Turns out, just because something stays stable during peaceful times doesn't mean it's stable at all. And, indeed, looking at the mechanism by which UST was supposedly guaranteed to remain stable, it's clear that this day was inevitable.
does this explosion impact the broader crypto marker particularly? I know some of these platforms are interconnected in weird ways but don't know much about it.
And is there any sensible world where it stabilizes at some value other than 0 or 1?
> does this explosion impact the broader crypto marker particularly?
Yes, if a lot of btc is bought in this stable coin, and the stable coin is printed, to buy btc in order to pump up the btc price then if that stable coin loses its peg, it cannot be used to pump btc anymore. When Tether finally dies it'll take down btc and the whole industry with it
Tether (USDT) is the largest "stablecoin" and the most interesting one here. Tether (USDT) and USD Coin (USDC) have a combined market cap of ~120. The total "stablecoin" market cap is ~170B. UST was at ~18B before the collapse, so it does account around 10% of the market. Significant, but not the most important player.
Not sure how exactly this digital asset is financially intertwined with other assets, but at the very least I'd expect this to cause some significant negative sentiment within the markets. Anyone who's invested in a digital asset right now is watching this situation and thinking, could this happen to my money too? I'd guess that a sizeable portion of these people are going to end up selling.
Also, anyone find it sus that these massive selloffs are happening exactly in the middle of the night for the US east coast?
> Also, anyone find it sus that these massive selloffs are happening exactly in the middle of the night for the US east coast?
Not in the slightest. Time zones exist and it only goes to show that maybe a lot of tokens have been held oversea. The (crypto-) world doesn't just consist of the US, let alone the US east coast. If some (institutional) investors in Europe or Asia decided to liquidate their assets, that's exactly what you'd expect.
> sus that these massive selloffs are happening exactly in the middle of the night for the US east coast?
Not totally.
Algorithmic stablecoins have two equilibria: 0 and 1. Zero is presumably permanent. Small dislocations from 1 are fixable, but require arbitrage bandwidth. That bandwidth has a limit that varies based on participation.
Considering this, it’s almost expected that the peg would break more violently when most arbitrageurs are asleep. And given a single unfixed deviation from 1 pushes the system to 0, and given zero is a permanent outcome, one would expect the long-run value of the system to be zero while governed by these rules. (Hence the push to accumulate unconnected reserves.)
It means a lot of people who paid $1 for an asset that was supposed to be worth $1 now have 40 cents, and these people are not very happy about it.
Also, that $1 valuation was supposed to be backed up by around $4 billion worth of bitcoin. If Terra (the company behind UST) starts selling bitcoin to prop up the valuation, the price of bitcoin will also tank.
And since markets anticipate that this is what will happen, the price of bitcoin is already tanking, which reduces the value of the no-longer-$4B hoard, which means they would need to sell more, and you can see where this is going.
It's unclear how much BTC they actually amassed and how much, if any, is left. But at the end of the day, beyond all the techy handwaving, Luna was propped up by essentially Ponzi-like promise of 20% returns and now that has collapsed.
That's a short tweet and those who read the docs understand the tweet glosses over the mechanics. UST is backed by BTC reserves as much as $ is backed by gold in Fort Knox. Maybe in a way, but the gold conversion window closed and there never was a UST to BTC conversion window.
UST has convertibility by burning it at $1 into LUNA. Anchor protocol 20% did not seem sustainable. I looked into this contraption and stayed away from all of it. In hindsight, of course it all seems obvious.
It is perhaps a reference to a libertarian themed science fiction novel published in 1966, called "The Moon Is a Harsh Mistress". In it, inhabitants of the Moon were called Lunatics or Loonies.
That is pure FUD. In the last year there has been less than one tenth of a cent of movement. It is so stable the graph is incredibly zoomed in to show any movement at all.
Tether's probably the least trustworthy one, known to lie about its USD supply[0][1]. The fact that this crash happened with another coin in my eyes only further clears up that the entire field is quite problematic.
I think Tether is a scam but the current price is $0.9998, or $0.0002 off from the peg as a three month low. Calling it "struggling" is overstating things.
Nah, that chart has a $0.0005 range on its y axis and even there, the value is fairly stable. This is what it looks like if the range is between $0.90 and $1.10: https://link.ekin.dev/zPe9Qq
Not saying Tether is the bastion of trust but the data shows exact opposite of what you are implying.
A sound-bite from elsewhere in the comment section is stablecoins having 2 stable values - 1 and 0. In this case, if the peg isn't being maintained that could easily be a sign of heavy stress. Someone is maintaining the peg. If they don't have the power to push from 0.999 to 1.001 then they certainly don't have the power to push from 0.9 to 1.0.
I'm sceptical enough of Tether that my opinion isn't interesting, but the trending nature of the slip could easily turn out to be an early warning.
They now publish quarterly audits alternating between major accounting firms, and publicly disclose the breakdown of backing assets. Less than 7% is "other," including digital assets.
Attestations, not audits. Tether is able to move assets between accounts on attestation day to show backing, and has done so in the past.
You can read all about it in the NYAG case
Edit: to reply your edit, there was no recent name change. Tether really really wants to give the impression they’re audited, but they have never done one
It’s not just a name change. The purpose of the attestations is to create the illusion of an audit.
Also, even per their “audits,” a good deal of their assets are in crypto, which means it’s presently uncollateralised to the tune of tens of billions of dollars.
You falsely claimed they are audits, they are not audits, not in the legal sense of the word. If they claim so then it's Tether who are committing fraud.
Is USDT experincing a lot of movement in the wake of this? I can't imagine people looking at USDT with confidence after this, but then again, most of crypto investing seems illogical to me.
