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Comment by Alex3917 | Hacker News Reader

> The effort to paint over such blatant fraud and negligence and pretend it was all a mistake from a well-meaning kiddo is disgusting

Let's not forget that the folks using FTX were only doing so in an attempt to steal money from others. If the key innovation of crypto is that it's supposed to reduce the risk of lending by bringing realtime transparency to the assets and liabilities of borrowers, then why was FTX paying vastly higher interest rates than traditional banks? It's hard to feel sorry for those who lost their money because they thought they were in on the con or whatever.

You can hear the folks who lost money saying this themselves, e.g.: https://www.youtube.com/watch?v=9cATvKsZA0A

And to those who think I'm being uncharitable, I've been saying the same thing on HN since long before the FTX collapse, e.g.: https://news.ycombinator.com/item?id=28457273

View on HN

> If the key innovation of crypto is that it's supposed to reduce the risk of lending by bringing realtime transparency to the assets and liabilities of borrowers, then why was FTX paying vastly higher interest rates than traditional banks?

What I hear from people who invest in crypto is hoping they will make money on it. Maybe that technology is part of it but I've only known people that want to invest in it for a greater return. It's thought of as a stock, but unlike a regular stock there is no company behind it that produces something of value. It's a made up digital collectible spawned from the mind of boy geniuses that is literally nothing.

My recommendation for investing in collectibles is comic books, trading cards, etc. They are finite, they exist, and they are not propped up by VC money.

> It's a made up digital collectible spawned from the mind of boy geniuses that is literally nothing.

Wow this got me thinking... like all collectibles the value is not intrinsic in the item itself, but subjective to the eye of the beholder.

What exactly is the subjective thing that's being collected here? I wonder if the appeal of crypto is that literally represents (well, as literal as a digital good can be) a piece of "the digital new", whatever that may be. It's a piece of the our perceived digital future, but one you can own and say is yours.

This must strongly resonate at a subconscious level to those weaned on social media who now live in a state of constant anxiety due to FOMO. The digital world is ephemeral, but bitcoin is something you can hold on to.

The average person doesn't understand the digital revolution and the world it's built and are discontent as they feel left out it's promise; namely a techno utopia that brings great wealth and power to those in the know (Gates/Jobs/Zuckerbergs/etc.).

Crypto therefore allows these people to believe they own a piece of the action. That may be it's only appeal. They can point to it and say it's theirs. "I don't understand it, but I'm not going to be left out of it."

It is the ultimate nexus of everything wrong with social media and the modern digital world. The future is coming, everyone else on my feed is having fun and smiling, and vast riches await you too if you only have Diamond Hands and HODL, which ensures you will never experience FOMO. A collectible that acts as a balm against all the anxieties of the modern world. Snake oil as a collectible.

I must think on this further.

also art and wine

> the key innovation of crypto is that it's supposed to reduce the risk of lending by bringing realtime transparency to the assets and liabilities of borrowers

Never heard this definition, where did you read this? Any time the word "asset" is linked to a crypto, people should know by now it's eventually going to zero.

> Never heard this definition, where did you read this?

I mean literally the reason why everyone refers to crypto as "triple entry accounting" is because entries on the ledger are cryptographically signed, which makes ledgers less expensive to audit and also prevents certain categories of fraud. So that alone should always make the costs of lending on the blockchain lower, and therefore also reduce interest rates.

But if you want a much more detailed explanation of why crypto should reduce the cost of borrowing money, especially in the developing world, here is an extremely detailed explanation on this topic:

https://www.youtube.com/watch?v=dla42bY7k90

I can see it clearly now - the next crypto crash rolling around like clockwork. Except this time it’ll be a speed run through four centuries of debtors law in which the cryptobros realize that the reason for interest rates isn’t the transaction cost or the paperwork but the enforcement arm to get people to complete the whole transaction through to the end.

I think it’ll come in two phases: first they’ll come around to the idea of debtor’s prisons and demand the governments of the world bring them back. Then when they’re all in the prisons, they’ll lead a movement to abolish them (again) completing the circle of “why bother?”

In the end we’ll be left with a saturated market of repo companies picking up the pieces for pennies on the dollar.

> the cryptobros realize that the reason for interest rates isn’t the transaction cost or the paperwork but the enforcement arm to get people to complete the whole transaction through to the end.

