A thesis on clean risk

Note: This article was originally published in Lendroid’s blog site on Feb 10, 2020.

Not all risk can be coloured with the same brush. We need to be able to call out dirty risk when we encounter it, and push for systems that drive clean risk.

The world is full of uncertainty. As they say, ‘It is what it is’. This could mean anything from coming to terms with a less than incredible coffee, to an ominous warning from Ed ‘The Irishman’ Sheeran, from a bad investment in the stock market, to a lifetime of bonded labour in a sweltering South Indian village. We all know, beyond doubt, At the heart of all this uncertainty is risk.

As human beings, our understanding of risk is fairly straightforward. Here are the broad strokes:

1. You are either for risk or against it
2. Calculating risk accurately is impossible
3. Risk is always hidden, at least partially
4. No risk means you don’t grow, and too much risk is a gamble
5. Things could go sideways at any time

This understanding is not wrong, but it is far from complete. Risk is often foisted on people who never asked for it, and don’t understand it. This is true of investors suckered into buying crap stock by brokers who have no skin in the game; and it is true of small businessmen and farmers caught in the web of loan sharking the world over. This is why a flower seller in Tamil Nadu, India, pays a 10% daily interest on her loan.

The problem

If we were to distil the problem into one tiny, shiny vial of meaning, it would be this — We believe dirty risk is the biggest social issue today. And we believe there is a better way.

But what is dirty risk? Let’s try and understand that through a parallel system, through an analogy. For the most part, the world runs on dirty fuel. We dig it up from deep in the ground, we burn it and that makes things run. The only problem is the stuff that accumulates when you burn it. It accumulates so much that now, the whole ecosystem is on the verge of collapse. The alternative is obvious — renewable, sustainable, clean fuel. For the most part, the financial world is fuelled by dirty risk. It is opaque, ambiguous and too often on the shoulders of people who didn’t choose it. And because of dirty risk accumulating in the system, it tends to collapse again and again, at every level. The alternative, is clean risk. Transparent, and never taken up by anyone that doesn’t see it or want it.

Even on the blockchain

It’s like in the movie ‘The Gods Must Be Crazy’, where a bottle falls from the sky into a village in the South African hinterland. The villagers can’t for the life of them figure out what to do with the bottle. They use it to smoothen skins or blow a tune out of. The ecosystem had not yet evolved to use that strange thing from the sky. A decade ago, the blockchain opened up a world of transparent, clean risk, the likes of which the world hadn’t seen before. Despite years of innovation, of fortunes made and unmade, of spitballing idea upon idea, we are all still figuring out what to do with that bottle.

Which is why dirty risk is as prevalent on the blockchain as it is on any conventional financial ecosystem. Any centralised system is prone to dirty risk. A user advisory in the beginning, or a ream of fine print doesn’t take away from the fact that centralised exchanges are susceptible. And DeFi doesn’t fare better either. While they stand on a moral high ground, their ecosystem is embarrassingly prone to black swan events. Crypto lending, for instance, is structured around the ‘wrangler’ concept — entities incentivised to sniff out weak loans and liquidate them. Liquidation is an essential part of any loan system, but if it forms the core of that system, there is a conflict of interest.

The alternative

Is clean risk. There is no other way to do this. And clean risk is possible only on the blockchain. That’s what is so amazing about it. To create systems where risk is transparent and never foisted without consent — this is impossible in conventional, centralised structures. Only DeFi can make this happen. Fortunately, it’s not far away.

The Deleuze version of the Lendroid protocol is designed around a flywheel of opportunity, stability and cyclicity. It is powered by Fungible Entangled Tokens, that enable the most transparent, sustainable distribution of risk, ever. It celebrates and propagates clean risk. There are a couple of corners we haven’t been able to skirt yet. We look forward to your keen eye and clear voice to help us with those. But as things stand, this is closest to an antifragile, black swan resistant financial engine that the blockchain has ever come to. And we don’t intend to stop here.

Note: This article was originally published in Lendroid’s blog site on Feb 10, 2020.