Friday, July 23, 2021

The FT's Izabella Kaminska Looks at Decentralized Finance

 From FT Alphaville, July 21:

DeFi paradoxes
Why using crypto smart-contracts to remove financial intermediaries comes with its own trade-offs.
You might have heard the term “DeFi” making the rounds in the cryptosphere. Like us, you may even have tried to understand what it was all about but given up due to the complexity, opacity and jargon surrounding its key aspects. 

Others have tried to shed light on its mysterious operations. The FT’s Miles Kruppa and Hannah Murphy, for example, noted as far back as the heady pre-pandemic days of December 2019 that DeFi operates as a broad umbrella term for blockchain projects that aim to eject human involvement in financial services by using smart contracts. To accomplish this, DeFi depends on the creation of “liquidity pools” and overcollateralised repo-style arrangements.

Even so, DeFi, which stands for “decentralised finance”, remains a murky if increasingly hyped up corner of the crypto world. 
To be blunt, FT Alphaville’s initial knee-jerk reaction — based on what we should confess was not that much research at all — was that the very idea of decentralised finance being something new or exciting was hugely naive.

The story of financial markets, after all, is one of continuous decentralisation, innovation and engineering to synthesise seemingly risk-reduced returns and free lunches, which usually turn out to be anything but. Crypto is just another part of that story.

From repo markets to eurodollars and commodities, the story always starts with decentralised frameworks arising quite organically, being heralded as amazing wealth generators, then turning risky, then blowing up, then having regulatory forces battle to contain them — usually by centralising their processes and slowing down their growth by forcing expensive checks and balances on the systems.

Were the alchemic solutions being offered by DeFi really immune to that age-old pattern?

We somehow doubted it....

....MUCH MORE, first rate.

And here with a contrary opinion, Bloomberg journo, aggrieved counterparty and former Alphavillain, Tracy Alloway:

I mean contrary to received guac-sqawk wisdom, not contrary to Izabella..
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