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SBF
@SBF_FTX
Replying to
@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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Brian Thompson
@b_d_thompson
Replying to
@SBF_FTX
and
@SBF_Alameda
Most lenders require over collateralization. The number 1 asset used to collateralize USD loans(and the banking sysyem) is real estate. e.g. conventional mortgage requires 20% equity which would be a minimum 125% collateral ratio. A mortgage creates USD exactly like borrowing Dai
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