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How does this make sense? If they don't hold the underlying security, where does the value come from? This feel like it's another one of those "while money is

How does this make sense? If they don't hold the underlying security, where does the value come from? This feel like it's another one of those "while money is flowing in it'll work, but if there's a run, it crashes spectacularly". If the liquidity dries up, i end up owning nothing. With a real security at least i end up owning a small part of apple, but here i literally own nothing.

donmcronald 5y ago
If the hedge funds and prime brokers are allowed to sell the unsuspecting public a bunch of counterfeit shorts, why not let the crypto market do the same? I’m only half joking.
- munk-a 5y ago
  Well the goal is never to have more problems. The discussion of the good or evils of regulations in general is a pretty deep debate in America though.
- dehrmann 5y ago
  > counterfeit shorts Do you have a reference for something that's had issues being naked shorted, recently? GME was a short squeeze, but that's different.
tablespoon 5y ago
How does this make sense? If they don't hold the underlying security, where does the value come from? Come on, this is cryptocurrency. The whole point is to con people into thinking a fake thing is real because blockchain and cash in; with the off chance that if enough people believe, then their belief will make the fake thing real.
- MathYouF 5y ago
  You should read up on the last decade in Venezuela, which used to be the richest country in Latin America, and having wealthy professionals see their savings evaporate due to 1,000,000% inflation because of the actions of a government they democratically elected. Belief is the only thing holding together a lot of the things that we rely on to keep society functioning the way it does. I'm guessing (though not assuming) you're posting from one of the most historically stable countries in human history, but that isn't how most people experience planet earth, and it isn't guaranteed that that's the wya you'll always experience it either.
  - cinquemb 5y ago
    > Belief is the only thing holding together a lot of the things that we rely on to keep society functioning the way it does. Which is why alot of people feel threatened by the ever shifting sands in the global financial landscape
    - MathYouF 5y ago
      Indeed, never seen so many people on HN be so reactionary and emotional about a simple technology. The demographics of the crowd: wealthy, living in the most stable country in history, with access to digital forms of banking worldwide, ability to emigrate wherever they'd like, able to transfer money as they see fit, and holding their savings in the global reserve currency for a country which they're a citizen of. Doesn't help many empathise with why many people around the world can't trust their governments centrap bank, or open a bank account elsewhere, or convert their savings to a stable currency and assume it won't be seized or banned locally. It's best to just build cryotocurrency and not bother explaining to Americans who aren't willing to listen why it's necessary. It's like explaining public transportation to people at a country club.
      - cinquemb 5y ago
        > It's best to just build cryotocurrency and not bother explaining to Americans who aren't willing to listen why it's necessary. > It's like explaining public transportation to people at a country club. That's a good way to put it, and that's me saying that as some one who left the US 6 years ago, worked in finance as a dev (consumer and derivatives markets, emerging/developing and developed) and actively helping to build defi protocols and blockchain research/development.
  - fock 5y ago
    The people of Venezuela elected the US government? That's news to me!
  - lottin 5y ago
    It's not like if hyperinflation could be avoided everything else should be fine. No, hyperinflation is a sign that the economy is grossly mismanaged, and that in turn is likely the result of desperate, incompetent government facing all sorts of economic, social and political problems. Switching to a different currency isn't going to fix a failed state, sorry.
ZephyrBlu 5y ago
I assumed they held all the securities themselves facilitated 24/7 trading like that. Not holding the securities seems extremely dodgy.
- cmckn 5y ago
  They mint and burn tokens as necessary to make the price resemble the actual stock. When minting new tokens, you have to provide collateral in the form of stablecoins. Yes, it is as bonkers as it sounds.
  - kristjansson 5y ago
    Just when I think the crypto people can’t surprise me any more, here they go again.
rawtxapp 5y ago
It's a derivative, it also exists in traditional markets and it's size is gigantic compared to normal markets. As far as I understand it, in this case, it's essentially cash settled.
- social_quotient 5y ago
  Yes and here is a good read for those that haven’t seen some of these figures. https://www.investopedia.com/ask/answers/052715/how-big-derivatives-market.asp https://www.investopedia.com/ask/answers/052715/how-big-deri... Now compare to the M2 money supply https://www.investopedia.com/terms/m/m2.asp https://www.investopedia.com/terms/m/m2.asp
- cmckn 5y ago
  I wouldn’t call stablecoins “cash settled”. Like, at all, in any sense, ever.
- lamontcg 5y ago
  It is a gambling market, not a derivative.
  - rawtxapp 5y ago
    That's mostly what they are used for anyways amongst other purposes like hedging or leverage.
    - lamontcg 5y ago
      There's historical reasons why bucket shop gambling is illegal, and why derivatives are regulated. Crypto is still speed running the past 150-years or so of financial misadventures. And pointing at how the NYSE is becoming more of a casino doesn't validate crypto doing it as well. Crypto is starting to look more and more like the det wire that could set off the next financial implosion.
tylersmith 5y ago
They use oracles to get the trading prices of the various assets. The actual value is held in on-chain tokens and typically requires over-collateralization.
davidkohcw 5y ago
It's a synthetic stock which is overcollateralized by stablecoins. So for example, if $100 dollars worth of the stock is issued, someone else had to lock up $150 dollars worth of USD to issue it. And when the price rises (and hence collateralization ratio drops), the issuer has to constantly top up collateral or run the risk of them being liquidated. How do they get price to track the real stock? By simple incentives. If the synthetic stock is trading lower than the real price, people have incentive to buy it. If it is trading above, people can easily mint new stock and sell it. There are lots of benefits to this: 1. It allows people who typically might not have access to the US market to get price exposure to US companies 2. It allows 24/7 trading 3. US stocks are just the start, before more innovative synthetic products can be built on top.
- grey-area 5y ago
  Oh you mean it is backed by those unaudited, unregulated, unredeemable opaque tokens like USDT which are also a scam. What could possibly go wrong!
  - cinquemb 5y ago
    > unaudited, unregulated, unredeemable opaque tokens like Federal Reserve Notes Would be nice if every single FRBNY operation were able to be queried by anyone in the public in real time, had a fixed set of rules all holders of notes could see and vote on, and was redeemable for gold like they used to be before the rules changed underneath holders who couldn't take part of governance (foreign holders)… > What could possibly go wrong! We're stuck in bailoutistan globably, and now it will be more expensive for tradfi entities to get bailed out on chain (which will happen, but cant shut down the dex's, cant reverse trades unless contracts allow for that) which will benefit non tradfi entities that take the opposite side of their highly leveraged trades conducted on chain.
    - grey-area 5y ago
      There are plenty of reasons to complain about fiat currencies like USD and the rights that states claim to control all transactions or control the value of our money. That doesn’t make using unregulated stable coins from terrible terrible people like those behind bitfinex a good idea, or mean that trustless distributed consensus is worth the massive downsides of a decentralised system like bitcoin, or that we should trust projects without the most basic financial controls. We have laws and regulators controlling money supply and financial transactions for good reasons, most of the unregulated experiments ‘defi’ is trying have already been run in fiat and banned for good reasons, including massive leverage, unregulated banks and exchanges, money printing etc etc.

