Kaal claims by topic: defi

256 atomic, individually citable claims from the published work of Wulf A. Kaal tagged defi.

Valuing thinly traded assets with exchange quotes is unsound because the price for less frequently traded assets may not indicate fair market value at the time of valuation, yet nearly a quarter of surveyed funds relied exclusively on such quotes. 2009
The Commodity Exchange Act family and friends exemption allows a qualifying manager to trade options and futures for fifteen individuals who need not be sophisticated or qualified investors, which circumvents accredited investor standards and admits retail investors into hedge funds. 2009
The German ABCP conduit model, which financed long term American mortgage loans with short term paper and pocketed the spread, was profitable only for as long as new buyers for the short term paper could be found, so the model collapsed the moment institutional buyers withdrew. 2010
Codetermination makes the German supervisory board's decision making more cumbersome, so a co determined Aufsichtsrat may not respond quickly enough to fast moving events such as an escalation of portfolio risk or a liquidity crisis. 2010
Exchange uniform voting rights policies should not be applied to contingent capital securities, and the NYSE and Nasdaq would themselves benefit from an exemption because it could increase marketability and trading on each exchange. 2011
Because hedge funds play a large role in the credit derivatives market and that market recently failed, an increased regulatory emphasis on banks' lending exposure to hedge funds is justified. 2011
Basel III capital charges based on a bank's lending exposure to hedge funds could help address the threat of regulatory arbitrage. 2011
Section 30 of the Exchange Act is Congress's only articulation of the extraterritorial reach of Section 10(b), and Congress did not intend the Exchange Act to have extraterritorial effect beyond that provision. 2011
For exchange traded securities, the location of the exchange rather than the location of the plaintiff's broker should be the controlling factor under Morrison, although it is uncertain whether all courts will adopt this bright line test. 2011
Mandating the issuance of contingent capital does not guarantee that a viable market in contingent capital securities will develop. 2012
Form PF requires disclosure of the reporting fund's positions and how long it would take to liquidate them, because the SEC needs a view of portfolio liquidity rather than positions alone. 2013
The Dodd-Frank Act tightened custodial practice by requiring safeguards for client assets and verification by independent accountants, a response to concerns over theft and client exposure to Ponzi schemes. 2013
The custodian requirements work by cutting off the operational mechanics of Ponzi finance: they curtail an adviser's ability to pay existing investors with money invested by new investors, and custodians may execute client trades but cannot remit sales proceeds to the adviser or to third parties. 2013
Hedge funds threaten the financial system through two distinct channels: directly, by damaging systemically important financial institutions, and indirectly, by generating liquidity shocks and raising volatility in key markets. 2014
The unprecedented growth of the private fund industry combined with the low interest rate environment created by post crisis quantitative easing drove private fund managers to reach for yield. 2014
Because private fund advisers supply liquidity and perform liquidity transformation in the manner of banks, the vulnerabilities their bank like activities create can carry large consequences for financial stability. 2014
The combination of unprecedented private fund industry growth and the low interest rate environment produced by post-crisis quantitative easing pushed private fund managers into reaching for yield, and the leverage and complex derivative transactions used to boost that yield further increased private funds' systemic risk. 2016
Market events like the LTCM failure can escalate into global financial crises when many highly leveraged hedge funds holding illiquid portfolios are obligors of a small number of major financial institutions, because adverse price movements dry up credit and depress collateral values. 2016
Private fund advisers in the shadow banking system perform bank-like functions, providing liquidity to clients and to financial markets and engaging in various forms of liquidity transformation, and the vulnerabilities this creates may have large implications for financial stability. 2016
Even if the risks hedge funds pose to financial institutions are often overstated, liquidity risk remains a serious issue because of the critical linkages created by over-the-counter credit risk relations. 2016
The systemic risk of hedge fund leverage comes from its capacity to amplify liquidity losses and to contribute to asset overvaluation during bull markets, not from leverage as such. 2016
The theoretical link between hedge funds and systemic risk rests on limits to arbitrage: speculators' capital is finite, their capacity to supply liquidity depends on funding, and that funding can dry up abruptly in periods of financial distress, producing liquidity spirals amplified by rising return correlations, higher volatility, and flight to quality. 2016
Hedge fund redemption policies are not irrelevant to risk: the rewards to liquidity risk are positive in part because redemption gates allow hedge funds to avoid asset fire sales. 2016
Once liquidity risk is incorporated into the analysis, the superior performance previously attributed to predictability in managerial skills disappears in hedge fund portfolios. 2016
