Headline is misleading: the founder has threatened to doxx and report them to the IRS if they don't return funds which according to the Compound protocol, they rightfully own anyway.
> which according to the Compound protocol, they rightfully own
And that is one of the biggest misconceptions of crypto stuff.
Law and contracts (1) determine who owns what, not who happens to currently hold it.
That's why the founder can threaten them with the IRS, because they (likely(1)) do not rightfully (as defined per law) own it.
This is also why NFTs are kinds stupid, because you totally can sell someone a NFT which "claims ownership rights" without selling them any ownership rights legally seen. Sure it's most likely fraud as you deceived people, but only if. So telling people you sell them the NFT but not the think behind the NFT would make that pretty legal. Like you can sell a certificate about the correctness/quality of a picture without selling (or even having) that picture.
(1): Smart contracts are not contracts, they are computer programs. They might also contain contracts, but that doesn't mean that just because something is done in a certain way in a smart contract it is legally binding, legal, or anything (Well, that's also true for contracts themself).
> That's why the founder can threaten them with the IRS, because they (likely(1)) do not rightfully (as defined per law) own it.
This statement is nonsensical - the IRS has no enforcement mandate for theft/fraud, nor does it have any authority to return stolen property. All the IRS would do is say "Hey, I heard you got an extra $NN last year - please pay your taxes on it".
It could even be argued that by reporting people the the IRS, the founder is implicitly admitting that the current possessors actually do own said crypto, otherwise they wouldn't owe any tax on it.
Illegal activities. Income from illegal activities, such as money from dealing illegal drugs, must be included in your income on Schedule 1 (Form 1040), line 8, or on Schedule C (Form 1040) if from your self-employment activity.
>Stolen property. If you steal property, you must report its fair market value in your income in the year you steal it unless you return it to its rightful owner in the same year.
> This is also why NFTs are kinds stupid, because you totally can sell someone a NFT which "claims ownership rights" without selling them any ownership rights legally seen.
It seems that the only thing you own when you purchase an NFT is the NFT itself. Not a little jpeg that it points to; just the bit of code on the blockchain.
It's kind of tautologically stupid. You buy a receipt that states you own that very receipt.
It’s more like a deed. Even if you possess the deed, someone can still take you to court because they actually own the property. But a deed can still be a useful tool if most of the time whoever possesses a deed owns the house.
But if people buy deeds instead of the house itself (i.e. most NFTs) then the link becomes broken and the signifier of “ownership” is less useful.
Deeds are legally binding, NFTs are nothing at all. You can make as many or as few as you want, and they come with anywhere from 0 to full rights to the underlying. Also the "underlying" is literally just a URL with no restrictions. What it points to could just disappear one day and SFYL. Should have checked the JSON blob you were buying to make sure it pointed at IPFS or something.
Possession of a deed is not legally binding — if someone robbed your house and took your deed, clearly they don’t own your house.
The deed is only a signifier of ownership, nothing more. If you can prove in court that the possession of the deed itself was improperly transferred, the state will return the deed to the rightful owner. Or annul the old deed and create a new one. (At least in the US.)
Sorry for the delay, what I meant is that the concept of NFT has no protection under law whatsoever. It means literally nothing. It's a bearer instrument for nothing.
As you say, a deed is not a bearer instrument but the concept of home ownership which it symbolizes has legal protection.
> But if people buy deeds instead of the house itself (i.e. most NFTs) then the link becomes broken and the signifier of “ownership” is less useful.
And as it is used for digital goods, the signifier of “ownership” is already broken, as multiple people can have a copy of the item without their being any ownership conflict, unlike a house.
NFTs likely make sense in a context like a metaverse where the bit of code is the law, and owning a digital item is the equivalent of owning a physical item within the metaverse.
> That's why the founder can threaten them with the IRS, because they (likely(1)) do not rightfully (as defined per law) own it.
This seems wrong. Here's the quote from the founder:
> Otherwise, it's being reported as income to the IRS, and most of you are doxxed.
It seems to be "return it or else it will count as your income," which seems... weird. Do most crypto people just not pay taxes on crypto? How is this a threat?
Most of the people I know that make any serious money on crypto definitely do report it, which made the founder's IRS thread confusing to me as well. If anything, I'd be more likely to keep it after hearing him say that (go ahead, report me to the IRS, I was already planning on paying taxes on it).
In fact, that threat almost makes returning it the riskier move. Are they going to report all of these transfers to the IRS? Will the IRS consider it income, and then a gift back to compound if I return it?
This puts to words the uneasy feeling I've had towards NFTs.
The thought experiment that made this concrete was a sort of reductio ad absurdem:
Let's say for a moment that NFTs win worldwide support and begin to be used as proof of ownership for everything. As part of this movement, the Louvre registers an NFT signature for each item in their collection.
Now, let's say a nefarious actor manages to use social engineering and convince a naive Louvre curator to transfer the NFT ownership of the Mona Lisa.
This bad actor promptly goes to Sotheby's and asks them to list "his" Mona Lisa for sale.
---
Of course, the Mona Lisa would not go anywhere. The French government would never allow it. This is an extreme example but can be walked back to less and less valuable items: would this work for an NFT of a house, a car, a computer, etc?
Unless the state decided to universally and with no exceptions enforce ownership of NFTs, they are ultimately worthless.
This isn't completely unlike a deed to a house. People have conned folks out of their deeds to properties, and sometimes the transaction is upheld and the bad actor gets to move into a house, and sometimes the transaction is recognized as invalid, and nobody gets kicked out of a house they've paid for.
Most developed contries have digitized their deed system, so I am not sure how you can con someone out of their deed.
Also, back when we did use physical deeds, there generally was owner’s copy and land office’s copy, and on the back of the deed would be the transfer history.
So to con someone out of their deed, you would not only need to get the owner’s deed, but you would also have to get your name added to the land office’s copy.
> Most developed contries have digitized their deed system, so I am not sure how you can con someone out of their deed.
Not the US*. I mean I guess they are digitized in the sense that records are typically published online electronically, but it is all still based off these bits of paper going back and forth, there is not like a database of ownership.
> Most developed contries have digitized their deed system, so I am not sure how you can con someone out of their deed.f
"Digitizing" something doesn't make it invincible to con artists - there's really no difference between me conning you into signing over a deed if it's paper or digital.
Nobody on Alpha Centuari cares how much Jeff Bezos owns either. All ownership is contextual, it only looks like we have universal rights enforcement because of the powerful state acting as middleman.
Therefore I have to conclude that NFT usage is an extremely radical act against state power, because what it says is that the state doesn't matter, this blockchain(the one you are using at that moment) does. And you are accepting that your rights end where it does, too, so you had better trust the community.
Thats not different than other forms of proof of ownership on paper or in some database. If somebody steals or defrauds you, you can go to the authorities and they might act on it. That does not make those instruments useless.
Compound protocol is not a legal person thus has no rights. The VC governance voters (Polychain Capital) should be responsible for pulling the trigger and sending the tokens to random people around the world. More here, plus the actual bug post mortem
That's why the community is talked about so much with regards to NFTs, because if you get the right community leaders, like Snowfro from Artblocks, you know you're in good hands with an ethical player. But to buy stuff from some random creators no one's heard of, can get you into sticky situations. And photo NFT's are even more troublesome.
...and this is supposed to be the better alternative to something like central banks with leadership appointed by elected governments! Because you can never trust any institution!
It’s not, but “give us our money back or we’ll report you to the IRS” strongly implies that they were willfully assisting in tax avoidance before. It might even legally be blackmail, if they’re aware of any crimes their customers have committed.
Except that recent events regarding Citigroups incorrect $900M payout on the Revlon bond shows that in fact grown up finance will sometimes say, actually, the law is the law and the contract doesn't cover this, so thanks for the money.
This was a case where the bond holders did have some claim to the money, but it was clearly an error.
> This was a case where the bond holders did have some claim to the money, but it was clearly an error.
You refer to recent events, and I don't know how recent, so maybe I missed something; but my understanding was that the finding was that it was reasonable for Revlon to believe when they received the fund that it was a legitimate payment, not just an error. Of course in retrospect (e.g., when Citigroup calls and says so!) it is clear that it was an error, but the legal argument, whether or not you buy its truth, was that it was not clear at the time. I think that this sort of finding in which both grown-up financiers decide not to be chummy about misplaced funds, and the law sides with them in not requiring them to do so, is comparatively rare.
I'm a little foggy on details, but I remember reading that the bond holders had been kind of mistreated before all this. Something to do with reorganizing or splitting off valuable parts of the company. The bond holders weren't too happy as it was beginning to look like they might not get their money back. So it makes sense why they would not be quick to cooperate and return what they initially thought were early payments.