It's interesting you brought that up because crypto has a similar mechanism to get people to complete the whole transaction and resolve disputes without involving interest rates.

For example, imagine person B was buying a product from A. Should A send the product first or should B pay first.

When both sides don't want to take the initiative, they use an escrow contract on the blockchain where both sides have to lock up 150% to 200% of the value of the product in crypto inside the contract.

A then sends the product.

B receives the product.

If B accepts the state of the product, he can press a button to release the relevant amount of crypto in the contract to A and refund the extra 50% to 100% he had to put up.

If B sees the product is fraud, he presses another button and both sides lose all their crypto. This disincentives both A and B from committing fraud.

There are more nuanced conditions involved so I won't bore you with the details, but the main concept is there and it doesn't involve interest rates.

> If B sees the product is fraud, he presses another button and both sides lose all their crypto. This disincentives both A and B from committing fraud.

That can't possibly be right. It would mean that if person A defrauds person B, person B would lose 150-200% of the asking price, rather than just 100% if no "crypto escrow" were used at all.

If that's not a scathing indictment of the kinds of simplistic thinking that cryptobros think can solve real world problems, I don't know what is.

Of course, the fact that it makes it impractical to buy any kind of expensive product is merely a detail. As is the extreme cost of non-fraudulent delivery failures in this scheme.

Nobody is going to post 150% collateral on a capital expenditure where the delivery can take months/years.

Cryptocurrency is finance as imagined by people who have never bought anything more expensive than a car or house.

That's just escrow but worse, and could already be accomplished with a non-blockchain based escrow service. What exactly does crypto add here?

A chance for em_te or likeminded folks to make money in some new and interesting way, that they couldn't have made otherwise :-)

Interest rates exist to incentivize loans in a universe where there’s a risk borrowers might not pay them back. The Roman Catholic Church decisively proved during the middle ages that no interest = no loans

You just described escrow with extra ~steps~ risk which has nothing to do with loans unless you’re suggesting borrowers put up 150-200% of the capital they want to borrow? (!?!?)

> entries on the ledger are cryptographically signed, which makes ledgers less expensive to audit and also prevents certain categories of fraud. So that alone should always make the costs of lending on the blockchain lower, and therefore also reduce interest rates.

.. but this is obviously garbage. The question in lending is always about default risk, which crypto does nothing to address. Most crypto lending seems to be so-called "overcollateralised" loans, which are secured on other crypto "assets", which also tend to turn out to be garbage.

And we can see that everyone in the crypto space is offering higher interest rates for depositors. Even more than Madoff's 8%. 10%? Why not! How about 10% per month! Who's taking the other side of that trade? Well, it turns out to be bankrupt exchanges and fraudsters.

The cost of ledgers and their auditing is not a meaningful proportion of retail interest rates in the current environment, which is dominated by the cost of funds, default risk, marketing/customer acquisition costs and profit.

Reducing or eliminating that cost should not make the costs of lending change in any noticeable way, because you're reducing something that is insignificantly small anyway.

I think you are confusing crypto with the layers on top of it. Lending via crypto is a dubious practice as it needs to tie into the physical world. Interest being paid on loans is an aspect of finance that some areas of crypto are recreating and failing at miserably, as they should, for obvious reasons.

> Lending via crypto is a dubious practice as it needs to tie into the physical world.

But if cryptocurrency is to be anything of actual value, it must tie into the physical world at some point, even if loans don't exist.

Okay, eventually it must...depending on the form. In it's current implementation being sold, it won't work. Lending to generate income relies on a mature legal system to back up contractual demands. Crypto itself (an algorithm) cannot guarantee repayment of loans.

"Exchanges" try to bridge this gap and counterparty risk isn't properly priced in. If anything, the high interest payments aren't high enough to represent risk.

Algorithms that can control their own energy usage and energy price can leak out into the real world.

Your video is from these guys:

> Sweetbridge converts any Commercial relationship, Supply chain, or Value chain into an Ecosystem that increases the Net Worth of its Members.

Just the casing of that phrase makes me suspect them of some fraud :-)))

Ah, confirmed:

> By running all of the sales and purchases from an organization through an Ecosystem over a 5 year period, members will typically increase their net worth by:

https://sweetbridge.com/wp-content/uploads/2021/06/bottom-li...

