17 ms·

Two thought experiments to evaluate automated stablecoins

210 points by bpierre 4y ago

Proven 4y ago
> In the non-crypto real world, nothing lasts forever. Gold does. > You can have a stablecoin pegged to a basket of assets, a consumer price index, or some arbitrarily complex formula ("a quantity of value sufficient to buy {global average CO2 concentration minus 375} hectares of land in the forests of Yakutia"). As long as you can find an oracle to prove the index, and people to participate on all sides of the market, you can make such a stablecoin work. Why would I want any of that? I can buy real assets rather than assume that these oracles, "Smart" Contracts, code dependencies, blockchain (network), and developers will remain stable in extreme conditions. If you need stablecoin, that's because cryptocurrencies are useless to denominate prices. We may as well use a Central Bankster-backed coin (which no one invested in crypto wants to admit). It may be harder to remain anonymous, but at least there's much less to fail (mostly just the currency itself, which is why buying real-world assets represented by tokens is a much better approach). (The charts and formulas made me laugh - seriously? Who wants to take Cryptocurrencies 101, read some "white paper" and do "research" before they decide to park savings in a "stable" coin??? Give up, it's ridiculous!)
- colechristensen 4y ago
  Central banks and large institutional banks are researching blockchain solutions for many of the things they do, not for the rebellious crypto reasons but because a distributed ledger with crypto guarantees can actually be a lot simpler to manage than a bunch of mainframe business logic developed decades past. This would be less for consumers paying for things but the many methods banks use to settle accounts between themselves. Example: https://www.bloomberg.com/news/articles/2022-05-26/jpmorgan-finds-new-use-for-blockchain-in-collateral-settlement https://www.bloomberg.com/news/articles/2022-05-26/jpmorgan-...
  - sofixa 4y ago
    Nope, that's entirely for PR reasons. For some reason "blockchain" is still hype. Does it even matter there's a blockchain if it's centralised at a single party? Central banks are looking in digital currencies (the so called CBDC), but blockchain is completely useless for that.
    - okwubodu 4y ago
      It makes the most sense when you're managing liquidity between multiple parties. I bet it would still be a logical next step if they couldn't get a PR boost off the hype.
      - bombcar 4y ago
        If you have a group that has a trusted party (even if said party is one of the group, or a new group made from the group itself), that party can just run a bog-standard database and there's no need for a blockchain.
        okwubodu 4y ago
        Of course, it’s an architecture decision. They do different things and different considerations may lead you to one or the other.
  - cuteboy19 4y ago
    Please understand that these types of decisions come straight from management so that they can tick off a box somewhere with the word blockchain. You may have heard this bank invest in IoT and AI/ML solutions as well. It's just buzzwords. There is no technical reason why this needs to be on a blockchain and it is very likely that the ""blockchain"" is run on some mainframe or 'private cloud' because that is how banks do tech.
- zmgsabst 4y ago
  I think the value in cryptocurrency has always been tokens which represent real goods intermixed with a digital, distributed transaction network. Smart contracts are a nice bonus. Unfortunately, early conmen seized the helm of Bitcoin, removed the smart contract opcodes, and led us down the “digital (fools) gold” path.
- medo-bear 4y ago
  people constantly see blockchain as a currency replacement. while this is a consequence it is not its raison d'etre. instead it is a decentralized, bank-less, accounting mechanism with its own denomination. it is up to you if you see value in this or not. i personally see value in being able to move my assets with involvement of a minimal (preferably but not necessarily 0) number of third parties
  - pfisherman 4y ago
    My understanding is that a blockchain is a distributed, publicly inspectable, append-only database is IRB some special properties. Is that not accurate?
  - cuteboy19 4y ago
    there is no incentive to run it without the currency part. you water it down further and it just becomes git
    - medo-bear 4y ago
      yes or any vc, or an incoming/outgoings journal, or a bank account ... except ... trustless and decentralized
      - cuteboy19 4y ago
        I mean git is also trustless and decentralised
        medo-bear 4y ago
        git is trustless to the extent of vc purposes. it is not trustless to the level of financial accounting. for example git has no concept of double spending, while in a blockchain there is (usually?) no concept of branching and merging. but you are right in that they are both based on merkle trees
        4y ago
- fleddr 4y ago
  That's just a misunderstanding of why (most) people use stablecoins in the first place. It's not ideological, it's practical. When you sell crypto and want to exchange it for "real" money, say USD, some exchanges don't support that, they only support crypto to crypto conversions. On exchanges that do support it, it's sometimes slow and often comes with a fee. Both the exchange and your bank may impose arbitrary limits on it. It may create a taxable event. By comparison, a crypto to crypto conversion (say BTC to USDC) is instant, often free, and without much limitation. If actual USD had none of the above limitations, nobody would need or use a stablecoin. It's a utility, not some bet against the dollar.
  - overtonwhy 4y ago
    The exchanges that don't support cashing out direct to your USD bank are unlicensed and unregulated and they're dealing in Tether to skirt the KYC and AML requirements that a real financial business has to have. Those exchanges deal in scam coins that are pure pump and dump. Those exchanges don't have to keep client funds in reserve.
    - elefanten 4y ago
      This is not the point. Even the most legal/regulated have to ACH/wire cash. If you’re a trader and want to raise your cash portion of a portfolio it’s much faster/easier/cheaper to hold stablecoins. The cost is that it’s riskier.
      - jazzyjackson 4y ago
        I don't know what you mean, for instance because Gemini follows all the regulations, I can hold USD cash in my account and it's even FDIC insured. Wiring back to a checking account is an option, but I can keep liquidity at the ready without dealing in stablecoins.
    - aqme28 4y ago
      You're ignoring distributed exchanges like Uniswap. They only deal in crypto-crypto because they exist only on the blockchain.
- lekevicius 4y ago