Alternative risk measures such as value at risk have severe measurement problems, so any direct regulation of leverage would be set conservatively and would substantially limit hedge funds' ability to provide market liquidity. 2016
Banks are uniquely positioned to discipline hedge fund behavior because their role as lenders, market makers, and product creators lets them use the threat of cutting off future lending as leverage over a fund. 2016
A system in which hedge funds submit position information to an authority that aggregates and publishes it cannot address liquidity risk, because protecting proprietary information requires so much aggregation that the resulting information loses value to market participants. 2016
A public database of nonproprietary hedge fund information might demystify the industry, but it would not address the central policy concern that opacity creates liquidity risk. 2016
Because the Dodd-Frank Act discouraged banks from growing too large and made bank lending harder, private funds and other alternative lenders filled the resulting void by financing small and medium sized businesses that traditional banks no longer served. 2016
The emergence of unconstrained mutual funds is driven by market forces: post-crisis structural and regulatory changes to the capital markets, a low interest rate environment, and the growth of private funds together created and then increased retail demand for alternative mutual funds. 2016
Proposed Rule 18f-4 would be highly limited in mitigating liquidity and other risks in an unconstrained mutual fund portfolio, because material leverage, counterparty, and liquidity risks in such a fund can arise from investments in a range of non-derivative instruments that the rule does not reach. 2016
In the unprecedented low interest rate environment prevailing since 2005, investment managers responded to retail investors reaching for yield by offering unconstrained mutual funds, a product that authorizes absolute return strategies in the fixed income world. 2016
LendingRobot can charge only a 1% management fee and a maximum 0.59% annual fund expense fee because its blockchain secured business model removes the investment adviser, overhead costs, and the legal fees associated with each investor agreement. 2017
A blockchain enabled fund delivers performance competitive with traditional funds: LendingRobot claims average performance of 6.86% to 9.66% depending on strategy, against an average 8.89% annualized return for a broad range of traditional hedge funds as of March 2017. 2017
Recording all fund transactions in the public blockchain lets an adviser demonstrate compliance with its best execution obligations and locate and audit past trades, converting a compliance burden into an automatic byproduct of trading. 2017
LendingRobot can charge only a one percent management fee and a maximum 0.59 percent fund expense fee because its business model removes the investment adviser, overhead costs, and the legal fees attached to each individual investor agreement. 2017
Post crisis regulation that restrained bank lending, particularly to SMEs, opened a new market that private investment funds moved into, accelerating their involvement in banking functions. 2017
ICOs filled the void left by constrained bank and non-bank start-up financing and enabled a democratization and inclusion process that facilitated banking disintermediation. 2017
The only real control power available to token holders is the decision to hold or sell their tokens, and even that exit right may be unavailable until the token is fully listed on an exchange. 2017
ICOs provide the highest possible liquidity for investors at the very beginning of a platform's lifecycle, before the reporting, accounting, and legal infrastructure that gives the investing public assurance of underlying business success, so investors trade on very limited information and volatility of the tokens and the whole cryptocurrency market increases. 2017
On bankruptcy or termination of the platform, token holders typically have no liquidity preference and no recourse at all once debt holders and outside creditors are satisfied, so unlike a venture capital seed investor with at least a simple liquidity preference, they typically lose everything they invested. 2017
Because banks and brokers had let LTCM borrow the full value of its collateral, LTCM's 4.8 billion dollars in capital dissipated quickly once banks began making margin calls. 2017
Banks overexposed themselves to private investment fund lending, which allowed LTCM and similar funds to grow significantly and led banks as counterparties to put their own existence at risk. 2017
Fund managers are unlikely to escape bank based indirect supervision by terminating a lending relationship, because their dynamic trading strategies depend on the immediate availability of capital and lending relationships now face increased scrutiny. 2017
Shareholder agreements matter more in closely held corporations because minority holders have sunk substantial time or capital into the enterprise yet cannot exit through sale, since their shares lack a ready market. 2017
Because earlier minted tokens pay out more than later ones at a steady fee rate, later experts have less motivation to join, and the remedy available to the bench is to change the exchange rate between fees and sem tokens to attract new recruits. 2018
Under certain restrictive assumptions it has been proven that no protocol can guarantee fair exchange with decentralized arbiters, so no design on this architecture can promise absolute certainty of fair machine arbitration. 2018
