Luckily for Paolo & friends, their terms of service clearly state that they do not ever have to offer redemptions of USDT for dollars. Or even whatever IOUs and bits of string they may or may not have in reserve.
Out of all the stable coins its the most likely to withstand a "run" because they do not have to pay you if you ask. In fact if you're a US person, you're not eligible at all. If you're not a US person, it's at their discretion to deem you a "customer." Even if they do that, they can delay your withdrawal arbitrarily. Even if they don't do that, they can pay you out with whatever is actually in their backing. [1]
What would get destroyed in a run is every other crypto, as folks desperately try and exchange their USDT for something they can sell at a fiat-backed exchange. The Crypto-USDT pairs will quickly go no-bid, and as people rush for the narrow exits at fiat exchanges, prices will plummet.
[1] tether.to/legal
That same thing will happen if crypto has a major run. The exchanges already conveniently "go down" when Bitcoin dumps even now. Every single time, it's become a running joke. If we had a serious Tether blow-up or BTC move that would rock the boat, everything would get locked down and you'd have no way to buy back your Tether short for pennies on the dollar. When tril/billions are on the line, ain't no way you're getting your millions, especially in this unregulated wild west.
I doubt a run on tether would even cause a 50% drop in BTC price. Hope your account doesn't blow up when Bitcoin inevitably reaches 1 million per coin ;)
Sure, in the short term, unregulated markets can be manipulated.
But Tether's been around more than seven years, more than enough time for the "smart money" to profit by obliterating them.
You can sell Tether on Coinbase for U.S. Dollar deposits to your bank account.
The fact that Tether maintains its 1:1 peg to the dollar is a signal that maybe all the smart guys who have been confidently predicting its imminent and inevitable failure for the last seven years might be missing something.
> The fact that Tether maintains its 1:1 peg to the dollar is a signal that maybe all the smart guys who have been confidently predicting its imminent and inevitable failure for the last seven years might be missing something.
Bernie Madoff claimed that his scam started in 1991, though in reality it was probably much earlier. It didn't collapse until 2008.
Even in the cryptocurrency space, Mt. Gox took five years to collapse.
There wasn't a well publicized US federal indictment and investigation of Madoff and Gox, settled with a fine and no injunction.
I'm not saying Tether is clean or 100% funded, I don't know. But unlike Madoff and Gox, accusations have been very loud and very public for a very long time, and the market still accepts USDT at parity with USD.
If Tether's treasury is empty, and if people can freely trade USDT for USD, it wouldn't hold 1:1.
Check this guy: https://en.m.wikipedia.org/wiki/Harry_Markopolos
The question of a collapse is when not if.
How would the smart money profit from obliterating them? If you’re referring to a Soros/GBP style trade, how would one borrow enough USDT to pull it off?
Presumably, people who hold hundreds of millions of the stuff are well aware of every accusation made against Tether.
If they wanted to, they could trade their USDT for actual US fiat on a 1:1 basis if they thought USD was worth more than USDT.
The really smart money with large crypto stashes could borrow USDT with crypto as collateral, and trade the USDT for greenbacks.
Have you looked into the mechanics of this trade? The crypto loans I'm aware of are all significantly overcollateralized. You would have to pledge say 1m BTC to get 0.8m BTC worth of USDT which you could then sell for dollars. If you succeeded USDT tanks, everyone who holds USDT would be rushing for the exit, wiping out the crypto you pledged as collateral also. So you succeed in losing 20% of your money on the initial USDT trade and almost all of the value of the crypto assets you pledged for the loan as well.
These markets are nowhere near as flexible and liquid as regular fx - I would be amazed if you ended up making money overall on this kind of strategy and the execution risk is significant.
Presumably the value of Tether would drop much farther than the value of other crypto.
If USDT drops 90% and BTC drops 50% in USD terms, the BTC would gain value in USDT terms and your loan would be even more overcollateralized.
Then you could pay back your loan with USDT at ten cents on the dollar and make an absolute killing.
Love to hear this.
1)In normal FX markets the amount transacted goes to trillions of USD per day, and liquidity at the touch is very high. So if you need to unwind a position there will be people who will take the other side and the market won't move much even if you're trying to unload a lot of a single cross.
2)In equity markets (which I'm a little more familiar with from a microstructure point of view) a single large market participant like a big broker/dealer will do more than a billion client orders on a busy day (when you add up the orders they do internally and all the child orders from executing trades in pieces). If you wanted to do a billion transactions on the ethereum blockchain at the current throughput it would take you almost 2 years, and no-one else would be able to do anything. So making a lot of trades fast isn't really possible.
Obviously chains like solana would help this a lot, but the point remains that in the current defi ecosystem markets aren't very resilient because they can't react as fast and they don't have the kind of depth of liquidity that conventional markets have.
So I suspect there’s not much overlap between people who believe they could break tether and people sitting on a large crypto stash to use as collateral.
- borrow a ton of USDT
- trade it for USD on exchanges, eating away at organic demand as well as the reserves used to keep the peg
- eventually (presumably) the peg will break and the price will collapse, and you can buy back the USDT for cheap to repay the loan
The trouble is getting that USDT-denominated loan, though.
Personally I'm really really confused about who holds all that Tether. Just who is it? I can't come up with any good idea. Is it the exchanges? But if so then why would they?
I did create a synthetic tracking portfolio to keep myself accountable to the bet over time, though: https://twitter.com/paulgb/status/1453111218374389763
If the Fed prints another trillion dollars tomorrow, their stock price could double, wiping out your short...
That, of course, would not happen. Even if there were such an event you'd still see people trying to beat the clock and mass liquidate the old BTC while there's still demand, or people immediately liquidating their positions in "new BTC" because they think it's not going to eclipse "old BTC".
We have a good real world example of these very things happening with things like BCH and Ethereum Classic still trading quite regularly. Both were the result of some users deciding to move to a fork and some deciding to stay. In traditional markets you could make some parallels with a stock split or demerger.
The big risk in your play is that the crowd in a panic will select another stable coin for going on the sideline IF AND ONLY IF such a coin is available. If not they will buy the most stable non-stablecoin which is ... drumroll ... bitcoin.
Of course, long-term effects might be different.
To this point specifically: is there any proof this is malicious? Amazon, Facebook, Google have all had outages before; shouldn't we apply Hanlon's Razor when a cryptocurrency exchange fails to serve requests during a massive traffic spike?
Further, an honest exchange makes money on people’s trades. Going down when volume is high means giving up peak profits. Equivalent of amazon reliably going down on black friday.
First and most importantly, the crypto market can drop 15-20%+ in a 24 hour period; similar rises take multiple days on high-volume, large-cap coins. This is actually not specific to cryptocurrencies, there's a well known phrase in the equity markets "bulls take the stairs, bears take the elevator (or 'the window')".
Similarly, with such volatile assets, when the price falls dramatically, many people are running for the exits. On the other hand, when the price is skyrocketing, many people have a "hodl" mentality, think the price will rise up further, etc. If the price falls off a cliff everyone is trying to sell, but when the price spikes many feel "I missed my chance, better wait for a dip" and aren't rushing to buy.
Making a robust exchange is hard and requires an amazon level of development. Huge movements in price correlate with massive increases in volume. The simplest explanation remains firmly in the realm of poor platform, in my mind, rather than nefarious and illegal manipulation.
Just look at Robinhood. They offer a sleek looking product, but their crypto offering falls down under load (positive and negative) regularly.
[1] http://rekt.news
Like, this happens with currencies that are pegged to the dollar. The government that's supposed to be maintaining the peg starts to run out of dollars and starts limiting dollar redemptions. People turn to the black market to obtain dollars. The price of a dollar (in that currency) goes up. The value of the currency (again in dollars) drops. Now the peg is broken.
Tether the company could walk into the sunset with whatever they're holding- they can just honor "friends and family" withdrawals, but that doesn't prevent the coin going to zero for everyone else. It actually makes it even worse for the currency: suppose it's collateralized at 50%. Tether could honor withdrawals at 50 cents on the dollar, force every holder to take a 50% haircut. The price might settle to something less than $1 but more than $0 and continue on.
But if they abscond with the money instead, the currency will have even more reason to drop to nil.
Individuals will be told they're not customers by Tether (this happened on Twitter a while back, someone set out to prove you could and Tether stonewalled them, so he deleted his account). They're offered a piddly USDT:USD market pair on a few exchanges, like Coinbase and Kraken, as a distraction. There, they can sell their USDT to folks trying to buy it (for instance, to fund a DeFi position) or the exchange obo Tether, Inc. to keep the charade going.
Only institutional parties like exchanges, Alameda and Cumberland are "deemed customers" and they'll never redeem because they know they can't.
Everyone's in on this. I think only a court-ordered exchange liquidation could possibly end the game, like a Binance collapse for instance.
I just don't see how Tether refusing to honor redemptions makes it more resilient to a run in progress, rather than less. If nobody wants to buy 1 USDT for a dollar, the peg will break all the same. If Tether stepped in as a buyer of last resort, that would make it more resilient- but if it doesn't, that worse for the peg, not better.
