Their issuers are centralized, and are supposed to be holding fiat for users, propping up the peg when worse comes to worst.
But they can't resist the temptation of making the fractional reserve a bit too "fractional". And there is no way of auditing those reserves.
Whereas a significant percentage of crypto enthusiasts believe they’re inventing the future of money, without the slightest idea of the protections the government offers their deposits in the status quo - and happily leaving this for the decidedly less robust protections of a nacent industry that has developed a name for scams and people losing their shirts
In deFi, information asymmetry is a feature, not a bug.
What about Stablecoins like Dai, are those also a scam, even if they are not centralized?
Works great if the collateral assets go up in value against the dollar. But if say the $3000 of ETH you had as collateral goes to say $1000 ...
Its like taking out a mortgage using your locked up snowflake stock as collateral.
If you put in $3K of ETH and borrow $1500, then your ETH collateral falls to 150% of your loan ($2275), you will get liquidated, and your collateral will be sold immediately to pay your debt. These mechanics are fully on-chain and fully automated by keepers (a liquidation can be triggered by anyone and they earn penalty fees for doing so).
The system is not without risks, but those are well known to all.
But what you say is true of all debt markets. Debt has an inflating effect on the price, and when those debts get wiped off from liquidations, it can have a cascading affect in the opposite direction from that on the way up. That is precisely what happened to the real estate market in '08. People didn't think the real estate market could go down in terms of price. And yet, it did, and we had a major financial crisis as a result as real estate prices drew down 50% or more in some areas and foreclosure supply flooded the market.
That was a different market. We’ve experimented this with currency boards. Holding reserves in anything but your anchor currency is asking for trouble. Making public what your reserves are invites specific arbitrages.
The added fun with crypto is that the monetary base of ETH is tiny compared to most reserve currencies. So the instability point for DAI is far smaller, in terms of triggering a fire sale, than for a real currency board.
Side note: I guess we’re about 15 years out from 2008, the minimum term for a generational divide, and so I shouldn’t be surprised about people saying 150% collateral is pretty much safe again. Mortgages then. Ether now. Russian bonds before.
Rates were low. There is less dumb money now. And its quantity will predictably decline over the coming 12 to 18 months.
Its ~ USD 7bn now (vs ETH 220bn market cap - and not the only stable coin holding eth ...).
https://bravenewcoin.com/insights/maker-price-analysis-multi...
3% is a large enough fraction of value to induce fire sales at less than a 50% price drop. (I don't know precisely where below 50%. Nobody does.)
Every shaky currency board in the history of pegged currencies hobbled through attacks when hard currency was easy in the absence of a solvency crisis. Let's assume Tether doesn't de-peg and Celsius's ETH loan [1] doesn't spark a run. That leaves rates. In 2018, we had relatively easy money, taper tantrums aside. Today, we don't. And hard money is only getting tighter.
[1] https://www.bloomberg.com/news/articles/2022-06-13/bitcoin-s...
So let's say you deposit 20 eth at @ $1,000 USD per eth, which gives you a collateral value of $20,000. You create $10,000 DAI which you can then do what you want with.
If the price of ETH goes down, and the value of your collateral drops to $14,500, less than 150% collateral, then DAI automatically holds an auction on your collateral, selling it to the highest bidder. Let's say it sells it for $14,000, that's a $500 profit for the purchaser, and a $4,000 profit to DAI. The looser here is you, who still has the $10,000 DAI, but has lost $14,500 in ETH.
Next time, you'll either top up, or pay back your vault before it gets to this point.
Same thing happened with the mortgage backed securities - even if they had some value (and everyone admitted they did) nobody could be found to buy them - hence "toxic" so the government stepped in and became the buyer of last resort.
In the end maybe only gold can keep you safe ;)
11% of the ETF market is synthetic, and it is effectively illegal to launch one in the US now.
So it appeaers that its a) not half the ETFs and b) the regulator aggrees.
ETFs, hold the thing they are convertable to and are audited. the equivalent would be the stable coin having $1 in a bank account for every stable dollar they mint ... and be willing to be audited.
