[HN Gopher] DeFi risks and the decentralisation illusion
___________________________________________________________________
DeFi risks and the decentralisation illusion
Author : wallflower
Score : 72 points
Date : 2021-12-20 19:45 UTC (1 days ago)
(HTM) web link (www.bis.org)
(TXT) w3m dump (www.bis.org)
| fennecfoxen wrote:
| It's real plank-in-your-own-eye stuff that all the crypto-huggers
| will dismiss the BLS analysis so readily at the line about banks
| acting as a risk buffer. Yes, to be sure! Banks present risks,
| massive risks, risks which should have been and still _should_ be
| much better managed, at both bank and government levels -- but
| boy howdy, are you in for a treat, you should see what happened
| to a financial system in the bad old days, when there were banks
| but no deposit insurance, and there would sometimes be a run on
| the banks, and they lose all their customers ' cash, and the
| shock waves ripple through the whole economy.
|
| Now let's do the exact same thing in the crypto-verse, except
| with even dodgier loans, even more pathetic capital buffers, and,
| by the way, _rampant_ fraud and bank robberies. It is only by the
| grace of obscurity and irrelevance to anything that matters that
| crypto-finance as a whole _doesn 't_ suffer widespread derision
| and fear a hundred times worse than the banking crisis.
| austinheap wrote:
| > [...] crypto-huggers will dismiss the BLS analysis so readily
| at the line about banks acting as a risk buffer. [...]
|
| For the past decade we've found out -- annually -- that
| internationally regulated financial provider X/Y/Z is banking
| narco terrorists, or sheltering funds for politicians, or being
| the final off-ramp for ransomware.
|
| > Now let's do the exact same thing in the crypto-verse, except
| with even dodgier loans [...]
|
| Guess it depends on your definition of "dodgier". I grew up
| with unregulated pay-day-loans being in every strip mall in
| Ohio.
|
| > [...] rampant fraud and bank robberies.
|
| The IC3 report <https://www.ic3.gov/Media/PDF/AnnualReport/2020
| _IC3ElderFrau...> on state-side fraud implies the per-capita
| rate of Americans scammed in 'normal banking' far exceeds the
| rate of Americans scammed by crypto.
| fennecfoxen wrote:
| > For the past decade we've found out -- annually -- that
| internationally regulated financial provider X/Y/Z is banking
| narco terrorists, or sheltering funds for politicians, or
| being the final off-ramp for ransomware.
|
| A scandal, to be sure! You have, indeed, identified the mote
| of dust in your brothers' eye. But while it's certainly
| bigger in absolute terms, you should try it as a percentage
| of transaction volume. The only reason that crypto doesn't
| blow it totally out of the water on crime volume is that
| crypto remains obscure, only marginally relevant to the real
| world.
|
| It's like telling me that there's more crime total in the US
| than there is in Haiti. It's technically true -- and yet,
| Haiti is much dangerous.
| NicoJuicy wrote:
| Crypto: Capital buffers? What's that.
|
| We didn't see it in our due diligence list.
|
| Here is a summary of that list:
| cblconfederate wrote:
| i mean yeah, that is one of the reasons why people are into
| crypto
| louloulou wrote:
| Nonsense. Free banking systems worked fin in Scotland and
| Canada on a gold standard, and would arguably work even better
| in an internet connected society. Central banks exist purely to
| give governments full control over money.
| nickff wrote:
| > _" you should see what happened to a financial system in the
| bad old days, when there were banks but no deposit insurance,
| and there would sometimes be a run on the banks, and they lose
| all their customers' cash, and the shock waves ripple through
| the whole economy."_
|
| It is my understanding that there was never a run on a solvent
| bank; runs were the consequences of bank failures, not the
| causes of them. It should also be pointed out that most bank
| failures were clearly caused by so-called 'unit banking', where
| the government prohibited banks from having multiple branches
| in diverse areas. Less-regulated banks (such as those in Canada
| and Scotland) suffered fewer failures, and had no issues with
| runs.
| fennecfoxen wrote:
| Historical bank runs were associated with a variety of
| causes; while some were caused mostly by bank failure due to
| asset shocks, others (e.g. the panics of 1893 and of 1933)
| were clearly marked by contagion, and even healthy banks were
| ruined by runs. https://eh.net/encyclopedia/banking-panics-
| in-the-us-1873-19...
|
| (+ Postscript for original post: I typoed BIS as BLS because
| I'm used to the latter, oops)
| aeternum wrote:
| The decentralisation illusion argument seems weak. One could have
| claimed the same about the early internet: Early internet wasn't
| truly decentralized as there were still ISPs, and you still need
| to register your domain with a centralized entity.
|
| This misses that the big change is one of access. Content
| creators were able to reach a large audience without playing ball
| with the big publishers or newspapers.
