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A stablecoin can't lose a peg, because it is backed 1:1 with a fully audited deposit of the underlying currency. "But what about -" -- then it's not a stableco

by dsr_ 4y ago

A stablecoin can't lose a peg, because it is backed 1:1 with a fully audited deposit of the underlying currency. "But what about -" -- then it's not a stablecoin.

kwertyoowiyop 4y ago
These are SchrodingerCoins: they may be stable or they may not, and until you open the box…
- whitesilhouette 4y ago
  he he he
grey-area 4y ago
Unfortunately none of these 'stablecoins' are actually backed 1:1 with a fully audited deposit at all. So when the crypto market crashes, some get exposed as a lie, which causes the crypto market to crash...
- _fat_santa 4y ago
  I noticed that DEI is backed with BTC as one of the funding options. I think it's a bit risky to back a stablecoin with a non-stablecoin that can have wild price movements.
- zionic 4y ago
  DAI is, it is in fact over-collateralized.
  - grey-area 4y ago
    We'll find out. I suspect you're wrong, unless by collateralized you mean they store other cryptocurrencies of questionable value as their collateral. In that case sure they're probably just overflowing with funds, until they actually need to use them during a crash.
    - zeven7 4y ago
      Dai is backed by other cryptos, so 100% transparent, and it was around in the last crash in 2018 and held up well. At the time it was backed 100% by ETH (it is now multi-collateral) and maintained the peg as ETH crashed from $1400 down to $80/ETH. It's a very different system from UST. The backing is made up from collateral from borrowers. If the price goes too far down, their position is liquidated, with borrowers losing their collateral to maintain the peg. So the funds are all accounted for, and there's an active system to convert the funds to stabilize the peg. By design Dai will still be $1 when there's only $100 left of crypto backing the peg.
      - AlexandrB 4y ago
        I think this comment has it right: https://news.ycombinator.com/item?id=31414217 https://news.ycombinator.com/item?id=31414217 DAI may still be vulnerable to a liquidity crisis. I.e. if there are no buyers for the collateral. This is probably not an issue if DAI is relatively small, but what if it becomes the dominant stablecoin?
        charcircuit 4y ago
        FYI that did happen 2 years ago due to congestion on ethereum. Well technically there was a buyer but he bid 0 DAI to win the auctions. DAI remained pegged and they got rid of the debt by minting and auctioning off MKR.
  - deleted 4y ago
    [deleted]
sumeno 4y ago
I agree, there is no such thing as a stablecoin
- biztos 4y ago
  But there could be, right? It’s just that actually backing your PLNC 1:1 with actual Złoty[0] you can actually retrieve, leaves very little room for the people behind the coin to get rich. [0]: https://en.wikipedia.org/wiki/Polish_złoty https://en.wikipedia.org/wiki/Polish_złoty
  - TheCoelacanth 4y ago
    Why would anyone bother running a real stablecoin? Even real banks don't maintain 100% reserves, because if they did there would be no way for them to profit.
    - criddell 4y ago
      In the US, banks also pay FDIC insurance premiums. A stable coin could run the same way - buy insurance on the portion of the deposits that they gamble with.
      - scoopertrooper 4y ago
        Wouldn't really work. Stablecoins operate in highly correlated markets, so if one goes down then presumably, others should go down. Also, the government is a highly diversified insurer that can create more the underlying asset it is insurring.
        criddell 4y ago
        > Stablecoins operate in highly correlated markets Do they have to? Is there any reason they couldn't hedge that money?
      - sumeno 4y ago
        Yet again cryptocurrency advocates independently rediscover why financial regulations exist and are good
jMyles 4y ago
Listen, I don't like stablecoins either. But what's the sudden obsession on HN with collateralization of blockchain assets? Algorithmic pegs are far more interesting and democratic. That scammers have discovered they can push ponzinomics out the door as well does not change this.
- Denvercoder9 4y ago
  The point of stablecoins isn't to be interesting, it's to be stable. Be as boring as possible, please.
  - jMyles 4y ago