USDT is a lot more popular, but there's still over $16B of UST out there (or there was before its value crashed). USDT's $83B is 5x larger, but it's not like UST was something tiny that no one used. Coinbase's USDC is $48B. $16B is still a lot of money.
In this case it seems to have been much more complex than that. There was UST, which was supposed to be stable, and a linked coin Luna which was a form of balancing token, with smart contracts allowing conversion between the two, with the Luna exchange rate supplied by an oracle.
If UST starts to lose value, buy pressure is created because someone could buy 100 of them at (say) $39 and immediately convert to $100 of Luna. If it starts to rise, say to $1.10, you use Luna to convert to UST at a discount and then sell it to turn a profit. There were multiple other mechanisms to this, including one that involved staking your UST for interest and getting Anchor tokens, so that others could take loans. Anchor would give a 20% interest rate(!) and then there was something about loan defaults and buying collateral at a discount and ...
Massively complex, and one of those things that works fine, until one day it doesn't.
You say complex, I say contrived. They managed to maintain the appearance of stability for a while but it sounds like that was built on a Lovecraftian nightmare of convoluted interconnected systems that only ever seemed trustworthy thanks to the power of buzzwords.
And I don't believe you would be wrong! It looks almost purposely designed to blind the casual investigator with complexity and buzzwords, while luring them in with the promise of m4d g41nz.
Stable coins don't have to be backed by dollars, e.g. Dai and MIM are over-collaterized with cryptos. Dai survived the fall from ~$2k Ether to ~$50 Ether, and never lost its peg.
If you are collateralized to survive a 97.5% loss in collateral value, it means there has to be a severe limit on the amount of USD circulated by the stablecoin. It cannot scale.
And why would you think that? HN has been around since before the BTC whitepaper, and there has been healthy discussion of the space over the years. Not sure what you think the right venue is, honestly, but I'd love to find out.
The right venue is someplace that is unlikely to have an audience familiar with monetary history, databases, decentralized networks and payment processing and settlement systems.
What do you mean? HN can have pretty meaningful discussions around this topic. It's rather bizarre that you'd need a safer space than Hacker News to discuss these innovations, there is no punishment (except losing some internet points if downvoted), the worst thing that happens around here for the crypto community is getting sceptics asking some deeper and/or harder questions.
I mean if you want a stable coin... just use dollars? I get that you want to make use of some of the benefits of crypto, but the downside is that there's scams and instability everywhere, and "stable" coin is just a sales pitch, not a guarantee.
I mean the USD is not stable either by definition, but there's more checks and balances there and your $1000 won't halve in value overnight except in extreme situations like the world shutting you off of the international financial system for invading a neighbouring country.
.. which is why in the real world central banks are there to act as lenders of last resort. If there's a bank run, print money and lend it to the banks until the run stops.
This is separate from the issues facing stablecoins. I'm reminded of the British government's failed attempt to maintain a "stablepound" against the "stablemark", in the proto-stablecoin mechanism known as the ERM. https://en.wikipedia.org/wiki/Black_Wednesday
Many of the same features are there. Spend the reserves! Increase the interest rates! Ultimately they had to de-peg.
The person on the other side of that trade? George Soros. Yes, really.
Matt Levine on point again with more information about how this works and why it stopped [0]. I liked the comparison between a bank run and a 'death spiral'.
> A bank run is a fairly mild event compared to a death spiral. In a bank run, your $1 stablecoin is backed by some pool of assets that are worth something; a rush to withdraw money leads to fire sales that depress their value, but their value derives from something other than confidence in the stablecoin. In a death spiral, the whole system is built on confidence in the stablecoin; if that confidence evaporates then there is no floor at all on the value.
This is truly wild to watch happening in real time. At the time he published his post, UST was around $0.90 and the recovery path to near term stability at $1 seemed plausible. At the time of the HN post, it was at $0.30 and the death spiral to $0 seemed plausible. As I write this comment, it's sitting at just about $0.50, which is obviously not a stable position for a stablecoin. It seems self-evident that a stablecoin ever being closer to $0 than $1 should destroy confidence in it, but apparently not immediately!
"As of right now I don’t know what the answer is and wouldn’t want to hazard a guess, though I will say that $0.91 is much closer to $1 than it is to $0."
I think what the UST situation is showing is that for a stablecoin 0.90$ is a lot closer to 0$ than to 1.00$. There is probably an interesting mathematical structure to the 0 and 1$ attractors.
> And so the LFG bought a bunch of Bitcoin and promised to use it to defend Terra’s peg to the dollar. If one Terra goes down to $0.90, instead of turning Terra into Luna and selling them in a death spiral, the LFG can buy Terra for $0.90 and pay for it in Bitcoin. If the LFG has enough Bitcoin, and if Bitcoin’s price holds up, then it can defend the peg and keep the price of Terra close to $1.
So they've basically re-invented fractional reserve banking, with Terra/Luna taking the place of bank notes in old-timey banking, and BTC being the gold bars sitting in bank vaults, in this metaphor.
I'm mostly being facetious, but the cynic in me does wonder about the timing of the current slump.
And yeah, Musk tweeting that Twitter will accept Dogecoin isn't going to prop up the market in its current falling state, but once the market depresses somewhat and then stabilizes, Musk announcing support for Twitter+crypto would be enough to start pumping up the market again.
and this is why cryptocurrencies as marketed today are a scam.
Sure, Twitter will “accept” Dogecoin. But the only reason people have Dogecoin is because they expect its value to rise, and rise dramatically.
So why would anyone pay for whatever they’re paying in Dogecoin, when they expect the value of Dogecoin to increase in the future?
