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The linked document is a 2 page PDF in the form of a Q&A. The portion the title quote is from is as follows: > Do you have any thoughts on the collapse of FTX

The linked document is a 2 page PDF in the form of a Q&A. The portion the title quote is from is as follows: > Do you have any thoughts on the collapse of FTX and the crypto market in general? Do you expect contagion? > I do not expect the fallout from FTX to spread beyond the cryptocurrency/NFT space. Based on the information that has come to light so far, the collapse of FTX was not a result of lax risk management, inadequate accounting procedures, or some feature inherent to crypto – it was purely fraud. With respect to the wider crypto universe – I view the asset class as too dependent on the “greater fool theory” to be a desirable investment. Fortunately, although FTX and firms like it have increased marketing of their products in recent years, the lack of any noticeable widespread market reaction to FTX suggests that they are still fairly concentrated in the hands of a relatively small subset of investors. Moreover, the differences we observed in the aftermaths of the popping of the tech bubble and the popping of the housing bubble showed clearly that credit-fueled asset bubbles create far more contagion when they ultimately deflate. There does not appear to be a significant amount of leverage dedicated to the cryptocurrency/NFT space at this time, so I do not expect contagion to spread very far beyond this particular asset class.

SkyMarshal 4y ago
> Moreover, the differences we observed in the aftermaths of the popping of the tech bubble and the popping of the housing bubble showed clearly that credit-fueled asset bubbles create far more contagion when they ultimately deflate. There does not appear to be a significant amount of leverage dedicated to the cryptocurrency/NFT space at this time, so I do not expect contagion to spread very far beyond this particular asset class. This is the key observation. Public, permissionless, anonymous/pseudonymous cryptocurrencies can't have native leverage because they have no native identity. Without identity there is no way to do credit ratings or other means of enforcing repayment. As a result, all smart contracts are fully- or over-collateralized, creating a massive buffer against the kind of contagion that took down the banking system in 2007/8 (and 1929, the other major credit contagion). It's inefficient by tradfi standards, but extremely robust to volatility and deflationary monetary policy.
- simple-thoughts 4y ago
  Lots of defi protocols are looking to provide what they perceive as solutions to lack of leverage including decentralized identity, undercollateralized lending, and uncollateralized stablecoin issuance. Credit boom and bust cycles are a natural feature of unregulated markets, and realistically any defi tech that wants to compete needs to embrace these while maintaining an ability to smoothly wind down during credit crunches.
  - SkyMarshal 4y ago
    > while maintaining an ability to smoothly wind down during credit crunches. Any idea how that would work? In a credit crunch, once the money is gone, it's gone.
    - simple-thoughts 4y ago
      Most of the ideas protocols are trying will not in fact work in opinion. I wouldn’t be surprised to see the next cycle see an explosion in defi credit with a narrative like “we solved the problems of Celsius and genesis, and defi protocols are now proven to be safe in bear since only defi collapsed in 2022”. Followed by exuberance and a crash of products like Frax or even Rai if it’s bad enough (rai is over collateralized but due to slowness in onchain liquidations it’s possible for collateral to crash faster than it can be liquidated. This happened to Dai a few years ago but now it’s mostly backed by USDC). Frax uses a market making mechanism that is supposed to identify the maximum seigniorage they can use to pump FXS without breaking peg. The ratio fluctuates over time. This is a partially uncollateralized coin. For the other cases, you can Google it or ask in bsc or eth telegram/discord defi chats to find them. I prefer not mentioning them as they are generally going to fail and the longer we can sit in this bear market the better for devs. Bulls suck all the talent into scams.
      - SkyMarshal 4y ago
        Thanks, I’m drawing a blank though, what’s “bsc” (telegram/discord)?
deleted 4y ago
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SkyMarshal 4y ago

> Moreover, the differences we observed in the aftermaths of the popping of the tech bubble and the popping of the housing bubble showed clearly that credit-fueled asset bubbles create far more contagion when they ultimately deflate. There does not appear to be a significant amount of leverage dedicated to the cryptocurrency/NFT space at this time, so I do not expect contagion to spread very far beyond this particular asset class. This is the key observation. Public, permissionless, anonymous/pseudonymous cryptocurrencies can't have native leverage because they have no native identity. Without identity there is no way to do credit ratings or other means of enforcing repayment. As a result, all smart contracts are fully- or over-collateralized, creating a massive buffer against the kind of contagion that took down the banking system in 2007/8 (and 1929, the other major credit contagion). It's inefficient by tradfi standards, but extremely robust to volatility and deflationary monetary policy.

simple-thoughts 4y ago
Lots of defi protocols are looking to provide what they perceive as solutions to lack of leverage including decentralized identity, undercollateralized lending, and uncollateralized stablecoin issuance. Credit boom and bust cycles are a natural feature of unregulated markets, and realistically any defi tech that wants to compete needs to embrace these while maintaining an ability to smoothly wind down during credit crunches.
- SkyMarshal 4y ago
  > while maintaining an ability to smoothly wind down during credit crunches. Any idea how that would work? In a credit crunch, once the money is gone, it's gone.
  - simple-thoughts 4y ago
    Most of the ideas protocols are trying will not in fact work in opinion. I wouldn’t be surprised to see the next cycle see an explosion in defi credit with a narrative like “we solved the problems of Celsius and genesis, and defi protocols are now proven to be safe in bear since only defi collapsed in 2022”. Followed by exuberance and a crash of products like Frax or even Rai if it’s bad enough (rai is over collateralized but due to slowness in onchain liquidations it’s possible for collateral to crash faster than it can be liquidated. This happened to Dai a few years ago but now it’s mostly backed by USDC). Frax uses a market making mechanism that is supposed to identify the maximum seigniorage they can use to pump FXS without breaking peg. The ratio fluctuates over time. This is a partially uncollateralized coin. For the other cases, you can Google it or ask in bsc or eth telegram/discord defi chats to find them. I prefer not mentioning them as they are generally going to fail and the longer we can sit in this bear market the better for devs. Bulls suck all the talent into scams.
    - SkyMarshal 4y ago
      Thanks, I’m drawing a blank though, what’s “bsc” (telegram/discord)?

deleted 4y ago

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