|
| With defi, the same can happen with finance. Marketplaces,
| exchanges and new financial instruments can be created by anyone
| that follows programmatic rules. Complex & expensive
| relationships with legacy banks are no longer required.
| cblconfederate wrote:
| network effects are real though. That's like saying that anyone
| can make a blog or anyone can make a facebook , but good luck
| with that. the problem is that , unlike bitcoin, VCs will
| control all the dominant network effects.
| JacobThreeThree wrote:
| Instead of having to curry favor with bankers, you now have to
| do so with a clique of developers, lest they hard or soft fork
| your crypto out of existence.
|
| "The development community is proposing a soft fork, (with NO
| ROLLBACK; no transactions or blocks will be "reversed") which
| will make any transactions that make any
| calls/callcodes/delegatecalls that execute code with code hash
| (ie. The DAO and children) lead to the transaction (not just
| the call, the transaction) being invalid, preventing the Ether
| from being withdrawn by the attacker past the 27-day window.
| This will later be followed up by a hard fork which will give
| token holders the ability to recover their Ether."
|
| Vitalik Buterin in response to the DAO Vulnerability on June 17
| hrhrhrhrhr wrote:
| This is the actual issue with DeFi's "decentralization", not
| what the article talks about.
|
| Bitcoin remains the only decentralized cryptocurrency that
| keeps living without governance.
| bliteben wrote:
| And it turns out the only people wanting to make novel
| financial instruments on crypto currency are scammers.
| dralley wrote:
| Most of the "novel" crypto financial instruments aren't
| necessarily "novel" so much as "made illegal in a century ago
| because of fraud and scams".
|
| Or at the very least "things with clear risks that crypto
| plebs are oblivious to"
|
| https://www.bloomberg.com/news/newsletters/2021-05-11/money-.
| ..
| nathias wrote:
| were they made illegal for my safety?
| exdsq wrote:
| Care to show one or two financial instruments that were
| claimed to be "novel" but were made "illegal a century
| ago"?
| kgwgk wrote:
| https://www.bloomberg.com/opinion/articles/2015-06-19/bit
| coi...
| exdsq wrote:
| This is six and a half years old, wasn't about a novel
| defi instrument but about derivatives, and derivatives
| aren't illegal. They're also now well implemented in
| DeFi.
| lottin wrote:
| You don't require a bank in the same sense that you don't
| require a baker. If you want to make your own bread, go head,
| nobody is stopping you. But in a modern society people engage
| in division of labour and specialisation, because this allows
| us to be orders of magnitude more productive and have things
| that we couldn't dream of making ourselves. People don't _want_
| to make their own bread, and they don 't want to be their own
| bank either.
| jermaustin1 wrote:
| > People don't want to make their own bread, and they don't
| want to be their own bank either.
|
| But they aren't saying you have to be your own bank, by
| opening it all up, more and more people can be "banks" and
| that helps to decentralize finances from the handful of Big
| Banks.
|
| I'm not saying that random person down the road should be
| allowed to create a bank that others then trust with storing
| their assets, and I will still keep the majority of my assets
| in traditional banks, but as a whole, less power concentrated
| in the few is better for everyone.
| lottin wrote:
| I definitely agree that competition is very important, I
| don't think there are many doubts about that. I just don't
| see how DeFi can bring competition to the banking sector by
| allowing people to become banks. Ordinary people becoming a
| bank is not realistic competition to actual banks. People
| have jobs, they have work to do, they have to raise a
| family, they're not going to become competent bankers on
| top of that and outcompete professionals, even if they
| tried.
| jermaustin1 wrote:
| I'm going to preface this with I have no idea how any of
| this ACTUALLY works, and I'm probably wrong, but the
| "blockchain" abstracts all the more complicated bits
| away. I'm not a crypto diehard, and probably never will
| be. I think they are neat, and I have about 10% of my net
| worth tied up in a handful of coins. Here is my
| understanding how we can all be banks without even really
| thinking about it.
|
| Some coins (PoS specifically) allow staking, which allows
| you to set it aside a certain amount, which is then used
| to validate other transactions, and you earn rewards. In
| traditional banking, this is kind of like a CD, and your
| money is used to help the bank out and it pays you
| interest on that.
|
| The Ethernet (and a few other coins Solana comes to mind)
| ledger allow for the creation of smart contracts
| (applications that run on the blockchain) that could
| (probably some already exist) allow you to automate the
| creation loans on the ledger, witnessed by the world,
| that automatically pay you back. You can probably use the
| smart contract to do a modicum of due diligence on the
| borrower. But instead of paying SynapseFi (or other but
| first name that came to mine) thousands a month to allow
| you to build out loans, its all there for you on the
| block chain. This probably IS the future of peer2peer
| lending, as it is already a HUGE industry, and this would
| kind of get rid of the middle man.
