Except those "exotic derivatives, structured products, etc" do have real investments at the heart of them. What is at the heart of those "DeFi" investments? It seems to mostly be criminal and criminal-like behavior (this includes transferring money in ways the local government doesn't approve of which can admittedly be great if the local government is oppressive).

I think it's arguable what real investments are. How "real" is the stock price of Gamestop? Aren't most prices just driven by imaginary narratives? Investors rarely care about dividends.

There are also DeFi projects that are based what you call "real investments" such as stablecoins, synthetic assets for stocks and commodities, etc. When the backing/staking mechanism for these works as intended, they are just as real as any derivatives on these assets in the traditional financial markets.

Let's say Gamestop is shutdown tomorrow. There is real estate, there is IP, and there are physical products that could all be sold to recoup losses. There is intrinsic value there regardless of whether the current stock price has greatly exceeded those values. The overwhelming majority of cryptocurrency investments have no intrinsic value.

And crypto projects that are derivatives on real world assets, like fiat currencies (stablecoins) or stocks (synthetic tokens), have equivalent backing. If the project were to dissolve, there would be assets backing that. Not suggesting this is the case here, but I keep seeing this worrisome trend where people are stuck in the Bitcoin and ICO world from 5 years ago and think nothing has changed and they don't really understand the technical details of how DeFi protocols work today.

In the case where tokens are not backed by anything they are often governance tokens, which are kind of like startup equity. Startups without much IP or real estate are commonly valued at millions of dollars. This is no different in that anyone is a VC investing in e.g. future governance rights.

What percentage of cryptocurrencies are backed by real world assets? Who ensures that this backing is actually baked into the cryptocurrency and isn't just some marketing speak? For example there is Tether which claimed to be backed by USD. "[I]t turns out that the stablecoin that used to say it was 100 per cent backed by cash reserves is in fact . . . 2.9 per cent backed by cash reserves".[1]

[1] - https://www.ft.com/content/529eb4e6-796a-4e81-8064-5967bbe3b...

And Theranos claimed to have working machines...

Risk is risk - in stock, crypto, or life in general.

That's a false equivalence. Literally every share of a business is supposed to be backed by a business. Zero coins entitle the bearer to any right or interest whatsoever. Even those stable coins don't give you any claim on the backing instruments. Certainly not in Tether town. Says so right in their T&Cs.

The key word there is 'supposed'...

Theranos, B. Madoff, and others seemed to feel that was just a suggestion :-P

Also, businesses are not required to buy their stock back from you, so they are not 'backed' any more then crypto is.

If a company goes broke, and you hold common stock - you get nothing

edit:s/there/their/

In this thread, you're comparing crypto to Madoff and Theranos, and you think this is an argument in its favour.

A startup equity consists of the startup's net assets, so the owners have a claim on these assets. In the case of these "governance rights" what assets do the holders have a claim on?

Governance tokens are just a glorified twitter poll.

> Investors rarely care about dividends.

This one statement reveals that you have zero idea what you’re talking about and are just presenting yourself as knowledgeable. Why do that?

I can see this being true in the stocks world. A lot of companies have IPOed without a plan for dividend payouts because their main business plan is investment in expansion. People who jumped onto amazon and tesla may have made fortunes but have gotten exactly 0 dividends.

Yet. Companies pay dividends when they no longer believe that they can provide a better ROI by investing it in themselves. Like AAPL. All it signals is there remains a growth story to be had.

However, any money the company invests in itself raises the intrinsic and shareholder value of outstanding equity, just like share buybacks, and dividends.

Companies have intrinsic value in their balance sheets and are also subject to accounting rules that give confidence (and value) to their cashflows. So, ultimately, a share in a company does map to something material that could theoretically be used for something other than speculation.

In the short term prices are driven by liquidity, but the fundamental value of a company's stock is the net present value of its future free cash flows. Anyone believing otherwise will, in the long term, lose money.

> There are also DeFi projects that are based what you call "real investments" such as stablecoins, synthetic assets for stocks and commodities, etc.

All these are examples of DeFi parasitising conventional finance products. Also none of these are decentralised or "trustless". Notice how all the main stablecoin issuers have to provide regular third-party attestations assuring that the coins have appropriate backing.

The GME stock price is a derivative.