donmcronald 5y ago

If the hedge funds and prime brokers are allowed to sell the unsuspecting public a bunch of counterfeit shorts, why not let the crypto market do the same? I’m only half joking.

munk-a 5y ago
Well the goal is never to have more problems. The discussion of the good or evils of regulations in general is a pretty deep debate in America though.
dehrmann 5y ago
> counterfeit shorts Do you have a reference for something that's had issues being naked shorted, recently? GME was a short squeeze, but that's different.

tablespoon 5y ago

How does this make sense? If they don't hold the underlying security, where does the value come from? Come on, this is cryptocurrency. The whole point is to con people into thinking a fake thing is real because blockchain and cash in; with the off chance that if enough people believe, then their belief will make the fake thing real.

MathYouF 5y ago
You should read up on the last decade in Venezuela, which used to be the richest country in Latin America, and having wealthy professionals see their savings evaporate due to 1,000,000% inflation because of the actions of a government they democratically elected. Belief is the only thing holding together a lot of the things that we rely on to keep society functioning the way it does. I'm guessing (though not assuming) you're posting from one of the most historically stable countries in human history, but that isn't how most people experience planet earth, and it isn't guaranteed that that's the wya you'll always experience it either.
- cinquemb 5y ago
  > Belief is the only thing holding together a lot of the things that we rely on to keep society functioning the way it does. Which is why alot of people feel threatened by the ever shifting sands in the global financial landscape
  - MathYouF 5y ago
    Indeed, never seen so many people on HN be so reactionary and emotional about a simple technology. The demographics of the crowd: wealthy, living in the most stable country in history, with access to digital forms of banking worldwide, ability to emigrate wherever they'd like, able to transfer money as they see fit, and holding their savings in the global reserve currency for a country which they're a citizen of. Doesn't help many empathise with why many people around the world can't trust their governments centrap bank, or open a bank account elsewhere, or convert their savings to a stable currency and assume it won't be seized or banned locally. It's best to just build cryotocurrency and not bother explaining to Americans who aren't willing to listen why it's necessary. It's like explaining public transportation to people at a country club.
    - cinquemb 5y ago
      > It's best to just build cryotocurrency and not bother explaining to Americans who aren't willing to listen why it's necessary. > It's like explaining public transportation to people at a country club. That's a good way to put it, and that's me saying that as some one who left the US 6 years ago, worked in finance as a dev (consumer and derivatives markets, emerging/developing and developed) and actively helping to build defi protocols and blockchain research/development.
- fock 5y ago
  The people of Venezuela elected the US government? That's news to me!
- lottin 5y ago
  It's not like if hyperinflation could be avoided everything else should be fine. No, hyperinflation is a sign that the economy is grossly mismanaged, and that in turn is likely the result of desperate, incompetent government facing all sorts of economic, social and political problems. Switching to a different currency isn't going to fix a failed state, sorry.

