Comment by jmyeet | Hacker News Reader

Comment by jmyeet | Hacker News Reader

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...

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)

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.

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?

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.

> 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 ...

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-...

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

> 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.

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