GME stock is a valid contract with a proportional ownership share of all GME tangible and intangible assets.

What crypto has the rights to any tangible assets? Even stablecoins are unaudited.

Stablecoins do not offer claim on the backing assets anyways, if and when they exist.

The difference is that GameStop actually has a way to receive cash outside of an investor. They're a real business with revenue. GameStop is using the inflated valuation to raise money to pay off debt and expand its business. While it's unlikely, it's possible that they will eventually make enough profit to justify it's valuation.

True, a good chunk of trading and wall street in general is not doing anything real. But just like the dotcom bubble, the music stops eventually, and you don't want to be stuck holding worthless stocks or coins when that happens.

> (this includes transferring money in ways the local government doesn't approve of which can admittedly be great if the local government is oppressive).

That is a very weird take. It assumes that privacy is somehow always linked to illicite activities. Even if I'm buying candy, the government doesn't have any right to track it. Hiding my life from the government should not be automatically labeled criminal.

I think it is more your interpretation of my take is weird because I never said anything approaching what you are suggesting.

You want privacy, buy in cash. Most cryptocurrencies don't provide added privacy and they usually end up decreasing privacy since all transactions are on the public ledger.

The type of thing I am talking about is people transferring money out of an economy in ways that are forbidden by the government. Governments can want to prevent this for legitimate reasons like trying to stop money laundering and tax evasion. They can also do it for illegitimate reasons like the government trying to retain authoritarian control over its citizens or to prop up a failing currency. Either way it would mean the transfers are illegal, but not all of them are necessarily immoral. That is why I dubbed it "criminal-like behavior".

Government bonds are already on the way there. There are multiple alternatives live today for getting exposure to stocks of major companies as well as commodities.

It is a matter of regulatory clarity, and processes and infrastructure (of which some of these projects fill) until we get hard non-crypto-related security tokens etc.

Things are starting to fall in place but things have to prove themselves in the current market before

>>Except those "exotic derivatives, structured products, etc" do have real investments at the heart of them.

Hmm...2008 housing crash and the recession that followed beg to differ.

I'm not sure how you think they differ. They are exactly what I am talking about. They had a real investment at the heart of them. The problem in 2008 was that the investments were bad. People were given mortgages that exceeded their ability to pay them back. But that is still a real investment with the intrinsic value of the real estate properties that were foreclosed on.

The mortgages were known to be essentially valueless, packaged up and resold anyway..

that's not what I'd consider having a 'real investment' at the heart of them. And the value of the real estate didn't cover the losses on the loans, prompting bailouts.

The mortgages didn't have positive value, but they had the actual homes as collateral which provided intrinsic value. A mortgage goes under and you have a house to short sell and recoup your losses. A cryptocurrency goes bust and you have nothing. It is the difference between losing 20% of your investment and losing 100% of your investment.

They literally threw the country into a recession? Also, the average person isn't writing mortgages.

A better example might be the average investor in a company. The average investor loses everything if a company goes under. Some creditors might get paid, and if they're lucky some 'preferred stock' holders might get something. But the average person (common stock) loses everything they put in..

I'm not really seeing much of a difference ? There is risk in everything...If you can't afford to lose, then don't bet?

>I'm not really seeing much of a difference ? There is risk in everything...If you can't afford to lose, then don't bet?

The difference is that intrinsic value provides a floor for potential losses and therefore reduces risk. If you can't understand why a worst case scenario of losing 20% of your investment is better than a worst case scenario of losing 100% of your investment, then I don't think you and I are going to have any constructive discussions about investing.

Wow - I specifically called out that most people don't write mortgages, presented what I thought was a relevant scenario for the 'average person' ...

And you specifically go out of your way to pretend you didn't see it/understand it? Yeah - 'constructive' doesn't seem to be likely

Regulatory capture is still a possible problem on the other end of the spectrum that needs to be countered with effort.

so we should expend the effort to fix the issues with the existing system..

But we should just throw out new systems like crypto because they still have issues that need "to be countered with effort" ?

I'm not claiming any system is perfect, but it seems odd to shrug at the issues in one system and demonize another system for having issues...

You injecting a straw man argument doesn't help.

