Stop grading DeFi on a Curve

Picture this: Jerome Powell, having recently purchased half of Australia using loans against Federal Reserve Board-approved compensation, suddenly realizes his Treasurys are within spitting distance of liquidation due to interest rates he, himself, was forced to hike to combat broader inflation. 

He’s acutely aware his liquidation would cause a global financial meltdown — and leave him penniless, with nothing to his name other than half a continent filled with nightmarish, unruly creatures.

Unwilling to completely abandon his tax-advantaged position, nor his coveted vacation real estate, Jerome seeks out a cavalcade of unscrupulous financiers, and with private, unknowable terms, sells his government bonds to a consortium of international pariahs. 

A large swath of America’s debt is owned by its enemies, but US financial hegemony lives to fight another day!

…bit of a pyrrhic victory though, isn’t it?

For the lucky few of you who haven’t been glued to DeFi dashboards and Twitter threads, this is an obtuse thought experiment that scales the current Curve crisis to an outlandish proportion — one that, thankfully, is impossible in the current traditional financial system (not that it isn’t capable of other, more creative cascading collapses).

The summary for the uninitiated: A founder of Curve, with an ABSURD percentage of its token supply, used his tokens as collateral to borrow stablecoins on various DeFi lending protocols. Why borrow rather than sell? To defer — or perhaps eliminate entirely, if held long enough — tax liability. 

After a nasty exploit on Curve, which sent the token price spiraling downward, these positions are all in danger of being liquidated, potentially causing a cascading series of losses saddling a bunch of loan protocols with bad debt, torpedoing the entire DeFi ecosystem.

Read more: Curve suffers $70M exploit, but damage contained

Oh and he used his stablecoins to buy mansions in Melbourne. One might say he’s Down Bad, Under Water.

Look, I am not a crypto hater, not by any stretch. I love this industry, I’ve been around for a while, and plan on being in it for the rest of my career. I think DeFi is fascinating (took me a little while to come around) and offers legitimate opportunities to revolutionize finance and fix a lot of structural unfairness in traditional finance. I don’t even begrudge early adopters reaping (reasonable) rewards for the risk they take in making these pie-in-the-sky ideas real.

But come on.

Having the vast majority of DeFi plumbing on the brink of a wipeout because a founder got enamored with opulence and clever tax strategies is not only anathema to what should be the core principles of DeFi, it plays perfectly into the hands of the irrational crypto hater. It just gives them even more ammunition to add brimstone and pain to the already quite-hot regulatory hellscape. 

And if this founder gets bailed out by OTC deals without any visibility into the deal structure or terms, preventing a catastrophic failure of the DeFi ecosystem? Still a massive L, I’m afraid, since again, one of the whole points of DeFi was to get away from opaque backroom deals where market participants don’t have the whole picture.

Obviously, a fair amount of blame falls to the Curve founder. But we shoulder it too. If his stake presented an existential risk, why didn’t participants demand smart-contract-level enforcement of a lock-up, or at the extreme, threaten to fork him out? Why didn’t lending protocol teams adequately assess the risk of these positions, or take preventative action against them?

The most likely answer — as is usually the case in all irrational behavior before a giant blow-up in the traditional financial world — is that too many people were making too much (paper) money to care. 

Sadly, crypto does not fix those blinded by greed, and arguably only enables them.

On the plus side, thanks to the relative transparency of these DeFi protocols, it’s been very clear to any outside observer what’s been going on — something that would have been harder in the traditional finance world…or off-chain, in FTX/Three Arrow Capital‘s books. And no, having this kind of visibility is not a contradictory view for those of us that desire much better individual privacy on these systems. 

Systems and market data being auditable and verifiable by any participant, while preserving their individual privacy, is a worthwhile and achievable goal, and one that will make these systems more robust. (Yes, I have bags to shill here, but no, I will not do so to cheapen this op-ed.)

But we cannot let collective greed, sloppiness or foolish risk-taking prevent us from giving the future of finance the future it deserves. This is no longer a playtime experiment with magic internet finance — as much as I enjoyed it when it was. 

We cannot leave the future of DeFi vulnerable to Justin Sun’s sketch-ball over-the-counter deals or the vicissitudes of the Melbourne real-estate market (god, what an insane thing to write).

In short, if our industry wants to play in the big leagues, it’s time for all of us to grow up and stop grading DeFi on a Curve.

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