The SPX etf holds the actual constituent shares 1:1 with what they are redeemable as so it is a terrible example from your side. It doesnt hold a bunch of chinese equities, or discount miami property on a punt that it will do better than their underlying asset.
Stable coins have (not Dao as I agree they have a very nice fixed protocol) taken their 1:1 dollar backing, punted it on crypto, and when it went up and they were overcollateralised - paid themselves the excess personally. When crypto has gone down in value closed their eyes and eventually gone bust.
You can see the figures for the EU here¹, it's the exact opposite of what you're saying. Fully physically replicating ETFs are in the minority. The most common category is fully synthetic and together with the physically sampling ones and more exotic categories like derivative based, non-fully physically replicating ETFs constitute almost 3/4 of the entire market. The US is going to be similar but I invite you to look it up yourself.
¹ https://www.esrb.europa.eu/pub/pdf/asc/esrb.asc190617_9_cane...
Nobody uses sampling for, say, an S&P500 fund.
>ETFs, hold the thing they are convertable to and are audited. the equivalent would be the stable coin having $1 in a bank account for every stable dollar they mint ... and be willing to be audited.
That is demonstrably false for the majority of ETFs, just read the above link. Holding some of the thing is not the same as being fully convertible. The user doesn't understand what sampling is and fixates on the word "synthetic" but it wasn't the original claim that most ETFs are fully synthetic in the first place. They don't have to be synthetic to not be 1-1 backed by all index constituents.
That isn't a claim about this being good or bad, many investors consider it acceptable risk.
1:0.9994
You happy?
https://www.marketwatch.com/investing/fund/spy/holdings
And to further correct the reccord:
the equivalent would be the stable coin having $0.9994 in a bank account for every stable dollar they mint not $0 (the $0.0006 was really the important bit in all this)
https://www.investopedia.com/articles/investing/111715/how-v...
The very fund you linked is exactly not fully replicating. Meaning some of the stocks from the index aren't in it.
Which stocks specifically? Their daily reporting has them owning every stock in the index.
https://www.ssga.com/us/en/intermediary/etfs/library-content...
[0] https://www.federalreserve.gov/econres/notes/feds-notes/synt... [1] https://www.nasdaq.com/articles/what-are-synthetic-etfs-2021...
> can't be true because even most physically replicating ETFs don't 1-1 hold all of the assets they purport to hold according to the index
Unfortunately they do hold the assets they purport to hold.
But DAI are basically very tied to USDC and it's not clear at all should Coinbase go bankrupt if they'd be using the assets backing the USDC to pay their debt or not. In a recent Coinbase report they said they may use customers' funds to pay back their debt should they go bankrupt but they said nothing about USDC.
I know USDC aren't directly emitted by Coinbase but by a joint-venture Coinbase is "only" part of but still sounds scary to me.
So it's not clear at all to me that DAI would still work in the face of Coinbase going belly up (COIN is at $48 before the market opens, that's -86% compared to its all time high so things aren't exactly smooth sailing and all the crypto exchanges are feeling the heat right now).
So, yup, DAI is more than fully collateralized, but it's relying on Coinbase / Circle not doing anything shady with the assets backing the USDC stablecoin.
This is the first time I hear it being associated/connected to Coinbase/USDC in any way. Could you share how you're making that connection? It went right past me somehow.
But it acts as a stabilizer for the Ethereum network, so power to them.
Instead of spending my dollars on a speculating on shitcoins, I buy up high-quality instruments. Ex: I-Bonds are yielding 9% right now due to inflation.
If you want inflation protection, there are inflation-protected securities to buy. And they're doing really well right now.
You see how stupid this "short them" argument is? If you don't like them, then short them.
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If you don't like them, that's fine. I'll just collect my 9% this year while BTC is... what? Down 18% in a day? You should have sold your BTC at the January high and transferred to higher-quality instruments, like I-Bonds or TIPS
> You see how stupid this "short them" argument is? If you don't like them, then short them.
I mean this in the politest way possible, but you should consider that you don't fully understand types of investments and short selling if you think the statement "short I-bonds" is equivalent to "short crypto" and if you think that I-Bonds can form a major part of an investment strategy.
