The only thing that maintains the value of any asset (or currency) is the collective belief in that asset or currency. Put another way: there is an inescapable component of trust in every asset.
Crypto in any form doesn't solve the trust problem other than a very narrow slice because as soon as you interact with anything outside of the blockchain, you're adding trust. Even on the blockchain, all the math in the world doesn't avoid the trust problem (eg it's been estimated that over half the Ethereum are owned by less than 10 entities).
Even backing a currency with gold (or any other asset) doesn't solve this problem. Additionally, it's not even correct. In years long gone the US government just maintained a peg between the US dollar and the gold price. Any reserves (which were never 100% anyway) are irrelevant to this. You don't need them. You just need sufficient capital to maintain the peg. Even if you had 100% reserves you still have to trust the government to honor redemptions and not to change the peg. If you have sufficiently deep pockets, you end up not even having to spend much money because no one challenges your peg.
So what actually makes the US dollar work as a currency is that it is backed by the long dick of the US government. This is a combination of economic, military and even cultural might.
So going back to algorithmic stablecoins, it doesn't matter how much you have in reserve. It doesn't even matter if there's new money entering the system (as this article claims) to maintain the peg. If people lose faith in the "stable" coin, it's finished.
> The only thing that maintains the value of any asset (or currency) is the collective belief in that asset or currency. Put another way: there is an inescapable component of trust in every asset
Most non currency assets are cash flow generating financial instruments.
If analysts don't believe a company is worth a dime, it can show them wrong by being profitable and paying dividends.
Edit: I think my point is - even if no one else believes in a stock or bond, you can still profit by "being right". The same is not true for currencies.
I cannot remember where I read this, but it was a view that basically the mere concept of a "company" is a collective fiction that we all believe in. As are nations, laws, etc etc. The idea that "tesla" is an entity one can interact with. That this "tesla" thing has value in and of itself. They're derived from beliefs in a system. Which could evapourate and render the idea of value meaningless.
I don't think this is very useful, since "yeah but without society there are no companies, money is nothing" doesn't take us very far! But hey.
It's useful from the standpoint it was explained in Sapiens (like how the fiction of the LLC allowed certain innovations) but not so much in this context. You can believe in the corporation or not, the important thing is that you won't go personally bankrupt if your company does, if the relevant 'belief system' aka the US judicial system evaporates, we have bigger problems to worry about than well, anything else in this conversation
It's worth talking about in so far as trust is important for some concept to work. Like.. how you will help your friend move apartments because you know he will help you in a year or so. Or whether a successful (thus far) crypto coin could go to zero.
But the whole point of a corporation is it is a legal entity, you don't need to trust anything for it to work other than other than.. idk the fabric of our society.
That was kind of Harari's point when using that lens in Sapiens, it wasn't that the corporation was some flimsy imaginary concept, it was that it is a fiction in the same way democracy or religion is.
It's interesting but not very useful. What's also interesting is that almost everything (actually everything?) is concepts that we collectively believe in.
This is my takeaway from the book The Case Against Reality.
> I don't think this is very useful, since "yeah but without society there are no companies, money is nothing" doesn't take us very far!
This reminds me there always exists a path between the current society & a completely different one, and a short path to something completely different is to start from scratch.
Company is not fiction to believe in, it is an agreement a contract by the society encoded in a set of laws. The laws governing companies, unlike the market-value of assets, are very resistant to change. Market values change very often, especially values of crypto-currencies. Laws don't change often.
A company exists and has valid standing not because people believe in it but because the law says it exists. It is easy to prove beyond reasonable doubt that a company exists (or not). That has nothing to do with whether people believe it is valuable.
My point is more fundamental than anticipating market mispricing within a certain set of constraints.
How does a company make money? Why does it distribute that money to shareholders? Why can't someone working at the company just keep all the money? Why can't the bank just confiscate it?
The answer at all levels is the the threat of violence. Property rights (eg to the money) are enforced by the threat of state-sanctioend violence, for example the police showing up at your house and throwing you in jail if you don't comply with laws.
So why would the police show up and do that? Why would the courts enforce those laws? It's not just the threat of violence, essentially. It's the collective belief in that system.
Why stop there? What makes an asset exist at all if not someone’s belief? Persistence is not a physical property as much as a phenomenon of perception. We believe that what we see is what we saw - and we believe that who we are is who we were. Etc.
Have to agree an asset is not a currency, in some case one can consider labor an assets and by extension an asset that can produce value. Labor might be unique in that regard but property seems to be similar you can derive value from nothing by putting property to use and since you can always change what the property produces. However, without any property, you physically cannot produce anything.
My house is valuable to me even if there isn't a collective belief in it. Most financial assets are backed to some extent by real assets.
I'm happy enough to put value in USD or imaginary-coin if I can swap my holdings in them for a nice house/car/jet. You don't really need "economic, military and even cultural might" - just for the currency to be accepted somewhere where you can buy real assets and for the supply to be limited so it doesn't inflate to nothingness.
The collective belief that you own your home is a crucial part of its value. If you come home and find a bunch of people partying in your kitchen, you can tell them to leave, or call the police and they'll drag them out. That's all due to the collective belief that you own your house.
Without that collective belief, owning anything is a huge effort to defend it against whoever else it might appeal to.
There's a big difference. Everybody may believe that you own your house. And everybody may believe you own 100 bitcoins. At issue is what is the exchange rate between bitcoins and say US dollars. If that goes to zero then you've lost the value of your bitcoins. You have not lost the ownership of your bitcoins, they have lost their value.
Whereas for your house, no matter what its market value would be you still have the right to live there and prevent others from doing so.
That is entirely still a societal norm and a statement of personal belief about specific rights. You might believe those rights to be inalienable and that your property is necessarily yours, but that doesn't actually translate to to a guarantee of maintaining that possession in the absence of the institutions that currently protect that ownership.
Anyone who's lived through a massive societal upheaval, collectivisation, dictatorship etc can attest to this - your ownership of property only means anything in as much as it's protected. If the state fails, or if society's understanding of private property radically changes then your investment is only valuable if you can hold on to it.
Even in the private-property loving West the value of an individuals property can often turn out to just be the amount that the state decides to pay them when they seize it via eminent domain.
All true but still I think there is a clear difference. Assets can and are traded in exchanges. Their value goes up and down based on what is the "shared belief" of their expected value. Laws are not traded. They can change but do so many orders of magnitudes less frequently than the value of assets on the market. Laws are not beliefs they are societal contracts.
> Laws are not beliefs they are societal contracts.
Societal contracts are just collective beliefs. When the number of people upholding a particular societal contract goes to zero it ceases to exist.
Just as any other belief, it requires believers to exist. Unlike, for example, the space rock that some group of sentient organisms decided to call Mars.
Pretty sure when Detroit went bankrupt they were basically paying people to come back to the city. There are ghost towns for a reason, because homes do lose value, even for the person who can still live there. Bitcoin right now is in the middle of nowhere like these ghost towns that can fail if the one company supporting them fails or the farmers just give up. It’s becoming a bigger city, to continue the analogy, but is still in the gold rush phase, where all the miners have come out looking for something. Maybe the city becomes San franscisco or maybe we find a ghost town in 100 years once everyone realizes the gold ran out.
I'm a crypto-sceptic myself. Crypto is a currency. The value of most currencies goes up and down based on the expected production/export capabilities of countries supporting their currency. But crypto is not associated with any country, so there is no country whose economic output could make crypto stronger or weaker. Perhaps this is a naive viewpoint but I think best way to look at crypto is as a currency and think what makes some currencies strong and some weak.
If the value of _dollars_ goes to zero, the house doesn't collapse. The social consensus and enforcement mechanism that protects your right to live there probably does though
Well such is the way of the world that you may have to defend your property or have someone do it on your behalf. Animals have homes and territories that they defend in nature too so it's not unique to human belief systems.
That feels to be reductionist beyond the point of usefulness. Treating physical objects and violence as abstract concepts seems to always lose something, although I find it difficult to pinpoint exactly what.
I'm not an expert in this, but I think that it basically starts with the political concept of legitimacy [0] - government, with the consent of the governed - which leads to the monopolisation of force (police, army etc), which provides a concrete means of enforcement for the collective belief of "property".
That is, the reason that you can call the cops when strangers take over your kitchen is because we have a very real police force, whose are permitted (even required) to use force in order to protect your property. Property may have started out as a collective belief, but the processes put in place over the last few centuries - especially the concept of Rule of Law [3] - have made it very real.
But ISTM that crypto works outside of these norms. From what I can see, it has no effective rule of law; no possibility for the creation of an effective enforcement body. There appear to be no consistently applied consequences of cheating, either intentional (eg, rug-pulls) or not. People seem to steal money using crypto scams all the time [1]; from what I've seen of it, the world of crypto seems to pretty much embody my personal, nightmare interpretation of anarcho-capitalism [2].
So while I agree that property is a collective belief in theory, in practice it has the rule of law, the legitimacy of the state, and the monopolisation of force supporting it. Crypto seems to have none of these things supporting it; I'm yet to be convinced that it is even, actually, property.
Ethereum has intentional soft and hard forks; whatever that process is, that’s it’s government. Whether that government chooses to address problems which challenge Ethereum‘s legitimacy is up to them.
I think that’s the right follow up question to explore - what establishes political legitimacy. Or perhaps more accurately, what best establishes political legitimacy. There’s arguably a vote in the sense that users of the network choose which fork to adhere to. This isn’t a perfectly distributed vote; you depend on the miners, the validators, the client developers, and the exchanges to establish a concept of the “current fork.” (God help us if all the exchanges ever decided differently than Vitalik what “ethereum” is.) Regular users have a minimal voice in that decision, but it’s theoretically possible for anyone to start a new fork and campaign for its adoption.