|
| One aspect of banking that is not really needed anymore
| would be the storage of assets. That is a built in part
| of cryptocurrency.
|
| There is still the question of how do you get crypto, and
| for now, and until more people use it for everyday
| actives, that requires exchanges. And Exchanges could be
| seen as a centralization of sorts, but even they are a
| dime a dozen so they are effectively decentralized. And
| most support transferring to a wallet. So... kinda
| decentralized.
| lottin wrote:
| The idea that banking activities can be automated and
| that therefore people will be able to ditch banks and do
| their own banking without resorting to professional
| banking services is unreasonable, for the simple reason
| that if this could be done, banks would have already done
| it, since they have every incentive to reduce costs. They
| would have laid off all the staff and replace it with a
| smart contract. They haven't done it because it can't be
| done, because banking has processes which are labour-
| dependent and can't just be automated away easily or at
| all.
| landemva wrote:
| Have you considered if much of this is due to debt-based
| currency? If people hold valuable fungible tokens, it
| becomes possible to make collateralized loan products and
| even synthetic stable tokens such as DAI.
| aeternum wrote:
| Maybe someone does want to create a very special and
| expensive type of bread and sell it worldwide.
|
| In order to accept payment, they must become a merchant with
| some centralized entity (Paypal, Mastercard, Visa). They must
| hope they live in the subset of countries where this is
| allowed. They must agree to a one-sided TOS that can be
| changed at any time. Then they must hope that all their
| buyers are honorable and trustworthy as those entities favor
| the buyer in a dispute.
|
| This is not an optimal state of affairs for the aspiring
| artisan bread maker.
| hellojesus wrote:
| Or they could sell their bread locally for cash only.
|
| Or they could make their own payment processor if the
| existing ones weren't doing a good enough job for them.
|
| There are a lot of avenues to work around the cartel of the
| banking industry, and I am a fan of any implementation that
| ignores the unconstitutional Bank Secrecy Act. Crypto does
| fall into this category but is not the only method.
| landemva wrote:
| 'Or they could make their own payment processor...'
|
| Theoretically maybe. Money transmission laws will likely
| trip them up. Big barrier to entry.
| RandomLensman wrote:
| Depending where you live, there will already be
| restrictions who you can do transactions with (sanctions
| etc.). So irrespective of technology the world doesn't
| quite accommodate this at present.
| dralley wrote:
| >They must hope they live in the subset of countries where
| this is allowed.
|
| Although the overlap between this subset, and the subset of
| countries with reliable international shipping, is pretty
| high.
| AnthonyMouse wrote:
| Relevant if your product is literally bread. Not so
| relevant if it's photography or software or news
| reporting or comedy sketches.
|
| And even if it is bread, having one problem is better
| than having two problems.
| idiotsecant wrote:
| >People don't want to make their own bread, and they don't
| want to be their own bank either.
|
| Speak for yourself, I quite like the idea!
| RandomLensman wrote:
| First off, this probably only holds if you sort of ignore
| current rules and regulations in a lot of cases (e.g. KYC, AML,
| securities laws, clearing requirements, reporting etc.). But to
| be fair, there is a discussion to be had if all those
| regulations are fit for purpose.
|
| Second, banks do a lot more than just be middle men in
| financial markets. They do have risk bearing capacity and they
| are willing to - crucially - use that on uncollaterized risk
| and things not netted atomistically. This means the demand for
| liquidity is kept low - which is good because money can flow
| towards longer term objectives.
| pishpash wrote:
| Risk is the only issue. Regulations are to ensure banks have
| the risk-bearing capacity that they say they do. A
| formalization of risk-bearing capacity, if you will. However,
| are banks the only ones with risk-bearing capacity? And if
| not, and especially if such capacity can be programmatically
| verified, is there still any benefit to banks?
| RandomLensman wrote:
| There is a ton of regulations aimed at proper functioning
| of markets unrelated to banks.
|
| In uncollateralized situations you cannot
| verify/verification is meaningless as you might not be able
| to claim what you verified.
| pishpash wrote:
| Let me pose the question thusly: Is there any decision
| making process by a bank, even ones executed by humans,
| not formalizable programmatically, provided sufficient
| information? If not, then what's to prevent decentralized
| finance from working just as well, provided the same
| information into the system?
| smackeyacky wrote:
| Human intervention is required more than you might think
| in the current banking system. Mistakes, fat fingered
| numbers, wrong accounts etc. None of it is resolved
| without humans with authority.
|
| Unless you can build an authority into the system somehow
| for dispute resolution, the system will always favour bad
| actors and fraud.
|
| The big push for no-authority, decentralised finance
| sounds wonderful, but the reality is if the system is
| inherently biased toward fraud and crime because of a
| lack of dispute resolution, fraud and crime is what you
| are going to get.