  For cryptocurrencies with fees priced with gas, price volatility is not a problem. As the price grows, number of gas units per operation will likely go down, but will maintain its "stable currency" price. Ether's price doesn't have to stay fixed. It can grow or fall, increasing or decreasing economic security of the network (assuming Proof of Stake). There is no good way to ensure price stability, and there's no reason to. We don't complain that stock prices change. That's why smart contract cryptocurrencies have stablecoins: to address "stable use case". But this is just one of many possible "dapps", many don't need external peg to function (NFTs can be priced in the volatile ETH just fine).
- BenoitEssiambre 4y ago
  Note that gold can have long run negative returns if you count, storage costs, transportation costs, insurance costs etc. plus it's not very stable in the short run.
- CryptoPunk 4y ago
JumpCrisscross 4y ago
> RAI's security depends on an asset external to the RAI system (ETH), so RAI has a much easier time safely winding down Yay, we've "discovered" currency boards [1]. (The thoughts on negative rates are genuinely interesting, given their relation to present thinking on the subject.) [1] https://en.wikipedia.org/wiki/Currency_board https://en.wikipedia.org/wiki/Currency_board [2] https://www.researchgate.net/publication/282613501_History_of_Economic_Thought_Concerning_Currency_Boards https://www.researchgate.net/publication/282613501_History_o...
- DennisP 4y ago
  There's nothing wrong with doing an old thing in a new, more automated and efficient way. In this case, taking something that's normally done by national banks, and doing it instead on a peer-to-peer network, implemented by a handful of developers.
  - JumpCrisscross 4y ago
    > taking something that's normally done by national banks, and doing it instead on a peer-to-peer network, implemented by a handful of developers It's not. A currency board tied to the U.S. dollar holds U.S. dollars. A board--or ETF--pegged to the dollar holding rubles (or pegged to gold holding dollars or vice versa) is stable under a specific set of conditions. Outside those conditions, in the real world, it's trivially defeated.
deleted 4y ago
[deleted]
Ilverin 4y ago
Rai was initially released based on a value of 3.14 usd, it's down from that. Since usd has experienced inflation one would expect an unpegged stablecoin like rai to be worth more not less usd over time. Vitalik's requirement for an automated stablecoin to only hold crypto assets is quite severe. If there's a general crypto downturn, people are going to want their money back, which turns into a bank run. It only takes a minority of holders to want their money back in order to create a bank run (and bank runs can start small and get larger because the debt/equity ratio goes down if you are already not at 100% of debt backed by equity and if you pay holders 100% value when they get out of the stablecoin). Basically the only reason to hold a stablecoin instead of the underlying assets is convenience, because if you own an automated stablecoin you don't own any upside but you do own downside risk (e.g. Terra)
- jjitz 4y ago
  But you do own upside---of the collateral.
  - Ilverin 4y ago
    You're right and my above comment is wrong, but I still think the downside risk is bigger than the upside risk. It's ETH with 100% leverage, except beyond the risk of collapse of ETH there is also the risk of the collapse of RAI. Either of those happening would result in severe losses.
  - a4isms 4y ago
    But you could have that upside by owning the collateral. If I own the collateral, I own the upside and downside of the collateral. If I own a stablecoin pegged to the collateral, I own the upside and downside of the collateral, plus the risk of the stablecoin collapsing. The stablecoin doesn't offer me any upside compensating for the risk, so we are left arguing that the risk of collapse is negligible, or arguing that there is some other benefit of owning the stablecoin to compensate for the additional risk of owning stablecoins instead of owning the collateral.
    - 4y ago
cmitsakis 4y ago
The 2nd though experiment about a stablecoin that that goes up 20% per year is interesting. So in order to guarantee a stable price, the algorithm has to be able to confiscate some of your coins whenever it needs. This makes sense, but it makes stablecoins less appealing as a store of value.
m00dy 4y ago
World of Crypto (WoC) has already addressed this issue [0]. [0]: https://www.worldofcrypto.io/blog/building-a-decentralised-monetary-system https://www.worldofcrypto.io/blog/building-a-decentralised-m...
lkrubner 4y ago
The user @Proven has a comment that was downvoted and is now dead, but I'm not sure why. The comment seems reasonable. At least this part, I agree with: ---------------------------- I can buy real assets rather than assume that these oracles, "Smart" Contracts, code dependencies, blockchain (network), and developers will remain stable in extreme conditions. If you need stablecoin, that's because cryptocurrencies are useless to denominate prices. We may as well use a Central Bankster-backed coin (which no one invested in crypto wants to admit). It may be harder to remain anonymous, but at least there's much less to fail (mostly just the currency itself, which is why buying real-world assets represented by tokens is a much better approach).
- MrStonedOne 4y ago
  Proven's comment is dead because they are banned. on hackernews banned users can still comment, but their comments start out [dead] until vouched. (comments that get downvoted and flagged enough also go [dead], as do comments deleted by HN mods) if you have enough karma, you can vouch for banned user's comments by clicking the vouch button, it only shows on the direct page for the comment, you get by clicking the date of the comment. I know all of this because I am banned.
  - pcthrowaway 4y ago
    Why are you banned? What's the process for being unbanned?
    - f38zf5vdt 4y ago
      What dang taketh, he giveth back at his discretion.
    - dang 4y ago
      As it happens, https://news.ycombinator.com/item?id=29558596 https://news.ycombinator.com/item?id=29558596 answers both of those questions.
  - archon1410 4y ago
Sloppy 4y ago
Thought experiment #3 Create a hypothetical new stable coin. Issue one coin for every dollar put into the stable coin. For every dollar subtracted pay out the dollar and take the coin out of circulation until another USD comes back in. Make money on exchange fees ONLY. No fair using the coins or dollars in any other way. The schemes for stable coins ALL have failure mods until someone does #3. The most likely entity to do #3 is the US treasury (or other national entity). But if someone is willing to live with income from fees only, they could do #3. Crypto currencies have efficiencies enough to make this a viable option.
- enkid 4y ago
  How is this different from a bank account?
  - zmgsabst 4y ago
    The bank doesn’t actually store your dollars and your bank account can’t make transactions on the blockchain.
    - lxgr 4y ago
      And where would the issuer of such a hypothetical stablecoin store actual dollars, if not in bank accounts or government bonds?
- zmgsabst 4y ago
  I’ve been hoping we get #3 but with commodities and precious metals. I want a “stable token” that represents barrels of oil, wheat, etc or physical gold, silver, etc. The argument against the gold standard is that there isn’t “enough” to represent money — but I think we’d gain a lot of stability if prices were denominated in a basket of commodities.
