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DAI has been stable because the assets that are used to defend the 1:1 peg have been liquid. In the event of a credit crunch/liquidity freeze, the assets that n

by boc 4y ago

DAI has been stable because the assets that are used to defend the 1:1 peg have been liquid. In the event of a credit crunch/liquidity freeze, the assets that need to be sold to defend the DAI peg aren't going to have an acceptable buyer, thus breaking the peg and causing DAI to fail. Everyone is thinking way too hard about this. There's no mathematical or economic way to create a parallel US currency that won't break in a credit crisis. It's called the Impossible Trinity [1] because it's empirically impossible to do the following all at once: 1. Setting a fixed currency exchange rate 2. Allowing capital to flow freely with no fixed currency exchange rate agreement 3. Autonomous monetary policy If you do number 1 (set a fixed currency exchange rate, aka 1 DAI : 1 USD), you CANNOT allow for the free flow of capital in and out of your exchange regime. It will eventually break every. single. time. Even if you're a massive sovereign nation, you still can't defend a peg against the Trilemma [2] Crypto investors should understand that they aren't up against ideology here or "haters", they are up against empirical mathematic principles. [1] https://en.wikipedia.org/wiki/Impossible_trinity https://en.wikipedia.org/wiki/Impossible_trinity [2] https://www.thebalance.com/black-wednesday-george-soros-bet-against-britain-1978944 https://www.thebalance.com/black-wednesday-george-soros-bet-...

