Decentralized Finance: On Blockchain- and Smart Contract-Based Financial Markets(research.stlouisfed.org)
research.stlouisfed.org
Decentralized Finance: On Blockchain- and Smart Contract-Based Financial Markets
https://research.stlouisfed.org/publications/review/2021/02/05/decentralized-finance-on-blockchain-and-smart-contract-based-financial-markets
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MakerDAO (aka oasis, dai system) is one of the coolest software project I've ever used, highly recommend anyone checking it out.
It's essentially a system of smart contracts and surrounding system which create a stablecoin pegged to the dollar (1DAI=1$) backed by crypto collateral.
One of the benefits of that is, you can access your crypto and use it without selling your position, which means you're not paying any capital gains taxes. There's a 4% stability fee with borrowing against your collateral (notice it's not an interest, it's a fee, which means many people who can't deal or don't want to pay/receive interest can actually use it). 4% is a drop in the bucket when you consider gains on your assets and a lack of capital gains tax.
p.s. I'm a long term BTC believer who always thought most of these projects were scam until I've actually started researching and trying to understand it.
It's essentially a system of smart contracts and surrounding system which create a stablecoin pegged to the dollar (1DAI=1$) backed by crypto collateral.
One of the benefits of that is, you can access your crypto and use it without selling your position, which means you're not paying any capital gains taxes. There's a 4% stability fee with borrowing against your collateral (notice it's not an interest, it's a fee, which means many people who can't deal or don't want to pay/receive interest can actually use it). 4% is a drop in the bucket when you consider gains on your assets and a lack of capital gains tax.
p.s. I'm a long term BTC believer who always thought most of these projects were scam until I've actually started researching and trying to understand it.
> always thought most of these projects were scam until I've actually started researching and trying to understand it.
Unfortunately these seems to be the case for most people. What have you this notion that it's all a scam? What it news pundits? Twitter/Reddit threads?
Unfortunately these seems to be the case for most people. What have you this notion that it's all a scam? What it news pundits? Twitter/Reddit threads?
I've been in crypto since 2014 and was here for 2017 when all ICOs that did absolutely nothing were being pumped and dumped, so I wrote off ether for a few years until defi kept creeping up in my news couple times.
I think there's still lots of scams out there, but the big projects like Maker, uniswap, compound, etc, have made me change my mind.
I think there's still lots of scams out there, but the big projects like Maker, uniswap, compound, etc, have made me change my mind.
I'm trying to wrap my head around it and I have a genuine question: I see on these DeFi platforms coins that have APY's well in excess of 10%. Who's borrowing at these rates, and why?
I know many people that are, because if you're savvy you can earn much more than that with the amount you're being loaned.
But why wouldn't they instead borrow USD? Interest rates are the lowest they've ever been.
In other words, if you're really savvy, you can earn even more than "much more than that" by borrowing USD at low interest rates (or Euro at negative interest rates), and then buying crypto and doing whatever you would have done after directly borrowing crypto at the much higher interest rates.
Who is choosing to forsake borrowing fiat currency at lower interest rates and then converting to crypto to do profitable things in favor of borrowing crypto directly at (much) higher interest rates, and why?
In other words, if you're really savvy, you can earn even more than "much more than that" by borrowing USD at low interest rates (or Euro at negative interest rates), and then buying crypto and doing whatever you would have done after directly borrowing crypto at the much higher interest rates.
Who is choosing to forsake borrowing fiat currency at lower interest rates and then converting to crypto to do profitable things in favor of borrowing crypto directly at (much) higher interest rates, and why?
Traditional finance has higher friction. I.e., higher cost to take credit, to operate, in many cases slower, and in general, has much higher entry barrier.
With defi you can get a loan for millions of dollars just immediately, maybe for a couple of seconds or milliseconds. Without filling any form asking why you need it. Without even creating any account anywhere except your own machine. It's new "in internet nobody knows you are a dog".
With defi you can get a loan for millions of dollars just immediately, maybe for a couple of seconds or milliseconds. Without filling any form asking why you need it. Without even creating any account anywhere except your own machine. It's new "in internet nobody knows you are a dog".
That makes sense.
Then the next logical question is: what if I never get my money back? What if I lend it to a "dog" who then buys highly leveraged calls on GME, only to be unable to pay me back. Do I, the lender, just write it off as a loss?
As you suggest, if you can get a loan for millions of dollars just immediately without filling any form asking why you need it or without even creating any account anywhere, then what's stopping me from just taking a bunch of loans in excess of the collateral and just never paying them back? After all, as a borrower, I don't have to worry about any sort of credit rating or rate limiting.
As a lender, how do I know that the borrower on the other end isn't running such a scam?
Then the next logical question is: what if I never get my money back? What if I lend it to a "dog" who then buys highly leveraged calls on GME, only to be unable to pay me back. Do I, the lender, just write it off as a loss?
As you suggest, if you can get a loan for millions of dollars just immediately without filling any form asking why you need it or without even creating any account anywhere, then what's stopping me from just taking a bunch of loans in excess of the collateral and just never paying them back? After all, as a borrower, I don't have to worry about any sort of credit rating or rate limiting.
As a lender, how do I know that the borrower on the other end isn't running such a scam?
Besides already mentioned collateralized loans, there is another type of loan, which I think is impossible with traditional finance. It's Flash Loans.
In this case, you don't need to provide any collateral, but the smart contract is designed so that you cannot avoid repayment. It's just an atomic operation, like with database, where all of the actions happen, including repayment, or nothing at all. You can do that with defi.
It's used for market arbitrage, or maybe to restructure other loans, etc.
In this case, you don't need to provide any collateral, but the smart contract is designed so that you cannot avoid repayment. It's just an atomic operation, like with database, where all of the actions happen, including repayment, or nothing at all. You can do that with defi.