  - causalmodels 4y ago
    Not really sure this would work. The problem with physical commodities is that you actually have to store them somewhere.
betwixthewires 4y ago
I like the write up, I think it articulates some principles well. I saw all the shitting on "algorithmic stablecoins" and found it a bit absurd. Not all algorithms are the same, this is plain as day. Not all game theoretical systems are identical. One very badly designed system fails, predictably, and all of a sudden every system that (conveniently) doesn't include a custodian is snake oil.
legitster 4y ago
I've been thinking about a way hypothetical idea for a stablecoin that uses price information. If the purpose of a stablecoin is to aid transactions, why not flip the contract around to be transaction first? I list a couch for sale on the blockchain. And I say I will exchange it for 799 LegitCoin. And now the blockchain mints out 799 LegitCoin, and auctions them to the highest bidder. And now there is 799 sitting on the blockchain while the product is listed as available. Because there will only be a 1:1 ration of coins available to coins spendable, you eliminate the role speculation will play. There is no rational reason for the value of the coin to rise above the peg, but there will almost always be arbitrage reasons to drive up the value of the coin to the peg.
- koliber 4y ago
  I may be silly, but isn’t this proof of stake, where you can stake anything, including a couch?
- cwkoss 4y ago
  How does the blockchain know you actually have a couch? How do you prevent someone from listing their toenail clippings for $1T?
  - all2 4y ago
    I had this idea, too. The problem is exactly what you have stated. Then you have "trusted" nodes that hold the physical asset in hock until someone buys it. A bank, of sorts, to hold your valuables. This bank (and its associated trust) would issue the coinage once it receives the item in question. Obviously the bank charges you for holding onto your goods (they have to make money somehow) and for the privilege of issuing you cash. Then, you have to know your banker. Can you trust Muhammid from down the street to issue your coin? Maybe. 3rd party services would pop up, telling you whether a certain issuer had defaulted on delivering some hard good. Turns out Muhammid is a stand up guy, and he delivers when people come calling. So he takes your couch and sends you 799 LegitCoin. Now Muhammid has options. He doesn't have to hold onto the couch. He has a couch that he valued at 799LC, but maybe he knows someone who would buy it for 815LC. This depends on whether the exchange is a loan or a sale. [edit] And what happens if you come back to Muhammid and he doesn't have your asset? Now you tell one of those 3rd party services. If there's a run on Bank Muhammid, and he defaults on everything, his coins are worthless. Now every coin he issued on the network is worthless. Just like small banks in the Western United States before we had the dollar. Technically speaking, that means any node on the LegitCoin network can mint a node-specific coin. The value of that coin is not locked against any other coin. This necessitates exchanges and means to evaluate the value of said coins against each other. Because of the cost of holding goods, most banks will hold high value assets; gold, land, rare goods, etc. And, because of the cost of holding those goods, only wealthier individuals will be able to trade assets for LegitCoin. [/edit] And so on. Crypto is simply reinventing existing monetary schemes. Everything old is new again.
Animats 4y ago
"What happens if we look at a stablecoin from the bold and radical perspective that the system's ability to avoid collapsing and losing huge amounts of user funds should not depend on a constant influx of new users?" Buterin's idea of humor.
- krick 4y ago
  I mean... he is absolutely right, what's your problem with that? Do you think this proposition is radical indeed? If so, it shouldn't look like a joke to you. Or do you think it isn't bold and radical, but an obvious prerequisite for a sustainable stablecoin? Well, then it is really funny, because people are investing fucking millions into a bucket full of holes, without bothering to notice that water is gushing from its bottom like crazy.
  - cuteboy19 4y ago
    The joke is that all crypto is like that. No coin has any actual utility (incl eth). As soon as the supply of greater fools dwindles, the price crashes. With stablecoins the crash is more spectacular because they are binary nature. Either they are equal to $1 or $0.
    - randomran01234 4y ago
      Eth can and often does drop without impacting USDC, DAI & others. The overall network and process of filling blocks continues just fine.
      - deleted 4y ago
        [deleted]
    - krick 4y ago
      Well, you can also say that all modern money is like that. USD is worthless. As soon as supply of fools that believe you can actually exchange it for useful stuff dwindles, the price crashes. So, no, this isn't the joke and this isn't the point. Either you accept the assumption that crypto has some utility, or you don't (i.e. you either truly believe that, or agree to play the game temporarily, because you believe you can jump off before the assumption becomes false). If you don't — then don't bother with that, it isn't your game anyway. If you do: well, now we can discuss algorithmic stablecoins. They aren't something you are supposed to believe in, they are supposed to be some clever technology that secures the constant price (i.e., the peg) for them, relying on some supposedly safe assumptions. The thing is, it is a relatively new technology with a lot of buzz and not so much proven facts, so if you want to play the game, please review these assumptions for yourself and see if they seem to be safe indeed. This is best done with some thought experiments.
rmbyrro 4y ago
Forgive my ignorance: What the heck is RAI? He throws that at some point in the article out of the blue ...
- clint 4y ago
  I used the website google.com and found this: https://reflexer.finance/ https://reflexer.finance/
Barrera 4y ago
Here's a different thought experiment. A sponsor organization maintains a stable coin pegged 1:1 to the US dollar. The token is bought and sold on the open market to keep the peg. Because it works so well, demand for the stable coin rises for years on end, resulting in the issuance of trillions of dollars worth of stable coin. Eventually the stable coin market cap hits 50% of all US dollars in existence. Numerous audits prove that the dollars are indeed responsibly held by the sponsor. Now, what specifically are the assets being held by the sponsor? This might seem like a trick question, but it's not. In what form would a stable coin of that magnitude keep its assets to ensure sufficient liquidity that the peg is never broken and can't be attacked successfully?
- svachalek 4y ago