It's better for anyone with physical custody of the Tether assets I guess (they have a pile of gold to Scrooge McDuck dive into) but the currency is even more boned than if they'd propped the market up by buying Tethers back.
A 100% collateralized stablecoin that just hands everyone back their dollars if they ask can survive anything, a 50% collateralized one can spend a lot of it back into the market to prop the price up, at least for a while. But if Tether can't or won't, that's going to make maintaining the peg a whole lot harder!
I feel stupid, but I still actually don't. If considerably more people will want to sell it than there is a demand for it, the price will have to go down, no matter what, as long as "price" is anything more than a decorative label on the exchange's website and you actually can swap it for any currency at all. So, either the exchange should cover all that demand, which doesn't sound reasonable (I'm not sure it's realistic, and even if it was — why would they do that? if this happens, Tether is dead, they can either abandon it or go down with it), or there actually must be some demand. So, I assume it's the latter.
But why would there be any demand for it, if everybody (basically) knows that USDT is a scam? It isn't the same thing as "SHIBA is a scam" or whatever, because even if everyone agrees SHIBA is essentially worthless, people are buying it to speculate, so it can hold onto a belief that others believe it will grow. You cannot speculate on USDT, since USDT cannot grow by definition, it's a stablecoin (and not the only one — there are others with better reputation). It can only crash.
So why doesn't it?
There are two ways this can be done. The first is to be a large holder of USDT already, one whose nominal position is greater than the entire reserve pile, and attempt to liquidate it in favor of USD (this is basically a bank run). Or you can artificially induce this by borrowing enough USDT and selling it to either soak up the entire reserves or induce others to do so as well. But Tether's reserves are probably substantial enough to make this latter option infeasible except for the very largest financial institutions.
Now the largest holders of USDT are those exchanges that immediately convert any USD you put into them into USDT. And so long as you don't try to withdraw that USDT for real USD, they're unlikely to sell any stocks of USDT they hold (in your name or in their own name). Effectively, this means that so long as there is a net inflow of hard currency into the cryptocurrency ecosystem, no Tether crisis is likely to happen. However, should there be a sustained net outflow... well, we'll discover who the equivalent of Lehman Brothers in the cryptocurrency world is.
But a longer term crypto recession would have a run on the exchanges, many would want to cash out, and the price isn't going to be stable
Even retail investors? Why do they hold a stablecoin that has any risk at all, with no upside? What is the retail investor’s end game here?
In each case no one believes it will collapse while they hold.
This is a highly risky activity pitched as not risky.
With centralized lenders (Nexo, Celsius, Blockfi) you sign over ownership of your crypto to them and hope they will meet their promises.
In Defi it’s programmatic. I am less familiar with the mechanics there. I figure there is massive risk when I see 20+% yields but do not understand the system.
Beyond that, you are correct of course!
But if "folks desperately try and exchange their USDT for something they can sell at a fiat-backed exchange" then surely the most desperate will be willing to take a haircut on their Tether to get out of it first, and then the Tether price collapses anyway, through some combination of the exchanges shutting down trading, drawing down their own collateral to maintain the peg (and then running out), and/or the exchange reluctantly allowing the price to float?
Like, the too-big-to-failness is definitely part of why it's still a thing, but that just means that the real buyer of last resort is other large crypto holders who don't want the ecosystem to collapse. That's great for Tether-the-company, and maybe good for Tether the coin, but it seems to me sort of distantly related to Tether allowing direct withdrawals.
There's an obvious mechanism for maintaining the peg if Tether allows large holders to redeem Tether: those holders buy any slightly discounted Tether, then hand it back to Tether and redeem it and keep the tiny profit. This will work but it's just Tether propping up the price with its capital with extra steps...
Being unable to redeem your USDT for dollars - regardless of reason (because Tether is out of money or Tether is refusing) - is what causes the run and the crash.
An entity that is holding a bunch of cash but refusing to honor IOUs it has issued will find that the value of those IOUs will rapidly approach zero. Permanently. Even if it laters starts honoring those IOUs, the IOUs have lost their utility forever and the price will remain at/near zero.
History has shown that this does not happen in crypto. Even for coins like Bitconnect and Confido that plainly turned out to be scams, there were still buyers long after the news was revealed. People like to bet on dead cat bounces, or some kind of news after the fact that redeems the coin.
I think what you mean is the Crypto-USDT pairs will go no offer (i.e. no USDT bid) as people turn to dump crypto against a fiat leg.
When you start using something like BTC as your unit of account and stop measuring your net worth with a shrinking fiat yardstick you'll realise this.
Fiat onramps will become less and less necessary. We'll hold everything in crypto and buy a bit of fiat from time to time when some backward merchant or hyperinflated backwater country requires it...
In contrast, imagine investing in, say, a new fast-food franchise joint. They money you put in there is used to acquire assets that are used to produce goods that people will pay to consume. If it's a well-run business, the value of the outputs will be more than the value of the inputs, making it a positive-sum effort.
When you own a share of Square (or Visa, or PayPal) each time a transaction takes place on their network, a portion of that transaction (revenue minus costs) accrues to the company - and by extension increases the intrinsic value of your share. The transaction revenue is spent on furniture, on R&D, on employees and on buffing up their cash position. As a shareholder, you benefit from every single transaction made on their network.
On the other hand with cryptocurrencies like Bitcoin, as a holder of Bitcoin you are a customer not an owner. You lose money on every transaction. That value accrues to miners, and by extension, your local PE firm re-opening a fossil fuel power plant or the Kazakh coal mining complex.
Square shares ~= Hut8 shares.
Bitcoin ~= a Starbucks gift card you hope appreciates in value when Starbucks sells more coffee. Currently there are enough, uh, savvy investors who think it should, so it does. In accounting terms, it won't though because that benefit accrues to shareholders of mining companies, which you are not. You hold a gift card. One that costs money to spend so must be worth less than face value.
Bitcoin is a strongly negative sum MLM, or if you agree with jstolfi, a Ponzi scheme with a fresh coat of paint. [1] The network currently costs $60M per day to operate. That's $21B per year in new money that has to come in to prop up the price. [edit](And all that money goes to burning coal and throwing away mining hardware).
[1] https://www.ic.unicamp.br/~stolfi/bitcoin/2020-12-31-bitcoin...
Bitcoin isn't figuratively a store of value, it actually is. The amount of bitcoin on DeFi, backing collateral for flash loans and Stablecoin minting is astounding.
>When you own a share of Square (or Visa, or PayPal) each time a transaction takes place on their network, a portion of that transaction (revenue minus costs) accrues to the company - and by extension increases the intrinsic value of your share.
All the V3 crypto protocols have exactly as you describe above. However, instead of the money going into the coffers of the company, it goes into a 'Development fund' That will award the crypto to people who have applied and been voted on by the community to launch a project/technology in the protocol. [1]
https://fintechs.fi/2021/10/29/as-parachain-auctions-launch-...
It's a speculative, negative-sum MLM token. I suggest reading up on what a store of value is. [1]
I'm not saying there aren't ways of monetizing it within the network - which may indeed create value, but intrinsically, it is a negative-sum asset, a mechanism of redistributing real cold hard dollars from new participants to old entrants and miners. It creates nothing. Systems built on top of it might, exploiting let's say regulatory arbitrage, facilitating crime or gambling, but intrinsically, it creates no value.
I know people point to the current system and infrastructure of stock exchanges, SWIFT, the IMF, Central Banks, Retail and Commercial Banks, Internet Banks (Such as Stripe, Paypal, ETC.), Credit Unions, Savings and Loan Associations, Investment Banks and Companies, Brokerage Firms, Insurance Companies as working good enough. But for me... Occams razor hits me hard. Doesn't it seem weird that through this complex system of interactions, we can recreate all of that in Code? If there was no value in it, why did we create all those institutions in the first place?
If we can recreate those in a more humane, democratized, decentralized way, I think it's worth the .001% of the global financial system that it currently is. Even if it's grabbing 5% of the current headlines.
All of these systems are already software.
> If there was no value in it, why did we create all those institutions in the first place?
Centralization makes them massively more efficient than crypto. If there was a way to make them more efficient that did not involve throwing risk models out the window or regulatory arbitrage, someone could just do that in the traditional economy without crypto.
This is a lot like the programmer tendency to want to re-write instead of refactor because to understand a system is way harder than to set out on a quest to build a new one. Although they always end up the same way: at best what you started with. To me this falls squarely under Spolsky's "things you should never do." [1]
There hasn't been a single actual competitive business built on top of crypto in fourteen years. That's because they're all hamstrung by the massive inefficiencies they boat-anchor to their solutions. Decentralization and trustlessness and permissionlessness don't matter at all to 99.9% of humans. Attempting to offer these is incredibly inefficient and makes it totally uncompetitive with centralized solutions for every legal use case.
I would argue it fails Occam's razor to try and add miners to a monetary system.
The simplest, most efficient, most economical solution to moving value around is centralization. If there's a better way to solve any of the given problems with crypto, there's an easy way to optimize it further: get rid of crypto.
[1] https://www.joelonsoftware.com/2000/04/06/things-you-should-...
Do you ever think a human being can be a sovereign individual in his own right, without owing fealty, taxes and morality to a government in some future?
