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Why DeFi is not a Ponzi Scheme

17 points by probe 5y ago

jstx1 5y ago
Isn't security the biggest concern that's basically impossible to properly address in the current DeFi framework? You have a lot of money being governed by publicly available code with irreversible transactions. There have been a number of exploits in the past and there's no reason why they would stop. Why do people put their money in a system where everyone is a target and a bug can bring their entire balance to zero with no way to reverse it?
- saurik 5y ago
  Maybe because it is fully programmable and transparent, executing the same rules for all participants, with no restrictions?
  - vore 5y ago
    Just because it's transparent doesn't mean there aren't latent exploits, e.g. the DAO. Open source doesn't mean bug free, and having those bugs immutably etched into the blockchain where all your money is tied up is pretty terrifying!
    - saurik 5y ago
      I got that, but the question was why someone would risk that; I am pointing out that there is a strong positive that maybe outweighs the negatives for a number of users.
- uh_uh 5y ago
  I'm wondering if newer projects like Cardano are trying to address reversibility at all. To me this looks like the real roadblock for crypto. No financial institution wants to go broke because of a bug in the code. Granted, this can also happen in traditional finance, albeit with crypto it looks a lot easier to achieve.
  - maliker 5y ago
    Is this an evolutionary mechanism that weeds out buggy DeFi contracts? Not saying the process to get to the end with a few trusted contracts/systems is going to be painless.
    - jstx1 5y ago
      It weeds out buggy ones but it doesn't guarantee that the ones that remain aren't buggy.
  - soco 5y ago
    I thought a big selling point for crypto was exactly this irreversibility. If we start building in crypto everything a fiat has, on one side we're reinventing the wheel and on the other neutralizing its (theoretical?) advantages.
- probe 5y ago
  What about the current DeFi framework makes it impossible to address? Imo smart contract engineering has much more in common with firmware, hardware, etc. than the mindset a typical React/web2 engineer might have (i.e. try things and iterate). I think that point is not talked about enough.
beders 5y ago
It's a P0NzI sChEMe. Something completely different ;)
- beders 5y ago
  Jesus. Joking not allowed on Hackernews. Thanks for the downvotes. You know, before emojis we had these things called smilies, which are composed of several different characters to express some intent. It works like this ;) - aka wink wink, I'm not serious.
  - reactorofr 5y ago
    It's not that people are against jokes, yours just didn't land. Have some humility.
    - BrissyCoder 5y ago
      Yeah this. I've seen plenty of good jokes on here get upvoted. OPs was unoriginal and lacked any creativity.
TheRealNGenius 5y ago
It says something when you need to convince people what it isn't
4512124672456 5y ago
Wow, this article is so right. Excuse me while I invest in <Coin named after meme based on another meme> with 1000%+ yield that comes from []. Tether? Never heard of it. Also, ignore the millions being lost in scams (https://www.rekt.news/ https://www.rekt.news/).
kleinsch 5y ago
The space certainly seems full of Ponzi schemes and rug pulls. This article spends a lot of words carefully dodging around that.
BrissyCoder 5y ago
It's a Ponzi scheme built upon a Ponzi scheme. Ethereum (and whatever other chains support smart contracts) literally only exist as a platform upon which to build Ponzi schemes. Sorry but I can't do anything with DeFi. It's just juggling more crypto around. I've had multiple tell me I can get a loan on it but this is just False for any practical reason. I can't say get a loan for a car and use the car itself as collateral like I can do at literally any bank. I have to put up 100% of collateral in crypto. It blows my mind that there are people on this site who are proponents of DeFi in its current form.
- probe 5y ago
  To be fair, you do have to start with over-collateralized loans before you can get under/no collateral loans with plenty of projects trying to do the latter. That's how lending itself started (https://www.provenir.com/resources/collateral/history-of-lending/ https://www.provenir.com/resources/collateral/history-of-len...). But I agree that if it's always overcollateralized then there is obviously much less utility created (though definitely some - similar to how you can get a loan against your home). The project mentioned, Goldfinch, has already distributed 4.5M in uncollateralized loans to emerging markets using DeFi rails and liquidity already (https://medium.com/goldfinch-fi/goldfinch-raises-11m-from-andreessen-horowitz-to-build-the-next-phase-of-decentralized-credit-459b08e7653 https://medium.com/goldfinch-fi/goldfinch-raises-11m-from-an...). My 2c is that it's a sign of what's to come.
  - BrissyCoder 5y ago
    > To be fair, you do have to start with over-collateralized loans before you can get under/no collateral loans with plenty of projects trying to do the latter. Yeah but also the collateral always has to be cryptocurrency right?
    - probe 5y ago
      Yes for the most part it is. One reason being that it's just a lot easier to code and cleaner when everything is on-chain and tracked the same way. But that's starting to change (https://centrifuge.io/ https://centrifuge.io/) - still a long way to go ofc. I also know people who have done non-crypto collateral or just completely unsecured lending, but it does involve trust that is off-chain (legal contract, know the person, etc). I think that's a fine stepping stone (and may end up being necessary) as people figure out how to do everything on-chain and in decentralized ways (ex. using on-chain reputation)
billiam 5y ago
OP says of growth in DeFI value: " I think it’s primarily driven from new entrants and solving problems." New entrants==Ponzi scheme. Also many fallacies about finance are stated as fact.
adolph 5y ago
A rosy definition of DeFi: DeFi (or “decentralized finance”) is an umbrella term for financial services on public blockchains, primarily Ethereum. . . . DeFi takes the basic premise of Bitcoin — digital money — and expands on it, creating an entire digital alternative to Wall Street, but without all the associated costs (think office towers, trading floors, banker salaries). This has the potential to create more open, free, and fair financial markets that are accessible to anyone with an internet connection. https://www.coinbase.com/learn/crypto-basics/what-is-defi https://www.coinbase.com/learn/crypto-basics/what-is-defi
- soco 5y ago
  ...and replaces those associated costs with gas costs.
deleted 5y ago
[deleted]
emerged 5y ago
They need to convince us it’s not a Ponzi scheme so we will put money into it so they make money off our money. Then all we need to do is convince some more people it’s not a Ponzi scheme.