    What proof do you need that collateralization, replete with shady or non-existent audits, is not a source of stability, and that something interesting, like approaches using pure mathematics, are more auditable and, in the short- and perhaps long-term, more stable? The dream collateralized stablecoin, audited in some transparent way, is still vulnerable to a good old fashioned heist. The gatekeeping of all projects that don't see the bank vault as the holy grail of community economics feels unbecoming of HN to me. This is creativity and science at work. Again, I understand that, in addition to sincere efforts to find an algorithmic solution, we get ponzi scum peddling their things. I don't understand why people buy those, and that's an element of human nature we can hopefully overcome as this process goes on. But you're watching collateralized coins fail, and your response is, "the only valid approach is collateralization!" ?
    - deleted 4y ago
      [deleted]
    - ahtihn 4y ago
      > that something interesting, like approaches using pure mathematics, are more auditable and, in the short- and perhaps long-term, more stable What approaches? Do you know of a known approach that isn't flawed in some way? Until proven otherwise, you can't create a stable coin with "pure mathematics".
salawat 4y ago
Yes, and how do you think that's attainable when the value of the dollar is always in flux, much of the collateral is corporate paper, and trying to liquidate will result in price movement of the underlying collateral? Frankly, it seems to me stablecoins are a market pipedream.
- rtkwe 4y ago
  USDT doesn't even have to liquidate the corpo paper if it gets that far. Their agreement says they can just hand you the paper itself and call that settled, then it's up to you to turn that into real money. https://tether.to/en/legal/#:~:text=Tether%20reserves%20the,in%20the%20Reserves https://tether.to/en/legal/#:~:text=Tether%20reserves%20the,...
ragingglow 4y ago
You're talking about backed stablecoins which are only a subset of stablecoins. In the common usage of the term, stablecoins include both backed stablecoins and algorithmic stablecoins.
smiddereens 4y ago
zionic 4y ago
The good ones shouldn't be able to. What is up with HN posting about these nonsense "stablecoins" that are seemingly named to confuse people? USDT (tether) vs UST (terra), and now DAI vs the DEI. DAI kept its peg from ETH $1440 -> $50 last time and is battle-tested + over-collateralized. Why don't people use that?
zeven7 4y ago
Direct backed stable coins require trust in the custodian. Algorithmic stable coins don't require the same trust, so there are benefits. And there are some that have been working well for a long time, and continue to work well in current market conditions. Look into DAI.
- AlexandrB 4y ago
  In practice most people are trading one trusted party for another. Instead of trusting the custodian, algorithmic stable coins require trusting the designer/developer of the smart contract(s). Not just because the code could be buggy, but also because the developer could have missed (or lied about) a corner case that could lead to a death spiral as what happened with UST. That's not to mention that, as what's happening with DEI, the developers could do something like halt redemption making your holdings suddenly illiquid at the pegged price. DAI seems safe given how over-collateralized it is. But a drop of 60+% in the collateral basket used by DAI is not inconceivable. In particular what happens if USDC's custodian is found to be untrustworthy? And the value of non-pegged cryptocurrencies tend to be strongly correlated, so a mix of crypto assets is not a diverse as one would hope.
  - zeven7 4y ago
    > But a drop of 60+% in the collateral basket used by DAI is not inconceivable. Dai has survived a 94% drop in the value of its backing collateral in 2018, and it maintained the peg well. It would, however, be a problem if the drop was _instant_ and sustained. But it should be able to handle the speed of the drop we saw in Luna. Your point is taken regarding trading types of trust with respect to bugs or backdoors. There is certainly a level of trust required there.
    - AlexandrB 4y ago
      Yeah, I was not aware of the liquidation mechanics used by DAI. Your other comment was very informative.
perryizgr8 4y ago
If there were to exist such a stable coin, that is always 1:1 with USD, wouldn't that negate the need for the coin? Just convert your crypto into actual USD whenever you want. Why have the intermediate stable coin step at all?

