Man gets under-collateralized DeFi loan by proving income through Sablier

A few days ago, Paul Razvan Berg, Founder of Sablier tweeted that he was one of the first people to ever receive an under-collateralized DeFi loan. Because of identity being difficult to prove within a mostly anonymous blockchain network, it has been too risky to borrow tokens without an over-collateralized position. Sablier allows users to prove their income stream, bringing DeFi one step closer to the ability to be under-collateralized.

Berg didn’t get his loan from a protocol or organization, instead, he asked people that he knew on Twitter. Essentially, Berg took a picture of his face next to his income stream on Sablier and was able to convince Peter Yuan Pan of Meta Cartel to give him a $200 loan that would be paid back by March 11th.

He enquired simply,

@AlexMasmej @pet3rpan_ now that you can see the money being streamed to me and you know that @SablierHQ is a reputable org that doesn’t fire its founders, would you lend me 10% of the stream’s worth? I’ll pay it back when I get all of the locked up money, that is, on March 11.”

This wasn’t one of Sablier’s intended use cases, according to their introduction blog post. They mostly are aiming to allow continuous income streams in a decentralized manner. Basically, an employer creates a contract with their employee that says “pay Bob $1000 by December 31st,” then the money will continuously be deposited into the Bob’s Sablier contract.

Determining credit scores through income or bank account balance isn’t a new idea though. As countries discusses creating a centrally backed digital currency, a talking point has been to use information that new digital information to create more immersive credit rating.

With Sablier, people can prove that they are getting paid, but there is still (to my knowledge) no mass under-collateralized lending protocol linked to a zero-proof knowledge credit core system. The only incentive that Berg really has to pay his under-collateralized DeFi loan back is that it is public, and bailing would affect his reputation.

Decentralized exchanges aren’t yet fully decentralized yet, please stop saying they are

Decrypt is a great crypto news outlet that I read on a daily basis, but something that they posted today triggered me a bit. “A truly decentralized exchange is about to go live,” read the title of their piece on an exchange called DeversiFi.

Their basis in calling this a “truly decentralized” exchange is that governance is handled by a decentralized autonomous organization, (DAO) that controls power through a system of checks and balances. This feature by itself doesn’t make the exchange decentralized as there can be other centralized factors. On top of that, Maker already has a similar system in place for Dai, where people holding Maker can essentially govern the Dai token.

Unfortunately, in order to prove my point, I will have to tear down just how non-decentralized DeversiFi is, even though I like their product. First off, 1/3 of their pairs trade against USDT, a coin that is (supposed to be) backed 1:1 with dollars. Trading with a coin that only has value because an organization is holding funds to back it is inherently centralized. Not to mention, USDT is one of the riskier backed stablecoins.

Second, they advertise “unmatched liquidity” thanks to “hybrid architecture” built off on the backend of a centralized exchange. We confirmed with DeversiFi that they do infact pull liquidity from decentralized exchanges.

“We pull liquidity from centralised exchanges, meaning that essentially it is DeversiFi that takes any counterparty risk instead of the trader,” said Ross Middleton, CFO at DeversiFi on their Telegram.

He continued to say that their model will be able to handle thousands of trades per seconds. Speed is a reason why many decentralized exchanges opt to being hybrid. “Fully” decentralized exchanges have problems with liquidity and speed.

Either way, it is not a completely decentralized exchange based solely off of the fact that they trade USDT pairs. But it’s not just them, there are no truly decentralized protocols in DeFi currently. In order to be completely decentralized, according to Kyle Kistner, an exchange has to have decentralized price feeds, margin calls, provide decentralized liquidity, determine interest rates, administer platform developments and updates all in a decentralized manner.

Kistner is one of the only people in the DeFi space to put out a criteria for decentralization, he also is a founder of the bZx protocol. We reached out to him to confirm our opinions and he believes that DeversiFi is not fully decentralized. That being said, he also says it doesn’t fit into his rating metrics because it is an exchange, not a protocol.

“STARKs have an element of centralization to them, as do matching engines. I wouldn’t say that it (DeversiFi) is 100% decentralized,” Kistner told me on Telegram.

All of this is not to say that being fully decentralized is the only way to go, but to differentiate between a marketing tactic and reality. People in crypto love decentralizing all of the things, but we are not at a place where that is a reality.