So, for example, if I’m trying to make a transaction for $10. And let’s say the dollar loses 10% value due to inflation in a year, while Dogecoin increases by 20% in a year. If I pay for the transaction in USD, a year later in 2023, that $10 USD would be worth $9 in 2022 USD.
If I pay for it in Dogecoin, however, the $10 worth of Dogecoin would a year later have been worth about $10.80 in 2022 USD.
If you think the value of crypto is going up then it makes absolutely no sense to use crypto for transactions.
A Twitter announcement for Crypto support would absolutely not be enough to pump the market. The wider sell off in crypto is due to a sell off in all markets due to a number of factors such as increasing rates. This is not some minor slump that will end with a Musk tweet.
> TerraUSD (UST) is pegged to the price of a dollar and is secured by Terra (LUNA). LUNA is an asset reserve that ensures the stability and security of the UST through the seigniorage process (income received from an emission of money).
Sounds like the peg was more-or-less a perpetual motion device that relied on a strong wind
What caused the 2008 crash was nothing to do with loose monetary policy. If you recall, that began in earnest after, and in response to, the crash.
It was loose regulatory policy. In no small part that Clinton rolled back Glass-Steagall in 1999. [1] Toxic mortgage-backed CDOs didn't have to become a systemic risk in the first place. There were a lot of contributing factors, but low interest rates weren't really top 10.
Loose banking policy, and not just in the US - Anglo-Irish and Kaupthing were major contributors, and RBS destroyed themselves and had to be rescued by the government. If I remember rightly it was an old fashioned physical bank run on Northern Bank which triggered the UK side of the collapse.
> Toxic mortgage-backed CDOs didn't have to become a systemic risk in the first place.
The problem had nothing to do with CDOs. No matter how you slice and dice risk, you never increase/decrease it. Someone would have owned the underlying MBS.
The issue was that the Blue Dog Democrats in the 90s decided with Alan Greenspan that homeownership should be incentivized. This created a housing bubble which ultimately is what caused the GFC.
The mechanism by which they turned garbage mortgages into AAA was 1) tranching, ie having junior and senior tranches, and 2) the assumption of low correlation (not all borrowers will run into trouble simultaneously).
Arguably, here we have something equivalent to the assumption of low correlation: if a few people here or there dump UST, you can indeed maintain the peg by issuing LUNA against it. But if many people simultaneously do it, then the whole edifice collapses.
> they turned garbage mortgages into AAA was 1) tranching, ie having junior and senior tranches, and 2) the assumption of low correlation (not all borrowers will run into trouble simultaneously)
Even the junior tranches eventually paid. They just weren’t liquid like other AAA assets (namely, Treasuries) in a crisis. The ratings described the tranches mostly accurately in terms of payout probabilities. Not in terms of liquidity.
The correlation assumption is common to these two. But…
> we have something equivalent to the assumption of low correlation: if a few people here or there dump UST, you can indeed maintain the peg by issuing LUNA against it
LUNA and UST were simultaneously issued by the same system. They are fundamentally correlated in a way even American mortgages are not. If the bandwidth of arbitrageurs is broken, the peg fundamentally fails. While one mortgage not paying increases the risk of another not paying, it doesn’t directly cause it in the way we see here.
Also, holders of junk mortgages still got a deed of real property against their loan. What will most Terra/Luna holders get?
> They just weren’t liquid like other AAA assets (namely, Treasuries) in a crisis.
Yes. I think that a big contributor to the crisis was that everyone knew that there was some loss on under-water-real-estate, but due to the complicated nature of the traded products nobody knew where those losses would manifest, and thus trust collapsed across the board.
Because you want to operate in a way that doesn't involve real currency, either on an exchange without any traditional banking arrangements, or perhaps one that doesn't wish to be regulated as dealing with real currency.
You may wish to avoid KYC/AML rules, you may want to avoid potential taxes incurred when changing to and from real currency, the exchange may wish to avoid reporting requirements too. You may wish to transfer large-ish sums around between exchanges without any traditional authorities being involved, and in a way that doesn't expose you to volatility.
More cynically, exchanges may or may not be able to get these stable-currency tokens (and this is more of a tether concern than UST) at a significant discount compared to real currency, or the exchange may wish to invent currency-like instruments that can be used on its platform without the need to hold real currency reserves.
Broke: Transfer $1000US to exchange. Wait 3 days. Buy. Sell. Want to buy another coin. Need a new exchange. Withdraw. Wait 3 days. Send to new
exchange. Wait 3 days. Buy new coin. Pay income tax. Send passport photos to anonymous stranger.
Woke: Transfer $1000US to exchange. Wait 2 days. Buy tether. Buy sell wrapped instruments on different chains using smart contracts NOT exchanges. Never wait for traditional finance. No KYC from strangers in foreign places. No income tax!
Not sure about the US but my SEPA transfers in the EU frequently do take 2-3 days (sometimes it's instant but at least with my German bank account it often isn't).
I did a SEPA transfer from a German N26 account yesterday and I have a message in the app that it might take 2-5 business days to reach the recipient. Instant transfers aren't universal.
> Do transfers in the US really take three days, rather than a second or so?
They take about thirty minutes (Fedwire), given banks’ antifraud procedures. That said, I can wire moderate amounts (generally, less than $25,000) in seconds to known counterparties. There are also P2P rails like Venmo for small, instant transfers, though that’s a gross settlement system.
It can take 3 days for the amount to show up on an exchange, due to regulatory checks or holds applied by the exchange. Coinbase is famous for accepting deposits then immediately locking them for several days while they verify the account.
My understanding is daytrading. Fiat on/off ramping is more involved, crypto-to-crypto is easy. So you can pretend to have USD while enjoying the convenience of cryptocurrencies (especially within an exchange, where next to no fees are involved).
