What is YCombinator’s “board”? Re their directory profile: every public YC company has one, even my defunct 11 year old startup —- it’s definitely not an active endorsement.
I didn't invest because it was only 15% gains. Sad, but true. I actually read them their material & saw it was based on Anchor Protocol. When I saw that it was based on UST, and I couldn't figure how UST was backed by anything I understood, I opted out. One of the few times in crypto where I felt "do you won research" paid off for me.
It's unfair to compare it against a savings account. Even 1-year treasury bills would give you around 2% interest. It's just that banks are not willing to offer that premium to you.
If a 20% better ponzi is better than a 15% one, again, I ask, why not a 1,500% one? There's new shitcoins born every day, promising these kinds of returns.
The part you're missing is that StableGains was simply parking their investors' money on Anchor, collecting the 20% APY, shaving off a quarter of it, and passing the remaining 15% to their investors.
Skipping the middleman is necessarily better because it is inherently lower risk for an absolute guarantee of 33% more upside.*
Investing in something else with even 16% promised returns, let alone 1500%, is not necessarily better because it is almost certainly higher risk.
* When Anchor (Luna/UST) crashed both StableGains and direct users of Anchor suffered the same percentage losses. But direct investors in Anchor had balances which were necessarily 33% ahead of StableGains investors due to not having StableGains shave off their interest earnings.
The reason StableGains initially looked compelling to me was for smaller transactions. Being able to deposit & withdraw smaller amounts of money w/o having to pay gas fees looked good. If you need to pull out $100 to cover your half of dinner w/ a friend, StableGains would make that easy. Trying to pull it out of Anchor Protocol would be more work, and you'd have to pay the gas fees.
There are almost definitely a priori reasons to think a 1500% one is much riskier. 20% is in the realm of possibility considering you could get ~15% yields from crypto.com, there were also some powerful players with deep pockets funding anchor paying the difference, and that there was almost 20bn$ TVL.
Stablegains had nothing going for it, in fact it had all of the risk with none of the reward. 1500% APYs are usually attached to LPs carrying huge risks of impermanent loss rather than stablecoin staking and are usually very transient in that they evaporate within hours.
Anchor protocol is/was paying around 20%. That was my benchmark. When I saw these guys were paying 15% and looked like a bank on the surface, was initially more interested because they looked established. Then I read up on it and changed my mind. Essentially it’s just anchor protocol with a fancy abstraction layer.
A company that couldn't get financing any other way could get financing by issuing fixed price convertible bonds. "Fixed price convertible" means the bond can be converted into shares (of the company), but at a fixed price - aka, regardless of the value of each individual share, you are promised fixed a dollar amount of them.
This means if the share price drops, you will be "made whole" by getting issued enough shares to match the fixed price.
It's called death spiral bond, because if/when the price of such a company drops, these convertible bonds will trigger, causing the amount of shares to increase (as they issue new shares), which in turn causes the price of the existing shares to drop, ad-infinitum. Often the owners of the shares would end up with nothing as the shares' value drops to zero (or the company recovers, and they do make some money).
Swap bonds with UST, and shares with Luna, and you get the above scenario.
You would certainly think so ... I did. But I'm sorry to say that you are strongly overestimating the general population here.
My friends know I'm the local crypto-geek[0] so Bitcoin and other cryptocurrencies and tokens are brought up to me all the time by people who's knowledge of what any of it is begins and ends with "Last year X coin was $7.00 and this year it's $100.00, and all of the other ones have had gains like nothing else I can invest in."
I can think of at least 6 members of my extended family who are presently invested in cryptocurrency trading (many just say "Bitcoin" and don't actually have any) who are -- in every way -- technologically obliviously ignorant[1]. Half of them, however, are not otherwise uneducated people (one guy is a very well paid VP at a company everyone in my state has heard of and has an MBA from a major university ... he's just not in finance or tech). They're not thinking "well, 15% APY is insane/impossible to provide over the short term/impossible to ever guarantee unless they've invented a time machine or are breaking the law." They're looking at the percentage gains on Bitcoin or Ethereum (depending on when you acquired it, of course -- Lord knows it's taken a hit lately) and thinking "15% sounds easy for a company to pull off in this space."
Everyone in my family who invested in some crypto used some company to hold their crypto. Almost all of them used services/companies that had enough of a strong scent of "scam" that I would have dismissed them without further research. Some used more mainstream crypto-sort-of-banks. Sort-of-banks because none of the companies that my family members chose for crypto trading were FDIC or otherwise insured in a manner that made sure the numbers they see on their page could be turned into dollars in a bank account somewhere else. The surprising thing is that none of them had any idea this was the case! A few family members thought they were buying Bitcoin because they were investing in "cryptocurrency" and it turned out they were buying some strange token running on the Ethereum network.
I'll grant it's a small sample size, but in every way it's consistent ... it's a "gold rush" kind of frenzy filled, unfortunately, with a lot of fraudsters riding the wave of news around the crazy gains of crypto.
The thing that scares me the most is that a few of my family members[2] have done very well trading crypto (4x/5x/10x their yearly salary). Some lost a little, the others gained a little. The ones that did well aren't treating it like a short-term gamble, even watching the prices drop ... it's like they're holding on to the stock of a company that they deeply believe in except ... there's no company.
[0] I don't invest, I did mine Ethereum a while back/spent most of it and made a small profit but did it mostly to learn how the miner worked and how to write CUDA software. I worked SecDev for a couple of years at a global telecom and I enjoy the technology behind it all.
[1] One of them -- not elderly -- called for help reconnecting to his 4G modem (their only internet service). The instruction "reboot your computer" was not understood. I fell back to "turn it off, count to ten, turn it on again." Nope, right back where he left it. I had not seen his computer setup so I could provide no more instruction. When I arrived I discovered he was "rebooting" ... the monitor.
[2] Four, precisely, two who are distantly related through a great aunt and are working together, but are among the most irresponsible people with money I've ever known, and two who are quite good with most things financial.
Edit: Realized my tone was harsh in a few places and there was one inaccuracy.
I have a (ex-) friend who falls for every MLM scam that comes along. Naturally, she put everything into crypto. She would undoubtedly think she could make 15% with no risk. I believe a huge number of the MLM gullible are the dupes involved in these scams.
Where do they specifically exclude the risk of depegging?
From their website :
"As Stablegains is not a traditional US bank, the funds are not secured by the FDIC. While we aim to make every effort to understand and mitigate everything that can possibly go wrong, there is still a non-zero risk you can lose your deposit. Our advice is to diversify and never invest all of your savings in a single place."
Of course they are selling themselves as pretty safe, and I'm sure they thought they were.
But as you mention, it's like the 10th stablecoin to drop, so it's not exactly a surprise that crypto is a risky investment in any case.
If you’re taking this from their Twitter thread after this whole situation happened, that is definitely not the same thing as an upfront risk factor when collecting investments from people.
They added a much more reasonable risk explanation after the event happened. Click the link that the submission is. Look at the before and after pictures
You are moving the goal post here. 15% is not 0.75%. The probability of returning 15% consistently is significantly lower than 0.75%.
If you guaranteed 0.75% to your customers and do not deliver, then you are liable. What you are describing is arbitrage and not what this scenario is about.
Most marketing is arguably fraudulent. I don't think these scams are good at all but part of me really wishes there were more just to force people to think twice when they see marketing from eg Apple or Tesla.
EDIT: s/advertising/marketing/g I don't really think of them as separate but that's a good point.
For the sake of being a pedant, your statement is incorrect: the U.S. federal fund rate was 15% in 1981, making CDs and T-bills yield 15% APY for the products bought that year. So that kind of return has a place in reality. Granted, those were different times, different economic climate and exceptional fed actions. What you probably mean is that promising anything that exceeds SOFR + say 2 percentage points has a risk premium that should be disclosed.
The fact those returns aren't guaranteed is a big part of why they are so high to begin with. Credit card debt is unsecured (no collateral put up to be seized in the event of a default), creditors can walk away from the debt and the issuer will never receive a cent.
From what I can tell they weren't promising a guaranteed return. Although their landing page used to not say "up to 15%" they had a section in their knowledgebase saying 15% APY is just an upper bound.
It does when the poor decision is to run a ponzi scheme
e: ah, only acting as the middlemen between the end user and a ponzi scheme. Probably that'll give them and their VC backers enough plausible deniability to avoid being arrested.
People like throwing the word scam around a lot, too. I don't think this was a scam. It was simply a shit financial product based on deluded fundamentals.
It's obfuscated by splitting the components into multiple cryptocurrencies with multiple actors, but that's what's going on. People were staking UST for 19.5% returns, and if you cut through the fluff, those returns came from later people putting their money in hoping to get those returns themselves. (and because UST was a stablecoin those returns were (ostensibly) in dollars, not just inflation of the coin value)
You just described banks. Banks take deposits & lend the money out at a higher rate. This is what anchor protocol was all about. Pay high interest, and lend at even higher interest.
The fact that they promised to redeem some UST deposits 1:1 with the dollar after the peg had failed, presumably using other customers funds tells me they were not just a custodian.
I wouldn't be surprised if friends of the founders got a half hour heads up before that 08:55 tweet... So that they could withdraw their money at full value.
At this point in your hypothetical, if we're still talking about the US dollar, you'll have a lot more to worry about than generating a return on your investment.
If you think this is a serious potential outcome, then I suggest you forget about investing all together and instead start learning subsistence farming practices.
Since the US can print money to pay its debts you technically can’t “lose” in dollar-denominated bonds.
But you can still lose to inflation, collapse of the US, etc. The term “risk-free rate” is used as a baseline in comparing other financial assets; there are still risks involved and for those above a certain wealth value, spending some percentage to mitigate those may be intelligent.
Dual passports and foreign holdings are often involved.
Anything that has DeFi yield farming on it with X% of returns per year is a textbook scam. It is neither 'stable' nor did anyone gain anything other than a loss.
It is another way for retail to hodl their bags for this lie called 'passive income' all into a loss while the VCs dump and exit scam with the founders.
risk premium arises from supply and demand in markets typically with some kind of quoting system. free money out of nowhere isnt really "risk premium" in that sense.
I am not familiar with the specifics of their business model, but the definition of risk premium allows for multiple types of risk.
A company being unable to meet its original obligations due to a bad business model is a type of financial risk that falls under this definition.
> risk premium arises from supply and demand in markets typically with some kind of quoting system.
Risk premium arises any time there exists an investment that's riskier than the safest possible investment (whatever it may be). No other conditions are necessary.
It sounds like they were going all in with their customers' money, so it kind of makes sense for them to deposit investor money in UST as well. In the case of a depeg, they are screwed (since all of their customer money is gone) regardless of where they placed their capital. Might as well take full advantage..
The last few weeks (months, really) has highlighted an incredible lack of discernment in the VC-verse wrt the thing we call web3. Now. I have no experience doing what YC does and don’t claim to, but the jig here was so transparent that the smallest drop of “street smart” should’ve been enough to set off some alarms.
We’re approaching a point where being passed over for “culture fit” is a compliment. Hopefully the embarrassment is enough to expand the founder vetting checkboxes.
Sure but as long as they (the VC) are shielded from liability, it's not their problem. Society is something other folk can worry about. And if things get really bad, then a quick essay on lessons learnt, we should all move on, etc.
The money changed hands... from people gambling on financial instruments to other people who are probably also gambling on financial instruments. Significant real value was only destroyed forever if the underlying tech for this is based on proof of work. Mining bitcoin destroys an enormous amount of ~real value, and nobody who cares about the advancement of society should touch it. Proof of work crypto mining is something we can and should just ban as a society the same way we ban watering lawns with drinking water in the middle of a drought.
Banning watering gardens is exactly as dumb as banning proof of work. The vast majority of water wastage occurs irrigating farms supporting crops that are unsuitable for that area.
A solar panel connected to a coin miner is only doing good in the world. Where is the negative? You sure it's the mining that is the bad thing and not the dirty energy?
For one, you are wasting a solar panel that could be offsetting more positive energy usage. And building both the solar panel and the miner is far from emission-free.
Wasting a solar panel? Do you think a beach is a waste of silicon?
