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SBF
@SBF_FTX
Replying to
@SBF_FTX
5) With that out of the way, the goal is: a) don't trust anyone, assume everyone is selfish and incompetent b) build great products that provide lots of value Let's first start with something that does pretty well: atomic swaps.
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SBF
@SBF_FTX
6) There are some details here (buying short-term options by reneging), but ignoring that you can swap 2 ERC20 tokens for each other in a way that's trustless and efficient. How? Well, you use smart contracts. The central smart contract can check that both sides have funds.
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SBF
@SBF_FTX
7) Both sides put the funds in the smart contract, and once it has both and both parties have agreed to a trade, it sends each person what they bought. You can do this via pre-programmed smart contracts with no middlemen who can fuck with things. And it does what users want.
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SBF
@SBF_FTX
8) What else works well in DeFi? Borrow/lending mostly works as desired; see Compound, Aave, etc. But venture far beyond that and the product quality quickly degrades. For example, take stablecoins.
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SBF
@SBF_FTX
9) Stablecoins are basically the simplest product in CeFi. You take an ERC20 token, and you take dollars in a bank account, and you map them 1:1, with creations and redemptions. There's basically nothing tricky about them (other than holding the bank account!). How about DeFi?
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SBF
@SBF_FTX
10) In DeFi, stablecoins are a total fucking mess. The problem, really, is that a stablecoin is a dollar, and dollars are not on the blockchain; they're centralized in bank accounts. So if you only have the blockchain, you can't redeem for $1. But then what makes it stable?
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SBF
@SBF_FTX
12) But those require banks, and if you don't allow centralized elements then you're left with, basically, atomic swaps of TUSD for USDC--which depend on some outside mechanism to keep them in line and provide liquidity.
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SBF
@SBF_FTX
13) But it gets worse--if you really hate centralization, you might not like the fact that your stablecoin's value relies on a bank account. What if it gets frozen, or the creation/redemption facility shuts down? What is worth $1 but doesn't rely on banking?
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SBF
@SBF_FTX
14) There's a really fundamental tension here! So we end up with stuff like $DAI. And DAI is a total mess. It's not backed by dollars. That means you can't redeem it for a dollar bill. But in fact, you usually can't redeem it at all! What makes it "worth" $1?
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SBF
@SBF_FTX
15) In fact you can't create it either, really--you can just borrow it. So it's peg is really soft. And it's backed by a leveraged position, so if markets move the stablecoin's holdings might get liquidated. So to recap: no creations, no redemptions, but yes liquidations.
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SBF
@SBF_FTX
17) So you don't want to trust USDC's centralized redemptions, but you do want to be able to turn your stablecoin into $1. What are you left with? Well, you have mStable, and Curve, and lots of other attempts to build out a hybrid product.
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SBF
@SBF_FTX
18) And stablecoins are just one example. The tradeoff between centralization and usability is all over the place. Many DeFi projects need price feeds; so they use oracles, which.... usually draw from Coinbase (or Binance, etc.). Which is fine--that's what FTX futures do!
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SBF
@SBF_FTX
19) But it's not super decentralized; it's super prone to centralized failure or API issues. (See e.g. BitMEX and Deribit futures when Bitstamp etc. blew out.) And if you want to trade BTC on Ethereum, most attemps ultimately have a pack of judges custodying the BTC.
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SBF
@SBF_FTX
20) This even pops up when looking at blockchains. One way to make your chain faster and cheaper is to make it centralized--if it's just you saying what happens you can do so quickly. But of course that starts to cut into the whole point of crypto, and DeFi in particular.
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SBF
@SBF_FTX
21) So what do we do here? Many of the answers aren't obvious. But that doesn't mean it's hopeless. There are powerful procedures to create trustless cross-chain behavior; there are blockchains that gain speed without sacrificing security.
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SBF
@SBF_FTX
22) And there are ways to approach stablecoins that, while not perfect, at least do something better than DAI, and less centralized than USDC. In order for DeFi to grow, it's going to have to make a compelling case that the trustlessness justifies the hassle.
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SBF
@SBF_FTX
23) And that means finding pareto optima, making the best tradeoffs you can, and continuing to find ways to build out the power of the DeFi ecosystem without sacrificing its core principles.
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SBF
@SBF_FTX
Replying to
@b_d_thompson
But with DAI you have to overcollateralize the borrow--so it costs like $1.50 to "create", or else you have to lock up $1.50 per DAI, and then eventually buy the DAI back to get your collateral back.
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