This article was updated to include quotes from Kyle Kistner and DeversiFi representatives

DeFi inspired me, a poor millennial, to start thinking about personal finance

I am in my early 20s, bad at saving, have an average credit score and am about to begin paying off my debt from college. For a while, I didn’t really know what was in store for the future, so I didn’t care much about planning on it. Suddenly, I heard about DeFi and became a bit more interested in my personal finance.

Not to say that I’m a crypto maximalist now, or that I’m even confident of Bitcoin lasting long into the future, but the tech behind it inspired me to learn more about money. There are two main things that appealed to me and likely appeal to others in my situation: Being your own bank, and earning real interest.

Take control of your personal finance

Like many others, I’m not a big fan of banks. I don’t care about the corruption, or whatever they’re doing with money behind the scenes. I simply don’t like them because they’re slow, hard to access and I don’t feel like even a small monthly fee is worth paying for their services.

My credit union doesn’t have many locations, so it’s always hard to deposit cash. When I return something at Best Buy, it doesn’t process on the weekend and takes 24 hours at the minimum. I get paid on the first and fifteenth, and it won’t process on Sundays. My savings account is essentially useless, with interest ranging from 0.05% to 0.15% APR.

Basically, ever since I opened a checking account at 16, I’ve experienced inefficiencies and a lack of incentives that have never changed. This effected my optimism on managing money effectively.

If I am receiving no returns from storing money, I might as well take complete ownership of it. Blockchain tech allows me to do just that. It’s pretty simple for me to get paid, convert cash to Dai, then lock a portion of it in a lending protocol to hedge against any small amount of volatility. Dai ranges +-5% of the USD, so through dollar cost averaging and earning interest through protocols, I now have a real incentive to save money.

I may not have ownership of the Dai while it is earning interest, but I have the ability to choose where it goes or to leave it in cold storage.

Earn actual interest in DeFi

Because of Maker splitting into Sai and Dai, this isn’t a great time to brag about how high potential interest is, but I can still earn about 80x more than my savings account. The APR for MakerDAO’s Dai Savings Rate is 4% right now, and by taking on more risk through other platforms, you can get up to 7.5%. Also, if you are more comfortable using a stablecoin backed by fiat dollars, loaning USDC can return around 3.6% of your cash.

Some money management protocols lock your coins into a contract that expires after a certain amount of time, and others allow you to pull out coins whenever you’d like. Similarly, some protocols have higher risk than others. For instance, protocols that let users take money out as they please are pooled, and pay higher interest depending on how full that pool is. If the protocol is paying 7.5% and is loaning 75 million out of 80 million, then 25 people with 100k decide to pull out, your money will be stuck until more people put their money in. At the same time, this will likely increase the interest paid.

So as long as you know what you’re getting into, these managing money through decentralized applications can be relatively safe. You may need to monitor lending pool usages and be wary of the amount you put into one protocol. For people like me who are saving a couple thousand dollars, I don’t worry about anything besides hackers.

DeFi isn’t perfect for everyone yet

Decentralized Finance is supremely illiquid, so people with real money to manage don’t like it. What it is able to do is trigger the interest of people like me who just haven’t been impressed by the traditional financial system. I’ve introduced DeFi lending protocols to a friend who cares about personal finance and is almost completely uninterested in crypto, and he couldn’t help but gravitate towards it.

I’m sure there are ways to earn similar interest rates through the traditional means but there’s a very small learning curve to get into crypto. You literally start a Coinbase account, send Dai to Maker and start earning 4% APR.


Why am I kind of surprised that Coinbase is promoting DeFi?

The theme of Coinbase’s Winter 2019 Hackathon was “Bring DeFi to the World” which is kind of crazy considering they are one of the most centralized entities in crypto. Coinbase is a centralized exchange that abides by tight regulation and operates a centrally backed stablecoin, USDC, with Circle.

DeFi vs. Coinbase

DeFi, or decentralized finance, aims to compete with Coinbase in all aspects other than onboarding. Ironically, Coinbase likely sells many Ether tokens that are part of the relatively large locked value of the DeFi ecosystem.

The most obvious sector where Coinbase and DeFi compete is in personal finance. They both allow users to earn interest on tokens, and DeFi gives much higher APR. In 2019, Coinbase started allowing USDC holders to earn interest on any tokens lying in their portfolio with an APR of 1.25%.

Dharma, an app that requires users to sign up with their Coinbase account, offers 3.6% APR on USDC with little difficulty. They are able to offer higher interest by using Compound, a decentralized lending pool. All it takes to earn more interest in this situation is to take the USDC you have on Coinbase and send it to your Dharma address.

