[dustintrex]

> Well a lot of it is coming from incentives of these protocols

I keep seeing this for DeFi.

- So you put 1 fiat into the magic box, and 2 fiat comes out. Where did the 1 fiat profit come from?

- DeFi collateralized staking algorithms hash protocol incentives!

- Yeah whatever but no really, it's a closed system so all inputs and outputs need to sum up, where did the new fiat come from?

- YoU dOnT uNdErStAnD cRYpTo!!1!!

[berberous]

I’m not really knowledgeable about DeFi, but here’s a simplistic model (would love to be corrected by someone with deep DeFi knowledge):

1. You put $1 of ETH into a new protocol, let’s say a new Decentralized Exchange on Ethereum that is paying a high amount of interest in order to attract liquidity to their protocol. The high interest is perhaps paid in ETH or maybe in a new token for the protocol.

2. Users flock to this new DEX, and actually use it, generating trading fees for the DEX, which drains activity from CEXs like Coinbase. If in step 1, the payment was made with a new token, perhaps that new token either earns a cut of trading fees, or gets governance rights over the DEX.

3. You either earned another $1 of ETH, or of the new token.

In the above example, it’s not a closed system anymore than the US economy is. A new company was created, which created real value by creating a better exchange which attracted users over CEXs. The company has value now it can payout because it generates trading fees and the equity/governance of the company is valuable. It bootstrapped that with protocol incentives.

[bglusman]

I think you may have just also described fractional reserve banking? that is literally where much of the money supply comes from.

https://en.wikipedia.org/wiki/Fractional-reserve_banking

[Jeema101]

Except that they aren't banks, and so there's no lender of last resort to backstop them. [1] There can't be any assurance that depositors would get all of their money back in the event of a bank run if the money isn't backed by actual dollars or a lender of last resort.

https://en.wikipedia.org/wiki/Lender_of_last_resort

[bglusman]

Well… I’m not expert on DeFi or anything but until the 20th century banks existed and didn’t have this right? But yes, there were runs on banks… but there are no runs on CDs right, and that’s a banking product also? Why not? Well, they’re contractually wrapped up for a time period. What if all DeFi lending is/was similar and crypto contracts locked them up for set periods… would that be an OK and legitimate system then? If not why not?

[notahacker]

Except of course, that the crypto world insists that all these cryptoinvestors borrowing crypto to buy other crypto to sell for more crypto to repay their original crypto debt is an ecosystem which isn't [even more] dependent on inflation of the crypto supply.

That and unlike stablecoins the Fed doesn't pretend it's fully backed.