Fiat isn’t usually 100% stable either. They either float like the USD or managed like Thai Baht or pegged hard like $HK dollar. I don’t know why expect stablecoins to be any different. Badly designed they can break like the UK £ or really well managed like $HK they can hold https://t.co/8RtRi7nuQR
"All of this will be familiar to anyone who has encountered even a single study of speculative attacks on pegged exchange rates... But this doesn’t mean that it is familiar to the wet-behind-the-ears software engineers touting stable coins" https://t.co/qD3C1HYFwd
I agree with this sub that crypto-currencies and "blockchain" have extraordinarily limited utilities, but if they have any, what utility does a cryptocurrency have if you remove censorship resistance? The WV twins are making a USD that is less useful than a regular USD, but doesn't even have censorship resistance. Please see: [https://firstname.lastname@example.org/gemini-can-make-gusd-non-transferrable-at-any-moment-code-review-a28d58ef6a61](https://email@example.com/gemini-can-make-gusd-non-transferrable-at-any-moment-code-review-a28d58ef6a61)
Hmm so what happens when, according to plan, crypto destroys all the currencies these stablecoins are pegged to?
I can see it now, smart butter moves all his butts into tether now with the falling price, then right on schedule, boom, all the globals fiats are destroyed in an orgy of crypto-violence or something. Smirking butter goes to exchange his tethers back to butts and discovers his USDT stash went down the tube with the USD.
The idea that "all global fiat will collapse and crypto will reign supreme" is both horrifying and delusional. It will both never happen, and if it ever did we would be in a horrifying place economically.
I am fan of this sub, but the authors of this article are not familiar with the three models of designing stable coins.
Type-I : Tether, TrueUSD, Digix Gold (A physical IOU)
Type-II: Maker/Dai (Over-collateralized with ETH)
Type-III: Algorithmic (Central Banking model of Bonds/printing)
The article writes:
" The second type of stable coin is **partly collateralised**. In this case, the platform holds dollars equal to, say **50%, of the value of the coins in circulation.**
The problem with this variant will be familiar to any monetary policymaker whose central bank has sought to peg an exchange rate while holding reserves that are only a fraction of its liabilities. If some coin owners harbour doubts about the durability of the peg, they will sell their holdings. The platform will have to purchase them using its dollar reserves to keep their price from falling. But, because the stock of dollar reserves is limited, other investors will scramble to get out before the cupboard is bare. **The result will be the equivalent of a bank run, leading to the collapse of the peg."**
Nobody has proposed this type of model. Dai is 150% over-collateralized with ETH. You can check the current network statistics here: [mkr.tools](https://mkr.tools) : currently 267.15% col.
Type-I and Type-III coins both do not work in the long run.
Did I get this right? If I hodl Dai and want to sell my coins, Maker has to buy them back paying me in ethers? Which are plummeting in value and definitely not stable in any way?
I'm confused, I don't see the appeal of it, can you please explain it further?
It makes things much easier to understand if you treat Dai like a simple ERC-20 that just happens to always sit around 1 USD in price. If you want to move from Dai into AUD or USD cash, you simply figure out the best way out - typically you go DAI->BTC->USD and you only expose yourself to a tiny period of volatility.
The appeal of Dai is that it has a lot of the properties of holding cash, or having a very basic chequing account, but in a digital and censorship-resistant form.
That is a great question, in order to answer it you have to understand where Dai comes from. An independent user must open a "line of credit" of sorts, termed "CDP" (collateralized debt position). With this line of credit, the user first "locks up" some collateral (some cryptocurrency like ETH) and then is allowed to "print" or "issue" new Dai (a loan) against this collateral, but the user is only ever allowed to withdraw 66% of the Value of the collateral in Dai. They then can spend that Dai, but must repay the full principle amount in order to retrieve their collateral.
So what prevents a "run on the banks"? Well let's pretend like you and I have sold all of our long-term investments in obvious Ponzi tokens because we no longer believe in the "tech" (remember its not about the price, but look at the price!!) and so we sold our digital shitcoins for dirty, dirty USD soft-pegged Dai (which has outperformed all but our boy Tether). We dont have any of these CDP loans, we just have millions in USD. What if we want to cash out? Would the price drop to $0.10? Well no, because all of the people that issued those debt tokens (Dai) need to retrieve their collateral, which is currently 2.8x more valuable than the outstanding debt - so if people see the price drop to $0.95, they see this as an opportunity to pay back their loan at a 5% discount.
Great question - the mechanics are not immediately comprehensible but they do answer legitimate questions like the one you asked.