"Better" is debatable. If you've ever actually wired money to scammer, you'd know that the banking system isn't one giant kumbaya circle run on gentlemen's agreements to Do The Right Thing, and you were rolling your eyes through the whole thread[1].
At most, it works like that for anyone rich or working on behalf of a big firm, which isn't exactly a ringing endorsement. And don't you worry, cryptocurrencies are just as capable of reversing transactions of those with the real power! [2]
I think what that twitter thread points out is that #2 is harder and less common in crypto (for better or worse) in the current state. What would be a trivial correction in the normal system isn't here.
There are also a lot more ways for regular people to reverse transactions, but I take your point about how hard it is to reverse wires to scammers.
founder is clearly an asshole but "reporting it as income to the IRS" probably doesn't count as "threat of initiating criminal proceedings" as it's likely something that they are enjoined to do anyways.
Amusing as the founder then would be outright saying he knows what criminal activity has been going on and exactly who is up to it ... and is willing to use that info if he see fit.
That would seem to present all sorts of risks for his users, and himself, legal and otherwise.
Not really? There are things that you're not required to report to the IRS that others can use to underreport income -- for example, the identity of which contractor you made small cash payments to. Reporting their identities to the IRS is not illegal, but neither is failing to.
(Also, I assume you mean tax evasion? Avoidance is the legal one.)
Not sure that makes any sense... if users held the assets before, they have an asset with unrealized gains. When it transfers ownership, those gains are realized.
> [...] strongly implies that they were willfully assisting in tax avoidance before.
It does nothing of the sort. It's a enormous leap based on an assumption of bad faith to go from expecting protocol users to sort out their own personal tax situation to "willfully assisting in tax avoidance."
> It does nothing of the sort. It's a enormous leap based on an assumption of bad faith to go from expecting protocol users to sort out their own personal tax situation to "willfully assisting in tax avoidance."
There are obviously lots of subtleties here, including places where no-one knows how the legal implications will shake out, but "expecting … users to sort out their own personal tax situation" isn't always an option; for example, my bank isn't allowed to assume I'll sort out my own personal tax situation and must report my interest earned, whereas, say, Amazon is allowed to make that assumption, and so need not report the items that they have sold to me. It could be that this is a more Amazon-y situation, but it could also be that it's a more traditional-bank-y situation. Probably even the IRS and Leshner, but definitely those of us who aren't involved in the situation, don't know which it is.
Precisely, which is why the jump to "strongly implies willfully assisting in tax avoidance" comes off so poorly. In my opinion, it not only mischaracterizes what is happening, it imputes ill intent to boot. Guidance for DeFi apps is poor currently and policy in this area is actively being legislated. In the meantime, shifting the onus for tax reporting back onto individual users !== willful assistance in tax avoidance any more than companies not witholding income taxes from payroll pre-WW2 was willful assistance in tax avoidance.
Further, since these transactions are all captured on a public ledger, anyone using this for tax avoidance is really just electing to pay their taxes later with massive penalties and possible jail time once the IRS gets around to tying addresses with unreported transactions to fiat on/off ramp transactions that are KYC'd.
> Paying taxes on free money isn't the end of the world.
Playing devil's advocate: it's not exactly "free money", it's free "tokens" of some kind, which might not be convertible to money at the same rate which was used to estimate the tax. If the tax amount was assessed at the value the tokens were supposed to have today (based on what they recently traded for at some exchange somewhere), but you were too slow and only traded the next day and the price paid for these tokens has fallen heavily, you might have to pay more in tax than the money you can get from these "free tokens". So yes, it's not hard to imagine a situation in which paying tax on that "free money" can be "the end of the world" for some.
Agree fully with this point if it is considered income and not a gift.
Let's assume the income case, a qyestion:
What would happen if someone took these coins then transfered them to a new wallet while claiming that their private key was compromised. So "theft" essentially. Would they still be on the hook for taxes?
The real downside to crypto to me is that there is no ownership, only proof of authentication credentials ownership.
From position of ignorance, I assume broadly same as being paid and than saying dog ate your cash on way Home. Crypto is not the first opportunity for dishonest actors to do dishonest things (it's just more fun to watch as they proclaim princioles and future and innocence :-)
So just offload ~35% or whatever it is to cover the taxes in anticipation that they're reporting it to the IRS. Not sure if it qualifies as a gift though, which may be taxed different than income.
The giftor pays the tax in the US, not the person receiving the gift. And only under certain scenarios. Practically speaking, "gift tax" is usually not a thing for what most people would consider gifts, but always speak to a CPA and probably attorney, etc. etc. etc..
In the US, you only pay taxes on income and gains. In other words, you’re not going to pay taxes on those tokens until you redeem them for fiat currency. The tax is an percentage of the fiat currency you receive, not the token value.
Just like stocks (you don’t pay for any changes in value to the stock until you sell it for fiat currency).
Crypto is taxed as income. Everything is taxed as income. You are only taxed on gains if you have a cost basis and are trading the tokens, but otherwise if you are compensated via tokens you owe income tax on that whether or not you convert it to fiat.
Yep, not just stock grants, but anything. For example you find a bug in an airline, and report it and they compensate you as a thank you with 200k airline miles... you now owe income tax on those miles.
Based on the value of the "item" for example airlines will assign a value to these miles ie (100,000 miles worth $1200) - or something like that. Otherwise, I don't know. I'm not an accountant/cpa, but I know that this stuff is taxable whether it's tokens or ketchup packets.
Imagine that, they tax you on a special “number”! Do they accept Crypto? If not, please point to the money they want to tax.
They can’t have it both ways. Either crypto is an equivalent to money or it isn’t. If it is, accept it. If it’s not, tax it when the money “appears” out the other end.
The government does not accept RSUs at tax payment. Instead, you pay tax as if you were paid the amount said RSUs are worth at the time you received them.
Basically the current trade value for the non-dollar item is your income on it.
There are some exceptions like exercising stock options where you’re taxed for the difference between the strike price and the fair market value at the time of exercise (I’m not sure why the law is this way).
The difference between the strike price and market price is the value of the option--its the money you otherwise would have had to pay to buy the stock if you didn't have the option. That's why it is so.
So tax the gain on sale of the stock - there's no good reason to tax it on exercise (especially when the stock is illiquid and the price can still go down).
Because your trading thing A for thing B. Suppose you could trade stock for a Yacht without income taxes applying. That’s the kind of loophole everyone buying a yacht would use, especially if you could use a near cash equivalent like gold instead of barter.
The difference between stock and stock options might not seem like enough to matter, but it’s simply the same generic rule applying.
I'm not sure this follows in the case of options? You have a contract to buy stock at X price. You do this at a discount and get the stock. You could just tax the gain on the stock on its sale with existing tax law and you could do this specifically for options if having some broad law would create weird exceptions like you suggest.
ISOs existed to correct for this failure in options, but the income at which AMT removes that protection hasn't been updated substantially since it was created so this protection no longer really covers exercise. I also don't really understand how it could be abused.
My change would be to have option exercise pay no tax on the spread, with all taxes payed on gains on sale.
As it is, people with massive wealth can exercise when there is no spread (because they have lots of cash already when the shares are granted to them) or they get special early exercise via the 83b election with the IRS and special access from their startup.
The people that get hit hardest by this are regular employees starting out that don't have lots of cash to exercise when the spread is zero.
Changing the law would of course change the system but paying people with options has significant economic and political implications. The current solution is for companies to agree to buy back enough shares to cover the tax burden when people exercise their options.
It might even be the best way to legitimize (legally launder?) the money.
If I receive $XX, would happily pay %Y of that to stay above board. If the IRS wanted to audit me, my personal war chest is now $XX-%Y greater than it was before and more than adequate to cover whatever past (accidental) tax errors I may have had in the past.
Can’t the people who have the money just pay the tax themselves? Seems like the easiest way to keep the money and stay on the right side of the threat?
EDIT: Also profitable, taxes should be less then 90%. Just out of curiosity, isn't DeFi motivating users to defraud the IRS by promising 10% without reporting it as income?
EDIT: Come to think of it, if they are offering 10% without reporting to the IRS, which is obviously less than after taxes, would it be reasonable to assume all revenue / profits have not yet been reported to IRS as revenue?
You're probably unlikely to have anyone knowledgeable lay out the exact means by which crypto can be used to evade income taxes, but it's a pretty well known that it's used that way.
> it's a pretty well known that it's used that way.
