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Can you do fractional reserve banking with stablecoins where you lend out the underlying dollars to people and don't have full reserves? That's what makes banki

Can you do fractional reserve banking with stablecoins where you lend out the underlying dollars to people and don't have full reserves? That's what makes banking tricky. When there are a surge of loan defaults across the banking system the money supply shrinks rapidly unless the government bails them out. Thus, the need for regulation. One reason the U.S government has to like stablecoins is because Tether is one of the biggest buyers of U.S treasuries that they use to back their stablecoins.

topranks 1y ago
Only a fool would think Tether have never had an audit done out of fear it would prove they’re fully backed.
graeme 1y ago
Yes, you can absolutely do that with stablecoins. Why couldn't you?
- sagarm 1y ago
  Then bank runs or regulation seem inevitable.
- elteto 1y ago
  How would the “out of thin air” value creation work in a blockchain ledger? Pardon my very naive understanding of both subjects.
  - topranks 1y ago
    The same way it does in Excel. You fire up Excel. Put some numbers in the boxes. Say those numbers are dollar bills you have under the bed. Then you do SUM(A1:A10) to show your total funds. It has to be legit because Excel doesn’t lie right?
  - Onavo 1y ago
    The reward function in the smart contract can be made to increase over time.
    - elteto 1y ago
      That’s not the same though. Banks literally make money out of thin air when they extend a loan (oversimplified of course). They can choose the time and place to do so without having to wait for “checkpoints”. They can even run themselves into the ground by creating too much money (if there is no reserve requirement).
      - immibis 1y ago
        Banks make bank-account-dollars (a form of IOU) but they can't make cash-dollars. When you withdraw, the bank has to give you cash-dollars from its pool and can't just print some. Only reason they're considered equivalent is... uh... because I said so? And they're legally allowed to denominate their bankdollars in dollars. Anyone can print IOUs, but not everyone can legally call them dollars. That's the only advantage banks have over the rest of us. Same on the blockchain but without the privilege of conflation. You can have a smart contract that has $100 of ether but trades in 200 shares valued at $10 each. But the blockchain systems prevent you from pretending that bank-ethers and cash-ethers are the same thing. You can label them the same but they're not the same and the system knows that. Even Wrapped ETH, a contract that literally just prints and destroys WETH 1-to-1 with the ETH it holds, i.e. a full-reserve zero-fee bank, isn't interchangeable with actual ETH.
      - Onavo 1y ago
        They can all be modeled. Reserve requirements can be written in a similar way to flash loans.
  - graeme 1y ago
    There are defi loans for example. You take an asset like BTC and loan stablecoins against it. The underlying asset can be rehypothecated, Celsius did this before going bust iirc. Tether is also the underlying backer of crypto market cap, and has never done an audit of their assets. They've made loans to various crypto market participants. In theory there are auto liquidation rules etc. In practice humans have not yet managed to create a financial system they can't make asset bubbles with
  - nl 1y ago
    It depends on the stablecoin mechanism. Algorithmic stablecoins[1] don't have a one-for-one backing in real world assets so can in theory create new coins "from thin air". The amount they can do this depends on the exact algorithm and the backing assets, and the practicalities of unstable crypto pricing make this difficult in practice. For example the well-known DAI stablecoin[2] is backed by a mix of crypto assets, but is overcollateralized to avoid problems when one of the backing assets drops in value. The is sort of the opposite of "creating money out of thin air"... Non-algorithmic stablecoins can do it by being backed by "high quality loan assets", in which case the conventional, non-crypto credit creation mechanism applies. [1] https://www.kraken.com/learn/algorithmic-stablecoins https://www.kraken.com/learn/algorithmic-stablecoins [2] https://en.wikipedia.org/wiki/Dai_(cryptocurrency) https://en.wikipedia.org/wiki/Dai_(cryptocurrency)
    - seviu 1y ago
      Dai might have been algorithmically backed but it’s now a flavor of usdc since it’s backed in its majority by usdc. So far all algorithmically backed stablecoins have failed. Remember Terra Luna.
      - immibis 1y ago
        > So far all algorithmically backed stablecoins have failed. Remember Terra Luna. So that's a sample size of 2, and from those 2, 1 has failed. Not exactly "all"
        seviu 1y ago
        I gave you the most dramatic example. So far no undercollateralized, algorithmically backed $1 stablecoin has sustained a reliable peg at scale over multiple years. Zero. Nada. There was always somebody somewhere exploiting it. TerraUSD USN USDN Basic Cash All failures so far, every time a death spiral. FRAX started as algorithmic and had to move to over collateralization Same with DAI You really can’t call them like that once they become backed by USDC
        1y ago
  - jekrb 1y ago
    theres no reason a bank couldn't take a stablecoin deposit and fractionally lend against it thats effectively what already happens with their own internal ledgers anyways
  - majormajor 1y ago
