The video interview at the bottom of the article discusses the source of capital for this enterprise to "keep" the peg. The interviewee claims that the source of the capital was basically a crowdfund. The team issued a lot of the tokens, kept a lot of it (about 1/2), and sold the rest. Perpetual motion is possible in finance, but you need fancy licenses and government appointments to do it. These guys are going to prison.
This thing isn't just one token, but apparently at least three. One of them (Anchor) claims a 20% yield on savings. This alone should be a red flag because that's about 1900 basis points above what you can expect to get from a good savings account or short-term treasury.
I don't have time to dive into the Rube Goldberg machine that this thing appears to be, but when it ends, it will end very badly.
Every Bitcoin era seems to have its Ponzi scheme. In 2017 it was BitConnect. They offered something very similar to what Anchor appears to be offering.
In Anchor's case there are way more lenders than borrowers so Anchor is resorting to pay those high yields from their reserves. It's cutting close to being a Ponzi scheme at the moment.
In a traditional banking world businesses take a loan either to cover for a short-term cashflow crunch (example an invoice that's delayed by their client) or for longer term investment. That money usually goes into economic activities which are expected (hoped?) to bear fruit to repay the loan.
In the crypto world however such loans are taken only to be put back into the crypto world; to be swapped into some hot new coin to be staked and what not. The music has got to stop at some point.
> In a traditional banking world businesses take a loan either to cover for a short-term cashflow crunch (example an invoice that's delayed by their client) or for longer term investment. That money usually goes into economic activities which are expected (hoped?) to bear fruit to repay the loan.
There's another option in the traditional world that also makes sense in the crypto-world:
People typically borrow shares of companies so they can sell them short. When the loan comes due, they 'cover' their short by buying the stock again. (So in some sense, the share that you give back is not the share you borrowed in the first place.) If the share drop in value between the sale and the covering buy by more than the borrowing costs, the short seller makes money.
Taking a crypto-loan would be one way to short-sell a specific crypto-currency.
Those crazy interest rates you mention are relatively normal for hard-to-borrow stocks with a lot of short interest.
Shorting stock is perfectly legitimate, and the proceeds from the short-sale usually sit with your broker as collateral for the borrow. In that sense, they don't go into 'economic activities which are expected (hoped?) to bear fruit to repay the loan'.
In practice, I suspect that most crypto-loans are not for short-selling purposes, but closer to what you suggest.
> The music has got to stop at some point.
Funny thing is, heavy short selling is one way for the music to stop earlier. And short selling needs exactly the kind of borrowing we decry here.
(Just to be perfectly clear: short selling by itself doesn't cause a collapse in value; Tesla hasn't collapsed after all. But short selling is a way for people who predict a drop in value to profit when their prediction comes true. Thus incentivising to add their information into the market price.)
My hypothesis is that investing 500 million in the yield reserve is cheap if it gives you control of $19 billion during the next bull market on which you reap 100% of the returns. It's a bet for sure but not totally insane.
When the music stops you will hear its loud absence.
So long as the exchanges keeps trading, those that dumped will consider them selves lucky to have sold at perceived local maximums and they will plow back into crypto. Until the religiously obsessive view of crypto ceases to dominate the mainstream the cycle will continue because it is fundamentally scarce. Buy the dip, hodl, “if you bought at every one of the last peaks you are still up…” — these ideas are religiously held and they are potent.
It's already stopped, but nobody is listening. Bubbles and the inevitable crash are often like this. Nobody can quite believe they're in the middle of one until afterwards.
No, what I'm saying is the music has slowed down; if the music had would have
stopped already, we'd be already living in the streets of San Francisco without a roof above our heads. FTX and Alameda are dumping crap into the market; the biggest excrements are about to appear
>> "there are three ways to make a living in
this business... Be first, be smarter, or
cheat. Well I don’t cheat, and even
though I like to think we have got some
pretty smart people in this building of
the two remaining options, it sure is a
hell of alot easier to just be first."
Can't wait for it to happen. I am not against cryptocurrencies etc. that would mean I fully grasp its impact on finance and potential effects on society and finance in the future - I do not.
But in its current form it seems to do way more harm than good. Aside from the troublesome regulatory issues, pure scams and lacking capabilities to counter financial crimes, the environmental impact is catastrophic. And I don't see Proof of Stake really changing that.
And don't get me started on NFTs and "DeFi". Nothing is decentralized when players like Alchemy effectively centralize access to the Ethereum blockchain and everyone and their mother uses them to build some scam apps.
>Aside from the troublesome regulatory issues, pure scams and lacking capabilities to counter financial crimes, the environmental impact is catastrophic. And I don't see Proof of Stake really changing that.
The environmental impact of Proof of Stake is pretty small, the chain in question here is probably less wasteful electricity-wise than many of the companies people on HN work at.
Proof of stake to elect a leader that mines using a verifiable delay function seems viable. Proof of stake ensures majority support. And only a single person needs to max out their cpu computing the vfd.
You can rewrite the chain easier than with PoW, but it is plenty hard - requires a majority to precommit to a secret fork. Safe enough for many purposes at a fraction of the cost.
You don't need a secret fork. You just need the community to split over some sort of doctrinal issue, such as already happened with the ETH/ETC split.
Only with PoS, there's no way to judge which fork is the "right" one. In PoW, miners vote with their finite hashpower. There's no practical limit to how many hard forks a PoS system can sustain because they don't rely on anything that's actually scarce.
Because a fork approximately divides the value of the currency between the two parts.
Imagine the USD was suddenly split into two incompatible and free-floating currencies, with the US House of Representatives saying one currency is the official one and the US Senate claiming the other. It would be chaos.
Please expand. Frankly if POS isn't viable I don't see a future for POW either; especially when carbon costs are priced in.
As things stand POW chains have traded massive inefficiency for decentralization. I doubt this can stand long term if we wish to address climate change. Crypto already has a higher energy use than many countries.
> [...] especially when carbon costs are priced in.
You misunderstand the economics of proof-of-work. Perhaps we should call it 'proof-of-waste'. Basically, in something like bitcoin proof-of-work functions a bit like an auction: the total amount of resources wasted on mining tends to equal the total amount of mining rewards.
