> We don't call corn futures fake corn

/ZC is physically settled[0], so that’s not a great example.

/ES (S&P 500) or other index futures that are cash-settled is a better analogy. They’re also, yknow, regulated[1].

[0] https://www.cmegroup.com/markets/agriculture/oilseeds/corn.c...

[1] https://www.cftc.gov/

Yeah, I would like to emphasize the fact that they're settled once individual contracts expire, be it cash or delivery.

I am yet to find a useful derivative that lacks a settling mechanism. How would you even price such a contract that lacks settling? Like why should it be worth anything at all?

skimmed the article - there's apparently a creation/redemption mechanism similar to ETFs.

settlement is always a mystery to me in crypto so i can't weigh in here. how do you guarantee delivery of the physical for units of the crypto that's inked on the blockchain.

Derivatives settlements with smart contracts is the all time killer app of crypto in my mind because the contract can allocate payouts on its own.

Obviously these can't be physical, they have to be financial, but if you are allocating something financial with value on a liquid market you are just one step away from getting to the physical thing.

Things like BTC swaps don't really have settlement periods: every so and so numbers of often (often 1 or 8), longs pay shorts using some premium formula is swap > index, and vice verse if swap < index.

I suppose you could construe that as some periodic partial settlement mechanism, though.

It is a periodic partial settlement mechanism. Perpetual futures are equivalent to a bag of daily futures that automatically roll over, one of which is always in its expiry period.

Is it not that settlement nominally occurs when you choose to exit your position? Which raises various questions about whether whatever stack of turtles your swap is built on can provide liquidity when you need it.

The order book provides liquidity. When someone sells a swap, someone else buys it.

Of course, the amount of liquidity and spread available will depend on how popular the coin or specific contract is.

Liquidity has a tendency to dry up when everyone wants it, especially in a highly-leveraged derivative. The fact that options have an expiration date seems to mean that trading cannot just stop when things are going badly.

Because there's some mechanism for arbitrage that allows you to effectively settle it. If the spot price is too low you can make a profit.

Well that mechanism for arbtrage usually occurs through settlement. ie at contract settlement, you trade one for the other.

Right, in lieu of that these schemes use a variety of different mechanisms. One way is you can mint the derived asset at a price oracle by staking other tokens. If the synthetic spot price is too high, you can sell your newly minted asset for more than you staked. If it’s too low, you can mint an inverse asset and sell that for more than you staked.

You could technically buy real shares and sell synthetic shares on the blockchain, harvesting the price difference.

This would generally have the same effect as the blockchain user buying the stock directly, but through an intermediary collecting premium.

Why stop there, you could buy real shares, sell synthetic ones, and then sell the real shares, too. Or just sell synthetic shares without having any real shares in the first place. This seems like a case where a blockhain doesn't really do much good.

Selling the real shares as well as the synthetic is really just going naked short. Lots of risk/leverage. You have to put up collateral so that you have something to lose if it goes bad

I'm looking at it from the buyer's perspective. The big selling point of blockhain transactions is zero trust and no counterparty risk. There is clear counterparty risk in synthetic shares sold on a blockhain.

IOW, the buyer is still stuck relying on the issuer of the "real" shares to honour the blockhain sale, or on the seller not defaulting.

Edit: just to expound further on something I think most people miss: The primary innovation of Bitcoin was that it is provably scarce without relying on any legal framework. That's it, and it's pretty radical. If you start relying on the law to provide value, the blockhain idea tends to become extraneous.

These would also trade like other crypto - 24/7, 365.

How do stocks that never pay a dividend settle?

Companies hold assets, cash flow and perform real world activities that have a tangible value. There are multiple ways that value can be realised. Aside from speculative investors which were discussing, companies and individuals can buy shares in order to exert strategic influence over the company for their own reasons, so the shares have a value to them beyond just the share price. For example the way Microsoft owned shares in Apple for a long time because the existence and operations of Apple at the time benefited them. Ultimately management can buy out the company, or an external player can mount a takeover, or there could be a merger, any of which can lead to a cash out situation.

E.g. a software company might never pay a dividend, but the company might be bought by a company that wants to acquire it's products or customers, or it's technology team. These things have economic value that can be realised. So there are multiple ways a company can have value that can lead to share owners benefiting from the materialisation of that value.

I'm not talking about the existence of economic value, but of settlement. So there is no settlement except at an indefinite transaction event -- not even under your control if they're non-voting shares, i.e. "whenever".