| pishpash wrote:
| 1. I wonder how much of this still holds in a potential
| future world where machines are making decisions in most
| aspects of life already.
|
| 2. It doesn't follow that you can't have some recognized
| authorities within decentralized finance to negotiate
| fallback cases. For instance, the role of banks could
| become merely to supply information related to human
| authentication, not most of market operation.
| smackeyacky wrote:
| I guess you could set it up that way, but then you create
| the problem of competing authorities - it's the same
| problem that the internet has with DNS. At some point, it
| has to have a single source of truth. The blockchain
| itself isn't enough when what is recorded on the
| blockchain is potentially not what the actors intended
| (or is what a criminal intended in a fraud scheme).
| RandomLensman wrote:
| At the sharp end, I'd say there are such non-formalized
| "processes" in place. For example, market making is not
| really programmatic for low liquidity stuff (and no, AMMs
| are not good for price formation absent arbitrageurs).
| Dealing with sudden changes to the state of the world is
| another. Heck, simple price formation for shares is
| totally not formalized.
|
| Also, not clear how defi would do on balance sheet money
| creation (at least to me) if we are replacing banks. (And
| what about all the other players in the financial
| ecosystem?)
| jacobr1 wrote:
| What about the most traditional business of a bank:
| providing security and paltry interest for deposits,
| intermediated by the bank, as capital for loans. Now DeFi
| can certainly do each of these, but crucially the
| traditional system also decouples the risk for
| depositors. The return of deposits is NOT contingent upon
| the performance of the loans, by both regulation and
| deposit insurance. Is there a defi solution for a similar
| system?
| aantix wrote:
| How do so many coins offer absurd APRs for staking?
| reducesuffering wrote:
| It's the same principle as junk bonds. The less people believe
| that their principle will be recovered, the higher the APR to
| incentivize buyers. If some $100 coin offers you 100% APR, you
| best believe it's not likely that your original coin is still
| going to be worth $100 at the end of the year. More likely
| you'll have 2 coins worth $50 each now.
| wmf wrote:
| There's a massive bubble with people throwing money into
| anything and everything.
| hrhrhrhrhr wrote:
| The APR is paid in the coin itself, not dollars, so they just
| inflate the supply to pay the "yield".
| jonathan-adly wrote:
| Lost me at "lack of shock absorbers such as banks" - DeFi has
| lots of flaws, but it takes truly a sheltered economists to think
| that banks absorb shocks!
|
| I will pay attention when Goldman Sachs starts to hand out
| stimulus money or even loans in a crisis to absorb the shock
| tablespoon wrote:
| > Lost me at "lack of shock absorbers such as banks" - DeFi has
| lots of flaws, but it takes truly a sheltered economists to
| think that banks absorb shocks!
|
| My car has a bumper. It's not valid to claim it doesn't absorb
| shocks because it can't absorb all the shock of a 20mph
| collision. A similar situation might be the case here. It's
| quite plausible that banks absorb all kinds of shocks all the
| time, but we have a distorted view because the shocks we tend
| to hear about are the ones they _didn 't absorb_ (or didn't
| absorb as smoothly as usual).
|
| > I will pay attention when Goldman Sachs starts to hand out
| stimulus money or even loans in a crisis to absorb the shock
|
| Isn't the fed a bank and hasn't it done things similar to
| "hand[ing] out stimulus money or even loans"?
| agentultra wrote:
| The US government responded to the 2008 financial crisis with
| the Dodd-Frank Act of 2008 to protect everyone against the kind
| of speculation that caused that financial crisis.
|
| Much of the financial legislation that regulates banks, payment
| systems, and other intermediaries is created in response to
| fraudsters and scammers.
|
| There are lots of "shock asorbers" that you might not be aware
| of. In the US payments system, a pull-based payment system,
| when a merchant makes a request to pull funds from your bank
| account, your bank is liable for the funds if they authorize
| the transaction. This protects the merchant from not receiving
| their money. The whole network is filled with debits and
| credits and liabilities.
|
| In fact it already is a distributed system that mirrors the
| social and political structures of moving value.
|
| Another shock absorber is that state chartered banks that
| handle a certain volume of transactions must first prove they
| have enough funds in reserve to serve their liabilities. Again
| to protect consumers.
|
| It's quite a fascinating industry and if you want to learn more
| about it there is an excellent book to get started [0].
|
| However don't take the US system as the _ideal_ model. There
| are more modern payment networks and protocols that enable
| transaction settlement in near real-time that is much more
| convenient and common in places like the EU and Canada.
|
| [0] https://www.amazon.com/Payments-Systems-U-S-Third-
| Profession...
| AnthonyMouse wrote:
| > The US government responded to the 2008 financial crisis
| with the Dodd-Frank Act of 2008 to protect everyone against
| the kind of speculation that caused that financial crisis.
