There are undercollaterized / no collateral loans on Ethereum. You can build a credit score using decentralized identities. But yeah, keep dismissing it. You'll eventually use Ethereum or something like it whether you want to or not.
The advantage eventually will be easier ways to get funding for startups or businesses of all kinds. You need highly liquid markets in order to facilitate global finance at scale so that's where it's starting today. Rebuilding all of the financial primitives onchain. Why? Because composability of contracts onchain results in higher velocities of money; higher than whats possible in traditional finance. Imagine a world where you can list ownership of a stock and have that be immediately accessible by millions of people around the world regardless of jurisdiction 24/7 in highly liquid markets, all from a browser app. That's where this is going in my opinion.
None of this makes any sense at all. Composability of contracts leads to higher velocity of money? Where do you get this from? And why do we want higher velocity of money? The only people who care about velocity of money are macroeconomists. Velocity of money has literally zero impact on businesses and individuals.
Velocity of money follows the equation V = P*T/M Where P = price level; T = aggregate value of transactions per delta t and M = total nominal amount of currency in circulation.
With DeFi, you can increase T because the aggregate value of transaction per delta time increases thanks to composability of money. In the traditional system, locking up money means buying an asset where that value then becomes illiquid (like buying shares of a stock, or a bond). However in DeFi, that same asset can be tokenized and used as liquidity as a tokenized collateral. For example, I can tokenize a TSLA share and then use that as collateral in a contract where I can get a yield. I could also pair TSLA with a stablecoin as a liquidity position (1:1 TSLA/USD) and tokenize the liquidity position which can then be used in other contracts.
The total aggerate value per unit time increases thanks to composability of contracts. You should download Metamask and use DeFi, it'll become clear what I'm talking about.
You want higher velocities of money because then that value is being put to work. When you have low velocities of money it means you have hoarding behavior which leads to deflation and a shrinking economy. With DeFi, the same value is more efficient than the traditional system because that value can be allocated more efficiently (i.e. higher yields thanks to tokenized positions and composable contracts), thus you get more bang for your buck so-to-speak.
Also, just having something like Uniswap with pooled liquidity means assets are more liquid, which also increases velocity of money. More liquidity = higher velocities of money. This is how you bank the unbanked, by giving everyone access to financial markets as long as they have an internet connection.
Okay, you're misusing a lot of financial terms, and then making some other terms up, such as "composability of money". Some things are composable but money isn't one of them.
What you describe as "tokenization" exists in traditional finance, and has existed for ages. For example, money market funds invest funds in money market instruments and then fractional ownership of the fund (and therefore of the underlying investments) in the form of shares can be bought and sold in the market. In short, this is not a DeFi innovation.
"Liquidity" refers to the easiness with which an asset can be converted into money. For example, a share is less liquid than money (because money is the most liquid asset, by definition) but more liquid than a house, because shares are sold easier than houses. Shares and bonds tend to be quite liquid. For example, some government bonds are so liquid that are considered a "money equivalent". And "tokenizing" an asset doesn't necessarily makes it more liquid. Finally, shares and bonds are used as collateral all the time. In fact, any financial and non-financial asset can be used as collateral. For example, a mortgage is a loan that is secured by real estate, even though real estate is relatively illiquid. It still used as collateral.
With regards to the velocity of money, you're misinterpreting something called the Quantity Theory of Money. The velocity of money is linked to the level of economic output but it doesn't really make sense to try to influence the velocity of money through economic policy in order to control the level of economic activity, it doesn't work like that. Also the velocity of money isn't being limited by some bottleneck in the financial sector, and specifically isn't being limited by money not being "composable" enough, whatever that means. Your whole argument about the velocity of money just doesn't make any sense.
I think you have good intentions but clearly you don't know much about finance, and if you're interested in DeFi you should definitely learn a little bit about finance, because right now you don't quite seem to grasp even the most elementary of financial concepts. I'm telling you that in good faith, don't take it badly.
Uh no, Aave has credit delegation for no collateral loans and it uses OpenLaw contracts to secure a credit line. And there's also TrueFi https://truefi.io/. And a bunch of others. You can get loans based on credit on Ethereum.
No, what I'm saying is that right now if you have a product on Ethereum with consistent cashflows, you can borrow money on credit from DAOs with large treasuries willing to lend them out using OpenLaw contracts as arbitration. The goal for these protocols is to expand this using decentralized identities and onchain credit scores.
If I can't buy a car on credit with DeFi it means DeFi can't do loans. And if it can't do loans it can't do finance. Maybe it can do a semblance of finance, maybe we can call it crippled finance, but it's not finance. Pretending that DeFi is going to turn everything upside down when it is unable to even make a simple loan is ridiculous. Nobody can take this seriously.
I can take a no collateral loan from DeFi today https://truefi.io/. So you can buy a car on credit using DeFi.
Also, this is early days. A few years ago HN's stance was that smart contracts are completely useless. Oh so now their not useless, but you can't get no collateral loans so it's not real finance. Right....
So what happens when I can get a decentralized identity and mortgage sized loans on DeFi in the next few years? This IS coming as there are at least a dozen projects working on this problem and there are already systems today that work, so it's only a matter of time.
Clearly you and many others in HN have blinders on because you were wrong to say that smart contracts are useless during the last crypto bubble. And over the years, you'll continue to be wrong as long as you bury your head in the sand. I'm absolutely confident about that.
As I suspected, I can't take a DeFi loan from https://truefi.io/. It's only open to a small number of vetted borrowers comprised of OTC desks and exchanges. Interesting to see how it works though. They say "delinquent borrowers will face legal action pursuant to the loan agreement signed", which means they're relying on the "legacy" legal system to enforce the loan agreement. In other words, it's not DeFi (surprise, surprise).
Are DeFi loans coming in the future? I have no idea, but right now it's not clear whether it's even possible to make loans with DeFi. No one has done it, so far. And loans are the most elementary of financial instruments.
Another problem with DeFi has to do with the very concept of decentralisation. For instance, these TruFi loans are approved or rejected by the lenders themselves. Another example, in a Dao, the shareholders assume management roles. Therefore, at least in these instances, decentralisation means replacing highly specialised workers with unpaid, non-specialised, informal labour. I think anyone can see that this is a dumb idea. A decentralised entity that is organised in this way will never be able to compete against a corporation that exploits division of labour and is professionalised.