Michael Morell, a former acting director of the CIA, has some things to say about the use of BTC in crime:
> Based on our research and discussions with industry experts, I have confidence in two conclusions: • The broad generalizations about the use of Bitcoin in illicit finance are significantly overstated. • The blockchain ledger on which Bitcoin transactions are recorded is an underutilized forensic tool that can be used more widely by law enforcement and the intelligence community to identify and disrupt illicit activities. Put simply, blockchain analysis is a highly effective crime fighting and intelligence gathering tool.
They setup a company in an offshore country like vanuatu and use an offshore bank to change the crypto into dollars avoiding capital gains tax etc, but its the offshore company and bank that facilitates the tax evasion.
Just because every one thinks they know how it works doesn't mean they know how it works, thats why I am questioning it. The truth is its pretty well known how tax evasion works but it doesn't use crypto.
That is completely wrong. Income is anything of value, not just cash. If you find a gold nugget in your yard, you have to pay taxes on the value of the gold even if you never sell it.
Yep, nothing stopping anyone from keeping the funds. But we've seen other shenanigans in the past (forks, CEX involvement, etc) to paper over these mistakes.
This is an interesting case because presumably they would want to write this off as a loss (in a theoretical world where they were paying US taxes) so it’s not a gift.
Technically the profits are a result of the computer code of the system, though. If they want to stick to their arguments that smart contracts are the law, then it’s just a regular payout from the system according to the rules of the system. Business as usual.
However, I suspect when the losses are in the tens of millions they’ll drop the pretense of “code is the contract” and start pursuing other legal avenues. The loss was about 1% of the total money locked in Compound.
You can make erroneous money transfers and it doesn't automatically count as a gift, the receiver can be liable if the amount makes it obvious it's an error for example and she won't return it. I'm sure this differs between jurisdictions in the details though..
No, of course a mistaken payment isn't a gift, and there's an appropriate mechanism for retrieving mistaken payments through the civil courts (if necessary).
But a mistaken payment is also not income and threatening willfully to mis-file a 1099 is completely inappropriate.
If they want to get the mistaken payments back, they can ask nicely, they can send threatening letters, they can sue in court; but they can't use the IRS as their cat's paw because the only tax situation that fits the facts here is gift.
It's not a gift - if you take the position that a smart contract is a binding contract, then the payment is pursuant to a contract that itself was entered into for full consideration. Nobody knew how the contract would develop, but the same applies for many contracts - eg options trading.
If one wants to claim it's a mistaken payment, then the recipient needs to return the tokens - their legal ownership was never conveyed.
Additionally, you can tell the intent is not that of a gift because the transferrer immediately wants it back.
But does anyone take the position that a smart contract is a binding contract? I believe even Nick Szabo regrets coining the term since its just a program that can transfer value so including it term “contract” is misleading.
No, because when you give me $10K because I made you a website, you're obviously paying me for my work. The IRS is not stupid, and doesn't look at the form you claim, it looks at the actual factual situation.
* it was paid under the terms of a valid contract and need not be returned, and therefore is income (as this rests on the existence of a contract embodied by the protocol, it is not a gift, but an exchange for value.)
* it was an error and must be returned.
This seems to be an offer to settle for the former treatment if the recipients refuse the offerers claim that the latter is correct.
This is nowhere near the first time that this has happened. There have been numerous folks to find bugs in smart contracts around the DeFi/ETH contract space, millions taken "by the code" and owners threatening and throwing various forms of shade, and even offering the exploiters job positions, reneging on said positions, etc.
But isn't the whole point of crypto to throw off all these inconvenient and unjust regulatory shackles? That technology has perfectly solved transacting in a trustless way, so that we no longer need or want agents of the state threatening citizens with violence in order to compel actions from them?
Usually, yes. But banks have a process for reclaiming funds that have been incorrectly wired so it’s pretty unusual for the “legality” of it to be litigated.[1] Blockchain has no such process. By design.
You can't just get rid of 100% of bad things about regulation and keep 100% of the good things about regulations. It reminds me of people who start open relationships. The upside sounds great, but there is a huge potential for downside and you may not fully appreciate that until it happens.
Yet another example of how the speculative bubble of crypto is mostly a scam at this point. Just imagine a bug that granted far more than was granted here. How many of us write software that has occasional bugs? Do you really want to trust your net worth that a software bug won't blow you out of the water?
No one knows for sure. This question is still not answered in the judiciary (of any country afaik) when it comes to cripto contracts and protocols. It is not as simple as "money wired to a wrong account", those protocols are based on smart contracts, and the concept that the code is the contract (something that also is not tested in court). So a bug in the smart contract code would be akin to signing a contract without properly reading it, and it ends up having a clause you didn't originally want (but you did sign), that kind of "buggy" contract may be 100% enforceable or not depending on the country and the situation.
Other analogy that may be relevant are cases where casinos had slot machines with bugs awarding more prizes than the casino intended. In some cases/jurisdictions the courts ruled in favor of casinos, that the money was awarded incorrectly and should be returned; but in other cases/jurisdictions favored the winner, saying that the winner did everything right according to the rules of the game and should keep the winnings.
Also the Pepsi 349 Scandal in the Philippines in 1992 comes to mind [1]. In that case courts side with Pepsi, but I suspect that money has some inertia in Judges minds, so it was easy to side with Pepsi when it haven't paid yet. I suspect that if all that money had actually been automatically transfered to the many winners, then Pepsi would have a much harder task to convince the judges to make everyone transfer the money back.
I'm going to add smart contact providers have a strong incentive not to get the concept of smart contact tested in court, as if invalidated it would render them unfit for their purported use.
But in this case the Compound contract specified this was intended to happen, therefore it's not an accident nor was the money transferred to the wrong account. The whole point of the contract is that it's a perfect, unambiguous, clear representation of intent.
Yes, exactly. If it's specified in the smart contract, that's what everyone signed up for, even if they didn't understand the bug.
If people signed a paper contract and a software system was designed to implement the contract, but the software system erroneously (through a bug) did something that went against the contract, that would be an erroneous payment.
But if the code is the contract in a smart contract, bugs aren't contract errors.
A wire transfer involves a money transmitter, who provides a service according to some terms & conditions. In case of a dispute, a court will have the final word. None of this applies to cryptocurrencies, because cryptocurrency transactions are final. They can't be overridden by a judge. If they could, they wouldn't be censorship resistant. You can have censorship resistance or rule of law, choose one.
They can be overridden by the judge in the same exact way cash transactions are: by forcing the offender to make a transfer in the amount that they owe, and/or selling off their other property to pay that debt.
The thing about crypto and ownership is that the blockchain is not the final arbiter of legal ownership, and that qualifier matters in a lot of cases.
Just because there’s technically no mechanism within the protocol to reverse the transaction does not suddenly make it legal to keep the money right? You could spend all the money accidentally wired to you and have nothing left to your name, but you still owe that money. So you could keep the ill-gotten crypto but still be liable for civil or criminal charges.
You'd be making the argument that the contract was followed perfectly, and it decided that you should have the money. If the code is the contract, the bugs are what everyone signed up for.
I believe the US law inforcement will criminally prosecute you if you receive money you have no reason to believe it should be yours (money mule laws, using stolen property, etc.).
Yes. In 99% of cases it is illegal. There are some cases when it ok to keep it (like if one pays off their loan too early [1]) but you will be criminally prosecuted if you do not return money you have no reason to believe it should be yours [2].
I'm not sure about the 'wrong account' scenario, but there was a case last year where Citibank accidentally paid off 'too much' of an outstanding debt to one of their creditors, and tried to recoup the money in court. They lost. But of course, they legitimately owed the money.
In the Citibank case, the beneficiaries were entitled to the money because they were the original lenders, and did not know that (what appeared to be) the repayment had been accidentally wired.
Correct. This is equivalent to you paying your bills early. Sure, it sucks to be stuck in a money crunch if you found it out later, but your financial mismanagement doesn't automatically mean that the you have the right to ask your utilities to return the money.
hmm i don't know. generally speaking, money today is not the same as money tomorrow. and so,
if you think about money as a commodity, to be consumed, transformed, redeployed, similar to let's say... corn. what would you do, as a grain processor, if your supplier decided to show up with 500k bushels six months too early?
I think that the analogy is reasonable, mainly because both examples are the type of debts that can be serviced (i.e. repaid) anytime (unless your utilities needs to be pre-paid before you can use it, which in case it breaks down because it becomes a bought thing, not a borrowed thing). There are recommended schedules to pay them, as well as a hard deadline, but you can usually pay them early (and sometimes those early payments can be rewarded, for example by reduced interests).
