Bank runs like from the movie "Its a wonderful life" - they don't happen anymore. Currencies devaluating like an exploding balloon - not since the civil war. Sure, it costs you more, but it saves you more.
Lotta benefits to crypto, but lots of hurdles need to be overcome (power and security for a start).
Another example of a bank run is the bank run of Northern Rock on the 14th September 2007. This was the biggest banking problem in the United Kingdom since the banking crisis in the seventies, this was also the first bank run in the United Kingdom in 150 years. Eventually, this resulted in the nationalization of Northern Rock. It is interesting to analyze this bank run because it is one of the most recent bank runs in Western Europe. Furthermore, the bank run from Northern Rock is a special case because it was a ‘reversed bank run’. Normally during a bank run, a lot of depositors first withdraw their money, due to lack of confidence for example, and then the bank will as a result of the huge withdraws get into a liquidity crisis. However, in the case of Northern Rock, the bank first got into a liquidity crisis and as a result of that, depositors withdrew their money from the bank.
https://arno.uvt.nl/show.cgi?fid=116241
It certainly looks like a bank run - the scenes in London today fulfilled the dictionary definition.
And heading north to Nottingham, and Middlesbrough, the same extraordinary scenes. savers forming long queues to drain their life savings from Northern Rock.
Banking -- an industry built on credibility, confidence and trust. But the Rock looks wrecked even in its home town of Newcastle.
Deposit guarantees should prevent this. But even after an extraordinary unlimited lending facility granted by the Bank of England and agreed by the Chancellor, customers preferred the sight of real cash.
https://www.channel4.com/news/articles/business_money/the%2B...
* It was somewhat less in 2007
> Deposit guarantees should prevent this. But even after an extraordinary unlimited lending facility granted by the Bank of England and agreed by the Chancellor, customers preferred the sight of real cash.
I've witnessed and been (indirectly) affected by a bank run in the last decade[0].
0. https://en.wikipedia.org/wiki/Seizure_of_Bulgaria%27s_Corpba...
The Fed Reserve and Treasury and FinGov apparatus does some 'stress tests' but mostly a dog and pony show.
Banking in US is mostly element of convenience than quality. No one ran from Wells Fargo accounts (at least retail users) to say Bank Of America because Wells Fargo is fined for basically fraud.
In short term its a good thing, in long term.. well it is prone to blow up, I hope that is not in my life time.
It would be a mistake to think of these two features as easily separable.
Here is $24bn of losses due to credit card fraud: https://shiftprocessing.com/credit-card-fraud-statistics/
If the bank bears the losses, then the burden is indirectly distributed to all its customers/shareholders. If the government bears the losses, then its distributed to the whole economy.
> Bank runs like from the movie "Its a wonderful life" - they don't happen anymore.
In the Western developed countries. There are billions living in countries/systems where currencies are devaluating like hell and where banking regulations is looser than crypto.
There was one at the beginning of the coronavirus epidemic in the US. A friend of mine runs a branch of a major bank. Just as lockdown was announced, they were mobbed by people demanding cash. The branch ran out of cash and had to close early. It was a bit of a frightening experience for the bank staff. But not a disaster. The branch ordered more cash delivered from the bank's cash center, added extra guards, reopened the next day with the ATMs fully loaded, paid out cash all day, and were back to normal traffic levels by the end of the day.
A bank run is something that forces the bank out of business -- it makes the bank insolvent. This happens because the bank can't convert its illiquid assets (e.g. mortgages) to cash in order to meet depositor outflow.
That doesn't happen anymore in part because there are markets for things like mortgages that didn't exist before (making those mortgages liquid) and also in part because banks are on the one hand regulated to control what types of assets they are allowed to hold but at the same time they are given access to lending facilities in which they can pledge their assets as collateral to get reserves directly from the Federal reserve, which will never run out of reserves, and with those reserves they can purchase cash from the Bureau of Engraving. Then trucks will ship that cash to the branch. Yes, it may take some time, but the bank will always be able to close out deposits after a brief delay.
Obviously banks try to minimize their cash holdings because cash pays no interest. So they have cash management professionals whose job is to predict cash demand (which is predictable) and hold no more cash than is necessary to meet that demand, parking the rest of their working capital into short term interest bearing liabilities like commercial paper or bills. Today, even reserves pay interest. So everything is better than cash. That necessarily means unexpected events will lead to a situation in which the cash management team underestimates a cash need and so they have to sell some assets (or borrow reserves), pick up the phone and order a truck. That happens quickly but not instantly. When that happens, e.g. when the cash management team makes a mistake, it's not considered a bank run, even if it means that a branch has to close until the armored trucks arrive. It's no different than Safeway running out of apples -- actually there can be prolonged apple shortages at safeway, but there can be no prolonged cash shortages at a bank, since the bureau of engraving can print cash with much lower latency than farmers can grow more apples.
I know that. You know that. The bank manager knows that. The average retail banking customer who comes to a branch does not know that.
The world is very different today and cash is not so important anymore.
I still remember the lines at the WaMu branches, it was insane.
That was also the 1st time I heard of FDIC insurance caps. A lot of people lost a lot of money over that if I remember correctly.
Code is law. This law was just written incorrectly. This is a known risk; it's the reason why defi interest rates are similar to junk bonds.
Underbanked get hammered by fees with no safety net for emergency expenses. And large portions of our population get saddled with poor legal representation resulting in de facto indentured survitude in for-profit prisons.
