Will DeFi Kill Banks?

[Neeranam]

1 hour ago, lkn said:

As I said in the beginning of this thread, I was initially interested in the technology, before it blew up, and before I realized just how useless blockchain actually is (e.g. that the cost of building the chain must be higher than the value secured). But I kept watching the space because a lot of interesting things happen, starting with Mt. Gox and just escalating from there — just because I don’t want to start my own criminal empire doesn’t mean I won’t find it interesting to read about people like Paul Le Roux ????

 

I don’t want it to fail, but I think it is inevitable that it will fail, in the sense that a lot of people will lose a lot of money, and I want this to affect as few people as possible, which is why I am a vocal critic and try to bring up the actual problems with the technology and the unregulated operators in the space.

 

U.S. regulators and lawmakers are sounding the alarm, the IMF put crypto in their October report about financial stability, we are not there yet, where it poses a systemic risk (according to the report), but we are moving toward it!

 

And when/if crypto fails (if it grows too big), there is a good chance it *will* affect me, just like the subprime crisis affected me, even though I am not even American.

 

I realize that people like you are a lot cause, and so far it seems you have done great in the space. But hopefully people will think twice before they invest more than what they can afford to lose in magic internet money.

 

Coinbase has around 68 million verified users. That is 68 million people that has put savings in crypto! This is absolutely crazy if you actually understand what it is: It is people who have bought digital tokens that cannot be used for anything other than trade for other digital tokens. Yes, they can *currently* be sold for money, but they are sold to other investors, who buy them, only because they think that they will go up in value.

 

It is really puzzling to me that many in this thread does not understand this simple fact.

 

It’s not like buying a bitcoin entitles you to any profit whatsoever, i.e. it’s not like running an exchange, a mining rig, or other business that actually does generate perceived value, and receives payment for having done so.

Thanks for explaining. 

[Neeranam]

2 hours ago, lkn said:

Please tell me where I can apply for my next mortgage? For comparison, I can borrow €1 million over 30 years at a fixed interest of 2% via my bank.

I am looking into borrowing $200k from Celcius at 1% p.a. 

It doesn't make much sense selling all my crypto when I can get 12% on my DOT and 9% on my MATIC, 16% on my EGLD. 

 

https://celsius.network/crypto-loans

Edited November 3, 2021 by Neeranam

[lkn]

34 minutes ago, Neeranam said:

I am looking into borrowing $200k from Celcius at 1% p.a. 

This is an over-colatorized loan (x4). E.g. if I am to borrow one million in stable coins, I have to put up four million worth of bitcoin as security (that I transfer to them).

 

This is not how lending works in a bank, this is more like a pawnshop.

 

People who get a mortgage do not have millions worth of bitcoin.

 

Edit: Also, the loan is due in 3 years (or less), again, people who borrow to buy a house generally pay it back over 20-30 years.

Edited November 3, 2021 by lkn

[mjnaus]

On 10/31/2021 at 9:21 AM, lkn said:

If I may restate your comment and see if you agree:

 

Claim: The price building the blockchain should be proportional with the value secured by the blockchain.

 

For example, if I want to receive $10M worth of ETH on the chain (for “services rendered”), and I want to have reasonable assurance that after a day, it is unfeasible for my counterparty to double-spend this amount, it should cost at least $10M to build one day’s worth of blocks (otherwise my counterparty could spend less to fork the chain). Do we agree on this?

 

If users have to pay for this, and we do 1M transactions per day, it naturally follows, that each transaction must cost at least $10. Are we still in agreement?

No, we're not in agreement. This is not how securing a blockchain works. 

 

A chain's security budget (let's stick with Ethereum for now), is detached from the data it is securing. You can think this is good, or bad, for a variety of reasons. However, this is the reality. The security budget is simply there to secure block data, whether it's ETH transactions, stable coin transactions, NFT's or any other data. So that claim goes out the window right there.

 

In the case of Ethereum, the security budget has two components: 1) block rewards (direct issuance) and 2) transaction fees. The former is, while we're still under PoW, is determined in relation to the costs of mining blocks (it's typically determined by community consensus and has been reduced several times over the years). The latter is determined by an auction mechanism, and therefor is based on supply/demand balance. 

 

Both components are 100% unrelated to the data they're securing. It's very possible you're paying more in transaction fees for a transaction that has zero monetary value then you'd pay for a transaction moving 100ETH from one wallet to another. 

 

It makes much more sense to look at a holistic security approach where every single transaction is as secure as any other, no matter what the monetary value of those transactions are.  