Personally I think the question of political legitimacy doesn’t make the notion of blockchain governance wrong; it just highlights that the system as constructed may have problems.
> From what I can see, it has no effective rule of law; no possibility for the creation of an effective enforcement body.
In early crypto days there was a general feeling that the "power of math" (i.e. how hard it would be to break various hash/public key algorithms) is the enforcement body and the reason you don't need a government and a police force. Maybe smart people saw through that, or maybe the experiment just had to be done to see how this actually turns out in practice.
Your points are why I thought an official US crypto coin could work. But there is not that much net added value compared to what credit cards offer.
This "collective belief" is somewhat more than mere "belief".
It has been translated into laws and social contracts backed by established enforcement that is sufficiently effective and has been demonstrated to the satisfaction and judgment of most people.
It's true that in the event of nuclear war, this could all evaporate --- but this probabilty is low enough for most people to reasonably ignore. Labeling this a "belief" is thus somewhat disingenous in the fact that it is reason rooted in logic and judgment and probability.
The claim that major elements of the social contract can be derived through logic and reason is controversial.
If you find yourself believing that our own social contract is the only logical & rational one, or at least the likely result of social progress, you might try reading Graeber and Wengrow's The Dawn of Everything. It covers a very wide range of alternatives that all made sense to the people in those societies at the time.
The claim that major elements of the social contract can be derived through logic and reason is controversial.
The "logic and reason" here has to do with the fact that the social contract is sufficiently real and functional enough to transcend mere "belief" in most people's lives.
The reason people are willing to give away their house/car/jet in exchange for crumpled is the existence of the market protected by that "economic, military and even cultural might".
Trust here is not in that the some big guns are protecting your cash, it is rather about you trusting that the next day/month/decade people will want that cash about the same as today.
You're confusing having value to others with having value to yourself.
I can be happy with a nice rock I found on the beach if I really love it and it's important to me. However, what we are taking about here is are assets which have a wider value on an open market.
Yeah but if it has value to me it probably does to others. These kind of things, good houses, land, gold etc. have a good record of retaining some sort of value over long periods of time.
To a certain degree yeah, but that has an interesting balance of, not being a finance guy, intrinsic vs extrinsic value? A great example is my rural property; my wife paid $1 for the land 20 years ago, and I paid $300 for the 40 year old mobile home we put on it. On the market, it probably wouldn’t be worth a whole lot, but to us it is an absolutely wonderful place that we treasure very much. It’s exceptionally unlikely that anyone would ever offer us a price that would convince us to sell. No one really wants to live in the area we live in! (Although Starlink has had a disproportionate effect on that, now that we’ve got wonderful internet out there)
A different belief shifting, though, would change the equation dramatically: either a shift towards less exclusive property ownership (e.g. theoretically requiring any non-primary residence to be rentable or something crazy like that) or dramatically higher tax burden for non-primary residences. If the annual upkeep costs were to increase, the external value wouldn’t change much (it’s already pretty close to zero), but the intrinsic value for us would drop dramatically and we might consider dumping it.
I would happily use Tether, Shib, beanie babies, USD as medium of exchange if I trusted that the exchange took place in a timeline I wanted. I'm not comfortable holding tether for more than a few minutes, and I'm not comfortable holding USD for more than a few years.
The problem is getting stuck holding the asset for a long period of time. USD will lose 80% of it's value over the next 50 years. Tether likely will lose 100% in that time frame.
>>My house is valuable to me even if there isn't a collective belief in it.
Right. I believe the point of the post you replied to is that while it may be "valuable to you", it also may or may not "have value" (which I interpret as being exchangeable / interesting to other parties), which requires common belief/faith that it has value (basically a circular definition). I could be misinterpreting one or both :)
> My house is valuable to me even if there isn't a collective belief in it.
It surely is, but this is just a semantic play on the word "value". You mean something like "personally important" in that sentence, the comment you were replying to was using it under its well-established economic definition.
In fact, your house is *not* valuable (in the economic sense) if there isn't a collective belief in it's equivalent in currency. Rather: it is exactly as valuable as the market is willing to pay, which is just a statement of the definition of "market value". That's what "collective belief" means in this context.
The value of a thing is in two parts, it's use value to it's possessor and it's exchange value with others.
Examples have already been posted here. My house has a use value to me because I need somewhere to live. If I lived on a small island off Antarctica it would still have great value to me but perhaps no value to anyone else.
Money is a financial instrument that only has exchange value, unless you count say the use of bank notes for lighting fires or papering walls. It's value as money is entirely by consensus.
Notably not even the government that issues it actually sets it's value. Ask the governments of Venezuela or Zimbabew about that. Yes of course they can do things that affect it's value, like printing too much of it or defaulting on bonds, or consistently paying on their bonds, but the actual value is set by people. When someone sells a product or service they ask for a price, and if someone pays it then that establishes a value for the product relative to other products, and a value for the currency exchanged. What happened in Zimbabwe is people asked for an awful lot of ZB$ for things compared to how many US$ they asked for. Thats what set the value of the ZB$ (and to some extent the US$ of course).
Governments sometimes do try to manipulate currency values through currency controls, but what that actually does is constrain currency flows. If a currency control set a high price for a currency, it will just not be traded as much, only people willing to pay the premium will do so. Those not willing to pay it simply won't and those transactions and that economic activity will be constrained (or the exchange will happen on the black market).
There can be coercive pressure of course, such as Russia requiring companies to hold Rubles, but you could hold a gun to my head and force me to hand over my house at a discount or for nothing. That says more about the use value of loaded guns than about the exchange value of my house. Governments have the ability to take value rather than exchanging it, but even that has it's limits.
It's true that utility is also a factor but it's extremely limited.
The house you and others have mentioned is an easy one. That whole concept of ownership is reliant on an entire system existing and enforcing those "rights". It's the threat of violence that prevents someone from showing up, "claiming" your house and kicking you out.
True, economically speaking personal use value doesn't really matter. It's great for you, but economics is about exchange.
Enforcement is an interesting factor. Laws can guarantee rights to enable and protect free exchange, but they can also coerce behaviour as I touched on.
In more or less free markets what laws do is provide guarantees that increase trust, which has the main effect of reducing costs. You don't need to personally audit the books of a company you invest in, because the government mandates that it's done for you to a set of standards which eliminates some risks (not all, just some). You don't need to personally research if the products you buy are safe or of a basic level of quality if the government mandates standards and enforces them, and if you have a right to return goods if you find a problem with them. This makes the goods themselves a little more expensive, but the overall costs and risks (which translates into costs) to consumers are much lower.
"So what actually makes the US dollar work as a currency is that it is backed by the long dick of the US government. This is a combination of economic, military and even cultural might."
It's the ability to demand and enforce tax payments in that denomination - with the consequence of not doing that being you will lose property and liberty.
Obtaining the denomination to settle the tax then becomes the discounted option, since the other option is far more expensive.
That alone makes the currency worth holding, since you can always get rid of it to somebody with a tax bill to pay.
As we have seen with Russia that power extends wherever the denomination is used. The US government has 'taxed' Russia anything it holds denominated in US dollars - completely unilaterally and wherever it was held.
I would say that what makes any currency valuable is the market using that currency; the necessity of paying taxes is both a jump-start and a stabilizer of that market preventing fragmentation of the currency.
I would say yes, in the sense that the government would cease to exist if it were to declare: "Compute your taxes in whatever unit of account you prefer."
But I think a broader statement is that the "long dick of the US government" is the collective expectation for the behavior of major world governments. On the other hand, it's worth noting that US currency is not absolutely stable.
"All debts public and private" - but only debts denominated in USD, right? If you loan me gold and specify repayment in gold or Canadian dollars or gerbils, I can't just give you a fistful of dollar bills to settle it, can I?
> The only thing that maintains the value of any asset (or currency) is the collective belief in that asset or currency. Put another way: there is an inescapable component of trust in every asset.
This is false in the general case. An asset means a useful or valuable thing, person, or quality. If something is useful to me, such as food, hydration or shelter, trust is irrelevant. In fact, something can have value to me (perhaps even objective value), even if there are no other agents/persons.
Even where there are other agents/humans, no trust in an asset is required in some cases. Suppose we all can independently verify the use and quality of something (we call this measurement). If that thing has some definite utility to us, the value each will assign may differ, but that thing's value is not dependent on the subjective valuation (Say a morsel contains 15 Joules and I can harvest 9 Joules and you 11 Joules, the value we each could assign differs, yours being greater than mine, but is objectively derived, being based not on trust nor subjectivity. Subjective meaning based on or influenced by personal feelings, tastes, or opinions). Granted, we can not preclude the possibility that someone, somewhere providing a subjective value to this thing, merely that somethings have value, potentially to many of us that is objective and intrinsic in and of the thing itself.
This is precisely why bitcoin adoption is not higher. By categorizing bitcoin as a security and not accepting bitcoin as a denomination for taxes or any calculation of taxes due it is effectively an extra unnecessary cog in every single system it is a part of. Any company doing legitimate business has to record every transaction they make in the denomination of their governments chose currency. It goes from a simple “I sold 5 pencils for X dollars” to “I sold this pencil for 1 bitcoin which is equal to X dollars on the date I sold it then made/lost Y dollars by converting back to dollars at a later date in order to pay taxes and buy more pencils, and spent Z dollars to trading fees in doing so.” So really at minimum we’ve gone from a single clear amount, to now having at minimum 3 separate records to make the same transaction. Bitcoin can never be as simple and efficient as an actual currency when you have to convert it anyways at some point.