Because absolute certainty is unavailable, the architecture substitutes a calculable probability of confidence built on verified reputation, which is enough for business to proceed even though no provably certain algorithm exists. 2018
Initial Coin Offerings provide unprecedented liquidity and efficiency for capital formation while minimizing transaction cost. 2018
Token holders typically receive no liquidity preference protecting them if the platform they invested in goes bankrupt or terminates. 2018
Although federal securities law is the main instrument countries use to regulate ICO technology, there is also concern about regulating exchanges, which may fall outside federal securities laws at least in part. 2018
At the time of publication there were no registered marketplaces or alternative trading systems for cryptocurrency in Canada. 2018
The People's Republic of China has banned ICOs entirely, including the offering of coins and the exchanges used to trade them, on the view that ICOs hurt the market through potential deception and fraud. 2018
Regulatory efforts toward ICOs take several forms or permutations of them, including regulating ICOs, cryptocurrencies, and DLT, mandating compliance programs, and regulating exchanges. 2018
Unlike a conventional corporate loyalty program, company or industry tokens offer liquidity, because platform participants can sell and transfer them on crypto exchanges or secondary markets, which integrates the token and the platform into the mainstream economy. 2018
The defining legal difference between the Overstock offering and a traditional offering is that the purchaser had to hold the record directly as beneficial owner and could not delegate custody to the broker, so the securities were not held in street name. 2019
Because direct ownership on a blockchain removes the need for the Depository Trust Corporation to hold the certificate and for a broker to record beneficial ownership, agency costs can be cut and ownership clarity increases. 2019
Instant settlement destroys an existing business practice: without the T+3 grace period, institutional investors can no longer lend idle shares to investors covering short positions. 2019
Neither the Overstock offering nor the Linq based offerings were structured to support widespread ownership or trading through blockchain, and no major exchange or inter-dealer market permits or will foreseeably permit trading of blockchain issued securities. 2019
A blockchain based offering routed through a single broker produces a specific cluster of risks, including limited price discovery, no market making and therefore less liquidity, constrained short selling, impaired best execution, and no print to a tape or national exchange. 2019
Validating blockchain as a cost effective means of supporting securities offerings does not by itself increase capital raising for private companies, because outside of unicorns there is unlikely to be broad retail interest in privately placed digital securities or in securities trading on a single non-scalable ATS. 2019
ICOs changed the venture funding market because they provide investors liquidity far faster than the traditional venture capital path to a late IPO or acquisition, letting venture funds capitalize on profits early. 2019
Without something that functions as an insurance policy when commercial risks materialize, the public has no reason to pursue the benefits of decentralized commerce, so decentralized underwriting is of core importance to any future decentralized technology solution. 2019
Democratized decentralized underwriting is more secure and stable than centralized underwriting because diversifying lenders and underwriters adds liquidity in all states of the economy and silos losses so that there is less cascading during economic crises. 2019
Decentralized underwriting is a necessary precondition for decentralized commerce: without something functioning as an insurance policy when commercial risks materialize, the public has no reason to pursue the benefits of decentralized commerce. 2019
Most legacy insurance companies will not consider underwriting a smart contract that is not subject to the traditional legal framework, which leaves sophisticated smart contracts without the insurance they require. 2019
Even if legacy insurers do enter the DApp market, their products may not fit the need, because actuarial methods for risk assessment under traditional insurance metrics are only partially compatible with rapidly evolving decentralized products. 2019
Historical evidence demonstrates that every time decentralization emerges in a given industry, profit margins disappear. 2019
Insurance underwriting as currently organized imposes significant costs and inefficiencies and erects high barriers to entry, and it provides no democratized access to the underwriting process or collective decision making on risk. 2019
In the traditional insurance structure, financial distress or bankruptcy of an individual underwriter harms consumers, who lose the protection of their insurance contract and must seek new coverage. 2019
The authors propose that insurance underwriting be operated by a Decentralized Autonomous Organization in which cryptocurrency tokens function as claims on the future cash flows of the underwriting business. 2019
Tokens in the proposed DAO function as reputation because an agent's proportional token holdings will grow over time only if that agent follows sound and successful underwriting practices. 2019
Participation in underwriting is gated by token ownership: only token holders may underwrite insurance policies in the DAO, and inbuilt processes assign new business among them. 2019