    Person A deposits $100. Person B borrows $100, all the coins move on the ledger. The ledger could facilitate the transfer while the bank maintains an "IOU" for person A's $100. The bank would be betting that not everyone will come withdrawing at once, just like a regular bank. Regulation is the only thing that can prevent this from being done with any sort of crypto. The same IOU-based business model as happened with cash, gold, etc, could very easily be implemented using the technology. If you don't like fractional reserve banking crypto isn't a magic bullet that makes it impossible, especially since the general public probably wouldn't be sophisticated enough to know how to stick to "true" crypto vs "IOU-based fractional crypto facades." But generally regulatory regimes have decided that the productivity advancements offered by the investment-through-loans of major portions of deposits are worth the risks. I don't think the GENIUS act allows this, though, so there's one regard where stablecoins are more-regulated. I worry about the edge cases, though - seems like requiring stablecoins to be paid off preferentially incentives using them for deposits, which could harm circulation if the reserves or followed, or which could screw over non-stablecoin deposit-holders if an institution doesn't comply and then goes under. (This is closer to how regular banking works than the naive "banks create money by incrementing a number in your account." After all, banks are generally either (a) expecting those loans to be spent or directly giving the money to third parties like car dealerships or home sellers - which is likely to physically move the money to other banks, institutions, or cash, not just recordings in their internal tables.)
  - thinkharderdev 1y ago
    As far as I understand, the backing assets aren't on-chain. I give tether $100, they create and issue me 100 USDT on-chain. But they can take my $100 and lend it out. Now whoever Tether loaned the $100 to has $100 and I have 100 USDT so $100 has been added to the money supply, just like with a normal bank.
have_faith 1y ago
In FIAT money lending is the act of money creation, rather than lending existing money held in account. I’m guessing that wouldn’t have a parallel with stablecoins because the technology won’t let you just make new money at will?
- topranks 1y ago
  Not unless you lie about what money you have and just print them out of thin air.
- worik 1y ago
  > In FIAT money lending is the act of money creation That depend on how you view money. Lending does increase the volume of money in circulation, in that sense it creates money. But that view is too simple to be useful. The regulators that regulate, and in particular control reserve ratios (complex calculations that banks have to make about the relationships between their various assets) and base interest rates are the real creators of money. The side stepping of those regulators is interesting. The conventional view is that it will lead to the same sort of financial instability as existed before the gold standard was abolished and we (pretty much the entire western world) moved to modern banking and fiat currency. A hundred years of quite stable money was quite an achievement.
  - nulbyte 1y ago
    > That depend on how you view money. Lending does increase the volume of money in circulation, in that sense it creates money. But that view is too simple to be useful. Far from being too simple, it is the primary method of money creation in modern economies. > The regulators that regulate, and in particular control reserve ratios (complex calculations that banks have to make about the relationships between their various assets) and base interest rates are the real creators of money. Simply setting rates does not create money. It can influence it, but it is not the ultimate cause. Lending is. Reserve banks can and do lend, but commercial banks are responsible for the majority of money creation.
    - 1y ago
vintermann 1y ago
> Can you do fractional reserve banking with stablecoins where you lend out the underlying dollars to people and don't have full reserves? In a manner of speaking. You need to trust that the issuers have the reserve they claim. There's no way around this, unless the asset in reserve is equally ethereal (i.e. another cryptocurrency). Tether, for one, almost certainly doesn't have the reserves.
- arcticbull 1y ago
  Correct, this is fundamentally the oracle problem. There is no link between the blockchain and the real world which is why only money-like instruments have been successful for whatever value of success this constitutes.
  - chipsrafferty 1y ago
    Is there a link for Fiat?
    - arcticbull 1y ago
      First of all, wut. Second, that's irrelevant because stable coins rely on fiat backing (ostensibly) so you're stacking a new problem on top of what you perceive to be a different problem. If you believed that to be a problem then stable coins give you that problem twice as hard. And a whole mess of new ones too, like zero recourse against the newly intermediated offshore issuers in low-or-zero regulation locales.
- seviu 1y ago
  You would be surprised about tether though They are now really backed. It might be they weren’t. Now they definitely are. https://tether.to/en/transparency/?tab=usdt https://tether.to/en/transparency/?tab=usdt All these years all this Fud and so far nobody demonstrated what you clam. They are also the faster to block their stablecoin whenever there is a hack.
  - topranks 1y ago
immibis 1y ago
They do exactly this. Buying treasuries is a form of fractional reserve. It's worth noting that no full-reserve bank has ever gotten a US banking license, even though many have tried.
ForHackernews 1y ago
Sure, you can! Just get Paolo to fire up the tether printer: https://cryptonews.net/news/altcoins/28875896/ https://cryptonews.net/news/altcoins/28875896/

topranks 1y ago

Only a fool would think Tether have never had an audit done out of fear it would prove they’re fully backed.

