A lot of Ethereum DeFi (and cryptocurrency in general) has been pretty frustrating to watch, because it's a lot of people with big ideas and little understanding of how to build stable financial systems.
In the case of Maker, what's interesting is that a stablecoin is actually possible. Maker has a really good core idea, several great elements to it:
1. The stablecoin is backed by collateral, typically a significant amount more collateral than the amount of stablecoin that has been issued.
2. People locking up collateral get greater exposure to Eth's volatility. So there's genuinely a reason to lock up collateral to issue stablecoins if you are bullish on Eth.
But, this breaks down a bit. There's no way to instantly convert the stablecoin back into the collateral asset, you have to find someone with a CDP who is willing to buy the stablecoin from you.
Similarly, there's no way to unlock your collateralized asset, you have to find someone who is willing to sell you the stablecoin in order to open up your vault and get your eth out.
So on both sides of the equation, you have this liquidity risk that doesn't really need to exist.
I could go on for a bit more, there are a bunch of other design decisions that are backwards and don't work well. But the fundamental ideas are actually pretty okay, and if you took a more traditional finance person and had them work through all the tiny details, I think you'd end up with something pretty powerful.
In that sense, it's almost like encryption. The tiniest detail being incorrect can make the whole construction useless, even if as a whole the fundamentals are pretty solid.
> There's no way to instantly convert the stablecoin back into the collateral asset, you have to find someone with a CDP who is willing to buy the stablecoin from you.
This is incorrect and actually doesn't make sense. An important part of DeFi are DEXes (decentralised exchanges) such as Uniswap and Kyber. There is a liquidity pool where you can instantly buy/sell assets. There is no 'waiting' to find someone (i.e. no problems with coincidence of wants). You definitely do not need to find someone with a CDP. You can hold DAI without opening a CDP. Contracts can hold DAI (as DEXes do).
> Similarly, there's no way to unlock your collateralized asset, you have to find someone who is willing to sell you the stablecoin in order to open up your vault and get your eth out.
Also incorrect. You need to pay back the debt of your CDP with DAI. You can do this easily by buying DAI on a DEX, paying back the debt, then releasing your collateral. Some services exist to do this in 1 transaction, so you don't need to actually 'buy' any other asset. You just send the transaction to a contract and they take care of the details.
The DeFi, specifically the Ethereum space, has moved very quickly in a short amount of time, so there are a lot of new concepts and instruments out there. I think a more traditional finance person will have trouble understanding it all as in some cases, there are no analogies to the traditional finance system (e.g. flashloans).
> I think a more traditional finance person will have trouble understanding it all as in some cases, there are no analogies to the traditional finance system (e.g. flashloans).
All "cryptocurrencies" are, in effect, complex securities that are derivatives of greater market factors. The crisis of 2007 showed the risk of using complex investment vehicles that were poorly understood by investors -- and the CDOs that were sold in the mid 00s were far more transparent and predictable than cryptocurrency. Given that crypto will always be one asset class among many, if the traditional finance system (which already operates outside any single fiat currency) can't understand it, they won't use it for anything more than speculation.
Using crypto as an investment vehicle requires a reasonably accurate assessment of risk. In the case of fiat currencies, central banks manage that risk so that investors can rely on the liquidity of the overall system without wiping out deposits. DeFi has no such mechanism, and no central bank to absorb a big hit temporarily in the case of a black swan event.
I still feel that cryptocurrency is just the 21st century version of penny stocks and junk bonds. Fiat currency works because its power as currency is secured by a government able to mobilize military and industrial power to solve market problems. The most heavily traded currencies (RMB, USD, EUR) are those backed by large industrial and military powers because those countries have the scale and political power to manage market risk. Centralized governance is a feature, not a bug.
If you hold Dai without opening a CDP, the only way to convert that Dai back to Eth is to find someone who opened a CDP and is willing to buy from you.
Similarly, if you opened a CDP and then sold the Dai, the only way to get your Eth back out of the CDP is to find someone who is willing to sell you Dai. The Maker liquidity crisis yesterday happened because there were more people trying to scoop up Dai and get their Eth out of their CDPs than there were people selling Dai, which meant that a lot of people were stuck holding leveraged positions on Eth that they couldn't exit. Even worse, the auction system was malfunctioning, so it appeared as though those people may not even get a fair value for their Eth if they did get liquidated (not to mention, they'd also have to pay the 13% fee for being liquidated, even if they got a fair price in the auction).