Building a solar panel and a gpu (say) is not emission free? Because they require energy to refine and manufacture. So we are still back to the fact the issue is with the energy generation. Right?
If gamers were swarming overnight* everything on the market like consumer, professional, server grade gpus then yes it would be problematic for the society.
I remember YC stating that they will "forfeit" (probably not the right legal term) their shares in companies that turn out to do unethical things. Now, let's see if they stick to their principles.
> I remember YC stating that they will "forfeit" their shares in companies that turn out to do unethical things.
Shares in a company are typically "forfeit" when the company you invested in goes bust.
While its a nice virtue signalling headline - giving up something worth 0 (only not worth a large negative number as shares are limited in liability) is not at all noble.
Sure, but if I remember correctly they said that they would give the shares back for free or something. So even if the unethical company didn't go bust but exited, they wouldn't get any cash.
We considered putting some of our treasury in Anchor. I didn't build a model, just one hour of DD was enough to see the risks. Here is the message I shared with my team on Slack with the findings from a very brief DD: https://twitter.com/josusanmartin/status/1524323026942242818
About 5 seconds thought would be enough to see the risks, and the same goes for the rest of the crypto ecosystem. Even the name of UST is clearly meant to con people who confuse it with USDT. It's scams upon scams all the way down.
Even if your figures seem out of date, your argument against UST also holds for USDT (which underpins much of the crypto price bubble):
There is 7B USD in circulation and the market cap of US(D)T is 74 BILLION USD
All this perceived wealth is going to melt into air soon, and yes a bear market has already arrived.
You say this, possibly as someone who knows a lot about this stuff but there are plenty of people (including engineers) who don't know enough to refute the bold claims made by the crypto-evangelists and who be convinced that "obviously X is bad, but our product is completely different".
I personally have lots of misgivings about various crypto but I really don't have enough expertise to argue against someone telling me that I just don't understand and everything is fine.
So why is your default position that they are right and this is a new paradigm?
Surely the onus is on those promoting such schemes to convincingly explain their workings; if you can get 20% a year the explanation had better be good...
This is just the last resort of a scoundrel who knows they can’t explain their scam.
> Here is how an algorithmic stablecoin works. You invent two tokens, call them Dollarcoin and Sharecoin. ... The process is sometimes compared to algorithmic central banking, where the central bank maintains the value of the currency (Dollarcoin) by adjusting its supply.
That raises an interesting ethical problem, really; should there be a duty to report this sort of thing, or is "scheme X is fundamentally flawed/a scam and investors will lose everything" legitimate proprietary information? As I understand it, various analysts were pretty sure at the time that Madoff's scheme was a Ponzi, but in general they didn't tell anyone (in fairness, one attempted to and had trouble getting listened to).
A model has assumptions, but the space is new enough to where there's going to be uncertainty in any model due to unknown unknowns. So it seems like defining a standard of mandatory reporting of assumptions would be hard.
There were many people that reported on the flawed stability mechanism of Terra/Luna/UST. But still, there were many other people that placed their trust in it and cheered the price appreciation.
for context for others following along, Galois Capital went public with their criticism months before they started shorting. most people didn't listen.
Some of the replies to that second tweet thread are hilarious in retrospect:
> But is this any more likely to happen than, say, the global thermonuclear war that is held at bay by the principle of MAD? I feel like we are surrounded by doomsday scenarios; economic and existential. Who would pull the pin on this one? Or is the problem blind faith in an algo? - https://twitter.com/thestephoflife/status/151220218743844864...
I'm curious why you call the first one cryptic though? It seems the opposite to me: it refers to all the elements by their actual, real-cryptocurrency-world names. To me, "cryptic" would mean that it abstracted away from all the actual terminology used, and just describes it in terms of pure mathematical finance, which would be cryptic since you'd be left wondering, "uh, what is this referring to? Is this an actual thing?"
I also don't see how it works as a recruiting tool. This is a space that involves exploiting domain knowledge, and it's trying to bring in expert outsiders who just haven't yet used their analytical expertise in this domain. But tweets heavily depend on you already knowing how all these protocols work (e.g. what staking/minting/gauge weight mean). Such a person, if an expert analyst as well, would already be working in the field or exploiting that knowledge themselves, and you wouldn't be plucking such diamonds out of the Twitter rough.
The SEC will pay you money if you report fraud, the problem is that it's not clear how illegal these schemes are, and for the ones that are illegal, whether or not the SEC will be able to build, and win a case.
Bitfinex, for example is being prosecuted. The SEC have cases against a few of the mid-level people, but the founder is hiding out somewhere in Asia, and will never see the inside of a US courtroom.
Also, it's very easy to con someone, but it's almost impossible to convince someone who has been conned that they've been cheated. If you do your due diligence, and disclose your findings, the marks will ignore you, the con artists will smear you in the press, start lawsuits against you, and everyone uninvolved will shrug their shoulders and 'both sides' your feud.
There’s a great recent Bloomberg Podcast episode (Odd Lots?) where the CEO of FTX interactive is describing yield farming, and it dawns on everybody (Matt Levine states it explicitly) that what he is describing is a Ponzi scheme.
And then the CEO guy basically says that their old school finance may consider it a Ponzi but it’s the future of finance and they’re just gonna end up suffering from FOMO.
If they are unregulated then it isn't a crime until it is a crime, and in this case, by then far too late to sort out.
Even when it does go wrong, there still might not be a crime any more serious than being an idiot, obviously would be different if the company misrepresents itself for gain, which would be fraud.
I suspect that many of these people genuinely believe their own hype, which is how they convince others to buy into it.
If sold to people in USA and if SEC deems it should have been registered as a security, then get ready for a well-deserved enforcement action. Would not want to be an American and on board of directors or a senior contributor or part owner.
Isn't that ultimately one of the purposes of financial regulations? Like you're not allowed to start a pyramid scheme even if you don't know that phrase or concept, don't realize that it's fundamentally unsound, and don't intend to take advantage of people.
Probably not much else to invest on right at this moment, at least not at this level ("small" start-ups wanting to "change the world").
I was honestly believing that the web3 bullsh.t were just some young people who didn't know any better or some scam-artists (or both), I didn't actually think for a second that a "serious" VC like YC would put money into something like that. Looks like I was wrong.
Huh, my take all along was that web3 terminology was specifically designed to “pretty up” blockchain related things to make it palatable to VCs, by implying that it was going to be the next internet and you need to get on now.
This seems spot on to me. It's all just a tower of dumb greed in the end. Web3 is just stupid expensive P2P without a pure disruption model so they just ate it up
I think this is something like AI -- where people who are calling it "AI" are often sales people/hucksters (I mean this as little a pejorative sense as possible), and the people calling it "ML" are the practitioners/people you should be listening to.
Once a phrase gains mainstream adoption and starts to rapidly lose meaning, I find that people who care dearly about that thing start calling it something else.
That said -- I really struggle to find the people who are really all in on crypto in a technical sense. Where are the people building cool things and trying to push the boundaries with crypto? Surely it's still happening but just hard to find it in all the debris/trash.
As someone who went heavy into crypto/web3, it does pain me to admit that there really are no use cases besides making money. Which isn’t a bad use case by itself, but after using practically hundreds of protocols and projects, there’s not a single one I’d use if there was no prospect of making money off of it. My dApp usage has cooled off almost completely. And all data shows that this is true for most others as well
> As someone who went heavy into crypto/web3, it does pain me to admit that there really are no use cases besides making money. Which isn’t a bad use case by itself, but after using practically hundreds of protocols and projects, there’s not a single one I’d use if there was no prospect of making money off of it. My dApp usage has cooled off almost completely. And all data shows that this is true for most others as well
I appreciate the candor -- I still hold out hope, thinking maybe PoS (with equally bought-in parties) could work, but at that point you might as well have regular old paper and pencil coordination/contracts...
The tech is novel, but the applications just don't seem to be falling into place at all... I even consider the ability for it to function as cool points (not NFTs but just a way to make and check exclusive tokens) is OK because it gives community builders a way to pull forward revenue. If I think of it like a self-hosted app for managing exclusive tokens then I can kind of see a use -- if before people didn't have an on-ramp to enforcing their own manufactured exclusivity then maybe it has some positive effects...
Unfortunately right now it looks like the ecosystem is just a backdoor to unregulated securities. Some of the automated exchange stuff (uniswap and co) seemed cool too though I haven't looked too deeply at them.
The one thing that still makes me excited for this tech is web wallets and being able to pay/send money with them. If they are widely adopted, and a safe stablecoin (maybe even a CBDC) becomes the defacto transacting currency with quick on/off ramps, it would really change the way we pay for things online.
Like buying a monthly subscription for a tool like, say, Icy.tools, is so much faster when you can pay directly with metamask. No accounts, no logins, no credit card screens.
The catch, of course, is that for the tech to get adopted by the mainstream, you will need way more regulations and safeguards. Maybe KYC on wallets (which means creating accounts/logins), maybe the ability to reverse transactions to reduce fraud.
All of these regulations might introduce enough friction that the final experience doesn't differ much from current legacy systems.
But a built-in browser wallet that makes payments (including micropayments) easier is really needed. It's the only antidote to our current advertising dependent model of the web.
Crypto wallets double as a kid of single sign-on identity. If you have a crypto wallet in a browser add-on, you already have a paudonymous account usable on tens of thousands of crypto enabled web apps. All you have to do is one-click sign-in.
No sign-up flow, no emails, no commitment. You just tap login and you have an account. One more tap and you've paid.
Plus other benefits like effectively free micro-transactions as small as thousands of a penny at a transaction rate in tens of milliseconds, for some chains (e.g. Solana w/Phantom or SolFlare browser extension).
All this adds up to being able to try, pay, assess, and "logout" of any completely novel (to you) service/site faster than a WSJ article page can load.
The effortless of the user experience doesn't translate well to words. Getting use to this frictionless use of compatable web apps is an experience qualitatively similar to browsing the web with an ad blocker. You can't go back. Going back feels broken, messy, slow, and outright aggravating.
I fear that any regulation that enables wider adoption of these wallets will also bring in additional steps that will kill the biggest pros of these wallets currently - privacy and anonymity
Which is why I said that the tech really needs a lot of improvements. But the core idea of a browser wallet that takes care of logins and payments is really powerful and might just be crypto’s killer app
>
As someone who went heavy into crypto/web3, it does pain me to admit that there really are no use cases besides making money.
In 2022, is there any money to be made there, other than:
1. Money that comes from 'less lucky' entrants in the various zero sum schemes?
2. Money that comes from selling shovels to the con artists running #1?
As a bystander, I'm not seeing any other ways that 'web3' is making money - and I'd argue that if it's just those two, then that's a pretty bad use case. I mean, it's good for the participants who are making money, but all that money comes from impoverishing others.
There really isn't. I'm deep in the crypto hole and have a whole bunch of close friends in private telegram groups scouring for opportunities. And collectively, we've only been down outside of a few lucky plays and/or airdrops (like the BAYC $APE airdrop).
Which is precisely why you see dApp usage numbers crater. Check out OpenSea's daily volume on Dune.xyz as an example - down to $30M/day from consistent $150M/day even a month ago.
100% over for now. No one is making any money right now, except for developers getting salaries and smart contract auditors
Whether it comes back or not will depend, imo, on Bitcoin adhering to the 4 year cycle. So far, Bitcoin has gone up after every halving. Bitcoin leads and the market follows on the “inevitability” of Bitcoin going up after a halving.
But Bitcoin has also only existed in a relaxed regulatory regime and a monetary policy of low rates and cheap money. Now cheap money is off the table and the market has become too big to go unregulated.
If Bitcoin doesn’t go up in the next cycle, it might just break faith in the market and then who knows?
I’d check back in mid-late 2023 if I were you. You might also want to learn some solidity development. All the decent devs I know who were active from 2019 onwards made 8 figures this run
To mean this sounds like it's trying to shift the blame to an outgroup. I think we have to acknowledge that there are bad people within our (SWE) ranks too.
You’re right, I did not mean to exclude SWE from the group of hucksters, I agree that they’re part of it.
