“If you can walk away from a landing, it’s a good landing. If you can use the airplane the next day, it’s an outstanding landing.”
— Chuck Yeager
Crash Testing DeFi
In 1947 when Chuck Yeager arrived at the desert outpost where the US military was exploring the limits of physics with rocket-propelled airplanes, the “sound barrier” was thought to be a literal barrier.
People expected that reaching the speed of sound (Mach 1) in an airplane would be like flying into a proverbial brick wall.
There was evidence to support that view: A year earlier, a British attempt to just approach the speed of sound proved fatal when the pilot’s plane disintegrated around him.
Yeager, however, thought it could be done and was happy to risk disintegration to find out.
He volunteered to be the first man to travel at the speed of sound, and he survived it, punching through Mach 1 with no ill effects other than some sore eardrums back on Earth.
A later path-breaking flight went less smoothly, however.
Yeager piloted a supersonic jet into outer space, knowing he had only enough fuel for the trip up through the atmosphere, with nothing left for the trip back down.
Once the jet lost momentum in space, Yeager hoped to maneuver it back to Earth in a glide.
Instead, it fell into its descent tail first and went into a spin that forced Yeager to eject at a dangerously low altitude of 6,000 feet.
After being shot like a bullet from the spinning plane, his parachute yanked him into a face-first collision with his ejected pilot’s seat.
The seat smashed his visor and got tangled in his parachute lines, while ejection propellant ignited a fire inside his helmet.
He somehow managed to untangle the seat, extinguish the fire with his hands and land safely.
Despite third degree burns over his face, neck and hands, he was back in the air just a few weeks later.
Having the Right Stuff
Why am I relating Chuck Yeager’s story in a newsletter on crypto and markets?
Because, on a somewhat less heroic scale, investing in DeFi often feels like volunteering to fly into a proverbial brick wall. Or flying into space with no particular plan on how to get back to Earth.
There is less at stake, of course: You stand to lose only whatever fiat you chose to risk, not life and limb.
But the probability of disaster seems similarly high.
At least that’s how I felt after last week’s $625 million Ronin hack.
I had volunteered in the Ronin experiment by buying AXS and SLP and farming them in return for an unknown number of RON — I had no real idea of what the return would be, but it seemed like something to try.
It looks like my return is going to be about -100%.
DeFi crash-and-burns are becoming as regular as clockwork. We keep losing millions to buggy code, not-so-smart smart contracts and wobbly bridges.
Yet we heroically soldier on, risking our hard-earning crypto in the cause of decentralizing finance.
And the cause has advanced: The Ronin hack was a new and more sophisticated type of attack, and I’m sure every bridge developer is now working on avoiding the same mistakes.
Who’s the Dummy?
Ok, fine. Losing a few grand in RON tokens is not going to get me a ticker tape parade.
I am more of a crash test dummy than fighter pilot hero.
But that is exactly the point: We are all just crash testing this DeFi thing.
DeFi is a brand new financial vehicle, and we’ve volunteered to test drive it full speed — while talking on the phone, drinking a latte and smoking a cigarette.
When critics say crypto is risky, scammy, not really decentralized, etc., they are right. It’s all of those things.
But of course it is! It's barely four years old!
Writing off DeFi because it’s risky and scammy in 2022 would be like writing off flight after the Wright Brothers had a couple of crashes in 1903.
You can’t get to commercial air travel without the Wright Brothers crashing a few planes, and you can’t get to space travel without Chuck Yeager crashing a few jets.
Similarly, we cannot get to a new financial system without crashing a few P&Ls.
Running new protocols in a simulation would not do the job.
DeFi is a volatile, unpredictable mix of tokenomics, smart-contract code, memes and money.
It can only be stress tested in the wild, with real fiat. Yours and mine.
And there’s no way to regulate away the risks we take, either.
If we had tried to develop a new financial system with full investor protections in place, we wouldn't even be out of the SEC working-paper stage by now.
And if it were possible to regulate out the risk, you wouldn’t want to: There’s nothing useful to be learned from risk-free trading.
Just the opposite: As demonstrated in 2008, allowing too-big-to-fail commercial banks to play the markets with risk-free, FDIC-insured deposits created the moral hazard that resulted in the Great Financial Crisis.
Moral hazard is perhaps the single biggest problem with traditional finance, and DeFi has none of it.
Because moral hazard is bad, its inverse — the immoral hazard of degen-ing — must be good.
We launch ourselves into DeFi knowing the Fed is not going to be there to bail us out of our bags — and that’s a feature, not a flaw.
So don’t let a few hacks deter you: Keep aping into those new, risky, possibly scammy protocols.
Not for a ticker-tape parade but, we hope, for a much improved financial system.
**Carefully consider the fund’s investment objectives, risk factors, charges, and expenses before investing. This and additional information can be found by visiting www.bitqetf.com. This and the additional information can be found in the fund’s full or summary prospectus, which may be obtained by visiting www.bitqetf.com/materials. Investors should read it carefully before investing.
Investing involves risk, including the possible loss of principle. The fund will not invest in crypto assets directly or through the use of derivatives.