, 31 tweets, 13 min read Read on Twitter
The question for the #ethereum community is, how do we do #defi without creating another ICO boom and bust like #YOLO situation... IMO the main cause of current eth/btc price being out of whack with the immense technical progress in and around eth over the last two years.
#bitcoin is overpriced because there's been very little technological progress. But finance isn't just about technology. It's also about trust. #bitcoin is overpriced vs better tech including #ethereum BECAUSE nothing changes, same as the UK and US high street banks.
Finance isn't the best space to move fast and break things. Alright it isn't health care or space flights and #innovation is never risk free but its important for the community to call out things that don't make sense

And then it's important to call out solutions that would make sense. #legalTech #riskTech and #regtech are the three legs without with #defi can't be sustained. Good news, the tech exists for those who care enough not to #YOLO
One may want to believe that #technology will change everything in finance. It turns out that history doesn't support that view and this time isn't different. Let's take a look at what has or has has not changed in finance because of previous breakthrough technologies.
Throughout history, many cycles of technological #innovation have failed to change 1. Credit as the foundation of money 2. The need for trust for credit to work. 3. Greed and fear that amplify trust 4. The need for some form of collective authority to enable non monetary trust.
What technology has changed and mostly reduced in every cycle of #innovation is the cost of 1. Information 2. Distribution 3. Access 4. Transactions 5. Controls
People think of #technology as ICT only. Double entry bookkeeping, central banking, risk management techniques, modern portfolio theory and auditing were also critical non ICT technologies that raised living standards by enabling free-er flow of credit around the planet.
Progressive #innovation s in software, hardware and communication protocols reduced the cost of each of the social technologies involved in producing, distributing and consuming financial services, increasing the reach of finance and the scale of financial institutions activities
What hasn't happened is that the cost of production of financial services hasn't gone down to zero. This is because as long as there's credit, someone either the consumer or the producer will have to bear the cost of trust which will be amplified by cycles of expectations
The achiles heel of most #cryptocurrency finance is credit. Everything works beautifully in bearer asset planet until the real world of credit and defaults is brought in.
In bearer asset planet of #cryptocurrency the #blockchain enforces trust... with exceptions involving miners and hacks but let's ignore those for a second.
Trouble is that a trust less economy of bearer assets can barely feed a few people at 10k btc/pizza max. To grow this economy to the moon we are are forced to re-introduce credit with Coinbase, Mount Gox and Binance ET Al.
We are forced to introduce dirty dirty fiat into the system which is just a credit note issued by the sovereign
Once that 'trustless private credit economy' predictably fails, Credit now becomes more complex and its not unexpected that the next wave of #Crypto finance is ALL ABOUT more complex credit and lending... but this time backed by collateral eg maker and legal docs ie stos.
... and ICOs which are private credit notes whose issuers unfortunately don't know that they are borrowing fiat indirectly. When they default ie don't deliver, the credit notes aka ico tokens go to zero
So if we ignore the software and focus solely on money as social technology, in #Crypto we have got from no credit to informal credit to implied credit to overcollateralised credit.
Essentially, thanks to the evolution of the pemissionless shared ledger, we have gone back in history and seen a rapid evolution of what are essentially primitive money systems using brand new technology
From a tech perspective, #Crypto is exicting and new. From a money perspective, quite primitive so far.
So what happens next? How far can we go with the social technology called money in a permissionless network? Can we go below 100% collateral to say, 80,50,0% collateral?
Is it possible to measure, monitor, manage and clear credit without KYC/#identity and reputation? Can there be a functioning financial system on the permissionless #blockchain without a credit scoring system or without mutualising credit losses?
How long before the sovereign backstop is needed for a monetary system to work beyond speculation? In a cross border, public #blockchain context where no sovereign has a fiat authority, who provides that final #credit backstop?
In the #ethereum #DeFi ecosystem, @MakerDAO s #dai currently resembles fiat currency pegged to USD with makerDao mirroring some open market ops of a central bank. The peg has held surprisingly so far.
My personal bet is that thanks to us greed and fear prone humans, a permissionless credit system without identity, reputation/credit scoring and legal recourse should be inherently unstable and even more prone to contagion than the modern global banking system.
However, recent work by @OpenLawOfficial and @fluidityio has made notable progress in terms of connecting the modern financial system to the #defi world of currently primitive credit.
In my mind it's inevitable that introduction of real world assets as collateral will reintroduce known intermediaries, especially custodians into the #defi ecosystem - especially for custody, client money protection and asset servicing. That can't remain a permissionless system.
Of course, once we relax the 'permissionless' assumption, sophisticated credit and money systems become possible.
This could go two ways... 1. Evolution of an algorithmic/mutualised 'sovereign' like maker or 2. Reinventing the modern monetary system onchain with some, but fewer intermediaries. Either way, the experiments are fascinating for drawing inferences about the future of banking.
So far, after three decades of #fintech predictions to the contrary, banks still aren't going anywhere. This is because custodying financial identity and financial reputation is the foundation of managing credit, which is basically what money is.
My view is that to go beyond interesting experiments, any form of finance, centralised or decentralised will need to address three things: #identity, #reputation and legal recourse and those three are the areas #defi Innovators should focus on rather than on high risk products.
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