It is for the purposes of this discussion.
"Short Crypto" is a terrible meme counter-argument, that ignores the large possibility of a long-term, sideways cryptomarket.
While cryptocoins move sideways, low-risk investments like TIPS or I-Bonds will outperform them. Cryptocoins don't have to "go down" for them to be a terrible investment. Even a "sideways movement" is enough to make them a bad investment.
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As long as lower risk options (such as TIPS and I-bonds) exist that have higher gains than Cryptocoin (definitely the case this year), then I "win" relative to you with my bond-heavy portfolio. No shorting of cryptocoin needed.
Edit: But knowing WHEN to short it is crucial. Otherwise you drown in interest fees during the short.
https://www.circle.com/en/usdc
Then there are truly collateralized stable coins, like DAI, which work off an automated system of collateralized on-chain deposits. DAI is borrowed into existence up to a limit. If a borrower's collateral gets within a threshold of going under water (depending on collateral risk params, could be 150%), they can get liquidated and their assets are sold to cover their debt. DAI is the most established of the "decentralized" stable coins. It was formed in 2017 by MakerDAO. All CDPs are on chain, and auditable.
USDD literally launched within the past 60 days, right about when UST was going bust. These coins are algo ponzis that are not fully backed and promise exorbitant interest rates which are completely unsustainable.
https://www.centre.io/usdc-transparency
> Top five accounting services firm Grant Thornton LLP issues attestations each month on the US dollar denominated reserves that back the USDC tokens in circulation.
Same trick Tether pulled for years.
https://ag.ny.gov/press-release/2021/attorney-general-james-...
> However, the very next day, on November 2, 2018, Tether began to transfer funds out of its account, ultimately moving hundreds of millions of dollars from Tether’s bank accounts to Bitfinex’s accounts. And so, as of November 2, 2018 — one day after their latest ‘verification’ — tethers were again no longer backed one-to-one by U.S. dollars in a Tether bank account.
Honestly it's wildly irresponsible to just claim without evidence that USDC isn't what it claims to be. With Tether, there was tons of evidence. With USDC, there's absolutely zero.
Also, "attestations" aren't meaningless. They're not full audits, but they're not meaningless.
To be clear, I'm referring to "calling attestations audits". Both Tether and USDC are using that same trick.
There are two options; they don't know the difference (incompetent), or they know the difference and still choose to publicly conflate the two (fraudulent). Neither is good.
> Also, "attestations" aren't meaningless. They're not full audits, but they're not meaningless.
They are meaningless for purposes of "does this organization control the money they claim to control".
It’s just a talking point by anti-crypto to claim otherwise. Attestations are used for similar purposes all the time, but only in crypto is it “not good enough”.
Well, sure. The problem is the claims are too narrow to be useful.
"Here's my bank balance" - roughly what Tether and other attest to - isn't even enough info for me to get a mortgage. The bank will want substantially more info; they want to know how I got that bank balance, how much I owe to other people, whether I'm employed to continue building it, etc.
Again, Tether attested to bank balances, and those attestations were truthful, but they entirely lacked the very important context of "we didn't have money yesterday, and we won't have money tomorrow".
The entire concept of attestations isn't in question here, only how Tether's attestation doesn't line up with its other actions.
> Gemini and the GUSD benefit from the direct supervision and regulatory oversight of the New York State Department of Financial Services (NYDFS). Gemini began issuing Gemini Dollars on September 9, 2018, making the GUSD among the first regulated stablecoins in the world.
https://www.gemini.com/cryptopedia/gusd-stablecoin-gemini-do...
> Each GUSD corresponds to a U.S. dollar held by Gemini in accounts at U.S. FDIC-insured bank accounts and money market funds holding short-term U.S. treasury bonds and maintained at a custodian. The cash portion of these GUSD reserves may be eligible for FDIC “pass through” insurance for Gemini customers, in the event of the failure of a bank holding the U.S. dollar deposit portion of the GUSD reserves.
The page: "Review the Gemini dollar reserve-funds independent accountant audit reports..."