The design requires underwriters to stake or encumber tokens against each policy they underwrite, and those encumbered tokens serve to secure the underwriters' promises. 2019
The underwriting use case is broader than traditional insurance: almost any blockchain transaction that does not consist purely of an exchange of digital tokens may require or benefit from underwriting. 2019
The burden of maintaining sufficient liquidity to meet claims does not rest on the DAO but on the individual underwriters that make it up. 2019
How much capital an underwriter holds is ultimately a matter of personal risk preference, and an underwriter willing to tolerate fluctuations in token holdings need provide only for expected losses. 2019
Assuming all agents are active underwriters, the DAO's rules can be designed so that the proportion of policies an agent writes in the long run is commensurate with that agent's proportion of token holdings. 2019
Blockchain-based funds can invert the traditional secrecy of hedge funds: the LendingRobot ledger discloses detailed holdings and supplies a hash code signature evidencing that the data is tamper proof. 2019
The legacy private investment fund model delays liquidity: the investment process is long, complex and time intensive and leads up to a very late liquidity event in the form of an IPO or acquisition, which is why funds seek the early liquidity cryptocurrencies provide. 2019
Recording all transactions in the public blockchain is what lets LendingRobot comply with its best execution obligations, making the public ledger a compliance instrument and not only an investment record. 2019
Moral hazard in hedge fund lending persists even when the lender is fully informed, because high enforcement costs can make prevention too costly for the lender. 2019
LTCM reached systemically dangerous size because banks lent to it without regard to repayment capacity, and in doing so the banks endangered their own existence. 2019
Banks continue to find hedge fund business desirable because hedge funds take risks other participants will not, borrow heavily and pay a premium for borrowing, which sustains the lending relationship despite its dangers. 2019
Banks can restrain borrower risk taking because they can credibly threaten to cut off future lending, a disciplinary tool other intermediaries lack. 2019
Fiat currency collateralization is expensive and inefficient because the entire backing value must be held liquid; anything less opens arbitrage opportunities of the Soros type. 2019
Trading a token directly against a well established stable cryptocurrency removes several layers of conversion fees and eliminates the risk that the bridge currency depreciates during the sequence of trades. 2019
A well established stable cryptocurrency and a universal exchange form a positive feedback loop: the exchange's liquidity is enhanced by the stable cryptocurrency, and the stable currency's stability and adoption are enhanced by the exchange. 2019
Leverage offered by cryptocurrency exchanges worsens rather than cures the market's illiquidity, because borrowed money rather than genuine demand is driving the price. 2019
Extreme illiquidity combined with the herd mentality of crypto investors systematically benefits speculators, because it lets apparent scarcity materialize out of nowhere precisely when investors are about to decide, prompting misinformed buy and sell decisions. 2019
A decentralized crypto economy requires a stable coin because no rational party will risk wealth on a long term contract denominated in a volatile currency: neither renter nor landlord will sign a lease whose rent may halve or double in any given week. 2019
Fiat currency collateralization is expensive and inefficient because the entire backing value must be held liquid; anything less opens arbitrage attacks of the kind Soros used against the Bank of England. 2019
The expected growth rate of DeFi, across diverse estimates, is large enough to call into question the long term viability of the existing decentralized technology infrastructure unless core infrastructure improvements are made. 2020
By 2019 the ICO market had lost its defining advantage over venture capital: because most ICOs between 2018 and 2019 imposed one to three year lockups, neither market offered early liquidity to investors or issuers, making the two substantively similar. 2020
Initial exchange offerings emerged as a market response to the near disappearance of the ICO market in January 2019, driven by the cryptocurrency exchanges that were most affected by the collapse. 2020
The IEO reinserts an intermediary into token offerings: the exchange screens the offering and the issuer no longer interacts with investors directly, reversing the direct issuer to investor structure of the ICO. 2020
Institutional investors face a distinct barrier beyond volatility: fiduciary responsibility to their clients limits the type of risk they may take on, and the lack of custody solutions recognized by regulators compounds the problem. 2020
Cyber security incidents contribute to the volatility of the digital asset market through a specific channel: consumers instantaneously withdraw their assets from an exchange affected by an incident. 2020
The evolution of the DeFi market and its new monetary system depends on the stability of DeFi products and digital assets, and both stability and adoption of DeFi are undermined by the instability of most cryptocurrencies. 2020
