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Comment by Ilverin | Hacker News Reader

Rai was initially released based on a value of 3.14 usd, it's down from that. Since usd has experienced inflation one would expect an unpegged stablecoin like rai to be worth more not less usd over time.

Vitalik's requirement for an automated stablecoin to only hold crypto assets is quite severe. If there's a general crypto downturn, people are going to want their money back, which turns into a bank run. It only takes a minority of holders to want their money back in order to create a bank run (and bank runs can start small and get larger because the debt/equity ratio goes down if you are already not at 100% of debt backed by equity and if you pay holders 100% value when they get out of the stablecoin). Basically the only reason to hold a stablecoin instead of the underlying assets is convenience, because if you own an automated stablecoin you don't own any upside but you do own downside risk (e.g. Terra)

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Where in the write up did he state that as a requirement? He clearly says he uses rai as an example for simplicity in explaining the mechanisms. Explaining the systems with DAI would've been much more difficult.

Collateralized loans can't result in bank runs, I don't know how you envision this working. In a downturn, people get their collateral liquidated, or exchange their stable tokens for their collateral.

The code of an automated stable coin exists as a contract in the blockchain. That code can only directly measure and influence things on the blockchain. Thus it can only directly manage assets in the form of crypto.

The contract can indirectly learn about things that are off-blockchain, such as the $USD - $COIN exchange rate, but that requires someone to input that value into the blockchain, and use a complicated set of incentives, incentives stronger than the one to input a manipulated one. Performing off-blockchain actions, would require incentived agents, and be even more difficult or even impossible.

If you're only holding crypto assets to back your stablecoin, doesn't it eventually work out to 1 BTC = 1 BTC? (Or ETH in this case, I guess).

Not if it's a basket of different crypto. You could peg it to the overall market cap of crypto. It would then by definition be stable in reference to itself, each token would always represent a fixed % of the pool. It still wouldn't be stable in relation to other non-crypto markets, but it's instability would be relative to crypto as a whole rather than any particular coin.

But this is only helpful if you don't need to have your money going back & forth between crypto & traditional investments or currency. It wouldn't be stable relative to fiat currencies. Relative to outside systems it would be more stable than riskier coins but probably less stable than something like BTC. Individual coins are still highly correlated to the crypto market as a whole, so any single coin's stability (or lack thereof) could still move the value of a stable coin like this significantly in relation to outside financial systems.

But you do own upside---of the collateral.

You're right and my above comment is wrong, but I still think the downside risk is bigger than the upside risk. It's ETH with 100% leverage, except beyond the risk of collapse of ETH there is also the risk of the collapse of RAI. Either of those happening would result in severe losses.

But you could have that upside by owning the collateral.

If I own the collateral, I own the upside and downside of the collateral. If I own a stablecoin pegged to the collateral, I own the upside and downside of the collateral, plus the risk of the stablecoin collapsing.

The stablecoin doesn't offer me any upside compensating for the risk, so we are left arguing that the risk of collapse is negligible, or arguing that there is some other benefit of owning the stablecoin to compensate for the additional risk of owning stablecoins instead of owning the collateral.

Sometimes you can't buy the same collateral e.g. if the basket has many elements/currencies/stocks.

Very true, that case parallels non-crypto assets like index funds. You own the upside and downside of the collateral, and you are also exposed to some risk that the company managing the funds does something extremely stupid and/or malicious.

I said above:

> we are left arguing that the risk of collapse is negligible, or arguing that there is some other benefit of owning the stablecoin to compensate for the additional risk of owning stablecoins instead of owning the collateral

In the case of an index fund, the typical purchaser is motivated by both a belief that the risk is negligible based on the reputation and track record of the fund manager, plus the "other benefit" of the convenience of investing in a single mutual fund rather than trying to purchase the same basket of stocks at small scale.

I agree that an automated stablecoin might offer sufficient convenience to be attractive to some investors, provided they consider the risk of collapse to be negligible.

You can do other things with the stablecoin. You own the upside and downside of the collateral, and you also own the downside of the collateral, and the upside of whatever you bought with the collateral.

Stablecoins are not meant to be an investment; they're for leverage. I agree it is probably a terrible idea to borrow a bunch of stablecoins and then just sit on them.

But by borrowing against the collateral (in this manner), you get some optionality along with the collateral's upside: if it crashes, you get to keep the amount you borrowed[1], thus hedging the loss. Plus any interest earned on it.

[1] Depending on the stablecoin's dependencies you might want to have converted it to dollars outside their platform first.

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