It's used for market arbitrage, or maybe to restructure other loans, etc.
Then you receive the collateral, which would cover the loan amount.
But the collateral almost never covers the full loan amount...otherwise the borrower wouldn't need to borrow money in first place; they already have it in the form of the collateral.
For borrowers that ostensibly need liquidity, it would be impossible for them to put down collateral equivalent to the loan amount, else they wouldn't need liquidity. If you do have access to collateral, why take a loan in the first place? It's just extra steps (and interest) to end up with the same amount of money that you already have. Is the collateral some lower amount? If so, a bad actor could always put down a lower collateral amount than the original loan amount and then never pay back, resulting in the lender losing {original loan amount - collateral} worth of money.
How is this fraud prevented? Is the interest rate baked into the collateral? If I'm borrowing on this platform, do I need to put down more money than what I seek to borrow in collateral? Who would ever want to do that? How many lenders actually receive, on the net, 10-20% APY successfully?
At least with high yield junk bonds, there are some safeguards built into the system in the form of credit ratings, KYC, and institutional friction (which functions as a rate limiter). How does any of this work in the DeFi world?
For borrowers that ostensibly need liquidity, it would be impossible for them to put down collateral equivalent to the loan amount, else they wouldn't need liquidity. If you do have access to collateral, why take a loan in the first place? It's just extra steps (and interest) to end up with the same amount of money that you already have. Is the collateral some lower amount? If so, a bad actor could always put down a lower collateral amount than the original loan amount and then never pay back, resulting in the lender losing {original loan amount - collateral} worth of money.
How is this fraud prevented? Is the interest rate baked into the collateral? If I'm borrowing on this platform, do I need to put down more money than what I seek to borrow in collateral? Who would ever want to do that? How many lenders actually receive, on the net, 10-20% APY successfully?
At least with high yield junk bonds, there are some safeguards built into the system in the form of credit ratings, KYC, and institutional friction (which functions as a rate limiter). How does any of this work in the DeFi world?
It's an overcollaterized position, so you have to put at least 150% of the money you're trying to borrow.
Now you might ask, if I already all that money, why the hell am I borrowing it? Because your asset is going to appreciate in value (like a ton of appreciation) whereas your debt is only going to go up 4%. So you want to hold on to your asset, yet you need cash to spend. Also you want to avoid capital gains taxes which happen when you sell the asset.
Now you might ask, if I already all that money, why the hell am I borrowing it? Because your asset is going to appreciate in value (like a ton of appreciation) whereas your debt is only going to go up 4%. So you want to hold on to your asset, yet you need cash to spend. Also you want to avoid capital gains taxes which happen when you sell the asset.
> But why wouldn't they instead borrow USD?
In addition to the sister comment, where else can I find these type of returns in traditional finance? There's tons of places you can find 50%+ interest, even up to 300%.
In addition to the sister comment, where else can I find these type of returns in traditional finance? There's tons of places you can find 50%+ interest, even up to 300%.
I love some of these, using them to swap USDC/ETH when I need some more stable tokens. However, the downside at the moment is a high price for transactions on Ethereum, I hope this will get better this year, heard there is some upcoming changes to make transactions cheaper.
When ETH2 goes live and transaction fees become lower. Centralized exchanges will have a hard time competing with DEX'es like uniswap. Fees are only as high as they are due to gas prices. ETH2 will be a game changer
DEXs can move to L2 in the coming months.
Once a giant like uniswap moves, the rest will follow. Should see transactions fees become a lot lower towards the end of the year.
Once a giant like uniswap moves, the rest will follow. Should see transactions fees become a lot lower towards the end of the year.
This is a really clearly written overview of DeFi, well worth reading over morning coffee no matter if you are new to the space or a veteran.
Shameless plug: I work on the design of one of the protocols mentioned in the paper - https://enzyme.finance / https://twitter.com/enzymefinance - it makes running on-chain funds and strategies very easy. You can create an investment track record, manage outside capital in a trustless and transparent way, create your own active or custom index funds in 2 mins.
We are looking for a frontend dev, and a smart contract dev - DM on Twitter if interested
Shameless plug: I work on the design of one of the protocols mentioned in the paper - https://enzyme.finance / https://twitter.com/enzymefinance - it makes running on-chain funds and strategies very easy. You can create an investment track record, manage outside capital in a trustless and transparent way, create your own active or custom index funds in 2 mins.
We are looking for a frontend dev, and a smart contract dev - DM on Twitter if interested
Where this is going to get really wild: tokenized securities backing the blockchain equivalent of an ETF.
Imagine you program a smart contract which is the frontend of a algorithmic trading system.
That future is coming.
Imagine you program a smart contract which is the frontend of a algorithmic trading system.
That future is coming.
Kind of close with TokenSets[0] managing Mirror[1] backed assets.
Things like the DeFi Pulse Index[2][3] I believe are automatically re-balanced by evaluating the weights on the third week of the month and then applied the first business day of the following month. I'm not sure if a human is involved?
[0] https://www.tokensets.com/portfolio/dpi
[1] https://mirror.finance/
[2] https://www.tokensets.com/portfolio/dpi
[3] https://www.pulse.inc/
Things like the DeFi Pulse Index[2][3] I believe are automatically re-balanced by evaluating the weights on the third week of the month and then applied the first business day of the following month. I'm not sure if a human is involved?
[0] https://www.tokensets.com/portfolio/dpi
[1] https://mirror.finance/
[2] https://www.tokensets.com/portfolio/dpi
[3] https://www.pulse.inc/
Common advice is to only invest in what you understand. If these markets are so obscenely complex only insiders can understand them then doesn't that limit their potential?
Very true, and the same was true for IT companies in the 90s/early 2000s.