17 points by probe 5y ago

Isn't security the biggest concern that's basically impossible to properly address in the current DeFi framework? You have a lot of money being governed by publicly available code with irreversible transactions. There have been a number of exploits in the past and there's no reason why they would stop. Why do people put their money in a system where everyone is a target and a bug can bring their entire balance to zero with no way to reverse it?

saurik 5y ago
Maybe because it is fully programmable and transparent, executing the same rules for all participants, with no restrictions?
- vore 5y ago
  Just because it's transparent doesn't mean there aren't latent exploits, e.g. the DAO. Open source doesn't mean bug free, and having those bugs immutably etched into the blockchain where all your money is tied up is pretty terrifying!
  - saurik 5y ago
    I got that, but the question was why someone would risk that; I am pointing out that there is a strong positive that maybe outweighs the negatives for a number of users.
uh_uh 5y ago
I'm wondering if newer projects like Cardano are trying to address reversibility at all. To me this looks like the real roadblock for crypto. No financial institution wants to go broke because of a bug in the code. Granted, this can also happen in traditional finance, albeit with crypto it looks a lot easier to achieve.
- maliker 5y ago
  Is this an evolutionary mechanism that weeds out buggy DeFi contracts? Not saying the process to get to the end with a few trusted contracts/systems is going to be painless.
  - jstx1 5y ago
    It weeds out buggy ones but it doesn't guarantee that the ones that remain aren't buggy.
- soco 5y ago
  I thought a big selling point for crypto was exactly this irreversibility. If we start building in crypto everything a fiat has, on one side we're reinventing the wheel and on the other neutralizing its (theoretical?) advantages.
probe 5y ago
What about the current DeFi framework makes it impossible to address? Imo smart contract engineering has much more in common with firmware, hardware, etc. than the mindset a typical React/web2 engineer might have (i.e. try things and iterate). I think that point is not talked about enough.

beders 5y ago

It's a P0NzI sChEMe. Something completely different ;)

beders 5y ago
Jesus. Joking not allowed on Hackernews. Thanks for the downvotes. You know, before emojis we had these things called smilies, which are composed of several different characters to express some intent. It works like this ;) - aka wink wink, I'm not serious.
- reactorofr 5y ago
  It's not that people are against jokes, yours just didn't land. Have some humility.
  - BrissyCoder 5y ago
    Yeah this. I've seen plenty of good jokes on here get upvoted. OPs was unoriginal and lacked any creativity.

