The largest American bank that collapsed after the financial crisis of 2008. This is the name of Silicon Valley Bank (SVB), the situation around which some characterized as event type “black swan”.
Was the collapse of the bank really so unpredictable and were there ways to avoid it, Core Contributor told Cryplogger specially DAO-constructor DeXe Protocol Yuri Gotovy.
What happened to Silicon Valley Bank?
SVB catered to VC-funded tech startups that were investing less amid rising interest rates.
Meanwhile, the bank inflated its balance sheet with bonds and ten-year mortgages, which it failed to unload when Fed raised rates and his 1.5% yield was no longer enough.
With fewer deposits, not-so-good assets, and depositors demanding money back, SVB suffered one of the biggest banking collapses since the Lehman Brothers bankruptcy.
For most, this came as a shock. But this might not have happened if the SVB had adopted the principles of the DAO.
USDC and SVB
Among the assets held in SVB, $3.3 billion belonged to Circle, a co-issuer of the USD Coin (USDC) stablecoin.
For years, experts and regulators have insisted that cryptocurrencies are risky and should be pegged to “safe” centralized assets and financial institutions.
However, when the news of the collapse of the SVB broke, the value of USDC dropped to $0.87. The collapse of the stablecoin could be a serious blow to the industry.
SVB got burned on the same MBS, the same leverage, lack of hedging, and misunderstanding of market and interest cycles as Lehman Brothers did in 2008. Despite the speeches of their representatives, the centralized financial leaders kept the same, essentially broken system working.
Boom. Recession. Repetition. Until so much money is printed that the currency and the economy that supports it completely lose their value. Millions of people are losing their savings. And there is no more trust in the system.
But there must be a better way.
DAO: a democratic alternative to banks and governments
Ironically, the only trustworthy bank will be the anti-bank. Instead of allowing a few bankers and politicians to keep ruining everything by saving their friends, we can use the collective power of millions of people around the world for better and more democratic governance.
Deep beneath the hype around cryptocurrencies and the hype around NFTs lies the emergence of an ecosystem of decentralized autonomous organizations: anti-banks, anti-governments, rather a mode of self-organization, where each participant is a banker, governor and decision maker.
Think about it:
- an organization where every decision is transparent, and questionable investments are visible not only during income reports;
- any participant can sound the alarm or propose a new strategy without waiting for it to be discussed by analysts on Twitter;
- With a broad base of stakeholders who are both investors, voters and strategists, DAOs promote much more thoughtful and balanced strategies than authoritarian centralized financial institutions.
Transparency, democracy and pluralism of ideas are just some of the ways to prevent the next collapse like the SVB case.
The old centralized system is doomed to make the same mistakes until it finally loses trust, Yuri Gotovy noted:
“The DAO, on the other hand, doesn’t even need to be trusted. After all, each participant sees exactly how the organization benefits him, and at any time he can suggest new ways. This combination of democracy and self-interest is sustainable, but the old system is not.”
How could the DAO solve the SVB problem?
DAO usually owns governance tokens, some of which is distributed among the participants, and some is stored in the treasury. The latter is used by the organization for investment, payment for useful activities, marketing and other purposes determined by voting. Stablecoins are allowed in the treasury.
Instead of relying on some company like Circle to deposit fiat money in centralized financial institutions and expose the asset to all the risks of the traditional system, the DAO treasury can create pools of different stablecoins. At the same time, the participants of the organization, as mutual counterparties, are able to maintain the binding of “stable coins” to the US dollar or other chosen currency.
The DAO pools don’t care about the Fed, bond yields, MBS, or any other part of the centralized system, which has often proved to be imperfect and ossified. In addition, DAOs and individuals already have a return on their stablecoins, for example from providing liquidity for cryptocurrency pairs.
Unlike buying bonds or MBS, income LP depends only on the volume of trading, and not on external changes in the exchange rate. Consequently, they have less incentive to make risky investments. And if deposits decrease, as happened with SVB, there are other DAOs ready to buy back USDC or other assets for LP returns.
Is $1 really supposed to be equal to $1?
The desire to keep stablecoins pegged to $1 is somewhat questionable.
The US dollar is by far the current reserve currency and thus the most stable measure of value for settlements, imports/exports, etc.
But it is still inflationary. But what if you tie a coin to the inflation-adjusted value of a currency? De facto, people who keep their savings in fiat lose money every year due to inflation. Imagine that your dollars have the purchasing power of 1920 dollars.
Through democracy in governance, DAOs can develop systems to do this.
Why DAO?
Not because any particular DAO is smarter than the US Federal Reserve or any single organization.
Rather, DAOs have collective power where each member is free to propose and vote on ideas. This increases the chances of accelerating the introduction of more sustainable, safer and fairer market solutions both financially and politically.
Otherwise, it’s just a matter of waiting for the next big bank to fail spectacularly, doing the same risky things that the previous ones did.
Found a mistake in the text? Select it and press CTRL+ENTER
Cryplogger Newsletters: Keep your finger on the pulse of the bitcoin industry!
