DeFi, The Big Short, and ‘Shit Loans’

tl;dr: Imagine a world where lending institutions can’t hide risky loans from investors, customers, and regulators. Loanscan demonstrates that this world is already here.

The Big Short is full of great scenes.

One of them is when Michael Burry realizes that all of the mortgages in the most recent series of mortgage-backed securities are sub-prime.

Or, as Margot Robbie brilliantly says from her bathtub: “think shit.”

Part of the reason why the banks could get away with this for so long was due to the complete lack of transparency on their balance sheets.

As Burry says to his investors, “I don’t even think the banks know what’s in these things.”

We all saw what happened when a total lack of transparency and accountability met greed and insatiable desire for profits.

Let’s now contrast that with Loanscan.

Thanks to the transparency of the blockchain, everyone can see the total amount of crypto-loans and risk issued on the Ethereum platform.

It’s as if any one of us has access to the combined balance sheets of every single bank in the world.

We all can see the relative stability and risk in the system. Plus, in the case of MakerDAO, we all know that the loans are backed by collateral (currently in the form of ETH, but soon in the form of other crypto assets).

No more uninhabited houses or ‘ninja loans’.

Credit is still available, but it’s not credit built out of thin air.

When we talk about “DeFi” or “Decentralized Finance,” this is one of the elements that make it up. The underlying trust in the system is transparent. The collateral IS there and, if the loan defaults, the collateral is lost to the borrower.

I’ve long struggled with the concepts behind MakerDAO but have always been impressed by their focus.

I’ve become more and more comfortable with it, though there’s always a part of me that is worried that a DAI stablecoin-which is algorithmically pegged to 1 USD- can work. Pegs, from what I understand, have a way of breaking.

For more on stablecoins, see my VentureBeat article here.

Still, given the immaturity of the crypto market, the transparency of the system, and the adoption (nearly 1% of all ETH is locked in DAI contracts), it’s worth paying attention to.

I’m not done with the podcast, but this recent interview with the founder of MakerDAO, Rune Christensen, shows a lot of promise.


DeFi, The Big Short, and ‘Shit Loans’ was originally published in Data Driven Investor on Medium, where people are continuing the conversation by highlighting and responding to this story.