Fake seems like a strange choice of words here. These things arent attempting to deceive anyone into believing they are the real thing. They clearly label themselves as derivatives.
We don't call corn futures fake corn, we don't call derivatives of other types fake those things and we shouldn't call these fake stocks.
I'm really not defending or not defending whatever these platforms are. I wouldn't be surprised if there is shady stuff going on here. But call it whatever it is. It isn't fake stocks.
Yeah, I would like to emphasize the fact that they're settled once individual contracts expire, be it cash or delivery.
I am yet to find a useful derivative that lacks a settling mechanism. How would you even price such a contract that lacks settling? Like why should it be worth anything at all?
skimmed the article - there's apparently a creation/redemption mechanism similar to ETFs.
settlement is always a mystery to me in crypto so i can't weigh in here. how do you guarantee delivery of the physical for units of the crypto that's inked on the blockchain.
Derivatives settlements with smart contracts is the all time killer app of crypto in my mind because the contract can allocate payouts on its own.
Obviously these can't be physical, they have to be financial, but if you are allocating something financial with value on a liquid market you are just one step away from getting to the physical thing.
Things like BTC swaps don't really have settlement periods: every so and so numbers of often (often 1 or 8), longs pay shorts using some premium formula is swap > index, and vice verse if swap < index.
I suppose you could construe that as some periodic partial settlement mechanism, though.
It is a periodic partial settlement mechanism. Perpetual futures are equivalent to a bag of daily futures that automatically roll over, one of which is always in its expiry period.
Is it not that settlement nominally occurs when you choose to exit your position? Which raises various questions about whether whatever stack of turtles your swap is built on can provide liquidity when you need it.
Liquidity has a tendency to dry up when everyone wants it, especially in a highly-leveraged derivative. The fact that options have an expiration date seems to mean that trading cannot just stop when things are going badly.
Right, in lieu of that these schemes use a variety of different mechanisms. One way is you can mint the derived asset at a price oracle by staking other tokens. If the synthetic spot price is too high, you can sell your newly minted asset for more than you staked. If it’s too low, you can mint an inverse asset and sell that for more than you staked.
Why stop there, you could buy real shares, sell synthetic ones, and then sell the real shares, too. Or just sell synthetic shares without having any real shares in the first place. This seems like a case where a blockhain doesn't really do much good.
Selling the real shares as well as the synthetic is really just going naked short. Lots of risk/leverage. You have to put up collateral so that you have something to lose if it goes bad
I'm looking at it from the buyer's perspective. The big selling point of blockhain transactions is zero trust and no counterparty risk. There is clear counterparty risk in synthetic shares sold on a blockhain.
IOW, the buyer is still stuck relying on the issuer of the "real" shares to honour the blockhain sale, or on the seller not defaulting.
Edit: just to expound further on something I think most people miss: The primary innovation of Bitcoin was that it is provably scarce without relying on any legal framework. That's it, and it's pretty radical. If you start relying on the law to provide value, the blockhain idea tends to become extraneous.
Companies hold assets, cash flow and perform real world activities that have a tangible value. There are multiple ways that value can be realised. Aside from speculative investors which were discussing, companies and individuals can buy shares in order to exert strategic influence over the company for their own reasons, so the shares have a value to them beyond just the share price. For example the way Microsoft owned shares in Apple for a long time because the existence and operations of Apple at the time benefited them. Ultimately management can buy out the company, or an external player can mount a takeover, or there could be a merger, any of which can lead to a cash out situation.
E.g. a software company might never pay a dividend, but the company might be bought by a company that wants to acquire it's products or customers, or it's technology team. These things have economic value that can be realised. So there are multiple ways a company can have value that can lead to share owners benefiting from the materialisation of that value.
I'm not talking about the existence of economic value, but of settlement. So there is no settlement except at an indefinite transaction event -- not even under your control if they're non-voting shares, i.e. "whenever".
True, it's not scheduled, but it's more common than a lot of people think, for a public company to be bought out. And the shareholders don't get to arbitrarily hold out, either.
The textbook answer to stock value is dividends. Many companies, most, I would argue, never reach that point.
In practice, the chief defender of fundamental value is M&A. Whole-company buyers can tap free cash flow in a way minority investors can’t. That is the arbitrage that sets a lower bound on the value of a company’s shares relative to its cash flow. (There is no similar mechanism for setting an upper bound.)
Eh, once you start averaging across market caps and counting stock buy-backs as the back-door dividend they are, it becomes far less common. Amazon is the one big outlier there; IIGC, they've only performed a buyback once.
The S&P 500 disburses ~half a trillion USD in dividends each year, and performs another ~half a trillion USD in stock buybacks. You shouldn't discount that second half.
Well Futures might be, but every year also the established financial players on the mainstream financial markets invent new derivatives and they all are not regulated until they are.
But most things of this type specifically arent settled, they're settled in cash and rolled over, again and again and again, forever. Look at the volumes traded for these derivatives, numbers are insanely high. People don't mostly use them to do what they were intended (hedge a poor rain year or similar), but to GAMBLE. The rest is mostly just narrative.
Saying that they were intended for hedging sounds like a very strong proposition to me. Chicago-style futures have (and have had, for as long as we know) numerous features that indicate speculation (or gambling, as it's also known) as one of their big reasons for existence.
They are also used to sell unconventional services (being long corn in August and short corn in July is effectively selling the service of transporting corn back in time) and,
perhaps most importantly, to make commodity loans (being long corn in the cash market and short corn in the futures market is a loan of corn.) This helps explain why, after removing costs of storage and insurance and such, prices are almost always in backwardation.
On this subject, almost every textbook is wrong. Well, I shouldn't say wrong, but their models fail to predict and explain easily observed real-world behaviour in futures markets.
I can strongly recommend Williams' The Economic Function of Futures Markets[1]. It gave me a lot of those "ooh, now that makes more sense" experiences after having heard the faulty model used in textbooks over and over.
Are these assets backed by legally binding contracts? If the answer is no it doesn't seem like a stretch.
If I sold you a stock in my company that gave you none of the traditional shareholder rights I'd also call those shares "fake", which seems to be what's going on here.
Nobody is claiming to be selling stock in companies. They're claiming to be, and are, selling synthetic assets that track that price movements of stock.
It's not really. They're transparent, auditable, and typically they're designed to use over-collateralization to prevent liquidity problems, but they're not 100% immune to them and still count as bucket shops IMO.
But they're absolutely not fraud or "fake stocks".
The spread betting companies in the UK work very much like bucket shops and are not only legal but tax free. Unlike these blockchain things they are regulated and unlikely to run off with your money.
I imagine very few people would be interested in smart contracts if it became a defacto legal standard in the US and Europe that these contracts are unenforceable.
Of course this doesn't address contracts being written out of Russia or traditional financial havens, but how valuable is a vehicle which can't be used to move assets into or within the US or Europe?
I think the question of enforcement is the wrong one.
Smart contracts are already unenforceable via the existing legal system. It's the blockchain that enforces them, and it will continue to do that regardless of their legal status.
The greater Ethereum community accepts to put restrictions into place, or the US/EU/China puts sanctions on Eth owners and traders. You get to either move to Sealand, or accept restrictions.
I'd love to see the DoD/CCP conduct a metadata drone strike agaisnt addresses that were generated for a specific transaction x seconds ago, correlated with some IP addr correlated with some location that ended up being a server running in supply closet on one of their military bases.
Esp for chain running evm compatible contracts that are more scalable than ethereum and can have millions of ephemeral validator nodes.
Sure, but those are backed by different legally binding contracts which also give legal recourse to buyers. My point is that unlike other types of synthetic assets these seem to have no legal backing and could quite conceivably be regulated out of existence in the future.
No one is claiming they are selling you a stock in a company. That's the whole point. They are very clear that they aren't selling you a stock in a company.
That’s what GOOG is (as opposed to the “real” Alphabet stock GOOGL). So by your definition one of the FAANGs is issuing “fake” stock. And for some reason it trades higher than the “real” shares.
Owning GOOG still gives you a real 'share' in the company, i.e. if the company was wound up and all its assets sold off, you would get paid in proportion to the amount of GOOG you owned. Whereas you would get no such thing with these fake stocks.
Unregulated would be a better description. This is a perfect example of the kind of financial asset that should be heavily regulated.
How do these assets track the price and what guarantees they will always do so? If the answer is trust us (like stablecoins, nfts, etc), people buying them are marks, not customers.
The mechanism behind Maker DAO simply doesn't work. That's why it lost the peg so badly, and for so long. There simply wasn't any working mechanism to deal with the situation where the price rises above one dollar.
When people create ETH-collateralized DAI and sell them they are basically doing so in order to go leveraged-long on the ETH/USD pair. So when you use ETH to buy DAI from one of these people, you're basically making a (collateralized) margin loan to somebody who wants to increase their leverage. In return you get something sort of like the ability to short the ETH/USD pair (not exactly due to liquidations, but it's pretty close). All of this actually works as advertised: Maker pairs up people who want to go long with people who want to short. But what if there aren't equal demands for both sides of that trade?
If there aren't enough people who want to make margin loans (i.e. go quasi-short) Maker can raise the margin loan interest rate (i.e. stability fee) to make lending more attractive.
The big problem is if there aren't enough people who want to increase their long leverage. There will be too few DAI-sellers and the DAI price (in ETH) will go up above the USD price (in ETH). That's what happened. And kept happening.
The solution was to capitalize Maker DAO with centralized stablecoins -- Coinbase's USDC and Tether.
As a result, Maker DAO is effectively no more than an "index fund" of centralized stablecoins. It absolutely is not trustless.
Not sure if you’re joking or not, but the entire purpose of this type of token is to be pegged to the price of dollar or some other real-life asset. It stops fulfulling that role if the price expressed in its peg currency varies (hence the name “stablecoin”). Any type of inflation or deflation separate from the dollar breaks the token’s utility.
The price is pegged to the dollar, not the quantity in circulation. My point is that if the price is over a dollar, you mint more of them to pull the price down.
To me, DAI going over USD just indicates supply not meeting demand.
No, in order to pull the price down you need to mint more of them and sell those new DAI into the market.
Doing this saddles the minter-seller with a long USD/ETH position: they have to lock up a bunch of collateral in order to mint new DAI, and if USD/ETH drops enough their collateral will be vaporized. If no sellers believe that USD/ETH is going to rise, none will be willing to take that risk.
DAI doesn't work like Tether. DAI aren't really "quasi-dollars". They're margin loans owed by other people. To bring them into existence, you need to find somebody who wants a margin loan in order to go long.