We need to fix the existing system, yes, and it requires real work - real relationship building, real trust networks of competent critical thinkers - a meritocracy, hierarchy of competent to form and be strengthened; regulatory capture is a multi-industry, multi-institutional issue.

Certain issues inherently to Bitcoin's issues are unavoidable pitfall and not fixable. The issues with government are fixable, and arguably the US government, democracy and capitalism has been highly successful for getting innovation to where it is today. Next step is making sure people/businesses are paying their fair share into the system and then redistributing a UBI to the largest segment or largest cog in the machinery - consumers, so then the machine has the fuel to run.

What strawman would that be?

BTW - I agree Bitcoin has issues (speed/cost being the 2 biggest). It was literally the first generation coin. Other coins are trying to solve those problems. Personally I like Cardano/ADA for that reason - its trying to fix some of the issues with first gen. coins.

Also, if you think you can get people/businesses to pay their fair share...I think your dreaming. I really hope you can, but I don't see it happening in the next 20 years.

I agree about consumers. Its annoying so much energy is spent talking about the 'minimum wage', when we really need people with a 'middle class wage' to drive the economy. Seems like we're more interested in keeping people at the bottom then actually increasing the numbers of people with disposable income to drive the economy.

Just one method of collecting more tax money and it's happening:

"Biden Wants to Hire 87,000 Additional IRS Agents to Go After Wealthy Tax Dodgers" - https://www.reddit.com/r/politics/comments/nibk03/biden_want...

"Biden's $80 billion plan to beef up IRS audits may target wealthy small business owners" - https://www.cnbc.com/2021/05/05/bidens-80-billion-plan-to-be...

That sounded great until the 'wealthy small business owners' part..

So the mega rich get off again...

Aannd of course, govt's are already trying to carve out provisions for their local pet industries in the G7 15% corporate tax talks..

'That sounded great until the 'wealthy small business owners' part..'

That would be wealthy small business owners who aren't paying their taxes, I presume. And you're making an assumption "so the mega rich get off again..."

DeFi can't do much financing at all since smart contracts can only replicate a small subset of financial products which aren't very useful to begin with. Even calling it "finance" is a bit of a stretch.

> smart contracts can only replicate a small subset of financial products

Why?

One of the reasons is that many financial contracts have provisions to seize assets under certain circumstances. This is not possible with DeFi because DeFi is built around "unconfiscatable" digital assets.

I believe it is possible to write in provisions for some actor or set of actors to seize assets in a smart contract. This doesn't seem common either because of immaturity or just culture, but I don't think it is impossible.

No, that's not it. An actor must be able to seize assets from another actor, under certain circumstances. That can't be done with smart contracts because of the security model of blockchains.

It can if it is written into the contract. I suspect pretty much all contracts will have provisions for this in the future.

There's still the issue of what kinds of trigger circumstances you can commit to code.

No, a smart contract cannot seize assets from another wallet. A key feature of distributed ledgers is that only the person who has the private key to a wallet can move assets from that wallet. If you don't understand this there's no point continuing this conversation.

I think you are thinking too narrowly. It is true that a simple transfer from one wallet to another can't be reversed through technical means (though I'm interested in seeing how the law on this develops, for instance whether the legal system will compel wallet owners to pay back assets under threat of real-world non-crypto consequences if they don't), but you certainly can set up an escrow system where the keys to the escrow account are held by a "court" which can come to consensus on one participant retrieving funds from another participant under some set of rules and circumstances. This is more complex and fraught to get right than just direct wallet transfers, which I'm sure is why it isn't common (or maybe doesn't exist at all, I'm not sure), but it's also not impossible.

Sure, but that's not a smart contract, it's a "court system" (except much worse, because it's unaccountable), whereas the whole purpose of smart contracts was to replace courts. The other problem is the assets still need be deposited somewhere in advance, which defeats the purpose of a whole lot of financial operations including most types of loans.

I'm talking about implementing a "court" inside a smart contract. That is, the "court" is just one or more entities that control the private keys necessary to govern the funds locked in the contract.

I'm not sure I understand your last sentence, escrow is a common mechanism in traditional finance, which seems to work for financial operations including loans. But you may well be right on this point, I just don't really understand what you mean.

