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Stablecoins are conspicuous in their absence in patio11's post. Personally, I believe that patio11's loathing of crypto has made him incurious about its potenti

by spir 4y ago

Stablecoins are conspicuous in their absence in patio11's post. Personally, I believe that patio11's loathing of crypto has made him incurious about its potential. But that's not the point here. The point is that stablecoins are about to become a Very Good Deal for ordinary people: In the near future, stablecoins like USDC will become immune to bank runs because the US Dollar reserves backing them will be held in vehicles that don't loan out the reserves and hold short-duration treasuries directly with the Treasury Department. At the same time, any person or entity with USDC in their wallet has instant, 24/7 access to global markets at their sole discretion, without intermediaries. On Ethereum today, anyone can buy Coinbase stock, treasuries, an S&P 500 index, and real estate. In short, the UX of stablecoins is becoming vastly superior to bank deposits because you'll be immune to bank runs, control your own money, and have instant access to global markets, including for low-risk yield on your stablecoins, such as in treasuries or over-collateralized lending.

pjc50 4y ago
This is essentially fanfiction, as stablecoins so far have been very opaque about what they do with their reserves. Especially Tether. (largely because the mechanics of holding $60bn in treasuries would attract some questions about KYC which stablecoins are unable to answer)
- spir 4y ago
  You're right that internationally-run Tether (USDT) is the largest stablecoin and has opaque reserves. However, American-run USDC is growing faster and has excellent transparency: https://www.circle.com/en/transparency https://www.circle.com/en/transparency
  - overthrow 4y ago
    It's also worth noting that the US government itself sometimes uses USDC when there is no better option. If there were any doubts of USDC's legitimacy, the government would be trying to shut it down (see: USDT), not using it for transfers. https://www.nasdaq.com/articles/us-government-enlists-usdc-for-global-foreign-policy-objective-in-venezuela%3A-circle-ceo https://www.nasdaq.com/articles/us-government-enlists-usdc-f... https://www.circle.com/blog/circle-partners-with-bolivarian-republic-of-venezuela-and-airtm-to-deliver-aid-to-venezuelans-using-usdc https://www.circle.com/blog/circle-partners-with-bolivarian-...
- rabf 4y ago
  Circle and Tether can freeze their stablecoins for AML/KYC and to stop criminal exploits on chain, and have done this many times in the past. Also to change to regular fiat you will be doing that via a regulated entity which will have done the appropriate AML/KYC checks on you.
- misssocrates 4y ago
  The fanfiction is that banks can be trusted. USDC and Tether as of now have a better track record than even some big banks like SVB.
  - pjc50 4y ago
    What's Tether's holding breakdown? How do you know they're not exposed to the same bond duration issue?
  - swores 4y ago
    Tether has existed for under a decade, USDC is less than 5 years old, and SVB died after 39 years. Yes technically "still alive" is better than "just died", but can you really call it a "better track record" when Tether is so opaque that we wouldn't be able to spot if it was about to die until it actually happens? If Tether died tomorrow it would undeniably have a worse track record than SVB, if it dies in a decade then it survived half as long as SVB. Unless you have some insight into the actual behind the scenes finances of Tether I don't see how you can make that judgement. And as to this claim from your GP's comment: > In the near future, stablecoins like USDC will become immune to bank runs because the US Dollar reserves backing them will be held in vehicles that don't loan out the reserves and hold short-duration treasuries directly with the Treasury Department. Circle (USDC) literally had $3.3B cash deposited at SVB, and presumably more accounts at other banks, so they're exposed directly to potential problems caused by those banks. More importantly they could decide tomorrow, assuming they haven't already, to make the exact same poor choices as any bank could. There's nothing stopping them moving 95% of their assets tomorrow into 10 year treasury bonds other than that it would be a bad idea, but both they and banks are equally motivated to avoid bad ideas, so it seems to be an unwarranted hope that those in charge of Circle will make better decisions than those in charge of any bank, rather than any specific feature of USDC that makes it impossible for them to make the exact same mistake SVB made? And that's even before considering that if it had been USDC rather than SVB that made the mistake already, FDIC wouldn't have come running in to fix anything as they try to with failed banks. Am I missing something about USDC that actually makes it a safer bet, other than apparently having more faith in their management team than in the management teams of various banks?
mtoner23 4y ago
USDC may have instant 24/7 access to global markets. But why did the price of USDC drop to 90 cents this weekend. It isn't immune bank runs.
- lifty 4y ago
