Bitcoin Rally Fuels Market in Crypto Derivatives | Hacker News Reader

Bitcoin Rally Fuels Market in Crypto Derivatives

wsj.com

All these articles try to add the illusion of sophistication of the this space full of scammers and questionable characters. I mean, what kind of mind will spend their limited amounts of life on something, which hides its main purpose - speculation and getting rich without actually doing anything but just HODL'ing. What a sad space!

At least with corn and soy futures there is an asset with intrinsic value and some unpredictability due to weather / disease / yield / etc.

In contrast, Bitcoin is only valuable because people assume others find it valuable. That seems like a currency, but most currencies have lower volatility and are used by a whole lot more people.

So, bitcoin trading really doesn’t make any sense to me.

I don't want to come across as an advocate, so I won't name names, but does anyone know why Proof of Capacity-based cryptocurrency schemes haven't taken off? They seem strictly superior to the BTC mechanism and, honestly, the Proof of Stake mechanism envisioned for ETH.

Schemes vary on certain details, but the gist on PoC is that you precompute answers to puzzles that take up a bunch of space on a disk and miners search their disks for the best answers to mine a block. It's hard to compute the solutions during the window for the next block on the fly, so precomputation and storage are required. Everyone's answers are different because the miner's account identity is part of each solution. This approach seems strong from an efficiency, transaction rate, and decentralization standpoint, but it hasn't taken off, and I'm at a loss to why.

(Like I said, this space is full of scams, so it's hard to ask a question honestly without sounding like a shill. Maybe I shouldn't have bothered asking.)

Cynical answer: Because existing cryptocurrency miners have a vested interest in maintaining the status quo.

Technological answer: This just sounds like proof of work with extra steps. It isn't inherently any more efficient or faster, and it's vulnerable to centralization in all the exact same ways.

Proof-of-Work initiated an arms race to do more work. Proof-of-Capacity would initiate an arms race to have more capacity. And you still need to do work to prepare the proof that you have the capacity. On face value it doesn't seem to offer many benefits.

The main feature that attracts my attention is that PoC claims to require orders of magnitude less electricity per block than existing PoW solutions. That, to me, seems like a huge benefit that reduces the need for participants to locate themselves near hydroelectric power plants.

However, to your point, it does replace a dependence on ASICs with a dependency on the HDD supply chain.

The work done is a feature not a bug. The fact that a miner has to locate their equipment by a hydroelectric power plant is what makes the network so secure. That just shows that work is difficult to fake.

All these efforts to limit bitcoin’s energy expenditure seem environmentally motivated, which is good. But the arguments seem equivalent to praising a safe’s security but criticizing how hard it is to open. Those features are linked.

Yes proof of stake or some other algorithm may take over eventually but we don’t know if they are as secure yet. Proof of work is the good idea that made the whole bubble possible and it remains to be seen if any of the other ideas can beat it.

Please don't misunderstand, I'm not suggesting that Bitcoin (or Proof-of-Work) is broken or bad or unsafe or even a bad investment.

Rather, my original question was why Proof-of-Capacity has not seen stronger adoption given that it appears to provide similar security guarantees with better decentralization properties due to a lower $/W/block cost profile.

The $/W/Block profile is where the security comes from. Insofar as a miner can spend dollars to increase their chance of getting the block, they will, until MR=MC. See this article which explains it very well, though it is talking about PoS: http://www.truthcoin.info/blog/pow-cheapest/

"PoC claims to require orders of magnitude less electricity per block than existing PoW solutions"

Ok, but a "block" is not a set amount of value or effort, is it? The way I thought Bitcoin and anything similar works is that the resource requirements are adjusted in a feedback loop. If some other scheme is 10x more "efficient", then whatever the operation is that is required, it will just be done 10x as much.

I may be misunderstanding, but it sounds to me like saying "company A uses much less electricity to generate a share of stock than company B".

They may seem, but they aren't so far, is the reason. There's major problems with that family of sybil resistance systems that have yet to be solved in practice.

I'm curious to hear your reasons for PoC being superior to PoS. I don't have a strong opinion, but PoS seems really compelling: If I have more to lose then I have to gain, than dishonestly is simply not profitable.

