> the key innovation of crypto is that it's supposed to reduce the risk of lending by bringing realtime transparency to the assets and liabilities of borrowers
Never heard this definition, where did you read this? Any time the word "asset" is linked to a crypto, people should know by now it's eventually going to zero.
> Never heard this definition, where did you read this?
I mean literally the reason why everyone refers to crypto as "triple entry accounting" is because entries on the ledger are cryptographically signed, which makes ledgers less expensive to audit and also prevents certain categories of fraud. So that alone should always make the costs of lending on the blockchain lower, and therefore also reduce interest rates.
But if you want a much more detailed explanation of why crypto should reduce the cost of borrowing money, especially in the developing world, here is an extremely detailed explanation on this topic:
I can see it clearly now - the next crypto crash rolling around like clockwork. Except this time it’ll be a speed run through four centuries of debtors law in which the cryptobros realize that the reason for interest rates isn’t the transaction cost or the paperwork but the enforcement arm to get people to complete the whole transaction through to the end.
I think it’ll come in two phases: first they’ll come around to the idea of debtor’s prisons and demand the governments of the world bring them back. Then when they’re all in the prisons, they’ll lead a movement to abolish them (again) completing the circle of “why bother?”
In the end we’ll be left with a saturated market of repo companies picking up the pieces for pennies on the dollar.
> the cryptobros realize that the reason for interest rates isn’t the transaction cost or the paperwork but the enforcement arm to get people to complete the whole transaction through to the end.
It's interesting you brought that up because crypto has a similar mechanism to get people to complete the whole transaction and resolve disputes without involving interest rates.
For example, imagine person B was buying a product from A. Should A send the product first or should B pay first.
When both sides don't want to take the initiative, they use an escrow contract on the blockchain where both sides have to lock up 150% to 200% of the value of the product in crypto inside the contract.
A then sends the product.
B receives the product.
If B accepts the state of the product, he can press a button to release the relevant amount of crypto in the contract to A and refund the extra 50% to 100% he had to put up.
If B sees the product is fraud, he presses another button and both sides lose all their crypto. This disincentives both A and B from committing fraud.
There are more nuanced conditions involved so I won't bore you with the details, but the main concept is there and it doesn't involve interest rates.
> If B sees the product is fraud, he presses another button and both sides lose all their crypto. This disincentives both A and B from committing fraud.
That can't possibly be right. It would mean that if person A defrauds person B, person B would lose 150-200% of the asking price, rather than just 100% if no "crypto escrow" were used at all.
If that's not a scathing indictment of the kinds of simplistic thinking that cryptobros think can solve real world problems, I don't know what is.
Of course, the fact that it makes it impractical to buy any kind of expensive product is merely a detail. As is the extreme cost of non-fraudulent delivery failures in this scheme.
Interest rates exist to incentivize loans in a universe where there’s a risk borrowers might not pay them back. The Roman Catholic Church decisively proved during the middle ages that no interest = no loans
You just described escrow with extra ~steps~ risk which has nothing to do with loans unless you’re suggesting borrowers put up 150-200% of the capital they want to borrow? (!?!?)
> entries on the ledger are cryptographically signed, which makes ledgers less expensive to audit and also prevents certain categories of fraud. So that alone should always make the costs of lending on the blockchain lower, and therefore also reduce interest rates.
.. but this is obviously garbage. The question in lending is always about default risk, which crypto does nothing to address. Most crypto lending seems to be so-called "overcollateralised" loans, which are secured on other crypto "assets", which also tend to turn out to be garbage.
And we can see that everyone in the crypto space is offering higher interest rates for depositors. Even more than Madoff's 8%. 10%? Why not! How about 10% per month! Who's taking the other side of that trade? Well, it turns out to be bankrupt exchanges and fraudsters.
The cost of ledgers and their auditing is not a meaningful proportion of retail interest rates in the current environment, which is dominated by the cost of funds, default risk, marketing/customer acquisition costs and profit.
Reducing or eliminating that cost should not make the costs of lending change in any noticeable way, because you're reducing something that is insignificantly small anyway.
I think you are confusing crypto with the layers on top of it. Lending via crypto is a dubious practice as it needs to tie into the physical world. Interest being paid on loans is an aspect of finance that some areas of crypto are recreating and failing at miserably, as they should, for obvious reasons.
Okay, eventually it must...depending on the form. In it's current implementation being sold, it won't work. Lending to generate income relies on a mature legal system to back up contractual demands. Crypto itself (an algorithm) cannot guarantee repayment of loans.
"Exchanges" try to bridge this gap and counterparty risk isn't properly priced in. If anything, the high interest payments aren't high enough to represent risk.
> Sweetbridge converts any Commercial relationship, Supply chain, or Value chain into an Ecosystem that increases the Net Worth of its Members.
Just the casing of that phrase makes me suspect them of some fraud :-)))
Ah, confirmed:
> By running all of the sales and purchases from an organization through an Ecosystem over a 5 year period, members will typically increase their net worth by:
Specifically with Ethereum, you can automate margin-calls and auto liquidation.
This is the basis for a lot of DeFi, which recently was the blockchain topic du joure. The idea is that you can trade in options, or margin loans, with the smart contract ensuring the seller of the option is sufficiently collateralized. This removes brokers and exchanges from the equation, which should make things easier.
Notably, FTX also offered the option of margin loans and options, though they were centralized. This turned out to be bad, not because it made things more difficult, but because they stole all the collateral.
Also note that the DeFi approach would likely have failed here, because the smart-contracts that determine the value of the collateral do a simple "units owned * current market price" computation. That doesn't account for price slippage. In practice the markets are quite illiquid, so selling some collateral will drop the price of that collateral quite quickly. DeFi currently has very little holistic risk management. When you have a lot of, say FTT, as collateral from counter-parties, that leaves you quite vulnerable. If FTT drops quickly, many people will get margin-calls. If they all default, then you get left with their FTT. If you try to sell that, it will crash the price even more.
Thanks for the response, I didn't realize Eth had this ability. I was taking issue with the statement of the "key innovation of crypto is that it's supposed to reduce the risk of lending" which I don't think you are agreeing with.
It's not clear to me that increased liquidity would solve their problem. I'm not against DeFi, but the spectacular failures are proving that it's not nearly ready for prime time.
Never heard this definition, where did you read this? Any time the word "asset" is linked to a crypto, people should know by now it's eventually going to zero.