[lkn]

30 minutes ago, mjnaus said:

It makes much more sense to look at a holistic security approach where every single transaction is as secure as any other, no matter what the monetary value of those transactions are.  

When I talk about security budget I mean, what would it cost, to launch an attack on the chain.

 

Right now, with PoW, do we agree, if I can do more work than the entire network, for same time unit, then I can successfully attack the chain?

[mjnaus]

2 minutes ago, lkn said:

When I talk about security budget I mean, what would it cost, to launch an attack on the chain.

 

Right now, with PoW, do we agree, if I can do more work than the entire network, for same time unit, then I can successfully attack the chain?

Yes, of course. If you can cough up upwards of 51% of the hashrate, you could in theory attack the network. On both Ethereum and Bitcoin, sustaining a 51% attack for one hour would cost roughly $2.5mil. 

[lkn]

14 minutes ago, mjnaus said:

Yes, of course. If you can cough up upwards of 51% of the hashrate, you could in theory attack the network. On both Ethereum and Bitcoin, sustaining a 51% attack for one hour would cost roughly $2.5mil. 

Right, so let’s say I transfer $20M worth of ETH to CoinBase, then I sell them for another coin, that I withdraw. And now I spend $10M renting on forking the chain so that my transaction to CoinBase never happened.

 

You see the problem?

[GrandPapillon]

9 minutes ago, lkn said:

Right, so let’s say I transfer $20M worth of ETH to CoinBase, then I sell them for another coin, that I withdraw. And now I spend $10M renting on forking the chain so that my transaction to CoinBase never happened.

 

You see the problem?

awesome ????

 

[mjnaus]

17 minutes ago, lkn said:

Right, so let’s say I transfer $20M worth of ETH to CoinBase, then I sell them for another coin, that I withdraw. And now I spend $10M renting on forking the chain so that my transaction to CoinBase never happened.

Fair enough. Yes, in theory this would be possible. However, in practical terms, it's extremely unlikely (under PoW, under PoS it becomes even more unlikely). 

If someone would want to launch a succesfull 51% attack, they'd have two options: rent existing hashrate or build their own.

 

For the first option, you'd have to convince more than half of the miners to participate in the attack. Compensating miners to the extend they'd participate would likely mean the organizing attacker giving up most of their gains. Furthermore, organizing all the different mining entities and aligning them to perform the attack is just nearly impossible to organize. 

 

The second option, building the infrastructure from scratch, is also extremely difficult. The amount of hardware needed to make this work, and the capital requirements, make it such that only nation states or large corporations would, in theory, be able to pull this off. 

 

In addition, Ethereum has a trick up their sleeves, if someone would launch such an attack. A protocol has been put in place where the Network can do a 'quick merge' where it would switch over to the PoS chain. 

 

Although 51% attacks are possible, and have taken place on smaller chains, successfully executing one on larger networks like Bitcoin or Ethereum is practically near impossible. As is evident by simply looking at these chain's history; the gains to be had are huge, if it could be done, it would have been done.   

[lkn]

12 hours ago, mjnaus said:

Fair enough. Yes, in theory this would be possible. However, in practical terms, it's extremely unlikely

You say extremely unlikely, but you admit that it has already happened to smaller chains, and that the scheme is feasible, and if there is something that should be certain by now is that if there is “free money on the table”, someone will sooner or later come and take them! Are you familiar with George Soros’ bet against the British Pound? He basically took a gamble against the currency of a nation state and won! So you think Ethereum is too big to be attacked? You say “convince miners”, but what about convincing bitcoin miners to attack the Ethereum chain? I think some would love to join such an attack ????

 

Anyway, this wasn’t actually my original point. The point is this: You say it costs $2.5M to produce one hour’s worth of blockchain, and you indirectly say that this is good, because that makes it more expensive for someone to attack it (i.e. it is more secure).

 

But if the price to run the network is $2.5M per hour, do the miners do this for free? Or does the cost fall on the users? There are less than 46,000 transactions per hour, so if we distribute the cost out equally among those “users” we get about $55 per transaction.

 

So we have a blockchain that does 46,000 transactions per hour at a price of $55 per transaction, and that is why banks can’t use blockchains for remittance, because it is more expensive than their current system, it is slower, and it has a very real security risk, that you may claim is “highly unlikely”, but nonetheless, it exist, and I wouldn’t sleep comfortable at night if I ran a bank on infrastructure which security relied on attackers unable to come up with $2.5M… and as code is law, would the double-spend even be illegal in the crypto-capitalistic system?