You already do use stablecoins, you use BankOfAmericaDollar (or WellsFargoDollar or...), which is fully convertible 1:1 to USD - some exceptions may apply. Your BankOfAmericaDollar isn't backed by currency, it's backed by assets with variable values, and there's an insurance fund that may cover some of your deposits, again limits and exceptions may apply.
Unless you have tender in your hands, or a fedwire account, you don't actually have 'real currency'.
My dear home country uses exchange rate trickery to charge a 50% tax on remittances.
Sending USDT to my friends and family instead of USD allows me to give them money without the implicit tax, while having an exchange rate that's simpler to understand and not doesn't risk crashes like Bitcoin.
are you intentionally writing !(!(riskcrash(bitcoin)))?
Because if that is what you wanted to say then I agree with you, but if you really wanted to say "doesn't risk a crash in value like bitcoin exposes me to" you do realize that that is simply untrue because no one knows the financial basis of Tether? Which means that at any moment it might go to 0?
When your country temporarily blocks people from buying foreign currency, and that "temporary" restriction becomes a 50% tax on all foreign currency transactions 10 years down the line (thus killing the tourism and services industry) you might think differently of this kind of tax evasion.
Keep in mind the local currency (which is the only legal way to save money) dropped 97.8% compared to USD since the block started.
In most (all ?) countries except US, you are not taxed for crypto to crypto conversion. However you are taxed when you convert crypto to fiat. For example if you want to secure your bitcoins benefits by converting them to 1M USD, in France you should pay 300k USD (30% flat tax). But if you convert them to 1M UST, or USDT, or USDC, or whatever, then you pay nothing.
So using stablecoins is a way of securing volatile crytpo assets for any period of time, while not having to pay taxes immediately (only when you decide to convert to fiat)
Of course this makes sense only if the stablecoin is actually stable ...
You're not taxed, because the tax authorities rely on self-reporting. Trading one asset for another asset is ~always a taxable in most (all?) countries.
Well not in France at least, and as far as I know this is the same in most EU countries. I do not really know for Asia and Africa though, but I only ever heard of US (and now of UK).
I will add that in some EU countries you are not taxed at all (assuming this is not your day job), even when converting to fiat ! Portugal, Belgium and Germany. Also Switzerland (not in EU)
There is no difference. There are a lot of currencies. There are two reasons you might want to hold them:
- you believe they might increase in value or at least hold their value relative to other currencies.
- you need them for something (e.g. because you need to spend some) and you trust they won't decrease in value short term.
With any coin, as soon as you break that trust it becomes a problem. This coin is no different than Argentina pegging their currency to the dollar back in the day. Didn't work out either because their economy was still bad and they had to walk back their promises regarding that value. As soon as people stopped believing their coin was worth 1 dollar, it devalued by a lot. There are plenty of examples of 'real' currencies running into issues with their valuation. The Venezuelan currency was at some point cheaper than toilet paper by weight, for example. Happens all the time. Real currencies can be as unstable or even less stable than the shittiest crypto coin.
Ultimately the problem with a lot of these stable coins is a lack of regulation and mandatory reserves combined with dodgy market making magic bots that may or may not work as advertised. This one clearly did not keep up and now the reserves are gone and the trust as well.
> - spread around some fud about peg and bank runs
> - dumped the fuck out of their $3bn $btc on market to trigger wider panic
I'm sorry, but this is deep in /r/wallstreetbets conspiracy territory. The Occam's razor explanation is that the infinite 20% returns Luna/Anchor Ponzi is actually collapsing and that's what's triggering the runs.
It has more to do with lending rates. The 10 year peaked above 3% and ibonds now yield 9.6%. Ponzi’s are getting a one-two punched. Suckers now have alternatives to seek better returns. Scammers and exploiters now pay to leverage up ponzi run ups.
This kind of market manipulation does happen all the time in the cryptocurrencies trading world though. That doesn't mean it's the most likely explanation in this case (as there was a literal Ponzi scheme behind all this !), but it's not completely impossible either.
It is worth noting that the depeg started at a time when liquidity was moving from curve finances ust-3pool to 4pool(Both trading pools of stablecoins). This resulted in much less liquidity for a time which would be perfect time to attack the weakness.
It was always going to blow up though so it is possible this was just a coincidence and all it needed was slightly less liquidity to trigger the run.
"now peg is being restored naturally via the market module"
:-D
Notice that all algorithmic stable coins essentially work the same way - the coin is issued against another coin acting as collateral. A fall in the value of the collateral will cause forced selling to buy back the stable coin.
They do also work the other way; pumping the value of the collateral as the stable coin can be used to bid up the collateral.
Creating an inherently unstable system that don't really need a conspiracy theory to explain why it will eventually collapse.
I personally didn't enjoy it, I post it more as a sign that, maybe, the powers that be (SEC? some other institution) will, somehow, intervene.
People killing themselves because of financial losses that could have been prevented had some prior regulations had been in place does not look good for those institutions I mentioned (SEC and the others). Or maybe the people at those institutions (and the people supporting the people at those institutions) just don't care anymore about this type of events and about how it reflects on the whole "ecosystem".
It doesn't require regulation to recover funds from fraudsters. [1]
I have the opinion that a higher likelihood of getting caught and facing prison would be more effective than regulators that can sometimes be easily tricked for years.
That was my takeaway as well. Telling gambling addicts 'no don't go, I've been there and suicide is not the answer. There is more gambling to be done!' is pretty strange. It might be helpful for some people to hear, but it's certainly not healthy.
