💾 Archived View for dioskouroi.xyz › thread › 29421663 captured on 2021-12-03 at 14:04:38. Gemini links have been rewritten to link to archived content
-=-=-=-=-=-=-
________________________________________________________________________________
Together the dozens of stablecoins in existence, which include Dai, Tether and usd coin, have a market capitalisation of close to $150bn.
I'm assuming these stable coins aren't actually backed by $150bn in actual USD, which is the underlying problem here and harkens back to the issue with the era of unstable "wildcat" banking in the US before 1863:
Before America instituted a national currency in 1863, banks issued their own banknotes, backed by assets and redeemable for gold or silver. Critics of stablecoins often point to this period of free banking, and the example of unstable “wildcat” banks in particular, as a cautionary tale.
As usual with crypto, it's up to the investor to perform due diligence.
BUSD as of Oct 29th had a market cap of $13.1B USD which was fully backed by fiat USD held in bank accounts which are audited monthly [1]
USDT has a market cap of $74B and has never been fully audited and last released an attestation report in March 2021.
[1]
https://paxos.com/attestations/
> BUSD as of Oct 29th had a market cap of $13.1B USD which was fully backed by fiat USD held in bank accounts which are audited monthly.
You claim this and then link to a page explicitly labelled attestations - an attestation is not the same thing as an audit. None of the stablecoins have had an actual audit done AFAIK - Tether said they were going to do one, and then their accountant dropped them shortly afterwards.
> I'm assuming these stable coins aren't actually backed by $150bn in actual USD,
Maybe I am missing something, how is this different than banks employing fractional reserve banking?
Several differences:
1) Fractional reserve banking has caused numerous financial crisies.
2) In the US, banks are required by law to carry deposit insurance (FDIC). While it is theoretically possible for the FDIC to become insolvent, that is far less likely than a bank becoming insolvent. Further, in practice, the FDIC can't fail because the government will just fund it directly if it's actual funds ran out.
3) While banks have less cash on hand than the sum of their debts; they are still solvent. That is to say, they are capable of paying back all of their creditors, they just need to be able to collect from their debtors in order to afford it.
When a bank takes a deposit for $100, they have a $100 liability, and a $100 asset in cash. Net worth $0, technically solvent.
They then loan out $90. Considering the likelihood of repayment, interest rate, and loan term, this debt is an asset that is worth (hopefully) >$90, so the bank remains solvent. The bank can take some of that surplass worth they have to do things like pay salaries, build offices, fund FDIC, give executive's their bonues, etc.
In contrast, when a stablecoin takes a deposit of $100, they have a $100 liability and $100 asset in cash. If they take $90 to pay salaries, they now have only $10 dollars in assets and are insolvent. In theory, a stablecoin could loan out that $90, or use it to invest is something else. If they do this, they are in roughly the same situation as the bank where they are hoping that their asset ends up being worth as much as they expect. They are also less regulated then banks, so the odds of something going wrong (either mallisiously or not) is greater.
In practice, even the normal banking system runs into some issues:
* Deposits into banks are much more liquid then loans out of banks. In theory, everyone can decide to withdraw all their money tomorrow. But if you took at a mortgage, the bank may have to wait 30 years to be fully payed back. This can be mitigate by selling debt to other institutions, or taking out loans backed by the debt, but you can still run into issue when these markets experience problems.
* Debtors do not always pay back what they owe to the banks. In theory this is accounted for, but if banks overestimate the actual value of the debts, they can end up in a situation where they are actually insolvent.
Banks don't lend out deposits though - a $100 loan creates both a $100 liability - the value in the customer's account - and a $100 (plus interest) asset - the loan itself - which also balances out to $0. The process literally creates money, meaning a bank could theoretically lend money even if it had no deposits at all. The constraints on making loans come from central bank requirements and regulations, not deposits made.
The fractional reserve model makes sense for commodity-backed money or things such as stablecoins that are backed 1:1 in some way, just not for banking in the modern economy where physical money is only a small part of the money supply.
https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...
>which also balances out to $0
>The process literally creates money, meaning a bank could theoretically lend money even if it had no deposits at all
If the assets and liabilities balance, why describe it as "literally creating money"?
It makes it sound to me like someone gained something, like banks have a special privilege, and like money is a physical resource.
And being able to lend money without deposits is possible whenever a bank has money from another source. Are you suggesting that there is something non-obvious going on that permits bootstrapping from nothing?
> if banks overestimate the actual value of the debts, they can end up in a situation where they are actually insolvent.
I think everyone here knows they'd never do that!
Of course they would do that, which is why they historically are required by regulators to _more than_ 100% back their liabilities with assets.
With stablecoins, does anyone even care?
That's not a great analogy, you can't redeem currency at a bank.
