UST Stablecoin Loses Dollar Peg | Hacker News Reader

UST Stablecoin Loses Dollar Peg

coindesk.com

655 pointslxm663 comments

The video interview at the bottom of the article discusses the source of capital for this enterprise to "keep" the peg. The interviewee claims that the source of the capital was basically a crowdfund. The team issued a lot of the tokens, kept a lot of it (about 1/2), and sold the rest. Perpetual motion is possible in finance, but you need fancy licenses and government appointments to do it. These guys are going to prison.

This thing isn't just one token, but apparently at least three. One of them (Anchor) claims a 20% yield on savings. This alone should be a red flag because that's about 1900 basis points above what you can expect to get from a good savings account or short-term treasury.

I don't have time to dive into the Rube Goldberg machine that this thing appears to be, but when it ends, it will end very badly.

Every Bitcoin era seems to have its Ponzi scheme. In 2017 it was BitConnect. They offered something very similar to what Anchor appears to be offering.

> These guys are going to prison.

It will be interesting where, if, or how.

The SEC attempted to establish jurisdiction over Do Kwon and Terraform Labs late last year but failed spectacularly.

They just hired another 20 people onto their crypto team, so hopefully they’re gearing up for more enforcement.

https://www.cnbc.com/2022/05/03/sec-adds-to-cryptocurrency-r...

> The SEC attempted to establish jurisdiction over Do Kwon and Terraform Labs late last year but failed spectacularly.

The effort that produced this order in their favor in February? https://www.coindesk.com/business/2022/02/18/terra-ceo-do-kw...

How did they fail?

They are not located in the US.

That certainly could be a factor that might contribute to the SEC failing, I’m asking for the evidence that the SEC did fail.

US courts have regularly exercised jurisdiction over parties located outside of the US.

> That certainly could be a factor that might contribute to the SEC failing

You are correct.

You have yet to substantiate that they failed, in any way.

They failed to establish jurisdiction over their intended targets.

No they did not.

You're both right and wrong. The SEC was told by a US court that they can in fact deliver a subpoena, so from the SEC perspective they've been given "jurisdiction". However the other side of the coin is that they've been granted permission to serve a subpoena to someone who isn't American, and to a company that doesn't have a presence in the US.

If Do Kwon decides to visit the US and hasn't complied, he may find himself getting arrested. If his company decides to have assets in the US, they may be seized. However until either of those things happen, which they won't*, then the US has zero teeth in this.

* assuming he doesn't visit the US again

*Or he isn't important enough to go get.

So the way this goes is, the Americans are patient. A week after you're hyper vigilant of course, a month after, a year after... and then 20 years later your best friend's daughter is getting married and she's insistent it has to be on Hawaii, and... next thing you know you're in handcuffs being led away by agents who weren't even born when you committed a crime.

> The SEC was told by a US court that they can in fact deliver a subpoena

Wrong. They served the subpoena first; they need no permission to do that. Then SEC sued to enforce the subpoena, and the SEC prevailed in their suit.

Then Do Kwon and Terraform applied to have enforcement of the subpoena stayed by the trial court pending appeal, and failed; they then attempted to get the US Court of Appeals for the Second Circuit to stay the subpoena pending appeal, and failed, and currently are in the process of litigating the case before the Second Circuit.

To portray this as a case where the SEC has failed (spefctacularly or otherwise) to establish jurisdiction is false.

I think Russia might have some comment to make here on the potential reach of US/interested-parties law.

The incentives are thankfully lower here, though.

If they sold to the US investors they have to abide by US rules. US has a bunch of extradition treaties making it very hard to run from US law enforcement.

> If they sold to the US investors they have to abide by US rules.

If you look closely at that statement, however, you can see that it's recursive and missing the base case: the rule which says "If they sold to the US investors they have to abide by US rules" is itself a US rule.

Thus the mention of extradition treaties, which mean (to a loose approximation) that other countries agree to let some US rules get enforced on people in their borders.

In Terraform's case, it looks like they're in Singapore. Which the US does indeed have an extradition treaty with.

And yet, Edward Snowden still sits outside of US prison.

Obviously the extradition treaties have limits.

Yes, the fairly obvious limit of going somewhere the US doesn't have an extradition treaty with. In Snowden's case: Russia. Which I personally wouldn't be thrilled to do, but the options are limited.

Here's the countries: https://en.wikipedia.org/wiki/List_of_United_States_extradit...

It's not hard, in theory, but it does rather limit your movements going forward.

There are a good number of grey countries on that map I suspect they would just rendition you from.

Lots of misrepresentation going on here. An extradition treaty merely facilitates things. You can have protections despite a treaty (e.g. France for its own citizens, ever!) and you could still be extradited if there isn’t one (there just isn’t an agreed upon mechanism for how to do it).

Before someone assumes this is a dirty European protectionist trick, the US do not extradite their citizens either.

No, they (rarely) do

Here’s a recent example - https://www.bbc.com/news/business-56248558

You’re right, every treaty is a different beast and there are no absolutes. But the general principle is Further, 18 U.S.C. 3181 and 3184 permit the United States to extradite, without regard to the existence of a treaty, persons (other than citizens, nationals or permanent residents of the United States), who have committed crimes of violence against nationals of the United States in foreign countries.

https://www.justice.gov/jm/jm-9-15000-international-extradit...

If the applicable treaty or convention does not obligate the United States to extradite its citizens to a foreign country, the Secretary of State may, nevertheless, order the surrender to that country of a United States citizen whose extradition has been requested by that country if the other requirements of that treaty or convention are met.

https://www.law.cornell.edu/uscode/text/18/3196

Those seem to be the mechanisms to extradite in the absence of a treaty. No point in having laws about treaties because ratified treaties trump the law (is my understanding).

Yeah I think that's a pretty common thing to do. Outside of US and some EU countries, I know Carlos Ghosn is famously hiding in Lebanon where he is a citizen.

Does any country extradite their own citizens?

Most do/will. Unless you have an ironclad constitutional protection against it, there’s an extradition risk for citizens in their own country.

Go to Russia and have a use for the authorities there, or have a lever/debt of gratitude.

I genuinely don't know where Snowden sits on that - I think he serves as a useful demonstration of the power of Russia and the failings of the US, but obviously know nothing.

On the other hand, a failed crypto bro who has taken oligarch money and can't repay it with interest. I think that is going to be the very definition of a "Russian Holiday".

Snowden’s charges had a maximum of 10 years. If he had surrendered and pled, he would be free in America soon. Instead he gets to spend the rest of his life in Russia. That was his choice.

He could have been free - or he could have suffered a 'mishap' in prison. Not that things have ultimately worked out well for him, but I'd understood Russia was merely a stop-over from which he realised there wasn't going to ever be a safe onward option, so he's stuck.

Each year in prison shortens your life expectancy by two years. So he'd be out soon, but very very unhealthy. Better to be in Russia. It's not the worst.

It seems it turned out the opposite earlier this year, didnt it? [1]

[1] https://www.coindesk.com/business/2022/02/18/terra-ceo-do-kw...

Yep. People should learn the difference between Kwon filing an opposing statement [that may have seemed convincing] and a judge actually ruling that way. By "late last year but failed spectacularly" I think /u/atian just accepted that process story (nov/dec) as being the result, perhaps because first the SEC filed and then Kwon filed a response. Every question before the court in cases like these has at least three documents typed up in Times New Roman and looking like that. Only the last one matters, the first and second are not useful to lay folk except to indicate that things are still chugging along.

In summary: the judge agreed with the SEC. The subpoena is being enforced.

> Every question before the court in cases like these has at least three documents typed up in Times New Roman and looking like that.

At risk of being excessively pedantic, there's generally the motion, the response, and then movants' reply, and then the judge's order. Sometimes the brief and the motion are separate documents (particularly when you're moving for a temporary restraining order or the like). So that's generally 4, not 3, documents that you'd expect to see.

Also, different courts have different rules on what the appropriate font is. There are some jurisdictions that explicitly prescribe a list of acceptable fonts (e.g., apparently Connecticut gives you a choice between Arial and Univers), and Times New Roman isn't necessarily on that list.

Yeah, a bit pedantic, each of those points was rhetorically preferable and accurate enough.

Re the number, that's why I said "at least three". The point I'm making is that it is practically never 2, so one should not conclude that the SEC lost simply because another story appeared that seemed to contradict its view. You have to wait for the one that actually says it's a judge's orders, counting is not my proposed method.

As for the font, sure. It was just another way of saying "official-seeming", I'm trying to encourage people to look past the official-ness because all the filings look pretty similar and you do have to read the title. Nevertheless in the federal courts (except SCOTUS) and in California, which are the cases you see most often on HN, it seems to be Times New Roman everywhere.

Without cashflow things usually end badly. The salt in the wound is that this is the year Buffett really attacked Bitcoin.

Attack how exactly?

called it worthless.

https://www.news.com.au/finance/money/investing/warren-buffe...

He and munger have been saying that almost every year now.

Don't they often say it about gold, too?

Yes, their point is that if you buy a cashflow negative asset you are now stuck having to figure out how to sell that asset to the next person. If you buy a cashflow positive asset the opposite situation happens. You don't have to convince anyone of anything.

This is why I hold Bitcoin. I expect it to be widely desirable someday, and will gain much value in the meantime. This is the nature of money itself.

I hold beanie babies because I expect them to be widely desirable again someday. This is the nature of collectibles.

Yes, money is a form of collectible. I don't think this is the criticism you believe it is.

I don't think value exists in the way you believe it does.

Value is always, and in all cases, subjective. So what makes Bitcoin users subjectively value Bitcoin? Because it's truly decentralized. Its decentralization is what makes it scarce, neutral and uncensorable. There are no insiders, founders or companies to attack. It's also digital, so it can be transferred at the speed of light.

This decentralization made early users speculate that it could be worth something for its unique properties. That jumpstarts the network effect. More people using it means even more people will start to value it. This is a positive feedback loop.

The incentives are obvious. The feedback loop will continue toward global adoption. But you seem very skeptical, so tell me, what is going to break this feedback loop? What is going to kill Bitcoin?

Nothing will kill Bitcoin, just like nothing killed beanie babies. They both will exist for a long time.

But the world is finite, there is a limited number of people who have a limited amount of money with to speculate. Maybe the Bitcoin pumpers will convince some of that money to move away from other speculative investments and into Bitcoin and the price will go up, but there is a limit that will be hit eventually, then you have to deal with the reality of a negative cashflow asset.

Are you ignoring scarcity? Beanie Babies can be made and remade, and fixed, and resold, and counterfeit, etc. There’s no law that prevents the manufacturers from just pumping out millions of beanie babies.

Bitcoin on the other hand is a finite resource. It stops at 21 million. It can never go higher than that. New shitcoins are birthed everyday, but they are not Bitcoin.

There is no law that prevents 51% of the node operators from forking the Bitcoin code. Even if there was, scarcity isn't the same thing as value. My kids art work is incredibly scarce compared to Bitcoin. I can copyright it so that no one can copy the only original that I own. But that doesn't mean it is going to go up in value.

You are not informed. Forking is not the issue. There have been forks before. Rewriting the chain history (which is extremely difficult by the way) is the issue.

like equities? from a macro level, dividends on the s&p500 is like 1.3%, so the difference between productive and nonproductive assets isn't very high, not nearly as high as it once was. munger and buffet come from an era when dividends were still 4.5% or higher. those days are over, with the sky high valuations we have now.

> One of them (Anchor) claims a 20% yield on savings. This alone should be a red flag

20% is risk parity for keeping your money in smart contracts

>> 20% is risk parity for keeping your money in smart contracts

That is an insane sentence.

How much would you want to keep some of your money in smart contracts?

The point isn’t how much would you want — it’s what could they possibly be doing on the other side of that debt instrument to yield more than that.

Flash loans is one thing that I have no idea how I could get as a typical retail tradition finance customer, but are readily available on crypto. In the ideal (impossible) case they are riskless. Executing just 200 of them yields ~20%.

What could possibly go wrong.

More than any legitimate enterprise in that space could possibly provide.

20% per annum isn't close to enough, as today's market demonstrates. I'd have needed probably 20% per month, if not per week.

But why would anyone be willing to pay it?

I could pay 40% for keeping your cash near a roaring fire, doesn’t mean I can sustain that forever.

Risk parity isn't the issue here. The issue is that is yield isn't coming from investing the funds in productive endeavors, it's being printed out of thin air, which is unsustainable.

I understand why the lender demands 20%. The economic problem is that the borrower has no conceivable use for the funds which could reasonably be expected to cover that yield (short of inventing the money out of thin air)

The other side of the trade is frequently a pump & dump. With that much borrowed capital, you frequently can exert noticeable market power on many thinly-traded cryptos. Push the price higher, consistently, wait till Reddit & Telegram pick up on the coin, then dump it on a greater fool at vastly inflated prices and use a portion of the proceeds to pay back the loan. Works great until there are no greater fools and the proceeds (which are often some stablecoin, or BTC/ETH) end up worthless too.

Before people shake their heads at how horrific crypto is, note that a good many leveraged buyouts operate on the same principle. Capitalist takes out a large loan at high interest rates, uses it to buy a company, company assumes the debt. Stripe mines company of assets & goodwill to goose the stock price. When the price is high, cash out and wait for shell of the company to implode under debt load, helped along by all the operational shortcuts that were taken to goose earnings.

>Before people shake their heads at how horrific crypto is, note that a good many leveraged buyouts operate on the same principle.

Oh so it's ok then, nothing to see here.

I think that's a PG version of "The Horrors of Crypto" movie. There's an NC-17 version that includes rug pulls, fraud, and CSAM extortion.

Except that there are real tangible assets involved in a leveraged buyout.

>20% is risk parity for keeping your money in smart contracts

I'm curious how you justify this statement. To the crypto-skeptic, such a statement is absurd on its face as a 20% APR is utterly unrealistic in the traditional finance/investment world. To the crypto-bull, 20% is far, far less than is offered to keep your money in various Defi protocols.

to the semi-invisible flagged comment, I met Carlos at Art Basel last year absolutely crushing it on the dance floor! what a guy

memes galore

I'm surprised he's be at an art event like that, didn't he lose everything?

> didn't he lose everything?

.... 5 years ago? how do you think that works?

I just don't think there is enough information to extrapolate anybody's financial position, anyone anywhere

A couple months ago I was trying to figure out how they did “stablecoins” across multiple IRL currencies, which of course can fluctuate wildly against each other IRL. Their Discord helpfully explained that it’s just incentivized validator-oracles, which IMO is like crack candy for any crypto-Soros[0] out there.

Not that I think this is what’s happened, it just stood out that the grand claims didn’t even have any fine print, you had to go actually ask the community, “hey um what about this apparent contradiction?”

To their credit the community was super nice and helpful.

[0]: I cite him as the world’s (former?) greatest currency speculator, not for his politics.

Well its not really a peg, more of a pigeon hole and when the pigeon goes in the hole we peg it, its pretty messy to be honest but we aren't really interested in pigeon holes are we? No, we are interested in pegging.

These algorithmic stablecoins are just the CDO reinvented.

You slice up the risk into different pools and play funny games with the risk. You can therefore build an AAA bond out of subprime mortgage crap, and everything is fine

Well, except for 2008 but who was paying attention to that anyway?

Dividing things into different senior/junior tranches or grouping together things to reduce uncorrelated risks is not a recent innovation. It’s been important to finance for a long time. I don’t think this has much to do with CDOs.

Fair.

Still, CDOs are the most recent example where they went wrong on a very large scale, enough to wreck the USA's real estate market in 2008... and then topple down a lot of banks as well.

And nothing in cryptocurrency is remotely in that same league or that systemically risky… yet.

I do worry about down the road, and hope all that hair-brained stablecoin and Ponzi schemes get broken and discredited before then.

2008 was caused by systemic risk. And geniuses in the banks failed to see it. So I guess, I fail to see why I should believe some $RANDOM_INTERNET_COMMENTER could figure out if an asset class has systemic risk.

Ironic, considering the source of quite a bit of profit was pretty much random internet blogger 3

Ironic or tragically coincidental? There was a song about that a while back.

The people I knew that made money off of it, like actually studied it and bet against the trend and were rewarded handsomely.

Apply Lenin's maxim... the banks made it through 2008; in fact Lehmans were really shocked that they got thrown under the bus. The miscalculation was that the authorities would act irrationally in the crisis and let a broker dealer go under. All the banks had tested this with LTCM and were confident that they would get bailed and could collect on both sides. They were mostly right. The lesson for me is that authorities need to act a bit like an old testament god. Some random smiting would change market behaviour significantly, and for the good.

I never thought I'd agree with such a thing but....

Yes, random smiting!

> All the banks had tested this with LTCM

Yeah I was just remembering this tonight. https://en.wikipedia.org/wiki/Long-Term_Capital_Management

The argument there was that LTCM was "too big to fail". Really they probably weren't, but they had 1.25T derivative positions off-book apparently.

Love or hate Paul Krugman, he argued that TARP could have been better put to use as a social safety net. The banks who took the risky investments can burn to the ground, but the citizens could be just fine.

I think it's like doctors arguing about what skin cream to use to treat smallpox. The requirement is to prevent market participants from being able to act like this, and the way to do that is to make the people who trade with them face nasty penalties like sudden liquidation of their businesses. That mechanism would make counterparties very careful about other people's business models.

I'm kinda more of a 'provide regulations and let the courts settle this out with the shareholders' kinda guy.

Also a true free market allows trading strategies that let you bet against something. Yes, they're abused, but in many cases they provide the best form of market regulation.

Two obvious reasons - 1) the market cap of all cryptocurrencies (prior to the ongoing crash) was only around $2-3T. And 2) there’s relatively little leverage in cryptocurrency at this point (compared to Wall St prior to GFC).

Tiny market cap + comparatively low leverage = no systemic risk in the same league as the banking system leading up to the GFC.

This is not so difficult to see or understand that you need some authority to claim it to believe it. $RANDOM_INTERNET_COMMENTER is sufficient. Easily verifiable.

There’s also actual empirical evidence - Bitcoin has lost 50%+ of its value five times now (counting the most recent crash), a massive loss. But it doesn’t collapse the entire global economy and require trillions in govt and Fed bailouts to prevent the end of civilization. Even in this current crash with stablecoins like UST failing, it won’t collapse the entire economy or require bailouts.

Whatever systemic risk there is in cryptocurrency right now is not remotely in the same league as in the banking system.

Thanks for replying back. I'm not saying your stupid, because you're most likely not. What I am saying is that a lot of smart people were misled during 2007/2008. And most likely $RANDOM_INTERNET_COMMENTER is not hired by wall street -- not on this board anyway. And even if you were, you probably missed signs anyway as you drank the wall street "everything is turning up Milhouse" kool-aid.

What I find interesting is that the volume you're talking about is in that anal pucker range for systemic risk. $US1.6T of CDO's were issued between 2004 and 2007 [1]. That's still less than the number you're talking about.

[1] https://en.wikipedia.org/wiki/Collateralized_debt_obligation

There was ~$1.6T of CDOs, plus some amount of separate MBS’s that weren’t re-securitized into CDOs, and over $30T of CDS’s, and the main Wall St. banks were over-leveraged up to 33:1, and Fannie and Freddie were over-leveraged by around 100:1. Between the banks and Fannie/Freddie, there was about $9T in over-leveraged debt with insufficient equity or collateral, almost half the US GDP at the time.

The conditions back then dwarf the current crypto market. But I am worried the crypto market is doing its best to not learn anything and to repeat those same mistakes anyway.

And I actually got lucky and in late 2006, as I was getting interested in investing for the first time, discovered an online community of forensic accountants piecing together from public filings what was happening with all the house flipping.

Shortly before I found them they had concluded it was a massive unsustainable bubble forming, which would inevitably end in collapse. Their research and evidence convinced me and formed my worldview before I even had a chance to drink the Wall St koolaid. All credit to them though, I just got lucky in discovering them.

To be clear, the great majority of investment bank losses in 2008/2009 did not come from CDOs and even CDO^2s ("CDO squared"). It came from CDS on ABS/CDO. Roughly, you could get long/short on an ABS/CDO/whatever bond that you didn't own. It's like selling fire insurance on your neighbor's home. By itself, not as crazy as it sounds in the financial derivatives landscape, but the underlying collateral were a pile of garbage. There was (and still is) already a huge and healthy CDS on corporate names market, so it seemed reasonable at the time to expand the CDS product. Unfortunately, once the fraud with underlying loans started to unravel, the losses became so large that many CDS counterparties went bankrupt, so the whole thing backed up the investment banks themselves. (See: Fed/Treasury bailouts / bank firesales!) To me: CDOs and CDS on ABS/CDO is just the tip of the fraud iceberg.