> If I made up [Luna] and [Terra] on my computer and said to you “I will give you the number 10 billion in this Excel spreadsheet if you give me 1 million U.S. dollars,” you would say no, and if I raised my offer to 400 quadrillion you would not change your mind.
Institutional stables (USDC,USDT,BUSD) are backed by traditional USD (more or less audited)
Algorithmic stables are vulnerable to things like what happened to ust because the coin basket has to be balanced always, DAI tends to be more or less stable because it has a big part of its reserves in USDC so its more like a wrapped USDC with a little ETH.
The more damaged ones were people who felt attracted for the completely unrealistic 20% interest.
However, this absolute dump was coordinated by big funds, they saw they could borrow and dump whatever, nobody would save the peg.
> Institutional stables (USDC,USDT,BUSD) are backed by traditional USD (more or less audited)
Sorry you can't say USDT and "more or less audited" in the same sentence. Literally un-audited. It's an empty vault in the Bahamas lol. [1]
Institutionalized stable would be a better description of USDT.
The issue is algorithmic and partially-collateralized stable coins are all, each and every one of them, vulnerable to attack. They purport to be $1, but you know fundamentally they are not. Therefore you can attack the peg and walk away with boatloads of money. This is actually how Soros made his money - he broke the GBP when it was pegged. [2] It's much easier to break these pseudo-dollars since the market is unregulated, you can do whatever you want, and they're small potatoes in the world of tradfi.
[edit] This is a great listen on the whole thing. [3]
well you only get a depeg with huge volitilty. Luna dropped 97%, that's why it depeged. Synethic SnP, real estate is like 10% max which isn't high enough volitilty to lead to what esseentially was a bankrun on UST.
The problem is getting people to trust the underlying collateral. Also, you can take the Dai approach and be over collateralized. Dai is at 150%, instead of trying to maintain parity.
"The order further finds that Tether and Bitfinex’s combined assets included funds held by third-parties, including at least 29 arrangements that were not documented through any agreement or contract, and that Tether transferred Tether reserve funds to Bitfinex, including when Bitfinex needed help responding to a “liquidity crisis.”"
It doesn't matter if you lock up something in a contract and sell if it price drops or the dillute existing holders by expanding the issuance and selling it. In aggregate the effect is the same.
If both DAI and MKR go to zero users still have the collateral. If UST and LUNA go to zero then there is nothing left(apart from very recently they started adding some BTC reserves).
Someone did not think that through. You could make the same argument with about: that they're essentially the same as some number in a spreadsheet.
What makes people trust a currency is who is controlling it. In the case of some cryptocurrencies that answer may be "people who contribute processing power". For USD that is "the US government", and for miscellaneous virtual currencies it may be some company who manages it in spreadsheet...
Fiat: If you give me food and shelter that I need to survive, I’ll give you numbers in a spreadsheet that you need to give to the people with guns so that they don’t lock you up in jail or shoot you.
That's totally correct. But it's also how it works the best, the world is brutal, move on. I'd rather face that than the bank run I just went through, and I was practically unscathed compared to the many horror stories out there.
I'm not sure what if anything they have left elsewhere to try to prop this up. But if they deployed all those reserves yesterday to get it back to $0.91-ish then I don't see how they recover it again.
Here, $UST's justification was a 20% interest for holding. Thus, in theory, just by owning $UST, you make more than you would holding dollar bills (emphasis on "in theory"). Broadly speaking, the raison d'etre of stablecoins is liquidity. Interfacing between fiat and crypto is difficult for banking reasons and taxing reasons, but interfacing between crypto coins is easy. Thus, stablecoins are seen as a useful tool for both accounting, as well as being coins that are hedged against collapses (again, in theory).
Some of the "stablecoins" are implemented on top of another blockchain, in such a way that it's possible to do crypto-to-stable transactions automatically fully within the blockchain system. That's attractive to the kind of people who want to build ever more complex financial machines.
It also provides a system that can pretend it's not subject to money laundering law.
Synthetic stablecoins using economic games implemented in smart-contracts to achieve pegging are not magically 1:1 with the pegged asset (even a representative currency would break this ratio sometimes), they are a set of mechanisms to bring the currency towards this goal ratio. The problem isn't that UST is below peg, the problem is if it can't return above or at peg, this is the point where most synthstables fail, where they fall into a negative loop and just slowly die. However there are at least some that have not failed this, but have not been tested at these scales. Either way UST turns, we will know more about how we can make stable coins.
Synthetic stablecoins are the most important technology of our time and a very large step for our species to organize ourselves.
I mean the industrial model of the State and the organization of labor it provides that is being deteriorated by globalization will change significantly. Things change when people get the same tools the corporations have been playing around with for decades.
Bad future: State owned CBDCs with types for different 'kinds' of people creating a society even more neofeudal
Good future: Decentralized DAPPs organizing workers with shared interests regardless of their location and social capital
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[ 3.4 ms ] story [ 300 ms ] threadAnd is there any sensible world where it stabilizes at some value other than 0 or 1?
Yes, if a lot of btc is bought in this stable coin, and the stable coin is printed, to buy btc in order to pump up the btc price then if that stable coin loses its peg, it cannot be used to pump btc anymore. When Tether finally dies it'll take down btc and the whole industry with it
Although BTC has been trending downwards with most of the rest of the financial markets this week.
Also, anyone find it sus that these massive selloffs are happening exactly in the middle of the night for the US east coast?
Not in the slightest. Time zones exist and it only goes to show that maybe a lot of tokens have been held oversea. The (crypto-) world doesn't just consist of the US, let alone the US east coast. If some (institutional) investors in Europe or Asia decided to liquidate their assets, that's exactly what you'd expect.
Not totally.
