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Algorithmic stablecoins are provably impossible without continuous funding

fragileequilibrium.substack.com

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Re: Algorithmic stablecoins are provably impossible without continuous funding

#221

Post by notahacker »

nostrademons wrote: post #212
notahacker wrote: post #89

Earlier quoted context omitted.

> So rates get pegged below the natural rate of interest (which equilibrates supply of savings with demand for productive investment) But the only body even attempting to determine what "productive investment" is and respond to it is the Fed. Savers are interested in money returns or at least preserving their holding which in many feasible circumstances (chronic instability, zero sum economies with fixed currency sup…

But that's not true: every individual household and business is trying to maximize their profits (or at least, those that aren't are replaced by those that are), reducing their expenditures and increasing their revenues. In the presence of a stable money supply and stable prices, the only way to do this is through innovation and better efficiency: you reduce the value of your inputs, or you increase the value of the…

> In the presence of a stable money supply and stable prices, the only way to do this is through innovation and better efficiency: you reduce the value of your inputs, or you increase the value of the outputs

Or you decide the winning move is not to play, because borrowing is expensive, the purchasing power of your Benjamins won't diminish if you bury them in the ground, and investing money on capital goods in the hope of accumulating more money has negative average risk adjusted returns if there never is any more money in aggregate. On the other hand the way you capture the share of the growing pie is by increasing efficiency, it ceases to be an adequate investment strategy to just hold your capital in uninvested currency.

And taking a graph like that one where the sharp fall in productivity growth starts a couple of decades before leaving the gold standard and actually stops falling afterwards as evidence that leaving the gold standard caused productivity growth slowdown is peak gold bug dodgy graph interpretation! Bretton Woods collapsed because it was inherently unstable anyway.

Re: Algorithmic stablecoins are provably impossible without continuous funding

#222

Post by throwaway290 »

drdeca wrote: post #50
imtringued wrote: post #47

Earlier quoted context omitted.

The economy is not like an ecosystem since there is no reciprocation. Money flows in one direction only, toward the top. I find it particularly frustrating that people don't see the economic distortion caused by monopolies in the private economy, they think it must be the government's doing when it tries to undo some of the harm caused by them.

> Money flows in one direction only, toward the top. This, taken literally, is clearly false (the wealthy do in fact buy things and pay for services / employees). So, as you don't mean it literally, what do you mean?

It's known as the "it's cheaper to be rich" paradox.

You save on buying in bulk and using better made products with longer lifespans, afford better education that makes you more difficult to fool and gets you a higher paying job, make more returns by investing more money, conserve willpower for important decisions by not having to choose between soap and bread at the store.

Re: Algorithmic stablecoins are provably impossible without continuous funding

#223

Post by notahacker »

charcircuit wrote: post #137
notahacker wrote: post #102

Earlier quoted context omitted.

The gambling system has a house edge. It's a system which exists for the house to take money (in aggregate) off gamblers. The profits are real, and nobody pretends there aren't losers. Most casinos operate on this basis without requiring constant injections of further capital. The stablecoin on the other hand claims that stakers are being rewarded for risking their capital without holders of the stable coin being fle…

>Most casinos operate on this basis without requiring constant injections of further capital. They mitigate the risk by settings caps to maximum bets. You can't just bet a bit more than half of a casino's assets in double or nothing with them. They don't want to be taking a 50% chance of losing everything. Even if there was a 2% edge that's still a 48% chance of it happening. They would rather work with smaller amoun…

> They may be rewarded but they aren't being guaranteed that the value of what they hold will always go up.

> Again a Ponzi scheme is a very specific thing. People make an investement and returns on that investment come from new investors. In this kind of stablecoin system there is no part that where that specific thing happens

The returns on staking do come from new investors. As you point out in your next comment, they turn negative after the project stops growing.

I agree it's not a Ponzi scheme in the narrow sense that some mountebank is telling stakers that they're being paid from the profit of nonexistent businesses before running off with the money. But the dynamics are identical: as you point out in the next post, the project depends on stakers earning rewards from its growth and the scheme collapses when the project stops growing and the stakers seek to avoid losses.

The dynamics of a casino are different: it doesn't promise its gamblers a positive return and thus doesn't needs constant capital injections to survive. Gamblers are service consumers, not investors and betting for entertainment that the wheel will stop on black, not for profit on the casino's ability not to default.

Re: Algorithmic stablecoins are provably impossible without continuous funding

#224

Post by nostrademons »

notahacker wrote: post #221
nostrademons wrote: post #212

Earlier quoted context omitted.

But that's not true: every individual household and business is trying to maximize their profits (or at least, those that aren't are replaced by those that are), reducing their expenditures and increasing their revenues. In the presence of a stable money supply and stable prices, the only way to do this is through innovation and better efficiency: you reduce the value of your inputs, or you increase the value of the…

> In the presence of a stable money supply and stable prices, the only way to do this is through innovation and better efficiency: you reduce the value of your inputs, or you increase the value of the outputs Or you decide the winning move is not to play, because borrowing is expensive, the purchasing power of your Benjamins won't diminish if you bury them in the ground, and investing money on capital goods in the ho…

My point is not so much that commodity money is stable as that fiat money is unstable. If you'd taken the opposite side of the debate I'd be happy to tell you everything that was wrong under the gold standard: frequent, severe, recessions; a tendency to hoard cash rather than investing it productively; lack of levers for governments to influence economic outcomes.