Still, I'd say investing in IT stock is accessible for the layman today. Part of this is just that it's early days and we're right now in the midst of a cambrian explosion.
Still, I'd say investing in IT stock is accessible for the layman today. Part of this is just that it's early days and we're right now in the midst of a cambrian explosion.
The interface to use MakerDAO (one of the defi projects mentioned) is a lot more straightforward than any bank I've ever used or had to deal with. Sure there are more complicated defi projects, but over time:
a) they get more user-friendly,
b) users become more educated.
It'll eventually be abstracted to where it's simple to be used by regular folks, or it'll be integrated into existing infrastructure.
Yup, I don't understand how a lot of traditional financial instruments work but I still use them. At least these are transparent.
That's one thing that I've really enjoyed so far - a lot of these projects are essentially lego bricks, and I can (and do) try and understand how all of the different pieces fit together. That's something that certainly isn't possible with a lot of traditional finance. Even if I wanted to figure it out, I don't have access to see everything.
Speaking of lego bricks, and I haven't used it yet myself, but https://furucombo.app/ looks really interesting!
I've played around with it a bit. I actually found a juicy arbitrage opportunity, and was trying to use it to chain a few trades together to take advantage. Unfortunately it didn't support one of the trading platforms I needed to use, so I ended up just manually making the transactions separately.
This really drove home how inefficient and full of opportunities Ethereum is if you know where to look.
This really drove home how inefficient and full of opportunities Ethereum is if you know where to look.
Learning about flash loans and how they settle in the same transaction that they originated in really made the idea of the lego bricks click for me, it was like a light bulb moment.
DeFi is a very innovative field indeed. What I find most appealing is that some popular derivative protocols are yet inefficient in some ways, which means there is a lot of room for new solutions to come along.
For instance, I'm interested in options trading, and there is a lot of competing protocols [1] each one with it's advantages and disadvantages. One of the most popular, Hegic [2], employs liquidity pools pricing options at a really expensive value due to a simplified pricing model (good for writers).
Shameless plug: I myself have been playing with smart contracts in my free time and deployed a tokenizable options trading decentralized exchange [3] (on kovan testnet nonetheless!) trying to address some os these points. Learned a lot implmementing it, and I find amazing that anyone can come up with their own DeFi solution.
[1] https://medium.com/coinmonks/an-update-of-a-comparison-of-de...
[2] https://www.hegic.co/
[3] https://github.com/TCGV/DeFiOptions
For instance, I'm interested in options trading, and there is a lot of competing protocols [1] each one with it's advantages and disadvantages. One of the most popular, Hegic [2], employs liquidity pools pricing options at a really expensive value due to a simplified pricing model (good for writers).
Shameless plug: I myself have been playing with smart contracts in my free time and deployed a tokenizable options trading decentralized exchange [3] (on kovan testnet nonetheless!) trying to address some os these points. Learned a lot implmementing it, and I find amazing that anyone can come up with their own DeFi solution.
[1] https://medium.com/coinmonks/an-update-of-a-comparison-of-de...
[2] https://www.hegic.co/
[3] https://github.com/TCGV/DeFiOptions
In many ways, the future is here, there are billions of dollars locked in these defi projects, I'd say now it's more about adoption and user education.
And scaling. Transaction fees have gotten insane lately, scaling solutions cannot come soon enough.
100% agree, right now it's like 80$ for a uniswap exchange, 200$ to open a maker vault, 100$ to transfer tokens, etc. I'm really looking forward to eth2 which will hopefully land without too much issues or delays.
It's not as bad if you're willing to wait a bit. Token transfers are like 10$ if you set the gas price to around 120 Gwei, should validate within an hour or two.
The tricky bit is the exchanges, though in my experience, the worst was around 60$ fee for a swap at a busy time.
The tricky bit is the exchanges, though in my experience, the worst was around 60$ fee for a swap at a busy time.
Fees on other chains like Binance Smart Chain(EVM compatible), Terra and others are quite low now(around 0.2 - 1 USD per transaction). PancakeSwap is a Uniswap alternative on BSC and TerraSwap is a Uni alternative on the Terra blockchain.
The issue is that all of the platforms people want to interact with right now tend to be on Ethereum (which is part of the reason it is so expensive).
I'm advising a team that is working on this problem right now; it will be a crowded field, but there are multiple distinct approaches. I'd describe the challenge as equal parts technical, legal/regulatory, and marketing/comms. If anyone is interested in potentially working on this or learning more, send me an email.
How close is Tzero to what you're talking about? https://www.tzero.com/
I'm attempting to build a data set ETF: https://rugpullindex.com
Check out keeperdao and keepers. They sort of do what you are describing.
That already exists in the form of yield farming.
Not as a frontend for traditional financial instruments as far as I know. Yield farming just trades other crypto asset, doesn't it?
Depends, there's some more complex formats defi systems out there now. Synthetix for example allows you to buy SNX tokens and then yeild farm on these against a B-Book which is filled with synth tokens (the synth tokens are derivatives of real assets e.g. sUSD, sAUD, sXAU, sFTSE) so you can trade against real financial instruments.
You can take a look at their litepaper [1] if you want to know more.
[1]: https://docs.synthetix.io/litepaper
You can take a look at their litepaper [1] if you want to know more.
[1]: https://docs.synthetix.io/litepaper
Apologies if this is a bit of an ELI5 request, but after many years I still don't understand the real-world uses of smart contracts. There was this post on HN a couple years ago, https://news.ycombinator.com/item?id=19225857, and I still don't understand how any of those issues are addressed.
Specifically what I'm struggling to understand is that most (all?) real-world contracts require some information about the real world: The price of corn (or corn futures), whether the rental apartment was as described, whether the sneakers were authentic, etc. But whenever you need this real world information, at some point you need an oracle, or a consensus of oracles, and at that point I don't really see the point of using blockchain as you have to trust the oracles.