Who is the mint seller, the minter or the one buying the minted coin?
It wouldn't be any entity minting these new DAI, it would be the Maker smart contract giving out new DAI loans for collateral (ETH, WBTC, WhateverTokens).
If DAI is trading at $2, and I believe it will hit the peg again in the future, I'm very highly incentivized to borrow it and sell it for $2, pulling the price down! I then pay back my loan with DAI I buy for $1.
Similarly, many crypto exchanges don’t give you access to a wallet and don’t let you actually transact on the blockchain, but they sell an asset that matches the value of a coin and those coins are held in reserve by the exchanges.
I don’t disagree, but the technical term is “synthetic” and substituting “fake” for “synthetic” in a headline and first paragraph doesn’t seem like that crazy of an editorial choice.
The basic idea is that bets are collateralized at a level of 150% of the starting price. If you buy a synthetic stock when it's at 100, and it goes above 150, your bet is cashed out at that point.
As usual, the big question is, what's the collateral? In this case it's their very own private stablecoin, Terra, which pays an annual percentage rate of 17%. That, in turn, is being paid by people who are borrowing that stablecoin to do - something.
The stablecoins are in turn collateralized by the LUNA token and something called Special Drawing Rights. There's also something called mAssets involved.
All this works as long as there's no net outflow. Whether it can survive a net outflow is questionable.
So far, three stablecoins have crashed all the way to 0. Supposedly because of "hacks". Whether or not those were inside jobs remains to be seen.
This should not be legal. It’s not okay to conjure up some arbitrary scheme, consisting of five different cryptocurrencies, and sell the instrument as though it will always track the price of some stock. It’s not okay to say “well, we thought it would work” when the system crashes. This should be considered as negligence (in properly ensuring that your system will work as advertised before selling to consumers) by the courts.
Seems ok for the 'existing financial system' to do it. Governments can just do a bailout when it collapses.
I think we will continue to see these parallels. The only reason people accept the existing financial system is that they don't understand it and/or it has become normalised. When people are seen trying to pull the same tricks with crypto, there is a justifiable but unfair negative response.
How does this make sense? If they don't hold the underlying security, where does the value come from?
This feel like it's another one of those "while money is flowing in it'll work, but if there's a run, it crashes spectacularly". If the liquidity dries up, i end up owning nothing. With a real security at least i end up owning a small part of apple, but here i literally own nothing.
How does this make sense? If they don't hold the underlying security, where does the value come from?
Come on, this is cryptocurrency. The whole point is to con people into thinking a fake thing is real because blockchain and cash in; with the off chance that if enough people believe, then their belief will make the fake thing real.
You should read up on the last decade in Venezuela, which used to be the richest country in Latin America, and having wealthy professionals see their savings evaporate due to 1,000,000% inflation because of the actions of a government they democratically elected.
Belief is the only thing holding together a lot of the things that we rely on to keep society functioning the way it does.
I'm guessing (though not assuming) you're posting from one of the most historically stable countries in human history, but that isn't how most people experience planet earth, and it isn't guaranteed that that's the wya you'll always experience it either.
It's not like if hyperinflation could be avoided everything else should be fine. No, hyperinflation is a sign that the economy is grossly mismanaged, and that in turn is likely the result of desperate, incompetent government facing all sorts of economic, social and political problems. Switching to a different currency isn't going to fix a failed state, sorry.
It's an individual citizen's hedge against a poorly managed government in a country they have little choice but to be in (immigration isn't so easy if you're not born into an already prosperous, stable country to begin with).
My friend from Venezuela certainly would've benefited from owning a currency that wasn't regulated by his government, which made exchanging Bolivars for external currency illegal except for those with government connections.
Are you saying one should only be concerned about the state itself, that citizens ought to go down with the ship and be victims of the government they were born into?
I'm hoping you're simply ignorant of the very real personal problems of people born into corrupt and unfortunate countries have that are mitigated or solved by crypto currencies (even if it doesn't solve the problems of the state) rather than simply uncaring for their plight and unwilling to care about solitons for them that don't involve also fixing the entire corrupt nation they were born into.
Cryptocurrencies are not used as currency anywhere in the world, because they have properties that make them highly undesirable as money. People who live in countries facing monetary problems will use a foreign currency if they can, but the thing is, using a foreign currency and avoiding some of the problems of hyperinflation is just a marginal improvement, it doesn't solve 99% of the problems that these people are having.
My knowledge of the usage and value and improvement on quality of life for people using cryotocurrency in nations experiencing massive hyperinflation come from one of my closest friends from Venezuela, who I talk to every week for hours (I'm sitting next to him right now as I type this).
Where does yours come from? Because what you're saying directly contradicts his reported experiences for both him and relatives and friends of his. I'm sure you have an equally credible source on the ground of at least a comparable market that informs your view on what does and doesn't affect the lives of people in those countries?
To your point, many Venezuelans do store their wealth in Crypto, and only convert the amount they need to spend that day to Bolivars. That is the use case.
Where does my knowledge come from? It comes from studying. I studied economic theory, economic history, the history of the international monetary system, and the economies of many of these countries. I read the reports from reputable organisations such as the IMF and the UN, and the regular news sources. So I'm well-informed and therefore I don't need to invent made-up Venezuelan friends like every Bitcoin propagandist does. I know, for example, that hyperinflation is one of the least pressing problems for Venezuelans. Most of them don't have savings that can be eroded by rapidly increasing prices, and the ones that do aren't stupid enough to invest their savings in an unsafe asset that can lose >50% of its value in one evening. Cryptocurrencies improve the lives of absolutely no one, so stop pretending that they do.
And if I were to go through the effort of providing proof of my Venezuelan best friend and his accounts of life in Venezuela, since my hacker news profile is the same name as my real identity profiles, I'm sure you'd capitulate and appologize for assuming anyone who disagrees with you is arguing in bad faith?
For posterity, I have a github profile of this same name, and my venezuelan friend and I are doing a hackathon project to allow Venezuelans to use crypto in the exact way I've described. In one month that project and a youtube video will be uploaded for it.
The person above who assumes that people argue in bad faith and that first hand reports are meaningless is not someone you should emulate or consider reliable. He's lost to his ego and dogma, please safely ignore him.
Privileged people have no idea what struggles others face and don't have much to lose by being wrong about their bad assumptions anyway. Let the way he thinks serve as a cautionary tale.
I doubt the person above (lottin) would be willing to share his identity, and have the foul temper and bad faith arguments of his associated with his real persona. This should tell you all you need to know if true.
Anyway, I won't be responding to the above poster anymore, you know what Twain said about arguing with fools.
Assuming that your story about your Venezuelan friend is made-up is just normal. Even if you did have a Venezuelan friend, how is that a source of authority on anything? It's just anecdotal evidence and irrelevant to the discussion. Like someone here, the other day, who claimed to be a business owner who made international payments with bitcoin on a regular basis... absolutely unbelievable.
If you're really arguing in good faith you should start by disclosing your conflicts of interest. You didn't mention you were involved in a bitcoin project. You probably own bitcoin as well. For the record, I don't have conflicts of interest. I don't have any financial stake in bitcoin or in other crypto-currencies.
To summarise, and going back to the topic of the conversation... your entire claim is that a number of Venezuelans (don't know how many) invest their savings in bitcoin and this improves their quality of life because they're able to combat the effects of hyperinflation in this way.
Okay, so what? Does that contradict my original point? No, it doesn't. My point is that, considering the situation as a whole, having the opportunity to avoid the effects of hyperinflation by using a foreign currency, for example, is only a marginal improvement for these people. Even assuming that bitcoin can fulfil the role of an actual solid currency, which in my opinion it can't.
Indeed, never seen so many people on HN be so reactionary and emotional about a simple technology.
The demographics of the crowd:
wealthy, living in the most stable country in history, with access to digital forms of banking worldwide, ability to emigrate wherever they'd like, able to transfer money as they see fit, and holding their savings in the global reserve currency for a country which they're a citizen of.
Doesn't help many empathise with why many people around the world can't trust their governments centrap bank, or open a bank account elsewhere, or convert their savings to a stable currency and assume it won't be seized or banned locally.
It's best to just build cryotocurrency and not bother explaining to Americans who aren't willing to listen why it's necessary.
It's like explaining public transportation to people at a country club.
> It's best to just build cryotocurrency and not bother explaining to Americans who aren't willing to listen why it's necessary.
> It's like explaining public transportation to people at a country club.
That's a good way to put it, and that's me saying that as some one who left the US 6 years ago, worked in finance as a dev (consumer and derivatives markets, emerging/developing and developed) and actively helping to build defi protocols and blockchain research/development.
> You should read up on the last decade in Venezuela, which used to be the richest country in Latin America,
I'm well aware of the last decade in Venezuela. Hasn't cryptocurrency been so helpful there?
> and having wealthy professionals see their savings evaporate due to 1,000,000% inflation because of the actions of a government they democratically elected.
It's kinda weird that you focus on the fortunes of "wealthy professionals" in that disaster.
Alternative currencies to the Bolivar have been the only way for Venezuelan citizens to protect themselves from losing their entire life savings because of the actions of their governments cental bank.
Digital forms of currency which aren't regulated by the state control of the banking system are the only safe way to get an alternative currency, since the Venezuelan government made exchanging Bolivars for stabler currencies like the USD illegal.
Im talking about solving the problems of individual Venezuelans, not the government or state. And if people with savings can't rely on them, then a country has no hope of attracting or retaining high talent professionals. Hence why it's so hard to find people left in Venezuela with highly sought after talents anymore.
It's a synthetic stock which is overcollateralized by stablecoins. So for example, if $100 dollars worth of the stock is issued, someone else had to lock up $150 dollars worth of USD to issue it. And when the price rises (and hence collateralization ratio drops), the issuer has to constantly top up collateral or run the risk of them being liquidated.
How do they get price to track the real stock? By simple incentives. If the synthetic stock is trading lower than the real price, people have incentive to buy it. If it is trading above, people can easily mint new stock and sell it.
There are lots of benefits to this:
1. It allows people who typically might not have access to the US market to get price exposure to US companies
2. It allows 24/7 trading
3. US stocks are just the start, before more innovative synthetic products can be built on top.
You can "burn" the synthetic and claim part of the collateral.
I don't think there is a problem in this particular situation.
The place where there will be a problem is where MakerDAO had problems: when there aren't enough people willing to mint synthetics. The only reason to mint a synthetic is in order to sell it, in order to get a synthetic short position. If not enough people want to do this, but other people want a long position, this will generate excess demand for synthetics and the synthetics will trade consistently above the price of their real-world underlying.
