Two thought experiments to evaluate automated stablecoins

https://vitalik.ca/general/2022/05/25/stable.html

by bpierre • 4 years ago

210 250 4 years ago

Proven• 4 years 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• 4 years 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-...

sofixa• 4 years 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.

cuteboy195• 4 years 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.

zmgsabst3• 4 years 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-bear4• 4 years 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• 4 years ago

My understanding is that a blockchain is a distributed, publicly inspectable, append-only database is IRB some special properties. Is that not accurate?

cuteboy195• 4 years ago

there is no incentive to run it without the currency part. you water it down further and it just becomes git

fleddr2• 4 years 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• 4 years 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.

smabie• 4 years ago

A significant usage of stable coins is also as margin for crypto derivatives contracts.

Animats4• 4 years ago

That's not a limitation of USD, it's a limitation of sleazy crypto exchanges. If I sell stock through my stockbroker, I can have funds in a bank account within hours. You ought to be able to sell BTC and get funds in your account in Chase or Barclays via wire transfer within hours.

But no. Crypto exchanges hate to pay out real money. They don't even like paying out cryptocurrencies to external wallets. They want you to just bet within their closed system.

Real brokerages don't care whether you're buying or selling. They get commissions either way. Crypto exchanges have a strong bias towards your buying what they're selling.

fshbbdssbbgdd3• 4 years ago

It may create a taxable event.

What’s the difference in tax liability from trading your BTC for dollars vs. a stablecoin?

I’m aware that there are places where you can exchange crypto for crypto that won’t report it to the IRS, but that doesn’t change whether it is a taxable event.

By the way, there’s no statute of limitations for tax fraud.

nradov2• 4 years ago

Will the utility persist as governments ramp up compliance requirements on those exchanges? So far they've largely flown under the radar. But eventually they will be forced to do more to comply with AML/KYC and tax reporting rules.

Hallucinaut• 4 years ago

The phrasing here seems to imply that exchanging one cryptocoin for a stablecoin should NOT create a taxable event. That's clearly not a long term reasonable expectation to hold as it's an obvious loophole all tax authorities will be looking to shut in the longer term.

DennisP3• 4 years ago

It's not just about central exchanges. A stablecoin lets you use on-chain exchanges like Uniswap, loan money on chain, etc.

(I don't think there's a tax advantage though. I'm not a CPA but my understanding is that in the US, any exchange of one token for another is a taxable event.)

lekevicius• 4 years 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• 4 years 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.

JumpCrisscross2• 4 years 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

[2] https://www.researchgate.net/publication/282613501_History_o...

DennisP3• 4 years 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.

JumpCrisscross2• 4 years 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.

Ilverin2• 4 years 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)

jjitz2• 4 years ago

But you do own upside---of the collateral.

Ilverin2• 4 years 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.

a4isms2• 4 years 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.

bombcar4• 4 years ago

If you're only holding crypto assets to back your stablecoin, doesn't it eventually work out to 1 BTC = 1 BTC? (Or ETH in this case, I guess).

ineedasername• 4 years ago

Not if it's a basket of different crypto. You could peg it to the overall market cap of crypto. It would then by definition be stable in reference to itself, each token would always represent a fixed % of the pool. It still wouldn't be stable in relation to other non-crypto markets, but it's instability would be relative to crypto as a whole rather than any particular coin.

But this is only helpful if you don't need to have your money going back & forth between crypto & traditional investments or currency. It wouldn't be stable relative to fiat currencies. Relative to outside systems it would be more stable than riskier coins but probably less stable than something like BTC. Individual coins are still highly correlated to the crypto market as a whole, so any single coin's stability (or lack thereof) could still move the value of a stable coin like this significantly in relation to outside financial systems.

im3w1l• 4 years ago

The code of an automated stable coin exists as a contract in the blockchain. That code can only directly measure and influence things on the blockchain. Thus it can only directly manage assets in the form of crypto.

The contract can indirectly learn about things that are off-blockchain, such as the $USD - $COIN exchange rate, but that requires someone to input that value into the blockchain, and use a complicated set of incentives, incentives stronger than the one to input a manipulated one. Performing off-blockchain actions, would require incentived agents, and be even more difficult or even impossible.

betwixthewires4• 4 years ago

Where in the write up did he state that as a requirement? He clearly says he uses rai as an example for simplicity in explaining the mechanisms. Explaining the systems with DAI would've been much more difficult.

