There's another option in the traditional world that also makes sense in the crypto-world:
People typically borrow shares of companies so they can sell them short. When the loan comes due, they 'cover' their short by buying the stock again. (So in some sense, the share that you give back is not the share you borrowed in the first place.) If the share drop in value between the sale and the covering buy by more than the borrowing costs, the short seller makes money.
Taking a crypto-loan would be one way to short-sell a specific crypto-currency.
Those crazy interest rates you mention are relatively normal for hard-to-borrow stocks with a lot of short interest.
Shorting stock is perfectly legitimate, and the proceeds from the short-sale usually sit with your broker as collateral for the borrow. In that sense, they don't go into 'economic activities which are expected (hoped?) to bear fruit to repay the loan'.
In practice, I suspect that most crypto-loans are not for short-selling purposes, but closer to what you suggest.
> The music has got to stop at some point.
Funny thing is, heavy short selling is one way for the music to stop earlier. And short selling needs exactly the kind of borrowing we decry here.
(Just to be perfectly clear: short selling by itself doesn't cause a collapse in value; Tesla hasn't collapsed after all. But short selling is a way for people who predict a drop in value to profit when their prediction comes true. Thus incentivising to add their information into the market price.)
In the real world, over-supply of lendable funds would drive rates down.
So long as the exchanges keeps trading, those that dumped will consider them selves lucky to have sold at perceived local maximums and they will plow back into crypto. Until the religiously obsessive view of crypto ceases to dominate the mainstream the cycle will continue because it is fundamentally scarce. Buy the dip, hodl, “if you bought at every one of the last peaks you are still up…” — these ideas are religiously held and they are potent.
SBF & Co. are about to be first.
But in its current form it seems to do way more harm than good. Aside from the troublesome regulatory issues, pure scams and lacking capabilities to counter financial crimes, the environmental impact is catastrophic. And I don't see Proof of Stake really changing that.
And don't get me started on NFTs and "DeFi". Nothing is decentralized when players like Alchemy effectively centralize access to the Ethereum blockchain and everyone and their mother uses them to build some scam apps.
The environmental impact of Proof of Stake is pretty small, the chain in question here is probably less wasteful electricity-wise than many of the companies people on HN work at.
You can rewrite the chain easier than with PoW, but it is plenty hard - requires a majority to precommit to a secret fork. Safe enough for many purposes at a fraction of the cost.
Only with PoS, there's no way to judge which fork is the "right" one. In PoW, miners vote with their finite hashpower. There's no practical limit to how many hard forks a PoS system can sustain because they don't rely on anything that's actually scarce.
Imagine the USD was suddenly split into two incompatible and free-floating currencies, with the US House of Representatives saying one currency is the official one and the US Senate claiming the other. It would be chaos.
As things stand POW chains have traded massive inefficiency for decentralization. I doubt this can stand long term if we wish to address climate change. Crypto already has a higher energy use than many countries.
> [...] especially when carbon costs are priced in.
You misunderstand the economics of proof-of-work. Perhaps we should call it 'proof-of-waste'. Basically, in something like bitcoin proof-of-work functions a bit like an auction: the total amount of resources wasted on mining tends to equal the total amount of mining rewards.
For simplicity, assume mining rewards are fixed.
If hashing becomes cheaper, (eg first because of GPU miners, later because of ASICs), the hash rate will go up, but the total amount of resources wasted on mining will stay the same.
If hashing becomes more expensive (eg because of a universal carbon tax), the hash rate will go down, but the total amount miners spend on mining stays the same.
Arguably, that's exactly how a carbon tax is supposed to work in the best case.
Of course, there will be plenty of incentives to avoid the carbon tax. Both by mining with clean power (good!) and by mining in places that don't implement the carbon tax (less good!).
half agree with that. PoW is the most efficient method of converting raw energy into a digitally secure token. It would be much better if the work done was actually useful beyond that.
Some attempts have been done in the past, but with low success (Riecoin IIRC uses cpus to find sequences of primes, GridCoin used BOINC for the PoW, proof-of-boinc in that case).
There is still work to be done on EVM chains. Contract calls need to be processed and verified by every (full) node
I'd say PoW is not the most efficient method. It's a terrible waste by design.