> An important part of DeFi are DEXes (decentralised exchanges) such as Uniswap and Kyber. There is a liquidity pool where you can instantly buy/sell assets.
This only works if the total number of buyers and sellers are balanced. The way Maker is set up right now, its possible for a large percentage of your Eth pool (or Dai pool) to be completely unavailable because the holders have not listed the Dai on an exchange. Simply having a decentralized exchange does not automatically guarantee liquidity - people have to agree to sell their assets on that exchange.
> You can do this easily by buying DAI on a DEX
The entire problem yesterday is that all of the Dai was scooped up from all of the Dexes. There was a period yesterday where the Dai price was >$1.11, meaning that CDP holders were paying an 11% premium to exit their positions. The Maker system had no exit valve for people stuck in this position.
> The DeFi, specifically the Ethereum space, has moved very quickly in a short amount of time, so there are a lot of new concepts and instruments out there.
There are also a lot of old concepts and well understood financial relationships that are being ignored, and a lot of highly predictable failure modes that are being forecasted as "black swans". The best team is likely composed both of people who have a very solid background in cryptocurrency as well as people who have a very solid background in traditional finance.
It's important to note that the vast majority of people who will own and use Dai have never and will never interact with the Maker protocol or CDP holders. You trade ETH to Dai on Uniswap and go about your day. You trade the Dai to ETH on Uniswap later. I'd expect most people just to go from fiat straight to Dai and back as well.
Maker itself is a system for the professionals and most users won't even know it exists and won't have to.
>So on both sides of the equation, you have this liquidity risk that doesn't really need to exist.
I'd love to hear more of your thoughts on this. It's apparently big problem with the Maker protocol, and seems to be an inherent issue with the use of a perpetual (afaik we're seeing the price of DAI spike as a consequence), but I'm not aware of a simple fix.
A good fix requires the whole system to be re-imagined a bit. You want to start with the invariant that a stablecoin holder can liquidate to Eth at any point, and that a collateral issuer can extract their Eth at any point.
Instead of having the collateral provider be the only one who can issue the stablecoin, you could build a system where anyone could acquire the stablecoin (Dai) by putting in an appropriate amount of Eth.
Any extra Eth that gets put into the pool will issue a volatile asset, which I'll call Vai here for simplicity. Where Dai has no exposure to volatility, Vai has increased exposure to volatility. As the Eth price rises, the amount of Eth that Vai can be redeemed for increases, and as the Eth price drops, the amount of Eth that Vai can be redeemed for decreases (this is the opposite of Dai).
At any time, Eth and Vai can be redeemed for Eth from the pool. As the price of Eth moves around, the pool becomes over-collateralized and under-collateralized.
If at any point the pool becomes under-collateralized, all Vai becomes worth zero, and all Dai can redeem Eth proportional to the amount of collateral that there is. Meaning, in a "black swan" scenario, Dai holders become exposed at 1x to the price volatility of Eth. This is much better than the whole system melting down, and the Dai holders do get to dodge a significant amount of the downtrend while the Vai evaporates. (Dai holders see no exposure until all the Vai is gone).
You can keep the pool balanced using interest rates. If you have a target collateralization level (say 150%), then any time the pool is under-collateralized, you can automatically drop the interest rate that Dai holders earn (going negative if necessary). If the pool is over-collateralized, you increase the interest rate.
A lower interest rate encourages Dai holders to withdraw and Vai holders to enter. A higher interest rate encourages Dai holders to enter and Vai holders to withdraw.
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The most important thing about the system above is that it is highly predictable. In all scenarios where the price of Eth moves, you can model what happens, and you have guarantees on how much Eth you can draw, and you can withdraw that Eth immediately (well, you'll need to pay blockchain fees and wait for a block, but you don't need a counterparty or any sort of system liquidity). The worst case for the stablecoin holders is that they get exposure to 1x Eth, but this only happens if Eth drops faster than people deposit Vai.
There are a bunch of math tricks you can use to allow people to select different exposure levels (you could have some Dai targeting 250% over-collateralization, meaning it's very robust to huge drops in Eth price, and other Dai only target 15% over-collateralization, and these two assets could be fully fungible against eachother) for Dai holders and Vai holders, but we are getting beyond the scope of a single HN comment.
this was my exact thoughts at the end of 2017 when Maker released their first version. Why instead of CDPs just don't use one big liquidy pool which initially funded with sufficient resources? If it is big enough - it would initially overcollateralized the system (when the cap is small) and can be used as a stabilization reserve, i.e. everyone would able to redeem their $1 stablecoin for $1 of ETH at any moment of time. I even try to design such a system https://stableunit.org/StableUnit-whitepaper.pdf
The main assumption that stablecoin with collateral/reserve has two values:
1) "redeemability value", i.e. the token without demand is worth $1 because you can redeem it for $1 of another asset with demand such as ETH.