ZephyrBlu 5y ago

I assumed they held all the securities themselves facilitated 24/7 trading like that. Not holding the securities seems extremely dodgy.

cmckn 5y ago
They mint and burn tokens as necessary to make the price resemble the actual stock. When minting new tokens, you have to provide collateral in the form of stablecoins. Yes, it is as bonkers as it sounds.
- kristjansson 5y ago
  Just when I think the crypto people can’t surprise me any more, here they go again.

rawtxapp 5y ago

It's a derivative, it also exists in traditional markets and it's size is gigantic compared to normal markets. As far as I understand it, in this case, it's essentially cash settled.

social_quotient 5y ago
Yes and here is a good read for those that haven’t seen some of these figures. https://www.investopedia.com/ask/answers/052715/how-big-derivatives-market.asp https://www.investopedia.com/ask/answers/052715/how-big-deri... Now compare to the M2 money supply https://www.investopedia.com/terms/m/m2.asp https://www.investopedia.com/terms/m/m2.asp
cmckn 5y ago
I wouldn’t call stablecoins “cash settled”. Like, at all, in any sense, ever.
lamontcg 5y ago
It is a gambling market, not a derivative.
- rawtxapp 5y ago
  That's mostly what they are used for anyways amongst other purposes like hedging or leverage.
  - lamontcg 5y ago
    There's historical reasons why bucket shop gambling is illegal, and why derivatives are regulated. Crypto is still speed running the past 150-years or so of financial misadventures. And pointing at how the NYSE is becoming more of a casino doesn't validate crypto doing it as well. Crypto is starting to look more and more like the det wire that could set off the next financial implosion.

tylersmith 5y ago

They use oracles to get the trading prices of the various assets. The actual value is held in on-chain tokens and typically requires over-collateralization.

davidkohcw 5y ago

It's a synthetic stock which is overcollateralized by stablecoins. So for example, if $100 dollars worth of the stock is issued, someone else had to lock up $150 dollars worth of USD to issue it. And when the price rises (and hence collateralization ratio drops), the issuer has to constantly top up collateral or run the risk of them being liquidated. How do they get price to track the real stock? By simple incentives. If the synthetic stock is trading lower than the real price, people have incentive to buy it. If it is trading above, people can easily mint new stock and sell it. There are lots of benefits to this: 1. It allows people who typically might not have access to the US market to get price exposure to US companies 2. It allows 24/7 trading 3. US stocks are just the start, before more innovative synthetic products can be built on top.

grey-area 5y ago
Oh you mean it is backed by those unaudited, unregulated, unredeemable opaque tokens like USDT which are also a scam. What could possibly go wrong!
- cinquemb 5y ago
  > unaudited, unregulated, unredeemable opaque tokens like Federal Reserve Notes Would be nice if every single FRBNY operation were able to be queried by anyone in the public in real time, had a fixed set of rules all holders of notes could see and vote on, and was redeemable for gold like they used to be before the rules changed underneath holders who couldn't take part of governance (foreign holders)… > What could possibly go wrong! We're stuck in bailoutistan globably, and now it will be more expensive for tradfi entities to get bailed out on chain (which will happen, but cant shut down the dex's, cant reverse trades unless contracts allow for that) which will benefit non tradfi entities that take the opposite side of their highly leveraged trades conducted on chain.
  - grey-area 5y ago
    There are plenty of reasons to complain about fiat currencies like USD and the rights that states claim to control all transactions or control the value of our money. That doesn’t make using unregulated stable coins from terrible terrible people like those behind bitfinex a good idea, or mean that trustless distributed consensus is worth the massive downsides of a decentralised system like bitcoin, or that we should trust projects without the most basic financial controls. We have laws and regulators controlling money supply and financial transactions for good reasons, most of the unregulated experiments ‘defi’ is trying have already been run in fiat and banned for good reasons, including massive leverage, unregulated banks and exchanges, money printing etc etc.