The kind of 'work' that works in PoW has some rather strict requirements, that's why it's almost impossible to shoehorn useful work into a PoW scheme.
Wikipedia tells me that eg GridCoin uses proof-of-stake to prevent double-spending attacks; its rewarding people for BOINC work is a totally separate gimmick.
That idea sounds good, but would only be a solution for a problem that doesn't exist.
Bitcoin's design solves two problems:
(1) only someone who owns a coin should be able to spend it
(2) they should only be able to spend it once
The first problem had been solved for ages: use digital signatures to authenticate messages of essentially the form "I, Alice, hereby send 3 bitcoins to Bob." Given some initial coin assignment to specific private/public key pairs, you can follow along these messages, keep a tally in a ledger, and know how much everyone has.
Solving the second problem is where bitcoin innovates. Without a trusted third party coordinating things, Alice could just show a message to Bob and Charles each 'sending' them the same 3 bitcoins. Bitcoin uses proof-of-work to pick (at most) one of these messages to be part of the consensus reality.
The scheme you are suggesting requires some trust in the partnership of government and power companies. But as soon as you have very minimal amounts of trust, you can just solve the double-spending problem directly.
And that direct solution involves much less trust than what is required for accepting any statements about the power grid.
If you want, I can sketch out a minimum trust system for the direct solution I mentioned.
PoST (Proof of Space and Time) is PoW 2.0 essentially. It addresses the energy consumption of PoW using the same Nakomoto Consensus mechanism that provides true decentralization and the security that comes with it. It does this by doing the work ONCE up-front and saving it to space (generating plot files) rather than doing the work for every block. Lookups are incredibly energy efficient (farming plots). The Time component ensures that a certain amount of time passes between blocks, and is responsible for moving the chain forward.
There is also the added benefit of utilizing datacenter drives destined to be scrapped // still perfectly usable for storing plot files.
In the long run, hard drives used for crypto lookups in PoST (farming) have very low load and can last for a decade. Whereas Bitcoin ASIC miners become obsolete much faster and can't be reused for general purpose computing afterwards.
> Consensus in both of them is based on unforgeable costliness, to make it economically unviable to create alternative histories.
> In both systems, total cost of mining approaches the block reward. For example, if block rewards are $10 million a day, then $10 million worth of energy is used in PoW. PoST burns through $10 million worth of hard drives.
In both systems, total cost of mining approaches the block reward. For example, if block rewards are $10 million a day, then $10 million worth of energy is used in PoW. PoST burns through $10 million worth of hard drives.
The cost of PoST is based on scarcity in hard drives, which incentivizes production of hard drives. The cost of PoW is based on scarcity in energy, which incentivizes production of cheap and clean energy.
I'm failing to follow how PoW is fundamentally different than PoST in terms of hardware (and the resources to produce it) necessary to validate blocks.
It seems that the point of PoST is that we get a similar potential of decentralization that we get with PoW with significantly less energy usage.
I somewhat understand the argument of PoW incentivizing production of cheap and clean energy and I hope this is realized ... specifically clean energy, specifically advanced nuclear as its utilization isn't geographically restricted.
The competition has shifted into finding cheaper energy sources, rather than developing more energy efficient ASICs. There's a clear trend in this direction.
Where do you get the 'clean' from?
Usually the cheapest sources are also far away from people, because any local demand will increase energy price. However, when renewables near people have overcapacity, Bitcoin miners can serve as a buyer of last resort. This way, investments in renewables become more profitable.
[0] https://www.weforum.org/agenda/2021/07/renewables-cheapest-e...
We can definitely agree that crypto's demand for electricity basically doesn't care about location. So it puts a floor of demand for electricity generation in remote places. (Also in more accessible places. But there it's relatively less important.)
Electricity is both fungible to an extent, but also not as globally traded as eg wheat or oil.
You are right that on the margin Bitcoin makes generation of renewable electricity more profitable. But it also makes all other electricity generation more profitable, on the margin.
Let's see how this develops.
In what fully decarbonized country do you live? Iceland?
https://ourworldindata.org/grapher/energy-consumption-by-sou...
Energy is somewhat fungible. Every Joule of electricity used on Bitcoin, can't be used for other purposes (apart from heating the data centre..)