The current financial system is not all software. When i pay in crypto, i give you my money. When i pay in the current financial system I am giving you every bit of information to rob me blind and hoping you don't take it all. My currency(Value i produce) is not my own and at any moment in time some outside entity can cause rapid inflation, devaluing of my currency or take everything i own straight out of my bank account. My contracts are not upheld by code, but by courts of law. I have to do a credit check to outside entity's to ensure you've got the collateral to extend you a loan. I have to physically go into a bank, have a minimum balance, an address, a phone number in order to even have a bank account. That doesn't sound like all code to me.
Also, you're right. POW as a consensus method is flawed. But again, all V3 cryptos have essentially transitioned to delegated proof of stake at this point.
Lastly, in a generation of cancel culture gone wild and as an avid reader of history, I'm glad crypto is available to me as the nation-state that we've all known and loved is looking more and more stressed.
If you still claim there's absolutely no value in any of it, then me and you have very different definitions of the term.
Edit: There are 104 protocols/coins that have over $1B market cap. Value isn't a personal judgement, it's a group one.
Since you asked, yes. I do. To me, it's like asking if a beehive will always have a queen. It's in our DNA.
> Also, you're right. POW as a consensus method is flawed. But again, all V3 cryptos have essentially transitioned to delegated proof of stake at this point.
I honestly don't know enough about "V3 cryptos" to speak to it, and I'm not trying to add any FUD to the conversation :) I'll have to DMOR if you will before I can speak to that, which is why I've been constraining my comments to the system I know (BTC).
> Edit: There are 104 protocols/coins that have over $1B market cap. Value isn't a personal judgement, it's a group one.
[edit] Market cap isn't a judgement of value, just the most recent price multiplied by supply. Control the most recent price, you control the market cap. Unless you include legitimate market depth it's not really a meaningful number. SHIB for instance.
Not the asker, but thank you for answering this--it goes a long way toward understanding where your arguments are coming from.
I think the burden of proof that there is a possible future without government lies on those making that claim. That burden has definitely not been met and the thus the feverent belied in that claim by cryptocurrency bulls is not rational.
It would be accurate, for the time, but hugely short sighted.
My main point is don't completely dismiss a nescient technological field based on it's lack of utility now. Sustained development effort with real venture capital only dates back to around 2017, 2018.
All major silicon valley firms have launched funds to develop early research teams, nobel prize winning mathematicians developing protocols and some of these people are currently the richest individuals on the planet, just no one really know how much they actually have and obvious issues with liquidity withstanding.
> SHIB for instance
As many (If not more) of the crypto industry is marketing teams riding the 'Wave'. However, some of the projects have 100's of employees building infrastructure for the new internet. Check out Parity if you want an example of a true crypto company.
There are often analogies to the early internet, but I was alive then and remember some of the early, tangible use cases which had me hooked:
* You can look at Nintendo’s website. It has information about games, which you are currently getting from magazines (my first exposure)
* You can buy books you can’t buy locally (Amazon)
* You can mail a friend from another location, for free (hotmail, gmail)
* You can call a friend in another country, for free (skype)
* You can call a phone in another country, for cheap (skype)
What are some crypto equivalents, today, that would convince someone who is not already invested in crypto that they need to get into crypto to use it?
E.g. saying “you can get a loan of 66% of your Bitcoin holdings!” is a use case for people already in crypto.
I would also exclude stablecoin yields because the risks there are massive, and there exist plenty of investments with high risk and high return in normal land.
Both are applications of NFTs and both have significant players developing them.
I can elaborate more on these two applications if you want. Currently on mobile.
We can already achieve this without blockchain technology! Indeed that's not the way the system works, but that's not due to technological limitation. What makes you think that once "permissionless stock markets" are available on the blockchain then secondary derivative markets won't spring up, making the ownership situation as murky is it currently is for stocks?
In principal, yes, the trusted parties could have stepped up and implemented a more transparant and automated system. No, they did not need to base such a solution on a blockchain. But the reality is that they were not inclined to change the status-quo, and now we find ourselves in a world where every relevant financial system is looking at, testing, or in the process of rolling out a blockchain based solution.
For anyone asking where the value in the technology lies, the proof is in how seriously the large players [1] are taking it.
[1] just one of the many public facing examples of a blockchain-based stock market (under the CHESS replacement program): https://www2.asx.com.au/markets/clearing-and-settlement-serv...
What can I do, today that should make me want to buy the crypto to do a thing with crypto. Rather than buy crypto to hope for an increase in value.
> Do you ever think a human being can be a sovereign individual in his own right, without owing fealty, taxes and morality to a government in some future?
Without governments, how are social strictures enforced? How are externalities, positive or negative, accounted for? How does a government-less world not look like Somalia? (Or are you suggesting that you really would like to live in a place like Somalia?)
This isn't to suggest that existing governments are perfect (far from it), but it seems to me that the anarchic counterpart is infinitely worse.
It's not flawed, just hardcore. It's like the gold bars sitting in vaults deep underground in London, rarely moved and usually just relabeled to account for change in ownership. Every now and then someone gets spooked and asks to take custody, and it's expensive as hell to move it but you can lay your hands on it and know your ownership is secure.
I don't understand this. You're saying if I send you $0.01 via internet banking, you can somehow take everything in the account?
It doesn't work this way in NZ, where it is common to put your bank account details on invoices so people can pay you directly.
I am trusting that outside entity in a number of different ways; To only take the required amount, b.) encrypt my information to prevent my information from leaking.
Credit card data is leaked regularly in mass uploads for pennys on the dollar. Credit card fraud is mediated by the credit companies themselves and is just an insurance issue to them.
Crypto, I sign the transaction to send it to you. You don't get anything but my public id, amount and block time.
Even with debit cards you have 3D secure these days which requires confirmation on your phone.
Just because USA is behind in banking department and even credit/debit card thing doesn't mean those problems are especially hard to solve. The rest of the world is already partially there and with more fintechs putting pressure on banks things will improve even more.
Also, you are trusting that the person you are sending money to honors their agreement as there is no intermediary to dispute transactional claims.
[0]: https://www.cardbenefits.citi.com/Products/Virtual-Account-N...
I think another thing to note is that the other party is ASKING your bank/credit issuer to debit. The transaction can be stopped if not approved.
Normally I see the argument for crypto being that this helps merchants by avoiding charge backs, etc.
> Do you ever think a human being can be a sovereign individual in his own right, without owing fealty, taxes and morality to a government in some future?
All of this is doing nothing to change my view that cryptocurrency requires me to buy into this whole weird worldview in a way that few other products do. No, I don't particularly want to be an anarcho-capitalist.
> I really would like to see a defense of Bitcoin that doesn't rest on the assumption that I want to live in Galt's Gulch.
As long there is scarcity of resources, there will be wars/conflicts and humans will be collective species, even if we don't have scarcity of resources, some humans will invent a few, and even if humans will not invent one, it is debatable since I don't know of any evidence where humans can survive individually. This is without mentioning social classes over multiple generations.
World Bank estimates 31 percent of people globally do not have a bank account. Decentralisation helps these people.
When you deposit money into a bank account, it is not your money. It is the bank's money. You aren't allowed to use it, or spend it how you like without the permission of your bank. Crypto doesn't have this issue.
There are financial tools that only people with net worths of over $100 million have access to, such as market making, arbitrage, liquidations, insurance lending etc. Crypto solves this.
99.9% of banks in traditional finance run their systems on outdated, closed source, barely maintained and bug ridden software. Contracts, money and agreements than can happen in seconds in crypto, takes weeks and months in centralised finance.
If centralised finance had the potential to be more efficient, there should have been more innovation decades ago. Centralised finance needs to catch up.
Banking helps these people. Remember a fully-realized BTC transaction fee (pricing in electricity and mining hardware) is right around $250 each. That's a non-trivial amount of the GDP per capita of a lot of these countries you're alluding to.
Poor folks are also the most vulnerable to the massive volatilities of this so-called currency.
Real, centralized solutions help these people. Solutions like M-Pesa [1]. And Postal Banking, which a hundred years of legacy solving exactly these problems. [2]
> There are financial tools that only people with net worths of over $100 million have access to, such as market making, arbitrage, liquidations, insurance lending etc. Crypto solves this.
It certainly does not haha. It makes them less efficient, which is why not a single crypto-powered business in the last 14 years is competitive with any centralized solutions except in the areas of regulatory arbitrage or by throwing risk models out the window.
> If centralised finance had the potential to be more efficient, there should have been more innovation decades ago. Centralised finance needs to catch up.
It's obviously more efficient, and pretending otherwise doesn't change that.
Crypto doesn't help bank the unbanked.
He supports his family with his income, and frequently sends money from the United States to Bosnia.
Best case scenario, using Paypal (Xoom), a centralized company, this takes him two days. Two days is the best case scenario!
With Bitcoin it is almost instant.
They switched to cryptocurrency after a near disastrous situation with the length of time the transfer took.
How is Bitcoin less efficient here?
Sure, it's one use case, but just because something doesn't benefit you does not mean it's not beneficial for anyone.
Bitcoin is not accepted anywhere, practically speaking.