I'd say the demand for most large currencies comes from the ability to buy stuff with them and being able to speculate on changes in value amongst them. The daily trillion dollar in FX trades are not tax motivated.
Agreed. In the special case of currencies, demand follows belief. If people believe in an assert they will accept it for trade, which may in turn crate demand. This leads to a cycle where more demand often strengthens the belief.
The issue with most crypto tokens is that its demand only exists within the closed crypto ecosystem in the form of liquidity, not in the real world. This makes is much easier to shake belief.
The main thing is that "belief" alone is a pretty useless source of demand because its extremely mutable.
Having a reliable long term income stream attached, an actual use for the asset and/or a supply which shrinks in relation to the fall in demand is a much more sustainable source of demand.
The "belief" that value depends on is the belief that there is demand, so the good can be exchanged if desired. The "trust" is that people are going to want the good tomorrow, similarly to today.
This seems an overly pedantic distinction. Demand is simply a result of belief in an asset’s value. If people didn’t believe an asset was valuable, they will not demand it.
> The only thing that maintains the value of any asset (or currency) is the collective belief in that asset or currency. Put another way: there is an inescapable component of trust in every asset.
> So what actually makes the US dollar work as a currency is that it is backed by the long dick of the US government. This is a combination of economic, military and even cultural might.
What many people call fiat is in fact partly a proof of violence consensus algorithm. Practically applied it means the sovereign will create a demand for its currency by imposing taxes denominated in that currency on its subjects and then threatening or using violence against parties that don't pay those taxes. However, that alone is insufficient to maintain the value of a currency. Mr. Mugabe of Zimbabwe surely had no philosophical aversion to using violence to maintain the value of the Zimbabwean dollar, but the collapse in his country's productive capacity rendered that moot.
Thus we can see that another major part of what makes the US dollar work is that the US economy that the US government has the power to tax is extremely large, productive, and well-diversified.
I agree: ultimately government is a collective decision on who gets to do the violence.
As for Zimbabwe, the primary difference it and the US is reach. More generally speaking, we've seen currencies collapse when people have lost faith in their value and what happens is people instead use a different currency (eg the US dollar) because they have more confidence in its value.
More specifically they have confidence in the stability of its value over time. It's the same reason that US T-bonds etc are said to be "risk free" and why the USD comprises 60% of the world's currency reserves. The EU and EUR come in second in terms of reserves (30%) for the same reason.
> eg it's been estimated that over half the Ethereum are owned by less than 10 entities
You throw this kind of claim without providing proof. Unfortunately, it's a claim I have seen made before (e.g. https://www.financemagnates.com/cryptocurrency/news/top-10-e...) and it doesn't hold any level of scrutiny. Although you embellish it and exaggerate it even further.
This kind of number typically assumes that a smart contract owns the ETH that it contains. Which is not true by the very nature of the smart contract, what it can do with the ETH is programmed in its code and the users depositing the ETH on it are the ones that decide what to do with it.
Then it looks at the accounts that have the most ETH (https://etherscan.io/accounts), aggregates together all centralize exchange accounts, assumes they also own the ETH. Do some quick math and publish a misinformation article ready to be shared by anyone whose confirmation biases are triggered. Bonus points if you can then exaggerate the numbers further without providing any figures and keep the misinformation going.
Whenever you do a transaction on the Ethereum network part of the fees (the base fee) are destroyed, this amount goes nowhere not even a special locked account. It just disappears, it's "burnt" as it's commonly referred.
This means that you cannot look simply at total ETH issued from the genesis block as you will be overestimating the amount of ETH in circulation by the total amount of ETH destroyed through base fee burning. Currently around 2.4M ETH has been destroyed in this manner.
> Even backing a currency with gold (or any other asset) doesn't solve this problem
It actually does. If the backing is real, the user knows he will always be able to exchange his coin for $1. If the price on an exchange goes under $1, the issuer of the coin can buy it back, making a profit. If the price goes above $1, the issuer can sell. It's a trivial algorithm. Of course, it only works if the backing is real.
Unfortunately having billions in cash is a huge temptation to invest them and make even more profit. That's what Tether did. And now, if their commercial paper is under water, they are insolvent.
If you have a backed stablecoin (as opposed to algorithmic stablecoin) that is pegged to the USD without any funny business, then the price of that coin can always be restored to $1. No matter how badly people "lose faith" in the coin.
Sounds like you are confusing an algorithmic stablecoin with a fully backed stablecoin. If I am mistaken and you have an actual argument behind that smirk, then please go ahead and present your argument.
GP's last paragraph seems to imply to me too that trust is all that keeps the pegs. I think the billions of dollars in arbitrage opportunity is a bit more powerful than trust as we've seen a few days ago when USDT lost its peg, but what do I know
Trust keeps bank runs away, arbitrage keeps the peg tight (feeding into said trust).
False. What you're describing applies to algorithmic stablecoin, but it doesn't apply to a backed stablecoin. If I sell 1000 units of BAOBABUSD to people for $1 each, and then they all panic and sell, I can buy all 1000 units of the stablecoin by using the $1000 I already have in the bank. Please explain why you feel that this maneuver requires unlimited amounts of money?
Belief is not well defined. The dollar has value because it is useful. Bitcoin may also have value to the extent that it is useful (e.g. for speculating, money laundering, grey/black market transactions). Thus usefulness or utility of a currency is a better measure of value than belief whatever that means.
We need a crypto that builds the network on trust between real people. If A and B know each other and B and C know each other, then A and C can trade or give credit to each other by going through B. No need for a global consensus.
Vouching systems are generally very solid if you also have some way to expell parts of your network after the fact. You need some way to slow down and curate your network or all the benefits are lost.
The benefit of these: it mimics in person interactions and describes a simple process.
But The trade off is that they only work if they grow slowly and organically, which seems to be contrary to what the crypto space is trying to do.
Hawala is widely used, but since it does the same job as a cryptocurrency (decentralized ledger), what would be gained by adding a cryptocurrency on top of it ?
This is the case where the worse UX is just a better security in disguise (note: "better", not "perfect"; see multiple US reports on trying to investigate the terrorist funding through hawala). No electronic transactions cuts a lot of SIGINT (though not all, people carry their phones with them, call each other, satellites make images, etc.) and sometimes HUMINT is more difficult in countries like Afghanistan or Pakistan.
Security can be improved later, the same way Monero came out after Bitcoin. Having the option to transact without intermediaries and locally is enough of an improvement, the same way Bitcoin is Pareto-optimal when compared to SWIFT.
Hawala has kinda been out there for a long time, and I'm not sure that there is a space for incremental improvement since, as I already mentioned, its main security properties lie in hawala being out of modern fully electronic systems. This is the case when we are talking about the general mechanism, of course; a group of 2, 5, 10, N people | N < some abstract big number where we can't tailor solutions easily and need to scale, there some customization may surely be devised as an improvement.
Huh! The marketing materials look like exactly the same thing so far.
> However, since Trustlines is designed to be implemented on a public blockchain, making transactions requires the use of a native cryptocurrency to pay transaction fees.
But this one part seems wrong. With such a design there should be no need for global consensus. :(
Why? Everyone is only ever dealing with people they trust. And every single agent is in charge of confirming or rejecting every operation they agree to.
Alice trusts Bob, who trusts Charlie. Alice has no idea who Charlie is.
Now Charlie gets $10 dollars as credit (not the same as cash) from Alice (mediated through Bob) and wants to buy $10 items from David and Eve. He shows the letter saying that Alice is good for the cash. Without a distributed consensus method, how can David or Eve confirm that they will be able to go to Alice to collect the cash? How can they even know that Alice has the cash in the first place? What if something happens to Bob?
The only way to do this without a blockchain would require something like Paxos, but Paxos only works if the participants are selected a priori. Every new participant would have to be vetted by everyone else, or everyone else would have to follow some central authority that can grant access to the system. If you are going this route, you are just re-inventing a credit cooperative.
Charlie cannot get a 10$ IOU from Alice, he can only get it from Bob. If Alice wants to give a 10$ IOU to Charlie, she will have to give it to Bob and ask him to give an equivalent IOU to Charlie.
If something happens to Bob, too bad. Both Alice's and Bob's IOUs are void because Bob can neither pay up nor demand payment. Both Alice and Charlie are sad because they knew Bob, and their ability to trade was more valuable than the current balance.
I don't think you understood. The scenario I presented Charlie is malicious by making a double-spending attack against David and Eve, separately.
You can remove Bob from the scenario and the problem still stands. Say that Charlie gets the IOU directly from Alice, David and Eve are left with duplicate IOUs. Alice has trusted Charlie with $10, not $20, so she can not re-pay both of the creditors. If you say "David and Eve should not have trusted Charlie then, so too bad if they lost each $10", consider the systemic issue if the double spending is made against with thousands of participants.
Without a way to control for double-spending, everyone can mint IOUs freely and any credit note is essentially worthless. And if remove the idea of IOU and try to make all transactions "cash-based", you just turned a fungible-currency into a non-fungible one (are these $10 coming from Alice-the-good-creditor or are they coming from Dick-the-double-spender?)
Charlie doesn't give Alice's IOU to David and Eve, he gives his own IOUs. He can default on those, but that's implied by David and Eve interacting with Charlie directly.
This is not at all what you said in your original comment, which implied transitive credit.
Without any transitive property, "Charlie gives his own IOUs" already exists. It is called "selling on credit". No crypto required. Shop owners have been doing that for centuries with pen and paper.