DeFi platforms grant the unbanked access to the loan market by disintermediating existing banks, connecting borrowers and lenders directly in peer to peer networks and accepting digital assets as collateral with far less documentation than banks require. 2020
The DeFi lending market is highly concentrated: MakerDAO alone accounts for almost ninety percent of the total USD value locked in DeFi projects. 2020
Centralized financial technology does not complete the disintermediation it promises, because users still deal with a technology company as intermediary instead of a financial institution, which leaves room for the decentralized solutions DeFi attempts to provide. 2020
DeFi is more efficient than existing financial intermediation including FinTech, and that superior efficiency traces to its extensive reliance on code and automation, which removes large parts of the human element and the errors and inefficiencies that come with it. 2020
DeFi's decentralization remains theoretical in one important respect: as of the early 2020s DeFi is still largely relegated to one dominant platform, with 87 percent of all publicly funded DeFi projects built on Ethereum. 2020
At the beginning of the 2020s DeFi was not sufficiently user friendly, because core interfaces such as metamask, myetherwallet, and scatter require levels of technical know how in handling public and private keys that most lay users do not possess. 2020
The digital asset market resulted from a technology push rather than a market pull: developers were driven by technical advancement rather than by usefulness and user friendliness, and market pull may only evolve once the DeFi technology infrastructure is more developed. 2020
DeFi platform technologies often have limited product market fit because the reliance on code over human judgment produces products built around automation that ignore the human element in financial transactions. 2020
Because human interactions in business are often too complex to be fully codified objectively, DeFi systems that exclude all non objective information from their analysis do not fully utilize available information, which limits their efficiency and usefulness. 2020
Accountability is a structural concern in DeFi: without a central entity it can become unclear who is responsible for wrongdoing, and when problems arise no central party can freeze transactions, fix problems, or restore normal operations. 2020
In the early 2020s the DeFi technology infrastructure was insufficiently developed to support DeFi growth estimates and growth potential, and fulfilling that potential requires significant tradeoffs between scaling, security, and levels of decentralization. 2020
The tradeoff between transaction approval speed and immutability has the potential to undermine the DeFi infrastructure in the long run. 2020
Read together with the network capacity failure that CryptoKitties caused on Ethereum in December 2017, the expected DeFi growth rates imply that the Ethereum network will continue to experience network shortages and throughput problems unless its infrastructure is upgraded to handle the expected transaction volume. 2020
Fully compliant legal custody solutions for digital assets increase legal certainty and mainstream investor confidence, and that increased confidence in turn builds markets in digital assets. 2021
The more digital assets are held by their owners in self-custody, the less likely intermediation by custody service providers becomes, so self-custody is the key driver of decentralization in emerging blockchain networks. 2021
Without the ability to rely on proven custody providers, mainstream and legacy institutional investors are restrained from making digital asset investments for legal or business reasons. 2021
The majority of digital asset custody providers and digital asset exchanges require customers to surrender ownership of their digital assets as a precondition for access and trading. 2021
Custody of a digital asset is not physical possession but ownership and control over a digital asset wallet, which in practice means holding the private keys and bearing responsibility for keeping the funds safe. 2021
Self-custody of securities declined in prevalence after the Stock Market Crash of 1929 because investors recognized how inherently risky the bearer certificate system was. 2021
The paper certificate system failed at scale: trust companies and intermediaries were overwhelmed by changing ownership records, and from 1967 to 1970 a reported $400 million in securities was lost or stolen. 2021
The inefficiencies of paperwork based custodial requirements are what produced the first central securities depository, which substituted electronic book entry records for the physical exchange of certificates. 2021
Traditional custody has become highly concentrated, with four large banks holding roughly $114 trillion in assets under custody at the end of the first quarter of 2018, and barriers to entry make it likely that this concentration continues. 2021
Hot storage buys easy access and quick transferability of digital assets at the cost of exposure to cyber attacks and to the difficulty of keeping private keys safe. 2021
Cryptocurrency exchanges store digital assets or private keys in internet connected hot storage because their main function is to provide liquidity rather than custody, unlike registered legacy stock exchanges which facilitate trading without taking custody. 2021
Centralized cryptocurrency exchanges require users to hand over their assets and then act as custodian, issuing what are essentially IOUs for users to trade with on the platform. 2021