PoC feels more efficient than PoW (I'm not familiar with the details though) but still requires a massive amount of physical resources and computation compared to PoS.

Being first to market and having mind share is more important than technical innovation a lot of the time.

Edit: I misunderstood how the system would work, sorry.

Can you explain the attack that you have in mind? I understand Sybil resistance, but I'm having a hard time thinking about applicability under the schemes I'm aware of.

I misunderstood how the account system would work I think. Sorry.

I'm still wondering how it would choose who gets to make the next block. If 8 people have huge storage and one needs to be picked to make the next block who wins? All 8 of them would presumably get the "answer" right immediately right? One of the highlights of proof of work is that it mathematically keeps block times at 10 minutes. I don't fully understand how this system works.

AIUI, the idea is that a solution is a path through a "hard-to-pebble graph", and that the consensus advances by awarding rewards to blocks that take the shortest path. The combination of a short transaction window and the massive search space work to reduce the probability that multiple miners find equivalently acceptable solutions. Some schemes have additional features that make the next block dependent on the earlier blocks, so that the chains can't easily be forked long after the fact.

Wow that's pretty cool. Thanks for explaining it.

This type of gambling is already risky on liquid, highly regulated markets. But doing it on heavily manipulated markets that are currently being propped up by billions of fake dollars is just baffling.

It depends on the type of derivatives. Consider commodity products: basic materials such as iron ore or coal or softs such as cocoa or wheat. Their (spot) prices used to be extremely volatile. Coincidentally, one of the first big economic crisis was caused by a pump and dump scheme in tulip seeds: https://en.wikipedia.org/wiki/Tulip_mania

In this case, futures contracts for those commodity have helped tremendously lower the volatility and make everybody more responsible. It's a good question if the same is going to happen with futures contracts for crypto

There is also the onion futures fiasco which provides some empirical evidence.

https://en.wikipedia.org/wiki/Onion_Futures_Act

Sorry but this is simply not true. Derivatives markets can be/is used to hedge risk on the spot market (or take leveraged directional positions). The development of derivatives markets is a natural complement to the spot market, with derivatives markets usually providing a order of magnitude of liquidity compared to spot. If anything, having a liquid derivatives market increases the amount of capital required to manipulate the spot market.

>This type of gambling is already risky on liquid, highly regulated markets.

Risk is always balanced with return. No one is forcing you to trade nor is there any systemic risk. People who take the risk know what they are getting into.

>But doing it on heavily manipulated markets that are currently being propped up by billions of fake dollars is just baffling.

Didn’t realise you were talking about SPX ;)

I don’t see how that matters when cryptocurrency exchanges are able to print money and liquidate leveraged positions at will (Bitfinex/Binance/Bitmex + Tether). Couple that with miner fees of over 10 million dollars worth of cryptocurrency every day and the market feels like a giant black hole for any fiat going in.

I trust Bitfinex a hell of a lot less than national govts, but if you look at central bank balance sheet data, they are doing essentially the same thing.

>I don’t see how that matters when cryptocurrency exchanges are able to print money and liquidate leveraged positions at will (Bitfinex/Binance/Bitmex + Tether)

If you start with a position as ridiculous as this then any further dialogue is futile. Goodbye.

Hey, come on. We don't want to ban you, but if you post like this what choice will we have? Every guideline we have points in the opposite direction: https://news.ycombinator.com/newsguidelines.html.

Can you explain where I’m going wrong? The evidence of Tether not being backed 1:1 is pretty overwhelming by now and Bitfinex has printed nearly two billion new ones since the start of April.

Honestly the reply you got was sort of justified. I find that when HN discusses crypto almost nobody has any idea what they are talking about.

>The NYAG, in its original injunction, said they did not want to prevent Bitfinex or Tether from continuing operations, but did move to prevent Tether from lending any further funds to Bitfinex, a move Bitfinex opposed.

I am not sure what evidence you are talking about, but if NYAG is satisfied then I am too. Also in the grand scheme of things Tether is irrelevant. There are bunch of stablecoins available these days.