  They held cash at SVB. They will probably smarten up and start holding short term treasuries and avoid as much as possible bank liabilities. Just a guess.
  - rabf 4y ago
    Tha majority of their reserves were in short term tresuries, only a fraction of thier reserves were stored in 4 different banks as cash in order to be able process redemtions.
    - lifty 4y ago
      So I guess for them the only option for their short term redemption buffer is to keep money in the 4 systemically important banks. There are no other options. Relevant note, FED won't approve full reserve banks (several tried) as they might suck too many deposits out of the rest of the banks, posing a risk to the other banks.
- spir 4y ago
  You're right, last weekend, USDC dropped to a low of ~$0.88. However note - SVB was closed on a Friday (as is the FDIC's custom). This meant that USDC could not process redemptions over the weekend as banks were closed, and this created fear in the market. - USDC had 8% of their reserves trapped in SVB. The fair market value of USDC would have been $0.92 if all SVB deposits were lost, which was never likely. - crucially, USDC operator Circle has acknowledged the need to transition to a "full reserve" model where reserves aren't subject to bank runs. https://twitter.com/jerallaire/status/1635548066185871360 https://twitter.com/jerallaire/status/1635548066185871360 - over the weekend, USDC did lose its $1 peg and trade as low as ~$0.88. However, all USDC holders were able to maintain access their USDC to do whatever they wanted with it, which is a lot better than SVB depositors frozen and waiting to see what happened.
snarf21 4y ago
Except that 99.9% of people will buy "stable" coins on Coinbase. Not your keys, not your crypto. If Coinbase gets leveraged or goes the way of SFB, you have literally the same non-immunity as a bank run except you also don't get FDIC backstops.
- brvsft 4y ago
  SFB? You mean SVB? SBF?
  - snarf21 4y ago
    Sorry, I meant SBF but transposed.
- spir 4y ago
  You're right, stablecoins held custodially in an entity could be subject to similar contagion. Yet, non-custodial holding is becoming much easier and safer. Crucially, wallets are improving a lot, and a spectrum of custodial options is developing, with rich tradeoffs in eg. safety and self-sovereignty. For example https://www.coinbase.com/blog/how-smart-cryptography-makes-coinbase-more-secure https://www.coinbase.com/blog/how-smart-cryptography-makes-c...
bix6 4y ago
Vastly superior except there is zero insurance, reserves are held within the traditional banking system and it can depeg at any time…
KaiserPro 4y ago
> Stablecoins are conspicuous in their absence in patio11's post. Stablecoins are just fractional reserve banking but with a thin veneer of tech, and a massive narrative to differentiate them from standard fiat currency. You're far better off just buying commodities directly, at least where your value is located is much more transparent. Stablecoins are basically "trust me bro its worth this much, and will never drop, just don't trade too much and make me defend the peg."
- spir 4y ago
  The reason this is not true is because the best stablecoins, like American-run USDC, have excellent transparency and are backed 1:1 in cash and short-duration treasuries, with no fractional reserve system. https://www.circle.com/en/transparency https://www.circle.com/en/transparency
michael1999 4y ago
A bank deposit is a stablecoin. SVB blew up because it was a bad stablecoin.
- michael1999 4y ago
  All stablecoins are inevitably fallible stablecoins. Wealth is social, and can not be "stored" outside a social context.
jameshart 4y ago
How do you create an institution which can guarantee that it will always be able to take the results of its short term treasuries maturing, and convert that back into more short term treasuries, forever? That sounds like the financial equivalent of a perpetual motion machine. If an institution has no choice but to buy short term treasuries, why wouldn’t sellers increase the price that institution has to pay?
notShabu 4y ago
A good point is individuals could be better off if they could open an account at the Fed and have access to "real" dollars rather than the numbers that are just bank IOUs Stablecoins are closer in this direction than banks but only if they actually maintain 1:1 reserves. One advantage is that b/c they are protocols there is less need to seek returns to make payroll, rent, and profit. Another is more transparency. But also... at this point such a stablecoin is basically a CBDC...
ranger207 4y ago
Patrick didn't talk about stablecoins, but Matt Levine did in Monday's newsletter[0]. Fundamentally, Tether and banks have the same problem: does everyone believe that that bank still has enough money to pay you your deposits? If not, then bank run. Does everyone believe that Tether has enough money to back each coin with $1? If not, then run on Tether. Banks are regulated, so there's supposed to be a bunch of people keeping track of the bank's reserves to see if they have enough money to back deposits. Tether "solves" the problem by not telling anyone what their reserves are, so nobody can figure out if Tether truly has the money to back each coin at $1 or not. [0] https://archive.is/l4nLU https://archive.is/l4nLU