> grouping together things to reduce uncorrelated risks is not a recent innovation

Completely misjudging whether risks are correlated or not is not a recent innovation either.

Algorithmic stablecoins aren't anything like CDO's at all. They're more like a pawn shop acting as a bank.

>> a pawn shop acting as a bank.

I thought that is what CDOs are as well. From Investopedia -> A collateralized debt obligation (CDO) is a complex structured finance product that is backed by a pool of loans and other assets and sold to institutional investors.

A bank issues money (deposits), and stablecoins try to produce something 'money-like'. CDO tranches promise different rates of return with different riskieness, they never really acted or were meant as money substitutes.

No one invests into stablecoins to get crappier versions of USD.

They go into UST because they were promised 20% risk free APY from Anchor.

CDOs (or really the generation of junior vs senior debt) showed these people how to cut up risks and provide returns for extended periods of time. Much like how CDOs cut up debts and moved risk around in funny ways.

But no wealth was actually generated. At least with CDOs the subprime mortgages had high APY, it was just that the risk of widespread default was miscalculated.

Furthermore, the senior debt tranches of CDOs had lower returns than the underlying. (3% 'risk free' for example, built out of 5% or 8% subprime mortgages)

This Anchor / UST / Luna looks unsustainable. There is no financial instrument that offers 20% risk free returns in today's world.

There was a off hand comment in the Big Short book, about a Money Market fund, Reserve Primary Fund, that announced they couldn't pay back all debits, during the worst of the 2008 crisis. It was, "Money Markets weren't cash -- they paid interest, and thus bore risk, ..."

Its interesting to note that Money Markets pay out <1% interest now. When I searched for Money Markets to get the %, I got an Ad for "Donut" touting a 7% APY DeFi. They advertise they put money into StableCoins and earn a return. Customer Quote on the page, "I make so much money on interest, I can pay rent". My god, the collapse will be huge.

"Crypto-Soros" is an excellent reference; I believe some of the Pound's fundamental weakness stemmed from a period of high inflation and low interest rates.

Carlos Matos, an absolute legend. Five years later, nothing was learned, but at least we have this amazing masterpiece for the books.

https://www.youtube.com/watch?v=vabXXkZjKiw

Maybe the real store of value was the memes we did along the way. https://youtu.be/e5nyQmaq4k4

>I don't have time to dive into

Just admit that you would rather state your opinion without informing it. How anchor offered 20% (it doesn't anymore, as you are not aware) and why that 20% was not sustainable is perfectly understandable without reverting to "it's a Ponzi scheme!" That's like the Godwin's Law of finance, if you have no idea what you're talking about but want to be sensational the lowest effort thing you can say is point at a thing and call it a Ponzi scheme. There are valid criticisms of Anchor - anyone even remotely familiar with the protocol could and would speak about the yield reserve, how Anchor yields are generated from stake rewards of other tokens, the risks and failure scenarios of that design etc - but you clearly have no clue about any of this. Usually the appropriate thing to do when you have nothing useful to contribute is not contribute.

>it doesn't anymore

https://app.anchorprotocol.com/ lists the deposit APR of UST to be 20.41%. Maybe it only says 20% due to the value of UST dipping?

2 days ago it was 17.5%. The rate used to be fixed at 20% (until last month) and was recently changed to variable. Today the rate is up because a lot of people removed UST from Anchor (deposits decreased by about 50% since Friday). Less depositors collecting interest from the yield reserve.

OP implied the fixed 20% rate is what is currently offered, but that is not true, the rate is variable.

That makes sense.

> There are valid criticisms of Anchor - anyone even remotely familiar with the protocol could and would speak about the yield reserve, how Anchor yields are generated from stake rewards of other tokens, the risks and failure scenarios of that design etc - but you clearly have no clue about any of this.

You have an unusually high level of confidence in understanding something (smart contract defi) that was invented, like, last week. I don't see why anyone should feel confident they understand how it works as opposed to how it's supposed to work.

> how Anchor yields are generated from stake rewards of other tokens

Ahh, so a distributed Ponzi scheme. Thanks for clearing that up.

> Anchor yields are generated from stake rewards of other tokens

Turtles all the way down.

As with the Lebanese Pound, if you are getting >10% on savings deposits you are being scammed.

CDs in the 1980s paid well over 10%. This has nothing to do with Luna/UST's scheme, but it remains true.

Of course the treasury rate was much higher as well.

ibonds in the US pay 9% right now. not far off 10%

FWIW many of these yield generation products work by selling options under the hood.

Selling options is not riskless. They would be collecting pennies until there is a big market move and they are on the hook for dollars.

How do you feel about StableGains, the ycombinator backed one?

StableGains is just a thin layer on top of Anchor. See https://blog.stablegains.com/stablegains-earns-you-yield-by-...

I'm not OP, but the money has to come from somewhere, because people want dollars, not some $shitcoin which may drop 90% in value overnight.

A credit card typically maybe has 15-19% interest. So I'd be surprised if the average credit card gets 10% profit per year from interest payments minus defaults. But somehow you're going to get a guaranteed 15% rate from algorithms? Smart contracts?

It's not a guaranteed 15%.

Let me reiterate what I wrote ~3 months ago[1]

In Anchor's case there are way more lenders than borrowers so Anchor is resorting to pay those high yields from their reserves. It's cutting close to being a Ponzi scheme at the moment.

In a traditional banking world businesses take a loan either to cover for a short-term cashflow crunch (example an invoice that's delayed by their client) or for longer term investment. That money usually goes into economic activities which are expected (hoped?) to bear fruit to repay the loan.

In the crypto world however such loans are taken only to be put back into the crypto world; to be swapped into some hot new coin to be staked and what not. The music has got to stop at some point.

[1] https://news.ycombinator.com/item?id=30335625

The music has already stopped.

When the music stops you will hear its loud absence.

So long as the exchanges keeps trading, those that dumped will consider them selves lucky to have sold at perceived local maximums and they will plow back into crypto. Until the religiously obsessive view of crypto ceases to dominate the mainstream the cycle will continue because it is fundamentally scarce. Buy the dip, hodl, “if you bought at every one of the last peaks you are still up…” — these ideas are religiously held and they are potent.

It's already stopped, but nobody is listening. Bubbles and the inevitable crash are often like this. Nobody can quite believe they're in the middle of one until afterwards.

It slowed down. Possibly going to proper stop eventually.

Can't wait for it to happen. I am not against cryptocurrencies etc. that would mean I fully grasp its impact on finance and potential effects on society and finance in the future - I do not.

But in its current form it seems to do way more harm than good. Aside from the troublesome regulatory issues, pure scams and lacking capabilities to counter financial crimes, the environmental impact is catastrophic. And I don't see Proof of Stake really changing that.

And don't get me started on NFTs and "DeFi". Nothing is decentralized when players like Alchemy effectively centralize access to the Ethereum blockchain and everyone and their mother uses them to build some scam apps.

>Aside from the troublesome regulatory issues, pure scams and lacking capabilities to counter financial crimes, the environmental impact is catastrophic. And I don't see Proof of Stake really changing that.

The environmental impact of Proof of Stake is pretty small, the chain in question here is probably less wasteful electricity-wise than many of the companies people on HN work at.

Please show me at least one project that utilizes proof of stakes, works and has a decent user base.

The projects mentioned in the article we are commenting on (or more accurately the chain they run on - Luna) are Proof of Stake. PoW is completely irrelevant here.

Yes, and it can't hold it's peg, that's why we are here. So apparently this is not a functioning project that is working (as in "can solve its proposed use-case")

Total non-sequetor PoS and stablecoins are two orthogonal arguments, one has no effect on the other.

This is like arguing that electric cars are better than diesel, and you retorting: but this tesla crashed into a wall, see electric cars suck!

As a disinterested bystander, it sure seems like, "this coin failed" is a reasonable rebuttal to the argument that this coin is an example of success.

You may be disinterested, but you're not informed. The people above you are not arguing about whether LUNA is a successful coin in general, but over how it reflects on "proof of stake" vs. "proof of work" protocols. If you think LUNA losing their peg is a good argument against PoS, you don't know enough about cryptocurrency to judge these arguments. LUNA's peg to the dollar is ensured with a scheme that has zero to do with either proof of stake or proof of work. Saying Luna's failure redounds on proof of stake protocols is like saying that AOL's failure redounds on the HTTP protocol.

I think stablecoins are more or less a scam, but that has absolutely nothing to do with PoW vs PoS.

Do you think real existing stablecoins are a scam, or do you think stablecoins by their very nature will be scams?

The USD stablecoin, backed by proof of army, is a fiat fraud propped up by gov't contractor known as "Federal Reserve".

Heard about Avalanche ecosystem ?

ethereum is changing its consensus mechanism to PoS later this year. when it does that, the only major PoW chain left will be bitcoin. all other smart contract chains with large userbases are PoS already.

I heard that for quite some time now, but Ethereum keeps pushing it back. That's why I was wondering if there is something working out there.

There are plenty, but none that are decentralized. They all use checkpoints or a trusted signer. Proof of work is a way to bootstrap consensus without a trusted party.

Carbon footprints rivaling countries are not small when we're already at 1.2C of warming and barreling toward 1.5C within the next 5 years. Tell yourself it's not small when the equator becomes too hot for the majority of humanity living at those latitudes and the migrant levels increase significantly, among all of the other problems. The blaise approach people take to climate change just boggles my mind.

PoS is a pipe dream for people that don't understand how PoW works. There is no cost to rewriting a PoS chain.

Please expand. Frankly if POS isn't viable I don't see a future for POW either; especially when carbon costs are priced in.

As things stand POW chains have traded massive inefficiency for decentralization. I doubt this can stand long term if we wish to address climate change. Crypto already has a higher energy use than many countries.

I agree with most of what you say. However:

> [...] especially when carbon costs are priced in.

You misunderstand the economics of proof-of-work. Perhaps we should call it 'proof-of-waste'. Basically, in something like bitcoin proof-of-work functions a bit like an auction: the total amount of resources wasted on mining tends to equal the total amount of mining rewards.

For simplicity, assume mining rewards are fixed.

If hashing becomes cheaper, (eg first because of GPU miners, later because of ASICs), the hash rate will go up, but the total amount of resources wasted on mining will stay the same.

If hashing becomes more expensive (eg because of a universal carbon tax), the hash rate will go down, but the total amount miners spend on mining stays the same.

Arguably, that's exactly how a carbon tax is supposed to work in the best case.

Of course, there will be plenty of incentives to avoid the carbon tax. Both by mining with clean power (good!) and by mining in places that don't implement the carbon tax (less good!).

> proof-of-waste

half agree with that. PoW is the most efficient method of converting raw energy into a digitally secure token. It would be much better if the work done was actually useful beyond that.

Some attempts have been done in the past, but with low success (Riecoin IIRC uses cpus to find sequences of primes, GridCoin used BOINC for the PoW, proof-of-boinc in that case).

There is still work to be done on EVM chains. Contract calls need to be processed and verified by every (full) node

Proof of waste is an interesting way of putting it. I don't disagree. Maybe it would be interesting for power companies and govt to pair up and provide coins that are deflationary, and are only mined by putting power back into the grid. Make those coins useful to pay for car registration, taxes, or whatever. At least some deflationary value could be put to work there.

> Maybe it would be interesting for power companies and govt to pair up and provide coins that [...] are only mined by putting power back into the grid.

That idea sounds good, but would only be a solution for a problem that doesn't exist.

Bitcoin's design solves two problems:

(1) only someone who owns a coin should be able to spend it

(2) they should only be able to spend it once

The first problem had been solved for ages: use digital signatures to authenticate messages of essentially the form "I, Alice, hereby send 3 bitcoins to Bob." Given some initial coin assignment to specific private/public key pairs, you can follow along these messages, keep a tally in a ledger, and know how much everyone has.

Solving the second problem is where bitcoin innovates. Without a trusted third party coordinating things, Alice could just show a message to Bob and Charles each 'sending' them the same 3 bitcoins. Bitcoin uses proof-of-work to pick (at most) one of these messages to be part of the consensus reality.

The scheme you are suggesting requires some trust in the partnership of government and power companies. But as soon as you have very minimal amounts of trust, you can just solve the double-spending problem directly.

And that direct solution involves much less trust than what is required for accepting any statements about the power grid.

If you want, I can sketch out a minimum trust system for the direct solution I mentioned.

> half agree with that. PoW is the most efficient method of converting raw energy into a digitally secure token. It would be much better if the work done was actually useful beyond that.

I'd say PoW is not the most efficient method. It's a terrible waste by design.

The kind of 'work' that works in PoW has some rather strict requirements, that's why it's almost impossible to shoehorn useful work into a PoW scheme.

Wikipedia tells me that eg GridCoin uses proof-of-stake to prevent double-spending attacks; its rewarding people for BOINC work is a totally separate gimmick.

PoS, to my knowledge isn't a viable alternative to PoW. There are too many similarities to the traditional financial system. That's partly (mostly?) why PoW was invented.

PoST (Proof of Space and Time) is PoW 2.0 essentially. It addresses the energy consumption of PoW using the same Nakomoto Consensus mechanism that provides true decentralization and the security that comes with it. It does this by doing the work ONCE up-front and saving it to space (generating plot files) rather than doing the work for every block. Lookups are incredibly energy efficient (farming plots). The Time component ensures that a certain amount of time passes between blocks, and is responsible for moving the chain forward.

There is also the added benefit of utilizing datacenter drives destined to be scrapped // still perfectly usable for storing plot files.

PoST is a step in the wrong direction. It doesn't address anything, because energy use is not a problem. PoST consumes natural resources and produces e-waste, which is way worse than just consuming clean energy and producing heat, which is what PoW does.

> because energy use is not a problem

In what fully decarbonized country do you live? Iceland?

https://ourworldindata.org/grapher/energy-consumption-by-sou...

Energy production is a problem, if it's produced with fossil fuels.

It's also a problem of opportunity costs.

Energy is somewhat fungible. Every Joule of electricity used on Bitcoin, can't be used for other purposes (apart from heating the data centre..)

I think this is kind of a fallacy. While it's true in short term, in long term more energy sources can be always built, because there's almost unlimited amount of renewable energy available. Demand for electricity increases new investments, expands capacity, and drives costs down. It's not a zero-sum game in the long run.

Also, like I said in the other comment, most of grid energy is already too expensive for Bitcoin, so mining really makes sense just for any extra capacity which wouldn't have a buyer anyway.

> Also, like I said in the other comment, most of grid energy is already too expensive for Bitcoin, so mining really makes sense just for any extra capacity which wouldn't have a buyer anyway.

That's only partially true. And your first paragraph explains exactly why.

Compare: most cows are raised for meat, and the leather is just a by-product. However, the extra income from the leather makes raising cows a bit more profitable, thus giving us more cows on the margin.

Similarly, bitcoin mining soaking up excess capacity makes electricity generation slightly more profitable.

Eg instead of running a coal baseload plant and a natural gas peaker, you could run two coal baseload plants and outside of peak periods, you mint bitcoins. (Numbers are just for illustration. You get the point.)

About your first paragraph: yes, supply is elastic in the long run. But opportunity costs still need to be paid. Yes, in the long run you might not be trading off one Joule for another Joule, but you are trading off uses for capital.

(Also keep in mind that even with elastic supply, we still have decreasing marginal returns. There's only so many good sites for hydro-electric generators; all the windiest spots will be full of wind turbines at some point, etc.)

PoST (Chia specifically) produces 20,000 times less e-waste than Bitcoin. Chia also has 20x the nodes as Bitcoin. A comparison of network security would probably be the best way to compare the scales of each.

In the long run, hard drives used for crypto lookups in PoST (farming) have very low load and can last for a decade. Whereas Bitcoin ASIC miners become obsolete much faster and can't be reused for general purpose computing afterwards.

As explained in another comment:

> Consensus in both of them is based on unforgeable costliness, to make it economically unviable to create alternative histories.

> In both systems, total cost of mining approaches the block reward. For example, if block rewards are $10 million a day, then $10 million worth of energy is used in PoW. PoST burns through $10 million worth of hard drives.

I would love to hear an explanation of how PoST consumes natural resources and produces e-waste as compared to PoW.

Consensus in both of them is based on unforgeable costliness, to make it economically unviable to create alternative histories. In PoW, the costliness is based on production and consumption of energy. In PoST, the costliness is based on production and consumption of hard drives. Hard drive production needs both energy and natural resources.

In both systems, total cost of mining approaches the block reward. For example, if block rewards are $10 million a day, then $10 million worth of energy is used in PoW. PoST burns through $10 million worth of hard drives.

The cost of PoST is based on scarcity in hard drives, which incentivizes production of hard drives. The cost of PoW is based on scarcity in energy, which incentivizes production of cheap and clean energy.

> The cost of PoW is based on scarcity in energy, which incentivizes production of cheap and clean energy.

Where do you get the 'clean' from?

Clean energy sources are the cheapest [0], and they get cheaper with every new investment and innovation. The competition in Bitcoin mining is global, which means that it becomes unprofitable for everyone to use fossil fuels when profit margins fall enough. This isn't true yet, and it's profitable to use fossil fuels in certain regions.

Usually the cheapest sources are also far away from people, because any local demand will increase energy price. However, when renewables near people have overcapacity, Bitcoin miners can serve as a buyer of last resort. This way, investments in renewables become more profitable.

[0] https://www.weforum.org/agenda/2021/07/renewables-cheapest-e...

Interesting!

We can definitely agree that crypto's demand for electricity basically doesn't care about location. So it puts a floor of demand for electricity generation in remote places. (Also in more accessible places. But there it's relatively less important.)

Electricity is both fungible to an extent, but also not as globally traded as eg wheat or oil.

You are right that on the margin Bitcoin makes generation of renewable electricity more profitable. But it also makes all other electricity generation more profitable, on the margin.

Let's see how this develops.

I'm stoked to see how this develops. Exciting times for sure.

If PoW's costliness is based on production and consumption of energy, it requires a certain amount of energy and natural resources to produce the hardware required to consume the energy, correct?

I'm failing to follow how PoW is fundamentally different than PoST in terms of hardware (and the resources to produce it) necessary to validate blocks.

It seems that the point of PoST is that we get a similar potential of decentralization that we get with PoW with significantly less energy usage.

I somewhat understand the argument of PoW incentivizing production of cheap and clean energy and I hope this is realized ... specifically clean energy, specifically advanced nuclear as its utilization isn't geographically restricted.

Yes, it requires production of mining hardware, but just for adding new hashing capacity to the network. Major part of the mining cost comes from energy, and I believe that in the long run even more so. Energy efficiency of mining hardware has pretty much plateaued, and modern hardware should be good for 10 years of mining, which means that less hardware has to be replaced.

The competition has shifted into finding cheaper energy sources, rather than developing more energy efficient ASICs. There's a clear trend in this direction.

Proof of stake to elect a leader that mines using a verifiable delay function seems viable. Proof of stake ensures majority support. And only a single person needs to max out their cpu computing the vfd.

You can rewrite the chain easier than with PoW, but it is plenty hard - requires a majority to precommit to a secret fork. Safe enough for many purposes at a fraction of the cost.

You don't need a secret fork. You just need the community to split over some sort of doctrinal issue, such as already happened with the ETH/ETC split.

Only with PoS, there's no way to judge which fork is the "right" one. In PoW, miners vote with their finite hashpower. There's no practical limit to how many hard forks a PoS system can sustain because they don't rely on anything that's actually scarce.

What is wrong with having many forks? Just ignore the ones you don't care about.

Because a fork approximately divides the value of the currency between the two parts.

Imagine the USD was suddenly split into two incompatible and free-floating currencies, with the US House of Representatives saying one currency is the official one and the US Senate claiming the other. It would be chaos.

No, what I'm saying is the music has slowed down; if the music had would have stopped already, we'd be already living in the streets of San Francisco without a roof above our heads. FTX and Alameda are dumping crap into the market; the biggest excrements are about to appear

A man of culture I see

>> "there are three ways to make a living in this business... Be first, be smarter, or cheat. Well I don’t cheat, and even though I like to think we have got some pretty smart people in this building of the two remaining options, it sure is a hell of alot easier to just be first."

SBF & Co. are about to be first.