As a reference - the team behind the project has been involved in this space since 2013, and after the pump of that year, followed by the 2 year dump, the founders realized that Bitcoin as a global currency and commercial tool is silly and untenable, and that this space would need a stable coin if it ever went beyond a science fair project.
And what if ETH drops ~by 300%~ to 1/3 of current price? And obviously this can never get bigger than ETH. So global adoption isn't an option. In fact it can only ever be worth a fraction of ETH.
I'm not understanding the uses for this. You are reliant on always being much much smaller than another thing, like ETH .
How is it still colatteralized by 2.8x? ETH is down by nearly 50% in the past month.
In order for you stable coin to be stable meth has to be stable and exist right? So if meth is a piece of garbage, which we know that it is, so is the stable coin.
I don't get it. Is there anyway to make a stable coin that isn't reliant on some non-stable coin?
First off, it will make things easier to understand if you go to this 3rd party tracking site: [mkr.tools](https://mkr.tools)
This site shows you how many CDPs (loans) have been created: 3000+
It also shows you how much Dai has been issued: 45 million units
And how much Ether is locked away in these CDPs as collateral: 750,000 (0.75% of all ETH)
If a single CDP has $160 in ETH, and they take out a $100 DAI loan (create and spend 100 Dai) then they will get "liquidated" if the value of the collateral drops below $150. When it hits that point, any independent actor can step in and pay off the loan (100 DAI) and receive the collateral at a discount of 3%. Then the owner of the CDP can forget about their debt (it has been wiped) and receives a part of the surplus ETH back. In total, the penalty is 13% on liquidations.
You can see all of the CDPs and how often the get liquidated in the [mkr.tools](https://mkr.tools) site, under "bites" which shows you the price of Ether and the times that CDPs got liquidated.
Also - please check out this cool visualization here: [https://medium.com/@mikeraymcdonald/single-collateral-dai-9-months-in-review-b9d9fbe45ab](https://medium.com/@mikeraymcdonald/single-collateral-dai-9-months-in-review-b9d9fbe45ab)
Edit: A new 3rd party site tracks these loans: [https://loanscan.io/](https://loanscan.io/)
Hrm.. so in the unlikely event this goes bad it shuts down. Can't go bad if its off! And then what? It waits for... What?
So it prevents the price tanking by shutting off withdrawals basically. Okay.
And it seems to be reliant on there being a "god" like being, like ETH. Basically a stable coin can only work as long as it's a small fraction of a much larger thing like Ethereum. Dai obviously can't approach the size of Ethereum. That wouldn't work.
Hmm. Seems real bad.
Another good question!
The system has a debt ceiling - the maximum amount of Dai that can be created against a specific collateral type - which prevents from the system becoming too large and posing too much of a risk. But let's say that something really unexpected and disruptive is happening - for example a contentious hard fork on Ethereum (as butters murder Vitalik) - then in order to ensure that the system does not hurt the holders /users of Dai (who must always have $1/dai purchasing power) the global settlement is triggered. At this point, no new CDPs can be created, the price of Dai is set at the current amount of ETH that would make it worth $1 and all Dai is redeemable for that amount of ETH (actually 2% more because of the PETH/ETH ratio).
Also - more important - the Dai stable coin is not ever going to scale to "replace all fiat", rather, it will likely only need to scale to a few hundred million units or maybe a couple billion to meet the total demand for a financial instrument of its type. Look how big Tether is, I think Dai can get 10-30% of the size of Tether.
If ETH drops low enough the whole thing falls apart anyways though. And ETH is an awful coin. How can you make a stable coin without it being reliant on some other, much larger coin? Obviously you can't have dai be backed by dai.
You cannot make a stable coin without some much larger coin to act as your foundation, correct? All you're doing is creating a stockpile and a couple measures to handle price fluctuations. But big enough price fluctuations and your stable coin falls apart.
And obviously your stable coin has to be a fraction of the value of the coin it's based off of. Dai can never be worth more than ETH. Or even close.
And bitcoin sucks. ETH sucks. So your stable coin inherently picks those properties up from their parent coin. How can you say your stable coin is any good when it's just a hedged version of the parent coin?
*If ETH drops low enough the whole thing falls apart anyways though. And ETH is an awful coin. How can you make a stable coin without it being reliant on some other, much larger coin? Obviously you can't have dai be backed by dai.*
You are right about a few things here. Dai right now only allows users to take out a line of credit (CDP) against ETH. I agree that ETH is a garbage scam token made by a delusional skeleton with 100 false promises and none of the expertise to back those promises..... however.....