Would really appreciate if anybody could provide some info or links that explain how this problem is handled or solved. More importantly, would appreciate a single example of an actual smart contract that responds to events that happen in the real world.
Specifically what I'm struggling to understand is that most (all?) real-world contracts require some information about the real world: The price of corn (or corn futures), whether the rental apartment was as described, whether the sneakers were authentic, etc. But whenever you need this real world information, at some point you need an oracle, or a consensus of oracles, and at that point I don't really see the point of using blockchain as you have to trust the oracles.
Would really appreciate if anybody could provide some info or links that explain how this problem is handled or solved. More importantly, would appreciate a single example of an actual smart contract that responds to events that happen in the real world.
Imagine you are going to hire something expensive, and the owner wants a rental bond. So you go to a 3rd party, they set up a smart contract which automatically returns the bond to you 2 weeks after the lease ends, but the 3rd party can redirect the money to the owner by manually intervening.
The example is basic, but now the 3rd party can't take the money, go broke, take risks using your bond, etc, etc, etc. There is clear-in-code records of what the powers of the parties are and when things happen. You can prove where the money ended up.
This isn't an earth-shattering example, and things can still go wrong. But the failure cases have shrunk vs using paper. It is an improvement on the status quo.
The example is basic, but now the 3rd party can't take the money, go broke, take risks using your bond, etc, etc, etc. There is clear-in-code records of what the powers of the parties are and when things happen. You can prove where the money ended up.
This isn't an earth-shattering example, and things can still go wrong. But the failure cases have shrunk vs using paper. It is an improvement on the status quo.
I've done your example in the real world, without smart contracts. The 3rd party is a notary. If I understood you right the notary here is replaced by a notary plus smart contracts.
A notary in my juristication (Germany) is a quasi-employee of the government, so has little risk to go broke etc. The particular bonds for these cases are usually non-transferrable.
OTOH smart contracts introduce new risks like bugs and costs like high gas prices - for what gain?
Edit: To clarify, the modes of failure are vastly worse for the smart contract scenario. If the notary goes broke, my money will not be part of the insolvency estate. If OTOH the smart contract has a bug, everone's money is gone.
A notary in my juristication (Germany) is a quasi-employee of the government, so has little risk to go broke etc. The particular bonds for these cases are usually non-transferrable.
OTOH smart contracts introduce new risks like bugs and costs like high gas prices - for what gain?
Edit: To clarify, the modes of failure are vastly worse for the smart contract scenario. If the notary goes broke, my money will not be part of the insolvency estate. If OTOH the smart contract has a bug, everone's money is gone.
I don't know about Germany, but in Belgium you pay a crazy amount of money for the notary service.
So it only makes sense to hire them for when dealing with large amounts of money. So what do you do with small amounts of money?
Plus, not only notaries but also escrow services might be replaced with smart contracts. Smart contracts might be way cheaper.
It will be very interesting to see this play out. But I wouldn't just discard smart contracts because we have some ancient way of doing things right now. And let's be honest, every time I have to deal with a notary, the work looks like it comes from Medieval times.
So it only makes sense to hire them for when dealing with large amounts of money. So what do you do with small amounts of money?
Plus, not only notaries but also escrow services might be replaced with smart contracts. Smart contracts might be way cheaper.
It will be very interesting to see this play out. But I wouldn't just discard smart contracts because we have some ancient way of doing things right now. And let's be honest, every time I have to deal with a notary, the work looks like it comes from Medieval times.
> A notary in my juristication (Germany) is a quasi-employee of the government,
In a sense; precisely. At the moment, to fill that function, you need a quasi-government employee to have a trustworthy bondholder.
With a smart contract, literally I could be the notary and while that would be super weird, I can't actually do anything not specified in the contract.
Something is possible that wasn't possible before. That is why people can get excited about the idea.
In a sense; precisely. At the moment, to fill that function, you need a quasi-government employee to have a trustworthy bondholder.
With a smart contract, literally I could be the notary and while that would be super weird, I can't actually do anything not specified in the contract.
Something is possible that wasn't possible before. That is why people can get excited about the idea.
yet you can do something not matching the real world outcome. and there's no way to roll that back. and people still need real-world trust in you... seems not soo smart to me.
In Switzerland that's the default for deposits: you create a bank account in your name, but you're not allowed to touch this money until you've left the accommodation and the landlord has agreed that you left it in good shape. I've heard that it's also rather hard for the landlord to claim this money, they need a strong case.
all those cases are examples of how old institutions have managed to solve issues relevant to the smartcontract case.
But most people don't have access to such institutions, and it turns out building political institutions capable of providing such tools and trustworthy is really hard. Even worse, some people don't have as much trust in longterm longevity of governments.
for all those people, trust-less smart contracts is a replacement of institutions they don't have, available as long as its tech works.
for all those people, trust-less smart contracts is a replacement of institutions they don't have, available as long as its tech works.
This is an exact example of what I'm talking about, where, in your example, I actually see 0 utility, really negative utility, in using a smart contract.
At the end of the day, this third party escrow service is still the only one that needs to evaluate the performance of services rendered - so where did your "trustless" distributed network go?
I get that the smart contract can ensure that there are only 2 outcomes (money sent or money returned), but it's not like you can remove the legal system here - there is nothing to stop the 3rd party from colluding with one of the other parties to make the decision their way. Heck, even is you still wanted to use crypto, why not just get rid of the smart contract altogether and send the money to the 3rd party's escrow account? You still have a full audit trail so you're guaranteed to know is the 3rd party sent the money somewhere else.
At the end of the day, this third party escrow service is still the only one that needs to evaluate the performance of services rendered - so where did your "trustless" distributed network go?
