I watched the video and the following questions arose in my mind:
Lending: (I assume DeFi is based on microloans, as few people have the opportunity to maintain, for example, a diversified mortgage portfolio)
How does this practically work? The video states that the loan applicant does not need to verify their identity or income information. How is the applicant’s eligibility guaranteed? Is this an American model where building a credit history is a lifelong project?
Does every applicant have the same interest rate? Currently, lenders have an overwhelming amount of data on applicants, based on which loans can be granted on reasonable terms even to new customers.
How are defaulted loans collected if identity has not been verified?
Does each individual lender have to collect each defaulted loan separately because there is no centralized body to handle it (cf. p2p services)?
Which country’s legislation is followed in situations such as debt collection or even bankruptcy?
Does each lender have to draw up their own promissory notes for each microloan, for example?
The video states that a user can set a token as collateral for a loan. Why take out a loan if there is already enough “cash”? How many people can afford this, for example, in Finland?
Stock Trading:
Is Ethereum’s transaction speed sufficient for, for example, HFT trading volumes?
Is there even a need for a public blockchain, or could banks establish their own private blockchain?
Payment Card Traffic:
Who pays the transaction costs? Currently, Visa and MC costs are paid by the merchant, but are consumers willing to take this hidden cost upon themselves?
What if there is a lot of traffic online (e.g., Black Friday)? Are consumers willing to accept rising/unforeseeable costs?
What if the merchant covers the costs? Is a small business owner willing to risk their margin on fluctuating transaction costs?
Is Ether suitable for paying for a coffee of a few euros, for example?
Accounting:
How does the method of data storage (DB vs. blockchain) affect accounting automation? Already, several operators are automating functions.
Decentralized Nature:
The absence of a centralized authority complicates, for example, fraud detection, removes the bank’s responsibility in cases of card theft, and eliminates the fight against terrorism and the gray economy. How is a terrorist organization defined in a decentralized network, for example? The above are statutory, but how are they implemented in DeFi if there is no statutory obligation?
Who issues a payment “card” based on DeFi? Isn’t using some service provider (application) as (de-)centralized as using Nordea’s or OP’s Visa?
The video mentions that interest rates are determined by market forces. The task of central banks is, in theory (let’s not go into the success of practical implementation now), to regulate economic activity with the policy rate. i.e., raise the policy rate when the economy overheats and lower it during a recession. How would this work in DeFi, where the area is the whole world? Turkey’s policy rate is around 20% and in the Eurozone it is negative. (Even within the Eurozone, the policy rate tends to be too low or too high for almost all member states.) Let’s imagine that DeFi would be the de facto method in a world where there are only the EU and Turkey. What would be the optimal interest rate level that would not stifle the EU economy but would also prevent the Turkish economy from collapsing? This equation becomes more complicated when more economic areas are included.
About the video in general:
The video also tries to address the shortcomings of DeFi, but very superficially and focuses mainly on puffing up its superior features. Ultimately, perhaps about 99% of people are not interested in the technical implementation of services, but they want easy-to-use services that work. The video already states that the system demands a lot from its user. Is the average user smart enough, when various scams are already commonplace? Not to mention the dumbest elements?
At the beginning of the video, the development of banks in the last century is discussed, but in the 2020s, development apparently stops?
I do believe that, for example, stock trading can be significantly streamlined using blockchains, but I am quite skeptical from the perspective of C2C (P2P) implementations. B2B and to some extent B2C are, in my opinion, the most likely avenues.
Even on a theoretical level alone, there must be some centralized marketplace (e.g., a stock exchange) for efficient price formation. In my opinion, it is most likely that the current banking system will implement the features of DeFi and blockchains itself.
I would love to hear counter-arguments to these questions! Personally, I consider cryptography (digital signature) to be a very valid identification method, for example, instead of a social security number.
PS. That GME saga was quite difficult, by the way. On a principled level, I considered the restriction of trading to be wrong, but I understand the SEC’s damage control perspective. The aftermath could have been really ugly all around if small investors had pumped GME to the sky (with borrowed money), and it had, for some reason X, gone bankrupt or close to zero. What if GME had been a Wirecard-type fraud? I’m thinking of the COVID crash and how many margin calls exploded then. Now we are much more leveraged on many levels. Especially those whose risk management might not warrant it. In another thread, there was a claim that yesterday’s crypto slump would have triggered 800,000 margin calls. Those are not in society’s interest. No one needs another financial crisis.
