This is good. The backing of stablecoins is a very real issue. As the Treasury points out, there's a very real possibility of a run. Two stablecoins have crashed so far, SafeDollar SDO, and $TITAN. They went all the way to zero.
Can Tether survive a net outflow? Probably not. They don't have the collateral.
Dai is really a derivative of Etherium. Dai is backed by Etherium at 150%. So
value in Dai is at risk if the price of Etherium drops more than 1/3. Etherium dropped by half back in May 2021, but recovered. DAI could have crashed at that time if it faced a net outflow. It didn't, though.
The real question is what happens in the next recession.
> Can Tether survive a net outflow? Probably not. They don't have the collateral.
Luckily for Paolo & friends, their terms of service clearly state that they do not ever have to offer redemptions of USDT for dollars. Or even whatever IOUs and bits of string they may or may not have in reserve.
Out of all the stable coins its the most likely to withstand a "run" because they do not have to pay you if you ask. In fact if you're a US person, you're not eligible at all. If you're not a US person, it's at their discretion to deem you a "customer." Even if they do that, they can delay your withdrawal arbitrarily. Even if they don't do that, they can pay you out with whatever is actually in their backing. [1]
What would get destroyed in a run is every other crypto, as folks desperately try and exchange their USDT for something they can sell at a fiat-backed exchange. The Crypto-USDT pairs will quickly go no-bid, and as people rush for the narrow exits at fiat exchanges, prices will plummet.
After that hedge fund issued a $1M reward on Tether backing I did some more investigation and the thing I realized is that 1) Tether is inherently backed by BS and 2) crafting any sort of Tether short is near impossible because everyone in the game - Tether, the exchanges, etc. - will all be against you if you're winning in the short. There's that scene in "The Big Short" where Mark Baum and crew know the subprime bonds are junk but they visit the ratings agency and they're not downgrading. [1]
That same thing will happen if crypto has a major run. The exchanges already conveniently "go down" when Bitcoin dumps even now. Every single time, it's become a running joke. If we had a serious Tether blow-up or BTC move that would rock the boat, everything would get locked down and you'd have no way to buy back your Tether short for pennies on the dollar. When tril/billions are on the line, ain't no way you're getting your millions, especially in this unregulated wild west.
I’ve been shorting a few bitcoin-related public companies on the theory that in a run on Tether they will have to liquidate large bitcoin holdings and bring down the rest of the market. It’s not as direct, but I’m less worried about counterparty risk. I wrote up my thesis here: https://paulbutler.org/2021/betting-against-bitcoin/
Interesting thoughts, I like the miner analysis, esp. since a lot of these companies have moved from OTC to NQ listed recently. I keep a watchlist just to observe how they react to BTC pricing, and pondering some of your thesis it's got me revisiting the thought that miners might be a great target for a "short the VIX" style strategy. There's also the new "BITO" ETF which is most certainly being used by some big brain quants to build some asset basket that nets them a near zero-risk long-term win. Wish I had more financial brainpower to put to it.
>I’ve been shorting a few bitcoin-related public companies on the theory that in a run on Tether they will have to liquidate large bitcoin holdings
I doubt a run on tether would even cause a 50% drop in BTC price. Hope your account doesn't blow up when Bitcoin inevitably reaches 1 million per coin ;)
Sure, in the short term, unregulated markets can be manipulated.
But Tether's been around more than seven years, more than enough time for the "smart money" to profit by obliterating them.
You can sell Tether on Coinbase for U.S. Dollar deposits to your bank account.
The fact that Tether maintains its 1:1 peg to the dollar is a signal that maybe all the smart guys who have been confidently predicting its imminent and inevitable failure for the last seven years might be missing something.
> But Tether's been around more than seven years, more than enough time for the "smart money" to profit by obliterating them.
> The fact that Tether maintains its 1:1 peg to the dollar is a signal that maybe all the smart guys who have been confidently predicting its imminent and inevitable failure for the last seven years might be missing something.
Bernie Madoff claimed that his scam started in 1991, though in reality it was probably much earlier. It didn't collapse until 2008.
Even in the cryptocurrency space, Mt. Gox took five years to collapse.
There wasn't this loud of a chorus continuously yelling that Madoff and Gox were scams, in every possible media outlet from blogs to Bloomberg, for seven years.
There wasn't a well publicized US federal indictment and investigation of Madoff and Gox, settled with a fine and no injunction.
I'm not saying Tether is clean or 100% funded, I don't know. But unlike Madoff and Gox, accusations have been very loud and very public for a very long time, and the market still accepts USDT at parity with USD.
If Tether's treasury is empty, and if people can freely trade USDT for USD, it wouldn't hold 1:1.
> But Tether's been around more than seven years, more than enough time for the "smart money" to profit by obliterating them.
How would the smart money profit from obliterating them? If you’re referring to a Soros/GBP style trade, how would one borrow enough USDT to pull it off?
> The really smart money with large crypto stashes could borrow USDT with crypto as collateral, and trade the USDT for greenbacks.
Have you looked into the mechanics of this trade? The crypto loans I'm aware of are all significantly overcollateralized. You would have to pledge say 1m BTC to get 0.8m BTC worth of USDT which you could then sell for dollars. If you succeeded USDT tanks, everyone who holds USDT would be rushing for the exit, wiping out the crypto you pledged as collateral also. So you succeed in losing 20% of your money on the initial USDT trade and almost all of the value of the crypto assets you pledged for the loan as well.
These markets are nowhere near as flexible and liquid as regular fx - I would be amazed if you ended up making money overall on this kind of strategy and the execution risk is significant.
In this scenario, if USDT drops low enough, might you not have trouble actually procuring enough USDT to payback and unlock your BTC? It would seem like a sudden collapse of USDT might cause a complete stop in all trading of USDT pairs, no? I suppose you could counteract that a bit by continuing to hold a certain amount of USDT, but would the loan instrument still accept USDT as repayment if USDT becomes worthless?
1)In normal FX markets the amount transacted goes to trillions of USD per day, and liquidity at the touch is very high. So if you need to unwind a position there will be people who will take the other side and the market won't move much even if you're trying to unload a lot of a single cross.
2)In equity markets (which I'm a little more familiar with from a microstructure point of view) a single large market participant like a big broker/dealer will do more than a billion client orders on a busy day (when you add up the orders they do internally and all the child orders from executing trades in pieces). If you wanted to do a billion transactions on the ethereum blockchain at the current throughput it would take you almost 2 years, and no-one else would be able to do anything. So making a lot of trades fast isn't really possible.
Obviously chains like solana would help this a lot, but the point remains that in the current defi ecosystem markets aren't very resilient because they can't react as fast and they don't have the kind of depth of liquidity that conventional markets have.
A lot of folks in the “tether will fail spectacularly” camp also believe that its failure poses a systemic risk to other crypto, both because tether holds positions that they would have to quickly liquidate in a run, and because USDT makes up a large component of the daily trading volume for many coins.
So I suspect there’s not much overlap between people who believe they could break tether and people sitting on a large crypto stash to use as collateral.
> Somebody holds large chunks of the $70.5 billion in USDT.
Personally I'm really really confused about who holds all that Tether. Just who is it? I can't come up with any good idea. Is it the exchanges? But if so then why would they?
Really interesting article. Thanks for sharing. I was going to ask which tickers you short so I could continue learning, but I see it's RIOT and MARA. Just curious: is it intentional not to mention them in the article?
Thanks. Yes, I wanted the underlying message of the article to be “you’re not stupid for avoiding bitcoin” rather than “yolo into this short with me” :).
Interesting idea. On the topic of shorting Tether itself, maybe I'm missing something obvious, but exchanges like Kraken actually offer margin trading on pairs such as USDT/USD and USDT/EUR. https://support.kraken.com/hc/en-us/articles/227876608-Margi... If somebody (probably a non-US-person who is allowed to do margin trading there) is convinced that Tether will tank, why can't they just go on such exchanges and initiate a short? Is the fear that the exchange itself will become insolvent after the crash, and you won't be able to withdraw your fiat out of it in the end? I'd be curious to hear thoughts on this.
The only contrary opinion would be the obvious one - that their correlation to tether's fortunes are not 1:1, and that shorting them gives you a bounded upside, and an unlimited, completely uncorrelated downside.
If the Fed prints another trillion dollars tomorrow, their stock price could double, wiping out your short...
Halving risks & information assymetry risks are pretty solid arguments for future headwinds faced by btc miners. Investopedia states that by August 2021, only 2.3M BTC out of the 21M cap remain to be mined (https://www.investopedia.com/tech/what-happens-bitcoin-after...). However, what is preventing a fork of bitcoin from addressing this?
Suppose BTC is met with a severe logjam as predicted by the author, won't a solution that does not involve mass liquidation (for e.g. a fork) be in demand and eagerly welcomed by existing BTC users?
Adoption of a fork by it's nature essentially requires there be a "liquidation event". If every single BTC user is on board then that's an "easy" game to play, you simply pick a date and coordinate with everyone that the old BTC becomes completely worthless and the new BTC is worth exactly as much as the old BTC.
That, of course, would not happen. Even if there were such an event you'd still see people trying to beat the clock and mass liquidate the old BTC while there's still demand, or people immediately liquidating their positions in "new BTC" because they think it's not going to eclipse "old BTC".
We have a good real world example of these very things happening with things like BCH and Ethereum Classic still trading quite regularly. Both were the result of some users deciding to move to a fork and some deciding to stay. In traditional markets you could make some parallels with a stock split or demerger.
Have you considered longing a BTCUSDT perpetual and shorting an equivalent BTCUSDC contract or e.g. borrow and sell BTC if you dislike the other stablecoins?
The big risk in your play is that the crowd in a panic will select another stable coin for going on the sideline IF AND ONLY IF such a coin is available. If not they will buy the most stable non-stablecoin which is ... drumroll ... bitcoin.
>That same thing will happen if crypto has a major run. The exchanges already conveniently "go down" when Bitcoin dumps even now
To this point specifically: is there any proof this is malicious? Amazon, Facebook, Google have all had outages before; shouldn't we apply Hanlon's Razor when a cryptocurrency exchange fails to serve requests during a massive traffic spike?
The exchanges never go down when the crypto price rises, only when it falls.
Further, an honest exchange makes money on people’s trades. Going down when volume is high means giving up peak profits. Equivalent of amazon reliably going down on black friday.
Well, I still don't think that's concrete evidence of maliciousness.
First and most importantly, the crypto market can drop 15-20%+ in a 24 hour period; similar rises take multiple days on high-volume, large-cap coins. This is actually not specific to cryptocurrencies, there's a well known phrase in the equity markets "bulls take the stairs, bears take the elevator (or 'the window')".
Similarly, with such volatile assets, when the price falls dramatically, many people are running for the exits. On the other hand, when the price is skyrocketing, many people have a "hodl" mentality, think the price will rise up further, etc. If the price falls off a cliff everyone is trying to sell, but when the price spikes many feel "I missed my chance, better wait for a dip" and aren't rushing to buy.
Most exchanges started as garage-based operations and most were built quickly or shodily. It wouldn’t be surprising if most of them have enormous piles of technical debt, especially as the number of alt coins exploded.
Making a robust exchange is hard and requires an amazon level of development. Huge movements in price correlate with massive increases in volume. The simplest explanation remains firmly in the realm of poor platform, in my mind, rather than nefarious and illegal manipulation.
Just look at Robinhood. They offer a sleek looking product, but their crypto offering falls down under load (positive and negative) regularly.
This has occasionally been mentioned elsewhere about some of the sketchier exchanges. I have never seen it mentioned with any of the exchanges I use - is there any non-anecdotal confirmation of this phenomena?
Not really, and you shouldn't try. The highest recorded price for 1 USDT was $1000 at a centralized exchange, and do you really trust your counter-party in a DeFi transaction not to get flash-loaned into oblivion or to rely on a bad oracle? [1] You also have to post crypto collateral which may get rekt alongside a Tether collapse. Who even knows what that might look like? The only way to win is not to play.
The only realistic way to short tether is to take a DeFi Tether loan and use some other stablecoin (You must trust that it's peg will hold longer than USDT's) as collateral.
I don't get it. If everyone starts selling their Tether (because they're afraid of it not being able to maintain the peg), even if they can't sell the Tether back to the company, won't that crater the Tether price- possibly to zero- effectively killing the currency?
Like, this happens with currencies that are pegged to the dollar. The government that's supposed to be maintaining the peg starts to run out of dollars and starts limiting dollar redemptions. People turn to the black market to obtain dollars. The price of a dollar (in that currency) goes up. The value of the currency (again in dollars) drops. Now the peg is broken.
Tether the company could walk into the sunset with whatever they're holding- they can just honor "friends and family" withdrawals, but that doesn't prevent the coin going to zero for everyone else. It actually makes it even worse for the currency: suppose it's collateralized at 50%. Tether could honor withdrawals at 50 cents on the dollar, force every holder to take a 50% haircut. The price might settle to something less than $1 but more than $0 and continue on.
But if they abscond with the money instead, the currency will have even more reason to drop to nil.
The reason it hasn't collapsed already is that all the exchanges are in on it. It's crypto's equivalent of "too big to fail."
Individuals will be told they're not customers by Tether (this happened on Twitter a while back, someone set out to prove you could and Tether stonewalled them, so he deleted his account). They're offered a piddly USDT:USD market pair on a few exchanges, like Coinbase and Kraken, as a distraction. There, they can sell their USDT to folks trying to buy it (for instance, to fund a DeFi position) or the exchange obo Tether, Inc. to keep the charade going.
Only institutional parties like exchanges, Alameda and Cumberland are "deemed customers" and they'll never redeem because they know they can't.
Everyone's in on this. I think only a court-ordered exchange liquidation could possibly end the game, like a Binance collapse for instance.
I just don't see how Tether refusing to honor redemptions makes it more resilient to a run in progress, rather than less. If nobody wants to buy 1 USDT for a dollar, the peg will break all the same. If Tether stepped in as a buyer of last resort, that would make it more resilient- but if it doesn't, that worse for the peg, not better.
It's better for anyone with physical custody of the Tether assets I guess (they have a pile of gold to Scrooge McDuck dive into) but the currency is even more boned than if they'd propped the market up by buying Tethers back.
A 100% collateralized stablecoin that just hands everyone back their dollars if they ask can survive anything, a 50% collateralized one can spend a lot of it back into the market to prop the price up, at least for a while. But if Tether can't or won't, that's going to make maintaining the peg a whole lot harder!
> Oh, I understand why it hasn't collapsed already.
I feel stupid, but I still actually don't. If considerably more people will want to sell it than there is a demand for it, the price will have to go down, no matter what, as long as "price" is anything more than a decorative label on the exchange's website and you actually can swap it for any currency at all. So, either the exchange should cover all that demand, which doesn't sound reasonable (I'm not sure it's realistic, and even if it was — why would they do that? if this happens, Tether is dead, they can either abandon it or go down with it), or there actually must be some demand. So, I assume it's the latter.
But why would there be any demand for it, if everybody (basically) knows that USDT is a scam? It isn't the same thing as "SHIBA is a scam" or whatever, because even if everyone agrees SHIBA is essentially worthless, people are buying it to speculate, so it can hold onto a belief that others believe it will grow. You cannot speculate on USDT, since USDT cannot grow by definition, it's a stablecoin (and not the only one — there are others with better reputation). It can only crash.
To make the price of USDT (or anything, for that matter) go down, someone who holds it must be trying and failing to offload it at the current price. Conversely, it's possible to prop up the price by being willing to buy fairly large amounts at the current price, burning your cash stockpile in the process. Meaningfully shorting the price of USDT requires getting access to a large stockpile without adding to Tether's (or its confederates') reserves and burning through their entire reserves.
There are two ways this can be done. The first is to be a large holder of USDT already, one whose nominal position is greater than the entire reserve pile, and attempt to liquidate it in favor of USD (this is basically a bank run). Or you can artificially induce this by borrowing enough USDT and selling it to either soak up the entire reserves or induce others to do so as well. But Tether's reserves are probably substantial enough to make this latter option infeasible except for the very largest financial institutions.
Now the largest holders of USDT are those exchanges that immediately convert any USD you put into them into USDT. And so long as you don't try to withdraw that USDT for real USD, they're unlikely to sell any stocks of USDT they hold (in your name or in their own name). Effectively, this means that so long as there is a net inflow of hard currency into the cryptocurrency ecosystem, no Tether crisis is likely to happen. However, should there be a sustained net outflow... well, we'll discover who the equivalent of Lehman Brothers in the cryptocurrency world is.
While crypto prices are rising generally there are more people putting money in and fewer people taking money out. Even a short shift in the market isn't enough to change that.
But a longer term crypto recession would have a run on the exchanges, many would want to cash out, and the price isn't going to be stable
If I understand correctly nobody has a useful handle to profit from killing it and all the players have an incentive in it's continued existence. Killing it would require large scale collaboration among individuals who collectively would all be hurt.
Ah, thank you for explaining. I assume the idea here is that the borrower of the stablecoin is then using it to make a bet on the continued price appreciation of some other currency, making it a leveraged bet. Crazy risky. Who is supposed to enforce the terms of the borrowing? Or is it done programmatically somehow?
Yup, exactly. Most used seem to be loans to buy more crypto.
With centralized lenders (Nexo, Celsius, Blockfi) you sign over ownership of your crypto to them and hope they will meet their promises.
In Defi it’s programmatic. I am less familiar with the mechanics there. I figure there is massive risk when I see 20+% yields but do not understand the system.
Ah I see. The point I was making is that since it brazenly doesn't have backing and it openly gets to choose who is allowed to redeem, a run would be very hard to actually start. The exchanges themselves are incentivized to backstop the pegs (up to a point) out of their own capital to ensure their own survival.
That makes some sense, since in normal banking you can bleed collateral until you're nearly dry without actually provoking a run, and when you're forced to start looking under your couch cushions for change and ask your depositors for patience, there's the trigger for your run. Tether doesn't have to worry about that...
But if "folks desperately try and exchange their USDT for something they can sell at a fiat-backed exchange" then surely the most desperate will be willing to take a haircut on their Tether to get out of it first, and then the Tether price collapses anyway, through some combination of the exchanges shutting down trading, drawing down their own collateral to maintain the peg (and then running out), and/or the exchange reluctantly allowing the price to float?
Like, the too-big-to-failness is definitely part of why it's still a thing, but that just means that the real buyer of last resort is other large crypto holders who don't want the ecosystem to collapse. That's great for Tether-the-company, and maybe good for Tether the coin, but it seems to me sort of distantly related to Tether allowing direct withdrawals.
There's an obvious mechanism for maintaining the peg if Tether allows large holders to redeem Tether: those holders buy any slightly discounted Tether, then hand it back to Tether and redeem it and keep the tiny profit. This will work but it's just Tether propping up the price with its capital with extra steps...
Assuming that the unlicensed exchanges have the capital to process withdrawals. In other unregulated industries the people operating the gray market platforms are almost always embezzling money and not keeping customer funds in segregated accounts. If the exchanges spend money propping up Tether they won't have it available for withdrawals.
Exchanges make money hand over fist, they keep non-trivial basis points from a nice simple MySQL transaction. The question is: is the net outflow from the USDT peg into USD more than the revenue they are bringing in?
Yeah but they're operating in a gray market that is going to almost certainly close or shrink with regulation and they're greedy so why not take as much as possible? It's not like the customers have any recourse when their sketchy offshore exchange disappears or closes without paying everyone.
Exactly this - the idea that Tether not being legally obligated to let you cash out USD somehow being a shield against a run seems ridiculous.
Being unable to redeem your USDT for dollars - regardless of reason (because Tether is out of money or Tether is refusing) - is what causes the run and the crash.
An entity that is holding a bunch of cash but refusing to honor IOUs it has issued will find that the value of those IOUs will rapidly approach zero. Permanently. Even if it laters starts honoring those IOUs, the IOUs have lost their utility forever and the price will remain at/near zero.
History has shown that this does not happen in crypto. Even for coins like Bitconnect and Confido that plainly turned out to be scams, there were still buyers long after the news was revealed. People like to bet on dead cat bounces, or some kind of news after the fact that redeems the coin.
and on the way the corresponding cryptos will all appear to shoot toward infinity, except the exchange shuts down for "maintenance" before that happens
You guys seriously seem to think that run risk exists more in the cryptosphere than fiatland. With the exception of shitcoins, I think the risk is more of a run on fiat...
When you start using something like BTC as your unit of account and stop measuring your net worth with a shrinking fiat yardstick you'll realise this.
Fiat onramps will become less and less necessary. We'll hold everything in crypto and buy a bit of fiat from time to time when some backward merchant or hyperinflated backwater country requires it...
Risk is that a tether run causes all of crypto to collapse, not just USDT. How many actual dollars are in the system? Everything real has been exfiltrated through electricity bills, taxes and early adopters selling, the entire crypto economy is a hollow shell, leveraged on retail deposits.
Exactly. Ultimately cryptocurrencies are a negative-sum game in that they take in real money and just move that money around, while spending some on overhead.
In contrast, imagine investing in, say, a new fast-food franchise joint. They money you put in there is used to acquire assets that are used to produce goods that people will pay to consume. If it's a well-run business, the value of the outputs will be more than the value of the inputs, making it a positive-sum effort.
I'm a crypto bear myself, but I'm not sure I agree with this argument. Plenty of services are built around "just moving money around" - accounting in this way has a ton of real value or else stripe, visa, paypal etc wouldn't be the huge companies they are. The questions are, whether "investing" by buying and holding is the right way to capture the value that this produces, and whether the benefits of doing it on a distributed blockchain outweigh the costs.
That's not quite correct, although I understand your sentiment.
When you own a share of Square (or Visa, or PayPal) each time a transaction takes place on their network, a portion of that transaction (revenue minus costs) accrues to the company - and by extension increases the intrinsic value of your share. The transaction revenue is spent on furniture, on R&D, on employees and on buffing up their cash position. As a shareholder, you benefit from every single transaction made on their network.
On the other hand with cryptocurrencies like Bitcoin, as a holder of Bitcoin you are a customer not an owner. You lose money on every transaction. That value accrues to miners, and by extension, your local PE firm re-opening a fossil fuel power plant or the Kazakh coal mining complex.
Square shares ~= Hut8 shares.
Bitcoin ~= a Starbucks gift card you hope appreciates in value when Starbucks sells more coffee. Currently there are enough, uh, savvy investors who think it should, so it does. In accounting terms, it won't though because that benefit accrues to shareholders of mining companies, which you are not. You hold a gift card. One that costs money to spend so must be worth less than face value.
Bitcoin is a strongly negative sum MLM, or if you agree with jstolfi, a Ponzi scheme with a fresh coat of paint. [1] The network currently costs $60M per day to operate. That's $21B per year in new money that has to come in to prop up the price. [edit](And all that money goes to burning coal and throwing away mining hardware).
