The Silicon Valley Bank Case: Could a DAO Have Saved the Bank from Collapse?

It is commonly called Silicon Valley Bank (SVB), the largest American bank to fail since the 2008 financial crisis. Around SVB, some characterized the situation as a Black Swan event.

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Was the bank’s collapse really that unpredictable, and were there ways to avoid it? For ForkLog, Core Contributor DAO-builder of DeXe Protocol Yuri Gotoviy explained.

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What happened to Silicon Valley Bank?

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SVB served technology startups funded by venture capital firms, which started to deploy less money as interest rates rose.

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Meanwhile, the bank had inflated its balance sheet with bonds and ten-year mortgage loans that it could not “unload” when the Fed raised rates and its 1.5% yield proved insufficient.

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With fewer deposits, not-so-great assets, and depositors demanding their money back, SVB suffered one of the largest bank collapses since Lehman Brothers’ bankruptcy.

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For many, it was a shock. But this might not have happened if SVB had embraced the principles of the DAO.

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USDC and SVB

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Among SVB’s assets were $3.3 billion belonging to Circle — the company that co-issues the USD Coin (USDC).

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For years, experts and regulators insisted that cryptocurrencies are risky and should be pegged to “safe” centralized assets and financial institutions.

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However, when news of SVB’s collapse emerged, the value of USDC fell to $0.87. A collapse of the stablecoin could have dealt a serious blow to the industry.

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SVB burned on the same mortgage-backed securities (MBS), the same leverage, the lack of hedging, and a misreading of market and interest-rate cycles that Lehman Brothers faced in 2008. Despite statements from its representatives, centralized financial leaders continued to support the same essentially broken system.

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Boom. Bust. Repeat. Until money is printed to such an extent that the currency and the economy backing it lose all value. Millions lose their savings. And trust in the system fades.

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But there must be a better path.

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DAO: A democratic alternative to banks and governments

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Ironically, the only bank worthy of trust would be an anti-bank. Rather than allowing a handful of bankers and policymakers to continue spoiling everything by bailing out their friends, we can harness the collective power of millions of people around the world for better and more democratic governance.

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Behind the hype around cryptocurrencies and the NFT fever lies the emergence of decentralized autonomous organizations: anti-banks, anti-governments—perhaps even a mode of self-organization where every participant is a banker, a governor and a decision-maker.

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Consider this:

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• An organization where every decision is transparent, and questionable investments are visible not only in earnings reports;
• any participant can raise a red flag or propose a new strategy without waiting for Twitter analysts to discuss it;
• with a broad base of stakeholders who are simultaneously investors, voters and strategists, DAOs advance far more thoughtful and balanced strategies than authoritarian centralized financial institutions.

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Transparency, democracy and pluralism of ideas are just some of the ways to avert the next collapse of the SVB kind.

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The old centralized system is doomed to repeat the same mistakes until it loses trust altogether, noted Yuri Gotoviy:

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“A DAO, on the other hand, does not even need trust. After all, every participant can see exactly how the organization benefits them, and at any time can propose new paths. That combination of democracy and self-interest is sustainable, while the old system is not.”

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How could a DAO have solved the SVB problem?

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A DAO typically owns governance tokens, a portion of which is allocated to participants, and the rest stored in a treasury. The latter is used for investing, funding worthwhile activity, marketing and other purposes determined by vote. Stablecoins may be held in the treasury.

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Rather than relying on a company such as Circle, which deposits fiat money in centralized financial institutions and exposes assets to the risks of the traditional system, the DAO treasury can create pools of different stablecoins. At the same time, participants can act as counterparties to sustain a peg of stablecoins to the US dollar or another chosen currency.

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DAO pools do not care about the Fed, bond yields, MBS or other parts of the centralized system, which has often proven its flaws and ossification. Moreover, DAOs and individuals already earn yields on their stablecoins, for example from providing liquidity to cryptocurrency pairs.

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Unlike buying bonds or MBS, the income of a LP depends solely on trading volume, not on external price movements. Consequently, they have fewer incentives to make risky investments. And if deposits shrink, as with SVB, other DAOs are ready to buy USDC or other assets at LP yields. 

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Should $1 really be pegged to $1?

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The desire to peg stablecoins to $1 is somewhat questionable.

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The U.S. dollar is, of course, the current reserve currency and, therefore, the most stable unit of account for calculations, imports/exports, etc.

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But it remains inflationary. What if a coin were pegged to the value of a currency adjusted for inflation? In effect, people who hold savings in fiat lose money each year to inflation. Imagine your dollars having the purchasing power of the dollars of 1920.

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Thanks to democratic governance, DAOs could design systems to achieve this.

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Why a DAO?

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Not because any particular DAO is smarter than the U.S. Federal Reserve or any single institution.

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Rather, DAOs wield collective power, where every participant can propose ideas and vote on them. This increases the chances of faster adoption of more sustainable, safer and fairer solutions in both financial and political spheres.

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Otherwise, one is left waiting for the next big bank to fail spectacularly, doing the same risky things as its predecessors.