The Problems With DeFi

Intro: 00:00
The Traditional System: 01:50
DeFi Basics: 03:15
DeFi Adoption: 06:14
Inefficiency: 07:18
The Risks: 09:17
Replicating Problems: 11:35

DeFi has seen rapid growth in its adoption, but will this likely continue? Today, we cover the issues faced by the system that might inhibit wider adoption.

DISCLAIMER:
This channel is for education purposes only and does not constitute financial advice - Richard is not responsible for investment actions taken by viewers. Please seek out a registered advisor if you require assistance (while Richard is a registered portfolio manager at WDS Investment Management, he does not provide advice through The Plain Bagel, which is not affiliated with his employer).

[KingOfMadCows]

There are tons of problems with having middlemen when dealing with money but there are some advantages. If someone scams you or steals your credit card, there is someone at the bank you can call to cancel transactions. The banks will also call you if they detect suspicious transactions.

[internetshaquille]

i think the "de" bit of defi is less about total decentralization and more like "just decentralized enough to let me as an early adopter squeeze into the center of a new system"

another fair and based take from the bagel

[monroerobbins]

This cleared up so much for me. Maybe it’s because I just don’t know tons about investing or finance, but when I first learned about crypto, and Defi, I just had a bad gut feeling, so I never got into it, but when I tried to learn, it felt so overwhelming to try and understand. But you broke it down, gave pros and cons, and it has helped me understand a lot better. While I do get not wanting a middleman, or not having a ton of trust in not-very transparent financial institutions, crypto is so much worse, and so unstable, that it wouldn’t thrive, it’s a pump and dump web that you can barely keep track of. Some of the initial ideas behind it? I agree. The rest, and how it’s executed, and the culture around crypto? Don’t agree, don’t like, 0 stars.

[chivasowle]

I love "Line Goes Up" so much. One of my all-time favorite YouTube videos.

[kondor]

Line Goes Up really crystallized for me how insane this entire “system” is. It’s basically a bunch of techbro’s trying to reinvent the wheel for the sole purpose of their own greed and narcissism. Of which there is an almost unlimited supply. Seemingly.

[therapturedmichelle]

I'm thankful you make these videos!!! They're so educational and helpful!!!! THANK YOU!!!!

[JackDuffley]

Imagine the amount of "I lost my password" folks who would have no centralized customer service to call

[sor]

12:40 This is why I can't understand "enthusiasts" who think they're "sticking it to the man" i.e. the banks and monied institutions. It's been co-opted by exactly those institutions they wish to stick it to except without restrictions! Joy! Whatever utopia they were hoping for, this isn't it.

[CryptoWorldJosh]

Another quality video, Richard! I definitely agree with some of your points such as the hype around NFT's getting out of hand, and that centralised finance will stick around, but there's a few important points that you either missed or were incorrect about DeFi:

7:28 Measuring Ethereum's (or any Crypto's) energy consumption in "energy per transaction" is incorrect. The energy is used to secure the network, not to process each transaction (energy consumption does not equal transaction count).

11:23 Things on the blockchain CAN be updated through softforks and hardforks. Over the years, Bitcoin and Ethereum have had many updates/improvements to their blockchains through decentralised consensus. It's mainly the transactions that cannot be altered.

And with the coming Ethereum update (Ethereum 2.0), it's blockchain will move from Proof of Work to Proof of Stake which means energy consumption and gas fees will plummet as the network will be secured by stakers rather than miners. Just like any new technology (computers, phones, the internet, etc) it starts out clunky, then becomes more streamlined.

[KaiSosceles]

Gas Fees - Yes, there are fees in DeFi just like there are fees in TradFi. The difference is that anyone is allowed to participate in getting those fees by either mining or validating. Not everyone gets to walk into their country's central bank and start asking for fees. This makes DeFi more accessible, not only to people within a country, but globally as well, as people from anywhere in the world have access to any crypto mining/validating process rather than being restricted by their nation's borders.

Overcollateralized Loans - Overcollateralized Loans are not a biproduct of volatile (see: free market) interest rates. They’re a security mechanism to allow lenders to be repaid in case borrowers default. It’s not all that different than take out a loan for a house or a car. Both of which require the collateral to be worth more than the loan (see: down payment required). The difference is that crypto markets are 24/7 and liquid enough to instantly liquidate a borrower's position to repay a lender vs. traditional markets where repossessing someone’s house in order to cover the loan is a pain in the ass. As far as use cases, Overcollateralized Loans in the crypto space allow for unlocking of liquidity similarly to how one might unlock the liquidity of their home by taking out a HELOC. It’s like saying HELOC loans aren’t useful because you have to put your house up for collateral. They’re still useful…

Recourse for lost funds - This is the cost of self-sovereignty. If a stranger on the street robs cash from your wallet—you don’t get that cash back. You can shift over a bank card, but then you lose sovereignty over your money. Go try getting Rubles out of your local bank in Russia right now—good luck, I have friends stuck in the country because they can’t access their finances. If they had cash, they could—but people have moved away from cash for the “safety” of banking systems. A case where Decentralization and Sovereignty don’t matter…until they matter. And the moment they matter is life changing for people who get screwed by relying on centralized, non-sovereign systems.