2) network/native value: more people use the coin, higher the value. In the same manner as Dogecoin worth anything at all, like Metcalfe's law but for cryptocurrency. With an empirical estimation of growth asymptotic higher than NlogN.
The important part here that as the system grows bigger 1) grows linear but 2) grows to faster than linear which means there are some sizes of then system when 2) > 1). This practically means that you can back part of stablecoin with less liquid assets because they won't be used often (if all). It's one way to explain why USDT can function even with partially collateralized.
The problem with all of this, that one thing is to have system design (I'm convinced that there are many different decentralized stablecoin systems that can work) and another to build a working project with user adoption. I've spoken with many people at MakerDAO and they all know about the limitations/imperfection of the system. For oracles, they chose that expensive design because it was an "engineering approach which just works security". And as we see right now at stablecoins market cap, they were right to do so.
There were a few products prior to MakerDAO that failed when their collateralized peg collapsed, most notably BitUSD and NuShares.
MakerDAO is somewhat more sophisticated and holds way more capital but the fundamental problem is that you can't exclusively collateralize a dollar peg from a highly volatile unit of account with elastic demand or black swan events can wipe it out.
BitUSD had a different mechanism as it only allowed its own token as collateral.
The Maker protocol doesn't use MKR as collateral, instead it serves as an efficient debt engine for other liquid assets and its holders collects fees on these debt positions almost like a bank. The interest fees collected stream in real-time from those who take debt(yes, this is possible on a blockchain) and a large portion is sent to depositors who hold on to the dollar stablecoin a savings rate in real time too.
Ether is just the first asset being used to perfect the mechanisms needed for fully autonomous banking. Any real world asset can be tokenized to take advantage of this efficient lending protocol right now.
Minimal? My understanding is someone was able to pull ETH out at near zero DAI. Nothing the contract didn't allow, but unforseen use of it which caused some people who had invested that ETH to essentially lose their life savings!
It's more complicated. Their collateral ratio has dropped below the liquidation level of 150%. So at best they would only get a fraction of their collateral back (any liquidation has a discount and a 13% penalty) - fundamentally they lost because their speculative bet didn't pay off. So yes, they lost more than they should, but describing it like they lost everything because of the liquidation problem alone is misleading.
The "attack" was trivial in that there was only one bid at an auction - not enough people liquidating undercollateralized positions, but now so many people are looking at this it's never going to repeat again. It's an obvious risk only in hindsight.
>So now it just needs a little help from miners to actively exclude all other bidders.
A mining cartel that censors transactions is indeed a real risk. Fortunately, ethereum is switching to PoS where even an average person with a smartphone could realistically generate several blocks a day, as opposed to multiple megawatt (or even giga) mining farms, so it's only a temporary issue.
>My understanding is that in this case there were other bidders but they were drowned out by the winning bidder paying much more gas.
Most likely lack of liquidity and/or gas pricing misconfiguration. Even at an ultra-high 600 gwei (during the peak congestion, the market rate was ~200 gwei) the total fee was less than $10. Simply put: not enough people running liquidation bots.
> average person with a smartphone could realistically generate several blocks a day,
I seem to recall the proposed staking minimum being around $200,000...
Eth's administrators must have a kink for kidnapping.
It's far from clear that "PoS" can result in a system which is both secure and decentralized: https://download.wpsoftware.net/bitcoin/pos.pdf ... the limited academic work attempting to demonstrate such things have done things like assume that users were using a lossless ordered reliable broadcast medium (which is equivalent to assuming they were communicating over a consensus system). While the history of ethereum has demonstrated that in spite of claims to the contrary in their investment prospectus strong decentralization isn't a feature of the system, there are still many practical challenges even achieving faux-decentralization with PoS. Practically speaking this challenge is demonstrated by the fact that ETH's operators have continually pushed back their promised migration to PoS. Moreover, as was recently demonstrated with "steem" PoS can also easily be abused to rig outcomes just like that above concern with mining.