I get that the smart contract can ensure that there are only 2 outcomes (money sent or money returned), but it's not like you can remove the legal system here - there is nothing to stop the 3rd party from colluding with one of the other parties to make the decision their way. Heck, even is you still wanted to use crypto, why not just get rid of the smart contract altogether and send the money to the 3rd party's escrow account? You still have a full audit trail so you're guaranteed to know is the 3rd party sent the money somewhere else.
I still don't understand what happens when you actually break something expensive that you hire?
Doesn't some 3rd part have to verify the damage? Doesn't the 2nd part then have to still take a part of the bond?
What if the 2nd part just says you broke something, when you didn't, who solves that?
Doesn't some 3rd part have to verify the damage? Doesn't the 2nd part then have to still take a part of the bond?
What if the 2nd part just says you broke something, when you didn't, who solves that?
The Automated Market Maker (AMM) systems are smart contracts using something more equivalent to a ballast system with pools - "liquidity pools" (LP, ironically and perfectly these act like limited partner shares of a pooled investment) - allowing the current price to be more of a ratio, which is stored in the smart contract after every trade. The largest AMM's have user-spawned markets which contain two assets (this is in direct contrast and competition to the concept of begging exchanges to add your asset and pretending that market makers organically showed up, all while getting extorted by the exchanges and market makers, the market has chosen AMMs).
When someone buys in an AMM market, they send AssetA adding to the pooled balance of AssetA, and receiving AssetB, reducing the pooled balance of AssetB. The ratio (simple division) of these two assets is stored at the end of that trade in the same smart contract (the spawned liquidity pool ballast), and can therefore be read by any other user and other smart contracts. Reading is a free operation.
This user-spawned and self-replication smart contract factory, alongside the price storage, has been key to the DeFi boom over the past year. No oracle required.
People (organizations) are using oracles to try to keep markets with similar assets in sync, and for smarter routing for the best price. The arbitragers take care of that too, which is simply Oracle + Fund movement. Flash loan users in the repo market are arbitraging as well, which is simply Oracle + Borrow + Fund movement + Repay in a single transaction included in a single block.
It is a growth industry when you stop asking why and start asking how. A lot of oracles are ignoring some market pairs, and the oracles themselves could have their own inefficiency.
This user-spawned and self-replication smart contract factory, alongside the price storage, has been key to the DeFi boom over the past year. No oracle required.
People (organizations) are using oracles to try to keep markets with similar assets in sync, and for smarter routing for the best price. The arbitragers take care of that too, which is simply Oracle + Fund movement. Flash loan users in the repo market are arbitraging as well, which is simply Oracle + Borrow + Fund movement + Repay in a single transaction included in a single block.
It is a growth industry when you stop asking why and start asking how. A lot of oracles are ignoring some market pairs, and the oracles themselves could have their own inefficiency.
>real-world contracts require some information about the real world
For a blockchain to know about the real world, it does indeed need so-called "oracles".
These are typically trusted external entities (e.g. an actuarial firm) who "inject" signed information into the blockchain that can then be consumed as input by smart contracts "living" in the blockchain.
For example, an Oracle could inject, say every day, signed with their published key pair, the average price of Bitcoin into the Ethereum blockchain, and you could image a family of smart contract paying out if and only if the oracle-published Bitcoin price meets certain conditions.
This solution is - of course - very far from ideal as the information is only as good as the trust you place in these external institutions.
On the other hand, this is not very different than the trust you place in well established institutions such as banks, rating firms, escrows, etc...
What benefit this brings is:
This latter scenario can't occur on a blockchain: the cheater would have to bribe the Oracle, a far more complicated affair.
[EDIT]: and as pointed out by another comment, there are federated oracles: a smart contract can use an aggregate of multiple sources that provide the same info and form a consensus based on those.
[EDIT2]: another interesting point is that as more and more financial activity "moves" to the blockchain, the need for Oracles diminishes as the information required by a smart contract becomes native. You can thus view oracles as a temporary onramp of legacy financial info into the blockchain.
For a blockchain to know about the real world, it does indeed need so-called "oracles".
These are typically trusted external entities (e.g. an actuarial firm) who "inject" signed information into the blockchain that can then be consumed as input by smart contracts "living" in the blockchain.
For example, an Oracle could inject, say every day, signed with their published key pair, the average price of Bitcoin into the Ethereum blockchain, and you could image a family of smart contract paying out if and only if the oracle-published Bitcoin price meets certain conditions.
This solution is - of course - very far from ideal as the information is only as good as the trust you place in these external institutions.
On the other hand, this is not very different than the trust you place in well established institutions such as banks, rating firms, escrows, etc...
What benefit this brings is:
1. Transparency (anyone can check the chain to see what contracts are in place)
2. Automation
3. Complex hierarchical structures where the "building blocks" or "leaf cells" is provided by the oracles.
4. A single failure of the Oracle to inject "truth" into the chain would ruin their rep. for ever.
This latter scenario can't occur on a blockchain: the cheater would have to bribe the Oracle, a far more complicated affair.
[EDIT]: and as pointed out by another comment, there are federated oracles: a smart contract can use an aggregate of multiple sources that provide the same info and form a consensus based on those.
[EDIT2]: another interesting point is that as more and more financial activity "moves" to the blockchain, the need for Oracles diminishes as the information required by a smart contract becomes native. You can thus view oracles as a temporary onramp of legacy financial info into the blockchain.
I agree. I've been holding BTC for a couple of years as I feel that international accessibility coupled with scarcity makes for a great store of value. But DeFi I still fail to wrap my head around.
My main concern being: DeFi could get harsh competition from traditional financial actors by them getting up to date on accessibility. Thus appealing to a new, more decentralized userbase.
