1/ QUESTION for #DeFi experts--has anyone seen analysis of DeFi projects under Misesian distinction of **commodity credit** vs **circulation credit**?
Here's where I'm going: if all debt in the DeFi system is commodity credit, then system is solvent & yield is coming from vol.
Here's where I'm going: if all debt in the DeFi system is commodity credit, then system is solvent & yield is coming from vol.
2/ But if some debt in the system represents circulation credit, then system is fundamentally not solvent at the systemic level--so that at least some of the yield is coming from counterparty risk, & then the question becomes "how do you quantify the credit risk in the system?"
3/ In other words, yield can be broken into 2 components: risk-free nominal yield + a credit spread. If all debt in the #DeFi project is commodity credit, then system is solvent (ie, all debt backed by someone else's equity)--so in theory no credit spread (excl. operational risk)
4/ If that's the case, then where does the yield come from--what does it represent?
In theory, it represents vol (vega). Vol is high in #crypto--high enuf to generate lots of yield, at least right now. But over time it might not stay that high. Time will tell.
In theory, it represents vol (vega). Vol is high in #crypto--high enuf to generate lots of yield, at least right now. But over time it might not stay that high. Time will tell.
5/ But if there's circulation credit in a #DeFi project, then at least some of its yield comes from unbacked leverage (credit risk).
Devil will be in details for each project. Must dig into the code to know.
Has anyone done this type of analysis of various DeFi projects yet?
Devil will be in details for each project. Must dig into the code to know.
Has anyone done this type of analysis of various DeFi projects yet?
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