So I think its far from clear that this is a temporary issue. Instead, to me it looks like PoS has turned into a never-arriving panacea being used to excuse all sorts of serious flaws in the ethereum ecosystem in addition to ethereum itself.
Stake grinding is an obsolete attack (solved by randao, in the future strengthened with VDF asics).
The second argument that weak subjectivity is somehow unsafe is at odds with reality: it assumes some far away hermit that runs an old node after 10 years of hibernation, with no ability to communicate with others otherwise. In reality, crypto is a technology for resource allocation among humans also participating in that specific system, which means the only constraint is to make the bonding period sufficiently long that manual decisions are feasible and not overly costly. A system that requires a node to run for few minutes every few months to follow the same chain fulfills those conditions.
>Moreover, as was recently demonstrated with "steem" PoS
No, steem has DPoS, which is very different in practice. It has inherent centralization because there are only 21 witnesses, as opposed to potentially millions. It has stake delegation baked in the protocol which ensures all witnesses are public figures that know each other, which makes a cartel the expected outcome. Nodes are by design heavy which makes outside verification very hard.
Eth2 has to support up to millions of nodes at once. It has pro-decentralization penalties - penalties grow if others are misbehaving at the same time - which means if most of the network is on aws and it goes down, they start to lose their stake very fast, as opposed to random home node going offline in an uncorrelated manner for (most likely) no penalty at all. Same goes for slashing incidents due to contradictory voting.
The system is verifiable externally and can be randomly sampled, because it's stateless and state root is part of the consensus. This also means a block that tries to do something against the rules automatically functions as a fraud proof given only its parent's block header. It's not possible to design a system that's more easily verifiable: all it takes is one person somewhere to observe incorrect behavior to alert the others.
There are going to be centralized staking services, but they are inherently going to charge some fees, and given how light one staking node is going to be and the correlation penalties, most likely they aren't going to be a significant portion of the network.
>never-arriving
It turns out it's not easy to design a system with all these characteristics. PoW is an easy and a temporary hack solution, but that's all it is. Mining (at least sha256) is now fully centralized in China.
If a PoW network ever became really important - not as a speculative toy mainly for rich Westerners, but as something used by countries like Iran to evade sanctions on a massive scale - mining would became fully regulated with enforced kyc on every transaction. It's trivial to do, there's no way to hide those mining farms.
PoS can fully function on tor or other anonymizing network.
"An Ohio man was arrested for his operation of Helix, a Darknet-based cryptocurrency laundering service.
In the three-count indictment unsealed Feb. 11 in the District of Columbia, Larry Harmon, 36, of Akron, Ohio, was charged with money laundering conspiracy, operating an unlicensed money transmitting business and conducting money transmission without a D.C. license.
According to the indictment, Harmon operated Helix from 2014 to 2017. Helix functioned as a bitcoin “mixer” or “tumbler,” allowing customers, for a fee, to send bitcoin to designated recipients in a manner that was designed to conceal the source or owner of the bitcoin. Helix was linked to and associated with “Grams,” a Darknet search engine also run by Harmon. Harmon advertised Helix to customers on the Darknet as a way to conceal transactions from law enforcement."
Right. For some reason I misread your previous comment as miners, not mixers. But now I don't fully understand why you brought mixers up, mining is a different activity.
Maybe I'm missing something, but I suspect the odds of building a non-gameable system for people whose primary interest is speculative gaming are not going to be good.
If there really are people that literally put their entire life savings into a single, unproven vessel then they almost certainly did so because they were gambling it would make them (an order of magnitude+) more money than a more reliable stable alternative. They won’t find much pity.
No one lost 100% They lost their collateral and got to keep the loan the took out against it.
If I stake $2000 of Ethereum, and in return get $1500 in a stablecoin, when my $2000 in collateral gets liquidated I still have 75% of that in the loan I took out and can walk away.
The people with the 100% loss story are being deceptive
There was nothing unexpected here. Users traded their eth X days ago for dai, with the full intention of adjusting their liquidity characteristics
What happened here simply precluded the possibility of the reverse trade when the loan became under collateralized, this was not unclear to anyone involved
I don't know if it's true, but my impression is that the same people who got really into complicated crypto trades also got into complicated option trades once it became accessible via app.
I dont think it was an unforeseen use. People that execute these smart contract dark patterns knew for a long time and didnt steer public discussions that way.