As such you're only looking at a small fraction of the transaction. You actually need to (1) transfer money into a crypto exchange for a 1-2% fee and whatever delay the domestic transfer takes (2) purchase Bitcoin for whatever fee the exchange charges (3) transfer it for $0.50-50 depending on the fee du jour (4) hope the market doesn't collapse out from under you while all this is happening (5) sell it at the destination unregulated exchange for whatever fee they charge and hope they don't flee with your money (6) transfer to the destination bank account, waiting as long as a domestic transfer takes.
This is probably a few days total, with severe counter-party risk, forex risk, and substantial transaction fees.
Or you can use Wise for a very low fee directly bank-to-bank, or open a Wise multi-currency account and support almost-free instant transactions. They're also super, duper regulated by a number of world regulators.
I know which I'd do, but to each their own.
Flash loans are used to arbitrage across exchanges, not create any extrinsic value.
Due to this emergent phenomena of smart contracts you can have very low slippage between exchanges, high liquidity and high yields.
A.K.A Every stock market financiers dream.
And what if they did want to refactor the existing system. Can they? What does that iteration process look like? Is the system currently evolving to fit everyone’s needs?
Remember, RMS actually did want to refactor the printer. He just wasn’t allowed to. [0]
Contrast that with how fast things are moving in DeFi. It’s permissionless innovation at its best and worst. We can barely even wrap our heads around OHM, but nobody needs permission to fork it into SPELL. Systemic refactors happen faster. [1]
When somebody in the future doesn’t like a piece of decentralized infrastructure, they can _literally_ fork all of it and just make their change. With fewer black-boxes, we share more intellectual property.
[0] https://www.fsf.org/blogs/community/201cthe-printer-story201...
This is assuming there is no value in regulatory arbitrage, which is wrong.
The value of this is proportional to the dysfunction of the existing system in any given country. In countries that impose currency exchange limitations or other authoritarian policies enforced through the financial system, cryptocurrency has more value.
You could capture that value by reforming the laws and governments in those countries, but that hasn't happened.
And one of the benefits of cryptocurrencies is encouraging those reforms. If you can't use the financial system to impose authoritarian policies because people will just use cryptocurrency instead, you might as well not try to use the financial system to impose authoritarian policies, at which point people can use the more efficient ordinary banking system instead of cryptocurrencies. But we're not there yet, are we?
One of the primary reasons for the rise of the complex system of interactions, as you put it, is trust. A lot of financial interactions require dealing with people who might not merely not have your best interests at heart but are literally in diametric opposition to your interests--several financial transactions are inherently zero-sum. So you need mechanisms that give you trust that your counterparty will actually honor their side of the transaction.
Code fundamentally does not provide trust--indeed, you might even say it is the antithesis of trust. Even accomplished software developers are frequently unable to write code that works in edge cases or even slightly abnormal operation. For regular users, code is as opaque as if it were written in Linear B. Indeed, to popular sentiment, software is often equated with a learned notion of bugginess--people tolerate the frequent mistakes of their computers far more than we would any other piece of equipment.
And the cryptocurrency community takes their misunderstanding of trust to new levels. I mean, we're being told by people like you that we shouldn't trust the government, but instead trust code [that the lay person can't and won't understand] written by people like the owners of Tether--people who have been convicted of stealing people's money and, in the history of their own company, lied about what they were doing.
As Matt Levine put it, only in the cryptocurrency industry is "we may be charlatans who will run off with all your money" literally something people feel necessary to put in their risk prospectus.
His column a couple weeks ago about the "main move" in finance (i.e. transmuting an amorphous pile of risk into tranches with radically different riskiness) and how this explains Tether was absolutely brilliant.
That's just one argument for Bitcoin, there are more. For example, it provides the opportunity to second/third world countries to break free from the IMF debt slavery.
This is a complete misunderstanding of the role of currency in a modern economy and the mandate of the federal reserve, which is to maintain a low, predictable rate of inflation to incentivize investment and maximize employment. Literally any asset will "save you" from the "relentless printing." That's the role of an asset, not a currency.
> That's just one argument for Bitcoin, there are more. For example, it provides the opportunity to second/third world countries to break free from the IMF debt slavery.
They're all basically debunked, but advocates trot them out and try and Gish gallop over any criticism.
> A store of value is an asset that maintains its value, rather than depreciating.
Value is just what others are willing to pay for something at a point in time. Literally nothing is guaranteed to maintain it's value, not even US Treasuries. So this is just circular logic saying "things that maintain value are value stores" and "if something that previously maintained it's value no longer does, then it is not a value store".
> Gold and other precious metals are good stores of value because their shelf lives are essentially perpetual.
Gold and other precious metals are terrible stores of value, their dollar values are incredibly volatile, they are incredibly expensive and risky to store and transact with, and contrary to popular belief, they really don't actually have much "intrinsic value". Let alone that "intrinsic value" is a nonsensical concept. "Intrinsic value" is meant to be understood roughly as "useful for some practical purpose", but valuations clearly often have nothing to do with their practical purposes. A stick or a basket can have very significant and diverse intrinsic values too, but that doesn't mean it has value. Likewise, some sticks and baskets might have very high values, despite actually not being very good sticks or baskets! (eg if they're antiques or archeological artifacts or whatever)
> A nation's currency must be a reasonable store of value for its economy to function smoothly.
Most central banks aim for 2% inflation per year, literally guaranteeing any amount to become worthless over time if stored in currency. (vs bonds or some other appreciating asset)
> intrinsically, Bitcoin is a negative-sum asset, a mechanism of redistributing real cold hard dollars from new participants to old entrants and miners.
Just what. Bitcoin is strictly positive sum under any sane definition. Unlike MLMs or pyramid schemes, Bitcoin never alleges to return anything other than Bitcoin.
> It creates nothing
Neither do currencies. They're just currencies. Their purpose is to be means of transacting things that are created, that otherwise wouldn't be created, if there was no means to transact. Bitcoin does that too. But in Bitcoin's case, it actually does create something: it creates the ledger of transactions itself, the wallets, the ability to sign things etc, which currencies don't.
> Systems built on top of it might, exploiting let's say regulatory arbitrage, facilitating crime or gambling, but intrinsically, it creates no value.
Even if you disagree with the valuation of Bitcoin and how inefficient the mining is (and I do), the realized idea of a distributed, tamper-proof ledger is useful, and thus has "intrinsic value" just like toilet paper or gold. (again, intrinsic value is a nonsensical concept, but under that logic, it does)
Just to be clear, my point was that the classical definition of a "store of value" isn't something that goes up exponentially and flails around wildly at the whims of folks trying to liquidate leveraged positions.
It's broadly regarded as something you can purchase and expect to get your money back. Not a ton more, not a ton less, roughly what you put in. I don't think there's a single world in which any cryptocurrency falls into that definition today. Might it? It could. I don't think it will. But that's speculation, what's not speculation is that it's not one today.
The "store of value" narrative was coopted once folks in the community realized it couldn't ever actually sustain more transactions than required by a small Costco.
> Gold and other precious metals are terrible stores of value, their dollar values are incredibly volatile...
They're dramatically less volatile than cryptocurrencies which does make them better suited, however I do not personally advocate for owning metals - for exactly the reasons you rightly describe.
> Most central banks aim for 2% inflation per year, literally guaranteeing any amount to become worthless over time if stored in currency. (vs bonds or some other appreciating asset)
Modern economies intentionally split long-term stores of value from short-term medium of exchange. Currencies are inflated slowly to incentivize investment, and to maximize employment along the Philips curve. This is the charter of the Federal Reserve and most other world central banks.
> Just what. Bitcoin is strictly positive sum under any sane definition. Unlike MLMs or pyramid schemes, Bitcoin never alleges to return anything other than Bitcoin.
It doesn't allege a return, however literally every frothing at the mouth holder of crypto will allege it for you, as they are incentivized to do. Bring in more people, you get wealthier. Sound familiar? It's a decentralized MLM. It's negative-sum because miners constantly extract $60 million dollars per day, $21B per year in block rewards. These are liquidated and cause negative price pressure, socializing what amounts to a $250 transaction fee. [1]
> Neither do currencies. They're just currencies.
Which is why they don't go up in value. You can't have it both ways :) dreadful currencies go up astronomically in value, because this creates a deflationary spiral. Dreadful currencies go down a ton in value because it doesn't offer you time to productively allocate. A good currency averages a low, predictable rate of inflation.
> ... tamper-proof ledger is useful, and thus has "intrinsic value" just like toilet paper or gold.
We have yet to find a single use for it. All you can do is look at your spreadsheet cell in a web browser, or get someone else to buy it from you. You can't do anything with it. At least you can turn gold into electronics, like bitcoin miners.
[1] https://www.ic.unicamp.br/~stolfi/bitcoin/2020-12-31-bitcoin...
Just because idiots abuse cryptos for baseless manias doesn't make the underlying technology or idea or thing bad, nor a pyramid scheme or an MLM. You could say the same thing about property, art, vintage cars, any number of things that are also not pyramid schemes or MLMs. Bitcoin is definitely experiencing baseless manias, but it's very clearly not a MLM or pyramid scheme.