Your example mainly deals with futures (a type of financial instrument), mainly because you have agreed to pay within a tight schedule, which does not allow you to service them too early nor too late. Also, you forgot that money was invented to be widely fungible (okay, you can argue if this is true in this age but I argue it's still largely is) meaning that it can be (relatively speaking) easier to convert to corn, stocks, or generators (for example), which is different from corn which is only usable to a subset of people, meaning that you can only deal with those people which needs or wants corn (for example, you cannot easily get generators with corn).
a couple thousand dollars here and there might be fungible, but at some scale it's not true that money today is money tomorrow. there generally needs to exist some method of transforming money today into money tomorrow, through various mechanisms that are broadly called "carry", and there also exists the possibility that these mechanisms become momentarily unavailable.
additionally, the lenders to revlon took on both an expectation on money in the future and a non-zero default probability. maybe you can say it is fine for money in the future to be money in the present, making the layman assumption that the carry mechanism exists every single day from the date of accidental payment to the date of actual payment, but the lenders cannot also give up the non-zero default probability. that's their obligation in return for full future payment. but since payment and the obligation are inseparable, i personally see no difference between early payment with no obligation and shylock's taking of a pound of flesh and all the blood along with it.
If you think of money as corn, then of course you get a different answer. But money is not corn; it is money.
Money is not a commodity; it's a quantity of fungible tokens (plus the other stuff that makes it money). Money doesn't expire; the closest thing is tax. Yes, it's worth a different amount as time goes on, but debts are generally money debts rather than value debts.
I like crypto, and decentralized finance is interesting, but I find it quite telling that users are being threatened with having to pay taxes as retaliation.
The founder has declared that they are not reporting financial transactions to the IRS that would be of material interest to the IRS, and noted that they will consider providing that material to the IRS only if their conditions are met.
It seems likely the IRS will subpoena them for the data regardless, and potentially seek conviction of tax fraud.
While I ironically enjoy that he thought the best way to intimidate cryptocoin people was to threaten them with taxation, it does highlight cryptocoin's primacy as a way to acquire nation currency without paying taxes on it.
what a weak threat. he should threatened to report the funds to exchanges to be blacklisted, that would be far worse. Technically, they would not pay anything unless they sold it for cash anyway.
Doesn't blacklisting funds go against the main idea of a decentralised crypto currency? What's the point of replacing the traditional banking and monetary system with something where funds could be devalued by the decisions of a few individuals?
Yep, crypto is more or less the same as traditional finance in this sense. A few powerful individuals already control a disproportionate amount of the crypto world.
Like the sketchy folks who run Tether and Binance at the same time.
Or Elon Musk tweets raising and lowering the value of Bitcoin by a significant amount.
Even Bitcoin itself is largely held by just a few people. It's just another tool for billionaires to get even richer.
Doxing is publicly publishing private information. Reporting someone to legally bound authorities is not doxing. Relying on trigger words and sensationalistic language is a tell for a weak argument/stance.
> Headline is misleading: the founder has threatened to doxx and report them to the IRS if they don't return funds which according to the Compound protocol, they rightfully own anyway.
That has strong implications the company is not reporting properly to begin with.
Wouldnt be a first for the capitalist class, but using your legally required tax as blackmail is... well.. Interesting.
It's so weird to see these scams running in full view of the public and casually discussed as if they're not basically just criminal ponzi or mlm schemes dressed up with some jargon. Hopefully when this ends up collapsing, it will be public and clear enough that "tokens" etc will have the same credibility as a Nigerian prince asking to help transfer money, but in this case I feel like there is always more lingo to keep dressing up the scams as something new, e.g. NFTs.
I don't generally like government intervention, but I do hope the "real" financial system is sufficiently isolated from these scams so their collapse won't cause problems.
Tesla provides things people outside of the auto industry want to buy. You might quibble about details (FSD in particular) but there is no shortage of people wanting to buy Tesla’s cars to use, not resell.
Cryptocurrencies have failed to do the equivalent – that’s why the pitch is “buy in now or you’ll wish you had later” rather than talking about things you could actually do that you can’t do as well now.
Tesla's value is approaching a trillion USD, approximately six times the value of the whole Volkswagen group. You can believe in Tesla or not, but that valuation is clearly hoping for a future where Tesla dominates multiple industries. I don't see much difference to people investing in any insanely valued coin because they think it's the future of payment.
Tesla's stock is definitely soaring but here's what they have underneath:
1. A very popular electric vehicle business (#1 & 2 best-selling EVs, top 10 across all vehicles)
2. A popular home sold and battery provider (3rd in the U.S.)
3. A large and popular EV charging network
4. A large collection of patents, software, manufacturing capabilities, and contracts for the previous three points
Shareholders are still seeing a lot of growth potential but if the market takes a downturn the floor of that value is still quite substantial, especially since the world is turning hard to EVs. Even the bad hypothetical scenarios are something like Toyota buys them at a lower price than shareholders want, not utter disasters.
In contrast, here's the sole value behind almost all cryptocurrencies:
1. How much the community thinks someone else will pay for a token
The floor is $0.00 because cryptocurrencies are the most distilled form of fiat currency with a very weak backing. Nobody is required to use it and almost everyone has alternatives which are at least as easy and affordable so it's possible to end up in the case where simply nobody is interested buying in your particular set of random hashes at any price, or where the cost of operating the network exceeds that value.
Yes, it's definitely possible for a stock to be overvalued. If you note my comment explicitly acknowledged this with the possibility that bad news could force a sale at well under the current price: the point was that there are very few possibilities where that value wouldn't still be a very large amount of money because there's a real business backing it and it's unlikely that the situation is going to change in a way which would cause all of their customers to disappear.
car making, EV charging and selling of home batteries are all terrible businesses: Highly competitive and capital intense, unit economics are disheartening (feel free to look into the financial statements of public pure-play companies in these sectors) - for cars you have a century of empirical data.
Are Tesla's manufacturing capabilities really superior to Toyota? The latter is making 20x as many cars (2020), makes money while doing so and is worth about a third of Tesla.
Again, I'm not saying they're perfect — only that there's a real business unlike a cryptocurrency. It might not be printing money like Google/Facebook ads but it's highly unlikely that the business could not turn a profit, albeit a tighter one due to competition.
Contrast with a cryptocurrency: there's no value other than marketing and nobody needs to use it at all, much less any particular cryptocurrency over an alternative. That puts your floor value at zero: unlike cars, nobody needs random hashes and certainly nobody needs to buy your hashes over equivalent hashes available somewhere else.
Yes, not trying to defend crypto here. Have been watching the space for 6 years and never used a product or service that was built on a blockchain. Cumulative value is hundreds of billions of dollars. I wonder whether I'll wake up in a few years thinking how could I be so blind to all this awesome innovation or whether the hype dies down.
Quick note on Tesla: I'm not saying they cannot make money, just that the current trillion dollar market cap is absolutely astronomical given the business performance.
Tesla sells government credits. Cars and solar panels are ancillary to that. The problem is that government issued credits like those can be sold. The Reagan administration cursed us with Elon Musk, and that simple fix (making government issued tax credits non-transferrable) prevents future Musks.
Again, I'm not saying that I agree that Tesla's current valuation is prudent — only that they have a real business making things which a lot of people like. Even if you think that competition will prevent the massive upsides some investors are hoping for, the floor value from that is a lot greater than the zero for a cryptocurrency.
TSLA has not much to do with Tesla the company, it’s just a token that is speculated upon, like in crypto. Traders and investors, especially retail, don’t care about what a stock is intrinsically (except maybe old school and large ones like Warren Buffet). They care only if they will be able to unload to someone else in the future. As long as people believe in a narrative the reality of what the company does is irrelevant. 10 years of Bitcoin have made that clear.
Words have meaning. TSLA is a share of a real entity with substantial assets and legal rights. While there is a portion of that value which is speculative, it’s grounded in a real business with measurable performance.
Contrast with cryptocurrencies which have no intrinsic demand or business outside of being speculated on. As Bitcoin has shown, this can get you a lot of speculative money but that doesn’t mean there’s any lasting benefit. Normal people would have their lives affected if Tesla folded but if Bitcoin shut down tomorrow nobody outside of speculators would be impacted.
Scams, criminals, ponzi schemes and MLMs. Usually when those are used to describe crypto there is no accompanying explanation of why those are relevant or apply in a particular case. There are many ways to genuinely critique crypto that don't use trite buzzwords.
Because they are a platform that promises users they will make money by investing, when in reality only the early adopters / extremely lucky have any chance at making money.
