@Falcon Finance $FF #FalconFinance
I did not rush into Falcon Finance; instead, I approached with a calm sense of skepticism regarding the viability of synthetic dollars, and whether this would simply be another version of a previously failed concept (i.e., Universal Collateral Framework). As someone who has witnessed multiple iterations of similar concepts unwind, I feel confident that good intentions are irrelevant, and that a design based on cooperation from markets that infrequently cooperate is fundamentally flawed. Therefore, my initial perspective was not excitement regarding the potential for significant returns, but instead a dispassionate skepticism that this could simply be another re-framed structure that has been attempted previously.
My skepticism stems from observed patterns which repeat consistently. Previous DeFi systems were developed to be fast, efficient in terms of using capital, and with little tolerance for error. Collateral-to-Value ratios were minimized, liquidity was assumed to be consistent, and liquidations were viewed as an indication of a protocol's strength as opposed to a vulnerability. When volatility entered into the equation, previous systems did not adjust to absorb the increased volatility, they instead amplified the negative effects. In many instances, synthetic dollars, created to serve as a symbol of confidence in addition to the underlying assumptions, lost all value when confidence in the system was needed most. These were not outliers — they were predictable consequences.
Falcon Finance approaches the same area, with a very distinct set of priorities. Users provide liquid digital assets as well as tokenized real world assets as collateral to mint USDf, an overcollateralized synthetic dollar intended to provide on-chain liquidity without compelling users to sell their collateral. The premise of the system is nearly explicitly simple. There is no intention to multiply capital or unlock previously unseen efficiencies. Instead, the system focuses on maintaining the integrity of capital, while allowing it to be used. That focus represents a paradigmatic shift from speculative reactions to something more akin to balance sheet thinking.
Overcollateralization is not a supplemental element of the Falcon Finance system — it is the defining characteristic of the system. By mandating that there be excess backing, Falcon Finance intentionally sacrifices higher throughputs and faster growth in favor of resiliency. The excess backing serves as a shock absorber for the realities most systems choose to ignore — delayed data, unequal liquidity, and human hesitation under duress. Overcollateralization does not preclude failure — it merely slows the rate at which failure occurs. As opposed to failing rapidly and resulting in cascading failures, the stress experienced by the system is given time to develop gradually, where it may be addressed rather than feared.
The inclusion of tokenized real-world assets further underscores the conservative nature of the Falcon Finance system. Real-world assets bring with them legal, operational, and valuation complexities that cannot be eliminated by code. Many DeFi protocols chose to exclude these complexities in favor of the clean symmetry of on-chain primitives. Falcon Finance appears to recognize that this symmetry can also represent the concentration of risk. During periods of market stress, real-world assets behave differently than digital assets, and this difference may serve as a stabilizing influence. The trade-off is friction, however, friction may be preferable to reflexivity when markets move as a single entity.
Perhaps equally telling is the manner in which Falcon Finance leaves much of the decision making up to its users. There is no inherent incentive for users to remain actively engaged in the system or to push their positions to their maximum possible levels. USDf provides liquidity in the simplest form of the word — as a means to access capital when required, and not as a means to require active management. This is important as many systemic failures are social prior to being technical. When a system incentivizes its users to perform the same action at the same time, fragility becomes collective. Falcon Finance appears to be designed to minimize the opportunity for such convergence to occur.
This restraint does not eliminate uncertainty. Even though synthetic dollars are inherently sensitive to prolonged downturns, during which confidence in the system may be slowly eroded versus rapidly collapsed, and even though tokenized real-world assets will face their true test in a dispute or liquidity constraint versus during normal operation — governance will ultimately face pressure to relax the standards to maintain competitiveness. Falcon Finance does not deny that these tensions exist. Rather, it appears to be premised on the notion that they will exist and that designing for durability is more important than designing for attention.
When viewed from afar, Falcon Finance seems to be more of a response to what DeFi has learned to date as opposed to a vision of what DeFi may evolve into in the future. Falcon Finance is not attempting to dominate the cycle or redefine the markets. Rather, it seeks to position itself as an infrastructure that remains viable during unremarkable or challenging times — the times most systems quietly fail. Whether or not this approach is successful in the long run remains an open question. However, if DeFi is to transition from an episodic to a dependable state, it will likely be driven by systems that are willing to stand still while everything else moves.