> It's negative-sum because miners constantly extract $60 million dollars per day, $21B per year in block rewards. These are liquidated and cause negative price pressure, socializing what amounts to a $250 transaction fee.
Agree this is bad but that's an artifact of what people are doing with Bitcoin, not an inescapable fundamental quality of Bitcoin. Bitcoin can and for a long, long time used to run just fine on comparatively little energy and transaction costs measured in cents. More energy efficient protocols (and those exist now) can comfortably accommodate orders of magnitude more transactions than Bitcoin for orders of magnitude less energy. (I guess if you wanted to calculate in dollar terms the "intrinsic value" of Bitcoin, it would be the equipment and energy cost of running a comparable or better blockchain, which could possibly be what a couple of grand per year?)
> You can't have it both ways :)
I'm not making claims about whether Bitcoin (or any other crypto) is a currency, or a good currency. But they undeniably share in common with currencies that they are means of transacting (other) things that are created, that otherwise wouldn't be created, if there was no means to transact. (despite them being insanely deflationary) (and while their psuedonymous nature certainly makes them attractive for illicit transactions, it simply isn't true that they're "only" used for those)
> We have yet to find a single use for it
This just isn't true. It's not difficult to imagine how a distributed tamper proof ledger could be useful, or find actual practical uses of blockchains. I'll be the first to admit blockchains are overhyped and that they don't offer any meaningful advantages over existing tech in many, many of of the proposed use cases, but the legitimate uses cases do exist.
I'd love to see you address any of jstolfi's points directly!
> Agree this is bad but that's an artifact of what people are doing with Bitcoin, not an inescapable fundamental quality of Bitcoin. Bitcoin can and for a long, long time used to run just fine on comparatively little energy and transaction costs measured in cents.
It really can't. Its security is proportional to its wastefulness. It must always waste more than its opponents are willing to spend to destroy it meaning its waste must grow with its valuation. It's a proof of waste algorithm.
> I'm not making claims about whether Bitcoin (or any other crypto) is a currency, or a good currency.
I am making the claim its so utterly bad at being a currency pretending it's a currency is pointless and harmful to the discourse.
> This just isn't true. It's not difficult to imagine how a distributed tamper proof ledger could be useful, or find actual practical uses of blockchains.
It's been 14 years. There isn't a single use that isn't crime or regulatory arbitrage - or solving a problem crypto created for itself. The proof is in the pudding, and there's simply no pudding.
> ... but the legitimate uses cases do exist.
If you find one, and productize it, you will be the single wealthiest person alive. Elon better step aside.
The handle I'm responding to hasn't exactly provided "evidence" either, including for:
* the existence of nebulous things like "value stores", "intrinsic value" or what constitutes or possesses either
* that Bitcoin is a negative-sum asset, a MLM or a pyramid scheme
* that a distributed tamper proof ledger doesn't have any usefulness for any practical purpose
which is fine by me, we're all just here to kill time between builds and deploys anyway :P but if you think evidence is required knock yourself out and prove some for any of the above
So you replaced "shareholders" with "developers of cryptocurrencies/beneficiaries of the development fund".
Does a rose, by any other name, not smell as sweet? I mean, from the case you're making, these v3 protocols seem more like securities.
Stablecoins sound exactly like banks. Which means AML/KYC/Reserves on the horizon.
The entire cryptocurrency space recreated the current financial system, rooked in a new generation of suckers (and some old one's that should have known better), did everything current financial product regulations were put in place to prevent, made it as energy inefficient as humanly possible in the case of PoW, but it isn't all that cause it's called something different.
My distinction without a difference alarm is ringing itself off the wall at the moment.
I'd encourage you to broaden your understanding of the purpose of PoW and specifically the energy used. The energy used is the cost of securing a PoW blockchain--quite literally, the cost of the energy used is what makes it difficult to mount a successful attack. It is simple and universally accessible. It is not "inefficient"; it is functioning exactly as intended.
What I think you are really trying to say is that you think the benefits provided by a PoW blockchain do not merit the economic expense of securely maintaining it. And that's a fine opinion to have. But the only reason you pay attention to the electricity cost is because it is highly visible--you probably have no clue how much electricity is consumed by all the other economic activities that you may consider pointless or wasteful.
There may be some Bitcoiners who think it should be used for all payments, but I’m not one of them. Centralized payment processors will always be more efficient, especially for the massive flow of low-value casual transactions that the average consumer produces.
If I borrow a Bitcoin what makes you think that I can repay the Bitcoin after it grew 10x in value? Who is doing 10x the work? (10x more productive)
That would make Bitcoin a very good store of value. However, to benefit from the "store of value" property you have to, you know, actually store the bitcoin yourself, not sell it now and try to buy it back later…
The difference is that if you shut down gold mining, existing gold would still retain all its value. If you were unable to protect your gold reserves, they still retain all their value. If you shut down Bitcoin mining it's immediately worth nothing. In fact if you reduce your energy expenditure below some unspecified threshold it becomes utterly worthless. Mining gold consumes resources, but once extracted it does not. I would consider it to be zero-sum, as compared to the negative-sum nature of Bitcoin.
I would argue if institutional demand and even jewelry demand for gold fell, it would still be a fairly valuable commodity, and its use in electronics would likely expand substantially as it became less expensive. Connectors, switches, wires, PCB contact plating. All big demand drivers, and gold is better than the status quo - just too expensive at the moment.
I am not sure I understand the negative sum game you mention. The first payment miners get is (I don't know the proper name) a bounty, which is equivalent to a gold miner obtaining gold. This can be seen as a built-in inflation, which not only gold but also any fiat currency has. The difference is there is no known limit on this inflation factor for gold or fiat currencies. For gold we assume some gargantuan deposit will not be found and that it will maintain its scarcity. I don't think anyone thinks there is an inflation limit for the US dollar or any other fiat currency. Bitcoin has a known amount limit. (As a disclosure, I own gold, bitcoin, and US dollars.)
The other part of what miners make is a transaction payment. That exists in every other payment system I assume, except I guess physically handing an object to another person, which covers a pretty small fraction of transactions.
Now to be sure there are some customers of the bitcoin system, using bitcoin as an intermediary to move money across borders or purchase from certain online marketplaces, and those customers are paying some amount of money into the system to use bitcoin for this purpose (analogous to the 2% that VISA skims off the top when you use your card to buy something on Amazon), but the majority of the money flowing in to balance that $20B outflow is from investors buying in. Unless you think bitcoin has managed to capture something in the order of $20B/year in transaction fees from the likes of Western Union, AMEX and Paypal, what's mostly happening is money being funnelled from investors taken as a whole to the the supplier industries that bitcoin relies on.
I'm taking about examples like when someone uses bitcoin to transfer money, by converting an external currency into bitcoin, sending the bitcoin somewhere then converting it back into an external currency. Whatever loss of value they see from that overall transaction has been transferred into the bitcoin system as a whole.
Except that it is impossible ever shut down Bitcoin mining at once(). It might be more similar to gold than what you think.
There are too many incentives to keep it up. The holders want value to be kept, the miners have vested interest in the system to continue to work. If you shut down, say, half the miners, this will create opportunity to other miners to invest and expand. If it drops too much, people inject money into the system, which gives liquidity to the miners again, that can continue to trade their work for goods and services with Bitcoin or by trading Bitcoin for fiat.
It is very similar to Visa, Mastercard, Stripe, Square and other centralized systems. The fees you pay for transactions keep the centralized finance business working and profitable as well as they invest back in software and hardware. For miners the Bitcoin fees, based on Bitcoin price, keep their systems profitable too. Not to mention some mining companies started to get listed on the stock market too.
(): Yes, you can shut down Bitcoin eventually, bugs, attacks, etc., but those have been tried and not very relevant to my point.
For those unfamiliar, Beanie Babies were a collectible toy that had a multi-year fad in the 1990s, with 5-dollar toys trading for thousands: https://www.ft.com/content/1563d643-332f-3887-8c6e-caf7435f3...
It's true that the Beanie Baby market never totally went away. And I'm sure that some die-hards will keep Bitcoin going for decades after it ceases to be practically relevant. But however much the bubble incentives keep major players aligned during the bubble, that doesn't mean the prices will stay up forever.
I wonder if we'll see things like that in the NFT market.
This is not really true--it's not like lowering the security budget means all the old blocks can be rewritten at will. Roughly speaking, the cost of rewriting a block is the cumulative PoW cost of that block and all the blocks after it, although this amount typically decreases over time as better mining equipment lowers the present cost of hashrate.
For current transactions, if the security budget relative to the transacted value gets low, all it means is that one must wait longer to achieve the same level of confidence in transaction finality. It doesn't abruptly render the currency "utterly worthless".
This ended in 1971, when the Bretton Woods agreement of exchange rates broke down and Nixon took the US dollar off the gold standard and in 1975 we were allowed to buy gold again.
Are you under the impression that Bitcoin is a company? This analogy really doesn't make sense from any angle, even being extremely charitable, so it's hard to address.
Starbucks cards are akin to pre-selling coffee tokens. Each time Starbucks redeems these coffee tokens for coffee, they collect a portion of the transaction just as miners do. And just as miners do, they pass on the majority to their suppliers and employees. Just as in the Bitcoin example, the fact Starbucks is selling tons of coffee, collecting a lot of transaction fees, doesn't mean that the Starbucks cards themselves become more valuable. Starbucks Inc, and Starbucks shares do, and that value accrues to their shareholders.