This is precisely what happened to MakerDAO before it turned itself into a "stablecoin index fund". DAI was trading way above $1.00 for several months running. MakerDAO's goal was to provide a trustless stablecoin. If it costs $1.15 to buy one this week and $1.00 next week, it's not very stable. Those 15 cents didn't make DAI expensive -- they made DAI a failure at its goal of producing a stable coin.
Mirror's case is different. They're not trying to create a stablecoin. If the synthetics trade at a premium to the underlying, that difference is effectively a brokerage fee charged in order to open a long position. If the fee charged to open a long position swings around by 15% week-to-week that is certainly unattractive, but it doesn't make Mirror a failure.
This might actually work as expected. The likely failure mode will be annoyingly high fees for long positions, rather than failure to deliver on its promise (as happened with MakerDAO).
Not sure why you have to be so snarky about this. Yes, USDT has dubious backgrounds/origins... but there are lots of other reputable proejcts out there.
Perhaps you were responding to the wrong comment, but the parent was referring to a different mechanism from what USDT uses, more akin to MakerDAO. You can be skeptical of that approach as well (I am), but there’s a notable difference in implementation and collateralization ratios.
> unaudited, unregulated, unredeemable opaque tokens like Federal Reserve Notes
Would be nice if every single FRBNY operation were able to be queried by anyone in the public in real time, had a fixed set of rules all holders of notes could see and vote on, and was redeemable for gold like they used to be before the rules changed underneath holders who couldn't take part of governance (foreign holders)…
> What could possibly go wrong!
We're stuck in bailoutistan globably, and now it will be more expensive for tradfi entities to get bailed out on chain (which will happen, but cant shut down the dex's, cant reverse trades unless contracts allow for that) which will benefit non tradfi entities that take the opposite side of their highly leveraged trades conducted on chain.
There are plenty of reasons to complain about fiat currencies like USD and the rights that states claim to control all transactions or control the value of our money.
That doesn’t make using unregulated stable coins from terrible terrible people like those behind bitfinex a good idea, or mean that trustless distributed consensus is worth the massive downsides of a decentralised system like bitcoin, or that we should trust projects without the most basic financial controls.
We have laws and regulators controlling money supply and financial transactions for good reasons, most of the unregulated experiments ‘defi’ is trying have already been run in fiat and banned for good reasons, including massive leverage, unregulated banks and exchanges, money printing etc etc.
> That doesn’t make using unregulated stable coins from terrible terrible people like those behind bitfinex a good idea…
Good thing is, you personally don't have to, but others will, and you have no say over that. Heaven forbid a decentralized uncollateralized stable coin comes into existence, where its mechanisms for inflation and deflation are purely market driven, that won't be controlled by any single entity, used by people from all over the world without your (or regulators) approval… not like existing interbank eurodollar transactions have much of that approval anyways (than the same transactions, junk rated rehypothicated collateral backing that entities like bitfinex engage in, yet with lower cashflows; can't seriously sit here and tell me that regulators are in control of dollar denominated liabilities being swapped offshore everyday in non local currencies and usd deposits created from that are 1:1 backed and have FDIC coverage…).
Hell, we know more about bitfinex operations than we do of the a typical tradfi bank engaging in the same transactions overseas… what a joke lol
> or mean that trustless distributed consensus is worth the massive downsides of a decentralised system like bitcoin
Let's not pretend that there aren't any better trustless distributed consensuses systems out there that people are actively using because you would like to dismiss something you don't like/use.
> or that we should trust projects without the most basic financial controls.
Not too hard to use/build protocols that implement controls you wish and stay away from those that don't. Not everyone has to ape into shitcoins and shitchains with no research. Not everyone has to follow the whims of someone else.
> We have laws and regulators controlling money supply and financial transactions for good reasons…
That routinely fail to address (and as well as regulators failing to comprehend [at best])
> …massive leverage…
In the forms of ever novel derivatives cropping up in tradfi
> …unregulated banks and exchanges, money printing etc etc.
After talking with people who had to trade lehman positions out of administration and all the shit that went down behind the scenes… TBTF might as well be unregulated, when their positions are routinely bailed out at expense of others in many different ways and leads to people having
> … plenty of reasons to complain about fiat currencies…
That have long gone unaddressed because of the existing incentives that stand in the way. Plenty of kabuki theatre about it though from "regulators", worth about as much as the latest shitcoins cropping up.
They mint and burn tokens as necessary to make the price resemble the actual stock. When minting new tokens, you have to provide collateral in the form of stablecoins. Yes, it is as bonkers as it sounds.
They use oracles to get the trading prices of the various assets. The actual value is held in on-chain tokens and typically requires over-collateralization.
If the hedge funds and prime brokers are allowed to sell the unsuspecting public a bunch of counterfeit shorts, why not let the crypto market do the same?
> But to stop mirrored stocks and other synthetic assets from trading, you would have to shut down the underlying open-source software code that makes up the blockchain and is used by a global user base that includes many anonymous players, he added.
Don't these synthetic assets need an oracle to inject the price of the real assets into the blockchain? To stop these synthetic assets from working, couldn't they just go after the oracle provider, and make it stop providing the price?
That is, indeed, the week spot in these constructs.
Commonly, oracles are composed of an aggregate of multiple independent providers. So roughly a majority of them have to collude to manipulate the price and you would have to take multiple oracle providers down to stop the price updates.
Any token derivative that relies on one or a few providers are very risky.
I forgot to add, re Chainlink: Chainlink can, as a single party, remove and add providers to the oracle feeds. So in this case, they are the one SPoF here. Maybe that will change with the introduction of some governance system at some point as things mature and stabilize, but presently despite the smoke and mirrors they can be coerced or compelled to shut down individual price-feeds.
In principle this could be "unstoppable", but as of right now it is not.
It seems like you wouldn't need an oracle if you created a mirror token in the same way USDT (supposedly) mirrors USD - issue one SynTSLA token in exchange for one actual TSLA stock certificate, and promise to redeem them 1:1 as well.
That is not the point. By manipulating the Apple stock price the system sees and acts upon you can extract huge amounts of money. The actual price is irrelevant in this case.
There are many mechanisms of trading. Some use a couple different oracles and average(more complex but essentially that's what it is). In order to 'minipulate' the oracles, you would get eaten alive by arbitrage. If there's a difference across exchanges, HFT bots will equalize. Chain link takes that to the extreme and requires no oracle, only arbitrage. Since any arbitrage opportunity will be exploited, you can allow the active trading price and take that at face value. You can actually minipulate that price, by selling at a reduced rate but the thesis is that it would be economically disadvantages to do so.
> Users can trade the tokens anonymously 24 hours a day, seven days a week, from anywhere, unhindered by capital controls, “know your client” rules imposed on broker-dealers, and other frictions of the traditional financial system.
I find it really weird how crypto folks keep pretending that financial regulation is an obviously bad thing, as opposed to restrictions put in place in response to real problems
Isn't it also weird that crypto enthusiasts assume that you obviously can't trust a central clearing house (or similar mechanism) when they have been working well for hundreds of years? In numerous cases humans trust institutions for certain things, and those institutions are usually strongly incentivized to act honorably, and do so. And when they don't, the court system works pretty well. At least in the countries where the vast majority of economic activity occurs.
These are two premise which... don't seem to hold water?
This obviously doesn't hold up if we look at the original purpose of the blockchain, ie Bitcoin, to avoid issuers of money to debase said money. Which has in fact happened thousands of times through out history and keeps happening to this very minute.
All the evidence shows that a rate of inflation around 2% averaged over the business cycle is beneficial and necessary for the economy. Trying to adopt a deflationary currency is akin to refusing to drink water because people drown in lakes.
There is no such evidence. There are those who benefit from inflation (and only if it's predictable for them) but the majority of people don't. Unless you define economy as something only the wealthy can benefit from - no, inflation is not good.
The majority of people have wealth in real estate and generate income from wages, both of which are inflation neutral.
In contrast, the rich are much more likely to have bonds or cash holdings. They are the ones for whom inflation is a real problem. Why else would all this political pressure for a 2% inflation target exist? It's because that's low enough for the rich, not because it's high.
Printing money and redistributing it would severely impact capital holders, like it did in the post WWII boom which created the middle class.
The wealth redistribution post-WW2 had more to do with the war itself than inflation though.
So back to the 21st century: what makes you think that those who have excess capital don't invest wisely? Compare that to lack of any excess capital for the majority.
Lack of excess capital means inflation doesn't affect them as they have no capital to depreciate, as long as wages keep pace with inflation. The fact that the minimum wage doesn't keep pace with inflation is a huge problem, but the solution is to raise the minimum wage, not to throw out inflation.
One quite essential feature of a clearinghouse is the ability to correct the books in case of operational errors, in response to court orders etc.
People lose their passwords, get scammed, go bankrupt, die and leave their possessions to their next of kin... It's very hard to achieve the desired/expected outcome for any of these situations on a blockchain.
Cash doesn't have a built-in paper trail and dispute resolution mechanism, all of which are highly desirable when doing business with unknown/not yet trustworthy entities.
In many (definitely not all!) cases, transaction finality is a bug, not a feature.
You make good points on paper, but in practice (in my own life at least) I’ve almost never needed to reverse a transaction where the merchant couldn’t do it himself.
And the one time I had a dispute, Visa claimed that the transaction was out of policy somehow (timeframe, region, etc)
So no, that better alternative doesn’t favor the customer
The existence of a dispute resolution system is usually enough to keep the vast majority of participants in a system honest.
In the case of card payments, merchants incur a fee for every transaction reversed through the card scheme, whereas voluntary refunds are essentially free. They are accordingly incentivized to understand and follow the scheme rules.
> And the one time I had a dispute, Visa claimed that the transaction was out of policy somehow (timeframe, region, etc)
That's unfortunate, and mistakes or seemingly unfair decisions do happen – just like in a public legal system. But you are essentially basing your opinion on a sample size of one.
Practically, some banks just seem to be better (i.e. more consumer friendly) at dispute resolution than others. As an example, in the case of a high profile airline bankruptcy in my country, some banks have proactively reached out to their customers, letting them know they're happy to pursue disputes for them, while others were declining them outright due to a – likely wrong – understanding of scheme rules and bankruptcy law.
Yeah, basically everything you've said is the details of what I meant. Why is this often overlooked? Why is it taken at face value that a central clearinghouse (or similar) is bad??
Regulated by who tho? There is a natural misstrust for everything involving the U.S. As service provider around here because of the weak privacy laws compared to us (Switzerland) or our neighbors . And yet we heavily depend(ed) on the American led credit card system.
