Crypto hits the laws of physics (and the laws itself)
The laws of physics still apply
Another week, another crypto group blew up.
The firm Celsius has been promising ‘safe’ interest rates of 18%. A bank run has commenced, much of their customer deposits appear locked in illiquid situations indefinitely, and they have halted withdrawals. Their solvency is unclear as of now. This is the second major ‘high-interest rate’ crypto scheme to spectacularly implode in a month. Many people have lost their life savings, and Canadian pensions appear hurt as well. Celsius has a US entity, so there will certainly be regulations and crackdowns stemming from this debacle.
The obvious takeaway should be that ‘risk-free’ rates cannot exceed the long-run returns of US equities (themselves a volatile and risky product). There’s no magic source of yield. I’ve looked up and down crypto and found none.
The bigger question/issue is what will remain of ‘DeFi’ after all of this. Decentralize Finance was a major driver of smart contract volume (and price appreciation of instruments like Ethereum and Solana). Celsius alone is 30-40% of some major ‘Defi Protocols’.
The legal laws still apply too
While Celsius is an enormous dumpster fire, it feels oddly pedestrian given the Luna implosion a mere month ago. BlockFi and others may go down too. Arguably more interesting is this precedent to be set for DAOs.
For those less familiar, DAOs are ostensibly organizations that are both decentralized and autonomous. Ultimately DAOs Achilles heel is they have a hard time interacting with the off-chain real world. In practice, they are shadowy (and likely sometimes unregistered) C corporations run by a few dudes in a Discord chat. While inner circles execute and run things at the end of the day, a veneer of “the community decides” is painted over the top.
The question we are about to answer is: what happens when a DAO decides to violate contracts and/or the law? An organization Merit Circle DAO (whom I’d never heard of) just voted to reneg on one major investor that stands to make substantial gains. The leaders/developers are attempting to hide behind a defense of “we are beholden to the vote of the DAO”.
Most likely – the court system will not take kindly to a Discord chat reneging on a valid contract. If the IRL legal system still applies, what is a DAO except as a polling system for your fans? I’m not a legal expert, but I would expect to be sued if I were involved with this debacle. An even more chilling precedent (which is almost certain not to occur) would be if the DAO succeeds. Even if the lawsuit succeeds, what if the smart contract is not designed to undo the will of the mob? No investor would put another dollar into those vehicles again.
I am reminded of the book The Sovereign Individual that many crypto aficionados reference. The book made a claim that with digital money, jurisdictions will need to accept the rules of the digital sphere or be cut off from investment. More and more I suspect the opposite: that digital money will need to accept the laws of the offline world or it will be cut off from investment.