curious to hear your thoughts on whether the market cap of a protocol can ever exceed the market cap of the chain it's built upon (i.e could DeFi eventually dwarf the market cap of ETH?)
Technically possible, I think. Some token could have a high valuation. Wouldn't be that safe under proof of stake as the staked amount (ETH) would be less than the tokens that could be stolen. But if you hacked ethereum, that would also reduce the value of tokens on ethereum.
All lending in crypto is over-collateralized. Rehypothecation is forbidden (only one entity has exclusive ability to liquidate the position). Is that good/bad/different/neutral compared to the fractional reserve system? The fractional reserve system makes sense if production causes actual wealth to be created to pay back the loan. Having to dig up gold to have enough money to pay for mining equipment to dig up gold doesn't make sense. Get a loan, dig up the gold, pay back the loan. But then if DeFi is using collateral that cannot be automatically liquidated/confiscated via smart contract... how does it work? I'll try to answer: to avoid having clown banks and clown managers to assess creditworthiness, automate collection and evaluation of off-chain data to automate decision making regarding collateral and liquidation (aka, Chainlink). How far can the Chainlink model go? Can it replace the clowns completely? Or is there a different way?
The current system looks to me like it gives an insane amount of power to bankers. Since money is loaned into existence, and bankers decide who can have a loan, bankers are the deciders of all economic activity. Dig a mine, design a VR headset, build a skyscraper... all of that has to be approved by a banker before it can happen. How can a banker be qualified to do all that? Insane level of centralization risk for the entire economy.
"An economy without credit can only increase spending (and thereby the counterparty’s income) with more production. This may not sound so bad, but imagine you could only buy a house with 100% down, or couldn’t go to college if you didn’t already have a high income to pay for tuition. Credit can be healthy if used to increase production and income to repay debt in the future."
Used to work in a debt financing banking role, so understand this concept well. But, I wonder, without credit, if the price of these goods (house, college) wouldn't just come down and become affordable / able to be saved for?
That's an interesting point. Government subsidized loans in education and housing have increased the prices of those things. The price becomes what people can borrow, which is generally higher than what they can save. Removing government subsidization wouldn't eliminate this effect entirely. The difference between principal (no loan case) and principal+interest (loan case) doesn't quite capture everything as customers are competing against each other and bidding up assets. Maybe there is something mispriced in the system because of misaligned incentives. E.g. a college or homeowner gets the cash, bank takes on default risk, but then default risk is redistributed via mortgage securitization (splitting the loan up and selling to multiple parties). But I don't think you could design a system where borrowers aren't competing with each other and bidding up assets using loans.
curious to hear your thoughts on whether the market cap of a protocol can ever exceed the market cap of the chain it's built upon (i.e could DeFi eventually dwarf the market cap of ETH?)
DeFi as a whole can (I think it will). I don’t think any single DeFi protocol will dwarf eth. They could however be larger than other smaller chains
Technically possible, I think. Some token could have a high valuation. Wouldn't be that safe under proof of stake as the staked amount (ETH) would be less than the tokens that could be stolen. But if you hacked ethereum, that would also reduce the value of tokens on ethereum.
If fractional reserve banking in crypto looked like it did in the US during gold standard, what would the size of DeFi be?
All lending in crypto is over-collateralized. Rehypothecation is forbidden (only one entity has exclusive ability to liquidate the position). Is that good/bad/different/neutral compared to the fractional reserve system? The fractional reserve system makes sense if production causes actual wealth to be created to pay back the loan. Having to dig up gold to have enough money to pay for mining equipment to dig up gold doesn't make sense. Get a loan, dig up the gold, pay back the loan. But then if DeFi is using collateral that cannot be automatically liquidated/confiscated via smart contract... how does it work? I'll try to answer: to avoid having clown banks and clown managers to assess creditworthiness, automate collection and evaluation of off-chain data to automate decision making regarding collateral and liquidation (aka, Chainlink). How far can the Chainlink model go? Can it replace the clowns completely? Or is there a different way?
The current system looks to me like it gives an insane amount of power to bankers. Since money is loaned into existence, and bankers decide who can have a loan, bankers are the deciders of all economic activity. Dig a mine, design a VR headset, build a skyscraper... all of that has to be approved by a banker before it can happen. How can a banker be qualified to do all that? Insane level of centralization risk for the entire economy.
"An economy without credit can only increase spending (and thereby the counterparty’s income) with more production. This may not sound so bad, but imagine you could only buy a house with 100% down, or couldn’t go to college if you didn’t already have a high income to pay for tuition. Credit can be healthy if used to increase production and income to repay debt in the future."
Used to work in a debt financing banking role, so understand this concept well. But, I wonder, without credit, if the price of these goods (house, college) wouldn't just come down and become affordable / able to be saved for?
That's an interesting point. Government subsidized loans in education and housing have increased the prices of those things. The price becomes what people can borrow, which is generally higher than what they can save. Removing government subsidization wouldn't eliminate this effect entirely. The difference between principal (no loan case) and principal+interest (loan case) doesn't quite capture everything as customers are competing against each other and bidding up assets. Maybe there is something mispriced in the system because of misaligned incentives. E.g. a college or homeowner gets the cash, bank takes on default risk, but then default risk is redistributed via mortgage securitization (splitting the loan up and selling to multiple parties). But I don't think you could design a system where borrowers aren't competing with each other and bidding up assets using loans.