My intuition tells me that if an asset class rises steadily (albeit with volatility) for 10+ Years the majority of investors would be in profit. Anecdotes aside. Do you have data that suggests otherwise? I would be surprised if you did.
So code isn't the law? Why does anyone trust these systems that keep failing time after time? If they need to ask money back and really have poor recourse? Didn't current banking and legal system to develop just solve those issues?
And that is the crux of the issue. Modern banking has tons of fees and burdensome regulations, but it also has entrenched layers of protection that makes sure both the bank and the customer are not 100% nuked when there is a problem.
Bank runs like from the movie "Its a wonderful life" - they don't happen anymore. Currencies devaluating like an exploding balloon - not since the civil war. Sure, it costs you more, but it saves you more.
Lotta benefits to crypto, but lots of hurdles need to be overcome (power and security for a start).
> Bank runs like from the movie "Its a wonderful life" - they don't happen anymore.
Another example of a bank run is the bank run of Northern Rock on the 14th September
2007. This was the biggest banking problem in the United Kingdom since the banking crisis in
the seventies, this was also the first bank run in the United Kingdom in 150 years. Eventually,
this resulted in the nationalization of Northern Rock. It is interesting to analyze this bank run
because it is one of the most recent bank runs in Western Europe. Furthermore, the bank
run from Northern Rock is a special case because it was a ‘reversed bank run’. Normally
during a bank run, a lot of depositors first withdraw their money, due to lack of confidence
for example, and then the bank will as a result of the huge withdraws get into a liquidity
crisis. However, in the case of Northern Rock, the bank first got into a liquidity crisis and as a
result of that, depositors withdrew their money from the bank.
It certainly looks like a bank run - the scenes in London today fulfilled the dictionary definition.
And heading north to Nottingham, and Middlesbrough, the same extraordinary scenes. savers forming long queues to drain their life savings from Northern Rock.
Banking -- an industry built on credibility, confidence and trust. But the Rock looks wrecked even in its home town of Newcastle.
Deposit guarantees should prevent this. But even after an extraordinary unlimited lending facility granted by the Bank of England and agreed by the Chancellor, customers preferred the sight of real cash.
In that case, the nationalisation in that context is to apply brakes - sure those brakes are broken already and so wouldn't prevent a collapse - but its intention is to allow Bank of England's and UK government's protection schemes to be applied with as minimal loss to the taxpayers' and other banks' customers' money as possible. In this case, it limited the run to only the original bank (unlike 19th and early 20th-century bank runs resulting runs in other unrelated banks). Unfortunately, if your a customer of Northern Rock, it sucks so bad.
It's still not the same as an old school bank run. The UK government guarantees the first £85000* of each depositors money (those with more are well advised to split it across multiple banks)
> Deposit guarantees should prevent this. But even after an extraordinary unlimited lending facility granted by the Bank of England and agreed by the Chancellor, customers preferred the sight of real cash.
In US FDIC, which insures bank accounts upto USD 250K, has basically obfuscated Good Bank vs Bad Bank quality check for the retail customer.
The Fed Reserve and Treasury and FinGov apparatus does some 'stress tests' but mostly a dog and pony show.
Banking in US is mostly element of convenience than quality.
No one ran from Wells Fargo accounts (at least retail users) to say Bank Of America because Wells Fargo is fined for basically fraud.
In short term its a good thing, in long term.. well it is prone to blow up, I hope that is not in my life time.
I know several people who closed their Wells accounts (and moved to other retail banks in the US who are just as shitty) when that whole high-level fraud thing at Wells came out (they were opening checking accounts for people without their knowledge and consent, yeah?).
I dropped WF for a credit union as soon as I became aware of their corruption, deception, and mistreatment of their customers. NCUA provides similar if not identical coverage, and with the CU, the entire institution feels less user-hostile.
If the bank bears the losses, then the burden is indirectly distributed to all its customers/shareholders. If the government bears the losses, then its distributed to the whole economy.
> Bank runs like from the movie "Its a wonderful life" - they don't happen anymore.
In the Western developed countries. There are billions living in countries/systems where currencies are devaluating like hell and where banking regulations is looser than crypto.
> Bank runs like from the movie "Its a wonderful life" - they don't happen anymore.
There was one at the beginning of the coronavirus epidemic in the US. A friend of mine runs a branch of a major bank. Just as lockdown was announced, they were mobbed by people demanding cash. The branch ran out of cash and had to close early. It was a bit of a frightening experience for the bank staff. But not a disaster. The branch ordered more cash delivered from the bank's cash center, added extra guards, reopened the next day with the ATMs fully loaded, paid out cash all day, and were back to normal traffic levels by the end of the day.
Running out of vault cash is not a bank run. Those are two completely different things.
A bank run is something that forces the bank out of business -- it makes the bank insolvent. This happens because the bank can't convert its illiquid assets (e.g. mortgages) to cash in order to meet depositor outflow.
That doesn't happen anymore in part because there are markets for things like mortgages that didn't exist before (making those mortgages liquid) and also in part because banks are on the one hand regulated to control what types of assets they are allowed to hold but at the same time they are given access to lending facilities in which they can pledge their assets as collateral to get reserves directly from the Federal reserve, which will never run out of reserves, and with those reserves they can purchase cash from the Bureau of Engraving. Then trucks will ship that cash to the branch. Yes, it may take some time, but the bank will always be able to close out deposits after a brief delay.
Obviously banks try to minimize their cash holdings because cash pays no interest. So they have cash management professionals whose job is to predict cash demand (which is predictable) and hold no more cash than is necessary to meet that demand, parking the rest of their working capital into short term interest bearing liabilities like commercial paper or bills. Today, even reserves pay interest. So everything is better than cash. That necessarily means unexpected events will lead to a situation in which the cash management team underestimates a cash need and so they have to sell some assets (or borrow reserves), pick up the phone and order a truck. That happens quickly but not instantly. When that happens, e.g. when the cash management team makes a mistake, it's not considered a bank run, even if it means that a branch has to close until the armored trucks arrive. It's no different than Safeway running out of apples -- actually there can be prolonged apple shortages at safeway, but there can be no prolonged cash shortages at a bank, since the bureau of engraving can print cash with much lower latency than farmers can grow more apples.
What should let them know their money has not dissapeared is that they can continue making purchases with their debit card or even go to the ATM of another bank to withdraw money.
The world is very different today and cash is not so important anymore.
Yes, let's turn the [financial|legal](delete as appropriate) system into an obfuscated C competition. Last place prize is: [lose your life savings|spend life in prison].
Curious. I would claim that our current finance and legal system frequently does the very same for the impoverished or disenfranchised...
Underbanked get hammered by fees with no safety net for emergency expenses. And large portions of our population get saddled with poor legal representation resulting in de facto indentured survitude in for-profit prisons.
You don’t need a justification for giving people more choices that they’re free to ignore if they don’t like the terms or circumstances.
More options are better. Nothing about DeFi or cryptocurrencies invalidates or prevents people from continuing to bank as usual. The whole alternative system is opt-in.
I don’t understand why anyone, even an enthusiast, would dare to touch cryptocurrency lending with a forty-nine-and-a-half-foot pole. There’s no technical measure that can force me to pay back the coins I borrowed if I don’t have them. If you wanted to enforce being paid back in the real world legal system you’d be much better served with normal lending systems, know your customers, and report them to credit authorities. And if it’s not one of those “stablecoins” you’re borrowing something that could conceivably be worth 10x more in a year; that sounds like financial suicide. What do you possibly gain from engaging with all this?
Maybe if I built a defi lending platform myself so I could take a lot of loans from my customers and then default. That’d work just fine. Otherwise, run for the hills.
Crypto evangelists have done so much to obfuscate the fundamental problem of the real world/digital world divide that I think many of them have lost sight of the problem themselves.
Until we find the API for reality, many of these decentralized projects are hopeless.
> Until we find the API for reality, many of these decentralized projects are hopeless.
That was nicely put. I see so many of these projects promising to end with banking, bureaucracy, but forgetting that at some level the bits and bytes have to be input or acted on by a human.
In some ways it's like the early days of banks, where flaws like this were found and fixed. However a lot of those fixes were put in place by governments and regulation with the threats of prison time and fines for both banks and their customers.
Another question is if things like this will poison the well and scare people away permanently.
It's almost like an authority is needed to enforce contracts. This decentralization for the sake of being decentralized doesn't solve the problem fully.
The difference is that the "early days of banking" were the 1200's CE (and arguably way before then). And even then, it took 800 years to really nail it down and finally get away from fiat currency. For some reasons none of this applies to crypto because reasons that definitely aren't a pump-and-dump.
