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MakerDAO’s “DAI” stablecoin is breaking, as predicted

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Re: MakerDAO’s “DAI” stablecoin is breaking, as predicted

#61

Post by jacques_chester »

Erlich_Bachman wrote: post #59
Animats wrote: post #40

Earlier quoted context omitted.

Well, of course it's easy to ensure that the price doesn't stay above $1. You can make more of them. It's ensuring that the price doesn't stay below $1 that's hard. You have to draw value from some reserve. If that reserve is depleted, you're screwed. All attempts to peg currencies run into that problem.

Would it not be possible to just destroy some of the coins? If they were destroyed for everyone, proportionally to how much they hold, wouldn't that be in interest of everyone? Because it would make the coin itself worth more?

As I see it, you have two options.

The first is distributed destruction. Everyone destroys some of their coins to raise the value of remaining coins. The problem is that this is a prisoner's dilemma: defection is the best strategy. Some people will not destroy their coins, thus increasing their relative position to others who do. Over time "destroy your coin" signals will simply be ignored.

Not to mention cold wallets, which simply don't participate in the ledger unless it suits them to. Are they meant to simply nuke coins upon rejoining? This introduces an incentive to stockpile coins in the hope that the policy will change in future.

The second approach is centralised. Someone has the authority to mark some fraction of coins as destroyed. Rather undermines the decentralisation thing people like.

Re: MakerDAO’s “DAI” stablecoin is breaking, as predicted

#62

Post by Erlich_Bachman »

jacques_chester wrote: post #61
Erlich_Bachman wrote: post #59

Earlier quoted context omitted.

Would it not be possible to just destroy some of the coins? If they were destroyed for everyone, proportionally to how much they hold, wouldn't that be in interest of everyone? Because it would make the coin itself worth more?

As I see it, you have two options. The first is distributed destruction. Everyone destroys some of their coins to raise the value of remaining coins. The problem is that this is a prisoner's dilemma: defection is the best strategy. Some people will not destroy their coins, thus increasing their relative position to others who do. Over time "destroy your coin" signals will simply be ignored. Not to mention cold wallet…

But the destruction would of course (obviously) be implemented in the protocol.

Just like in Bitcoin, it's not up to each user to be honest and prevent double-spends, it's instead up to the network that checks and re-checks everything - the destruction of those coins in the example would be enforced by the network. Not relied on users.

Re: MakerDAO’s “DAI” stablecoin is breaking, as predicted

#63

Post by jacques_chester »

Erlich_Bachman wrote: post #62
jacques_chester wrote: post #61

Earlier quoted context omitted.

As I see it, you have two options. The first is distributed destruction. Everyone destroys some of their coins to raise the value of remaining coins. The problem is that this is a prisoner's dilemma: defection is the best strategy. Some people will not destroy their coins, thus increasing their relative position to others who do. Over time "destroy your coin" signals will simply be ignored. Not to mention cold wallet…

But the destruction would of course (obviously) be implemented in the protocol. Just like in Bitcoin, it's not up to each user to be honest and prevent double-spends, it's instead up to the network that checks and re-checks everything - the destruction of those coins in the example would be enforced by the network. Not relied on users.

This is why I brought up the cold wallet.

The network can check that transactions occurred, but it can't really make people perform them. It's a ledger system.

If someone doesn't post a coin destruction event, how do I know why? Is it because they're cheating? Because of a cold wallet?

You might say "I will make coin destruction a precondition for any other transaction". Now the incentive of a hoarder is to sit on their wallet while destruction is high and only enter the market when destruction is low. This means liquidity is tied to how far off the peg you are, which isn't a desirable property.

OK, how about summing up the destruction tally for any wallet that's inactive, to be paid in a lump sum? Now you're telling me that my wallet can be completely drained over time by a destruction tax that realises only if I open my wallet. Not very attractive.

OK, maybe you just destroy the net of coin creation and coin destruction at transaction time. This seems more likely to work, though I'm unsure whether I can evade it by changing addresses. I'm also unsure what incentives miners have to validate coin destruction. There's also the problem of how it cope with truly heavy amounts of capital flow. Watching a numerical balance surge up and down during a single day might be unattractive to a lot of holders.

Re: MakerDAO’s “DAI” stablecoin is breaking, as predicted

#64

Post by zodiac »

justincormack wrote: post #55
zodiac wrote: post #36

Earlier quoted context omitted.

It's not even technically attainable for USD. If China places huge market orders for a basket of commodities with USD, USD would lose purchasing power wrt the basket for a short amount of time (I think a few seconds is possible).

The USD is not pegged to commodity prices.

You're right - what would you say it is pegged to?

Re: MakerDAO’s “DAI” stablecoin is breaking, as predicted

#65

Post by xg15 »

Erlich_Bachman wrote: post #59
Animats wrote: post #40

Earlier quoted context omitted.

Well, of course it's easy to ensure that the price doesn't stay above $1. You can make more of them. It's ensuring that the price doesn't stay below $1 that's hard. You have to draw value from some reserve. If that reserve is depleted, you're screwed. All attempts to peg currencies run into that problem.