AlexandrB 4y ago
Interesting, this reminds me of how perpetual motion machines can be dismissed out of hand by citing the 2nd law of thermodynamics. As with plausible-seeming perpetual motion machines, the key to a popular stablecoin seems to be to make it complicated enough that it's difficult to analyze from first principles.
- boc 4y ago
  I think you've hit the nail on the head. Stablecoins exist in the non-crypto world [1] and they all are slaves to the Trilemma - there are trillions at stake if someone could figure out a way around this, but, much like the 2nd law of thermodynamics, you can't make the math work. Crypto doesn't offer a technology solution to this issue since it's not a matter of tech, but rather financial math. If you're a fan of crypto and still reading, here's a hint at the next financial innovation after pegged currencies that you can try to replicate in the cryptoverse: XDR [2] [1] https://en.wikipedia.org/wiki/List_of_circulating_fixed_exchange_rate_currencies https://en.wikipedia.org/wiki/List_of_circulating_fixed_exch... [2] https://en.wikipedia.org/wiki/Special_drawing_rights https://en.wikipedia.org/wiki/Special_drawing_rights
  - deleted 4y ago
    [deleted]
  - SilasX 4y ago
    Special Drawing Rights was one of the stablecoins on the (recently defunct) Terra platform. You present yourself as deeply knowledgeable about these topics, I’m surprised you missed it: https://www.investopedia.com/terra-5209502 https://www.investopedia.com/terra-5209502
    - pmyteh 4y ago
      I don't read parent's comment as advocating the creation of a stablecoin pegged to XDR, but rather repurposing the principle of targeting (flexibly) a basket of underlying reserve assets as a unit of account in cryptoland.
      - SilasX 4y ago
        But choosing the same basket as XDR would still satisfy that goal, and picking different currencies would be a trivial difference. And if that's the extent of the idea, the parent could have just said so, rather than taking on this coy mystique of "oh, I'd reveal my deep insight, but, novices like you have to do the research and figure it out yourself, else you won't be ready for it".
  - deleted 4y ago
    [deleted]
SilasX 4y ago
DAI sacrifices 3 [+] so it should be able to meet 1 and 2, though, right? Much the same as GUSD maintains one by obligating itself to honor redemptions. [+] Dai's monetary policy is not autonomous; new units can only be issued for sufficient collateral and must be destroyed when value falls too low, a constraint that would make a central bank not be regarded as autonomous.
- whimsicalism 4y ago
  Hard to see how the GP missed this obvious fact...
- boc 4y ago
  In terms of free capital flows with no fixed exchange rate, this is the "it works until it doesn't" part of the problem. DAI only survived the recent run because they had a rainy-day fund in their "PSMs" or Peg Stability Modules. The PSM takes your USDC and mints new DAI and gives it to you. When DAI is >$1 you can make an instant profit doing this. (take 1 USDC, trade it for 1 DAI that you can sell for $1.001.) The PSM takes your DAI and gives you USDC (while stocks last.) When DAI is >$1 you can make an instant profit doing this. (buy 1 DAI trading at $0.999, and swap it for 1 USDC worth $1.) Notice the issue? The PSM within DAI is contingent on having enough USDC (proxy for USD) to keep the peg. When that reserve runs out, the PSM mechanism breaks and the peg fails. To suggest otherwise is financial alchemy.
  - whimsicalism 4y ago
    If the auctioning functions correctly, there will always be more reserves as compared to Dai. If the "reserves run out", then there would be no Dai to buy.
    - boc 4y ago
      But DAI doesn't control USDC, which means that they cannot control the reserve piece of the equation. This is the independent monetary policy + free capital flow piece of the trilemma. The auction function doesn't work if USDC suddenly isn't worth 1 USD, because then you're facing down a reserve that isn't worth "more" than DAI, even though the algo still thinks it's in balance. Basically you've tied DAI to USDC, which in turn is tied to Coinbase, which in the event of a bank run/bankruptcy event will freeze assets and cause massive capital flight causing people to sell their USDC for less than 1 USD as they flee for safety. This causes DAI to become unbalanced because their reserve of USDC isn't actually worth what it should be in USD terms, causing DAI to also lose the peg in terms of real US dollars. I'm telling you, there isn't a way to make this stuff work. It's financial alchemy.
t_mann 4y ago
empirical mathematic principles I wish this was a joke. How about you try to collect the $1m Millennium price with your proof of the Riemann hypothesis based on "empirical mathematic principles"? To be 100% clear about this: there's no such thing as empirical mathematical facts, there has never been and there will never be, not in this universe or any other. No matter how many (finitely many) roots of the zeta function you collect, they will never constitute a proof. To your point: you do realize that stablecoins like Dai have given up monetary autonomy, right? The amount of Dai in circulation is governed by users/the market, not the protocol or a central bank. You seem to be acting in bad faith, because you deliberately only discuss two points, but according to this theory, a stable exchange rate and capital mobility are indeed compatible if you're willing to let the market dictate your monetary policy.
whimsicalism 4y ago
What? All of these coins obviously sacrifice number 3.... And what is an "empirical mathematical principle"?

by boc 4y ago

AlexandrB 4y ago

Interesting, this reminds me of how perpetual motion machines can be dismissed out of hand by citing the 2nd law of thermodynamics. As with plausible-seeming perpetual motion machines, the key to a popular stablecoin seems to be to make it complicated enough that it's difficult to analyze from first principles.

boc 4y ago
I think you've hit the nail on the head. Stablecoins exist in the non-crypto world [1] and they all are slaves to the Trilemma - there are trillions at stake if someone could figure out a way around this, but, much like the 2nd law of thermodynamics, you can't make the math work. Crypto doesn't offer a technology solution to this issue since it's not a matter of tech, but rather financial math. If you're a fan of crypto and still reading, here's a hint at the next financial innovation after pegged currencies that you can try to replicate in the cryptoverse: XDR [2] [1] https://en.wikipedia.org/wiki/List_of_circulating_fixed_exchange_rate_currencies https://en.wikipedia.org/wiki/List_of_circulating_fixed_exch... [2] https://en.wikipedia.org/wiki/Special_drawing_rights https://en.wikipedia.org/wiki/Special_drawing_rights
- deleted 4y ago
  [deleted]
- SilasX 4y ago
  Special Drawing Rights was one of the stablecoins on the (recently defunct) Terra platform. You present yourself as deeply knowledgeable about these topics, I’m surprised you missed it: https://www.investopedia.com/terra-5209502 https://www.investopedia.com/terra-5209502
  - pmyteh 4y ago
    I don't read parent's comment as advocating the creation of a stablecoin pegged to XDR, but rather repurposing the principle of targeting (flexibly) a basket of underlying reserve assets as a unit of account in cryptoland.
    - SilasX 4y ago
      But choosing the same basket as XDR would still satisfy that goal, and picking different currencies would be a trivial difference. And if that's the extent of the idea, the parent could have just said so, rather than taking on this coy mystique of "oh, I'd reveal my deep insight, but, novices like you have to do the research and figure it out yourself, else you won't be ready for it".
- deleted 4y ago
  [deleted]

