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DeFi risks and the decentralisation illusion

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Re: DeFi risks and the decentralisation illusion

#71

Post by RandomLensman »

pishpash wrote: post #70
RandomLensman wrote: post #63

Earlier quoted context omitted.

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 -…

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?

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.

Re: DeFi risks and the decentralisation illusion

#72

Post by pishpash »

jonathan-adly wrote: post #21

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

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.

Re: DeFi risks and the decentralisation illusion

#73

Post by defaultprimate »

delabay wrote: post #61

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.

This, but applied to crypto bagholders

Re: DeFi risks and the decentralisation illusion

#74

Post by pishpash »

ethanbond wrote: post #23
jonathan-adly wrote: post #21

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.

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.

Re: DeFi risks and the decentralisation illusion

#75

Post by majormajor »

hrhrhrhrhr wrote: post #58
anonymousDan wrote: post #51

Earlier quoted context omitted.

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?!

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.

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.

Re: DeFi risks and the decentralisation illusion

#76

Post by pishpash »

RandomLensman wrote: post #71
pishpash wrote: post #70

Earlier quoted context omitted.

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?

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.

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?

Re: DeFi risks and the decentralisation illusion

#77

Post by AnthonyMouse »

agentultra wrote: post #25
jonathan-adly wrote: post #21

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

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…

> 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.

Re: DeFi risks and the decentralisation illusion

#78

Post by fennecfoxen »

austinheap wrote: post #55
fennecfoxen wrote: post #31

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…

> [...] 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 lo…

> 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.

Re: DeFi risks and the decentralisation illusion

#79

Post by smackeyacky »

pishpash wrote: post #76
RandomLensman wrote: post #71

Earlier quoted context omitted.

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.

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?

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.

Re: DeFi risks and the decentralisation illusion

#80

Post by RandomLensman »

pishpash wrote: post #76
RandomLensman wrote: post #71

Earlier quoted context omitted.

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.

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?

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?)

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