Because a wallet provider or exchange that has custody of a digital asset gains full control over transactions, hacking a digital asset exchange is equivalent to robbing a bank: the attacker obtains valuable cryptocurrency that can be cashed out. 2021
Between 2011 and 2018 there were 56 cyberattacks on cryptocurrency exchanges, initial coin offerings and other digital currency platforms worldwide, totaling $1.63 billion in hacking related losses. 2021
As of 2017, 73 percent of digital asset exchanges took custody of their users' private keys while only 23 percent let users maintain control over their own keys. 2021
Custodial exchanges are largely unprepared for breach: only 53 percent of small custodial exchanges and 78 percent of large custodial exchanges have a written policy setting out what happens to customer funds if a security breach causes loss. 2021
The unprecedented growth rate of decentralized exchanges may be an early indicator of increasing reliance on decentralized self-custody by retail users, but mainstream institutional adoption of digital assets is unlikely to materialize through self-custody and DEXs. 2021
Cold storage custody solutions are much more secure and resistant to cyber attacks than hot storage because the digital assets and associated private keys are held in wallets that are not connected to the Internet. 2021
Institutional investors are less likely to engage in digital asset investments where custody solutions for digital assets are underdeveloped, and they find it difficult to commit fully until a reliable and respected custody solution exists. 2021
Self management of private keys or passphrases for individual digital assets is too cumbersome for institutional investors, so institutional custody solutions must be as robust as those provided for traditional assets. 2021
Operational risk is inherently high in custody services because of the high volume of transactions processed daily, and those risks are magnified in a global custody operation running around the clock across different markets. 2021
Information security infrastructure and controls to mitigate hacking, theft, and fraud must be enhanced when maintaining custody of digital assets, because digital assets have unique technical characteristics. 2021
Every risk in a digital custody operation should carry both a preventative and a detective control, layered so that if some controls fail others remain to reduce the risk. 2021
Specialized digital custody audit procedures for verifying that a bank maintains access controls over a cryptographic key differ from the audit procedures used for physical assets, so some risk management processes must be tailored for digital custody. 2021
Becoming an OCC regulated trust is one route by which crypto exchanges can operate nationwide without securing state level licenses in each of the 49 states that require one. 2021
Multi-signature wallets and a combination of hot and cold storage solutions are the advisable custody design for digital assets. 2021
While the majority of cryptocurrency spot exchanges require ownership to be surrendered in order to transact, decentralized exchanges introduce the ability for users to transact without exposing their private keys to vulnerability. 2021
Applying current legacy custody rules developed for traditional assets to digital assets is inconsistent with the foundations of decentralization, because the very nature of a decentralized system mandates the avoidance and eradication of intermediaries for business transactions. 2021
Delegation of rights to custody providers is only an incremental step toward centralization via delegation to third party investment managers, and it opens a floodgate because each additional level of investment discretion over digital assets exacerbates centralization concerns and compounds rent seeking suboptimalities. 2021
Taking the realities of decentralization and decentralized self-custody seriously would require investment advisers to provide digital asset investment advice for a fee without ever taking custody of the assets. 2021
Legacy customer expectations of custodial solutions are what force continuous experimentation with digital asset custody within the existing and evolving legal framework, rather than a clean move to non custodial models. 2021
Centralized custody solutions and decentralized non custodial deal platforms will run in parallel until both are more established, and existing DeFi trends suggest the decentralized non custodial deal platforms will produce more innovation and better deals. 2021
Most decentralized exchanges have struggled with liquidity and price discovery. 2021
Because basic standards for the governance of digital assets were still missing at the beginning of the 2020s, the digital asset market stagnated and decentralized finance remained in its infancy; without standards and governance, certainty and market confidence cannot develop. 2021
Usability is the most important decentralized infrastructure requirement: without intuitive graphic user interfaces, decentralized systems may not reach mainstream consumer adoption, because requiring users to manage public and private keys and their own security makes sufficient public education very difficult. 2021
DeFi's distinctive disruption is that it attempts to make financial transactions permissionless, completely open to anybody, and borderless, promising reduced transaction costs, broader financial inclusion, and open access across borders. 2021
DeFi's disruptive potential may be blunted by incumbents: existing financial institutions can adopt decentralized technologies inside a controlled environment, capturing benefits such as transparency and interoperability while preserving centralized oversight. 2021
