
MakerDAO’s “DAI” stablecoin is breaking, as predicted - matthewbauer
https://prestonbyrne.com/2018/01/11/epicaricacy/
======
MicahZoltu
The thing the author seems to be confused about is that when people talk about
stable coin they aren't claiming that the market can't be irrational. They are
claiming that over a sufficient period of time the coin will trend towards its
target. In the case of DAI today, that target is 1 DAI == 1 USD. This means
that while the market may irrationally buy/sell DAI for more or less than 1
USD, over time it will trend towards 1 USD.

For the vast majority of people looking for a stable coin, this is exactly
what they want. They don't care so much that on a particular exchange DAI is
worth more or less than $1, they care that in a week, or a month or a year DAI
will still be worth "about a dollar" and not "100x USD" or "x/100 USD". DAI
has the mechanisms necessary to make it profitable to drive the price of DAI
back toward 1 USD if it loses its peg and those mechanisms have been shown to
generally work in the wild so far.

I have personally made a few bucks when DAI transiently slipped its peg in the
past. There are people actively authoring bots that profit off of DAI losing
its peg and as those bots become more efficient and gain capital, I think
we'll see DAI slip its peg less and less often.

~~~
pjbyrne
> They are claiming that over a sufficient period of time the coin will trend
> towards its target

This is not what the MakerDAO team, nor any other stablecoin shill, is
claiming. They are claiming the system "ensures" that the stablecoin is "a
money that will always maintain its purchasing power."

"Ensure" and 'always' don't mean "trend towards over time." They mean always,
as in all the time. If their intention is to sell a different product, I can
only suggest they make more representations which are a little harder to
falsify.

~~~
MicahZoltu
If what you want is "something that always is worth _exactly_ 1 USD then you
are asking for the unatainable. As others have mentioned, it is _impossible_
in an open market to have a true 100% no variability peg. Markets work on
supply and demand and the instant that one exceeds the other the peg will
drift.

A good stable coin will have pressures that push that drift back toward the
target, but it is impossible to stop the drift from ever occurring. The USD
itself presumably targets some basket of goods, but it drifts away from that
basket of goods. So even the USD isn't a "stable coin" by your definition.

~~~
AroundTheBlock_
I mean the notion of "exactly" is nonsensical in so many ways, especially when
it comes to thinly traded exchanges. I can sell $1 to my friend for $1.10
break the US dollar. Lol.

------
kwikiel
In this thread cryptocurrency community will rediscover banking and money.

We have stablecoins or tethers (manny attempts to create something people
want) - people want some form of money for peer to peer value transfer, that
will allow arbitrage between exchanges and connection to "real world" as
almost nobody is pricing their services in ethereum/bitcoin.

Let's say we have 3 competing stablecoins and Gresham's law will apply =
people will be moving to "best" coin and leaving others holding bad ones.
Imagine that you have 2 banks - one with good reputation and large reserves
and second one - almost without them, yet both will be issuing private money
redeemable for each other. So how come one can attract customers to his
specific stablecoins solution? By offering interest rate - a stablecoin that
pays dividend will be better than stablecoin without it.

It's complicated - ideologically stablecoins are similar to economical
perpetuum mobile devices, yet the first are impossible due to laws of physics
and second one may work because economy depends on human behaviour and humans
may act irrationally.

~~~
erikpukinskis
A stablecoin isn't a store of value. It's an instrument for holding pretend
Fiat. It's a way for holders to pretend they are the Fed, and say "Now I have
USD! You can have it. Just sell it back to someone else eventually because
it's pretend."

It's an index basically, not an actual commodity.

(Except of course in the sense that Everything Is A Commodity in the crypto
world.)

~~~
MicahZoltu
Eh, I wouldn't quite call it an index. While I agree that it isn't _actually_
1USD (or whatever it is pegged to), it is backed by other assets (in the case
of DAI today, it is backed by ETH) and the system is setup such that there
should always be more ETH backing the DAI than necessary to make everyone
whole.

------
hal9000xp
Actually, for such laughably small trading volume DAI is as stable as
mountain:

[https://coinmarketcap.com/currencies/dai/#markets](https://coinmarketcap.com/currencies/dai/#markets)

I do expect DAI to be more stable as adoption and trading volume grows.

Author of is article is a troll. In his last post he wrote literally:

> Having taken fifteen minutes to review the MakerDAO paper

MakerDAO is probably one of the most ambitious projects on Ethereum with
pretty complicated structure. Draw conclusions on 15 minutes of review is
nonsense.

~~~
krrrh
> Author of is article is a troll.

