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Comment by pru567 | Hacker News Reader

Aren't algo-stablecoins a refuted concept after IronFinance and Terra/Luna?

Refuted means you can conclusive prove something. You can only say these attempts at algorithmic stablecoins failed but it doesn’t mean they are destined to always fail. The devil is in the details and honestly Terra was run incompetently and for greed rather than as a true professional endeavor.

Like communism, I guess real algo-stablecoins have never been tried.

Sounds like a no true Scotsman fallacy. Even has Luna started losing peg, lots of people thought there was no way they would go entirely down because it was one of the biggest name in crypto and supported in the industry by so many. It was very mainstream solution and among the top 10 crypto in market cap.

The history of currency and pegs are well documented in the world of finance, for decades. If anything the demonstration that an algorithmic stablecoin is possible is something that must be proven, because every signs are pointing toward the fact that it's not.

I guess it is a Scotsman like scenario. The issue is that algorithmic lending isn’t uniform nor fully explored yet so it is hard to say that it is proved that it can not work.

I would argue that it is akin to saying that because you found 5 Scotland and none of them is tall then it proves all Scotsman’s are short. It is not a true proof that all Scotland are short but rather an observation that all Scotland you’ve seen so far are short. These are different things. Maybe all Scotsman are short but it isn’t yet a hard proof just a conjecture. That is all.

> The devil is in the details and honestly Terra was run incompetently and for greed rather than as a true professional endeavor.

If the market can't discern honest players from the criminals, then how will an honest attempt at these coins ever succeed? The problem is that we don't know that they're criminals until they've gone under, and there's no due diligence or oversight to verify that they're legit because that would be antithetical to the entire system.

It would be like continuing to drop a little money in every single altcoin that hits r/cryptomoonshots because at least one of those people has to be honest, right?

If being trustless is central to the technology, then we have no idea if what we're putting our money into is legit or not and that's a fundamental problem with this stuff. The system rewards bad behavior, plain and simple. As long as that's true, I don't see how honest people gain enough influence to actually achieve the vision that the community realizes.

If the market can't discern honest players from the criminals, then how will an honest attempt at these coins ever succeed?

Yeah, this is a huge problem for crypto in general.

The problem is that we don't know that they're criminals until they've gone under, and there's no due diligence or oversight to verify that they're legit

At least one third party analyzed Terra's algorithm and predicted the collapse around 6 months before it happened.

I mean, people were screaming that the Terra ecosystem was going to collapse since forever. It's just that different people invested in it anyway. There's nothing impossible about verifying the legitimacy of any endeavour, people just don't do it.

Honest people will do honest work and succeed or fail on their own terms, the fact that there are a hundred scams running adjacent to the honest projects is unfortunate and very disruptive but doesn't actually fundamentally block honest work.

People have been screaming about that for every part of crypto.

How is the non-crypto-expert supposed to tell that the Terra and DOGE hate is real but the BTC and ETH hate isn't? Or that the ETH hate also is, and it's only the BTC hate that you should ignore? Or any of a number of different permutations?

Isn't the adoption of the honest work blocked by this inability to differentiate without lots of hours of research?

Pro-tip: They're all scams

Much of crypto, such as NFTs, Ethereum and Bitcoin, is based on consensual reality that these tokens have value because there are no underlying assets. As long as people believe they are a store of value they essentially are. Until at some point people lose faith and then they do not hold value.

In fact stable coins in theory are one of the least scammy parts because they have a real value as long as there are not outright scams (of which many of them are.)

In practice, stablecoins will plummet to 0 if a central bank decides to offer a dollarcoin or a yuancoin or a Eurocoin.

There is a Yuancoin already btw. And there probably should also be an official US and Euro digital coin as well. But I do not think these alternatives will go to zero, rather they will act like ETFs, as they sort of do now. If they are collateralized properly, they should be fine.

a hundred scams running adjacent to the honest projects ... doesn't actually fundamentally block honest work

People expect the honest projects to give the same rate of return as frauds which is impossible.

The reason they failed seems rather general. They are based on assets that can go down in value fast when there is a run to get out of the stablecoin and not enough traders to handle the volume. Essentially, the stablecoin needs to be fully backed by traders who need to be prepared to back most of the market cap by trading at scale.

An "algorithmic" stablecoin allows anyone to do that trade, but it doesn't make any particular guarantee that these traders will be there when they're needed. And I don't see how that can be automated unless the algorithm already has the assets, as with an overcollateralized margin loan?

So, while innovation is hard to rule out, it seems like you need a good explanation for why this time it's different.

It goes without saying that algorithmic stablecoins have to be overcollateralized. The remaining debate is about the precise mechanism for contracting supply. https://vitalik.ca/general/2022/05/25/stable.html

Vitalik had some good things to say about RAI recently: https://vitalik.ca/general/2022/05/25/stable.html

There are still some notable people in crypto who want to see the concept succeed. I imagine we'll see at least a few more try (and probably blow up) before they get regulated out of existence.

The concept is pretty interesting if there were real assets behind the coin. Problem is you would need a good counterparty… which means you need a good custodian… which means you might as well just use the counterparty and custodian.

The only real benefit of the coin in this case would be programming derivatives without further intermediate custodians and counter parties. This could be useful for some back office finance activities outside of scams.

The incentives are such that if you can figure it out you can basically create money out of nothing. So there will always be people that are looking for it to succeed. It's alchemy. It all breaks down if the floater goes to zero or a price such that you can't mint enough to stabilize the coin. And on a long enough time span this is bound to happen.

The stable coin can never go above its target value, but it can go below. So you're essentially holding value and then getting wiped out every N years or so. So it's doomed to fail

It’s a fascinating intellectual exercise. I think at this point nobody really knows whether or not it can work.

I ask two questions to see if passes the smell test:

1. Does this work if the floater is worth 0?

2. Is there some kind of natural cap? In other words, can I print an infinite amount of dollars?

None of the implementations works without some value being attributable to the floating token(s). Similarly, I never hear of any natural caps. For instance, you can create a stable coin with a market cap of $100 and just mint N tokens of the floater for M where M*N = 100. But why can't you mint more and sell at a slightly lower price? Is there some natural limit? If so, can't the price of the floater go down to such a level to not be able to support the market cap?

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