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Anonymous and pseudonymous public, permissionless cryptocurrencies remove debt and leverage from the system, making GFC-like financial crises impossible. Witho

Anonymous and pseudonymous public, permissionless cryptocurrencies remove debt and leverage from the system, making GFC-like financial crises impossible. Without native identity, you can’t have native debt, leverage or margin. No native identity = no credit ratings or any other means of enforcing repayment. (Yes centralized crypto exchanges have these, but not the actual blockchains). All financial contracts on these systems must be fully- or over-collateralized, and if the collateral is used up there’s no margin calls for more, instead the contract is automatically closed. That creates an immense buffer against cascading financial collapse and house-of cards style financial structures that Wall St. likes to build. The possibility of a GFC or Great Depression (leveraged credit crises/collapse) is arguably the single biggest problem in all of the traditional financial system. Cryptocurrency may solve it.

300bps 4y ago
Sure and you could use blockchain to store your personal recipes but there are better tools to do it. There are many ways to prevent Wall Street or other organizations from becoming overleveraged.
- SkyMarshal 4y ago
  Oh? Correct me if I’m wrong, but it seems all the ways of preventing Wall St. from becoming over leveraged fundamentally depend on regulation, which is vulnerable to lobbying and political capture. That’s happened twice now - dismantling of Glass-Steagal after the Great Depression, and dismantling of Dodd-Frank after the GFC. The former took decades, the latter was done in just ten years. My point is, crypto may represent a permanent and deterministic solution to this problem, implemented at the protocol/infrastructure level, and which is difficult or impossible to corrupt via lobbying and political capture.
ivalm 4y ago
Being able to do things on credit is good, that’s where most of growth comes from and is a feature, not a bug.
- SkyMarshal 4y ago
  Well there are two general ways of financing economic growth - debt-based and equity-based. Equity-based is the main way that the startup ecosystem works, for example, though debt is also a part of it. With little or no debt, economic growth would no doubt be slower in the short/medium term. But an equity-only system with slower growth might be comparable in the long-run, due to continuous growth with no principle drawdowns and setbacks from periodic financial collapses. I don’t know of any research attempting such comparisons, everyone assumes debt is inevitable and doesn’t bother thinking about this.
  - ivalm 4y ago
    Equity based growth (eg startups) is much much smaller in $ amounts. There are like $140B in equity investment vs trillions in debt financing.
    - SkyMarshal 4y ago
      True, though you have to include the stock market too, that's equity. US Bond market cap is roughly $120 trillion, stock market cap is ~$45trillion. So the equity market is about half the debt market, if you exclude govt debt. That said, if somehow you had a similar hypothetical economy but with little or no debt, the equity side might be larger.
      - ivalm 4y ago
        Vast majority of stock market cap does not contribute to company capitalization. Primary equity offerings on the market are rare and use only a fraction of total equity. Most trades are secondary and don’t capitalize the company. The entire bond market value is a capital raise for the companies.
polygamous_bat 4y ago
If we wanted to remove leverage we could sign a law to remove it tomorrow. The problem is credit is a good thing that lets us accomplish more that what resources what we have right now. The fact that some people abuse trust doesn't mean we should throw trust out altogether, rather find ways to cost of breaching trust more.
- SkyMarshal 4y ago
  Theoretically we sign a law to remove it tomorrow, but practically it’s completely impossible. The financial industry would never allow it, and would spend billions defeating both the law and any politician who even remotely supported it.
  - polygamous_bat 4y ago
    Not because there will be billions spent, but because such a law would be extremely unpopular. Try convincing people that any option for your home loan and your car loan won't exist anymore (those are leverage too!) and see how happy they are.
- everfree 4y ago
  > If we wanted to remove leverage we could sign a law to remove it tomorrow. The kind of unsafe leveraged bundling that caused the great financial crisis was already illegal. In theory, the banks should have suffered the consequences of their poor trades. In practice, both the banks and the government knew that by enforcing those consequences, the entire financial system as we knew it would fall apart. So the banks smartly factored the bailouts into their risk calculations when entering into those trades. Crypto enables systems that cannot be as easily bailed out. It changes the game theory so that failure is no longer a "get bailout and still win" condition for speculative lenders. So in a way, crypto absolutely does create "ways to make breaches of trust cost more."

300bps 4y ago

Sure and you could use blockchain to store your personal recipes but there are better tools to do it. There are many ways to prevent Wall Street or other organizations from becoming overleveraged.

SkyMarshal 4y ago
Oh? Correct me if I’m wrong, but it seems all the ways of preventing Wall St. from becoming over leveraged fundamentally depend on regulation, which is vulnerable to lobbying and political capture. That’s happened twice now - dismantling of Glass-Steagal after the Great Depression, and dismantling of Dodd-Frank after the GFC. The former took decades, the latter was done in just ten years. My point is, crypto may represent a permanent and deterministic solution to this problem, implemented at the protocol/infrastructure level, and which is difficult or impossible to corrupt via lobbying and political capture.

ivalm 4y ago

Being able to do things on credit is good, that’s where most of growth comes from and is a feature, not a bug.

SkyMarshal 4y ago
Well there are two general ways of financing economic growth - debt-based and equity-based. Equity-based is the main way that the startup ecosystem works, for example, though debt is also a part of it. With little or no debt, economic growth would no doubt be slower in the short/medium term. But an equity-only system with slower growth might be comparable in the long-run, due to continuous growth with no principle drawdowns and setbacks from periodic financial collapses. I don’t know of any research attempting such comparisons, everyone assumes debt is inevitable and doesn’t bother thinking about this.
- ivalm 4y ago
  Equity based growth (eg startups) is much much smaller in $ amounts. There are like $140B in equity investment vs trillions in debt financing.
  - SkyMarshal 4y ago
    True, though you have to include the stock market too, that's equity. US Bond market cap is roughly $120 trillion, stock market cap is ~$45trillion. So the equity market is about half the debt market, if you exclude govt debt. That said, if somehow you had a similar hypothetical economy but with little or no debt, the equity side might be larger.
    - ivalm 4y ago
      Vast majority of stock market cap does not contribute to company capitalization. Primary equity offerings on the market are rare and use only a fraction of total equity. Most trades are secondary and don’t capitalize the company. The entire bond market value is a capital raise for the companies.

polygamous_bat 4y ago

If we wanted to remove leverage we could sign a law to remove it tomorrow. The problem is credit is a good thing that lets us accomplish more that what resources what we have right now. The fact that some people abuse trust doesn't mean we should throw trust out altogether, rather find ways to cost of breaching trust more.

SkyMarshal 4y ago
Theoretically we sign a law to remove it tomorrow, but practically it’s completely impossible. The financial industry would never allow it, and would spend billions defeating both the law and any politician who even remotely supported it.
- polygamous_bat 4y ago
  Not because there will be billions spent, but because such a law would be extremely unpopular. Try convincing people that any option for your home loan and your car loan won't exist anymore (those are leverage too!) and see how happy they are.
everfree 4y ago
> If we wanted to remove leverage we could sign a law to remove it tomorrow. The kind of unsafe leveraged bundling that caused the great financial crisis was already illegal. In theory, the banks should have suffered the consequences of their poor trades. In practice, both the banks and the government knew that by enforcing those consequences, the entire financial system as we knew it would fall apart. So the banks smartly factored the bailouts into their risk calculations when entering into those trades. Crypto enables systems that cannot be as easily bailed out. It changes the game theory so that failure is no longer a "get bailout and still win" condition for speculative lenders. So in a way, crypto absolutely does create "ways to make breaches of trust cost more."