|
| Let's review the 2008 financial crisis.
|
| The was a thing called a credit default swap. It's a type of
| insurance. If you make a loan, and the borrower fails to pay
| you back, the insurance pays you instead.
|
| The insurance actuaries did the math on how much these should
| cost based on the historical rate at which homeowners paid
| back their loans. They also calculated that most of the
| claims would be offset by the ability to foreclose on the
| house, so they'd only have to pay to the extent that the
| homeowner owed more on the mortgage than the house was worth.
| That seemed pretty unlikely, right?
|
| Enter moral hazard. If you're a bank buying credit default
| swaps, you don't care one bit whether the borrower can pay
| back the loan, so you issue loans to everybody. Banks issuing
| loans to people who can't afford them inflates a housing
| bubble.
|
| The regulators who should have seen this and said "hey wait a
| minute" instead said "neat, they're promoting home ownership"
| and just let it happen.
|
| Then when those borrowers, in fact, can't afford the loan
| payments, they default.
|
| Around the same time, the insurance companies figure out that
| they fucked up real bad, so the price of credit default swaps
| goes way up and banks stop buying more of them. Which means
| they stop wanting to loan money to people who can't afford to
| pay back the loans, and the housing bubble pops. That puts
| the existing loans underwater, which would bankrupt the
| insurance companies, which would in turn bankrupt the banks.
|
| Then the "solution" became to set interest rates to zero to
| reinflate the housing bubble, where they've been ever since,
| and we now have an even bigger housing bubble than we did in
| 2007.
|
| The cause of this was not a fraud or a scam. It wasn't
| "buffers" or anything like that. It was incompetence. Nobody
| wants to admit that, because anyone could have asked the
| question, what does a credit default swap do to a bank's
| incentive to vet creditworthiness? But they didn't.
| agentultra wrote:
| A good deal of US banking legislation came into being in
| response to various crises. Like the Federal Reserve Act in
| response to the Panic of 1907. It's pretty normal.
|
| A lot of this legislation exists to provide buffers to
| protect people from all kinds of situations. That's why we
| have legislation and regulation.
| pishpash wrote:
| Anyone with sufficient capital and willing to take risks can be
| a shock absorber. The particular organization of such
| individuals such as into banks is merely an abstraction.
| ethanbond wrote:
| Banks hand out loans to mitigate _localized_ shocks all the
| time, which is one thing that prevents them from turning into
| more macro shocks.
| pishpash wrote:
| You make it sound as if the ability to create loans is an
| intrinsic property of banks, as opposed to it being a
| licensed monopoly granted to such institutions by the state.
| clutchdude wrote:
| Exactly - for instance, if the commercial paper markets don't
| function, paychecks don't get issued.
| m00dy wrote:
| This report has been written by old-school economist. I would
| suggest not pay attention much.
| WheatM wrote:
| JaimeThompson wrote:
| Why?
| anonu wrote:
| I have been saying this for a while: DeFi depends on CeFi
| (Centralized Finance). Coinbase depends on people connecting
| their bank accounts or credit cards to fund their accounts.
| Coinbase's value was created through an IPO on the NYSE - the
| mecca of centralized finance...
| dqpb wrote:
| > it is impossible to write code spelling out what actions to
| take in all contingencies
|
| It sounds like two economists are struggling with the concept of
| software and systems engineering.
| pavlov wrote:
| It sounds like economists are much more realistic about the
| feasibility of bug-free immutable software.
| dqpb wrote:
| If their argument was about the insanity of no-one doing
| model checking, I'd be on board. But that's not their
| argument.
| cblconfederate wrote:
| it's not fair to say that all economic transactions are going
| to have unaccounted contingencies. There are plenty of
| transactions which are just dead-simple, and when automated
| they don't need a middleman
| ruffrey wrote:
| The comparison to banks as shock absorbers is pretty rich. It has
| been only 12 years since banks caused global recession due to
| secrecy and greed. At least the decentralized options are more
| open, despite any flaws, which would be shared by centralized
| finance anyways.
|
| A mix of centralized and decentralized seems the safest.
| yob28 wrote:
| kyruzic wrote:
| Their entire point about defi not being decentralized is almost
| entirely false.
|
| Uniswap the company is entirely disconnected from the uniswap
| router which is what defi really is. The uniswap router is what
| completes transactions on the blockchain. Not the uniswap
| website. The uniswap website simply provides a front end for
| interacting with the uniswap protocol.
|
| You can easily, like less than 100 lines of code, write your own
| implementation of the uniswap swap functionality. This is why it
| truly is decentralized. Uniswap the company has no way of
| preventing you from doing that in their v1, v2, or v3 router.