However, I posit that all of those downsides are inherently necessary to drive innovation and increase the efficiency of the economy. Bankruptcy and unemployment is how you garbage-collect inefficient ways of doing things: you want people to lose their jobs, because that forces them to take employment in more efficient sectors of the economy. Hoarding is how you a.) amass the capital stocks so that you can deploy them on bold opportunities when they arrive and b.) ensure that people are selective about which opportunities they pursue. If you encourage people to immediately invest any spare cash because the value of that cash goes down, you encourage them to seek out any marginal-productivity activity that might remotely be cash-flow, rather than waiting for big innovative opportunities that might take longer to appear.

In other words, I'm saying that there's no free lunch, a concept that should be familiar to any economist. You need failure to drive success. Mitigate failure and you also eliminate success. And the opportunity cost of suppressing serious failure for 50 years is stagnation, low productivity, and inflation, exactly what we've observed. All social systems eventually collapse; it's just that some people who remember how the previous social system collapsed become blind to how the current system is collapsing, because all they can do is think back to the problems it solved.

Re: Algorithmic stablecoins are provably impossible without continuous funding

#225

Post by doctor_eval »

pfraze wrote: post #171
doctor_eval wrote: post #159

Earlier quoted context omitted.

I'm not an expert in this, but I think that it basically starts with the political concept of legitimacy [0] - government, with the consent of the governed - which leads to the monopolisation of force (police, army etc), which provides a concrete means of enforcement for the collective belief of "property". That is, the reason that you can call the cops when strangers take over your kitchen is because we have a very…

Ethereum has intentional soft and hard forks; whatever that process is, that’s it’s government. Whether that government chooses to address problems which challenge Ethereum‘s legitimacy is up to them.

But that government is not legitimate, in the political sense. There is no mechanism for the population of users, as a whole, to vote.

In a sense, it sounds like a political party that splits in two. It’s not democratic; maybe it’s technocratic.

Re: Algorithmic stablecoins are provably impossible without continuous funding

#226

Post by Kinrany »

rglullis wrote: post #136
Kinrany wrote: post #106

Earlier quoted context omitted.

We need a crypto that builds the network on trust between real people. If A and B know each other and B and C know each other, then A and C can trade or give credit to each other by going through B. No need for a global consensus.

https://trustlines.network

Huh! The marketing materials look like exactly the same thing so far.

> However, since Trustlines is designed to be implemented on a public blockchain, making transactions requires the use of a native cryptocurrency to pay transaction fees.

But this one part seems wrong. With such a design there should be no need for global consensus. :(

Re: Algorithmic stablecoins are provably impossible without continuous funding

#227

Post by Kinrany »

BlueTemplar wrote: post #167
Kinrany wrote: post #106

Earlier quoted context omitted.

We need a crypto that builds the network on trust between real people. If A and B know each other and B and C know each other, then A and C can trade or give credit to each other by going through B. No need for a global consensus.

Hawala is widely used, but since it does the same job as a cryptocurrency (decentralized ledger), what would be gained by adding a cryptocurrency on top of it ?

This is indeed the same principle, it just needs better UX.

Re: Algorithmic stablecoins are provably impossible without continuous funding

#228

Post by tablespoon »

sifar wrote: post #17
tablespoon wrote: post #11

Earlier quoted context omitted.

> Not a crypto fan but I'm beginning to see that our entire economy is proving impossible without continuous manipulation by the fed Just like driving a car proves impossible without continuous manipulation by its driver.

cue autonomous vehicles. Seriously though this is a very wrong analogy. The economy is more like an ecosystem where individuals interact with themselves & the environment. It doesn't need continuous manipulation. In fact it tends to distort than aid.

>> Just like driving a car proves impossible without continuous manipulation by its driver.

> cue autonomous vehicles

In my analogy, the driver can be a machine.

> Seriously though this is a very wrong analogy. The economy is more like an ecosystem where individuals interact with themselves & the environment. It doesn't need continuous manipulation. In fact it tends to distort than aid.

It does if you want to to go where you want to go. Take that away, and it'll drive off a cliff. Maybe eventually it will correct itself, but that'll take too long to help us.

Re: Algorithmic stablecoins are provably impossible without continuous funding

#230

Post by pfraze »

doctor_eval wrote: post #225
pfraze wrote: post #171

Earlier quoted context omitted.

Ethereum has intentional soft and hard forks; whatever that process is, that’s it’s government. Whether that government chooses to address problems which challenge Ethereum‘s legitimacy is up to them.

But that government is not legitimate, in the political sense. There is no mechanism for the population of users, as a whole, to vote. In a sense, it sounds like a political party that splits in two. It’s not democratic; maybe it’s technocratic.

I think that’s the right follow up question to explore - what establishes political legitimacy. Or perhaps more accurately, what best establishes political legitimacy. There’s arguably a vote in the sense that users of the network choose which fork to adhere to. This isn’t a perfectly distributed vote; you depend on the miners, the validators, the client developers, and the exchanges to establish a concept of the “current fork.” (God help us if all the exchanges ever decided differently than Vitalik what “ethereum” is.) Regular users have a minimal voice in that decision, but it’s theoretically possible for anyone to start a new fork and campaign for its adoption.

Personally I think the question of political legitimacy doesn’t make the notion of blockchain governance wrong; it just highlights that the system as constructed may have problems.

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