For people that can't see the image, it basically promises that companies can increase their net worth by 25-200% and individuals by 50-200%.

Get outta here with that garbage, pardon my French.

Specifically with Ethereum, you can automate margin-calls and auto liquidation. This is the basis for a lot of DeFi, which recently was the blockchain topic du joure. The idea is that you can trade in options, or margin loans, with the smart contract ensuring the seller of the option is sufficiently collateralized. This removes brokers and exchanges from the equation, which should make things easier.

Notably, FTX also offered the option of margin loans and options, though they were centralized. This turned out to be bad, not because it made things more difficult, but because they stole all the collateral.

Also note that the DeFi approach would likely have failed here, because the smart-contracts that determine the value of the collateral do a simple "units owned * current market price" computation. That doesn't account for price slippage. In practice the markets are quite illiquid, so selling some collateral will drop the price of that collateral quite quickly. DeFi currently has very little holistic risk management. When you have a lot of, say FTT, as collateral from counter-parties, that leaves you quite vulnerable. If FTT drops quickly, many people will get margin-calls. If they all default, then you get left with their FTT. If you try to sell that, it will crash the price even more.

Thanks for the response, I didn't realize Eth had this ability. I was taking issue with the statement of the "key innovation of crypto is that it's supposed to reduce the risk of lending" which I don't think you are agreeing with.

It's not clear to me that increased liquidity would solve their problem. I'm not against DeFi, but the spectacular failures are proving that it's not nearly ready for prime time.

I’m not in total disagreement with your point, and, frankly, I’m glad that you made it.

But how would you respond to the argument: those that lost money in FTX weren’t consciously in on the con, but instead had (vastly) exaggerated expectations about the future of crypto?

> those that lost money in FTX weren’t consciously in on the con, but instead had (vastly) exaggerated expectations about the future of crypto?

I've said multiple times on HN that I consider blockchain to be the most economically important invention of the last 500 years, e.g.:

https://news.ycombinator.com/item?id=14633148

https://news.ycombinator.com/item?id=18574399

But the reason it's exciting is, among other things, because it should radically drive down the cost of borrowing money. So yeah, I'm probably literally on the most bullish person on crypto on HN, but that's why it's so easy for me to see how the folks chasing those double digit interest rates on FTX aren't exactly the innocent victims they're being portrayed as.

I'm hardly an economist, but even the most financially illiterate people know that interest rates should be vaguely proportional to risk.

A lot of people still haven't figured out that crypto is a psychological hack, not a technological or a financial one.

It's just virtual tulip bulbs and South Sea Company shares. And that's all it's ever been.

The fraud is the point. It's not an unfortunate, isolated, and regrettable accident. Crypto literally raises the cost of borrowing by making it trivially easy for fraudsters to steal it, under the cover of running a "secure exchange" or a global high profile pump and dump, or worthless NFTs, or whatever the next scam du jour is.

Well, sort of. Crypto-- done well-- is supposed to represent banking as a SaaS. The existence of these electronic exchanges demonstrated the failure of that function. It just wasn't practical or even possible to transfer value without the involvement of these shady characters.

After removing "banking as SaaS" from the value proposition, what was left was a bunch of hustlers running cleverly incentivized Ponzi schema. It's not even tulip bulbs. We're finding its black boxes, creative financing and yield farming as far as the eye can see.

Ultimately none of these things produce anything of value and all they do is trade money in circle. Ultimately the money has to leave system. Right now there is less money in the system than it did before. I guess soon enough we will find many people cannot leave the system. This is the reason why Binance CZ announced the 1 billion crypto recovery fund to stop spreading contagion.

The 500 years thing is pretty tough for me. No love for the steam engine? mass production? Computers? The internet? Surely the internet has revolutionized the world more than blockchain will.

> mass production? Computers? The internet?

None of these would have been possible without the invention of double entry accounting, because before double entry accounting you couldn't even really run anything larger than a family business because there was no way to know whether or not you were making or losing money. So it stands to reason that because blockchain is a breakthrough in accounting of a similar magnitude, in the sense that it will enable all sorts of new economic relationships that aren't possible today by radically driving down the transaction costs of doing business, that these new relationships will similarly enable all sorts of new technologies that we can't even imagine today.