The largest American bank that collapsed after the financial crisis of 2008. This is the name of Silicon Valley Bank (SVB), the situation around which some characterized as event type “black swan”.
Was the collapse of the bank really so unpredictable and were there ways to avoid it, Core Contributor told Cryplogger specially DAO-constructor DeXe Protocol Yuri Gotovy.
What happened to Silicon Valley Bank?
SVB catered to VC-funded tech startups that were investing less amid rising interest rates.
Meanwhile, the bank inflated its balance sheet with bonds and ten-year mortgages, which it failed to unload when Fed raised rates and his 1.5% yield was no longer enough.
With fewer deposits, not-so-good assets, and depositors demanding money back, SVB suffered one of the biggest banking collapses since the Lehman Brothers bankruptcy.
For most, this came as a shock. But this might not have happened if the SVB had adopted the principles of the DAO.
USDC and SVB
Among the assets held in SVB, $3.3 billion belonged to Circle, a co-issuer of the USD Coin (USDC) stablecoin.
For years, experts and regulators have insisted that cryptocurrencies are risky and should be pegged to “safe” centralized assets and financial institutions.
However, when the news of the collapse of the SVB broke, the value of USDC dropped to $0.87. The collapse of the stablecoin could be a serious blow to the industry.
SVB got burned on the same MBS, the same leverage, lack of hedging, and misunderstanding of market and interest cycles as Lehman Brothers did in 2008. Despite the speeches of their representatives, the centralized financial leaders kept the same, essentially broken system working.
Boom. Recession. Repetition. Until so much money is printed that the currency and the economy that supports it completely lose their value. Millions of people are losing their savings. And there is no more trust in the system.
But there must be a better way.
DAO: a democratic alternative to banks and governments
Ironically, the only trustworthy bank will be the anti-bank. Instead of allowing a few bankers and politicians to keep ruining everything by saving their friends, we can use the collective power of millions of people around the world for better and more democratic governance.
Deep beneath the hype around cryptocurrencies and the hype around NFTs lies the emergence of an ecosystem of decentralized autonomous organizations: anti-banks, anti-governments, rather a mode of self-organization, where each participant is a banker, governor and decision maker.
Think about it:
- an organization where every decision is transparent, and questionable investments are visible not only during income reports;
- any participant can sound the alarm or propose a new strategy without waiting for it to be discussed by analysts on Twitter;
- With a broad base of stakeholders who are both investors, voters and strategists, DAOs promote much more thoughtful and balanced strategies than authoritarian centralized financial institutions.
Transparency, democracy and pluralism of ideas are just some of the ways to prevent the next collapse like the SVB case.
The old centralized system is doomed to make the same mistakes until it finally loses trust, Yuri Gotovy noted:
“The DAO, on the other hand, doesn’t even need to be trusted. After all, each participant sees exactly how the organization benefits him, and at any time he can suggest new ways. This combination of democracy and self-interest is sustainable, but the old system is not.”
How could the DAO solve the SVB problem?
DAO usually owns governance tokens, some of which is distributed among the participants, and some is stored in the treasury. The latter is used by the organization for investment, payment for useful activities, marketing and other purposes determined by voting. Stablecoins are allowed in the treasury.
Instead of relying on some company like Circle to deposit fiat money in centralized financial institutions and expose the asset to all the risks of the traditional system, the DAO treasury can create pools of different stablecoins. At the same time, the participants of the organization, as mutual counterparties, are able to maintain the binding of “stable coins” to the US dollar or other chosen currency.
The DAO pools don’t care about the Fed, bond yields, MBS, or any other part of the centralized system, which has often proved to be imperfect and ossified. In addition, DAOs and individuals already have a return on their stablecoins, for example from providing liquidity for cryptocurrency pairs.
Unlike buying bonds or MBS, income LP depends only on the volume of trading, and not on external changes in the exchange rate. Consequently, they have less incentive to make risky investments. And if deposits decrease, as happened with SVB, there are other DAOs ready to buy back USDC or other assets for LP returns.
Is $1 really supposed to be equal to $1?
The desire to keep stablecoins pegged to $1 is somewhat questionable.
The US dollar is by far the current reserve currency and thus the most stable measure of value for settlements, imports/exports, etc.
But it is still inflationary. But what if you tie a coin to the inflation-adjusted value of a currency? De facto, people who keep their savings in fiat lose money every year due to inflation. Imagine that your dollars have the purchasing power of 1920 dollars.
Through democracy in governance, DAOs can develop systems to do this.
Why DAO?
Not because any particular DAO is smarter than the US Federal Reserve or any single organization.
Rather, DAOs have collective power where each member is free to propose and vote on ideas. This increases the chances of accelerating the introduction of more sustainable, safer and fairer market solutions both financially and politically.
Otherwise, it’s just a matter of waiting for the next big bank to fail spectacularly, doing the same risky things that the previous ones did.
Found a mistake in the text? Select it and press CTRL+ENTER
Cryplogger Newsletters: Keep your finger on the pulse of the bitcoin industry!