  This depends very much on the definition of "all US dollars in existence". If I put a dollar in my savings account and the bank loans it out to someone else, who has the dollar? It's on my balance, but it's in their pocket. How many dollars are there? This is the question of money supply, it's very complicated but the TLDR is there is no fixed "all dollar" amount. This scenario just further muddies the question, but also explains why stable coins keep central bankers awake at night.
  - tshaddox 4y ago
    > If I put a dollar in my savings account and the bank loans it out to someone else, who has the dollar? Note that for every dollar you put into a U.S. bank account that's subject to reserve requirements (I believe just checking accounts?), the bank can loan out much more than 1 dollar, based on the legally required liquidity ratio or "reserve requirement ratio." Note also that since 2020 that reserve requirement ratio is zero.
    - whatshisface 4y ago
      That is a common misconception that got started as a misunderstanding of Milton Friedman's (reasonable) money multiplier equation. Banks cannot lend more money than they have - if they could, then you could start a bank and multiply your own money. The money multiplication that banks can do is take the money that party B has received for selling something and loan it back to to party A, who can use it to buy something from party B again. A zero percent reserve requirement does not lead in all cases to infinite inflation, because banks are also afraid of a default. Bank's desire to avoid defaults adds another fraction to their reserve ratio and limits money multiplication even when the Fed would technically allow it to proceed infinitely. Another thing you should know is that Fed chairmen have said that Friedman's equation underestimates bank's ability to create money, because in practice the Fed will allow any bank that desires liquidity to borrow it. The Fed, especially post-great-depression, will happily loan banks however much they needed to cover their reserve requirements, meaning that even before the ratio was set at zero, the number of times a single dollar could be spent was decided primarily by a balance of interest rates and fear of defaults.
Traster 4y ago
I'm finding it difficult to engage with the "Let's pretend USD is a ponzi scheme" pre-condition of some of this. I also think that the premise that RAI is distinct from ETH is... tenuous. The problem that UST-TERRA had was that it was trivially the same, but that means what we're saying is that if RAI succeeds to any significant extent then it puts ETH in a situation where it may also death spiral. I feel like I'm agreeing with Vitalik there. >Another extreme case worth examining is where RAI becomes the primary appliation on Ethereum. In this case, a reduction in expected future demand for RAI would crater the price of ETH. In the extreme case, a cascade of liquidations is possible, leading to a messy collapse of the system. But RAI is far more robust against this possibility than a Terra-style system. I think the conclusion of the 2nd experimnet is "Don't buy RAI". It's just that if the return on RAI is positive, well, buy it but know it's going to explode. If it's negative well... You're earning a negative return well done.
- DennisP 4y ago
  Unlike UST/LUNA, there's no scenario in which more ETH will be minted to support the price of RAI.
  - fshbbdssbbgdd 4y ago
    Correct, but the mechanism of safe liquidation could look kind of like minting in the right context. Suppose RAI became dominant. Then the old safes of ETH locked away could become really large. In theory, they could even be larger than the ETH float. Increasing ETH prices would fuel lots of RAI withdrawals. But then if the price of the limited amount of floating ETH dropped, suddenly these safes would be forced to liquidate. This liquidation would release a lot more ETH, further depressing the price and driving increasingly larger liquidations. Of course this is pretty unlikely, because RAI is peanuts compared to ETH.
timcavel 4y ago
asasidh 4y ago
How about leaving fiat to the retail and central banks and not trying to invent wheel on top of a rocket ship
- clippablematt 4y ago
  You are posting on hacker news. Hacker. The defining thing of hackers is taking things apart, understanding them, modifying, breaking, rebuilding, improving, dreaming! What a sad ideology of “don’t touch, leave it to the authorities”
  - asasidh 4y ago
    Satoshi was a hacker. These Defi charlatans are scammers at best.
EGreg 4y ago
The only way I think a stablecoin can work without trust is to be backed by another coin which is deflationary and always in demand. Such as a gas coin that has no block rewards but burns some percent of the mining fees on every transaction. As long as the network is used for transactions, people will voluntarily pay gas fees and deflate the coin (unlike Safemoon which burns it on transfer, paying to secure transactions is a service and the miners can just raise their fees if they want to make more). Then theoretically as long as there is demand for this coin, it will go up in price and therefore can back any sidechain coin that will grow slower in price (or better yet, gradually drop in price relatively to it like the dollar). That’s what we are planning to do with Intercoin: https://community.intercoin.org/t/intercoin-application-virtual-currency/ https://community.intercoin.org/t/intercoin-application-virt...
- VWWHFSfQ 4y ago
  > The only way I think a stablecoin can work without trust is to be backed by another coin which is deflationary and always in demand. OMG. I feel like a fucking alien. People are looking at me like have 2 heads. There is no such thing as a "stablecoin" ... It doesn't exist! It can't possibly mathematically exist. Because it's the USA Dollar itself.
  - EGreg 4y ago
    That hardly made sense lol
Thorrez 4y ago
The article is kind of confusing. It starts off noob-friendly, defining what a stablecoin is and the relevant terms. Then suddenly it starts talking about "redemption rate" without ever defining that. It's a big jump from "we're going to be noob-friendly" to "sorry, only experts who already understand these systems beyond this point".
Thorrez 4y ago
>The targeting mechanism is completely decentralized, and free of protocol-level dependencies on specific trusted actors. ... >As long as you can find an oracle to prove the index, Isn't the oracle a trusted actor?
fsckboy 4y ago
just as something of a useful aside: the difference between real costs of operations and the price you pay for these operations, and argue that in the long run, costs are more stable and more important than prices just want to mention the proper business vocabulary (standardized over accounting, finance, marketing) if you want to be understood across your enterprise. costs are monies you spend for necessities, they entail quantities purchased wrt prices and they reduce your profitability. Prices are without regard to quantity, and refer to market competitveness, especially "what price should I sell my product at, as I have a choice about that, but also competitive prices in the market" or as a shorthand, costs have to do with your spending, prices with your selling.