That's such a great movie. (https://www.youtube.com/watch?v=K05sxfa4zdM)

So in other words, banks reinvest in the next hot thing hoping to make a buck?

Seems analogous to what u say about crypto investing in the next hot new 'coin', which very well is just a proxy to people trying to build something of value.

Well the difference is that banks are highly regulated, and invest in a diverse portfolio of stocks, bonds and financial services which are usually expected to be underpinned by fundamental analysis. They are heavily audited and have strict rules about speculation.

The difference to some pretty much unregulated company that reinvests lots of its money in crypto because crypto has gone up in the past so ‘past performance must equal future growth right?’ is pretty obvious to me.

Like the OP said, UST was paying 19.5% to depositors. In contrast borrowers were only charged ~13%. A regulated bank could choose to do this if they really wanted to.

So the main difference is really that banks run a sustainable model by charging borrowers more than they pay depositors (who are lenders in the fractional reserve model); by orders of magnitude. Being paid out more than is put in should've been a massive red flag to anyone who entertained the Luna ponzi.

I would guess that in many countries a regulated bank offering more to depositors than they charged borrowers (without some kind of strict limits on the amount per customer) would get a visit from their regulators quite quickly to understand how this was sustainable and in-line with Banking regs.

In the UK at least retail bank deposits are guaranteed up to £85k per account, so there's a real incentive for the banking industry to police their member as if one fails, they'll all take a hit.

>how this was sustainable

Why does it need to be sustainable? The APR can simply lower once the high APR is no longer sustainable.

So you are saying it was sustainable at some point?

Yes, it was sustainable for a period of time.

The most likely reason to pay much higher interest on money deposited than money they lend out is to steal the deposited money. It isn't illegal to do it, but it is a huge red flag which is why it would warrant an inspection.

Smart contracts doesn't save you here, since the deposit happened when you bought their crypto coins, not when you signed the smart contract.

I wonder how they verified borrowers identity.

Stealing the deposits would require

a) Verification happens without any government id (I assume this is true) b) depends somehow on the bank / smart contract authors

Then it would be trivially easy to generate huge amount of "borrowers" who simply "default" on their "loan".

The sky high interest is its sole raison d'être

As in they lose money on every loan but make it up in volume?

The irony here is that’s supposed to be a joke and not an actual business plan.

I think you missed a key detail. The collateral for taking out a loan earns staking rewards that get distributed to the depositors. The amount of money staking rewards are worth can fluctuate too depending on the state of the project / cryptocurrency ecosystem.

A lot of businesses operate at a loss for the sake of growth early on, including a lot of the unicorns from the last decade or more.

Yes, but most of them have a business plan that doesn't involve taking a loss, once they've reached a certain scale. And while they're taking that "loss" it's not usually due to revenues being below the cost of goods sold, it's because they're spending all profits + some investor money to grow. Many (though not all) can simply stop growing and be instantly profitable. Businesses that sell you $10 for $5 tend to fail as soon as they run out of capital, because they've got no path to profitability.

> Why does it need to be sustainable? The APR can simply lower once the high APR is no longer sustainable.

At which stage, people with savings withdraw funds because of the lower interest rate and the Ponzi scheme collapses.

>the Ponzi scheme collapses

The only thing that collapses would be the APY. Everyone can still withdraw their full deposit.

Their deposit has been loaned. No free lunch here…

If you offer more to depositors than you charge borrowers, it's never sustainable you're making a loss.

If I make £3000 in interest from borrowers on a set of money and give away £5000 in interest to depositors of those same funds, even before I account for the costs of operations (systems don't develop and run themselves) I'm making a loss.

You seem to be suggestion luring people in with a high rate and then dropping it later. That only really works if there's some kind of lock-up to prevent all your depositors fleeing as soon as you lower the rates again.

If you lock-up funds, generally you have to guarantee the rates for the period of the lock-up otherwise that's a bait-and-switch, which is generally going to get you into legal problems :)

>If you offer more to depositors than you charge borrowers, it's never sustainable you're making a loss.

Like a sibling comment you are not accounting for the profit that comes from the collateral.

Maybe a nondefi example would help. Imagine if a landlord got a loan using a rental property as collateral. In this example the lender will now get the payments of rent. Now the lender makes money from both the interest rate on the loan and from the renters of the property. Depending on the demand for the rental property the amount of rent you may collect can fluctuate. This means that some months you may make more money than others. So in order to sustain a certain level of profits the amount of rent you collect will need to be worth a certain amount.

That’s not how it works in the real world though. A landlord takes out a loan at a particular interest rate, and makes repayments based on that. The bank doesn’t “get” the rent, they get the repayment that ideally for the landlord is less than the rental income, unless they’re relying on capital gains. The collateral only comes into account if the borrower defaults, for the lender to sell to make back what they were owed. Otherwise they have no claim on anything to do with the collateral - neither the rent nor capital gains.

I was just trying to make up some sort of example where you can gain income by holding on to someone's collateral. I wasn't trying to say how something typically works.

That isn't how collateral works, so you really are just making stuff up. If you did start doing this sort of thing as a bank you would attract regulatory attention pretty quick.

You're basically talking about reypothecation[0]

[0]: https://www.investopedia.com/terms/r/rehypothecation.asp

>If you offer more to depositors than you charge borrowers, it's never sustainable you're making a loss.

Only if the amounts being borrowed and loaned are exactly the same.

I.e 20% on $100 is less than 10% on $1000

> In the UK at least retail bank deposits are guaranteed up to £85k per account, so there's a real incentive for the banking industry to police their member as if one fails, they'll all take a hit.

As you wrote it this doesn't make a lot of sense, so I'll explain, in the process I'll actually fix some errors too.

The UK government protects up to £85k per person per banking license. So if you have £40k in accounts at each of four brand name banks but they're actually all part of one huge corporation "Big Banks Inc." with a single license then the government only protects £85k total, 'cos that's just one license.

Unlike FDIC this is not insurance, instead it's a Last Man Standing system. If some banks fail, the government re-coups its loss over time from all remaining licensed banks. So for example if Santander fails, the costs of fixing that problem land on HSBC and other enormous banks. As indicated this produces an incentive to "police" your rivals because if you allow them to go under by not warning of risky practices, you're going to eat that cost yourself.

As an individual in the UK, if the £85k isn't enough you can invest in the NS&I which is a bank owned by the government. Unlike commercial banks NS&I isn't lending your savings to some unknown (to you) borrowers instead they're effectively lending everything to the government, which would otherwise need to borrow that money commercially (ie issue bonds) so it knows what that's worth. The rates aren't great but since it's owned by the government there aren't a lot of scummy for-profit shenanigans like "introductory" rates that then zero out unless you're constantly opening new accounts and moving your money. Since NS&I is owned by the government who also print the money your savings are denominated in, it can't go bankrupt. The money could become worthless, but in that case it doesn't really matter who you banked with and the whole country is fucked anyway.

Also for some NS&I accounts interest is tax free because technically they are lottery (although with a relatively predictable return for large savings).

Mind, the interest is currently so low that it doesn't really make much of a difference.

The rationale for Premium Bonds isn't really the tax it's the fact that people like gambling.

It turned out that persuading Aunt Sally to buy the new baby £100 of investment that will earn interest and might be worth something when the baby goes to college is hard - whereas Aunt Sally is much more interested in buying the baby £100 of scratch-offs with a tiny chance it wins big but most likely it gets nothing. This is before scatch-offs were legal in the UK as they are now but NS&I tweaked the numbers to offer a product that is (from their point of view as a bank with many savers) just a bond, but from the individual saver's point of view works like a lottery.

https://www.nsandi.com/products/premium-bonds

It’s often the tax, my parents have premium bonds and cite the tax benefits as they have maxed their ISA.

To add to that, financially, it makes no sense to borrow at such a high interest rate unless you have issues with obtaining credit traditionally.

There is a reason why payday loans charge extortionate interest. Their bad loan rate is usually sky high. Their returns are substantially lower.

Basically whether it works or not depends on if they could print money that holds value. Obviously they couldn't.

How do they prevent people from borrowing to deposit? If I own two wallets, would I be able to borrow some coins, transfer them to my other wallet, and then deposit them so I'm netting 6.5% for free?

Well, the rigorous KYC regulations and policies mean they can ensure every person owns just one wallet... /s

> Well the difference is that banks are highly regulated ...

probably why there is so many instances of banks getting caught laundering money for criminal organizations by the billions

> They are heavily audited and have strict rules about speculation.

you can audit blockchains. you can't audit a bank's database and have to way for the next panama papers leak

Come on, what percentage of banking activity is money laundering, and what percentage of NFTs sold is money laundering? I think there is an order of magnitude, order of magnitude difference.

that is the wrong comparison IMHO. if you are talking about money laundering using NFT's as in pics of cartoon monkeys (an NFT is just a digital deed, the monkey pic is actually an extension), you should be comparing them to money laundering using art.

> They are heavily audited and have strict rules about speculation.

If only these "heavy" audits and "strict" rules could stop the incessant corruption we see all around the globe in federally insured banks.

People who think crypto is shockingly bad just haven't been paying attention to banking. Sure, crypto is full of small scams and because of most of cryptos open fundamentals you can expect those scams will never grow into federally insured banks. That isn't the case for private banks who have been getting away with the worst scams for far longer than I've been alive.

>That isn't the case for private banks who have been getting away with the worst scams

People are straight-up rug-pulling in the crypto world for tens of millions of dollars, outright scams, and the scale of crypto is a fraction of the banking world. I bet you'd be hard pressed to name a couple equivalent scams banks have pulled in a first-world, financially regulated economy. I'm not talking about some rogue employee ripping off accounts, I mean organized fraud.

Anyone who has ever actually worked with or in the financial industry knows how crazy the regulation is. It's far from perfect, but saying it's worse than the crypto world is laughable.

"far from perfect" - well that misses the mark by a long shot. We still have unsettled shorts happening every day that are often naked and regularly stay naked for months on end - companies are destroyed from this blatant market manipulation.

Gamestop was 140% short! Is this uncommon? Many people seem to think not.

The corruption in wall-street runs so deep that tax payers have to foot the bill when no middle class person would look over the toxic loans being packaged up pre-2008 and think that wasn't a scam. This crashed the world economy, it's hard to imagine a bigger scam ever being possible without the former bank CEOs running every financial branch of the government promising bail-outs to the "too big to fail" scammers.

> 140%

We're still stuck on this[0]?

[0]: https://www.sec.gov/files/staff-report-equity-options-market... @ Page 25

Yes I'm still stuck on that, it's a story people often recognize and just because there has been no naked shorting found as of that report doesn't mean there isn't significant naked shorting involved. With the shorting moved to dark pools on top of the fact there were likely 45 million shares still shorted after that reporting data shows, it's not as clear cut as you might be implying.

Many people are confident naked shorting happens and GME hit 140%, the highest ever according to that report. So yeah, consider me skeptical that the SEC was able to find evidence of a non-scandal and used that evidence to report a non-controversial finding.

You can bury your head in the sand and pretend the market is fair if you want, but I'll stay skeptical.

I don’t know that I’d go so far the other way to infer the market is _fair_ to retail traders, but the 140% short number is not itself evidence of impropriety. All it requires a lot of longs allowing their shares to be lent (check) and a lot of shorts with appetite, conviction, and deep pockets (check).

this is foolish commentary. its like a trader on Wall Street complaining about javascript frameworks

Naked shorting doesn't destroy companies. Hypothetically even if the stock price goes to zero that doesn't prevent the company from operating as a going concern.

Incompetent managers destroy companies. Sometimes those managers try to deflect blame for their own failings by whining about short sellers.

> Gamestop was 140% short! Is this uncommon? Many people seem to think not.

This is silly. Of course it is uncommon - if it was common we would see short squeezes all the time.

> If only these "heavy" audits and "strict" rules could stop the incessant corruption we see all around the globe in federally insured banks.

Unless your claim is that corruption and its effects somehow uniquely apply only to bankers, I don't see what's the purpose of pointing this out.

The popular trend lately is to point out flaws in our regulated institutions in a feeble attempt to suggest that the solution is to abandon regulated institutions altogether in favor of some techno-libertarian hellscape. Because why fix a broken thing when you can throw it away and replace it with something even more broken.

The internet (just like crypto) is a global distributed network with only local regulations (that are easily bypassed, again, just like crypto) and I would argue this "techon-libertarian hellscape" is the most valuable and important invention mankind has ever created.

I'm not seeing how using the internet as analogy is at all relevant to the discussion about corruption. The internet, if it has resistance to catering to special financial interests at all, is only so because it is far removed from that sector, not because of any special attributes from being a distributed network.

I used to feel far more optimistic about the internet. Today I see the social aspects of it as a net negative; Social media in general is a cesspool, user privacy means nothing to the big internet players, ads and tracking are absolutely pervasive, and the quality of online discourse has been on a steep downward trajectory for the better part of a decade.

What was actually fixed after 2018? Which banksters went to prison?

Banks generally invest in something related to productive activity which is expected to provide an income stream. Crypto banks invest in something valued only for its popularity which is unrelated to productive activity.

All investments are speculative and involve some risk. But outside of crypto, few of them are purely so.

My hypothesis is that investing 500 million in the yield reserve is cheap if it gives you control of $19 billion during the next bull market on which you reap 100% of the returns. It's a bet for sure but not totally insane.

>In Anchor's case there are way more lenders than borrowers so Anchor is resorting to pay those high yields from their reserves.

In the real world, over-supply of lendable funds would drive rates down.

> In a traditional banking world businesses take a loan either to cover for a short-term cashflow crunch (example an invoice that's delayed by their client) or for longer term investment. That money usually goes into economic activities which are expected (hoped?) to bear fruit to repay the loan.

There's another option in the traditional world that also makes sense in the crypto-world:

People typically borrow shares of companies so they can sell them short. When the loan comes due, they 'cover' their short by buying the stock again. (So in some sense, the share that you give back is not the share you borrowed in the first place.) If the share drop in value between the sale and the covering buy by more than the borrowing costs, the short seller makes money.

Taking a crypto-loan would be one way to short-sell a specific crypto-currency.

Those crazy interest rates you mention are relatively normal for hard-to-borrow stocks with a lot of short interest.

Shorting stock is perfectly legitimate, and the proceeds from the short-sale usually sit with your broker as collateral for the borrow. In that sense, they don't go into 'economic activities which are expected (hoped?) to bear fruit to repay the loan'.

In practice, I suspect that most crypto-loans are not for short-selling purposes, but closer to what you suggest.

> The music has got to stop at some point.

Funny thing is, heavy short selling is one way for the music to stop earlier. And short selling needs exactly the kind of borrowing we decry here.

(Just to be perfectly clear: short selling by itself doesn't cause a collapse in value; Tesla hasn't collapsed after all. But short selling is a way for people who predict a drop in value to profit when their prediction comes true. Thus incentivising to add their information into the market price.)

What if someone created a USD stablecoin but programmatically only allowed people to trade it at $1.00 so it never loses peg?

If you had such a coin, there'd always be the risk that no one will want to buy it from you, making it worthless. Therefore, real stablecoins generally have a backing organization with a supply of another currency that is guaranteed to give you a dollar-equivalent for your coin. The problem arises when nobody wants to buy your coin and the backing organization doesn't actually have the money to back it up.

Maybe when all other coins are losing peg, people would be more interested in a coin that is enforced to be $1.00, even if it had nothing backing it?

>people would be more interested in a coin that is enforced to be $1.00

I have some of these in my wallet right now, in fact.

But as to your question - why would anyone be interested in a $1 coin "even if it had nothing backing it"? The attractiveness of backed-by-nothing cryptocurrencies is the potential for wild upswings. That's lost in a hypothetical programmed-to-$1 digital currency.

And to preempt any comments about fiat, the USD is backed by "the full faith and credit" of the US Government, which at the current time is made tangible through military and economic force.

Finally, currency prices are dictated by the price people are willing to pay. There's no such thing as what you are suggesting if people refuse to pay $1 for it.

> real stablecoins generally have a backing organization with a supply of another currency that is guaranteed to give you a dollar-equivalent for your coin

I can't see the difference. So what if nobody wants to buy that coin either? You just added an additional step.

Traditionally, the backing currency is a well-established fiat currency such as USD, which in turn is backed by an international economy full of buyers. But here, I was specifically talking about the scenario where you contractually force buyers and sellers to maintain the peg. If the backing currency doesn't have such a contract, then buyers would still be willing to buy it for a sufficiently low price, like what's happening now to UST.

I don't know much about tethercoins and I might be misunderstanding something here, but if you force to maintain the peg in the backing currency (I assume via smart contract?) then you just changed the failure scenario to "nobody buys the coin", i.e. the value drops straight to zero. Not sure how that's an improvement except it happens in the backing currency.

...and this has circled back to your original comment where you say exactly that, but referring to the proposed stablecoin? Not sure what I'm missing!

I guess there's really a couple different failure modes for a pegged coin:

1. The backing organization isn't actually fully backing the coin with the backing currency. Too many people try to sell the coin at once, and the backing organization goes bankrupt.

2. The backing currency loses its real value, so that you can no longer exchange it for goods and services. You can buy as many as you want from your pegged coin, but all your money is gone. This could happen if the backing currency is another volatile coin, or if it is a fiat currency subject to hyperinflation.

I read Matt Levine's article on UST, and by his account it fell victim to the second failure mode: as holders lost confidence, the value backing Luna coin went down toward 0, due to the backing mechanism diluting the supply ad infinitum. Right now, Luna is at a low but positive value (in USD), and Terra has lost its peg, mainly because the backing mechanism is too slow. If it were infinitely fast, Luna would become worthless, and Terra would be worth whatever value speculators would gamble it at.

My apologies for the confusion, I got mixed up in the last comment. If you enforced the peg by contract, then you'd need a steady stream of buyers who believe it is valuable. But if you have a backing organization who can always provide a backing currency, then the peg can be maintained through arbitrage alone.

It is traded in a black market at its actual price.

Could a smart contract prevent black markets from existing?

Imagine if every transaction had to have a digitally signed "seal of approval" from a DAO that verifies that 1 USD was sent in the other direction.

How would that would? If you can't trade the actual coins due to crypto magic, you just trade IOUs instead.

Blunt force contracts have been attempted with mixed success.

Then we'll trade the keys to the addresses of those coins. You simply cannot prevent a black market.

So pretty much USDC, BUSD, or USDT where there is a company who will buy / sell it for $1.00? Else how do you envision it working?

Except this has nothing to do with Bitcoin.

Are you sure? The Luna Foundation has been the largest buyer of Bitcoin the past couple of months because they knew their scam was crumbling and they needed an actual reserve asset. Yesterday they deployed their reserves to exchanges and OTC desks in order to start buying up their scam token and keep their scheme going a little bit longer.

The key to running a Ponzi scheme is to make it last a really long time. Ironically, Satoshi saw this behavior with the US federal government printing money and effectively scamming people on fixed income and anuities. He was right to be upset that people were effectively lied to about the value of their money.

Now the shoe is on the other foot and the crypto world is full of predators who would be selling anuities to old people, but are now selling crypto scams to suckers.

Society itself is a kind of ponzi scheme.

It relies on a continual influx (and ideally growth) of new people who do the actual work that the old, burnt out, and jaded don't want to do anymore.

Eventually, there will be a generation that puts in the work, but receives no reward in the old age because the house of cards collapses.

In my opinion, our goal as a society should be to prolong the ponzi scheme for as long as possible, ideally close to the heat death of the universe.

So we've been in one of the longest bull markets in modern history. I have been amazed at the wilful ignorance of Crypto Andys when it comes to why financial markets, the financial system, central banking, debt and debt markets are the way they are.

There's a certain delight [1] in watching increased market volatility exposing how understanding merkle trees and consensus protocols doesn't make you an expert on what the financial system is, how it works and why it is the way it is.

So lots of countries have tried pegging their currencies to other currencies, most commonly the US dollar. Your ability to do so is limited by how much money you are prepared to throw at it to counterbalance market forces. I mean this is one reason why we moved from Bretton-Woods to floating exchange rates.

Central banks have far more ability to defend a peg. Still a pet can be attacked (eg [2]) if the peg is sufficiently out of line with the market.

It's going to be funny to watch these crypto trainwrecks learn these lessons (again) the hard way.

[1]: https://www.youtube.com/watch?v=nCQGQ5qBQTA

[2]: https://www.investopedia.com/ask/answers/08/george-soros-ban...

These comments don't seem very relevant to stablecoins such as this one, which are algorithmic rather than backed. (Although they are now trying to back it, but that's not how it's designed.)