by spir 4y ago

pjc50 4y ago

This is essentially fanfiction, as stablecoins so far have been very opaque about what they do with their reserves. Especially Tether. (largely because the mechanics of holding $60bn in treasuries would attract some questions about KYC which stablecoins are unable to answer)

spir 4y ago
You're right that internationally-run Tether (USDT) is the largest stablecoin and has opaque reserves. However, American-run USDC is growing faster and has excellent transparency: https://www.circle.com/en/transparency https://www.circle.com/en/transparency
- overthrow 4y ago
  It's also worth noting that the US government itself sometimes uses USDC when there is no better option. If there were any doubts of USDC's legitimacy, the government would be trying to shut it down (see: USDT), not using it for transfers. https://www.nasdaq.com/articles/us-government-enlists-usdc-for-global-foreign-policy-objective-in-venezuela%3A-circle-ceo https://www.nasdaq.com/articles/us-government-enlists-usdc-f... https://www.circle.com/blog/circle-partners-with-bolivarian-republic-of-venezuela-and-airtm-to-deliver-aid-to-venezuelans-using-usdc https://www.circle.com/blog/circle-partners-with-bolivarian-...
rabf 4y ago
Circle and Tether can freeze their stablecoins for AML/KYC and to stop criminal exploits on chain, and have done this many times in the past. Also to change to regular fiat you will be doing that via a regulated entity which will have done the appropriate AML/KYC checks on you.
misssocrates 4y ago
The fanfiction is that banks can be trusted. USDC and Tether as of now have a better track record than even some big banks like SVB.
- pjc50 4y ago
  What's Tether's holding breakdown? How do you know they're not exposed to the same bond duration issue?
- swores 4y ago
  Tether has existed for under a decade, USDC is less than 5 years old, and SVB died after 39 years. Yes technically "still alive" is better than "just died", but can you really call it a "better track record" when Tether is so opaque that we wouldn't be able to spot if it was about to die until it actually happens? If Tether died tomorrow it would undeniably have a worse track record than SVB, if it dies in a decade then it survived half as long as SVB. Unless you have some insight into the actual behind the scenes finances of Tether I don't see how you can make that judgement. And as to this claim from your GP's comment: > In the near future, stablecoins like USDC will become immune to bank runs because the US Dollar reserves backing them will be held in vehicles that don't loan out the reserves and hold short-duration treasuries directly with the Treasury Department. Circle (USDC) literally had $3.3B cash deposited at SVB, and presumably more accounts at other banks, so they're exposed directly to potential problems caused by those banks. More importantly they could decide tomorrow, assuming they haven't already, to make the exact same poor choices as any bank could. There's nothing stopping them moving 95% of their assets tomorrow into 10 year treasury bonds other than that it would be a bad idea, but both they and banks are equally motivated to avoid bad ideas, so it seems to be an unwarranted hope that those in charge of Circle will make better decisions than those in charge of any bank, rather than any specific feature of USDC that makes it impossible for them to make the exact same mistake SVB made? And that's even before considering that if it had been USDC rather than SVB that made the mistake already, FDIC wouldn't have come running in to fix anything as they try to with failed banks. Am I missing something about USDC that actually makes it a safer bet, other than apparently having more faith in their management team than in the management teams of various banks?

mtoner23 4y ago

USDC may have instant 24/7 access to global markets. But why did the price of USDC drop to 90 cents this weekend. It isn't immune bank runs.

