Thread by @ElonBachman

Talked to a buddy whose Fintech lending firm is being "disintermediated" by crypto

The innovation turns out to be paying retail 10% for demand deposits, then lending (long term) to third world Fintechs at low teens APYs, guaranteeing credit losses

Oh, and the lending is unsecured, lol

And the borrowing is done through a securitization structure

But there is no indenture (and no collateral)

And the protocol is governed by an illiquid governance token that can be attacked

So it's a CDO, but it makes 2006-era mortgage securitizations look like T-bills

Ok, I was wrong about the deposits being demand deposits. Depositors can only redeem their pro rata portion of any principal repayment.

The protocol allocates more senior capital to pools that are underwritten by junior lenders with good track records

So because this is on the blockchain, you can launder yourself a good track record by borrowing from yourself many times, then getting a HUGE loan and defaulting

I am now advising my buddy to fire his lending staff, hire a single programmer who understands crypto, and go into business attacking this protocol

There is a neat "auditor" function that is akin to a PoS validator. Auditors can use arbitrary out-of-band tools to determine whether a borrower can create a lending pool

But in practice there's no way to prevent collusion between borrowers / lenders

Need courts for that.

Quis audit ipsos auditores?

With 22% of the auditor vote, you can shut down the protocol

To prevent this, there are oracles who decide who gets to be an auditor

If you look long enough, you can always find the centralized trusted party behind the curtain!

"Oracle" is the lynchpin of the entire contraption, and nowhere in the white paper is it defined

Which makes me assume it's just a hand-picked group of a16z associates

And makes me wonder if all this would pass the Howey Test...