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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

#71

Post by notahacker »

ur-whale wrote: post #60
jmyeet wrote: post #37

This doesn't go far enough. 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. Crypto in any form doesn't solve the trust problem other than a very narrow slice because as soon as you interact with anything outside of the blockchain, you're adding trust. Even on the blockchai…

> The only thing that maintains the value of any asset (or currency) is the collective belief in that asset or currency. The only thing that maintains the value of any asset is the demand for it. Where that demand comes from may or may not be belief. Water has value because there is a clear demand for it, not because anyone believes in it. As long as there is someone who wants an asset, it has value. Belief is but a…

The main thing is that "belief" alone is a pretty useless source of demand because its extremely mutable.

Having a reliable long term income stream attached, an actual use for the asset and/or a supply which shrinks in relation to the fall in demand is a much more sustainable source of demand.

Re: Algorithmic stablecoins are provably impossible without continuous funding

#72

Post by overtonwhy »

mcs5280 wrote: post #7

Not a crypto fan but I'm beginning to see that our entire economy is proving impossible without continuous manipulation by the fed

It is literally their job: The mission of the Federal Reserve System is to foster the stability, integrity, and efficiency of the nation's monetary, financial, and payment systems so as to promote optimal macroeconomic performance.

Re: Algorithmic stablecoins are provably impossible without continuous funding

#73

Post by MattPalmer1086 »

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 a fact that the majority of wealth increase has gone to the already wealthy over the last few decades. So while not literally true (clearly some money flows in other directions), it is broadly correct.

Re: Algorithmic stablecoins are provably impossible without continuous funding

#74

Post by dasz »

This puts into light how the usd works. And how inflationary money printing is. Every dollar printed might as well be seen as debt or burden. That's an interesting aside.

More relevant to stablecoins:

If the stablecoins need constant funding then what is their real value? Why should someone hold them? Why spend them? Why owe them? Constant funding itself isn't bad as such but how much and how often are what decide value.

This is not to say they are useful or useless. But it certainly seems like the market hasn't got a firm answer either. The greater market is at least certainly ambivalent about them.

Contrast what would happen if any of these stablecoins were used for purchasing crude oil or wheat or some other international commodity. In that case we'd see very different views on their value.

Re: Algorithmic stablecoins are provably impossible without continuous funding

#75

Post by Animats »

Well, of course.

An algorithmic stablecoin with a backing system can survive some stress. What they can't survive is a net outflow, because they can't reprice downwards. The era of "line goes up" is now over, and we see net outflows in many financial sectors.

A lot of faith-based financial instruments are going to tank.

Re: Algorithmic stablecoins are provably impossible without continuous funding

#76

Post by julianbuse »

seanhunter wrote: post #61

I'm not sure I know enough to have a credible opinion about his underlying thesis, but it seems to me this article is wrong in lots of specific details: 1. "Stablecoin insurers" (in the author's terminology) are not short puts on the stablecoin, because noone has a specific right to force them to buy the stablecoin. Their position (as I understand it) is much more akin to some sort of swap where they pay/receive the…

I believe (with my limited knowledge) that in this scenario the insurer is algorithmic, so in a sense they are "forced" to buy the stablecoin. Maybe that addressed the first point?

Re: Algorithmic stablecoins are provably impossible without continuous funding

#77

Post by charcircuit »

mNovak wrote: post #39

> To be in balance, the Stablecoin must provide real utility to the Outside World that transcends the Stablecoin/Insurer construct. Specifically: > 1. There must be a transaction tax for real utility provided by the Stablecoin. Don't all major reserve-based algorithmic stablecoins charge some kind of minting/redemption fee, to reward the risk taken on by reserve holders? And that makes this whole argument somewhat mo…

Luna stakers were paid in transaction fees in the network which consisted Luna and the stable coins on terra such as UST

Re: Algorithmic stablecoins are provably impossible without continuous funding

#78

Post by nathias »

The article uses fuzzy terms that conflates some essential points, and then uses this confusion to demand regulation. All about this is bad. Yes pegging has some essential limitations, but capital flow is a condition for most financial sytems.

> Investments that are provably problematic should be appropriately regulated and efforts should be made to protect consumers against them.

Not at all. Regulate yourself and don't buy things that exceed your risk threshold, or if you are a child incapable of that, tell your parents to regulate you.

Re: Algorithmic stablecoins are provably impossible without continuous funding

#79

Post by thisisit »

I find it interesting that the CHF peg example is always missing articles like these. The Swiss Central Bank had decided to defend the peg the CHF at 1.2. This wasn't broken until the Central Bank decided to drop it in 2015. I guess unless it became a big trade it doesn't really matter.

Re: Algorithmic stablecoins are provably impossible without continuous funding

#80

Post by pa7x1 »

jmyeet wrote: post #37

This doesn't go far enough. 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. Crypto in any form doesn't solve the trust problem other than a very narrow slice because as soon as you interact with anything outside of the blockchain, you're adding trust. Even on the blockchai…

> eg it's been estimated that over half the Ethereum are owned by less than 10 entities

You throw this kind of claim without providing proof. Unfortunately, it's a claim I have seen made before (e.g. https://www.financemagnates.com/cryptocurrency/news/top-10-e...) and it doesn't hold any level of scrutiny. Although you embellish it and exaggerate it even further.

This kind of number typically assumes that a smart contract owns the ETH that it contains. Which is not true by the very nature of the smart contract, what it can do with the ETH is programmed in its code and the users depositing the ETH on it are the ones that decide what to do with it.

Then it looks at the accounts that have the most ETH (https://etherscan.io/accounts), aggregates together all centralize exchange accounts, assumes they also own the ETH. Do some quick math and publish a misinformation article ready to be shared by anyone whose confirmation biases are triggered. Bonus points if you can then exaggerate the numbers further without providing any figures and keep the misinformation going.

Some numbers...

There is currently 39 M ETH locked in DeFI smart contracts (32% of circulating supply). https://defillama.com/chain/Ethereum?currency=ETH

There is 13 M ETH locked in the staking contract (11% of circulating supply).

There is 2.5 M ETH locked in L2s (2% of circulating supply). https://l2beat.com/

So that's 45% of circulating supply not owned by any single entity.

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