Because the only way to get a loan is to put up collateral that is locked into a contract. And that collateral can only be extracted if you pay back the loan. So, if you value the collateral less then your debt, then, sure, walk away. But if the value of that collateral falls to less then the liquidation threshold (an amount some percentage greater then the value of your debt), your debt will be paid back by a liquidation bot and the the liquidator will take your collateral for themselves.
Yeah, but the whole purpose of a loan is to fund something, and to be able to fund something the amount loaned out needs to be larger than the collateral. Otherwise, there's no financing going on. It's simply a bet on the relative value of the principal vs the collateral. Calling this "a loan" is misleading.
What happens is someone takes a loan out with their BTC as collateral, the BTC grows, they earn more than the interest on the loan with the money they've borrowed, and make a lot of money chaining these together over and over again.
Vastly oversimplified (and possibly wrong), but if you want to know more, do some searching for "yield farming".
The point is that they want to keep their BTC because they think it's going to go up, so they take out a loan with their BTC as collateral rather than directly spend their BTC.
If you take a loan in BTC and post the same amount of BTC as collateral, the payoff from such a "loan" is the return on BTC during the holding period minus the rate of interest charged times the principal (or collateral, since it's the same amount). In finance, this called a "swap", and in a swap the principal is not actually exchanged because it's inconsequential, it's only used to calculate the amounts due. In short, what you describe is not loan, but a swap, which is a different kind of financial product.
A car or a house being used as collateral are kept by the borrower at their disposal. This means the borrower can benefit from the collateral asset, e.g. by using it or living in it, while the debt still hasn't been paid off. In these cases a fully colletarelised loan can make sense. But this is not the kind of collateral that we're talking about here. We're talking about collateral that is held by the lender in a margin account, or "locked" (in defi parlance), until the debt is paid off, which is the only kind of collateral that can be used in "decentralised finance", because the other type requires a contract (not a smart contract, an actual, legal contract) and the ability to litigate.
Which is why car loan providers usually require a substantial down payment so the loan is not underwater. (And why home mortgage providers usually require a LTV well under 100 percent--and make you pay mortgage insurance even then unless the LTV is even lower.)
What the hell are you taking about? I have never made a down payment for a car and have never paid interest on a car loan. Ever. And I’ve purchased many cars.
E: woah! .06 seconds to the first downvote to a Dow thread comment on a two day old post! I’m out.
Currently several year-old cars are selling for nearly as much as brand-new cars. Even before the current car shortage, repossessed zero-money-down cars were commonly resold at basically the same price as the first sale.
There is a huge problem with the collateral model: liquidity.
If you put up $X in FOO_COIN as collateral and FOO_COIN starts tanking in value, the contract is supposed to auto-liquidate once it hits a certain point. But there is absolutely no guarantee that this can find a buyer. So the "guaranteed" collateral recovery is not exactly guaranteed.
That's why you can only borrow up to 80-ish% of your collateral, and that's getting very risky for the borrower. It also means that the sane lending protocols are somewhat stingy with what they take as collateral and then set the borrowing limits and liquidation thresholds fairly conservatively.
When the market starts making big moves downward the liquidation bots have a keen eye on which positions are at risk, watching and predicting the oracle updates, and within a block or 2 (~30 seconds) of a position being vulnerable have the deal all closed out. It can even be all done in a single transaction bundle that calls the liquidation function, pays back the debt, takes the collateral, and sells it on a dex, all in one go.
The market price for the collateral would have to drop more then 20% in the span of that 30-seconds for it to not be profitable for the liquidator.
That's not to say it's impossible for this to fail, the biggest and sharpest dumps happen during liquidation cascades. But a failure is in the category of 'black swan event', and not something that is seen with regularity.
A "black swan event" is something which was obviously possible in retrospect, but no one could have predicted other than via blind guessing. If you can explain how it'd happen in advance, it's not one.
It's actually a correct use of the term. A “black swan” is something that is believed not to be possible – or, in retrospect, something that was believed impossible but happened anyway.
The term predates the discovery of black swans;
> However, in 1697, Dutch explorers led by Willem de Vlamingh became the first Europeans to see black swans, in Western Australia.[9] The term subsequently metamorphosed to connote the idea that a perceived impossibility might later be disproven. Taleb notes that in the 19th century, John Stuart Mill used the black swan logical fallacy as a new term to identify falsification.[10]
There are a lot more backstops. Traditional finance can have this problem, but we can install human systems to limit the blast radius of things. As you say, it is traditional finance on steroids.
Crypto enthusiasts seem to think it is the opposite. People tell me that defi loans are "zero risk" because of the automatic collateral systems and I just laugh and laugh.
Crypto finance and especially DeFi is tiny compared to traditional finance. The blast radius is still small without the regulations. But the regulations will come. Crypto finance is going down the same path that traditional finance did just in a period of a few years than a century.
Everybody who claims there's "zero risk" is either lying or blind to the risks. You can't get those large yields with zero risk.
You can't get Rich with a capital R through safe, traditional investing working even a SWE job.
You can get upper-class rich, seven figures rich, comfortable house, vacation home, early retirement rich, but you can't get Private Jet Rich, Masters of the Universe Rich, Look At Me Rich.
If you want to be Rich you need to to resort to something like playing the lottery, or starting a unicorn startup, or exploiting large numbers of people for your own profit, or crazy "technically it's not a pyramid" schemes like crypto and DeFi.
> You can get upper-class rich, seven figures rich, comfortable house, vacation home, early retirement rich, but you can't get Private Jet Rich, Masters of the Universe Rich, Look At Me Rich.
SWE at the staff level will get you low to mid eight-figures rich [0] by the time you're old with safe, traditional investing. Sure you aren't Masters of the Universe Rich, but you're still filthy rich.
And how many crypto people are going to beat low-to-mid eight figures? Maybe if you put $100k into bitcoin in 2013, but I'd bet there are more SWEs making $500k+ than there are people who put that much into crypto early enough (and weren't already filthy rich).
[0] Low-to-mid eight-figures in today's dollars. Nine figures in future dollars. Assume $500k income, putting half away from 35 to 65, getting 7% (4.1% after 2.9% inflation).
> Nobody should have the power that having a billion dollars gives you
Let's pretend for a moment that I agreed with you on this. Your proposal to address the situation is to take all that money, which is currently at least somewhat distributed, and concentrate it in a single organization which already claims a license to steal, kidnap, and murder. I really don't think you've thought this through…
If the code is the law how can it be incorrect? It can only be incorrect by comparison with some other law (like "the code writer's intentions"), in which case you are effectively making that the true authoritative law, rather than the code.
Not “anyway“ but because of the hack. TheDAO was done for after it was hacked. The code was too bad and trust was gone as well. That was clear pretty soon.
The only thing to decide was if they would let the hacker get away with at the time 15% of the whole supply. If they did that it would have endangered the decentralization of the eventual proof-of-stake switch.
Technically, there was no rewriting of history. Just a single (but very large) transaction was added to the consensus rules that (IIRC) replaced the TheDAO smart contract code.
Given that this incident resulted in the Ethereum/Ethereum Classic split, the "centralized cabal" was not very effective. The community voted with their feet and many went to Ethereum Classic.
You have to specify what kind of decentralization you're getting at.
The distribution of ETH was less decentralized before the hard fork than afterwards. 15% of the whole supply in one hand is quite a concentration in the distribution.
Because 'code is law' is a terrible expression to begin with. Law can be expressed with code, but law is ultimately a construct of human consensus. In the case of the DAO hack, the human consensus forked away from the bugs in the code.
> So code isn't the law? Why does anyone trust these systems that keep failing time after time? If they need to ask money back and really have poor recourse? Didn't current banking and legal system to develop just solve those issues?
As far as the crypto itself is concerned, of course it is. The issue here is that the founder is using another system to blackmail users.
The fact that this founder had to resort to tactics like these (instead of reverting the mistake on his end) shows that these systems are working as advertised.
While I'm not into Ethereum itself, lots of the failures you see are happening because the infrastructure for (mostly) decentralized finance is moving at an incredible (and irresponsible) speed. We're witnessing the modern version of old bank robberies that helped create the regulations.
Man, it feels like this has been happening a lot. I guess this happens when you have what is essentially JavaScript code on the EVM handling vast sums of money.