Collateralized loans can't result in bank runs, I don't know how you envision this working. In a downturn, people get their collateral liquidated, or exchange their stable tokens for their collateral.

cmitsakis• 4 years 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• 4 years ago

World of Crypto (WoC) has already addressed this issue [0].

[0] https://www.worldofcrypto.io/blog/building-a-decentralised-m...

lkrubner2• 4 years 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• 4 years 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• 4 years ago

Why are you banned? What's the process for being unbanned?

archon1410• 4 years ago

you spooked me with the last line. very dramatic—the imagery is of talking to an old man in a cemetary.

dang3• 4 years ago

Comments from banned accounts get killed by default. If you see a good comment that's dead, please don't copy it. Instead, vouch for it (https://news.ycombinator.com/newsfaq.html#cvouch). That's the entire reason for the vouching feature.

Other users vouched for that comment (https://news.ycombinator.com/item?id=31521548), so now we have two copies of it in the thread—the original, plus yours—and a split discussion, which makes merging the threads a pain. I'll move the replies to the proper place, but please don't do this again. (edit: especially since you've done it before - e.g. https://news.ycombinator.com/item?id=31178929)

lkrubner2• 4 years ago

Sorry, I didn't know about "vouching". I'll do that in the future.

Sloppy• 4 years 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• 4 years ago

How is this different from a bank account?

zmgsabst3• 4 years ago

The bank doesn’t actually store your dollars and your bank account can’t make transactions on the blockchain.

zmgsabst3• 4 years 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.

causalmodels2• 4 years ago

Not really sure this would work. The problem with physical commodities is that you actually have to store them somewhere.

nradov2• 4 years ago

There are already ETFs which hold precious metals and other commodities. But most commodities aren't really "stable" stores of value themselves. Large quantities of wheat or oil can only be stored for a few years at most before they start to rot or decay. Storage is also quite expensive, especially when you run out of big oil tanks and have to charter tankers to hold the overflow.

SilasX5• 4 years ago

They have XAUT and PAXG as ERC20 tokenized gold. Article (sorry if shady):

https://www.publish0x.com/journey-to-the-cryptocurrency-ocea...

landemva• 4 years ago

> The argument against the gold standard is that there isn’t “enough” to represent money

I hadn't heard anyone seriously say that. What amount of additional gold should be mined to fix this alleged problem?

Since there are 84M Litecoin, is LTC 4x better than BTC with 21M?

https://www.investopedia.com/articles/investing/040515/what-...

lottin12• 4 years ago

The argument against the gold standard is that there isn’t “enough” to represent money

I literally have never heard this argument against the gold standard.

What amount of gold would be needed for it to be able to sufficiently "represent money"?

And why do you need gold to "represent money" anyway? Isn't gold itself money under the gold standard?

e9• 4 years ago

yes and a lot of these coins claim they are all backed but it's just a lip service, it's too lucrative to not do full 1-1 backing, you are right only something like US treasury can do it.

https://markets.businessinsider.com/news/currencies/tether-c...

betwixthewires4• 4 years ago

Sure, direct 1:1 collateralized stable coins work, but look at the "algorithm" behind the underlying asset.

USD itself is an interesting stablecoin, algorithmic in nature with a board able to make decisions to change the algorithm. It is not pegged to an asset, rather it attempts to be pegged to an economic state, primarily an inflation rate, using issuance and purchase of other assets. It has failure modes as well.

Note that algorithmic and reserve based crypto stablecoins are both exposed to this, since one is backed and the other is pegged to it.

So if you want to avoid that, you need to peg your cryptocoin to something without that, i.e not a fiat currency. This is hard to do with collateral, some gold backed coins try. Pegging a stablecoin to some commodity or asset or index or "basket" algorithmically is much easier, if somewhat less stable depending on the system that is built to do it.

TuringNYC3• 4 years ago

> So if you want to avoid that, you need to peg your cryptocoin to something without that, i.e not a fiat currency.

