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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

#231

Post by galaxyLogic »

DoughnutHole wrote: post #174
galaxyLogic wrote: post #150

Earlier quoted context omitted.

There's a big difference. Everybody may believe that you own your house. And everybody may believe you own 100 bitcoins. At issue is what is the exchange rate between bitcoins and say US dollars. If that goes to zero then you've lost the value of your bitcoins. You have not lost the ownership of your bitcoins, they have lost their value. Whereas for your house, no matter what its market value would be you still have…

That is entirely still a societal norm and a statement of personal belief about specific rights. You might believe those rights to be inalienable and that your property is necessarily yours, but that doesn't actually translate to to a guarantee of maintaining that possession in the absence of the institutions that currently protect that ownership. Anyone who's lived through a massive societal upheaval, collectivisati…

All true but still I think there is a clear difference. Assets can and are traded in exchanges. Their value goes up and down based on what is the "shared belief" of their expected value. Laws are not traded. They can change but do so many orders of magnitudes less frequently than the value of assets on the market. Laws are not beliefs they are societal contracts.

Re: Algorithmic stablecoins are provably impossible without continuous funding

#232

Post by galaxyLogic »

smaryjerry wrote: post #205
galaxyLogic wrote: post #150

Earlier quoted context omitted.

There's a big difference. Everybody may believe that you own your house. And everybody may believe you own 100 bitcoins. At issue is what is the exchange rate between bitcoins and say US dollars. If that goes to zero then you've lost the value of your bitcoins. You have not lost the ownership of your bitcoins, they have lost their value. Whereas for your house, no matter what its market value would be you still have…

Pretty sure when Detroit went bankrupt they were basically paying people to come back to the city. There are ghost towns for a reason, because homes do lose value, even for the person who can still live there. Bitcoin right now is in the middle of nowhere like these ghost towns that can fail if the one company supporting them fails or the farmers just give up. It’s becoming a bigger city, to continue the analogy, but…

I'm a crypto-sceptic myself. Crypto is a currency. The value of most currencies goes up and down based on the expected production/export capabilities of countries supporting their currency. But crypto is not associated with any country, so there is no country whose economic output could make crypto stronger or weaker. Perhaps this is a naive viewpoint but I think best way to look at crypto is as a currency and think what makes some currencies strong and some weak.

Re: Algorithmic stablecoins are provably impossible without continuous funding

#233

Post by dragonwriter »

dinom wrote: post #217
dragonwriter wrote: post #16

Earlier quoted context omitted.

> The idea behind prices in a market economy is that they're an information-carrying abstraction. No, the idea behind prices is that they are what the participants in particular trades think it is worth trading at. The normative argument for the superiority of laissez-faire economies may involve market prices as an information carrying mechanism, but that normative argument is much newer than market economies, and is…

> > The idea behind prices in a market economy is that they're an information-carrying abstraction. > No, the idea behind prices is that they are what the participants in particular trades think it is worth trading at. Why are these two things mutually exclusive? Aren't they, in fact, mutually dependent?

> Why are these two things mutually exclusive?

They aren’t. They are different, and one is actually the “idea behind prices in a market economy”, and the other is an academic argument, observing the fact of price setting in a market economy, for why price setting in a market economy is valuable to others besides the direct participants in the individual exchanges.

> Aren’t they, in fact, mutually dependent?

No, there is a one-way dependency between them. The normative argument depends on the fact, but not vice-versa.

Re: Algorithmic stablecoins are provably impossible without continuous funding

#234

Post by fjkdlsjflkds »

cuteboy19 wrote: post #209
coding_lobster wrote: post #143

Earlier quoted context omitted.

It is not the same because in the case of the coins above a flash crash results in liquidation of the collateral to support the peg. In the case of Luna there was no such mechanism as it relies on people doing the arbitrage required to maintain the peg.

Liquidating luna is the same thing as minting luna. The trigger is the same (price below peg) and the effect is the same (more luna in circulation)

The difference is that you can always redeem UST for LUNA, which directly results in minting additional LUNA (the total amount of LUNA in circulation increases when UST is destroyed), while the same does not happen for debt-based stablecoins.

In the case of DAI and other debt-based stablecoins, there is no minting of additional collateral when liquidations occur or when debt is repaid (the total amount of the underlying collateral in circulation does not increase when DAI is destroyed).

This is the main difference between so-called "algorithmic stablecoins" (e.g. UST, FRAX, USDN), which rely on internal collateral (whose supply can be arbitrarily expanded/contracted by the controlling entity) and "overcollateralized debt-based stablecoins", which usually rely on external collateral (whose supply cannot be arbitrarily expanded/contracted).

Treating these two different things as if they are the same is not particularly insightful.

Re: Algorithmic stablecoins are provably impossible without continuous funding

#235

Post by random_comment »

BlueTemplar wrote: post #168
random_comment wrote: post #129

Earlier quoted context omitted.

