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> We don't call corn futures fake corn /ZC is physically settled[0], so that’s not a great example. /ES (S&P 500) or other index futures that are cash-settled

> We don't call corn futures fake corn /ZC is physically settled[0], so that’s not a great example. /ES (S&P 500) or other index futures that are cash-settled is a better analogy. They’re also, yknow, regulated[1]. [0] https://www.cmegroup.com/markets/agriculture/oilseeds/corn.contractSpecs.html https://www.cmegroup.com/markets/agriculture/oilseeds/corn.c... [1] https://www.cftc.gov/ https://www.cftc.gov/

H8crilA 5y ago
Yeah, I would like to emphasize the fact that they're settled once individual contracts expire, be it cash or delivery. I am yet to find a useful derivative that lacks a settling mechanism. How would you even price such a contract that lacks settling? Like why should it be worth anything at all?
- minitoar 5y ago
  Because there's some mechanism for arbitrage that allows you to effectively settle it. If the spot price is too low you can make a profit.
  - smabie 5y ago
    Well that mechanism for arbtrage usually occurs through settlement. ie at contract settlement, you trade one for the other.
    - minitoar 5y ago
      Right, in lieu of that these schemes use a variety of different mechanisms. One way is you can mint the derived asset at a price oracle by staking other tokens. If the synthetic spot price is too high, you can sell your newly minted asset for more than you staked. If it’s too low, you can mint an inverse asset and sell that for more than you staked.
- smabie 5y ago
  Things like BTC swaps don't really have settlement periods: every so and so numbers of often (often 1 or 8), longs pay shorts using some premium formula is swap > index, and vice verse if swap < index. I suppose you could construe that as some periodic partial settlement mechanism, though.
  - mannykannot 5y ago
    Is it not that settlement nominally occurs when you choose to exit your position? Which raises various questions about whether whatever stack of turtles your swap is built on can provide liquidity when you need it.
    - smabie 5y ago
      The order book provides liquidity. When someone sells a swap, someone else buys it. Of course, the amount of liquidity and spread available will depend on how popular the coin or specific contract is.
      - mannykannot 5y ago
        Liquidity has a tendency to dry up when everyone wants it, especially in a highly-leveraged derivative. The fact that options have an expiration date seems to mean that trading cannot just stop when things are going badly.
  - anonymoushn 5y ago
    It is a periodic partial settlement mechanism. Perpetual futures are equivalent to a bag of daily futures that automatically roll over, one of which is always in its expiry period.
- um_ya 5y ago
  You could technically buy real shares and sell synthetic shares on the blockchain, harvesting the price difference. This would generally have the same effect as the blockchain user buying the stock directly, but through an intermediary collecting premium.
  - rebuilder 5y ago
    Why stop there, you could buy real shares, sell synthetic ones, and then sell the real shares, too. Or just sell synthetic shares without having any real shares in the first place. This seems like a case where a blockhain doesn't really do much good.
    - SailingSperm 5y ago
      These would also trade like other crypto - 24/7, 365.
    - ENGNR 5y ago
      Selling the real shares as well as the synthetic is really just going naked short. Lots of risk/leverage. You have to put up collateral so that you have something to lose if it goes bad
      - rebuilder 5y ago
        I'm looking at it from the buyer's perspective. The big selling point of blockhain transactions is zero trust and no counterparty risk. There is clear counterparty risk in synthetic shares sold on a blockhain. IOW, the buyer is still stuck relying on the issuer of the "real" shares to honour the blockhain sale, or on the seller not defaulting. Edit: just to expound further on something I think most people miss: The primary innovation of Bitcoin was that it is provably scarce without relying on any legal framework. That's it, and it's pretty radical. If you start relying on the law to provide value, the blockhain idea tends to become extraneous.
- princeb 5y ago
  skimmed the article - there's apparently a creation/redemption mechanism similar to ETFs. settlement is always a mystery to me in crypto so i can't weigh in here. how do you guarantee delivery of the physical for units of the crypto that's inked on the blockchain.
  - anm89 5y ago