The very foreseen problem was that people dont show up to governance decision in crypto. Yes you can use a blockchain for voting but nobody shows up.
The real problem is that there are no alert protocols built into wallets and client side defi apps.
Now people are discussing it.
The bigger gamble was whether liquidation and auction could occur fast enough to prevent emergency shutdown. They did, one person showed up to the auction and bid $0.
System worked.
Everyone with dollar signs now is going to research that and bid $1 until the order book is populated and it never happens again.
Software updates to overfit for this possibility would be worse.
> but your comments sound like "we have a proof of concept that this issue could be solved, therefore it is solved".
What? No. This is about more people showing up to a foreclosure auction because they heard about the guy that bid $0 by being the only person at the foreclosure auction, and flipped a property for $4mm.
And then you have an actual market.
The auction house itself doesn't need to be patched. The auction process doesn't need to be patched. If the auction house has sympathy for the people that got foreclosed on then they can do whatever they want to compensate them from their own pocket, they can automatically do that in case a reserve bid isn't met, but the fact that the auction occurred in a timely fashion is proper behavior.
I just feel like it's a typical libertarian comment that markets solve things because they will probably react eventually. It's not wrong to expect the feedback, but in the meantime, havoc that affects people occurs. That legitimately can affect peoples' opinion of a process.
The problem with marginalizing it to "libertarian" means that you imagine that it is a future ideal reality for libertarians that doesn't already exist, while you simultaneously don't even entertain the argument presented. Cognitively negligent.
If the auction didn't happen, then there would be a software problem to fix and a criticism of trusting MakerDao and "decentralized finance" smart contracts. If the auction did happen, and only 1 person showed up and bid as low as possible, there isn't a problem.
I was on the MakerDao video conference, and people suggested software tweaks such as a minimum, and people pointed out that it wouldn't make much of a difference for the person that got liquidated and if the market actually was moving faster (like it was at the time) an arbitrary - but software hardcoded - minimum would have disrupted the auction anyway.
The only thing that happened here is nobody showed up to the auction. Now you and thousands of other people know that there is an opportunity to be the only one at a auction, and non-existing UI prevents a crowd from being notified and showing up. And yet, if you want the opportunity to make millions, you'll figure it out, and so will other people, and you will start to outbid each other.
Black swans happen once a decade or so: dotcom bust, 9/11, GFC, now coronavirus. If the crypto can't deal with it, it's not much of an investment or a store of value.
Well the solution is to have some sort of emergency fund which activates in black swan events to rebalance the portfolio. It's just something to factor in. Adds some costs to operations but only fractions of a percent.
Quite the opposite actually. At least to me it means that institutions actually have been holding crypto reserves, which I'd say gives it a fair amount of legitimacy.
Crypto didn't sell off in a vacuum this time, it sold off with the market at a time when it should be selling off.
I know what you're thinking, but that's not the case. Right now, same as in 2008, institutions are liquidating "store of value" assets to open up more liquidity. That $1.5T in fed repo? Well the fed doesn't take BTC as collateral. And since they don't nobody else is right now. Same with gold. Cash and T-bills are king, so liquidate everything else.
Really this shows that crypto is at least starting to be folded into the main financial world. It actually for once has some degree of beta.
Most of the contracts in MakerDAO are currently holding collateral worth 300% of the loan amount. You won't see any widespread failures until either that changes or the price drops at least 66%.
When you are involved long enough with crypto, you'll see a lot of stupid ideas. DAI is one of them.
For those who don't have time to get into the weeds, DAI is a "digital native" stable coin. It wants to create a 1-1 peg to USD using an underlying volatile asset, Ethereum. If you want to use USD, it's probably most efficient to go get USD. :) But for some ideological reasons (decentralization), DAI wants to be USD but also digital native. So they "lock" the underlying asset, Ethereum, and issue DAI coins. The premise is with intelligent computer algorithms, we can maintain 1-1 peg between a digital asset (Ethereum) and a real-world asset (USD).
Digital assets are digital. Humans are the arbitrageurs. Humans are emotional. DAI is trying to create stability on top of Ethereum volatility. It's kinda like building a stable house on a shaky foundation. Your building will either collapse or you spend so much money patching the flaws of your shaky foundation. This is a laughable idea for those who live in reality. But I guess some computer programmers/investors live in alternative realities too long. They forget about reality.