The number of developers became a key metric for coins to project legitimacy and there are certainly SWEs who are bad actors and/or knowingly contributing
The problem with web3 and crypto in general is that most people and energy get attracted by the potential to get rich, and being useful is an afterthought. I would be more attracted if I saw more products that tried to be useful first, and then try to make money for it afterwards. But it's harder to direct so much energy into projects like that.
Products that are trying to be useful first do their due diligence and realize that blockchain is wholly unsuitable for anything other than creating speculative assets and just use a normal database instead.
Crypto doesn't solve this, you still need to pick a currency/exchange and pay them transaction fees. That on top of the potential delay issues/fraud is much harder to deal with in the crypto-sphere etc.
VCs are unfortunately, on the whole, all too discerning when it comes to Web3. It's a meme now in the community that when a VC and tokens are involved, there's a good chance they are getting preferential treatment and using the end users as their exit liquidity. That's not necessarily the case here but "greed" has become a general theme and the motivations behind otherwise-puzzling investments become clear when viewed through that lens.
> the SEC is protecting people and their money… by sitting on their hands and doing jack shit
It’s unclear if they have jurisdiction. The likes of Coinbase’s Armstrong have certainly been lobbying hard to constrain it. In any case, it’s hard to be sympathetic when escaping regulation is the rallying cry of so many crypto enthusiasts.
Without wanting to defend the VCs, this is the same deal they would strike by buying equity in a company. It's in their interest to take a stake at lowball prices so they can 100x or whatever when it's time to IPO.
Or, they knew all that but thought they would probably personally benefit anyway?
You can get rich in a gold rush selling shovels. And it doesnt really matter if there's no gold, or not enough for all the miners to make a living. And why would a shovel salesman focus on the negative like that?
Frankly the shovel salesmen were relatively small time, since some miners brought their own, some quit and sold theirs (whether bought or brought), and some shovels were, um, just found lying around, "Goodness, whatever could have happened to that poor miner?"
The real money was in services (brothels, gambling, baths) and consumables (food, booze).
VCs mostly fund crypto to make incredible amounts of money by pumping and dumping on retail. Take Solana as an example. 40% of their initial supply was allocated to insiders. Giving those VCs and founders the ability to dump on retail. It’s truly abhorrent behavior [1]
I didn't know either so I went on a quick Google - turns out, conventional latex condoms are soaked in casein to make them smoother [1], and said casein is also responsible for the sour-ish odor.
Vegan condoms and sex toys are made without casein or other animal-based byproducts.
Fun fact: a lot [2] of consumer goods use animal-based byproducts either as technical agents (e.g. beer that's being filtered through fish bladders) or as outright ingredients (shampoo, perfume, ...).
They’re just one of several shiny fintech apps/websites running the same scam, a modern two-and-twenty on a ponzi — but with really nice UI.
Alice (alice.co / @alice_finance) is another prominent one that may have lost customer funds, which was also using the Anchor protocol. It’s unclear how much they lost, but it’s interesting that Do Kwon’s name is still an actual logo listed on their home page.
And Vertex Protocol (vertexprotocol.com / @vertex_protocol) recently raised $8.5m to launch a trading platform based on the Anchor protocol, but because their Phase 1 beta had just closed and the open launch was not planned until this summer, it looks like they may have just barely dodged the bullet?
What I’m really curious about are the new and (of course) unregulated “insurance” products meant to cover catastrophic crypto depegs, as happened to Terra/Luna. Unslashed (https://app.unslashed.finance/cover) is supposed to kick in after fourteen days, I believe. We’re not quite there yet, it’s barely a week so far. But I’m sure with this kind of implied loss reserves, it’ll be fine…
I publicly called out LUNA/UST on Twitter a few times a few months before the collapse [0] [1]. Just stating this so it's clear that I don't have any interest defending them.
That being said, calling these platforms "ponzis" isn't correct, the most you can say is that they were front ends for a ponzi. It would be like setting up a front-end to receive investments, and then depositing the money with Madoff. I'm not saying that it is a legitimate business, just not a ponzi.
And I'm not defending these companies either, a very light DD [2] made it obvious that the LUNA-UST mechanism was broken and the collapse was inevitable. It's really messed up that they put clients' money at risk, and that they lost it. I also think that YC is somewhat responsible for this.
What makes the situation even worse is that the collapse didn't happen from one day to the next, they actually had time to pull the money out at a 0.5%-5% loss, but they still decided to wait and see if it would repeg.
> It would be like setting up a front-end to receive investments, and then depositing the money with Madoff. I'm not saying it's a legitimate business, just not a ponzi.
So, it’s neither legitimate nor a Ponzi. Cool, what is it then?
The whole thing reminds me of something more like baseball cards or other collectibles, where the monetary value rests in a collective belief in the inherent value.
How much of the real value of cryptocurrency is not monetary? How much of the value is in the existential value of participation, e.g. Dogecoin?
You're pretty much exactly right with this intuition. The infamous MTGox exchange, the grandaddy of all rug pull Bitcoin / crypto disasters, started out life as a platform for magic the gathering trading cards. Recognizing an overlap in both the mechanism and the type of motivation driving both types of trading activity.
networks derive their value from participation. ex. if the us government held 100% of dollars or berkeley had 100% of internet connected devices or jack had 100% of twitter accounts, these dollars or devices or accounts wouldn't be very useful
When you pretend to be ignorant about parts of a crime that you haven't been proved to be involved with (although you built your entire business around the crime.) Between being charged with malice or stupidity, the wise man chooses stupidity.
Umm, once it's not a legitimate business, it's fraudulent. Exactly what type of fraudulent is a somewhat secondary issue.
[of Boiler Room scams of old] "... often rely on high-pressure sales tactics, such as aggressive cold-calling, misinformation, and extravagant promises to assure buyers that they are buying "a sure thing." [..] The SEC requires brokers to adhere to strict standards when selling securities. Brokers may not misinform or omit material facts when selling securities; nor can they exaggerate their own track records. They are also required to have a “reasonable basis to believe that a recommended transaction or investment strategy is suitable for a customer.”"[0]
Ring any bells?
Do we think customers are really giving informed consent before putting their savings into these platforms?
Excuse my ignorance on crypto. I don’t understand how UST can drop 90% when I assume it required some sort payment of some other currency/coins to get mint them. I heard it was tens billions of UST was minted. So what happened to these coins? Were they used to pay out the interest?
Thanks, some great stuff. This[0] jumped out at me:
"But there is no magic here. There is no algorithm to guarantee that Luna is always worth some amount of money. The algorithm just lets people exchange Terra for Luna. Luna is valuable if people think it’s valuable and believe in the long-term value of the system that you are building, and not if they don’t.
The danger here is that Point 7 never goes away. Any morning, people could wake up and say “wait a minute, you just made up this all up, it’s worthless,” and decide to dump their Lunas and Terras."
To be clear, I was interpreting josu's “these platforms” as the layers on top of UST, not inclusive of UST itself. He also mentions that they might be ”front ends for a ponzi” which is basically where I fall on this. (So, to your question, the answer would be that the yields in fact do come from a ponzi mechanic)
This is a pretty meaningless distinction if you invested in them, because you were exposed to the same mechanics, but it does have some implications for culpability because it's the difference between “should have known it was a ponzi” and “actually operated a ponzi”.
> but it does have some implications for culpability
In many jurisdictions around the world, there isn’t much of any difference between “directly handed the loaded gun to the killer” and “pulled the trigger and killed someone”.
I'd treat the offer of earning 20% interest on a risk-free investment with the same scepticism I'd treat the offer of buying a perpetual motion machine.
You can have abnormally high interest, or your capital can be risk-free. I simply don't believe it's possible to have both, at least not over the long term.
Interest has to come from somewhere. It is a zero sum game. There has to be some mechanism that is generating interest unless you're paying from the money invested which would qualify as a ponzi scheme
> the most you can say is that they were front ends for a ponzi. It would be like setting up a front-end to receive investments, and then depositing the money with Madoff.
This was absolutely a thing; most large Ponzi schemes have feeder funds.
Indirection seems to be very valuable with scams. The 2008 housing crash had a lot of layers:
1. Loan Application (Borrower Lying about income)
2. Mortgage Originator ( Not validating loan application )
3. Mortgage Back Security Creators ( Obfuscate what is in the security )
4. Ratings Agencies ( Not being honest that step 3 happened )
5. Sellers of MBS ( Not being honest that steps 1-4 exist )
I don't know enough about crypto to list out all the layers but I'm pretty sure I understand the first step:
1. Claim that underlying technology will be revolutionary just like the internet in a vague way that cannot be validated.
im pretty sure at this point everybody knows there is nothing behind it, at least 80% people that invest in something like this, so like Ponzi they hope that enough people will come in that they can cash out before everything falls out.
It's a psychological concept that maybe up to 15% of a deviation from cold hard truth is normal embelishment or puffing. When you line up 5 actors each puffing in the same direction it's easy to get a material total effect, e.g., 75% in the example above, while each actor can maybe feel comfortable themselves with their role in it. This unfortunately is not terribly unusual.
I'd swap 1) and 2). The people writing the mortgages were telling the borrowers to lie, and that the lies wouldn't be checked. It wasn't some oversight.
I understand, there were some cases where #1 didn't even exist, The person at #2 edited the application without #1 knowing. But the #1 situation happened as well, sometimes because a realtor told them that was the only way they would get the house.
> That being said, calling these platforms "ponzis" isn't correct, the most you can say is that they were front ends for a ponzi. It would be like setting up a front-end to receive investments, and then depositing the money with Madoff. I'm not saying that it is a legitimate business, just not a ponzi.
Something like this happened with Madoff in a very similar manner to what you describe.
Madoff was a board member on one the schools at Yeshiva University. J. Ezra Merkin was on Yeshiva University's investment committee. Merkin funneled some of the University's money directly into his own fund which turned out to be 100% invested in Madoff.
Now, in some ways this is an even bigger ethical breach. lets say Merkin didn't know that Madoff was sketchy, why does he have to use his fund as a middle man for the University's funds when Madoff is on the board so he presumably can invest the funds directly with Madoff. The only reason is to skim off the top. For others, who didn't have an entry into Madoff's funds themselves, perhaps the middleman has value (assuming the middleman really believes in the underlying investment, if they are just there to skim off the top, the I would say they are not fundamentally different than ponzi themselves, as they are just pulling a Sgt Shultz, "I see nothing, I hear nothing, I know nothing")
I thought Terra provided the perfect environment to apply what I learned in my research. Ensuring the stability of a digital currency closely resembled the issues faced by central banks in deciding monetary policy measures, while the lessons learned in studying trading in the equity and bond markets are crucial in guarding against potential manipulation by malicious market participants.
What do you think are Terra’s strengths compared to other blockchain projects or potential competitors?
There are several, but I will mention just three. First, there is no improvisation. In fact, our strong research team stays grounded and informed by the latest research in economics and finance, devoting a lot of attention in making sure that Terra’s ecosystem remains stable. Second, top eCommerce companies in Asia are pushing for Terra’s adoption, ensuring that Terra will be widely used from the start. Finally, the team is composed by a diverse and uniquely qualified set of people that are excited to collaborate in solving one of the most exciting challenges of our time.
Those 3 reasons can be summarised as : "We are a bunch of excited 20yo who think they know better than everyone else and we have received pinky swear promises from shady asian websites, so we are definitely going to be rich, trust us ! xoxo"
That guy is at least 35 but he surely compensates the old age with lots of enthusiasm. After all, you don’t get a chair of royal garments innovation by pointing out that the king is naked.
Nothing in there indicates that he thought Terra would stay stable. Indeed, you can even read it has him wanting him to be involved becuase he found the lack of stability an interesting problem to try and solve.
“We propose a cryptocurrency, Terra, which is both price-stable and growth-driven. It achieves price-stability via an elastic money supply, enabled by stable mining incentives.”
“Terra achieves price stability by creating stable incentives for mining (PoS consensus) via highly predictable rewards. We propose a framework to evaluate the stability of Terra’s peg under stress. […]
Our findings, based on 1 million years’ worth of simulation data, indicate that Terra’s peg is highly robust under both forms of stress.”
Some very smart people mistake being pedantic for being smart.
It's very easy to join a "conversation" by picking up a pedantic point. Compare that to arguing over the fundamentals which actually requires some knowledge and experience.