Alice wants to buy an apple from Charlie. Alice gives an IOU to Bob, Bob gives an IOU to Charlie, Charlie gives the apple to Alice.
And - sure, everything crypto does could be done with pen and paper and a phone line. But here Bob's computer can agree to do this without Bob's involvement.
This only works at a minuscule scale, where people could actually get to meet face-to-face. On a global network, Alice can still create an attack against Charlie. She just needs to get more intermediaries. Even if the intermediaries thought "surely Alice won't put the relationship at risk over a small amount", no one in their right mind would be doing large scale, automated transactions based on "friend-of-a-friend" connections.
Another thing, if you want to make transactions like the one you described, you don't need to pass IOUs around, you just pass money. Alice gives the IOU to Bob, Bob gives her money and then she can buy from Charlie, David, Eve or anyone else.
Your design makes it in a way that the IOUs are not fungible. Alice can not buy something from Charlie unless she shows that Bob is the one backing her. If it is not fungible, it is not money.
What you want to do is an digital version of Hawala. Hawala works, but there is a reason it is not automated. You can not scale it and it gets very easy to hit liquidity bottlenecks.
I think your ideas are in the right place (if you look at Raiden's off-chain side payment channels, it works somewhat similarly with what you are attempting to design) but can we agree to the fact that if they were feasible to be done without BFT mechanisms, it would have been done already? It is not like people want to use blockchains.
You're right, not really money but a payment mechanism. And yeah, Hawala.
What are these liquidity bottlenecks? Feel free to reply with a link or a keyword if this is common knowledge.
One thing I like about this model is that you can have regular fiat money on top if Charlie gets his IOU from the US government and Alice gives one of US government IOUs back. But it can now be a single network for all currencies where anyone can start issuing their own money.
> can we agree to the fact that if they were feasible to be done without BFT mechanisms, it would have been done already? It is not like people want to use blockchains.
I'm not sure. Would anyone be able to profit from it? Developing the software and educating people is hard, especially with p2p things.
The lack of liquidity happens because you are not using fungible money, so you are asking everyone to barter, but instead of using cows, wheat or some other commodity, people would be trading based on the expected value of each personal bond. Given that these bonds do not pay any interest, there will be very few people interested in accepting them for payment.
Re: profiting from the Blockchain, you are going at this backwards. You don't need to make it profitable by the tech. What we want is to have a global payment network that can make transactions cheaper than (and equally faster/secure as) Visa. If that were possible to do without blockchains, the market would pay handsomely.
> The only thing that maintains the value of any asset (or currency) is the collective belief in that asset or currency.
Hello jmyeet! Unfortunately, I believe this statement, as you have given it, is untrue.
I hear it often, as it is continually and frequently asserted by crypto enthusiasts (and I am not suggesting you are one of those).
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For assets, value is grounded in utility (whether to do some useful function, generate some feeling, etc).
Asset price, on the other hand, could be almost anything depending on supply/demand and may be affected by beliefs at times.
It's important to disambiguate price and value. I can buy a superb pair of shoes from a desperate seller for $1, but that doesn't make their 'value' $1 to me or other people. Value can be personal, it can also be societal i.e. averaged over many people.
Indeed if price and value were the same thing, there would be no buyers or sellers, because you would have little reason to go to the effort of swapping two things of identical value to you.
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For currency, specifically, national currency where you are living in that nation - the value (and relative price) of a unit of a currency is grounded in taxation enforced by, well... force, by the state.
Taxation generates continual demand for units of currency regardless of individual or collective beliefs.
And in trust in the currency, again, is enforced by... force, by the state. Which prevents unlimited supply (by random people), again, regardless of individual or collective beliefs.
Thus, both supply and demand for the units of currency are set by the state, and supply/demand is what it takes to generate a stable price and mandatory use.
I note you mention trust, and 'backed by...' and 'might'.
However, discussing currency in terms of only trust and not in terms of taxation, misses half the argument. Both halves are essential for the argument to make sense.
Absent a mandatory minimum demand, control of supply of currency (and trust in that control) is meaningless.
In computing terms, you can see taxation + limited supply as a technique to 'bootstrap' an initial price for a currency without needing any shared or individual beliefs at all. It also underwrites the price in the long term, again, without any need for beliefs.
None of this is to say that a currency can't have its price/value shifted around by collective beliefs once bootstrapping / underwriting is in place. Of course it can. But what maintains, inescapably, a certain minimum price (your own words: maintain, inescapable), is enforced taxation.
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Going back to the price of assets. Well, you can believe all you want about, say, oil, and your whole country may have a collective belief, or even the planet, but since there is X units of oil needed and Y units of oil in supply, the price will be set by ongoing auction as always, or you can freeze/be stuck in your garage/factory shutdown. Supply and demand. Beliefs can affect supply and demand, of course. But supply and demand are primary, beliefs are secondary and they sit alongside necessity and physical reality.
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(Finally - again without wishing to imply you are a crypto enthusiast - a lot of crypto enthusiasts seem to imagine that mathematics has a similar 'force' to states, 'there can only be X coins', ignoring that a) chain algorithms/limits can be changed by widespread consensus b) no one is forcing anyone to use the crypto at all i.e. no physically enforced taxation c) it's trivial to substitute a chain with a duplicate chain (again consensus), as e.g. dogecoin proved rather effectively. They also invariably neglect the issue of needing 'mandatory demand' via taxation. I would speculate this is because the essential need for tax in currency systems, completely undermines the ponzi's disguise as a currency.)
(I use the word 'ponzi' casually here; technically ponzis are zero-sum, whereas crypto is worse - negative-sum, especially for the environment).
What you're saying is wildly untrue. You are redefining words. Trust is completely different thing than valuation in markets.
You don't need to trust gold or bitcoin. They are verifiable. Don't trust, verify.
Also, the US dollar doesn't work very well, so you're redefining reality. They're constantly abusing that trust and creating way more money than would be necessary or moral.
Gold standard fetishist forget that if there is a food shortage even tons of gold won't help them.
In scenario where financial system collapses only real currency is skill - if you can make food from something available locally or be helpful like being a medic.
Why would I trade a chicken that I can eat for piece of gold when I can trade chicken for sewing my wounds after being bitten by a stray dog.
There is a spectrum between everything going smoothly and complete government collapse. Most people worry about a Turkey or Argentina where the currency loses most of its value but the government still functions.
Even in failed states gold maintains value. For example in Somalia’s recent past, not only was gold still fully exchangeable but the existing Somali currency continued to work with counterfeit currency filling the vacuum.
What stops gold exchange is not non-existent government but any particularly strong and draconian government that decides that alternative forms of money are a risk to the regime (e.g. North Korea).
My grandfather who lived through the Dutch famine in world war 2 did fine buying food with gold while people were eating flower bulbs and grass, so in that case at least it worked.
Analysis aside, common sense suggests that it is very difficult if not impossible to manufacture long term stability in any system based mostly on speculation with limited hard assets to back it up.
More generally, I think we can state, it is difficult if not impossible to manufacture long term stability in any inherently unstable system, which all financial markets and human economies are. Better to acknowledge and accept that reality, understand the nature of the inherent volatility, and work to become robust and resilient against it.
Scalable, self-similar, clustering, and long memory are some of the characteristics of the fractal-style randomness of financial markets. Thus, build in safety factors, multiple redundancies, hedges, etc. with those characteristics in mind.
Stability; or the lack thereof, is relative --- with currency made from electrons and hardly any ties to real world economic conditions being a relatively extreme example.
> While there are plenty of automated stablecoin designs that are fundamentally flawed and doomed to collapse eventually, and plenty more that can survive theoretically but are highly risky, there are also many stablecoins that are highly robust in theory, and have survived extreme tests of crypto market conditions in practice. Hence, what we need is not stablecoin boosterism or stablecoin doomerism, but rather a return to principles-based thinking.
Any stablecoin that follows the same logic as DAI (i.e. overcollateralized debt-based stablecoins) could also apply (at least in theory). This includes (but is not limited to) sUSD, MIM, LUSD, MAI, agEUR...
The "collateral" is a bunch of useless tokens that can flash crash in an instant. It is the same thing as the luna/Terra system but with minting $2 worth of luna for $1 worth of UST. Any depeg event will only be faster as compared to luna
It is not the same because in the case of the coins above a flash crash results in liquidation of the collateral to support the peg. In the case of Luna there was no such mechanism as it relies on people doing the arbitrage required to maintain the peg.
The difference is that you can always redeem UST for LUNA, which directly results in minting additional LUNA (the total amount of LUNA in circulation increases when UST is destroyed), while the same does not happen for debt-based stablecoins.
In the case of DAI and other debt-based stablecoins, there is no minting of additional collateral when liquidations occur or when debt is repaid (the total amount of the underlying collateral in circulation does not increase when DAI is destroyed).
This is the main difference between so-called "algorithmic stablecoins" (e.g. UST, FRAX, USDN), which rely on internal collateral (whose supply can be arbitrarily expanded/contracted by the controlling entity) and "overcollateralized debt-based stablecoins", which usually rely on external collateral (whose supply cannot be arbitrarily expanded/contracted).
Treating these two different things as if they are the same is not particularly insightful.
I'm not sure I know enough to have a credible opinion about his underlying thesis, but it seems to me this article is wrong in lots of specific details:
1. "Stablecoin insurers" (in the author's terminology) are not short puts on the stablecoin, because noone has a specific right to force them to buy the stablecoin. Their position (as I understand it) is much more akin to some sort of swap where they pay/receive the difference between the stablecoin and the volcoin
2. Since it's a swap, then their position has 1 delta, so they don't "delta hedge". They need to make good losses on the stablecoin (and collect profits in good times)
3. There is no expiry so they are not long theta. They are collecting carry on the swap
I believe (with my limited knowledge) that in this scenario the insurer is algorithmic, so in a sense they are "forced" to buy the stablecoin. Maybe that addressed the first point?