>>> UST loses peg

>> There's a certain delight [1] in watching increased market volatility exposing how understanding merkle trees and consensus protocols doesn't make you an expert on what the financial system is, how it works and why it is the way it is.

> These comments don't seem very relevant to stablecoins such as this one, which are algorithmic rather than backed

Just... muah. Perfecto.

I apologize if I gave the impression that I understand meekly trees

> which are algorithmic rather than backed. (Although they are now trying to back it, but that's not how it's designed.)

genuine question, why are trying to do when it's covered by the 'algorithm'?

In this case the algorithm pegs the coin to another cryptocurrency, LUNA. You can algorithmically exchange 1 USD worth of LUNA for 1 UST at any time.

But note that this algo doesn't help you cash out your LUNA! Is 1 USD worth of LUNA really worth 1 USD if there is nobody who will buy it from you?

If there isn't a healthy USD-LUNA market, the fact that the UST-LUNA market is algorithmically enforced doesn't help you that much.

Algorithm won't help you make a healthy LUNA-USD market, only way is to have a market maker putting up USD and LUNA reserves to offer liquidity to buyers/sellers.

luna is way down, but there's still a luna/usd market.

Price of LUNA/USD doesn't matter so much - the issue is liquidity. Without a market maker offering sufficient liquidity to the LUNA/USD market the peg will break down.

Yes there is still a price on the LUNA/USD pair, and this price has not collapsed completely. But there just aren't enough buyers on the USD side of the trade. The market isn't big enough to handle the demand to exit LUNA to USD. And so the UST peg breaks down.

That’s my question too.

I hope, for your sake, you're not putting too much faith in the "algorithmic" part of this because when it comes to a central bank maintaining a peg, it's basically exactly the same thing. You should look into what open market operations actually looks like in practice.

Actually the stablecoin is worse. In the case of this article the reserve funds are seemingly crowdfunded. Central banks can just print money if they have to. This of course leads Crypto Andys eschewing the printing of money with disdain but it's actually a feature not a bug.

> In the case of this article the reserve funds are seemingly crowdfunded.

The money went elsewhere rather than backing the coin. They took the money out of the fund and assumed $LUNA would be able to back it forever. Jokes on them. amiright?

No dog in the fight, just want to understand. From my quick look at open operations it just sounds like backed stablecoins e.g. USDT, which again is very different from how an algorithmic stablecoin is set up (not supposed to be backed at all).

It is very different and the top commenter clearly has a dog in the fight. Also modelling your stablecoin off what Terra has done, even to critique stable coins, is foolish.

When modern countries try to maintain a currency peg, like the BoE example above, they are also not really ‘backed’ in the sense I think you mean.

But it seems they do try to participate in the market in order to move demand so that the price stays at 1. Which is just not how UST is designed at all. So I’d like to understand the difference.

Is it really that hard to defend a peg? As long as you don’t spend the money people give you, you’ll have 1:1 dollars to stable coin. Then you can earn interest on the dollars.

My understanding is that some stablecoin projects do that. The issue is greed, it’s too tempting to invest the money in something riskier and keep all of the returns. When you lose the money you have nothing to defend the peg with.

This can be easily solved via governmental certification.

Good idea! Maybe a note that attests that your 1 token is backed by government certification? What about making that note green, to make sure people understand that it is the real thing?

Yeah, but they wouldn't give a damn about a greenback-a-dollar, they'd probably spend it fast as they can.

Looks at inflation rate

Yes, cause the government is so much better at this stuff.

Yes, ultimately, the gold standard is the only way to stop arbitrary taxation AKA inflation.

Ah yes, the gold standard. Aka severely limiting worldwide economic growth until we dig more shiny rocks out of the ground.

This is an egregious example of statist overreach. The free market would never...oh wait, Binance has set a $0.70/UST floor price. Never mind.

As a taxpayer I certainly don't want my government wasting resources on such schemes.

Yeah agree, at least in the case of a crypto which is literally just $ in -> coin out, no caveats, hold the $ and do nothing with it till withdrawal.

My impression is that many pegs don't work this way, but to the extent one did I kind of don't see how it could fail?

Negative rates could make it fail.

It could only fail in the cryptocurrency sense, in that, you're going to be offering less than 2% gains (as in, whatever you can get for a long-term bulk deposit minus operating expenses) when your competitors are offering 20%. This means, for you, no Lambo.

yeah my assumption is you would need to be a platform like coinbase or something where the added convenience for people trading on your platform was the benefit you got from it and it just not costing much was sufficient

This is exactly why Coinbase does have its own asset back reserve stable coin called USDC. Well, to be specific, its a consortium of companies to which Coinbase is on of.

As you described, theyre incentivized to properly hold and maintain the reserve assets because A) They are exposed and liable to US laws (Coinbase is a public US company) B) They reap the benefits of having a native stable coin for the users on their respective platform.

> As long as you don’t spend the money people give you

Yeah, this is somewhat hard to do, especially if you want...

> Then you can earn interest on the dollars.

to be true for a meaningful amount of money.

This also assumes that you originally had the dollars to back the stable coin in the first place, which is a somewhat dubious assertion for many purported stable coins.

Sure, but then you don't get to build a giant rube-goldberg machine with multiple tokens and exciting 20% interest advertising and claim to be the smartest guy in the room!

"Algorithmic stablecoins" are a different beast:

"These uncollateralized digital assets, which attempt to peg the price of a reference asset using financial engineering, algorithms, and market incentives, are not stable at all but exist in a state of perpetual vulnerability"

http://www.wakeforestlawreview.com/2021/10/built-to-fail-the...

Great read, thanks.

You're correct. Which using occam's razor means they didn't actually collect a dollar for every coin they created.

All of these stablecoins may have started legitimate, but realized that nobody could tell the difference between backed coins and unbacked coins. So they kept creating unbacked coins and had enough capital floating around daily to cover the required daily maintenance of the peg.

It all works swimmingly until the music stops, then you cash out your billion bitcoin wallet and disappear to a tropical island somewhere.

If they're earning interest, it means they have swapped their dollars for some interest-bearing instrument, so they no longer have 1:1 dollar reserves.

You could, but then where would you make money from? Why would you run a stable coin and all involved risk of actually holding either real money or handle your tokens. And why would I choose a stable coin that only has fees over real money?

Let me talk about tether. It really is just an unregulated bank. The stable coin is a liquid liability for tether. It must own liquid assets in proportion to how much people want to withdraw USD. If too many people withdraw at once and they are out of liquid assets(reserves) they must sell illiquid assets, possibly at a different price than they bought them. Bonds with low interest lose their value if you can get new bonds with higher interest. Tether is unable to pay out USD if this scenario were to happen and the peg would be broken.

But that way you make way less money. Taking the dollars and investing them in high-risk investments is a much better option, because ultimately you get to keep the gains, but the losses are covered by others

> Then you can earn interest on the dollars.

Can you really, while maintaining liquidity and taking low risks?

These two conditions are important, because if you buy risky assets, then you can end-up below 1:1 when markets decline, and if you hold illiquid assets, then it doesn't really matters that you have the asset at all, as you cannot defend the peg with illiquid assets.

> As long as you don’t spend the money people give you, you’ll have 1:1 dollars to stable coin.

The lure of fractional reserve banking is strong. Crypto ideologues don't seem to get this because they think crypto is immune from the same forces that create monetary inflation. Just because it's not fiat, doesn't mean that economic actors don't have an an incentive to take profit any which way they can.

Its not about "winning" its about skimming enough off the top that you end up rich and someone else is holding the bag.

We don't prioritize punishing white collar crimes.

They will keep doing it because as far as they're concerned it works. I guarantee you these folks have been partying it up since the second they had the cash on hand.

Most of the greater fool schemes are not crimes, so it's risk-free income (assuming you're able to spin the yarn to convince fools that your balanced merkle trees come with extra splines)

> understanding merkle trees and consensus protocols

I don't think most people who invest in crypto know much about these

They know that line goes up, and this is the way to stop being poor

And when they lose all their money in crypto, it'll be just like when they walked away from that essential oil company, and that house they were going to flip, and their beany babies, and that .com company and the herbalife in their garage and the ...

> I have been amazed at the wilful ignorance of Crypto Andys when it comes to why financial markets, the financial system, central banking, debt and debt markets are the way they are.

Innovation often comes from outsiders. If we wait for the bankers and regulators of this world, we won't see much innovation happening in the way of banking/finance.

> There's a certain delight [1] in watching increased market volatility exposing how understanding merkle trees and consensus protocols doesn't make you an expert on what the financial system is, how it works and why it is the way it is.

That's kind of a sad sentiment to have, on HN of all places. Personally, I don't rejoice in the failure of people who take risks and push the boundaries. I hope they learn from their mistakes and keep innovating.

What is the best book to understand the financial system is, how it works and why it is the way it is for a layman?

IIRC there was a book called "how the city works" which I read as a junior trader. That's a non technical interview of what kinds of roles there are in finance, explaining what all the different players do.

You probably mean "The money machine: how the city works"

https://www.amazon.co.uk/Money-Machine-How-City-Works/dp/014...

I agree, it's a good intro. Covers insurance too.

Yep

Is it this book? https://www.koganpage.com/product/how-the-city-really-works-...

Some of patio11’s blog posts are better, and more succinct, than most books.

Start with Investopedia articles. Here's one on currency pegs, and why most governments don't have free floating exchange rates.

https://www.investopedia.com/terms/c/currency-peg.asp

Also read about the "impossible trinity":

  1. Fixed exchange rate
  
  2. Free movement of capital
  
  3. Independent monetary policy

You can have at most two, but not all three at once.[0]

0. https://en.wikipedia.org/wiki/Impossible_trinity

The Bank of England has two great introductory papers on money in the modern economy, they're about as easy as it gets when explaining quite a complicated system.

https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...

The majority of people in crypto draw an intensely bright line between what Luna is doing, what Tether has done, and what Dai or even centralized fully backed stablecoins do. Maybe you should take off the sunglasses. Using Terra (a centralized ponzi chain) to attack all of crypto is peak cope; its peak strawman. If merkle trees aren't so hard to understand you would put your effort into thinking about how stable stable coins work rather than using the market swings to affirm your biases.

> Using Terra (a centralized ponzi chain) to attack all of crypto is peak cope

Most of the cryptocurrency ecosystem is scams, this is just another data point demonstrating that fact. Frankly, your equivocating defense sounds more like "peak cope" than the comment you're replying to.

Even DAI is kind of shady, if I understand correctly. The main mechanism they use to regulate demand and try to ensure the 1:1 exchange is the Dai Savings Rate, which is interest you earn by locking Dai into the savings smart contract. But right now, I don't think there's many places where you can actually use Dai to buy/sell goods and services, so the only "exit" is to sell that DAI to other people.

Considering the few places where you can actually use cryptocurrencies, even stable ones like DAI, it's weird that there's so much demand and volume. Operations on DAI have amounted to almost a billion dollars in the last 24h according to Coinbase, how much of that comes from trading and how much from other economic transactions?

It looks like this (un-)stablecoin has lost its peg two times in the past. The interesting thing is that's it's an algorithmic stable coin: if its price is below a dollar, you can 'burn' one UST to get $1 worth of LUNA (a regular crypto currency without an enforced peg). That has a deflationary effect and is meant to raise UST's price. Conversely, if UST's price is above $1, you can burn LUNA to get back UST, inflating the supply and lowering the price.

It's quite the neat idea really -- but I suppose it hinges on people believing that there is a healthy UST-LUNA ecosystem tomorrow that you can use to withdraw your funds if you want. Burning UST to get LUNA doesn't make sense if LUNA loses enough value by the time you could exchange it for something else, so I assume people rather take the loss on selling UST for less than $1, which would explain what we're seeing: Right now UST is at $0.81 and LUNA is down 47% in the last 24h. We'll see if the system is robust enough to recover from a 'bank run', if you can call it that. It at least isn't the first time the peg has been broken, and so far it's stabilized at $1 again every time.

> Right now UST is at $0.81

$0.72 on Coinbase.

But to be fair, the last 5 minutes have been brutal...

Yup, I thought about posting a correction, but figured it would be outdated by the time I was finished, heh.

It's not looking good at the moment... I know HN isn't very fond of crypto, but I still feel for everyone stuck in UST space right now. I've been there with other assets, and it's too damn stressful. There is so much red across the board in cryptoland... it's gonna be a stress test for more than UST and LUNA.

The value is "holding" at $0.66 right now (in that it stopped going down... for now... anyway). This crash is utterly fascinating to me. Its definitely a slow-motion train wreck.

I do feel for the people who are in this crash right now, wondering if they should get out right now, or if it will be back to normal tomorrow morning. But I don't think this stablecoin has ever dropped this low before.

I think I can understand the stress anybody is feeling from this. Its kinda horrific. I remember when money-markets lost their peg back in 2008 and pretty much the world went apocalyptic. I can't imagine what it feels like to lose 30% of an alleged "stable" value in a few hours.

The thing is that people had pretty good reasons to expect Money Market Mutual Funds to be stable at $1. Everybody who really understood them knew that breaking the buck was possible, but absent fraud, it wouldn't have been possible without a massive economic collapse (which didn't happen).

Nobody in their right mind should have expected UST to remain stable for any length of time at all, as it is fundamentally built on smoke, mirrors, and Ponzi's best friend.

I'm sure there will be some sad stories about people who had no idea what they were buying that lost money they couldn't afford to gamble with, but it's really hard to feel too bad for the suckers and hypemonkeys who memed this stuff into having temporary value.

> I remember when money-markets lost their peg back in 2008 and pretty much the world went apocalyptic.

For comparison, I believe it was only one money market fund that had to break the buck and sell for something like $0.97 instead... and the withdrawals were hitting 10% of total money market fund value in a few days.

> The value is "holding" at $0.66 right now

By some reports, Binance has set a floor price on trades at $0.70, so people cannot sell lower. It has also suspended withdrawals. So this 'holding' may be influenced by one of the largest exchanges effectively halting trading.

That sounds like fun. If the price stays lower than that level, I wonder will they get sued for losses beyond that point?

So from what I can tell they removed those constraints earlier today, and after a brief attempt to prop the peg back up somehow, which saw it hit $0.95, the UST price has been back down between $0.3 and $0.5.

I don't imagine that anyone will find themselves sued successfully...

When idiots experience stress as a result of making bad choices that's not "horrific". It's a good object lesson for them to be less gullible.

You're wise to avoid the updating and it will be painful for many people. I had friends explain that stablecoin was the way to make an easy 20%. I can empathize with their pain.

> I had friends explain that stablecoin was the way to make an easy 20%. I can empathize with their pain.

I understand the empathy, better than contempt.

But what were they thinking? Sorry they lost all their money. A fool and their money....

Clearly they believed the underwear gnomes on South Park.

> I know HN isn't very fond of crypto, but I still feel for everyone stuck in UST space right now.

I can't speak for HN, but any financial instrument that can't be easily differentiated from a ponzi scheme should be assumed as one unless proven differently. I think that's just investor due diligence frankly.

Hey, I'm ~$3,000 in which isn't zero but also isn't that meaningful.

I'm holding and taking no action (ie, not buying more). It's at the risk exposure I'm comfortable with.

Then again I held my shares in sun microsystems until the very end. No regrets on that either.

This is not financial advice, I'm probably a fool. FWIW, UST is recovering way quicker then my positions in Nvidia and Adobe are. It's back to $0.92.

In an environment where companies like Rivian are down over 90% and across the board 75% stock price drops are common right now, recovering in 24 hours is pretty great

Out of curiosity, what's the point of having a "position" in a stablecoin? It seems that if they manage to maintain the peg, there can't be any gains either. My impression was stablecoins are mainly used as an intermediary when converting between crypto positions, as a kind of "crypto reserve currency".

Not OP. I guest he put his UST on Anchor to earn the 20% interest.

What would people choose UST over USDC?

https://crypto.com/us/earn

I'll know the crypto rush is over when you can't "stake" for 10% anymore.

That's a bit misleading--you can only stake for 10% if you agree to lock up a large amount of money in CRO for a long period of time, and if you agree to a three month fixed-term deposit for the USDC you're "staking". CRO exposes you to arguably more risk than the staking is worth, and the fixed-term deposits have the downside risk of crypto.com literally collapsing and not being able to pay you back.

If you want staking rewards on USDC (from crypto.com) without a fixed-term deposit, the best you can do is 2%. If you want to avoid having to lock up $40,000 in CRO for a minimum of 6 months, the best you can do is 1.5%. Given that you can earn 0.7% on a FDIC-insured deposit in actual USD, that's not much of a deal.

> I'll know the crypto rush is over when you can't "stake" for 10% anymore.

Agree with tkfu that this is misleading. You're looking at 6% for a 3 month lock up right now without investing in CRO. I think 3 months is fairly short compared to say US I-Bonds which are currently paying over 9%.

3 months ago you could have locked in a 3 month investment in USDC for 10% though without any CRO. It should be noted that you're not actually get 10% after 3 months though, more like .25 .1 * (Your investment). 3 months = .25.

* I-Bonds interest changes every 6 months. Lockup period is 1 year. You lose 3 months interest if you take it out before 5 years though.

Make that $0.66 on Coinbase, though it was as low as $0.62.

Seems that .70 floor might possibly have been due to some mechanics at Binance https://twitter.com/hasufl/status/1523817151471230976

It's not a neat idea. There's no novel economic concept here. It's just a ponzi scheme that has run out of greater fools. Remove the layers of deception and it is fundamentally a ponzi scheme.

You could make that argument about the majority of the crypto-currency universe, yes. I wouldn't consider an algorithmic stablecoin a ponzi scheme, though. People don't buy UST because they expect to be able to sell it to a greater fool for more; they buy it, because they expect to be able to sell it back to an equally-great fool for the same price. That expectation is founded in a shared belief in the 'value control algorithm' -- which I still think is a neat idea, in itself, because it's like a central bank in code form.

It turns out, you need a lot of guns to make a central bank work.

That's what I keep telling people: until we have the autonomous murder drones, a smart contract can't really be binding outside of the cryptoverse.

A currency is backed by armies and millions of productive citizens.

The problem here is that the country with the most guns (largest armies) gets to define what a "productive citizen" is. So the parent comment still stands.

> I wouldn't consider an algorithmic stablecoin a ponzi scheme

I would unless it's trading paper or some other non-crypto security somewhere behind the backend.

This particular algorithmic stablecoin is and has always been 100% a scam. If you actually look at the way the system works, it's pegged by exactly nothing, the only demand for LUNA is to burn it for UST, or to hold it for speculative purposes. Terra was never going to survive a bear, and this is only a little blip compared to past bear markets (so far).

Considering the market caps of other crypto currencies that serve no purpose whatsoever (other than going to the moon, obviously), one could argue that by being interconnected with UST, LUNA is actually one of the more sensible currencies. Because at least it's not _just_ for speculative purposes. Though I suppose that says more about the rest of the crypto space than about LUNA's legitimacy.

You could argue that, from a naive understanding of how it works. Of course, it's worse than even a useless speculative asset, because it was designed to scam people out of money. The mechanism is designed to prop up the value of LUNA while the creators accumulated BTC, not to maintain a pegged stablecoin, as stated.

I've researched some more and come upon this article: https://kash-defi.medium.com/why-ust-is-a-superior-stablecoi...

I'd be curious to hear whether you still think it's a scam after reading it.

Alright, first point in the article:

> For every $1 of UST, there’s an algorithm to maintain parity with the US Dollar

Well that was broken yesterday. The algorithm is not sufficient because you have to have collateral to maintain parity correlation. Why would I "believe" in an algorithm? It either works or it doesn't. This one obviously doesn't.

Interesting the title of the section is "belief." Things are not worth what we think they're worth because we believe it. It's a common misconception. Something is used because we believe it will still be worthwhile tomorrow, but something isn't worthwhile tomorrow just by believing it will be.

> Belief in the protocol based on its mechanics, its math, its history, and its team.

Belief in it's team? Nobody in their right mind in this market would ask you to believe in a team. Belief in the mechanics? Based on the writing, I'd be willing to bet the author doesn't understand the mechanics. I do, and I've explained it in this thread a few times, it is nonsensical.

Then there's an admission of investment into the project and therefore bias.

Then ample appeal to authority, fallacious explanations as to why Terra is different than competitors with a similar scheme, "cash flow" which is laughable in a decentralized context. The author has the audacity to claim that Luna is backed by transaction fees. This is absurd.