Bitcoin isn't figuratively a store of value, it actually is. The amount of bitcoin on DeFi, backing collateral for flash loans and Stablecoin minting is astounding.
>When you own a share of Square (or Visa, or PayPal) each time a transaction takes place on their network, a portion of that transaction (revenue minus costs) accrues to the company - and by extension increases the intrinsic value of your share.
All the V3 crypto protocols have exactly as you describe above. However, instead of the money going into the coffers of the company, it goes into a 'Development fund' That will award the crypto to people who have applied and been voted on by the community to launch a project/technology in the protocol. [1]
> Bitcoin isn't figuratively a store of value, it actually is.
It's a speculative, negative-sum MLM token. I suggest reading up on what a store of value is. [1]
I'm not saying there aren't ways of monetizing it within the network - which may indeed create value, but intrinsically, it is a negative-sum asset, a mechanism of redistributing real cold hard dollars from new participants to old entrants and miners. It creates nothing. Systems built on top of it might, exploiting let's say regulatory arbitrage, facilitating crime or gambling, but intrinsically, it creates no value.
Exactly. Nobody before 2009 would have described a highly volatile unbacked synthetic commodity as a "store of value". That's just what Bitcoin partisans shifted to when they realized it was unworkable for its stated purpose as a payment system. E.g.: https://avc.com/2017/08/store-of-value-vs-payment-system/
It seems our difference in opinion comes from our definition of value.
I know people point to the current system and infrastructure of stock exchanges, SWIFT, the IMF, Central Banks, Retail and Commercial Banks, Internet Banks (Such as Stripe, Paypal, ETC.), Credit Unions, Savings and Loan Associations, Investment Banks and Companies, Brokerage Firms, Insurance Companies as working good enough. But for me... Occams razor hits me hard. Doesn't it seem weird that through this complex system of interactions, we can recreate all of that in Code? If there was no value in it, why did we create all those institutions in the first place?
If we can recreate those in a more humane, democratized, decentralized way, I think it's worth the .001% of the global financial system that it currently is. Even if it's grabbing 5% of the current headlines.
> Doesn't it seem weird that through this complex system of interactions, we can recreate all of that in Code?
All of these systems are already software.
> If there was no value in it, why did we create all those institutions in the first place?
Centralization makes them massively more efficient than crypto. If there was a way to make them more efficient that did not involve throwing risk models out the window or regulatory arbitrage, someone could just do that in the traditional economy without crypto.
This is a lot like the programmer tendency to want to re-write instead of refactor because to understand a system is way harder than to set out on a quest to build a new one. Although they always end up the same way: at best what you started with. To me this falls squarely under Spolsky's "things you should never do." [1]
There hasn't been a single actual competitive business built on top of crypto in fourteen years. That's because they're all hamstrung by the massive inefficiencies they boat-anchor to their solutions. Decentralization and trustlessness and permissionlessness don't matter at all to 99.9% of humans. Attempting to offer these is incredibly inefficient and makes it totally uncompetitive with centralized solutions for every legal use case.
I would argue it fails Occam's razor to try and add miners to a monetary system.
The simplest, most efficient, most economical solution to moving value around is centralization. If there's a better way to solve any of the given problems with crypto, there's an easy way to optimize it further: get rid of crypto.
Do you think we will forever be organized and segregated by governments?
Do you ever think a human being can be a sovereign individual in his own right, without owing fealty, taxes and morality to a government in some future?
The current financial system is not all software. When i pay in crypto, i give you my money. When i pay in the current financial system I am giving you every bit of information to rob me blind and hoping you don't take it all. My currency(Value i produce) is not my own and at any moment in time some outside entity can cause rapid inflation, devaluing of my currency or take everything i own straight out of my bank account. My contracts are not upheld by code, but by courts of law. I have to do a credit check to outside entity's to ensure you've got the collateral to extend you a loan. I have to physically go into a bank, have a minimum balance, an address, a phone number in order to even have a bank account. That doesn't sound like all code to me.
Also, you're right. POW as a consensus method is flawed. But again, all V3 cryptos have essentially transitioned to delegated proof of stake at this point.
Lastly, in a generation of cancel culture gone wild and as an avid reader of history, I'm glad crypto is available to me as the nation-state that we've all known and loved is looking more and more stressed.
If you still claim there's absolutely no value in any of it, then me and you have very different definitions of the term.
Edit: There are 104 protocols/coins that have over $1B market cap. Value isn't a personal judgement, it's a group one.
> Do you think we will forever be organized and segregated by governments?
Since you asked, yes. I do. To me, it's like asking if a beehive will always have a queen. It's in our DNA.
> Also, you're right. POW as a consensus method is flawed. But again, all V3 cryptos have essentially transitioned to delegated proof of stake at this point.
I honestly don't know enough about "V3 cryptos" to speak to it, and I'm not trying to add any FUD to the conversation :) I'll have to DMOR if you will before I can speak to that, which is why I've been constraining my comments to the system I know (BTC).
> Edit: There are 104 protocols/coins that have over $1B market cap. Value isn't a personal judgement, it's a group one.
[edit] Market cap isn't a judgement of value, just the most recent price multiplied by supply. Control the most recent price, you control the market cap. Unless you include legitimate market depth it's not really a meaningful number. SHIB for instance.
Places without a functional government have a history of doing pretty poorly.
I think the burden of proof that there is a possible future without government lies on those making that claim. That burden has definitely not been met and the thus the feverent belied in that claim by cryptocurrency bulls is not rational.
This is kind of a straw man… while I’m sure there are some fringe John McAfee-types who think crypto is the door to anarcho-capitalism, I don’t take any of them seriously. So I’m not sure who you’re directing your argument towards.
All humans enforce laws with physical interactions, especially violent ones. If you have no central governing body then every human makes their own rules and laws and when they enforce these rules they will be just as violent as the governments they wanted to run away from.
You should probably read some philosophy. There are much more sophisticated and nuanced ways of thinking about government and law than your comment seems to endorse.
Really enjoyed this convo, if you want a bit more of a long form of my thought process on this, read the Sovereign individual (With a grain of salt, it gets a bit wild)
My main point is don't completely dismiss a nescient technological field based on it's lack of utility now. Sustained development effort with real venture capital only dates back to around 2017, 2018.
All major silicon valley firms have launched funds to develop early research teams, nobel prize winning mathematicians developing protocols and some of these people are currently the richest individuals on the planet, just no one really know how much they actually have and obvious issues with liquidity withstanding.
> SHIB for instance
As many (If not more) of the crypto industry is marketing teams riding the 'Wave'. However, some of the projects have 100's of employees building infrastructure for the new internet. Check out Parity if you want an example of a true crypto company.
Is there any short form version of something someone can read to get a sense of the value you’re seeing? I followed this conversation with interest, but still find myself unenlightened as to what there is I haven’t understood yet about the space. Whenever I talk to a proponent it seems very theoretical.
There are often analogies to the early internet, but I was alive then and remember some of the early, tangible use cases which had me hooked:
* You can look at Nintendo’s website. It has information about games, which you are currently getting from magazines (my first exposure)
* You can buy books you can’t buy locally (Amazon)
* You can mail a friend from another location, for free (hotmail, gmail)
* You can call a friend in another country, for free (skype)
* You can call a phone in another country, for cheap (skype)
What are some crypto equivalents, today, that would convince someone who is not already invested in crypto that they need to get into crypto to use it?
E.g. saying “you can get a loan of 66% of your Bitcoin holdings!” is a use case for people already in crypto.
I would also exclude stablecoin yields because the risks there are massive, and there exist plenty of investments with high risk and high return in normal land.
I think two of the coming applications that has me most excited (of which there are many others on the horizon), are permission-less stock markets where shares are fully accounted for at all times in real-time (an actually transparent financial market), and proper third party markets for digital goods whereby goods bought online can essentially be treated like you do physical goods.
Both are applications of NFTs and both have significant players developing them.
I can elaborate more on these two applications if you want. Currently on mobile.
> permission-less stock markets where shares are fully accounted for at all times in real-time
We can already achieve this without blockchain technology! Indeed that's not the way the system works, but that's not due to technological limitation. What makes you think that once "permissionless stock markets" are available on the blockchain then secondary derivative markets won't spring up, making the ownership situation as murky is it currently is for stocks?
Transparency is always a sliding scale, and right now there is very little transparancy with regards to who owns what stock and how much of it. The system is currently more paper based than digitally reconcilled. And the onus is on every financial firm (bank, hedge fund, brokerage, settlement house, etc.) to maintain their own books and report back as best they feel inclined to. What they volunatarily report back can be ammended, or late. And when you add up all the human induced delays / data entry mistakes, what the public has available to look at can be months out of date or just plain wrong.
In principal, yes, the trusted parties could have stepped up and implemented a more transparant and automated system. No, they did not need to base such a solution on a blockchain. But the reality is that they were not inclined to change the status-quo, and now we find ourselves in a world where every relevant financial system is looking at, testing, or in the process of rolling out a blockchain based solution.
For anyone asking where the value in the technology lies, the proof is in how seriously the large players [1] are taking it.
I’m much more interested in something already happening, now. Crypto is full of “wait and see, this is the future” but the early internet had immediate utility.
What can I do, today that should make me want to buy the crypto to do a thing with crypto. Rather than buy crypto to hope for an increase in value.
I love discussing both this topic specifically, and all sorts of things I have a strong opinion on with folks who disagree. I'm always open to being wrong; I've added The Sovereign Individual to my Kindle library and my reading list. Hope you have a great evening. Enjoyed the back-and-forth as well.
Just want to chime in and say I enjoyed reading this interaction. Both well-reasoned points, politely and maturely presented (one of the things I love about HN.) I happen to agree entirely with your side, but that's irrelevant. Thanks!
Just want to chime in (on the flip side) and say I enjoyed reading this interaction. Both well-reasoned points, politely and maturely presented (one of the things I love about HN.) The opposite of what i wrote below: I happen to not agree with your point, but that doesn't matter. Thanks for sharing your perspective!
> Do you think we will forever be organized and segregated by governments?
> Do you ever think a human being can be a sovereign individual in his own right, without owing fealty, taxes and morality to a government in some future?
Without governments, how are social strictures enforced? How are externalities, positive or negative, accounted for? How does a government-less world not look like Somalia? (Or are you suggesting that you really would like to live in a place like Somalia?)
This isn't to suggest that existing governments are perfect (far from it), but it seems to me that the anarchic counterpart is infinitely worse.
It's not flawed, just hardcore. It's like the gold bars sitting in vaults deep underground in London, rarely moved and usually just relabeled to account for change in ownership. Every now and then someone gets spooked and asks to take custody, and it's expensive as hell to move it but you can lay your hands on it and know your ownership is secure.
When i pay for something online, I am giving away my credit card/ debit card/ ACH information away for them to subtract the total amount of my transaction (Or debit it).
I am trusting that outside entity in a number of different ways; To only take the required amount, b.) encrypt my information to prevent my information from leaking.
Credit card data is leaked regularly in mass uploads for pennys on the dollar. Credit card fraud is mediated by the credit companies themselves and is just an insurance issue to them.
Crypto, I sign the transaction to send it to you. You don't get anything but my public id, amount and block time.
I often notice this expressed by Americans. I can't remember last time I gave my debit card (why would anyone need a credit card anyway) to any party other than big companies like PayPal. Locally I pay with Blik (I have to confirm exact amount transferred on my phone and the seller doesn't have an option to extract/ask for more). If a company really wants a card I create a virtual, load it up with a chosen small amount and get rid of it when I no longer need it.
We also have instant bank transfers if needed (normal ones take several hours).
Even with debit cards you have 3D secure these days which requires confirmation on your phone.
Just because USA is behind in banking department and even credit/debit card thing doesn't mean those problems are especially hard to solve. The rest of the world is already partially there and with more fintechs putting pressure on banks things will improve even more.
> Do you think we will forever be organized and segregated by governments?
> Do you ever think a human being can be a sovereign individual in his own right, without owing fealty, taxes and morality to a government in some future?
All of this is doing nothing to change my view that cryptocurrency requires me to buy into this whole weird worldview in a way that few other products do. No, I don't particularly want to be an anarcho-capitalist.
> Do you think we will forever be organized and segregated by governments?
As long there is scarcity of resources, there will be wars/conflicts and humans will be collective species, even if we don't have scarcity of resources, some humans will invent a few, and even if humans will not invent one, it is debatable since I don't know of any evidence where humans can survive individually. This is without mentioning social classes over multiple generations.
Good, a bit of competition works out better for the end user. Political systems tend to be a monopoly, and monopolies lend themselves to abusive practices.
The only people that have no issues with centralisation are the people who are benefiting from it.
World Bank estimates 31 percent of people globally do not have a bank account. Decentralisation helps these people.
When you deposit money into a bank account, it is not your money. It is the bank's money. You aren't allowed to use it, or spend it how you like without the permission of your bank. Crypto doesn't have this issue.
There are financial tools that only people with net worths of over $100 million have access to, such as market making, arbitrage, liquidations, insurance lending etc. Crypto solves this.
99.9% of banks in traditional finance run their systems on outdated, closed source, barely maintained and bug ridden software. Contracts, money and agreements than can happen in seconds in crypto, takes weeks and months in centralised finance.
If centralised finance had the potential to be more efficient, there should have been more innovation decades ago. Centralised finance needs to catch up.
> World Bank estimates 31 percent of people globally do not have a bank account. Decentralisation helps these people.
Banking helps these people. Remember a fully-realized BTC transaction fee (pricing in electricity and mining hardware) is right around $250 each. That's a non-trivial amount of the GDP per capita of a lot of these countries you're alluding to.
Poor folks are also the most vulnerable to the massive volatilities of this so-called currency.
Real, centralized solutions help these people. Solutions like M-Pesa [1]. And Postal Banking, which a hundred years of legacy solving exactly these problems. [2]
> There are financial tools that only people with net worths of over $100 million have access to, such as market making, arbitrage, liquidations, insurance lending etc. Crypto solves this.
It certainly does not haha. It makes them less efficient, which is why not a single crypto-powered business in the last 14 years is competitive with any centralized solutions except in the areas of regulatory arbitrage or by throwing risk models out the window.
> If centralised finance had the potential to be more efficient, there should have been more innovation decades ago. Centralised finance needs to catch up.
It's obviously more efficient, and pretending otherwise doesn't change that.
The lack of a bank account doesn't have to do with centralization, for the most part, and decentralization doesn't matter if you can't spend the decentralized "money" without turning it into the local currency, because to do that, you need to have a bank account.
I personally know people who were running a HFT market making fund when their net worth were below one million. It's true it's not the easiest field to enter but that's the case for many others as well (medicine, law, competitive bike racing etc.).
His best case scenario is opening a Wise multi-currency account, with supporting instant transfers free of charge in many cases.
Bitcoin is not accepted anywhere, practically speaking.
As such you're only looking at a small fraction of the transaction. You actually need to (1) transfer money into a crypto exchange for a 1-2% fee and whatever delay the domestic transfer takes (2) purchase Bitcoin for whatever fee the exchange charges (3) transfer it for $0.50-50 depending on the fee du jour (4) hope the market doesn't collapse out from under you while all this is happening (5) sell it at the destination unregulated exchange for whatever fee they charge and hope they don't flee with your money (6) transfer to the destination bank account, waiting as long as a domestic transfer takes.
This is probably a few days total, with severe counter-party risk, forex risk, and substantial transaction fees.
Or you can use Wise for a very low fee directly bank-to-bank, or open a Wise multi-currency account and support almost-free instant transactions. They're also super, duper regulated by a number of world regulators.
Yeah, usehackernews@ can you detail which exchanges he is using on both ends because I'm guessing your standard ACH transfer to an exchange to make the initial USD->Bitcoin transfer would probably make the supposed time speedup moot.
I completely agree with this; the prior example given for bitcoins value (that it is used in defi for flash loans, etc) is literally deriving its value from moving value around (internal to the crypto ecosystem).
Flash loans are used to arbitrage across exchanges, not create any extrinsic value.
> This is a lot like the programmer tendency to want to re-write instead of refactor because to understand a system is way harder than to set out on a quest to build a new one.
And what if they did want to refactor the existing system. Can they? What does that iteration process look like? Is the system currently evolving to fit everyone’s needs?
Remember, RMS actually did want to refactor the printer. He just wasn’t allowed to. [0]
Contrast that with how fast things are moving in DeFi. It’s permissionless innovation at its best and worst. We can barely even wrap our heads around OHM, but nobody needs permission to fork it into SPELL. Systemic refactors happen faster. [1]
When somebody in the future doesn’t like a piece of decentralized infrastructure, they can _literally_ fork all of it and just make their change. With fewer black-boxes, we share more intellectual property.
> If there was a way to make them more efficient that did not involve throwing risk models out the window or regulatory arbitrage, someone could just do that in the traditional economy without crypto.
This is assuming there is no value in regulatory arbitrage, which is wrong.
The value of this is proportional to the dysfunction of the existing system in any given country. In countries that impose currency exchange limitations or other authoritarian policies enforced through the financial system, cryptocurrency has more value.
You could capture that value by reforming the laws and governments in those countries, but that hasn't happened.
And one of the benefits of cryptocurrencies is encouraging those reforms. If you can't use the financial system to impose authoritarian policies because people will just use cryptocurrency instead, you might as well not try to use the financial system to impose authoritarian policies, at which point people can use the more efficient ordinary banking system instead of cryptocurrencies. But we're not there yet, are we?
The argument is that cryptocurrency is useless under the assumption that the traditional financial market is functioning perfectly, i.e. that there is no regulatory inefficiency at all. There currently exist countries where this is not the case, so that assumption is incorrect and cryptocurrency is useful until such time as that is no longer the case.
> Doesn't it seem weird that through this complex system of interactions, we can recreate all of that in Code? If there was no value in it, why did we create all those institutions in the first place?
One of the primary reasons for the rise of the complex system of interactions, as you put it, is trust. A lot of financial interactions require dealing with people who might not merely not have your best interests at heart but are literally in diametric opposition to your interests--several financial transactions are inherently zero-sum. So you need mechanisms that give you trust that your counterparty will actually honor their side of the transaction.
Code fundamentally does not provide trust--indeed, you might even say it is the antithesis of trust. Even accomplished software developers are frequently unable to write code that works in edge cases or even slightly abnormal operation. For regular users, code is as opaque as if it were written in Linear B. Indeed, to popular sentiment, software is often equated with a learned notion of bugginess--people tolerate the frequent mistakes of their computers far more than we would any other piece of equipment.
And the cryptocurrency community takes their misunderstanding of trust to new levels. I mean, we're being told by people like you that we shouldn't trust the government, but instead trust code [that the lay person can't and won't understand] written by people like the owners of Tether--people who have been convicted of stealing people's money and, in the history of their own company, lied about what they were doing.
As Matt Levine put it, only in the cryptocurrency industry is "we may be charlatans who will run off with all your money" literally something people feel necessary to put in their risk prospectus.
I've been a big fan of Matt Levine's commentary on crypto--he doesn't get all histrionic and judgmental because he knows (and his regular readers know) that whatever craziness is happening in crypto is basically exactly what happens in traditional finance, just dialed up a notch or two.
His column a couple weeks ago about the "main move" in finance (i.e. transmuting an amorphous pile of risk into tranches with radically different riskiness) and how this explains Tether was absolutely brilliant.
In my book, there's some value in protecting the average Joe from the incessant dollar printing that decreases the value of the dollars in their saving accounts.
That's just one argument for Bitcoin, there are more. For example, it provides the opportunity to second/third world countries to break free from the IMF debt slavery.
> In my book, there's some value in protecting the average Joe from the incessant dollar printing that decreases the value of the dollars in their saving accounts.
This is a complete misunderstanding of the role of currency in a modern economy and the mandate of the federal reserve, which is to maintain a low, predictable rate of inflation to incentivize investment and maximize employment. Literally any asset will "save you" from the "relentless printing." That's the role of an asset, not a currency.
> That's just one argument for Bitcoin, there are more. For example, it provides the opportunity to second/third world countries to break free from the IMF debt slavery.
They're all basically debunked, but advocates trot them out and try and Gish gallop over any criticism.
> Literally any asset will "save you" from the "relentless printing."
That's an oversimplification. Let's just say that Bitcoin and Ethereum are now the apex assets.
I'm no frothing at the mouth crypto advocate or fiat currency hating conspiracy theorist, but whatever you're trying to say, and the article you link to, seems like complete nonsense to me, and your snarky recommendation to "read up on what a store of value is" is silly.
> A store of value is an asset that maintains its value, rather than depreciating.
Value is just what others are willing to pay for something at a point in time. Literally nothing is guaranteed to maintain it's value, not even US Treasuries. So this is just circular logic saying "things that maintain value are value stores" and "if something that previously maintained it's value no longer does, then it is not a value store".
> Gold and other precious metals are good stores of value because their shelf lives are essentially perpetual.
Gold and other precious metals are terrible stores of value, their dollar values are incredibly volatile, they are incredibly expensive and risky to store and transact with, and contrary to popular belief, they really don't actually have much "intrinsic value". Let alone that "intrinsic value" is a nonsensical concept. "Intrinsic value" is meant to be understood roughly as "useful for some practical purpose", but valuations clearly often have nothing to do with their practical purposes. A stick or a basket can have very significant and diverse intrinsic values too, but that doesn't mean it has value. Likewise, some sticks and baskets might have very high values, despite actually not being very good sticks or baskets! (eg if they're antiques or archeological artifacts or whatever)
> A nation's currency must be a reasonable store of value for its economy to function smoothly.
Most central banks aim for 2% inflation per year, literally guaranteeing any amount to become worthless over time if stored in currency. (vs bonds or some other appreciating asset)
> intrinsically, Bitcoin is a negative-sum asset, a mechanism of redistributing real cold hard dollars from new participants to old entrants and miners.
Just what. Bitcoin is strictly positive sum under any sane definition. Unlike MLMs or pyramid schemes, Bitcoin never alleges to return anything other than Bitcoin.
> It creates nothing
Neither do currencies. They're just currencies. Their purpose is to be means of transacting things that are created, that otherwise wouldn't be created, if there was no means to transact. Bitcoin does that too. But in Bitcoin's case, it actually does create something: it creates the ledger of transactions itself, the wallets, the ability to sign things etc, which currencies don't.
> Systems built on top of it might, exploiting let's say regulatory arbitrage, facilitating crime or gambling, but intrinsically, it creates no value.
Even if you disagree with the valuation of Bitcoin and how inefficient the mining is (and I do), the realized idea of a distributed, tamper-proof ledger is useful, and thus has "intrinsic value" just like toilet paper or gold. (again, intrinsic value is a nonsensical concept, but under that logic, it does)
> ... and the article you link to, seems like complete nonsense to me, and your snarky recommendation to "read up on what a store of value is" is silly.
Just to be clear, my point was that the classical definition of a "store of value" isn't something that goes up exponentially and flails around wildly at the whims of folks trying to liquidate leveraged positions.