My main concern being: DeFi could get harsh competition from traditional financial actors by them getting up to date on accessibility. Thus appealing to a new, more decentralized userbase.
Why do people think cyberspace is not the real world?
I think smart-contracts as envisioned by early cypherpunks where meant to run in a world where Governments are obsolete, they won't work well in our current society.
This is the kind of "cyber-babble" I'm talking about. Smart contracts can only respond to things that happen on the chain, but the vast majority of events that humans produce contracts to govern in the first place happen in what is colloquially termed "the real world". Yes, I think the blockchain is "real", but I think most people understand what I'm talking about when saying I want a contract to be able to reference actual performance of a service rendered in 3D space.
> I think smart-contracts as envisioned by early cypherpunks where meant to run in a world where Governments are obsolete
"Governments" have existed in some form since the beginning of the species (families and tribal structures, etc.) and pretending that some piece of technology may make them "obsolete" belies a very simple understanding of human nature.
> I think smart-contracts as envisioned by early cypherpunks where meant to run in a world where Governments are obsolete
"Governments" have existed in some form since the beginning of the species (families and tribal structures, etc.) and pretending that some piece of technology may make them "obsolete" belies a very simple understanding of human nature.
I'm really glad you asked this question, because I've wondered it as well.
blhack(1)
I like the idea of making things more "seamless", but what troubles me is how cavalier people are willing to disregard existing knowledge about how to make working markets.
For example, CLOBs are not a bad thing and re-inventing price discovery mechanisms is a dangerous thing (I am aware of all the issues in real world markets, but still). Some of these things have many 100s of years of evolutionary refinement in them. As another example, atomic settlement is also not a cure all, as it might up the liquidity requirements (i.e. have cash ready before entering into transactions, which is not how the current world works and it is not clear that this would be better world).
The other overlooked item is role of real world law and legal actions, so there is an inherent mechanism to legislate when trust breaks down and that will supersede whatever a smart contract might say.
Some points on transparency are also somewhat outdated, regulators now collect vast amounts of data to understand what happened on certain events, where exposures are, how market structure changes and so forth.
This seems to be a great ‘intro to defi’ read.
Can someone with knowledge of defi point out any deficiencies or inaccuracies here? Are there better ‘intro to defi’ papers that newcomers should read?
Can someone with knowledge of defi point out any deficiencies or inaccuracies here? Are there better ‘intro to defi’ papers that newcomers should read?
If I wanted to know everything about how these systems worked, where would I begin? Is there anything comprehensive that'd take a while to digest?
I have considered writing a book about this stuff but it's an insanely bad use of my time vs. building tech in this space from a profit perspective. Defi is the highest possible way that a software engineer can earn money in 2021 without being some high-up FAANG architect or hit the startup lotto. Small teams are making millions or tens of millions of dollars, and they are making actual value (not ICO scams like in 2017!) with billions of dollars flowing through it.
If you want to break into this space, start with the bitcoin white paper, read this book[0], then do the Ethereum white / yellow papers, start messing around with smart contracts, then consume every possible piece of knowledge you can, because it's all spread out everywhere without good central repositories of knowledge.
Defi is protocolized finance. It's making building blocks of financial tools that people and projects fit together in new ways to accomplish various things (earn interest, hedge, go leveraged long, buy insurance, etc. etc. etc.). The possibilities are truly endless and the space is open for innovation like never before as there are no rules and regulations, and there never will be any! Good luck!
[0] https://www.amazon.com/Mastering-Bitcoin-Programming-Open-Bl...
If you want to break into this space, start with the bitcoin white paper, read this book[0], then do the Ethereum white / yellow papers, start messing around with smart contracts, then consume every possible piece of knowledge you can, because it's all spread out everywhere without good central repositories of knowledge.
Defi is protocolized finance. It's making building blocks of financial tools that people and projects fit together in new ways to accomplish various things (earn interest, hedge, go leveraged long, buy insurance, etc. etc. etc.). The possibilities are truly endless and the space is open for innovation like never before as there are no rules and regulations, and there never will be any! Good luck!
[0] https://www.amazon.com/Mastering-Bitcoin-Programming-Open-Bl...
> there are no rules and regulations, and there never will be any! Good luck!
https://en.wikipedia.org/wiki/Virtual_currency_law_in_the_Un...
https://www.wired.com/story/janet-yellen-consider-limiting-c...
---
Governments around the world, at any time, could outlaw bitcoin or cryptocurrency. At the moment, it's accepted, but the minute it's seen as 'uncontrollable' expect that regulations will be attempted.
https://en.wikipedia.org/wiki/Virtual_currency_law_in_the_Un...
https://www.wired.com/story/janet-yellen-consider-limiting-c...
---
Governments around the world, at any time, could outlaw bitcoin or cryptocurrency. At the moment, it's accepted, but the minute it's seen as 'uncontrollable' expect that regulations will be attempted.
Bittorrent can't be stopped and neither can bitcoin or ethereum. It's decentralized. The price could take a short/medium term hit with government bans but the tech won't go away and can't be stopped.
you are aware that it's quite trivial to locate big electricity sinks. And this would be done in every country having a suitable grid: have fun mining in congo
> there are no rules and regulations, and there never will be any! Good luck!
Literally the reason why people should stay the hell away from all this. No rules and regulations == Wild West.
Literally the reason why people should stay the hell away from all this. No rules and regulations == Wild West.
You will get 10 different contradictory answers because the whole ecosystem is a mess. It's filled with huge amounts of technical complexity, opaqueness, bad actors, and so many gotchas and snafus you didn't forsee that you will be wondering where all the money went. It has no viability and you would be best to stay as far away from it as you can.
Read this and the papers mentioned inside it to get an overview of the market:
https://messari.io/pdf/messari-report-crypto-theses-for-2021...