Would it not be possible to just destroy some of the coins? If they were destroyed for everyone, proportionally to how much they hold, wouldn't that be in interest of everyone? Because it would make the coin itself worth more?

That would remove supply, but how would it stop dwindling demand?

If I have two moldy banana peels worth approx $0 each and I burn one of them, the other will presumably still be worth $0.

Re: MakerDAO’s “DAI” stablecoin is breaking, as predicted

#66

Post by Animats »

jacques_chester wrote: post #61
Erlich_Bachman wrote: post #59

Earlier quoted context omitted.

Would it not be possible to just destroy some of the coins? If they were destroyed for everyone, proportionally to how much they hold, wouldn't that be in interest of everyone? Because it would make the coin itself worth more?

As I see it, you have two options. The first is distributed destruction. Everyone destroys some of their coins to raise the value of remaining coins. The problem is that this is a prisoner's dilemma: defection is the best strategy. Some people will not destroy their coins, thus increasing their relative position to others who do. Over time "destroy your coin" signals will simply be ignored. Not to mention cold wallet…

"Distributed destruction" is just inflation in another form.

Re: MakerDAO’s “DAI” stablecoin is breaking, as predicted

#68

Post by MicahZoltu »

pjbyrne wrote: post #25
MicahZoltu wrote: post #21

The thing the author seems to be confused about is that when people talk about stable coin they aren't claiming that the market can't be irrational. They are claiming that over a sufficient period of time the coin will trend towards its target. In the case of DAI today, that target is 1 DAI == 1 USD. This means that while the market may irrationally buy/sell DAI for more or less than 1 USD, over time it will trend to…

> They are claiming that over a sufficient period of time the coin will trend towards its target This is not what the MakerDAO team, nor any other stablecoin shill, is claiming. They are claiming the system "ensures" that the stablecoin is "a money that will always maintain its purchasing power." "Ensure" and 'always' don't mean "trend towards over time." They mean always, as in all the time. If their intention is to…

If what you want is "something that always is worth _exactly_ 1 USD then you are asking for the unatainable. As others have mentioned, it is _impossible_ in an open market to have a true 100% no variability peg. Markets work on supply and demand and the instant that one exceeds the other the peg will drift.

A good stable coin will have pressures that push that drift back toward the target, but it is impossible to stop the drift from ever occurring. The USD itself presumably targets some basket of goods, but it drifts away from that basket of goods. So even the USD isn't a "stable coin" by your definition.

Re: MakerDAO’s “DAI” stablecoin is breaking, as predicted

#69

Post by MicahZoltu »

cornyNetHandle wrote: post #38
MicahZoltu wrote: post #21

The thing the author seems to be confused about is that when people talk about stable coin they aren't claiming that the market can't be irrational. They are claiming that over a sufficient period of time the coin will trend towards its target. In the case of DAI today, that target is 1 DAI == 1 USD. This means that while the market may irrationally buy/sell DAI for more or less than 1 USD, over time it will trend to…

It may attempt to trend towards the dollar over time, but will it be trending that way during the time that you personally need it? "The market can remain irrational longer than you can remain solvent", springs immediately to mind. edit: Also, pegging a cryptocurrency to the dollar seems almost comedically perverse. What is it for?

As DAI gains trading volume and gets listed on more exchanges you'll likely see it stabilize. Any active trader who believes the price pressures will work has incentive to buy DAI when it is below 1 USD and sell DAI when it is over 1 USD as this is a low-risk trade (opportunity cost only). Right now, there isn't much volume so it is pretty easy for someone to come in and want a bunch of DAI or to liquidate a bunch of DAI and cause the market to shift suddenly. It will then take a few minutes for the market to correct, and with per-transaction fees the market is hesitant to correct small errors due to the lack of volume.

TL;DR: The more volume DAI has on public exchanges, the tighter it will hold its peg.

Re: MakerDAO’s “DAI” stablecoin is breaking, as predicted

#70

Post by MicahZoltu »

erikpukinskis wrote: post #30
kwikiel wrote: post #24

In this thread cryptocurrency community will rediscover banking and money. We have stablecoins or tethers (manny attempts to create something people want) - people want some form of money for peer to peer value transfer, that will allow arbitrage between exchanges and connection to "real world" as almost nobody is pricing their services in ethereum/bitcoin. Let's say we have 3 competing stablecoins and Gresham's law…

A stablecoin isn't a store of value. It's an instrument for holding pretend Fiat. It's a way for holders to pretend they are the Fed, and say "Now I have USD! You can have it. Just sell it back to someone else eventually because it's pretend." It's an index basically, not an actual commodity. (Except of course in the sense that Everything Is A Commodity in the crypto world.)

Eh, I wouldn't quite call it an index. While I agree that it isn't _actually_ 1USD (or whatever it is pegged to), it is backed by other assets (in the case of DAI today, it is backed by ETH) and the system is setup such that there should always be more ETH backing the DAI than necessary to make everyone whole.
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