As many people on this forum know first hand, it's very, very hard to write that's 'perfect'. I've had the chance to write some fairly technically complicated EVM code (on chain contract upgrades with some other admin features), even the simple lines need a plethora of testing and review. This was a few years ago, but it took myself and another engineer, start to finish a couple months of dedicated effort to write what amounted to something like 5 source files. You have to know how the code executes with extremely high confidence up and down the entire stack, this takes time even with seasoned people. We ended up going through a security review with a third-party team, this is big money to do, high five figures for what amounted to two weeks of code review and pen testing! The problem is, without this serious dedication ($$) to making sure it's as good as you can get, projects are doomed to blow up like this. Hell, who knows what happens in 6 months after release when some EVM level bug gets discovered and directly exposes a hole in your contact. This might be different now, but a lot of contracts back then didn't have anyway to upgrade from those security exploits!
So from my point of view, you have this massive upfront cost, that I suspect the vast majority of teams are not paying, and you also have the chance of success being very low. Where have we seen this before, home automation seems to ring a bell and we've seen the security horror show with that. I don't mean to be such a downer on these projects, but they're really difficult to get right and audit. And when we're talking about putting millions(90!) of dollars into a thing, I don't really want to rely on the goodwill of some hackers to give me my money back. I wish the general public understood the security aspects of these contracts more, but people seem to see these hacks, shrug to themselves thinking they'll get debugged and fixed like normal software, and then continue on in life.
Unfortunately people are going to get burned in crypto by lack of experience, lack of review, lack of investment, and pure and simple scams.
If you look at the associated pull request, it added over 2K lines of code, and removed almost 1K, spread across 20 different files. 5 files have changed so much, GitHub doesn't even show their diff by default.
Sounds like introducing some formal methods would be a good way to reduce costs auditing and verification costs. I know there's some work in that area in the Ethereum ecosystem, but I'm surprising it isn't prioritized more.
Yes, but banks tend to have policies and procedures in place where large transactions require multiple parties to review and approve. When those procedures get broken, it's usually a result of fraud and appropriate legal actions can be taken.
While DeFi can implement these kind of policies and procedures, the rate at which seemingly undertested (untested?) code is being deployed and given unfettered access to a large values of tokens definitely falls under the "move fast and break things" category. Clearly the people involved don't grasp the level of risks they're taking or there would be a heck of a lot more emphasis on QA over deployment-to-the-blockchain.
And the government stepped in to save them. Not a fan of that but it's just what happened. Government will not step in to save crypto, at least not yet.
There's also the possibility that governments will actively ignore cryptos problems just to de-enforce crypto's utility.
> Banks behave nicely only when they're legally obliged to.
Not even then, as repeated illegal actions by banks (Wells-Fargo in particular has been getting caught a lot recently, but is hardly the only offender) demonstrate.
That’s a pretty glib and incorrect way of explaining crypto’s creation. Really, it was created because of the misguided belief that the fed breaks things, not “banks”. Basically, it was goldbug ideology on steroids.
If we’re comparing who “breaks” things more, crypto or banks, crypto will lose every single time. So far I’ve never had my bank account wiped out and the website replaced with a single page that says “penis”.
I see Solidity as statically-typed JS flavour. Knowing all the gotchas, I think it deserves to be called the JS of DeFi. When you write code in it, it feels like walking on a minefield. Except when things go wrong, your frontend won't crash, but you'll lose yours or someone else's money.
Not to mention, you have all sorts of people trying to exploit your code - draining smart contracts from money is a great incentive for black hats.
So it's even worse than JS in some aspects (not just the language itself, but the platform it is tied to).
Solidity is nothing like js. The biggest security issue in js is weird implicit casting and conversions which aren't an issue in solidity.
It's definitely the best language to write smart contracts as over the years simple traps have been eliminated, or are at least well known (the worst remaining one comes from people still using .transfer to send eth, but the method is widely known to be obsolete now). What remains is the actual irreducible complexity of writing smart contracts.
The entire compound bug was apparently a typo, > instead of >=. No language can protect against logic errors like that.
It's almost like there are rules and laws and people in the loop to prevent these kinds of things, and crypto is an expression of naive libertarianism that has no path to implementation without all the same things we decry about fiat - because in the real world those things are useful.
Any code that controls money needs to be super solid, but I wonder if Chia's smart contracts[1] would help? Their VM is functional and doesn't have stateful side effects like Solidity/EVM. The Chia team claims this is more secure/efficient/auditable than arbitrary Solidity code because state changes are often the hardest things to reason about in programs. It's an interesting claim — one that seems like it could be true and is worth seeing if it plays out in reality.
It has nothing to do with the language. It's all about software architecture and logic. Modern JavaScript is one of the best programming languages in existence.
Wouldn't a language with built-in support for proving properties of the code be better? My understanding was that compared to most of the typed functional programming languages, idiomatic JavaScript code is terribly more difficult to prove things about, by hand or machine.
Formal proofs are a waste of time. You're more likely to make a mistake in the proof than in the code. How do you prove that the proof sets the right expectations? What is the point of proving that software meets certain requirements if these requirements are the wrong requirements and the problem was solved in the wrong way (the problem was solved, but it was the wrong problem; the user did not need that feature to behave like that)? Coming up with the requirements during implementation is the hard part; that's what most developers get wrong. Implementation is easy.
Formal proofs might even make software worse since they lock down requirements; potentially in a sub-par way. Not to mention that requirements change. Good code needs to be able to handle changing requirements.
Ahem: "Wells Fargo clients began to notice the fraud after being charged unanticipated fees and receiving unexpected credit or debit cards or lines of credit."
Were the consequences actually impactful? Or did they only amount to a slap on the wrist and brief period of public shame before returning to business as usual?
Nobody except the 'bank' in this case lost money. In fact, Compound also has a treasury that can and has been used to pay out users affected by bugs. Some small percentage of every loan on compound goes to fund the treasury. It's quite a good system.
It specifically happened with payments from the IRS (I was getting someone's refunds) so my assumption was some wonky automated deposit handling on the bank's end. OCR is my theory because we had the same account number, except a 1 was switched to a 7.
Yeah totally. My credit limit on my Chase Freedom card is $90M, and this one time I bought something for $90M when I thought it was $90, and I was totally unable to reverse it.
Sure, but my credit card also gives me 2% cash back on all purchases, and since I would have to pay the extra % no matter what, may as well get the cash back, too.
I also get something for that 2%… the fraud protection you mentioned, the safety of not having to carry cash, ease of use, spending tracking, the ability to dispute a charge if a vendor screws me.
Honestly, credit cards have been a great thing for me. I have never paid a penny of credit card interest and get thousands of dollars in cash back every year.
> The cash back you receive does not cover the increase in prices that are passed on to you
Very few places charge a different rate for credit card vs cash purchases, so I would have to pay the increased cost whether I use a credit card or not. Since I have to pay it anyway, might as well get the cash back.
Also, while you are right that I could hypothetically have my account suspended for no reason, it has never happened in the 25 years I have been using credit cards. I also mitigate this risk by having more than one credit card with different providers.
However, I have had merchants fail to deliver something I purchased and had to use the chargeback feature of my card multiple times, something I couldn’t do with crypto.
I don’t think I want to try to eliminate hypothetical risks that are unlikely at the cost if incurring very likely risks that I know will happen.
This seems like people who don’t wear a seatbelt because they are worried they will be trapped in a burning car unable to get out. Sure, that is possible, but not nearly as likely as being in a car accident where a seatbelt would save you from injury or death.
> Also, while you are right that I could hypothetically have my account suspended for no reason, it has never happened in the 25 years I have been using credit cards.
To you. It has happened to a lot of protesters, publishers, and dissidents in the world.
These systems shape all of society, not just your one life.
And yet, it remains the case that you experienced a bug where money was suddenly removed from your account without proper authorization, which was my point.
That's not a bug, it's how they were designed. Someone could steal your secret key and make an unauthorized transaction with cryptocurrencies too. Only, then you would have practically no recourse.
"Unauthorized payments" is a bug. It's an unfixable bug for which they've created a recovery system, but it's still a bug, because the system is not intrinsically secure.
"Steal your secret key" is not a valid analogy to a having a credit card number stolen. The information density of a secret key is orders of magnitude higher than credit card info, and that's why it has provable security properties that credit cards do not. Credit card info can in principle be brute forced where keys cannot.
Every time I have had fraudulent charges on my credit card, it was the credit card company who spotted it and reversed the charge before I even notified them.
"Tradition is a set of solutions for which we have forgotten the problems. Throw away the solution and you get the problem back. Sometimes the problem has mutated or disappeared. Often it is still there as strong as it ever was"
Substitute tradition for "regulations" and you have "Uber of X" or "hot start up industry disruptor" in a nutshell.