Algorithmic stablecoins have two equilibria: 0 and 1. Zero is presumably permanent. Small dislocations from 1 are fixable, but require arbitrage bandwidth. That bandwidth has a limit that varies based on participation.
Considering this, it’s almost expected that the peg would break more violently when most arbitrageurs are asleep. And given a single unfixed deviation from 1 pushes the system to 0, and given zero is a permanent outcome, one would expect the long-run value of the system to be zero while governed by these rules. (Hence the push to accumulate unconnected reserves.)
Obviously tether and friends won't go down this path right?
Also, that $1 valuation was supposed to be backed up by around $4 billion worth of bitcoin. If Terra (the company behind UST) starts selling bitcoin to prop up the valuation, the price of bitcoin will also tank.
And since markets anticipate that this is what will happen, the price of bitcoin is already tanking, which reduces the value of the no-longer-$4B hoard, which means they would need to sell more, and you can see where this is going.
That is uninformed and incorrect. UST is supported by promise of conversion into LUNA at $1 per UST, so it is supported by convertibility.
It is unwinding. I have not held either of these.
Those not just making stuff up can read the docs: https://www.terra.money/intro-to-terra
https://twitter.com/stablekwon/status/1503296630396645376
More details: https://techcrunch.com/2022/04/06/terras-founder-plans-to-ba...
It's unclear how much BTC they actually amassed and how much, if any, is left. But at the end of the day, beyond all the techy handwaving, Luna was propped up by essentially Ponzi-like promise of 20% returns and now that has collapsed.
UST has convertibility by burning it at $1 into LUNA. Anchor protocol 20% did not seem sustainable. I looked into this contraption and stayed away from all of it. In hindsight, of course it all seems obvious.
[0] https://fortune.com/2021/10/15/tether-crypto-stablecoin-fine...
[1] https://www.bloomberg.com/news/features/2021-10-07/crypto-my...
That aged well. Tether hit $0.9935 hours after this comment.
Now much smaller, and steadily down. Probably nothing but a definite change in their patterns
Not saying Tether is the bastion of trust but the data shows exact opposite of what you are implying.
I'm sceptical enough of Tether that my opinion isn't interesting, but the trending nature of the slip could easily turn out to be an early warning.
https://tether.to/en/transparency/#reports
Edit: I falsely claimed they were alternating firms, but it turns out it was just a name change recently. That is my bad.
You can read all about it in the NYAG case
Edit: to reply your edit, there was no recent name change. Tether really really wants to give the impression they’re audited, but they have never done one
It’s not just a name change. The purpose of the attestations is to create the illusion of an audit.
https://www.coindesk.com/markets/2022/01/26/tethers-new-acco...
https://fortune.com/2021/10/15/tether-crypto-stablecoin-fine...
That's why Bitfinex thus Tether are banned from doing business with US citizens.
Looks like some people have.
If UST starts to lose value, buy pressure is created because someone could buy 100 of them at (say) $39 and immediately convert to $100 of Luna. If it starts to rise, say to $1.10, you use Luna to convert to UST at a discount and then sell it to turn a profit. There were multiple other mechanisms to this, including one that involved staking your UST for interest and getting Anchor tokens, so that others could take loans. Anchor would give a 20% interest rate(!) and then there was something about loan defaults and buying collateral at a discount and ...
Massively complex, and one of those things that works fine, until one day it doesn't.
And I don't believe you would be wrong! It looks almost purposely designed to blind the casual investigator with complexity and buzzwords, while luring them in with the promise of m4d g41nz.
What's the issue with scrutinisation?
The community at large has awful factions, but a portion of this tech will be normalized sooner than we hope.
I mean the USD is not stable either by definition, but there's more checks and balances there and your $1000 won't halve in value overnight except in extreme situations like the world shutting you off of the international financial system for invading a neighbouring country.
This is separate from the issues facing stablecoins. I'm reminded of the British government's failed attempt to maintain a "stablepound" against the "stablemark", in the proto-stablecoin mechanism known as the ERM. https://en.wikipedia.org/wiki/Black_Wednesday
Many of the same features are there. Spend the reserves! Increase the interest rates! Ultimately they had to de-peg.
The person on the other side of that trade? George Soros. Yes, really.
> A bank run is a fairly mild event compared to a death spiral. In a bank run, your $1 stablecoin is backed by some pool of assets that are worth something; a rush to withdraw money leads to fire sales that depress their value, but their value derives from something other than confidence in the stablecoin. In a death spiral, the whole system is built on confidence in the stablecoin; if that confidence evaporates then there is no floor at all on the value.
[0] https://archive.ph/slgNt
I think what the UST situation is showing is that for a stablecoin 0.90$ is a lot closer to 0$ than to 1.00$. There is probably an interesting mathematical structure to the 0 and 1$ attractors.
So they've basically re-invented fractional reserve banking, with Terra/Luna taking the place of bank notes in old-timey banking, and BTC being the gold bars sitting in bank vaults, in this metaphor.
And yeah, Musk tweeting that Twitter will accept Dogecoin isn't going to prop up the market in its current falling state, but once the market depresses somewhat and then stabilizes, Musk announcing support for Twitter+crypto would be enough to start pumping up the market again.
Sure, Twitter will “accept” Dogecoin. But the only reason people have Dogecoin is because they expect its value to rise, and rise dramatically.
So why would anyone pay for whatever they’re paying in Dogecoin, when they expect the value of Dogecoin to increase in the future?
So, for example, if I’m trying to make a transaction for $10. And let’s say the dollar loses 10% value due to inflation in a year, while Dogecoin increases by 20% in a year. If I pay for the transaction in USD, a year later in 2023, that $10 USD would be worth $9 in 2022 USD.