|
| Further they themselves are not running the router. Anyone who is
| running an eth node, or miner is running the router. So yes,
| uniswap has a financial interest in making a commercially
| successful product. But that product is uniswap.org/app
|
| It is not the smart contract. The smart contract is what makes it
| decentralized.
|
| Their only argument besides the financial interests of the
| companies who created the first defi products is claiming that
| blockchain rewards lead to concentration. Which is the same
| argument that has been made since bitcoin was first launched, but
| every single day the likelyhood of any sort of attack related to
| concentration becomes less likely. As more people start their own
| mining operations and start hosting their own node.
|
| If someone wanted to centralize the chain they missed their
| opportunity. Because it is simply not feasible for it to occur at
| this point.
|
| Like usual, old school economists desire to control crypto
| markets. But they know they aren't able to and won't ever be able
| to so they write ill informed articles filled with factually
| incorrect claims in order to misled policy makers to implement
| laws to attempt to regulate the industry. Which will also fail.
| throw_nbvc1234 wrote:
| Agreed, you see this misunderstanding constantly here and it
| makes it hard to take the valid parts of any counter-arguments
| seriously. De-centralization doesn't mean that there are no
| centralized UI winners. It's that if those winners disappear
| overnight (https://nftplazas.com/hic-et-nunc-finds-a-solution-
| after-sud...) or start to abuse their power, people can just
| move to alternatives and the company has no power to lock them
| in. HackerNews would love this kind of "data portability" hedge
| against the classic google deletion of chat apps and other
| services.
|
| The blockchain just provides a decentralized trusted authority
| to ensure that the portable data is authentic. Without this,
| any data portability solution would have a problem with
| spoofing, or the data would require another centralized
| authority to validate the data which defeats the purpose. I
| guess you could argue the government could be that authority
| but idk how that works in a global sense.
|
| Having a data portable chat app is sketch if someone can just
| make up messages and import them into their new 3rd party app.
| it's dangerous/unworkable if the application is something with
| more consequences like defi.
| delabay wrote:
| About BIS: The BIS mission is to support central banks' pursuit
| of monetary and financial stability through international
| cooperation, and to act as a bank for central banks.
|
| > It is difficult to get a man to understand something when his
| salary depends upon his not understanding it.
| defaultprimate wrote:
| This, but applied to crypto bagholders
| amirhirsch wrote:
| no one depends on their cryptocurrency like their salary or
| retirement savings. the total market capitalization of
| cryptocurrency is basically the total amount of wealth
| humanity is willing to just throw away
| defaultprimate wrote:
| Weird how every time there's a crash there's suicide
| hotline posts on all the subreddits and crypto news
| websites then
| [deleted]
| delabay wrote:
| The psychological momentum of BIS far exceeds that of crypto.
| BIS and affiliated parties are comprised of thousands of old
| guard who have built their career and sense of self worth on
| the belief what they are doing is necessary and beneficial
| for society. Crypto participants are at max involved a few
| years and overwhelmingly young 20-somethings.
|
| Just as science advances one funeral at a time, so too will
| this whole industry. It will help if we just stop debating
| whether crypto assets are real to begin with, and accept that
| this stuff isn't going away.
| hammock wrote:
| Just in: The central bank of central banks (BIS) is
| propagandizing against the decentralization of the banking
| system. To the surprise of no one.
| _448 wrote:
| So is it popcorn time now? :)
|
| Looks like the banks(and some countries) are sharpening their
| swords against cryptocurrencies.
| xwolfi wrote:
| What I dont understand is how they calculate rates for loans. I
| dont know much about DeFi and just consider it as scammy as NFTs,
| but for me a lending rate is always function of a default risk:
| too high, no loan, high, high rate, low, low rates.
|
| I've worked in fintech and am in a bank now and we've always had
| our proprietary mapping table with field studies of default stats
| and long attribute lists (age, immigration status, salary, number
| of other loans, number of past default, other assets and so on),
| and the key was to either religiously stick to these or take
| strategic decisions to open the valves if needed (say to fit a
| quota, we let the younger people in for a while).
|
| How is DeFi doing lending rates ?
|
| Edit: got it, over collateralized with valuable collateral
| confiscated rather than promised so not fit for the same purposes
| as normal consumer loan. You wont pay your daughter's sweet 16
| mega party in mexico or your son's wedding in Singapore or your
| first car in France with a DeFi loan :D So it's not exactly
| decentralized finance, it's more decentralized leverage, I guess.
| At least you cant default a DeFi loan, which sounds reassuring on
| paper.
| yao420 wrote:
| I recommend reading Compounds white paper. They are a big
| player and have a decentralized protocol which establishes
| money markets with algorithmically set interest rates based on
| supply and demand.
|
| https://compound.finance/documents/Compound.Whitepaper.pdf
| norswap wrote:
| All loans are overcollateralized, and basically used for
| leverage: put up your bitcoins as collateral, borrow
| stablecoins, buy more bitcoins.
