6 ms·

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 want

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
raesene9 4y ago
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.
- charcircuit 4y ago
  >how this was sustainable Why does it need to be sustainable? The APR can simply lower once the high APR is no longer sustainable.
  - jannes 4y ago
    So you are saying it was sustainable at some point?
    - charcircuit 4y ago
      Yes, it was sustainable for a period of time.
      - Jensson 4y ago
        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.
        arlcode 4y ago
        I wonder how they verified borrowers identity. Stealing the deposits would require a) Verification happens without any government id (I assume this is true) b) depends somehow on the bank / smart contract authors Then it would be trivially easy to generate huge amount of "borrowers" who simply "default" on their "loan".
  - Grustaf 4y ago
    The sky high interest is its sole raison d'être
  - UncleEntity 4y ago
    As in they lose money on every loan but make it up in volume? The irony here is that’s supposed to be a joke and not an actual business plan.
    - charcircuit 4y ago
      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.
- tialaramex 4y ago
  > 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.
  - gpderetta 4y ago
    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.
    - tialaramex 4y ago
      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. https://www.nsandi.com/products/premium-bonds https://www.nsandi.com/products/premium-bonds
starfallg 4y ago
To add to that, financially, it makes no sense to borrow at such a high interest rate unless you have issues with obtaining credit traditionally. There is a reason why payday loans charge extortionate interest. Their bad loan rate is usually sky high. Their returns are substantially lower. Basically whether it works or not depends on if they could print money that holds value. Obviously they couldn't.
- deleted 4y ago
  [deleted]

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

raesene9 4y ago

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.

charcircuit 4y ago
>how this was sustainable Why does it need to be sustainable? The APR can simply lower once the high APR is no longer sustainable.
- jannes 4y ago
  So you are saying it was sustainable at some point?
  - charcircuit 4y ago
    Yes, it was sustainable for a period of time.
    - Jensson 4y ago
      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.
      - arlcode 4y ago
        I wonder how they verified borrowers identity. Stealing the deposits would require a) Verification happens without any government id (I assume this is true) b) depends somehow on the bank / smart contract authors Then it would be trivially easy to generate huge amount of "borrowers" who simply "default" on their "loan".
- Grustaf 4y ago
  The sky high interest is its sole raison d'être
- UncleEntity 4y ago
  As in they lose money on every loan but make it up in volume? The irony here is that’s supposed to be a joke and not an actual business plan.
  - charcircuit 4y ago
    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.
tialaramex 4y ago
> 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.
- gpderetta 4y ago
  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.
  - tialaramex 4y ago
    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. https://www.nsandi.com/products/premium-bonds https://www.nsandi.com/products/premium-bonds

starfallg 4y ago

To add to that, financially, it makes no sense to borrow at such a high interest rate unless you have issues with obtaining credit traditionally. There is a reason why payday loans charge extortionate interest. Their bad loan rate is usually sky high. Their returns are substantially lower. Basically whether it works or not depends on if they could print money that holds value. Obviously they couldn't.

deleted 4y ago
[deleted]