It's broadly regarded as something you can purchase and expect to get your money back. Not a ton more, not a ton less, roughly what you put in. I don't think there's a single world in which any cryptocurrency falls into that definition today. Might it? It could. I don't think it will. But that's speculation, what's not speculation is that it's not one today.
The "store of value" narrative was coopted once folks in the community realized it couldn't ever actually sustain more transactions than required by a small Costco.
> Gold and other precious metals are terrible stores of value, their dollar values are incredibly volatile...
They're dramatically less volatile than cryptocurrencies which does make them better suited, however I do not personally advocate for owning metals - for exactly the reasons you rightly describe.
> Most central banks aim for 2% inflation per year, literally guaranteeing any amount to become worthless over time if stored in currency. (vs bonds or some other appreciating asset)
Modern economies intentionally split long-term stores of value from short-term medium of exchange. Currencies are inflated slowly to incentivize investment, and to maximize employment along the Philips curve. This is the charter of the Federal Reserve and most other world central banks.
> Just what. Bitcoin is strictly positive sum under any sane definition. Unlike MLMs or pyramid schemes, Bitcoin never alleges to return anything other than Bitcoin.
It doesn't allege a return, however literally every frothing at the mouth holder of crypto will allege it for you, as they are incentivized to do. Bring in more people, you get wealthier. Sound familiar? It's a decentralized MLM. It's negative-sum because miners constantly extract $60 million dollars per day, $21B per year in block rewards. These are liquidated and cause negative price pressure, socializing what amounts to a $250 transaction fee. [1]
> Neither do currencies. They're just currencies.
Which is why they don't go up in value. You can't have it both ways :) dreadful currencies go up astronomically in value, because this creates a deflationary spiral. Dreadful currencies go down a ton in value because it doesn't offer you time to productively allocate. A good currency averages a low, predictable rate of inflation.
> ... tamper-proof ledger is useful, and thus has "intrinsic value" just like toilet paper or gold.
We have yet to find a single use for it. All you can do is look at your spreadsheet cell in a web browser, or get someone else to buy it from you. You can't do anything with it. At least you can turn gold into electronics, like bitcoin miners.
> literally every frothing at the mouth holder of crypto will allege it for you, as they are incentivized to do. Bring in more people, you get wealthier. Sound familiar? It's a decentralized MLM.
Just because idiots abuse cryptos for baseless manias doesn't make the underlying technology or idea or thing bad, nor a pyramid scheme or an MLM. You could say the same thing about property, art, vintage cars, any number of things that are also not pyramid schemes or MLMs. Bitcoin is definitely experiencing baseless manias, but it's very clearly not a MLM or pyramid scheme.
> It's negative-sum because miners constantly extract $60 million dollars per day, $21B per year in block rewards. These are liquidated and cause negative price pressure, socializing what amounts to a $250 transaction fee.
Agree this is bad but that's an artifact of what people are doing with Bitcoin, not an inescapable fundamental quality of Bitcoin. Bitcoin can and for a long, long time used to run just fine on comparatively little energy and transaction costs measured in cents. More energy efficient protocols (and those exist now) can comfortably accommodate orders of magnitude more transactions than Bitcoin for orders of magnitude less energy. (I guess if you wanted to calculate in dollar terms the "intrinsic value" of Bitcoin, it would be the equipment and energy cost of running a comparable or better blockchain, which could possibly be what a couple of grand per year?)
> You can't have it both ways :)
I'm not making claims about whether Bitcoin (or any other crypto) is a currency, or a good currency. But they undeniably share in common with currencies that they are means of transacting (other) things that are created, that otherwise wouldn't be created, if there was no means to transact. (despite them being insanely deflationary) (and while their psuedonymous nature certainly makes them attractive for illicit transactions, it simply isn't true that they're "only" used for those)
> We have yet to find a single use for it
This just isn't true. It's not difficult to imagine how a distributed tamper proof ledger could be useful, or find actual practical uses of blockchains. I'll be the first to admit blockchains are overhyped and that they don't offer any meaningful advantages over existing tech in many, many of of the proposed use cases, but the legitimate uses cases do exist.
> Bitcoin is definitely experiencing baseless manias, but it's very clearly not a MLM or pyramid scheme.
I'd love to see you address any of jstolfi's points directly!
> Agree this is bad but that's an artifact of what people are doing with Bitcoin, not an inescapable fundamental quality of Bitcoin. Bitcoin can and for a long, long time used to run just fine on comparatively little energy and transaction costs measured in cents.
It really can't. Its security is proportional to its wastefulness. It must always waste more than its opponents are willing to spend to destroy it meaning its waste must grow with its valuation. It's a proof of waste algorithm.
> I'm not making claims about whether Bitcoin (or any other crypto) is a currency, or a good currency.
I am making the claim its so utterly bad at being a currency pretending it's a currency is pointless and harmful to the discourse.
> This just isn't true. It's not difficult to imagine how a distributed tamper proof ledger could be useful, or find actual practical uses of blockchains.
It's been 14 years. There isn't a single use that isn't crime or regulatory arbitrage - or solving a problem crypto created for itself. The proof is in the pudding, and there's simply no pudding.
> ... but the legitimate uses cases do exist.
If you find one, and productize it, you will be the single wealthiest person alive. Elon better step aside.
Wow. This is a HackerNews thread, not some academic panel.
The handle I'm responding to hasn't exactly provided "evidence" either, including for:
* the existence of nebulous things like "value stores", "intrinsic value" or what constitutes or possesses either
* that Bitcoin is a negative-sum asset, a MLM or a pyramid scheme
* that a distributed tamper proof ledger doesn't have any usefulness for any practical purpose
which is fine by me, we're all just here to kill time between builds and deploys anyway :P but if you think evidence is required knock yourself out and prove some for any of the above
>All the V3 crypto protocols have exactly as you describe above. However, instead of the money going into the coffers of the company, it goes into a 'Development fund' That will award the crypto to people who have applied and been voted on by the community to launch a project/technology in the protocol.
So you replaced "shareholders" with "developers of cryptocurrencies/beneficiaries of the development fund".
Does a rose, by any other name, not smell as sweet? I mean, from the case you're making, these v3 protocols seem more like securities.
Stablecoins sound exactly like banks. Which means AML/KYC/Reserves on the horizon.
The entire cryptocurrency space recreated the current financial system, rooked in a new generation of suckers (and some old one's that should have known better), did everything current financial product regulations were put in place to prevent, made it as energy inefficient as humanly possible in the case of PoW, but it isn't all that cause it's called something different.
My distinction without a difference alarm is ringing itself off the wall at the moment.
> made it as energy inefficient as humanly possible in the case of PoW
I'd encourage you to broaden your understanding of the purpose of PoW and specifically the energy used. The energy used is the cost of securing a PoW blockchain--quite literally, the cost of the energy used is what makes it difficult to mount a successful attack. It is simple and universally accessible. It is not "inefficient"; it is functioning exactly as intended.
What I think you are really trying to say is that you think the benefits provided by a PoW blockchain do not merit the economic expense of securely maintaining it. And that's a fine opinion to have. But the only reason you pay attention to the electricity cost is because it is highly visible--you probably have no clue how much electricity is consumed by all the other economic activities that you may consider pointless or wasteful.
I mean, we can compare it to mastercard: 74 billion transactions a year for mastercard vs 100 million a year for bitcoin. Mastercard revenue is 15 billion while bitcoin has 21 billion in annual mining fees. So mastercard processes 740 times as many transactions for 70% of the cost and I would argue the real cost is the revenue - operating income for their actual expenses to operate which is 7 billion so 1/3 the cost. That would make it 2,220 times as efficient.
Bitcoin is like physically moving gold bullion between (anonymous) vaults. It is not appropriate to compare it to MasterCard, because it has dramatically different requirements and guarantees.
There may be some Bitcoiners who think it should be used for all payments, but I’m not one of them. Centralized payment processors will always be more efficient, especially for the massive flow of low-value casual transactions that the average consumer produces.
> If I borrow a Bitcoin what makes you think that I can repay the Bitcoin after it grew 10x in value?
That would make Bitcoin a very good store of value. However, to benefit from the "store of value" property you have to, you know, actually store the bitcoin yourself, not sell it now and try to buy it back later…
This all sounds intuitively correct, and it seems that similar arguments can be made about gold bullion, right? It costs some amount of money every year to mine, refine, transport and store it, and none of that is accruing to the actual holders of bullion. (One difference being that there is some residual value of the gold for industrial and jewellery uses, but that's hardly what's keeping the bullion price where it is).
It's similar gold, yes. Gold is an unproductive asset. You are correct that there is base demand for it in the form of jewelry and electronics. In fact, a percentage of the world's gold output goes into making Bitcoin miners each year. However, its value is not supported by its demand in these industries. This is why I personally do not invest in gold.
The difference is that if you shut down gold mining, existing gold would still retain all its value. If you were unable to protect your gold reserves, they still retain all their value. If you shut down Bitcoin mining it's immediately worth nothing. In fact if you reduce your energy expenditure below some unspecified threshold it becomes utterly worthless. Mining gold consumes resources, but once extracted it does not. I would consider it to be zero-sum, as compared to the negative-sum nature of Bitcoin.
I would argue if institutional demand and even jewelry demand for gold fell, it would still be a fairly valuable commodity, and its use in electronics would likely expand substantially as it became less expensive. Connectors, switches, wires, PCB contact plating. All big demand drivers, and gold is better than the status quo - just too expensive at the moment.
I think you are a little unfair in your comparison of bitcoin and gold. Gold has advantages over bitcoin, but bitcoin also has advantages over gold. Storing gold is more expensive then storing bitcoin. Transacting gold is much more difficult than transacting bitcoin. One of the downsides of bitcoin is that it could go to zero for some reason. I think gold has less of a risk of that, but other investments have a significant risk of going to zero.
I am not sure I understand the negative sum game you mention. The first payment miners get is (I don't know the proper name) a bounty, which is equivalent to a gold miner obtaining gold. This can be seen as a built-in inflation, which not only gold but also any fiat currency has. The difference is there is no known limit on this inflation factor for gold or fiat currencies. For gold we assume some gargantuan deposit will not be found and that it will maintain its scarcity. I don't think anyone thinks there is an inflation limit for the US dollar or any other fiat currency. Bitcoin has a known amount limit. (As a disclosure, I own gold, bitcoin, and US dollars.)
The other part of what miners make is a transaction payment. That exists in every other payment system I assume, except I guess physically handing an object to another person, which covers a pretty small fraction of transactions.
AIUI, the negative-sum game breaks down like this: consider a black box around the entire bitcoin ecosystem. This black box is consuming $20B/year worth of real resources, which (given that you can't generally buy electricity or generation assets with bitcoin) means $20B/year is flowing out of it.
Now to be sure there are some customers of the bitcoin system, using bitcoin as an intermediary to move money across borders or purchase from certain online marketplaces, and those customers are paying some amount of money into the system to use bitcoin for this purpose (analogous to the 2% that VISA skims off the top when you use your card to buy something on Amazon), but the majority of the money flowing in to balance that $20B outflow is from investors buying in. Unless you think bitcoin has managed to capture something in the order of $20B/year in transaction fees from the likes of Western Union, AMEX and Paypal, what's mostly happening is money being funnelled from investors taken as a whole to the the supplier industries that bitcoin relies on.
You mentioned transaction fees, the other is "inflation" or mined coins. As mentioned above, this is the same as gold and many other things. I guess it is just a matter of definition if you want to say that is a negative sum game. It is not unique to bitcoin though.
It's important to realise that when I'm talking about transaction costs I'm not referring to the inbuilt transaction fees in the protocol - those are bitcoin-denominated and so are an internal transfer within the ecosystem (likewise for the block rewards).
I'm taking about examples like when someone uses bitcoin to transfer money, by converting an external currency into bitcoin, sending the bitcoin somewhere then converting it back into an external currency. Whatever loss of value they see from that overall transaction has been transferred into the bitcoin system as a whole.
> If you shut down Bitcoin mining it's immediately worth nothing.
Except that it is impossible ever shut down Bitcoin mining at once(). It might be more similar to gold than what you think.
There are too many incentives to keep it up. The holders want value to be kept, the miners have vested interest in the system to continue to work. If you shut down, say, half the miners, this will create opportunity to other miners to invest and expand. If it drops too much, people inject money into the system, which gives liquidity to the miners again, that can continue to trade their work for goods and services with Bitcoin or by trading Bitcoin for fiat.
It is very similar to Visa, Mastercard, Stripe, Square and other centralized systems. The fees you pay for transactions keep the centralized finance business working and profitable as well as they invest back in software and hardware. For miners the Bitcoin fees, based on Bitcoin price, keep their systems profitable too. Not to mention some mining companies started to get listed on the stock market too.
(): Yes, you can shut down Bitcoin eventually, bugs, attacks, etc., but those have been tried and not very relevant to my point.
This is like arguing that the Beanie Baby market will never die. It's precisely the belief that the bubble will be eternal that helps inflate the bubble.
It's true that the Beanie Baby market never totally went away. And I'm sure that some die-hards will keep Bitcoin going for decades after it ceases to be practically relevant. But however much the bubble incentives keep major players aligned during the bubble, that doesn't mean the prices will stay up forever.
The Beanie Baby market on eBay is useful to study because it shows much the same behavior as NFTs. Beanie Babies are non-fungible - each one is different. So there's no "market price", just lots of individual offers. On eBay, you'll see asking prices around $5000. But if you look at completed transaction info, prices are around $50. That's what an illiquid market looks like. NFTs behave the same way - high asking prices, few transactions. Such markets don't crash, they stall.
Interesting! I see that there are grading/authentication services out there for Beanie Babies. That makes sense, as a lot of commodities have systems for taking unique objects and making them tradable. E.g., the CME wheat contract definition is extremely specific: https://www.cmegroup.com/content/dam/cmegroup/rulebook/CBOT/...
I wonder if we'll see things like that in the NFT market.
> In fact if you reduce your energy expenditure below some unspecified threshold it becomes utterly worthless.
This is not really true--it's not like lowering the security budget means all the old blocks can be rewritten at will. Roughly speaking, the cost of rewriting a block is the cumulative PoW cost of that block and all the blocks after it, although this amount typically decreases over time as better mining equipment lowers the present cost of hashrate.
For current transactions, if the security budget relative to the transacted value gets low, all it means is that one must wait longer to achieve the same level of confidence in transaction finality. It doesn't abruptly render the currency "utterly worthless".
There are still holding costs for it, though - the guards at the New York Federal Reserve don't work for free - so doesn't it have a similar "value continuously leaving the system" dynamic that suggests that it's negative-sum? Maybe the answer is that the quanta of value leaving is so minimal compared the the amount invested in the stock of bullion that "ever so slightly negative-sum" and "zero-sum" are the same to a first approximation.
Gold was also legal tender within living memory in many jurisdictions —- until 1971, you could freely exchange USD for gold and vice versa. In some ways holding gold as a hedge asset is a survival, though as with its intrinsic value, this doesn’t account for its current role in the market.
This is not correct. Gold in the US was freely exchanged for about $20 an ounce in the US until the Great Depression when, on April 5th, 1933 Franklin D. Roosevelt signed Executive Order (no. 6102) prohibiting the hoarding of gold coin, gold bullion, and gold certificates, and requiring them to be delivered to the Federal Reserve Bank. After getting all/most of the gold, on January 31st, 1934, the dollar was set to a new price of $35 an ounce by Franklin D. Roosevelt's Presidential Proclamation (no. 2072). Debts and contracts that specified gold in payment were made illegal and people had to use dollars instead of gold for transactions. Exchanging dollars for gold was not possible at a bank and actually illegal to do with your fellow citizens (certain exceptions applied).
This ended in 1971, when the Bretton Woods agreement of exchange rates broke down and Nixon took the US dollar off the gold standard and in 1975 we were allowed to buy gold again.
On Ethereum, the majority of transaction fees are burned. In effect, they are distributed to ETH holders in the same way that stock buybacks distribute corporate revenues.
I disagree, crypto incentivizes to add more miners such that equipment + electricity = revenue so there is no profit. Stock buybacks effectively transfer income into the share price so that when you sell your stock it will be for a higher price and thus you will make a profit.
But most of the fee revenue isn't going to the miners, it's being destroyed. And sometime in the first half of next year there won't be any miners; with the reduced issuance, the ETH supply will begin to shrink.
> Bitcoin ~= a Starbucks gift card you hope appreciates in value when Starbucks sells more coffee
Are you under the impression that Bitcoin is a company? This analogy really doesn't make sense from any angle, even being extremely charitable, so it's hard to address.
Bitcoin is a combination of a set of tokens, BTC, and a set of miners. Miners are either sole proprietors or, increasingly, publicly traded companies which operate the network collectively. When a transaction takes place, value is extracted from the BTC everyone holds and is transferred to these entities. The more transactions take place, the more value accrues to miners, not to holders. It's in fact taken from holders. Miners become more valuable, and the value accrues to these mining entities, which frequently means to shareholders in the public markets.
Starbucks cards are akin to pre-selling coffee tokens. Each time Starbucks redeems these coffee tokens for coffee, they collect a portion of the transaction just as miners do. And just as miners do, they pass on the majority to their suppliers and employees. Just as in the Bitcoin example, the fact Starbucks is selling tons of coffee, collecting a lot of transaction fees, doesn't mean that the Starbucks cards themselves become more valuable. Starbucks Inc, and Starbucks shares do, and that value accrues to their shareholders.
I hope that clarifies my thoughts. Open to being wrong about this framing.
An important thing you may not be aware of is that Bitcoin’s “dilution schedule”, so to speak, is fixed in advance. 88% of “shares” have been issued. This is, in fact, a critical advantage Bitcoin has over a ton of shitcoins - fixed dilution schedule, and no pre-mine/creator subsidy.
As a holder of crypto, you are both a customer and an owner.
You pay a fee for each transaction you send, just like any other service. b
However, your holdings increase in value the more other people use the same chain because the value of the entire ecosystem needs to scale proportionally to the value people are attempting to transact across it.
Financial systems, like social networks, and most businesses coming out of SV rely on network effects for much of their value.
USD has been the default option for the world, and enforced through violence when people attempt to create their own networks of trade.
The positive sum value that cryptocurrency is attempting to create is the ability to send anyone in the world any amount of value (money or otherwise) not subject to government permission, or sabotage (ie money printing)
It's like any one being able to suggest a Federal Reserve policy, and the vote being handled by the people, not representatives or a committee.
> USD has been the default option for the world, and enforced through violence when people attempt to create their own networks of trade.
Hah! Of course, who can forget how US paratroopers abruptly ended the attempted creation of the Euro shortly before its intended launch in 1999. Or the way the US Seventh Fleet blockaded China's commercial ports starting in 2002, preventing their rise as a commercial power. We can only wonder what a world with multilateral economic power might look like.
visa, paypal... all provide value in allowing commercial transitions. Exchange of goods and services, digitally or on credit. The value it is providing is eliminating the inefficiency of barter (which cash also does), and allowing remote digital transactions, again good for societal benefit.
There is no societal benefit to buying, holding, selling a crypto currency.
The thing that could provide societal value is smart contracts - but that has nothing to do with crypto. Visa (or Stripe) could implement smart contracts in javascript on top of their platform and society gets pretty much all of the benefits without needing any of the crypto.
There is value in having a monetary system though. And if BTC is a better system and more people find it's utility for barter or wealth preservation better it might appreciate more in relation to something like the USD which has many different characteristics.
It's a strictly worse monetary system by any measure. It's massively more expensive to transact, it's unbelievably inefficient - requiring as much power as Thailand and generating as much e-waste as the Netherlands to scribble 2-3 tx/sec into a ledger. That's 60 days of power for the average US household and 1 iPad of e-waste per transaction. [1] [edit](97% of all mining hardware will be thrown away without ever winning a single block reward).
If adopted as an actual currency it would immediately lead to a deflationary spiral savaging the job market. [2] Even the dictator of El Salvador wasn't nuts enough to adopt it as an actual currency. All pricing continues to be in USD and exchanged for BTC at the point of sale - and the point of a gun. (Keep in mind legal tender laws in ES require everyone to accept your Bitcoin for purchases or you face criminal charges).
To call it wholly unfit for any purpose except exchanging for black tar heroin would be an understatement.
Given the capacity of the BTC blockchain, if everyone one earth finally adopted BTC (as some people dream about), everyone could get in about one transaction in their lifetime.
(3 tx/sec = 3 tx/sec * 31m sec/a = 100m tx/a = 10bn tx/100a, so the network supports 10 bn transactions in about 100 years, and there are about 10bn people on earth, each living around 100 years.)
This is also one of the reasons Lightning is not a viable scaling solution. If you don't get your LN channel open soon, you'll be waiting until the year 2120. This will also of course consume 100% of the remaining block reward and almost a trillion dollars in electricity.
All of these issues can be overcome by upgrades and borrowing ideas and proven tech from other coins or just by moving to those coins if needed. I think it would be orders of magnitude easier to decarbonize bitcoin than it would be the petrol dollar backed by the thirsty U.S. Military machine.
Visa or PayPal are quite expensive to transact. It ranges from one to three percent overhead on every purchase you make. I don't think btc is that high is it?
21 billion in mining rewards / 100 million transactions per year is about 210 dollars per transaction. You'd need an average transaction size of $7,000 for a 3% fee to be comparable which it most certainly is not.
Mining rewards are not fees. They're the initial distribution mechanism (as a fairer alternative to pre-mining). The median transaction fees[0] which users actually pay are much lower: about 65¢ currently. With Lightning transactions they're negligible, potentially as low as 0.00000001 BTC (0.064¢). You can expect this to increase over time as the mining rewards drop, but there is no need to replace all the mining reward with transaction fees, and simple economics says that people wouldn't pay fees that high anyway. Instead the effort expended on mining will drop, resulting in a lower mining difficulty. We're in a "gold rush" phase right now due to the initial block rewards; that won't last forever.
Miners are incentivized to keep adding hardware/electricity until total cost = revenue. To pay their bills, they have to sell their new bitcoin to people which is effectively like a fee as their selling of 21 billion dollars in new bitcoin supply to pay their bills reduces the price of bitcoin acting like a fee on buying it.
> To pay their bills, they have to sell their new bitcoin to people which is effectively like a fee …
No, that's nothing like a transaction fee. The person submitting transactions to the network doesn't pay the seigniorage for minting new bitcoins. There is inflation due to the mining rewards (currently less than 2% annually, and set to decrease over time) which places some slight downward pressure on prices. That inflation is a cost for those holding bitcoin, not those spending it—not that anyone would notice it given the way the price has appreciated.
> 97% of all mining hardware will be thrown away without ever winning a single block reward
And fewer than 50% of Thoroughbred horses ever win a single race. This is a silly clickbaity statistic and you know it. Come on, you're better than this arcticbull ;-)
Horse racing is actually a pretty good analogy here, in that it's essentially pointless and an awful lot more money goes in than comes out. The big difference is that at least horse racing produces a fair bit of entertainment value, and that a lot of people truly love their horses.