True, it's not scheduled, but it's more common than a lot of people think, for a public company to be bought out. And the shareholders don't get to arbitrarily hold out, either.

> How do stocks that never pay a dividend settle?

The textbook answer to stock value is dividends. Many companies, most, I would argue, never reach that point.

In practice, the chief defender of fundamental value is M&A. Whole-company buyers can tap free cash flow in a way minority investors can’t. That is the arbitrage that sets a lower bound on the value of a company’s shares relative to its cash flow. (There is no similar mechanism for setting an upper bound.)

Eh, once you start averaging across market caps and counting stock buy-backs as the back-door dividend they are, it becomes far less common. Amazon is the one big outlier there; IIGC, they've only performed a buyback once.

The S&P 500 disburses ~half a trillion USD in dividends each year, and performs another ~half a trillion USD in stock buybacks. You shouldn't discount that second half.

Well Futures might be, but every year also the established financial players on the mainstream financial markets invent new derivatives and they all are not regulated until they are.

But most things of this type specifically arent settled, they're settled in cash and rolled over, again and again and again, forever. Look at the volumes traded for these derivatives, numbers are insanely high. People don't mostly use them to do what they were intended (hedge a poor rain year or similar), but to GAMBLE. The rest is mostly just narrative.

Saying that they were intended for hedging sounds like a very strong proposition to me. Chicago-style futures have (and have had, for as long as we know) numerous features that indicate speculation (or gambling, as it's also known) as one of their big reasons for existence.

They are also used to sell unconventional services (being long corn in August and short corn in July is effectively selling the service of transporting corn back in time) and,

perhaps most importantly, to make commodity loans (being long corn in the cash market and short corn in the futures market is a loan of corn.) This helps explain why, after removing costs of storage and insurance and such, prices are almost always in backwardation.

>Saying that they were intended for hedging sounds like a very strong proposition to me

I think most people believe this since every textbook I've seen explains them and implies that this is what they are for.

On this subject, almost every textbook is wrong. Well, I shouldn't say wrong, but their models fail to predict and explain easily observed real-world behaviour in futures markets.

I can strongly recommend Williams' The Economic Function of Futures Markets[1]. It gave me a lot of those "ooh, now that makes more sense" experiences after having heard the faulty model used in textbooks over and over.

[1]: https://www.amazon.com/Economic-Function-Futures-Markets-Wil...

Are these crypto assets not derivatives? Can you name any other instance where a derivative financial asset is labeled fake <underlying>?

Are these assets backed by legally binding contracts? If the answer is no it doesn't seem like a stretch.

If I sold you a stock in my company that gave you none of the traditional shareholder rights I'd also call those shares "fake", which seems to be what's going on here.

Nobody is claiming to be selling stock in companies. They're claiming to be, and are, selling synthetic assets that track that price movements of stock.

How is that different to a bucket shop? https://en.wikipedia.org/wiki/Bucket_shop_(stock_market)

It's not really. They're transparent, auditable, and typically they're designed to use over-collateralization to prevent liquidity problems, but they're not 100% immune to them and still count as bucket shops IMO.

But they're absolutely not fraud or "fake stocks".

According to the Wikipedia link, bucket shops are illegal gambling.

So if what this is doing isn't any different than a bucket shop... I think we'll see the same outcome.

Are they illegal everywhere though?

The spread betting companies in the UK work very much like bucket shops and are not only legal but tax free. Unlike these blockchain things they are regulated and unlikely to run off with your money.

Yes I think that's very likely. The closer DeFi gets to traditional markets the more likely enforcement is coming.

What are some possible enforcement mechanisms against Ethereum DeFi smart contracts?

I imagine very few people would be interested in smart contracts if it became a defacto legal standard in the US and Europe that these contracts are unenforceable.

Of course this doesn't address contracts being written out of Russia or traditional financial havens, but how valuable is a vehicle which can't be used to move assets into or within the US or Europe?

I think the question of enforcement is the wrong one.

Smart contracts are already unenforceable via the existing legal system. It's the blockchain that enforces them, and it will continue to do that regardless of their legal status.

The greater Ethereum community accepts to put restrictions into place, or the US/EU/China puts sanctions on Eth owners and traders. You get to either move to Sealand, or accept restrictions.

I'd love to see the DoD/CCP conduct a metadata drone strike agaisnt addresses that were generated for a specific transaction x seconds ago, correlated with some IP addr correlated with some location that ended up being a server running in supply closet on one of their military bases.