Buggy smart contracts - At least we can /see/ and audit the code, unlike blackbox banking systems where when things fail behind the scenes—we just don’t know they’ve failed until it’s too late and we have 2008, Enron, and ponzis like Madoff.

Power Distribution - There’s some kind of false narrative that people have been sold here about crypto economics being some kind of futuristic egalitarian utopia that just isn’t true and was never intended to be true. Early adopters get more power in systems because they TAKE ON MORE RISK and in free market economics, risk is rewarded. Not every person in the world is meant to have 1 bitcoin—that’s why there’s only 21 million. There is no perfect adoption curve that allows equal distribution in any of these systems. If you want more power—you take on more risk and responsibility that comes with that risk (re: governance votes, running nodes, etc). There's no free lunch in crypto just like any other market.

[ashiqurrahmanabir]

Core problem of DEFI is it can be exchanged with FIAT currency. For this in practice instead of using it as a currency people use it as a asset .

[anaestereo]

This video will put you in hot water...

[sor]

7:42 "stringing together multiple small programs" is basically the "microservices" architecture a lot of software engineers / big tech talk about. It's treated as the absolute best way to do things, for those more naive, but it has it's trade offs. As you said... it's more difficult or "clunky" as you say. But not an entirely unheard of idea is what I'm saying.

[Graceful_G]

This video highlights some of the potential drawbacks and challenges associated with DeFi, bringing attention to important issues that need to be addressed within the decentralized finance ecosystem.

It's a valuable resource for anyone looking to gain a balanced understanding of the opportunities and risks associated with DeFi.

Thank goodness that I thought about Difi not being insured. I wondered what would happen in the next crash so I avoided Difi.

[JordanPriede]

If I take a loan on my car, the lender need to know they can take the car back if I don't pay.

This necessarily requires a central entity to act.

If I take a "defi" loan on my car, a decentralized non-entity can't take my car if I don't pay.

The only thing defi seems to allow is leveraged trading. Yay

[spyrex]

i think having a middle man is better than getting scamed

[dalay-lam]

Just want to say thanks for the great content from Vancouver BC!!

[aequitas]

As a fan of crypto and defi, I really appreciated hearing a fair, measured critique of the space by someone who actually took the time to research and understand it well enough to come up with an informed opinion about it. I'm still bullish on it, to the point where I think that the Defi replacing our traditional banking system is basically inevitable, in the long term (i.e., I'd be shocked if this hasn't happened 30-40 years from now, but I'm not some hype investor who's naive enough to expect Defi to completely collapse the current banking system next month). As you correctly pointed out, it's still a very new area of technology, and has a lot of challenges to overcome. With time, I think that these challenges WILL be overcome, and the defi ecosystem will eventually be better for its end-user than the current banking system is.

The only thing from the video that I would strongly disagree with is the comparison between the electricity usage of 1 Ethereum transaction vs 100, 000 Visa transactions. I wouldn't dispute the accuracy of this at all, I just think that it's a bit of a false equivalency and doesn't tell the whole story. If you compare the electricity use of Ethereum transactions to the cost of all credit card transactions + the electricity used by running every bank, mortgage lender, etc on the planet (which, in theory, would no longer be needed if the world's financial landscape was dominated by defi), I think that would give you a more accurate comparison.
On top of that, there are already other blockchain projects that use less electricity and have lower gas fees than Ethereum, and this is a brand new technology that's only going to continue improving. The first computers ever created took up the space of an entire room: now, decades later, you have a computer in your pocket with a level of processing power that people couldn't even dream of at the time the first computers were created. So while I agree that it's premature to hype up defi as if it's going to be the norm by 2023, I also think that it has an excellent chance to be successful long-term.

Anyway, thanks for the great video! Would love to see you dig into more crypto topics in the future.

[EricTangOfficial]

Love the discussion, Richard! Really liked how you presented a very objective, rational critique of Decentralized Finance, and I was honestly surprised by how much you researched about the DeFi space. While I appreciate people like Graham or Andrei for hyping these financial instruments, you provide a much needed level headed perspective. Very bold move against crypto enthusiasts 😆. Wondering if you knew about Anchor Protocol and would love to know your thoughts on those being seen as "very safe" (by some people) with 20% interest yields .