It's true for any endeavor that falls on the bell curve that only has one winner. And this analogy ignores the fact that mining rigs win every day just by pooling their efforts
Yeah I should have replied to the parent above. I would have loved to use horsecoin to purchase human ivermectin from India last night.
All the feed stores in my area have locked up the paste and I have only the toxic to ingest orally pour on cattle versions readily attainable.
You can get by with rubbing it on the fatty areas of your body but dosing it is hit and miss.
Anyhow back to the guys in India, they would only take pay pal and the demand was so high, I had to pay an extra thirty five dollars just for pay pal processing. Crazy times...
Anyhow, I hope the mods don't burn this post. What if ivm is the real deal and I need it to save my life because my country with free health care can't fund any other kind of useful early treatment? It costs about two thousand from what I've read and there's no way they can print more money to cover this for the masses.
I'm not trying to get around vaccines even though the first one I took clotted on me and almost killed me. You should see my face right now, there's a huge scar on my forehead where my plastic surgeon ripped out a hardened clot from a vein in there last week. I'm just looking for early treatments for all of the people's no matter the vax status.
Pay pal will almost certainly shut this company off in India when they find out what he's doing. Horse coin will be the only way after that.
There is value in having a useful monetary system.
That ship sailed (multiple times) during the block size debacle for bitcoin, and there isn't nearly enough adoption with other cryptos to make them a useful payment system (aside from Monero if you're doing illegal activities)
If you live in a country where the government mismanages the economy or the currency, Bitcoin is not a great choice. What most people use in that situation is just a different national currency. This is a well-known phenomenon known as dollarization or currency substitution: https://en.wikipedia.org/wiki/Currency_substitution
In most of those countries the transaction fee is a non-trivial percentage of the GDP. Using it as a currency there would be economic suicide. And the volatility would be crushing to the poor.
They'd be infinitely better off with like USDC or better yet, a USD issued CBDC.
More and more I wonder if there’s a cultural/community aspect to crypto. Humans are meaning and group seeking animals and there is a hard to break value from that relationship. While some are likely ephemeral (hype coins like shiba) the amount of community formed around ETH and BTC is non-trivial and provides something akin to “value”.
For sure. Bitcoin is in some ways better understood as a religion. If you're interested, I'd suggest the documentary LuLaRich, currently on Amazon Prime Video. It looks at the MLM/pyramid scheme LuLaRoe and does a good job conveying the quasi-religious nature of these things.
Money transfer services do convey money from one person to another, and along the way they may provide additional services. But the focus there is on the service provided. I don't just put money into my American Express card in hopes that I somehow get more money back later; their job is to give money to merchants I patronize while protecting us both from certain problems and risks.
What I'm talking to is more along the lines of poker games and Ponzi schemes, both of which "just move money around" in the sense that no more money comes out than goes in, even though certain individuals may do better than others.
Buying a cryptocurrency as an "investment" is much more like the latter than the former.
You could make the same claim about any kind of money though. Whose to say the USD or GOLD or CAD or tree bark is real money? A productive asset is an entirely different thing. It's not easy to convert an asset for instance or walk across a border with it.
People make the fundamental mistake thinking these things are investments, they aren't, it's just currency or forex speculation that we are doing here.
> You could make the same claim about any kind of money though.
This is one of the things I find hilarious about cryptocurrency discussions. When I point out it isn't a good asset, people argue it's really a currency. When I point out it's a bad currency, people argue it's an asset. I'd love it if you all could get together and agree on what it's supposed to be good for and just leave the rest of us out of it.
But addressing your point directly, it's bad as a currency. It was launched in 2009 as e-cash, and for a while people argued it was going to be a great medium of exchange. Now, more than a decade later, Bitcoin is doing what, 100m transactions per year? Most of which are not real economic transactions for goods and services. Venmo, which started around the same time, does over 2 billion. M-Pesa, a "digital money" solution the same age does 15 billion. US credit transactions? 45 billion. Debit? 75 billion per year. And unlike Bitcoin, most of those are what people would call real transactions. Bitcoin's real use as a currency/payment system is a rounding error.
Anyhow, as others point out, actual major currencies are backed by very sophisticated organizations dedicated to maintaining the value of those currencies. Which are in turned supervised by national governments, most of which are democratically elected.
For Bitcoin, at best you have a set of shadowy organizations manipulating the market to their own advantage. E.g., reasonable people suspect that Tether is behind quite a bit of Bitcoin price appreciation. They have been proven to be liars about what they're doing and how much money they have. This is great for creating hype and volatility, but it's very much not what you want in an actual currency.
All reasonable criticisms. But it is very early still and you won't see many transactions for exchange of goods this early in its adoption. That's not to say that BTC will eventually take over, it's just to say that the kinds of uses you see this early aren't predictive of its future.
It is not very early. I specifically gave comparisons for things that launched at the same time.
And merchant adoption actually declined heavily for Bitcoin. It had a period where many online merchants and some offline merchants tried it out. Everybody gave up on that because it is not a good currency. That's when prominent advocates pivoted to "store of value" (which it is also bad at). For example: https://avc.com/2017/08/store-of-value-vs-payment-system/
The whole "but look at the fuuuuuuuuuuture" routine was plausible early on. But at this point there's nothing but wishful thinking to suggest that there will be a radical change. Whatever it is, Bitcoin is what it is.
In the case of the USD, the existence of a powerful government with a variety of powers (including coercive ones). Nothing is guaranteed in life, but it is orders of magnitude different from a digital currency offered by private individuals.
Sure and I agree the USD at the moment has an incredible backing. Also it being the reserve currency and base for most other currencies and commodities is no small thing.
You could argue that BTC is backed by one of the most powerful networks of computing power on the planet. I don't think that's better than what the USD has, but it isn't 'Nothing'. The fact it can't be debased as easily as fiat currencies is not a tangible thing but it does compel interest in it.
Its network doesn't create value, it extracts value. $60M per day, $21B per year.
> The fact it can't be debased as easily as fiat currencies is not a tangible thing but it does compel interest in it.
That is not a benefit to a currency, quite the opposite. A deflationary currency would likely lead to a deflationary spiral, savaging the job market [1]
It also leads to a monetary system that cannot adjust to a changing population or to transient issues such as COVID. If BTC were the currency of record in 2020, the economy would likely have been utterly devastated.
Maybe you are stuck on the track that there has to be a winner. There doesn't have to be a single monetary system. There can be several. And bitcoin has real utility in a lot of valid scenarios. Not having a central authority is interesting and appealing to many. Deflationary by nature makes it an excellent store of value.
> And bitcoin has real utility in a lot of valid scenarios.
Let's just wait I'm sure OP will deliver even a single one that isn't crime, regulatory capture or gambling.
> Not having a central authority is interesting and appealing to many.
Lots of counterproductive things are appealing to lots of people. Rolling coal is appealing to lots of people. Not getting vaccines is appealing to lots of people. That doesn't mean the benefits outweigh the costs socially, and it doesn't mean that it should be legal.
> Deflationary by nature makes it an excellent store of value.
And that makes it an awful currency. The fact it's a negative-sum MLM which creates no value whatsoever while creating the illusion of wealth is what makes it an awful asset. There's nothing left.
> Let's just wait I'm sure OP will deliver even a single one that isn't crime, regulatory capture or gambling.
I’ll bite. Donating to a Ukrainian twitch streamer. PayPal doesn’t allow it, every other option requires entering your credit card details on potentially shady sites.
Caveats: This was a few years ago, not sure what the situation is now; Current BTC tx fees make that rather expensive (which may or may not be alleviated by lightning or a cheaper to send crypto).
Well it just depends how much you trust the entity in control of the money and whether they will allow it for things you want. Will they let you buy a plane ride if it's your tenth trip already this year to see your sick mom in Hawaii? Maybe not, too much carbon. Control of money is control of society, even the individual if you apply a little tech to the mechanics. Trump and Hitler were both elected democratically, are you okay with either of them pulling the strings on the only thing you can exchange for your labour?
What about Xi in China with their real life social credit system built by exactly who? Should that regime be trusted with that much control over that much humanity?
> BTC is backed by one of the most powerful networks of computing power on the planet
And that huge computing power is employed to basically solve Sudokus whose difficulty is adjusted to burn as much energy as is put into it (which unscrupulous people will do as long as that energy is still cheaper than the mining rewards).
It appears that's the case but I've read a lot of bitcoin is mined using power sources that are under utilized and otherwise not practical to keep using. Much off this includes green energy which might have a better ROI in its early stages with bitcoin hovering it up when it's excess can't be sold. It's fairly easy to just switch to proof of stake though if ever this issue is forced hard enough by energy providers.
It could be debased rapidly through collective regulation and enforcement. While that hasn't happened yet, at least consistently, there's no guarantee it won't happen.
Its value and utility would drop but it won't be debased in a technical sense. For now the kml/amc controls for the on and off ramps are so locked down I think the powers that be are satisfied. The tin hatters say this is just a warm-up to get us primed for a centrally controlled all digital central bank backed system that can be used to better control a populations use of carbon, vaccine uptake and whatever else they want to pull your strings with. I often wonder why they tolerate crypto. I hope this isn't why.
Yes, the USD is backed by the most absurd proof of violence the world has ever seen. No organization of human civilization has ever been able to summon as much death and despair as the United States.
However, most of the ability of the United States to execute such power is centralized in Washington D.C. and New England. Centralization brings immense efficiency, but also vulnerability. Those geographic regions are a potential target that takes a lot of energy to defend. Why do you think the 9/11 terrorists chose New York and D.C.?
Meanwhile, China just fully outlawed cryptocurrency and mining, and it was a minor hiccup in the network. Bitcoin's hash rate as already recovered. The price has doubled. It's stronger than it's ever been.
That's what makes bitcoin such a potentially powerful store of value. It's security mechanism is incredibly anti-fragile. There's no throat anyone can choke. It's also globally available and permissionless, so it accepts everyone and anyone without judgement. These traits are powerful, in a different way than the power that backs the USD.
> Yes, the USD is backed by the most absurd proof of violence the world has ever seen. No organization of human civilization has ever been able to summon as much death and despair as the United States.
That has nothing to do with the currency. I'm not saying its good, or bad, I'm saying you've stapled together two unrelated concepts.
The US army is a small fraction of GDP and exists to support the defense of the US as a nation, and to further its interests abroad. That will remain the case whether the currency is fiat, gold, BTC or shoelaces. Unless you think that the army will be disbanded because BTC is going to make Xi Jinping come to the table with Tsai Ing-Wen over Baijiu and apologize, that the Sudanese are going to lay down their arms, Kim Jong-un is going to find Jesus and so on. However that's completely unfounded.
The US army predates the fiat dollar by two hundred years. World wars were fought on the gold standard.
Further, the backing of dollars is only in limited part due to "the army" - fractional reserve lending means that each time supply is added, demand for that supply is also created as the loan issued must be repaid with those same dollars. This is what actually fully backs the dollar.
It's also why countries that use the USD, like El Salvador, have their own armies. And why some countries that use fiat dollars don't have armies at all, like Japan and Iceland. There is no causative relationship between fiat money and armies. There is a causative relationship between the existence of militaristic states and armies. There are hundreds of years of proof that the backing of the currency has little or no bearing.
This theory is a pile of misconceptions stacked on top of each other.
Without the aircraft carriers, any mildly malevolent nation could print dollars. Some already try. There's no question that a large military is necessary to preserve USD as a world currency.
You can't ignore this cost. Maybe the US would cut military spending, maybe not, but as long as it wants USD to be the coin of the realm, there's no choice in the matter.
(1) Domestically, the US Army does not enforce law or make sure the dollar is the "coin of the realm." That would violate Posse Comitatus act. US domestic law enforcement enforces laws, domestically - including legal tender laws. I agree you can apportion some of the strength of the US dollar to its legal system, which makes sense, as the currency is an emergent property of the state. However, shifting to BTC instead of USD will simply reallocate the expenditure not reduce or remove.
Counterfeiting is an issue broadly. A small one. Of course, the expense of a Bitcoin transaction (literally 60 days of power for an average US household and 1 iPad of e-waste) far, far, far outweighs the expenditure of the secret service whose job it is to act on counterfeiting. AML and KYC rules, and a counterfeit detection pen will prevent this fake money from turning into a digital representation.
The army isn't generally called in to stop counterfeiting because nation-states have basically zero incentive to counterfeit on a large scale. What good are a few fake paper bills, when the Treasury would just cut you off from the entire world financial system?
(2) How do you explain that countries that do not have armies at all, like Iceland, are able to issue their own fiat currency with value?
(3) If you cannot draw a direct line between switching the currency and reduction in military spending, does it really make sense to apportion value that way?
Counterfeit USD is a small, inexpensive problem because of US military might. The biggest guy in the playground never actually needs to fight.
Imagine for a moment the world suddenly adopted the Nicaraguan Córdoba as the common reserve currency. How long before it gets printed everywhere? Who is going to stop it? And how far do you think Nicaragua's AML/KYC regime would actually reach?
Iceland's currency wouldn't work as a world reserve either, for pretty much the same reasons. You can get away with being small and isolationist if your currency isn't that important.
Make no mistake, "cut off from the entire world financial system" requires the threat of violence. Banks get fined, countries get sanctioned, warrants are issued for people that have never set foot in the US. I don't know exactly how to apportion the cost of that enforcement, but I know you can't ignore it.
> Counterfeit USD is a small, inexpensive problem because of US military might. The biggest guy in the playground never actually needs to fight.
[citation needed]
> Imagine for a moment the world suddenly adopted the Nicaraguan Córdoba as the common reserve currency. How long before it gets printed everywhere? Who is going to stop it? And how far do you think Nicaragua's AML/KYC regime would actually reach?
Why would any state on earth illegally print Nicaraguan money when they can instead print their own legally? What's the goal? Is this really the easiest path to achieve that goal?
> Make no mistake, "cut off from the entire world financial system" requires the threat of violence.
It really doesn't. In this case the carrot is way bigger than the stick.
Please tell me, what stops North Korea (or Iran, or any other US-hostile nation) from printing as many USD as it likes? Don't tell me "risk of being cut off from the US financial system"; they already are. Furthermore, NK already tries:
> Why would any state on earth illegally print Nicaraguan money when they can instead print their own legally? What's the goal? Is this really the easiest path to achieve that goal?
You seem to have just asked "Why would any state on earth illegally print the world reserve currency when they can instead print their own legally?" That seems pretty self-evident, but you can look to Venezuela or Zimbabwe for answers.
He is right in the figurative sense that the government's power to tax and spend in its own fiat currency is what drives demand for the currency. W. Mosler, one of the founders of MMT, has this allegory: If we are in a room full of people with a single exit and I am blocking the exit with a gun in my hand and tell you you need one my business cards to exit the room, then my business card has value.
Sure, but the issue is not demand but supply. Enforcing the scarcity of USD requires a large military. Enforcing the scarcity of BTC merely requires electricity.
Proof of stake is just a fork that'll happen whenever there's enough force applied by the power providers.
This excess low cost energy that can't be moved easily to other areas is often the only kind of energy bitcoin can use to win the economics of btc mining. It in fact subsidizes a lot of green energy and makes it more viable in the longer term.
Not following this line of thinking now. How does the military enforce scarcity? Also, scarcity of fiat currency is relative to the amount of goods and services available for sale in the economy and the demand for them.
The reserve status of the dollar is absolutely dependent on the might of the USA military. Ask Libya what happened when they ventured down the path of trying to not use the petrol dollar to sell their oil.
For the vast majority of use cases, the answer is no, though I'm certain someone will dig up an outlier use case or vaporware implementation of blockchain though.
There were timestamping services which people paid for before bitcoin.
So, there is some price people will pay in order to be able to demonstrate in the future that some data existed at or before a given time.
A decentralized ledger also provides this purpose.
Of course, at current transaction fees on most blockchains, it would be wasting quite a bit of money to make a transaction just to timestamp a single thing.
This is why there are services (one of which, iirc, has gotten a, uh, endowment(?) in order to provide the service for free?) which collect large quantities of (hashes of) data that people want to establish existed before a given time, and produce a Merkle tree of all of that, so that all those people can demonstrate that their data existed before a given time.
So, that's one useful service.
Is it enough to justify all the stuff that goes into blockchain stuff? That's a different question.
But, if the question is "Do they have any genuine use?", the answer is "yes." .
The blockchain is a pretty terrible timestamping service as the block time varies based on the current hash rate and difficulty. From as little as 5.5 minutes to as much as 15 minutes. [1] It's at best a coal-powered monotonic counter. Given the massive variability you have to correlate it with an actual clock you trust lol, and if you trust the clock you may as well just use that.
by timestamping I didn't mean in terms of, getting the most precise time possible, but in terms of a very difficult to fake-in-large-ways timestamp.
I have at least slightly more trust in the bitcoin blockchain not having the times be falsified in a major way than I do for any of the centralized timestamping services where you are trusting the security of those companies' timestamping servers.
The reason why I say "slightly more" is because I do have a pretty large amount of trust in those timestamping sources.
Bringing up the coal-powered is irrelevant to my point, which is not about whether it is worth it, but whether it has any uses.
Agree! If there was no way for ppl playing in crypto to get their hands on bonafide fiat currency, I don't think anybody would really care about crypto. Remember the Gemini exchange adds looking for qualified investors? Why? because such people have US dollars, which is what Gemini wants to bank.
Right now that's the case but there's no guarantee any currency will always remain the one of choice. And BTC doesn't need exchanges, but of course it does help, especially in the early stages.
> Ultimately cryptocurrencies are a negative-sum game in that they take in real money and just move that money around, while spending some on overhead.
I'm no Crypto fan, but this is wrong.
Plenty of new coins get minted which are redeemed for real money. This is basically the credit creation cycle[1] as seen in traditional banking (where banks create money by lending the same deposit out multiple times simultaneously) except in this case there is often no equivalent of a deposit (except sort-of staking in some cases).
The positive externalities from sound money and the concomitant demonetization of other assets (like real estate, oil, etc.) are massive, especially in the long term.
Have you considered that you may simply be failing to comprehend the meaning?
In particular, "monetization" literally means "the process of turning into money" - one of several more specific meanings, which should be clear from context, is the conversion of a non-monetized asset with sufficient monetary properties into a monetized asset. A monetized asset (not monetary - that term is too overloaded, although "monetized" isn't much better) is precisely an asset which has a higher value than would be predicted from its expected revenues, commodity consumption value, etc.
If people are concerned about currency devaluation, where do they put their money? Whatever set of assets people turn to (equities, commodities, whatever) will be subject to additional demand purely qua wealth storage, pushing up the price of those assets beyond what you would expect from a pure discounted cash flow model - i.e. they become monetized (begin to function as money, in addition to whatever asset class one might naively assign them to).
So, with that in mind, let's address:
> Real estate and oil are not money and therefore cannot be demonetized
If people are using real estate, oil, (gold, equities, ...) as a place to stash their wealth to protect it from inflation or whatever, and all of a sudden there's a better option available for this purpose, demand for random "not money" assets qua money is going to drop, and they will cease to behave like money - demonetization.
Humanity is just a negative sum game in that we take in real resources and just move those resources around and then die, all while increasing entropy of the universe.
> imagine investing in, say, a new fast-food franchise joint
Let us imagine instead that you want to invest in Burger King. You buy some shares in Restaurant Brands International (QSR). When you own those shares, what does that actually mean - how is that connected to the purchase of burgers?
I think share ownership is often a better metaphor for many cryptocurrencies than fiat currency. Especially when considering shares like Tesla, Hertz, or GameStop.
Where does the value of a share come from? Can a company steal all your money? What actually records your share ownership? How are profits calculated, and how do you get them?
The value of a share typically comes from the productive assets the company owns. If you buy all 468 million shares of QSR, you get all the restaurants, the brands, the vendor relationships, the employee relationships, the customer relationships. If you have a smaller fraction, you have a smaller fraction of that, plus you are entitled to a share of the profits generated.
But if you buy a Bitcoin, you own no productive asset and therefore are entitled to no profits. At one point the theory was you could trade it for something useful, like other currencies. But it's a pretty bad currency, so people mostly have stopped pretending it is useful for that.
There are answers to the rest of your questions, which are complicated and depend on exchange and jurisdiction, but people can look up the details if they want.
As an unaccredited investor, your investment funds can only be accepted by publicly traded corporations (with all the legal protections and reporting requirements that entails). Investing in GameStop is definitely riskier than putting your money in a savings account, but fraud is substantially easier in a totally anonymous and unregulated market like the crypto sector.
I mean, just think about how hard the Enron execs had to work to defraud their investors! They had to come up with a novel scheme to hide losses, collude with their accountants to avoid detection, and some of them even had to spend some time in prison. Yesterday, I read about an NFT scam where the anonymous developer just transferred funds to his personal wallet and then disappeared.
I always love looking at “market cap” for these things. As if every coin there could actually be sold for the price listed making it worth hypothetical billions.
Even a small cash out will cut the value to pieces.
The stock market won't collapse in the same way because stocks have earnings and dividends (which is what the value is largely based upon).
Sure: securities can go up, or down, in price almost arbitrarily. But they largely can't go below zero (aka: bankruptcy law protects against that), and they can't really go below the expected profits of the company (because shareholders are entitled to those profits. Worst-comes-to-worst, the shareholders can demand dividends and cash out through those means)
A lot of companies are 20x or 30x, or more of their expected profits (representing maybe 20 years of profits is roughly the fair price for a typical company's stock price). There are exceptions, especially in growth stage companies (where "profits" is now "expected profits" of the far future: the shareholders believe the company is onto a good idea and are willing to pay more on the hopes that the company becomes very large in the future).
Invidiual stocks collapse all the time. Selling down large positions is a real problem that institutional investors face and they plan for a haircut on the list price when doing so.
The stock market can be priced in BTC and I think this maybe shows that a currency and a stock contract for ownership are fundamentally different. You can't put your money to work in a currency, you just speculate that it might rise in value and have higher conversion rates in the future.
Stocks are also used like a currency in mergers which seems odd but is practical in some circumstances.
Stocks and currency can both become most valuable as TP or wall paper.
The wilds swings in exchange rate is typical of any new currency, even the USD in its early years.
Did the stock market value drop by 50% in the past couple of weeks?
Because BTC has doubled. If you're saying "BTC's price is the fundamental measure" of our economy, then it means we're in a horribly deflationary spiral right now.
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Alternatively, it means that BTC is in a bubble and maybe we can't price things in terms of BTC, because BTC is a horribly volatile asset that almost has no rhyme or reason behind its price movements.
Because its more tax-efficient to reinvest the gains back into the company in most cases.
But if the stock ever crashed to say: the value of the expected dividend... it would make more sense to pay out the dividend rather than invest.