What is your complaint against binance? They are solvent, they don't liquidate people because they don't have margin trading enabled yet, they are opening a regulated US exchange in September. When they got hacked they've covered the loss themselves despite being unregulated.

Of course Bitmex automatically liquidates people, what other option do they have? Collect KYC info and hire an of army of international debt collectors? You know your liquidation price before you open a position. If your position gets anywhere near it's because you are being an overleveraged gambler rather than a disciplined trader. It's 100% your fault.

I've heard more complaints about Coinbase or Kraken not processing fiat withdrawals for months at a time, than I've heard about Binance or Bitmex doing anything wrong.

Nearly all trading volume occurs in Tether, compared to dollars or other stablecoins. Tether by their own admission says that they're only 74% backed by "cash and cash equivalents."

https://www.bloomberg.com/news/articles/2019-04-30/tether-sa...

I'm assuming that "cash equivalents" refers to Bitcoin and other cryptocurrency that would crater the market if actually sold for fiat. Not to mention this was before nearly two billion tethers were dropped on the market. I have a hard time believing that institutional investors sent billions of dollars to an unregulated and unaudited institution that used this guy to move around its money:

https://www.bloomberg.com/news/articles/2019-05-03/ex-nfl-ow...

When Tether/Bitfinex blow up (either by indictment or by finally just running out of greater fools' money), so will the rest of the cryptocurrency market, particularly Tether-based exchanges like Binance. Mt Gox will look tiny by comparison.

Why are you saying goodbye to someone on a public forum.

Hint: don't reply.

After building a derivatives trading platform for Bitcoin and attempting to get it off the ground, I can categorically say that no one is interested in hedging their risk, not even payment processors.

>not even payment processors.

what do they need to hedge? don't they immediately sell the coins after receiving them?

Think about the amount of price fluctuation that can occur before you get a few confirmations in, especially during this last bout of speculation.

I met with one payment processor and told them that based on their rough transaction figures and the previous day's price action, I knew that they lost the equivalent of a software engineer's yearly salary because of falling prices. Wouldn't they like to hedge some of that risk off and be able to hire more people? But no, not really - most of the payment processors or businesses using Bitcoin could make more money by just sitting and holding their Bitcoin and going through the motions of running a business. The potential price increase dwarfs any normal economic activity, so they had no reason to hedge away risk.

>Think about the amount of price fluctuation that can occur before you get a few confirmations in

>[...] based on their rough transaction figures and the previous day's price action, I knew that they lost the equivalent of a software engineer's yearly salary because of falling prices.

Can't this issue be solved by keeping a bunch of coins in reserve? That way you can convert to fiat immediately rather than waiting for 6 confirmations. This doesn't solve the issue of the payment processor essentially giving the buyer a free 15 minute put option[1], but I don't see how derivatives can solve this issue.

[1] you pay for an invoice worth $1000. the payment processor gives you a quote for x bitcoins, valid for 15 minutes. this is essentially a 15 minute put option because if the price goes down, the higher price is locked in. But if it goes up, you can create another invoice to get a better price.

I wish we'd stop calling bitcoin "currency"— that is not remotely what it is. Currency has a number of important properties that allow it to fill its function, and cryptocurrency has basically none of them.

I wrote about this in 2017, but it is as relevant now as it was then: https://www.bzarg.com/p/what-bitcoin-shows-us-about-how-mone...

After reading through your blog, I'm still unsure which properties Bitcoin lacks which nation sponsored currency has.

How about national sponsorship for one...

What exactly does it mean when people say that a currency is backed by a government? ”Backed” to me implies, e.g., redeemable for gold which is clearly not the case for the US dollar. Is it that the government issue bonds denominated in that currency? But that has nothing to do with the money supply per se...?

Please explain.

The US dollar, if you live here, can be traded for a bit of freedom - pay off the IRS and avoid jail time. It's also good to settle a debt - the government will force the creditor to accept USD.

If I try to buy a macbook in cash in Portugal, that is illegal. I will be fined for it.

Does that mean the euro is not a currency?

National sponsorship is not a requirement for a currency

What is it about being backed by a nation which makes a currency more valid?

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