First off, this probably only holds if you sort of ignore current rules and regulations in a lot of cases (e.g. KYC, AML, securities laws, clearing requirements, reporting etc.). But to be fair, there is a discussion to be had if all those regulations are fit for purpose.

Second, banks do a lot more than just be middle men in financial markets. They do have risk bearing capacity and they are willing to - crucially - use that on uncollaterized risk and things not netted atomistically. This means the demand for liquidity is kept low - which is good because money can flow towards longer term objectives.

Risk is the only issue. Regulations are to ensure banks have the risk-bearing capacity that they say they do. A formalization of risk-bearing capacity, if you will. However, are banks the only ones with risk-bearing capacity? And if not, and especially if such capacity can be programmatically verified, is there still any benefit to banks?

There is a ton of regulations aimed at proper functioning of markets unrelated to banks.

In uncollateralized situations you cannot verify/verification is meaningless as you might not be able to claim what you verified.

Let me pose the question thusly: Is there any decision making process by a bank, even ones executed by humans, not formalizable programmatically, provided sufficient information? If not, then what's to prevent decentralized finance from working just as well, provided the same information into the system?

Human intervention is required more than you might think in the current banking system. Mistakes, fat fingered numbers, wrong accounts etc. None of it is resolved without humans with authority.

Unless you can build an authority into the system somehow for dispute resolution, the system will always favour bad actors and fraud.

The big push for no-authority, decentralised finance sounds wonderful, but the reality is if the system is inherently biased toward fraud and crime because of a lack of dispute resolution, fraud and crime is what you are going to get.

1. I wonder how much of this still holds in a potential future world where machines are making decisions in most aspects of life already.

2. It doesn't follow that you can't have some recognized authorities within decentralized finance to negotiate fallback cases. For instance, the role of banks could become merely to supply information related to human authentication, not most of market operation.

I guess you could set it up that way, but then you create the problem of competing authorities - it's the same problem that the internet has with DNS. At some point, it has to have a single source of truth. The blockchain itself isn't enough when what is recorded on the blockchain is potentially not what the actors intended (or is what a criminal intended in a fraud scheme).

Competing authorities seem like a feature not a bug. It allows for experimentation and evolution of governance models. International law works this way and is what allows people to “vote with their feet”. There is no actual requirement for a single source of truth.

That seems kind of different in a way, the different authorities cover different countries where laws are different.

It almost seems like to make it work you would need...regulation.

What about the most traditional business of a bank: providing security and paltry interest for deposits, intermediated by the bank, as capital for loans. Now DeFi can certainly do each of these, but crucially the traditional system also decouples the risk for depositors. The return of deposits is NOT contingent upon the performance of the loans, by both regulation and deposit insurance. Is there a defi solution for a similar system?

At the sharp end, I'd say there are such non-formalized "processes" in place. For example, market making is not really programmatic for low liquidity stuff (and no, AMMs are not good for price formation absent arbitrageurs). Dealing with sudden changes to the state of the world is another. Heck, simple price formation for shares is totally not formalized.

Also, not clear how defi would do on balance sheet money creation (at least to me) if we are replacing banks. (And what about all the other players in the financial ecosystem?)

1. The way you'll provide the real-world information won't be decentralized (it'll be some kind of oracle).

2. The costs of decentralized finance are too high.

You don't require a bank in the same sense that you don't require a baker. If you want to make your own bread, go head, nobody is stopping you. But in a modern society people engage in division of labour and specialisation, because this allows us to be orders of magnitude more productive and have things that we couldn't dream of making ourselves. People don't want to make their own bread, and they don't want to be their own bank either.

Maybe someone does want to create a very special and expensive type of bread and sell it worldwide.

In order to accept payment, they must become a merchant with some centralized entity (Paypal, Mastercard, Visa). They must hope they live in the subset of countries where this is allowed. They must agree to a one-sided TOS that can be changed at any time. Then they must hope that all their buyers are honorable and trustworthy as those entities favor the buyer in a dispute.

This is not an optimal state of affairs for the aspiring artisan bread maker.

>They must hope they live in the subset of countries where this is allowed.

Although the overlap between this subset, and the subset of countries with reliable international shipping, is pretty high.

Relevant if your product is literally bread. Not so relevant if it's photography or software or news reporting or comedy sketches.

And even if it is bread, having one problem is better than having two problems.

Depending where you live, there will already be restrictions who you can do transactions with (sanctions etc.). So irrespective of technology the world doesn't quite accommodate this at present.

Or they could sell their bread locally for cash only.

Or they could make their own payment processor if the existing ones weren't doing a good enough job for them.

There are a lot of avenues to work around the cartel of the banking industry, and I am a fan of any implementation that ignores the unconstitutional Bank Secrecy Act. Crypto does fall into this category but is not the only method.

'Or they could make their own payment processor...'

Theoretically maybe. Money transmission laws will likely trip them up. Big barrier to entry.