For simplicity, assume mining rewards are fixed.
If hashing becomes cheaper, (eg first because of GPU miners, later because of ASICs), the hash rate will go up, but the total amount of resources wasted on mining will stay the same.
If hashing becomes more expensive (eg because of a universal carbon tax), the hash rate will go down, but the total amount miners spend on mining stays the same.
Arguably, that's exactly how a carbon tax is supposed to work in the best case.
Of course, there will be plenty of incentives to avoid the carbon tax. Both by mining with clean power (good!) and by mining in places that don't implement the carbon tax (less good!).
half agree with that. PoW is the most efficient method of converting raw energy into a digitally secure token. It would be much better if the work done was actually useful beyond that.
Some attempts have been done in the past, but with low success (Riecoin IIRC uses cpus to find sequences of primes, GridCoin used BOINC for the PoW, proof-of-boinc in that case).
There is still work to be done on EVM chains. Contract calls need to be processed and verified by every (full) node
> half agree with that. PoW is the most efficient method of converting raw energy into a digitally secure token. It would be much better if the work done was actually useful beyond that.
I'd say PoW is not the most efficient method. It's a terrible waste by design.
The kind of 'work' that works in PoW has some rather strict requirements, that's why it's almost impossible to shoehorn useful work into a PoW scheme.
Wikipedia tells me that eg GridCoin uses proof-of-stake to prevent double-spending attacks; its rewarding people for BOINC work is a totally separate gimmick.
Proof of waste is an interesting way of putting it. I don't disagree. Maybe it would be interesting for power companies and govt to pair up and provide coins that are deflationary, and are only mined by putting power back into the grid. Make those coins useful to pay for car registration, taxes, or whatever. At least some deflationary value could be put to work there.
> Maybe it would be interesting for power companies and govt to pair up and provide coins that [...] are only mined by putting power back into the grid.
That idea sounds good, but would only be a solution for a problem that doesn't exist.
Bitcoin's design solves two problems:
(1) only someone who owns a coin should be able to spend it
(2) they should only be able to spend it once
The first problem had been solved for ages: use digital signatures to authenticate messages of essentially the form "I, Alice, hereby send 3 bitcoins to Bob." Given some initial coin assignment to specific private/public key pairs, you can follow along these messages, keep a tally in a ledger, and know how much everyone has.
Solving the second problem is where bitcoin innovates. Without a trusted third party coordinating things, Alice could just show a message to Bob and Charles each 'sending' them the same 3 bitcoins. Bitcoin uses proof-of-work to pick (at most) one of these messages to be part of the consensus reality.
The scheme you are suggesting requires some trust in the partnership of government and power companies. But as soon as you have very minimal amounts of trust, you can just solve the double-spending problem directly.
And that direct solution involves much less trust than what is required for accepting any statements about the power grid.
If you want, I can sketch out a minimum trust system for the direct solution I mentioned.
PoS, to my knowledge isn't a viable alternative to PoW. There are too many similarities to the traditional financial system. That's partly (mostly?) why PoW was invented.
PoST (Proof of Space and Time) is PoW 2.0 essentially. It addresses the energy consumption of PoW using the same Nakomoto Consensus mechanism that provides true decentralization and the security that comes with it. It does this by doing the work ONCE up-front and saving it to space (generating plot files) rather than doing the work for every block. Lookups are incredibly energy efficient (farming plots). The Time component ensures that a certain amount of time passes between blocks, and is responsible for moving the chain forward.
There is also the added benefit of utilizing datacenter drives destined to be scrapped // still perfectly usable for storing plot files.
PoST is a step in the wrong direction. It doesn't address anything, because energy use is not a problem. PoST consumes natural resources and produces e-waste, which is way worse than just consuming clean energy and producing heat, which is what PoW does.
PoST (Chia specifically) produces 20,000 times less e-waste than Bitcoin. Chia also has 20x the nodes as Bitcoin. A comparison of network security would probably be the best way to compare the scales of each.
In the long run, hard drives used for crypto lookups in PoST (farming) have very low load and can last for a decade.
Whereas Bitcoin ASIC miners become obsolete much faster and can't be reused for general purpose computing afterwards.
> Consensus in both of them is based on unforgeable costliness, to make it economically unviable to create alternative histories.
> In both systems, total cost of mining approaches the block reward. For example, if block rewards are $10 million a day, then $10 million worth of energy is used in PoW. PoST burns through $10 million worth of hard drives.
Consensus in both of them is based on unforgeable costliness, to make it economically unviable to create alternative histories. In PoW, the costliness is based on production and consumption of energy. In PoST, the costliness is based on production and consumption of hard drives. Hard drive production needs both energy and natural resources.
In both systems, total cost of mining approaches the block reward. For example, if block rewards are $10 million a day, then $10 million worth of energy is used in PoW. PoST burns through $10 million worth of hard drives.
The cost of PoST is based on scarcity in hard drives, which incentivizes production of hard drives. The cost of PoW is based on scarcity in energy, which incentivizes production of cheap and clean energy.
If PoW's costliness is based on production and consumption of energy, it requires a certain amount of energy and natural resources to produce the hardware required to consume the energy, correct?
I'm failing to follow how PoW is fundamentally different than PoST in terms of hardware (and the resources to produce it) necessary to validate blocks.
It seems that the point of PoST is that we get a similar potential of decentralization that we get with PoW with significantly less energy usage.
I somewhat understand the argument of PoW incentivizing production of cheap and clean energy and I hope this is realized ... specifically clean energy, specifically advanced nuclear as its utilization isn't geographically restricted.
Yes, it requires production of mining hardware, but just for adding new hashing capacity to the network. Major part of the mining cost comes from energy, and I believe that in the long run even more so. Energy efficiency of mining hardware has pretty much plateaued, and modern hardware should be good for 10 years of mining, which means that less hardware has to be replaced.
The competition has shifted into finding cheaper energy sources, rather than developing more energy efficient ASICs. There's a clear trend in this direction.
Clean energy sources are the cheapest [0], and they get cheaper with every new investment and innovation. The competition in Bitcoin mining is global, which means that it becomes unprofitable for everyone to use fossil fuels when profit margins fall enough. This isn't true yet, and it's profitable to use fossil fuels in certain regions.