Algorithmic stablecoins are impossible simply because all crypto not tied to outside assets can suddenly go to 0 value, and then any stablecoin is going to be worthless unless they are claims to outside assets (which requires trust in the issuer honoring them).
Sorry for hijacking this thread, but can somebody explain like I'm five, what's the point of algorithmic stablecoins?
My understanding of the term 'stablecoin' means that it is a crypto 'proxy' to some fiat currency, typically US dollar, just to avoid the actual conversion between crypto and fiat (because of taxes etc). So why isn't there just a DumbCoin(tm) that simply is 1-to-1 backed by the dollars? You give me a dollar, I mint you a coin. Somebody sends the coin back, I return them the dollar.
There is - this is exactly what Tether is. It's the largest, most liquid of the stable coins with someone like $80bn of coins in circulation [1]. Binance and Coinbase also have their own as well which are also pretty big.
As far as algorithmic stable coins are concerned, I have no idea what the point is. Largely experimental as far as i can tell (but pretty much guaranteed to fail given how they work)
1. In fact so big now that cash managers and corporate treasurers keep an eye on Tether as they have a material impact on the bills and CP markets.
Except that Tether has no legal requirement to allow you to redeem their coins, aren't 100% backed by USD, and has a history of lieing about their backing.
LOL. “Transaction tax” and “devaluing their asset to pay insurers”. Both things that are handled by Base rate inflation. The missing part of this analysis is that it is very hard to peg a deflating asset. The other problem is that from a monetary policy POV, you can’t defend it in a deflationary system without capital inflow because the whole system is denominated in a different currency which is inflating.
> To be in balance, the Stablecoin must provide real utility to the Outside World that transcends the Stablecoin/Insurer construct. Specifically:
> 1. There must be a transaction tax for real utility provided by the Stablecoin.
Don't all major reserve-based algorithmic stablecoins charge some kind of minting/redemption fee, to reward the risk taken on by reserve holders? And that makes this whole argument somewhat moot, since it's not a purely closed construct like they're describing. Though perhaps this line of reasoning (equivocating to other financial constructs) could lead to fee pricing equations required for some notion of stability.
Minting consists of spending money (hardware, energy, human work...) to obtain some cryptocurrency units, basically the same as buying them from someone and an influx of actual money into the crypto scheme (which might or might not compensate the risk takers as delineated in the article).
I don't think anybody operates under the delusion that the Federal Reserve isn't applying policy to the economy? That's in stark contrast to the seemingly common delusion that cryptocurrency economics are uniquely free of manipulation.
Well duh, that is the whole point of the fed - tweaking the dials to smooth out the peaks and troughs. Sometimes that doesn’t work, or works only after the fact, but the last 70 years or so has been fairly smooth sailing compared to what came before.
The worst is when it works to smoothen out the peaks but the cost is silently screwing over poor people. So everyone at the top can pat themselves on the back, and people in the middle start blaming capitalism.
1. The chairman of the Fed may not be a directly elected position but is still indirectly elected, because they are appointed by the president and must be confirmed by the senate. Saying they're not democratically elected is about as true as saying the secretary of defense is not democratically elected. Technically true, but mostly irrelevant.
2. You vastly overstate the power of the chairman of the Fed. It's not like Powell can have a bad day and decide to nuke the world. He's more powerful than most people, but society hardly depends on him.
Every time we have seen a government take control over the money printing press, it ended spectacularly bad. There is a reason why most governments have agreed that the central banks need to be as impartial and independent as possible - and countries like Turkey are proving it at the moment.
Just imagine someone like the 45th being able to order the Fed around in a way similar to Erdogan. Complete, utter horror.
Seriously though this is a very wrong analogy. The economy is more like an ecosystem where individuals interact with themselves & the environment. It doesn't need continuous manipulation. In fact it tends to distort than aid.
The economy is not like an ecosystem since there is no reciprocation. Money flows in one direction only, toward the top. I find it particularly frustrating that people don't see the economic distortion caused by monopolies in the private economy, they think it must be the government's doing when it tries to undo some of the harm caused by them.
It's a fact that the majority of wealth increase has gone to the already wealthy over the last few decades. So while not literally true (clearly some money flows in other directions), it is broadly correct.
It's known as the "it's cheaper to be rich" paradox.
You save on buying in bulk and using better made products with longer lifespans, afford better education that makes you more difficult to fool and gets you a higher paying job, make more returns by investing more money, conserve willpower for important decisions by not having to choose between soap and bread at the store.
I find it useful thinking in ecosystem terms as a model. And ultimately, the economy is situated in a real ecosystem and not an abstract manifestation.
>> The economy is not like an ecosystem since there is no reciprocation
If mutual beneficial trade is not reciprocation, then I don't know what is. Reciprocity is more a societal thing than an economic one. I would say historically there have always been reciprocal societies. Smaller ones tend to be more reciprocal than larger ones since their survival depends on it.
>> Money flows in one direction only, toward the top
This is by design i.e intervention. It need not be so.
And there is nothing preventing a species from colonizing an habitat till it exhausts the resources and it's own ultimate demise.
Monopolies, by and large are formed (and broken) by government aid/intervention.
Post the industrial revolution, the government has become involved in more and more areas of the economy, so much so that now it has become the chief driver, to stimulate growth, reduce inflation, boost employment/industries. Given the complexity of interactions in the real world, I don't understand how someone can believe they can understand everything and control it.
Regarding your other comment, I agree, the notion of exponential growth is ridiculous and runs into real world limits.
The idea that monopolies are formed due to government intervention runs counter to my lived experience of watching the Google Search and Facebook monopolies form in largely unregulated markets. The only viable competitors to Facebook were acquired before they could become a threat, Google meanwhile has used its search monopoly to fund monopolistic takeovers of other markets (web browsers come to mind).
You also get into the regulatory capture. Could anyone today create another YouTube with all of the necessary content controls for all the different countries in place? Or create a baby formula making company for current events?
It's possible - just it represents a significant amount of work that needs to be invested in the product before it can see the light of day (compared to other domains where there's less needed to invest).
>> Just like driving a car proves impossible without continuous manipulation by its driver.
> cue autonomous vehicles
In my analogy, the driver can be a machine.
> Seriously though this is a very wrong analogy. The economy is more like an ecosystem where individuals interact with themselves & the environment. It doesn't need continuous manipulation. In fact it tends to distort than aid.
It does if you want to to go where you want to go. Take that away, and it'll drive off a cliff. Maybe eventually it will correct itself, but that'll take too long to help us.
The economy gathers outside energy as the production of value, which is what the vast majority of companies do, and some of it disappears out the other end as consumption of goods with value.
It's perfectly true that the system is perfectly capable of running alone without any external stimulus applies. The economy will keep being the economy no matter how much you tamper with it. The main problem people have with that is not that the economy won't "work", it's that the economy working necessarily means things like heavy business cycles, cyclical unemployment, a general tendency of wealth to move upwards, and a relatively fast accumulation to the level where those who have accumulated wealth begin to have serious power over politics and will impose meddling with the economy for their benefit.
It will work fine, it working just isn't what humans generally want to happen.
That isn't working fine. Any properly working economy is able to represent negative yields and thereby solve the wealth accumulation and unemployment problem.
The idea that your wealth ought to grow exponentially regardless of whether the economy itself is growing and how much you contributed to the economy is ridiculous. What did people expect from this arrangement other than accumulation of wealth at the top?
By the way, the economy won't work, it will collapse at some point, because 3% growth over two thousand years would imply colonizing entire galaxies. People think they have a birthright to eternal 3% growth without even being aware of what it means to grow exponentially for that long.
Thomas piketty already discovered that the growth rate of the economy must be higher than the rate of return on capital. Not all returns actually go to 0% due to monopolies, etc. This means those returns have to be taken from someone else and forcibly growing the economy is just a bandaid so people don't lose what they already have to the rich owners of monopolies.
It is literally their job: The mission of the Federal Reserve System is to foster the stability, integrity, and efficiency of the nation's monetary, financial, and payment systems so as to promote optimal macroeconomic performance.
"When a measure becomes a target, it ceases to be a good measure."
The idea behind prices in a market economy is that they're an information-carrying abstraction. They let producers at every stage of the value chain understand the relative costs that go into different alternate ways of producing a good, without needing to understand every single stage of the supply chain and all the decisions that their suppliers made. And it also gives them information about relative demand, so that producers which make things that nobody want go bankrupt and those make things that lots of people want rake in windfall prices.
The whole point of the Fed is to alter prices, on one hand to keep producers from raking in windfall prices (price stability) and on the other to prevent too many of them from going bankrupt all at once (full unemployment).
Problem is that when you do this too much, for too long, the biggest input to a firm's production decisions becomes the Fed funds rate. When it goes up, time to layoff people, because the cost of capital just went up and you can't do anything without capital. When it goes down, time to go on a hiring frenzy because if there's money for the taking and you're not the one taking it, you get outcompeted by the ones who are. Over time this begins to dominate all other signals that pricing normally provides, like producing goods efficiently and making things lots of people want. You get companies like Uber, which lose money on every transaction but make it up in fundraising.