Yes, that's why I stated that crypto was still applicable. You get the benefits of money transfer without the barriers to entry (except maybe in converting to and from fiat).

> People don't want to make their own bread, and they don't want to be their own bank either.

But they aren't saying you have to be your own bank, by opening it all up, more and more people can be "banks" and that helps to decentralize finances from the handful of Big Banks.

I'm not saying that random person down the road should be allowed to create a bank that others then trust with storing their assets, and I will still keep the majority of my assets in traditional banks, but as a whole, less power concentrated in the few is better for everyone.

I definitely agree that competition is very important, I don't think there are many doubts about that. I just don't see how DeFi can bring competition to the banking sector by allowing people to become banks. Ordinary people becoming a bank is not realistic competition to actual banks. People have jobs, they have work to do, they have to raise a family, they're not going to become competent bankers on top of that and outcompete professionals, even if they tried.

I'm going to preface this with I have no idea how any of this ACTUALLY works, and I'm probably wrong, but the "blockchain" abstracts all the more complicated bits away. I'm not a crypto diehard, and probably never will be. I think they are neat, and I have about 10% of my net worth tied up in a handful of coins. Here is my understanding how we can all be banks without even really thinking about it.

Some coins (PoS specifically) allow staking, which allows you to set it aside a certain amount, which is then used to validate other transactions, and you earn rewards. In traditional banking, this is kind of like a CD, and your money is used to help the bank out and it pays you interest on that.

The Ethernet (and a few other coins Solana comes to mind) ledger allow for the creation of smart contracts (applications that run on the blockchain) that could (probably some already exist) allow you to automate the creation loans on the ledger, witnessed by the world, that automatically pay you back. You can probably use the smart contract to do a modicum of due diligence on the borrower. But instead of paying SynapseFi (or other but first name that came to mine) thousands a month to allow you to build out loans, its all there for you on the block chain. This probably IS the future of peer2peer lending, as it is already a HUGE industry, and this would kind of get rid of the middle man.

One aspect of banking that is not really needed anymore would be the storage of assets. That is a built in part of cryptocurrency.

There is still the question of how do you get crypto, and for now, and until more people use it for everyday actives, that requires exchanges. And Exchanges could be seen as a centralization of sorts, but even they are a dime a dozen so they are effectively decentralized. And most support transferring to a wallet. So... kinda decentralized.

The idea that banking activities can be automated and that therefore people will be able to ditch banks and do their own banking without resorting to professional banking services is unreasonable, for the simple reason that if this could be done, banks would have already done it, since they have every incentive to reduce costs. They would have laid off all the staff and replace it with a smart contract. They haven't done it because it can't be done, because banking has processes which are labour-dependent and can't just be automated away easily or at all.

Have you considered if much of this is due to debt-based currency? If people hold valuable fungible tokens, it becomes possible to make collateralized loan products and even synthetic stable tokens such as DAI.

I don't know what you mean by debt-based currency, but no I don't think that using tokens instead of currency changes anything. The process of granting and managing a loan is exactly the same regardless of whether the loan is denominated in currency or in some token.

>People don't want to make their own bread, and they don't want to be their own bank either.

Speak for yourself, I quite like the idea!

And it turns out the only people wanting to make novel financial instruments on crypto currency are scammers.

Most of the "novel" crypto financial instruments aren't necessarily "novel" so much as "made illegal in a century ago because of fraud and scams".

Or at the very least "things with clear risks that crypto plebs are oblivious to"

https://www.bloomberg.com/news/newsletters/2021-05-11/money-...

Care to show one or two financial instruments that were claimed to be "novel" but were made "illegal a century ago"?

This is six and a half years old, wasn't about a novel defi instrument but about derivatives, and derivatives aren't illegal. They're also now well implemented in DeFi.

were they made illegal for my safety?

network effects are real though. That's like saying that anyone can make a blog or anyone can make a facebook , but good luck with that. the problem is that , unlike bitcoin, VCs will control all the dominant network effects.

Instead of having to curry favor with bankers, you now have to do so with a clique of developers, lest they hard or soft fork your crypto out of existence.

“The development community is proposing a soft fork, (with NO ROLLBACK; no transactions or blocks will be “reversed”) which will make any transactions that make any calls/callcodes/delegatecalls that execute code with code hash (ie. The DAO and children) lead to the transaction (not just the call, the transaction) being invalid, preventing the Ether from being withdrawn by the attacker past the 27-day window. This will later be followed up by a hard fork which will give token holders the ability to recover their Ether.”

Vitalik Buterin in response to the DAO Vulnerability on June 17

This is the actual issue with DeFi's "decentralization", not what the article talks about.

Bitcoin remains the only decentralized cryptocurrency that keeps living without governance.

At this stage of maturity, ETH would never survive a fork like that,

which is pretty evident given the umpteen hacks that have happened since going unabated!