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Is it really that hard to defend a peg? As long as you don’t spend the money people give you, you’ll have 1:1 dollars to stable coin. Then you can earn interest

by hahajk 4y ago

Is it really that hard to defend a peg? As long as you don’t spend the money people give you, you’ll have 1:1 dollars to stable coin. Then you can earn interest on the dollars.

deleted 4y ago
[deleted]
lcvw 4y ago
My understanding is that some stablecoin projects do that. The issue is greed, it’s too tempting to invest the money in something riskier and keep all of the returns. When you lose the money you have nothing to defend the peg with.
- Siira 4y ago
  This can be easily solved via governmental certification.
  - chronolitus 4y ago
    Good idea! Maybe a note that attests that your 1 token is backed by government certification? What about making that note green, to make sure people understand that it is the real thing?
    - ohples 4y ago
      Yeah, but they wouldn't give a damn about a greenback-a-dollar, they'd probably spend it fast as they can.
  - _Algernon_ 4y ago
    Looks at inflation rate Yes, cause the government is so much better at this stuff.
    - Siira 4y ago
      Yes, ultimately, the gold standard is the only way to stop arbitrary taxation AKA inflation.
      - boc 4y ago
        Ah yes, the gold standard. Aka severely limiting worldwide economic growth until we dig more shiny rocks out of the ground.
        razius 4y ago
  - rchaud 4y ago
    This is an egregious example of statist overreach. The free market would never...oh wait, Binance has set a $0.70/UST floor price. Never mind.
  - nradov 4y ago
    As a taxpayer I certainly don't want my government wasting resources on such schemes.
    - Siira 4y ago
      - nradov 4y ago
        Actually I don't hate cryptocurrency, I just find it silly and pointless. Sort of like collecting and trading baseball cards. I feel dumb for entirely unrelated reasons.
joebob42 4y ago
Yeah agree, at least in the case of a crypto which is literally just $ in -> coin out, no caveats, hold the $ and do nothing with it till withdrawal. My impression is that many pegs don't work this way, but to the extent one did I kind of don't see how it could fail?
- cma 4y ago
  Negative rates could make it fail.
- freeone3000 4y ago
  It could only fail in the cryptocurrency sense, in that, you're going to be offering less than 2% gains (as in, whatever you can get for a long-term bulk deposit minus operating expenses) when your competitors are offering 20%. This means, for you, no Lambo.
  - joebob42 4y ago
    yeah my assumption is you would need to be a platform like coinbase or something where the added convenience for people trading on your platform was the benefit you got from it and it just not costing much was sufficient
    - eudoxus 4y ago
      This is exactly why Coinbase does have its own asset back reserve stable coin called USDC. Well, to be specific, its a consortium of companies to which Coinbase is on of. As you described, theyre incentivized to properly hold and maintain the reserve assets because A) They are exposed and liable to US laws (Coinbase is a public US company) B) They reap the benefits of having a native stable coin for the users on their respective platform.
jcranmer 4y ago
> As long as you don’t spend the money people give you Yeah, this is somewhat hard to do, especially if you want... > Then you can earn interest on the dollars. to be true for a meaningful amount of money. This also assumes that you originally had the dollars to back the stable coin in the first place, which is a somewhat dubious assertion for many purported stable coins.
Nursie 4y ago
Sure, but then you don't get to build a giant rube-goldberg machine with multiple tokens and exciting 20% interest advertising and claim to be the smartest guy in the room!
tlrobinson 4y ago
"Algorithmic stablecoins" are a different beast: "These uncollateralized digital assets, which attempt to peg the price of a reference asset using financial engineering, algorithms, and market incentives, are not stable at all but exist in a state of perpetual vulnerability" http://www.wakeforestlawreview.com/2021/10/built-to-fail-the-inherent-fragility-of-algorithmic-stablecoins/ http://www.wakeforestlawreview.com/2021/10/built-to-fail-the...
- ShamelessC 4y ago
  Great read, thanks.
boc 4y ago
You're correct. Which using occam's razor means they didn't actually collect a dollar for every coin they created. All of these stablecoins may have started legitimate, but realized that nobody could tell the difference between backed coins and unbacked coins. So they kept creating unbacked coins and had enough capital floating around daily to cover the required daily maintenance of the peg. It all works swimmingly until the music stops, then you cash out your billion bitcoin wallet and disappear to a tropical island somewhere.
lottin 4y ago
If they're earning interest, it means they have swapped their dollars for some interest-bearing instrument, so they no longer have 1:1 dollar reserves.
Ekaros 4y ago
You could, but then where would you make money from? Why would you run a stable coin and all involved risk of actually holding either real money or handle your tokens. And why would I choose a stable coin that only has fees over real money?
imtringued 4y ago
Let me talk about tether. It really is just an unregulated bank. The stable coin is a liquid liability for tether. It must own liquid assets in proportion to how much people want to withdraw USD. If too many people withdraw at once and they are out of liquid assets(reserves) they must sell illiquid assets, possibly at a different price than they bought them. Bonds with low interest lose their value if you can get new bonds with higher interest. Tether is unable to pay out USD if this scenario were to happen and the peg would be broken.
nikanj 4y ago
But that way you make way less money. Taking the dollars and investing them in high-risk investments is a much better option, because ultimately you get to keep the gains, but the losses are covered by others
littlestymaar 4y ago
> Then you can earn interest on the dollars. Can you really, while maintaining liquidity and taking low risks? These two conditions are important, because if you buy risky assets, then you can end-up below 1:1 when markets decline, and if you hold illiquid assets, then it doesn't really matters that you have the asset at all, as you cannot defend the peg with illiquid assets.
rchaud 4y ago
> As long as you don’t spend the money people give you, you’ll have 1:1 dollars to stable coin. The lure of fractional reserve banking is strong. Crypto ideologues don't seem to get this because they think crypto is immune from the same forces that create monetary inflation. Just because it's not fiat, doesn't mean that economic actors don't have an an incentive to take profit any which way they can.