Neither of the two hold water if you look at how Chinese institutions dealt with the Ant IPO and recently the Didi fiasco and probably many more if you look.
You're seeing this from a western, first world perspective.
If you're in a third world country, you likely don't have access to robust, transparent local stock markets. Whatever exchanges might exist tend to be rife with scammy companies, insider trading and poor regulation. If you want to invest in, say, the US stock market, you'd have to jump through a ton of hoops or have a ton of money, essentially locking out all but the wealthiest.
These crypto "stocks" essentially allow anyone living anywhere to "invest" in top-tier stocks like AAPL.
I don't see any reason why you'd buy these crypto stocks if you're living in the US. But if you're living in Somalia or Madagascar? Hell yes.
Again, all the crypto criticism is very myopic and first world. HN needs to step out of that POV to understand the value. Decentralized, global markets don't benefit first world citizens, but they definitely level the playing field for us third worlders.
So first, investing in DEFI is not exactly simple. If I am reading it properly, you lose 20% in fees at least if you buy bitcoin with Madagascar dollars on paxful,
How many more hoops do you then have to jump through to acquire fake stocks?
Second, you then have to make sure you avoid pyramid schemes (like OneCoin), rug pulls, exit scams, bad exchanges and bad "smart" contracts (like the Parity bug).
This is not easy even for highly informed tech workers in the Global North. Now if you happen to speak another language (as I do) I recommend you go and Google "how to invest in Defi" or whatever in it. In my case (French), you get just articles after articles that are sponsored content from very dubious sounding wallet and exchanges, especially if you add "Madagascar" or "Congo" or whatever to your search.
So frankly, I think the idea that "crypto markets are great for the Global South" is more of a convenient story.
I guess it comes down to whether one does the cost benefit analysis for society as a whole or for individuals.
While decentralized permissionless markets can (and have) helped some individuals escape economic restrictions (capital controls, sanctions, etc.) it's not at all clear to me that they have had an overall positive effect, or ever will.
At the end of the day, the rise in the price of bitcoin, scams like AfriCrypt and OneCoin, the new Salvador laws etc are all just new means of extracting capital from the Global South. I'm of the opinion that the benefits to individuals are not balancing the overall societal harms, but I could see how someone with a more individualistic ideology would disagree.
From personal Perspective: ALL scam I had as a seller was with credit cards. I always ate the costs by refunding with extra fees. Over Easter I could not transfer money for 5 days!! Because holidays. Also no transfers on weekends. European and American banks refuse to open a private account for me because money laundering laws. Even thought I have an EU passport but just living in Switzerland locks me out of this. And at last the fees. A few years back I paid well over 1000 dollars in banking fees within a year, mostly because I was getting transfers in Euro or dollars and withdraw in Eur on CHF account. Or how microtransactions are essentially non existent on the internet because of fees.
Say what you want, for me personally traditional banking is more of a burden than anything.
1. The practical: It’s not that regulation is bad but that many existing regulations are bad. They make obviously useful things illegal or impractical, are often worded in such a way they are basically impossible to apply to, for example, peer-to-peer systems. It’s possible to imagine (and indeed we should, and some countries are!) good regulation that is less stifling. (Note also that no regulation of specific financial products is required to make fraud and mis-selling illegal.)
2. The political: Financial regulations as they stand enable a huge surveillance and censorship/control apparatus. Purportedly this helps prevent terrorism etc. but many people do not agree that this is the right trade off. Financial regulations currently also give a handful of countries (and one in particular) a lot of power over the global financial system. Many believe they have too much power. These are political arguments but it is not a completely inexplicable political position for someone to be against financial surveillance and censorship, particularly when it comes to the US and other countries using them to exert power outside their borders. In which case, the financial regulatory environment we currently have is “bad” in that it delivers those things.
3. The countercultural: Cryptography and cryptocurrency are intertwined with countercultural groups and thinking (most obviously, but not exclusively the “cypherpunks”) because they are tools that allow activists, anarchists, subversives, marginalised or oppressed groups, organised crime (which, yes, is a form of counterculture), and others to communicate and operate more effectively and with lower risk. This means those groups are more highly represented in crypto. Obviously they’re likely to think rules that make their lives harder are bad. (This may seem like the “bad group” and maybe you like them being shut out and suppressed, but much social and political progress started as persecuted countercultural movements and subversive ideas.)
So yeah… is financial regulation bad? No. Not always and not necessarily.
Are current financial regulations bad? Yes if you value innovation, have certain political beliefs, or are part of a group that is (intentionally or otherwise) shut out of the system by them.
Financial regulations are bad, because they criminalize honest fraudsters and scam artists. How are they supposed to make a living in our current system? /s
Ayn Rand libertarians and people with a massive Dunning-Kruger effect who didn't go past economy 101 form a significant part of cryptocurrency proponents.
It's because like other libertarian/anarcho-capitalist politics, which seem to be heavily tied in with cryptocurrency, it's based on some idea that every individual is super smart and rational and shouldn't be hindered by the regulations, combined with a fairly righteous mistrust of government and big institutions.
It's a kind of arrogance that they personally don't feel like there's a colossal power asymmetry they need protection from and cryptocurrency proves this.
Perhaps some are clued enough to not get steamrollered by institutions and fraudsters, however they appear to have utter contempt and disregard for people who lack the time or ability or learning speed to protect themselves.
Regulation S requires US persons no matter where they live to only trade at SEC regulated exchanges. [1] So broadly speaking it applies to all US persons - residents and citizens regardless of place of residency.
I suspect accredited investors can do as they please though, but that's only a guess.
Because literally the far majority of the world is what you call 'unregulated' just because US people are excluded does not at all make this illegal for anyone else.
I believe Archegos bought total return swaps. Those are different from CFDs, but I'm not sure how different they are. I'm not sure why one would be illegal (like CFDs are) and one would be legal (like total return swaps).
>Binance may have violated securities rules when it issued the tokenized shares of Tesla, MicroStrategy Inc. and Coinbase, BaFin said in April.
Microstrategy Inc. So just to be clear, they're created a synthetic crypto-instrument to track the performance of a share that is something like >90% correlated with BTC (since MSTR is basically a leveraged BTC bet now).
This is absolutely snake eating it's own tail kinds of insane.
>Dallas Mavericks owner Mark Cuban, an enthusiastic and influential investor in DeFi, recently called for regulations to address the cryptocurrencies after losing money when one crashed in value to zero.
Sorry but Mark Cuban is the most sophisticated of investors, it should not be illegal for him to lose money.
This isn't about Mark Cuban's losses per se, I also have no issue with him (an accredited investor) getting bilked for some change between the couch cushions - the issue is even if an incredibly sophisticated investor like Mark could fall for such a rug-pull/failure then how can we possibly expect unsophisticated investors not to get bamboozled? Remember, those who wash out of trading end up beneficiaries of the state bankruptcy and welfare programs, so the state very much has an interest in this.
Crypto now is like trading stocks was before and leading up to the great depression: a bunch of hucksters, shills, snake-oil salesmen and unrestricted margin. And a few well-intentioned people. Before the Securities Act, the Securities Exchange Act, Regulation T and the SEC.
The great finance speed-run has reached mid-1929.
[edit] Seriously if the Fed has to cough up $60 billion dollars to bail out Tether, I'm going to be incredibly pissed off.
That is exactly why no one should be trading cryptocurrency. Anyone who does so deserves to lose everything. I don't want the SEC wasting my tax money protecting those idiots.
Knowledge is heavily domain specific, it's about being 'smart' or not. Franky Cuban was just invested in a crappy coin he understood nothing about, and didn't get lucky.
I don't feel bad for Mark Cuban - a sucker who should have known better - but clearly if his team fell for it than its good evidence the entire system needs much heavier regulation.
I don't want to have to deal with the societal problems/have my taxes go to a bailout when there's billion dollar scams affecting average workers, a pension fund, or minority first-time investors.
I think your worries are in the wrong place. I'm more worried about the FED bailing out the banks and companies too big to fail who have ventured into crypto
Looks like cryptocurrencies are not very innovative. They keep reinstalling all the features that have been there and improved in the regular markets.
Tether and stablecoins mimicking the USD, now this stuff mimicking stocks, how are the not getting in trouble with government institutions or Apple?
What are the loopholes? No existing laws yet? Or they operate and reside in far away jurisdictions?
The fact that these offerings are non-custodial is innovative, as is the fact that they are always open (albeit if there's high demand the fees may be high enough to be prohibitive)
FDIC & regulation kind of makes it so for most people most of the time it doesn't matter that banks are custodial.
Offering these services without being custodial is innovative though.
EDIT:
The other major (IMO) innovative piece is the permissionlessness. zapper.fi is a great example of being able to build something that adds lots of value (given you've already bought into crypto & defi) without needing anyone's permission to integrate into their systems.
> FDIC & regulation kind of makes it so for most people most of the time it doesn't matter that banks are custodial.
Non-custodial means the owner is responsible for protecting the asset from theft and operational risks. Nobody wants that, especially not in the case of digital assets, which aren't governed by property rights and instead rely entirely on effective control of the asset to determine who "owns" it.
I already explained why non-custody is a dumb anti-feature that only appeals to a small number of conspiracy theorists who haven't really thought things through.
I explained my point of view, and you haven't, so if you ask me what I think without adding anything new to the conversation, what do you expect me to do other than pointing out that I already explained my position? It seems that you don't understand how conversations work.
A crypto-token tracking the listed security of a company that is itself so heavily invested in crypto that the security price more or less tracks with crypto reminds me of the new new internet from Silicon Valley.
> Users can trade the tokens anonymously 24 hours a day, seven days a week, from anywhere, unhindered by capital controls, “know your client” rules imposed on broker-dealers, and other frictions of the traditional financial system.
These are certainly new innovations and features, be they good or bad.
>> Users can trade the tokens anonymously 24 hours a day, seven days a week, from anywhere, unhindered by capital controls, “know your client” rules imposed on broker-dealers, and other frictions of the traditional financial system.
> These are certainly new innovations and features, be they good or bad.
That's saying a car with its seat belts removed has an "innovative new feature." The usual word for that situation is "regression."
"capital controls" only don't seem like a big deal because you presumably live under a government which you trust, which allows allows cross-border money flows, and which has a relatively stable currency.
Hacker News is generally lucky to be a community of extremely well-organized and put-together people, often with a bit of social clout and wealth. I've noticed on many threads an obliviousness to the fact you've pointed out.