    Derivatives settlements with smart contracts is the all time killer app of crypto in my mind because the contract can allocate payouts on its own. Obviously these can't be physical, they have to be financial, but if you are allocating something financial with value on a liquid market you are just one step away from getting to the physical thing.
- pishpash 5y ago
  How do stocks that never pay a dividend settle?
  - simonh 5y ago
    Companies hold assets, cash flow and perform real world activities that have a tangible value. There are multiple ways that value can be realised. Aside from speculative investors which were discussing, companies and individuals can buy shares in order to exert strategic influence over the company for their own reasons, so the shares have a value to them beyond just the share price. For example the way Microsoft owned shares in Apple for a long time because the existence and operations of Apple at the time benefited them. Ultimately management can buy out the company, or an external player can mount a takeover, or there could be a merger, any of which can lead to a cash out situation. E.g. a software company might never pay a dividend, but the company might be bought by a company that wants to acquire it's products or customers, or it's technology team. These things have economic value that can be realised. So there are multiple ways a company can have value that can lead to share owners benefiting from the materialisation of that value.
    - pishpash 5y ago
      I'm not talking about the existence of economic value, but of settlement. So there is no settlement except at an indefinite transaction event -- not even under your control if they're non-voting shares, i.e. "whenever".
      - perl4ever 5y ago
        True, it's not scheduled, but it's more common than a lot of people think, for a public company to be bought out. And the shareholders don't get to arbitrarily hold out, either.
  - JumpCrisscross 5y ago
    > How do stocks that never pay a dividend settle? The textbook answer to stock value is dividends. Many companies, most, I would argue, never reach that point. In practice, the chief defender of fundamental value is M&A. Whole-company buyers can tap free cash flow in a way minority investors can’t. That is the arbitrage that sets a lower bound on the value of a company’s shares relative to its cash flow. (There is no similar mechanism for setting an upper bound.)
- deleted 5y ago
  [deleted]
ButtSpark69 5y ago
But most things of this type specifically arent settled, they're settled in cash and rolled over, again and again and again, forever. Look at the volumes traded for these derivatives, numbers are insanely high. People don't mostly use them to do what they were intended (hedge a poor rain year or similar), but to GAMBLE. The rest is mostly just narrative.
- kqr 5y ago
  Saying that they were intended for hedging sounds like a very strong proposition to me. Chicago-style futures have (and have had, for as long as we know) numerous features that indicate speculation (or gambling, as it's also known) as one of their big reasons for existence. They are also used to sell unconventional services (being long corn in August and short corn in July is effectively selling the service of transporting corn back in time) and, perhaps most importantly, to make commodity loans (being long corn in the cash market and short corn in the futures market is a loan of corn.) This helps explain why, after removing costs of storage and insurance and such, prices are almost always in backwardation.
  - Tenoke 5y ago
    >Saying that they were intended for hedging sounds like a very strong proposition to me I think most people believe this since every textbook I've seen explains them and implies that this is what they are for.
    - kqr 5y ago
      On this subject, almost every textbook is wrong. Well, I shouldn't say wrong, but their models fail to predict and explain easily observed real-world behaviour in futures markets. I can strongly recommend Williams' The Economic Function of Futures Markets[1]. It gave me a lot of those "ooh, now that makes more sense" experiences after having heard the faulty model used in textbooks over and over. [1]: https://www.amazon.com/Economic-Function-Futures-Markets-Williams/dp/0521389348/ https://www.amazon.com/Economic-Function-Futures-Markets-Wil...
  - deleted 5y ago
0x008 5y ago
Well Futures might be, but every year also the established financial players on the mainstream financial markets invent new derivatives and they all are not regulated until they are.
deleted 5y ago
[deleted]
anm89 5y ago
Are these crypto assets not derivatives? Can you name any other instance where a derivative financial asset is labeled fake <underlying>?