Th rest is just shitting on something called Titan and something called Iron, which are probably low hanging fruit.

Go read about nubits and nushares and learn a thing or two about previous attempts to do this.

The algorithmic part itself I think is fine. It's similar to the mechanism ETFs use to stay close to the benchmark they want to track: if the ETF ever tracks above or below its benchmark, you can arbitrage by converting the component shares to ETF shares, or by redeeming the ETF for its components.

That all depends on liquidity though. The arbitrage mechanism is only compelling and effective if you can reliably take some asset you actually want (say, USD), put it into one side of that market, do the arbitrage, and get USD back out from the other side. If that route becomes risky then you're mixing the arbitrage mechanism up with significant asset pricing and/or counterparty risk.

I think a lot of people hear ponzu scheme and think pyramid scheme, but the true definition is more “pay old investor returns from new investor principal” rather than “pay all investor returns from economic profit”

By that definition almost all crypto is currently behaving like a ponzu scheme.

> There's no novel economic concept here. It's just a ponzi scheme that has run out of greater fools. Remove the layers of deception and it is fundamentally a ponzi scheme.

I'm not defending the coin, but in what way is this a Ponzi scheme? It may be hair-brained and an absolutely terrible investment, but from OPs description it does sound "novel" to my novice ears. How is this specific concept (pegging one coin to $1 by using a second coin) a ponzi scheme?

It seems Ponzi scheme has become a misnomer for "scam".

Whereas "scam" has become to mean "thing I don't like".

Whereas “thing I don’t like” is used to dismiss people calling out scams.

It relies on people to keep buying the second coin (Luna) in order that its price is supported to a level that the peg mechanics work. But there's no fundamental value anywhere in the system, you can't pay your taxes with this, it's not backed up by a government with a monopoly on violence nor by a large economy of productive output. So the "trust us, it's valuable" part (which ends up being the only part that matters) doesn't work.

There's also Anchor, which is the third piece of this Ponzi. Anchor promises 20% yield on UST, and this is what generates demand for UST. However, the yield contains risk which is hidden on purpose or not generally understood. Ponzi schemers profit from this information asymmetry, and work to maintain it.

Most of the yield in crypto is generated from dilution, and therefore the real return can be positive as long as there are new investors, which offset the effect of dilution. Now, classifying them as Ponzi schemes depends on how these assets are marketed and sold. Expected return of these kind of schemes is zero, which is how they should be marketed.

As is the printing of the dollar, except it's backed by a big military and fancy bankers.

Don't forget to point out how most other markets operate on similar Ponzi principles too. You can't make profit off of anything unless you can have someone else pay more for it than what you paid.

Or if it actually creates wealth like real companies.

It also relies an a healthy USD-LUNA market. If there aren't any buyers on the LUNA side it doesn't matter how man LUNA you can mint from your UST because you can't exit the LUNA side anyway.

It's the same problem for basically any stablecoin: they exist because the paths between traditional finance and crypto are narrow and tricky. But this in turn limits the ability of a stablecoin to actually peg to a value from traditional finance. If there are mass net outflows from the cryptocurrency ecosystem back into traditional finance it will be impossible for these stablecoins to maintain their value. They are essentially a bet on the downside of crypto (if everything goes to custard you won't be able to exit) with none of the upside of crazy returns found in non-stablecoin cryptocurrencies.

Doesn't that make UST a derivative of LUNA? The price of UST when it is below $1 should be equal to the expected percentage that LUNA falls during the time it takes to convert your UST to LUNA and then sell that LUNA. Since doing that actually inflates the LUNA supply there is no point at which LUNA should stop falling (absent other value propositions) and therefore UST should always be below $1 and so LUNA should inflate away.

I'm probably missing something, but stable this is not.

Too late to edit: I guess what I'm missing / got wrong is that this represents only a price floor for UST.

You are not missing anything. It's has a death spiral in it by design. If luna price goes down, then people lose trust, then people start selling ust, which leads to burning ust and minting more luna, which inflates luna supply, which makes luna price go down, which makes people lose trust more, etc.

And it gets faster and faster as luna price falls, because more luna is minted to burn the ust. The amount of minting is inversely proportional to luna price.

Note this is UST (TerraUSD), not USDT (Tether) the stablecoin controlled by Bitfinex.

USDT has about $84 billion market cap, USDC has about $49 billion, UST had about $18.7 billion, as of 7 May [https://cryptonews.com/exclusives/usdt-vs-usdc-vs-ust-how-do...].

good clarifying point, the 2nd one never had a peg? argument: https://www.youtube.com/watch?v=dAQP3cPUNtA

It has a peg. All that means is that they're targeting a particular exchange rate and managing to maintain it.

The allegation is that it's not fully backed.

> managing to maintain it. The allegation is that it's not fully backed.

Which means if there's a run on the currency, those backing assets might not actually be able to be liquidated at a price that can back the withdrawals. Aka, the peg is only good if there's no run on the currency - allegedly anyway. I personally wouldn't trust it.

Ah you see they don't actually have any obligation to cash out USDT to USD at all if it would cause them issues. It's right in the contract.

For all the talk of fiat and money printers it's crazy how central USDT is to the crypto markets. I suppose people are willing to overlook a lot to avoid tax exposures...

[0] https://tether.to/en/legal/#:~:text=Tether%20reserves%20the,....

>I suppose people are willing to overlook a lot to avoid tax exposures...

I don't see how that's the case? Doing any sort of trade is a taxable event. The tax is due in the year that the trade was made, not when it hits your bank account.

I'm continually surprised USDT doesn't unpeg. Going from "100% backed" by USD reserves as questionable as that was to being backed by a mix of crypto holdings (who's price is heavily affected if USDT is pumping money into crypto) and commercial paper really didn't seem to have any affect on it's use. For all the winging about money printing and crypto not being printed USDT is seemingly a huge money printer forming a pretty central part of the crypto economy.

Everyone knows USDT is a problem. The issue is that exchanges refuse to stop accepting it.

I also fully believe Bitfinex is likely to be manipulating USDT. It is the only way it makes sense. But check this out, here's why you should not wish too hard on its failure:

It is too big to fail because a lot of BTC would lose value over night, the entire plug would be pulled out of the industry due to the loss of confidence. Predatory and uninformed legislation would happen while the price and negotiating power is low, and in this time, that is when you really see the blood hit the floor with regard to scams, theft, crime, etc.

Regardless of your position on USDT, you should pray this never happens.

Edit: For the critics of cryptocurrencies responding below, allow me to make this response -- I didn't have anything to do with subprime mortgages, along with most of USA, however we all paid dearly for that mistake. As the comingling of cryptocurrency and traditional markets become increasingly intertwined, what makes you think that the ancillary effects of a crypto crash wouldn't effect you in some way?

Sorry where's the downside? That all sounds pretty good, especially for the environment.

All of crypto barely uses more power (120 TWh) than a single hydroelectric dam produces (111 TWh.) The "bad for the environment" is a meaningless talking point used by people that are jealous they didn't "get in on it" early enough.

Those numbers --- lower than numbers you can get from Google, but sure --- appear to say the same thing as "all of crypto uses barely more power than any but the top 28 energy-consuming countries in the world". Do let me know if I got the math wrong there!

Now you know that most most countries barely use any power! A single dam could power them! This is why the "crypto uses more power than X country" is a meaningless talking point.

The list includes Sweden, Norway, Argentina, the Netherlands, the UAE, the Philippines, Finland, Belgium, Pakistan, Austria, the Czech Republic, Israel, Switzerland, and Singapore, among (obviously) many others. I don't think that statistic was the mic drop you thought it was.

But sure, let's give them all 111TWh hydroelectric dams.

Can you remove Argentina from the list? :)

I'll copy an old comment by me, and the 2 parents comments for context. It was posted in https://news.ycombinator.com/item?id=28420667 (8 months ago)

>>> So let's use the article's figure of 140 TWh of power used per year. Let's compare that to domestic energy usage by country https://yearbook.enerdata.net/electricity/electricity-domest.... That's more than Argentina and about half of what the UK uses.

>> From https://digiconomist.net/bitcoin-energy-consumption/ .

>> Bitcoin would be the 27th most energy using country: ahead of Argentina (30), Sweden (29), and Ukraine (28); just below and about to overtake Malaysia (26), and below Egypt (25) and Poland (24).

> A big chunk of our economy in Argentina is transforming sunlight into soybeans. So we should add it. Just imagine that we covered all the Pampa with solar panels and then use that energy to ... illuminate hydroponic soy.

> From https://en.wikipedia.org/wiki/Agriculture_in_Argentina#Produ... the cultivated area is 250.000km^2 . Let's assume 1000W/m^2 and a 10% of efficiency, 12 hours of sun per day, and 1/3 of the year of grow of the plants. Then I get 36.5TWh https://www.wolframalpha.com/input/?i=250.000km%5E2+*1000W%2... (I had to guess a lot of things. I'd love to see a more accurate calculation.)

> So with an additional energy of 36.5TWh, we jump from 132.7TWh to 169.2TWh that is more than the value of Poland 168.8TWh. (But other countries may want to add their solar->plants power too.)

The Site C damn in British Columbia (5.1TWh) has been under construction since 2015 with a 2025 completion forecast. Estimated cost: $12.3 billion (USD).

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

The single largest hydropower dam in the fucking world could power them... I really don't think you know the scale of the power generation you are eluding to here, energy is a currency for development, there is nothing being developed in the real world with the amount of power that crypto uses. Absolutely nothing.

Compare the real-world value of economies powered by the energy consumption of crypto and let me know if you think that crypto is creating more value for humanity than these countries, I'd love to hear your arguments on that.

> The Hoover Dam generates, on average, about 4 billion kilowatt-hours (4 TWh) of hydroelectric power each year for use in Nevada, Arizona, and California - enough to serve 1.3 million people.

Edit: Looks like the "single hydroelectric plant" is the Three Gorges. Hot dam, that really puts Hoover to shame.

> The Three Gorges Dam has been the world's largest power station in terms of installed capacity (22,500 MW) since 2012 (10% of China's electricity).

111TWh is well beyond a typical hydroelectric dam output (most are an order of magnitude lower storage and generation). As an example, the very sizable Australian Snowy Hydro 2.0 upon completion is estimated to have storage for 350GWh (the Australian national energy market is ~190TWh). The original Snowy Hydro (9 stations) has annual energy production of ~5GWh.

Oh, it only requires ALL the energy from by far the largest and most environmentally destructive hydroelectric dam on the planet? One that accounts for 10% of China's energy use? Oh, that's nothing at all then! /s

How do guys like you keep a straight face saying things like this? This is an utterly insane amount of power. And putting into context the utility these crypto services are providing to most people (very little), it's even more insane. How much power would we be using if everyone actually started using PoW crypto for useful transactions regularly?

And it's not just electricity, it's high-end silicon too.

Cryptocurrencies is the first example of an algorithmic cancer IMO. (I cell that's tricking its host into thinking it's useful, but which mainly replicates and takes over resources as much as it can regardless of the utility the cells have to the host.)

Central banks are a frequent source of exploitation. Burning some energy to reduce their power can be a worthwhile tradeoff.

Central banks are saints walking the earth compared to the kind of exploitation going on in the crypto space. Remember "Save the Kids"?[1]

[1] https://www.insider.com/faze-clan-save-the-kids-cryptocurren...

All of the crypto ponzi schemes going to zero and all the idiots who participated losing their shirts would really be a wonderfully great outcome.

It's also inevitable eventually, all alternatives are just artificially prolonging the pain

> all the idiots who participated losing their shirts would really be a wonderfully great outcome.

Very harsh.

I can see no ethical way that they can keep their shirts (unethical is sell to greater fool). I do not think this is a "...great outcome". Wonderful or otrherwise

It is yet another repeat of the age old lesson: There is no magic.

I'm convinced that's what NFTs were partially invented and pushed to do. Hot new shiny thing to bring new money in to let the original crypto group cash out.

NFTs are a concept no different than Rai stones used by Micronesians for centuries, or any other property deeds style exchange. Hating on them is absurd - it's just another concept/financial construct.

As a concept, they are more like me selling a photograph of the deed to my house.

Thinking that they solved a problem that anyone has ever had is what's absurd.

Except that you basically have a photograph to the deed of your house. The deed to your house is not normally considered a bearer certificate, so if you lose it, the property tax office can issue you another one.

In fact, your possession of the deed doesn't really entitle you to anything. While you assume that law enforcement would accept it as proof, they do not have to, and ultimately judges and the county registration system decides who owns what. And it's not even all that straightforward in some cases.

So sure, your deed to your house. Okay.

NFTs typically don't even entitle you to copy the content you "own" - DEFINITELY not to re-license it, for any popular crypto market. If you are not the original buyer (i.e. if you bought your monkey NFT from someone else, not from the original issuer), they may well not entitle you to anything at all, since you do not have any kind of contract with the original issuer.

They were probably made with good intentions, but it's hard to conceive of a more powerful device for laundering money.

Ah, "too big to fail"? Remind me, what about this whole cryptocurrency experiment is working the way its proponents claimed?

> plug would be pulled out of the industry due to the loss of confidence.

Sounds great!

> Predatory and uninformed legislation would happen while the price and negotiating power is low, and in this time, that is when you really see the blood hit the floor with regard to scams, theft, crime, etc.

I don't wish scams on anyone, but perhaps it's time we got this all over with, yeah? Seems like it's going to hurt more people in the long run.

> what makes you think that the ancillary effects of a crypto crash wouldn't effect you in some way?

That it's not that intertwined yet. And such a crash would likely prevent a lot of such going forward, which is arguably very good news for the longer term.

The scenario you describe is how I justify my stance as long btc/eth, but holding neither. When USDT pops, it will leave a huge vacuum in behind, and cause a lot of harm to the latest wave of crypto adopters (2017-on).

Like your analogy to subprime mortgages, this crisis will precipitate serious regulation that probably won't quite go far enough, which is the final stage of institutionalization cryptocurrency has been missing. From that crater, it can only improve in terms of mass adoption. I'll be a holder again in the year 1, post-USDT.

The crash is going to happen anyway, the longer it takes the more painful it will be.

It's true, everyone does know about Tether's problems.

Still waiting for the evangelists of unregulated free markets to explain why it doesn't trade at ninety-nine cents or less.

Best guess it doesn't really need a real executable peg since it provides such a convenient tax shelter to avoid realizing crypto gains. It's useful enough people are willing to ignore the issues and since it's backing isn't immediately examinable it gets to stay alive. On chain algorithmic pegs are vulnerable because their backing is immediately visible where Tether was able to just fake backing long enough to get deeply integrated into the crypto markets.

In most developed nations, capital gains tax applies even against "like-for-like" trades. The swap between crypto types triggers a capital gain event and resets your cost basis. So people using USDT to move funds between exchanges without paying taxes on their gains are probably asking for trouble.

USDT _IS_ a useful tool to facilitate quick movement of funds between exchanges without the delays and expense of the conventional financial system, though.

I'm not an accountant, and I'm not your accountant. Not financial advice.

Because people can, and do, redeem USDT -> USD via wires.

As long as people can redeem, then there's no major concern.

It used to unpeg frequently (though not as bad as this TerraUSD episode). The stability has increased and the yield has decreased; a lot (yearly yield was close to 30% at some points). My guess is that they figured out how to peg efficiently as they have maintained the peg through various brutal crypto dips. The market does seem to think so (hence the low yield).

Tether doesn't have a yield; did you mean a particular platform that takes deposits?

Tether has a yield in the same way USD cash has yield. You have to deposit into a platform and get exposed to an instrument to generate the yield.

USD doesn’t have a yield either, and if I wanted to refer to the yield you’re describing here, I’d refer to the specific instrument that generates the yield (eg government bonds of a particular duration) rather than the yield on the invested asset itself.

What instruments did you mean for USDT and USD?

check out defi llama for pools.

How long has UST managed to stay pegged to the dollar, despite being self-evidently unsound? The market can remain irrational indefinitely, &c &c.

If the market can remain irrational indefinitely, is it even being irrational anymore? Words should continue to have meaning.

I think the parent is referring to the saying "the market can remain irrational longer than you can remain solvent". Meaning that the market can remain irrational for arbitrary periods of time, not infinite. It'll eventually converge, but it's a question of how long.

Rationality is not defined by what the market thinks, so yes.

USDT is a black box. They almost certainly just write whatever is needed to keep the peg on their “bookkeeping” each day

USDT will only unpeg if many people simultaneously try to convert USDT to dollars at Tether.

Right now most people who want to convert USDT to USD just sell them to another person at an exchange.

This game can last for a long time.

it just did lol

UST seems to be an "algorithmic stablecoin" that is supported by the Luna cryptocoin?

It seems like you cannot trade Luna directly on coinbase. But there's a "WLUNA" (wrapped luna) that alleges to trade like Luna over the Ethereium blockchain. https://pro.coinbase.com/trade/WLUNA-USD

I'm not sure how any of this works. I recognize that the "algorithmic stablecoin" basically sells LUNA to prop up UST (and vice versa, when UST goes over $1, then UST is sold to prop up LUNA). But I thought that the whole TITAN / IRON thing from a few months ago proved that this structure was vulnerable?

Did UST / LUNA just end up making the same mistakes as TITAN / IRON? Why is this article discussing "BTC reserves" ?? Why would they be selling BTC to prop up UST? What mechanism exists there?

All of these cryptocoins have their own rules, and those rules will determine the failure case. I know how much I don't know. But at the end of the day, a $0.90 "stablecoin" is not a good look.

EDIT: Wait, its now $0.78 ?? https://pro.coinbase.com/trade/UST-USD

Erm... that's not good.

75 handle now... EDIT: 71 now. It's a bloodbath; people can't get out fast enough, there's no price support at all.

Now 68, still dropping. Volume is increasing steadily. This is a rush for the exit.

Does the stabilization algorithm give up after some amount of drop, or has it already liquidated its backup pool down to 0?

They gave away most of their reserve, over a billion in BTC to "professional market makers" to defend the peg - people realized and are now dumping LUNA, the counterpart to the peg.

To make matters worse, the algorithm effectively mints new LUNA diluting the supply if the peg breaks downwards.

It’s a closed feedback loop of death right now.

This mistake literally killed TITAN / IRON a few months ago.

Did nobody learn from that?

I’ll go ahead and assume that is a rhetorical question

Lol. Fair point.

I guess my overall question is: what did UST / LUNA do differently to try and mitigate the problem that was proven in IRON / Titan?

Well, depends on who you ask, but in my humble opinion they managed to do everything as bad or even worse.

Titan was backed by some percentage of USDC and Titan itself, while Luna managed to be even more abominable: Backed by BTC and Luna, ensuring full exposure to 100% of market volatility and the highest possible system leverage, and then STACKING LOANS using the reserve BTC as collateral to generate even more system leverage! It’s phenomenal.

I was trying to understand how it works, and it looks like there are 2 things at play here. First, UST can always be burnt for $1 worth of LUNA (determined based upon the price the oracle establishes). There appears to be some sort of rate limiter or something, and it's trading a few percentage points above this.

Secondarily, you need to transfer out of LUNA (via a bridge or some other mechanism) in order to sell the LUNA. The problem is that the network is.. quite busy, and from what I can gather, bridging is taking a few minutes to go through.

I seriously considered bridging back and forth between Terra and Ethereum, buying UST on Ethereum, transferring it to Terra, trading it for LUNA, transferring the LUNA back, and finally selling the LUNA for more UST. The potential delays in bridging expose me to more risk than I would have expected.

Down to $0.57, after a runup to almost $0.90.

For a stablecoin, the only stable points are 1 and 0.

seems to have hit the bottom at 0.616. Now it's back at ~0.85

edit: down to $0.799

Can you explain how they stopped a death spiral to zero?

I think the tool they used came from their capital reserves. IIRC they had about a billion dollars worth of BTC, and they have money from other sources as well. So they got liquidity to buy up all the sellers of UST on exchanges and stopped it from going to zero. If you have enough capital to soak up the supply, then you're good.

Would Binance and maybe other exchanges not allowing trading below $0.70 help a ton and possibly be the biggest factor?

I mean.. it's been sitting at 75 for a bit - there is definitely some support.

Like like it dipped below 70 cents briefly but somehow they’ve managed to turn it around. Now at 88 cents. Miraculous recovery

It's made a pretty remarkable recovery to .91-.92 USD/UST.

I posted a few months ago that when people realize their stablecoins are not so stable, the game's half up. usdt is also an obvious fraud, as is almost all of crypto right now.