The decentralized economy cannot fully proliferate until it acquires the institutions ordinary commerce depends on, above all a secure and meaningful reputation system for anonymous supranational partners and an effective, dynamic governance system. 2021
Because the decentralized economy currently lacks many of the civil institutions available in the larger economy, the average person should not invest anything in the crypto economy. 2021
Liquidity has always been a problem on decentralized exchanges because meaningful history and reputation cannot form where there is little or no governance structure, no insurance, no appeals process and no reputable decentralized news service. 2021
Decentralized insurance requires networks of policy writers carrying individual reputations, since efficient underwriting of every type of transaction depends on those reputations. 2021
Tokenization is meaningless unless the token is underwritten by someone who puts their reputation and ultimately their money on the line to attest that the token validly represents the asset. 2021
Applying Web3 technology to chit funds replaces the foremen and their commission with smart contracts, which eliminates the risk that a foreman absconds with the fund. 2021
Member default on premia is a major inefficiency in chit funds, with estimates that a large share of subscribers have defaulted at least once recently and a substantial share have defaulted after winning an auction. 2021
Reputation must be grounded to be meaningful, so reputation tokens should be minted only when policy premia enter the group, reputation should dictate power, and fees should be shared through reputation weighted salaries. 2021
Because underwriting mints new reputation tokens, passive holders see their proportional ownership in the DAO fall over time, which is designed to incentivize agents to underwrite actively while still allowing passive investors to earn income. 2021
Underwriters encumber reputation tokens against each policy under a preset formula, and if the insured event occurs they lose control of those tokens, which are auctioned to meet the claim, with new tokens minted and sold if the auction falls short. 2021
In the Underwriting DAO a breach occurs only when the market values the encumbered reputation tokens at less than the payout, which requires minting additional tokens to meet the claim. 2021
From the viewpoint of consumers and regulators, encumbered reputation tokens serve as a substitute for capital, because they derive their value from the DAO's future cash flows. 2021
Decentralization empowers knowledge at the edge: individuals with fine grained information about their neighbors and community can make better underwriting decisions than a centralized hierarchy can. 2021
Concentration of power, especially monopolies or trusts, decreases market liquidity, while decentralization of power improves it. 2021
Decentralized derivatives must be capitalized at least fully because the platform and its anonymous users cannot be trusted, a requirement that would be impossibly onerous in traditional markets and that leaves the market for decentralized options extremely shallow. 2021
The antiregulation fervor that follows from the anarchist and libertarian philosophy of most Web3 developers is damaging the potential for widespread adoption of decentralized peer to peer tools. 2021
The inability of anonymous participants to trust one another is crippling the DeFi market and forces decentralized markets into overcollateralization, giving traditional markets a fundamental advantage. 2021
Once secure and meaningful reputation is incorporated into Web3, the collateral imbalance will reverse, and because reputation tokens are more meaningful than identity and easier to value, less collateralization will be required than in traditional protocols. 2021
DeFi will take off only when cryptocurrency is used in authentic transactions such as insurance and equities across broad segments of industry and tokenization of commodities and properties is instituted. 2021
Decentralizing the power structures of core institutions improves them in both effectiveness and efficiency, because decentralization supplies transparency and liquidity. 2021
Every type of economic action becomes more efficient when decisions are hedged, because hedging lets participants confidently change investments and keeps the market liquid, and lending and insurance therefore require someone to underwrite the risk. 2021
Underwriting, like policing, can be decentralized and automated, which gives each network member the power to choose the level of security they require. 2021
Removing the middlemen who serve as business catalysts would kill the economy: liquidity would dry up because after a few people unfairly lose on business deals, no one will take the risk of initiating one. 2021
Even if code review and audit firms did engage in thorough insurance underwriting and guarantees for their clients, the remedy would still fail because those firms would remain subject to the flawed and centralized legacy insurance market, which is itself dominated by a cartel of a few core players. 2021
Decentralized code review underwriting makes the code review market more efficient because it democratizes the functions of code review and frees untapped sources of power and knowledge. 2021
In future iterations the CRDAO will offer the customer a form of insurance where the code review does not correspond with the contractual obligations of the parties. 2021
Centralization is dangerous in any market because monopolies ruin market efficiency by impairing liquidity, while the most efficient and liquid markets have high transaction rates of many goods moving between many small players. 2021