By being pedantic it's very easy to "win" an argument, you're entering with a position you consider factually correct.
It's not at all productive as you indicate, and actually harms more productive conversation by de-railing the conversation.
A ponzi is when an investment that supposedly produces a return actually pays the funds needed to deliver that return from new entrants to the scheme rather than productive enterprise.
Given that there’s literally no productive return-producing enterprise underpinning any of this it’s totally fine to consider the word ponzi at least loosely applicable to the entire concept of cryptocurrency as practiced.
By this definition most crypto wouldn‘t be a ponzi.
E.g. bitcoin doesn‘t claim that funds are invested in productive entreprise.
It is clear that it is only a value store (like gold). Whether it is any good at storing value long term, we will see.
Bitcoin proponents definitely (for a time) claimed that it was Bitcoin's utility as a currency that gave it value in the first place. That everyone would need some because everyone would use it to transact. That's a claim of an inherent investment value that didn't actually exist, making Bitcoin exactly like a distributed Ponzi scheme.
It was originally created to be a form of non-fiat democratized currency. It is exactly that even though it's not its most popular use which is as a store of value. I don't see how that makes it a Ponzi scheme. I buy things with it a few times per year and do my degenerate sports gambling with it all the time. It works within seconds for almost no cost.
The front-end is the ponzi. The whole point of the ponzi is that there is no investment activity happening beyond tricking customers into depositing funds. So being the front-end for a ponzi (even unwittingly) means you’re an integral part of the scheme.
Feeder funds are a normal part of the structure of modern ponzis, Madoff had them too. Pirate40 had them. They're ubiquitous and an important part of scaling up these fraudulent operations. Essentially all HYIPs have them.
Not only do feeders increase the sales force the reduction in yield by the feeder's profit margin actually helps hit more of the potential market: People hear 20% apy and assume it's a scam... but 15% apy? 10% apy? -- starts just sounding like a good deal.
> That being said, calling these platforms "ponzis" isn't correct, the most you can say is that they were front ends for a ponzi.
“Its not a Ponzi, it's just paper thin layer of indirection on top of a Ponzi, which is often how most victims of a Ponzi scheme are brought in” is maybe not as important of a distinction as you are making it out to be.
The thing that has shocked me about all of this over the last year or so is how seemingly easy it is to just start issuing debit cards to people.
Maybe there's more regulation than I realise (and the emperor has more layers of clothes than Joey Tribbiani), but I'm not seeing it.
I assumed issuance of payment methods was much more strictly controlled than this due to the risk of contagion if the issuer can't meet it's obligations after the transaction (are card payments instant delivery between institutions these days? I always assumed there was a clearing period in the background).
There are multiple physical card APIs, costing around 50¢ + shipping to provision cards. All you need is a photo ID and e-signature to start issuing unlimited cards with any name stamped on them in less than 10 minutes.
Notably, these cards require online funds verification and settlement for every transaction. Some cards you might get through a bank or major card company may not, for convenience sake. But these cards do, for the obvious reason.
They're essentially pre-paid cards that load instantly (at the point of transaction) from a larger balance the dev/company controls.
There are even multiple APIs for creating card issuing APIs, checking account issuing APIs, etc. These have itemized pricing that looks more like AWS/GC/Azure pricing and are more complicated to use, in the same way AWS is more complicated than running everything on a single Digital ocean droplet.
Insurace is another site who offered insurance for the UST depeg. They had a very poor estimation for the risk and had the price at only 2% annually for the amount insured. They were covering 22.2 million worth of UST and as of a few days ago they had claims submitted totalling 7.3 million worth.
"Due to unprecedented market conditions on the Terra blockchain - most notably risks of TerraUSD de-pegging as previously disclosed in (help.alice.co......) the UST to USD offramp is unavailable...we are unfortunately uncertain when ramp services will be resumed.
For information on alternative paths to convert to USD please see..."
the alternative paths are withdrawing to a wallet or exchange and getting 8 cents on the dollar.
The whole idea was to become a middleman to a ponzi scheme and charge a performance fee.
They described what they are doing in their documentation, but the core ethical problem here is that the only users that would use their service are those incapable of understanding how UST/Terra worked, because anyone capable of understanding would just deposit funds directly and get higher APR for the same risk! Extremely predatory.
UST fooled many ...not very bright people who genuinely didn't realize it's a ponzi scheme - but obviously smart and technically proficient founders of Stablegains' have no such excuse. Zero room for doubt - they fully knew it's certain to collapse eventually, banking on their legal terms to protect them from liability while privately profiting as long as it works.
Founders of Stablegains belong in prison and everything they own should be confiscated and divided among victims. Sadly they are probably safe - as knowing the inevitability of collapse they must have felt their legalese to be ironclad.
I think investors probably didn't know. High safe defi yield existed for most of 2020 and 2021 - during that time it would be legit. It's possible that's how it happened - first plan based on safe yield that disappeared (exactly because it was high and safe), but instead of closing down founders decided to become middlemen to a ponzi.
No, perfectly safe three digit APR yield was the norm for months, and high double digit - for about 1.5 years. Checking the contracts was easy, as usually they were copied from other projects and thus known. Often capital was locked doing nothing at all, sometimes just providing liquidity in a lp pair. Took a while for the absurd risk premium to go down to its real value of ~0, crashing safe yields.
Ironically, this is partially what made UST so big - because to many people it looked like this:
(1) months of three digit APR - 'obviously unsafe' ('common sense' - high yield is sus, smells like ponzi)
(2) it wasn't a ponzi. Nothing bad happens. Many people make bank. Some have no idea what's safe and were just gambling, some make informed decisions
(3) eventually, the person in question feels stupid for missing free money and decides to put money in with no deep understanding
(4) safe yields crater from a combination of people like that + slow moving, but smart, funds that started to deposit hundreds of millions
(5) person in question deposits into the UST ponzi scheme by extrapolating safety record of non-ponzi farms that are now gone, due to a category error - 'it's defi and it was safe for so long, therefore UST is safe'
(6) not realizing it's a ponzi scheme they don't even try to exit when the gig is up. Massive loss.
Ironically I now see many examples of the same category error but applied in reverse - many people that lost on Luna think its collapse proved that defi is, in fact, fundamentally unsafe, when the reason they lost is because they put their money into a ponzi scheme that leveraged defi brand for marketing.
If you were doing this though (using funds to mint other tokens to sell), the principle was clearly not in USD, so there was still a risk of the bottom falling out on whatever you were holding funds in.
You also can't really add "almost always" to "completely safe". It's either "completely safe", or it's not. This statement is just "it works 100% of the time 65% of the time", but with words rather than numbers.
"It's 'completely safe', until it's not" which is exactly the point that I and others in this thread started with.
I don't see how stablecoins are fundamentally a ponzi scheme, it's really not hard to imagine a sustainable stablecoin business model - reinvest what people pay into the stablecoin, keep risk low so you don't lose your principal and end up unable to repay debtors, keep enough in reserves that the stablecoin doesn't collapse in a bank run, and cross your fingers. Now, you certainly COULD turn this entire scheme into a ponzi scheme, and I would be freaking shocked if it didn't turn out several stablecoins were Ponzi schemes, but it's totally possible for a stablecoin to sustain itself without constantly seeking new deposits in principle.
Stablecoins are literally modernised promissory notes and the people hawking them are unregulated banks. It's incredible the people selling these stablecoins are not being regulated as if they are banks.
> I don't see how stablecoins are fundamentally a ponzi scheme
Of course they are not, but UST is. Stablecoins are different from each other. USDT, USDC and DAI are all collateralized (at least partially). UST is minted out of void by burning LUNA, creating demand for LUNA so creators get a profit and turn away, slashing all UST investors. It is an outright ponzi scheme hidden behind layers of DeFi jargons and borrowing trust from true stablecoins like USDC while being fundamentally different from any other responsible stablecoin.
UST wasn't a stablecoin, it was a ponzi scheme along with Luna. The invention here is obfuscation - move the exponential ponzi growth part into a separate token. In a very straightforward ponzi $2M coming after $1M would allow initial owners to cash out with a 2x gain. Which is too obvious. UST instead would transfer all $2M to Luna sellers (real wealth) while printing just enough UST to provide 20% APR to previous depositors (may have been a bit higher in the past).
What happens when some old depositor wants to cash out? Money comes out of new money that's coming in. As long as there's enough new money it works (the fundamental ponzi property). The system also utilizes some liquidity buffers (liquidity pools with other stablecoins) that can absorb temporary volatility in a redemption demand - which works as long as money flow is positive. When that stops being true, and liquidity buffers run out - both UST and Luna started collapsing, with 100% of inflows redirected to UST sellers.
Viewed as a system - all difference to a traditional, straightforward ponzi disappears. Empirically, this obfuscation is so successful from the marketing perspective algostables with meaningless changes (or even not) will continue to proliferate, although it may take years for any to get as big as UST.
To add some info, USDC is 100% collateralised with USD and DAI is 165%+ collateralised with ETH.
Due to their actual stability (relative to other stablecoins), they're more likely to trade at a premium than at a discount.
About a year ago I traded 10,000 USDC for 12,100 USDT during a run on a certain DeFi bridge, only to trade it back to 12,080 USDC a couple hours later.
By definition, a Ponzi scheme involves some kind of reporting fraud where you're being lied-to about how your investment was converted and how much of that converted asset there is.
I'm not saying these aren't some other kind of scam but lots of people use "Ponzi" as if it meant any kind of scam... And generally speaking "how many thingy-coins do I own" is the one thing cryptocurrencies focus on making very difficult.
TLDR: Everybody overuses "Ponzi" and it annoys me.
Fraud logically can't be part of the mechanism of a ponzi scheme itself. A ponzi scheme is any financial scheme where old investors are paid exclusively by new investors, and without new investments the system doesn't generate any income at all. There are many different variations.
Lying about source of potential gains concerns marketing of it - which is something external and done by humans, and not part of the internal distribution of money flows. How can an algorithm itself commit fraud? It can't.
> A ponzi scheme is ANY financial scheme where old investors are paid exclusively by new investors
No, that assumption (emphasis added) is popular but utterly false.
In a Ponzi scheme, cash from new buy-ins gets FRADULENTLY reported to existing participants as dividends from the underlying business or investment.
That fraudulent reporting of fake-dividends is essential to the scheme, because it's how the scammer lures in successive waves of investors to keep it perpetuated.
Remembering the early days of bitcoin, and Pirateat40's Bitcoin Savings and Trust ponzi (BTCST) from 2012.
That also had a pile of feeder ponzis hanging off the side. They'd claim to be completely uncorrelated with BTCST, but just put their coins into BTCST.
Crypto has now gone beyond replaying old scams from the history of finance, and is now just replaying old scams from the history of crypto. But now they're VC-funded.
Yeah the days of being accepted into YC meaning anything are long gone, they're investing in pretty much anything these days. On the whole I think YC is a lite version of a rugpull though I don't really mean that as some sort of scathing criticism, it's par for the course.
That's just the way most businesses operate, you build up trust and provide loads of value when you're small. Then, as you expand you take advantage of the trust-inertia to exploit the gap between how much value you are perceived to provide and how much value you actually have to provide to keep getting money (or equity) from people and giving it to yourself.
Not unbelievable at all. I've pointed this out before, and I'll probably have cause to do so again, but Y Combinator has twice funded companies whose entire business model is smuggling:
That's interesting. I never thought of it that way. Solutions to the "Amazon doesn't deliver here" problem are quite popular in Ghana. Asking someone returning to get you something is quite common. I have friends who've created businesses around this.
The name "StableGains" sounded exactly like "SafeMoon", a heavily advertised pump-and-dump shitcoin that, unsurprisingly, was not safe, and did not go to the moon. Free money with no risk sure sounds appealing though, just don't think too hard about it.
to use an oxymoronic name like "safe moon" is a great tell that it's a scam. A coin cannot be safe - that is, riskless and stable in value -, but also go to the moon! So they probably looked up the thesaurus and found "Stable" and "Gain" as synonyms...
How many people get duped into thinking there's such a thing as "unlimited gain" and "rewards without risks"
Like what, people are just going to give you money without you doing anything?