Except is that really the issue? We're not trying to worried that dollar slides and hence the stablecoin is worth less. We're mostly worried that there arent dollars backing the stablecoin to begin with.

carlosdp• 4 years ago

This already exists, Circle Finance + Coinbase issue USDC, for example. It's just backed by 1:1 actual USD (at least it will be 1:1 very soon, as in 100% reserve, according to public statements, I haven't checked recently if that is complete).

whimsicalism6• 4 years ago

They definitely do not back with 100% paper. They hold bonds and potentially corporate paper as well.

TuringNYC3• 4 years ago

Is there a central location where the public can see the public statements frequently updated? I'm very skeptical about a public filing from three months ago when collateral was worth 2x what it is today...

whimsicalism6• 4 years ago

Yeah, but now people have to actually trust that you are being truthful about your backing.

pavel_lishin• 4 years ago

Isn't this what Tether purports to do?

baq• 4 years ago

Tether is the next Big Short of the crypto community. I’m yet to find someone who doesn’t think tether will blow up. It’s going to be an interesting week when that happens.

tomatocracy4• 4 years ago

Even this scheme is subject to the risk that the "issuer" of the stablecurrrency stays solvent enough to pay the operating costs of those trades (or at least that there is a sufficient supply of replacement issuers and the legal system and government where the issuer is located appropriately recognise segregation of those assets on a bankruptcy and that it has a low cost and efficient bankruptcy regime), or if it's the US treasury the risk of expropriation of a change to the system which could be different from the risk with traditional currency. Ultimately you're taking credit and/or performance risk on someone.

runeks• 4 years ago

What’s the practical difference between this and a debit card?

betwixthewires4• 4 years 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• 4 years 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• 4 years ago

I may be silly, but isn’t this proof of stake, where you can stake anything, including a couch?

cwkoss• 4 years ago

How does the blockchain know you actually have a couch? How do you prevent someone from listing their toenail clippings for $1T?

all2• 4 years 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.

svachalek3• 4 years ago

If you expand this transaction to an entire economy, I think this is in the neighborhood of how a central bank works. Sora XOR is/was an attempt in this direction, where a smart contract central bank buys and sells XOR on a curve to respond to economic demand. (The price crashed before it could collateralize the curve, so afaik it's never functioned as intended)

Animats4• 4 years 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.

krick5• 4 years 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.

cuteboy195• 4 years 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.

Traster2• 4 years ago

That's the humour, it's not "bold and radical" but obviously true.

rmbyrro• 4 years ago

Forgive my ignorance: What the heck is RAI?

He throws that at some point in the article out of the blue ...

clint• 4 years ago

I used the website google.com and found this: https://reflexer.finance/

Barrera• 4 years 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?

svachalek3• 4 years 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.

tshaddox3• 4 years 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.

vanjajaja1• 4 years ago

but also explains why stable coins keep central bankers awake at night.

Can you elaborate on this?

majormajor2• 4 years ago

There are far more "fake dollars" in the world than just that, even.

Ask someone with non-cash investments their net worth. They'll give you a number that includes a lot of non-cash assets. They can borrow against them. They expect to be able to cash many of them out, so they often spend as if they're "real" dollars. But they aren't "real" printed dollars.

vishnugupta2• 4 years ago

If I put a dollar in my savings account and the bank loans it out to someone else, who has the dollar?

I don't think that's how banks work; at least in the US and England.

Below is an extract from an excellent article/tutorial from The Bank of England[1]

In the modern economy, most money takes the form of bank deposits. But how those bank deposits are created is often misunderstood: the principal way is through commercial banks making loans. Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money.

The reality of how money is created today differs from the description found in some economics textbooks:

1. Rather than banks receiving deposits when households save and then lending them out, bank lending creates deposits.

2. In normal times, the central bank does not fix the amount of money in circulation, nor is central bank money ‘multiplied up’ into more loans and deposits.

[1] https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/m...

stonemetal123• 4 years ago

My guess is low risk debt. Most likely treasury bonds would be the majority of their holdings.

discodave• 4 years ago

Is there enough supply of treasury bonds and other low risk debt to do this?

ryukoposting• 4 years ago

It feels to me like a logical conclusion would be to have a government manage such a stablecoin. But at that point, it's just normal money but less convenient.

obilgic2• 4 years ago

well normal money, but in a revolutionary form factor. metal coin usd -> paper usd -> crypto usd

Smaller jump then gold -> usd -> btc which actually means changing the global reserve currency.

