Comment by gst
3 years ago
> In crypto, there is no buffer. Auto liquidation of undercollateralized positions occurs. All of those humans in the loop, “unfair rules”, and settlement delays crypto proponents complain about are the very things that make traditional finance stable.
Is auto-liquidation a bad thing? It leads to more volatility in the short-term, but it seems that there might be long-term benefits of ensuring that players with unresponsible business practices will be forced out of the market.
"Traditional" crypto holders will be affected too (the value of their investment goes down while people are forced to sell), but this looks more like a temporary impact. As long as they don't trade on margin they won't be forced to sell and as long as they hold their own keys they are unaffected if exchanges are crashing.
From a "price" perspective the current events might be bad for the crypto ecosystem, but from a "health" perspective I think that they could be positive, as only the responsible players with healthy business practices are going to survive.
The concern is propagation. If margin calls blow up individual organizations or institutions, that's bad but not a fundamental threat. The issue is that things are connected.
But it's only an issues for other connected entities when they are using risky business practices themselves.
A stablecoin that backs its assets in the currency that the stablecoin issues (for example a USD-based stablecoin that is backed by US treasuries) won't be affected by any disruption in the market. An exchange that is fully backed and does not allow margin trading won't be affected either. Regular holders who hold their own coins or use responsible exchanges also aren't affected.
Yes - there's quite a bit of propagation. But all entities affected by that propagation didn't seem to have proper risk management and used business practices that work well when the market does well, but that fall apart in case of high volatility. Maybe I'm just biased because I'm not a fan of margin trading (and similar practices), but I don't consider it a disadvantage if an ecosystem is hostile to those types of business practices.
The process by which you create a bubble is when you create mechanisms to ship risk as far away from the people who are knowledgeable about it as possible.
The core might all be completely self-deluded or intentional scammers, but the second-degree people who invested/loaned to them intended to some degree to take a bit less risk than being directly involved in the scam, the third-degree people who rely on the second-degree people thought they were allowing a little innovation instead of missing out by playing it too safe, the fourth-degree people aren't even aware that they're invested in the core scam or delusion at all, and make fun of it online. There's a fifth-degree of people who have no idea that whether they eat depends on the scam (because the fourth-degree was a municipal bond issue, the city is now drowning in liabilities, so they had to cut food banks.)
edit: The most recent crypto peak was largely fueled by a ton of normies who put their retirements into something that has gone down somewhere between 40% and 70% in value since they bought it. Other people depend on those people.
>But it's only an issues for other connected entities when they are using risky business practices themselves.
I think that's the thrust of the argument. We're about to find out how many DeFi companies are utilizing bad business practices.
> Is auto-liquidation a bad thing?
Not if you pretend everyone is an island and economies aren't interconnected.