It would be largely beneficial to everyone, if we were to provide some basic economic/financial/"how money works" lessons to everyone through the use of schools and public education..
> Like what, people are just going to give you money without you doing anything?
That's what a savings account is, essentially. The same thing with bigger numbers isn't immediately nonplausible to someone who doesn't understand the mechanics of what makes savings accounts nearly risk free and how that doesn't apply to the alternative.
Then there's the bank owners etc. They got rich when banks were deregulated and then began skimming from every transaction. You do that for long enough, you have all the money.
Even if you have done the education, weeks and years of seeing articles and news reports on how Bitcoin has gone up eleventybillion percent can wear you down, and you start wanting a slice of that pie and become susceptible.
For the people who get sucked into these things, it’s asking a lot for them to educate themselves without being burned - especially when there are so many communities dedicated to shoving out naysayers.
> Like what, people are just going to give you money without you doing anything?
That’s disingenuous. When you put money into a high yield savings account, or even into a fiat backed 1:1 stablecoin you’re doing something. You’re providing liquidity. A high yield savings account (2-4%) or yield on a fiat backed 1:1 stablecoin (5-8%) is risky in the sense that you need to trust a bank (or exchange), but that’s eased by FDIC (which some exchanges like Gemini have [1]).
You’re saying that there’s an account with FDIC coverage that pays 5-8% returns? Please provide a link. This doesn’t line up with my understanding of banking regulations. The current risk-free return of a callable loan on dollars is less than 1%, so I don’t see how the FDIC would agree to guarantee 5-8%.
> ¹ FDIC insurance applies only to the USD reserve funds. GUSD exist as ERC-20 tokens on the Ethereum blockchain; tokens are under the user’s self-custody, and are not insured through Gemini.
So if you send them USD, they'll hold your USD in an FDIC insured account. If you hold GUSD, and it turns out GUSD is a fraud or is otherwise insolvent, your SOL.
I don’t blame you for getting that impression, though. The Gemini dollar marketing page talks about earning high yields, and it talks about FDIC protection. It doesn’t explicitly mention whether you can get the yields and the insurance as the same time, but the answer is no.
The I-bond is subsidized by the US government. Its rate has no relevance to the FDIC. They are great though! I strongly encourage anyone who is eligible to park money there before they give it to Gemini!
2. Algorithmic "stablecoins" don't work, in the same way as perpetuum mobile doesn't work. You think you're inventing a perpetuum mobile, but you're building a Rube Goldberg's machine instead ;)
3. Every algorithmic "stablecoin" can be traced to 2 papers published in 2014: Hayek Money and Robert Sams' Seigniorage Shares
> algo stablecoins work fine when they're overcollateralized, like dai.
DAI/MakerDAO isn't an algorithmic "stablecoin", it's an unregistered SEF (Swap Execution Facility) which should be regulated by the CFTC in the US, and similar agencies in other parts of the world.
The only reason DAI didn't broke the USD peg during the "crypto" bear market, is because OG's cost base of ETH was zero to 30 cents, and their objective was to save MakerDAO, rather than make a profit on their CDPs.
> the industry keeps chasing undercollateralized algo stablecoins because of capital efficiency.
Isn't it obvious? ;)
The energy industry also chased perpetuum mobile because of the fuel efficiency, so what?
IMO there are ways to design a capital-efficient low-volatility digital assets (not algorithmic "stablecoins" per say - they're impossible), but they will most-likely be illegal in any developed country, as they will be an exotic derivative instruments.
From the JTBD PoV, the job of the "stablecoins" is to hedge your exposure to the volatile "crypto" assets. The only way to do this is either to exchange them to a less volatile assets, or to enter into a contract with somebody else willing to take the risk in exchange for something.
stablecoins don't promise to hold the peg 100%. they promise to be able to repeg in times of severe distress. even some money markets broke the dollar. they had to be bailed out by the government.
what about makerdao makes it reliant on dao goodwill? the incentive to restore the peg is the expectation of profits from liquidating the overextended.
I didn't said that. Once they're listed on "exchanges" or traded on DEX, their price isn't under control of the protocol, and in theory can be anything.
>they promise to be able to repeg in times of severe distress. even some money markets broke the dollar. they had to be bailed out by the government.
MMFs are funds with the NAV which supposed to be around $1.00 (that in addition to earning an interest). In case the NAV goes under $0.95, the fund has to be liquidated. See "Breaking the Buck":
>what about makerdao makes it reliant on dao goodwill? the incentive to restore the peg is the expectation of profits from liquidating the overextended.
Why people kept locking ETH in MakerDAO CDPs over and over during the "crypto" bear market, when ETH was in the free fall? It doesn't make sense from the economic PoV. It only makes sense if your ETH is cheap and you want to prove that MakerDAO works.
Different agents optimize for different things. Some (most?) optimize for size of their wallet/bank account, others want to save their project/ecosystem. Both types are rational.
> In 2008 however, the day after Lehman Brothers Holdings Inc. filed for bankruptcy, one money market fund fell to 97 cents after writing off the debt it owned that was issued by Lehman. This created the potential for a bank run in money markets [...] the next day the United States Treasury announced a program to insure the holdings of publicly offered money market funds so that should a covered fund break the buck, investors would be protected to $1 NAV
if the US Treasury insured $ust, luna would have been fine
---
> Why people kept locking ETH in MakerDAO CDPs over and over during the "crypto" bear market, when ETH was in the free fall?
they're long eth. it's not altruistic, it's incentive alignment.
I don't know the ins and outs of MakerDao. Trying to understand your point. If they were long ETH, are you saying they should still have let the liquidations happen for economic reasons? Also asking in good faith here: did you find specific instances of insolvency or are you assuming eth was falling fast enough for the liq action to be insolvent?
MakerDAO is based on a concept called CDP - Collateralized Debt Position. They call it debt, but it's basically a callable swap - you swap ETH with DAI (their "stablecoin"). Since ETH is a highly volatile asset (ranging from 30c to ~$4K), these swaps are over-collateralized, i.e. 150-200%. In case the market value of the ETH falling below the value of the DAI - the swap is called out (in their term - the CDP got liquidated). There are also additional fees (fines?) involved in liquidations.
If you lock your ETH into a CDP - you believe that ETH will not go down.
You can also take the DAI from one CDP, exchange it to ETH, and then re-invest it into another (or the same?) CDP - thus creating a synthetic leveraged ETH long position. This can be repeated multiple times;)
My point was that people continued locking ETH into CDPs during the 2018's 90% fall in ETH prices, which only made sense if they had cheap ETH (i.e. insiders/OGs), and their goal was to prevent DAI from de-pegging.
MakerDAO's CDP doesn't seems to be the best instrument for making a LONG bet on ETH. You can just hold ETH, or you can buy ETH futures on Bitmex if you want leverage.
The problem with many algorithmic "stablecoin" designs is the assumption that there always will be speculators willing to take the risk in exchange of betting that peg will be restored. But unlike the designated market makers in some regulated markets, crypto speculators are not contractually obligated to take the risk.
Eh, I can see many people preferring decentralized leverage over centralized i.e. Bitmex. And even if there were other decentralized solutions for leverage back then, they may have liked the security posture and liq parameters of MakerDao specifically.
And nowadays (maybe even back then) US citizens cannot use Bitmex.
Users need to monitor their open CDPs and add collateral if they are at risk. This has been done to protect users from paying the liquidation penalty fee, which is ~ 13%.
Also, do you really need leverage if your ETH's cost basis is 0 to 30c at the time when market price was in the range of $141 to $816 range?
It's all rounding error to you, you can basically print DAI out of thin air.
I'm gobsmacked at the amount of money people have entrusted to experimental beta software whose behavior at scale is unknown. It's fascinating to watch these systems spin out of control in a new kind of flash crash
It's like a used car salesman who claims his name is 'Honest' Freddy. You'd think such flagrantly shameless self-aggrandizement would make everybody turn and run, but evidently it works on some people.
Their tagline is "Earn higher interest on your cash". And the website says "You can now earn up to 15% APY interest on your cash with Stablegains. This is 30x higher than in your traditional bank*."
I don't see how they can justify making such a claim. Once you put the money into their system the cash is converted to UST. No one is earning interest on their cash.
Comparing themselves to a bank, and using terminology like "deposit" and "withdrawl" are sketchy as hell. All those imply that the capital is not at risk, which it obviously was.
I always wonder with such things where the line between dishonest advertising and fraud is. To me its fraud, but a lot of people take a different view. E.g. in a lot of countries in Europe, banks were offering loans where the debt was registered in Swiss Francs. They advertised it as really safe, but it wasn't and they knew it. But in some countries the banks got into issues with authorities and in others it was viewed as the risk that the borrower should've known. I'm never really sure where to draw the line.
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[ 5.0 ms ] story [ 340 ms ] threadhttps://www.ycombinator.com/companies/stablegains
I'm confused. Were you looking for a cryptocoin that was promising 1,500% gains?
Anyone promising a safe 15% return in a world where your savings account earns 0.15% interest is trying to rob you.
Skipping the middleman is necessarily better because it is inherently lower risk for an absolute guarantee of 33% more upside.*
Investing in something else with even 16% promised returns, let alone 1500%, is not necessarily better because it is almost certainly higher risk.
* When Anchor (Luna/UST) crashed both StableGains and direct users of Anchor suffered the same percentage losses. But direct investors in Anchor had balances which were necessarily 33% ahead of StableGains investors due to not having StableGains shave off their interest earnings.
Stablegains had nothing going for it, in fact it had all of the risk with none of the reward. 1500% APYs are usually attached to LPs carrying huge risks of impermanent loss rather than stablecoin staking and are usually very transient in that they evaporate within hours.
FWIW I disagree with Anchor being termed a ponzi.
A company that couldn't get financing any other way could get financing by issuing fixed price convertible bonds. "Fixed price convertible" means the bond can be converted into shares (of the company), but at a fixed price - aka, regardless of the value of each individual share, you are promised fixed a dollar amount of them.
This means if the share price drops, you will be "made whole" by getting issued enough shares to match the fixed price.
It's called death spiral bond, because if/when the price of such a company drops, these convertible bonds will trigger, causing the amount of shares to increase (as they issue new shares), which in turn causes the price of the existing shares to drop, ad-infinitum. Often the owners of the shares would end up with nothing as the shares' value drops to zero (or the company recovers, and they do make some money).
Swap bonds with UST, and shares with Luna, and you get the above scenario.
Why? Because crypto bros are too degen to be okay with 15% yield lol
My friends know I'm the local crypto-geek[0] so Bitcoin and other cryptocurrencies and tokens are brought up to me all the time by people who's knowledge of what any of it is begins and ends with "Last year X coin was $7.00 and this year it's $100.00, and all of the other ones have had gains like nothing else I can invest in."
I can think of at least 6 members of my extended family who are presently invested in cryptocurrency trading (many just say "Bitcoin" and don't actually have any) who are -- in every way -- technologically obliviously ignorant[1]. Half of them, however, are not otherwise uneducated people (one guy is a very well paid VP at a company everyone in my state has heard of and has an MBA from a major university ... he's just not in finance or tech). They're not thinking "well, 15% APY is insane/impossible to provide over the short term/impossible to ever guarantee unless they've invented a time machine or are breaking the law." They're looking at the percentage gains on Bitcoin or Ethereum (depending on when you acquired it, of course -- Lord knows it's taken a hit lately) and thinking "15% sounds easy for a company to pull off in this space."
Everyone in my family who invested in some crypto used some company to hold their crypto. Almost all of them used services/companies that had enough of a strong scent of "scam" that I would have dismissed them without further research. Some used more mainstream crypto-sort-of-banks. Sort-of-banks because none of the companies that my family members chose for crypto trading were FDIC or otherwise insured in a manner that made sure the numbers they see on their page could be turned into dollars in a bank account somewhere else. The surprising thing is that none of them had any idea this was the case! A few family members thought they were buying Bitcoin because they were investing in "cryptocurrency" and it turned out they were buying some strange token running on the Ethereum network.
I'll grant it's a small sample size, but in every way it's consistent ... it's a "gold rush" kind of frenzy filled, unfortunately, with a lot of fraudsters riding the wave of news around the crazy gains of crypto.
