Can you explain what you mean by crypto's forced liquidation rules? Not familiar with how that works at all.
In a case where there's contagion [549] the banks or even the government can work to negotiate what's happening, and slow down the collapse (or even prevent it) - an example being the subprime mortgage backed securities which got to the point that nobody knew how to value them, so the government bought them all (and eventually actually "made" money by riding it out).
DEFI has algorithms that lock up the capital and will automatically liquidate it if certain parameters are met - which others can use to "attack" it - if the oracle sees bitcoin fall below $20k in a flash crash, it triggers the selling of ten thousand coins, say, which floods the price down further, you snap them up, the crash is over, you slowly sell at $25k or whatever. Bitcoin itself is pretty resistant to this, but the other coins, not so much, especially the side coins.
As a side note, most US home loans do NOT have a "call" clause and the bank can only initiate liquidation after you've missed payments and gone delinquent for a certain number of days; this was instituted in the US after calling mortgages contributed to the Great Depression. Some business loans can be called after a period of time for any reason (usually, interest rates have gone up).
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. This is why traditional finance doesn’t take seriously the idea of immediate settlement, and why end of day settlement is as good as it’ll get.
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.
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.
I think that's the thrust of the argument. We're about to find out how many DeFi companies are utilizing bad business practices.
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.
Not if you pretend everyone is an island and economies aren't interconnected.
Often, the lender is also the exchange through which people hold their crypto so they don't even have to contact the holder before they sell their holdings.
1. The price of an asset need not be a nice continuous line. It can jump.
2. That's why liquidation occurs not at -10%, but at some point before that, to manage this gap risk. Might be at -7%, or whatever. This reduces, but does not eliminate gap risk. For that, the crypto exchanges have insurance funds.
So as a borrower, today, if you were to borrower 8000 USDC and deposit 10 ETH as collateral, the AAVE protocol would automatically sell your collateral if the ETH price went to 941$. So your position is "auto liquidated". https://aavecalculator.com/
AAVE currently has ~$9.9B in assets locked into its protocol.
Part of it depends on what the margin is used for - margin for VTX is going to be handled differently than forex margin.
There are 9-digit lending positions in $ of crypto collateral that will be forcefully sold into the market if BTC/ETH keep dropping. Unless more collateral will be deployed, which lowers the forced liquidation price.
TradFi - Your word is your bond.
Of course few ppl actually look at the code, or sometimes the code is just bad and you get bad actors willing to exploit this.
That being said: In practice and real life there are a bunch of dodgy companies and badly written eth-contracts(code).
I've seen many a times, "business ppl" just go with lowest cost when wanting some software done. Try going for the "lowest cost bidder" when getting a web3 contract coded !
You right, bugs do and always will exists and we are all but human, but some bugs have a much higher cost than other - even if they are simpler.