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DeFi risks and the decentralisation illusion

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Re: DeFi risks and the decentralisation illusion

#11

Post by lottin »

aeternum wrote: post #5

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,…

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.

Re: DeFi risks and the decentralisation illusion

#12

Post by edvinbesic »

vmception wrote: post #6
xwolfi wrote: post #2

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…

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 bi…

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.

Re: DeFi risks and the decentralisation illusion

#13

Post by lottin »

DarylZero wrote: post #9
lottin wrote: post #7

Earlier quoted context omitted.

> 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.

Surely the DeFi loan should be a "smart contract" that just locks the asset from transfer until either default or repayment.

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.

Re: DeFi risks and the decentralisation illusion

#14

Post by aeternum »

lottin wrote: post #11
aeternum wrote: post #5

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,…

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 th…

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.

Re: DeFi risks and the decentralisation illusion

#15

Post by idiotsecant »

lottin wrote: post #11
aeternum wrote: post #5

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,…

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 th…

>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!

Re: DeFi risks and the decentralisation illusion

#16

Post by idiotsecant »

xwolfi wrote: post #2

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…

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'

Re: DeFi risks and the decentralisation illusion

#17

Post by vmception »

edvinbesic wrote: post #12
vmception wrote: post #6

Earlier quoted context omitted.

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 bi…

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.

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)

Re: DeFi risks and the decentralisation illusion

#18

Post by thebean11 »

lottin wrote: post #13
DarylZero wrote: post #9

Earlier quoted context omitted.

Surely the DeFi loan should be a "smart contract" that just locks the asset from transfer until either default or repayment.

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.

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.

Re: DeFi risks and the decentralisation illusion

#19

Post by bluedevil2k »

norswap wrote: post #3
xwolfi wrote: post #2

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…

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…

> 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.

Re: DeFi risks and the decentralisation illusion

#20

Post by jermaustin1 »

lottin wrote: post #11
aeternum wrote: post #5

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,…

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 th…

> 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.

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