> The only thing that maintains the value of any asset (or currency) is the collective belief in that asset or currency. Hello jmyeet! Unfortunately, I believe this statement, as you have given it, is untrue. I hear it often, as it is continually and frequently asserted by crypto enthusiasts (and I am not suggesting you are one of those). ----- For assets, value is grounded in utility (whether to do some useful funct…

I guess it's kind of the point of TFA "not proving enough", everything is a "Ponzi" : can't escape the law of thermodynamics !

If you genuinely think taxes are not a sufficiently 'proven' way of forcing demand for a currency, see what happens when someone stops paying them.

Re: Algorithmic stablecoins are provably impossible without continuous funding

#236

Post by pyrryh »

Kinrany wrote: post #227
BlueTemplar wrote: post #167

Earlier quoted context omitted.

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.

This is the case where the worse UX is just a better security in disguise (note: "better", not "perfect"; see multiple US reports on trying to investigate the terrorist funding through hawala). No electronic transactions cuts a lot of SIGINT (though not all, people carry their phones with them, call each other, satellites make images, etc.) and sometimes HUMINT is more difficult in countries like Afghanistan or Pakistan.

Re: Algorithmic stablecoins are provably impossible without continuous funding

#237

Post by notahacker »

nostrademons wrote: post #224
notahacker wrote: post #221

Earlier quoted context omitted.

> 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 inh…

> the opportunity cost of suppressing serious failure for 50 years is stagnation, low productivity, and inflation, exactly what we've observed

But the United States is not the world, and the latter half of the twentieth century is not all of recorded history. The majority of the world grew further and faster over the period of modern money than at any other time in history (yes, there are other important reasons. There are other reasons why US productivity growth is not at its postwar peak too). The majority of recorded history on commodity standards, owners of wealth didn't patiently wait for the most innovative opportunities and direct resources better than the modern world, they hoarded, barely maintained their limited capital stock and much of the speculation that did take place was on capturing neighbours' hard assets rather than generating new wealth streams. US productivity growth in recent years might be below its postwar peak but is way ahead of historic norms, including the initial period of growth and labour saving device invention so unprecedented we call it the Industrial Revolution. Which doesn't mean the current system is ideal, it just means that everybody was worse off before.

Re: Algorithmic stablecoins are provably impossible without continuous funding

#238

Post by Kinrany »

pyrryh wrote: post #236
Kinrany wrote: post #227

Earlier quoted context omitted.

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

This is the case where the worse UX is just a better security in disguise (note: "better", not "perfect"; see multiple US reports on trying to investigate the terrorist funding through hawala). No electronic transactions cuts a lot of SIGINT (though not all, people carry their phones with them, call each other, satellites make images, etc.) and sometimes HUMINT is more difficult in countries like Afghanistan or Pakis…

Security can be improved later, the same way Monero came out after Bitcoin. Having the option to transact without intermediaries and locally is enough of an improvement, the same way Bitcoin is Pareto-optimal when compared to SWIFT.

Re: Algorithmic stablecoins are provably impossible without continuous funding

#239

Post by spiralx »

jmyeet wrote: post #202
User23 wrote: post #194

Earlier quoted context omitted.

> The only thing that maintains the value of any asset (or currency) is the collective belief in that asset or currency. Put another way: there is an inescapable component of trust in every asset. > So what actually makes the US dollar work as a currency is that it is backed by the long dick of the US government. This is a combination of economic, military and even cultural might. What many people call fiat is in fac…

I like the term "violence consensus algorithm". I agree: ultimately government is a collective decision on who gets to do the violence. As for Zimbabwe, the primary difference it and the US is reach. More generally speaking, we've seen currencies collapse when people have lost faith in their value and what happens is people instead use a different currency (eg the US dollar) because they have more confidence in its v…

More specifically they have confidence in the stability of its value over time. It's the same reason that US T-bonds etc are said to be "risk free" and why the USD comprises 60% of the world's currency reserves. The EU and EUR come in second in terms of reserves (30%) for the same reason.

Re: Algorithmic stablecoins are provably impossible without continuous funding

#240

Post by spiralx »

lima wrote: post #188
mvolfik wrote: post #177

Sorry for hijacking this thread, but can somebody explain like I'm five, what's the point of algorithmic stablecoins? My understanding of the term 'stablecoin' means that it is a crypto 'proxy' to some fiat currency, typically US dollar, just to avoid the actual conversion between crypto and fiat (because of taxes etc). So why isn't there just a DumbCoin(tm) that simply is 1-to-1 backed by the dollars? You give me a…

> So why isn't there just a DumbCoin(tm) that simply is 1-to-1 backed by the dollars? Those exist (like USDC), but they rely on a trusted entity holding the reserves.

USDC is exactly as unaudited as USDT, they've just flown under the radar so far.
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