Usually the cheapest sources are also far away from people, because any local demand will increase energy price. However, when renewables near people have overcapacity, Bitcoin miners can serve as a buyer of last resort. This way, investments in renewables become more profitable.
We can definitely agree that crypto's demand for electricity basically doesn't care about location. So it puts a floor of demand for electricity generation in remote places. (Also in more accessible places. But there it's relatively less important.)
Electricity is both fungible to an extent, but also not as globally traded as eg wheat or oil.
You are right that on the margin Bitcoin makes generation of renewable electricity more profitable. But it also makes all other electricity generation more profitable, on the margin.
I think this is kind of a fallacy. While it's true in short term, in long term more energy sources can be always built, because there's almost unlimited amount of renewable energy available. Demand for electricity increases new investments, expands capacity, and drives costs down. It's not a zero-sum game in the long run.
Also, like I said in the other comment, most of grid energy is already too expensive for Bitcoin, so mining really makes sense just for any extra capacity which wouldn't have a buyer anyway.
> Also, like I said in the other comment, most of grid energy is already too expensive for Bitcoin, so mining really makes sense just for any extra capacity which wouldn't have a buyer anyway.
That's only partially true. And your first paragraph explains exactly why.
Compare: most cows are raised for meat, and the leather is just a by-product. However, the extra income from the leather makes raising cows a bit more profitable, thus giving us more cows on the margin.
Similarly, bitcoin mining soaking up excess capacity makes electricity generation slightly more profitable.
Eg instead of running a coal baseload plant and a natural gas peaker, you could run two coal baseload plants and outside of peak periods, you mint bitcoins. (Numbers are just for illustration. You get the point.)
About your first paragraph: yes, supply is elastic in the long run. But opportunity costs still need to be paid. Yes, in the long run you might not be trading off one Joule for another Joule, but you are trading off uses for capital.
(Also keep in mind that even with elastic supply, we still have decreasing marginal returns. There's only so many good sites for hydro-electric generators; all the windiest spots will be full of wind turbines at some point, etc.)
The projects mentioned in the article we are commenting on (or more accurately the chain they run on - Luna) are Proof of Stake. PoW is completely irrelevant here.
Yes, and it can't hold it's peg, that's why we are here. So apparently this is not a functioning project that is working (as in "can solve its proposed use-case")
You may be disinterested, but you're not informed. The people above you are not arguing about whether LUNA is a successful coin in general, but over how it reflects on "proof of stake" vs. "proof of work" protocols. If you think LUNA losing their peg is a good argument against PoS, you don't know enough about cryptocurrency to judge these arguments. LUNA's peg to the dollar is ensured with a scheme that has zero to do with either proof of stake or proof of work. Saying Luna's failure redounds on proof of stake protocols is like saying that AOL's failure redounds on the HTTP protocol.
ethereum is changing its consensus mechanism to PoS later this year. when it does that, the only major PoW chain left will be bitcoin. all other smart contract chains with large userbases are PoS already.
There are plenty, but none that are decentralized. They all use checkpoints or a trusted signer. Proof of work is a way to bootstrap consensus without a trusted party.
Carbon footprints rivaling countries are not small when we're already at 1.2C of warming and barreling toward 1.5C within the next 5 years. Tell yourself it's not small when the equator becomes too hot for the majority of humanity living at those latitudes and the migrant levels increase significantly, among all of the other problems. The blaise approach people take to climate change just boggles my mind.
So in other words, banks reinvest in the next hot thing hoping to make a buck?
Seems analogous to what u say about crypto investing in the next hot new 'coin', which very well is just a proxy to people trying to build something of value.
Well the difference is that banks are highly regulated, and invest in a diverse portfolio of stocks, bonds and financial services which are usually expected to be underpinned by fundamental analysis. They are heavily audited and have strict rules about speculation.
The difference to some pretty much unregulated company that reinvests lots of its money in crypto because crypto has gone up in the past so ‘past performance must equal future growth right?’ is pretty obvious to me.
Like the OP said, UST was paying 19.5% to depositors. In contrast borrowers were only charged ~13%. A regulated bank could choose to do this if they really wanted to.
So the main difference is really that banks run a sustainable model by charging borrowers more than they pay depositors (who are lenders in the fractional reserve model); by orders of magnitude. Being paid out more than is put in should've been a massive red flag to anyone who entertained the Luna ponzi.
I would guess that in many countries a regulated bank offering more to depositors than they charged borrowers (without some kind of strict limits on the amount per customer) would get a visit from their regulators quite quickly to understand how this was sustainable and in-line with Banking regs.
In the UK at least retail bank deposits are guaranteed up to £85k per account, so there's a real incentive for the banking industry to police their member as if one fails, they'll all take a hit.
> In the UK at least retail bank deposits are guaranteed up to £85k per account, so there's a real incentive for the banking industry to police their member as if one fails, they'll all take a hit.
As you wrote it this doesn't make a lot of sense, so I'll explain, in the process I'll actually fix some errors too.
The UK government protects up to £85k per person per banking license. So if you have £40k in accounts at each of four brand name banks but they're actually all part of one huge corporation "Big Banks Inc." with a single license then the government only protects £85k total, 'cos that's just one license.
Unlike FDIC this is not insurance, instead it's a Last Man Standing system. If some banks fail, the government re-coups its loss over time from all remaining licensed banks. So for example if Santander fails, the costs of fixing that problem land on HSBC and other enormous banks. As indicated this produces an incentive to "police" your rivals because if you allow them to go under by not warning of risky practices, you're going to eat that cost yourself.
As an individual in the UK, if the £85k isn't enough you can invest in the NS&I which is a bank owned by the government. Unlike commercial banks NS&I isn't lending your savings to some unknown (to you) borrowers instead they're effectively lending everything to the government, which would otherwise need to borrow that money commercially (ie issue bonds) so it knows what that's worth. The rates aren't great but since it's owned by the government there aren't a lot of scummy for-profit shenanigans like "introductory" rates that then zero out unless you're constantly opening new accounts and moving your money. Since NS&I is owned by the government who also print the money your savings are denominated in, it can't go bankrupt. The money could become worthless, but in that case it doesn't really matter who you banked with and the whole country is fucked anyway.