The "audit": "Our examination was conducted in accordance with ATTESTATION standards established by the American Institute of Certified Public Accountants."
Attestations are not audits; they are different in very important ways. "I have $1,000 in the bank" is an attestation. "I have $1,000 in the bank, but I owe $2,000 in mortgage payments tomorrow" is an audit.
Tether got caught pulling this trick; they'd get Bitfinex to transfer money into their accounts the day before an attestation, and move it out the day after.
https://ag.ny.gov/press-release/2021/attorney-general-james-...
> However, the very next day, on November 2, 2018, Tether began to transfer funds out of its account, ultimately moving hundreds of millions of dollars from Tether’s bank accounts to Bitfinex’s accounts. And so, as of November 2, 2018 — one day after their latest ‘verification’ — tethers were again no longer backed one-to-one by U.S. dollars in a Tether bank account.
Is not just a rubber stamp.
So far you have not provided any evidence about Gemini lying, just whataboutism about Tether.
An audit would determine where the money came from, who has claims on it, etc.
> So far you have not provided any evidence about Gemini lying, just whataboutism about Tether.
Calling an attestation an audit is a lie. Tether provides a concrete example of why attestations are not sufficient; an audit would've revealed the shenanigans with transfers in and out, and that's likely why they never completed one despite promising regular audits on their home page for years.
If my company has $100 in the bank and owes $50 to our gardener based on a handshake agreement, how is an auditor supposed to find out about the debt except by asking me?
Just because it hasn't been entered into the accounts, doesn't mean we don't have a legal obligation to pay the guy.
Shady dealings in this area can e.g. get you banned from being a company director in the future - but that's hardly a deterrent in the cryptocurrency space, where a fraud can leave you set for life.
Sure. A house is built on a foundation, but a foundation is not a house.
> If my company has $100 in the bank and owes $50 to our gardener based on a handshake agreement, how is an auditor supposed to find out about the debt except by asking me?
In the Tether case, by going "Hey, why'd you get hundreds of millions of dollars yesterday? Who's it from?" It stood out to the NY AG, it'd have stood out to an auditor.
The "Management Assertion" is described in Section II, containing among other things "segregated specifically for the US dollars that correspond to Gemini dollars".
So to my reading the BPM accounting firm, which is in top 5 Bay Area accounting firms, agrees that the Gemini dollars are backed by segregated dollars. You should well known what segregated means.
An audit might reveal that the $1B is someone else's money.
Segregated means that the company can not touch that money except to return it to clients. That's law. So it can't be "someone else's money" by law. And the bank holding this segregated money is also complied by law.
https://financialit.net/blog/segregated-accounts/why-fintech...
Nothing prevents them from taking $1B from a friendly (or closer, as in the Tether/Bitfinex scenario) exchange as a "customer" for a day to pad out the balance. Again, stablecoins have literally been caught doing exactly this.
I know, I know, whatabout Tether.
Which is why SIPC exists. https://en.wikipedia.org/wiki/Securities_Investor_Protection...
(I guarantee you Schwab undergoes full audits, not just attestations. Here's one: https://www.sec.gov/Archives/edgar/data/87634/00000876341700...)
edit: Tron itself bragged about their overcollateralization. https://medium.com/@usddio/usdd-upgrades-into-the-first-over...
> “Spearheading the Stablecoin 3.0 era, the upgraded, over-collateralized USDD will add more diversified features to underpin its stability,” said H.E. Justin Sun, Founder of TRON. “The $10 billion reserves pledged by the TDR will enable USDD to become the most reliable decentralized stablecoin with the highest collateral ratio in blockchain history. Currently, the 200%+ collateral ratio offers USDD a very strong safety net.”
Oof, I remember people saying this before 2008.
https://medium.com/@usddio/usdd-upgrades-into-the-first-over...
> The TRON DAO Reserve is currently holding 10,500 BTC, 240 million USDT, and 1.9 billion TRX in the reserve account, on top of the 8.29 billion TRX already in the burning contract. The real-time collateral ratio is now over 200% — a total $1.37 billion of assets backing the 667 million USDD in circulation.
Collateralization won't save you if the collateral isn't in USD.