Even In the USA or EU, a significant proportion of people do not have access to something like buying some Apple stock legitimately. Just think of all the people who use those extortionate "cash apps" and payday loan services. Why not just use a bank? The same reason they're not going to be buying Apple stock the proper way.
Most obviously, perhaps no bank account, or no ID. They may not have legal status in the country they live in. They may owe child support. Or tens of thousands of unpaid fines for criminal convictions. Or they have a garnishment against them. Or banks simply won't open an account for them because of bad credit. So on and so on, reasons legitimate, and not, for not engaging with the formal financial system.
This adds up to something like 5 - 20% of Americans depending how you set your threshold. To those people, both cryptocurrencies and possibly-scam crypto-investments are attractive because they offer something otherwise not available.
> There's no benefit to the user to having no seatbelts.
No seatbelts means it's easier to get out of the vehicle (if you planned to or not). Some seatbelts are uncomfortable. Seatbelts add to the materials and assembly cost of the vehicle, and add weight to the vehicle which increases fuel usage and wear on the tires and suspension and road. Maybe they wrinkle your clothes? Installing retrofit seatbelts on a vehicle without them can be difficult and the result may be really uncomfortable. Very ocassionally, it might be preferable to be flung from a vehicle rather than retained in a vehicle during a colission, although that would have to be a pretty specific set of circumstances, because being flung from a vehicle results in a lot of undesirable injury.
Not having seatbelts has minor benefits. All of them are outweighed by the benefits of seatbelts in my opinion (and I think there's broad consensus) but claiming there's no benefit to not having them or that there's no cost to having them is silly.
> There's no benefit to the user to having no seatbelts. There's a huge benefit to having open markets at all times.
I quoted the full sentence, but I was mainly referring to:
>> unhindered by capital controls, “know your client” rules imposed on broker-dealers, and other frictions of the traditional financial system
While you can always find some little exceptions, most financial regulation has actually has good reason to exist and solves actual problems (though maybe not your problems, as in burglary laws do not solve burglars' problems). It's not much of a "feature" to do away with them, since then you just invite the re-emergence of problems that have already been solved or mitigated.
There are no benefits to you. There are plenty of benefits to me. Let the market decide? Probably not. It's easy to accuse people of logical fallacies while somehow you're the sole arbitrator to what is and isn't good for users.
Would you have said the same when we moved from measuring stock prices in increments of dubloons to decimals?
Where does all this HN hostility come from, I thought this crypto stuff would mesh so well with the Silicon Valley mindset. Trading should be instant, totally free, in any increment you choose, across borders! That’s the kind of mentality we apply to so much else in tech right? Is this really a bunch of hackers defending oppressive government regulations written by lobbyists for oligopolies?
Since when does Silicon Valley defend the old ways?
Pricing stocks used to be done in fractions with 16 as the denominator because Spanish traders some 400 years ago quoted prices in fractions of Spanish Gold Doubloons. Obviously decimals are superior, they allow much more accurate price discovery. What are you referring to?
It's poorly written and misleading, if not technically false.
"even before the decimal conversion, some ECNs permitted their customers to enter orders in penny and subpenny increments or their equivalents (e.g., in increments as small as 1/256 of a dollar)"
It appears that 8ths were the official minimum until mid 1997, which must be why I don't remember smaller fractions being very common. I feel like maybe it was mostly penny stocks that traded in smaller fractions?
I also read about it in the book Dark Pools which chronicled the story of a guy named Josh Levine who first implemented the decimal change in his pursuit of free, automated trading for average investors. He’s an absolute legend, someone I think the HN crowd would love.
I've both implemented, and been impacted by, KYC workflows. It is definitely friction. "Required by law," sure. "Prevents money laundering," on occasion. But friction, most definitely.
It's a law that requires financial institutions to "Know Their Customer" in order to operate legally. It's a reasonable law. Following existing regulations will be needed for crypto to have a chance at being mainstream
How is it a reasonable law? It's an invasion of privacy that ties every book you buy on Amazon to your government ID.
People argue that voter ID is an unreasonable burden on vulnerable populations. If that's the case then how is it a reasonable burden for interacting with the financial system?
If cryptocurrency does anything useful at all it will be to make privacy invasions like that sufficiently toothless that the case can be made to eliminate them in the ordinary financial system as well. Arguably it already has and all that's left is to eliminate the pointless KYC requirements.
Yep. It's burdening 99% of legitimate users with a very minor inconvenience, to stop the 1% of bad actors who would otherwise end up doing a lot of really bad things that would harm the 99% in ways that go far outside the scope we think of as covered by the financial system.
So yes, I understand where you're coming from, but my libertarian instincts to reflexively think of KYC/AML as excessive and annoying regulation and untrammeled exchange as a good thing, turn out on closer examination to be simply wrong.
I'm not sure I would categorize it as "minor inconvenience". In terms of financial numbers, it's estimated to cost 180B$ [1]. You also have to consider all the opportunity costs of what we could achieve with a faster and smoother financial system. And you have to consider financial inclusion and all that, there are lots of really interesting financial instruments that I can't access because there's some retail that doesn't understand exactly how it works and because we lower regulations to lowest common denominator, let's just ban it. We are also cutoff from these exchanges like Binance which have much more liquidity, more interesting products, etc.
And I'm not sure that it's all that effective, especially after seeing HSBC launder money for cartels and get away with it [2]. Oh and none of these regulations obviously stopped 2008 or any of the previous crises.
To me a lot of these regulations seem like the TSA security theatre, seems useful, but at this point, pretty outdated and inefficient.
Agreed that this isn't just a "minor inconvenience" and as a resident alien in another country for a while (the UK), I found KYC regulations to be really quite obnoxious — and I was a pretty good position to handle them, at that.
The question of whether it's worth it is a real one, and more honestly answered (whether positive or negative) if we admit these substantial costs.
Okay, fair enough, maybe 'very minor inconvenience' is understating it. And granted that the safeguards are not perfect, and some financial crime does get through. I still think the current state of affairs is a big improvement on what we would have if we just threw out the regulations.
It’s not reasonable. The government should not be snooping into people’s financial accounts anymore than they should be snooping into people’s private homes or email inbox.
It astounds me how even principled civil libertarians wholesale accept an Orwellian level of surveillance on anything related to money. The Founding Fathers would have all revolted at anything even resembling modern KYC/AML law.
KYC does not give the gov't your transaction history, it simply means that your financial institution needs to verify your identity. It is part of an overall strategy to reduce the amount of damage malevolent actors can create.
You might try reading the Federalist Papers before making claims about the founding fathers. Again, it is not surveillance by government anyhow.
If you take away all the buzzwords you’ll notice that the core utility of uniswap is the “decentralization” of services which are offered by the traditional finance system.
Yes it’s far easier for retail investors to play the role of the market maker but the financial services themselves are the same. Also realize that if defi becomes mainstream retail will still be pushed out by institutions as yields approach zero.
OP says “nothing like uniswap exists” but the goal is literally to democratize lending, market making, and currency exchange. (All of which exist in centralized forms)
> If you take away all the buzzwords you’ll notice that the core utility of uniswap is the “decentralization” of services which are offered by the traditional finance system.
If I contact my bank, will they allow me to become a liquidity provider for USD-EUR pair and give me a cut of USD-EUR exchanges that they make? If not, which traditional financial institution do I have to contact for this?
Actually, I would be ok if you could point me to a bank that provides positive yield (or at least nonnegative yield) if I deposit my money there. Is there a traditional financial institution that can provide me with some sort of working "savings" solution... If there is, please let me know, because I'm looking for one.
The way I see it, entities like Uniswap/AAVE/etc. are surely emulating aspects of the traditional finance system, but are not exactly redundant. Perhaps if banks start offering positive interest rates on deposits (not even above inflation... just positive), I'll change my mind.
Yes you can provide liquidity for eur-usd if you jump through all the hoops.
A quick google search will show you that lots of savings accounts have positive yields. Rates have been low cause of fed action but banks have provided positive returns in savings accounts since like forever ago.
Seems like a lot of blockchain critiques involve some variant of "you can already do that if you jump through all the hoops," without recognizing that it's worthwhile to remove the hoops.
It certainly might be worthwhile to remove the hoops!
The original discussion was whether or not defi protocols enable new financial services. I argue they do not, but instead attempt to automate/decentralize those services.
That seems like a quibble over definitions. I'm not aware of traditional finance offering exchanges without order books, I think Uniswap is new in doing that. But it is still an exchange.
Speaking broadly, finance involves trades and loans and bets on future prices, and pretty much anything defi does will fit into those categories, even if it does it in a different way; anything that doesn't fit in those categories won't be called "finance."
> Yes you can provide liquidity for eur-usd if you jump through all the hoops.
The emphasized part is important. Most people either can't or don't know how to jump through these hoops. Is it even worth it to jump through these hoops, when I only have 100 USD to "invest"? Entities like Uniswap make the process much easier and widely-accessible, which makes a big difference (particularly if you live outside the developed world).
Furthermore, you did not respond to what I asked: which institution do I need to contact for this? My bank?
> A quick google search will show you that lots of savings accounts have positive yields. Rates have been low cause of fed action but banks have provided positive returns in savings accounts since like forever ago.
This comment is rather US-centric. My experience where I am right now (outside of the US) is that interest rates currently are either negative (yes, you have to pay money to the bank to park your money there; example: [0]) or basically zero (an interest rate of 0.01% might not even cover the "maintenance fees" of your account, let alone losses due to inflation, particularly if you are not rich... might as well just stash the cash under my mattress and keep the maintenance fees to myself).
So, yeah... this is what entities like Uniswap provide that traditional financial institutions don't. Among other things:
* Capacity to borrow, lend, buy and sell "crypto-assets" or whatever you want to call them (most traditional financial institutions will not touch them with a 10-feet pole, for obvious reasons);
* Capacity to do those things with minimum friction/overhead, from anywhere in the world, at any time (no KYC, no gatekeepers);
* Exchange and interest rates that are actually decided by the market, rather than centrally planned (by your bank and central banks), which leads to reasonable interest rates for borrowing/lending (i.e. positive rates).
Of course, you can argue that some of these "features" are "anti-features" (e.g. no KYC = no friction, but it also means that perhaps money laundering could take advantage of it). Either way, it seems clear to me that Uniswap et al. enable you to do things that you (or, at least, "most people") simply cannot do within the traditional financial system; you may not see too much value in these things, and even be generally suspect of "cryptocurrencies", but it seems complicated to argue that Uniswap does not bring anything new to the table.
The proof is in the pudding... if Uniswap was not useful (beyond what traditional financial institutions already provide), you wouldn't see so many people flocking to it.
I appreciate the effort you put into your response!