Whatever your algorithms are, you need to arbitrage risks. So you will always need to lock up more USD-ETH to account for risks. To be safe, maybe, you need 1.5 USD-ETH for a DAI USD. However, with digital scarce and volatile assets like Ethereum, there's a chance that 1.5 USD-ETH will drop to 0.9 USD-ETH. At that point, you will be underwater. Yesterday, it did. If you need to lock up 1.5 USD for 1 USD, you may as well go get 1 USD. It's a dumb idea to use 1.5 USD to get 1 USD.
DAI has a lot of jargon and technology (more layers on top of the shaky foundation). These things make it look sophisticated and fool people. The basic problem is very simple. You only need elementary school arithmetic and logic to know its flaws and inefficiency.
>Digital assets are digital. Humans are the arbitrageurs. Humans are emotional. DAI is trying to create stability on top of Ethereum volatility. It's kinda like building a stable house on a shaky foundation.
And yet it works. Dai has practical results; it has weathered massive volatility in the price of Ether over the past 2 years.
>If you need to lock up 1.5 USD for 1 USD, you may as well go get 1 USD. It's a dumb idea to use 1.5 USD to get 1 USD.
If it's such a stupid idea then nobody would do it. Yet, there is now 350 million dollars worth of collateral people have put up of their own volition just to generate some Dai for themselves in this fashion. stats: https://defipulse.com/maker
>DAI has a lot of jargon and technology. These things make it look sophisticated and fool people.
Or you just don't understand how it works. Dai is a complicated solution to a complicated problem, but its not some trick.
> Or you just don't understand how it works. Dai is a complicated solution to a complicated problem, but its not some trick.
But the problem isn't complicated. If you need something worth 1USD, buy 1USD. It is by definition stable relative to 1USD. You don't need to understand complicated terminology or esoteric failure modes.
People buy 1USD of Paypal account value for 1USD all the time, do you say the same thing to them?
I'm not saying I definitely think Dai is a good idea, but fundamentally the value isn't the only thing that matters. The ability to transfer that value is important and Dai offers something different to USD there.
Elsewhere in this thread posters are talking about users losing their "life's savings", but you're right perhaps they weren't investing. Maybe they just wanted to park money someplace they viewed as safer than a traditional savings account or treasury bonds.
Presumably this is because there's a trade that promises one side something (stable value coin vs USD) that has another side that offers something different (profits if everything works out, losses if it doesn't?). Kind of like Lloyds of London?
I think the issue is that people are using DAI to leverage what is an "investment" (or gambling, depending on your perspective) in ETH. But this isn't a failing of DAI. DAI merely allows you to leverage an existing position in ETH into a higher risk / higher reward investment, the DeFi way. This is only one of DAI's use-cases.
That's probably not a good idea given how risky ETH is on its own, but again, it is not a unique failing of DAI when people use it in very risky ways. For example, you could take out a personal loan to achieve the same level of financial irresponsibility (as many people did when they used their student loans or whatever to buy crypto).
> If you need to lock up 1.5 USD for 1 USD, you may as well go get 1 USD. It's a dumb idea to use 1.5 USD to get 1 USD.
DAI locks up 1.5 USD of ETH, not 1.5 USD. There is an important difference. The main benefit/use of DAI is that it effectively lets you increase your leverage when you are betting long on ETH. The trick is that when you lock ETH in the contract you can then use the resulting DAI to purchase more ETH, lock up that ETH/etc. The end result is about 3X leverage for relatively minimal fees.
The real idea here is even beyond going long on ETH. It's multi collateral DAI. The idea that you can (eventually) lock up any collateralized asset and mint DAI. Need to take out a mortgage on a property you own? You can do it automatically and atomically through smart contracts without any middlemen. Eventually people could tokenize things like their future earnings and take out a loan against that now. As dystopian as that last point sounds, it illustrates the point.
Where on earth are you going to get accurate price data for a house when you allow this? What if the foundation is crumbling and there are termites? The process of getting a mortgage involves a ton of inspections, background checks and paperwork. No amount of magic blockchain dust will change that.
> Eventually people could tokenize things like their future earnings and take out a loan against that now. As dystopian as that last point sounds, it illustrates the point.
Yeah that’s just called an unsecured loan, you can get one online now in minutes.
Why can't all the background checks and inspections be part of the process towards tokenizing the house? If everything is verifiable and transparent on the blockchain it can surely be used for this process.
The key with this is it's not unsecured. It's secured by something.
