Recourse and DeFi Tail Risk - Chase Coleman

hi everyone nice to be here um as i said my name is chase coleman i'm a data scientist and an economist at uma and so today we're going to talk about recourse and defy tail risk so you know when we talk about the types of things that we all do on the internet you know trade at 10x leverage or do these other things when we think about the risks these are what the risks we think we're exposed to are you know the price goes down we get liquidated everyone's sad um it turns out that there's kind of a lot more underlying risk so this is the kind of front page of wrecked if you haven't gone there it's uh it's a little bit scary oh wow that's a lot louder so yeah so you can see some of the recent hacks that have happened wormhole the sifu scandal etc etc so there's kind of two classes of risk and defy the first is kind of the type of risk that we typically are thinking about which is this market risk prices go up prices go down people get liquidated companies fail etc etc but there's this other type of risk that we're kind of really exposed to in crypto which is you know what i'm going to call tail risk which is you know hacks or exploits or some kind of a system failure that results in the loss of a lot of money um so as defy works to become more mainstream we should think seriously about you know what are these tail risks and how can we minimize them um you know do you want your grandma exposed to things like wormhole you know i i don't um so the way that we're going to think about this is we're going to kind of you know take the typical crypto approach which is put things into a trilemma and this trilemma is going to have three components and so it's going to describe financial systems the first is you know a financial system could have anonymity and anonymity is you know anyone can interact with anyone in a trustless manner whether or not you know who your counterparty is and we've kind of got some really great advertising going on right now in canada so we've put that front and center the second is instant finality so you think about you know how fast does a particular financial system process transactions um on my you know trade on my brokerage account if i go ahead and i buy a stock it shows up in my account immediately on the blockchain if you get liquidated that happens you know as soon as the block is mined so this is the second property instant finality and the third is recourse which is the ability to dispute the validity validity of a particular transaction and then seek reparation so in the tradify world that takes you know the form of going to court and you know companies spend millions and millions and millions of dollars paying lawyers to seek recourse for them um there's a few projects that are thinking about these types of things in defy already so you know plug for our project uma we're an optimistic oracle there are things like nexus mutual that provides insurance for when you use different protocols and then there's other things similar like claros that are actually like a resolution dispute like it's literally a court system for the blockchain so you know i think people recognize that we should be thinking about this recourse and um there we go so we're going to use these three properties this these three properties of the trilemma to think about what does traditional finance look like and what does defy look like uh oh there we go okay so traditional finance is the combination of instant finality and recourse so if we think about this you know again going back to this purchasing and equity example when i purchase an equity from my broker it shows up in my account nearly immediately now there's things happening behind the scenes that maybe make it not so instant but from my perspective it's instant i can sell that as soon as i have it in my account now if the stock doesn't show up i can sue my brokerage and i can say hey you committed to give me this thing and it didn't show up in my account but being able to seek this type of recourse requires that i know who they are and they know who i am and that there's a judicial system that we're willing to go to defy is very different so d5 thinks about you know well we want anyone to be able to interact with anyone so we're prioritizing anonymity and up until now we've put a lot of focus on versions of this where we have instant finality so if you think about a liquidation um you know i chase coleman am able to liquidate any position that shows up as under collateralized on any of the lending platforms without knowing who was under collateralized and without them knowing who i am and then as soon as that liquidation happens that transaction is finalized and so you know then the question becomes well what happens if that liquidation was performed at an inaccurate price what do we do and it turns out that the answer right now is your out of luck you know you sit there you wish you had you know someone liquidated you at a price much lower than it was supposed to be and you lost a lot of your money and that's maybe not the you know that's maybe not the best way to do things and so you know devs do something so what types of things can developers do about this and the first thing you know it's a little bit tongue-in-cheek but also kind of serious like we can just say well maybe recourse doesn't matter a system without recourse is incompatible with the majority of today's you know tradify system but that might actually not be a problem defy adds a lot of other characteristics we saw it added anonymity and other things and you know a lot of us value those properties so it might not be worth the developer time developing answers to recourse the second thing is we could do what more of what um we at uma have been calling slow defy which is maybe we don't want our transaction to be finalized as soon as the block is processed and so in this version of defy we might think about you know instead of having anonymity and instant finality let's have anonymity and recourse and when you think about the types of things that you do i think you know this high frequency trading thinking about liquidation those things require instant finality but if you're doing something like betting on the super bowl maybe you're willing to sit for a couple of hours after the answer has come out in order to ensure that there's not a hack or some other issue and so thinking about you know what types of contracts require instant finality and what types of contracts need more emphasis on recourse i think is important and for reasons i don't have time to get into today it turns out that slow defy doesn't have to actually be slow but i'm happy to talk to people about that over coffee or beer and then the last thing is you know developers can be doing is continuing to innovate so what can we build as a community lots of us are developers here lots of us are members of different communities what can we do to you know ensure that either there is more recourse or kind of recognize we don't want recourse and you know cut it off at umo we've had some i think kind of neat ideas so we had a member of our team develop something called a protected token so i'm going to post these slides on my twitter account and you should all read that article i think it's quite clever and then we've talked a lot about insured oracles which again for reasons of time i'm not going to get into today but i'm happy to talk you know at length about this over coffee or beer and you know i hope that we do think about this seriously and we take this problem and we either find solutions or actively decide not to pursue it that's all i'm going to say today that gives some time back to everyone i have questions there's links to uma and across and those are the projects i'm involved with across is an l2 bridge built on some of the optimistic oracle ideas from uma and you know as a spoiler alert for when we grab beer it uses something close to the insured oracle you can find me on twitter at blackbox economist i've written more about this topic and additionally there is a poe app that our community has created for all of the uma speakers so if you download the poe app app the secret word is chase data and you'll get a poep with my face on it so that's all i have thanks everyone you