Thread by @bramcohen

So there are *ahem* some 'defi' projects which claim to get you risk-free returns on your Ethereum deposits. Time for a not-so-hot take (thread)

First of all, for those of you saying 'Isn't that, like, the classic red flag for a Ponzi scheme?' Well yeah that's a reasonable instinct, but I'll try to make a case for these things and point out more specific problems

First of all, a stablecoin has a business model: Some fraction of the funds are never redeemed, so whenever deposits are made you can keep some fraction as profit. If nothing else, there's some breakage in the system (but more on that later)

So you can set up a business which has this business model, which gives it profit, sell off interest in it as a token, and use the proceeds as deposits to get reserve backing up your stablecoin started.

The actual projects have a bunch of other stuff thrown in about reserve requirements and price oracles and such. It doesn't improve the story at all and they aren't terribly clear externally (and possibly internally) on the details, so I won't get into the weeds

This of course has the failure mode that people redeem more than the reserve amount, either because there's a run on the bank or because the technology has gotten myspaced. Anyone who doesn't know about George Soros and the Bank of England has no business designing \

these things but that seems to be the norm. And of course most tech stacks get myspaced eventually, with Myspace itself being a great example but also Friendster, Yahoo, Altavista, etc.

There are also numerous legal risks. I am not a lawyer and this is not legal advice, but the investment and issuance sure looks like unlicensed securities and the stablecoin activities sure look like unlicensed banking

This isn't a 'This is an innovative model and the existing legal frameworks don't apply' sort of situation. What's being done looks pretty normal from a legal standpoint and some parts of it are securities and other parts of banking and everything looks like it's skirting the law

Also that thing about breakage? In many jurisdictions that money can't be pocketed, it has to be held in reserve and eventually handed over to the state. This isn't a an old regulation stopping an innovative business model. Banks stealing from \

their customers is an old business model, and stopping it is exactly what the regulations are there for.

So where are the returns coming from? It's a combination value from a (possibly) legit business, counterparty risk that the whole thing possibly (maybe inevitably) goes kaput, and slow moving Ponzi scheme.

In the past I've given analysis assuming the second explanation, which may be charitable. As you may guess I'm not terribly bullish on this stuff. On top of everything else these projects start with a price oracle which \

they assume fixes the whole pricing problem, apparently unaware that price discovery is one of the primary functions of financial markets and needs to be solved first before tackling more advanced problems. Yeah, I'll be staying away from that one.