If you think about it didn't the U.S. government did a similar thing by gold. USD was pegged to gold initially, then they changed it.

throwawaycities4• 4 years ago

It feels to me like a logical conclusion would be to have a government manage such a stablecoin.

I think you give Governments far to much credit, they can’t even manage to peg the penny to 1cent or a nickel to 5cents.

In 2020 a penny cost 1.76cents and a nickel cost 7.42cents.

thedstrat• 4 years ago

Why do you think this would be best facilitated by a government as opposed to a large group of stakeholders?

pjc503• 4 years ago

I've been annoying people lately by referring to Black Wednesday as "the collapse of the stablepound against the algorithmic stablecoin the ERM". https://en.wikipedia.org/wiki/Black_Wednesday

bergenty3• 4 years ago

I have a simpler thought experiment. Every time you own a tether, you buy it for a dollar. That dollar goes into a large room. Now each tether is backed by a literal dollar. What’s the problem? I can’t wrap my head around what’s so hard about this.

lmm3• 4 years ago

What happens when a bunch of literal or metaphorical rats eat the dollars?

lesam• 4 years ago

Who pays for security for the room with the dollars?

raverbashing• 4 years ago

You don't need crypto to know how this experiment ends.

It was called the Argentinian Peso, and it was pegged to the dollar. It didn't get to 50% of the existing dollars, it crashed and burned way before that

quickthrower22• 4 years ago

I guess they need to be an actual US based bank themselves to hold that much cash/bank deposits. And to also be trustworthy.

seanhunter• 4 years ago

Your question is a trick question because the first few assumptions beg all the detail that would be required to answer the question.

But fundamentally if you were to reach that size the assets you were using to collateralize the coin would in some sense have to have some leverage against the coin itself. Ie be loans backed partially by the coin or something. But because you can’t pull yourself up by your own bootstraps that would never work, and because 50% of all the US dollars in existence is a mindbogglingly large number no player in any market could ever be that large. In particular, regulation actually prevents you from being that large in lots of important ways. For example if you try to participate in equity markets more than a certain percentage you will have your exchange access shut off and you will be investigated for trying to run an illegal market corner. Even if you set regulation aside, as you try to buy 50% say of a government bond issue to have those assets to pledge you will find the price moves further and further against you. This is the supply/demand mechanism forcing you to give more than 50% of the dollars away to other market participants meaning you can never get to the goal that you mention in your hypothesis.

Quite separately your thought experiment doesn’t apply to the situation Vitalik is talking about- he specifically says in the article he is talking about pure algorithmic stablecoins rather than ones backed by assets held by custodians of the type you mention here.

vishnugupta2• 4 years ago

In what form would a stable coin of that magnitude keep its assets

US Treasury bills?

Thorrez3• 4 years ago

Can they put it in a bank? Do banks have maximum account sizes?

pjc503• 4 years ago

In practice, yes. Because you're just pushing the backing question on to them; banks rely on withdrawals being de-correlated. Not everybody takes their money out at once. A single bank-sized account ruins that model.

Also, the larger it gets, the bigger the money laundering question gets. "We're providing seventy billion dollars of financial services to unknown parties" is not a sustainable position with a reputable bank. Tether have already got banned from several banks and are being very cagey about who they bank with.

thaumasiotes• 4 years ago

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?

By definition, they hold every dollar in existence. Holding any other type of good would wipe them out as soon as the exchange rate to the dollar changed.

Traster2• 4 years 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.

DennisP3• 4 years ago

Unlike UST/LUNA, there's no scenario in which more ETH will be minted to support the price of RAI.

fshbbdssbbgdd3• 4 years 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.

asasidh2• 4 years ago

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

clippablematt• 4 years 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”

asasidh2• 4 years ago

Satoshi was a hacker. These Defi charlatans are scammers at best.

EGreg2• 4 years 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-virt...

VWWHFSfQ• 4 years 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.

EGreg2• 4 years ago

That hardly made sense lol

Thorrez3• 4 years 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".

Thorrez3• 4 years 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• 4 years 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.

Two thought experiments to evaluate automated stablecoins

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