The thing that scares me the most is that a few of my family members[2] have done very well trading crypto (4x/5x/10x their yearly salary). Some lost a little, the others gained a little. The ones that did well aren't treating it like a short-term gamble, even watching the prices drop ... it's like they're holding on to the stock of a company that they deeply believe in except ... there's no company.
[0] I don't invest, I did mine Ethereum a while back/spent most of it and made a small profit but did it mostly to learn how the miner worked and how to write CUDA software. I worked SecDev for a couple of years at a global telecom and I enjoy the technology behind it all.
[1] One of them -- not elderly -- called for help reconnecting to his 4G modem (their only internet service). The instruction "reboot your computer" was not understood. I fell back to "turn it off, count to ten, turn it on again." Nope, right back where he left it. I had not seen his computer setup so I could provide no more instruction. When I arrived I discovered he was "rebooting" ... the monitor.
[2] Four, precisely, two who are distantly related through a great aunt and are working together, but are among the most irresponsible people with money I've ever known, and two who are quite good with most things financial.
Edit: Realized my tone was harsh in a few places and there was one inaccuracy.
Up to
This is like the 10th algo stablecoin to eat shit. You would think by now, a risk person could adequately describe these existential risks.
Stablegains was a rent collecting middleman. The risks are not characterized adequately on this page, and there ought to be some level of liability.
From their website : "As Stablegains is not a traditional US bank, the funds are not secured by the FDIC. While we aim to make every effort to understand and mitigate everything that can possibly go wrong, there is still a non-zero risk you can lose your deposit. Our advice is to diversify and never invest all of your savings in a single place."
Of course they are selling themselves as pretty safe, and I'm sure they thought they were. But as you mention, it's like the 10th stablecoin to drop, so it's not exactly a surprise that crypto is a risky investment in any case.
Article is from July 2021 (according to Google), updated 7 days ago
Say you promise 0.75% because the bank promised you 1% and you skim 0.25%. Is that scenario fraud? Probably not. At what point is it actually fraud?
My guess is it's not the yield but the loss of deposits.
If you guaranteed 0.75% to your customers and do not deliver, then you are liable. What you are describing is arbitrage and not what this scenario is about.
EDIT: s/advertising/marketing/g I don't really think of them as separate but that's a good point.
e: ah, only acting as the middlemen between the end user and a ponzi scheme. Probably that'll give them and their VC backers enough plausible deniability to avoid being arrested.
A Ponzi scheme is an investment fraud that pays existing investors with funds collected from new investors.
https://www.investor.gov/introduction-investing/investing-ba...
I don't get why calling it a Ponzi is so popular when there wasn't something paying returns using other people's money.
I wouldn't be surprised if friends of the founders got a half hour heads up before that 08:55 tweet... So that they could withdraw their money at full value.
Even money market funds, which is what stablecoins are similar to for fiat currencies, are not without risk.
If you think this is a serious potential outcome, then I suggest you forget about investing all together and instead start learning subsistence farming practices.
Or you could buy Swiss bonds?
But you can still lose to inflation, collapse of the US, etc. The term “risk-free rate” is used as a baseline in comparing other financial assets; there are still risks involved and for those above a certain wealth value, spending some percentage to mitigate those may be intelligent.
Dual passports and foreign holdings are often involved.
It is another way for retail to hodl their bags for this lie called 'passive income' all into a loss while the VCs dump and exit scam with the founders.
The only ones that can "promise" a yield are sellers of titles for a fixed period. Anything else is an estimate at best
Exorbitant returns - extremely high probability of ending up at the bottom of the pyramid.
A company being unable to meet its original obligations due to a bad business model is a type of financial risk that falls under this definition.
> risk premium arises from supply and demand in markets typically with some kind of quoting system.
Risk premium arises any time there exists an investment that's riskier than the safest possible investment (whatever it may be). No other conditions are necessary.
https://www.worldofcrypto.io/blog/we-should-let-luna-die
I assume they might need some more.
https://blog.stablegains.com/we-raised-3-million-and-are-hir...
Didn’t think same kind of shit happen in the BTC crazy circa 2017?
We’re approaching a point where being passed over for “culture fit” is a compliment. Hopefully the embarrassment is enough to expand the founder vetting checkboxes.
The main problem with capitalism in one handy sentence.
Banning watering gardens is exactly as dumb as banning proof of work. The vast majority of water wastage occurs irrigating farms supporting crops that are unsuitable for that area.
A solar panel connected to a coin miner is only doing good in the world. Where is the negative? You sure it's the mining that is the bad thing and not the dirty energy?
For one, you are wasting a solar panel that could be offsetting more positive energy usage. And building both the solar panel and the miner is far from emission-free.
Building a solar panel and a gpu (say) is not emission free? Because they require energy to refine and manufacture. So we are still back to the fact the issue is with the energy generation. Right?
We are mobilizing all these resources and manufacturing capacity to do what? Run infinite loops on a useless program?
Meanwhile at my lab that works on bio simulations they could not find gpus to do their research.
Are gamers just running useless programs too?
We mobilise resources for whatever people want to pay for… “why” they want to spend their money on that has never been an issue.
Is Gucci wasting leather that could otherwise be used to make school shoes? Ban Gucci!
* and also dumping them all together overnight
Terra is a proof-of-stake blockchain
1. VCs provide a ton of money, to incentivise token issuers.
2. The issuers pump out a pile of tokens that would constitute unregistered penny stocks. The VCs buy in.
3. If the SEC doesn't bust the issuers, the VCs make a bundle, and much quicker than they could funding a productive company.
4. If the SEC does bust the issuers, the poor widdle investors are protected from the evil issuers, who have to refund investors - the VCs don't lose.
It's the gig economy of penny stock scams, with the legal risk being borne by the issuers.
Shares in a company are typically "forfeit" when the company you invested in goes bust.
While its a nice virtue signalling headline - giving up something worth 0 (only not worth a large negative number as shares are limited in liability) is not at all noble.
You can talk to the people who built their models and they have lots of fun things to say about the ordeal.
Even if your figures seem out of date, your argument against UST also holds for USDT (which underpins much of the crypto price bubble):
There is 7B USD in circulation and the market cap of US(D)T is 74 BILLION USD
All this perceived wealth is going to melt into air soon, and yes a bear market has already arrived.
I personally have lots of misgivings about various crypto but I really don't have enough expertise to argue against someone telling me that I just don't understand and everything is fine.
Surely the onus is on those promoting such schemes to convincingly explain their workings; if you can get 20% a year the explanation had better be good...
This is just the last resort of a scoundrel who knows they can’t explain their scam.
> Here is how an algorithmic stablecoin works. You invent two tokens, call them Dollarcoin and Sharecoin. ... The process is sometimes compared to algorithmic central banking, where the central bank maintains the value of the currency (Dollarcoin) by adjusting its supply.
> On first principles this is insane.
https://twitter.com/galois_capital
first a cryptic puzzle as a recruiting tool for analysts: https://twitter.com/Galois_Capital/status/148693793605468979...
followed by months of warnings like this: https://twitter.com/Galois_Capital/status/151217543903232819...
and threads pushing the systemic risk angle: https://twitter.com/Galois_Capital/status/150461116699529216...
why the founders didn't flinch... who knows? maybe they decided that 3ac being invested is their security.
> But is this any more likely to happen than, say, the global thermonuclear war that is held at bay by the principle of MAD? I feel like we are surrounded by doomsday scenarios; economic and existential. Who would pull the pin on this one? Or is the problem blind faith in an algo? - https://twitter.com/thestephoflife/status/151220218743844864...
I'm curious why you call the first one cryptic though? It seems the opposite to me: it refers to all the elements by their actual, real-cryptocurrency-world names. To me, "cryptic" would mean that it abstracted away from all the actual terminology used, and just describes it in terms of pure mathematical finance, which would be cryptic since you'd be left wondering, "uh, what is this referring to? Is this an actual thing?"
I also don't see how it works as a recruiting tool. This is a space that involves exploiting domain knowledge, and it's trying to bring in expert outsiders who just haven't yet used their analytical expertise in this domain. But tweets heavily depend on you already knowing how all these protocols work (e.g. what staking/minting/gauge weight mean). Such a person, if an expert analyst as well, would already be working in the field or exploiting that knowledge themselves, and you wouldn't be plucking such diamonds out of the Twitter rough.
https://twitter.com/galois_capital/status/148693794923729715...
Bitfinex, for example is being prosecuted. The SEC have cases against a few of the mid-level people, but the founder is hiding out somewhere in Asia, and will never see the inside of a US courtroom.
Also, it's very easy to con someone, but it's almost impossible to convince someone who has been conned that they've been cheated. If you do your due diligence, and disclose your findings, the marks will ignore you, the con artists will smear you in the press, start lawsuits against you, and everyone uninvolved will shrug their shoulders and 'both sides' your feud.
And then the CEO guy basically says that their old school finance may consider it a Ponzi but it’s the future of finance and they’re just gonna end up suffering from FOMO.
Even when it does go wrong, there still might not be a crime any more serious than being an idiot, obviously would be different if the company misrepresents itself for gain, which would be fraud.
I suspect that many of these people genuinely believe their own hype, which is how they convince others to buy into it.
Where is the line between an outright scam and just people believing their own bullshit.
I was honestly believing that the web3 bullsh.t were just some young people who didn't know any better or some scam-artists (or both), I didn't actually think for a second that a "serious" VC like YC would put money into something like that. Looks like I was wrong.
The thing some call web3.
Once a phrase gains mainstream adoption and starts to rapidly lose meaning, I find that people who care dearly about that thing start calling it something else.
That said -- I really struggle to find the people who are really all in on crypto in a technical sense. Where are the people building cool things and trying to push the boundaries with crypto? Surely it's still happening but just hard to find it in all the debris/trash.
I appreciate the candor -- I still hold out hope, thinking maybe PoS (with equally bought-in parties) could work, but at that point you might as well have regular old paper and pencil coordination/contracts...
The tech is novel, but the applications just don't seem to be falling into place at all... I even consider the ability for it to function as cool points (not NFTs but just a way to make and check exclusive tokens) is OK because it gives community builders a way to pull forward revenue. If I think of it like a self-hosted app for managing exclusive tokens then I can kind of see a use -- if before people didn't have an on-ramp to enforcing their own manufactured exclusivity then maybe it has some positive effects...
Unfortunately right now it looks like the ecosystem is just a backdoor to unregulated securities. Some of the automated exchange stuff (uniswap and co) seemed cool too though I haven't looked too deeply at them.
Like buying a monthly subscription for a tool like, say, Icy.tools, is so much faster when you can pay directly with metamask. No accounts, no logins, no credit card screens.
The catch, of course, is that for the tech to get adopted by the mainstream, you will need way more regulations and safeguards. Maybe KYC on wallets (which means creating accounts/logins), maybe the ability to reverse transactions to reduce fraud.
All of these regulations might introduce enough friction that the final experience doesn't differ much from current legacy systems.
But a built-in browser wallet that makes payments (including micropayments) easier is really needed. It's the only antidote to our current advertising dependent model of the web.
No sign-up flow, no emails, no commitment. You just tap login and you have an account. One more tap and you've paid.
Plus other benefits like effectively free micro-transactions as small as thousands of a penny at a transaction rate in tens of milliseconds, for some chains (e.g. Solana w/Phantom or SolFlare browser extension).
All this adds up to being able to try, pay, assess, and "logout" of any completely novel (to you) service/site faster than a WSJ article page can load.
The effortless of the user experience doesn't translate well to words. Getting use to this frictionless use of compatable web apps is an experience qualitatively similar to browsing the web with an ad blocker. You can't go back. Going back feels broken, messy, slow, and outright aggravating.
Which is why I said that the tech really needs a lot of improvements. But the core idea of a browser wallet that takes care of logins and payments is really powerful and might just be crypto’s killer app
In 2022, is there any money to be made there, other than:
1. Money that comes from 'less lucky' entrants in the various zero sum schemes?
2. Money that comes from selling shovels to the con artists running #1?
As a bystander, I'm not seeing any other ways that 'web3' is making money - and I'd argue that if it's just those two, then that's a pretty bad use case. I mean, it's good for the participants who are making money, but all that money comes from impoverishing others.
