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There are national governments that have tried and failed to maintain a currency peg. Why does anyone expect a crypto company to be able to do it?
by substation13 4y ago
There are national governments that have tried and failed to maintain a currency peg. Why does anyone expect a crypto company to be able to do it?
- rdl 4y agoAn entity with a single purpose (accounting to issue no more of X tokens than they have Y tokens in another account) has a vastly easier challenge (both directly, and from audit/controls perspective) than a more-powerful entity with lots of conflicting needs. There are still incentives for people at a custodial stablecoin to steal/debase, but it is a relatively tractable problem compared to e.g. federal reserve dual mandate or a non-independent central bank with even more competing concerns.
- TMWNN 4y agoMy understanding is that Luna was crushed by an attack not unlike what Soros et al. did to the British pound in 1992. No, the pound did not go to zero like Luna did, but then the UK has tangible assets in a way that Luna did not. To reiterate your point, if a * G7 member * Security Council member * NATO member * Nuclear power etc., etc. could not defend the pound in 1992, why does anyone expect a crypto company to be able to do it?
- dan-robertson 4y agoIf tether have sufficient and sufficiently liquid assets, they shouldn’t have a particularly hard time. The cases where it fails look like: - tether runs out of liquid assets and must sell illiquid assets at a loss to meet redemptions - tether / market participants are not willing/able to process redemptions fast enough and the price is dislocated for a long time - tether never had enough assets and runs out of money and stops processing redemptions If you think that tether has sufficient good backing then it’s a lot more like maintaining the ‘peg’ of a money market fund or an etf than a peg between two floating currencies.
- Slartie 4y agoIt is conceptually very simple to maintain a currency peg: just store 100% of reserves in the currency that you want to maintain the peg to, and promise to honor redemptions from those reserves at any time. What you describe as "difficult" is what Terra/Luna tried to achieve: maintain a peg without keeping 100% of your reserves in the pegged currency. That is what nation states also do, which is why even they can easily fail. But that is not what USDT or USDC proclaim to do. They proclaim to implement the "simple" variant. If that is actually true (for which there are some doubts in the case of USDT, but let's just assume for the sake of discussion that Tether is truthful) they shouldn't have a hard time doing what they plan to do.
- rednerrus 4y agoIsn't parking Billions of dollars in reserve a waste of capital?
- dan-robertson 4y agoFirstly it isn’t so easy to just ‘park’ billions of dollars. Even if they’re in a bank they can be lent out by the bank. Secondly the point is sort-of that an organisation like tether doesn’t get the choice: their purpose is to hold dollars and issue equal amounts of their IOU, just like when a bank holds shares in Volkswagen and issues an equal amount of the ADR (the ADR represents the shares held by the bank but, unlike Volkswagen stock, can trade in US markets) because their job is to hold these two meant-to-be-equivalent things rather than to hold Tesla stock instead because they think that would be less of a waste of capital. If people felt that it was a waste of capital to put money into tethers then maybe they wouldn’t do it (but of course if you have tethers you can lend them in crypto things rather than regular things and maybe you think that’s actually better so you don’t care what tether the company does)
- anm89 4y agoThis isn't a particularly clever argument. It is trivially easy to maintain a currency peg. I could issue one hncoin tomorrow, peg it at a dollar, and hold a dollar in escrow and my coin is pegged. It'd hard for governments because they have to manage an economy and politics either their currency. Stable coins could end up fitting the same description but not a of them do. If they choose to just peg peg coin with reserves of the underlying and make exchange easy the peg will stick. The comparison to a government is irrelevant though.
- substation13 4y agoI think it's hard to maintain a currency peg at scale. Your example is technically valid, but not practically relevant.