Good afternoon! I hope you’re enjoying the start of summer. Oh yea, and you look great today :))
Quote of the Week:
"When life gets scary and difficult, we tend to look for solutions in places where it is easy or at least familiar to do so, and not in the dark, uncomfortable places where real solutions might lie."
— Robert Maurer
Thought of the Week:
Crypto Lending Part 2
DeFi means that if the crypto you borrowed stablecoins to buy goes down, an algorithm sells your crypto at hopefully a high enough price to pay off your loan. This is done automatically, rather than through a phone call, as done in traditional finance.
Removal of the human element means that in DeFi, the algorithm just looks at an investor’s collateral and position, and if their collateral is too low, liquidation is triggered. This system is usually stricter than traditional finance.
As a lender, the benefit of this is that there is less buildup of systemic risk, and the harm of this is that it is more unsettling.
If an DeFi platform realises that a whale has built up a large position in an increasingly volatile market and that the platform’s margin provisions are not enough to protect them if the whale needs to close the position, it is more difficult to intervene with the ad hoc things a lender would traditionally do.
This means the platform would need to act with foresight to prevent the algorithm from automatically liquidating the client.
Solend’s suggested solution was to amend the smart contract to let their team take over the client’s position and begin liquidating it in over-the-counter transactions before it hits the margin trigger. This suggestion was was put to a vote in Solend’s DAO and was passed. However, it was passed in a hasty way, setting off a slew of objections. Then, they rescinded the proposal, introduced another one, and a third one to create new position limits to mitigate the risk in a more mechanical way.
In essence, no matter whether it is in traditional finance or DeFi, humans make decisions on how to respond to changes in market conditions. In DeFi, humans just communicate, amend, and act upon those decisions through code rather than verbally and manually.
That’s all for this week!
See you again soon,
Angeline
Resources:
“Food for thought.” The Bloomberg Close, Europe Edition, Bloomberg, June 20, 2022.
“Hierarchy.” Brain Food, Farnam Street, June 19, 2022.
“On yer bike.” The Bloomberg Open, Europe Edition, Bloomberg, June 21, 2022.
“Stunning setback.” The Bloomberg Open, Europe Edition, Bloomberg, June 20, 2022.
Levine, Matt. “Citi and Revlon Are in Murky Waters.“ Money Stuff, Bloomberg Opinion, Bloomberg UK, June 21, 2022.
Sorkin, Andrew Ross. “The dirty secret of Covid.” DealBook, The New York Times, June 18, 2022.