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I will pay attention when Goldman Sachs starts to hand out stimulus money or even loans in a crisis to absorb the shock
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…
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
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
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"?
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
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...
It sounds like two economists are struggling with the concept of software and systems engineering.
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…
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.)
I guess this is related to @jack's tweet today. He was talking about VC-funded web3 however, not about defi in general
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
Banks hand out loans to mitigate localized shocks all the time, which is one thing that prevents them from turning into more macro shocks.