Lets say a company's stock price is $40, and they make $2 per stock of profit one year. They can give out the dividend... or... they can reinvest the money into the company (and theoretically: if the stock market reacts correctly, it would raise the price of the stock to $42).
In contrast: if the stock market fails to react like this, eventually the company will be say: $2 per share. They'll still be making $2 in profits each year however (assuming the fundamentals haven't changed). At this point, it makes sense to pay out a dividend of $2, if their stock price doesn't react.
After all: might as well double your money each year at that point. (Take those $2 dividend, then double your number of shares in the company, then receive double the money next year).
Market cap for publicly traded corporations is still a good measure of value since there are laws, regulations, public disclosures, etc. ensuring they're equally measured to a degree.
If I paid $50000 for a cowry shell and said the market cap of cowry shells is more than MasterCard then there's a few problems...
It depends on the stock and what each individual holder is prepared to sell for. So it's exactly the same. In a corporate buyout the individual sellers typically agree on a sale price, but that's a contract on top of the market. Without that in play you'd be subject to the same unknowns and market cap wouldn't guarantee any buyout price. Hostile takeover is one example.
For stocks though the market cap is judged against earnings typically. The price can never get too low or the shareholders can just force a dividend to make the money directly from the underlying equity.
I want to preface this by saying I don't own crypto and I think its often full of scams (eg. squid coin). But it has some real potential and isn't always as bad as it seems.
Tether is a real risk, I agree.
> Everything real has been exfiltrated through electricity bills, taxes and early adopters selling, the entire crypto economy is a hollow shell, leveraged on retail deposits.
Yeah, but that's not untrue for banks. Conceptually, a bank's job is to store money for depositors. That has a real cost, so theoretically you should have to pay for banking service. We know that banks make that money back from lending the money with interest (profiting off interest). This lending behavior is theoretically possible for individuals to do while skipping banks, but it is not practical at scale. So, basically depositors "pay" with opportunity cost - and since the world fiat currencies have inflation, this is essentially paying the devalued difference of money.
Crypto is similar... it costs real money to maintain the deposits - aka POW to secure the ledger. Instead of lenders' interest paying the cost, it is paid by deflation by depositor by more currency being circulated. Not too different than fiat-at-banks.
Crypto also is potentially more egalitarian since anyone can mine (at a small scale at least) to potentially make some small income, and certain complex financial actions can be done for "free-ish" in contracts (conditional swaps/lending, escrow, multi-sig transactions).
Banks do not lend deposits in fiat currency regimes such as the ones most western countries have. Banks create deposits out of thin air to 'fund' loans. The have capital and reserve requirements to meet, of coarse, but they do not lend out deposits or depend on deposits for lending.
This is a possibility of course, but the second claim is something that would really need some proof. It's sure fun to say, but did you calculate it or do you just want it to be true?
> Dai is really a derivative of Etherium. Dai is backed by Etherium at 150%. So value in Dai is at risk if the price of Etherium drops more than 1/3. Etherium dropped by half back in May 2021, but recovered. DAI could have crashed at that time if it faced a net outflow. It didn't, though.
DAI didn't collapse because the drop in Ethereum value wasn't sudden. As the price falls, bots are allowed to liquidate your debt and keep the overall collateral ratio healthy.
150% is the minimum amount of collateral. If the USD value of your locked eth falls below that 150% threshold relative to your DAI denominated debt, a liquidator will pay off your debt and take your collateral.
So, a conservatively managed Maker CDP's regularly are collateralized to the tune of 300% if not more.
Tether can survive a net outflow because Tethers aren't redeemable in that way. If you show up with 1M USDT, they won't give you $1M USD.
It'll have to collapse on exchanges with more sellers than buyers, and to determine how that happens you need to actually understand what specific mechanism underlies how the peg is maintained.
I suspect Tether is all crypto-backed debt issuance which is denominated in real $USD which gives the counterparty incentive to maintain the peg on exchanges.
It'll likely fall apart when crypto falls apart and exchanges have already failed and those counterparties have already gone broke. Tether imploding will probably come after crypto is in the middle of a collapse and be more of a symptom and an accelerant. I doubt that Tether detonating will be the first sign of trouble.
> Tether can survive a net outflow because Tethers aren't redeemable in that way
I think it's worth distinguishing here between Tether the company and Tether the coin. Tether the company isn't automatically destroyed by a net outflow for the reasons you mention, but if they are indeed not fully backed, a net outflow could certainly break the peg and kill the coin as we know it.
Tether will collapse the same way that Squid Game Coin collapsed - extremely quickly.
Assuming a power distribution of coins across accounts, it's likely that 99% of tether accounts don't meet the 100,000 $USDT threshold to cash out. If you have a coin, where 99% of people/accounts aren't allowed to cash out that reeks of scam.
You can come up with tons of smoke to disguise it, and the whole "well you have to sell on another exchange, but prices there will be propped up due to 'arbitrage'" disguises and delays things nicely. But fundamentally it is propped up because people can't get out directly. There is no fair price discovery right now on Tether w.r.t. USD.
I think its very clear by now that if it were that simple it would have already happened.
And yes, the fact you can't cash out directly shows that it is a scam, yet counterparties are willing to continue to do business with them. That again suggests that the mechanism isn't that simplistic.
And I don't doubt that Tether will collapse very quickly, but I don't think Tether is the det cord that sets off the collapse. Tether is the ricketty-ass foundation that causes the entire building to slide over and take out multiple downtown city blocks of collateral damage. The det cord is going to simply be a bubble followed by a panic collapse in the price. The blasting charges that then go off will be a bunch of major exchanges and counterparties to Tether going under. Then Tether implodes as a mechanism for the contagion to spread and wipe out pretty much everyone else.
While I assume I know what you did, rather than go with that, describe how you cashed out and I'll explain how I believe that supports why it's ultimately a scam.
By selling it for fiat on an exchange and then sending that to my bank account. Same way I'd cash out shares. Whatever your beliefs about it's support, it's not comparable to Squid Game which you literally couldn't sell from the start. And to be frank, if you are exaggerating that much I'm less inclined to believe you are evaluating it honestly .
There is a very important aspect of opposite pressure.
If DAI price ever loses peg and goes to eg 0.90 anyone with open positions immediately starts buying a shitton of them and closing their position, because they just got a 10% discount on paying off their debt, sending the peg back.
If the price ever goes to 1.10, anyone with free capital around immediately starts minting new coins and floods the market with them, because they just got an instant 10% bump on the size of minted capital, sending the peg back.
If you really believed that Dai was on a crash course to $0, you would be very wise to buy ASAP to pay your dai debts and retrieve your collateral before the crash in Dai crashed Ethereum in tandem causing you to get liquidated.
Not really. The point is: there's always someone who has a debt in DAI they need to pay off. If they thought the dip would go even further , they would wait longer, because to them, the DAI does have value: it is what they need to get their hands on to get their collateral back.
Sure, if more people who hold DAI thought it would than it wouldn’t, it would be a problem. At this point there are so many arbitrage bots and protocols on top that it won’t even budge to 0.95 though, because this incentive balance has proven to be solid. The main downside really is that it’s overcollateralized by assets in 2x or so value.
> The real question is what happens in the next recession.
Well, there was a recession just last year and the stock market / BTC market went crazy.
The real question is what happens in the next market downturn (specifically the cryptocoin market downturn, since these "stablecoins" look like they're "stable" only because of assumptions underlying the cryptocoin markets). The cryptocoin markets don't necessarily match up with the general economy.
> Well, there was a recession just last year and the stock market / BTC market went crazy.
Ultimately this is because central banks are in the driver's seat for asset prices these days. It's been trending that way since the Greenspan Put in the 90's. The economic fundamentals matter, but not as much as the monetary policy backdrop; after all, if there's more cash chasing the same number of shares, it can't help but drive up stock prices. Similarly, low borrowing rates reduce the equity risk premium, drive up growth valuations, etc.
So really, the real test for crypto is when the monetary policy regime shifts. But to be honest with you, I don't see that happening. Maybe inflation finally forces the issue -- but then there's the fact that inflation will drive flight to alternative assets anyway.
Actually, it was fiscal policy which dropped money from helicopters in the form of pandemic assistance of all kinds including small business loans that will never be paid back again. In the 2007 financial crisis, the federal government bailed out banks and big finance ( see AIG). This time it was businesses and consumers who were bailed out. Allot of that money went into crypto and stocks.
Is Dai similar to Gemini's GUSD stable coin? It too is backed by Etherium. I think Gemini is paying 8 or 9% APR for holding. Where is that money coming from? Are they loaning out for a higher rate than that?
>Dai is a stablecoin cryptocurrency which aims to keep its value as close to one United States dollar (USD) as possible through an automated system of smart contracts on the Ethereum blockchain. [...] Dai is created from an overcollateralized loan[.]
I agree on this, although ampleforth is not specifically a stablecoin, but nonetheless it's one of the most interesting economic experiments I've witnessed since bitcoin, a true Hayek money had never been possible before in humanity, thanks to chainlink a currency that even Satoshi Nakamoto dreamed of is now possible
If you are referring to Gemini Earn, they take your GUSD (or other currency) and take a spread then lend it to Genesis, who takes a spread and then lends it to big institutions. None of this is insured.
Some of it is likely them promoting the use of their stablecoin (paying out of pocket) while a lot of it probably comes from lending it out at higher rates. It is VERY easy to make more than 8-9% on stablecoins.
I thought dai would continuously be bought and used to liquidate positions as the price drops.
I.e. if someone mints 100 dai with 150 worth of ETH and the price of ETH drops then anyone can acquire dai and use that dai to access the collateral.
Through that mechanism the supply of dai should contract not the spot price. The bigger worry is that they allow minting Dai from USDC which could freeze their assets
If a recession is bad enough some will panic and pull it all out.
The reality is that crypto is not essential—it’s convenient and has potential but it’s value is backed by what? Other financial assets are backed by stuff like voting rights in a company or a physical asset.
Hence: people will dump crypto first.
I suppose Ethereum is different because it is backed by the functionality provided by the distributed Turing machine and all applications which rely on that. So the folks who wouldn’t pull their money out would be product owners who rely on the blockchain as a revenue stream.
My question would be who holds the price up high? Institutions or the broader public holdings of ETH?
Oxygen, heat, water, food. In that order. At least crypto is 'backed' by math. I expect the currency to dump will be related to who, and not what, is backing each asset class.
Correct, OP seems to be referring to single-collateral DAI aka SAI, which is deprecated. The current DAI is backed by a basket of assets.
IMO, the basket is too heavily weighted towards centralized stablecoins like USDC. I rotated some of my MKR holdings to Terra/Luna, which may have a better peg mechanism (although it is similar to Titan, which exploded).
But many coins seem to move in concert (just based on casual observation). Additionally diversifying in traditional equities has the benefit of being exposed to multiple industries - lets say farms and chip manufacturers - that don't depend on the same commodities as inputs and don't sell products into the same markets. Crypto doesn't have this property - besides requiring an input of energy, they're not involved in any kind of production at all. So what does diversifying even mean for that kind of asset? In a recession, why would there be any reason to think that ETH would behave differently than BTC?
If there's a run on a stable coin then so what? Systematically important financial institutions don't have very much exposure so there wouldn't be a significant impact on the real economy.
This is why I'm excited about Djed (https://djed.xyz). Input Output Global (creator of Cardano) has been researching stable coins and drafted a pretty extensive white paper on their solution (https://eprint.iacr.org/2021/1069.pdf). The white paper also include a mentions for how they will prevent bank runs.
One of the problems this class of mechanisms runs into, in the real world, is that--particularly in times of crisis--liquidity and prices are discontinuous.
Djed doesn't seem to be vulnerable to the former. (Reserve coin holders transparently give up liquidity for their yield. Though, as the paper admits, reserve coin holders are subject to run mechanics.) It would be to the latter.
I worry there target release date of 2042 seems extremely aggressive for them based on past performance and some of there research might not be relevant by the time it comes out.
The thing that is working slightly in the background to ensure net outflows don't happen is during time of downward volatility, stablecoins is what the prudent crypto investor is transitioning into and stores his wealth until they are ready to buy again.
Titan/Iron is (was?) an algorithmic undercollateralized stablecoin pair. Iron was the $1 one actually. This is not a meaningful comparison to fully collateralized coins like USDC or Tether.
They may have their own issues, but the certainly don't have Iron's
I agree, with one caveat. There's always a chance that the organizations issuing these "stablecoins" pull off something analogous to what Nixon did when he ended the convertibility of the US Dollar into gold, making it impossible, in fact illegal, for anyone to call up the US Treasury and request that they exchange a bunch of dollars with gold from Fort Knox.[a]
Many so-called "gold bugs" and "Austrian School economists" predicted the transition to a non-convertible dollar would surely lead to monetary and economic disaster... but so far, they've been wrong: Things have actually worked remarkably well for half a century.
Could Bitfinex pull off something like that? I'm not sure, but I wouldn't rule it out 100%.
Is there a way to find out what was the market cap of those two? Searched coingecko and a few other places and came empty handed (they just list "price" but no historical market cap or outstanding coins)
Just a correction: there have been far more stable coin crashes, there was a time not so long ago when every week one of them crashed. There’s dozens, or more likely hundreds, of stablecoins out there.
DAI is backed by vaults of various crypto assets. Because there already was a crunch of DAI a few years ago, the USDC was added to the mix. A fiat collaterized stablecoin.
OP doesn't realize that DAI has sailed through falls in ETH value of far more than 50% (I think the worst was over 90% in 2018)
OP, despite his obvious great intelligence, doesn't realize that another, stronger question about DAI would be the potentially-worrying linkage to USDC etc to provide stability (though critics should note that even before that stability module, PSM, was introduced it had never deviated by more than 1%, AFAIK)
Seeing that this is, despite all those errors and omissions, the top comment here, is extremely dispiriting
You mean what happens when economy does well enough that it starts overheating which forces an exit from the liquidity trap and turns real interest rates positive? I guess we'll find out soon.
> To address risks to stablecoin users and guard against stablecoin runs, legislation should require stablecoin issuers to be insured depository institutions, which are subject to appropriate supervision and regulation, at the depository institution and the holding company level.
> To address concerns about payment system risk, in addition to the requirements for stablecoin issuers, legislation should require custodial wallet providers4 to be subject to appropriate federal oversight. Congress should also provide the federal supervisor of a stablecoin issuer with the authority to require any entity that performs activities that are critical to the functioning of the stablecoin arrangement to meet appropriate risk-management standards.
> To address additional concerns about systemic risk and concentration of economic power, legislation should require stablecoin issuers to comply with activities restrictions that limit affiliation with commercial entities. Supervisors should have authority to implement standards to promote interoperability among stablecoins. In addition, Congress may wish to consider other standards for custodial wallet providers, such as limits on affiliation with commercial entities or on use of users’ transaction data.
AKA StableCoin operators should be banks. (Stable Coins will be bank notes)?
Even the Cato blogger here concedes that wildcat banks failed more often and were probably fraudulent from the beginning some of the time (but you can't prove it!). His argument more or less boils down to regulation being inherently bad, therefore it's worth it to try this all over again with stablecoins, in case it works this time, also sometimes people got back like 95 cents on the dollar so if you don't count those cases as wildcat banks the story looks a lot better. Not surprising, but it's a lot of words to make such a banal point.
You've totally missed and mischaracterized the point of the article. That wildcat banks failed was never in dispute. They failed, by definition.
As the monetary historian notes, wildcat banks were very rare, and the cause of wildcat banking was not, as alleged, lack of centralized regulatory gatekeeping: the failures were generally directly due to regulatory intervention that exacerbated risk, like prohibitions on bank branching which precluded diversification.
I mean it's published by the Cato Institute. Regulatory gatekeeping is the root cause of all problems.
Joking aside, I didn't see the prohibition on branching specifically called out, other than to say that Scotland (which did allow it) did not see banknote discounting, and that ultimately it was the 1864 National Banking act which finally ended the practice.
The most common thread it seemed to be were that banks held confederate bonds and caused massive losses after the war broke out.
Ironically I think the author makes an excellent comparison between Wilcat banking to Stablecoin. I've replaced a few key words like "notes" and "loans" and "currency" with coin and stablecoin:
> Nor did they make any loans, their profits having instead consisted entirely of fees drawn on the transactions from their stablecoins. "People needed the coins they produced at a time when money was scarce," Du says. "So the community acquiesced in their conduct."
> But, the debate continues, if the public "acquiesced," in what sense can the stablecoins be said to have bamboozled it? Would having no stablecoin at all to trade with really have been better than having to rely on suspended ones?
Where it explains the harm done by the prohibitions on branching:
>>Thanks to the combination of a large country, poor (though rapidly improving) transportation infrastructure, and unit banking, when notes traveled any substantial distance from their source, getting them redeemed could be quite costly. In smaller nations, and especially those, like Scotland, where banks were allowed to branch nationwide, banknote discounts were unknown: the fact that there were many different banks of issue, with varying assets, didn't prevent such nations from having "uniform" banknote currencies. Even Canada, which was geographically as large as the United States, but much less populous and with a far less developed internal transportation system, managed (with the help of several private clearinghouses) to achieve a uniform currency, based on the notes of several dozen commercial banks, by the early 1890s.[4]
>>Had it not been for unit banking, the United States might well have had a uniform state banknote currency before the Civil War, thanks to its by then impressive railroad network. Even with unit banking, it came a lot closer than most people realize. Despite already having had over a hundred banks of issue at the time, with hardly any branches, New England managed, with the help of the Suffolk System—an early, Boston-based banknote clearinghouse—to achieve a uniform currency as early as 1824.
But yes, the most harmful restrictions were those barring banks that didn't hold the state-mandated reserves, which made banks, and the money supply in general, susceptible to changes in public finances, and made those changes systemic in nature, since all banks were affected in the same way, and at the same, by a change in the availability and value of the statutory reserve assets.
This article is nonsense, and typical of intellectually dishonest right-wingers. They always claim that it was actually regulation the whole time that caused the problems! Wow! Yet we can look at the regulations the author cites, and what were ultimately the reasons for the end of wildcat banks, and see those were obviously not the cause.
Regardless, the lessons learned are still applicable today. Whether wildcat banks were common or not doesn't change that most cryptocurrencies mirror the failed wildcat banks of the past.
>>wildcat bank, unsound bank chartered under state law during the period of uncontrolled state banking (1816–63) in the United States. Such banks distributed nearly worthless currency backed by questionable security (e.g., mortgages, bonds) and were located in inaccessible areas to discourage note redemption.
As for your criticism: no, the author meticulously details the ways in which regulatory restrictions led to most of the bank failures associated with wildcat banks, and contrasts it with the experience of 19th century British North America, i.e. Canada, and Scotland, which lacked those same restrictions.
I assume you're referring to the author, not publisher, since the credibility of the publisher of the article is irrelevant to the content of the article. An economist coming to a conclusion that is different from the establishment's, or yours, doesn't make them not neutral. I don't know of any conflicts of interest they have that would make them not neutral.
The author is employed by the Cato institute which has the stated aim of publishing research and policy papers that advocate for the removal of regulations.
While I don’t know that they have a conflict of interest per se, it’s absolutely reasonable to suspect their writing to be mission driven, not pure research.
The author developed the view that free markets facilitate economic coordination long before joining the Cato Institute, and has enough statute to presumably not need the employment.
>>it’s absolutely reasonable to suspect their writing to be mission driven, not pure research.
Perhaps, but really the author provides arguments and evidence that can be judged on its own merit.
What do you call an institution that takes deposits and lends them out, such as by buying ""commercial paper"" that Tether repeatedly talks about? A bank. (Or possibly a money market fund)
You call it a 0% interest money market fund. You do not call it a bank. A bank does something entirely different: create 'bank loans'. A non-bank does not have the ability to create bank loans.
This might be right (though to my knowledge, it's not what they claim to be doing). To originate a loan, Tether would simply issue and lend their coin (Tether), specifically ignoring dollar backing. Can you provide a discussion of them doing this?
> A non-bank does not have the ability to create bank loans.
A decentralized derivatives protocol can lend its credit balance (and fractions of its stablecoin balance, if it exists at all at the point when a position is opened) to a decentralized liquidity pool when there is demand by end users to open a position (ex. a user can deposit frax to buy options/forwards/interest rate swaps/etc against a liquidity pool while the exchange allows the pool to borrow collateral into existence [and destroyed when the users position is closed, modulo the type of derivative the user bought]) without the liquidity pool providing all or any the collateral to back the position if it ends up moving against the liquidity pools exposure.
Such a protocol can also issue debt against their stablecoin flows in accordance the protocol code, that can also float on a dex at a premium or a discount and also be used as collateral in other decentralized stable coins that allow for differing collateral underlying (like some decentralized credit/debt backed stablecoins out there now, or allow themselves to be collateralized by any combination of ERC20 underlying).
This sounds like credit, but not credit origination. If new units of the numeraire are created, that is origination akin to a bank loan. If not, that is not origination. I don't know of an English term that describes 'not originated' lending, as everyone sees to use the term 'lending' for both behaviors. What do you mean by 'borrow collateral into existence'?
> This sounds like credit, but not credit origination. If new units of the numeraire are created, that is origination akin to a bank loan.
New units of stablecoins are being created out of thin air, but the catch is that they can only be used on the exchange (technically, it could be spent else where if other contracts wanted to use it), and if there is a shortage of actual stablecoins when someone tries to withdraw their credit balance, they will receive debt tokens that are redeemable from the exchange for stablecoins at an interest (collateral requirements will be raised for all actors if credit balance > stablecoin balance, and lowered when the opposite is the case).
> What do you mean by 'borrow collateral into existence'?
In this case, in order for the credit balance for an address to increase typically, a user will need to deposit stablecoins into the exchange and their credit balance gets incremented by the same amount (their credit balance is used to buy derivatives).
However, in the case where a liquidity pool is borrowing from the exchange, the credit balance is increased for the liquidity pool without stablecoins being deposited by the pool (typically a pool will need to have stablecoins deposited into it by liquidity providers in order for the credit balance of the pool to increase, the credit balance of the pool is used as collateral write/buy derivatives).
Tether was invented to provide bitfinex with banking services after the banks refused to deal with them. Not super surprising that regulators are treating this banking replacement as a bank.
Interesting to read this with an eye on the authors' mindset. Their understanding of stablecoins seems largely centered on Tether (and to a lesser extent, BUSD/USDC). A lot of their understanding is incorrect when applied to algorithmic stablecoins like Dai, eg. there is no central issuing authority; Dai is minted in exchange for Ethereum (and other cryptocurrencies), not fiat currencies; the effect of a run on Dai is unlikely to spill over into the mainstream financial system; a "custodial wallet" in DeFi is not a company but just an Ethereum address, i.e. a hash of a public/private keypair.
Overall I get the sense that the government is still people/organization centric and cannot wrap its head around a future where reality is determined by computer code and people are bit players in the script.