He may have an incendiary and flippant writing style, but it’s worth noting
that he was a founder and COO of Monax (née Eris) which released an open
source private-chain fork of Ethereum in 2014. He’s qualified to have an
opinion on complex smart contracts and not be called a troll. If anything he’s
emblematic of the frustration felt by many early adopters who understand that
the hype bubble is making it hard for this rather experimental technology to
meet inflated expectations (Vitalik recently being another prime example).

[http://www.businessinsider.com/ethereum-founder-threatens-
to...](http://www.businessinsider.com/ethereum-founder-threatens-to-leave-if-
the-crypto-community-doesnt-grow-up-2017-12)

~~~
cowpig
"Author of this article is a troll" != "Author of this article doesn't have a
technical background"

I also have a strong background in the field and the MakerDAO project took me
a long time to understand. The author makes several mistakes in his opening
paragraph.

I'm not entirely convinced that the project will work as intended, but the
author clearly doesn't even understand the basic ideas.

------
DennisP
I'm a bit skeptical of derivative-based stablecoins in general, but Dai
dropped briefly and then went right back to about a dollar, currently $1.02. I
don't think they ever claimed that their price stabilization mechanisms would
work instantaneously.

~~~
Erlich_Bachman
And while it dropped momentarily, it dropped to 70%-80% of the USD. In the
world where most other cryptocurrencies move that much in a regular day
without anyone breaking a sweat - that seems like a very good deal to me.

------
sna1l
It is funny because this guy also fundamentally doesn't understand how
Basecoin works.

"If the price of 1 BASE is above $1, the blockchain prints new $BASE to
holders of “BASE Shares” (mother of god), a standalone cryptocurrency which is
issued in the genesis block and held by early adopters, which then distributes
new Basecoins to them as a “dividend.” Holders of “BASE Shares” are free to
either hold onto their Dividend-Basecoins (thus not bringing the price down)
or sell them into the market, pushing out the supply curve and bringing down 1
BASE’s price. This process continues until the price of 1 BASE drops to
$1."[0]

Actually, the Basecoin will first go to the Bond holders. I think there are
reasons to be skeptical of Basecoin and stable cryptocurrencies, but this
guy's "articles" don't really seem to touch on those.

[https://prestonbyrne.com/2017/10/13/basecoin-
bitshares-2-ele...](https://prestonbyrne.com/2017/10/13/basecoin-
bitshares-2-electric-boogaloo/)

~~~
Animats
Well, of course it's easy to ensure that the price doesn't stay _above_ $1.
You can make more of them. It's ensuring that the price doesn't stay _below_
$1 that's hard. You have to draw value from some reserve. If that reserve is
depleted, you're screwed. All attempts to peg currencies run into that
problem.

~~~
Erlich_Bachman
Would it not be possible to just destroy some of the coins? If they were
destroyed for everyone, proportionally to how much they hold, wouldn't that be
in interest of everyone? Because it would make the coin itself worth more?

~~~
jacques_chester
As I see it, you have two options.

The first is distributed destruction. Everyone destroys some of their coins to
raise the value of remaining coins. The problem is that this is a prisoner's
dilemma: defection is the best strategy. Some people will _not_ destroy their
coins, thus increasing their relative position to others who do. Over time
"destroy your coin" signals will simply be ignored.

Not to mention cold wallets, which simply don't participate in the ledger
unless it suits them to. Are they meant to simply nuke coins upon rejoining?
This introduces an incentive to stockpile coins in the hope that the policy
will change in future.

The second approach is centralised. Someone has the authority to mark some
fraction of coins as destroyed. Rather undermines the decentralisation thing
people like.

~~~
Erlich_Bachman
But the destruction would of course (obviously) be implemented in the
protocol.