 

And if your answer is that L2 solves all this, please mention the L2 system you think is the solution, and preferably one that actually has working implementation, is used, and does not contain any central custodian / liquidity provider, then I will evaluate your claim. Also, if there is a L2 system that solves it all, why don’t we just drop the blockchain and use that instead? ????

Edited November 7, 2021 by lkn

[Neeranam]

4 hours ago, lkn said:

So we have a blockchain that does 46,000 transactions per hour at a price of $55 per transaction, and that is why banks can’t use blockchains for remittance, because it is more expensive than their current system, it is slower, and it has a very real security risk, that you

Banks DO use Blockchain for remittance.

It is much faster.

[mjnaus]

8 hours ago, lkn said:

You say extremely unlikely, but you admit that it has already happened to smaller chains, and that the scheme is feasible, and if there is something that should be certain by now is that if there is “free money on the table”, someone will sooner or later come and take them! Are you familiar with George Soros’ bet against the British Pound? He basically took a gamble against the currency of a nation state and won! So you think Ethereum is too big to be attacked? You say “convince miners”, but what about convincing bitcoin miners to attack the Ethereum chain? I think some would love to join such an attack ????

 

Anyway, this wasn’t actually my original point. The point is this: You say it costs $2.5M to produce one hour’s worth of blockchain, and you indirectly say that this is good, because that makes it more expensive for someone to attack it (i.e. it is more secure).

 

But if the price to run the network is $2.5M per hour, do the miners do this for free? Or does the cost fall on the users? There are less than 46,000 transactions per hour, so if we distribute the cost out equally among those “users” we get about $55 per transaction.

 

So we have a blockchain that does 46,000 transactions per hour at a price of $55 per transaction, and that is why banks can’t use blockchains for remittance, because it is more expensive than their current system, it is slower, and it has a very real security risk, that you may claim is “highly unlikely”, but nonetheless, it exist, and I wouldn’t sleep comfortable at night if I ran a bank on infrastructure which security relied on attackers unable to come up with $2.5M… and as code is law, would the double-spend even be illegal in the crypto-capitalistic system?

 

And if your answer is that L2 solves all this, please mention the L2 system you think is the solution, and preferably one that actually has working implementation, is used, and does not contain any central custodian / liquidity provider, then I will evaluate your claim. Also, if there is a L2 system that solves it all, why don’t we just drop the blockchain and use that instead? ????

Ok, I am not going to respond to everything here, because all of this discuss has been discussed to death. You think you're the first person to come with the brilliant idea of a 51% attack? Trust me, people a whole lot smarter than yourself and me have been working on this since the dawn of crypto.

 

If you would have looked into the difference between Bitcoin mining and Ether mining, you'd know the two are not compatible. Bitcoin mining rigs can not mine Ether. And even if they could, it wouldn't change anything as you'd still face the same issues. 

 

Let me just leave you with this: no system ever, anywhere, has zero attack surface. Every possible system has, at least, theoretical attack vectors and the Ethereum and Bitcoin networks are no different. Nor is the traditional banking system. Once a blockchain network reaches escape velocity and the network reaches scale, performing a 51% attack becomes extremely unlikely. As is evident by reality. If it could be done, it would be done. It is as simple as that. Again, do you honestly believe you're the first person to come up with this? It's been tried by people a whole lot smarter with a whole lot more resources. And guess what.... they failed. 

 

The conventional banking system's attack surface is many, many times higher than that of a properly secured blockchain. As is evident by the numerous incidents and hacks over the years. Both the Bitcoin network and the Ethereum network, have experienced ZERO, I repeat ZERO, hacks since they came into existence. But hey, if you sleep better trusting the archaic security of the conventional banking system, by all means.  

 

8 hours ago, lkn said:

And if your answer is that L2 solves all this, please mention the L2 system you think is the solution, and preferably one that actually has working implementation, is used, and does not contain any central custodian / liquidity provider, then I will evaluate your claim. Also, if there is a L2 system that solves it all, why don’t we just drop the blockchain and use that instead?

Sigh.... because an L2 depends on the security of the underlying L1? Both Optimism and Arbitrum are working, and have increasing liquidity. Both use the native Ethereum asset. Evaluate whatever you want. At this point, I seriously doubt you're in a position you actually can, even with your "CS background". But by all means, give it a whirl. At the very least, it'll allow for some entertaining reading material ????

[GrandPapillon]

5 hours ago, Neeranam said:

Banks DO use Blockchain for remittance.