In turn this increases sensitivity to the Fed's actions, which limits their freedom to take them. If the whole economy breaks when you raise rates to 1.5% (as happened in 2019), it becomes very hard to raise rates above 1.5%. So rates get pegged below the natural rate of interest (which equilibrates supply of savings with demand for productive investment), lots of economically dubious projects get funded, you inflate a perma-bubble, and you can't deflate it without taking down the whole economy.
> The idea behind prices in a market economy is that they're an information-carrying abstraction.
No, the idea behind prices is that they are what the participants in particular trades think it is worth trading at.
The normative argument for the superiority of laissez-faire economies may involve market prices as an information carrying mechanism, but that normative argument is much newer than market economies, and is not the “idea behind prices in a market economy”. The benefits some people see (or imagine) in something after the fact are not the underlying purpose of the thing.
They aren’t. They are different, and one is actually the “idea behind prices in a market economy”, and the other is an academic argument, observing the fact of price setting in a market economy, for why price setting in a market economy is valuable to others besides the direct participants in the individual exchanges.
> Aren’t they, in fact, mutually dependent?
No, there is a one-way dependency between them. The normative argument depends on the fact, but not vice-versa.
> So rates get pegged below the natural rate of interest (which equilibrates supply of savings with demand for productive investment)
But the only body even attempting to determine what "productive investment" is and respond to it is the Fed. Savers are interested in money returns or at least preserving their holding which in many feasible circumstances (chronic instability, zero sum economies with fixed currency supply) is most reliably achieved by not investing in anything productive, not whether their investment makes optimal use of a country's productive capacity. There's nothing more "natural" about production decisions taking the spot price of a commodity the monetary authority has designated as money, or an arbitrary growth rate for money, or how badly undercapitalised wildcat banks are as inputs, and there's nothing about a regime not trying to avoid bubbles or busts that makes it inherently less likely to result in them.
But that's not true: every individual household and business is trying to maximize their profits (or at least, those that aren't are replaced by those that are), reducing their expenditures and increasing their revenues. In the presence of a stable money supply and stable prices, the only way to do this is through innovation and better efficiency: you reduce the value of your inputs, or you increase the value of the outputs. In the presence of external variations in the cost of capital, it becomes more profitable to capture that external capital than it is to increase efficiency.
Peter Thiel and many other observers have noted that American innovativeness and productivity growth fell off a cliff c. 1971 [1]. He blames government regulation; however, a more likely explanation is that Nixon turned the U.S. dollar into a fully-fiat currency right around then, incentivizing people to compete for newly-created dollars rather than capture more of the ones circulating through the economy.
The causality might run the other way around too, as the Fed holds rates artificially low to paper over low real productivity growth, but this is not an improvement: it just means that we have a feedback loop between money-supply growth, inflation, and low real economic growth.
> In the presence of a stable money supply and stable prices, the only way to do this is through innovation and better efficiency: you reduce the value of your inputs, or you increase the value of the outputs
Or you decide the winning move is not to play, because borrowing is expensive, the purchasing power of your Benjamins won't diminish if you bury them in the ground, and investing money on capital goods in the hope of accumulating more money has negative average risk adjusted returns if there never is any more money in aggregate. On the other hand the way you capture the share of the growing pie is by increasing efficiency, it ceases to be an adequate investment strategy to just hold your capital in uninvested currency.
And taking a graph like that one where the sharp fall in productivity growth starts a couple of decades before leaving the gold standard and actually stops falling afterwards as evidence that leaving the gold standard caused productivity growth slowdown is peak gold bug dodgy graph interpretation! Bretton Woods collapsed because it was inherently unstable anyway.
My point is not so much that commodity money is stable as that fiat money is unstable. If you'd taken the opposite side of the debate I'd be happy to tell you everything that was wrong under the gold standard: frequent, severe, recessions; a tendency to hoard cash rather than investing it productively; lack of levers for governments to influence economic outcomes.
However, I posit that all of those downsides are inherently necessary to drive innovation and increase the efficiency of the economy. Bankruptcy and unemployment is how you garbage-collect inefficient ways of doing things: you want people to lose their jobs, because that forces them to take employment in more efficient sectors of the economy. Hoarding is how you a.) amass the capital stocks so that you can deploy them on bold opportunities when they arrive and b.) ensure that people are selective about which opportunities they pursue. If you encourage people to immediately invest any spare cash because the value of that cash goes down, you encourage them to seek out any marginal-productivity activity that might remotely be cash-flow, rather than waiting for big innovative opportunities that might take longer to appear.
In other words, I'm saying that there's no free lunch, a concept that should be familiar to any economist. You need failure to drive success. Mitigate failure and you also eliminate success. And the opportunity cost of suppressing serious failure for 50 years is stagnation, low productivity, and inflation, exactly what we've observed. All social systems eventually collapse; it's just that some people who remember how the previous social system collapsed become blind to how the current system is collapsing, because all they can do is think back to the problems it solved.
> the opportunity cost of suppressing serious failure for 50 years is stagnation, low productivity, and inflation, exactly what we've observed
But the United States is not the world, and the latter half of the twentieth century is not all of recorded history. The majority of the world grew further and faster over the period of modern money than at any other time in history (yes, there are other important reasons. There are other reasons why US productivity growth is not at its postwar peak too). The majority of recorded history on commodity standards, owners of wealth didn't patiently wait for the most innovative opportunities and direct resources better than the modern world, they hoarded, barely maintained their limited capital stock and much of the speculation that did take place was on capturing neighbours' hard assets rather than generating new wealth streams. US productivity growth in recent years might be below its postwar peak but is way ahead of historic norms, including the initial period of growth and labour saving device invention so unprecedented we call it the Industrial Revolution. Which doesn't mean the current system is ideal, it just means that everybody was worse off before.
Their argument is what the graph is actually showing is related to the fact that labour's share of US income peaked around 1970 and then began to drop, not some tautologically-defined concept of "production".
If you can guide a currency and there is some power imbalance in who is doing the guiding, then that can turn out to be a nasty problem. For instance, there is some asymmetric effects if the entity doing the guiding dilutes savings by pumping the money supply and simultaneously buys mortgage products while setting a central bank lending rate of near 0%.
The only way I think a stablecoin can work without trust is to be backed by another coin which is deflationary and always in demand. Such as a gas coin that has no block rewards but burns some percent of the mining fees on every transaction. As long as the network is used for transactions, people will voluntarily pay gas fees and deflate the coin (unlike Safemoon which burns it on transfer, paying to secure transactions is a service and the miners can just raise their fees if they want to make more).
Then theoretically as long as there is demand for this coin, it will go up in price and therefore can back any sidechain coin that will grow slower in price (or better yet, gradually drop in price relatively to it like the dollar).
>In the event that the funding comes from new entrants into the Stablecoin/Insurer ecosystem, the system is definitionally a Ponzi Scheme and is unstable.
No, that is not the definition of a Ponzi scheme. A Ponzi needs funding from outside money to continue to operate, but not everything that needs outside funding to operate is a Ponzi scheme.
As an example let's create a gambling system. Any deposits made into the house account gives you a proportional share of the profits of the system. If the house gets lucky investors can make money. If they are unlucky the house account can run out of money and require outside money to work again. This gambling system isn't a Ponzi scheme at no point are you paid out with new investor's money. If you are lucky you are paid out with gambler's money and if you unlucky your investment goes to 0.
Edit: Even with a positive house edge the house can get unlucky and go bankrupt.
The gambling system has a house edge. It's a system which exists for the house to take money (in aggregate) off gamblers. The profits are real, and nobody pretends there aren't losers. Most casinos operate on this basis without requiring constant injections of further capital.
The stablecoin on the other hand claims that stakers are being rewarded for risking their capital without holders of the stable coin being fleeced at their expense. The only way to do this is by the number of people coming into the system expanding, and unlike the gambling system, the proposition of the stablecoin is these new participants don't lose money either. It has the classic Ponzi dynamic of being a zero sum game masquerading as a positive sum game through growth.
I guess a stablecoin could theoretically operate on the basis that "stakers" were supposed to enjoy average negative returns for the sheer joy of gambling like people on craps tables. That would be much more like your proposal, and would be far too truthful in its white paper to be called a Ponzi, though it might have trouble attracting gamblers compared with the glitz and glamour of the casino and all the crypto ways to gamble money that don't openly admit paying negative returns.
>Most casinos operate on this basis without requiring constant injections of further capital.
They mitigate the risk by settings caps to maximum bets. You can't just bet a bit more than half of a casino's assets in double or nothing with them. They don't want to be taking a 50% chance of losing everything. Even if there was a 2% edge that's still a 48% chance of it happening. They would rather work with smaller amounts where the chance of someone winning a ton of times in a row to eventually win everything is practically 0%.
>The stablecoin on the other hand claims that stakers are being rewarded for risking their capital without holders of the stable coin being fleeced at their expense.
They may be rewarded but they aren't being guaranteed that the value of what they hold will always go up.
Again a Ponzi scheme is a very specific thing. People make an investement and returns on that investment come from new investors. In this kind of stablecoin system there is no part that where that specific thing happens.
>were supposed to enjoy average negative returns for the sheer joy of gambling like people on craps tables
This is usually how algostables work. People bet on growth of the project and once growth has peaked negative returns will be coming. By trying to avoid this period of negative returns a depeg happens.
> They may be rewarded but they aren't being guaranteed that the value of what they hold will always go up.
> Again a Ponzi scheme is a very specific thing. People make an investement and returns on that investment come from new investors. In this kind of stablecoin system there is no part that where that specific thing happens
The returns on staking do come from new investors. As you point out in your next comment, they turn negative after the project stops growing.