|
| So the risk is limited as long as the loans can be liquidated
| in time in case of a price crash.
|
| The rates are determined the ratio of all stablecoin liquidity
| provided vs the amount actually borrowed. Liquidity providers
| can remove liquidity at any time, and so the smaller the
| remaining liquidity buffer gets, the higher the fees gets.
|
| Most of the rates are dynamic: i.e. the interest rate on your
| existing loan can increase drastically if there is a liquidity
| crunch. In practice your interest is charged as though it was
| extra borrowing and so lowers your liquidiation threshold.
|
| On the flip side, the dynamic rate also means that as the
| liquidity gets thinner, the interest rate paid to liquidity
| provider gets higher, meaning it incentivizes liquidity
| deposits when they are most needed.
| bluedevil2k wrote:
| > put up your bitcoins as collateral, borrow stablecoins, buy
| more bitcoins
|
| Nothing could possibly go wrong with this, right? Tether is
| found to not have the reserves they claim and it plunges, and
| the artificial demand for bitcoin disappears and it plunges
| as well.
| Osiris wrote:
| DeFi loans are over-collatoralized usually by 1.5-2x.
|
| If you want to borrow $100k, you put up $200k in
| collateral.
| anonymousDan wrote:
| Sorry I don't get it. Why would you lock up 200k in order
| to borrow 100k? Why not just use part of the 200k you
| already have?!
| colinmhayes wrote:
| To lever gains. Now you can "own" 300k worth of bitcoin
| gains with only 200k worth of bitcoins. Of course the
| downside is that loses are levered too.
| yokem55 wrote:
| To retain the price exposure of the asset worth 200k
| while avoiding selling or spending it.
| giantrobot wrote:
| You gotta pay the upline!
| hrhrhrhrhr wrote:
| If you believe that the value of Bitcoin is going to go
| up, it makes sense to lock is as a collateral and spend
| the borrowed fiat instead of selling the Bitcoins.
| majormajor wrote:
| Is there a part of the system that keeps working even if
| the value of bitcoin stops (being believed to keep) going
| up all the time?
|
| If ETH or some other new token takes more and more
| mindshare from btc isn't that a big inflationary pressure
| on the crypto ecosystem as a whole? More tokens = less
| valuable tokens.
|
| At some point buy the dip will turn into cash out.
| hrhrhrhrhr wrote:
| If the value of Bitcoin stops going up, sooner or later
| your debt grows larger than the amount you were allowed
| to borrow and your collateral gets liquidated by someone
| who implemented the fastest liquidator bot.
|
| https://docs.aave.com/developers/guides/liquidations
| Qworg wrote:
| Different tax treatment. Locking up to buy something with
| the loan doesn't expose you to gains.
| beefield wrote:
| > So the risk is limited as long as the loans can be
| liquidated in time in case of a price crash.
|
| If I may guess, it seems unlikely there are too many folks in
| DeFi circles who have ever heard acronym LTCM.
|
| (TL;DR: A bunch of actual Nobel laureates (no kidding, or at
| least as much as Nobel price in economics is an actual Nobel)
| founded a huge and famous hedge fund with a trading strategy
| assuming they can liquidate their position at market prices.
| At this point you may guess that it ended tits up and was
| kind of a mess. Time will tell if DeFi folks were smarter
| than that.)
| Ekaros wrote:
| It really sounds like fun and games until it all comes
| crashing down...
|
| Then again if it's all crypto and everything goes down at
| once, I suppose there isn't too big issue. Apart from
| losing some fiat, but they who cares about that in
| cryptoworld...
| [deleted]
| makotobestgirl wrote:
| Loans are overcollateralized, so you need to put in the same or
| more amount of capital that you're loaning out. That may not
| seem useful at first, but it allows you to have exposure to
| multiple assets. For example, you may want to use ETH
| temporarily, but you only have BTC. But you want to keep your
| BTC investment for the long term. So you're putting up BTC to
| borrow ETH. You keep your exposure to BTC, but you have liquid
| ETH.
|
| It's the same concept as putting up your house as collateral.
| You don't want to sell your house just because you need some
| liquid cash temporarily.
| lottin wrote:
| > It's the same concept as putting up your house as
| collateral.
|
| The crucial difference is in a mortgage loan the borrower
| keeps the collateral and gets to use of it, e.g. live in it,
| while they pay off the loan, whereas in a DeFi "loan" the
| lender has to keep the collateral the whole time.
| DarylZero wrote:
| Surely the DeFi loan should be a "smart contract" that just
| locks the asset from transfer until either default or
| repayment.
| lottin wrote:
| Yes, the "smart contract" keeps it. The point is the
| borrower doesn't get to keep the collateral. This makes
| DeFi loans unsuitable for a large number of purposes.
