Exactly. Capital lent is always at risk; effectively risk-free interest is an abstraction created by deposit insurance. (Which, too, could fail)

I don’t understand where DeFi yields come from, but I can tell you they’re not risk-free, for the same reason a physicist can tell you your perpetual motion machine doesn’t work without studying the blueprints.

> I don’t understand where DeFi yields come from

Best I can tell from my research defi is being used for holder of volitile lower quality coins to exit without triggering a taxable event.

This is based on how all the pools I found had clear lopsided supply of lending and borrowing. Stable coins all had the highest rates, with btc and eth being middling, and a flood of alt coins sitting in pools earning zero returns.

This makes perfect sense. Margin loan volume is too low to explain the lending size. Likewise margin would want to borrow high volatility coins, and never stable coins. And yet stable coins are offering the highest interest precisely because stable coin borrowing is in demand.

Overall defi makes sense if it is about holders of paper gains exiting with debt to avoid taxable events. It does suggest a worrying risk profile I suspect everyone is underesitmating: many borrowers do not care about the coins they put up as collateral.

> many borrowers do not care about the coins they put up as collateral.

Oh, you can use "shitcoin" X as collateral for a loan in "stablecoin" Y? Can the borrower then selectively default if the X/Y exchange rate moves in their favor? In which case this is just a funny-looking option.

> holders of paper gains exiting with debt to avoid taxable events

A similar scheme was used to evade income tax in the UK with "loan forgiveness" for a while, but was ruled unlawful. I suppose the more crypto steps you put in the harder it is to trace.

> Can the borrower then selectively default if the X/Y exchange rate moves in their favor?

They very much can. For that reason though, the loans are always over collateralized so defaulting involves leaving some money on the table. That money could be less than hypothetical tax payments though..not sure.

They could already be subject to those risks without getting the benefits.

But yes, DeFi seems to me mostly zero sum gambling where the risks are shifted around until nobody understands the system any more which naturally means that there is no risk any more.

The way to guarantee return on investment is to denominate it in Monopoly money. I can guarantee that I will update your account with 5% more Monopoly coins every week if I have already minted my own trillions of monopoly coins and have them in reserve.

Banks want the deposit insurance to fail because once the government chips in they realized a profit on the bad loans they made. It's a well known moral hazard.

No, they want deposit insurance to kick in and succeed (in your view). If the deposit insurance fails, that'll create a bankrun (because their value proposition, risk-free interest, no longer exists), and they'll go under as well.

Deposit insurance kicks in only after the bank has failed, and cannot be used to realise a profit. At least in the real world.

Privatized gains/socialized losses is a moral hazard, but it doesn't follow that it's in banks' interest for FDIC to fail.

E.g. if I borrow $1,000 from you to bet on a roulette table, you suffer the downside if I lose and can't pay you back, but it's still in my interest to win.

One of those requirements being that you participate in the FDIC/NCUA insurance system, so that end-users really don't have any risk up to the maximum insurable amount per account.