I hope that clarifies my thoughts. Open to being wrong about this framing.
You pay a fee for each transaction you send, just like any other service. b
However, your holdings increase in value the more other people use the same chain because the value of the entire ecosystem needs to scale proportionally to the value people are attempting to transact across it.
Financial systems, like social networks, and most businesses coming out of SV rely on network effects for much of their value.
USD has been the default option for the world, and enforced through violence when people attempt to create their own networks of trade.
The positive sum value that cryptocurrency is attempting to create is the ability to send anyone in the world any amount of value (money or otherwise) not subject to government permission, or sabotage (ie money printing)
It's like any one being able to suggest a Federal Reserve policy, and the vote being handled by the people, not representatives or a committee.
It is revolutionarily democratic.
Hah! Of course, who can forget how US paratroopers abruptly ended the attempted creation of the Euro shortly before its intended launch in 1999. Or the way the US Seventh Fleet blockaded China's commercial ports starting in 2002, preventing their rise as a commercial power. We can only wonder what a world with multilateral economic power might look like.
It's ok to disagree without resorting to arguments like these, they just poison the discussion.
There is no societal benefit to buying, holding, selling a crypto currency.
The thing that could provide societal value is smart contracts - but that has nothing to do with crypto. Visa (or Stripe) could implement smart contracts in javascript on top of their platform and society gets pretty much all of the benefits without needing any of the crypto.
If adopted as an actual currency it would immediately lead to a deflationary spiral savaging the job market. [2] Even the dictator of El Salvador wasn't nuts enough to adopt it as an actual currency. All pricing continues to be in USD and exchanged for BTC at the point of sale - and the point of a gun. (Keep in mind legal tender laws in ES require everyone to accept your Bitcoin for purchases or you face criminal charges).
To call it wholly unfit for any purpose except exchanging for black tar heroin would be an understatement.
[1] https://digiconomist.net/bitcoin-energy-consumption
[2] https://www.investopedia.com/terms/d/deflationary-spiral.asp
(3 tx/sec = 3 tx/sec * 31m sec/a = 100m tx/a = 10bn tx/100a, so the network supports 10 bn transactions in about 100 years, and there are about 10bn people on earth, each living around 100 years.)
That, and the quadratic routing complexity.
[0] https://bitinfocharts.com/comparison/bitcoin-median_transact...
No, that's nothing like a transaction fee. The person submitting transactions to the network doesn't pay the seigniorage for minting new bitcoins. There is inflation due to the mining rewards (currently less than 2% annually, and set to decrease over time) which places some slight downward pressure on prices. That inflation is a cost for those holding bitcoin, not those spending it—not that anyone would notice it given the way the price has appreciated.
And fewer than 50% of Thoroughbred horses ever win a single race. This is a silly clickbaity statistic and you know it. Come on, you're better than this arcticbull ;-)
Step right up to Horsecoin, fastest horse gets the block!
All the feed stores in my area have locked up the paste and I have only the toxic to ingest orally pour on cattle versions readily attainable.
You can get by with rubbing it on the fatty areas of your body but dosing it is hit and miss.
Anyhow back to the guys in India, they would only take pay pal and the demand was so high, I had to pay an extra thirty five dollars just for pay pal processing. Crazy times...
Anyhow, I hope the mods don't burn this post. What if ivm is the real deal and I need it to save my life because my country with free health care can't fund any other kind of useful early treatment? It costs about two thousand from what I've read and there's no way they can print more money to cover this for the masses.
I'm not trying to get around vaccines even though the first one I took clotted on me and almost killed me. You should see my face right now, there's a huge scar on my forehead where my plastic surgeon ripped out a hardened clot from a vein in there last week. I'm just looking for early treatments for all of the people's no matter the vax status.
Pay pal will almost certainly shut this company off in India when they find out what he's doing. Horse coin will be the only way after that.
That ship sailed (multiple times) during the block size debacle for bitcoin, and there isn't nearly enough adoption with other cryptos to make them a useful payment system (aside from Monero if you're doing illegal activities)
If you live a country where the govt mismanages the economy and drop the value of the nation's currency then in that case BTC has a lot of value.
They'd be infinitely better off with like USDC or better yet, a USD issued CBDC.
Money transfer services do convey money from one person to another, and along the way they may provide additional services. But the focus there is on the service provided. I don't just put money into my American Express card in hopes that I somehow get more money back later; their job is to give money to merchants I patronize while protecting us both from certain problems and risks.
What I'm talking to is more along the lines of poker games and Ponzi schemes, both of which "just move money around" in the sense that no more money comes out than goes in, even though certain individuals may do better than others.
Buying a cryptocurrency as an "investment" is much more like the latter than the former.
People make the fundamental mistake thinking these things are investments, they aren't, it's just currency or forex speculation that we are doing here.
This is one of the things I find hilarious about cryptocurrency discussions. When I point out it isn't a good asset, people argue it's really a currency. When I point out it's a bad currency, people argue it's an asset. I'd love it if you all could get together and agree on what it's supposed to be good for and just leave the rest of us out of it.
But addressing your point directly, it's bad as a currency. It was launched in 2009 as e-cash, and for a while people argued it was going to be a great medium of exchange. Now, more than a decade later, Bitcoin is doing what, 100m transactions per year? Most of which are not real economic transactions for goods and services. Venmo, which started around the same time, does over 2 billion. M-Pesa, a "digital money" solution the same age does 15 billion. US credit transactions? 45 billion. Debit? 75 billion per year. And unlike Bitcoin, most of those are what people would call real transactions. Bitcoin's real use as a currency/payment system is a rounding error.
Anyhow, as others point out, actual major currencies are backed by very sophisticated organizations dedicated to maintaining the value of those currencies. Which are in turned supervised by national governments, most of which are democratically elected.
For Bitcoin, at best you have a set of shadowy organizations manipulating the market to their own advantage. E.g., reasonable people suspect that Tether is behind quite a bit of Bitcoin price appreciation. They have been proven to be liars about what they're doing and how much money they have. This is great for creating hype and volatility, but it's very much not what you want in an actual currency.
And merchant adoption actually declined heavily for Bitcoin. It had a period where many online merchants and some offline merchants tried it out. Everybody gave up on that because it is not a good currency. That's when prominent advocates pivoted to "store of value" (which it is also bad at). For example: https://avc.com/2017/08/store-of-value-vs-payment-system/
The whole "but look at the fuuuuuuuuuuture" routine was plausible early on. But at this point there's nothing but wishful thinking to suggest that there will be a radical change. Whatever it is, Bitcoin is what it is.
You could argue that BTC is backed by one of the most powerful networks of computing power on the planet. I don't think that's better than what the USD has, but it isn't 'Nothing'. The fact it can't be debased as easily as fiat currencies is not a tangible thing but it does compel interest in it.
> The fact it can't be debased as easily as fiat currencies is not a tangible thing but it does compel interest in it.
That is not a benefit to a currency, quite the opposite. A deflationary currency would likely lead to a deflationary spiral, savaging the job market [1]
It also leads to a monetary system that cannot adjust to a changing population or to transient issues such as COVID. If BTC were the currency of record in 2020, the economy would likely have been utterly devastated.
[1] https://www.investopedia.com/terms/d/deflationary-spiral.asp
Let's just wait I'm sure OP will deliver even a single one that isn't crime, regulatory capture or gambling.
> Not having a central authority is interesting and appealing to many.
Lots of counterproductive things are appealing to lots of people. Rolling coal is appealing to lots of people. Not getting vaccines is appealing to lots of people. That doesn't mean the benefits outweigh the costs socially, and it doesn't mean that it should be legal.
> Deflationary by nature makes it an excellent store of value.
And that makes it an awful currency. The fact it's a negative-sum MLM which creates no value whatsoever while creating the illusion of wealth is what makes it an awful asset. There's nothing left.
I’ll bite. Donating to a Ukrainian twitch streamer. PayPal doesn’t allow it, every other option requires entering your credit card details on potentially shady sites.
Caveats: This was a few years ago, not sure what the situation is now; Current BTC tx fees make that rather expensive (which may or may not be alleviated by lightning or a cheaper to send crypto).
What about Xi in China with their real life social credit system built by exactly who? Should that regime be trusted with that much control over that much humanity?
And that huge computing power is employed to basically solve Sudokus whose difficulty is adjusted to burn as much energy as is put into it (which unscrupulous people will do as long as that energy is still cheaper than the mining rewards).
However, most of the ability of the United States to execute such power is centralized in Washington D.C. and New England. Centralization brings immense efficiency, but also vulnerability. Those geographic regions are a potential target that takes a lot of energy to defend. Why do you think the 9/11 terrorists chose New York and D.C.?
Meanwhile, China just fully outlawed cryptocurrency and mining, and it was a minor hiccup in the network. Bitcoin's hash rate as already recovered. The price has doubled. It's stronger than it's ever been.