Secured by what? Magic beans that live in your computer? That's strictly less powerful than the contract law an unsecured loan is based on today. It's also totally verifiable: the person lending you the money has every interest in retaining an audit trail for themselves. They're the only ones that need to verify this. Who on earth else needs to know you have a loan?
"It's kinda like building a stable house on a shaky foundation"
Maybe it's kind of like building your house on sand and believing that with powerful enough hydraulic actuators controlled by fast computers and sensors, you can keep it stable. Dynamic instability is proven to work on fighter jets, right?
You could use something like uniswap and use their ETH/USDC pool as a source of price data for ETH. This is a bad idea because its easy to manipulate that one price feed but that is technically a truly decentralized price feed.
One of the main purposes of cryptocurrency IMO is to replace the concept of debt. So I find the idea of using blockchain to implement debt to be ridiculous.
Why do you need debt if any group of people can create a cryptocurrency and raise money that way?
Debt is an outdated concept and a dirty hack on the financial system, it allows one person to lend money to another person to run their business without owning any part of the business. In today's reality, there are two scenarios:
- The business succeeds and the borrower can afford to repay their debt. The lender only gets back their principal plus interest even if the business no matter how successful the business was. If the lender had invested in the business instead, would have gotten more out of it.
- The business fails and the borrower declares bankruptcy. The lender may lose all their principal; they may have gotten some interest payments if the business was running for some time but it typically doesn't come anywhere close to offsetting the loss of principal. Liquidating remaining assets likely won't cover it either. If the lender had invested in the business instead - In the event of business failure, they may still have been able to get similar returns because they could get a share of the value of remaining assets from liquidation. The only thing they would miss out on is preferential treatment in the event of liquidation... Which is the financial equivalent of travelling first class on the Titanic.
So debt as a concept doesn't make sense from the lender's perspective. As a lender, if you win, your upside is limited. If you lose, your downside is not limited (not any more than it would have been if you had owned the shares outright and could benefit from asset liquidation in case the business had to shut down).
Not only that, but forcing the business to constantly make debt repayments only makes it more likely that they will fail. The lender is setting themselves up for failure from the beginning.
That's why only banks loan nowadays. It doesn't make sense. It just allows the Fed to keep giving free money to their cronies.
No, you would save up to buy a car.
Same for a house, you would save up to buy it. The average house price would be lower because demand would be lower because only people who could afford it would be able to make an offer. Same supply, lower demand means lower price. You won't have to compete with over-leveraged fools who are on their 20th credit card as is the case today.
Saving is fine, as long as you know what your needs will be ahead of time and can wait.
But the social purpose of loans is to help people who have an urgent need, or an unexpected one.
Living beyond your means isn't inherently part of borrowing money.
If you can't get a loan to buy a house, having to save for 30 years is in some sense, making you a lot poorer. You only have so long to live, and for 30 years, you don't get to live in the house.
And if you can't get a loan when something unexpected happens, then bad things could happen, that are really unnecessary. People don't have to prepare independently for all possible disasters because we live in a society.
If you think borrowing money is bad, what about borrowing things? Should rental cars be eliminated? Is it only that borrowing things should be free? Is borrowing a cup of sugar from your neighbor ok?
Edit: I should say, urgent, unexpected, or short term.
The other aspects which you see as deal breakers that make business impossible are actually all negotiated terms to maximize the likelihood of success for both parties.
In the case of Maker, what's interesting is that a stablecoin is actually possible. Maker has a really good core idea, several great elements to it:
1. The stablecoin is backed by collateral, typically a significant amount more collateral than the amount of stablecoin that has been issued.
2. People locking up collateral get greater exposure to Eth's volatility. So there's genuinely a reason to lock up collateral to issue stablecoins if you are bullish on Eth.
But, this breaks down a bit. There's no way to instantly convert the stablecoin back into the collateral asset, you have to find someone with a CDP who is willing to buy the stablecoin from you.
Similarly, there's no way to unlock your collateralized asset, you have to find someone who is willing to sell you the stablecoin in order to open up your vault and get your eth out.
So on both sides of the equation, you have this liquidity risk that doesn't really need to exist.
I could go on for a bit more, there are a bunch of other design decisions that are backwards and don't work well. But the fundamental ideas are actually pretty okay, and if you took a more traditional finance person and had them work through all the tiny details, I think you'd end up with something pretty powerful.
In that sense, it's almost like encryption. The tiniest detail being incorrect can make the whole construction useless, even if as a whole the fundamentals are pretty solid.