Esp for chain running evm compatible contracts that are more scalable than ethereum and can have millions of ephemeral validator nodes.

Forward contacts and SPVs are two ways of encumbering share ownership without (necessarily) conferring all the rights of the underlying shares.

Sure, but those are backed by different legally binding contracts which also give legal recourse to buyers. My point is that unlike other types of synthetic assets these seem to have no legal backing and could quite conceivably be regulated out of existence in the future.

No one is claiming they are selling you a stock in a company. That's the whole point. They are very clear that they aren't selling you a stock in a company.

That’s what GOOG is (as opposed to the “real” Alphabet stock GOOGL). So by your definition one of the FAANGs is issuing “fake” stock. And for some reason it trades higher than the “real” shares.

Owning GOOG still gives you a real 'share' in the company, i.e. if the company was wound up and all its assets sold off, you would get paid in proportion to the amount of GOOG you owned. Whereas you would get no such thing with these fake stocks.

Unregulated would be a better description. This is a perfect example of the kind of financial asset that should be heavily regulated.

How do these assets track the price and what guarantees they will always do so? If the answer is trust us (like stablecoins, nfts, etc), people buying them are marks, not customers.

You can read Maker DAO whitepaper to see how a stablecoin can be created without trust.

I did, and it doesn't.

The mechanism behind Maker DAO simply doesn't work. That's why it lost the peg so badly, and for so long. There simply wasn't any working mechanism to deal with the situation where the price rises above one dollar.

When people create ETH-collateralized DAI and sell them they are basically doing so in order to go leveraged-long on the ETH/USD pair. So when you use ETH to buy DAI from one of these people, you're basically making a (collateralized) margin loan to somebody who wants to increase their leverage. In return you get something sort of like the ability to short the ETH/USD pair (not exactly due to liquidations, but it's pretty close). All of this actually works as advertised: Maker pairs up people who want to go long with people who want to short. But what if there aren't equal demands for both sides of that trade?

If there aren't enough people who want to make margin loans (i.e. go quasi-short) Maker can raise the margin loan interest rate (i.e. stability fee) to make lending more attractive.

The big problem is if there aren't enough people who want to increase their long leverage. There will be too few DAI-sellers and the DAI price (in ETH) will go up above the USD price (in ETH). That's what happened. And kept happening.

The solution was to capitalize Maker DAO with centralized stablecoins -- Coinbase's USDC and Tether.

As a result, Maker DAO is effectively no more than an "index fund" of centralized stablecoins. It absolutely is not trustless.

It is trust laundering.

> There simply wasn't any working mechanism to deal with the situation where the price rises above one dollar.

..inflation?

Not sure if you’re joking or not, but the entire purpose of this type of token is to be pegged to the price of dollar or some other real-life asset. It stops fulfulling that role if the price expressed in its peg currency varies (hence the name “stablecoin”). Any type of inflation or deflation separate from the dollar breaks the token’s utility.

The price is pegged to the dollar, not the quantity in circulation. My point is that if the price is over a dollar, you mint more of them to pull the price down.

To me, DAI going over USD just indicates supply not meeting demand.

> you mint more of them to pull the price down

No, in order to pull the price down you need to mint more of them and sell those new DAI into the market.

Doing this saddles the minter-seller with a long USD/ETH position: they have to lock up a bunch of collateral in order to mint new DAI, and if USD/ETH drops enough their collateral will be vaporized. If no sellers believe that USD/ETH is going to rise, none will be willing to take that risk.

DAI doesn't work like Tether. DAI aren't really "quasi-dollars". They're margin loans owed by other people. To bring them into existence, you need to find somebody who wants a margin loan in order to go long.

Who is the mint seller, the minter or the one buying the minted coin?

It wouldn't be any entity minting these new DAI, it would be the Maker smart contract giving out new DAI loans for collateral (ETH, WBTC, WhateverTokens).

If DAI is trading at $2, and I believe it will hit the peg again in the future, I'm very highly incentivized to borrow it and sell it for $2, pulling the price down! I then pay back my loan with DAI I buy for $1.

Similarly, many crypto exchanges don’t give you access to a wallet and don’t let you actually transact on the blockchain, but they sell an asset that matches the value of a coin and those coins are held in reserve by the exchanges.

As always there is a buzzword associated and here instead of fake the preferred terminology is… synthetic.

I don’t disagree, but the technical term is “synthetic” and substituting “fake” for “synthetic” in a headline and first paragraph doesn’t seem like that crazy of an editorial choice.