lifty 4y ago
They held cash at SVB. They will probably smarten up and start holding short term treasuries and avoid as much as possible bank liabilities. Just a guess.
- rabf 4y ago
  Tha majority of their reserves were in short term tresuries, only a fraction of thier reserves were stored in 4 different banks as cash in order to be able process redemtions.
  - lifty 4y ago
    So I guess for them the only option for their short term redemption buffer is to keep money in the 4 systemically important banks. There are no other options. Relevant note, FED won't approve full reserve banks (several tried) as they might suck too many deposits out of the rest of the banks, posing a risk to the other banks.
spir 4y ago
You're right, last weekend, USDC dropped to a low of ~$0.88. However note - SVB was closed on a Friday (as is the FDIC's custom). This meant that USDC could not process redemptions over the weekend as banks were closed, and this created fear in the market. - USDC had 8% of their reserves trapped in SVB. The fair market value of USDC would have been $0.92 if all SVB deposits were lost, which was never likely. - crucially, USDC operator Circle has acknowledged the need to transition to a "full reserve" model where reserves aren't subject to bank runs. https://twitter.com/jerallaire/status/1635548066185871360 https://twitter.com/jerallaire/status/1635548066185871360 - over the weekend, USDC did lose its $1 peg and trade as low as ~$0.88. However, all USDC holders were able to maintain access their USDC to do whatever they wanted with it, which is a lot better than SVB depositors frozen and waiting to see what happened.

snarf21 4y ago

Except that 99.9% of people will buy "stable" coins on Coinbase. Not your keys, not your crypto. If Coinbase gets leveraged or goes the way of SFB, you have literally the same non-immunity as a bank run except you also don't get FDIC backstops.

brvsft 4y ago
SFB? You mean SVB? SBF?
- snarf21 4y ago
  Sorry, I meant SBF but transposed.
spir 4y ago
You're right, stablecoins held custodially in an entity could be subject to similar contagion. Yet, non-custodial holding is becoming much easier and safer. Crucially, wallets are improving a lot, and a spectrum of custodial options is developing, with rich tradeoffs in eg. safety and self-sovereignty. For example https://www.coinbase.com/blog/how-smart-cryptography-makes-coinbase-more-secure https://www.coinbase.com/blog/how-smart-cryptography-makes-c...

bix6 4y ago

Vastly superior except there is zero insurance, reserves are held within the traditional banking system and it can depeg at any time…

KaiserPro 4y ago

> Stablecoins are conspicuous in their absence in patio11's post. Stablecoins are just fractional reserve banking but with a thin veneer of tech, and a massive narrative to differentiate them from standard fiat currency. You're far better off just buying commodities directly, at least where your value is located is much more transparent. Stablecoins are basically "trust me bro its worth this much, and will never drop, just don't trade too much and make me defend the peg."

spir 4y ago
The reason this is not true is because the best stablecoins, like American-run USDC, have excellent transparency and are backed 1:1 in cash and short-duration treasuries, with no fractional reserve system. https://www.circle.com/en/transparency https://www.circle.com/en/transparency

michael1999 4y ago

A bank deposit is a stablecoin. SVB blew up because it was a bad stablecoin.

michael1999 4y ago
All stablecoins are inevitably fallible stablecoins. Wealth is social, and can not be "stored" outside a social context.

jameshart 4y ago

How do you create an institution which can guarantee that it will always be able to take the results of its short term treasuries maturing, and convert that back into more short term treasuries, forever? That sounds like the financial equivalent of a perpetual motion machine. If an institution has no choice but to buy short term treasuries, why wouldn’t sellers increase the price that institution has to pay?

notShabu 4y ago

A good point is individuals could be better off if they could open an account at the Fed and have access to "real" dollars rather than the numbers that are just bank IOUs Stablecoins are closer in this direction than banks but only if they actually maintain 1:1 reserves. One advantage is that b/c they are protocols there is less need to seek returns to make payroll, rent, and profit. Another is more transparency. But also... at this point such a stablecoin is basically a CBDC...

ranger207 4y ago

Patrick didn't talk about stablecoins, but Matt Levine did in Monday's newsletter[0]. Fundamentally, Tether and banks have the same problem: does everyone believe that that bank still has enough money to pay you your deposits? If not, then bank run. Does everyone believe that Tether has enough money to back each coin with $1? If not, then run on Tether. Banks are regulated, so there's supposed to be a bunch of people keeping track of the bank's reserves to see if they have enough money to back deposits. Tether "solves" the problem by not telling anyone what their reserves are, so nobody can figure out if Tether truly has the money to back each coin at $1 or not. [0] https://archive.is/l4nLU https://archive.is/l4nLU