I'd like to add nuance: tradition seems to oftentimes be a mix between actual solutions to problems, and legacy cruft that can be safely removed without undoing the fix to the problem. Large, active codebases have to be occasionally refactored to keep them understandable, and this refactoring can often be done without a loss of functionality - why would the law (or tradition) be different?
In particular, it feels like much of the legal system is a bunch of hacks grafted onto existing (oftentimes much older) laws, and that there's an opportunity to rewrite the laws and merge the hacks in to form a cohesive whole.
While that's true, often times tradition and regulation are not the best solutions to the problemx certainly not as technology has evolve.
Not to mention much of the time regulation is not a solution at all but rather just means to protect incumbents.
Edit: To be clear, I agree there is tons of bullshit going on in crypto and DeFi, but I also believe that the existing players are ripe for disruption if they weren't regulatory protected.
There's no reason why I shouldn't be able to do a bank transfer instantly, or why I can't pay a a small business electronically without a large fee going to Visa.
You're both right. We need to run a meta-scam where we create a visibly half-baked crypto currency in the hopes that a million investors hoping for a windfall from a software bug invest $10 each.
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> Compound is the world’s fifth-largest DeFi protocol with a total value locked of $9.65 billion, according to DeFi Llama, which provides ranking and metrics for DeFi protocols.
So they lost 1% of the total funds due to a bug.
And their solution was to threaten to dox the users.
I mean, it's making many of them, but DeFi/"Smart Contracts" is a novel mistake. "Due to misdrafting of a contract we have to give all of the bank's funds to a cat" isn't a thing that happens in the real world; while contract mistakes can be expensive, the sheer ridiculousness common in DeFi-world is unique and new.
Superficially, the mistakes are different, but the evolution is the same.
E.g. the original goal of bitcoin was to be a digital form of cash. Cash because the transaction is just between you and the buyer - cash is a bearer instrument. With ACH it's a custodial relationship with the bank, and the bank's interest may not be aligned with yours. They can decline transactions, freeze your funds, monitor what you do, etc. So there was less "ownership", and this true ownership combined with digital payments was the original vision.
Except that true ownership is really limiting. Sometimes you want the intermediary or need money held in escrow and that's when you want a custodial relationship. So enters Etherium and the notion of contracts. Now it's no longer payer and payee, but you have the contract sitting between the two, much as the bank. And just as the bank, the contract can act against your interests. Now it's true, the specific ways that you get screwed by the smart contract are different than by the bank.
Next up, we are seeing the need for adjudication/rollback for when the custodians screw up, as people want to unwind errors in smart contracts or make policy changes. So this will be like re-inventing the court system. Soon, someone will be able to sue you and put a lien on your digital currency, using smart contracts, for example, with appeal to an adjuticating system that can force you to enter into the contract against your will. Then we will be back to longing for the days of bearer currencies.
The difference is that in real life, contracts aren't read by a thoughtless computer. Things can be implied based on the usual business practice. If there's an ambiguity, the intent of the parties can be used to resolve it. If something really unfair would happen, it can be thrown out as unconscionable or against public policy.
This is the second crypto startup this week I've seen cost people a lot of money. The other was a startup destroying a bunch of NFTs that got produced in a hack. Catch was, these tokens had already been bought and sold.
Cavalier stuff like this will absolutely get you regulated. The draw of crypto is supposed to be immunity from this sort of thing, but the frequently amature execution of the products leaves end users often more vulnerable to attack than had they shoved their money in Bank of Your Nation. Banks invest eye-wateringly large sums of money every year in security. Crypto startups are just unable to match this level of security analysis and testing.
All that plus a lot of mistakes that weren’t even possible before. Like, epic disaster stuff we couldn’t even imagine yet.
But the accessibility and costs will be massively superior to the old system, which will be unable to compete in anything but politics, and and thus will get worse rather than better, and will fail with near certainty.
I wonder if that's really the case. It's also possible that, if you kept 10% and returned 90%, you'd still have to pay tax on the 100% (that is, the 90% you returned might not be deductible).
No, but most folks have addresses (with maybe one or 2 degrees of separation) that have interacted with centralized exchanges that have done the kyc. The only way to truly anonymously get assets in the Ethereum world is to run the funds through tornado cash (slow and expensive) or bounce through the shadiest non-kyc exchanges who very well could just pocket the funds you try to put through them.
You might be able to mine your way to anonymous funds, but that is even more expensive in terms of power and equipment costs.
Cryptocurrency bros are hilarious. In one breath they’ll claim the government is evil and they’re building tech to circumvent government control, and in the next they’re threatening people to weaponize the government against them if they don’t fix their massive fuckup.
I unfortunately just spent some time on Twitter reading about this debacle, and the number of crypto bros attacking anyone remotely critical of DeFi was astounding. They're all throwing around the term 'TradFi' as a pejorative — it's so weird.
At least in some European countries you can sue a person who refuses to return the funds transferred by a mistake and win inevitably. I have been such a person who got money this way (from a particularly rich company which earns its money a legal but morally questionable way so I have no remorse) and has been forced to return + pay the legal expenses (which can be pretty affordable in Europe). I never meant to actually keep the funds forever but used the lucky event as a loan :-)
I am also a bit confused by this. I have definitely read before that you can't keep money payed by mistake. Is this different in the US or is this some difference with cryptocurrencies vs normal banks?
> “The protocol can easily absorb a loss of $90 million and a lot of it will likely be returned, but the larger issue would be if people lose confidence in the system’s ability to function properly,” said Greenspan.
Why would anyone ever lose confidence in a system that sent $90 million to users as a result of a “one-letter bug” in an "upgrade gone epically wrong"?
The IRS is the most understaffed, underfunded, overworked of the major agencies. Its alleged power is mostly an illusion of the media. I know someone who made over $1mm in a year and didn't pay taxes. just kept delaying it and got a lot of letters. A decade later still has not paid it. now the FBI and Secret Service are way worse though.
The founder "threatened" them by telling them that if they don't return it, it'll be reported to the IRS as income. Crypto is a weird place when this comes across as a threat.
The article implies it's common for recipients to return a lot of the tokens in cases like this. Anyone have any clue why? I would thinks there is 0 incentive to return free crypto.
Just a wild guess: To maintain faith in the system? I don't know anything about Compound aside from what I've read today but I would imagine whatever you've got invested could quickly go to zero if the crypto-investing public decides the protocol is too risky. (Assuming, of course, there exists an upper-limit to their risk tolerance.)
Returning the money elevates the hacker to "hero" status within the crypto community. By keeping the funds they risk getting doxxed and having serious legal action taken against them. Additionally, if the funds are a sizeable portion the entire project might fail rendering their token useless.
I have a couple of questions that I hope someone more versed than me can answer:
* Isn't the rule of crypto currencies and the like that the code is explicitly the contract, so if the code says to give people money then that is "legally" binding?
* Doesn't the IRS, etc still consider crypto currencies to be assets, not currency, so you'd only declare income on sale of the asset, not acquisition?
Code is not law and never has been, consensus is law.
The Ethereum community (technically, node operators) as a majority decided to rollback the blockchain and it would have been impossible to do so otherwise. The community was tiny barely three months after launch and this would be much harder to orchestrate today.
IMO, if the project is truly decentralized as they claim, then the recipients of the tokens should be entitled to keep the funds. That said, I hope the SEC will investigate this to rule out a scheme in case the bug was an intentional way to launder tokens to insiders.
Compound is a YC company, lol, can you cancel that CEO to force greater decentralization? He shouldnt have said anything, their protocol already allows for user contributed code to get merged in so its already distributed enough and doesn't need him. They can find someone else to click “Merge Pull Request” and redeploy contracts.
Can anyone shed light into why Robert Leshner jumped into the fray at all? Its not even an issue and some people got rich. People know how to report income to the IRS themselves.
edit: okay I see his followup tweet saying he wanted to act on behalf of the community and considered the prior tweet boneheaded. Just normal amateur hour with amateur founders in crypto.
I have no current interest in DeFi not do I have any DeFi related crypto (Full disclosure: I have very minor Doge/ETH/BTC holdings).
I know it's fun to kick DeFi when it's down and make fun of "code is law" and the like but all of this leaves me with a very queasy feelings especially when the same comments praise our current financial system as if it has figured this all out and only idiots try to reinvent the wheel. All I can think of is 2008 and how all our financial institutions royally screwed us and almost no one went to jail and no one was held accountable (I think 1 person went to jail and they were a small fry).
Does the exact issue that happened here happen in our current systems? Yes, but it's fixable. That said, much worse things happen and they can be swept under the rug/ignored.
I don't put much faith in DeFi but I also put very little in "fiat"/"regular" financial institutions.
Notch it up to another first for crypto.