It might be worth it to get a pro subscription at messari.io or theblockcrypto.com for a saner alternative to crypto twitter and other news outlets.
The quickest way to learn is to actually use it. Make trades on uniswap, earn fees with a liquidity pool, get some sushis, stake them, etc. etc. Unfortunately these days eth gas fees are very expensive though and you will spend a lot of money in fees.
It's nice to read about the history how everything involved and get to know some of the characters behind. Two books i enjoyed: - Bitcoin Billionaires - from the guy who wrote that book from the facebook movie - Out of Ether, how Ethereum got started
https://messari.io/pdf/messari-report-crypto-theses-for-2021...
It might be worth it to get a pro subscription at messari.io or theblockcrypto.com for a saner alternative to crypto twitter and other news outlets.
The quickest way to learn is to actually use it. Make trades on uniswap, earn fees with a liquidity pool, get some sushis, stake them, etc. etc. Unfortunately these days eth gas fees are very expensive though and you will spend a lot of money in fees.
It's nice to read about the history how everything involved and get to know some of the characters behind. Two books i enjoyed: - Bitcoin Billionaires - from the guy who wrote that book from the facebook movie - Out of Ether, how Ethereum got started
Uniswap and others will be upgrading to L2 in March so that'll certainly help with the fees.
It would take quite a bit time, but with enough dedication, it's not that difficult. The books: Mastering Bitcoin and Mastering Ethereum (although ethereum one is a bit outdated now) cover a lot of it pretty nicely and you can find them for free on github.
The blockchain that wins will become a global and immutable log for all commercial events. Smart contracts and tokens are but building blocks in a fully on-chain financial system.
https://tokenized.com/docs/intro/preface
https://tokenized.com/docs/intro/preface
Shameless self-plug on how DeFi can be done more robustly using functional programming constructs: https://vishakh.medium.com/bringing-true-composability-and-r....
I don't think anyone disagrees with this. The reason functional languages aren't used to write smart contracts is the same reason functional languages aren't used to write a majority of software projects...adoptability/lack of knowledge/interest.
If anyone is interested in a DEX ecosystem which can scale for real (unlike the ones presented in this article) check out https://ldex.trading/ - It's still early so only 1 market for now.
It scales by allowing each market to have separate infrastructure and it executes trades chain-to-chain. It's a natural way to shard the ecosystem based on markets. The degree of decentralization can vary based on the market.
It scales by allowing each market to have separate infrastructure and it executes trades chain-to-chain. It's a natural way to shard the ecosystem based on markets. The degree of decentralization can vary based on the market.
[deleted]
CURRENT GAS PRICES:
1 MATIC GWEI on the MATIC PoS Ethereum sidechain! Rapidly growing liquidity on Quickswap, MATIC PoS Universe 1 has Gas Limits of 30,000,000 GWEI. Restart your higher frequency strategies there!
15 BNB GWEI on the Binance Smart Chain EVM! Rapidly growing liquidity on PancakeSwap and Julswap
These gas prices are equivalent to cents, compared to the hundreds of dollars in gas needed on Ethereum mainnet
The newer AMMs have land grabs for farmers!
1 MATIC GWEI on the MATIC PoS Ethereum sidechain! Rapidly growing liquidity on Quickswap, MATIC PoS Universe 1 has Gas Limits of 30,000,000 GWEI. Restart your higher frequency strategies there!
15 BNB GWEI on the Binance Smart Chain EVM! Rapidly growing liquidity on PancakeSwap and Julswap
These gas prices are equivalent to cents, compared to the hundreds of dollars in gas needed on Ethereum mainnet
The newer AMMs have land grabs for farmers!
It seems that for years now whenever people try to justify the usefulness of blockchain, cryptocurrencies, and smart contracts there are always 10 different, jargonic, and barely-understandable answers. There is no shortage of excuses given for why they haven't busted banks, credit cards, and payment apps.
For years decentralized technologies have been pushed as the future for the internet and yet they still aren't used by anybody outside hardcore enthusiast communities, while bringing ruin to many others as volatile 'investments'. Goes to show that the problem is in the technology itself, no matter how you present it. Unless it is changed to reflect people's actual needs (i.e: reject the ideology of decentralization for convenience and easy payments) it will never gain traction.
For years decentralized technologies have been pushed as the future for the internet and yet they still aren't used by anybody outside hardcore enthusiast communities, while bringing ruin to many others as volatile 'investments'. Goes to show that the problem is in the technology itself, no matter how you present it. Unless it is changed to reflect people's actual needs (i.e: reject the ideology of decentralization for convenience and easy payments) it will never gain traction.
The web roughly took from 1995 to 2005 to take off. DLT and DeFi manage value, not just data or customer interactions, the cost of every error can be devastating. Yet, DeFi already has a couple of billions under management which isn't too bad.
I do agree that the fixation on decentralization over everything isn't going to cut it, DLT will be backend tech used to secure hybrid applications. I don't see anyone paying in bitcoin or having an ETH wallet for daily purposes.
I do agree that the fixation on decentralization over everything isn't going to cut it, DLT will be backend tech used to secure hybrid applications. I don't see anyone paying in bitcoin or having an ETH wallet for daily purposes.
No, it goes to show that you're unwilling to understand new technologies. Your view is jaded, the ecosystem has evolved a lot since 2017 and is starting to see real usage, DeFi being the first of many real world applications to come.
With large financial institutions putting billions into it in 2020 and its continuation in 2021, I think the window for catastrophic failure has gone. Regardless of whether it’s useful or valuable i think it’s here to stay.
This is a great summary, and HNers who knee-jerk hate crypto and say it's worthless should especially give it a read. It's becoming clearer that more and more finance is going to move to blockchain rails. IMO this is the future, and yes I have put my money where my mouth is on that opinion.