Well, there are different types of loans. What you're describing is a collateralised loan which is the only type of loan that is feasible to implement with smart contract. Such a loan isn't very useful because the borrower has to post a sum equivalent to the amount borrowed as collateral, which means the borrower isn't really borrowing anything. Undercollateralised loans are more useful, because they can be used to actually finance projects, but these loans can only work if the lender has the ability to seize the lender's assets in the event of default, otherwise the lender would take the money and never pay the loan back. Such loans are not possible with cryptocurrencies because cryptocurrencies are "unconfiscatable", they cannot be seized. The escrow mechanism that you mention doesn't work because because it requires the lender to post collateral and then it's no longer an undercollateralised loan.

Ah I see the miscommunication, I wasn't really talking about loans but just more like settlements between parties which can use escrow. I definitely see your point about most loans being unimplementable purely as smart contracts. I guess I'm not quite as convinced as you that there can't be a useful role for smart contracts as one portion of a system that also includes legal contracts and traditional liability. It seems to me that it's harder to take out and especially to underwrite loans than it needs to be and I think there's some room for improvement there, though I'm certainly not completely convinced that this will come to fruition.

Thanks for your patience in making me see what you meant!

But governments regulate because before regulation, it was a scammers paradise.

I don't think you're wrong conceptually. But in practical terms:

1) the traditional options with varying risk profiles are mostly legitimate. The ratio of scam to authentic project is much higher in crypto. Or if not "scam", products where the creators (as pointed out in this article) might be perfectly happy if the product turned out to be successful, but mostly don't care because they make their money up front: reward with very little risk. Retail customers take all the risk. Traditional financial products align incentives better because if no one want is, no one is making transaction or management fees either. They're (mostly) only successful if customers are successful

2) Financial products based on crypto have no real-world assets backing them, making their prices much more volatile. If you're investing in traditional high risk product that ultimately relies on a real-world commodity like oil, you can make reasoned predictions on where oil demand might be headed. Your might make a high risk bet that oil prices are going to bottom out from their current peak due to decreased demand after the Summer and a minor resurgence in COVID as more and more people go back to work and then kids stop distance learning and mostly go back to school in the fall, etc. You might be wrong, but you can see an actual underlying asset with real-world utility to make better reasoned decisions. It is much harder to do that with crypto when a tweet by some high profile billionaire (Elon comes to mind) or rumors of regulatory scrutiny could send prices soaring or plummeting. This is very rare in traditional financial products.

I also don't think crypto will ever ever ever replace government regulated markets. It may become part of them, but not replace. The government (at least in the US) is already regulating crypto. CTR's are already required, the SEC has stepped in pretty heavily to classify most crypto as securities, complete with the requirements that comes with that, etc. It can be decentralized but still regulated, and governments are simply not going to allow crypto to take away their ability to control their own monetary policy. Plenty of governments may wish to move on from the USD being the default world reserve currency, but that's because they want it to be something they have more control over. Crypto doesn't fill that role.

All the US would have to do is regulate how every US bank works with crypto, and require that US banks only work with foreign banks that follow similar requirements. Any foreign bank wanting to do business even remotely related to the US-- which is nearly all of them, would have no choice but to follow. Or the US could regulate how businesses are able to accept crypto as a currency. Businesses don't operate in a decentralized abstraction layer: They operate in physical locations. It might be difficult to seize their crypto assets if they violate the law (though not impossible) but still very easy to seize & shutdown their physical assets, throw people in jail, etc.

Sure, if crypto could somehow avoid all of that until it became the de facto medium of exchange, governments would have a much harder time doing this. But it's not like governments aren't aware of what's going on, and as I said the regulation has already begun.

I agree with most of this, but: "SEC has stepped in pretty heavily to classify most crypto as securities" is pretty much not true. The SEC has been pretty heavy handed with ICO's, but most cryptocurrencies are not currently regulated as securities. If they were, all existent US based exchanges would be illegal.

Good point-- You're right, it's mainly ICOs that the SEC has cracked down on. But then very few coins have been given "currency" status, leaving most in regulatory limbo. And the CRT requirement along with suspicious activity requirements already means the government has knowledge of anything but minor transactions if they touch US institutions.

I think governments will be perfectly fine with crypto becoming just another part of the financial infrastructure. And I think the countries dominant in the financial industry will squash anything that looks like a threat to their ability to control their own monetary policy.