Read on Twitter
Haven’t seen anyone make the obvious analogy yet: defi is “globalizing” things into one giant capital market with shared total risk. Your stablecoins on one defi platform are lent out across a half dozen protocols to maximize yield.
2/ the globalization of capital markets where local risks disappear into a kind of total global risk budget produced concepts like economic contagion, fragility, and the “electronic herd” wrecking countries’ economies. Also...maximum yield and diversification of risks.
3/ looks like a repeat of the@1990s “open finance”, where money started sloshing around between local capital markets more aggressively forming a real-time global pool of capital for the first time.
4/ it’s a self-fulfilling process: investors are drawn to the highest yields which comes from lending and re-lending assets. As far as I know, that trend has never reversed except with regulation.
5/ the danger is that assets naturally go to the riskiest and lowest quality protocols and borrowers as part of the Daisy chain of yield hunting. Eventually, much of all the global market is exposed to the very riskiest stuff.
6/ investors may think they’re only lending to/on Goldman Sachs, or Aave, but the demand for yield means Goldman and Aave are re-lending to lower quality counterparties and protocols.
7/ software that “optimizes” for the highest yield is often just finding the lowest quality borrower or protocol, (that’s often why the yield is highest there.)