Most people have no understanding of the hidden leverage built up in the system and how a small margin call in a negative sentiment env could easily trigger a 80-90% draw down.

You should have cashed out/been buying high quality real estate for the past 6-8 months but if you haven't been doing that, it's still not too late to get out.

DAI survived the fall from $1450 to $50 (ETH).

Not all stable coins are the same, this one is so shady it’s even named to confuse investors.

The mechanism of DAI is quite a bit different. If the value of the underlying collateral crashes the created DAI is destroyed, which raises the value of DAI from its peg [1]. The only scenario in which DAI depegs in a direction against DAI holders is if the underlying collateral (i.e. Ethereum) flash crashes before anyone can liquidate the minted DAI.

[1] https://makerdao.com/en/whitepaper#maker-protocol-auctions

Sometimes when I read these things I feel like I'm going crazy, like it sounds kinda logical at first glance but when you think about it it makes no sense. Why would destroying it automatically raise value? If demand stays and supply goes down, sure, but it's not like it's something like food or housing, which people need - why would the demand stay the same?

There will always be demand for money, especially if a dollar can be bought for cents. And the demand for food and housing also doesn't stay the same.

The demand for DAI comes people who want to repay their DAI denomonated debt to unlock their collateral or stave off liquidation, or from liquidators who need DAI to participate in a liquidation auction that happens if a vault holder's collateral falls below a target threshold. In any of those cases, when the DAI is repaid, it gets burned. As long as folks want their collateral back, or liquidators want to buy that collateral, there is demand for DAI.

Why would people put in the collateral in the first place?

USDC is fully backed by bank deposits and US treasuries, and is issued by a US financial institution (albeit not a bank, but an entity that is overseen by banking regulators).

Not all stablecoins are created equal.

Historically, these guys seem pretty shady.

https://coingeek.com/usdc-coinbase-is-involved-with-2-stable...

https://fortune.com/2021/08/12/usd-coin-stablecoin-circle-cr...

> buying high quality real estate

Really crappy advice at the height of a bubble and considering the likelihood of a major recession.

It's also not the first asset class that comes to mind when I think of "not highly leveraged"...

Exactly. Not many asset classes that have not gone up a huge amount in the last 10 years. They all have room to fall.

Also, buy real-estate requires significant amounts of money, much more than the average person has lying around (or can borrow).

The real estate will be worth something in 10 years, the shitcoins will not. I assume op was talking about crypto whales with massive paper gains.

That's true, but it might be worth a lot less than it is now.

I know that's every second day in crypto, but why expose the crypto boys to even more bad financial advice.

How many recessions happen when a bunch of people think a recession will happen tomorrow? The Fed is trying to reduce inflation. It seems like they’ve done a pretty good job of doing so just by signaling an aggressive rate increase schedule. Once inflation is lower, they can go back to pretending stocks and real estate aren’t real inflation and start juicing the markets again.

How many times has there been one of the longest bull runs in history, bubbles all around and Russia going berserk all at the same time?

I’m not certain many people think there is one coming. For whatever it’s worth many hedgies at NYSE are still blissfully ignorant too. (I know, I work at a major public hedgefund)

This story has nothing to do with USDT

not yet

You know we had 2008 and we learned that in high finance there were these complex derivatives that a lot of people understood in a loose sense, but rarely in a detailed sense. And that they were basing those complex instruments on credit ratings that were essentially fraudulent. And that structure of a fraudulent base and mounds of complexity on top can surf for a really long time before blowing up catastrophically.

How is this not just the exact same formula? "Oh you see it's stable because there's this exchange mechanism and it's attached to this floating currency, blah blah blah." It all sounds very complex but then it breaks and you look underneath and it seems like anyone who understood what the mechanics actually were would've always been a little sketched out by it. Is this whole ecosystem not just small-time hobbyists and programmers trying to create this exact dangerous dynamic over and over?

>How is this not just the exact same formula?

Is it? Specifically, what's the equivalent of "credit ratings that were essentially fraudulent"? If you read the smart contract code, misunderstood how it worked, proceeded to invest anyways, and then it blew up, that sounds like something that's on you. If you invested in some opaque financial product (I don't think MBS buyers can go through each mortgage with a fine toothed comb) and the independent third party that's supposed to be evaluating it was actually biased, that's at least partially on the seller and/or third party.

So would you propose an independent third part to evaluate all these various things, and see which ones are, say, backed by fundamentals?

How would you do that evaluation yourself, if it was your job?

I'm assuming that you don't intend your point to be "the only difference is that in the 2008 example, someone who should've called bullshit fucked up, and this time nobody is officially supposed to call bullshit, you're supposed to do it yourself."

> So would you propose an independent third part to evaluate all these various things, and see which ones are, say, backed by fundamentals?

So you want a repeat of the subprime crisis, but by having credit rating agencies rate smart contracts?

>I'm assuming that you don't intend your point to be "the only difference is that in the 2008 example, someone who should've called bullshit fucked up, and this time nobody is officially supposed to call bullshit, you're supposed to do it yourself."

No, that's the difference between the two. caveat emptor vs fraud. Seems like a pretty important difference to me.

Nah, I'm reading your comment as admitting that the idea that any of these should be seen as mainstream investment vehicles is nonsense and that the fraud is in the very presentation of them as such. There are many, many parties pitching people on the idea of investing in this stuff right now without pitching them on reading a bunch of code.

Steph Curry is telling me every day that FTX makes it so I don't have to be a crypto expert. If you're right, and I actually need to do my due diligence for crypto things... FTX is a fraudster, no?

"This is all bullshit based purely on hype but I'm not gonna come out and say that, you just have to realize it by reading the code," basically.

>I'm reading your comment as admitting that the idea that any of these should be seen as mainstream investment vehicles is nonsense

Perhaps? Depending on your view on how much stupidity is allowed, the only thing that qualifies as a "mainstream investment vehicle" is broad market ETFs.

>There are many, many parties pitching people on the idea of investing in this stuff right now without pitching them on reading a bunch of code.

Yeah, that's what "caveat emptor" means.

>"This is all bullshit based purely on hype but I'm not gonna come out and say that, you just have to realize it by reading the code," basically.

you realize that both can be true? If some hustler pitches you some penny stocks and gives you false information (eg. fake earnings reports), that's fraud and definitely not okay. However, if you got suckered into some penny stock because some guy on wsb posted his gains and you got greedy, that's on you.

> If you read the smart contract code, misunderstood how it worked, proceeded to invest anyways, and then it blew up, that sounds like something that's on you.

Not a software engineer or information security professional I gather...

Most of the smart contract system has been based on the assumption that contract termination/violation is not possible. This effectively ignores counter party risk.

If the luna coin collapses UST will start exponentially inflating the supply of luna. If UST users are trying to get out, then the price may go to zero. You can't correct the stable coin by printing coins with zero value.

> Most of the smart contract system has been based on the assumption that contract termination/violation is not possible. This effectively ignores counter party risk.

I mean, maintaining the peg is based on that assumption, but I doubt "price of luna going to zero" is a scenario that serious analysts skipped over. Therefore, the failure to account for that scenario is still on them.

fair, but then what is the smart contract really doing?

In the long term, any stablecoin which requires other cryptocurrencies to maintain a certain US$ level will fail.

The whole cryptocurrency ecosystem is doomed. A roller coaster ride that can only end in one place: Zero

> How is this not just the exact same formula?

I think it's actually a much more interesting formula because

(1) this stuff was invented out of whole cloth - concepts like MEV bots, hoping normies don't notice the rugpulls in progress, inventing stablecoins, staking, and establishing borrow rates are all unique to decentralized finance and involve strangers paying money in order to be entertained and maybe earn some of other strangers' money

(2) even though it was built entirely from scratch, the concepts and language end up looking EXACTLY like some of the synthetic constructs we see in "traditional finance", which I thought were actually based on something of real value

So -- watching my Twitter feed with the contributions from the smart folks I know from college who have gone into fulfilling careers as cryptocurrency VCs and founders has been fascinating overall. It's made me question how firmly I understand the value of "real things".

Note that I do kind of gloss over the "multiple slurp juices on one ape" stuff and questions about whether art has value. Much more interesting to me is the technical jargon that surrounds this communal hallucination that the bits on the blockchain represent amounts of money and that finance concepts can meaningfully be applied to them.

If everyone has mutually consented to moving around money this way in DeFi and it's working out ok (i.e. everyone is simultaneously giving each other a sly wink about the foundations but we're all having fun and it's fine), does the whole rest of modern finance also work the same way? What is the difference between cosplaying doing technical analysis on the blockchain and doing the other kind with stocks, options, futures, and commodities?

> What is the difference...?

Remember when the price of a barrel of oil went negative?

That's the difference.

With something like BitCoin, there is no meaningful way that it could possibly drop below $0 in value, because there's nothing behind it. If everyone gets bored of digital currencies, it will become worthless, and nothing will change in physical reality[1].

Meanwhile if you buy oil futures, then you must take delivery of... you know... a bunch of crude oil! A fleet of tanker trucks will literally turn up at your doorstep and demand that you provide storage for your oil.

That's why the price of oil can go negative. The price is just a reflection of a reality. The oil that is being pumped out of the ground isn't just a number in a computer system, it's a physical liquid that has to go somewhere thanks to conservation of mass. If you buy it, part of that cost calculation is that you[2] will have to store the physical goods somewhere.

The price went negative because oil storage ran out, and the producers would pay people to take the oil off their hands. They had literally nowhere left to put it, and you can't just dump it in the ocean.[3]

So you see, Buffet saying that BitCoin is fundamentally worth $0 is in a way a worse indictment than oil going negative! It's saying there there is nothing behind it. Nothing of value that you might have to "deal with" as its owner.[4]

Even fiat like the US dollar has something behind it giving it inherent value: citizens of the United States are required by law to pay their taxes in USD. They must use it, whether they like it or not. They can't just walk away and stop using it, they'll go to jail if they do. Essentially its backing is the US government and associated institutions that use it as the preferred currency. BitCoin has no significant state support like this.

Now... you would think that BitCoin could get state support, but that's a guaranteed economic catastrophe for any large economy that switches to BTC for their official currency. Partly because that government would lose control over their financial system, and more importantly because inherently deflationary currencies like BitCoin are certain to cause economic deadlock where nobody wants to spend money "now" because they expect their future spending power to be even greater.

[1] In terms of products and services. I'm sure a lot of people will cry, but that's a secondary effect. [2] Or whomever you sell the future to. [3] Well, you can, but it's illegal these days. You can be assured that they would dump it without a moments hesitation if it wasn't illegal, because it would "make the line go up" in the futures chart. [4] There are lots of things like this. Property values can go negative if the taxes and legally-mandated maintenance cost exceeds the expected income.

I agree, but not only that.

The "value" of real world money comes from the physical production behind it: someone, somewhere, is working against thermodynamic equilibrium, which is why when you and I have money, it's useful. Even things that seem like they're not rooted in this principle actually are.. they're just a layer or several layers of abstraction above the physical process.

Cryptocurrency, by contrast, works with thermodynamic equilibrium -- you take a bunch of energy that could do useful work, and then waste it as heat; and declare that the "value" produced actually arose from the waste itself!

This difference between cryptocurrency and regular currency is not rooted in ideology, technology, or any of other woo. It is rooted in the law of nature.

Cryptos are already state-supported: The value of BTC has the whole weight of El Salvador behind it.

I did say "significant" state support.

Except the majority of the citizens who have largely discarded its use or holding of it.

From CoinMarketCap

    Top 10 Holders: 56.6%
    Top 20 Holders: 67.05%
    Top 50 Holders: 82.17%

So it looks like a few people can make huge decisions to swing $UST. Then you hope the algorithm either catches up or there's enough greater fools to buy in.

Luna's even worse: https://coinmarketcap.com/currencies/terra-luna/holders/

It claims the top 10 holders hold 95.89%.

Is this data correct? If so it barely seems like these are real projects, just made up things by a handful of people moving fake money around to create big numbers.

The definition of Web 3. Wash trading is the backbone of this entire thing.

It's not correct, it's only the data on the Ethereum blockchain (Terra is on its own blockchain).

Looking through the "top addresses" - these are mostly smart contracts on Ethereum

It's difficult to maintain a peg when it starts to become unsustainable and the big players start to bet against you. Reminds me of when Soros took on the Bank of England and won: they were trying to peg the value of the pound using the European Exchange Rate Mechanism (the precursor to the Euro). These guys can use up all their capital easily.

Of course it's hard. Perhaps they should have thought about that before trying to be a middleman in a grifter's market.

I’m sure they thought about it a lot.

Thinking alone doesn’t really help if you dont know shit about finance.

Right and grifting only works if you don't get caught.

The pound peg broke because the price it was pegged at was fundamentally mispriced. The mispricing was the problem, not the pegging.

Bulgaria pegged it's currency to the Euro for more than a decade now. And the peg is solid. There are a few more countries with solid pegs - Denmark, Hong Kong.

All pegs are solid until they break, though. Unless the two currencies are affected exactly equally by all events and treated exactly equally by everyone, there is no single price that won't eventually be "fundamentally mispriced".

"The pound peg broke because the price it was pegged at was fundamentally mispriced."

The pound peg broke because the other side of the peg with infinite capacity - the Bundesbank - refused to undertake their part of the bargain, buying pounds for new DMs.

Pegs can only be stable if each issuer takes out the excess liquidity when the price moves in their direction.

No currency can stabilise itself by selling foreign. It can only stabilise itself by suppressing an increase in its own value with devaluation - as we can see recently with the Rouble.

In other words currencies can only cap, they can't collar.

Schlesinger, Bundesbank President tipped Soros to boot.

For a more prominent example, most gulf countries peg their currencies to the USD. This chart only goes back 20 years, but the Saudi Riyal has been pegged to USD since 1986

https://finance.yahoo.com/quote/USDSAR=X/

https://www.bis.org/publ/bppdf/bispap73v.pdf

Currency values shift over time. Hence any pegging is a problem as inevitably there will be mispricing.

As someone who understands the basics of crypto, and markets in general, but doesn't have the time to go read the fine detail, I have always wondered what I was missing to understand how stablecoins not backed by their reference currency could possibly work, i.e., guarantee that they are always at parity with their reference currency.

This seems explanatory... apparently, what I was missing is that they just don't.

Stable coins work on the principle that the issuer has the equivalent value of the minted coins as backing and will always trade these coins in or sell them for their dollar value. Therefore, nobody has the incentive to sell below their value, as they could always trade them in with the issuer, and nobody wants to buy above their value, as they can always buy them from the issuer. As the issuer (theoretically) has the whole market value as backing, you can also be sure that the price never drops.

Now, in practice, having billions of dollars flying around is both very hard and unpractical. Therefore, issuers can use different stuff (like investments) as backing or, as in this case, just don't have anything approaching the necessary value at all.

This is fundamentally different though, they never claimed AFAIK to be backed in that way like eg. USDT/USDC do. It's supposed to algorithmically maintain its peg, by being swapped with LUNA. I think the idea is that if it drops below $1 then people will swap it for LUNA, which burns the UST, reducing the total supply and increasing its value. And likewise you can swap LUNA for freshly minted UST, I think - so if it gets above $1 people will do that and the increased supply will push the price back down.

I don't understand what was expected to happen if LUNA dropped 50%+ as it has, and as all non-pegged cryptocurrencies historically sometimes do. I might be missing something but it seems like this sort of peg can only hold if that LUNA token has low volatility.

That is exactly what was so Ponzi about UST/Luna in the first place. It all works well and fine as long as the value of Luna keeps going up, since you have excess backing for every UST created. However, soon as Luna starts going down, your entire ecosystem is at an existential risk.

This mechanism was further prolonged by Anchor, a DeFi protocol that "guaranteed" a "stable" 20% return on deposited UST. What it practically did was encouraged people to buy and hold UST, thus (a) providing much needed liquidity for creators of Luna/UST to cash out into other stablecoins or real money and (b) kept the musical chairs running, since as long as the greater fools kept buying and capital kept flowing into the ecosystem, the stability of UST/Luna wasn't challenged.

These people should be in jail, IMO. UST/Luna was a technologically advanced Ponzi scheme, which also "solved" the age old Satoshi problem of "if you, the creator, have a few billion dollars in Bitcoins, but not enough people/liquidity in the market to sell it to, how do you cash out?"

Your are talking about normal stablecoins. UST is an algorithmic one. Quite different.

You're right, I confused it with USDT. Sorry!

I really don't understand why anyone wants algorithmic stable coins. It really just seems like the worst of both worlds. If you want a crypto asset that correlates with USD, why not buy something like USDC that's actually... you know, backed by USD?

Because it being backed by actual USD also means it's subject to the reach of the US federal government. That means your funds can potentially be arbitrarily frozen/seized.

It all comes back to the idea that crypto is only a novel solution for scams and illicit markets.

Is that not the case for blockchains because the wallet ids do not divulge identities?

Two points:

- Government agencies can ascertain the identities of virtually all accounts with Chainalysis, following the money to the fiat entry/exit points.

- Even with a theoretical anonymous account, with centralized stablecoins like USDC or USDT, the balance held by that account can be frozen because the issuers of those tokens have crafted their token contracts such that they maintain the ability to mark certain addresses as incapable of transfer

Took 17 responses, but I think your second point answers my question. Thank you.

>wallet ids do not divulge identities

Theoretically yes, but in practice no. A quick search turns up https://www.theblockcrypto.com/post/129133/tether-freezes-ov... for instance

If your biggest reason to use risky crypto is because the US Government might seize your funds, that's probably a reason to not do whatever you're doing (if you live in the USA) since the US Goverment can probably just seize you for the same reason.

1. not everyone lives in the US

2. "seize you" is much harder to do (ie. court conviction) than freezing a bank/stablecoin account

Then don't keep your assets in banks linked to the USA so they can't just seize your assets on a whim, they actually have to prove that the money should be seized.

What activities can a non-american do that would result in seizure of their funds, but wouldn't also subject them to arrest? (other than accruing IRS debt)

> Then don't keep your assets in banks linked to the USA so they can't just seize your assets on a whim, they actually have to prove that the money should be seized.

If your net worth is high enough to afford such an arrangement, by all means do that.

> What activities can a non-american do that would result in seizure of their funds, but wouldn't also subject them to arrest? (other than accruing IRS debt)

activities that generate enough suspicion for the authorities to target you (ie. civil forfeiture) but for which the authorities don't have enough evidence to convict you.

If your net worth is high enough to afford such an arrangement, by all means do that.

How much net worth do you need to find a bank that's doesn't have a branch or other offices in the USA which would require them to obey USA seizure requests? Can't you just look for a small local bank that's not part of an iternational bank with offices in the USA?

activities that generate enough suspicion for the authorities to target you (ie. civil forfeiture) but for which the authorities don't have enough evidence to convict you.

I meant specifically, not general hand waving "anything that makes authorities suspicious".

I just want to know what the legitimate use case is for using crypocurrency to shield your funds from the USA that couldn't also be done at a traditional bank.

>How much net worth do you need to find a bank that's doesn't have a branch or other offices in the USA which would require them to obey USA seizure requests? Can't you just look for a small local bank that's not part of an iternational bank with offices in the USA?

It was unclear whether you were talking about american or foreigner in that context. For a foreigner, you'd have to contend with local banks that are subject to requests from local police.

>I meant specifically, not general hand waving "anything that makes authorities suspicious".

literally any of the civil forfeiture horror stores that show up on HN from time to time.

It was unclear whether you were talking about american or foreigner in that context. For a foreigner, you'd have to contend with local banks that are subject to requests from local police.

You said "not everyone lives in the USA", so I was speaking of non-americans, keeping their money out of the reach of american authorities. But for the German citizen keeping money in a German bank, what specific activity would lead his money to being seized that would not also subject himself to arrest and prosecution.

literally any of the civil forfeiture horror stores that show up on HN from time to time.

I've seen lots of cases reported where cash is seized, but what ones had their bank accounts seized without having committed a crime that would lead to prosecution?

Again, I'm just asking for a specific example of why someone would use cryptocurrency because they are doing some legitimate activity that would lead to their bank account being seized, but wouldn't also open themselves up to prosecution.

Transfer $10k or whatever is deemed to trigger AML detection at the bank? Probably worse is accepting 1000 x $10 like people who are … running a business.

Stories of paypal cancelling a business because they locked up all the revenue were quite common when I was interested in that kind of stuff a few years ago.

Almost all banks in the developed countries work with the USA.

Banks in the developing countries may be less trustful than crypto currency.

