Will DeFi collapse the crypto economy like the "subprime mortgage crisis" in 2008?
Decentralized finance has been all the rage over the past few months, and the price of its tokens attests to the excitement.
However, while the goal of decentralized finance is to create aA financial world without a central authority, but actuallyManaged through efficient and seamless smart contracts and operated through cryptocurrencies. So it may not actually achieve that lofty goal, nor one of its goals, and the CDO is the worst financial experiment of the century.
CDOs are mortgage-backed debt or packaged debt securities issued by banks, invested by investment companies and sold to investors, mainly from the mortgage market.The foundation of the entire CDO market is the U.S. housing market, and when the housing market crashes, that is, when homeowners can't pay their rent, the pyramid collapses and the whole system collapses with it.
U.S. and European banks lost $1 trillion between January 2007 and September 2009, mostly betting onandandsuperior.superior.
And what happened in the DeFi world is quite similar, what happened ten years ago with CDOs. In an interview with AMBCrypto, Decred’s head of research and strategy Richard Red said,Due to the high profile of DeFi, it also means that there are many loopholes that can be exploited, so the field has attracted a lot of attention.This focus is poking holes in the smart contracts of many protocols and highlighting that the system is not very reliable at all.
Richard said, “This situation has many similarities to the mortgage debt problem that led to the 2007 financial crisis (complexity masked risk).”
Comparing DeFi to CDOs, we see an interesting pattern.
Packaged and repackaged CDOs are the newest financial product on the market, allowing all parties to participate in the creation and transfer of debt.Here, companies build debt collateral based on how likely they are to pay back, and these things that are unlikely to be paid back are labeled "subprime."
Rating agencies rated the combined debt highly, despite rating the debt. This collateral is in turn sold to retail traders and institutional investors. Essentially, the practice works like this: Everyone makes money if the homeowner pays regular interest, and makes money if no one pays.
DeFi also has "omnidirectional, bringing all types of financial firms into the space, from lenders to borrowers to insurance companies. Richard explained,Bringing so many people together under one system creates profit-taking.
“Overall, DeFi users stringing together disparate protocols and smart contracts can lead to some systemic risk, as each smart contract relies on inputs from other smart contracts to function in a predictable manner.”
The chances of more people coming in, motivated by profiteering, and causing a flaw in the system grows.Because of this situation, Richard said, "novel protocols" are being promoted, and often, they "may not be reliable in all cases."
Similar to what happened with CDOs, some banks profited from it and many others decided to join in. As mortgage-backed securities became the "new thing," this raised concerns.Because of this haste, even the more established banks couldn't figure out how to manage their debt securities and whether they could be repaid in full, and this information vacuum eventually created a bubble that then burst.
"The complexities created by the interplay of all these novel protocols mean that it is difficult, even for experts, to know exactly what is going on, and unexplained surprises often occur."
Although still in its infancy, the growth of the DeFi ecosystem has begun to turn into "barbaric growth".The original text comes from ambcrypto, compiled by the Bluemountain Labs team, the English copyright belongs to the original author, please contact the compiler for Chinese reprint.
The original text comes from ambcrypto, compiled by the Bluemountain Labs team, the English copyright belongs to the original author, please contact the compiler for Chinese reprint.
