Blockchain Confidential - 12 August 2022
Live-Blogging the Apocalypse at DeFiCon NYC
“The evils of reckless trading are always apt to spread beyond the persons immediately concerned … when rumors attach to a bank’s credit, they make a wild stampede to exchange any of its notes which they may hold; their trust has been ignorant, their distrust was ignorant and fierce.”
— Alfred Marshall
The warehouse space in Brooklyn hosting DeFiCon NYC made me feel the way the W Hotel made me feel on business trips in my old life: that I was probably much less cool than even the elevator’s decor. In the Stygian dark of an all-black, neon LED-stripped interior sealed off from the blazing August sun on the street, it was clearly a moment of introspection: for all the ambient cool, the mood was unsettled. Multiple speakers talked about trade-offs in privacy; regulation; and again and again, the hunt for sustainable yield, whether from better tokenomics or real-world assets.
When the big new idea is “sustainable yield," something has gone terribly wrong.
I have been reading Manias, Panics and Crashes post-Terra, post-Celsius, post-3AC, which features the quote above; it’s a good antidote to the manic pace of the cryptoverse to mix in a historical perspective. And it’s needed. One panelist said it is apparent on the face that earning four-digit APY for Pickle tokens in a DeFi protocol token of dubious value, and yet he still did the trade. A panelist from Goldfinch talked about interviewing people from CeFi lenders like Celsius who talked about printing deals with no collateral at all to win a deal where someone else was offering 50% under-collateralized. But KYC/AML checks were also described as a user experience mis-feature; magical thinking about SEC securities designations abounded; and some talk of tuning up tokenomics to get better results suggested that in some corners, the tune playing was come on baby one more time.
And yet: a young woman stood up and asked Goldfinch about whether a push toward centralizing underwriting means a return to a world where the marginalized are locked out from the financial system; a developer described a side project he is on to distribute protocol yield to certified charities; Zoe Weinberg cited The Uncensored Library as her inspiration for what the metaverse could do for free speech; a young founder described his protocol which dramatically increases the capital efficiency of on-chain borrowing & lending, and makes a good argument for why algorithmic credit scoring might be overrated or at least infeasible today; the privacy panelists argued equally passionately for privacy by default, with the analogy of SSL’s broad acceptance after the push for the Clipper chip years ago, and the difference between privacy and the right to choose what you share vs. anonymity. The kids are all right.
I also think that this trio of concerns, about the balance between privacy, regulation and sustainability, is the central question. There are always trade-offs. If you want certain protections against unsustainable, fraudulent protocols or use of protocols by bad actors which might undermine support in society for the whole ecosystem, you might need to compromise on revealing information to regulators and put in some controls. If you want sustainable yield and effective risk management, you might need to reach out to off-chain credit history, off-chain documentation, and off-chain assets that produce real-world cashflows. Web3 innovations and clever use of Zero Knowledge Proofs can help make for a better balance of concerns, but the need for balance and choices does not go away just because your tech is sexier than SWIFT.
Overall, a great event: I will be back next year. Want to meet in person in NYC? Next month I will be at DAS and Messari Mainnet. Look out for the Cloudwall hoodie ….