Not the cash in the shoebox under my bed

"cash in the shoebox under my bed" can't be sent over the internet.

That is a good thing

For just a second this exchange made me think what an insane world we'd live in if you'd always been able to spend cash in dollars without the physical bills, but could use the serial numbers on them to spend them. Imagine all the scams like the Target gift card phone calls where they try to get you to send photos of the bills.

1. USDC is not backed by USD.

2. You want "a stable value" but don't really want to hold USD (because to hold USD, you need access to the US capital markets and banking system).

USDC is backed by cash and cash equivalents (treasury bonds, for instance). They've gone through multiple audits, and are in the process of going public.

The cash equivalents is highly rated securities and it's unclear what they define as highly rated. They don't disclose the securities they are hedging with, plus they mention that they are actively trading with this money (so there is some additional risk even if they are trading solely treasury bonds).

In theory an algorithmic stable coin can be moved around more quickly, since you can move the backing BTC/ETH/... more quickly than the backing USD.

In practice they are extremely fragile as seen here.

Basically what you're doing is you're shuffling risk using an algorithm. If USD is less volatile than something else, you can park money in an asset that correlates close to 100% with it without actually having to worry about banks and KYC and all of that.

Of course, if you're going to use it, you'd better understand the system behind it. There's a DAO called MakerDAO that maintains a pegged stablecoin called DAI that is pegged to USD using actual crypto reserves. It works very, very well. Of course, given time, all pegs break. But it's miles ahead of this Terra system that was an obvious sham from the get go.

MakerDAO seems sketchy. A bunch of participants have filed a class action lawsuit.

https://www.coindesk.com/policy/2020/09/29/28m-makerdao-blac...

At any rate, I don't think most people really have the skills to discern what is and is not a grift in the cryptocurrency space. Best to assume they all are, unless you can basically read and grok all the code and fine print.

That's exactly right. Always assume something is a scam, because you'll be right 99% of the time.

MakerDAO is pretty self explanatory if you look at the code and the spec of how the protocol works. You overcollateralize based on the ratio set by the DAO, you get dollar pegged coins (which then, are undervalued, providing the stability) and the system keeps the amount of stablecoins in circulation always less than the value of collateral. It can break, it will break eventually, as all pegs do, but it is wildly more stable than these other obviously flawed schemes.

Skimming through that article, it looks like a frivolous attempt at a settlement. There's no misrepresentation whatsoever: open a CDP, if the value of collateral drops below the threshold, your CDP gets liquidated unless you can top it up. I'm not surprised the judge allowed it to go to arbitration. It also looks like a plaintiff tried to get a class action going but not a lot of people joined in.

Rather than trust some internet stranger, I'll just assume it's a scam. It looks like a scam. Your defense of it is sufficiently technical to be well outside the understanding of basically everyone. Further, it doesn't really matter "how it works" according to the creators. You would have to independently vet and verify all the code and fine print to be sure, meaning you should probably just invest in something a little less fucking needlessly complicated.

Thanks for skimming the article before dismissing it though, I guess.

Find me an investment strategy that isn't needlessly complicated. Everything you can do in the traditional world you need an army of lawyers to get right.

All you have to do is vet the handful of things you're interested in. I don't know everything about every crypto project out there, and I assume everything is a scam unless something piques my interest and so I dive in depth on it and determine it isn't. Most things that do pique my interest turn out to be scams within. 5 minutes of reading. Sometimes that means I miss out on money, it's a risk assessment.

I'm not invested in maker because it isn't a passive investment. You either buy a stablecoin, no gains on that, or you become a DAO member and have a role to play. But it is a very interesting tool that people can use that works really well. It does what it's designed to do, keep dai correlated highly with the dollar.

> Find me an investment strategy that isn't needlessly complicated. Everything you can do in the traditional world you need an army of lawyers to get right.

Not terribly interested in discussing it further, but a comment I made elsewhere applies, at least:

> They think that the flaws of the incumbent system justify any flaws in the new one, without realizing the burden is on them to prove the new system doesn't posses _all_ of the problems (and more) of the original.

> I think "whataboutism" describes the situation well. See it a lot with the crypto crowd. Clearly a lot of cognitive dissonance going on there.

It's not 2008 or even 2013. You can get crypto at a coin counting kiosk in any grocery store in middle America.

The psychology driving crypto for the last half decade or so is the same sort of psychology that drives penny stocks and scratch-offs. The only people who don't understand this yet are sitting in SV/NYC/Miami and are totally out of touch.

Stablecoins were sold as "the stability of a savings account with the returns of dogecoin".

Multi-coin stablecoins like UST are usually structured to make money for a third party. For some, additional usage of the primary coin drives the appreciation of the secondary coin. If they are built to incentivize adoption, you can guarantee nobody will pay too close attention to whether or not the match checks out.

We desperately need to support collateralized stablecoins like USDC through clarifying regulation that standardizes reserve requirements and transparency. This would likely drive use away from algo coins and bring stability to so called stablecoins.

> why not buy something like USDC that's actually... you know, backed by USD?

why not buy something like USDC that's allegedly you know, backed by USD?

Here, corrected it for you.

My favorite thing about this is how the founder was so confident the algorithmic (sketchy) UST would completely disrupt the overcollateralized (fully backed) DAI: https://twitter.com/stablekwon/status/1506494471873081352

Do Kwon was putting a lot of weight behind a stablecoin liquidity pool designed to cut out DAI, crv-4pool. Those who invested in the crv-4pool are left with lots and lots of UST and very little of the other FRAX, USDT or USDC.

https://curve.fi/4pool (Ethereum RPC wallet required to see stats) USDC: 300,086.92 (4.73%) USDT: 302,375.01 (4.76%) UST: 5,443,729.24 (85.77%) FRAX: 300,405.16 (4.73%)

Assuming an algorithmic stable coin could work reliably, wouldn’t it be strictly better than a stable coin backed by fiat? Getting it to work seems like it would be a real innovation.

The concept of decentralized "stablecoins" is fool's gold. It is not possible because it requires an outside source of truth (price of fiat) to be injected into the system by a trusted third party.

The reason that proof of work is absolutely necessary for both decentralization and scarcity is because the only objective source of truth available from meatspace is raw computation. Nothing else is trustlessly verifiable in cyberspace other than computation.

I've asked people questions about stablecoins before on other fora, and I get the impression that even if they maintain their peg, they wouldn't be useful to mere mortals as opposed to big crypto exchanges. Just so that others and myself can be absolutely clear, what are USD-pegged stablecoins for? No snarky answers, please.

I ask this because:

- you can't actually shop in your supermarket using stablecoins

- there is more risk to them than holding USD

- there is no increase in privacy because blockchains are public ledgers

- it's not bankless because the stablecoin issuer is effectively a (poor) bank

- it doesn't bypass KYC or AML because a regulator can decide that stablecoins are effectively currency. Also, Bitfinex requires their KYC forms to be filled out before you can withdraw stablecoins, making them no better than fiat, at least within the context of that exchange. If other crypto exchanges are like this, then you are better off converting to fiat every single time.

From discussions with people, this appears to be a weird dance that means regulators can't regulate, for some reason.

You gotta keep them in a non-custodial wallet and they're less volatile than non-stablecoins.

sigh This is the bullshit non-answer I'm used to.

> You gotta keep them in a non-custodial wallet

Bullshit. That's called a bank. Turn it into cash and stick it in a normal bank.

Why would I want to do that?

Stick it in an ordinary bank? Because that's insured, and therefore strictly safer than a "stable" coin. Beats your "non-custodial wallet".

non-custodial is the opposite of a bank.

No. Being "non-custodial" means you don't have the risk of the exchange going down. But the risk of the stablecoin losing its value is greater than your bank having a bank run. So if you don't want risk, turn it into cash and keep it in your bank.

Otherwise, what the hell do you want from "non-custodial"? And why can't I ever get a straight answer.

Non-custodial just means you own and control the asset by virtue of being the only person with the private key.

A similar analogy is web servers. Most users are fine to run their website on AWS, but some users would like the ability to host their own servers without dependence on a business corporation. The reasons for doing so might be varied, despite the additional burden of maintenance/costs and higher risk of downtime. A system where this option is possible is better than a system where this option is not possible.

A specific financial example of where custody might prove problematic even in a developed country (where your currency, government, and banks is not causing you financial hardship) is escheat laws[1]. You purchase a stock, mostly forget about it, and come back several years to find that the state has taken control of it and sold it to generate revenue for itself. Some users might prefer to have non-custodial ownership over that stock, despite the additional maintenance burden.

There are other features of ERC20 tokens that you cannot easily achieve with fiat; which may be another reason to hold stablecoins.

Obviously if somebody wishes to avoid risk entirely, and they have access to a suitable bank and government, they should stick with a fiat custodial account and not purchase any assets.

[1] https://www.npr.org/2022/05/04/1096726920/escheat-show-class...

> A specific financial example of where custody might prove problematic even in a developed country (where your currency, government, and banks is not causing you financial hardship) is escheat laws.

Doesn't explain Tether, which does have custody. The market cap of Tether is something truly enormous. I just don't know why and what for.

Any explanation of stablecoins will have to explain the use cases and market cap of Tether.

Tether (USDT) is attractive to high-risk traders who are seeking high return and low exchange fees. This doesn't mean it is good or will remain stable indefinitely—I would not be surprised if it follows a similar path as UST. As it is an ERC20 token[1], it can be held and transferred in a non-custodial fashion as with most other crypto tokens, but with the caveat that it is run by a centralized entity and therefore your address could be frozen/blacklisted by their contract. The same is not true of all stablecoins; DAI cannot freeze an address, for example.

It might be hard to realize, but there are dozens or hundreds of stablecoins. Anybody can publish a new stablecoin as the blockchain is permissionless (literally: nobody needs permission to deploy a new ERC20 token). Obviously not all purported "stablecoins" will be safe, stable, or useful; but it also does not mean that every one will carry the same risks as UST and USDT. A government could issue a ERC20 token for example and it would largely be seen as "safe" with the caveat that it is centralized.

[1] https://ethereum.org/en/developers/docs/standards/tokens/erc...

OK, I thought some more:

If you assume that smart contracts are useful and important, then stablecoins are a necessary part of any smart contract ecosystem. If a smart contract can perform useful operations on tokens, then it makes sense that people might want to perform those operations on tokens which are stable.

I guess my confusion is that I'm coming from Bitcoin and Tether. Bitcoin doesn't have support for smart contracts (except in the form of Bitcoin Script, which is so limited that I'm not counting it). And Tether is far from non-custodial; it's very centralised. Then it's easy to wonder what Tether is for.

OK, to summarise:

It's for transferring USD between exchanges without cashing out first. Supposedly, cashing out first costs money and takes time, and stablecoins can do between-exchange transfers faster and cheaper. But then why does it use blockchain? Blockchains are really slow, and transaction fees are bloody huge. There's also no privacy on a blockchain. This doesn't need a blockchain to happen. Why does this bullshit use blockchains?

It's also for keeping your money in a "non-custodial wallet". But that's basically a motherf---ing bank. Just cash out and stick your money in a bank.

It's also for "smart contracts". But BTC barely supports smart contracts.

"Blockchains are really slow, and transaction fees are bloody huge. There's also no privacy on a blockchain."

Depends largely on the chain.

Your arguments seem like you never had the pleasure in paying international money transfer fees and wait days for it to go through.

Could it be that you're living in a rich western country?

> what are USD-pegged stablecoins for? No snarky answers, please

simply put: mitigating price volatility of the base token. rather than only holding an asset that has huge swings per day, you can hold an asset that has minuscule swings per day.

this might be useful for tax purposes, payments & donations, or just to balance your portfolio. unlike fiat this has all the features of ERC20 and self-custody.

DAI, USDC and RAI are all fairly interesting and make different choices and trade-offs to stabilize their price. all stablecoins do carry risk though; if you want a risk-free coin then just convert to fiat.

> simply put: mitigating price volatility of the base token

Then cash it out and put it in your bank. OMG.

> this might be useful for tax purposes,

How??

> payments

You can't pay for groceries.

> & donations,

Your donee won't be able to get groceries.

> or just to balance your portfolio.

But it pays no dividends, so it's not really part of any portfolio, and it's a poor man's cash.

> unlike fiat this has all the features of ERC20

And what are those? And can those be achieved in other ways?

> and self-custody.

What the hell does this mean?

> DAI, USDC and RAI are all fairly interesting

Oh, indeed!

> and make different choices and trade-offs to stabilize their price.

But I still don't know why you need this!!!

> all stablecoins do carry risk though; if you want a risk-free coin then just convert to fiat.

Oh, absolutely.

[addition]

I'm coming more from the BTC direction, where smart contracts are very limited. Then I really don't know what stablecoins are for. From an ETH direction, stablecoins might make sense as a way for smart contracts to operate on USD, assuming smart contracts are actually useful for something that can't be done better in other ways.

Perhaps one example is Endaoment[1], which automatically converts ETH payments to USDC to mitigate market volatility and ensure beneficiaries receive donations in dollar amounts. This is also good from a tax perspective, as businesses report income based on the USD price of an asset at the time it is received, not based on the price of that asset later when it may be disposed.

Also see Stripe USDC payouts[2]. Some users may prefer this to receiving payments in a PayPal account.

[1] https://app.endaoment.org/

[2] https://stripe.com/newsroom/news/crypto-payouts

You're coming from a BTC direction but you don't know what self custody means?

Anyways, an example of what I would use stablecoins for: I expect the price of $TOKEN to go down so I swap it for USDC. While I'm waiting for $TOKEN price to go down I lend my USDC on Aave for ~3% APY (and yes, there is smart contract risk here but I chose Aave in my example for that reason). When $TOKEN price drops enough I swap the USDC back for $TOKEN.

Another situation: I want to send my family member money to help with down payment on a house. I don't want to sell $TOKEN because I think the price will go up, so instead I lend $TOKEN on Aave and borrow stablecoins. I send stablecoins to family member (worth noting this would be difficult to do in FIAT due to the amount) and when he pays me back I can then withdraw my $TOKEN.

One more: I just sold a jpeg and want to make sure I have enough cash to pay taxes next year. Instead of hoping my $TOKEN price will stay same or go up I sell some for USDC to cover taxes

> (worth noting this would be difficult to do in FIAT due to the amount)

Difficult how? Wire transfers are a thing. Or are you just hoping that doing this with a token lets you dodge taxes somehow?

Jesus, is the comment about dodging taxes necessary? For the record I paid a fuckton of taxes for my crypto transactions, it would be idiotic not to. Do you know why?

I'm not sure if my wire transfer experience is uniquely bad, but I had to do a wire transfer when I made a down payment on my house last year. To do this I had to drive to a physical bank location, sign some papers, and then they told me it will probably arrive within a couple hours.

Google says the bank I use is 6th largest in the US so maybe bigger banks are better but I'm guessing my experience is not an outlier.

edit: oh also forgot to mention wire transfer limits. I don't know the exact limit is for my bank but I'm guessing it's under the amount I transferred. I'm guessing this would mean multiple trips to a physical bank branch in the year 2022

Schwab lets me wire up to 100K a day using an online form, sounds like you need a better bank. I thought the whole point of wire transfers was to move around large sums of money, so it surprised me that you thought it's supposed to be difficult.

> I send stablecoins to family member (worth noting this would be difficult to do in FIAT due to the amount) and when he pays me back I can then withdraw my $TOKEN.

While you're on your high horse about the taxes comment, you should know that in the US what you're describing here is illegal. You can't give someone an interest-free loan and have neither party pay taxes on it. Your options are roughly either to classify it as a gift or structure it like an actual loan, with a minimum acceptable rate published by the IRS each month. https://www.lindsayandbrownell.com/beware-of-the-interest-fr...

Sorry, taxes comment was out of place. Just frustrated.

The loans aren't interest free, they have a variable rate determined by supply and demand. For USDC its been pretty steady around 3%. There was a day or two last year where it spiked to 40% when Justin Sun removed billions of his capital.

In response to wire transfer, I was more complaining about having to be at a physical bank branch to do it. Not sure if that is unusual either.

edit: Just remembered that normally I wouldn't have to physically go to the bank. I had to do so to make sure it arrived in time for the signing. I think they told me it would take a day or two if I did it online/over phone? But being there in person they said it would "probably" arrive in a couple hours

I was referring to your loan to your family member, not the interest-bearing crypto loan.

The primary reason people buying stable coins is that most crypto exchanges only have trade pairs in crypto against another crypto.

The second reason is that some services offer high interest for stable coins.

The third reason is to bypass banks. For instance some prostitutes accept USDC as banks do not open accounts for them.

In most (all ?) countries except US, you are not taxed for crypto to crypto conversion. However you are taxed when you convert crypto to fiat. For example if you want to secure your bitcoins benefits by converting them to 1M USD, in France you should pay 300k USD (30% flat tax). But if you convert them to 1M UST, or USDT, or USDC, or whatever, then you pay nothing.

Note this is not tax evasion. At the end if you want to buy something useful (e.g. a house) with your crypto assets, you will still need to convert them to fiat and to pay taxes. This is just a way of securing volatile crytpo assets.

Apparently it's literally just for staking. As a south american it would be very hard for me to invest any dollars in stocks or whatever compared to staking these stablecoins in my local exchange. A few taps and they will take my money. The traditional financial system literally won't take my money due to them thinking I'm a drug kingpin or something.

Permission to fail, granted

Which is what I like most about that ecosystem, just do it, accept the consequences, rapidly iterate to something more resilient

Like the US dollar, perhaps?

> Like the US dollar

We're going on 10+ years of failed cryptoscams now and people on the internet are still saying goofy stuff like this as if it has any meaning whatsoever in the real world or are in any way similar.

I think you may have misread the GP. I think the point may have been that the US dollar was the "something more resilient".

if GP is referring to me, I wasn't making that point, I was mostly thinking about how ideation in the crypto space rapidly evolves because people are willing to try, all levels of the stack improve, consumers and investors rapidly become more discerning. lifecycles that are decades long in other markets play out in months or weeks in the crypto space.

No, "GP" referred to the grandparent of my post, which was aaronbrethorst.

You read my comment accurately.

What has evolved? Smart contracts? Algorithm over people? Decentralized? NFTs? These things don’t hold water when situations like Ethereum reverse their major hack by forking and having everyone follow along goes against the ethos of crypto. One could argue it’s closer to centralized than decentralized because of the fork, the founder having so much control and influence, going to PoS.

It’s hard for me to see how any levels of the stack have improved, and 100% am sure consumers and investors have become less discerning, not more over crypto’s near 15 year history.

What about the people losing money? Also, that statement implies that these are all honest efforts, not scams.

> What about the people losing money?

try not to, as with everything else.

> Also, that statement implies that these are all honest efforts, not scams.

it doesn't imply that at all. it implies that its an individual discernment issue. anybody can still go blow it all on a casino or Reg CF securities offerings, unless they are richer, then they have a few additional choices to blow it all.

> anybody can still go blow it all on a casino or Reg CF securities offerings, unless they are richer, then they have a few additional choices to blow it all.

That implies all risk is the same, which is a way to normalize scams, negligence, and irresponsibility. Casinos and regular security offerings are generally honest about what they offer and are regulated.

which changes nothing about the user experience where some massive fraud decades ago resulted in an extra paragraph in the 30 pages of disclaimers and some regulator smugly sitting at their corner desk thinking "ah, in this moment, I am euphoric, consumers are protected"

Yes, fewer scams and less negligence dramatically changes user experience.

They think that they flaws of the incumbent system justify any flaws in the new one, without realizing the burden is on them to prove the new system doesn't posses _all_ of the problems (and more) of the original.

I think "whataboutism" describes the situation well. See it a lot with the crypto crowd. Clearly a lot of cognitive dissonance going on there.

if "they" is referring to "me", I don't feel that the new one doesn't inherit or replicate other incumbent system problems. I like that its easy to try out, compared to attempting to try in the incumbent systems. for better, or for worse. its up to the all users to be just as discerning and pragmatic about participating or not. its great that many users are pragmatic supporters that accept things can go wrong and that they become a case study. less discerning users should also be like that, or not participate at all.

cool well unfortunately you're not in charge, a bunch of venture capitalists are. It's great to appeal to ideals but the reality of the situation is that people who don't possess the skills to judge this for themselves are being told to buy in by Matt Damon.

This seems to still be echoing what another responder said “which is a way to normalize scams, negligence, and irresponsibility.”

I'd argue that UST / Anchor is more transparent tbh. Anyone can read the source code, or (more accessibly) the docs and get a pretty good understanding of how it works.