210 points by bpierre 4y ago

> In the non-crypto real world, nothing lasts forever. Gold does. > You can have a stablecoin pegged to a basket of assets, a consumer price index, or some arbitrarily complex formula ("a quantity of value sufficient to buy {global average CO2 concentration minus 375} hectares of land in the forests of Yakutia"). As long as you can find an oracle to prove the index, and people to participate on all sides of the market, you can make such a stablecoin work. Why would I want any of that? I can buy real assets rather than assume that these oracles, "Smart" Contracts, code dependencies, blockchain (network), and developers will remain stable in extreme conditions. If you need stablecoin, that's because cryptocurrencies are useless to denominate prices. We may as well use a Central Bankster-backed coin (which no one invested in crypto wants to admit). It may be harder to remain anonymous, but at least there's much less to fail (mostly just the currency itself, which is why buying real-world assets represented by tokens is a much better approach). (The charts and formulas made me laugh - seriously? Who wants to take Cryptocurrencies 101, read some "white paper" and do "research" before they decide to park savings in a "stable" coin??? Give up, it's ridiculous!)

colechristensen 4y ago
Central banks and large institutional banks are researching blockchain solutions for many of the things they do, not for the rebellious crypto reasons but because a distributed ledger with crypto guarantees can actually be a lot simpler to manage than a bunch of mainframe business logic developed decades past. This would be less for consumers paying for things but the many methods banks use to settle accounts between themselves. Example: https://www.bloomberg.com/news/articles/2022-05-26/jpmorgan-finds-new-use-for-blockchain-in-collateral-settlement https://www.bloomberg.com/news/articles/2022-05-26/jpmorgan-...
- sofixa 4y ago
  Nope, that's entirely for PR reasons. For some reason "blockchain" is still hype. Does it even matter there's a blockchain if it's centralised at a single party? Central banks are looking in digital currencies (the so called CBDC), but blockchain is completely useless for that.
  - okwubodu 4y ago
    It makes the most sense when you're managing liquidity between multiple parties. I bet it would still be a logical next step if they couldn't get a PR boost off the hype.
    - bombcar 4y ago
      If you have a group that has a trusted party (even if said party is one of the group, or a new group made from the group itself), that party can just run a bog-standard database and there's no need for a blockchain.
      - okwubodu 4y ago
        Of course, it’s an architecture decision. They do different things and different considerations may lead you to one or the other.
- cuteboy19 4y ago
  Please understand that these types of decisions come straight from management so that they can tick off a box somewhere with the word blockchain. You may have heard this bank invest in IoT and AI/ML solutions as well. It's just buzzwords. There is no technical reason why this needs to be on a blockchain and it is very likely that the ""blockchain"" is run on some mainframe or 'private cloud' because that is how banks do tech.
zmgsabst 4y ago
I think the value in cryptocurrency has always been tokens which represent real goods intermixed with a digital, distributed transaction network. Smart contracts are a nice bonus. Unfortunately, early conmen seized the helm of Bitcoin, removed the smart contract opcodes, and led us down the “digital (fools) gold” path.
medo-bear 4y ago
people constantly see blockchain as a currency replacement. while this is a consequence it is not its raison d'etre. instead it is a decentralized, bank-less, accounting mechanism with its own denomination. it is up to you if you see value in this or not. i personally see value in being able to move my assets with involvement of a minimal (preferably but not necessarily 0) number of third parties
- pfisherman 4y ago
  My understanding is that a blockchain is a distributed, publicly inspectable, append-only database is IRB some special properties. Is that not accurate?
- cuteboy19 4y ago
  there is no incentive to run it without the currency part. you water it down further and it just becomes git
  - medo-bear 4y ago
    yes or any vc, or an incoming/outgoings journal, or a bank account ... except ... trustless and decentralized
    - cuteboy19 4y ago
      I mean git is also trustless and decentralised
      - medo-bear 4y ago
        git is trustless to the extent of vc purposes. it is not trustless to the level of financial accounting. for example git has no concept of double spending, while in a blockchain there is (usually?) no concept of branching and merging. but you are right in that they are both based on merkle trees
        4y ago
fleddr 4y ago
That's just a misunderstanding of why (most) people use stablecoins in the first place. It's not ideological, it's practical. When you sell crypto and want to exchange it for "real" money, say USD, some exchanges don't support that, they only support crypto to crypto conversions. On exchanges that do support it, it's sometimes slow and often comes with a fee. Both the exchange and your bank may impose arbitrary limits on it. It may create a taxable event. By comparison, a crypto to crypto conversion (say BTC to USDC) is instant, often free, and without much limitation. If actual USD had none of the above limitations, nobody would need or use a stablecoin. It's a utility, not some bet against the dollar.
- overtonwhy 4y ago
  The exchanges that don't support cashing out direct to your USD bank are unlicensed and unregulated and they're dealing in Tether to skirt the KYC and AML requirements that a real financial business has to have. Those exchanges deal in scam coins that are pure pump and dump. Those exchanges don't have to keep client funds in reserve.
  - elefanten 4y ago
    This is not the point. Even the most legal/regulated have to ACH/wire cash. If you’re a trader and want to raise your cash portion of a portfolio it’s much faster/easier/cheaper to hold stablecoins. The cost is that it’s riskier.
    - jazzyjackson 4y ago
      I don't know what you mean, for instance because Gemini follows all the regulations, I can hold USD cash in my account and it's even FDIC insured. Wiring back to a checking account is an option, but I can keep liquidity at the ready without dealing in stablecoins.
  - aqme28 4y ago
    You're ignoring distributed exchanges like Uniswap. They only deal in crypto-crypto because they exist only on the blockchain.
lekevicius 4y ago
For cryptocurrencies with fees priced with gas, price volatility is not a problem. As the price grows, number of gas units per operation will likely go down, but will maintain its "stable currency" price. Ether's price doesn't have to stay fixed. It can grow or fall, increasing or decreasing economic security of the network (assuming Proof of Stake). There is no good way to ensure price stability, and there's no reason to. We don't complain that stock prices change. That's why smart contract cryptocurrencies have stablecoins: to address "stable use case". But this is just one of many possible "dapps", many don't need external peg to function (NFTs can be priced in the volatile ETH just fine).
BenoitEssiambre 4y ago
Note that gold can have long run negative returns if you count, storage costs, transportation costs, insurance costs etc. plus it's not very stable in the short run.
CryptoPunk 4y ago