I agree it's not a Ponzi scheme in the narrow sense that some mountebank is telling stakers that they're being paid from the profit of nonexistent businesses before running off with the money. But the dynamics are identical: as you point out in the next post, the project depends on stakers earning rewards from its growth and the scheme collapses when the project stops growing and the stakers seek to avoid losses.
The dynamics of a casino are different: it doesn't promise its gamblers a positive return and thus doesn't needs constant capital injections to survive. Gamblers are service consumers, not investors and betting for entertainment that the wheel will stop on black, not for profit on the casino's ability not to default.
This puts into light how the usd works. And how inflationary money printing is. Every dollar printed might as well be seen as debt or burden. That's an interesting aside.
More relevant to stablecoins:
If the stablecoins need constant funding then what is their real value? Why should someone hold them? Why spend them? Why owe them? Constant funding itself isn't bad as such but how much and how often are what decide value.
This is not to say they are useful or useless. But it certainly seems like the market hasn't got a firm answer either. The greater market is at least certainly ambivalent about them.
Contrast what would happen if any of these stablecoins were used for purchasing crude oil or wheat or some other international commodity. In that case we'd see very different views on their value.
The article uses fuzzy terms that conflates some essential points, and then uses this confusion to demand regulation. All about this is bad. Yes pegging has some essential limitations, but capital flow is a condition for most financial sytems.
> Investments that are provably problematic should be appropriately regulated and efforts should be made to protect consumers against them.
Not at all. Regulate yourself and don't buy things that exceed your risk threshold, or if you are a child incapable of that, tell your parents to regulate you.
I find it interesting that the CHF peg example is always missing articles like these.
The Swiss Central Bank had decided to defend the peg the CHF at 1.2. This wasn't broken until the Central Bank decided to drop it in 2015. I guess unless it became a big trade it doesn't really matter.
USD has the same issue. The dollars continually get "used up" and need reprinted. Transferring electronic money burns energy and labor, and costs labor at the treasury and fed to mantain.
If stablecoins are a pyramid scheme, the USD is too. Virtually every currency is negative-sum, destroying value every time they are spent.
The problem here is the abuse of the word "stable".
It's being conflated with the word "pegged".
Pegging something to something else that is unstable doesn't make it stable.
For as long as monetary policy in fiat continues to ease, you'll have more dollars around, inflating the money supply.
The pegged item will need to match this in the long run to maintain the peg. Which won't be possible without further minting of the so-called stablecoin.
The real solution, which I admit is a long time away, is to just stop using fiat and their "stablecoin" proxies altogether and just use another currency altogether.
What is a viable alternative to fiat? Both commodity money (e.g. gold shillings) and representative money (e.g. backed by precious metal reserves) have already failed.
This is the problem with "analysis" on stablecoins. He dreams up a 'potential stablecoin', inherently designs it with flaws and says all algorithmic stablecoins will fail without contiinuous funding.
The sky is the limit with Algorithmic stablecoins and you can't throw the baby out with the bath water. All this is simply not true in every case.
Imagine a stablecoin over-collateralized with interest bearing crypto (basket of POS coins) and certified tokenized REITS, synthetic S&P, commodity futures, etc.
You cannot prove things in the real world by running a computer program. Traditional financial systems have trust, belief, demand all factored in. They are constantly prodded and tweaked by powerful entities, with cultural, legal and military might to keep things running. However it turns out these are all features, and in the speed run to invent finance 2.0, deluded tech bros forgot that reality exists, or they were complicit in implementing a pyramid scheme.
An algorithmic stablecoin with a backing system can survive some stress. What they can't survive is a net outflow, because they can't reprice downwards.
The era of "line goes up" is now over, and we see net outflows in many financial sectors.
A lot of faith-based financial instruments are going to tank.
I mean, it’s true that the peg may in some instances be difficult (or undesirable) to maintain, and may be dropped (the yuan isn’t strictly pegged to the dollar anymore, say). But at that point the currency will generally still be a useful currency. The only value of a stablecoin is that it’s pegged to something; once the peg is lost it becomes largely useless.
Cryptocurrencies are built on a deck of lies and scams. You equivocate about 'fiat' or real dollars being 'the same.' They're not. If you support this drivel, you'll only perpetuate and prolong the pain.
Let me share my theory that the economy is impossible or paradoxical and that the American dream is impossible and that everything is built on by faith.
To buy a loaf of bread, the price needs to pay for the wheat, ovens, energy and the employee costs. This relationship is recursion. The staff of the bread company need to afford bread of their own and shelter and energy and transportation.
Everyone is thereby supporting themselves and everyone else with what they purchase. This guarantees poverty as not everyone can scale their earnings to provide for themselves and everyone else as the prices all come from the same money supply. Inflation is baked in. This is why central banks don't want wage growth. If you understand recursion and recursive relationships then you understand that poverty is baked into the system. (Edit: due to not everyone producing more than they cost)
Think what this means for people at the bottom and give to the poor.
The United States is a society of excess. Yet, we still let people starve and go unsheltered. There is an easy solution that doesn't have the unreasonable expectation of the poor relying on the goodness of other people: tax individuals with high incomes at higher rates. The marginal tax rate for the highest income earners has steadily fallen in the past decades. People with those high incomes have the least marginal utility on their income and should have a higher tax burden on the portion of their income which isn't necessary for their comfort.
This isn't to say that charitable giving is bad. If you are financially stable and have money to spare, please donate your time or money to those that need it. It just isn't the solution to a national problem.
It’s not that easy and having money isn’t the problem here. If we could pay off the homeless to stop being homeless, you have to believe that we’d have already done that.
SF spends ~60k per homeless person per year (maybe more now). It’s clearly not money that is the limiting factor here.
That 60k per year seems to come from a small program where they're spending 60k per year for a tent, food and washrooms - twice the median cost of a one-bedroom apartment.
The Laffer Curve argued that revenue from taxation might represent an inverted U shape with tax rate. If you were above the revenue-optimizing tax rate, then lowering the tax rate could increase revenue.
But that revenue-optimizing tax rate, which is the subject to much debate, is probably somewhere around 65% to 70%, far higher than the tax rates in the United States. We could surely increase taxes on high income individuals without doing much harm to the economy.
My understanding is every time a "Laffer curve inspired" tax cut has happened in practise, tax revenues have indeed gone down.[1]
The thing about the Laffer curve idea that I don't understand is the curve doesn't need to be continuous. Say we accept at a tax rate of 100% you get no marginal benefit from working so no-one will work and the tax take will go to zero, at a tax rate of 100%-epsilon you still get (small) additional marginal utility for each additional dollar earned, so it's still in your interests to work. So it's literally only at a tax rate of 100% that the Laffer concept would make the tax take go to zero.
"In practice, the Laffer Curve has not provided the dual benefits of lower taxes and higher revenue. In fact, every US tax cut since 1965 has been followed with a sharp decrease in tax revenue, while every increase in taxes has led to an increase in government tax revenue."
> So it's literally only at a tax rate of 100% that the Laffer concept would make the tax take go to zero.
Yeah, that's the point of the curve. I don't think you've made a convincing argument against continuity.
And the quote seems to misunderstand the curve (I didn't read the article). The curve itself is reasonable, the main debate is where the current tax regime puts you - to the right or left of the peak. The other mistake is that many people using the curve to argue for lower taxes are not really honest debaters. They want lower taxes and use any argument available. They state that we're on the right even though ask evidence suggests the opposite.
I am having trouble understanding your comment. Farmers and bakers easily produce more food than they need to stay alive themselves.
When people start a business they must borrow money and usually pay interest. That interest forces you to be profitable, you can't just run your company at 0% profit as that would only pay for your salary and the salary of your employees and the materials and machines you bought.
It is impossible for every company to be simultaneously be profitable. After all, if there is a million dollars in the economy, you can't have a 5% profit and reinvest the money as that would require a money supply of 1.05 million dollars. Thus, the money supply must grow endlessly and if the economy can't keep, there must be inflation.
I am one person out of 7 billion. I need to provide for myself, everything I pay must cover the costs of all the costs of those people I bought from. When people buy my labour they must cover my costs of providing for everyone else.
My work and the work those people are doing needs to pay all those costs. We effectively pay eachother to work at what we are independently good at - trade.
But a worker only receives revenue from the work they do (I'm excluding unearned income)
If everyone gets everything they need ultimately from other people, and each of those people needs to get everything they need from everyone else - and sometimes the same people.
Where does the salary of the workers I buy things from come from?
I feel intuitively it doesn't matter how much bread someone can create, the total revenues from selling bread in general needs to cover the costs of all their employees and the business costs themselves.
But this process repeats for all transactions the total transactions for MasterCard pays the bills that MasterCard employees have.
Everyone needs to earn more than they cost but so does everyone else! How can this not inflate endlessly over time?
When I look at government deficit and debt levels of the world, people don't produce more than they cost and relative and absolute poverty.
What's the proportions of owners of wealth? Compare the bottom 99% with the top 1%.
Bank loans create new money by increasing bank deposits, which is then destroyed when the principal is repaid, leaving behind the interest on the loan. So it is theoretically possible for every company to borrow money at once.
Or as Henry George put forward over a century ago, we should tax only the unimproved value of land, as everything else is the product of humanity, while land is finite and required for everything else.
It's not recursion because the earth is not a closed system.
Farmers don't have to pay for the energy used to grow wheat. The Sun provides that for free. Same with the oxygen, and much of the water. Value is created, it's not a zero-sum game (except from the perspective of universal entropy.)
In a healthy economy, most of the value should be created rather than extracted from others. But ownership of fixed resources like land led to serfs and sharecroppers, which led to landlords and industrialists accumulating capital, which led to exploitation. That's Marx's whole thing.
