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Comment by Animats | Hacker News Reader

Unclear. The whole crypto boom may have been an artifact of low interest rates. The junk bond part ("staking", etc.) definitely was.

As I point out occasionally, most retail financial scams appeared in the 17th through 19th centuries, as newspapers made it possible to reach large numbers of suckers. There's not much innovation. Most of crypto is the same old scams, repackaged. Look up "bucket shop", "blind pool", "tulip mania", "Mississippi bubble", "Florida real estate scam", and "high yield investment program". Those alone cover most of crypto.

There have been overhyped tech booms many times in history, but most actually did something, such as build canals or railroads or electric utilities or networks. The crypto community has accomplished very little in the real world.

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These booms have happened before, complete with distributed finance boom and bust cycle, exploitative rugpull projects, and community mania. They just get a little bit bigger each time.

They can only get bigger if you can reach a new population of suckers with each new cycle. But crypto is probably at the point where anyone who can operate a computer, has heard of it.

Plus, with how many regular people have lost a lot of money, and are still losing more, a major regulatory crackdown is just a matter of time now. And that will cripple most of the crypto ecosystem.

But there's going to be a new Ponzi, there always is. It's just a matter of finding what the grifters latch onto next.

> Most of crypto is the same old scams, repackaged. Look up "bucket shop"

A bucket shop doesn't appear to be a scam. You go to a bucket shop and purchase a share of stock, and the bucket shop assumes the obligation to deliver you that stock on demand, but it doesn't purchase the stock right away. (It's hoping that, because you're stupid, the price of the stock will drop.)

The reason it's hard to call this a scam is that a bucket shop selling you a share of stock is economically identical to an upstanding market participant and pillar of his community selling you a call option. Or, viewed another way, it's economically identical to the bucket shop selling you a short share of stock.

It's a naked short

The difference is that the people selling the thing want you to lose. They're the counterparty. A real broker doesn't care. They just get a commission on the trade either way.

> The difference is that the people selling the thing want you to lose. They're the counterparty.

That is not a difference from either the call option model or the short sale model. It's true in all "three" cases.

Furthermore, if your intention as a rope vendor is specifically to sell someone enough to hang themselves with, you're not operating a scam as you sell them the rope.

Might post-Glass Steagall banks mix back in this underhandedness? They can bet against their own customer.

What underhandedness? For the bucket shop to be doing something underhanded, they'd need to be able to intentionally shift the price of the stocks you buy.

Yeah I'm not sure maybe there is a better term. Profiting off your client's loss. Or minimally, using information from your client to place a bet for yourself

>"The junk bond part ("staking", etc.) definitely was."

Might you or someone else explain what staking is? Is this an overloaded term in crypto? I know that there is proof of stake that is used for consensus but I'm guessing this is not the same thing? Is staking a Defi offering?

"All you need to know about crypto staking"[1]

That's what they tell the suckers.

[1] https://hitbtc.com/blog/all-you-need-to-know-about-crypto-st...

"Staking" means locking your coins on a platform/chain for some period of time (like a year). So, Tera or Celsius offer 20% APY for locking your coins there for a year, then when everything tanks and they go bankrupt everyone who locked their coins there loses everything. It's a "junk bond" because the idea is that you only get paid at the end of the term, and at that point the bond is statistically unlikely to pay out.

Like most financial schemes, it really has nothing to do with the crypto, other than that it would be illegal to operate platforms like this with real money, since we created regulations decades ago to protect people from this.

Thanks these are helpful in understand that PoS the consensus enables the the financial instrument known as "staking."

Would the following be a correct summary then?

By holding more tokens you become a preferable verifier node because you hold more tokens. And the way you hold more tokens and burnish your reputation as a verifier is by borrowing those assets from the actual owners and then paying the asset owners double digit interest? Is this correct? The idea is that you will make enough in transaction fees on the network to payout something like 18% interest to asset owner and still make a profit?

If so this seems wildly circular.

The person who replied to you originally is confused.

"Staking" originally meant participating in a proof-of-stake consensus and you get rewarded by the network with the new blocks that are mined.

All the Terra / Luna / NFT / exchange "staking" was people latching onto DPoS to make their schemes sound more technologically sound. Its an overloaded term at this point thats nearing meaningless unless you are clear you mean actual proof-of-stake.