JumpCrisscross 4y ago

> RAI's security depends on an asset external to the RAI system (ETH), so RAI has a much easier time safely winding down Yay, we've "discovered" currency boards [1]. (The thoughts on negative rates are genuinely interesting, given their relation to present thinking on the subject.) [1] https://en.wikipedia.org/wiki/Currency_board https://en.wikipedia.org/wiki/Currency_board [2] https://www.researchgate.net/publication/282613501_History_of_Economic_Thought_Concerning_Currency_Boards https://www.researchgate.net/publication/282613501_History_o...

DennisP 4y ago
There's nothing wrong with doing an old thing in a new, more automated and efficient way. In this case, taking something that's normally done by national banks, and doing it instead on a peer-to-peer network, implemented by a handful of developers.
- JumpCrisscross 4y ago
  > taking something that's normally done by national banks, and doing it instead on a peer-to-peer network, implemented by a handful of developers It's not. A currency board tied to the U.S. dollar holds U.S. dollars. A board--or ETF--pegged to the dollar holding rubles (or pegged to gold holding dollars or vice versa) is stable under a specific set of conditions. Outside those conditions, in the real world, it's trivially defeated.

deleted 4y ago

[deleted]

Ilverin 4y ago

Rai was initially released based on a value of 3.14 usd, it's down from that. Since usd has experienced inflation one would expect an unpegged stablecoin like rai to be worth more not less usd over time. Vitalik's requirement for an automated stablecoin to only hold crypto assets is quite severe. If there's a general crypto downturn, people are going to want their money back, which turns into a bank run. It only takes a minority of holders to want their money back in order to create a bank run (and bank runs can start small and get larger because the debt/equity ratio goes down if you are already not at 100% of debt backed by equity and if you pay holders 100% value when they get out of the stablecoin). Basically the only reason to hold a stablecoin instead of the underlying assets is convenience, because if you own an automated stablecoin you don't own any upside but you do own downside risk (e.g. Terra)

jjitz 4y ago
But you do own upside---of the collateral.
- Ilverin 4y ago
  You're right and my above comment is wrong, but I still think the downside risk is bigger than the upside risk. It's ETH with 100% leverage, except beyond the risk of collapse of ETH there is also the risk of the collapse of RAI. Either of those happening would result in severe losses.
- a4isms 4y ago
  But you could have that upside by owning the collateral. If I own the collateral, I own the upside and downside of the collateral. If I own a stablecoin pegged to the collateral, I own the upside and downside of the collateral, plus the risk of the stablecoin collapsing. The stablecoin doesn't offer me any upside compensating for the risk, so we are left arguing that the risk of collapse is negligible, or arguing that there is some other benefit of owning the stablecoin to compensate for the additional risk of owning stablecoins instead of owning the collateral.
  - 4y ago

cmitsakis 4y ago

The 2nd though experiment about a stablecoin that that goes up 20% per year is interesting. So in order to guarantee a stable price, the algorithm has to be able to confiscate some of your coins whenever it needs. This makes sense, but it makes stablecoins less appealing as a store of value.

m00dy 4y ago

World of Crypto (WoC) has already addressed this issue [0]. [0]: https://www.worldofcrypto.io/blog/building-a-decentralised-monetary-system https://www.worldofcrypto.io/blog/building-a-decentralised-m...

lkrubner 4y ago

The user @Proven has a comment that was downvoted and is now dead, but I'm not sure why. The comment seems reasonable. At least this part, I agree with: ---------------------------- I can buy real assets rather than assume that these oracles, "Smart" Contracts, code dependencies, blockchain (network), and developers will remain stable in extreme conditions. If you need stablecoin, that's because cryptocurrencies are useless to denominate prices. We may as well use a Central Bankster-backed coin (which no one invested in crypto wants to admit). It may be harder to remain anonymous, but at least there's much less to fail (mostly just the currency itself, which is why buying real-world assets represented by tokens is a much better approach).

MrStonedOne 4y ago
Proven's comment is dead because they are banned. on hackernews banned users can still comment, but their comments start out [dead] until vouched. (comments that get downvoted and flagged enough also go [dead], as do comments deleted by HN mods) if you have enough karma, you can vouch for banned user's comments by clicking the vouch button, it only shows on the direct page for the comment, you get by clicking the date of the comment. I know all of this because I am banned.
- pcthrowaway 4y ago
  Why are you banned? What's the process for being unbanned?
  - f38zf5vdt 4y ago
    What dang taketh, he giveth back at his discretion.
  - dang 4y ago
    As it happens, https://news.ycombinator.com/item?id=29558596 https://news.ycombinator.com/item?id=29558596 answers both of those questions.
- archon1410 4y ago

Sloppy 4y ago

Thought experiment #3 Create a hypothetical new stable coin. Issue one coin for every dollar put into the stable coin. For every dollar subtracted pay out the dollar and take the coin out of circulation until another USD comes back in. Make money on exchange fees ONLY. No fair using the coins or dollars in any other way. The schemes for stable coins ALL have failure mods until someone does #3. The most likely entity to do #3 is the US treasury (or other national entity). But if someone is willing to live with income from fees only, they could do #3. Crypto currencies have efficiencies enough to make this a viable option.