For example: UST [0] - anyone can mint UST by burning $1 worth of LUNA, or mint LUNA by burning $1 worth of UST. With a bit of deductive reasoning, it's pretty clear that in a "race for the exits" scenario, infinite LUNA will be minted, driving the price of UST to zero.

[0] https://docs.terra.money/docs/learn/protocol.html

> Anyone can read the source code, or (more accessibly) the docs and get a pretty good understanding of how it works.

I really hope this argument is made in court.

'Members of the jury, anyone can read the source code ...'

Haha, I totally get where you're coming from. From my perspective, I will say that compared to other "investments", I really felt like I could understand the risks with UST. I had money invested, but because I understood the mechanisms I understood how it could fail, and had an idea of the probability.

I wish it was possible to replicate this visibility for other investments - the lengthy "disclosures" are no where near as useful as full visibilty into market mechanisms, and real time data on assets / liabilities.

> accept the consequences

"I accept that I have lost all of our users a lot of money, soz". There's a lot of vulnerable people losing a lot of money on crypto, I've yet to see how any of this is good for society.

The immediate effect is that money is transferred from people who are bad at predicting the future to people who are good at predicting the future. Not in every case, of course, but in aggregate. This is probably good for society, as it puts more capital in the hands of people who will invest in things that succeed rather than things that fail.

Economic natural selection?

> The immediate effect is that money is transferred from people who are bad at predicting the future to people who are good at predicting the future

After the crypto bubble collapses, I think what we'll discover is that it was a great mechanism to transfer wealth out of people who badly want to predict the future to people who have so much money that they don't really care how it plays out - it's just some small percentage hedge of their gigantic portfolio.

This is one reason bubbles are so harmful to regular people - if they join in, they could lose their shirts. But the truly wealthy are just picking between years of underperforming returns vs risk.

"This is probably good for society, as it puts more capital in the hands of people who will invest in things that succeed"

This argument doesn't clearly stand on its own in my opinion.

It starts with the implicit assumption that profit is in fact a determiner of societal good, that a soup kitchen which gives away food is not doing any good since they have no profit, while an HFT firm who notices some minor inefficiency in the stock market and makes billions is doing lots of societal good, that the government maintaining roads is less good than a contractor who is able to profit 5x as much by over-charging the taxpayer.

I think the increasing wealth divide is clearly good for the rich, but I question if it's good for society as a whole.

It’s of course very complicated, but the hypothesis is not implausible. A recent example is Twitter. Musk spent a ton of money to buy it, which will probably improve the service, while Musk himself doesn’t gain much physical resources in the exchange. (If he succeeds in fixing Twitter up, he would get a status boost, but that is counterbalanced by the deboost he’d get if he fails.)

We can stay basic. If wealth inequality and the benefits people like Musk get over others isn’t an enormous problem in and of itself. it breaks any data or evidence based notions of “people who are good at betting on the future” and so on. The powerful are the ones who influence the future the most. Protected more, etc.

How many people would be able to buy their own version of Twitter that is analogous to their net worth in the way Musk did? Not that many people. Your average person isn’t getting the sort of loans or interest rates. Or other supposedly good at predicting the future but again they are also the most powerful. Like the $7B+ Musk has raised from other investors so far.

That's incredibly naive.

> The immediate effect is that money is transferred from people who are bad at predicting the future to people who are good at predicting the future.

The effect is transfer money from unlucky to lucky fools. Nothing in that is good for anything, not even the "lucky fools". You are lucky once, not next time.

Being a fool is not shameful. But you need to know yourself and stay out of speculative markets

“This is probably good for society, as it puts more capital in the hands of people who will invest in things that succeed rather than things that fail.”

interesting how in your model wealth inequality doesn’t affect society at all. if one guy has a trillion and everyone else has a penny, it’s good for our society, bc he will invest in things that succeed, because no one else has a chance to succeed.

>There's a lot of vulnerable people losing a lot of money on crypto

I feel absolutely no sympathy for people who lose their money in crypto. If they're truly "vulnerable people" and they're dumping their savings into crypto, they deserve the expected outcome. Same for people who spend their rent and food money on scratch-off lottery tickets. Take some damn responsibility for your actions.

May I ask - do you have first-hand experience of poverty? Do you understand what that means, and why these people may be more susceptible to make mistakes like this? Do you really believe that it is a good thing that they are getting scammed out of what little they have?

Yes, I grew up poor in a single parent household. Generic food brands at discount grocery stores, clothes from thrift stores, etc. I know what being poor is.

>Do you really believe that it is a good thing that they are getting scammed out of what little they have?

Do you really believe that's what I said? I said I have no sympathy for people who choose to lose their money in irresponsible ways. I believe people have agency and they should be held accountable for their decisions. That's part of being an adult. The alternative to that is: daddy government tells everyone what they're allowed to do with their money, because nobody has any responsibility.

You said they deserve it, most people think it's good when people get what they deserve. You see my confusion.

You can believe that someone deserves negative outcomes that are the direct consequences of their bad decisions, but also think that neither their decisions nor the consequences are good.

> I feel absolutely no sympathy

Is there a question in there?

It doesn't need to be mutually exclusive. Did these people ultimately make the decision themselves? Yes. Do people know that those in poverty are prone to being nudged to make these sorts of "investments" because of the psychology behind scarcity? Also yes. I certainly have sympathy that they're preyed upon.

Do casinos prey on the vulnerable? Does the state lottery? That's not where I draw the line for "preyed upon." When I think "preyed upon", I think of a con artist who is orchestrating bad situation to make it very difficult to escape from. That bar is much higher than what I see with crypto.

Preyed upon can use a multitude of psychological biases as tools for the deception. Crypto does that, it masquerades as this new exciting thing that's making a lot of people a lot of money. As any gold rush would tell you, greed will push people to their psyche's limits, they will fall more easily for scams given that the return might be enormous, friends will betray friends to invite them over to their scam being run in the midst of this chaos of greed.

It's a layered preying system it's taxi drivers suddenly making bank from crypto and telling other taxi drivers to join in (as I've seen happening in Brazil). It's a lucky hippie artist stumbling upon a pump-and-dump group when researching stuff for a residency, making bank and explaining to their family how they can also do it. The hippie then starting a community in some tropical paradise and funding it with the schemes they barely understand while helping his friends to join on the pump-and-dump.

People are more willing to join if they can see someone they know recommending them some strategy to make money. A lot of people will think it's iffy and miss out, and feel pretty down when they see others that weren't so smart joining in the hype and making bank. So they might join as well.

If you go to any poor country with internet access right now you'll hear about crypto. In ads, from taxi drivers, from tourism workers, etc., a lot of vulnerable people to be preyed upon and sustain the scam for a little bit longer.

The scammers don't really need to run the scheme anymore, it's self-perpetuating, a meme.

A stochastic system of preying upon financially illiterate, desperate and/or greedy people.

Casinos absolutely do. There's a litany of stories about casinos enabling gambling addicts by offering them free rooms, drinks, food, flights, whatever it takes, to keep them coming back because they know these people have a psychological condition which they can profit off of. It's exploitation.

Active vs passive is where I draw the line. Passively being enticing is not the same as actively coercing someone to do something. If passively enticing is considered preying, then the number of things in the world that "prey upon" people goes up by orders of magnitude. Fast food restaurants are now preying upon people by posting delicious advertising. It becomes a meaningless term.

> I believe people have agency and they should be held accountable for their decisions.

Sure, are you in favor of prosecuting the innumerable influencers who convinced them in the first place? Surely they had agency in deciding whether to illegally shill scams or not.

I feel for the poor, or middleclass, person who is losing on crypto.

I do not feel for the wealthy boys whom have been taking advantage of essentially free money (ridiculously low interest rates for way to long) that speculated on crypto for basically bragging rights.

I always felt crypto platforms should have put limits on accounts. A few grand at most.

If they crash--I will bet it's due to wealthy boys gambling with crypto.

Basically the only members of society that could get those 0 few point loans were the wealthy.

It seems like they didn't even believe in the movment? All they wanted was a quick buck, and bragging rights at the hootenannies they frequent.

It's the poor people, and middleclass, whom were tired of .0025% on their cd that were enticed.

Sure they should have gone with a Vanguard----but didn't really have enough to invest to make it really worthwhile.

Crypto seemed like the better option besides Lottery tickets.

The poor/middle will be able to collect a bit of interest on CD's with rates rising. I would love to get 5% on a CD.

I have no clue to whether crypto will live, or die. I still regret not buying the three graphic cards I had in my Amazon Cart a few years ago though.

I was so close to building my rig, but thought you guys were right, and crypto was a bad bet.

I have found you guys wrong on pretty much every prediction, but believe you on crypto.

Irregardless of who wins, crypto wasen't a crazy idea. I just have a feeling the wealthy boys ruined it for everyone, as usual, by being greedy with their huge leveraged transactions.

Unfortunately, we've reached the point where it's not so simple anymore. Sure, there are assholes who deserve to lose their money, and I had the same attitude about some of the past crashes of BTC.

Nowadays though, the crypto folks are running huge ad campaigns in mainstream media at least in some places (the ad campaigns were huge when I recently visited South America). The consequence is that innocent people who happen to be financially uneducated and perhaps a bit naive are sucked into this stuff, and it is our duty as a society to protect people from that.

Not everybody can be an expert in finance, and not everybody should be! That's the point of division of labor. That's why a moderate amount of regulation that protects non-experts against being taken advantage of makes some sense.

Better now than later. The longer this illusion takes to unravel, the more innocent people will get sucked in.

In Bangkok, ads for crypto everything and NFT stuff are ubiquitous. One of the biggest campaigns says “Join the Crypto Revolution.” I’m sure a lot of people are buying into this lottery who really should not.

Meanwhile in the consumer protection paradise of the EU, I went to watch the Giro d’Italia bicycle race and there were ads everywhere for the “Official Giro NFT.”

The beast hungers for the many…

Have you seen time square anytime over the last 2 years? its atrocious, worse than the ICO days

Nope, I’m going to NYC soon for the first time since 2000… Times Square is not on my bucket list but I will keep an eye out!

If you're stupid enough to buy into crypto because of big fancy ads with dork ass actors then I simply do not care if you lose your shirt.

There's an old joke - "When you owe the bank $1M and can't pay it's your problem, but when you owe them $1G it's theirs." (Like I said it's an old joke ;)

The US has a culture that likes to blame working folks when they screw up and to some extent it's good for everyone to have a culture of individual agency - you want people to feel that they have control over their fates and work toward better themselves and their families.

But if you twist your society sufficiently that enough average folks sink under the barrage of predatory kleptocratic institutional behavior, then it's no longer just their problem. You might find yourself no longer living in an "advanced mixed economy/democracy" but rather something much less fun.

I feel like you have the quote backwards

and also need to update the amounts

Because its still a very relevant and not old joke that is told with updated amounts

The quote is the right way around: if you owe a million dollars ($1M) and can't pay, they'll foreclose your house and other assets and recover some of their money - it's entirely your problem.

If you owe a billion dollars ($1G) and can't pay it back, then the bank will work with you to try to get the investment back on its feet, as they will certainly not be able to recover any significant amount of it forcefully. It becomes their problem.

They may have thought G meant thousand. That’s not what I thought but it’s the only number that I could think of. Didn’t think it could mean a billion.

G is the SI prefix for "Giga", meaning 10^9. So, 1Gm is the SI representation of "1 giga meter = 1 billion meters", for example. It's most commonly used in computing, e.g. in 1GHz = 1 billion Hertz. You may have also seen it in power output numbers, such as saying that some power plant produces 1GWh annually (1 giga watt-hours = 1 billion watt-hours).

Of course, in computing G is also sometimes used to mean 2^30. The ISO has allocated the prefixes Ki/Mi/Gi (Kibi, Mebi, Gibi) for that use, so technically my machine has 16 GiB or RAM, which is slightly more than 16GB of RAM would be.

Sure, but when people talk about money, a G is usually a thousand (not talking about financial terms, just common usage)

aka "I just lost 3 G's on UST"

When's the last time you interacted with a human? $1G = ? Or $1000 at best.

Giga dollars? Get out more dude.

This was a fairer take when there weren't elected officials and sports stars hyping crypto.

Who is on the other side of transaction? Isn’t it some other [equivalently vulnerable if things don’t go their way] people?

I tried to tell some of these kids. I tried. You all of a sudden hear about this cool sounding new thing and you should be suspicious. "Terra", "UST is the third largest stablecoin" and I looked at it and it looked a lot like nubits, a previous failed attempt at a stablecoin, older than ethereum. They won't listen. The thing was a scam, it was plainly obvious.

If $1 is equal to 1 UST then why bother holding UST at all? Just hold dollars and convert for on demand usage.

My understanding is the sales pitch is that it's quicker to move in and out of a stable coin then it is convert to cash. Plus you can avoid having to keep your funds locked in at an exchange. There's been enough exchanges disappearing with people's money that I guess keeping your cash on a blockchain with a stable coin looked more secure to some traders.

> the sales pitch is that it's quicker to move in and out of a stable coin then it is convert to cash

That's true for bank account deposits as well. The sales pitch for this specific stablecoin is (was?) apparently an almost 20% APR on deposits.

> There's been enough exchanges disappearing with people's money

What's the functional difference between that and a stablecoin issuer disappearing with people's money?

Bank transfers usually take some time, days in some cases. My understanding is that keeping things on chain generally makes things go smoother.

> What's the functional difference between that and a stablecoin issuer disappearing with people's money?

I'm not invested into any crypto, exactly because of scenarios like this. Too many wildcat banks. A lot of people are going to rediscover why our financial institutions have so much regulation.

Debit card transactions can and normally are instant. The fee maxes out at 1-2%.

You could stake UST stablecoins for 20% APY. You could also get loans with UST collateral, and stablecoins are native to crypto. How do you move a dollar out of coinbase, into a wallet, bridge to another blockchain, and then stake it? That's only possible with stablecoins.

On demand usage can mean long term staking, you can't do that with USD, you need a crypto token. I'm not saying it's smart to do that, but that there is a need for stablecoins.

The real reason is that it allows you to trade using “United States Dollars” on exchanges which have no banking connections and often no KYC compliance. When you want to take a break from trading you can just put it into a “stable” coin and (mostly) not have to worry about crypto volatility.

Apologies here, but could someone ELI5: what's the appeal of a stablecoin? If I want to hold something in an asset pegged to the dollar, why not just hold dollars?

It's the same reason you have money in a (zero interest) checking account rather than holding cash. For some that's the idea of security, others the convenience of spending "digital money" (e.g. wanting to do block-chainy things without risking the currency fluctuation of ETH or other coins).

and for others, its a way to evade taxes

Easy to send and trade a stablecoin. May also avoid tax in certain countries.

Particularly useful in decentralized finance as it's on the same chain as the token you are trading.

Q. Why would people buy something worth a dollar at max and potentially nothing?

A. Day trading speculation; Tax evasion; Money laundering

There are other reasons why having stablecoins is useful.

Regular money can’t be transferred digitally. If you want to send money to someone, both your bank and their bank need to speak the same protocol. This isn’t an issue usually but try sending a large transfer (>100k) or sending money internationally.

Stablecoins have the protocol built into it. Just by using a stablecoin, you are able to receive and send the coins digitally to anyone else who uses them.

That is true, but I have used Forex services before to transfer money internationally. Using stablecoins is going to be harder.

Forex service:

1. Set up deal. 2. Country A: Transfer your Bank -> Forex Bank 3. Country B: Receive Forex Bank -> your Bank

"Large" transfers (I am not rich so someone can chime in about millions) are a bit different. There is no problem doing the above, it is the same. But you might trigger AML/KYC questions at both the banks and with the Forex service. But this might also happen when transferring from fiat to crypto (more likely, many banks are now extra careful if they think the money is going to crypto).

'Stablecoin' was always a marketing term and people outside the company should never have adopted it ('so-called-Stablecoin' would have been fine). Someone at a company doesn't decide that UST is worth 1 USD if they don't have the USD to back it up. The market does.

It’s back to $0.92, incredible arbitrage opportunity right now to make 8% in little time (high risk obvs)

I don’t think the word “arbitrage” applies when there is high risk.

Something interesting to note about pegs is that they can be quite exploitable. Some banks/countries have tried to defend their peg but in the end it can ruinous (or wildly profitable) depending on what side you are on.

Some history:

https://historyofyesterday.com/the-day-george-soros-broke-th...

Eh, it will repeg eventually now that they are making it centralized like Dia and Tether. They can artificially inflate it up some non-zero amount backing the stablecoin and it will go back to 1. Pretty good arb opportunity if you have the stomach.

Do Kwon: "By my hand, Dai will die"

Do Kwon two months later: "i will become Dai"

OK - so who is shorting LUNA now?

The yields look pale in comparison with the drops now - so I guess the only buyers of LUNA are shorters taking profits.

How do you short LUNA?

Permissioned chains are not inherently bad, but people must understand the difference between a permissioned chain and an economically open protocol (there's a spectrum). And much of the insidiousness in crypto these last two years is the former posing as the latter.

This is when you wish the crypto market closed at the end of the day until the morning.

Say what you will, but a cooling off period during a period panic does seem to help the market after bad Friday's or bad earnings at the end of the day.

I never understood why i should use stablecoins instead of the regular banking system, which is highly regulated, to secure my money as good as possible. Stablecoins are just the worst of both worlds, aren’t they?

In answered in another comment but usually for gambling or nefarious reasons.

To avoid delays with traditional money rails. Most usage is for DeFi (you’d prbly call it gambling) but I also know people who use it for remittances. Believe it or not, sending stablecoins internationally and off ramping at a foreign bank acc is faster / cheaper than using something like western union

In Europe we have now SEPA real time bank transfers. And they are really real time: less than 30 seconds. Also internationally

Good time to buy if you want to make 33% in less then a month, probably...

You’re really asking a lot of the word “probably” here...

Yeah, just like in the stock market, also expect to loose 75%... UST is already back at $0.92 though...

That means it’s not really stable right? Should be renamed to Unstablecoin

Tether scam can and will go down, when is the billion dollar question.

I’m surprised and sad that UST blew up before tether

Backed by Bitcoin™ - Somewhat of a so-called 'store of value' which was down 11% and $11B of it was bought at >$40,000 and moved to another wallet.

What could possibly go wrong?

UST is not backed by bitcoin at all.

Free arb if the big boys bail it out. Which I'm betting on.

A bit like laying the outlier in a horse race is a free win.

previous thread https://news.ycombinator.com/item?id=31318328

Is the house of cards finally falling?

It looks like TerraUSD has already fallen, honestly.

A dollar stablecoin that occasionally dips to $0.75 is a non-starter.

Note Tether has not lost it's peg

or MIM which may become the defacto decentralized stablecoin.

Is that from the same folks that made Time Wonderland and effectively rugged its holders, whilst having the guy from Quadriga as a partner?

How does loaning bitcoin to market makers defend the peg, other than just by wash trading?

It’s an algorithmic margin call!

official update from terra https://twitter.com/terra_money/status/1523749536379793408

That was at 3:40pm EST this afternoon when the peg was at $0.95-ish or so.

UST is now at $0.78 on coinbase and LUNA is down 50% in a single 24-hour period, and continues to plummet. The last 4-hours are way, way way worse for LUNA / WLUNA and UST.

----------

What was the saying? Blood in the water attracts sharks? Or something like that?

Fraud. Any chance there will be justice? I won't hold my breath.

This entire market is a joke. Give it 1-2 months and LUNA will be at all time highs.

I remember when the Axie Ronin network was hacked for $600 million ETH. That same day Axie pumped 20%+.

There is no logic here. BTC goes up, most alts go up too.

Shouldnt have been climbin on the topsails.

I really like what Do Kwon is creating, the whole Terra project is amazing. I hope he doesn't get killed by the US criminal law system.

Is USDC safe?

What is your definition of safe when it comes to investing in crypto? In the broader sense of the word, it is absolutely not safe because crypto is not safe.

Not safe in what sense?

Ha! I fell into the same trap. I meant crypto is not a low-risk investment.

it's not threatened by this issue at all.

GUSD is safest

As long as it's backed by the USD it's not safe

Stablecoins are even more of a mistake than fiat currency is

Luna token is losing -50%

Sadly all the news around UST and its associated dramas precipitates more people to try to liquidate

Now let's do USDT

It deserves to fail. Another crypto ecosystem bootstrapped off itself.

Reply on news.ycombinator.com