1. Dai doesn't collapse if ETH goes down in price, if that were the case the coin would be long gone, because the price of ETH has collapsed more than 80% over the 9 months of Dai, and the M0 supply of Dai has steadily gone up over time, not down (while the price of Dai has been stable). Dai collapses if ETH falls too much too quickly - by this I mean if ETH falls 60% in less than 4 hours, we would very likely see the end of Dai as the collateral would be less than the principal loan faster than the free market could step in to settle bad debts. In this case, MKR (the 2nd token, the governance token) would be printed on OasisDEX and sold for Dai. This is essentially diluting the shareholders of the project in order to protect the consumers.
2. Dai can only get as large (theoretically) as the value of the collateral. So today, it would be impossible for the M0 supply of Dai to exceed 10 Billion, as there would not be enough ETH to cover it. It would also become a riskier and riskier stable coin as more of ETH is held in CDPs, because if Vitalik starts tweeting about how he invented another word and the price tanks, a much larger economy of people would lose everything. Both of these concerns are mitigated by introducing a variety of collateral types, which is being released this week on testnet as Multi-Collateral Dai. The problem here (in my mind) is that most tokens on ETH are just as scammy, useless and volatile as ETH, so it becomes a false sense of "diversification". In the future, I and many others are committed to the addition of Bitcoin to the collateral types, but this is a technically hard problem, because you can send Bitcoin and validate that on a smart contract, but the smart contract cannot send Bitcoin back.
3. I don't agree with you that Dai sucks if Bitcoin and ETH suck. I think regardless of the financial instrument you use to create a synthetic asset, you can do it, its just that Bitcoin and ETH are not particularly efficient due to volatility, but efficient enough that it works.
So then why don't you make your coin based off a regulated financial asset rather than bitcoin or ETH? Or any crypto? With any crypto you're totally reliant on that coin being magnitudes larger than your stable coin.
The value of ETH and bitcoin is zero. Therefore your stable coin is worthless. In fact the whole point of your coin is that bitcoin and ETH are worthless. Surely you can. See the issue here?
You have to issue a coin based off Amazon stock or real estate or something. You're just hedging or diluting the problems of those coins. Not solving them.
You make some very good points.
(Q1) Why not use a regulated financial asset?- Well if you are willing to use regulated financial assets at all, then why do you need a synthetic asset that is so capital inefficient in order to create a digital token that is *almost* like the dollar - just use the dollar! You can e-transfer, paypal, venmo, apple pay, etc. These solutions would be clearly more efficient, but they miss the point.
The goal of stable coins is not to compete with any of these products, rather, the point is to guarantee for those people in the world that don't already have access to basic financial tools an opportunity to use the next best thing (or something that is better than nothing at all). The entire demand for stable coins worldwide in the next 20 years is not likely to be in the trillions, it is a very small market and might already be saturated with 3 billion USD in stable coins available on the market.
(Q2) The value of Bitcoin (and Eth) is zero, so how can any stable coin use them as collateral?- This point is very important, because it gets to the crux of my disagreements with the buttcoin reddit. My contention is that Bitcoin has a non-zero value, that it does in fact have some utility for certain people. This utility might justify a price per BTC of $10 (if that) but it is real. This is an important distinction, because If I believed that Bitcoin could in theory have a zero value I would not even contemplate stable coins as they would never work.
Do you believe that Bitcoin has no value or some (even 99.9% less value than the Butters believe) value?
Hopping over from the crypto subs to comment on this. The article makes some valid criticisms, but it left out a very important category of coin: on-chain collateralized. Basically, you can use a volatile crypto currency like Ether as collateral to back a stablecoin. You store it in a smart contract, which is like a program that runs on the blockchain(kind of like a public cloud). Everyone can see it. No one can change it.
When the price of Ether swings wildly, the program automatically sells the collateral to recoup the value necessary to keep backing the stable coin.
This system is pretty sound, and hasn't flinched throughout the recent 85% decline in the price of Ether.
The only answer is to stop using bitcoin as a commodity and use it AS A CURRENCY. Using it as a commodity means it has no intrinsic value and its value is purely a whim. You will never have stability that way.
It's not an either/or proposition. Speculators will take advantage of fluctuations whenever they can. It's what they do. And the more pioneering crypto users will spend it as currency even during these early unstable years because they want to contribute to adoption. In years to come I expect there will be more huge surges and fallbacks but I strongly suspect the trend will be upward. Each low after a surge will be higher than the previous one. there will come a day when the prevailing crypto, (very possibly not bitcoin), is big enough and simple enough for the average Joe to try out on a whim without having to commit much time or money. if it works for them, good.