Through The Looking Glass: A Survey Of Decentralized Finance

We are witnessing a renaissance at the intersection of mathematics, computer science, and finance, and the intellectual capital that is coming into the space continues to accelerate. — Read more from Identity Element  here or follow on Twitter In just two months since my last piece, "The Case For Ethereum," the cryptocurrency landscape reached its next milestone with the launch of EIP-1559 on August 4th. As alluded to in the previous piece, EIP-1559 meant quite a bit for the Ethereum ecos

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3 thoughts on “Through The Looking Glass: A Survey Of Decentralized Finance

  1. I love thinking about this and must admit that I have moved from a firm “no way, ever” to “I am curious and want to understand more”. No where near “ready to play” but I have never had an interest in video gaming, so I might not be cut out for this, ever. Not sure.

    It would be very interesting to hear your insights into what the universe looks like of who/what is participating in the “global” Defi space. I always like to know who or what I might be up against. I prefer “win-win” to “zero sum game”, which makes Defi intriguing.

    For example, If I am understanding correctly, the underlying premise of a particular Defi space might be an actual, old-fashioned, “barter” transaction – such as to tokenize the physical use of a vacation home (a modern day timeshare). I have one, so I like to think through what could be a real life situation for me.
    Based on that underlying premise, there would be a wide variety of reasons why someone and/or quantum computers might participate in that Defi space.
    I am interested to gain a general understanding of the motivations of the other Defi participants, so it seems like I would want to know the approximate percentages that fall into each of these 4 categories.
    First, those (human or otherwise) who actually tokenize a property in exchange for tokens, which could then be kept for future use in that particular vacation home, or in that Defi space. Alternatively, their tokens could be exchanged into another cryptocurrency or even liquidated from that Defi space into a fiat currency-say USD.
    Those who purchase/collect tokens with the intention of using the tokens for actual time physically spent at such vacation home.
    Third, those people/computers who have no intention of participating in the actual physical use of such vacation home, but merely want to enrich themselves by gaining tokens.
    Fourth- participants for all other reasons.

    It seems that the percentage of participants party to the actual barter transactions might be miniscule at this point, but that the idea is that the participation of that group will increase over time. Possible takeaway- get in early?

    Finally, is there a minimum IQ that you could suggest/recommend that one (human or otherwise) possess before entering a Defi space? Possible takeaway- I might get wiped out?

    Identify Element- thanks for taking the time to document your extraordinary thoughts. And, as always, thanks to H – for expanding my universe on a daily basis.

    1. Emptynester — thanks for taking the time to read the piece and apologies for the tardy response.

      With respect to tokenization of physical assets, consider a newly wed couple that want to purchase a $1mn at 20% down.
      They have $200k liquid, and place this down-payment on a home. Then, on some future DeFi playform, the couple takes title of the house and collateralizes an $800k loan with the tokenized $1mn home.

      They pay some interest rate for this $800k loan, to be paid out over some period of timem and users on the platform fractionalize ownership of the house so it functions as a debt instrument of sorts. the couple will make payments at some % clip to the individuals who have purchased this debt-like fractionalized token. Consequently, in the event the couple defaults, the fractionalized owners of the home can come to consensus and liquidate the underlying home to meet the debt obligation (in the same way a bank currently would), potentially making a profit in the process due to appreciation in the home’s price over the duration of the loan.

      I don’t think humans, in the singular sense of the term, will be doing the tokenizing. The goal would be to develop software templates to streamline this process — but the couple would have the option to tokenize the home they are interested in purchasing if the rate landscape offering by DeFi is favorable relative to the traditional banking system. If this experiment works, it likely will be.

      You may find some people purchasing fractions of a token representing a home/timeshare for the sake of actually exercising their right to use it, but I think thats unlikely. Tokenization is more a means to partition underlying ownership of a singular asset to an anonymous collective, and ensure that profits/losses are properly tracked. This serves to spread risk/reward of asset ownership to individuals who would not have had a means to experience appreciation in homes otherwise — a college student looking to make a targeted $5k real-estate bet could get in a fractionalized offering of a home he (she) is particularly bullish on. This is impossible in our current paradigm.

      I think your third point is where most of the DeFi bucket will fall, but again, for everyone fractionalized asset distributed among this anyonmous collective their must be an entity or entities willing to make the initial purchase (in our example, the entity is the couple).

      Finally, the fourth group will be the same players we see in the financial landscape today — hedge funds, banks, traders, other sophisticated players — looking to take advantage of any inefficiencies that have cropped up as a result of the space’s quirkiness. For instance, there are trades that exist where one can effectively borrow $100, purchase token X, lock token X up for 4 years to receive token Y immediately (but still have access to token X in 4 years time), sell token Y in the market for $80, then pay down $80 of the $100 outstanding loan. Consequently, you have paid $20 to own token X 4 years out — it is an implicit future that would otherwise have been un-observable. Does linearity of this term structure make sense? I.e. should the token decay by $20 a year until the final year? I posit that cannot possibly be the case, and other sophisticated players are certainly making similar wagers.

      I have a hard time speaking to IQs. My entire life, I have never felt particularly blessed intellectually. I just have an incredible passion to learn — an intense curiosity that motivates these pursuits. I think that’s led to an impressive accumulation of knowledge to the outside observer, but if you are willing to put the time in to experiment in the space, you can become a player. This piece highlighted the mechanics of what was going on underneath DeFi platforms, but you do not think about what goes on underneath your iPhone in order to use it 🙂

      These opportunities are yours for the taking. I’d suggest googling DeFi tutorial and seeing how to setup a MetaMask. Start with a few hundred dollars to get your feet wet and go from there.

      IE

      1. For all of the terrible things that the internet has become, there are still some incredible little pockets of quality knowledge, humor, insight and interaction that I have found in the worldwide web, which I truly value and enjoy.
        Thanks for your additional thoughts.

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