That's what makes bitcoin such a potentially powerful store of value. It's security mechanism is incredibly anti-fragile. There's no throat anyone can choke. It's also globally available and permissionless, so it accepts everyone and anyone without judgement. These traits are powerful, in a different way than the power that backs the USD.
That's why bitcoin matters.
That has nothing to do with the currency. I'm not saying its good, or bad, I'm saying you've stapled together two unrelated concepts.
The US army is a small fraction of GDP and exists to support the defense of the US as a nation, and to further its interests abroad. That will remain the case whether the currency is fiat, gold, BTC or shoelaces. Unless you think that the army will be disbanded because BTC is going to make Xi Jinping come to the table with Tsai Ing-Wen over Baijiu and apologize, that the Sudanese are going to lay down their arms, Kim Jong-un is going to find Jesus and so on. However that's completely unfounded.
The US army predates the fiat dollar by two hundred years. World wars were fought on the gold standard.
Further, the backing of dollars is only in limited part due to "the army" - fractional reserve lending means that each time supply is added, demand for that supply is also created as the loan issued must be repaid with those same dollars. This is what actually fully backs the dollar.
It's also why countries that use the USD, like El Salvador, have their own armies. And why some countries that use fiat dollars don't have armies at all, like Japan and Iceland. There is no causative relationship between fiat money and armies. There is a causative relationship between the existence of militaristic states and armies. There are hundreds of years of proof that the backing of the currency has little or no bearing.
This theory is a pile of misconceptions stacked on top of each other.
You can't ignore this cost. Maybe the US would cut military spending, maybe not, but as long as it wants USD to be the coin of the realm, there's no choice in the matter.
(1) Domestically, the US Army does not enforce law or make sure the dollar is the "coin of the realm." That would violate Posse Comitatus act. US domestic law enforcement enforces laws, domestically - including legal tender laws. I agree you can apportion some of the strength of the US dollar to its legal system, which makes sense, as the currency is an emergent property of the state. However, shifting to BTC instead of USD will simply reallocate the expenditure not reduce or remove.
Counterfeiting is an issue broadly. A small one. Of course, the expense of a Bitcoin transaction (literally 60 days of power for an average US household and 1 iPad of e-waste) far, far, far outweighs the expenditure of the secret service whose job it is to act on counterfeiting. AML and KYC rules, and a counterfeit detection pen will prevent this fake money from turning into a digital representation.
The army isn't generally called in to stop counterfeiting because nation-states have basically zero incentive to counterfeit on a large scale. What good are a few fake paper bills, when the Treasury would just cut you off from the entire world financial system?
(2) How do you explain that countries that do not have armies at all, like Iceland, are able to issue their own fiat currency with value?
(3) If you cannot draw a direct line between switching the currency and reduction in military spending, does it really make sense to apportion value that way?
Imagine for a moment the world suddenly adopted the Nicaraguan Córdoba as the common reserve currency. How long before it gets printed everywhere? Who is going to stop it? And how far do you think Nicaragua's AML/KYC regime would actually reach?
Iceland's currency wouldn't work as a world reserve either, for pretty much the same reasons. You can get away with being small and isolationist if your currency isn't that important.
Make no mistake, "cut off from the entire world financial system" requires the threat of violence. Banks get fined, countries get sanctioned, warrants are issued for people that have never set foot in the US. I don't know exactly how to apportion the cost of that enforcement, but I know you can't ignore it.
[citation needed]
> Imagine for a moment the world suddenly adopted the Nicaraguan Córdoba as the common reserve currency. How long before it gets printed everywhere? Who is going to stop it? And how far do you think Nicaragua's AML/KYC regime would actually reach?
Why would any state on earth illegally print Nicaraguan money when they can instead print their own legally? What's the goal? Is this really the easiest path to achieve that goal?
> Make no mistake, "cut off from the entire world financial system" requires the threat of violence.
It really doesn't. In this case the carrot is way bigger than the stick.
Please tell me, what stops North Korea (or Iran, or any other US-hostile nation) from printing as many USD as it likes? Don't tell me "risk of being cut off from the US financial system"; they already are. Furthermore, NK already tries:
https://www.google.com/search?q=north+korea+counterfeit
> Why would any state on earth illegally print Nicaraguan money when they can instead print their own legally? What's the goal? Is this really the easiest path to achieve that goal?
You seem to have just asked "Why would any state on earth illegally print the world reserve currency when they can instead print their own legally?" That seems pretty self-evident, but you can look to Venezuela or Zimbabwe for answers.
This excess low cost energy that can't be moved easily to other areas is often the only kind of energy bitcoin can use to win the economics of btc mining. It in fact subsidizes a lot of green energy and makes it more viable in the longer term.
Is a decentralized, public ledger not a good people will pay (via cryptocurrency) to consume?
So, there is some price people will pay in order to be able to demonstrate in the future that some data existed at or before a given time.
A decentralized ledger also provides this purpose.
Of course, at current transaction fees on most blockchains, it would be wasting quite a bit of money to make a transaction just to timestamp a single thing.
This is why there are services (one of which, iirc, has gotten a, uh, endowment(?) in order to provide the service for free?) which collect large quantities of (hashes of) data that people want to establish existed before a given time, and produce a Merkle tree of all of that, so that all those people can demonstrate that their data existed before a given time.
So, that's one useful service.
Is it enough to justify all the stuff that goes into blockchain stuff? That's a different question.
But, if the question is "Do they have any genuine use?", the answer is "yes." .
[1] https://bitinfocharts.com/comparison/bitcoin-confirmationtim...
I have at least slightly more trust in the bitcoin blockchain not having the times be falsified in a major way than I do for any of the centralized timestamping services where you are trusting the security of those companies' timestamping servers.
The reason why I say "slightly more" is because I do have a pretty large amount of trust in those timestamping sources.
Bringing up the coal-powered is irrelevant to my point, which is not about whether it is worth it, but whether it has any uses.
Indeed, I was being glib. Apologies if it was out of place, was meant more for a smile than relevance.
I'm no Crypto fan, but this is wrong.
Plenty of new coins get minted which are redeemed for real money. This is basically the credit creation cycle[1] as seen in traditional banking (where banks create money by lending the same deposit out multiple times simultaneously) except in this case there is often no equivalent of a deposit (except sort-of staking in some cases).
[1] https://www.economicsnetwork.ac.uk/archive/starkey_banking
Have you considered that you may simply be failing to comprehend the meaning?
In particular, "monetization" literally means "the process of turning into money" - one of several more specific meanings, which should be clear from context, is the conversion of a non-monetized asset with sufficient monetary properties into a monetized asset. A monetized asset (not monetary - that term is too overloaded, although "monetized" isn't much better) is precisely an asset which has a higher value than would be predicted from its expected revenues, commodity consumption value, etc.
If people are concerned about currency devaluation, where do they put their money? Whatever set of assets people turn to (equities, commodities, whatever) will be subject to additional demand purely qua wealth storage, pushing up the price of those assets beyond what you would expect from a pure discounted cash flow model - i.e. they become monetized (begin to function as money, in addition to whatever asset class one might naively assign them to).
So, with that in mind, let's address:
> Real estate and oil are not money and therefore cannot be demonetized
If people are using real estate, oil, (gold, equities, ...) as a place to stash their wealth to protect it from inflation or whatever, and all of a sudden there's a better option available for this purpose, demand for random "not money" assets qua money is going to drop, and they will cease to behave like money - demonetization.
Let us imagine instead that you want to invest in Burger King. You buy some shares in Restaurant Brands International (QSR). When you own those shares, what does that actually mean - how is that connected to the purchase of burgers?
I think share ownership is often a better metaphor for many cryptocurrencies than fiat currency. Especially when considering shares like Tesla, Hertz, or GameStop.
Where does the value of a share come from? Can a company steal all your money? What actually records your share ownership? How are profits calculated, and how do you get them?
But if you buy a Bitcoin, you own no productive asset and therefore are entitled to no profits. At one point the theory was you could trade it for something useful, like other currencies. But it's a pretty bad currency, so people mostly have stopped pretending it is useful for that.
There are answers to the rest of your questions, which are complicated and depend on exchange and jurisdiction, but people can look up the details if they want.
I mean, just think about how hard the Enron execs had to work to defraud their investors! They had to come up with a novel scheme to hide losses, collude with their accountants to avoid detection, and some of them even had to spend some time in prison. Yesterday, I read about an NFT scam where the anonymous developer just transferred funds to his personal wallet and then disappeared.
Even a small cash out will cut the value to pieces.
Sure: securities can go up, or down, in price almost arbitrarily. But they largely can't go below zero (aka: bankruptcy law protects against that), and they can't really go below the expected profits of the company (because shareholders are entitled to those profits. Worst-comes-to-worst, the shareholders can demand dividends and cash out through those means)
A lot of companies are 20x or 30x, or more of their expected profits (representing maybe 20 years of profits is roughly the fair price for a typical company's stock price). There are exceptions, especially in growth stage companies (where "profits" is now "expected profits" of the far future: the shareholders believe the company is onto a good idea and are willing to pay more on the hopes that the company becomes very large in the future).
Either expectations of future income, or present circumstances.
Stocks are also used like a currency in mergers which seems odd but is practical in some circumstances.