To understand blockchain, you need to go back and read all the books on the history of double entry accounting in order to understand the changes that it enabled within society. But these changes aren't going to happen over night, they'll take a couple hundred years to play out, in the same way that it was a couple hundred years between the invention of double entry accounting and the height of the Dutch East India company or whatever.

>None of these would have been possible without the invention of double entry accounting, because before double entry accounting you couldn't even really run anything larger than a family business because there was no way to know whether or not you were making or losing money.

What? I thought the benefit of double-entry was that it makes fraud and inconsistencies easier to catch, not detection of profit per se (which single-entry can surface).

> I thought the benefit of double-entry was that it make fraud and inconsistencies easier to catch, not detection of profit per se

One of the key principles of double entry accounting is denominating profit and loss in a fungible currency, rather than just recording the number of goats you own or whatever. Double entry is actually the codification of several different best practices, it’s more than just having two sides of the ledger. But even with just the fraud part, you are very limited on the number of employees you can have if you don’t have any way to know if they’re stealing from you. That’s why even though e.g. Ancient Rome had thousands of fast food restaurants, they didn’t have franchises like McDonalds.

Poppycock. Ancient Rome and Ancient Greece both had plenty of sophisticated bookkeeping and accounting methods — I don’t think you can even point to a single moment in time when double entry was “invented” (just standardized or popularized).

There are many reasons that they didn’t have McDonalds-like franchises, and none of them have to do with accounting. Those kinds of franchises didn’t exist in the modern world until the 20th century; they are product of many elements of modern culture (and modern approaches to business). What the heck would a franchise even do for someone in Ancient Rome? It’s not like there are massive chicken suppliers or industrial-scale bakeries that produce standardized food products to sell. Every restaurant needs to source local suppliers directly anyways. Fast food chains make no sense without industrialization, among many other things (bookkeeping being the least of them).

You could (somewhat weakly) argue that Roman publicani were a form of franchise.

> even the most financially illiterate people know that interest rates should be vaguely proportional to risk.

I estimate that approximately 80% of people would not even understand the claim you're making, let alone be able to evaluate how true it is.

I think you have a fundamental misunderstanding of what blockchain is. You mention its the most important invention economically of the past 500 years and in your other post you said thats because its a replacement for double entry accounting and thats why its so important.

Its not. Blockchain is an immutable ledger only, there's nothing in the original blockchain spec (not Satoshi's spec, Satoshi didn't make blockchain. he kinda stole it, like he didn't cite his sources very well) that mathematically enforces any sort of double entry accounting feature like ledger immutability is mathematically enforced. But blockchain is useful and interesting for other reasons. Lets set that aside since you're clearly talking about crypto, which is also not a replacement for double entry accounting for its own myriad of reasons including but not limited to excessive power consumption, reliance on a consensus of random computers (of which anyone could own 51%+ and effectively have full control over the chain), zero recourse for lost/stolen funds, unpredictable value, poor security features (true), no way to correct errors (without compromising the data structure), and the list does go on.

Even if it was a panacea for the burden of having to have an accounting department (the horror), it can't have the same economic impact as double entry accounting like you claim since double entry accounting literally didn't exist before double entry accounting. Crypto is just automated (until there's problems, and there's always problems) double entry accounting, its literally still double entry accounting and will still even need to be audited by real accountants (ugh, stupid laws, right?) LOL.

Bonds were invented in the 500 year timespan you’ve given. It’s a pretty hyperbolic claim lol

> interest rates should be vaguely proportional to risk.

Not really. If we take nominal interest rate = real rates + inflation expectation + credit spread, then only the (counter party dependent) credit spread reflects riskiness. Real rates reflect an equilibrium of time preferences.

> should radically drive down the cost of borrowing money

I got my mortgage for less than 2%. I can't see how crypto is going to enable negative rates.

(Historical factoid: the world's oldest bank in the modern form is up to 550 years old https://en.wikipedia.org/wiki/Banca_Monte_dei_Paschi_di_Sien... )

“The answer might be that every crypto exchange has a 15% or higher chance of exploding per year and they've all just been extremely lucky”

Nailed it!

Reply on news.ycombinator.com