> people latching onto DPoS to make their schemes sound more technologically sound

overloading technical jargon for marketing, just on its own, seems like a strong scam signal. or at least a signal to stay away

It is really not surprising that the term got overloaded when the underlying principle is the same: put money down, do nothing, then come back and your money is magically multiplied. It is as blatant a scam as they come, except the scam is built directly into the consensus protocol itself.

The principals aren’t the same. In DPoS, you literally do nothing other than lend your coins out. In PoS, you run and maintain a node that runs the rules of the network to secure it. If your node is down, you’ll leave rewards as punishment. If you run the wrong client or don’t upgrade, you’ll get slashed if any consensus rules change. You also have to pay for electricity, bandwidth, and have to have monitoring in place.

PoS is like running your own whitelabel SaaS offering.

Hm, I'm not sure I'd go that far. I'd use "staking" for anything that's done programatically as part of a smartcontract, regardless of whether you have to run a node yourself. For example, The Graph (GRT) where you attach your tokens to a node to strengthen its signal and share of the rewards.

And yes, I know, it's fighting an uphill battle to discourage the use of "staking" for lending out on a centralized platform. "Words drift in meaning, deal with it". But it's also important for people to be able to know what you mean, and there are pretty substantive differences between that kind of staking and "anything that earns a return on your coin" and it's helpful to have a separate word for it.

This is not accurate, but the problem is that staking got way overloaded.

Staking should mean partcipating in a proof-of-stake network by using your stake to participate in block validation or delegating to someone else. In most cases you don't need to lock anything and at no point do you hand control of your funds to someone else.

The problem is that many grifters then came to use "staking" to mean all sorts of different things with the only thing being in common is, get some rewards. But I've seen things like BlockFi get described as "staking" when really its just giving your money to control of someone else and earning interest on it.

You're arguing that it should mean something else, but GP explained quite accurately what it actually means today.

He didnt. UST placed in Terra Anchor for the promised 20% was not staked or locked. You could withdraw at any time. Really, this site needs to stop choking on the crypto ignorance. This has been going on for more than 13 years now.

I'm surprised you compare it to a junk bond.

It sounds pretty much like a CD aka "Certificate of Deposit" which is a product sold by banks.

Is there an entire generation that doesn't know anyone who ever bought a CD from a bank?

These days they are a joke, but still shown on bank web pages.

Here is the list of rates from a regional bank near me:

   5 Year CD  0.10%
   4 Year CD  0.10%
   3 Year CD  0.10%
   2 Year CD  0.10%
   18 Month CD  0.10%
   12 Month CD  0.10%

CDs are FDIC insured. If the bank goes under, you keep your funds (up to the insurance limit). Cryptocurrency accounts "staked" to a given exchange don't enjoy that benefit, as many people are now learning.

I'd also recommend anyone shop around for CD rates. Those are hardly representative of what you can get at, say, Ally. (2.75% APY on a 5 year)

It's a high risk junk bond with deceptive retail packaging to make it look like a safe bank certificate of deposit. The suckers are supposed to think it's a CD. As long as the underlying market goes up, it behaves like one. If the underlying market goes down...

It's a crappy bet, because the upside is limited while the downside can take you to 0.

You're still getting ripped off. Don't buy CDs from ally. You can buy treasury bonds directly from the US government for north of 3%.

See treasurydirect.gov.

It 'sounds like' any bond right, but compare the rates. One pays 20%, one pays 0.1%. One is 'junk', one would deserve as many As as Moody's has to offer.

(I don't think they actually rate them? Not from the US. But in some hand-wavy approximate way, they're as good as US gov bonds since they're similarly backed. (Actually why do you have both CDs & 'treasuries'? Monetary/fiscal separation sort of thing?))

The answer is yes many young people have never lived as adults during a time when you saved money by putting it into instruments like CDs.

I asked one question, and seemingly you heard a different, dumber one.

Wow, that got a lot of downvotes.

Yes, 0.10% is dramatically lower than 20% or whatever. That's my point.

And yes, FDIC insurance is a thing. That's also my point.

And yes, younger people almost certainly haven't ever owned a CD themselves, but that wasn't my (somewhat rhetorical) question.

I think you may have gotten lost in your communications.

