DeFi Part 4. Watch and wait for honey says Pooh Bear

Pooh Bear followed Eeyore’s bearish view and Tigger’s bullish view at The Pooh Corner Debate on DeFi by calling on his moderator privilege to sum up. As he put it, “my name is on door so you have to listen to me”.

He pointed to one slide with 4 risks;

Financial Risk. DeFi is promising returns that are impossible in Legacy Finance. This could be because a scammer is luring in naive capital with unrealistic returns or it could be because central banks have been manipulating Legacy Finance markets and DeFi is showing what a free market is like. Sounding a bit like Eeyore, Pooh warned that “if it sounds too good to be true, it probably is not true”.

Counterparty Risk. Buying and selling Bitcoin or other assets in a decentralized blockchain network has zero Counterparty Risk. That is what trustless means. A Centralized DeFi is of course centralized and has Counterparty Risk. This is a manageable problem in Legacy Finance (with the exception of Platform risk covered later).

Tech Risk. This is high for DeFi but low for Legacy Finance. Bleeding edge is risky – duh!

Platform Risk. This is obviously high for DeFi but surprisingly high for Legacy Finance because centralized systems are hacked a lot. Sounding like Eeyore, but making a point that Tigger enjoyed, Pooh pointed out that while banks and governments bear the liability, this does not protect you in an extreme case like Lehman in 2008.

One of the attendees heckled him, shouting

“how can a bear of little brain like you prognosticate on what will happen” to which Pooh replied that his heckler was right and nobody knows what will happen.

Some subjects are too complex for our short attention spans, so we do 4 posts one week apart, each one short enough not to lose your attention but in aggregate doing justice to the complexity of the subject. Stay tuned by subscribing, click here for Part 1.

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