DeFi: a discussion on the rise of Decentralized financial services
The last few months I’ve noticed a surge of DeFi usage and I’m trying to wrap my head around it’s usage. Flash loans, I can understand. People take out a loan by hedging collateral, and repay it without losing their initial collateral. It’s great since you get the fast cash you need (and you don’t lose the crypto you’re holding in case it moons).
But all the rage regarding curve bonding, how everyone is taking loans, staking it in other services to mint governance tokens, which then are used elsewhere to produce another token etc.
Is this healthy long term? It’s not as if someone is adding cash in their Akropolis account and they just accumulate interest from that. It feels like chaos when I try to think about why that happens and how it potentially helps the end user who wants a loan.
This is not an attack in anything. I feel dumb and I enjoy a good discussion (if the community is up for it).
Posted Jul 23, 2020, 1:19 PM UTC
Don't. The first step to knowledge is understanding that you need more information. Kudos for reaching out humbly & with an open mind.
Broad strokes: DeFi is about annihilating the massive rent-seeking that legacy finance has had locked in for 50+ years.
Venture capital, hedge funds, private banks & central banks have gamed financial systems to extract massive profits while injecting near-existential risk into our societies (2008, 2001, 80s & 90s.) Benefits have been captured by small minorities while costs has been externalized to everybody: gigantic national debt, growing wealth inequality, run-away inflation, depreciation of most labor markets (simply put: same job now vs 10 years ago pays less.)
Specific example: private banks borrow from central banks at low interest rates & lend at higher rates, pocketing the difference. The incentive to maximize this process & bypass regulatory oversight led to out-of-control speculative lending & financialization of mortgage products, culminating w/ the 2008 implosion. A few select entities (Lehman Brothers, Washington Mutual) went bankrupt, but the vast majority of the global financial system was propped up at the expense of taxpayers.
Although in an an stage, DeFi provides an alternative to a deeply dysfunctional & arguably predatory financial systems, relying on blockchain code to:
#1 better aligns incentives with good behavior and
#2 enable voluntary contractual exchanges (loans, derivatives, services) between willing individuals.
Current functionality is limited & largely speculative--using existing crypto as collateral for leverage, more or less.
But as functionality improves (scaling, more secure smart contracts, solutions for complicated services like arbitration, insurance or on-blockchain representation of physical world wealth) more & more people will be able to by-pass the rent-seeking previously secured by legacy finance, and profits will be assigned to those that participate as good actors rather than predatory institutions.
Amazing answer. Thanks for taking the time, and patience, to write this for me (and everyone else reading right now!).
To be honest DeFi and the prospect that 2 billion in this world, that have never had access to financial services, can finally get their loans or make a profit by lendin money safely and securely, is what makes blockchain technology and it’s application to finance so great.