"""Stablecoins that are purportedly convertible for an underlying fiat currency are distinct from a smaller subset of stablecoin arrangements that use other means to attempt to stabilize the price of the instrument (sometimes referred to as “synthetic” or “algorithmic” stablecoins) or are convertible for other assets. Because of their more widespread adoption, this discussion focuses on stablecoins that are convertible for fiat currency."""
Ah, interesting. Dai is mentioned several times within the body of the report, though, so it's implied that it's covered within the scope of the report.
I'm sure that the distinction will be lost on whatever press cycle or legislative output this report generates.
Perhaps I'm oversimplifying your comment, but it seems like a very good thing that the government continues to be people/organization centric and doesn't embrace a future where "reality is determined by computer code and people are a bit players". We should hope our democratic institutions continue to operate this way.
You have a valid point, and to some extent government should continue to be people centric. But there is value in replacing a some of the system in place by code.
IMO, a lot of ambiguous laws and polices create different outcomes for similar inputs, and that should not be the case of legal systems and institutions. Money is perhaps the first of the government aspects to be easier to express in decentralized code, but I won't be surprised to see this as only the beginning of a trend. Think autonomous cars replacing drivers and other interesting similar developments.
I'm value-neutral in this comment thread, I'm just describing a.) how things are and b.) how the authors of this report are making assumptions about how things are. I can see plusses and minuses for both people-centric and code-centric approaches.
I get that it's pretty natural that people would consider it a bad thing for people to hand over power to computer code. It makes perfect sense if you consider yourself not as a person but as a collection of electrical impulses floating around in your brain, though. Computers are the same thing, they just transmit those electrical impulses millions of times faster.
So is capitalism, and yet capitalism has seemingly taken over human behavior in a way that many people find is not an improvement, and yet are powerless to stop.
Complex systems often exhibit complex emergent behavior. Humans are part of that system. Humans are not the only part of that system, and it makes sense that agents interacting at speeds millions of times greater than us might eventually come to dominate the system.
> capitalism has seemingly taken over human behavior in a way that many people find is not an improvement, and yet are powerless to stop.
Lots of people banded together to rollback the degree to which capitalism dominanted life in the developed world, and were pretty successful at it over the last century.
Realistically I don't have the power to put humans either above or below computers. That'll depend upon the independent choices of billions of humans and hundreds of billions of microprocessors.
I've found that having an accurate model of the world - one that can generate likely predictions - is very important for profit now and potentially for survival in the near future. Knowing that people are frequently blind to changes in the world that do not place them at the center of the universe, it's worth correcting for that bias in myself and envisioning a world where humans are not necessarily on top. What would that look like, and what's my best chance for survival in such a world, given that I am human?
Sure, but your comment doesn't reflect an accurate model of the world -- brains and computers are not the same kind of thing, and humans are more than just a brain. I know there are powerful people trying to convince us that your model is accurate, though, with the goal of getting us to allow their computers more control over our lives. I'm worried that people are buying into this view, not because they believe it's an accurate model of the world, but because they think it's inevitable that these powerful people and their computers actually will end up in control, so they'd better prepare for that future.
Everything is already under control of three companies world wide. Vanguard, Blackrock and Berkshire Hathaway own everything worth owning. Who owns them?
One is that they broke down stablecoins into the following activities:
* Governance
* Management of Reserve Assets
* Custody of Reserve Assets
* Settlement
* Distribution
Just because one, more, or all of those functions are managed by smart contracts does not mean that the others cannot be regulated. Regulation may be the requirement to have regular contract audits for example and, in the case of Dai, the Maker Foundation would be responsible for adhering to those regulations.
Second, I don't think the writers of this paper perceive nearly as large of a risk from algorithmic stablecoins as they do institutions which claim to maintain asset backing in the normal financial system. The former have the transparency of the chain as a backing, and that transparency makes the currency peg safer. The latter have no transparency and regularly seek to obscure, which makes them extremely dangerous as they grow in scope.
DAI has a market cap of ~$6.5b and the transactions happen on chain. USDT has a market cap of ~$70.3b and has 0 transparency. It is clear where regulation should be focused.
> a future where reality is determined by computer code and people are but players in the script.
Corporations are "things" in a legal sense - but they're still managed by people, created by people and owned by people. DEFI contracts and orgs are still made by people, and sometimes also managed by people. You can probably be held liable and tied to your misbehaving contract.
The 9th Circuit ruled that source code is protected under the First Amendment in the Bernstein case, which legalized the export of cryptography. If you just publish the contract and don't have any ongoing administration, I would think that gives you a pretty strong legal defense.
Publish the code, or activate/enable/fund/start/whatever to instantiate the activity.
If you just publish it github - thats probably a good defense (linux T isn't to blame for all bad things that ran on linux).
If you publish a smart contract in a way that enables people to start using it, then that may not be covered. While its different than actively running an API/Service that needs continuous/paid hosting, its probably a grey area at best.
If the government were to take a hard line on this, then publishing on github for anyone to deploy would work. It's easy to verify that the compiled contract matches published source code.
But the Bernstein case was about PGP, and after the decision people had no trouble with using it, making compiled code available for download, etc.
> Overall I get the sense that the government is still people/organization centric and cannot wrap its head around a future where reality is determined by computer code and people are bit players in the script.
Conversely, people in government tend to view crypto folks as senselessly computer-centric and unable to view macroeconomics as the result of human interaction.
There is no such thing as value without exchange. That's a definitional thing. Coins themselves are just numbers.
Exchange value only matters when there's trade. My view of crypto is "wrong in the right direction" because it currently addresses macroeconomic coordination via mimicry of traditional finance. The technologies it uses to achieve decentralized coordination do matter, though. Automated consensus on a large scale is meaningful. But it needs a post-trade, natural-systems view of the world to really make sense.
DAI is not considered an algorithmic stablecoin, but an asset backed stablecoin. Algorithmic stablecoins like FEI do not seem to work as well as asset backed stablecoins.
> a future where reality is determined by computer code and people are bit players in the script.
As opposed to a reality determined by physics? Perhaps you're referencing AI overlords? I suggest that you may not understand the purpose of states. Even algorithms are the expressions of people.
Perhaps you can explain what you meant in a way that I'll more easily understand?
It is the government's job to translate abstract concepts to be people centric, simply because the world itself is people centric. Digital bits have no power unless they is a shared recognition of that power, same as a written contract, a book of laws, an election or anything else.
Except it doesn't. On Ethereum and other blockchains, that computer code runs everywhere, and every IP address is a gossip protocol that may have originated an undetermined number of hops backwards.
The lifecycle of an autonomous program (colloquially called smart contract) is that it is deployed by an address of a human being or that human being's server, and then the address' first transaction to the autonomous program is to delete the address' administrative capabilities of that program. Autonomous programs live on every validating node of that blockchain, and those validating nodes have no knowledge of the behavior of those programs. The deployment feature publishes the code on all validating nodes, no different than any other transaction. All future behavior of the autonomous program comes from individual users who do not control it.
So for what grandparent poster was referring to, stablecoins collateralized by digital assets, all the collateral is provided by users and all the stablecoins issued were caused by users providing collateral. Those users clearly do not run the autonomous program, no different than a depositor at a bank is not responsible for the bank when they ask for a loan from the bank. There is nobody to sanction, and there is no way to disable the autonomous program that accepts collateral and issues collateralized stablecoin loans.
Also, within EVMs (a type of development platform, growing category of blockchains), the users do not have a record of an IP address (although the node they connect to can record it, to mitigate that the user can run a relaying node from their personal computer. relaying nodes forward to validating nodes. no nodes in an EVM have knowledge of other nodes IP address and no nodes are even aware of which node saw a transaction first). And regarding the tracing of their onchain address, a user can provide collateral from a virgin address funded by other autonomous programs like Tornado which sufficiently mix funds. The programs and the regulators are not capable of factoring in our opinion about that.
This is specifically referring to non-algorithmic stablecoins.
"Stablecoins that are purportedly convertible for an underlying fiat currency are distinct from a smaller subset of stablecoin arrangements that use other means to attempt to stabilize the price of the instrument (sometimes referred to as “synthetic” or “algorithmic” stablecoins) or are convertible for other assets. Because of their more widespread adoption, this discussion focuses on stablecoins that are convertible for fiat currency."
This is a very good point. The risk profile of centralized stablecoins like Tether and USDC is way, way different from something algorithmically controlled like DAI.
This shouldn’t be surprising. Permissionless systems often innovate orders of magnitude faster than permissioned systems.
So many of these threads are filled with comments of the form “well why do we actually need a blockchain for that? Can’t we just do the thing with centralized databases?”
But the point is after 50 years the centralized databases haven’t built those systems. Smart contracts, and instant finality transfers, and a public identity tied to private keys could all exist on ACH. Yet they only happened when blockchains came along.
Blockchains aren’t a technical innovation, they’re a sociological innovation. They remove the responsibility of a centralized administrator if shit hits the fan. Visa won’t allow smart contracts in its network, because it has too much to lose. In Ethereum if the DAO breaks there’s no one to sue. Result smart contracts exist in Ethereum but not Visa.
Same story holds true with the Internet. Do we really need a decentralized network designed to withstand a nuclear war? Surely a single telco network could just as easily serve up websites. Except it never did. The Internet won because it was permissionless and therefore innovation occurred much more rapidly.
> They remove the responsibility of a centralized administrator if shit hits the fan.
I'd argue that they remove the liability of a centralized administrator but not necessarily the need for administration. This is why you see coins/tokens with some kind of voting scheme. Will be interesting to see if at some point in the future we see voting rights as presenting a liability.
Legal risk holds back a ton of innovation from taking over processes normally governed by nature, which we can't sue, to those governed by people and institutions, who we can sue. It prevents us from taking risk, even if we know we can probably solve the problem better than nature.
You can't sue a decentralized system, because there's no throat to choke.
For a stable coin to actually be worth $1, there has to always be someone ready to give me $1 for 1 stable coin. I see no guarantee of that over time for DAI. No different than other stable coins.
> Legislation should address the risks outlined in this report by establishing an appropriate federal prudential framework for payment stablecoin arrangements.29 In particular, with respect to stablecoin issuers, legislation should provide for supervision on a consolidated basis; prudential standards; and, potentially, access to appropriate components of the federal safety net. To accomplish these objectives, legislation should limit stablecoin issuance, and related activities of redemption and maintenance of reserve assets, to entities that are insured depository institutions.
> The standards to which these [insured depository] institutions are subject include capital and liquidity standards that are designed to address safety and soundness and, for the largest banking organizations, also include enhanced prudential standards that address financial stability concerns. Under the Federal Deposit Insurance Act, insured depository institutions also are subject to a special resolution regime that enables the orderly resolution of failed insured depository institutions by, among other mechanisms, protecting customers’ insured deposits, and according priority to deposit claims over those of general creditors, and limits any potential negative systemic impacts in the event of bank failure.
I suspect that we're going to very quickly (by legislative standards) find out which stablecoins are backed by real currency and which are "backed by real currency." I'm betting short-term there'll be some issues with liquidity, especially on smaller exchanges. But longer-term, having the gaps filled in by stabler stablecoins can't hurt.
I'm not so sure. There's a type of person who would deem the US Government having a privileged role in coin governance as a legitimacy-reducing factor for that coin, and that type of person is over-represented in crypto circles.
Also there's a possibility that whatever coins decide to comply end up spending their reserves on humans-in-the-loop to ensure compliance, thereby giving an advantage to the noncompliant coins.
Something analogous to this happened where I'm from: We voted to legalize recreational cannabis, but most people still use the black market because regulatory burdens put the legal shops at too great of a disadvantage to be competitive.
Historically, we've had major bubbles and crashes in all kinds of financial markets, from stocks and bonds, to property and dotcom stocks. Is there any reason to believe that cryptocurrency is more stable and we won't have a catastrophic crash?
Which is pretty clear evidence that those crashes weren't "catastrophic". That doesn't provide any proof that a future crash won't be substantially worse
In theory, cryptocurrency should be more resilient through greater transparency; anyone can inspect a smart contract and see how it works, what collateral it holds.
In practice, non-algorithmic stablecoins like Tether have very little transparency. I hope in the long run the market will gravitate towards algorithmic stablecoins like DAI.
Crypto "expert" here. We will have a catastrophic crash, it's normal and natural. But, the tech is here to stay and is 100x better than existing solutions. Crypto is changing the world, one crash at a time :)
The only practical differences in the tech is that it wastes more power, has no insurance, has no fraud remediation, and has no safeguard against volatility. I guess the potential anonymity too, but that's only really a practical benefit if making an illegal transaction.
The only time I can ever see a cryptocurrency being worth it is if you do not have any central authority you can trust. If we ever get to the point where you can't trust the courts to somewhat reasonably protect your money, then I think we have worse problems. Especially since you wouldn't have any physical protection from the legal system.
I can protect my own money, thank you. I do not need a nanny.
Anonymity might seem redundant to you and other people who "have nothing to hide". However, in a slightly more dystopian reality -e.g. when we are forced to use CBDCs- the government might choose to block you from using your hard earned money because you posted a criticism of the president on twitter.
> the government might choose to block you from using your hard earned money because you posted a criticism of the president on twitter
Um, I don't really see how cryptocurrencies are going to help you much when that same government just tosses you in jail instead. In fact, there are governments in our present reality that will throw people in jail for saying the wrong thing on twitter, so that really isn't an outrageous thing to imagine.
I'm sure the government would love to throw Edward Snowden in jail, but he is out of their reach. They would love to shut down Wikileaks and Sci-Hub too. On the other hand, governments can very easily weaponize financial services to deny people the ability to send individuals and organizations money - which is how Wikileaks found itself digitally embargoed by Visa, PayPal and Mastercard. Not so with cryptocurrencies. Cryptocurrencies can also provide anonymity to financial donors who would otherwise be targeted themselves for sending money to a party like Wikileaks.
Yes, cryptocurrencies are good if you want to finance illegal activity. However, since the vast majority of people are unable or unwilling to become international fugitives like Snowden, cryptocurrencies aren't especially useful as a way to post freely on twitter while retain your money against seizure by a hypothetical dystopian government.
You're assuming that financial censorship primarily targets illegal activity - it doesn't. The vast majority of financial censorship targets legal activity and persons, businesses and corporations who have not been charged by any government with any crime. And it's done by corporations pursuing political interests.
That's a long way from the claim that started this chain:
> in a slightly more dystopian reality -e.g. when we are forced to use CBDCs- the government might choose to block you from using your hard earned money because you posted a criticism of the president on twitter.
> I can protect my own money, thank you. I do not need a nanny
I love when people out themselves as having never worked on anything significant. Yeah, sure, for your pocket change, I'm sure you can reasonably protect it. For any significant transaction, I want the ability to reclaim my money if the other side turns out to be fraudulent.
> people out themselves as having never worked on anything significant
I really don't understand how you jumped to this condescending conclusion.
> the other side turns out to be fraudulent
Crypto is not here to protect you from falling victim to fraud. It is here to replace a faulty and completely outdated financial infrastructure. The same laws against criminals apply whether they use crypto or not.
> I really don't understand how you jumped to this condescending conclusion.
If you believe that financial regulations are the "nanny", you probably only have a child-like understanding of things. In that case, condescension is warranted. It means you don't have the experience needed to comment seriously on the topic.
> It is here to replace a faulty and completely outdated financial infrastructure
Yet it performs worse in every measurable metric. How many transactions per second can Bitcoin sustain? Four, lmao.
> The same laws against criminals apply whether they use crypto or not.
One does not need to be a criminal for proper regulations to apply. Again, this is the immaturity of people commenting.
Edit: after posting the below, I took a closer look at your commenting history and was shocked to see how frequently and how badly you've been breaking the site guidelines. That's definitely not ok, so I've banned the account. If you don't want to be banned, you're welcome to email hn@ycombinator.com and give us reason to believe that you'll follow the rules in the future. They're here: https://news.ycombinator.com/newsguidelines.html.
----
I'm late to this, but can you please stop posting in the flamewar style to HN and stop breaking the site guidelines? You did so extremely badly in this thread. "I love when people out themselves as having never worked on anything significant" is a bannable offense just by itself. No more of that, please.
I don't want to ban you, but we need you to post in the intended spirit of the site. If you'd review https://news.ycombinator.com/newsguidelines.html and stick to the rules going forward, we'd appreciate it.
@dang this is a pathetic response. HN encourages garbage comments and posts, but doesn't allow anyone to follow up. You think you're creating a safe space for discussion, but really you're creating an echo chamber of bad information.
The harm that bad information causes is incalculable, so no, I won't stop commenting on stupid posts. Perhaps you need to evaluate your responsibility to the world at large, and your role in supporting disinformation.
If someone believes that banking regulations are the "nanny", they shouldn't be allowed to comment on adult topics. Sorry not sorry.
Does it matter to you that you do more harm than my flames?
YCombinator just funded arguably the worst startup in history, Skip the Interview. Maybe you could do with a little dissension?
> If you believe that financial regulations are the "nanny", you probably only have a child-like understanding of things
Have you heard of the term "accredited investor"? That's 100% a "nanny" regulation that excludes poorer people from opportunities.
> Yet it performs worse in every measurable metric.
You jump to arbitrary conclusions. You probably did the same when it comes to Bitcoin that's why you say factually wrong things like in the comment. For example, do you understand what near-instant settlement means?
> One does not need to be a criminal for proper regulations to apply.
Comments like this make me believe that Crypto still has a ways to run up because most people still do not understand it yet - or at least not the full breadth of stuff that is happening in the industry.
I feel like if you look at the last 20 years and don't fall on knees at the Church of Fiat, then you have no idea what you're talking about. Crypto doesn't solve any urgent problems and is contributing to climate change as a bonus. Who is making use of crypto right now except crypto speculators and money launderers?
If you remain skeptical, that's fair. The good news is, Ethereum is reaching adulthood this year by switching to proof of stake and launching the web of layer-2 networks. Within another three years or so, the "actual applications" will become so ubiquitous as to be impossible to ignore.
I've tried to remain open minded for a long time on this issue, but honestly that list still looks really bad. At a glance, all the top companies seem to only be useful for coin trading/borrowing/lending/financialization.
Do you have any example of a use case with traction that serves a need not created by the existence of the cryptocurrency market itself?
For example, Eco is a non-crypto app that seeks to compete with CashApp, Venmo, and Apple Pay.
Although Eco is a fully non-crypto app, it is built on top of crypto rails.
Eco offers its users greater savings rates than traditional banks by using crypto to literally cut out the middlemen.
As well, Eco accounts are not FDIC insured-- but, I think that's a temporary downside of the current regulatory landscape. It seems like there's no reason why Eco accounts couldn't be FDIC insured in the future. Happily, the benefit of cutting out the middlemen is forever.
I think that's fair because right now, most or almost all crypto apps are circular.
Yet, I have found it useful to try and separate the fundamental innovations from the current set of assets being manipulated.
Here is a partial list of fundamental crypto innovations:
- non-custodial wallets in general to protect people from predatory institutions or governments
- smart contracts that always do what they say they'll do
- inherent global jurisdiction of blockchains, ie. borderless
- vastly reduced transaction costs to stand up and operate new, networked financial instruments and other kinds of digital asset systems (property registries, etc.)
The fact that these innovations are currently majority operated on dog money, Bitcoin, ETH, etc. is a temporary characteristic of this early stage of crypto's growth.
In the future, these same innovations will operate on everything in the economy.
For example, Tesla stock (backed by custodially-held physical shares, not synthetics) has been available on Solana for some time.
> non-custodial wallets in general to protect people from predatory institutions or governments
You can do that now by hiding money in your mattress. In both cases, it's not on you to protect your money, and a lot of people who are tech savvy have been failing to do so. Regular folks are going to get robbed often.
> smart contracts that always do what they say they'll do
Except when they don't, because they have a bug, and all the money is stolen.
> inherent global jurisdiction of blockchains, ie. borderless
This is only true if you are able to spend the money as cryptocurrency. Once you try converting that into fiat, you start hitting those borders really quickly.
> vastly reduced transaction costs
Except that the transaction costs are higher, on average, and especially so if you consider the fees for converting from fiat, and back to fiat.
> Tesla stock (backed by custodially-held physical shares, not synthetics) has been available on Solana for some time
Sure, but a financial institute is holding those shares. You could cut the middle-man here (the cryptocurrency) and just use the financial institution.
Thanks for that link. I've been long on BTC since the beginning, and I fully love the concept of crypto.
But busy with work (and I sold my startup 2 years ago) I went completely dark on the Crypto world. Now I'm trying to catch up with it and both DeFi and everything Layer 2 seem to be the future.
Which part? Could you say more? If you make a comment like this, I feel like it should be obvious what you mean, but it isn't at all obvious to me in this case.
There's a large subset of the talented people on HN that were wrong about crypto years ago-- they couldn't see that the casino and the innovation are, unfortunately, inseparable-- and many now cling to their original incorrect points of view, even as crypto is clearly changing the world like the internet did in the 90s and mobile in the 00s.
I have been full-time in crypto for years. I could write you a 10,000-word essay on crypto's promising use cases. But, I believe that you, and many others on HN, don't want to hear it.
That's too bad, because you guys grew up on sci-fi and rigor, and now you're ignoring that crypto is both rigorously successful and cypherpunk sci-fi come to life.
It’s pathetic because you’re just writing nonsense and can’t even describe anything practically productive about crypto. None.
By the way, I could ALSO write you 10,000 word salad about how commonly found stones can solve the wrongs in modern finance. That doesn’t say anything about common stones. It just says modern finance is FLAWED.
You are not showing yourself to be a person that it is worthwhile for this person to waste time on. There are other people in this thread with your point of view but who are commenting in good faith, rather than in bad faith like you are.
That is one kind of bad faith argument but there are others. In this case it is asserting that something is some adjective ("pathetic"), getting a response, and then just reasserting the same thing without responding to the response.
It was a bit brusque. I think that's the word you're looking for. If that's what bad faith means to you (which still seems a stretch of the definition so you can get the guidelines invoked and win the internet) then both sides of the discussion are guilty of this.
On the other side of the aisle, we have people pointing out that there aren't any interesting dApps, with the reply being:
"Sure there are! Here's a list dApps that are just more layers on moving cryptocurrency!"
That's only interesting if you assume the blockchain is valuable and interesting. This is a circular argument. Do you have anything better?
"Sure do! Here's a list dApps that are just more layers on moving cryptocurrency! Register on this site to hear me talk about NFTs!"
Is that "bad faith" too? I don't think so. There's a divide though, and it's a tiresome one. Some of us think the emperor has no clothes. Others think they are the best clothes ever. We probably all need our eyes checked.
There's a difference between "pointing out that there aren't any interesting dApps" and saying "This is just pathetic". The former is a reasonable point to make while the latter is a bad faith insult.