If I pay for it in Dogecoin, however, the $10 worth of Dogecoin would a year later have been worth about $10.80 in 2022 USD.
If you think the value of crypto is going up then it makes absolutely no sense to use crypto for transactions.
Sounds like the peg was more-or-less a perpetual motion device that relied on a strong wind
Loose monetary policy caused the crash.
What caused the 2008 crash was nothing to do with loose monetary policy. If you recall, that began in earnest after, and in response to, the crash.
It was loose regulatory policy. In no small part that Clinton rolled back Glass-Steagall in 1999. [1] Toxic mortgage-backed CDOs didn't have to become a systemic risk in the first place. There were a lot of contributing factors, but low interest rates weren't really top 10.
[1] https://en.wikipedia.org/wiki/Aftermath_of_the_repeal_of_the...
The problem had nothing to do with CDOs. No matter how you slice and dice risk, you never increase/decrease it. Someone would have owned the underlying MBS.
The issue was that the Blue Dog Democrats in the 90s decided with Alan Greenspan that homeownership should be incentivized. This created a housing bubble which ultimately is what caused the GFC.
The mechanism by which they turned garbage mortgages into AAA was 1) tranching, ie having junior and senior tranches, and 2) the assumption of low correlation (not all borrowers will run into trouble simultaneously).
Arguably, here we have something equivalent to the assumption of low correlation: if a few people here or there dump UST, you can indeed maintain the peg by issuing LUNA against it. But if many people simultaneously do it, then the whole edifice collapses.
Even the junior tranches eventually paid. They just weren’t liquid like other AAA assets (namely, Treasuries) in a crisis. The ratings described the tranches mostly accurately in terms of payout probabilities. Not in terms of liquidity.
The correlation assumption is common to these two. But…
> we have something equivalent to the assumption of low correlation: if a few people here or there dump UST, you can indeed maintain the peg by issuing LUNA against it
LUNA and UST were simultaneously issued by the same system. They are fundamentally correlated in a way even American mortgages are not. If the bandwidth of arbitrageurs is broken, the peg fundamentally fails. While one mortgage not paying increases the risk of another not paying, it doesn’t directly cause it in the way we see here.
Also, holders of junk mortgages still got a deed of real property against their loan. What will most Terra/Luna holders get?
Yes. I think that a big contributor to the crisis was that everyone knew that there was some loss on under-water-real-estate, but due to the complicated nature of the traded products nobody knew where those losses would manifest, and thus trust collapsed across the board.
You may wish to avoid KYC/AML rules, you may want to avoid potential taxes incurred when changing to and from real currency, the exchange may wish to avoid reporting requirements too. You may wish to transfer large-ish sums around between exchanges without any traditional authorities being involved, and in a way that doesn't expose you to volatility.
More cynically, exchanges may or may not be able to get these stable-currency tokens (and this is more of a tether concern than UST) at a significant discount compared to real currency, or the exchange may wish to invent currency-like instruments that can be used on its platform without the need to hold real currency reserves.
Broke: Transfer $1000US to exchange. Wait 3 days. Buy. Sell. Want to buy another coin. Need a new exchange. Withdraw. Wait 3 days. Send to new exchange. Wait 3 days. Buy new coin. Pay income tax. Send passport photos to anonymous stranger.
Woke: Transfer $1000US to exchange. Wait 2 days. Buy tether. Buy sell wrapped instruments on different chains using smart contracts NOT exchanges. Never wait for traditional finance. No KYC from strangers in foreign places. No income tax!
Satire some, but true.
TLDR: Smoother gambling.
Now if you transfer on a Tuesday and the bank is closed on Wednesdays - tough luck, they're allowed to take till Thursday.
But there's always the option of doing an "instant" transfer if you're willing to pay extra.
They take about thirty minutes (Fedwire), given banks’ antifraud procedures. That said, I can wire moderate amounts (generally, less than $25,000) in seconds to known counterparties. There are also P2P rails like Venmo for small, instant transfers, though that’s a gross settlement system.
What if 10% of the people decide to do that?
What if it turns out that the number of $$$ that Tether actually has is much smaller than the number they imply that they have?
Unless you have tender in your hands, or a fedwire account, you don't actually have 'real currency'.
Sending USDT to my friends and family instead of USD allows me to give them money without the implicit tax, while having an exchange rate that's simpler to understand and not doesn't risk crashes like Bitcoin.
> and not doesn't risk crashes
are you intentionally writing !(!(riskcrash(bitcoin)))?
Because if that is what you wanted to say then I agree with you, but if you really wanted to say "doesn't risk a crash in value like bitcoin exposes me to" you do realize that that is simply untrue because no one knows the financial basis of Tether? Which means that at any moment it might go to 0?
Keep in mind the local currency (which is the only legal way to save money) dropped 97.8% compared to USD since the block started.
Would that have something to do with a recent war by any chance?
The latest version of foreign currency restrictions has been on the books since 2019, so it's mostly about the government systemically being shit.
So using stablecoins is a way of securing volatile crytpo assets for any period of time, while not having to pay taxes immediately (only when you decide to convert to fiat)
Of course this makes sense only if the stablecoin is actually stable ...
I will add that in some EU countries you are not taxed at all (assuming this is not your day job), even when converting to fiat ! Portugal, Belgium and Germany. Also Switzerland (not in EU)
- you believe they might increase in value or at least hold their value relative to other currencies.
- you need them for something (e.g. because you need to spend some) and you trust they won't decrease in value short term.