Also for some NS&I accounts interest is tax free because technically they are lottery (although with a relatively predictable return for large savings).
Mind, the interest is currently so low that it doesn't really make much of a difference.
The rationale for Premium Bonds isn't really the tax it's the fact that people like gambling.
It turned out that persuading Aunt Sally to buy the new baby £100 of investment that will earn interest and might be worth something when the baby goes to college is hard - whereas Aunt Sally is much more interested in buying the baby £100 of scratch-offs with a tiny chance it wins big but most likely it gets nothing. This is before scatch-offs were legal in the UK as they are now but NS&I tweaked the numbers to offer a product that is (from their point of view as a bank with many savers) just a bond, but from the individual saver's point of view works like a lottery.
If you offer more to depositors than you charge borrowers, it's never sustainable you're making a loss.
If I make £3000 in interest from borrowers on a set of money and give away £5000 in interest to depositors of those same funds, even before I account for the costs of operations (systems don't develop and run themselves) I'm making a loss.
You seem to be suggestion luring people in with a high rate and then dropping it later. That only really works if there's some kind of lock-up to prevent all your depositors fleeing as soon as you lower the rates again.
If you lock-up funds, generally you have to guarantee the rates for the period of the lock-up otherwise that's a bait-and-switch, which is generally going to get you into legal problems :)
>If you offer more to depositors than you charge borrowers, it's never sustainable you're making a loss.
Like a sibling comment you are not accounting for the profit that comes from the collateral.
Maybe a nondefi example would help. Imagine if a landlord got a loan using a rental property as collateral. In this example the lender will now get the payments of rent. Now the lender makes money from both the interest rate on the loan and from the renters of the property. Depending on the demand for the rental property the amount of rent you may collect can fluctuate. This means that some months you may make more money than others. So in order to sustain a certain level of profits the amount of rent you collect will need to be worth a certain amount.
That’s not how it works in the real world though. A landlord takes out a loan at a particular interest rate, and makes repayments based on that. The bank doesn’t “get” the rent, they get the repayment that ideally for the landlord is less than the rental income, unless they’re relying on capital gains. The collateral only comes into account if the borrower defaults, for the lender to sell to make back what they were owed. Otherwise they have no claim on anything to do with the collateral - neither the rent nor capital gains.
I was just trying to make up some sort of example where you can gain income by holding on to someone's collateral. I wasn't trying to say how something typically works.
That isn't how collateral works, so you really are just making stuff up. If you did start doing this sort of thing as a bank you would attract regulatory attention pretty quick.
I think you missed a key detail. The collateral for taking out a loan earns staking rewards that get distributed to the depositors. The amount of money staking rewards are worth can fluctuate too depending on the state of the project / cryptocurrency ecosystem.
Yes, but most of them have a business plan that doesn't involve taking a loss, once they've reached a certain scale. And while they're taking that "loss" it's not usually due to revenues being below the cost of goods sold, it's because they're spending all profits + some investor money to grow. Many (though not all) can simply stop growing and be instantly profitable. Businesses that sell you $10 for $5 tend to fail as soon as they run out of capital, because they've got no path to profitability.
The most likely reason to pay much higher interest on money deposited than money they lend out is to steal the deposited money. It isn't illegal to do it, but it is a huge red flag which is why it would warrant an inspection.
Smart contracts doesn't save you here, since the deposit happened when you bought their crypto coins, not when you signed the smart contract.
How do they prevent people from borrowing to deposit? If I own two wallets, would I be able to borrow some coins, transfer them to my other wallet, and then deposit them so I'm netting 6.5% for free?
> They are heavily audited and have strict rules about speculation.
If only these "heavy" audits and "strict" rules could stop the incessant corruption we see all around the globe in federally insured banks.
People who think crypto is shockingly bad just haven't been paying attention to banking. Sure, crypto is full of small scams and because of most of cryptos open fundamentals you can expect those scams will never grow into federally insured banks. That isn't the case for private banks who have been getting away with the worst scams for far longer than I've been alive.
>That isn't the case for private banks who have been getting away with the worst scams
People are straight-up rug-pulling in the crypto world for tens of millions of dollars, outright scams, and the scale of crypto is a fraction of the banking world. I bet you'd be hard pressed to name a couple equivalent scams banks have pulled in a first-world, financially regulated economy. I'm not talking about some rogue employee ripping off accounts, I mean organized fraud.
Anyone who has ever actually worked with or in the financial industry knows how crazy the regulation is. It's far from perfect, but saying it's worse than the crypto world is laughable.
"far from perfect" - well that misses the mark by a long shot. We still have unsettled shorts happening every day that are often naked and regularly stay naked for months on end - companies are destroyed from this blatant market manipulation.
Gamestop was 140% short! Is this uncommon? Many people seem to think not.
The corruption in wall-street runs so deep that tax payers have to foot the bill when no middle class person would look over the toxic loans being packaged up pre-2008 and think that wasn't a scam. This crashed the world economy, it's hard to imagine a bigger scam ever being possible without the former bank CEOs running every financial branch of the government promising bail-outs to the "too big to fail" scammers.
Yes I'm still stuck on that, it's a story people often recognize and just because there has been no naked shorting found as of that report doesn't mean there isn't significant naked shorting involved. With the shorting moved to dark pools on top of the fact there were likely 45 million shares still shorted after that reporting data shows, it's not as clear cut as you might be implying.
Many people are confident naked shorting happens and GME hit 140%, the highest ever according to that report. So yeah, consider me skeptical that the SEC was able to find evidence of a non-scandal and used that evidence to report a non-controversial finding.
You can bury your head in the sand and pretend the market is fair if you want, but I'll stay skeptical.
I don’t know that I’d go so far the other way to infer the market is _fair_ to retail traders, but the 140% short number is not itself evidence of impropriety. All it requires a lot of longs allowing their shares to be lent (check) and a lot of shorts with appetite, conviction, and deep pockets (check).