Stocks and currency can both become most valuable as TP or wall paper.
The wilds swings in exchange rate is typical of any new currency, even the USD in its early years.
Did the stock market value drop by 50% in the past couple of weeks?
Because BTC has doubled. If you're saying "BTC's price is the fundamental measure" of our economy, then it means we're in a horribly deflationary spiral right now.
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Alternatively, it means that BTC is in a bubble and maybe we can't price things in terms of BTC, because BTC is a horribly volatile asset that almost has no rhyme or reason behind its price movements.
But if the stock ever crashed to say: the value of the expected dividend... it would make more sense to pay out the dividend rather than invest.
Lets say a company's stock price is $40, and they make $2 per stock of profit one year. They can give out the dividend... or... they can reinvest the money into the company (and theoretically: if the stock market reacts correctly, it would raise the price of the stock to $42).
In contrast: if the stock market fails to react like this, eventually the company will be say: $2 per share. They'll still be making $2 in profits each year however (assuming the fundamentals haven't changed). At this point, it makes sense to pay out a dividend of $2, if their stock price doesn't react.
After all: might as well double your money each year at that point. (Take those $2 dividend, then double your number of shares in the company, then receive double the money next year).
https://www.marketwatch.com/story/companies-on-pace-to-penci...
If I paid $50000 for a cowry shell and said the market cap of cowry shells is more than MasterCard then there's a few problems...
Tether is a real risk, I agree.
> Everything real has been exfiltrated through electricity bills, taxes and early adopters selling, the entire crypto economy is a hollow shell, leveraged on retail deposits.
Yeah, but that's not untrue for banks. Conceptually, a bank's job is to store money for depositors. That has a real cost, so theoretically you should have to pay for banking service. We know that banks make that money back from lending the money with interest (profiting off interest). This lending behavior is theoretically possible for individuals to do while skipping banks, but it is not practical at scale. So, basically depositors "pay" with opportunity cost - and since the world fiat currencies have inflation, this is essentially paying the devalued difference of money.
Crypto is similar... it costs real money to maintain the deposits - aka POW to secure the ledger. Instead of lenders' interest paying the cost, it is paid by deflation by depositor by more currency being circulated. Not too different than fiat-at-banks.
Crypto also is potentially more egalitarian since anyone can mine (at a small scale at least) to potentially make some small income, and certain complex financial actions can be done for "free-ish" in contracts (conditional swaps/lending, escrow, multi-sig transactions).
DAI didn't collapse because the drop in Ethereum value wasn't sudden. As the price falls, bots are allowed to liquidate your debt and keep the overall collateral ratio healthy.
So, a conservatively managed Maker CDP's regularly are collateralized to the tune of 300% if not more.
It'll have to collapse on exchanges with more sellers than buyers, and to determine how that happens you need to actually understand what specific mechanism underlies how the peg is maintained.
I suspect Tether is all crypto-backed debt issuance which is denominated in real $USD which gives the counterparty incentive to maintain the peg on exchanges.
It'll likely fall apart when crypto falls apart and exchanges have already failed and those counterparties have already gone broke. Tether imploding will probably come after crypto is in the middle of a collapse and be more of a symptom and an accelerant. I doubt that Tether detonating will be the first sign of trouble.
I think it's worth distinguishing here between Tether the company and Tether the coin. Tether the company isn't automatically destroyed by a net outflow for the reasons you mention, but if they are indeed not fully backed, a net outflow could certainly break the peg and kill the coin as we know it.
Assuming a power distribution of coins across accounts, it's likely that 99% of tether accounts don't meet the 100,000 $USDT threshold to cash out. If you have a coin, where 99% of people/accounts aren't allowed to cash out that reeks of scam.
You can come up with tons of smoke to disguise it, and the whole "well you have to sell on another exchange, but prices there will be propped up due to 'arbitrage'" disguises and delays things nicely. But fundamentally it is propped up because people can't get out directly. There is no fair price discovery right now on Tether w.r.t. USD.
And yes, the fact you can't cash out directly shows that it is a scam, yet counterparties are willing to continue to do business with them. That again suggests that the mechanism isn't that simplistic.
And I don't doubt that Tether will collapse very quickly, but I don't think Tether is the det cord that sets off the collapse. Tether is the ricketty-ass foundation that causes the entire building to slide over and take out multiple downtown city blocks of collateral damage. The det cord is going to simply be a bubble followed by a panic collapse in the price. The blasting charges that then go off will be a bunch of major exchanges and counterparties to Tether going under. Then Tether implodes as a mechanism for the contagion to spread and wipe out pretty much everyone else.
If DAI price ever loses peg and goes to eg 0.90 anyone with open positions immediately starts buying a shitton of them and closing their position, because they just got a 10% discount on paying off their debt, sending the peg back.
If the price ever goes to 1.10, anyone with free capital around immediately starts minting new coins and floods the market with them, because they just got an instant 10% bump on the size of minted capital, sending the peg back.
If it starts falling to $.99 then $.98 then $.95 then $.90.. you have to decide if it’s really a dip or the end.
Well, there was a recession just last year and the stock market / BTC market went crazy.
The real question is what happens in the next market downturn (specifically the cryptocoin market downturn, since these "stablecoins" look like they're "stable" only because of assumptions underlying the cryptocoin markets). The cryptocoin markets don't necessarily match up with the general economy.
Ultimately this is because central banks are in the driver's seat for asset prices these days. It's been trending that way since the Greenspan Put in the 90's. The economic fundamentals matter, but not as much as the monetary policy backdrop; after all, if there's more cash chasing the same number of shares, it can't help but drive up stock prices. Similarly, low borrowing rates reduce the equity risk premium, drive up growth valuations, etc.
So really, the real test for crypto is when the monetary policy regime shifts. But to be honest with you, I don't see that happening. Maybe inflation finally forces the issue -- but then there's the fact that inflation will drive flight to alternative assets anyway.
Probably because the govt/Fed is printing more money.
It's happened a few times before and they're fine
>Dai is a stablecoin cryptocurrency which aims to keep its value as close to one United States dollar (USD) as possible through an automated system of smart contracts on the Ethereum blockchain. [...] Dai is created from an overcollateralized loan[.]
https://support.gemini.com/hc/en-us/articles/360056367771-Ar...
I.e. if someone mints 100 dai with 150 worth of ETH and the price of ETH drops then anyone can acquire dai and use that dai to access the collateral.
Through that mechanism the supply of dai should contract not the spot price. The bigger worry is that they allow minting Dai from USDC which could freeze their assets
The reality is that crypto is not essential—it’s convenient and has potential but it’s value is backed by what? Other financial assets are backed by stuff like voting rights in a company or a physical asset.
Hence: people will dump crypto first.
I suppose Ethereum is different because it is backed by the functionality provided by the distributed Turing machine and all applications which rely on that. So the folks who wouldn’t pull their money out would be product owners who rely on the blockchain as a revenue stream.
My question would be who holds the price up high? Institutions or the broader public holdings of ETH?
Oxygen, heat, water, food. In that order. At least crypto is 'backed' by math. I expect the currency to dump will be related to who, and not what, is backing each asset class.
IMO, the basket is too heavily weighted towards centralized stablecoins like USDC. I rotated some of my MKR holdings to Terra/Luna, which may have a better peg mechanism (although it is similar to Titan, which exploded).
Me too!
Djed doesn't seem to be vulnerable to the former. (Reserve coin holders transparently give up liquidity for their yield. Though, as the paper admits, reserve coin holders are subject to run mechanics.) It would be to the latter.
Still, fascinating stuff.
I worry there target release date of 2042 seems extremely aggressive for them based on past performance and some of there research might not be relevant by the time it comes out.
A massive inflow of capital to crypto, bitcoin in particular.
They may have their own issues, but the certainly don't have Iron's
Many so-called "gold bugs" and "Austrian School economists" predicted the transition to a non-convertible dollar would surely lead to monetary and economic disaster... but so far, they've been wrong: Things have actually worked remarkably well for half a century.
Could Bitfinex pull off something like that? I'm not sure, but I wouldn't rule it out 100%.
[a] https://www.federalreservehistory.org/essays/gold-convertibi...
I kind of preferred the algorithmix approach !
What you want is a thick equity cushion.
Dai is now backed by a lot more tokens than just Ether, and 150% is really the minimum to avoid liquidation (145% now).
OP doesn't realize that DAI has sailed through falls in ETH value of far more than 50% (I think the worst was over 90% in 2018)
OP, despite his obvious great intelligence, doesn't realize that another, stronger question about DAI would be the potentially-worrying linkage to USDC etc to provide stability (though critics should note that even before that stability module, PSM, was introduced it had never deviated by more than 1%, AFAIK)
Seeing that this is, despite all those errors and omissions, the top comment here, is extremely dispiriting
Can Tether survive a net outflow? Probably not. They don't have the collateral.
Dai is really a derivative of Etherium. Dai is backed by Etherium at 150%. So value in Dai is at risk if the price of Etherium drops more than 1/3. Etherium dropped by half back in May 2021, but recovered. DAI could have crashed at that time if it faced a net outflow. It didn't, though.
The real question is what happens in the next recession.