My understanding is that stable coins are stable because they claim to be backed 1:1 by some other currency. If they are not actually doing that, then thats a fraudulent statement, isnt it?
Not all stablecoins claim redeemability for USD. Some claim each unit's redeemability for an amount of some digital asset that is worth 1 USD, with the amount redeemed fluctuating in proportion to the value of the digital asset, to maintain the stable value.
And all of the incentives are set up for the maintainer to take the money and run. Excessive ammounts of idle money is an attractive nuisance.
I do not know what I am talking about, but I would love to see some type of crypto actually start solving some type of problem, versus just being a speculative asset.
With the USPS trying to get back into banking, which they used to do in the past, I personally think this would be a great stablecoin opportunity for the underbanked. Be a perfect way to send money orders from end user to end user, USPS could have cash in their coffers.
https://www.executivegov.com/2021/10/usps-launches-pilot-ban...
NFTs have solved a real problem for digital artists.
Outside of that yeah it’s hard to get excited about crypto atm even though I think it’s got a huge potential.
What problem is that? We had art auctions before and they already supported money laundering via value inflation.
What? I said NFTs SOLVED a problem. They introduced a liquid global permissionless marketplace for digital Art. That's a solution for digital artists who previously had to jump through tens of hoops to get anything out there with any value.
I think we're agreeing but I'm not sure.
> tens of hoops to get anything out there with any value
Does it actually have value then? Money transfers / crypto payments existed before. So did services listing digital art. What did the nft provide?
Imagine being a billionaire because you convinced enough people to give you money in exchange for a promise.
Pretty sure this is exactly how most startups get funded.
And this is HN. Imagine how the rest of the world thinks.
Fundraising as we know it will be replaced by coin offerings soon.
Just consulted on a project that was able to raise $20m on their own through a yield farm and is using it to build out their product team and do tons of marketing.
Defi is the future, anyone who doesn’t see that is being willfully ignorant.
Well, some people will get rich. Many will lose a lot of money.
Yeah, that’s called capitalism.
It's the worst parts of capitalism if you have people getting rich by taking advantage of others.
I love how these conversations always come up in relation to defi/crypto.
I don’t know what world you live in, but it’s like you guys believe there is some kind of ethics or moral high ground in sneering at something you barely understand.
>>>Just consulted on a project that was able to raise $20m on their own through a yield farm
Jeez. Over how long of a timeframe, and how much did they start farming with?
They launched the token and farm, it was their fundraising mechanism for the project and it is still ongoing.
Its for a game with play-to-earn mechanics, still early phase but they just made a ton of big hires.
> raise $20m on their own through a yield farm
What is a yield farm and how is is structured?
That’s a very googleable question, but in a nutshell it is a series of smart contracts that reward token holders for holding a staking a token.
It incentivizes investors to buy and hold instead attempting to trade the asset and create unwanted volatility.
It can also raise funds through a small fee structure that can be applied on deposit of non-native token pools.
OK, so it's a shadow bank: lend long, into other people's short term borrowing.
So it must have extremely high interest rates? Which raises the question, who's borrowing all this and how's it collateralized?
I think you are starting with an incorrect assumption and trying to work your way backwards from it.
If you want more mature examples of this structure in the wild I would start with pancakeswap ($4b market cap) and apeswap ($500m market cap).
Congrats you've reinvented ponzi schemes
Oh my, never heard that one before.
People’s willingness to speak confidently from a position of ignorance always surprises me.
And how brick-and-mortar banks operate.
Then there is civil asset forfeiture.
>Nor is it clear that wildcat banks are the summation of all historical experience of privately issued money. George Selgin of the Cato Institute, a libertarian think-tank, has likened the use of wildcat banking by critics of private-money issuance to the use of Germany’s interwar hyperinflation by critics of central-bank money issuance: both are extreme and negative examples, rather than representative. Scotland’s free-banking system between 1716 and 1844, for instance, is often cited as a period of stability. Three large banks and several smaller lenders all issued currency and redeemed each other’s notes at their full value.
>Furthermore, at least some of the problems with American free banking may have reflected poor regulation rather than a total absence of it. Banks were often not allowed to have networks of branches and interstate banking was near-impossible, which limited the expansion of successful and trusted institutions. Many were also made to hold volatile state bonds as collateral. Slumps in the value of these could—and did—spark local banking crises.
In addition to the fact that it was the lack of freedom in banking that caused most wild banks in the so-called free banking era of the US, Selgin provides statistics showing that wildcat banks were actually very rare, with the pervasiveness of the phenomenon greatly exaggerated by the popular narrative that individuals in the regulatory sector, who are advocating for more centralization, promulgate, and use to justify their agenda.
Financial 'innovations' are increasingly rhetorical. Investors are seemingly being asked to bet on whether the humans can tell a rose by another name.