Which is precisely why you see dApp usage numbers crater. Check out OpenSea's daily volume on Dune.xyz as an example - down to $30M/day from consistent $150M/day even a month ago.
And by "making money", we really mean transferring money from gullible and/or desperate fools to unscrupulous insiders.
Whether it comes back or not will depend, imo, on Bitcoin adhering to the 4 year cycle. So far, Bitcoin has gone up after every halving. Bitcoin leads and the market follows on the “inevitability” of Bitcoin going up after a halving.
But Bitcoin has also only existed in a relaxed regulatory regime and a monetary policy of low rates and cheap money. Now cheap money is off the table and the market has become too big to go unregulated.
If Bitcoin doesn’t go up in the next cycle, it might just break faith in the market and then who knows?
I’d check back in mid-late 2023 if I were you. You might also want to learn some solidity development. All the decent devs I know who were active from 2019 onwards made 8 figures this run
Scaling also doesn’t seem to be in the interest of miners who essentially provide the network security…
What this says about the original purpose of Bitcoin is left to the reader.
The number of developers became a key metric for coins to project legitimacy and there are certainly SWEs who are bad actors and/or knowingly contributing
It’s unclear if they have jurisdiction. The likes of Coinbase’s Armstrong have certainly been lobbying hard to constrain it. In any case, it’s hard to be sympathetic when escaping regulation is the rallying cry of so many crypto enthusiasts.
You can get rich in a gold rush selling shovels. And it doesnt really matter if there's no gold, or not enough for all the miners to make a living. And why would a shovel salesman focus on the negative like that?
The real money was in services (brothels, gambling, baths) and consumables (food, booze).
1. https://youtu.be/nBHH0k8EOHE
https://www.cnbc.com/2018/05/10/early-theranos-investor-tim-...
Vegan condoms and sex toys are made without casein or other animal-based byproducts.
Fun fact: a lot [2] of consumer goods use animal-based byproducts either as technical agents (e.g. beer that's being filtered through fish bladders) or as outright ingredients (shampoo, perfume, ...).
[1] https://www.greencondom.club/vegan
[2] https://www.onegreenplanet.org/animalsandnature/products-you...
Alice (alice.co / @alice_finance) is another prominent one that may have lost customer funds, which was also using the Anchor protocol. It’s unclear how much they lost, but it’s interesting that Do Kwon’s name is still an actual logo listed on their home page.
And Vertex Protocol (vertexprotocol.com / @vertex_protocol) recently raised $8.5m to launch a trading platform based on the Anchor protocol, but because their Phase 1 beta had just closed and the open launch was not planned until this summer, it looks like they may have just barely dodged the bullet?
What I’m really curious about are the new and (of course) unregulated “insurance” products meant to cover catastrophic crypto depegs, as happened to Terra/Luna. Unslashed (https://app.unslashed.finance/cover) is supposed to kick in after fourteen days, I believe. We’re not quite there yet, it’s barely a week so far. But I’m sure with this kind of implied loss reserves, it’ll be fine…
https://mobile.twitter.com/CurveFinance/status/1416392630754...
That being said, calling these platforms "ponzis" isn't correct, the most you can say is that they were front ends for a ponzi. It would be like setting up a front-end to receive investments, and then depositing the money with Madoff. I'm not saying that it is a legitimate business, just not a ponzi.
And I'm not defending these companies either, a very light DD [2] made it obvious that the LUNA-UST mechanism was broken and the collapse was inevitable. It's really messed up that they put clients' money at risk, and that they lost it. I also think that YC is somewhat responsible for this.
What makes the situation even worse is that the collapse didn't happen from one day to the next, they actually had time to pull the money out at a 0.5%-5% loss, but they still decided to wait and see if it would repeg.
[0] https://twitter.com/josusanmartin/status/1478185473499615233
[1] https://twitter.com/josusanmartin/status/1478188494463848448
[2] This DD took me less than 1 hour: https://twitter.com/josusanmartin/status/1524323026942242818
So, it’s neither legitimate nor a Ponzi. Cool, what is it then?
How much of the real value of cryptocurrency is not monetary? How much of the value is in the existential value of participation, e.g. Dogecoin?
Hanlon's razor.
Terra and the Anchor protocol should have appeared fraudulent to any expert from the very start.
Umm, once it's not a legitimate business, it's fraudulent. Exactly what type of fraudulent is a somewhat secondary issue.
[of Boiler Room scams of old] "... often rely on high-pressure sales tactics, such as aggressive cold-calling, misinformation, and extravagant promises to assure buyers that they are buying "a sure thing." [..] The SEC requires brokers to adhere to strict standards when selling securities. Brokers may not misinform or omit material facts when selling securities; nor can they exaggerate their own track records. They are also required to have a “reasonable basis to believe that a recommended transaction or investment strategy is suitable for a customer.”"[0]
Ring any bells?
Do we think customers are really giving informed consent before putting their savings into these platforms?
[0] https://www.investopedia.com/terms/b/boilerroom.asp
Excuse my ignorance on crypto. I don’t understand how UST can drop 90% when I assume it required some sort payment of some other currency/coins to get mint them. I heard it was tens billions of UST was minted. So what happened to these coins? Were they used to pay out the interest?
They answer all your question and are much more cohesive than anything I could type here.
Thanks, some great stuff. This[0] jumped out at me:
"But there is no magic here. There is no algorithm to guarantee that Luna is always worth some amount of money. The algorithm just lets people exchange Terra for Luna. Luna is valuable if people think it’s valuable and believe in the long-term value of the system that you are building, and not if they don’t.
The danger here is that Point 7 never goes away. Any morning, people could wake up and say “wait a minute, you just made up this all up, it’s worthless,” and decide to dump their Lunas and Terras."
[0] https://archive.ph/HQAwY
This is a pretty meaningless distinction if you invested in them, because you were exposed to the same mechanics, but it does have some implications for culpability because it's the difference between “should have known it was a ponzi” and “actually operated a ponzi”.
In many jurisdictions around the world, there isn’t much of any difference between “directly handed the loaded gun to the killer” and “pulled the trigger and killed someone”.
I'd treat the offer of earning 20% interest on a risk-free investment with the same scepticism I'd treat the offer of buying a perpetual motion machine.
You can have abnormally high interest, or your capital can be risk-free. I simply don't believe it's possible to have both, at least not over the long term.
This was absolutely a thing; most large Ponzi schemes have feeder funds.
https://www.reuters.com/article/us-pwc-madoff-settlement-idU...
1. Loan Application (Borrower Lying about income) 2. Mortgage Originator ( Not validating loan application ) 3. Mortgage Back Security Creators ( Obfuscate what is in the security ) 4. Ratings Agencies ( Not being honest that step 3 happened ) 5. Sellers of MBS ( Not being honest that steps 1-4 exist )
I don't know enough about crypto to list out all the layers but I'm pretty sure I understand the first step:
1. Claim that underlying technology will be revolutionary just like the internet in a vague way that cannot be validated.
Something like this happened with Madoff in a very similar manner to what you describe.
Madoff was a board member on one the schools at Yeshiva University. J. Ezra Merkin was on Yeshiva University's investment committee. Merkin funneled some of the University's money directly into his own fund which turned out to be 100% invested in Madoff.
Now, in some ways this is an even bigger ethical breach. lets say Merkin didn't know that Madoff was sketchy, why does he have to use his fund as a middle man for the University's funds when Madoff is on the board so he presumably can invest the funds directly with Madoff. The only reason is to skim off the top. For others, who didn't have an entry into Madoff's funds themselves, perhaps the middleman has value (assuming the middleman really believes in the underlying investment, if they are just there to skim off the top, the I would say they are not fundamentally different than ponzi themselves, as they are just pulling a Sgt Shultz, "I see nothing, I hear nothing, I know nothing")
https://www.hbs.edu/faculty/Pages/profile.aspx?facId=697248
https://medium.com/terra-money/have-you-met-marco-216ca2a8b9...
https://assets.website-files.com/611153e7af981472d8da199c/61...
https://cdck-file-uploads-global.s3.dualstack.us-west-2.amaz...
Why did you decide to join Terra?
I thought Terra provided the perfect environment to apply what I learned in my research. Ensuring the stability of a digital currency closely resembled the issues faced by central banks in deciding monetary policy measures, while the lessons learned in studying trading in the equity and bond markets are crucial in guarding against potential manipulation by malicious market participants.
What do you think are Terra’s strengths compared to other blockchain projects or potential competitors?
There are several, but I will mention just three. First, there is no improvisation. In fact, our strong research team stays grounded and informed by the latest research in economics and finance, devoting a lot of attention in making sure that Terra’s ecosystem remains stable. Second, top eCommerce companies in Asia are pushing for Terra’s adoption, ensuring that Terra will be widely used from the start. Finally, the team is composed by a diverse and uniquely qualified set of people that are excited to collaborate in solving one of the most exciting challenges of our time.
Sincerely, an old fart who hasn't seen 35 in the rearview mirror for a while now.
For what it’s worth, I was also 35 once.
Hopefully you're not referring to a past life.
“Terra achieves price stability by creating stable incentives for mining (PoS consensus) via highly predictable rewards. We propose a framework to evaluate the stability of Terra’s peg under stress. […] Our findings, based on 1 million years’ worth of simulation data, indicate that Terra’s peg is highly robust under both forms of stress.”
I feel like "ponzi" has become the "magazine/clip" derailer of crypto discussions.
It's very easy to join a "conversation" by picking up a pedantic point. Compare that to arguing over the fundamentals which actually requires some knowledge and experience.
By being pedantic it's very easy to "win" an argument, you're entering with a position you consider factually correct.
It's not at all productive as you indicate, and actually harms more productive conversation by de-railing the conversation.
Given that there’s literally no productive return-producing enterprise underpinning any of this it’s totally fine to consider the word ponzi at least loosely applicable to the entire concept of cryptocurrency as practiced.
Not only do feeders increase the sales force the reduction in yield by the feeder's profit margin actually helps hit more of the potential market: People hear 20% apy and assume it's a scam... but 15% apy? 10% apy? -- starts just sounding like a good deal.
“Its not a Ponzi, it's just paper thin layer of indirection on top of a Ponzi, which is often how most victims of a Ponzi scheme are brought in” is maybe not as important of a distinction as you are making it out to be.
Maybe there's more regulation than I realise (and the emperor has more layers of clothes than Joey Tribbiani), but I'm not seeing it.
I assumed issuance of payment methods was much more strictly controlled than this due to the risk of contagion if the issuer can't meet it's obligations after the transaction (are card payments instant delivery between institutions these days? I always assumed there was a clearing period in the background).
Notably, these cards require online funds verification and settlement for every transaction. Some cards you might get through a bank or major card company may not, for convenience sake. But these cards do, for the obvious reason.
They're essentially pre-paid cards that load instantly (at the point of transaction) from a larger balance the dev/company controls.
There are even multiple APIs for creating card issuing APIs, checking account issuing APIs, etc. These have itemized pricing that looks more like AWS/GC/Azure pricing and are more complicated to use, in the same way AWS is more complicated than running everything on a single Digital ocean droplet.
I’m guessing they don’t have enough users and can make people whole using their seed fund.
"Due to unprecedented market conditions on the Terra blockchain - most notably risks of TerraUSD de-pegging as previously disclosed in (help.alice.co......) the UST to USD offramp is unavailable...we are unfortunately uncertain when ramp services will be resumed.
For information on alternative paths to convert to USD please see..."
the alternative paths are withdrawing to a wallet or exchange and getting 8 cents on the dollar.
They described what they are doing in their documentation, but the core ethical problem here is that the only users that would use their service are those incapable of understanding how UST/Terra worked, because anyone capable of understanding would just deposit funds directly and get higher APR for the same risk! Extremely predatory.
UST fooled many ...not very bright people who genuinely didn't realize it's a ponzi scheme - but obviously smart and technically proficient founders of Stablegains' have no such excuse. Zero room for doubt - they fully knew it's certain to collapse eventually, banking on their legal terms to protect them from liability while privately profiting as long as it works.
Founders of Stablegains belong in prison and everything they own should be confiscated and divided among victims. Sadly they are probably safe - as knowing the inevitability of collapse they must have felt their legalese to be ironclad.