| thebean11 wrote:
| What's an example of something you'd want to "do" with
| your crypto asset while using it as collateral? Obviously
| you can't spend it, give it away, use it as collateral
| for another loan etc as that would conflict with the
| first loan.
|
| But you can do other stuff. For example you could covert
| ETH to one of the many tokens that represent staked ETH
| (rocketpool rETH for example) and use that as collateral.
| Now you are have collateral and staking revenue with the
| same funds.
| lottin wrote:
| Well, that's the point, 1) you need 100% collateral, 2)
| the collateral needs to be in the form of digital tokens
| and 3) it needs to be kept in custody by a third party
| (the "smart contract"). Yes, you can still do useful
| things despite these limitations, but at the same time be
| aware that 99% of the borrowing/lending activity that
| goes on in the real world is not possible with this
| technology.
| Ekaros wrote:
| This really sounds most like gambling. And not a
| financial instruments that is very supportive for
| economy. Like let's say company loaning money to purchase
| equipment.
| lottin wrote:
| Yes, these loans can't be used to fund investment or
| consumption in the real economy. The only use-case of
| crypto-loans, as far as I know, is making leveraged bets
| on the prices of crypto-currencies.
| thebean11 wrote:
| Why not? One can easily borrow USDC or another stablecoin
| with crypto collateral, withdraw to USD and use it for
| non-crypto investments..
| colinmhayes wrote:
| The borrower does keep the collateral in that it's only use
| to them is the gains it provides. Those gains still belong
| to the borrower.
| vmception wrote:
| CeDeFi (Centralized Decentralized Finance, websites like
| Coinbase, Nexo, Blockfi, Celsius. Registered companies with
| licenses that will often advertise as being the same as onchain
| DeFi services) offer fixed rates to customers, while they earn
| much greater variable rates in DeFi platforms, they pocket the
| difference. Just like TradFi (traditional finance) lenders we
| are all familiar with, the spreads are just much bigger right
| now, as expected in growing economies.
|
| DeFi platforms are offering variable rates based on how many
| farmers and how much value is deposited that is trying to earn
| the same fixed amount of tokens, and those tokens current
| exchange rate. They are using present/historical data, as well
| as current exchange rates. These are not projections. Also do
| notice that APY, and APR are used interchangeably and
| inaccurately and not in any uniform way across platforms.
| Platform developers typically just choose whichever number
| shows the greater percentage.
|
| Some DeFi platforms are just diluting their own token for some
| time, or indefinitely, and people earn that and hope the
| exchange rate support the greater supply long enough to convert
| out. Some DeFi platforms are successful at building a demand
| model and utility to offset the supply. Other DeFi platforms
| are doing something monetarily productive that earns the
| platform money which is distributed to stakers or farmers.
|
| Hope that helps. There is no one way to evaluate or dismiss all
| defi products with a yield, but there are some patterns to look
| for and to understand why they attract so much capital on
| deposit so quickly. Much of the capital comes from CeDeFi
| looking for yield that won't cause them to loose all the
| customer money.
| edvinbesic wrote:
| Small nitpick but CeDeFi is a term coined by Binance to make
| them appear more palatable and competitive. Binance is a
| centralized network so it's a CeFi foundation with all the
| controls that come with that, but with a DeFi coat of paint.
|
| Coinbase is a centralized exchange (Cex, not a Dex) so it has
| little to do with DeFi in general.
| vmception wrote:
| a) who cares who coined it, it is a classification used by
| many and quickly conveys the shared concept that matches
| that classification, which is the overall point of language
|
| b) Coinbase is many products. Coinbase Staking is the one
| that matches what was described above. Don't conflate the
| front facing CEX for everything they offer. No different
| than Amazon not being a bookstore, nor just an ecommerce
| platform. It is many products. The context was solidified
| amongst several other products with similar offerings.
| Coinbase's _various_ CEX products have nothing to do with
| their Staking product (or the Lending one they were going
| to try, of Vault or several others)
| edvinbesic wrote:
| a) it does matter because despite what you think CeDeFi
| is only there to create confusion in the industry.
| Centralized decentralized finance. Which is it?
|
| b) staking has nothing to do with DeFi
| idiotsecant wrote:
| Borrowing money in exchange for a promise to pay it back isn't
| really a thing in defi (and I'm not sure it ever could be?) All
| DeFi i'm aware of is based on borrowing less than the value of
| some asset you stake to assure your repayment. It's definitely
| a different thing than most people think of when they think
| 'loan'
| cblconfederate wrote:
| It seems however that defi can be redesigned to be truly free
| from centralization.
|
| I guess this is related to @jack's tweet today. He was talking
| about VC-funded web3 however, not about defi in general
| [deleted]
| [deleted]
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