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Let me reiterate what I wrote ~3 months ago[1] In Anchor's case there are way more lenders than borrowers so Anchor is resorting to pay those high yields from

Let me reiterate what I wrote ~3 months ago[1] 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. [1] https://news.ycombinator.com/item?id=30335625 https://news.ycombinator.com/item?id=30335625

arcbyte 4y ago
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.
grey-area 4y ago
The music has already stopped.
- jacklizhui 4y ago
  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
  - namdnay 4y ago
    A man of culture I see
  - phyalow 4y ago
    >> "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." SBF & Co. are about to be first.
- DSingularity 4y ago
  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.
  - grey-area 4y ago
    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.
- simonebrunozzi 4y ago
  It slowed down. Possibly going to proper stop eventually.
  - neuronic 4y ago
    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.
    - Tenoke 4y ago
      >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.
      - kravvall 4y ago
        Please show me at least one project that utilizes proof of stakes, works and has a decent user base.
        cliftonk 4y ago
        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.
- nicky0 4y ago
  That's such a great movie. (https://www.youtube.com/watch?v=K05sxfa4zdM https://www.youtube.com/watch?v=K05sxfa4zdM)
birthday 4y ago
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.
- Closi 4y ago
  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.
  - oarabbus_ 4y ago
    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.
    - UncleMeat 4y ago
      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?
      - jboy55 4y ago
        Well, the rigorous KYC regulations and policies mean they can ensure every person owns just one wallet... /s
    - 4y ago
itsoktocry 4y ago
>In Anchor's case there are way more lenders than borrowers so Anchor is resorting to pay those high yields from their reserves. In the real world, over-supply of lendable funds would drive rates down.
eru 4y ago
> 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.)

arcbyte 4y ago

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.

grey-area 4y ago

The music has already stopped.

jacklizhui 4y ago
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
- namdnay 4y ago
  A man of culture I see
- phyalow 4y ago
  >> "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." SBF & Co. are about to be first.
DSingularity 4y ago
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.
- grey-area 4y ago
  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.
simonebrunozzi 4y ago
It slowed down. Possibly going to proper stop eventually.
- neuronic 4y ago
  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.
  - Tenoke 4y ago
    >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.
    - kravvall 4y ago
      Please show me at least one project that utilizes proof of stakes, works and has a decent user base.
      - cliftonk 4y ago
        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.
nicky0 4y ago
That's such a great movie. (https://www.youtube.com/watch?v=K05sxfa4zdM https://www.youtube.com/watch?v=K05sxfa4zdM)

birthday 4y ago

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.

Closi 4y ago
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.
- oarabbus_ 4y ago
  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.
  - UncleMeat 4y ago
    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?
    - jboy55 4y ago
      Well, the rigorous KYC regulations and policies mean they can ensure every person owns just one wallet... /s
  - 4y ago

itsoktocry 4y ago

>In Anchor's case there are way more lenders than borrowers so Anchor is resorting to pay those high yields from their reserves. In the real world, over-supply of lendable funds would drive rates down.

eru 4y ago

> 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.)