More options are better. Nothing about DeFi or cryptocurrencies invalidates or prevents people from continuing to bank as usual. The whole alternative system is opt-in.
Maybe if I built a defi lending platform myself so I could take a lot of loans from my customers and then default. That’d work just fine. Otherwise, run for the hills.
Until we find the API for reality, many of these decentralized projects are hopeless.
That was nicely put. I see so many of these projects promising to end with banking, bureaucracy, but forgetting that at some level the bits and bytes have to be input or acted on by a human.
Another question is if things like this will poison the well and scare people away permanently.
Vastly oversimplified (and possibly wrong), but if you want to know more, do some searching for "yield farming".
The point is that they want to keep their BTC because they think it's going to go up, so they take out a loan with their BTC as collateral rather than directly spend their BTC.
Um, what?
If I take out a mortgage to buy a house, the loan amount is not going to be larger than the value of the collateral (the house).
If I take out a loan to buy a car, the loan amount is not going to be larger than the value of the collateral (the car).
What kind of loan are you thinking of?
Pray tell of these new cars whose value does not plummet the moment they are driven off the lot.
E: woah! .06 seconds to the first downvote to a Dow thread comment on a two day old post! I’m out.
If you put up $X in FOO_COIN as collateral and FOO_COIN starts tanking in value, the contract is supposed to auto-liquidate once it hits a certain point. But there is absolutely no guarantee that this can find a buyer. So the "guaranteed" collateral recovery is not exactly guaranteed.
When the market starts making big moves downward the liquidation bots have a keen eye on which positions are at risk, watching and predicting the oracle updates, and within a block or 2 (~30 seconds) of a position being vulnerable have the deal all closed out. It can even be all done in a single transaction bundle that calls the liquidation function, pays back the debt, takes the collateral, and sells it on a dex, all in one go.
The market price for the collateral would have to drop more then 20% in the span of that 30-seconds for it to not be profitable for the liquidator.
That's not to say it's impossible for this to fail, the biggest and sharpest dumps happen during liquidation cascades. But a failure is in the category of 'black swan event', and not something that is seen with regularity.
If it happens, it's not a black swan event.
Black swans are rare but actually exist.
The term predates the discovery of black swans;
> However, in 1697, Dutch explorers led by Willem de Vlamingh became the first Europeans to see black swans, in Western Australia.[9] The term subsequently metamorphosed to connote the idea that a perceived impossibility might later be disproven. Taleb notes that in the 19th century, John Stuart Mill used the black swan logical fallacy as a new term to identify falsification.[10]
Evergrande almost went belly-up as the prices of their real state fell sharply because they sold so much of it to cover their credits.
The financial crisis from 2007 was because the collaterals were nowhere as sound as they were sold for.
Don’t get me wrong I think it’s mostly a house of cards but crypto finance is just traditional finance on steroids IMO.
There are a lot more backstops. Traditional finance can have this problem, but we can install human systems to limit the blast radius of things. As you say, it is traditional finance on steroids.
Crypto enthusiasts seem to think it is the opposite. People tell me that defi loans are "zero risk" because of the automatic collateral systems and I just laugh and laugh.
Everybody who claims there's "zero risk" is either lying or blind to the risks. You can't get those large yields with zero risk.
You can get upper-class rich, seven figures rich, comfortable house, vacation home, early retirement rich, but you can't get Private Jet Rich, Masters of the Universe Rich, Look At Me Rich.
If you want to be Rich you need to to resort to something like playing the lottery, or starting a unicorn startup, or exploiting large numbers of people for your own profit, or crazy "technically it's not a pyramid" schemes like crypto and DeFi.
SWE at the staff level will get you low to mid eight-figures rich [0] by the time you're old with safe, traditional investing. Sure you aren't Masters of the Universe Rich, but you're still filthy rich.
And how many crypto people are going to beat low-to-mid eight figures? Maybe if you put $100k into bitcoin in 2013, but I'd bet there are more SWEs making $500k+ than there are people who put that much into crypto early enough (and weren't already filthy rich).
[0] Low-to-mid eight-figures in today's dollars. Nine figures in future dollars. Assume $500k income, putting half away from 35 to 65, getting 7% (4.1% after 2.9% inflation).
I think this is a deal-breaker for get-rich-quick types.
Nobody should have the power that having a billion dollars gives you
Let's pretend for a moment that I agreed with you on this. Your proposal to address the situation is to take all that money, which is currently at least somewhat distributed, and concentrate it in a single organization which already claims a license to steal, kidnap, and murder. I really don't think you've thought this through…
The only thing to decide was if they would let the hacker get away with at the time 15% of the whole supply. If they did that it would have endangered the decentralization of the eventual proof-of-stake switch.
So the solution to save "decentralization" was for a centralized cabal to literally rewrite history?
Given that this incident resulted in the Ethereum/Ethereum Classic split, the "centralized cabal" was not very effective. The community voted with their feet and many went to Ethereum Classic.
So they decided to kill it outright?
The distribution of ETH was less decentralized before the hard fork than afterwards. 15% of the whole supply in one hand is quite a concentration in the distribution.
Your argument is circular; “code isn’t law because I’ve redefined the word ‘law’ to explicitly preclude it”.
As far as the crypto itself is concerned, of course it is. The issue here is that the founder is using another system to blackmail users.
The fact that this founder had to resort to tactics like these (instead of reverting the mistake on his end) shows that these systems are working as advertised.