10 ms·
I prefer Matt Levine from his newsletter today: "Safe assets are much riskier than risky ones. This is I think the deep lesson of the 2008 financial crisis, an
by akkartik 4y ago
I prefer Matt Levine from his newsletter today:
"Safe assets are much riskier than risky ones. This is I think the deep lesson of the 2008 financial crisis, and crypto loves re-learning the lessons of traditional finance. Systemic risks live in safe assets. Equity-like assets — tech stocks, Luna, Bitcoin — are risky, and everyone knows they’re risky, and everyone accepts the risk. If your stocks or Bitcoin go down by 20% you are sad, but you are not that surprised. And so most people arrange their lives in such a way that, if their stocks or Bitcoin go down by 20%, they are not ruined.
"On the other hand safe assets — AAA mortgage securities, bank deposits, stablecoins — are not supposed to be risky, and people rely on them being worth what they say they’re worth, and when people lose even a little bit of confidence in them they crack completely. Bitcoin is valuable at $50,000 and somewhat less valuable at $40,000. A stablecoin is valuable at $1.00 and worthless at $0.98. If it hits $0.98 it might as well go to zero. And now it might!
"I have in the past told the story of TerraUSD and Luna by saying: The weakness in TerraUSD is Luna. One UST can be exchanged for $1 of Luna, but that only works if people continue to have confidence in Luna; if Luna goes to zero then TerraUSD will follow. But you could also tell the story by saying: The weakness in Luna is TerraUSD. Luna, as the cryptocurrency of a blockchain ecosystem, would rise or fall with the value of that ecosystem. But Luna, as the thing supporting a stablecoin, could go to zero in a week if that stablecoin needed support. Terra was so unstable because it was trying to be stable."
- quickthrower2 4y agoSurely no one through stablecoins were low risk?
- iaabtpbtpnn 4y agoStable is right there in the name.
- lupire 4y ago
- quickthrower2 4y agoBy the folks who put “safe” in safemoon.
- mechanical_bear 4y agoI am pretty bullish on crypto but Safemoon has to be one of the worst “assets” out there. Bunch of charlatans.
- rglullis 4y agoIncluding overcollaterized ones? They are not risk-free, but DAI has survived much worse market swings that the one from this week.
- jeromegv 4y agoThat’s what the whole crypto industry has been saying for years. If they didn’t think it was stable (or didn’t want you to believe it was), it wouldn’t be called stable. Millions of people at this point have been led to believe a stable coin is stable.
- berkut 4y agolol Apparently, you could even get 'depeg' insurance! Multiple levels of Ponzi...
- dwater 4y agoYeah, as someone who didn't know about Luna or Terra a week ago I think he did a good job of explaining the system, and the way it would fail, pretty well 2 days ago on Wednesday: https://www.bloomberg.com/opinion/articles/2022-05-11/terra-flops https://www.bloomberg.com/opinion/articles/2022-05-11/terra-... You can read down through where he details the Death Spiral. I also haven't paid much attention to other stablecoins, but I imagine the systems are similar, based on faith in the system, and only good as long as there's not a run on the system and more than some percentage try to get their money out.
- initplus 4y agoIt's absolutely true of other algorithmic stablecoins. When it comes to "backed" stablecoins like USDT the scam is even simpler: you just say it's backed by cash when it's not.
- ryanSrich 4y ago> When it comes to "backed" stablecoins like USDT the scam is even simpler: you just say it's backed by cash when it's not. This is such a silly argument. USDT is definitely backed by USD. To claim that it isn’t is just a lie. I think what you meant to imply is that it’s not backed 1:1. This isn’t only an issue with Tether. This is the case with any fractional reserve banking system.
- simulate-me 4y agoFractional reserve banking lends out deposits. This creates risk, but the net assets on the books remain the same (actually assets increase due to interest). With USDT, they may have bought something like commercial paper, which would be similar to fractional reserve banking, or they could have spent it on something irreversible (e.g. a dividend) and thus the net assets on the books is lower than the amount of USDT. It's unknown which situation applies to USDT.
- VirusNewbie 4y ago
- acchow 4y agoMatt Levine is usually great. But the reason why UST at 0.98 makes the whole thing collapse is not because people “rely on them being worth what they’re worth”. It’s because you can sell UST into Luna for arbitrage minting new Luna in the process, thus inflating Luna. But Matt knows this. He describes the whole mechanics in his newsletter like 3 days ago. So not sure why the stretched analogy here…
- uh_uh 4y agoSo you sell UST into Luna, buy more UST with Luna, sell UST into even more Luna, rinse and repeat?
- anm89 4y agoYes, this is the nature of arbitrage opportunities. You are leveling the price of two assets by moving liquidity. You keep doing it until the prices normalize and the arbitrage opportunity dissapears. In this case "normalizing" was going to zero for luna because that is what became the shared understanding of the value of what it was backed by.
- eudoxus 4y agoLuna didn't go to zero because the whole crypto market woke up and realized that was no intrinsic value to it. If it did, it never would've got as big or lasted as long as it did. There was an explicit attack that crippled the peg to the point that their algorithmic stability mechanic couldn't self heal. Which led the Luna project to attempt to assist the peg by deploying their own reserves, which unfortuently didn't work.
- mrcartmeneses 4y agoCan you send explain some more?
- shawabawa3 4y agoThere didn't have to be an attack for this to happen It may have been, but it equally could have been mass de-risking due to market conditions causing lots of UST withdrawals. Once the peg goes for a minute, confidence soon follows and the whole house of cards unwinds LFG had $1.5B of reserves to plug a hole in a $18B leak. It never had a realistic chance of working (unless it was fast enough to stop the initial depeg, in which case it could have delayed the inevitable)
- not2b 4y agoThose weren't AAA mortgage securities that went bust in 2008, though some were fraudulently marketed as such. They were liar loans on second-rate properties chopped up into a bunch of tiny pieces and re-sold, based on the notion that real estate would only go up forever, so if people failed to pay the lender would foreclose and own real estate with more value than the original loan. Seems similar to some methods of stabilizing a "stablecoin": back it by a traditional cryptocoin and assume that this other coin can only go up. People who had only bank deposits didn't lose anything.
- DennisP 4y agoThose chopped-up pieces of crap got lumped together in big collections which got rated AAA, because the people rating them assumed that not too many of the little pieces would fail at the same time.
- loeg 4y agoI think GP covered that with: > though some were fraudulently marketed as such
- DennisP 4y agoI don't think what I described was entirely fraud. I think people honestly underestimated how correlated the failures could become. (But I won't deny that there was also fraud, and economic incentives for inflated ratings.)
- anm89 4y agoDead wrong. This is the major take away from 2008 that has been widely reported on in pop media. The junk was repackaged so it could be stamped AAA
- Sniffnoy 4y agoLink? Edit: Found it, it's https://www.bloomberg.com/opinion/articles/2022-05-13/elon-musk-trolls-twitter https://www.bloomberg.com/opinion/articles/2022-05-13/elon-m...
- hooande 4y agooff topic, but I wouldn't have understood anything that happened in the last few weeks without Levine. now most of my days are waiting for him to post so that I know wtf just happened