Decentralized finance

DeFi has so far introduced ‘stablecoins’ as mechanisms for token exchange rate stability with respect to fiat currencies and pooling mechanisms for stabilizing token prices; and, more recently, also decentralized banking and insurance protocols: that assets need not lie idle, but can be mobilized for borrowing and lending, with mechanisms of insurance offered on the side. Lending is then giving rise to the potential for leverage: borrowing in order to take positions in markets. That, in turn, is opening up issues like collateral requirements with margin calls and default risk. Predictably, we are seeing next the issuance of derivative financial products like credit default swaps (CDS) and collateralized debt obligations (CDO) designed to on-sell default risk from those who wish to avoid it to those prepared to carry it for a fee. These developments have the hallmark of the sorts of derivative products being traded in the lead-up to the 2007 global financial crisis. Whether they are pointing to crypto’s ‘Minsky moment’ is the question, for the products themselves were never the source of crisis; it was their governance, expressed in pricing models and the conditions of access to leverage they were built upon. It is not surprising that the emergence of cryptoderivatives and a focus on DeFi governance are emerging concurrently. In fact, historically speaking decentralized finance is redundant: finance has been historically decentralized. The problem is that financial instability leads financial markets to self-organize governance institutions, which then get taken over by the state. For example, the US had a private clearinghouse acting as a de facto central bank before this facility was essentially taken over by the government. The bankers organized it because they needed it. We are interested in moving from DeFi to social derivatives: to using finance to create different socialities, which always means different governances.

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