Also, like I said in the other comment, most of grid energy is already too expensive for Bitcoin, so mining really makes sense just for any extra capacity which wouldn't have a buyer anyway.
That's only partially true. And your first paragraph explains exactly why.
Compare: most cows are raised for meat, and the leather is just a by-product. However, the extra income from the leather makes raising cows a bit more profitable, thus giving us more cows on the margin.
Similarly, bitcoin mining soaking up excess capacity makes electricity generation slightly more profitable.
Eg instead of running a coal baseload plant and a natural gas peaker, you could run two coal baseload plants and outside of peak periods, you mint bitcoins. (Numbers are just for illustration. You get the point.)
About your first paragraph: yes, supply is elastic in the long run. But opportunity costs still need to be paid. Yes, in the long run you might not be trading off one Joule for another Joule, but you are trading off uses for capital.
(Also keep in mind that even with elastic supply, we still have decreasing marginal returns. There's only so many good sites for hydro-electric generators; all the windiest spots will be full of wind turbines at some point, etc.)
This is like arguing that electric cars are better than diesel, and you retorting: but this tesla crashed into a wall, see electric cars suck!
Seems analogous to what u say about crypto investing in the next hot new 'coin', which very well is just a proxy to people trying to build something of value.
The difference to some pretty much unregulated company that reinvests lots of its money in crypto because crypto has gone up in the past so ‘past performance must equal future growth right?’ is pretty obvious to me.
So the main difference is really that banks run a sustainable model by charging borrowers more than they pay depositors (who are lenders in the fractional reserve model); by orders of magnitude. Being paid out more than is put in should've been a massive red flag to anyone who entertained the Luna ponzi.
There is a reason why payday loans charge extortionate interest. Their bad loan rate is usually sky high. Their returns are substantially lower.
Basically whether it works or not depends on if they could print money that holds value. Obviously they couldn't.
In the UK at least retail bank deposits are guaranteed up to £85k per account, so there's a real incentive for the banking industry to police their member as if one fails, they'll all take a hit.
As you wrote it this doesn't make a lot of sense, so I'll explain, in the process I'll actually fix some errors too.
The UK government protects up to £85k per person per banking license. So if you have £40k in accounts at each of four brand name banks but they're actually all part of one huge corporation "Big Banks Inc." with a single license then the government only protects £85k total, 'cos that's just one license.
Unlike FDIC this is not insurance, instead it's a Last Man Standing system. If some banks fail, the government re-coups its loss over time from all remaining licensed banks. So for example if Santander fails, the costs of fixing that problem land on HSBC and other enormous banks. As indicated this produces an incentive to "police" your rivals because if you allow them to go under by not warning of risky practices, you're going to eat that cost yourself.
As an individual in the UK, if the £85k isn't enough you can invest in the NS&I which is a bank owned by the government. Unlike commercial banks NS&I isn't lending your savings to some unknown (to you) borrowers instead they're effectively lending everything to the government, which would otherwise need to borrow that money commercially (ie issue bonds) so it knows what that's worth. The rates aren't great but since it's owned by the government there aren't a lot of scummy for-profit shenanigans like "introductory" rates that then zero out unless you're constantly opening new accounts and moving your money. Since NS&I is owned by the government who also print the money your savings are denominated in, it can't go bankrupt. The money could become worthless, but in that case it doesn't really matter who you banked with and the whole country is fucked anyway.
Mind, the interest is currently so low that it doesn't really make much of a difference.
It turned out that persuading Aunt Sally to buy the new baby £100 of investment that will earn interest and might be worth something when the baby goes to college is hard - whereas Aunt Sally is much more interested in buying the baby £100 of scratch-offs with a tiny chance it wins big but most likely it gets nothing. This is before scatch-offs were legal in the UK as they are now but NS&I tweaked the numbers to offer a product that is (from their point of view as a bank with many savers) just a bond, but from the individual saver's point of view works like a lottery.
Why does it need to be sustainable? The APR can simply lower once the high APR is no longer sustainable.
If I make £3000 in interest from borrowers on a set of money and give away £5000 in interest to depositors of those same funds, even before I account for the costs of operations (systems don't develop and run themselves) I'm making a loss.
You seem to be suggestion luring people in with a high rate and then dropping it later. That only really works if there's some kind of lock-up to prevent all your depositors fleeing as soon as you lower the rates again.