SilasX 4y ago

DAI sacrifices 3 [+] so it should be able to meet 1 and 2, though, right? Much the same as GUSD maintains one by obligating itself to honor redemptions. [+] Dai's monetary policy is not autonomous; new units can only be issued for sufficient collateral and must be destroyed when value falls too low, a constraint that would make a central bank not be regarded as autonomous.

whimsicalism 4y ago
Hard to see how the GP missed this obvious fact...
boc 4y ago
In terms of free capital flows with no fixed exchange rate, this is the "it works until it doesn't" part of the problem. DAI only survived the recent run because they had a rainy-day fund in their "PSMs" or Peg Stability Modules. The PSM takes your USDC and mints new DAI and gives it to you. When DAI is >$1 you can make an instant profit doing this. (take 1 USDC, trade it for 1 DAI that you can sell for $1.001.) The PSM takes your DAI and gives you USDC (while stocks last.) When DAI is >$1 you can make an instant profit doing this. (buy 1 DAI trading at $0.999, and swap it for 1 USDC worth $1.) Notice the issue? The PSM within DAI is contingent on having enough USDC (proxy for USD) to keep the peg. When that reserve runs out, the PSM mechanism breaks and the peg fails. To suggest otherwise is financial alchemy.
- whimsicalism 4y ago
  If the auctioning functions correctly, there will always be more reserves as compared to Dai. If the "reserves run out", then there would be no Dai to buy.
  - boc 4y ago
    But DAI doesn't control USDC, which means that they cannot control the reserve piece of the equation. This is the independent monetary policy + free capital flow piece of the trilemma. The auction function doesn't work if USDC suddenly isn't worth 1 USD, because then you're facing down a reserve that isn't worth "more" than DAI, even though the algo still thinks it's in balance. Basically you've tied DAI to USDC, which in turn is tied to Coinbase, which in the event of a bank run/bankruptcy event will freeze assets and cause massive capital flight causing people to sell their USDC for less than 1 USD as they flee for safety. This causes DAI to become unbalanced because their reserve of USDC isn't actually worth what it should be in USD terms, causing DAI to also lose the peg in terms of real US dollars. I'm telling you, there isn't a way to make this stuff work. It's financial alchemy.

t_mann 4y ago

empirical mathematic principles I wish this was a joke. How about you try to collect the $1m Millennium price with your proof of the Riemann hypothesis based on "empirical mathematic principles"? To be 100% clear about this: there's no such thing as empirical mathematical facts, there has never been and there will never be, not in this universe or any other. No matter how many (finitely many) roots of the zeta function you collect, they will never constitute a proof. To your point: you do realize that stablecoins like Dai have given up monetary autonomy, right? The amount of Dai in circulation is governed by users/the market, not the protocol or a central bank. You seem to be acting in bad faith, because you deliberately only discuss two points, but according to this theory, a stable exchange rate and capital mobility are indeed compatible if you're willing to let the market dictate your monetary policy.

whimsicalism 4y ago

What? All of these coins obviously sacrifice number 3.... And what is an "empirical mathematical principle"?