1/ WHAT IS THE FUTURE OF DEFI AND CEFI?
Why #DeFi on-chain markets are the future and what is Trading 3.0 going to look like? How is the current crypto market stress going to reshape the market microstructure?
A thread.
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Why #DeFi on-chain markets are the future and what is Trading 3.0 going to look like? How is the current crypto market stress going to reshape the market microstructure?
A thread.
๐๐๐
3/ As a context for this thread:
#CeFi (centralised finance) refers to "off-chain", traditional finance institutes, who have secret paper agreements and whose assets and liabilities are not disclosed.
#CeFi (centralised finance) refers to "off-chain", traditional finance institutes, who have secret paper agreements and whose assets and liabilities are not disclosed.
4/ #DeFi (decentralised finance) refers to "on-chain" protocol finance, where all transactions are public and trades are controlled by smart contracts instead of individuals like directors.
5/ Crypto markets have taken beating and for good reason. Macroeconomy Putin's war, COVID in China, are dragging everything down. However, some of the pain is self inflicted.
6/ The self-inflicted pain comes in the form of centralised lending and trading services that have grown too fast and too big
- "Guaranteed" very high yield %
- Borrowed money
- Lending out this money to high risk ventures
- Now facing liquidity crisis
- "Guaranteed" very high yield %
- Borrowed money
- Lending out this money to high risk ventures
- Now facing liquidity crisis
7/ Centralised lending services took money from both institutional investors (hedge funds, family offices) and a man on the street. Then they either invest this in staking themselves, lend it out for traders (3AC) to generate the yield.
8/ Centralised counterparties being bankrupt or with liquidity issues include
- Three arrows capital (3AC)
- Celsius network
- BlockFi
- Babel finance
and maybe soon
- Tether USDT
- Three arrows capital (3AC)
- Celsius network
- BlockFi
- Babel finance
and maybe soon
- Tether USDT
9/ Some good threads and posts on the topic:
13/ The problem is that lending services like Celsius and BlockFi do not disclose the risk to their investors properly. In free markets, the yield always goes up with increased risk.
That's the only way to make money faster: take more risk.
That's the only way to make money faster: take more risk.
14/ Security regulators love to take down companies on false advertising and inproper disclosures.
15/ If you have money in centralised services, my advise is:
If panic it pays to panic first.
If panic it pays to panic first.
17/ The key component that differs on-chain protocols from centralised services is transparency: one cannot hide its risk or decisions.
18/ Anyone has full transparency of protocol lending pools and other positions and can calculate
Or often you do not need to calculate, as there are rea-time dashboard available like this one from @fraxfinance:
app.frax.finance
Or often you do not need to calculate, as there are rea-time dashboard available like this one from @fraxfinance:
app.frax.finance
19/ Even if an end user itself does not understand the risk, there exists an active group of journalist who will break the news. See some famous names on my top accounts to follow list here:
https://twitter.com/moo9000/status/1535945694166622209
20/ A proper* #DeFi protocol also has a DAO governance layer. One person cannot do YOLO trades without stakeholder consensus. This slows downs decision making process, but it also prevents insider fraud.
* Many claimed DeFi protocols are not proper
* Many claimed DeFi protocols are not proper
21/ If the project is large enough
- There are bound to be people who follow the project
- ...and may times have their own capital at risk
- There are bound to be people who follow the project
- ...and may times have their own capital at risk
22/ - If they see something risky or smelly going on they will ring the bell
- Their voices are amplified by press, forums, etc. eventually reaching most of the stakeholders
- The governance debate ensues
- Their voices are amplified by press, forums, etc. eventually reaching most of the stakeholders
- The governance debate ensues
23/ Note that none of this can completely stop realisation of risks. Low likelihood risks might still occur even for the most conservative protocols when markets are very stressed.
One can be just unlucky.
One can be just unlucky.
24/ But what #DeFi does is that prevents risk built up. Any uncollateralised lending, any illiquidity forming, can be seen further away. It also cannot be hidden, mitigating any risk contagion issues.
25/ A good example of good DAO governance risk controls includes this discussion between @makerdao and @aaveaave about disabling Direct Deposit Module (D3M) to prevent risk build up.
coindesk.com/layer2/2022/06โฆ
coindesk.com/layer2/2022/06โฆ
26/ Of course there can be questionable decisions like spending treasury to boost "price and morale" during extreme distressed times. It is more risk averse to maximize any runway - even though this incident is cosmetic:
https://twitter.com/mhonkasalo/status/1537478112069488643
27/ But #DeFi is not immune to bad risk taking either.
The protocol governance may decide to try to YOLO trade their way out from bad debt. The case Magic Internet Money (it's magic is fading).
The protocol governance may decide to try to YOLO trade their way out from bad debt. The case Magic Internet Money (it's magic is fading).
https://twitter.com/autismcapital/status/1537941573383561217?s=21&t=CU4NwqqLQ9dezNdeiAdmvA
28/ Not to mention Luna and Terra UST, which was kind of DeFi. However the warnings about Luna were touted months before the crash and the conditions in which UST would crash were well-known.
29/ What does happens next to crypto markets?
What is the price target?
Will the pain last forever?
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What is the price target?
Will the pain last forever?
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30/ Crypto markets are not likely to go up before the built up risk is develeraged.
This may mean wiping out actors that have taken unreasonable risks.
This may mean wiping out actors that have taken unreasonable risks.
31/ But unlike in banking in 2008, in crypto, no one is too big fail. Those who are standing after the carnage is very, very, solid projects.
This is the way.
This is the way.
32/ A lot of people have lost money. But I feel this is not different of losing money in 2018-2019 bear when $ETH went from $1400 -> $90, over 90% drop.
Let's not exaggerate this pain with clickbait headlines.
Let's not exaggerate this pain with clickbait headlines.
33/ Regulations will get tighter. It's good because a lot of these lending desks where outright lying to their users.
Gary G is out there to take us all down.
Gary G is out there to take us all down.
34/ #DeFi cannot lie, so it would be good that these regulations would not touch DeFi yet. Proper on-chain protocol with proper governance layer should be exclused for any regulation, for the reasons discussed in this thread.
35/ Also #Bitcoin, #Ethereum, other blockchain, communities should come together. While there are large disagreements, those disagreements are smaller than any outside threads like banning mining, banning all cryptos.
Some politicians (even in) Western democracies want this.
Some politicians (even in) Western democracies want this.
36/ Even if you do not like people or their ideology, it is better to unite on crypto matters. Because somewhat unite community can get much more done regarding the upcoming crypto wars than fragmented community where people shitpost each other.
37/ FIN
And whatever happens, I will keep drinking my coffee and building.
And whatever happens, I will keep drinking my coffee and building.
38/ Ps. Thank you for @mhonkasalo, @chainyoda, @lawmaster and others for keeping me up with the recent CeDeFi events. So much going on right now.
Pps. A very insightful post about the situation of Babel Finance by @WuBlockcha1n
wublock.substack.com/p/investigatioโฆ
wublock.substack.com/p/investigatioโฆ
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