It is much faster.

not it's not, and they don't. And there is the regulatory issue and the tracing of funds they need to perform. what's the point of using a program with a "FOR NEXT" loop to do a simple transfer which is a simple addition and subtraction operation, not some stupid complex algo achieving absolutely nothing ????

[GrandPapillon]

1 hour ago, mjnaus said:

Let me just leave you with this: no system ever, anywhere, has zero attack surface. Every possible system has, at least, theoretical attack vectors and the Ethereum and Bitcoin networks are no different. Nor is the traditional banking system.

that just takes away the whole argument that crypto is more secure than traditional banking ????

 

like I said, no use case ????

[lkn]

8 hours ago, mjnaus said:

The conventional banking system's attack surface is many, many times higher than that of a properly secured blockchain. As is evident by the numerous incidents and hacks over the years. Both the Bitcoin network and the Ethereum network, have experienced ZERO, I repeat ZERO, hacks since they came into existence

I wonder how you define the attack surface for “the banking system”? Surely the infrastructure that my bank uses is pretty damn secure, as I don’t think they are letting unknown third parties in foreign countries update their ledger on the public internet.

 

But if you include *everything*, like people stealing credit cards, then you should also include smart contract exploits, wallet hacks, trojans, hacked exchanges, etc. in the crypto ecosystem. And even though it is not comparing apples to apples, because FIAT is magnitudes larger than crypto, I am almost certain that a lot more “value” have been stolen from DeFi than from financial institutions in the same time frame.

 

Also, please remember this was about the price of transactions for ETH. Have you finally come to terms with the fact that a transaction currently cost $55? Somebody has to pay this bill, and if we add more miners, yes, we make the network more secure, but we also increase the cost of transactions.

 

8 hours ago, mjnaus said:

At this point, I seriously doubt you're in a position you actually can, even with your "CS background"

Again with the insults. Why are you unable to have a civil discussion? I am being really patient with you, it took several attempts to get you to understand something as simple as transactions on a blockchain have a cost associated with them, somebody has to pay that cost, and that cost is proportional with the security of the network. I still don’t think you understand what it means though, namely that the value secured by the network should not be larger than the cost of producing the blockchain, although we have to define a time frame here, but as some posters claim banks are using blockchains because of their fast transfers, that time frame shouldn’t be too big, otherwise it would not allow fast (high value) transfers…

 

I will revisit L2 later, as what I have seen generally suffer from liquidity and routing problems, but I will have to look at your two mentions in-depth before saying anything about these, that is, if you actually wish to have a productive discussion — above you seemed to say “smarter people have looked at this, so why should we?” which is a bit of a sad statement coming from one who claims to have a CS background, I wonder, what field of computer science did you do your masters in?

Edited November 8, 2021 by lkn

[lkn]

Interesting thread on r/programming, here are the top comments:

Quote

The biggest flaw of cryptocurrency, by far, is that the fundamental concept of decentralized currency is worse than currency with a central authority for the vast majority of people.

Being able to do chargebacks against scummy companies is a great thing. Being able to (even sometimes) reverse fraudulent charges is a great thing. Being able to walk into a bank with your ID and access your account even though your phone was stolen and you don’t remember your password is a great thing.

Many of the current problems with current cryptocurrencies could eventually be improved or fixed. But that doesn’t change the very fundamental problem that most of the world doesn’t need or even want a decentralized currency.

 

Quote

The irony is that companies have sprung up to manage wallets and transactions and “fix” these problems (Coinbase) except now it’s centralizing things all over again but at the discretion of corporations, many of which are not US based, no FDIC or other protections, little oversight, none of the usual security compliance that banks go though, slower and more expensive transactions, etc. and STILL no chargebacks or anti fraud measures that a bank would do.

Quote

And the idea of “smart contracts” leading to trustless financial and legal workflows cutting out the middlemen, faces similar issues. You have to trust the contract by verifying the code in the contract, which not many people can do. So more likely, you’d rely on open source consensus on whether a contract is safe or not. So now you’re trusting a bunch of people you don’t know, assuming the contract you want to use is popular enough in the first place.

Quote

We have known for a long time that 'trustless' systems are not a panacea.

The entire ideological project behind cryptocurrency stems from looking at a broken financial system full of bad actors and saying "we need to abandon trust" rather than saying "we need to restore trust". If you hate banks, join a credit union! The idea that you can do everything trustlessly with crypto is a fantasy.

 

Edited November 8, 2021 by lkn

[mjnaus]

2 hours ago, lkn said:

Interesting thread on r/programming, here are the top comments:

Quote

Honestly don't think that posting random anon's thoughts on the matter is going to do anything for this discussion. I can go and grab quotes from posts that argue the other side; then what?