graeme 1y ago

Yes, you can absolutely do that with stablecoins. Why couldn't you?

sagarm 1y ago
Then bank runs or regulation seem inevitable.
elteto 1y ago
How would the “out of thin air” value creation work in a blockchain ledger? Pardon my very naive understanding of both subjects.
- topranks 1y ago
  The same way it does in Excel. You fire up Excel. Put some numbers in the boxes. Say those numbers are dollar bills you have under the bed. Then you do SUM(A1:A10) to show your total funds. It has to be legit because Excel doesn’t lie right?
- Onavo 1y ago
  The reward function in the smart contract can be made to increase over time.
  - elteto 1y ago
    That’s not the same though. Banks literally make money out of thin air when they extend a loan (oversimplified of course). They can choose the time and place to do so without having to wait for “checkpoints”. They can even run themselves into the ground by creating too much money (if there is no reserve requirement).
    - immibis 1y ago
      Banks make bank-account-dollars (a form of IOU) but they can't make cash-dollars. When you withdraw, the bank has to give you cash-dollars from its pool and can't just print some. Only reason they're considered equivalent is... uh... because I said so? And they're legally allowed to denominate their bankdollars in dollars. Anyone can print IOUs, but not everyone can legally call them dollars. That's the only advantage banks have over the rest of us. Same on the blockchain but without the privilege of conflation. You can have a smart contract that has $100 of ether but trades in 200 shares valued at $10 each. But the blockchain systems prevent you from pretending that bank-ethers and cash-ethers are the same thing. You can label them the same but they're not the same and the system knows that. Even Wrapped ETH, a contract that literally just prints and destroys WETH 1-to-1 with the ETH it holds, i.e. a full-reserve zero-fee bank, isn't interchangeable with actual ETH.
    - Onavo 1y ago
      They can all be modeled. Reserve requirements can be written in a similar way to flash loans.
- graeme 1y ago
  There are defi loans for example. You take an asset like BTC and loan stablecoins against it. The underlying asset can be rehypothecated, Celsius did this before going bust iirc. Tether is also the underlying backer of crypto market cap, and has never done an audit of their assets. They've made loans to various crypto market participants. In theory there are auto liquidation rules etc. In practice humans have not yet managed to create a financial system they can't make asset bubbles with
- nl 1y ago
  It depends on the stablecoin mechanism. Algorithmic stablecoins[1] don't have a one-for-one backing in real world assets so can in theory create new coins "from thin air". The amount they can do this depends on the exact algorithm and the backing assets, and the practicalities of unstable crypto pricing make this difficult in practice. For example the well-known DAI stablecoin[2] is backed by a mix of crypto assets, but is overcollateralized to avoid problems when one of the backing assets drops in value. The is sort of the opposite of "creating money out of thin air"... Non-algorithmic stablecoins can do it by being backed by "high quality loan assets", in which case the conventional, non-crypto credit creation mechanism applies. [1] https://www.kraken.com/learn/algorithmic-stablecoins https://www.kraken.com/learn/algorithmic-stablecoins [2] https://en.wikipedia.org/wiki/Dai_(cryptocurrency) https://en.wikipedia.org/wiki/Dai_(cryptocurrency)
  - seviu 1y ago
    Dai might have been algorithmically backed but it’s now a flavor of usdc since it’s backed in its majority by usdc. So far all algorithmically backed stablecoins have failed. Remember Terra Luna.
    - immibis 1y ago
      > So far all algorithmically backed stablecoins have failed. Remember Terra Luna. So that's a sample size of 2, and from those 2, 1 has failed. Not exactly "all"
      - seviu 1y ago
        I gave you the most dramatic example. So far no undercollateralized, algorithmically backed $1 stablecoin has sustained a reliable peg at scale over multiple years. Zero. Nada. There was always somebody somewhere exploiting it. TerraUSD USN USDN Basic Cash All failures so far, every time a death spiral. FRAX started as algorithmic and had to move to over collateralization Same with DAI You really can’t call them like that once they become backed by USDC
        1y ago
- jekrb 1y ago
  theres no reason a bank couldn't take a stablecoin deposit and fractionally lend against it thats effectively what already happens with their own internal ledgers anyways
- majormajor 1y ago
  Person A deposits $100. Person B borrows $100, all the coins move on the ledger. The ledger could facilitate the transfer while the bank maintains an "IOU" for person A's $100. The bank would be betting that not everyone will come withdrawing at once, just like a regular bank. Regulation is the only thing that can prevent this from being done with any sort of crypto. The same IOU-based business model as happened with cash, gold, etc, could very easily be implemented using the technology. If you don't like fractional reserve banking crypto isn't a magic bullet that makes it impossible, especially since the general public probably wouldn't be sophisticated enough to know how to stick to "true" crypto vs "IOU-based fractional crypto facades." But generally regulatory regimes have decided that the productivity advancements offered by the investment-through-loans of major portions of deposits are worth the risks. I don't think the GENIUS act allows this, though, so there's one regard where stablecoins are more-regulated. I worry about the edge cases, though - seems like requiring stablecoins to be paid off preferentially incentives using them for deposits, which could harm circulation if the reserves or followed, or which could screw over non-stablecoin deposit-holders if an institution doesn't comply and then goes under. (This is closer to how regular banking works than the naive "banks create money by incrementing a number in your account." After all, banks are generally either (a) expecting those loans to be spent or directly giving the money to third parties like car dealerships or home sellers - which is likely to physically move the money to other banks, institutions, or cash, not just recordings in their internal tables.)
- thinkharderdev 1y ago
  As far as I understand, the backing assets aren't on-chain. I give tether $100, they create and issue me 100 USDT on-chain. But they can take my $100 and lend it out. Now whoever Tether loaned the $100 to has $100 and I have 100 USDT so $100 has been added to the money supply, just like with a normal bank.