Naked shorting doesn't destroy companies. Hypothetically even if the stock price goes to zero that doesn't prevent the company from operating as a going concern.
Incompetent managers destroy companies. Sometimes those managers try to deflect blame for their own failings by whining about short sellers.
The popular trend lately is to point out flaws in our regulated institutions in a feeble attempt to suggest that the solution is to abandon regulated institutions altogether in favor of some techno-libertarian hellscape. Because why fix a broken thing when you can throw it away and replace it with something even more broken.
The internet (just like crypto) is a global distributed network with only local regulations (that are easily bypassed, again, just like crypto) and I would argue this "techon-libertarian hellscape" is the most valuable and important invention mankind has ever created.
I used to feel far more optimistic about the internet. Today I see the social aspects of it as a net negative; Social media in general is a cesspool, user privacy means nothing to the big internet players, ads and tracking are absolutely pervasive, and the quality of online discourse has been on a steep downward trajectory for the better part of a decade.
I'm not seeing how using the internet as analogy is at all relevant to the discussion about corruption. The internet, if it has resistance to catering to special financial interests at all, is only so because it is far removed from that sector, not because of any special attributes from being a distributed network.
Come on, what percentage of banking activity is money laundering, and what percentage of NFTs sold is money laundering? I think there is an order of magnitude, order of magnitude difference.
that is the wrong comparison IMHO. if you are talking about money laundering using NFT's as in pics of cartoon monkeys (an NFT is just a digital deed, the monkey pic is actually an extension), you should be comparing them to money laundering using art.
Banks generally invest in something related to productive activity which is expected to provide an income stream. Crypto banks invest in something valued only for its popularity which is unrelated to productive activity.
All investments are speculative and involve some risk. But outside of crypto, few of them are purely so.
A couple months ago I was trying to figure out how they did “stablecoins” across multiple IRL currencies, which of course can fluctuate wildly against each other IRL. Their Discord helpfully explained that it’s just incentivized validator-oracles, which IMO is like crack candy for any crypto-Soros[0] out there.
Not that I think this is what’s happened, it just stood out that the grand claims didn’t even have any fine print, you had to go actually ask the community, “hey um what about this apparent contradiction?”
To their credit the community was super nice and helpful.
[0]: I cite him as the world’s (former?) greatest currency speculator, not for his politics.
These algorithmic stablecoins are just the CDO reinvented.
You slice up the risk into different pools and play funny games with the risk. You can therefore build an AAA bond out of subprime mortgage crap, and everything is fine
Well, except for 2008 but who was paying attention to that anyway?
Dividing things into different senior/junior tranches or grouping together things to reduce uncorrelated risks is not a recent innovation. It’s been important to finance for a long time. I don’t think this has much to do with CDOs.
Still, CDOs are the most recent example where they went wrong on a very large scale, enough to wreck the USA's real estate market in 2008... and then topple down a lot of banks as well.
To be clear, the great majority of investment bank losses in 2008/2009 did not come from CDOs and even CDO^2s ("CDO squared"). It came from CDS on ABS/CDO. Roughly, you could get long/short on an ABS/CDO/whatever bond that you didn't own. It's like selling fire insurance on your neighbor's home. By itself, not as crazy as it sounds in the financial derivatives landscape, but the underlying collateral were a pile of garbage. There was (and still is) already a huge and healthy CDS on corporate names market, so it seemed reasonable at the time to expand the CDS product. Unfortunately, once the fraud with underlying loans started to unravel, the losses became so large that many CDS counterparties went bankrupt, so the whole thing backed up the investment banks themselves. (See: Fed/Treasury bailouts / bank firesales!) To me: CDOs and CDS on ABS/CDO is just the tip of the fraud iceberg.
2008 was caused by systemic risk. And geniuses in the banks failed to see it. So I guess, I fail to see why I should believe some $RANDOM_INTERNET_COMMENTER could figure out if an asset class has systemic risk.
Apply Lenin's maxim... the banks made it through 2008; in fact Lehmans were really shocked that they got thrown under the bus. The miscalculation was that the authorities would act irrationally in the crisis and let a broker dealer go under. All the banks had tested this with LTCM and were confident that they would get bailed and could collect on both sides. They were mostly right. The lesson for me is that authorities need to act a bit like an old testament god. Some random smiting would change market behaviour significantly, and for the good.
The argument there was that LTCM was "too big to fail". Really they probably weren't, but they had 1.25T derivative positions off-book apparently.
Love or hate Paul Krugman, he argued that TARP could have been better put to use as a social safety net. The banks who took the risky investments can burn to the ground, but the citizens could be just fine.
I think it's like doctors arguing about what skin cream to use to treat smallpox. The requirement is to prevent market participants from being able to act like this, and the way to do that is to make the people who trade with them face nasty penalties like sudden liquidation of their businesses. That mechanism would make counterparties very careful about other people's business models.
I'm kinda more of a 'provide regulations and let the courts settle this out with the shareholders' kinda guy.
Also a true free market allows trading strategies that let you bet against something. Yes, they're abused, but in many cases they provide the best form of market regulation.
Two obvious reasons - 1) the market cap of all cryptocurrencies (prior to the ongoing crash) was only around $2-3T. And 2) there’s relatively little leverage in cryptocurrency at this point (compared to Wall St prior to GFC).
Tiny market cap + comparatively low leverage = no systemic risk in the same league as the banking system leading up to the GFC.
This is not so difficult to see or understand that you need some authority to claim it to believe it. $RANDOM_INTERNET_COMMENTER is sufficient. Easily verifiable.
There’s also actual empirical evidence - Bitcoin has lost 50%+ of its value five times now (counting the most recent crash), a massive loss. But it doesn’t collapse the entire global economy and require trillions in govt and Fed bailouts to prevent the end of civilization. Even in this current crash with stablecoins like UST failing, it won’t collapse the entire economy or require bailouts.
Whatever systemic risk there is in cryptocurrency right now is not remotely in the same league as in the banking system.
Thanks for replying back. I'm not saying your stupid, because you're most likely not. What I am saying is that a lot of smart people were misled during 2007/2008. And most likely $RANDOM_INTERNET_COMMENTER is not hired by wall street -- not on this board anyway. And even if you were, you probably missed signs anyway as you drank the wall street "everything is turning up Milhouse" kool-aid.