I think the conversation has diverged quite a bit from my original point. I’m not even trying to argue that uniswap is not useful or an improvement. Instead I’m pointing out that when we compare defi protocols to the traditional system, the core services are largely the same. Defi is an attempt to allow anyone to participate in the roles which are usually accessible only for institutions. That doesn’t mean those roles are just now being invented by uniswap/aave/whatever.
Unrelated Opinion: defi’s practical utility comes from circumventing regulation and adding leverage to a crypto position. (Eg no KYC, selling AAPL tokens, borrow tether against an ETH position to buy more ETH)
> I’m not even trying to argue that uniswap is not useful or an improvement.
Sorry, I misread what you wrote, then.
> Instead I’m pointing out that when we compare defi protocols to the traditional system, the core services are largely the same.
Sure, I don't disagree. Why reinvent the wheel if it has already been invented? But... just because the wheel has already been invented, doesn't mean that inventing a "tire" is not novel (because a tire is just a fancy wheel, after all, no?).
My point: in many ways, defi is replicating "service-types" that already existed in the traditional financial system (as you say); on the other hand, it is not replicating the exact same services (note: my bank does not allow me to borrow BTC from them) and in the same exact way.
In a nutshell, defi is a "copy" of the traditional financial system the same way that "a tire is a copy of a wheel" (i.e. they are clearly not the same thing, and a tire is an innovation over a wheel, but they can also be thought as being "more or less the same thing", since they both are used to make cars move).
> Defi is an attempt to allow anyone to participate in the roles which are usually accessible only for institutions.
More than that. Even an institution cannot convince a bank to give them a USD loan using BTC as collateral.
> That doesn’t mean those roles are just now being invented by uniswap/aave/whatever.
Agreed. The same way that, when Dunlop and Goodyear invented tires, they did not try to claim that they had invented wheels. I am not sure you'll find anyone trying to argue that (e.g. that AAVE invented "loaning against a collateral").
> Unrelated Opinion: defi’s practical utility comes from circumventing regulation and adding leverage to a crypto position. (Eg no KYC, selling AAPL tokens, borrow tether against an ETH position to buy more ETH)
Not necessarily just that. Even if I have no problems with any regulation that needs circumventing (i.e. I'm not doing anything illegal), and have no need to borrow crypto-assets, the traditional financial system (currently) provides no way to lend crypto-assets. If, for some reason, you have 100 ETH, you're going to use Uniswap et al., and not the traditional financial system (since that's not even an option, currently).
I have some professional backround in finance and still have literally no clue what "route liquidity for direct asset swapping" means. Can you ELI5 what uniswap does that current financial system does not? (Orher than "decentralization")
Uniswap is an exchange without an order book. A Uniswap pair has two assets in quantities X and Y, and a constant k such that X*Y=k. If you give some X to the contract, then it will give you back enough Y so that k is still constant. Effectively the ratio between the two assets' quantities is equal to their relative prices.
By giving the contract both X and Y, you're providing liquidity. You get a new token Z, specific to that pair. Every exchange of X for Y (or vice versa) skims off a transaction fee, which is apportioned among holders of Z.
(This actually describes the first version of Uniswap. The new version 3 has more complex math that lets you do fancier stuff, but is the same basic idea.)
It seems that you can currently exchange $20M of USDC (Coinbase USD stablecoin) to Ethereum, or visa-versa, on Uniswap, with only ~3% slippage off the spot price.
I'm not sure if this is impressive, but the US government must be glad that USDC is controlled by an American company (Coinbase) and an Irish one (Circle).
"In a form of what is now considered illegal front running and self-dealing, a bucket shop holding a large position on a stock, and knowing a client's vulnerable margin, might sell the stock on the real stock exchange, causing the price on the ticker tape to momentarily move down enough to exhaust the client's margins. Through its opportunistic actions, the bucket shop thereby gains 100% of the client's investment.
The term bucket shop came to apply to other types of scams, some of which are still practiced. They were typically small store front operations that catered to the small investor, where speculators could bet on price fluctuations during market hours. However, no actual shares were bought or sold: all trading was between the bucket shop and its clients. The bucket shop made its profit from commissions, and also profited when share prices went against the client.
Bucket shops were made illegal after they were cited as a major contributor to the two stock market crashes in the early 1900s."
Except you aren’t actually buying ownership of AAPL. You don’t get any voting power or dividends. You are buying a token that the creator pinky promises are worth/redeemable for x shares of AAPL.
I don't think there's any political interest in looking at them right now. It's largely just a bunch of nerds playing with pretend money. It hasn't really hurt anybody outside of it yet.
That's true, though govts are definitely looking at them.
On one hand, the crypto-economy is still too small to represent the same kind of systemic risk that took down the banking system in 2007/8, so there's less urgency to do anything about it.
Additionally, both governments and regulators, in the US at least, tend to prefer to let new technologies incubate and evolve for a time before regulating it more strictly.
On the other hand, it's too small to have the armies of lawyers defending it that the banking system does, so it's an easier target for regulators looking for wins than Wall Street is.
The SEC, CFTC, Treasury are all looking at it in the US and doing some triage regulation, only going after the most blatant and worst problems atm. I'm sure they'll step it up if/when the crypto-economy continues to grow.
It doesn’t matter. Anything running on the blockchain has no single point of failure.
Let’s say the government outlaws Uniswap tomorrow and throws the entire team in Supermax prison for life. The protocol will just keep running forever. There’s nothing that can be done unless the government can shut down every Ethereum node in the world. Even “outlawing” Ethereum in the US wouldn’t work, unless they put in a Chinese style Internet firewall.
And for things like paying for ddos attacks and money laundering in general.
Ah yes, and the classic all things dark web.
There is not one use case except speculation for people who are not amongst the non law abiding elements of society.
I prefer to look at it as crypto is exposing a market that wasn’t visible - companies need to invest in their security and 3rd party software needs to be better vetted.
We still have widespread chip and computer shortages, and in some regions of the world electricity shortages, because of the amount of silicon and energy being wasted on mining.
Many people are asking: Why government should regulate finance?
In the US you should look at the so-called free-banking era (1837–1864) or the crisis era (1782–1930). Btw. Free banking didn't mean no rules. It just meant that there was no charter or permission is needed to start a bank,
Finance was basically free for all. Easy to get in. Constant stream of economic recessions and banking crises harmed everyone. Wildcat banking increased incentives for risk-taking and fraud to high levels. It hindered economic growth, destroyed wealth of may hard working individuals.
The US has huge financial industry partly because the regulation is so extensive. People from all over the world invest their money in the US because they know what when liquidity crisis happens, they still get their money back.
> The US has huge financial industry partly because the regulation is so extensive. People from all over the world invest their money in the US because they know what when liquidity crisis happens, they still get their money back.
And that is one of the reasons so many people invest in crypto-scams. They are used to the safety of traditional banking, and think that it comes for free. Not realizing that it is a hard earned situation earned thru the pain of a past era and enforcement of regulations. Sadly, people that has no understanding of banking are for a surprise when they realize in what are they really investing and how little recourse they have when the crypto-scamsscams explode.
I like to follow the fallout from cyrpto/token scams on reddit as they happen and it’s the same thing every time: People who had been touting the benefits of “no regulation” are suddenly angry and outraged that the government hasn’t done more to prevent the scam from happening and isn’t (in their minds) doing enough to get their money back.
It’s a leopards ate my face situation. And it’s beyond frustrating but I can also sympathize with them a bit. Who among us hasn’t stubbornly needed to see something for ourselves in order to learn a lesson we could have (and should have) learned by listening to the people with a bit of experience?
Investing in crypto projects is the same like investing in dot com companies back in the day. You invest in concepts not in the actual product or solution and ofc 99% of these projects are unrealistic or team behind them is incompetent.
When Webvan went bankrupt, they truly bought all of those warehouses / refrigerated vans. They were honest about their business idea.
When "Africrypt" (a recent Crypto group) stole $3.6 Billion from its customers, that's straight up fraud and would not stand even back in the dot-com boom in the 90s. That's the sort of thing US Regulators are trying to protect investors from.
----------
You still might invest into a bad idea (ex: Webvan or Theranos), but those CEOs are truly spending money on vans / warehouses / poorly designed blood tests and not just actively stealing it from their investors.
Even when companies criminally lie (ex: Enron or Worldcom), its a far lesser crime than what the Africrypt brothers did just a few weeks ago. The size and scope of the scams currently going on in the Blockchain world is far worse than what happens in US regulated markets.
I agree with you on Webvan but Theranos was pure fraud.
The so called "Crypto" industry will mature when regulation happens and when real cryptographers and real computer scientists enter the scene and start innovating. Until then we have hyped up teens playing with the buzzwords like blockchain and decentralized finance.
>The size and scope of the scams currently going on in the Blockchain world is far worse than what happens in US regulated markets.
I somewhat tend to believe that governments all around the world are giving the "Blockchain world" grace period of not being tightly regulated so they can catch as many crypto criminals as they can because let's be honest if these guys were not stealing in the crypto world they would be stealing somewhere else. And I also tend to believe that current financial regulations are enough to regulate crypto as it is but governments are moving slowly as usual.
It's been almost 14 years, so where are the "real cryptographers" and "real computer scientists?" I suspect they've been searching and realized there's no "there" there.
I guess they are not interested; Microsoft recently shut down its Azure blockchain service[0] for example. Facebook made its own crypto coin but I am afraid that will lead to nowhere. Google and Amazon are not very interested as well so real cryptographers and real computer scientists are working on other stuff and on other problems.
For example in Cryptology Eprint Archive for current year[0] majority of research papers are unrelated to blockchain and cryptocurrencies although you can find couple of dozens of such papers.
P.S. By quickly searching through the list there are around 900 papers of which around 30 are blockchain, cryptocurrency and electronic/digital cash related.
Just because the majority of a field of research is not working on a certain subfield, doesn't mean that there aren't capable people working in such subfield. As far as I can tell, you seem to be confirming that there are "real" computer scientists and cryptographers currently working on such things.
> P.S. By quickly searching through the list there are around 900 papers of which around 30 are blockchain, cryptocurrency and electronic/digital cash related.
If you just Ctrl+F'd for those terms, it is likely that you are leaving out some (many?) papers. For example: did you count these two...
"VCProof: Constructing Shorter and Faster-to-Verify zkSNARKs with Vector Oracles", by Yuncong Zhang and Ren Zhang and Geng Wang and Dawu Gu
"On Simulation-Extractability of Universal zkSNARKs", by Markulf Kohlweiss and Michał Zając
?
