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Comment by frgtpsswrdlame | Hacker News Reader

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?

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> 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.

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?

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?

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