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SBF
@SBF_FTX
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@SBF_FTX
3) The core of DeFi is to be, well, decentralized, and ideally trustless. But centralization is often efficient, and for lots of DeFi projects the cost of decentralization is being a bad product. Why is this, and what are ways out of this tradeoff?
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SBF
@SBF_FTX
4) Well, before you can do _anything_, you have to trust the blockchain you're using: trust that its miners, or stakers, or nodes, will try to build the longest chain without ulterior motives. And I'll leave discussion of different blockchains to another day.
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SBF
@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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