My point: it might not be 100% obvious whether a certain cryptographic primitive (or line of research) is "blockchain-related" or not.
As far as I can tell, whether you like the subfield or not, it does seem like there is some fundamental cryptographical research being done as a consequence of the "blockchain" craze (e.g. zero-knowledge proof systems, robust consensus mechanisms in adversarial settings, ring confidential transactions).
EDIT: if you Ctrl+F for "smart contract", for example, you'll get half a dozen more; if you Ctrl+F for "byzantine", you'll get some more; if you Ctrl+F for "zero-knowledge", you'll get 21 more; "cross-chain", "mining", etc.
zkSNARKs are not only meant and used for cryptocurrencies. They are decades old technology but ofc they can be used for all sorts of solutions including cryptocurrencies.
Maybe there are real people working on crypto problems or maybe there is some sort of Crypto winter akin to AI winter[1].
Let's take Satoshi for example a top notch computer scientist and a top notch C++ programmer. Who is even close to him? Vitalik? Kid who dropped out of college and rediscovered Satoshi's smart contract scripting language that Bitcoin had way back in 2008. Is Gavin Andresen[2] still involved? A 3D computer graphics programmer who worked in the Silicon Valley back in the 90s. These are the kind of people I am talking about.
> zkSNARKs are not only meant and used for cryptocurrencies. They are decades old technology but ofc they can be used for all sorts of solutions including cryptocurrencies.
Yes, but their current popularity (and the reason why so much effort is put into this subfield of cryptological research these days) is most likely due to their use in the context of cryptocurrencies, as far as I can tell. If I'm wrong, please let me know.
> Maybe there are real people working on crypto problems or maybe there is some sort of Crypto winter akin to AI winter[1].
Most likely, both. Once the low-hanging fruit is picked, things tend to slow down a bit (at least for a while). As you pointed out, this is common in many research fields, and not something specific to "blockchain tech".
> Let's take Satoshi for example a top notch computer scientist and a top notch C++ programmer. Who is even close to him? Vitalik? Kid who dropped out of college and rediscovered Satoshi's smart contract scripting language that Bitcoin had way back in 2008.
Just because Satoshi is a better programmer than Vitalik (I don't know if it's the case, but I'll assume it to be true), and he decided to leave the field (allegedly), it still doesn't mean that there aren't capable people out there working in the field.
> These are the kind of people I am talking about.
Fair enough. But then the argument should be that "most big-shots are not working in the field" rather than "there aren't any real computer scientists and cryptographers working in the field", as the person I replied to was saying.
I just responded because it sounded a bit like a "no true scotsman" fallacy (i.e. "a real computer scientist or cryptographer would be working on more serious things"). It's almost as if, if you are working in something blockchain-related, you must be a bad professional somehow (or, worse, a scammer).
I think you may have misinterpreted my last phrase (it was not an attempt at insulting you or calling you a scammer at all).
I'll rephrase it: "It's almost as if, if one is working in something blockchain-related, one must be a bad professional somehow (or, worse, a scammer)."
I don't disagree that the field is filled with amateurs (and, yes, scammers). It still doesn't imply that there isn't any serious cryptological research being done within the (so-called) field of "blockchain", which was the argument I originally replied to.
One of the major innovative points of cryptocurrencies and the current DeFi wave is that many interesting things can be built which are non-custodial.
Taking one of the largest DeFi exchanges for instance: Uniswap.
If the devs of uniswap decide to try and steal all of the funds that have been locked up in their contracts they can't[1]
That being said there are plenty of DeFi projects that claim to have no backdoor, but they do. And just because something is non-custodial doesn't mean that the value of the token won't go to zero, e.g. here's a good example of a project that went to zero even though there wasn't a known backdoor: https://www.rekt.news/iron-finance-rekt/
[1]: Assuming no one has missed a backdoor in the code
> Wildcat banking increased incentives for risk-taking and fraud to high levels.
The evidence points out that it’s the current banking system that incentivizes risk taking because the international bankers know they’re getting a bailout every time when they mess up.
> The US has huge financial industry partly because the regulation is so extensive. People from all over the world invest their money in the US because they know what when liquidity crisis happens, they still get their money back.
I’d like to know how this massive regulation helped consumers during the GameStop events at the end of January.
Naked short selling is running rampant and the system is protecting these crooks who essentially resell the same shares repeatedly.
Stock trading must inevitably take place on a blockchain: it is the only means to publicly verify accurate data. The current system with self-reported data and slap on the wrist fines is completely ridiculous.
There's no need to use blockchain technology for stock trading. The current centralized clearinghouse system works fine and is highly scalable. It also allows for transactions to be unwound in the case of mistakes or system failures. No one cares if a handful of retail investors lost money on foolish GameStop trades.
> There's no need to use blockchain technology for stock trading.
You can believe what you want, I find the current system very hard to trust.
With a blockchain, you don't have to trust anybody: you can just always get verifiable accurate real-time information with no possibility for manipulation or corruption.
> The current centralized clearinghouse system works fine
I don't understand how anybody could think that a system that can't even reliably and accurately tell you how many shares of real stock are in existence, requires self-interested self-reporting for vital stats with a slap on the wrist fine for "errors", and allows shares to be sold multiple times somehow is working fine.
> is highly scalable
T+2 time for trades to clear is highly scalable?
> No one cares if a handful of retail investors lost money on foolish GameStop trades.
The issue isn't that some people made or lost money on a trade: the issue is that there's different sets of rules for different people with the current system.
> Naked short selling is running rampant and the system is protecting these crooks who essentially resell the same shares repeatedly.
> Stock trading must inevitably take place on a blockchain: it is the only means to publicly verify accurate data. The current system with self-reported data and slap on the wrist fines is completely ridiculous.
I don’t know if blockchain tech is up to the task, but I agree in the context of non-negotiable, immutable transparency. It’s the only way we’ll ever find out just how corrupt Wall Street actually is. IMO the answer is very!
The current banking system has big failure modes and there is a constant threat of regulatory capture. It's still much better than alternatives.
In a regulated financial environment, financial innovation creates bubbles and failures in those regions that are outside regulation and transparency.
The subprime mortgage crisis was able to grow because CDO's and MBSes were outside regulators' sight.
The next financial crisis is probably simmering in shadow margin and shadow banking – not well-regulated areas. When those risks actualize, then there will be more regulation.
>In the US you should look at the so-called free-banking era (1837–1864) or the crisis era (1782–1930). Btw. Free banking didn't mean no rules. It just meant that there was no charter or permission is needed to start a bank,
>Finance was basically free for all. Easy to get in. Constant stream of economic recessions and banking crises harmed everyone. Wildcat banking increased incentives for risk-taking and fraud to high levels. It hindered economic growth, destroyed wealth of may hard working individuals.
This is untrue; the US rate of growth was actually higher during this period (4%+) than it was during the 1900s. And there was way less wealth equality, as there was no central bank with the ability to transfer wealth from all currency holders to the banking and finance industry via printing money and the Cantillon effect.
It doesn't sound like futures or simple bets. From the article, its almost sounds like they're almost selling NFTs of a photograph of a stock created form whole cloth. That can't be right, can it? Surely its backed by something?
Some users, called stakers, put up collateral, and in return the contract mints a synthetic asset. Stakers can destroy ("burn") the synthetic asset to unlock their collateral. The exchange rate is based on price feeds that oracles publish to the blockchain. There is an incentive for stakers to mint or burn the synthetic asset until its price matches the one published by the oracle.
Anytime I see a DeFi proponent saying something like this:
> is so powerful in unlocking financial services for disenfranchised people around the world
What I hear is "we have a new way to trick the unsavy and take all their money."
Without any actual connection to divedends / voting rights / IPOs, all the traditional excuses of stock trading vanish and you are left with straight-up gambling.
The guy quoted isn't the Robin Hood, he's the Sheriff of Nottingham stealing from the poor.
> But to oversimplify, under the Mirror Protocol, the idea is to keep prices of the synthetic -- or “mirrored” -- equities in the ballpark of the real thing by offering incentives for traders to arbitrage price discrepancies and manage the actual supply of tokens. Users can create, or “mint,” new tokens when prices are too high by posting collateral, and destroy, or “burn,” tokens when prices are too low, driving the price up or down.
> Binance, the world’s biggest cryptocurrency exchange, has already drawn the attention of Germany’s financial regulator by offering tokens that are tied to the performance of popular U.S. stocks but backed by the actual equities. Binance may have violated securities rules when it issued the tokenized shares of Tesla, MicroStrategy Inc. and Coinbase, BaFin said in April.
Binance's version of this seemed relatively straight forward, although you had considerable third party risk. But I imagine if they were regularly audited or had a redemption mechanism for the underlying stock, this is much preferable to the more complex method used in the Mirror protocol.
So much of DeFi is focused on getting around regulatory barriers. I get that the state uses finance and money as a way to control nerfarious activity (illicit substance sales, tax avoidance etc), but it leads to giving up a lot in privacy and freedom. Maybe they should give up on trying to attack it at the money level and focus more upstream. Why shouldn't you allow just about anyone to buy Tesla stock?
> But to oversimplify, under the Mirror Protocol, the idea is to keep prices of the synthetic -- or “mirrored” -- equities in the ballpark of the real thing by offering incentives for traders to arbitrage price discrepancies and manage the actual supply of tokens. Users can create, or “mint,” new tokens when prices are too high by posting collateral, and destroy, or “burn,” tokens when prices are too low, driving the price up or down.
This seems pretty similar to the authorized participant model used successfully with ETFs, so not sure if it's actually an issue.
Yes, its important for tracking that authorized participants are able to both create and redeem the ETFs for the underlying. This is why the Grayscale family does such a god-awful job of tracking the underlying. Check out the premium over time. [1]
I suspect these are more like perpetual futures or CFDs?
Not always. There are synthetic ETFs backed by nothing but swap contracts.
For example, commodities ETFs typically work by throwing cash in to treasuries and purchasing the total return swap contracts between those treasuries and some benchmark of commodity future contracts.
The major difference with these blockchain tokens is that the collateral (the stablecoin) held against the stock benchmark is itself completely synthetic.
people who live in countries that are under US sanctions i would presume? I'm not an expert on this stuff but I'd be surprised if buying or selling US securities was not heavily restricted for people in sanctioned countries like Iran.
There's a reason they got sanctioned, though, right? Broadly, attempting to develop nuclear warheads in unstable regions. So yeah, I'm ok with sanctioned people not trading TSLA to pressure the regime. Frankly, I can't think of a reason why that would be ok.