[mjnaus]

4 hours ago, lkn said:

Again with the insults. Why are you unable to have a civil discussion? I am being really patient with you

I thank you, from the bottom of my heart, for your patience. You are, indeed, too kind ser ????

 

It's hard for me to have a serious discussion about the merits of L2's when you're, seriously, asking why they'd need an L1 at all. This just clearly show you do not grasp the most basic concepts than define a true L2. Go do your homework and try again. 

[lkn]

22 minutes ago, mjnaus said:

It's hard for me to have a serious discussion about the merits of L2's when you're, seriously, asking why they'd need an L1 at all.

LOL… I forget how I phrased the question, but it was a rhetorical question meant to point out how stupid this Rube Goldberg machine is… we need to transfer money, so we design L1, but L1 doesn’t work, so we come up with a new system and call it L2, but it requires L1 to work…

 

I wonder, can you actually tell me the downsides with L2? Or do you think it is perfect? What about L1? Any downsides? Or also perfect? It would be a breath of fresh air if we could get a little bit of realism from the proponents.

Edited November 8, 2021 by lkn

[mjnaus]

2 hours ago, lkn said:

I wonder, can you actually tell me the downsides with L2? Or do you think it is perfect? What about L1? Any downsides? Or also perfect? It would be a breath of fresh air if we could get a little bit of realism from the proponents.

Definitely not perfect. It depends on the type of L2. Since there seems to be consensus in the dev community that roll-ups are, currently the best option, I’ll focus on those. 
 

Loss of composability is a problem; as smart contracts on the roll-up L2

can not directly communicate with smart contracts on the L1 or other L2’s. This is a problem for DeFi protocols that would, ideally, span both the L1 and (multiple) L2’s. Eventually bridge protocols will solve this, but we’re not quite there yet. 
 

Another problem is fraud proofs. Since roll-ups move computation off the L1 and the roll-up L2 will post computation results to the L1 while the smart contract is located on the roll-up L2. So the L1 can’t verify the posted data is indeed correct. Going into the details of how this is tackled is going to be long technical affair, so I’ll limit myself to the downsides of the two main solutions to this problem. Either we’re dealing with a long time to finality (about a week) on the L1 (with optimistic roll-ups) or extremely resource intensive cryptography (zero knowledge roll-up). 
 

The first generation will face the long time to finality on the L1 problem; however this isn’t always a problem; it boils down to the nature of the transaction. And there are ways around the problem, but these come with trade-offs.

 

So L2’s are by no means perfect and won’t solve everything. They’re a part of the solution and will solve certain problems (like high gas fees for low value transactions)

[mjnaus]

4 hours ago, lkn said:

Again with the insults. Why are you unable to have a civil discussion? I am being really patient with you

I thank you, from the bottom of my heart, for your patience. You are, indeed, too kind ser ????

 

It's hard for me to have a serious discussion about the merits of L2's when you're, seriously, asking why they'd need an L1 at all. This just clearly show you do not grasp the most basic concepts than define a true L2. Go do your homework and try again. 

[lkn]

Mastercard to launch crypto linked payment cards in Asia Pacific.

 

The TL;DR; is that you will be able to get a Mastercard for your Bitkub account. So you deposit THB to Bitkub, you buy BTC for this THB.

 

Then you go to a store and pay with your card. The store gets THB from Mastercard, Mastercard tells Bitkub to sell some of your BTC to reimburse them.

 

All this happens on Bitkub’s central exchange and using the Mastercard rails, nothing touches the blockchain, and you pay commission for exchanging to/from BTC and take a currency risk.

 

Yes, magic times indeed! What exactly is the point of this? Because it has nothing to do with decentralized finance.

Also, on CoinBase a user paid ETH to another CoinBase user, but via both’s custodial wallet hosted on CoinBase, i.e. just a database update on a central site, nothing touched the blockchain, and lo and behold, this is apparently worth announcing to r/ethereum and it got more than 2,000 upvotes:

 

 

[lkn]

SEC Rejects VanEck’s Spot Bitcoin ETF Proposal:

 

Quote

the Commission concludes that [the fund] has not met its burden under the Exchange Act and the Commission’s Rules of Practice to demonstrate that its proposal is consistent with … the requirement that the rules of a national securities exchange be ‘designed to prevent fraudulent and manipulative acts and practices’ and to ‘protect investors and the public interest.’

 

[3NUMBAS]

thais like huge wads of cash and no checks

[lkn]