Instead of the thinly veiled ad hominem of trying to paint the user as a troll by crying "bad faith! bad faith!" Why didn't you provide some killer examples instead? This omission is as frequent as it is telling.
I am widely published inside the crypto industry on twitter and on a few podcasts over the years. For example, here is an episode on the many present & future uses of NFTs (episode requires a free Real Vision crypto account)
No, they were exactly right. In ten years, cryptocurrencies have produced nothing of value except speculation. This is like saying the Dutch that didn't sell their homes to buy into the tulip bulb craze were wrong. Sure, people have made huge gains, like all ponzi schemes generate. Most are bagholders, though.
> even as crypto is clearly changing the world like the internet did in the 90s and mobile in the 00s.
Crypto hasn't changed a single thing about the world. There is not a single popular thing backed by crypto. Every example you gave in this thread was either weak, like that DeFi Pulse link, or just straight not even using crypto, like Eco.
When you as an expert can't even identify a popular product using crypto at it's core, it doesn't speak very highly.
> I have been full-time in crypto for years. I could write you a 10,000-word essay on crypto's promising use cases. But, I believe that you, and many others on HN, don't want to hear it.
I am an actual cryptographer and would love to read world salad like that.
> That's too bad, because you guys grew up on sci-fi and rigor, and now you're ignoring that crypto is both rigorously successful and cypherpunk sci-fi come to life.
Stop. Libertarian dorks that don't understand the history of finance is hardly the sci-fi we want.
I've responded to several commenters who say this with my real world examples, the most notable of which are paying people in Venezuela to do work for me when most mainstream forms of monetary exchange are nearly impossible in/out of that country.
Venezuelan here. You're exaggerating the use of bitcoin in Venezuela. You might have paid some people with it but on the streets you use and want USD. Zelle, PayPal or USD in cash. No one wants another volatile currency, we've had enough of those.
I have not heard of that to be honest. What does happen is you might settle change with random stuff. Say you buy groceries for $8.50. You might pay half with a transfer in bolivares (local currency) and the rest with a $5 bill. Then they'll give you back a chocolate and a bar of soap as change as they might not have enough. It's bizarre
I am, uh, paying two contractors in Venezuela in cryptocurrency (not BTC) by their request. Not sure how I'm exaggerating it. Unless you think I'm only paying one contractor, I guess.
Why would that matter? Do you believe that you aren't transacting with USD when you buy something using the VISA network? Or with apple pay? Or a check?
There is a vast market for efficient, fast, and affordable methods of transferring money/wealth across political boundaries. Blockchain/crypto seems to be filling that niche for many people, myself included, without "speculation and crime" being a factor. There is no "remittance app" for it because you can do it with your pick of various widely available crypto coins and exchanges.
"If well-designed and appropriately regulated, stablecoins could support faster, more efficient, and more inclusive payments options."
Anyone else find it bizarre that the solution to slow payments might turn out to be distributed ledgers based on proof of work? It feels like the last thing you'd expect - especially since we're starting from a position of managing money through trusted centralised authorities. It's actually really weird we can't settle payments in seconds already.
All traditional methods use gatekeepers that control the flow of money. If you can't do what you want with your money is it really yours? The Trustless nature of BTC involves a seeming waste of energy, but you get a lot in return (like ownership of your money).
> The Trustless nature of BTC involves a seeming waste of energy, but you get a lot in return (like ownership of your money).
You get that too with proof of stake. Bitcoin really only has the branding of being the first mover, and as such as a strong chance of remaining the digital gold (not a digital currency that’s fast and easy to transact)
Sure, but my point was not really about trust. My point is that speed is easier to achieve without Blockchain than with it. It's strange that the centralised solution is slower.
The removal of human trust is the source of the speed.
It's effectively the automation of slow, human intermediaries in the financial network that allows you to create a programmable money that runs 24/7 and is open and permissionless to boot.
And with this programmable network, we can see an explosion of innovation, because nobody needs to wait around for a person to approve anything you want to try.
Real-time gross settlement is the instant way of transferring money between banks. Try and send $100K to someone and getting it done same day. Most people don't have access to that system.
https://en.wikipedia.org/wiki/Real-time_gross_settlement
That’s because the current system is not centralized, the current system is heavily decentralized. It basically is based on a lot of different banks trying to partner with one another. Blockchains are distributed databases, and as such they emulate a centralized server. That’s why it’s faster.
The centralized, heavily regulated solution is slower.
If they could impose all the regulation they want on permissionless, trustless p2p decentralized networks, those would be slow and massively expensive, too.
Fortunately, they haven't the power. They can attack the edges (and ultimately every centralized stablecoin can be attacked) but they can't stop, say, uniswap.
I’m under the impression that we are starting with decentralized ledgers with traditional banking. The problem solved by blockchain is the synchronization/balance of payments between the ledgers by just making everyone track the same unified ledger.
From a Coinbase exec: "Tether is a ticking time bomb. Whenever it goes off, it'll be a 70-80% market correction for 2-3 years"
Crypto continues to help nobody and achieve nothing in the real world. This administration has been criminally slow in shutting it down, lobby is strong.
No there won’t be a big long term correction from Tether because there are dozens of other stable coins now for people to temporarily sell into. There’s also the ability to short crypto and buy puts on crypto. All of that provides ways for speculators, investors, middle class savers, and early technology adopters to stay in the game.
You’re like a doomsday predictor that will never see a doomsday happen.
No real value? The AAVE crypto platform alone already holds more value ($23B) than the entire market cap of Ecuador’s stock market ($11B). The AAVE platform is literally more valuable than a country.
AAVE is just one of many applications built on the Ethereum network. It speaks nothing of Uniswap, Maker, Yearn, Balancer, USDC, Compound, and many others.
The Quito stock exchange consists of over 300 companies in farming, forestry, power generation, medical care etc. They have physical and human capital and earn profits from their paying customers, whether or not people want to buy stocks which offer them a share of this profit
The AAVE platform consists of individuals lending recently printed tokens to each other to buy other recently printed tokens in what is essentially a zero sum game with no connection to the real world unless they can convince outsiders to pay even more money for some of the tokens.
The fact the latter is notionally valued at higher than the former pretty much underlines the OP's point about the lack of "real value" underpinning the whole thing...
The difference is momentum and trust. Crypto is underlined by trust. Permissionless trust and cross-border trust. Either people don’t trust the Quito stock exchange to return all of the money back to shareholders or they don’t see their money going up in value there. So people don’t give them their money.
Market psychology is hard to predict. Going from one coin to another in a state of crisis is like people dumping their X stocks to buy Y stocks, because X is crashing. Or selling their housing real-estate portfolio to buy some other class of real-estate.
Casual "investors" sell their portfolios for hard cash when markets start crashing, which in turn induces others to sell. And if you're sufficiently leveraged, you're forced to sell - no mater how much belief you have in your investments.
> Crypto continues to help nobody and achieve nothing in the real world
Crypto posts on HN seem to be a hotbed for these sorts of hyperbolic, wholly unsubstantiated and objectively false comments. I wish i understood what the motivation was for these sorts of replies.
Please show me a real world use case that's better than the status quo and is not speculation or gambling. It's been over 12 years and I'm still looking.
Cryptoclowns can't use the it's too early excuse anymore.
But they choose to listen to a handful of man children running around promising world peace via a distributed database.
Money transfers across borders. I have friends who live internationally and crypto has become our defacto way to transfer money.
But frankly, your presentation of the question leaves me doubtful you are looking for a meaningful answer here. The reality, as others have pointed out, is that there are lots of platforms in the space offering plenty of compelling services. You personally may not desire those services, but that doesn't change their viability.
If I was presenting the question more completely, I would have included financial fraud alongside speculation/gambling, which is exactly what you're doing by sending $ across borders without AML/Forex regulatory checks on the txn.
Proof of humanity providing Sybil resistance and ubi => proof of humanity.id
Holly+ trialling collective ownership and finding ways to pay musicians. (Spotify ceo worth $5billion yet the musicians get fractions of pennies). https://mobile.twitter.com/hollyplus_
“Information wants to be free. Information also wants to be expensive, that tension doesn’t go away” - s.b.
HN often uses the first half of that quote and forgets the rest.
There are several options to 'stake' (deposit) coins/tokens and earn interest. You can earn more interest in crypto than you can at a bank. Assuming you trust the underlying tech long enough for your investment horizon.
I could give you more examples if I needed to, but considering the argument always made here is that cryptocurrencies have precisely zero use cases, one example should suffice. If you want a better response, don't leave yourself open with sweeping generalizations.
> Crypto continues to help nobody and achieve nothing in the real world
It's kind of surprising how little progress has been made.
It is absolutely possible to use privacy-respecting low-fee tokens to purchase ebooks, purchase "no advertisement" article reads, or subscribe to periodicals.
Even something like Taler is better than Visa and Mastercard. I would love to know why lwn.net, ars, or the register don't try. I would absolutely pay $0.25-$2.00 per read for the ~50 articles I read per month on these websites.
Micropayments for tech readers seems like a good place to start. Tech readers use ad blockers, but are also willing to try new tools with janky UX.
I believe the case for micropayments was shot down back in 2002 when Scott McCloud first proposed it as an option for webcomic authors in his comic post "I Can't Stop Thinking" (the original no longer exists at his site, but various rebuttals [1] are still around)
Basically, people hate microtransactions. They hate the very idea of paying per article. They don't want to do it.
Ars, among many other sites, offers yearly subscriptions with various benefits (such as no ads) and that business model has worked well for them for many years.
I run a globally, distributed company funded solely operated based on smart contracts and cryptocurrency/equity. We got 50 investors from around the world. Most of hackernews is exclusively focused on the United States, which is a very limited point of view. Try travel and see other parts of the world and you might understand it better.
"70-80% market correction for 2-3 years" is a contradiction. A correction brings asset prices back in line with their true values. That a coinbase exec thinks the cryptocurrency is 3-5x overvalued is wild, but if that is true I don't see any particular reason to expect the prices to go back within a few years.
The party will come to an end soon. There are people at Treasury (FINCEN and OFAC) who find the idea of people being able to transact even thousands of dollars without them knowing about it repulsive. Having coins tied to dollars is begging for regulatory action.
If you don’t have strong checks in place to address fraud, lack of transparency and instability, you are essentially forcing regulators to get involved.
I don't believe they support them today, but all of these companies have announced plans to adopt crypto in some form, including stablecoin support or Ethereum-based settlement.
Visa uses Ethereum mainnet today (for about 6 months or more?) to settle obligations between a small subset of their merchants whose businesses are in crypto.
> No but they settle financial transactions today, and the SEC is basically saying there should be no difference
This report is from the Treasury. Not the SEC.
Also, the SEC doesn't regulate financial transactions. Just securities and exchanges. The SEC has argued that stablecoins are securities. That is an interesting argument, and I sort of see both sides of it, but somewhat unrelated to this paper.
> Conversely, mass adoption of a well-regulated and supervised stablecoin with
strong AML/CFT protections built into the stablecoin could provide greater transparency into illicit
financial activity and could mitigate ML/TF risks, especially if the stablecoin takes market share
away from riskier alternatives.
Interesting.
The blockchain is public, so they see benefit in being able to audit it.
> Who would want tether if you can get government backed USD stable coins?
People who wanted to hold USD outside of the US's jurisdiction, for one. I suspect this is one reason that apparently “more legitimate” stablecoins haven't caused huge Tether outflows.
Nobody. The alternative to government backed USD stable coins isn't tether. It's algorithmic stablecoins (FEI, FRAX, etc.) and collateralized stablecoins (DAI, MIM, LUSD, DOLA, etc.).
Tether and other pose a critical systemic risk to all cryptocurrency. Anything to increase trust/transparency with stablecoins is a big with for crypto.
Tether absolutely poses a large risk to crypto. If companies do issue stablecoins, they should have links to third-party attestations that verify proof of reserves like Circle (USDC) does.
Tether could end all of their "FUD" if they ever published such a report.
IMO “FUD” about Tether will never end, because it’s a fairly clear scam. The fear/uncertainty/doubt around it is not due to an easily remedied lack of transparency, the lack of transparency is just an attempt to disguise the scam.
I see Tether heading towards collapse, not legitimacy, and any actual increase in transparency would just hasten the collapse.
The problem is an independent audit would also uncover Tether's likely involvement in various illegal schemes to pump up the prices of cryptocurrencies. It's not only that they don't want to be audited but that they just can't.
An attestation is doesn't mean squat. It means someone witnessed something once and some agreement was executed in accordance with some policy.
You want an audit. I have been there, seen the procedures, run the numbers, and independently verified that when followed yield the same result as reported.
It's the difference between "Seem's legit" and "The numbers check out".
> To address risks to stablecoin users and guard against stablecoin runs, legislation should require stablecoin issuers to be insured depository institutions, which are subject to appropriate supervision and regulation, at the depository institution and the holding company level.
How does this interact with the concept of algorithmic stablecoins? Not every stablecoin is simply backed by deposits.
> How does this interact with the concept of algorithmic stablecoins? Not every stablecoin is simply backed by deposits.
Relegated to a footnote (just like Jeffery Snider at Alhambra Partners talks a lot of the typical chatter by frbny et al wrt the (euro)dollar system gets relegated to footnotes and nick named the phenomena "footnote dollars") on page 4:
"Stablecoins that are purportedly convertible for an underlying fiat currency are distinct from a smaller subset of stablecoin arrangements that use other means to attempt to stabilize the price of the instrument (sometimes referred to as “synthetic” or “algorithmic” stablecoins) or are convertible for other assets. Because of their more widespread adoption, this discussion focuses on stablecoins that are convertible for fiat currency."
i.e we'll pretend that people cant swap dollar denominated non centralized corporate issued stablecoins for any kind of fiat at the floating rate of the denomination of the stablecoins underlying to the fiat in typical fx markets (also ignoring that higher amount of those other stable coins are being used in defi protocols relative to their supply than the centralized ones).
So of course, those like FEI, FRAX and others will get ignored.
This is what I wonder, since I thought what most consider stablecoins now (like Tether) are basically steppingstones towards things like Maker/ Dai, which I am unsure how they would fit into this kind of regulation.
The primary targets here are going to be folks issuing stables backed by real world assets and fiat. Under-collateralized algo-stables will probably be targeted as securities by the SEC, while overcollaterized debt based ones will probably just be ignored for now because of how capital inefficient they are.
Excellent question, also synthetics. This is my big question. If you make fiat backed stable coins to onerous to manage, then everyone just moves to algorithmic stable coins.
I read your comment and then started reading about at MakerDAO's governance model. It doesn't jump out as a scam to me, just a clever bit of game theory.
I'm not the government or even a lawyer. But I'd imagine they'd block companies from trading Bitcoins for dollars or mining Bitcoin. Turn off all the ETFs and options trading. Say Tesla and MicroStrategy can't hold it in their treasury. I doubt they can make it disappear but that would certainly put a dent in US adoption.
They can make it illegal to buy and sell these stablecoins. The exchanges where the stablecoins are bought and sold would have to delist these coins or face criminal action.
Hmmm, I'm aware of some that aren't scams. MakerDAO and OlympusDAO aren't scams. They might fail utterly, but lots of things that aren't scams are just good faith failures.
This strikes me as a catch-22. People who research cryptocurrencies / blockchains and conclude they are promising technologies are likely to both invest in them and also tell people they are promising. But that doesn't tell you anything about the direction of causality. It could be either "I invested in them so I tell people they're promising" or "I think they are promising so I invested in them".
I remember investing in Microsoft in the 90s and Apple when the iPhone came out and also telling lots people that I thought Windows 98 was really great and that the iPhone was a huge deal, but the primary reason I told people those things was not because of my investment in the stocks, rather I invested in the stocks because I thought those things were true.
And many of the people who show up to hate on cryptocurrencies participate in what amount to support groups for people who had the opportunity to buy but didn't.
I have been waiting for some regulatory movement in this space. I am not really familiar enough with government agencies to know how a document like this filters into Congress for actual regulations to start getting drafted and debated, but to my ignorant eyes this is great news!
How can the SEC and the Treasury let these crypto coins continue to exist when it's so rife with scams? Based on the TOS of Tether, it's clearly as scam with no protections for any investors.
Why hasn't the US government regulated all these coins out of existence? I feel like it's turning into a systemic risk to our economy given how much money is being turned towards them.
Maybe I'm missing something obvious, but exchanges like Kraken actually offer margin trading on pairs such as USDT/USD and USDT/EUR. https://support.kraken.com/hc/en-us/articles/227876608-Margi... If somebody (probably a non-US-person who is allowed to do margin trading there) is convinced that Tether will tank, why can't they just go on such exchanges and initiate a short? Is the fear that the exchange itself will become insolvent after the crash, and you won't be able to withdraw your fiat out of it in the end?
The backing of stable coins is not an issue. The real issue is:
1) Anyone can send a stablecoin to anyone without any permission. People do it currently at a large scale. That is not acceptable to the governments because it takes a crucial element of control away from them.
2) Unlike bitcoin, all stable coins have a single point of failure - a bank account that holds funds can be frozen, a CEO of a company can be arrested.
That's why all centralized stable coins will be decommissioned sooner or later.
Treasury at least knows what it's talking about. The Congress (whom they're asking for legislation here) not only won't understand any of this, but worse, will write whatever laws big bank lobbyists want them to write, with the primary intent to make all of this non-viable for anyone but Goldman Sachs and JPMorgan through regulatory capture.
I'll leave it to you to decide whether this preferential treatment is better than the current lax regulation.
My head is swirling with all the coins coming out these days. Have these coins all been around for some time or am I just hearing about them now?
I don’t know how this crypto shit will ever end. It’s basically speculation that there will always be a greater fool to buy your coin. Zero fundamentals. Can this really go on forever? Or will there be an ultimate bag holder at some point?
I've previously named Tether "rat poison" and I hope they are regulated/banned. Tether is an easy problem to "solve", and imho, should fall under existing regulation.
However, I would love to see an explanation on how the treasury recommendation of regulating stablecoins as banks should apply to (what I see as beneficial) "algorithmic"/DAO stablecoins.
The treasury's continued omissions, ignoring the real elephant in the room Maker, will only confuse regulators instead of addressing the "hard problem" of Maker.
There are gorging differences between a centralized and "trusted" service like Tether and the algorithmic, automatic, decentralized, and trustless Maker.
The elephant in the room is that the US Congress has insufficient power to regulate stablecoins effectively, any more than they can effectively ban the consumption of marijuana in the USA.
This is a lot of handwaving and sure they can make Coinbase stop supporting USDT but that's not going to do it.
The worries about stablecoins being used for day to day transactions are pretty interesting. I haven't seen any interest in that online and I personally think transacting with stablecoins would be the worst of the cryptocurrency and credit card worlds.
Would the act of regulating Tether and other stablecoins in and of itself crash the market? If the government shut Tether down, wouldn't that cause the run they are afraid of?
The money is already missing, it is only a question of when the market realizes it.
The best time to stop the fraudulent scheme was yesterday. The next best time is now.
It's better the Tether market crash now than after it's grown even more. This will suck for the folks that lose money, but it was going to hurt at some point.
Right now the intellectually curious can earn 19.5% in DeFi on stablecoins using Anchor protocol. No, it isn't FDIC insured, but insurance is available for 2-3% netting 16~17%. Unlike banks anyone anywhere has access to this free and open monetary network and the returns are 1700~2000 basis points higher than any US bank offers.
What if this guy is right?
"They are not afraid that criminals will use it; they're afraid that all the rest of us will use it." - Andreas M. Antonopoulis
Look into the Terra stablecoin network and read the whitepaper before dismissing it. The returns are very real. There is a reason that decentralized finance is the fastest growing industry in history. You may want to investigate with an open mind.
I don't see how there can be risk free 40% gains without them being arbitraged away. It is the equivalent of printing money. If the gains are real the only logical conclusion is that the risks are being underestimated.
UST is the stablecoin pair to Luna which is the native token of the Terra network - an algorithmic stablecoin platform. It's an innovative approach to stablecoins across multiple currencies and it is growing amazingly fast.
I would encourage everyone who feels like they missed out on Bitcoin or Ethereum to understand that Decentralized Finance is yet another opportunity of a lifetime. Centralized banking is the legacy play here and it is being disrupted at an amazing pace by DeFi. If you have an open and curious mind and are able to do some research down the rabbit hole, this is a space that will provide handsome returns to the enthusiast - already has.
It may not be immediately obvious that all banks run their own "stablecoin": LD: "Ledger Dollars". How do "internal bank ledger dollars" differ from stablecoins?
As well, very many countries of the world "peg" their currency to the USD.
> Countries will experience a particular set of problems when a currency is pegged at an overly low exchange rate. On the one hand, domestic consumers will be deprived of the purchasing power to buy foreign goods. Suppose that the Chinese yuan is pegged too low against the U.S. dollar. Then, Chinese consumers will have to pay more for imported food and oil, lowering their consumption and standard of living. On the other hand, the U.S. farmers and Middle East oil producers who would have sold them more goods lose business. This situation naturally creates trade tensions between the country with an undervalued currency and the rest of the world.
> Another set of problems emerges when a currency is pegged at an overly high rate. A country may be unable to defend the peg over time. Since the government set the rate too high, domestic consumers will buy too many imports and consume more than they can produce. These chronic trade deficits will create downward pressure on the home currency, and the government will have to spend foreign exchange reserves to defend the peg. The government's reserves will eventually be exhausted, and the peg will collapse.
> When a currency peg collapses, the country that set the peg too high will suddenly find imports more expensive. That means inflation will rise, and the nation may also have difficulty paying its debts. The other country will find its exporters losing markets, and its investors losing money on foreign assets that are no longer worth as much in domestic currency.
(Meanwhile, <party> does continue to advise persons to invest diversifiedly and non-volatilely in order to meet or exceed CPI (Consumer Price Inflation))
You have to be careful with your choice of words. Especially on an engineering / science forum. The word "proven" implies a definitive certainty backed by solid theoretical foundation and a massive body of evidence. Very few things are proven in social science and economics. And most of them are simply definition.
You are free to express your opinion though, but please mark it as such and make at least a small effort to explain how you reached it as otherwise your post is not adding value to the conversation.
This public official laying down rules “you are free to… but please” tone has become commonplace on HN in the past few years. Anyone know the origin? Perhaps a shift in public enthusiasm for controlling speech? Did it start at universities? It seemed to just show up one day around 2018. It’s incredibly distracting.
The audience of hackernews has grown and old users are trying to maintain the culture of the site. The value of this site comes from its community. Let's not turn it into reddit. I personally welcome this type of policing.
Anyway, I don't think such tone-policing is all that off-culture for HN, nor do I mind it all that much. PG explicitly said back around 2008 that posts which keep the discourse civil and intellectually honest are welcome even if they don't directly add content. I just thought that there's a certain irony about "old users trying to maintain the culture of this site" when the users in question are less than a year old and are responding to someone who's been here for 14 years.