I need to pay the farmer indirectly through supermarket food, the electricity company, the water company, the gas company, my phone manufacturer, my computer manufacturer, my rent for my landlord or my mortgage to the bank.
The farmer doesn't pay the sun but they still have to pay other costs ad infinitum. There is no last cost.
Each of those people also have the same problem
I'm not arguing for zero sum. I'm just saying that the problem of costs is recursive, you need to produce more than you cost. As each of those people has the same costs that I do. So it can only grow in size and costs can only inflate.
There are several issues with that. The largest one is that you assert that the costs can only inflate. They cannot.
TL;DR – Yes, but the added value gets smaller each recursion, such that even if you add on an infinite amount of these costs it will only come out to a finite value. The productivity of a single person, which in today's industrial world is immense, makes these costs so small they might as well be cents on the final product.
Let's say a farmer farms a square field with 100 metre sides, or exactly 1 ha of land. This is a size which it is perfectly reasonable for one person to farm, even entirely by hand, and which is woefully small considering modern farming equipment. On it they grow wheat, with a production of 0.25 kg/m² annually, or 2 500 kg when you do the calculation. This is a perfectly reasonable yield. Taking into account milling yield, we end up with only about 70% of that, or 1 750 kg of flour. A loaf takes roughly half a kilo of flour so, assuming water and yeast are effectively free, so selling this to a baker, they produce 3 500 loaves in the end.
So far, so easy. Then we take into account the losses that are going to be accrued for the loaf of a single customer in this very small thought experiment economy, in which exist only the farmer and the baker. Each, we say, might eat 2 entire half-kilogram loaves in a week, so 8 in a month and 96 in a year. The baker prices one loaf at (flour cost + 96·loaf cost)/3 500. The farmer prices his flour at 96·loaf cost/1 750 kg, but as the farmer buys everything, we can ignore the division. The price of one loaf is now (96·loaf cost + 96·loaf cost)/3 500, or 192·loaf cost/3500, or, rounding a bit, 0.05·loaf cost. Propagating it down, we have 0.05²·loaf cost, then 0.05³·loaf cost, and when you recurse to infinity, we have 0. The further you get from the producer, the smaller the added cost becomes in reality, such that even if you add up all the costs you eventually reach not an infinite value but a finite one.
If we say that each take a profit of $100 annually in addition to what they need to live, we get that the farmer prices their flour at ($100 + 96·loaf cost)/1 750 kg and the baker their bread at ($200 + 192·loaf cost)/3 500. Propagating it down, the price becomes ($200 + 192·($0.06 + 0.05·loaf cost))/3500 = ($210 + 0.05·loaf cost)/3 500. Going further, it will be ($210 + 0.05·($0.06 + 1.4·10⁻⁵·loaf cost))/3 500 where we entirely lose precision and the added cost from profits appears to stay at $210/3 500, while the rest of the calculation becomes so small it disappears off to 0 at infinity once again.
While this example is only very simple, and I won't prove here that it applies in larger or more complex cycles, it is nevertheless fairly obvious that this disappearing off applies to everything. Whereas your recursive argument about costs only being able to inflate is correct, they can only inflate up to a finite value at the limit due to the inflation added at each level of recursion being smaller than the last.
What I witness in the world is endless costs, from housing maintenance to shelter and rent and mortgage costs and transport costs. Everything is very expensive. Housing is not cheap relative to salaries nor is transport.
If I wanted to pay someone to do work for me, I need to pay enough to pay all the workmen's costs.
I need to provide for myself and provide enough revenues for everybody else to pay for these things. So the prices you pay provide revenues for these costs fans out in all directions through everyone you buy things from.
Is the finite value that these cycles larger than the money supply?
There is a finite amount of work that can be done per period of time but some people work 60 hour weeks. But work is renewable until you ruin your joints and knees or health problems.
I am sure everyone wants to earn more and has costs they want money for and want larger houses and to own housing rather than rent.
I didn't even include profits or value addition to my theory as they need to come from somewhere.
I doubt money supply has much to do with the issue at hand, since we're looking at the real world and money is just a tool for managing it.
I think you're correct in that everything is very expensive, possibly close to the most expensive it can be. Salaries paid are essentially just what is enough to keep yourself alive nowadays, often not even enough to keep yourself in decent mental health. I doubt your average worker is capable of purchasing everything they create in a month with their monthly salary.
It's certainly not the first time this has been observed either. Let me give you a classic criticism. Take the old but reliable labour theory of value. We ignore price fluctuations for this analysis because they are considered nothing but representative of true value – a method of making trade easier. Work is what people value, specifically the time used for labour. Creating something in one minute gives it one minute of value, it would be more valuable if it took more effort to create. For the purposes of markets, it's also obvious that what matters to us is not the individual value per se but the socially necessary labour time, the average value taken to create something. Therefore a man who creates a spoon in one minute and a man who creates one in 20 will make an equally valuable object in the societal context. Creating an object from materials will have the value of those materials plus the value you create through your work, so $2 bread from $1 wheat will have $1 of additional work done by the baker.
With this in mind, let's investigate farming. A farmer works land, they create $1 worth of wheat and sell it. That $1 is the full reimbursement for their work and if they want to buy their wheat back they will pay that $1 for it.
Adding in an agricultural conglomerate, lets say that a bunch of farmers work the land of this conglomerate as employees. As a large oversimplification, we once again say that a farmer creates $1 worth of wheat for the company. The company sells it and returns to pay the farmer a salary: ¢80. The ¢20 missing is the profit of the company and it has to be larger than zero for the company to keep existing at all, profit being their singular reason for existence.
This is fine and all, and it's how most companies work, the issue arises when you think about the farmer being a consumer. The farmer is not reimbursed in full for their work, in other words, they become incapable of purchasing back their own labour in full. If the farmer the goes home and to the store, they cannot purchase the wheat they themselves created, it will cost more than what they were paid. This repeats itself in every company, the employees simply cannot be fully reimbursed for their work, not now and not ever. Yet, the workers also form the base of consumers, they are the vast majority of people who must be relied upon to consume these products. The end result is that everything seems expensive relative to salaries and you will, at some point, have to have a violent economic event to correct the markets as consumers simply run out of money.
Now that's not accurate in its entirety and it's a critique from the 19th century, but it goes to show that we have always recognised this being an issue. We just deal with it by accepting that some people will be unjustly hurt in regular recessions in the boom and bust cycle and move on – there's no just way of doing things without entirely removing companies from the picture. That's the way our economy is doomed to work, and we just have to accept it and move on unless we want to literally outlaw companies and organise production on a national level.
I like staying in a city as I rely on all the people around me to pay towards the costs of garbage collection, water pumping, electricity distribution costs and supermarket logistics chains of getting food from factories to where I am.
Society requires everyone to produce more than they cost. The government invests in you in terms of free education and in some countries free healthcare.
Work is the resource that is renewable. Everyone is forced into a grind to raise enough to pay for everyone else's costs and your own due to the recursive relationship of costs.
I don’t get what point you’re trying to make. A baker can make bread for a thousand people with relative ease, there is no need for them to be poor. The US produces enough to feed and clothe and house everyone with ease, including both the working poor and others. They choose not to do so for various vacuous reasons, none of which have anything to do with the FED.
I agree. It upsets me deeply that people are working poor and can never earn enough to stay still.
I am arguing that in a society each person needs funding from somewhere, it can only come from everyone else in exchange for their work. Each person therefore depends on their costs being provided by everybody else. This relationship is therefore recursive. As each person must also provide for everyone else that someone is providing for.
As we witness in the world, not everyone can produce more than they cost. Some people cannot afford to travel or stay near work. Opportunities are cut off from them.
>As we witness in the world, not everyone can produce more than they cost
And we also witness that others can produce more than they cost. So it could (actually, is and has been for the last ~500 years) be that overall, the average person produces more than they cost. Forget your recursion idea.
I think that is the author's point, that a closed system makes it impossible. You need the wealth from outside sources to fund the debt to fund the spending. Also, at some point, there is some production that is not just shuffling existing assets around.
why do some people make it to the top then? why do some people make $40k/yr, some make $80k, some make $120k, some make $200k, some make $400k, some make $4m, some make $40m, some make $100m
fun fact, the sum across x_n of x_{n+1}=1/2*x_n, with x_0=1 is the fixed value 2. Don't blame math for your inability to understand that trade creates value.
The only thing that maintains the value of any asset (or currency) is the collective belief in that asset or currency. Put another way: there is an inescapable component of trust in every asset.
Crypto in any form doesn't solve the trust problem other than a very narrow slice because as soon as you interact with anything outside of the blockchain, you're adding trust. Even on the blockchain, all the math in the world doesn't avoid the trust problem (eg it's been estimated that over half the Ethereum are owned by less than 10 entities).
Even backing a currency with gold (or any other asset) doesn't solve this problem. Additionally, it's not even correct. In years long gone the US government just maintained a peg between the US dollar and the gold price. Any reserves (which were never 100% anyway) are irrelevant to this. You don't need them. You just need sufficient capital to maintain the peg. Even if you had 100% reserves you still have to trust the government to honor redemptions and not to change the peg. If you have sufficiently deep pockets, you end up not even having to spend much money because no one challenges your peg.
So what actually makes the US dollar work as a currency is that it is backed by the long dick of the US government. This is a combination of economic, military and even cultural might.
So going back to algorithmic stablecoins, it doesn't matter how much you have in reserve. It doesn't even matter if there's new money entering the system (as this article claims) to maintain the peg. If people lose faith in the "stable" coin, it's finished.