Vincent A Saulys' Blog
DeFi Makes Crypto Antifragile
Tags: defi crypto
May 24, 2021

Objects or systems that gain, rather than lose, from disorder are called Antifragile. This is contrast to objects that are resistant to change (robust) or lose more than gain (fragile). [0] For much of crypto's history, it was an asset that lost from disorder. The original pitch of "digital gold" seems hard to stomach when one man's tweet can cause prices tumbling. But these were handwaved as "early days" when proponents were asked.

However, this appears to be changing. Greatly.

DeFi, short for decentralized finance, is an innovative way to use your cryptocurrencies. The idea is to have smart contracts run on networks like Ethereum or the Binance Smart Chain that replace bank's lending and borrowing (among other functions). This can be done by overcollateralizing loans whereby a borrower puts up more than he is borrowing so the lender is never out more than they put up.

This has a profound impact on volatility. People who "stay in the game" and keep assets in lending platforms can now earn more than they normally would as borrowers get liquidated during a downmarket and lose their original asset.

The counter-effect on this is that borrowers stop looking for money. The lenders now buy up the liquidating assets at auction for pennies-on-the-dollar. The system continues.

This makes cryptocurrencies antifragile -- savers benefit from unstable times.

Does this make DeFi the next big thing?

[0] Antifragile by Nassim Taleb

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