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DeFi/crypto detractors will say "but there's nothing backing it" which is not entirely crazy. After all you could just print out bits of paper and exchange them

DeFi/crypto detractors will say "but there's nothing backing it" which is not entirely crazy. After all you could just print out bits of paper and exchange them for money, so long as someone is willing to play that game with you. Blockchain is no different, it's just a clever way to record who has what. So why do people put billions in crypto but not in random bits of paper such as Pokemon cards? Liquidity. This is the magic of the IPO: bits of paper that give you dividend rights to a business suddenly become worth multiples more when it becomes easy to trade them. I'll take a punt on your crappy taxi app if I can jump out of that bet for a small fee. The motivation? Other people will think the same. Crypto has reinvented the financial system, particularly the part where you can split risks and trade them. There's a whole industry of liquidity providers who basically transport risk across venues and risk classes: prices for the same thing need to be approximately the same across venues, returns for riskier things need to be higher than returns for less risky things. Things that are a bag of risk need to cost something similar to the sum of things in the bag. This is the exact same as in the traditional financial market: ETFs are bags of stocks, high yield bonds are for riskier issuers, and you can buy the same stock on many exchanges at more or less the same price. A lot of these trades are really just relative value arbs: something is worth x here, so I can offer it at x + 1 there. When some guy gives it to me at x, I sell it to the other guy at x + 1. If some guy gives me a bag for X + Y, I sell the X to one guy for X + 1 and I sell the Y for Y + 1. But the liquidity is what allows people to stick loads of money in. They see that you can have a punt on something and get your money back for low slippage, so they give it a go. Whether that's in one scheme or another doesn't matter, but this "put money in a box" analogy is quite apt. Maybe your mechanism is a DAO, maybe it's an AMM, maybe it's some option vault. As long as there's a financial sense in which it can be glued to the rest of the ecosystem, someone will have a go at it.

puranjay 4y ago
imo, this liquidity is precisely what's stifling widespread crypto adoption. Speculators kill long term growth of any project and punish actual users the most. GameFi is the perfect example - prices go up as speculators pile in. Actual gamers suddenly can't afford to play (which is why you have gaming "scholarships" - an absurd idea). Most projects that have earmarked tokens for their employees suffer as well. As the token goes through the speculative pump and dump, employees with locked in tokens can watch their networth go from millions to nothing - without being able to do anything about it. Employees constantly jump ship because after the dump, they realize that their locked in tokens are worth very little - and when the vesting ends, they market dump it all to get whatever profit they can. As the price craters, the project finds it harder and harder to attract new talent. I've seen this happen with so many projects that I now appreciate why we don't have exchanges for new businesses. Can you imagine what the startup world would be like if every startup was listed on a stock exchange immediately after it was founded? You'd have speculators pumping up the stock price based on rumor and/or fact ("YC invested! Sequoia is in!"). Employee vested ESOPs would go from millions to nothing and hiring future employees would be extremely hard since their ESOPs would be worth nothing.
- lordnacho 4y ago
  Indeed, there is a case against overfinancialization. Everything becomes anticipation, there's less point in actually making the thing Vs marketing the stock.
  - puranjay 4y ago
    Seen this happen with so many developers that I’m completely jaded by this space. Dev launches a promising project idea. Token balloons because of the reputation of the dev or promise of the idea. By the time the product actually launches, the price has cratered. Devs, team members and users can’t be compensated enough in the native token and abandon the project
    - sokoloff 4y ago
      Could you list a few of these promising ideas that were killed by this process? I’m admittedly not following closely, but most of what I’ve glanced at seemed like “would only get funded as a by-product of defi/crypto craze”.
CTDOCodebases 4y ago
Well put. The financial system largely exist for the purpose of wealth extraction. Sure, companies use the share market to initially raise capital but what is the true value of Amazon stock considering they don't issue dividends? Even with a stock that issues dividends how do know that it will happen for years to come? It's all speculation backed by nothing but emotion.
- lordnacho 4y ago
  The "fundamentals" are used in a kind of Schelling game. If people think no divs means it's worth more, the price will go up.
- wefarrell 4y ago
  Amazon stock isn’t backed by nothing but emotion. It’s backed by a company that is the largest e-commerce provider and cloud provider.
  - CTDOCodebases 4y ago
    So Amazons asset minus liabilities is $420.549B - $276.766B Divide that by the number of shares (shares outstanding for simplicity's sake) is $143.783B / 0.509B This gives us a value of $282.48 per share. Share price at the time of the above figures is $3259.95. So it looks like you might be right. 8.7% of the share price is backed by real world value (assuming the figures are correct) that might be realised for the shareholder some day in the future and the other 91.3% of the share price is hopes and dreams devoid of all emotion. Jokes aside humans cannot predict the future, value is subjective and emotion plays a part in everything we do. So who is anyone to say that something is worth nothing if there is a buyer that is willing to purchase.
- s1artibartfast 4y ago
  For Amazon, it has value due to partial ownership of the business itself and the cash/assets held by the business. If I own 1% of amazon and it has $100 in the bank, I own $1 of that. This underlies and backs the stock value. Companies also execute stock buybacks, even if they dont offer dividends. Amazon just announced a $10 billion buyback, which is theoretically equivalent to a 1% dividend this year ($1T market cap). If amazon buys back 1% of stocks, I now own 1.01% of the company and $1.01 in that company bank account. https://www.cnbc.com/2022/03/09/amazon-announces-20-for-1-stock-split-10-billion-buyback.html https://www.cnbc.com/2022/03/09/amazon-announces-20-for-1-st...