by dsr_ 4y ago

A stablecoin can't lose a peg, because it is backed 1:1 with a fully audited deposit of the underlying currency. "But what about -" -- then it's not a stablecoin.

kwertyoowiyop 4y ago

These are SchrodingerCoins: they may be stable or they may not, and until you open the box…

whitesilhouette 4y ago
he he he

grey-area 4y ago

Unfortunately none of these 'stablecoins' are actually backed 1:1 with a fully audited deposit at all. So when the crypto market crashes, some get exposed as a lie, which causes the crypto market to crash...

_fat_santa 4y ago
I noticed that DEI is backed with BTC as one of the funding options. I think it's a bit risky to back a stablecoin with a non-stablecoin that can have wild price movements.
zionic 4y ago
DAI is, it is in fact over-collateralized.
- grey-area 4y ago
  We'll find out. I suspect you're wrong, unless by collateralized you mean they store other cryptocurrencies of questionable value as their collateral. In that case sure they're probably just overflowing with funds, until they actually need to use them during a crash.
  - zeven7 4y ago
    Dai is backed by other cryptos, so 100% transparent, and it was around in the last crash in 2018 and held up well. At the time it was backed 100% by ETH (it is now multi-collateral) and maintained the peg as ETH crashed from $1400 down to $80/ETH. It's a very different system from UST. The backing is made up from collateral from borrowers. If the price goes too far down, their position is liquidated, with borrowers losing their collateral to maintain the peg. So the funds are all accounted for, and there's an active system to convert the funds to stabilize the peg. By design Dai will still be $1 when there's only $100 left of crypto backing the peg.
    - AlexandrB 4y ago
      I think this comment has it right: https://news.ycombinator.com/item?id=31414217 https://news.ycombinator.com/item?id=31414217 DAI may still be vulnerable to a liquidity crisis. I.e. if there are no buyers for the collateral. This is probably not an issue if DAI is relatively small, but what if it becomes the dominant stablecoin?
      - charcircuit 4y ago
        FYI that did happen 2 years ago due to congestion on ethereum. Well technically there was a buyer but he bid 0 DAI to win the auctions. DAI remained pegged and they got rid of the debt by minting and auctioning off MKR.
- deleted 4y ago
  [deleted]

sumeno 4y ago

I agree, there is no such thing as a stablecoin

biztos 4y ago
But there could be, right? It’s just that actually backing your PLNC 1:1 with actual Złoty[0] you can actually retrieve, leaves very little room for the people behind the coin to get rich. [0]: https://en.wikipedia.org/wiki/Polish_złoty https://en.wikipedia.org/wiki/Polish_złoty
- TheCoelacanth 4y ago
  Why would anyone bother running a real stablecoin? Even real banks don't maintain 100% reserves, because if they did there would be no way for them to profit.
  - criddell 4y ago
    In the US, banks also pay FDIC insurance premiums. A stable coin could run the same way - buy insurance on the portion of the deposits that they gamble with.
    - scoopertrooper 4y ago
      Wouldn't really work. Stablecoins operate in highly correlated markets, so if one goes down then presumably, others should go down. Also, the government is a highly diversified insurer that can create more the underlying asset it is insurring.
      - criddell 4y ago
        > Stablecoins operate in highly correlated markets Do they have to? Is there any reason they couldn't hedge that money?
    - sumeno 4y ago
      Yet again cryptocurrency advocates independently rediscover why financial regulations exist and are good

jMyles 4y ago

Listen, I don't like stablecoins either. But what's the sudden obsession on HN with collateralization of blockchain assets? Algorithmic pegs are far more interesting and democratic. That scammers have discovered they can push ponzinomics out the door as well does not change this.