Decentralized finance is structurally disadvantaged against traditional finance because decentralized products must be backed with full collateral, typically 100 percent and 200 percent on secondary layers such as MakerDAO, a collateralization burden that would be unthinkable in traditional markets. 2021
Reputation tokens used in decentralized finance are more meaningful and easier to value than traditional identity verification metrics, so decentralized protocols that use reputation metrics will require less collateralization than traditional protocols. 2021
Locking a user's reputation tokens instead of fungible assets would be a leap in efficiency and a powerful economic advantage over traditional finance, but this advantage is conditional on a coherent system that securely tracks the value of a reputation token. 2021
The more reputation replaces capital, the less capital must be allocated, tied and encumbered, which raises the ratio of unencumbered capital available to be newly deployed. 2021
Reputation can underwrite tokenized assets and provide immutable guarantees for them, and with reputation staked guarantees tokenized assets can over time function like real assets. 2021
The liquidity benefits of reputation underwriting can only materialize if the underlying reputation is meaningful and secure. 2021
Replacing capital with reputation gives DAOIC members a permanent option and a right of first refusal on deals, because a member can stake reputation non fungible tokens on a deal without joining the purchase commitment. 2021
The delayed voting outcomes and feedback effects created by the transition from loosely coupled to tightly coupled voting let DAOIC members triangulate their own internal liquidity position against deal feasibility. 2021
Because reputation staking carries no ex post capital commitment, the removal of capital makes capital calls and other liquidity limiting measures less relevant for DAOIC members. 2021
Exit by selling reputation tokens is more problematic for reputation than for other cryptocurrency tokens, because reputation is less fungible: a token's value is tied to the specific post in which the reputation was created and is subject to separate review. 2021
In a firm commitment underwriting deal whose public portion does not sell out, a member is forced to sell reputation non fungible tokens on the over the counter market to satisfy the resulting capital call, but only if that member cannot cover the pro rata capital requirement with liquid capital. 2021
In traditional underwriting, investors who cannot distinguish underwriters by reputation create free riding: once free riding occurs, underwriters stop investing in screening and try to free ride on others, producing a lemons problem. 2021
Traditional underwriting also fails at the agent level, because individual agents within an underwriter may sacrifice the underwriter's overall reputation for personal gain, for example by putting out a fraudulent offering. 2021
In the theoretical model, the incentive design of decentralized reputation staking governance aligns the individual with the group so tightly that the agent cannot gain personally at the expense of the principal. 2021
Best efforts underwriting in the DAOIC is implemented as a smart contract accountability system: a member's capital commitment is encumbered as a deposit and released to the token opportunity only after the reputation staking pool decides, and funding occurs only on a majority upvote. 2021
In a firm commitment reputation staking engagement the DAOIC commits no capital at all except for the portion of the token opportunity that does not sell out to the public. 2021
If the public fails to purchase the capped amount of a token opportunity, the DAOIC must sacrifice its own liquidity and buy the remaining part of the sale, so firm commitment underwriting turns a collective misjudgment of public demand into a capital obligation. 2021
Misjudging the public commitment portion of a firm underwriting engagement would neutralize the liquidity the DAOIC previously gained through reputation staking. 2021
Against the view that firm commitment underwriting is antithetical to decentralization, Kaal argues it in fact further enhances the level of decentralization. 2021
Shifting policy so that all returns on purchases are minted into fungible reputation tokens paid proportional to reputation holdings instantiates the shift from capital to reputation and functions as a form of best efforts underwriting on a token opportunity. 2021
Replacing capital with reputation increases liquidity because reputation takes over part of the role of capital and frees otherwise locked capital, letting decentralized investment vehicles deploy capital more effectively since reputation staking on deals requires no capital deployment. 2021
Lack of liquidity is one of the biggest problems in the traditional venture capital ecosystem, and the traditional VC model disincentivizes generating early profits because capital is locked in for an extended period of time. 2021
Because traditional fiat VC funds must maintain liquidity to support capital calls from their investors, they are limited in their ability to deploy capital, which affects their return on investment and overall fund performance. 2021
Reputation as venture capital must be distinguished from the capital replacement enabled in decentralized underwriting, because in venture capital reputation needs to fill the role of capital for each funded venture deal rather than only when a claim is filed. 2021