enkid 4y ago
How is this different from a bank account?
- zmgsabst 4y ago
  The bank doesn’t actually store your dollars and your bank account can’t make transactions on the blockchain.
  - lxgr 4y ago
    And where would the issuer of such a hypothetical stablecoin store actual dollars, if not in bank accounts or government bonds?
zmgsabst 4y ago
I’ve been hoping we get #3 but with commodities and precious metals. I want a “stable token” that represents barrels of oil, wheat, etc or physical gold, silver, etc. The argument against the gold standard is that there isn’t “enough” to represent money — but I think we’d gain a lot of stability if prices were denominated in a basket of commodities.
- causalmodels 4y ago
  Not really sure this would work. The problem with physical commodities is that you actually have to store them somewhere.

betwixthewires 4y ago

I like the write up, I think it articulates some principles well. I saw all the shitting on "algorithmic stablecoins" and found it a bit absurd. Not all algorithms are the same, this is plain as day. Not all game theoretical systems are identical. One very badly designed system fails, predictably, and all of a sudden every system that (conveniently) doesn't include a custodian is snake oil.

legitster 4y ago

I've been thinking about a way hypothetical idea for a stablecoin that uses price information. If the purpose of a stablecoin is to aid transactions, why not flip the contract around to be transaction first? I list a couch for sale on the blockchain. And I say I will exchange it for 799 LegitCoin. And now the blockchain mints out 799 LegitCoin, and auctions them to the highest bidder. And now there is 799 sitting on the blockchain while the product is listed as available. Because there will only be a 1:1 ration of coins available to coins spendable, you eliminate the role speculation will play. There is no rational reason for the value of the coin to rise above the peg, but there will almost always be arbitrage reasons to drive up the value of the coin to the peg.

koliber 4y ago
I may be silly, but isn’t this proof of stake, where you can stake anything, including a couch?
cwkoss 4y ago
How does the blockchain know you actually have a couch? How do you prevent someone from listing their toenail clippings for $1T?
- all2 4y ago
  I had this idea, too. The problem is exactly what you have stated. Then you have "trusted" nodes that hold the physical asset in hock until someone buys it. A bank, of sorts, to hold your valuables. This bank (and its associated trust) would issue the coinage once it receives the item in question. Obviously the bank charges you for holding onto your goods (they have to make money somehow) and for the privilege of issuing you cash. Then, you have to know your banker. Can you trust Muhammid from down the street to issue your coin? Maybe. 3rd party services would pop up, telling you whether a certain issuer had defaulted on delivering some hard good. Turns out Muhammid is a stand up guy, and he delivers when people come calling. So he takes your couch and sends you 799 LegitCoin. Now Muhammid has options. He doesn't have to hold onto the couch. He has a couch that he valued at 799LC, but maybe he knows someone who would buy it for 815LC. This depends on whether the exchange is a loan or a sale. [edit] And what happens if you come back to Muhammid and he doesn't have your asset? Now you tell one of those 3rd party services. If there's a run on Bank Muhammid, and he defaults on everything, his coins are worthless. Now every coin he issued on the network is worthless. Just like small banks in the Western United States before we had the dollar. Technically speaking, that means any node on the LegitCoin network can mint a node-specific coin. The value of that coin is not locked against any other coin. This necessitates exchanges and means to evaluate the value of said coins against each other. Because of the cost of holding goods, most banks will hold high value assets; gold, land, rare goods, etc. And, because of the cost of holding those goods, only wealthier individuals will be able to trade assets for LegitCoin. [/edit] And so on. Crypto is simply reinventing existing monetary schemes. Everything old is new again.

Animats 4y ago

"What happens if we look at a stablecoin from the bold and radical perspective that the system's ability to avoid collapsing and losing huge amounts of user funds should not depend on a constant influx of new users?" Buterin's idea of humor.

krick 4y ago
I mean... he is absolutely right, what's your problem with that? Do you think this proposition is radical indeed? If so, it shouldn't look like a joke to you. Or do you think it isn't bold and radical, but an obvious prerequisite for a sustainable stablecoin? Well, then it is really funny, because people are investing fucking millions into a bucket full of holes, without bothering to notice that water is gushing from its bottom like crazy.
- cuteboy19 4y ago
  The joke is that all crypto is like that. No coin has any actual utility (incl eth). As soon as the supply of greater fools dwindles, the price crashes. With stablecoins the crash is more spectacular because they are binary nature. Either they are equal to $1 or $0.
  - randomran01234 4y ago
    Eth can and often does drop without impacting USDC, DAI & others. The overall network and process of filling blocks continues just fine.
    - deleted 4y ago
      [deleted]
  - krick 4y ago
    Well, you can also say that all modern money is like that. USD is worthless. As soon as supply of fools that believe you can actually exchange it for useful stuff dwindles, the price crashes. So, no, this isn't the joke and this isn't the point. Either you accept the assumption that crypto has some utility, or you don't (i.e. you either truly believe that, or agree to play the game temporarily, because you believe you can jump off before the assumption becomes false). If you don't — then don't bother with that, it isn't your game anyway. If you do: well, now we can discuss algorithmic stablecoins. They aren't something you are supposed to believe in, they are supposed to be some clever technology that secures the constant price (i.e., the peg) for them, relying on some supposedly safe assumptions. The thing is, it is a relatively new technology with a lot of buzz and not so much proven facts, so if you want to play the game, please review these assumptions for yourself and see if they seem to be safe indeed. This is best done with some thought experiments.

rmbyrro 4y ago

Forgive my ignorance: What the heck is RAI? He throws that at some point in the article out of the blue ...

clint 4y ago
I used the website google.com and found this: https://reflexer.finance/ https://reflexer.finance/

Barrera 4y ago

Here's a different thought experiment. A sponsor organization maintains a stable coin pegged 1:1 to the US dollar. The token is bought and sold on the open market to keep the peg. Because it works so well, demand for the stable coin rises for years on end, resulting in the issuance of trillions of dollars worth of stable coin. Eventually the stable coin market cap hits 50% of all US dollars in existence. Numerous audits prove that the dollars are indeed responsibly held by the sponsor. Now, what specifically are the assets being held by the sponsor? This might seem like a trick question, but it's not. In what form would a stable coin of that magnitude keep its assets to ensure sufficient liquidity that the peg is never broken and can't be attacked successfully?