TheRealNGenius 5y ago

It says something when you need to convince people what it isn't

4512124672456 5y ago

Wow, this article is so right. Excuse me while I invest in <Coin named after meme based on another meme> with 1000%+ yield that comes from []. Tether? Never heard of it. Also, ignore the millions being lost in scams (https://www.rekt.news/ https://www.rekt.news/).

kleinsch 5y ago

The space certainly seems full of Ponzi schemes and rug pulls. This article spends a lot of words carefully dodging around that.

BrissyCoder 5y ago

It's a Ponzi scheme built upon a Ponzi scheme. Ethereum (and whatever other chains support smart contracts) literally only exist as a platform upon which to build Ponzi schemes. Sorry but I can't do anything with DeFi. It's just juggling more crypto around. I've had multiple tell me I can get a loan on it but this is just False for any practical reason. I can't say get a loan for a car and use the car itself as collateral like I can do at literally any bank. I have to put up 100% of collateral in crypto. It blows my mind that there are people on this site who are proponents of DeFi in its current form.

probe 5y ago
To be fair, you do have to start with over-collateralized loans before you can get under/no collateral loans with plenty of projects trying to do the latter. That's how lending itself started (https://www.provenir.com/resources/collateral/history-of-lending/ https://www.provenir.com/resources/collateral/history-of-len...). But I agree that if it's always overcollateralized then there is obviously much less utility created (though definitely some - similar to how you can get a loan against your home). The project mentioned, Goldfinch, has already distributed 4.5M in uncollateralized loans to emerging markets using DeFi rails and liquidity already (https://medium.com/goldfinch-fi/goldfinch-raises-11m-from-andreessen-horowitz-to-build-the-next-phase-of-decentralized-credit-459b08e7653 https://medium.com/goldfinch-fi/goldfinch-raises-11m-from-an...). My 2c is that it's a sign of what's to come.
- BrissyCoder 5y ago
  > To be fair, you do have to start with over-collateralized loans before you can get under/no collateral loans with plenty of projects trying to do the latter. Yeah but also the collateral always has to be cryptocurrency right?
  - probe 5y ago
    Yes for the most part it is. One reason being that it's just a lot easier to code and cleaner when everything is on-chain and tracked the same way. But that's starting to change (https://centrifuge.io/ https://centrifuge.io/) - still a long way to go ofc. I also know people who have done non-crypto collateral or just completely unsecured lending, but it does involve trust that is off-chain (legal contract, know the person, etc). I think that's a fine stepping stone (and may end up being necessary) as people figure out how to do everything on-chain and in decentralized ways (ex. using on-chain reputation)

billiam 5y ago

OP says of growth in DeFI value: " I think it’s primarily driven from new entrants and solving problems." New entrants==Ponzi scheme. Also many fallacies about finance are stated as fact.

adolph 5y ago

A rosy definition of DeFi: DeFi (or “decentralized finance”) is an umbrella term for financial services on public blockchains, primarily Ethereum. . . . DeFi takes the basic premise of Bitcoin — digital money — and expands on it, creating an entire digital alternative to Wall Street, but without all the associated costs (think office towers, trading floors, banker salaries). This has the potential to create more open, free, and fair financial markets that are accessible to anyone with an internet connection. https://www.coinbase.com/learn/crypto-basics/what-is-defi https://www.coinbase.com/learn/crypto-basics/what-is-defi

soco 5y ago
...and replaces those associated costs with gas costs.

deleted 5y ago

[deleted]

emerged 5y ago

They need to convince us it’s not a Ponzi scheme so we will put money into it so they make money off our money. Then all we need to do is convince some more people it’s not a Ponzi scheme.