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DeFi risks and the decentralisation illusion

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Re: DeFi risks and the decentralisation illusion

#81

Post by fennecfoxen »

nickff wrote: post #48
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…

> "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…

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)

Re: DeFi risks and the decentralisation illusion

#82

Post by exdsq »

kgwgk wrote: post #49
exdsq wrote: post #45

Earlier quoted context omitted.

Care to show one or two financial instruments that were claimed to be "novel" but were made "illegal a century ago"?

https://www.bloomberg.com/opinion/articles/2015-06-19/bitcoi...

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.

Re: DeFi risks and the decentralisation illusion

#83

Post by Qworg »

anonymousDan wrote: post #51
Osiris wrote: post #42

Earlier quoted context omitted.

DeFi loans are over-collatoralized usually by 1.5-2x. If you want to borrow $100k, you put up $200k in collateral.

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?!

Different tax treatment. Locking up to buy something with the loan doesn't expose you to gains.

Re: DeFi risks and the decentralisation illusion

#84

Post by lottin »

jermaustin1 wrote: post #57
lottin wrote: post #50

Earlier quoted context omitted.

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…

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 sp…

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.

Re: DeFi risks and the decentralisation illusion

#85

Post by pishpash »

smackeyacky wrote: post #79
pishpash wrote: post #76

Earlier quoted context omitted.

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…

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.

Re: DeFi risks and the decentralisation illusion

#86

Post by jacobr1 »

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?

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?

Re: DeFi risks and the decentralisation illusion

#88

Post by hellojesus »

aeternum wrote: post #14
lottin wrote: post #11

Earlier quoted context omitted.

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 trus…

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.

Re: DeFi risks and the decentralisation illusion

#89

Post by louloulou »

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…

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.

Re: DeFi risks and the decentralisation illusion

#90

Post by amirhirsch »

defaultprimate wrote: post #73
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

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
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