Another way that Coinbase competes/cooperates with DeFi is that they, along with Circle, created a stablecoin. At the same time, they sell the Dai stablecoin on their platform. Dai uses an algorithm and incentives to keep the token pegged to the dollar while USDC is backed 1:1 by USD. USDC cremes Dai in total market cap, but Dai has been gaining notoriety in recent months. On top of that, DeFi lending pools often offer more interest for Dai holdings than USDC.

And finally, they compete because Coinbase is a centralized way to exchange tokens, where as DeFi offers a way to do that straight from one wallet to the other. Exchanges like Uniswap or even aggregated exchanges like DEX.AG act as a forum for users to match orders with each other. Coinbase and other centralized exchanges always win in terms of slippage, but someone who values privacy and decentralization will likely opt for a decentralized exchange.

Is Coinbase promoting DeFi for the culture?

“DeFi, or decentralized finance, is an essential part of an open financial system. DeFi tools are censorship-resistant, unbiased, programmable, and available to anyone with a smartphone. For this hackathon, we’re focusing on bringing DeFi to the world. (Costumes not required.)” - Coinbase

This quote from Coinbase is advertising the opposite of what Coinbase is. Maybe they have accepted the role they play in the space, but as enthusiasts of decentralization, they appreciate breaking boundaries in finance.

One thing that is forsure, is Coinbase has been keen on decentralized projects. ChainLink is a decentralized oracle service, 0x is a decentralized liquidity tool, Dai is a decentralized stablecoin, and ofcourse, Ethereum is the platform to build dApps. Also, the aforementioned projects are on the bottom half of the ranks on Coinbase in terms of market cap, which could imply that Coinbase is sort of sticking their neck out for the ideas.

My theory is that like many others, Coinbase finds DeFi to be one of the more interesting and tangible things coming out of Blockchain tech. I am a bit biased, but listing 0x and Dai doesn’t seem like a decision that was made to rake tons of money and new users in. It seems more like a long-term bet.


People are arguing about whether or not DeFi is bad for proof-of-stake systems

It all started with a post from Haseeb Qureshi, an investor at Dragonfly Capital, titled ‘How DeFi cannibalizes PoS security.’ Qureshi wrote a piece implying that the more Ether gets locked in DeFi, the less people there will be to stake, resulting in a weaker proof-of-stake system.

Since posted, the article has received harsh criticism from people like Vlad Zamfir and founder of EthHub, Eric Conner.

The “unqualified” opinions that Zamfir was referring to comes from Tarun Chitra, CEO of the Gauntlet Network, who Qureshi cited in his article. Gauntlet is a “simulation platform” that increases security of smart contract protocols. They work with projects like Compound, so they don’t seem to have much of incentive to degrade opinion on DeFi.

Qureshi’s Dragonfly Capital is even deeper in to DeFi, being invested in Compound, dYdX, Oasis Labs, Cosmos and more, all built within Ethereum. Certainly an investment group with money thrown around the DeFi ecosystem wouldn’t want to hurt returns in any way.

Zamfir doesn’t deny the potential issues, but says that they have been discussed before and brushes it off as a non-issue. Eric Conner on the other hand offers an in detail perspective on the argument.

“It’s claimed the attacker can gather this ETH by paying high rates on Compound. Besides major jumps in logic around liquidity of the defi market and sourcing of collateral, let’s just assume the attacker is able to borrow all this ETH and find $1.5bn in collateral.” - @econoar

He goes on to break down the math behind why it would be unlikely for an attacker to take over 5,000,000 Eth, but the basis of the argument is that it would be very difficult. Others have mentioned that economic incentives aren’t the only reason to claim stake, and there will presumably be a large group of people who are staked for the sole purpose of keeping Ethereum secure.
Brendan Foster, Co-founder of Dharma gave some insight to how Compound might deal with proof-of-stake, a widely used lending platform that he works closely with.
“I’d bet that Compound will integrate staking in ETH2, just like they have DSR for unutilized Dai. So lending in high-yield DeFi won’t be mutually exclusive with staking” - @brendan_dharma
As usual, people don’t really know what will happen in crypto as most operations are one big experiment. It’s hard to name a crypto project that hasn’t gone through a very traumatic experience at some point. Let us know in the comments if you think DeFi will ruin Ethereum’s upcoming proof-of-stake mechanisms.