have_faith 1y ago

In FIAT money lending is the act of money creation, rather than lending existing money held in account. I’m guessing that wouldn’t have a parallel with stablecoins because the technology won’t let you just make new money at will?

topranks 1y ago
Not unless you lie about what money you have and just print them out of thin air.
worik 1y ago
> In FIAT money lending is the act of money creation That depend on how you view money. Lending does increase the volume of money in circulation, in that sense it creates money. But that view is too simple to be useful. The regulators that regulate, and in particular control reserve ratios (complex calculations that banks have to make about the relationships between their various assets) and base interest rates are the real creators of money. The side stepping of those regulators is interesting. The conventional view is that it will lead to the same sort of financial instability as existed before the gold standard was abolished and we (pretty much the entire western world) moved to modern banking and fiat currency. A hundred years of quite stable money was quite an achievement.
- nulbyte 1y ago
  > That depend on how you view money. Lending does increase the volume of money in circulation, in that sense it creates money. But that view is too simple to be useful. Far from being too simple, it is the primary method of money creation in modern economies. > The regulators that regulate, and in particular control reserve ratios (complex calculations that banks have to make about the relationships between their various assets) and base interest rates are the real creators of money. Simply setting rates does not create money. It can influence it, but it is not the ultimate cause. Lending is. Reserve banks can and do lend, but commercial banks are responsible for the majority of money creation.
  - 1y ago

vintermann 1y ago

> Can you do fractional reserve banking with stablecoins where you lend out the underlying dollars to people and don't have full reserves? In a manner of speaking. You need to trust that the issuers have the reserve they claim. There's no way around this, unless the asset in reserve is equally ethereal (i.e. another cryptocurrency). Tether, for one, almost certainly doesn't have the reserves.

arcticbull 1y ago
Correct, this is fundamentally the oracle problem. There is no link between the blockchain and the real world which is why only money-like instruments have been successful for whatever value of success this constitutes.
- chipsrafferty 1y ago
  Is there a link for Fiat?
  - arcticbull 1y ago
    First of all, wut. Second, that's irrelevant because stable coins rely on fiat backing (ostensibly) so you're stacking a new problem on top of what you perceive to be a different problem. If you believed that to be a problem then stable coins give you that problem twice as hard. And a whole mess of new ones too, like zero recourse against the newly intermediated offshore issuers in low-or-zero regulation locales.
seviu 1y ago
You would be surprised about tether though They are now really backed. It might be they weren’t. Now they definitely are. https://tether.to/en/transparency/?tab=usdt https://tether.to/en/transparency/?tab=usdt All these years all this Fud and so far nobody demonstrated what you clam. They are also the faster to block their stablecoin whenever there is a hack.
- topranks 1y ago

immibis 1y ago

They do exactly this. Buying treasuries is a form of fractional reserve. It's worth noting that no full-reserve bank has ever gotten a US banking license, even though many have tried.

ForHackernews 1y ago

Sure, you can! Just get Paolo to fire up the tether printer: https://cryptonews.net/news/altcoins/28875896/ https://cryptonews.net/news/altcoins/28875896/