Just like in Bitcoin, it's not up to each user to be honest and prevent
double-spends, it's instead up to the network that checks and re-checks
everything - the destruction of those coins in the example would be enforced
by the network. Not relied on users.

~~~
jacques_chester
This is why I brought up the cold wallet.

The network can check that transactions occurred, but it can't really make
people perform them. It's a ledger system.

If someone doesn't post a coin destruction event, how do I know why? Is it
because they're cheating? Because of a cold wallet?

You might say "I will make coin destruction a precondition for any other
transaction". Now the incentive of a hoarder is to sit on their wallet while
destruction is high and only enter the market when destruction is low. This
means liquidity is tied to how far off the peg you are, which isn't a
desirable property.

OK, how about summing up the destruction tally for any wallet that's inactive,
to be paid in a lump sum? Now you're telling me that my wallet can be
completely drained over time by a destruction tax that realises only if I open
my wallet. Not very attractive.

OK, maybe you just destroy the net of coin creation and coin destruction at
transaction time. This seems more likely to work, though I'm unsure whether I
can evade it by changing addresses. I'm also unsure what incentives miners
have to validate coin destruction. There's also the problem of how it cope
with truly heavy amounts of capital flow. Watching a numerical balance surge
up and down during a single day might be unattractive to a lot of holders.

------
jerrycabbage
In the past, this person trolled Bitshares to make a name for themselves. They
selectively cut'n'pasted snippets of the Bitshares forum as some form of
evidence in other posts. There is a ton of context there that was removed. A
blockchain can give an asset value, but that doesn't mean every market will
guarantee those prices. He is now going after the Maker coin. The guy does
well SEOing his website with this rubbish but he doesn't seem to understand
much outside of that. oh well, no big deal until google/ycombinator point to
him as an authority.

------
rebuilder
It seems to me that any decentralized stablecoin would break the impossible
trinity. [0]

Basically, since the interest rate is fixed (at 0 in this case, I believe),
there's an incentive to sell DAI in favour of some higher-yielding currency,
which creates a downward pressure on the price. So short of preventing DAI
from being sold somehow, in order to maintain a peg, someone needs to pump
money into DAI at a loss.

You can try to build a complicated system to hide all that, but it seems the
goal of a stable peg is simply impossible. Even for nation states it is only
possible in the case they have sufficient resources and the will to maintain a
peg.

[0]:[https://en.wikipedia.org/wiki/Impossible_trinity](https://en.wikipedia.org/wiki/Impossible_trinity)

~~~
nora4
Why do you say interest rate is fixed at 0. Isn't the whole bond mechanism
supposed to introduce an adaptive interest rate?

------
zodiac
Author has misunderstandings of what he's criticizing. From the article I
suspect he thought the crash was caused by undercollateralization at first
before his friend corrected him. His 15 minute attempt to understand the
system didn't include enough time to check the collateralization ratio limits.

Also claims that a collateralized stablecoins "only works if the collateral
value keeps rising", and that selling something is equivalent to using it as
collateral

------
3solarmasses
How is this mud slinging article so high on hacker news? This guy is just like
every other troll who attempts to forge a name for themselves by tearing down
other people's hard work.

~~~
moomin
Yeah, I hate security researchers too. They should shut up about TLS and
processor vulnerabilities.

------
isubkhankulov
The author's main point is that since the token is collaterized by ether, the
value of the coin depends on ETH rising in value. The token's creators attempt
to solve this by over collateralizing 50% which he considers foolish because
it just adds leverage to the system so when losses occur, they are
exaggerated.

~~~
orthecreedence
Sure, but they are planning on adding other assets as collateral. ETH is just
the first version, the proof of concept. I think the author knows this,
though, and chooses to dismiss the project anyway.

------
onestone
FUD. Insufficient liquidity on some exchange might cause the price to
fluctuate briefly, of course. But it quickly corrected back to $1.

~~~
tenaciousDaniel
And unless I'm mistaken, the people at Maker never said it was hard-pegged to
the dollar. It was a soft peg, so the price could fluctuate here and there,
but remain _roughly_ stable.

------
oh_sigh
If a group wants to peg a coin to the dollar, why don't they just issue coins
for $1, put that directly into a savings account, and allow redemption of any
coin for $1?

~~~
cowpig
That's called Tether, and its primary problem is that everyone is taking the
issuers at their word that the money is going into a savings account, and that
they are only issuing it when they receive $1.

------
arisAlexis
introduction bashes ethereum over its price jump and seems to go for tulips
explanation. that's where I stopped reading

------
decentralised
Another misinformed article from Preston Byrne. It's unbelievable how out of
touch this guy is!

------
yusee
Tether gets criticized for being fractional, but it's more stable than fancy
collateralized derivative products. Cryptocurrency never ceases to amaze me.

~~~
mtgx
Wait, tether is fractional now? Wasn't one of their big promises that Tether
is always backed up 1:1 by the dollar?

~~~
alphast0rm
I believe you are correct that it's not fractional, their website claims "100%
Backed - Every tether is always backed 1-to-1, by traditional currency held in
our reserves. So 1 USD₮ is always equivalent to 1 USD." [1]

The whitepaper abstract also states "issued tokens are fully backed and
reserved at all times." [2]

[1] [https://tether.to/](https://tether.to/)

[2] [https://tether.to/wp-
content/uploads/2016/06/TetherWhitePape...](https://tether.to/wp-
content/uploads/2016/06/TetherWhitePaper.pdf)