H8crilA 5y ago

Yeah, I would like to emphasize the fact that they're settled once individual contracts expire, be it cash or delivery. I am yet to find a useful derivative that lacks a settling mechanism. How would you even price such a contract that lacks settling? Like why should it be worth anything at all?

minitoar 5y ago
Because there's some mechanism for arbitrage that allows you to effectively settle it. If the spot price is too low you can make a profit.
- smabie 5y ago
  Well that mechanism for arbtrage usually occurs through settlement. ie at contract settlement, you trade one for the other.
  - minitoar 5y ago
    Right, in lieu of that these schemes use a variety of different mechanisms. One way is you can mint the derived asset at a price oracle by staking other tokens. If the synthetic spot price is too high, you can sell your newly minted asset for more than you staked. If it’s too low, you can mint an inverse asset and sell that for more than you staked.
smabie 5y ago
Things like BTC swaps don't really have settlement periods: every so and so numbers of often (often 1 or 8), longs pay shorts using some premium formula is swap > index, and vice verse if swap < index. I suppose you could construe that as some periodic partial settlement mechanism, though.
- mannykannot 5y ago
  Is it not that settlement nominally occurs when you choose to exit your position? Which raises various questions about whether whatever stack of turtles your swap is built on can provide liquidity when you need it.
  - smabie 5y ago
    The order book provides liquidity. When someone sells a swap, someone else buys it. Of course, the amount of liquidity and spread available will depend on how popular the coin or specific contract is.
    - mannykannot 5y ago
      Liquidity has a tendency to dry up when everyone wants it, especially in a highly-leveraged derivative. The fact that options have an expiration date seems to mean that trading cannot just stop when things are going badly.
- anonymoushn 5y ago
  It is a periodic partial settlement mechanism. Perpetual futures are equivalent to a bag of daily futures that automatically roll over, one of which is always in its expiry period.
um_ya 5y ago
You could technically buy real shares and sell synthetic shares on the blockchain, harvesting the price difference. This would generally have the same effect as the blockchain user buying the stock directly, but through an intermediary collecting premium.
- rebuilder 5y ago
  Why stop there, you could buy real shares, sell synthetic ones, and then sell the real shares, too. Or just sell synthetic shares without having any real shares in the first place. This seems like a case where a blockhain doesn't really do much good.
  - SailingSperm 5y ago
    These would also trade like other crypto - 24/7, 365.
  - ENGNR 5y ago
    Selling the real shares as well as the synthetic is really just going naked short. Lots of risk/leverage. You have to put up collateral so that you have something to lose if it goes bad
    - rebuilder 5y ago
      I'm looking at it from the buyer's perspective. The big selling point of blockhain transactions is zero trust and no counterparty risk. There is clear counterparty risk in synthetic shares sold on a blockhain. IOW, the buyer is still stuck relying on the issuer of the "real" shares to honour the blockhain sale, or on the seller not defaulting. Edit: just to expound further on something I think most people miss: The primary innovation of Bitcoin was that it is provably scarce without relying on any legal framework. That's it, and it's pretty radical. If you start relying on the law to provide value, the blockhain idea tends to become extraneous.
princeb 5y ago
skimmed the article - there's apparently a creation/redemption mechanism similar to ETFs. settlement is always a mystery to me in crypto so i can't weigh in here. how do you guarantee delivery of the physical for units of the crypto that's inked on the blockchain.
- anm89 5y ago
  Derivatives settlements with smart contracts is the all time killer app of crypto in my mind because the contract can allocate payouts on its own. Obviously these can't be physical, they have to be financial, but if you are allocating something financial with value on a liquid market you are just one step away from getting to the physical thing.
pishpash 5y ago
How do stocks that never pay a dividend settle?
- simonh 5y ago
  Companies hold assets, cash flow and perform real world activities that have a tangible value. There are multiple ways that value can be realised. Aside from speculative investors which were discussing, companies and individuals can buy shares in order to exert strategic influence over the company for their own reasons, so the shares have a value to them beyond just the share price. For example the way Microsoft owned shares in Apple for a long time because the existence and operations of Apple at the time benefited them. Ultimately management can buy out the company, or an external player can mount a takeover, or there could be a merger, any of which can lead to a cash out situation. E.g. a software company might never pay a dividend, but the company might be bought by a company that wants to acquire it's products or customers, or it's technology team. These things have economic value that can be realised. So there are multiple ways a company can have value that can lead to share owners benefiting from the materialisation of that value.
  - pishpash 5y ago
    I'm not talking about the existence of economic value, but of settlement. So there is no settlement except at an indefinite transaction event -- not even under your control if they're non-voting shares, i.e. "whenever".
    - perl4ever 5y ago
      True, it's not scheduled, but it's more common than a lot of people think, for a public company to be bought out. And the shareholders don't get to arbitrarily hold out, either.
- JumpCrisscross 5y ago
  > How do stocks that never pay a dividend settle? The textbook answer to stock value is dividends. Many companies, most, I would argue, never reach that point. In practice, the chief defender of fundamental value is M&A. Whole-company buyers can tap free cash flow in a way minority investors can’t. That is the arbitrage that sets a lower bound on the value of a company’s shares relative to its cash flow. (There is no similar mechanism for setting an upper bound.)
deleted 5y ago
[deleted]

ButtSpark69 5y ago

But most things of this type specifically arent settled, they're settled in cash and rolled over, again and again and again, forever. Look at the volumes traded for these derivatives, numbers are insanely high. People don't mostly use them to do what they were intended (hedge a poor rain year or similar), but to GAMBLE. The rest is mostly just narrative.

kqr 5y ago
Saying that they were intended for hedging sounds like a very strong proposition to me. Chicago-style futures have (and have had, for as long as we know) numerous features that indicate speculation (or gambling, as it's also known) as one of their big reasons for existence. They are also used to sell unconventional services (being long corn in August and short corn in July is effectively selling the service of transporting corn back in time) and, perhaps most importantly, to make commodity loans (being long corn in the cash market and short corn in the futures market is a loan of corn.) This helps explain why, after removing costs of storage and insurance and such, prices are almost always in backwardation.
- Tenoke 5y ago
  >Saying that they were intended for hedging sounds like a very strong proposition to me I think most people believe this since every textbook I've seen explains them and implies that this is what they are for.
  - kqr 5y ago
    On this subject, almost every textbook is wrong. Well, I shouldn't say wrong, but their models fail to predict and explain easily observed real-world behaviour in futures markets. I can strongly recommend Williams' The Economic Function of Futures Markets[1]. It gave me a lot of those "ooh, now that makes more sense" experiences after having heard the faulty model used in textbooks over and over. [1]: https://www.amazon.com/Economic-Function-Futures-Markets-Williams/dp/0521389348/ https://www.amazon.com/Economic-Function-Futures-Markets-Wil...
- deleted 5y ago

0x008 5y ago

Well Futures might be, but every year also the established financial players on the mainstream financial markets invent new derivatives and they all are not regulated until they are.

deleted 5y ago

[deleted]

anm89 5y ago

Are these crypto assets not derivatives? Can you name any other instance where a derivative financial asset is labeled fake <underlying>?