With any coin, as soon as you break that trust it becomes a problem. This coin is no different than Argentina pegging their currency to the dollar back in the day. Didn't work out either because their economy was still bad and they had to walk back their promises regarding that value. As soon as people stopped believing their coin was worth 1 dollar, it devalued by a lot. There are plenty of examples of 'real' currencies running into issues with their valuation. The Venezuelan currency was at some point cheaper than toilet paper by weight, for example. Happens all the time. Real currencies can be as unstable or even less stable than the shittiest crypto coin.
Ultimately the problem with a lot of these stable coins is a lack of regulation and mandatory reserves combined with dodgy market making magic bots that may or may not work as advertised. This one clearly did not keep up and now the reserves are gone and the trust as well.
https://threadreaderapp.com/thread/1524006086147252227.html
> - spread around some fud about peg and bank runs
> - dumped the fuck out of their $3bn $btc on market to trigger wider panic
I'm sorry, but this is deep in /r/wallstreetbets conspiracy territory. The Occam's razor explanation is that the infinite 20% returns Luna/Anchor Ponzi is actually collapsing and that's what's triggering the runs.
It was always going to blow up though so it is possible this was just a coincidence and all it needed was slightly less liquidity to trigger the run.
:-D
Notice that all algorithmic stable coins essentially work the same way - the coin is issued against another coin acting as collateral. A fall in the value of the collateral will cause forced selling to buy back the stable coin.
They do also work the other way; pumping the value of the collateral as the stable coin can be used to bid up the collateral.
Creating an inherently unstable system that don't really need a conspiracy theory to explain why it will eventually collapse.
[1] https://old.reddit.com/r/terraluna/comments/un0fni/for_those...
People killing themselves because of financial losses that could have been prevented had some prior regulations had been in place does not look good for those institutions I mentioned (SEC and the others). Or maybe the people at those institutions (and the people supporting the people at those institutions) just don't care anymore about this type of events and about how it reflects on the whole "ecosystem".
Let's not forget the massive Madoff ponzi scheme in a highly regulated space...
https://en.wikipedia.org/wiki/Recovery_of_funds_from_the_Mad...
I have the opinion that a higher likelihood of getting caught and facing prison would be more effective than regulators that can sometimes be easily tricked for years.
[1] https://news.ycombinator.com/item?id=30260787
https://www.bloomberg.com/opinion/articles/2022-05-10/anothe...
The biggest AFAIK is still Maker/DAI which is orderly unwinding at the moment:
https://coinmarketcap.com/currencies/maker/
https://coinmarketcap.com/currencies/multi-collateral-dai/
(Click one year and market cap to see the unwinding.)
Algorithmic stables are vulnerable to things like what happened to ust because the coin basket has to be balanced always, DAI tends to be more or less stable because it has a big part of its reserves in USDC so its more like a wrapped USDC with a little ETH.
The more damaged ones were people who felt attracted for the completely unrealistic 20% interest.
However, this absolute dump was coordinated by big funds, they saw they could borrow and dump whatever, nobody would save the peg.
> this absolute dump was coordinated by big funds
Really? Because people have been talking about the reserve to pay out the promised interest falling away for some time now.
Sorry you can't say USDT and "more or less audited" in the same sentence. Literally un-audited. It's an empty vault in the Bahamas lol. [1]
Institutionalized stable would be a better description of USDT.
The issue is algorithmic and partially-collateralized stable coins are all, each and every one of them, vulnerable to attack. They purport to be $1, but you know fundamentally they are not. Therefore you can attack the peg and walk away with boatloads of money. This is actually how Soros made his money - he broke the GBP when it was pegged. [2] It's much easier to break these pseudo-dollars since the market is unregulated, you can do whatever you want, and they're small potatoes in the world of tradfi.
[edit] This is a great listen on the whole thing. [3]
[1] https://www.bloomberg.com/news/features/2021-10-07/crypto-my...
[2] https://www.investopedia.com/ask/answers/08/george-soros-ban...
[3] https://cryptocriticscorner.com/2022/05/04/episode-71-terra-...
Theoretically you can purchase synthetic stocks, tokenized real estate, other stablecoins. No one has tried it yet tho.
The problem is getting people to trust the underlying collateral. Also, you can take the Dai approach and be over collateralized. Dai is at 150%, instead of trying to maintain parity.
"The order further finds that Tether and Bitfinex’s combined assets included funds held by third-parties, including at least 29 arrangements that were not documented through any agreement or contract, and that Tether transferred Tether reserve funds to Bitfinex, including when Bitfinex needed help responding to a “liquidity crisis.”"
https://www.cftc.gov/PressRoom/PressReleases/8450-21
DAI requires 150% collateral in a currency completely outside the system that it can't burn or mint.
It is a big difference.
edit: UST is going to be collateralized in the future if it survives this https://twitter.com/stablekwon/status/1524331190995484672
And they are both run by algorithms.
What makes people trust a currency is who is controlling it. In the case of some cryptocurrencies that answer may be "people who contribute processing power". For USD that is "the US government", and for miscellaneous virtual currencies it may be some company who manages it in spreadsheet...
Think of prisoners using cigarettes for currency - it's not necessary for the tobacco companies to be involved or even care.
I'm not sure what if anything they have left elsewhere to try to prop this up. But if they deployed all those reserves yesterday to get it back to $0.91-ish then I don't see how they recover it again.
[0] https://techcrunch.com/2022/05/10/us-treasury-secretary-jane...
https://coinmarketcap.com/currencies/xusd/
ETA: Though, as some people are learning now, you're not actually removing your crypto price risk.
It also provides a system that can pretend it's not subject to money laundering law.
What do you mean by this?
Bad future: State owned CBDCs with types for different 'kinds' of people creating a society even more neofeudal
Good future: Decentralized DAPPs organizing workers with shared interests regardless of their location and social capital