The sanctions affect everyone in Iran. The elites and people actually involved in the nuclear program in Iran have access to dollars/western markets via smuggling networks and other underground efforts (see https://en.wikipedia.org/wiki/Reza_Zarrab, https://www.justice.gov/opa/pr/two-us-citizens-one-pakistani..., NIOC and ship-to-ship transfers, etc). The result is that unconnected people suffer and the elites continue on like before. Is it fair to deny a rug vendor in Tehran who wants to export some of their carpets to Europe their living because they live in a country with a terrible government?
Is it possible to exert pressure on the regime without also exerting pressure on the people? It's obviously sad collateral but IMO avoiding the Iranians getting a nuke is worth the cost. Undercutting the effort seems the worst of all worlds with most Iranians continuing to pay a high price for longer.
> Is it possible to exert pressure on the regime without also exerting pressure on the people?
Not really. Every government ultimately draws their legitimacy from the consent of the governed. If enough people riot and/or strike, you're done. Even Rome had a grain ration to keep the people content.
Your options for pressure usually come down to making the people of that country uncomfortable, or military action. Neither of which are very comfortable for those on the bottom.
You can also bribe the government to clean up their act, but that has a mixed record. I also wouldn't really call it putting pressure on the regime.
Reminds me of HSX (Hollywood Stock Exchange). It's a trading game/predictive market (no real money) where you trade shares in actors, movies, forthcoming movies, and even funds, e.g. "all Marvel movies." Pretty fun. https://www.hsx.com
I expect in short order we will see synthetic asset-backed securities that track the prices of real ones, synthetic macroeconomic indicators that track the real ones, and a full suite of other financial derivatives -- maybe even "synthetic NFTs" that track the prices of "real NFTs."
The number and variety of synthetic securities, AKA derivatives, that could be created on blockchains are limited only by human creativity and imagination.
And all these decentralized blockchain derivatives will be accessible to retail investors worldwide, without regulatory limits on leverage, and without regulatory oversight. Sort of like a massively distributed shadow banking system.
If I understand Godel's theorem (which only 6 people do), the natural conclusion of this is an asset which is a derivative security of itself. Which could be the ultimate stablecoin, or equally a disproof of the self-consistency of the blockchain itself. Maybe both at the same time.
Calling synthentic assets - something otherwise fully embraced by traditional finance - 'fake stocks' repeatedly lets me think they might have had some sort of an agenda on this one..
Disclosure: I have personally invested small sums in the mentioned SNX and MIR.
Equity futures are constructed around, on settlement date, delivery of the underlying shares to long contract holders from short contract holders. They're called SSFs for short. [1]
There are cash-settled futures too, but they're usually for things that don't sit well in a brokerage account like "a NASDAQ" or crypto, for instance.
With real stocks, shareholders buy/sell in a manner that might be compared to gambling for some. And if those were the only cash-flows, then the stock-market would be a zero-sum game. But they're not; the stocks entitle holders to other cash-flows, e.g. dividends or asset-distribution to shareholders -- so the stock-market isn't zero-sum.
By contrast, such gambling platforms would seem to have cash-inflows only from other gamblers. And additional cash-outflows to cover incentives to miners, etc., to keep the block-chain operating. So while the real stock-market might be better-than-zero-sum, seems like these would be worse-than-zero-sum.
So.. why? I mean, even if someone just wants to gamble, why not gamble in a net-positive system rather than a net-negative system?
(Also this sounds like it might be illegal in the US and perhaps elsewhere.)
---
To sketch a simple example:
Alice starts a company with $1,000 of her own money, creating 100 shares (valued at about $10/share). She sells some of her shares to others for ~$10/share.. let's say she sells half, so she gets back $500 while retaining a 50% stake in the $1,000 pot.
As CEO, Alice invests all $1,000 in US bonds, getting some interest. After 10 years of operation, Alice liquidates the company, which now has $1,000+(10 years of interest).
Now everyone who bought a share from Alice at the start (for ~$10) would get about ~$10+(10 years of interest), much like if they had invested $10 in bonds themself.
And Alice herself gets back $500+interest (in addition to the $500 she got from selling shares earlier).
Now what about people who gambled on Alice's company? This is, now that Alice's company has dissolved and the real shareholders got their cash+interest, what do the people with "synthetic shares" get?
Oh and how about contracts for difference, equity swaps, futures on stocks, etc?
Of course when traditional players do it's totally fine, but the moment the same thing is done on crypto rails, that's when we raise our value signalling pitch forks.
This has nothing to do with what I was saying about negative cashflows leading to a negative-sum game.
Are you trying to make the point that this is meant to appeal to a "fight-the-power"-type crowd who'd be willing to suffer losses for thematic reasons?
Can anyone explain why regulators wouldn't just smack this down if got big? I can't imagine you can create a mirror stock market without going through some regulatory channels.
In case you've not been paying attention - for the most part the regulators are currently sitting scared in the corner, and not even Musk tweeting asinine stuff like "SEC = Suck Elon's Cock" is able to bring them to action. As always, you get serious enforcement actions only on the down leg, when the public opinion is again behind you.
The world exists outside of the US. There isn't one set of global "regulators". Lots of smaller countries want to grow their own financial markets and take a share of the US's pie, and being friendly to crypto is one way to achieve that.
I can't think of very many countries that don't have regulatory channels for selling stocks to their citizens. Generally wouldn't want to launch something that breaks local regulations if you serve nationals of those countries. Puts directors at risk if they visit those countries.
> the idea is to keep prices of the synthetic -- or “mirrored” -- equities in the ballpark of the real thing by offering incentives for traders to arbitrage price discrepancies and manage the actual supply of tokens. Users can create, or “mint,” new tokens when prices are too high by posting collateral, and destroy, or “burn,” tokens when prices are too low, driving the price up or down.
How does that work? What prevents me from "minting" tokens and running away?
All this is, like 95% of all blockchain „innovations“, is to confuse/inspire people long enough to make a fortune from investors/gamblers. Theres just AAA gigs like this and less sophisticated ones. I have yet to be proven wrong.
Even Mark Cuban fell for something similar with great production value.
This isn't the same thing but I do think companies issuing stock for crypto is the next logical step and it will happen at some point. Not derivatives or any sort, just company stock directly listed on a crypto stock exchange. I imagine it's a long road to that point, but certain companies like Tesla just might be willing to do such a thing since they own a decent portion of crypto as is.
Cryptocurrencies are a decentralised ecosystem, as such anybody can create a token. "Why" people are allowing this to happen, is that crypto enthusiasts build said decentralised ecosystem. Trust layers need to be built on top for it to become more useful, for instance, a trusted and auditable institution issuing tokens.
I'm an investor in one of these (as a disclaimer and because I'm excited about the tech) -- https://structure.fi/.
Personally, I think this is going to be huge over time. Trading on-chain tokenized stocks 24/7 is a powerful layer above the traditional financial markets.
As an investor, you have 100% a vested interest in this getting big at all cost, because otherwise, who's going to buy your magic beans from you? So anything you say about is kind of compromised.
While I agree democratized 24/7 stock settlement would be cool; It's hard to believe an investment seeking startup would want what's best for the common man - hopefully at least better than wall street does.
The way these work is totally transparent (open source smart contracts govern the issued tokens). There's no risk of hidden insolvency (there are significant technical risks, though).
Benefits:
24/7, lower fees, less financial incumbent insiders front running your trades, less retail traders giving data of their every move to financial incumbent insiders, privacy.
I think this'll be adopted widely in the near-future by savvy traders.
It benefits the little guys.
And I look forward to the day companies preferably issue equity directly atop decentralized networks - under what legal framework and/or sovereignty is yet to be determined.
Not in America they won't lol, it's illegal. In fact it's illegal for US persons to trade securities out of a non-SEC regulated brokerage account. See Regulation S.
Isn't the new monetization strategy in crypto literally to reorder blocks and front-run transactions due to the massive time quanta?
How exactly do you think the NBBO rule is to be implemented? [1]
The little guys as always are the most likely to get hurt.
It will not be implemented, of course. But it's a bit interesting to bring up MEV and the NBBO rule together. The situation in the US is that retail order flow is goes to wholesalers, and wholesalers subscribe to the SIP feed (which is substantially delayed) and the direct feeds from venues, and they can decide whether they want to offer price improvement compared to the *delayed SIP feed* based on the more recent data from the direct feeds. It doesn't seem like retail is getting a great deal in that situation.
>Not in America they won't lol, it's illegal. In fact it's illegal for US persons to trade securities out of a non-SEC regulated brokerage account
Is this comment referring companies issuing equity directly on-chain?
Of course it's currently illegal.
That doesn't mean it's illegal in all global jurisdictions or that savvy traders won't find a way to have financial liberty, even if it means moving countries/jurisdictions, opening up a corporation elsewhere etc..
>Isn't the new monetization strategy in crypto literally to reorder blocks and front-run transactions due to the massive time quanta?
What a disingenuous way to frame the concept of MEV.. That's quite an unobjective bias you have.
>The little guys as always are the most likely to get hurt.
The little guys are most likely to get hurt when there's a lack of transparency. In an internet age with transparent tools, the little guys should have freedom with accountability (e.g. they can't even invest in startups).
Why would we voluntarily give up the security afforded by the SEC?
The front-running thing is literal observable fact. If you know what transactions are to be included in the next block, and you're in charge of ordering them on a multi-minute timeframe, and you know pricing on exchanges in real-time why would you not take advantage? Why would you not front run? There's no law stopping you is there?
> The little guys are most likely to get hurt when there's a lack of transparency. In an internet age with transparent tools, the little guys should have freedom with accountability (e.g. they can't even invest in startups).
Which is exactly the issue with the blockchain. You're given a peek at the chain but that's not what matters.
>If you know what transactions are to be included in the next block, and you're in charge of ordering them on a multi-minute timeframe, and you know pricing on exchanges in real-time why would you not take advantage? Why would you not front run? There's no law stopping you is there?
Check out time-lock encryption, auctioning transaction order rights, or Automata's conveyor service etc.
There's some powerful ideas floating around to bring MEV to negligible levels.
This is the beauty of crypto:
users will flow to the most efficient blockchain. If MEV is their primary concern, they'll flow to that which nullifies it :)
> That doesn't mean it's illegal in all global jurisdictions or that savvy traders won't find a way to have financial liberty, even if it means moving countries/jurisdictions, opening up a corporation elsewhere etc..
Sure, you can always move your trading to El Salvador, which plans to use bitcoin as official currrency.
> Benefits: 24/7, lower fees, less financial incumbent insiders front running your trades, less retail traders giving data of their every move to financial incumbent insiders, privacy.