What I find interesting is that the volume you're talking about is in that anal pucker range for systemic risk. $US1.6T of CDO's were issued between 2004 and 2007 [1]. That's still less than the number you're talking about.
There was ~$1.6T of CDOs, plus some amount of separate MBS’s that weren’t re-securitized into CDOs, and over $30T of CDS’s, and the main Wall St. banks were over-leveraged up to 33:1, and Fannie and Freddie were over-leveraged by around 100:1. Between the banks and Fannie/Freddie, there was about $9T in over-leveraged debt with insufficient equity or collateral, almost half the US GDP at the time.
The conditions back then dwarf the current crypto market. But I am worried the crypto market is doing its best to not learn anything and to repeat those same mistakes anyway.
And I actually got lucky and in late 2006, as I was getting interested in investing for the first time, discovered an online community of forensic accountants piecing together from public filings what was happening with all the house flipping.
Shortly before I found them they had concluded it was a massive unsustainable bubble forming, which would inevitably end in collapse. Their research and evidence convinced me and formed my worldview before I even had a chance to drink the Wall St koolaid. All credit to them though, I just got lucky in discovering them.
I thought that is what CDOs are as well. From Investopedia -> A collateralized debt obligation (CDO) is a complex structured finance product that is backed by a pool of loans and other assets and sold to institutional investors.
A bank issues money (deposits), and stablecoins try to produce something 'money-like'. CDO tranches promise different rates of return with different riskieness, they never really acted or were meant as money substitutes.
No one invests into stablecoins to get crappier versions of USD.
They go into UST because they were promised 20% risk free APY from Anchor.
CDOs (or really the generation of junior vs senior debt) showed these people how to cut up risks and provide returns for extended periods of time. Much like how CDOs cut up debts and moved risk around in funny ways.
But no wealth was actually generated. At least with CDOs the subprime mortgages had high APY, it was just that the risk of widespread default was miscalculated.
Furthermore, the senior debt tranches of CDOs had lower returns than the underlying. (3% 'risk free' for example, built out of 5% or 8% subprime mortgages)
This Anchor / UST / Luna looks unsustainable. There is no financial instrument that offers 20% risk free returns in today's world.
There was a off hand comment in the Big Short book, about a Money Market fund, Reserve Primary Fund, that announced they couldn't pay back all debits, during the worst of the 2008 crisis. It was, "Money Markets weren't cash -- they paid interest, and thus bore risk, ..."
Its interesting to note that Money Markets pay out <1% interest now. When I searched for Money Markets to get the %, I got an Ad for "Donut" touting a 7% APY DeFi. They advertise they put money into StableCoins and earn a return. Customer Quote on the page, "I make so much money on interest, I can pay rent". My god, the collapse will be huge.
"Crypto-Soros" is an excellent reference; I believe some of the Pound's fundamental weakness stemmed from a period of high inflation and low interest rates.
Well its not really a peg, more of a pigeon hole and when the pigeon goes in the hole we peg it, its pretty messy to be honest but we aren't really interested in pigeon holes are we? No, we are interested in pegging.
You're both right and wrong. The SEC was told by a US court that they can in fact deliver a subpoena, so from the SEC perspective they've been given "jurisdiction". However the other side of the coin is that they've been granted permission to serve a subpoena to someone who isn't American, and to a company that doesn't have a presence in the US.
If Do Kwon decides to visit the US and hasn't complied, he may find himself getting arrested. If his company decides to have assets in the US, they may be seized. However until either of those things happen, which they won't*, then the US has zero teeth in this.
> The SEC was told by a US court that they can in fact deliver a subpoena
Wrong. They served the subpoena first; they need no permission to do that. Then SEC sued to enforce the subpoena, and the SEC prevailed in their suit.
Then Do Kwon and Terraform applied to have enforcement of the subpoena stayed by the trial court pending appeal, and failed; they then attempted to get the US Court of Appeals for the Second Circuit to stay the subpoena pending appeal, and failed, and currently are in the process of litigating the case before the Second Circuit.
To portray this as a case where the SEC has failed (spefctacularly or otherwise) to establish jurisdiction is false.
So the way this goes is, the Americans are patient. A week after you're hyper vigilant of course, a month after, a year after... and then 20 years later your best friend's daughter is getting married and she's insistent it has to be on Hawaii, and... next thing you know you're in handcuffs being led away by agents who weren't even born when you committed a crime.
If they sold to the US investors they have to abide by US rules. US has a bunch of extradition treaties making it very hard to run from US law enforcement.
Yes, the fairly obvious limit of going somewhere the US doesn't have an extradition treaty with. In Snowden's case: Russia. Which I personally wouldn't be thrilled to do, but the options are limited.
Lots of misrepresentation going on here. An extradition treaty merely facilitates things. You can have protections despite a treaty (e.g. France for its own citizens, ever!) and you could still be extradited if there isn’t one (there just isn’t an agreed upon mechanism for how to do it).
Yeah I think that's a pretty common thing to do. Outside of US and some EU countries, I know Carlos Ghosn is famously hiding in Lebanon where he is a citizen.
You’re right, every treaty is a different beast and there are no absolutes. But the general principle is Further, 18 U.S.C. 3181 and 3184 permit the United States to extradite, without regard to the existence of a treaty, persons (other than citizens, nationals or permanent residents of the United States), who have committed crimes of violence against nationals of the United States in foreign countries.
If the applicable treaty or convention does not obligate the United States to extradite its citizens to a foreign country, the Secretary of State may, nevertheless, order the surrender to that country of a United States citizen whose extradition has been requested by that country if the other requirements of that treaty or convention are met.
Those seem to be the mechanisms to extradite in the absence of a treaty. No point in having laws about treaties because ratified treaties trump the law (is my understanding).
Go to Russia and have a use for the authorities there, or have a lever/debt of gratitude.
I genuinely don't know where Snowden sits on that - I think he serves as a useful demonstration of the power of Russia and the failings of the US, but obviously know nothing.