HN (and the horribly named 'intellectual darkweb' to an extend) are sadly becoming 'old man yell at cloud' when talking about crypto. Unfortunately, most of the conversation on btc and DeFi has moved on to subreddits.
It’s possible to both recognise that cryptocurrency is a cool tech and has value, and that it will not become the primary fintech.
A hovercraft is insanely cool tech, and has value, but you’re not driving to work in one.
A hovercraft is insanely cool tech, and has value, but you’re not driving to work in one.
I've definitely seen a shift here over the past year or so.
Now it seems that threads like this have more comments like yours than actual crypto-bashing comments. I think the tide has turned.
Now it seems that threads like this have more comments like yours than actual crypto-bashing comments. I think the tide has turned.
> I think the tide has turned.
Old people eventually retire and die.
But it took BTC to go to 46k for the tide to turn!
And given what I keep noticing every now and then here on HN, the moon seems to control the tide :)
Old people eventually retire and die.
But it took BTC to go to 46k for the tide to turn!
And given what I keep noticing every now and then here on HN, the moon seems to control the tide :)
[deleted]
How does one best bet on the future of DeFi?
Tricky problem. I’d probably buy some ETH/FTM/DOT to cover speculation on the infra side. Then get some YFI/AAVE/SNX/ROOK to cover the app speculation although there’s hundreds here to choose from.
The approach I’m taking is a blockchain agnostic one. There’s lots of middleware projects with tokens such as GRT, REN and LINK. I see middleware growing really as it has utility in defi but also other applications.
The approach I’m taking is a blockchain agnostic one. There’s lots of middleware projects with tokens such as GRT, REN and LINK. I see middleware growing really as it has utility in defi but also other applications.
Ethereum (ETH) and DeFi Pulse Index (DPI). Everything is built on Ethereum so the value of the network will be reflected in ETH. There are a few groups working in how to calculate the total value on chain as well as how this value should be related to and reflected in the price. DPI is a basket of DeFi tokens so you'll receive exposure to the big players through asset. You can think of this like an ETF.
Unless you feel like really high stakes and/or getting really involved in keeping up with the nitty gritty, go for core infra stuff.
For the past 5 years and the foreseeable short-to midterm. that mainly means ETH (Ethereum), preferably hedged by smaller positions in one or a handful of similarly scoped projects that could end up eating its mind- and marketshare (I won’t judge which are better bets but some candidates would be Polkadot, Cardano, Solana, Tezos. Stay away from EOS and Ripple, there’s nothing behind their curtains)
Other more specific projects mentioned here like LINK, REN, various defi-specific solutions like AAVE/Uniswap, are more perennial and more suited for someone who actually uses these protocols or services, not something I would see as an investment.
For the past 5 years and the foreseeable short-to midterm. that mainly means ETH (Ethereum), preferably hedged by smaller positions in one or a handful of similarly scoped projects that could end up eating its mind- and marketshare (I won’t judge which are better bets but some candidates would be Polkadot, Cardano, Solana, Tezos. Stay away from EOS and Ripple, there’s nothing behind their curtains)
Other more specific projects mentioned here like LINK, REN, various defi-specific solutions like AAVE/Uniswap, are more perennial and more suited for someone who actually uses these protocols or services, not something I would see as an investment.
Ethereum seems to have the best network effects, developer community and actual capital running on it. If eth2 succeeds, it would probably be the winner, but there are lots of challengers, like polkadot.
You might get yourself some BTC (as a reserve asset for defi), some ETH (as the oil or the machinery which makes the smart contracts go around) and maybe some DOT in case eth2 fails and dot delivers.
p.s. personal opinions, not responsible for losses, etc etc.
You might get yourself some BTC (as a reserve asset for defi), some ETH (as the oil or the machinery which makes the smart contracts go around) and maybe some DOT in case eth2 fails and dot delivers.
p.s. personal opinions, not responsible for losses, etc etc.
[deleted]
buy etherum
Cardano (ADA) looks more promising for the DeFi applications. It's better designed and written in a safer, purer language (Haskell).
"It's better designed" - that's a very subjective comment.
There are already a bunch of other chains that do what ADA seeks to do like Tezos, Polkadot, and Solana. Why haven't those gained traction?
Also, while it does make dapps safer, the lack of functional programming experience in most programmers makes it diffcult for me to think Cardano will do any better.
There are already a bunch of other chains that do what ADA seeks to do like Tezos, Polkadot, and Solana. Why haven't those gained traction?
Also, while it does make dapps safer, the lack of functional programming experience in most programmers makes it diffcult for me to think Cardano will do any better.
Polkadot certainly gained traction recently - together with Cardano they occupy 3 and 4 places on market capitalization if you exclude Tether[1].
[1] https://coinmarketcap.com/
[1] https://coinmarketcap.com/
Market cap is not adoption. Look at how many projects that were in the top 20 in 2017 that aren't the anymore. LSK, Neo, EOS, NEM, OMG, DASH, BTG....goes on and on
Cardano doesn't have smart contracts yet, and with Metcalfe's Law and network effects, Ethereum is already leading with DeFi.
They are almost there with Plutus[1][2] and Marlowe[3].
[1] https://docs.cardano.org/projects/plutus/en/latest/
[2] https://github.com/input-output-hk/plutus
[3] https://docs.cardano.org/en/latest/marlowe/marlowe-explainer...
[1] https://docs.cardano.org/projects/plutus/en/latest/
[2] https://github.com/input-output-hk/plutus
[3] https://docs.cardano.org/en/latest/marlowe/marlowe-explainer...
- https://uniswap.org/
- https://aave.com/
- https://makerdao.com/
- https://yearn.finance/