Denvercoder9 4y ago
The point of stablecoins isn't to be interesting, it's to be stable. Be as boring as possible, please.
- jMyles 4y ago
  What proof do you need that collateralization, replete with shady or non-existent audits, is not a source of stability, and that something interesting, like approaches using pure mathematics, are more auditable and, in the short- and perhaps long-term, more stable? The dream collateralized stablecoin, audited in some transparent way, is still vulnerable to a good old fashioned heist. The gatekeeping of all projects that don't see the bank vault as the holy grail of community economics feels unbecoming of HN to me. This is creativity and science at work. Again, I understand that, in addition to sincere efforts to find an algorithmic solution, we get ponzi scum peddling their things. I don't understand why people buy those, and that's an element of human nature we can hopefully overcome as this process goes on. But you're watching collateralized coins fail, and your response is, "the only valid approach is collateralization!" ?
  - deleted 4y ago
    [deleted]
  - ahtihn 4y ago
    > that something interesting, like approaches using pure mathematics, are more auditable and, in the short- and perhaps long-term, more stable What approaches? Do you know of a known approach that isn't flawed in some way? Until proven otherwise, you can't create a stable coin with "pure mathematics".

salawat 4y ago

Yes, and how do you think that's attainable when the value of the dollar is always in flux, much of the collateral is corporate paper, and trying to liquidate will result in price movement of the underlying collateral? Frankly, it seems to me stablecoins are a market pipedream.

rtkwe 4y ago
USDT doesn't even have to liquidate the corpo paper if it gets that far. Their agreement says they can just hand you the paper itself and call that settled, then it's up to you to turn that into real money. https://tether.to/en/legal/#:~:text=Tether%20reserves%20the,in%20the%20Reserves https://tether.to/en/legal/#:~:text=Tether%20reserves%20the,...

ragingglow 4y ago

You're talking about backed stablecoins which are only a subset of stablecoins. In the common usage of the term, stablecoins include both backed stablecoins and algorithmic stablecoins.

smiddereens 4y ago

zionic 4y ago

The good ones shouldn't be able to. What is up with HN posting about these nonsense "stablecoins" that are seemingly named to confuse people? USDT (tether) vs UST (terra), and now DAI vs the DEI. DAI kept its peg from ETH $1440 -> $50 last time and is battle-tested + over-collateralized. Why don't people use that?

zeven7 4y ago

Direct backed stable coins require trust in the custodian. Algorithmic stable coins don't require the same trust, so there are benefits. And there are some that have been working well for a long time, and continue to work well in current market conditions. Look into DAI.

AlexandrB 4y ago
In practice most people are trading one trusted party for another. Instead of trusting the custodian, algorithmic stable coins require trusting the designer/developer of the smart contract(s). Not just because the code could be buggy, but also because the developer could have missed (or lied about) a corner case that could lead to a death spiral as what happened with UST. That's not to mention that, as what's happening with DEI, the developers could do something like halt redemption making your holdings suddenly illiquid at the pegged price. DAI seems safe given how over-collateralized it is. But a drop of 60+% in the collateral basket used by DAI is not inconceivable. In particular what happens if USDC's custodian is found to be untrustworthy? And the value of non-pegged cryptocurrencies tend to be strongly correlated, so a mix of crypto assets is not a diverse as one would hope.
- zeven7 4y ago
  > But a drop of 60+% in the collateral basket used by DAI is not inconceivable. Dai has survived a 94% drop in the value of its backing collateral in 2018, and it maintained the peg well. It would, however, be a problem if the drop was _instant_ and sustained. But it should be able to handle the speed of the drop we saw in Luna. Your point is taken regarding trading types of trust with respect to bugs or backdoors. There is certainly a level of trust required there.
  - AlexandrB 4y ago
    Yeah, I was not aware of the liquidation mechanics used by DAI. Your other comment was very informative.

perryizgr8 4y ago

If there were to exist such a stable coin, that is always 1:1 with USD, wouldn't that negate the need for the coin? Just convert your crypto into actual USD whenever you want. Why have the intermediate stable coin step at all?