by hahajk 4y ago

Is it really that hard to defend a peg? As long as you don’t spend the money people give you, you’ll have 1:1 dollars to stable coin. Then you can earn interest on the dollars.

deleted 4y ago

[deleted]

lcvw 4y ago

My understanding is that some stablecoin projects do that. The issue is greed, it’s too tempting to invest the money in something riskier and keep all of the returns. When you lose the money you have nothing to defend the peg with.

Siira 4y ago
This can be easily solved via governmental certification.
- chronolitus 4y ago
  Good idea! Maybe a note that attests that your 1 token is backed by government certification? What about making that note green, to make sure people understand that it is the real thing?
  - ohples 4y ago
    Yeah, but they wouldn't give a damn about a greenback-a-dollar, they'd probably spend it fast as they can.
- _Algernon_ 4y ago
  Looks at inflation rate Yes, cause the government is so much better at this stuff.
  - Siira 4y ago
    Yes, ultimately, the gold standard is the only way to stop arbitrary taxation AKA inflation.
    - boc 4y ago
      Ah yes, the gold standard. Aka severely limiting worldwide economic growth until we dig more shiny rocks out of the ground.
      - razius 4y ago
- rchaud 4y ago
  This is an egregious example of statist overreach. The free market would never...oh wait, Binance has set a $0.70/UST floor price. Never mind.
- nradov 4y ago
  As a taxpayer I certainly don't want my government wasting resources on such schemes.
  - Siira 4y ago
    - nradov 4y ago
      Actually I don't hate cryptocurrency, I just find it silly and pointless. Sort of like collecting and trading baseball cards. I feel dumb for entirely unrelated reasons.

joebob42 4y ago

Yeah agree, at least in the case of a crypto which is literally just $ in -> coin out, no caveats, hold the $ and do nothing with it till withdrawal. My impression is that many pegs don't work this way, but to the extent one did I kind of don't see how it could fail?