svachalek 4y ago
This depends very much on the definition of "all US dollars in existence". If I put a dollar in my savings account and the bank loans it out to someone else, who has the dollar? It's on my balance, but it's in their pocket. How many dollars are there? This is the question of money supply, it's very complicated but the TLDR is there is no fixed "all dollar" amount. This scenario just further muddies the question, but also explains why stable coins keep central bankers awake at night.
- tshaddox 4y ago
  > If I put a dollar in my savings account and the bank loans it out to someone else, who has the dollar? Note that for every dollar you put into a U.S. bank account that's subject to reserve requirements (I believe just checking accounts?), the bank can loan out much more than 1 dollar, based on the legally required liquidity ratio or "reserve requirement ratio." Note also that since 2020 that reserve requirement ratio is zero.
  - whatshisface 4y ago
    That is a common misconception that got started as a misunderstanding of Milton Friedman's (reasonable) money multiplier equation. Banks cannot lend more money than they have - if they could, then you could start a bank and multiply your own money. The money multiplication that banks can do is take the money that party B has received for selling something and loan it back to to party A, who can use it to buy something from party B again. A zero percent reserve requirement does not lead in all cases to infinite inflation, because banks are also afraid of a default. Bank's desire to avoid defaults adds another fraction to their reserve ratio and limits money multiplication even when the Fed would technically allow it to proceed infinitely. Another thing you should know is that Fed chairmen have said that Friedman's equation underestimates bank's ability to create money, because in practice the Fed will allow any bank that desires liquidity to borrow it. The Fed, especially post-great-depression, will happily loan banks however much they needed to cover their reserve requirements, meaning that even before the ratio was set at zero, the number of times a single dollar could be spent was decided primarily by a balance of interest rates and fear of defaults.

Traster 4y ago

I'm finding it difficult to engage with the "Let's pretend USD is a ponzi scheme" pre-condition of some of this. I also think that the premise that RAI is distinct from ETH is... tenuous. The problem that UST-TERRA had was that it was trivially the same, but that means what we're saying is that if RAI succeeds to any significant extent then it puts ETH in a situation where it may also death spiral. I feel like I'm agreeing with Vitalik there. >Another extreme case worth examining is where RAI becomes the primary appliation on Ethereum. In this case, a reduction in expected future demand for RAI would crater the price of ETH. In the extreme case, a cascade of liquidations is possible, leading to a messy collapse of the system. But RAI is far more robust against this possibility than a Terra-style system. I think the conclusion of the 2nd experimnet is "Don't buy RAI". It's just that if the return on RAI is positive, well, buy it but know it's going to explode. If it's negative well... You're earning a negative return well done.

DennisP 4y ago
Unlike UST/LUNA, there's no scenario in which more ETH will be minted to support the price of RAI.
- fshbbdssbbgdd 4y ago
  Correct, but the mechanism of safe liquidation could look kind of like minting in the right context. Suppose RAI became dominant. Then the old safes of ETH locked away could become really large. In theory, they could even be larger than the ETH float. Increasing ETH prices would fuel lots of RAI withdrawals. But then if the price of the limited amount of floating ETH dropped, suddenly these safes would be forced to liquidate. This liquidation would release a lot more ETH, further depressing the price and driving increasingly larger liquidations. Of course this is pretty unlikely, because RAI is peanuts compared to ETH.

timcavel 4y ago

asasidh 4y ago

How about leaving fiat to the retail and central banks and not trying to invent wheel on top of a rocket ship

clippablematt 4y ago
You are posting on hacker news. Hacker. The defining thing of hackers is taking things apart, understanding them, modifying, breaking, rebuilding, improving, dreaming! What a sad ideology of “don’t touch, leave it to the authorities”
- asasidh 4y ago
  Satoshi was a hacker. These Defi charlatans are scammers at best.

EGreg 4y ago

The only way I think a stablecoin can work without trust is to be backed by another coin which is deflationary and always in demand. Such as a gas coin that has no block rewards but burns some percent of the mining fees on every transaction. As long as the network is used for transactions, people will voluntarily pay gas fees and deflate the coin (unlike Safemoon which burns it on transfer, paying to secure transactions is a service and the miners can just raise their fees if they want to make more). Then theoretically as long as there is demand for this coin, it will go up in price and therefore can back any sidechain coin that will grow slower in price (or better yet, gradually drop in price relatively to it like the dollar). That’s what we are planning to do with Intercoin: https://community.intercoin.org/t/intercoin-application-virtual-currency/ https://community.intercoin.org/t/intercoin-application-virt...

VWWHFSfQ 4y ago
> The only way I think a stablecoin can work without trust is to be backed by another coin which is deflationary and always in demand. OMG. I feel like a fucking alien. People are looking at me like have 2 heads. There is no such thing as a "stablecoin" ... It doesn't exist! It can't possibly mathematically exist. Because it's the USA Dollar itself.
- EGreg 4y ago
  That hardly made sense lol

Thorrez 4y ago

The article is kind of confusing. It starts off noob-friendly, defining what a stablecoin is and the relevant terms. Then suddenly it starts talking about "redemption rate" without ever defining that. It's a big jump from "we're going to be noob-friendly" to "sorry, only experts who already understand these systems beyond this point".

Thorrez 4y ago

>The targeting mechanism is completely decentralized, and free of protocol-level dependencies on specific trusted actors. ... >As long as you can find an oracle to prove the index, Isn't the oracle a trusted actor?

fsckboy 4y ago

just as something of a useful aside: the difference between real costs of operations and the price you pay for these operations, and argue that in the long run, costs are more stable and more important than prices just want to mention the proper business vocabulary (standardized over accounting, finance, marketing) if you want to be understood across your enterprise. costs are monies you spend for necessities, they entail quantities purchased wrt prices and they reduce your profitability. Prices are without regard to quantity, and refer to market competitveness, especially "what price should I sell my product at, as I have a choice about that, but also competitive prices in the market" or as a shorthand, costs have to do with your spending, prices with your selling.