So someone can collatoralize $1,500,000 worth of ETH to take out $1,000,000 worth of DAI loan. [I will let all my millionaire friends know] This isn't exactly useful for home ownership, as I can collatoralize $200,000 deposit to buy the same house with a bank. The difference that the bank does home valuation and risk assessment, and bears the risk that I will default. And MakerDAO charges a few percent interest for the loan [And at the extreme these loans are only repayble because of fiat monetary expansion...]
These pseudo zero-risk loans aren't exactly useful. The hard part of finance is in valuations, risk assessment, and regulatory compliance. And I stress the word pseudo, even DAI is built on a house of cards, although somewhat sturdier than its competition [order of mangitude depreciation, and when the market can't catch a bid it may be game over]
I think the utility is the medium itself. Your TradFi loan was delivered to you using a financial system maintained by thousands of highly specialized bankers and engineers leveraging billions of dollars in infrastructure. A DeFi loan is delivered to you via a smart contract that runs on a generic financial computing platform known as a blockchain. Even if the only thing you can do with a blockchain is implement existing financial systems, that itself is utility because the blockchain has lower barriers to entry, both in terms of knowledge and capital, which thus democratizes the financial system.
I agree with the beanie baby analogy when it comes to the various tokens that people "invest" in. But I wouldn't be so quick to say there was no utility, at least conceptually. It didn't really "click" for me until I implemented a smart contract. I realized that I could implement the entire financial system relatively easily, e.g. I could create an analog for stocks, options, margin lending, etc. Building a similar system without the blockchain would be much more difficult. I certainly couldn't do it alone. And even if I did do it with the blockchain, there would be an additional step of convincing people to trust that my system would stay up. Smart contracts run "forever" (in a sense).
As I stress in another post, the hard part of finance is valuation, risk assessment, and regulation. The transmision of ownership of assets, custody, etc. aren't exactly the hard part. Sure you can move digital tokens around on the worlds most expensive Raspberry Pi, but you could also do this on a permissioned system - and you still haven't solved the hard problems of finance. As an analogy it's kind of like saying you got a webapp to work on your home box, and therefore demonstrated any competence to scale it to hundreds of millions of users.
The billions of dollars of infrastructure doesn’t exist for no reason! The regulations and difficulty of starting a bank or mortgage company aren’t there for the hell of it!
Name the specific parts of mortgages that you believe should not exist and that DeFi eliminates.
Should we not do income checks on homebuyers to ensure that they can reasonably be able to pay the debt?
If they can’t pay their debt, what happens to the home? Is it collectively owned by the smart contract? How does that work? Where does the deed go?
Speaking of the deed, what if there’s a bug in the contract? Are we really going to pretend that these contracts have the force of law and a house can be stolen because someone wrote a bug? Or are we accepting that we can override the contract and none of the benefits of “smart contracts run[ning] forever” are real?
How should a smart contract value a home, to determine if the loan is adequately backed? If the buyer wants a $1m mortgage on what is actually a $10k plot of land, they can default and the contract (?) gets (??) an asset two orders of magnitude less than the check it wrote.
Hand-waving “well every real estate transaction will also be on the blockchain with perfect metadata so AI can make that decision” is not an answer.
How does a DeFi platform prevent money laundering? Should it not? This requires people! And regulations!
This is a tiny slice.
But we cannot pretend that any of this makes sense without thinking more than one layer deep. Which is really the problem.
I think you're entirely missing my point. You're going off on a tangent about mortgages, regulations, and titles. That's at a much higher level than what I'm talking about. To use load balancers as an example, you're talking about L7 stuff, I'm talking about L3 stuff.
Let's use your example of mortgages. When you get a mortgage, your lender wires money to the seller. How do they do that? They use Fedwire, which is a system maintained by the Federal Reserve for banking transfers. Such a system can be totally replaced by a blockchain. If you replaced Fedwire with a blockchain, you wouldn't remove the regulatory and legal requirements, you would just replace a legacy technical system with something that is more powerful. A blockchain can do everything Fedwire can do, and a blockchain implements this functionality in a more generic fashion that allows for additional constructs, like smart contracts, to be added.
Following your mortgage a little further: most mortgages are not held by the bank. The was the main issue in the financial crisis in 2008. Banks don't hold mortgages, so they were very loose in who they lent to. Rather than hold on to the mortgages, the bank sends them to a clearing house that packages up the mortgages into a mortgage backed security. All of this infrastructure could be replaced by a smart contract.
A blockchain can be thought of as a generalization of a financial system (system here meaning the technical system, i.e. the nitty gritty details of how and when money is moved). This is a powerful generalization and can implement existing financial systems in a much more efficient manner. As an individual, I could implement a mortgage-backed security system. That type of productivity is not possible in our current financial system.
This does not mean that I'm advocating for some type of anarchistic hellscape where regulations fall by the wayside. You can still have the same set of regulations, but implement the underlying nuts and bolts financial system in a way that's more efficient, standardized, and democratic.
"Network effects" seem to be a fairly compelling reason that "two highly correlated and intertangled financial systems" is the most we'll get, not two fully separate ones.
As long as people can interact with both easily, they will, and a lot of the risk/rewards will get tied together. Things move up together and down together.
I don’t think fully separate systems is a common goal. Rather, people are building alternatives that make different tradeoffs to the same end. e.g. a DeFi market may have global liquidity, 24/7 operations, but adds exposure to smart contract risks.
These pseudo zero-risk loans aren't exactly useful. The hard part of finance is in valuations, risk assessment, and regulatory compliance. And I stress the word pseudo, even DAI is built on a house of cards, although somewhat sturdier than its competition [order of mangitude depreciation, and when the market can't catch a bid it may be game over]