puranjay 4y ago

imo, this liquidity is precisely what's stifling widespread crypto adoption. Speculators kill long term growth of any project and punish actual users the most. GameFi is the perfect example - prices go up as speculators pile in. Actual gamers suddenly can't afford to play (which is why you have gaming "scholarships" - an absurd idea). Most projects that have earmarked tokens for their employees suffer as well. As the token goes through the speculative pump and dump, employees with locked in tokens can watch their networth go from millions to nothing - without being able to do anything about it. Employees constantly jump ship because after the dump, they realize that their locked in tokens are worth very little - and when the vesting ends, they market dump it all to get whatever profit they can. As the price craters, the project finds it harder and harder to attract new talent. I've seen this happen with so many projects that I now appreciate why we don't have exchanges for new businesses. Can you imagine what the startup world would be like if every startup was listed on a stock exchange immediately after it was founded? You'd have speculators pumping up the stock price based on rumor and/or fact ("YC invested! Sequoia is in!"). Employee vested ESOPs would go from millions to nothing and hiring future employees would be extremely hard since their ESOPs would be worth nothing.

lordnacho 4y ago
Indeed, there is a case against overfinancialization. Everything becomes anticipation, there's less point in actually making the thing Vs marketing the stock.
- puranjay 4y ago
  Seen this happen with so many developers that I’m completely jaded by this space. Dev launches a promising project idea. Token balloons because of the reputation of the dev or promise of the idea. By the time the product actually launches, the price has cratered. Devs, team members and users can’t be compensated enough in the native token and abandon the project
  - sokoloff 4y ago
    Could you list a few of these promising ideas that were killed by this process? I’m admittedly not following closely, but most of what I’ve glanced at seemed like “would only get funded as a by-product of defi/crypto craze”.

CTDOCodebases 4y ago

Well put. The financial system largely exist for the purpose of wealth extraction. Sure, companies use the share market to initially raise capital but what is the true value of Amazon stock considering they don't issue dividends? Even with a stock that issues dividends how do know that it will happen for years to come? It's all speculation backed by nothing but emotion.

lordnacho 4y ago
The "fundamentals" are used in a kind of Schelling game. If people think no divs means it's worth more, the price will go up.
wefarrell 4y ago
Amazon stock isn’t backed by nothing but emotion. It’s backed by a company that is the largest e-commerce provider and cloud provider.
- CTDOCodebases 4y ago
  So Amazons asset minus liabilities is $420.549B - $276.766B Divide that by the number of shares (shares outstanding for simplicity's sake) is $143.783B / 0.509B This gives us a value of $282.48 per share. Share price at the time of the above figures is $3259.95. So it looks like you might be right. 8.7% of the share price is backed by real world value (assuming the figures are correct) that might be realised for the shareholder some day in the future and the other 91.3% of the share price is hopes and dreams devoid of all emotion. Jokes aside humans cannot predict the future, value is subjective and emotion plays a part in everything we do. So who is anyone to say that something is worth nothing if there is a buyer that is willing to purchase.
s1artibartfast 4y ago
For Amazon, it has value due to partial ownership of the business itself and the cash/assets held by the business. If I own 1% of amazon and it has $100 in the bank, I own $1 of that. This underlies and backs the stock value. Companies also execute stock buybacks, even if they dont offer dividends. Amazon just announced a $10 billion buyback, which is theoretically equivalent to a 1% dividend this year ($1T market cap). If amazon buys back 1% of stocks, I now own 1.01% of the company and $1.01 in that company bank account. https://www.cnbc.com/2022/03/09/amazon-announces-20-for-1-stock-split-10-billion-buyback.html https://www.cnbc.com/2022/03/09/amazon-announces-20-for-1-st...