On the other hand, a failed crypto bro who has taken oligarch money and can't repay it with interest. I think that is going to be the very definition of a "Russian Holiday".
Snowden’s charges had a maximum of 10 years. If he had surrendered and pled, he would be free in America soon. Instead he gets to spend the rest of his life in Russia. That was his choice.
Each year in prison shortens your life expectancy by two years. So he'd be out soon, but very very unhealthy. Better to be in Russia. It's not the worst.
He could have been free - or he could have suffered a 'mishap' in prison. Not that things have ultimately worked out well for him, but I'd understood Russia was merely a stop-over from which he realised there wasn't going to ever be a safe onward option, so he's stuck.
> If they sold to the US investors they have to abide by US rules.
If you look closely at that statement, however, you can see that it's recursive and missing the base case: the rule which says "If they sold to the US investors they have to abide by US rules" is itself a US rule.
Thus the mention of extradition treaties, which mean (to a loose approximation) that other countries agree to let some US rules get enforced on people in their borders.
In Terraform's case, it looks like they're in Singapore. Which the US does indeed have an extradition treaty with.
Yep. People should learn the difference between Kwon filing an opposing statement [that may have seemed convincing] and a judge actually ruling that way. By "late last year but failed spectacularly" I think /u/atian just accepted that process story (nov/dec) as being the result, perhaps because first the SEC filed and then Kwon filed a response. Every question before the court in cases like these has at least three documents typed up in Times New Roman and looking like that. Only the last one matters, the first and second are not useful to lay folk except to indicate that things are still chugging along.
In summary: the judge agreed with the SEC. The subpoena is being enforced.
> Every question before the court in cases like these has at least three documents typed up in Times New Roman and looking like that.
At risk of being excessively pedantic, there's generally the motion, the response, and then movants' reply, and then the judge's order. Sometimes the brief and the motion are separate documents (particularly when you're moving for a temporary restraining order or the like). So that's generally 4, not 3, documents that you'd expect to see.
Also, different courts have different rules on what the appropriate font is. There are some jurisdictions that explicitly prescribe a list of acceptable fonts (e.g., apparently Connecticut gives you a choice between Arial and Univers), and Times New Roman isn't necessarily on that list.
Yeah, a bit pedantic, each of those points was rhetorically preferable and accurate enough.
Re the number, that's why I said "at least three". The point I'm making is that it is practically never 2, so one should not conclude that the SEC lost simply because another story appeared that seemed to contradict its view. You have to wait for the one that actually says it's a judge's orders, counting is not my proposed method.
As for the font, sure. It was just another way of saying "official-seeming", I'm trying to encourage people to look past the official-ness because all the filings look pretty similar and you do have to read the title. Nevertheless in the federal courts (except SCOTUS) and in California, which are the cases you see most often on HN, it seems to be Times New Roman everywhere.
I understand why the lender demands 20%. The economic problem is that the borrower has no conceivable use for the funds which could reasonably be expected to cover that yield (short of inventing the money out of thin air)
The other side of the trade is frequently a pump & dump. With that much borrowed capital, you frequently can exert noticeable market power on many thinly-traded cryptos. Push the price higher, consistently, wait till Reddit & Telegram pick up on the coin, then dump it on a greater fool at vastly inflated prices and use a portion of the proceeds to pay back the loan. Works great until there are no greater fools and the proceeds (which are often some stablecoin, or BTC/ETH) end up worthless too.
Before people shake their heads at how horrific crypto is, note that a good many leveraged buyouts operate on the same principle. Capitalist takes out a large loan at high interest rates, uses it to buy a company, company assumes the debt. Stripe mines company of assets & goodwill to goose the stock price. When the price is high, cash out and wait for shell of the company to implode under debt load, helped along by all the operational shortcuts that were taken to goose earnings.
Risk parity isn't the issue here. The issue is that is yield isn't coming from investing the funds in productive endeavors, it's being printed out of thin air, which is unsustainable.
Flash loans is one thing that I have no idea how I could get as a typical retail tradition finance customer, but are readily available on crypto. In the ideal (impossible) case they are riskless. Executing just 200 of them yields ~20%.
>20% is risk parity for keeping your money in smart contracts
I'm curious how you justify this statement. To the crypto-skeptic, such a statement is absurd on its face as a 20% APR is utterly unrealistic in the traditional finance/investment world. To the crypto-bull, 20% is far, far less than is offered to keep your money in various Defi protocols.
The key to running a Ponzi scheme is to make it last a really long time. Ironically, Satoshi saw this behavior with the US federal government printing money and effectively scamming people on fixed income and anuities. He was right to be upset that people were effectively lied to about the value of their money.
Now the shoe is on the other foot and the crypto world is full of predators who would be selling anuities to old people, but are now selling crypto scams to suckers.
I'm not OP, but the money has to come from somewhere, because people want dollars, not some $shitcoin which may drop 90% in value overnight.
A credit card typically maybe has 15-19% interest. So I'd be surprised if the average credit card gets 10% profit per year from interest payments minus defaults. But somehow you're going to get a guaranteed 15% rate from algorithms? Smart contracts?
Yes, their point is that if you buy a cashflow negative asset you are now stuck having to figure out how to sell that asset to the next person. If you buy a cashflow positive asset the opposite situation happens. You don't have to convince anyone of anything.
Value is always, and in all cases, subjective. So what makes Bitcoin users subjectively value Bitcoin? Because it's truly decentralized. Its decentralization is what makes it scarce, neutral and uncensorable. There are no insiders, founders or companies to attack. It's also digital, so it can be transferred at the speed of light.
This decentralization made early users speculate that it could be worth something for its unique properties. That jumpstarts the network effect. More people using it means even more people will start to value it. This is a positive feedback loop.
The incentives are obvious. The feedback loop will continue toward global adoption. But you seem very skeptical, so tell me, what is going to break this feedback loop? What is going to kill Bitcoin?
Nothing will kill Bitcoin, just like nothing killed beanie babies. They both will exist for a long time.
But the world is finite, there is a limited number of people who have a limited amount of money with to speculate. Maybe the Bitcoin pumpers will convince some of that money to move away from other speculative investments and into Bitcoin and the price will go up, but there is a limit that will be hit eventually, then you have to deal with the reality of a negative cashflow asset.