If you lock-up funds, generally you have to guarantee the rates for the period of the lock-up otherwise that's a bait-and-switch, which is generally going to get you into legal problems :)
Only if the amounts being borrowed and loaned are exactly the same.
I.e 20% on $100 is less than 10% on $1000
Like a sibling comment you are not accounting for the profit that comes from the collateral.
Maybe a nondefi example would help. Imagine if a landlord got a loan using a rental property as collateral. In this example the lender will now get the payments of rent. Now the lender makes money from both the interest rate on the loan and from the renters of the property. Depending on the demand for the rental property the amount of rent you may collect can fluctuate. This means that some months you may make more money than others. So in order to sustain a certain level of profits the amount of rent you collect will need to be worth a certain amount.
[0]: https://www.investopedia.com/terms/r/rehypothecation.asp
At which stage, people with savings withdraw funds because of the lower interest rate and the Ponzi scheme collapses.
The only thing that collapses would be the APY. Everyone can still withdraw their full deposit.
The irony here is that’s supposed to be a joke and not an actual business plan.
Smart contracts doesn't save you here, since the deposit happened when you bought their crypto coins, not when you signed the smart contract.
Stealing the deposits would require
a) Verification happens without any government id (I assume this is true) b) depends somehow on the bank / smart contract authors
Then it would be trivially easy to generate huge amount of "borrowers" who simply "default" on their "loan".
If only these "heavy" audits and "strict" rules could stop the incessant corruption we see all around the globe in federally insured banks.
People who think crypto is shockingly bad just haven't been paying attention to banking. Sure, crypto is full of small scams and because of most of cryptos open fundamentals you can expect those scams will never grow into federally insured banks. That isn't the case for private banks who have been getting away with the worst scams for far longer than I've been alive.
People are straight-up rug-pulling in the crypto world for tens of millions of dollars, outright scams, and the scale of crypto is a fraction of the banking world. I bet you'd be hard pressed to name a couple equivalent scams banks have pulled in a first-world, financially regulated economy. I'm not talking about some rogue employee ripping off accounts, I mean organized fraud.
Anyone who has ever actually worked with or in the financial industry knows how crazy the regulation is. It's far from perfect, but saying it's worse than the crypto world is laughable.
Gamestop was 140% short! Is this uncommon? Many people seem to think not.
The corruption in wall-street runs so deep that tax payers have to foot the bill when no middle class person would look over the toxic loans being packaged up pre-2008 and think that wasn't a scam. This crashed the world economy, it's hard to imagine a bigger scam ever being possible without the former bank CEOs running every financial branch of the government promising bail-outs to the "too big to fail" scammers.
We're still stuck on this[0]?
[0]: https://www.sec.gov/files/staff-report-equity-options-market... @ Page 25
Many people are confident naked shorting happens and GME hit 140%, the highest ever according to that report. So yeah, consider me skeptical that the SEC was able to find evidence of a non-scandal and used that evidence to report a non-controversial finding.
You can bury your head in the sand and pretend the market is fair if you want, but I'll stay skeptical.
Incompetent managers destroy companies. Sometimes those managers try to deflect blame for their own failings by whining about short sellers.
This is silly. Of course it is uncommon - if it was common we would see short squeezes all the time.
Unless your claim is that corruption and its effects somehow uniquely apply only to bankers, I don't see what's the purpose of pointing this out.
probably why there is so many instances of banks getting caught laundering money for criminal organizations by the billions
> They are heavily audited and have strict rules about speculation.
you can audit blockchains. you can't audit a bank's database and have to way for the next panama papers leak
All investments are speculative and involve some risk. But outside of crypto, few of them are purely so.
In Anchor's case there are way more lenders than borrowers so Anchor is resorting to pay those high yields from their reserves. It's cutting close to being a Ponzi scheme at the moment.
In a traditional banking world businesses take a loan either to cover for a short-term cashflow crunch (example an invoice that's delayed by their client) or for longer term investment. That money usually goes into economic activities which are expected (hoped?) to bear fruit to repay the loan.
In the crypto world however such loans are taken only to be put back into the crypto world; to be swapped into some hot new coin to be staked and what not. The music has got to stop at some point.
[1] https://news.ycombinator.com/item?id=30335625