Some of us change account names as a matter of internet hygiene. I think I've had 6 or 7 here over the years, and even this old one was dormant for most of its life. Anyway, the point is you never know just based on account age.
I'm not a public official, but I like my readings to be informatives and display a good faith attempt to convey the truth. HN is one of the rare place on Internet that manages to do both. And I think everyone can contributes when given the opportunity to do so, so I think a small remainder can be better than an outright downvote / ban.
Seems like you are confused about why people might respond negatively to you (the comment thinking the issue is around 'shiny dirt'), and that some one had the time to try and explain what might be going on.
I see some one stating outright their respect for your freedoms, but it seems to trouble you. Why is that?
I think it would be helpful here to compare the theory of a ponzi scheme to that of bitcoin.
In the beginning, buyers buy into a ponzi scheme because of a story that the creators are telling about their scheme. As time goes on, people buy in because the early investors are making a ton of money, as the value of the asset begins to skyrocket. Later on, people buy in because of previous hype, even though returns are actually beginning to level off, people don't notice. In the end, returns start to go negative, and the asset plummets, because nobody else has any reason to buy the asset anymore.
With bitcoin the theory goes: In the beginning, buyers buy into bitcoin because of the vision and idea of a decentralized currency made by an anonymous hacker on the internet. As time goes on, people buy in because the early investors are making a ton of money, as the value of the asset begins to skyrocket. Later on, people buy in because of previous hype, even though returns are actually beginning to level off. In the end, however, due to the properties of the currency, and its penetration throughout the population, people continue to buy even though there is little profit to be made anymore. It has been shown to be a better long term store of value than fiat currency, but with similar liquidity, unlike other assets with higher returns such as bonds and real estate. It can be easily transferred around the globe and is highly divisible, making it useful for payments large and small, avoiding complex VISA networks and regulatory red tape. Due to its enforced scarcity, it isn't possible to create any more of it, and so it maintains its high price rather than simply being overproduced back down to a lower valuation.
A ponsi scheme is fundamentally different than a market.
With a market one day you trade five USD for one BTC. The next the best offer your able to get from anyone might be two USD for one BTC. That's just the nature of any market for anything. Value for anything depends on who comes to the market and their bias.
A ponsi scheme is nefarious and more of a shell game. When the asset is gone, it's really gone and not coming back. There eventually aren't units to redeem because the originator took the aasset.
If BTC or crypto were a ponsi the analogy would be satoshi hacking your wallet and draining your funds.
In traditional crypto there aren't returns, there's just potential for it's perceived value relative to a base like the USD to change.
There's a canonical toxic response to this = HFSP. I don't like that because we're all still learning. I hope you see how the money printer is making scarce assets outside of Govt manipulation more valuable. The Bitcoin rabbit hole goes deep. You're right in that stablecoins might actually be worthless in the long run since they're backed by USD which might be worthless in due course of time. Zoom out of the day to day movement - we're in price discovery stage where nothing makes sense in the short term.
>>There's a canonical toxic response to this = HFSP.
I don't feel this was your actual response, but I still need to address it because I don't understand how anybody ever can have that as a remotely legitimate, thought-out response.
How can any financial instrument/currency make everybody "rich", in any real terms?
If you gave everybody million USD tomorrow, it'd crash so bad that we'd be right back where we came from.
Is there anybody that believes that we could all invest fiat money into X.coin, and after some period of time, we'd all be rich? If so, how? What wonderful value does it produce, what mechanism would magically elevate all without disruption?
From where I'm sitting, any currency or investment is a re-distribution of wealth/money/value. A person who bought X.coin yesterday can only derive/extract value tomorrow if somebody else buys it for more. We didn't gain/extract/create value out of thin air by virtua of fintech, it's a simple exchange.
So what if everybody DID get some X.coin, so that nobody did "HFSP"? What'd happen then?
I will restrict myself to Bitcoin as I don't believe as strongly in the rest though I do own some of those as well. Bitcoin is at a market cap of 1T. That's less than major tech cos (Apple 2.5T, Google ~2T), gold(10T), total USD (~30-40T) etc. If you believe BTC will be used as the global store of wealth and currency, buying anytime (until the time BTC gets there) will make anybody who buys rich.
Of course, after price discovery is more or less complete, we can't all be rich as the value relative to goods and services will stagnate, and BTC will become as boring as gold.
> From where I'm sitting....if somebody else buys it for more.
Sure, and they will if the value of said coin keeps going up. Note that you don't need to sell it for USD, you could be paying for services in said coin directly. Point being that the exchange doesn't need to happen in USD, it can happen in any form of value.
A central plank of the US dollar (all fiat currencies, really) is that if you hold on to them for long enough all the wealth you had when you first picked them up gets transferred to someone else.
Compared to that baseline holding literally anything else - including crypto - has a better theoretical chance of preserving your wealth. When measured in terms of US dollars, that has the appearance of everyone who owns it getting richer.
> How can any financial instrument/currency make everybody "rich", in any real terms?
You have resources, someone else has a really good idea for how to use them. Financial instruments let the situation play out sensibly (you lend them resources, get back resources + something) with easy-to-manage legal enforcement if something goes wrong.
More complicated financial instruments let that scenario play out in more abstract ways. All in theory, in practice most people are bad with debts and more complicated concepts.
No, crypto does not 'theoretically' hold out better than USD or other things.
An asset - no matter what it is - is only going to have value in the future depending on how others are going to a value it.
This means does it survive war? National collapse? etc..
USD is a currency, not a store of value, it's designed to be slightly inflationary. That's policy and public information. Don't hold them for 'long term' but it will at least have some value.
Gold and Real Estate (to the extent you can control that real estate, which depends on rational social organization etc.) - will probably hold their value. As will some other things.
Crypto would be the last choice among many as a store of value, as they could all be wiped out in a second, forget the issues of what financial fashions might come into place in the future.
Crypto is still 100% experimental, and every dollar traded in crypto, is at least today, purely speculative, no different than trading Baseball Cards. But without at least the Baseball Cards. That's where it is today and while something might come along, nothing is quite on the horizon just yet.
>>You have resources, someone else has a really good idea for how to use them. Financial instruments let the situation play out sensibly (you lend them resources, get back resources + something) with easy-to-manage legal enforcement if something goes wrong.
I agree with that in general; however, that's not the current premise of most cryptocurrencies - I see them more like gold in that you buy them and hold on to them; not as a capitalist investment into anything specific or generic. I may be wrong...
For newer cryptocurrencies you often buy them and then either (1) stake them (earn rewards for contributing to network security) or (2) deposit them in a crypto-bank like Aave and earn yield from having your money loaned out. Increasingly people don't look to cash out to USD but rather stay within the crypto ecosystem.
I do think that BTC and its clones engender a certain dragon-cache hoarding mentality that aligns with either plans to eventually cash out at a higher price or some kind of apocalyptic vision where eventually USD is no longer used at all.
>How can any financial instrument/currency make everybody "rich", in any real terms?
By organizing economic activity in a more efficient way than our present system of centrally planned debt supplies. That's what currency is "for" - organizing real activities.
So what kinds of economic activities, besides ransom, drug sales and donations to wikileaks and others not liked by u.s. government does bitcoin facilitate? Remittances to countries under repressive economical regime or under embargo?
Not saying those are good or bad, just aiming to quantify the market size.
The potential of cryptocurrency is a lot brighter than the potential of Bitcoin. The right investment to make in cryptocurrency isn't buying it, it's thinking about it and economics to try to figure out how it can be gainfully used. Ethereum has many potential applications and so may be worth buying, but only if you have a use for it. (The price of every asset is such that buying it is a martingale.)
BTC isn't even truly decentralized - it's Chinese.
This summer, China banned Bitcoin mining, which resulted in a temporary drop in the hash rate. We're almost back where we were before the ban: https://www.blockchain.com/charts/hash-rate
That speaks volumes about how resilient Bitcoin's ecosystem is.
Bitcoin isn't Chinese. Bitcoin doesn't belong to any country, nation, tribe, political party, institution, or person at all.
I get that, at some high level; but I'm not really seeing any of the current coins being actively used as currencies as much as investment / static store of value. They all look more like Gold than Dollar, to my ignorant eye
To start with, I'll say that I agree with the mainstream view that cryptocurrency isn't actually creating wealth, in the sense of non-financial real goods that improve people's lives. It's redistributing it. Everybody's crypto gain comes at the expense of somebody else's crypto loss.
I'll also throw in that folks who say "HFSP" are often the losers, because they're the ones who FOMO in because of greed and ego at the top of the cycle and then panic-sell at the bottom when they actually become poor. The folks who are making millions in crypto are the ones who buy at cyclical bottoms - 2012, and 2015, and 2019 - and hold on to sell at the tops, when everybody else is making fun of the folks sitting on the sidelines.
However, they're on to something. Imagine that you're inside a group with superior military technology - the Mongols in 1200, for example, or an American settler in 1840 - and you're looking at the people you are about to conquer. Or less bloodily, you're going into software in 2002, aware that a computer program will replace the jobs of whole industries, and trying to figure out which profession to go into. It's much better to be on the inside of change than on the outside.
They aren't necessarily wrong, either - they're correctly perceiving that the fiat currency system is unsustainable and is its own Ponzi scheme, and creating an alternative Ponzi scheme to recruit participants into. Game theoretically, if you have an inflationary currency and a deflationary currency, it makes sense for everybody to spend the inflationary currency and save the deflationary currency (Gresham's Law) which further drives up the relative price of the deflationary currency so long as there's an excess of savings available. If we enter a time of shortages (which we might), then the value of the deflationary currency will collapse (since everybody needs to spend money, and merchants are accustomed to taking the inflationary currency) - but if that happens, Bitcoin and its electricity & Internet demands are screwed anyway. In the meantime, as long as labor and savings both remain abundant, holders benefit at the expense of new adopters.
The actual claim isn't that crypto is going to make everybody's life better. The claim is that it's going to make the life of holders better, at the expense of late adopters. People can't come out and say that directly - "Hi, I'm going to fuck you over and take all your wealth". I'm sure that'd go over great with the general public. So they say it in coded egoisms like "have fun staying poor", where you can write it off as somebody blowing off steam.
Can you explain how all gains are from other peoples losses?
Someone invented a technology. Initially it was worth zero. Now it’s worth 1tn. The gains are from the gradual realisation that the technology has some merits. There are way more gains than losses… so far at least.
Other than the number in someone's bank account, what do you get from cryptocurrency?
With technologies like washing machines and dishwashers and stoves, it's pretty easy to see the real gains in wealth: you save labor. Ditto cheap housing and automobiles: you can live places you wouldn't before, which opens up a yard and white picket fence to people who previously lived in tenements. The Internet opened up a whole new world of information, which let people start businesses, learn new skills, apply for jobs they wouldn't otherwise know about, plan vacations, etc.
With cryptocurrency, the product is money. Money isn't wealth though; it's something you can trade for wealth. And whatever money you get from cryptocurrency got paid in by someone who newly bought what you just sold. There are people who have bought houses with gains from crypto (more power to them!), but that's paid for by other people putting money into crypto and getting nothing tangible in return. For those other people to get tangible benefits, somebody else would have to put money into crypto, and so on.
Money is a measurement tool, not a thing in of itself. In a properly functioning economy you get money when you create wealth, but money isn't itself wealth.
I agree with you. However I’m not sure about classing them as losses.
If the price now plateaus indefinitely (obviously this won’t actually happen) then the early adopters made some profits and the more recent investors don’t lose anything. Everyone is free to buy and sell as they wish going forward.
Plus, if the crypto offers some people some benefits, such as avoiding large fees when sending money abroad or avoiding inflation, then it’s possible that the crypto invention is a net positive.
Thank you; your two posts have given me more of a practical understanding/faith in cryptocurrencies at large than any number of passionate posts over the years.
I guess it pays to think of Cryptocurrencies other than BitCoin (which is in 90% of headlines), and imagine what CAN be / what superior systems are and can be out there.
Amazing how many people are die hard advocates of being closed minded. The net market for crypto hits over a trillion dollars, and you still say things like this declaring they are proven to be worthless. This is posted on a report by the US government on a technology that is effectively a digital wrapper to use the US dollar easily online. How is there no worth in that?
Out of curiosity, what would it take to change your mind on this? Is there not even a single dollar of real value in the crypto world?
Then don't use Tether. Plenty of more reputable companies and projects providing stabletokens with strong (USDC, GUSD) or soft (DAI, sUSD) pegs to the dollar.
Also, you are missing the point of view of the merchant and the amount of possibilities that open with crypto. E.g, you can sell digital goods with zero risk of fraud or chargebacks, to anyone in the world, at whatever price point. No credit card operator will ever be able to do that.
Yes, but you likely live in a first-world country with generous options for banking. Bitcoin can serve anyone anywhere, regardless if they live in a privileged country or not. Try using your USD bank to send/receive money as a citizen of Iran or Libya or Nigeria. There are over 1 billion unbanked in the world today. They cannot use the US dollar easily online.
I work on an international team and 2 of our devs are based in Nigeria. Nigeria currently suffers from 16% annual inflation and so the people have flocked to crypto as a store of value. Over 20% of the population uses cryptocurrencies. There are many more examples including Venezuela, Iran, the West Bank, and El Salvador.
Consider that many more have internet and a smartphone than a bank account. There are over 1 billion unbanked in the world, many of those have internet and smartphones. You would be surprised at the spread of smartphones amongst the world's poor - much greater than the prevalence of bank accounts with FDIC insurance or the equivalent.
I'd like to see people actually spending it day to day items, rather than hoarding it or spending it on blackmarket/illegal goods. There's a claim that people send money home to families in other countries, but I don't see how that could be trillions? And when pressed, enthusiasts hide behind "third world" claims.
No one is buying groceries with it. No one is buying commodities with it. People are buying it to get rich. Even in El Salvador, it failed immediately because the transaction fees were too high and the stipend given to citizens swung in value too radically.
I will be convinced when people are buying groceries with it and not trying to become crypto mill/billionaires overnight.
Monero and other privacy coins have some real utility for enabling drug sales, tax evasion and ransomware. In terms of above-board use cases, I'm deeply skeptical.
I just went through the process of buying something expensive in a "trustless" system in an IRL country. It was pretty painful and very expensive -- I paid $300 just to get a guaranteed check cut!
Of course this is a trivial problem to solve with smart contracts, if you can have things like real-life identity and real-life money mapped to them.
While I don't think any of the crypto stuff out there today solves any of these problems realistically, at least Ethereum sure looks like an experiment in that direction.
That a lot of people are getting rich speculating on crypto absolutely triggers my FOMO, and sometimes my disdain (cf. certain NFT sales) -- but I definitely wouldn't call it worthless.
Some day we may have free, secure, trustless escrow via smart contracts, and a bunch of other neat stuff. I think that's unlikely to be on any of the current networks, but I also think we'll get it decades earlier because of them.
> Of course this is a trivial problem to solve with smart contracts, if you can have things like real-life identity and real-life money mapped to them.
This reminds me of talking to a salesperson at $BIG_CO about their "blockchain platform cloud" offering for "ending inventory tracking system inaccuracy problems once and for all".
I could never figure out how cryptography was supposed to help with the "is the physical thing actually where it's supposed to be in the physical warehouse" problem. That seemed like the non-trivial part. Everything else you could just do with a flat-file CSV or whatever.
"Of course this is a trivial problem to solve with smart contracts, "
No, it doesn't. The 'contract' was never the issue really. We need a judicicial and regulatory system in which the contract is valid, the means to redress issues, undo transactions.
Now, $300 is probably too much to move money and speaks to the incumbency of financial actors ... but a good chunk of that cost is actually the reality of the fact that it takes a lot of very smart, very conscientious and super 'small-c' conservative running financial infrastructure.
I think regular fintech startups will beat down that $300 cost faster than crypto will.
Even less than people want to hear that gold is just shiny dirt, people don't want to hear that almost all perceptions of value are inherently subjective and meaningless.
That social credit, and money, and everything we hold dear and true is just narrative we've crafted around ourselves to cope with the uncaring void that is the cosmos.
So -- my guess -- people are probably going to keep thinking that things are valuable so long as everyone else around them does. And technically everything can be reduced to nothing more than a set worthless human brain farts.
Edit: except for your values of course. Whoever you are, your values are certainly meaningful, and your life is a story that really matters.
Where do you get that people “don’t want to hear” this? I find it’s a tedious revelation that people seem to love having. Yes, things are only valuable if people believe they’re valuable. Deep. So what though?
The downvotes are because "worthless" is hyperbolic and unhelpful. Clearly, the coins have value because someone out there feels like paying money for them.
More importantly: we _HAVE_ to understand the market dynamics here. What's going on is very human and very important to realize.
Matt Levine from Bloomberg has a very simple explanation: the cryptocoin world has discovered "senior debt vs junior debt", and are using this concept to create stablecoins.
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The issue is, the rest of the world _REMEMBERS_ 2008, and what happened the last time we relied upon the senior/junior debt split. The concept is simple:
Junior debt is high-risk. Senior debt is low-risk. Through the use of structuring your economy around this concept, your junior debt "supports" senior debt.
A stable-coin, is simply the senior-debt on some other cryptocoin.
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Lets take BTC for example. Lets say I want to "create" a stablecoin out of BTC, despite its widely varying valuation. Lets say I set up a senior set of notes: it stays at $1 as long as BTC stays above $10,000.
But what about all the "risky part" ? Well, someone out there in the world wants to bet it all on the risky part. When BTC rises from $10,000 to $50,000, they want to make $40,000 with $0 investment. Because the "senior" guy already took the risks for $10,000 and below, I can now offer the "rest of the gains" to the junior guy, who can play with all the values of BTC above $10,000 (except, without having to pay any money in the first place).
When BTC goes up to $20,000, the junior guy spent $0 and made $10,000. Senior guy still has $10,000.
When BTC goes up to $50,000, junior guy now has $40,000 and senior guy has $10,000.
This sounds hypothetical, but its in fact very similar to how the stablecoin TITAN / IRON was structured, with Titan as the "senior" stablecoin and Iron as the junior.
Now just wrap it all up in a smart contract, maybe tie the concept to Ethereum (or whatever other cryptocoin suits your fancy), and you too can reinvent senior/junior debt structures and pretend you're a genius.
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You see? Senior is "just" the stablecoin guy. Junior is the WSB idiot who might lose all of his money.
Or in other terms: your CDO of CDOs is truly and 100% secure. You may have a pile of shit, but you can extract stable values out of it.
Or at least, so went the theory of 2008 housing crisis, CDOs, and CDSes and all that. We know where that went however.
It hasn't even been 13 years and everyone's forgotten about the underlying assumptions that broke the market in the 00s.
> Is the correct value for a Ponzi scheme really determined by the most recent dollar they took in?
I wouldn't say a Ponzi scheme should be valued by this dollar. It should be valued by the next dollar that someone is willing to put into it as the whole point of the Ponzi scheme is to gather the next dollar.
I certainly agree that worth and current market price are correlated. But I disagree that they're definitionally the same.
Indeed, pretending they're equivalent is a great way to lose a lot of money. I used to work for financial traders and I got some very fat bonus checks paid for by people who confused the two during high-volatility events while our traders stayed more flexible.
Your post makes a lot of sense to me from a fundamental econ perspective, however, I know I don't know enough about the topic of crypto-currencies in general to trust my opinion much. I'd love to see the strongest possible counter-argument to yours to help me understand why so many people seem to disagree.
All crytocoins have their own programming and therefore their own general behaviors that fail to generalize.
My post was largely based on the TITANIUM / IRON saga of the cryptocoin world, just a few months ago ("Titan" for short). I'd suggest you read up on the mechanics of how / why that crashed.
> When BTC goes up to $20,000, the junior guy spent $0 and made $10,000. Senior guy still has $10,000.
When BTC goes up to $50,000, junior guy now has $40,000 and senior guy has $10,000.
You used a lot of words to describe a Ponzi scheme.
I'm describing a CDO scheme. Its important to remember the difference. Ponzi is a very, very different structure.
CDOs do well as long as the underlyings don't crash beyond a certain value. The "junior" guys have lots of risk (and they _WANT_ the risk and enjoy it). The "senior guys" think they're safe.
Indeed: senior/junior is roughly how we split up fiat dollars: banks do this with our money all the time (under tight regulations of course, to ensure that the banks are following the rules). Senior/junior can work, but in practice... someone out there will want to cheat the system. At that point, it all comes crashing down.
Regulating the heck out of banks to ensure that no one cheats is a big part of the solution.
> CDOs do well as long as the underlyings don't crash beyond a certain value
Which, to be clear, didn't happen in 2008. People assumed that super safe meant super liquid. The AAA tranches of every CDO I've looked at performed as promised, in terms of not losing money. Even when the underlying securities performed abysmally. They just didn't trade in a crisis like the Treasuries their buyers were using them to replace.
(Side note: a lot of algorithmic stablecoins similarly assume perfect liquidity and continuous pricing.)
There's of course, "The Big Short" if you want a stupid 2-hour movie. But that movie glosses over so many details and is straight up hyperbole at many points... so its not "realistic" but maybe a better thing to watch if you really don't want to put in much effort?
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I guess my post was based off of the Bloomberg blogpost "Looking for Tether’s Money" by Matt Levine. So read that for my original inspiration, though you may need a Bloomberg subscription to be able to read it.
The only real point of stable coins seems to be tax/sanctions evasion. Given that, no respectable institution (tier 1 banks etc) will run one. Given that, all stable coins are only stable till the disreputable nature of the operator catches up with them...
I see it more as People who are given the job to protect the American People and the American economy from financial manipulation see that stablecoins have a high risk of financial manipulation rather than "govt wants in"
However the sole existence of stablecoins and crypto is due to the fact that legacy, corrupt financial institutions and irresponsible government fiscal policies present the biggest risk to people wellbeing.
So all these "risk" talks is a prerequisite for more taxes and more regulations that will only accelerate the natural evolution away from outdated, corrupt, centralized legacy institutions.
While I would agree that the government is strongly incentivized to try and regulate crypto I think its hard to argue that stablecoins aren't ticking time bombs. Most of them clearly don't have the assests to back up their market caps and with 138 billion USD in market cap [1] they would certainly cause a crash of at least cryptocurrency if they became worthless.
For a stable coin to actually work, it needs to be private and algorithmic. The only such crypto I know of, is Haven protocol. This is based on a fork of Monero the largest fungible crypto network, with a system of private synthetic assets on top. Things like synthetic USD, CHF, GBP, also gold and silver...etc. If you find this interesting, read more at https://havenprotocol.org/knowledge/
Can Tether survive a net outflow? Probably not. They don't have the collateral.
Dai is really a derivative of Etherium. Dai is backed by Etherium at 150%. So value in Dai is at risk if the price of Etherium drops more than 1/3. Etherium dropped by half back in May 2021, but recovered. DAI could have crashed at that time if it faced a net outflow. It didn't, though.
The real question is what happens in the next recession.