Are you ignoring scarcity? Beanie Babies can be made and remade, and fixed, and resold, and counterfeit, etc. There’s no law that prevents the manufacturers from just pumping out millions of beanie babies.
Bitcoin on the other hand is a finite resource. It stops at 21 million. It can never go higher than that. New shitcoins are birthed everyday, but they are not Bitcoin.
There is no law that prevents 51% of the node operators from forking the Bitcoin code. Even if there was, scarcity isn't the same thing as value. My kids art work is incredibly scarce compared to Bitcoin. I can copyright it so that no one can copy the only original that I own. But that doesn't mean it is going to go up in value.
You are not informed. Forking is not the issue. There have been forks before. Rewriting the chain history (which is extremely difficult by the way) is the issue.
like equities? from a macro level, dividends on the s&p500 is like 1.3%, so the difference between productive and nonproductive assets isn't very high, not nearly as high as it once was. munger and buffet come from an era when dividends were still 4.5% or higher. those days are over, with the sky high valuations we have now.
Are you sure? The Luna Foundation has been the largest buyer of Bitcoin the past couple of months because they knew their scam was crumbling and they needed an actual reserve asset. Yesterday they deployed their reserves to exchanges and OTC desks in order to start buying up their scam token and keep their scheme going a little bit longer.
If you had such a coin, there'd always be the risk that no one will want to buy it from you, making it worthless. Therefore, real stablecoins generally have a backing organization with a supply of another currency that is guaranteed to give you a dollar-equivalent for your coin. The problem arises when nobody wants to buy your coin and the backing organization doesn't actually have the money to back it up.
> real stablecoins generally have a backing organization with a supply of another currency that is guaranteed to give you a dollar-equivalent for your coin
I can't see the difference. So what if nobody wants to buy that coin either? You just added an additional step.
Traditionally, the backing currency is a well-established fiat currency such as USD, which in turn is backed by an international economy full of buyers. But here, I was specifically talking about the scenario where you contractually force buyers and sellers to maintain the peg. If the backing currency doesn't have such a contract, then buyers would still be willing to buy it for a sufficiently low price, like what's happening now to UST.
I don't know much about tethercoins and I might be misunderstanding something here, but if you force to maintain the peg in the backing currency (I assume via smart contract?) then you just changed the failure scenario to "nobody buys the coin", i.e. the value drops straight to zero. Not sure how that's an improvement except it happens in the backing currency.
...and this has circled back to your original comment where you say exactly that, but referring to the proposed stablecoin? Not sure what I'm missing!
I guess there's really a couple different failure modes for a pegged coin:
1. The backing organization isn't actually fully backing the coin with the backing currency. Too many people try to sell the coin at once, and the backing organization goes bankrupt.
2. The backing currency loses its real value, so that you can no longer exchange it for goods and services. You can buy as many as you want from your pegged coin, but all your money is gone. This could happen if the backing currency is another volatile coin, or if it is a fiat currency subject to hyperinflation.
I read Matt Levine's article on UST, and by his account it fell victim to the second failure mode: as holders lost confidence, the value backing Luna coin went down toward 0, due to the backing mechanism diluting the supply ad infinitum. Right now, Luna is at a low but positive value (in USD), and Terra has lost its peg, mainly because the backing mechanism is too slow. If it were infinitely fast, Luna would become worthless, and Terra would be worth whatever value speculators would gamble it at.
My apologies for the confusion, I got mixed up in the last comment. If you enforced the peg by contract, then you'd need a steady stream of buyers who believe it is valuable. But if you have a backing organization who can always provide a backing currency, then the peg can be maintained through arbitrage alone.
>people would be more interested in a coin that is enforced to be $1.00
I have some of these in my wallet right now, in fact.
But as to your question - why would anyone be interested in a $1 coin "even if it had nothing backing it"? The attractiveness of backed-by-nothing cryptocurrencies is the potential for wild upswings. That's lost in a hypothetical programmed-to-$1 digital currency.
And to preempt any comments about fiat, the USD is backed by "the full faith and credit" of the US Government, which at the current time is made tangible through military and economic force.
Finally, currency prices are dictated by the price people are willing to pay. There's no such thing as what you are suggesting if people refuse to pay $1 for it.
Just admit that you would rather state your opinion without informing it. How anchor offered 20% (it doesn't anymore, as you are not aware) and why that 20% was not sustainable is perfectly understandable without reverting to "it's a Ponzi scheme!" That's like the Godwin's Law of finance, if you have no idea what you're talking about but want to be sensational the lowest effort thing you can say is point at a thing and call it a Ponzi scheme. There are valid criticisms of Anchor - anyone even remotely familiar with the protocol could and would speak about the yield reserve, how Anchor yields are generated from stake rewards of other tokens, the risks and failure scenarios of that design etc - but you clearly have no clue about any of this. Usually the appropriate thing to do when you have nothing useful to contribute is not contribute.
> There are valid criticisms of Anchor - anyone even remotely familiar with the protocol could and would speak about the yield reserve, how Anchor yields are generated from stake rewards of other tokens, the risks and failure scenarios of that design etc - but you clearly have no clue about any of this.
You have an unusually high level of confidence in understanding something (smart contract defi) that was invented, like, last week. I don't see why anyone should feel confident they understand how it works as opposed to how it's supposed to work.
2 days ago it was 17.5%. The rate used to be fixed at 20% (until last month) and was recently changed to variable. Today the rate is up because a lot of people removed UST from Anchor (deposits decreased by about 50% since Friday). Less depositors collecting interest from the yield reserve.
OP implied the fixed 20% rate is what is currently offered, but that is not true, the rate is variable.
This thing isn't just one token, but apparently at least three. One of them (Anchor) claims a 20% yield on savings. This alone should be a red flag because that's about 1900 basis points above what you can expect to get from a good savings account or short-term treasury.
I don't have time to dive into the Rube Goldberg machine that this thing appears to be, but when it ends, it will end very badly.
Every Bitcoin era seems to have its Ponzi scheme. In 2017 it was BitConnect. They offered something very similar to what Anchor appears to be offering.