You responded that you were surprised that something high risk / high reward was compared to a junk bond, and then compared it to a CD. It's obviously more like a junk bond than a CD, for exactly the two reasons you now mention.

Since I don't want to have to respond to all of the cryptos misunderstanding what staking means, you can also just google it:

https://www.coindesk.com/learn/crypto-staking-101-what-is-st...

> Similarly, when you stake your digital assets, you lock up the coins in order to participate in running the blockchain and maintaining its security. In exchange for that, you earn rewards calculated in percentage yields. These returns are typically much higher than any interest rate offered by banks.

https://www.fool.com/investing/stock-market/market-sectors/f...

> The unstaking process may not be immediate; with some cryptocurrencies, you're required to stake coins for a minimum amount of time.

https://academy.binance.com/en/articles/what-is-staking

> Enter Proof of Stake. The main idea is that participants can lock coins (their “stake”), and at particular intervals, the protocol randomly assigns the right to one of them to validate the next block.

The original meaning for "staking" is that, for PoS networks, you put some coins, say ETH, to run a network validator, who secure the network by producing valid blocks, and in return you get a profit in that same coin (the network prints coins at a fixed rate per year, say 10% ETH, to attract validators). The coins are needed to prevent sybil attacks (i.e. preventing someone to running infinite validators and attack the network). So if you own 1% coin you can only run 1% validator and won't be able to flood the network.

However running a validator is hard, requires custom servers and hardware, so people simply delegate them to another validator, who does the validation on their behalf and distributes the reward to its delegators. In essense, you earn 10% ETH simply by voting a validator. Note that this IS safe and in most cases, people do get their coins and profits back and it's very secure. You can't lose money in the sense that you won't lose ETH. There are ill-minded people to steal people's funds, but that's not the general case.

Since most people only cared about the profit part, the term "staking" has since changed meaning to become anything that requires you to put coins in and get coins back. Staking UST is one case: you lend UST to the protocol and withdraw UST at any time, and the protocol prints you UST at 20% APR. There are lending protocols, airdrops requiring you to stake something, providing liquidity to collect fees, etc. And for simplicity they all become "staking".

Note that while staking is secure, it doesn't change the argument about how ETH is just junk bonds. If they offer 3% return per year, it's essentially printed money and the currency's value would decline 3% per year as well. If they lock you in for a longer period (ETH staking locks you in indefinitely until The Merge goes live for half a year), you are kept from selling your ETH and these coins are already worthless once they are unlocked. Buying ETH for staking is essentially providing liquidity for people selling ETH so they can make a quick profit.

This is really helpful thanks. I had a couple of questions. You mentioned:

>"So if you own 1% coin you can only run 1% validator and won't be able to flood the network."

Is this the reason that companies are pay interest is because the more coins they hold means their validator percentage in the network and so their profits go up?

Also you mention:

>"However running a validator is hard, requires custom servers and hardware, ..."

I was under the impression that PoS meant there was no need for special/custom ASICs in the same way that PoW mining has. Is that not true? What types of custom servers and hardware is necessary for participating in PoS validation?

> Is this the reason that companies are pay interest is because the more coins they hold means their validator percentage in the network and so their profits go up?

That's about it. But the profits are usually a fixed percentage of your earnings which is the same for everyone holding the coin, so it's more like the central bank paying out interest for deposits, which does not actually increase currency value (you lose value by not depositing).

> I was under the impression that PoS meant there was no need for special/custom ASICs in the same way that PoW mining has. Is that not true? What types of custom servers and hardware is necessary for participating in PoS validation?

Usually no ASIC is necessary and in rare cases GPU can speed it up a bit. However, you often need decent amounts of RAM, CPU and disk to validate transaction validity and run smart contracts, since smart contracts handle a lot of state like balances of accounts and that has to be computed. So it takes the same amount of resources like a regular database would do.

There was an interesting take on that stuff in "Sam Bankman-Fried and Matt Levine on How to Make Money in Crypto"

https://archive.ph/41hMi#selection-3923.0-3923.13

Staking is roughly what he calls putting something in the box in that story

>The whole crypto boom may have been an artifact of low interest rates.

You mean it was an artifact of excessively high liquidity and high liquidity can only be explained by the fact that the interest rate is trapped at the zero lower bound as there is no market signal that tells people to reduce their degree of liquidity.

The crypto boom was a gold rush for the permanently online generation.

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