Just because something didn’t explode previously, doesn’t mean it was safe until now.
Ironically, this is partially what made UST so big - because to many people it looked like this:
(1) months of three digit APR - 'obviously unsafe' ('common sense' - high yield is sus, smells like ponzi)
(2) it wasn't a ponzi. Nothing bad happens. Many people make bank. Some have no idea what's safe and were just gambling, some make informed decisions
(3) eventually, the person in question feels stupid for missing free money and decides to put money in with no deep understanding
(4) safe yields crater from a combination of people like that + slow moving, but smart, funds that started to deposit hundreds of millions
(5) person in question deposits into the UST ponzi scheme by extrapolating safety record of non-ponzi farms that are now gone, due to a category error - 'it's defi and it was safe for so long, therefore UST is safe'
(6) not realizing it's a ponzi scheme they don't even try to exit when the gig is up. Massive loss.
Ironically I now see many examples of the same category error but applied in reverse - many people that lost on Luna think its collapse proved that defi is, in fact, fundamentally unsafe, when the reason they lost is because they put their money into a ponzi scheme that leveraged defi brand for marketing.
You also can't really add "almost always" to "completely safe". It's either "completely safe", or it's not. This statement is just "it works 100% of the time 65% of the time", but with words rather than numbers.
"It's 'completely safe', until it's not" which is exactly the point that I and others in this thread started with.
It was often in usd.
>"It's 'completely safe', until it's not" which is exactly the point that I and others in this thread started with.
The meaning was: almost all smart contracts were safe, meaning you had to at least check the code before depositing.
If you're driving 200kph and crash, you weren't safe before the crash and unsafe afterwards.
Stablecoins are literally modernised promissory notes and the people hawking them are unregulated banks. It's incredible the people selling these stablecoins are not being regulated as if they are banks.
Of course they are not, but UST is. Stablecoins are different from each other. USDT, USDC and DAI are all collateralized (at least partially). UST is minted out of void by burning LUNA, creating demand for LUNA so creators get a profit and turn away, slashing all UST investors. It is an outright ponzi scheme hidden behind layers of DeFi jargons and borrowing trust from true stablecoins like USDC while being fundamentally different from any other responsible stablecoin.
What happens when some old depositor wants to cash out? Money comes out of new money that's coming in. As long as there's enough new money it works (the fundamental ponzi property). The system also utilizes some liquidity buffers (liquidity pools with other stablecoins) that can absorb temporary volatility in a redemption demand - which works as long as money flow is positive. When that stops being true, and liquidity buffers run out - both UST and Luna started collapsing, with 100% of inflows redirected to UST sellers.
Viewed as a system - all difference to a traditional, straightforward ponzi disappears. Empirically, this obfuscation is so successful from the marketing perspective algostables with meaningless changes (or even not) will continue to proliferate, although it may take years for any to get as big as UST.
Due to their actual stability (relative to other stablecoins), they're more likely to trade at a premium than at a discount.
About a year ago I traded 10,000 USDC for 12,100 USDT during a run on a certain DeFi bridge, only to trade it back to 12,080 USDC a couple hours later.
I'm not saying these aren't some other kind of scam but lots of people use "Ponzi" as if it meant any kind of scam... And generally speaking "how many thingy-coins do I own" is the one thing cryptocurrencies focus on making very difficult.
TLDR: Everybody overuses "Ponzi" and it annoys me.
Lying about source of potential gains concerns marketing of it - which is something external and done by humans, and not part of the internal distribution of money flows. How can an algorithm itself commit fraud? It can't.
No, that assumption (emphasis added) is popular but utterly false.
In a Ponzi scheme, cash from new buy-ins gets FRADULENTLY reported to existing participants as dividends from the underlying business or investment.
That fraudulent reporting of fake-dividends is essential to the scheme, because it's how the scammer lures in successive waves of investors to keep it perpetuated.
Unsustainable optimistic speculation != Ponzi Scheme
It was conflated in the past because without smart contracts ponzi schemes were necessarily executed by people.
>Unsustainable optimistic speculation != Ponzi Scheme
Speculation on a token that doesn't generate any income and isn't backed by anything is one version of a ponzi scheme, yes.
https://m.youtube.com/watch?v=zXmQW_aqBks
Works every time.
That also had a pile of feeder ponzis hanging off the side. They'd claim to be completely uncorrelated with BTCST, but just put their coins into BTCST.
Crypto has now gone beyond replaying old scams from the history of finance, and is now just replaying old scams from the history of crypto. But now they're VC-funded.
Lambda School and Inflow are two that come to mind.
That's just the way most businesses operate, you build up trust and provide loads of value when you're small. Then, as you expand you take advantage of the trust-inertia to exploit the gap between how much value you are perceived to provide and how much value you actually have to provide to keep getting money (or equity) from people and giving it to yourself.
"15% interest. No surprises."
No! Surprises!
https://techcrunch.com/2014/08/13/backpack-connects-you-with...
https://techcrunch.com/2016/01/28/shypmate-pays-travelers-to...
https://www.youtube.com/watch?v=_w3fZMkE69s
That's interesting. I never thought of it that way. Solutions to the "Amazon doesn't deliver here" problem are quite popular in Ghana. Asking someone returning to get you something is quite common. I have friends who've created businesses around this.
I really cannot believe how we let for so long that many charlatans drive clueless people to financial ruin.
How many people get duped into thinking there's such a thing as "unlimited gain" and "rewards without risks"
Like what, people are just going to give you money without you doing anything?
It would be largely beneficial to everyone, if we were to provide some basic economic/financial/"how money works" lessons to everyone through the use of schools and public education..
That's what a savings account is, essentially. The same thing with bigger numbers isn't immediately nonplausible to someone who doesn't understand the mechanics of what makes savings accounts nearly risk free and how that doesn't apply to the alternative.
But sure, lets make it a moral good that we don't (get to) have money too. The 1% deserve all the money!
For the people who get sucked into these things, it’s asking a lot for them to educate themselves without being burned - especially when there are so many communities dedicated to shoving out naysayers.
That’s disingenuous. When you put money into a high yield savings account, or even into a fiat backed 1:1 stablecoin you’re doing something. You’re providing liquidity. A high yield savings account (2-4%) or yield on a fiat backed 1:1 stablecoin (5-8%) is risky in the sense that you need to trust a bank (or exchange), but that’s eased by FDIC (which some exchanges like Gemini have [1]).
1. https://www.gemini.com/dollar
From their site:
> ¹ FDIC insurance applies only to the USD reserve funds. GUSD exist as ERC-20 tokens on the Ethereum blockchain; tokens are under the user’s self-custody, and are not insured through Gemini.
So if you send them USD, they'll hold your USD in an FDIC insured account. If you hold GUSD, and it turns out GUSD is a fraud or is otherwise insolvent, your SOL.
[0]: https://news.ycombinator.com/item?id=28147244
I don’t blame you for getting that impression, though. The Gemini dollar marketing page talks about earning high yields, and it talks about FDIC protection. It doesn’t explicitly mention whether you can get the yields and the insurance as the same time, but the answer is no.
If you are a us citizen, you can buy $10k per year from treasurydirect.gov
It’s “risk free” in that it’s guaranteed by the us treasury.
https://www.investor.gov/protect-your-investments/fraud/type...
2. Algorithmic "stablecoins" don't work, in the same way as perpetuum mobile doesn't work. You think you're inventing a perpetuum mobile, but you're building a Rube Goldberg's machine instead ;)
3. Every algorithmic "stablecoin" can be traced to 2 papers published in 2014: Hayek Money and Robert Sams' Seigniorage Shares
https://twitter.com/nivertech/status/1073248331726553090
the industry keeps chasing undercollateralized algo stablecoins because of capital efficiency. jon wu explains to laura shin, worth a watch: https://twitter.com/laurashin/status/1525505300219961344
DAI/MakerDAO isn't an algorithmic "stablecoin", it's an unregistered SEF (Swap Execution Facility) which should be regulated by the CFTC in the US, and similar agencies in other parts of the world.
The only reason DAI didn't broke the USD peg during the "crypto" bear market, is because OG's cost base of ETH was zero to 30 cents, and their objective was to save MakerDAO, rather than make a profit on their CDPs.
> the industry keeps chasing undercollateralized algo stablecoins because of capital efficiency.
Isn't it obvious? ;)
The energy industry also chased perpetuum mobile because of the fuel efficiency, so what?
IMO there are ways to design a capital-efficient low-volatility digital assets (not algorithmic "stablecoins" per say - they're impossible), but they will most-likely be illegal in any developed country, as they will be an exotic derivative instruments.
From the JTBD PoV, the job of the "stablecoins" is to hedge your exposure to the volatile "crypto" assets. The only way to do this is either to exchange them to a less volatile assets, or to enter into a contract with somebody else willing to take the risk in exchange for something.
what about makerdao makes it reliant on dao goodwill? the incentive to restore the peg is the expectation of profits from liquidating the overextended.
I didn't said that. Once they're listed on "exchanges" or traded on DEX, their price isn't under control of the protocol, and in theory can be anything.
>they promise to be able to repeg in times of severe distress. even some money markets broke the dollar. they had to be bailed out by the government.
MMFs are funds with the NAV which supposed to be around $1.00 (that in addition to earning an interest). In case the NAV goes under $0.95, the fund has to be liquidated. See "Breaking the Buck":
https://www.investopedia.com/terms/b/breaking-the-buck.asp
https://www.investopedia.com/articles/mutualfund/08/money-ma...
>what about makerdao makes it reliant on dao goodwill? the incentive to restore the peg is the expectation of profits from liquidating the overextended.
Why people kept locking ETH in MakerDAO CDPs over and over during the "crypto" bear market, when ETH was in the free fall? It doesn't make sense from the economic PoV. It only makes sense if your ETH is cheap and you want to prove that MakerDAO works.
Different agents optimize for different things. Some (most?) optimize for size of their wallet/bank account, others want to save their project/ecosystem. Both types are rational.
from your link:
> In 2008 however, the day after Lehman Brothers Holdings Inc. filed for bankruptcy, one money market fund fell to 97 cents after writing off the debt it owned that was issued by Lehman. This created the potential for a bank run in money markets [...] the next day the United States Treasury announced a program to insure the holdings of publicly offered money market funds so that should a covered fund break the buck, investors would be protected to $1 NAV
if the US Treasury insured $ust, luna would have been fine
---
> Why people kept locking ETH in MakerDAO CDPs over and over during the "crypto" bear market, when ETH was in the free fall?
they're long eth. it's not altruistic, it's incentive alignment.
If you lock your ETH into a CDP - you believe that ETH will not go down. You can also take the DAI from one CDP, exchange it to ETH, and then re-invest it into another (or the same?) CDP - thus creating a synthetic leveraged ETH long position. This can be repeated multiple times;)
My point was that people continued locking ETH into CDPs during the 2018's 90% fall in ETH prices, which only made sense if they had cheap ETH (i.e. insiders/OGs), and their goal was to prevent DAI from de-pegging.
MakerDAO's CDP doesn't seems to be the best instrument for making a LONG bet on ETH. You can just hold ETH, or you can buy ETH futures on Bitmex if you want leverage.
The problem with many algorithmic "stablecoin" designs is the assumption that there always will be speculators willing to take the risk in exchange of betting that peg will be restored. But unlike the designated market makers in some regulated markets, crypto speculators are not contractually obligated to take the risk.
Users need to monitor their open CDPs and add collateral if they are at risk. This has been done to protect users from paying the liquidation penalty fee, which is ~ 13%.
Also, do you really need leverage if your ETH's cost basis is 0 to 30c at the time when market price was in the range of $141 to $816 range?
It's all rounding error to you, you can basically print DAI out of thin air.
https://standardcrypto.wordpress.com/2020/04/30/a16z-struggl...
https://en.wikipedia.org/wiki/Flash_crash
I don't see how they can justify making such a claim. Once you put the money into their system the cash is converted to UST. No one is earning interest on their cash.
Comparing themselves to a bank, and using terminology like "deposit" and "withdrawl" are sketchy as hell. All those imply that the capital is not at risk, which it obviously was.