cma 4y ago
Negative rates could make it fail.
freeone3000 4y ago
It could only fail in the cryptocurrency sense, in that, you're going to be offering less than 2% gains (as in, whatever you can get for a long-term bulk deposit minus operating expenses) when your competitors are offering 20%. This means, for you, no Lambo.
- joebob42 4y ago
  yeah my assumption is you would need to be a platform like coinbase or something where the added convenience for people trading on your platform was the benefit you got from it and it just not costing much was sufficient
  - eudoxus 4y ago
    This is exactly why Coinbase does have its own asset back reserve stable coin called USDC. Well, to be specific, its a consortium of companies to which Coinbase is on of. As you described, theyre incentivized to properly hold and maintain the reserve assets because A) They are exposed and liable to US laws (Coinbase is a public US company) B) They reap the benefits of having a native stable coin for the users on their respective platform.

jcranmer 4y ago

> As long as you don’t spend the money people give you Yeah, this is somewhat hard to do, especially if you want... > Then you can earn interest on the dollars. to be true for a meaningful amount of money. This also assumes that you originally had the dollars to back the stable coin in the first place, which is a somewhat dubious assertion for many purported stable coins.

Nursie 4y ago

Sure, but then you don't get to build a giant rube-goldberg machine with multiple tokens and exciting 20% interest advertising and claim to be the smartest guy in the room!

tlrobinson 4y ago

"Algorithmic stablecoins" are a different beast: "These uncollateralized digital assets, which attempt to peg the price of a reference asset using financial engineering, algorithms, and market incentives, are not stable at all but exist in a state of perpetual vulnerability" http://www.wakeforestlawreview.com/2021/10/built-to-fail-the-inherent-fragility-of-algorithmic-stablecoins/ http://www.wakeforestlawreview.com/2021/10/built-to-fail-the...

ShamelessC 4y ago
Great read, thanks.

boc 4y ago

You're correct. Which using occam's razor means they didn't actually collect a dollar for every coin they created. All of these stablecoins may have started legitimate, but realized that nobody could tell the difference between backed coins and unbacked coins. So they kept creating unbacked coins and had enough capital floating around daily to cover the required daily maintenance of the peg. It all works swimmingly until the music stops, then you cash out your billion bitcoin wallet and disappear to a tropical island somewhere.

lottin 4y ago

If they're earning interest, it means they have swapped their dollars for some interest-bearing instrument, so they no longer have 1:1 dollar reserves.

Ekaros 4y ago

You could, but then where would you make money from? Why would you run a stable coin and all involved risk of actually holding either real money or handle your tokens. And why would I choose a stable coin that only has fees over real money?

imtringued 4y ago

Let me talk about tether. It really is just an unregulated bank. The stable coin is a liquid liability for tether. It must own liquid assets in proportion to how much people want to withdraw USD. If too many people withdraw at once and they are out of liquid assets(reserves) they must sell illiquid assets, possibly at a different price than they bought them. Bonds with low interest lose their value if you can get new bonds with higher interest. Tether is unable to pay out USD if this scenario were to happen and the peg would be broken.

nikanj 4y ago

But that way you make way less money. Taking the dollars and investing them in high-risk investments is a much better option, because ultimately you get to keep the gains, but the losses are covered by others

littlestymaar 4y ago

> Then you can earn interest on the dollars. Can you really, while maintaining liquidity and taking low risks? These two conditions are important, because if you buy risky assets, then you can end-up below 1:1 when markets decline, and if you hold illiquid assets, then it doesn't really matters that you have the asset at all, as you cannot defend the peg with illiquid assets.

rchaud 4y ago

> As long as you don’t spend the money people give you, you’ll have 1:1 dollars to stable coin. The lure of fractional reserve banking is strong. Crypto ideologues don't seem to get this because they think crypto is immune from the same forces that create monetary inflation. Just because it's not fiat, doesn't mean that economic actors don't have an an incentive to take profit any which way they can.