
Bancor Is Flawed - sidko
http://hackingdistributed.com/2017/06/19/bancor-is-flawed/
======
dna_polymerase
Great great great great article. Never seen so much facts and analysis in an
Ethereum/ICO post (aside from Vitaliks maybe).

This whole ICO craze is going to hurt Eth in the long run, just like
fraudulent campaigns hurt Kickstarter. People need to realize those ICOs are
completely overhyped right now, lacking anything worth investing in the most
cases.

~~~
Roritharr
The problem is, even if you know this its still a Keynesian Beauty Contest, as
you can make money by following the hype along for a while.

------
isubkhankulov
Bancor's initial response isn't great:

[https://twitter.com/bancornetwork/status/876934646344404992](https://twitter.com/bancornetwork/status/876934646344404992)

since they mentioned FUD, it sounds like they're afraid Gun's post may affect
trading of their token.

~~~
topynate
>it sounds like they're afraid Gun's post may affect trading of their token.

Yes, it works out quite nicely all round. They, by taking his ability to move
the market so seriously, grant him social proof that can't be obtained any
other way. He, very magnanimously, walks back his most serious attacks, to
wit: their team are not credible, and the problem they want to address "is not
a real problem". And anyone else who wants their token to pop* will know who
they'd better have inside the tent.

* Bancor's token becomes tradeable shortly, see [https://blog.bancor.network/token-activation-update-285ba819...](https://blog.bancor.network/token-activation-update-285ba81995b1). It would have been tradeable today, but they have some last minute debugging before their smart contract is ready to "automate Yellen", as Sirer puts it. It's hard to begrudge them this, having seen how Yellen performs in the unpatched 1.0 release.

~~~
el33th40r
For the record: I have not walked back any criticism. I saw a brigade forming,
and the last thing I want to be is the kind of person who, wittingly or
unwittingly, creates a social media brigade. My own blog has been brigaded
countless times, and I know how it feels. So do allow me to walk a nuanced
line, if you will -- we're all better off if we can diffuse tension instead of
getting entrenched in all out assault mode.

~~~
asymmetric
I really appreciate your stance, but I have a question: if your goal is to
walk a nuanced line, why use Twitter to walk it?

------
nextstep
> There already exists a common currency through which we can trade. It's
> called ether, and we can use it no matter which token pairs we want to
> trade...

Exactly. For every ICO that pops up, ask does this use case require a special
token? Often ether would be sufficient or even preferable because of greater
liquidity.

Exchange between digital assets can be easily facilitated with something
simple like Prism: [https://info.shapeshift.io/blog/2017/05/21/introducing-
prism...](https://info.shapeshift.io/blog/2017/05/21/introducing-prism-worlds-
first-trustless-portfolio-market-platform)

~~~
isubkhankulov
if you cut through the hype, Prism is an ethereum hosted CFD (contract for
difference) platform.

They claim that they will be taking the other side of customer bets on
portfolios initially, and hedging by buying the underlying. later, they
envision other market participants will short coin portfolios.

With CFD's upside and downside is capped. so neither party is investing, just
betting.

~~~
Animats
_Prism is an ethereum hosted CFD (contract for difference) platform._

Is the Tel Aviv binary option crowd somehow involved with this? Having been
closed down in binary options, they've been pushing "contracts for difference"
and "ladders".[1]

[1] [https://www.spotoption.com/products](https://www.spotoption.com/products)

~~~
isubkhankulov
this is aimed at cryptocurrencies and designed to not have counter-party risk.
self executing smart contracts.

one problem is that they may be relatively expensive because they require
"gas" to execute but on the plus side they can't be shut down.

------
burke
The underlying problem here is that the ICO model as most-frequently
implemented is pretty broken.

It's kind of a like a hybrid between an IPO and a Kickstarter, but:

1\. With kickstarter, the reward has roughly constant value with respect to
the total funds raised;

2\. With an IPO, the supply is predetermined. While the cost per share may be
astronomical by the time you get around to buying in, it's clear what fraction
of the offering you're purchasing.

ICOs tokens typically have:

1\. value inversely proportional to the total funds raised; and

2\. (since supply is not determined until the end of the ICO in many cases) no
clarity around what fraction of the offering an investment actually purchases
until the offering is complete.

This leads to some pretty crazy situations, Bancor being the most recent and
most notable example, but in general, it just doesn't really lead to very sane
practices.

\---

This is precisely why IPOs are conducted the way they are, with investment
banks pre-purchasing a predetermined number of shares just shy of what they
expect to be a fair market value, handing that money to the company, and then
selling those shares on the open market.

~~~
laser
ICOs implementations have varied, such that while your points about inverse
value and transparency of fraction of offering may hold for some, ex. Bancor
w/ it's "hidden ETH cap" announced at 80% full [1], it does not hold for many
others, ex. SONM capping at 331,360,000 SNM for 117,337 ETH for a pre-
determined max ~$42 million ICO [2]. Whether or not the SONM-style, Bancor-
style, or some other style of ICO has "most frequently" been done is an open
question?

[1] [http://www.newsbtc.com/2017/06/06/bancor-ico-starting-
june-1...](http://www.newsbtc.com/2017/06/06/bancor-ico-starting-june-12th-
participation-terms/)

[2] [https://ico.sonm.io/](https://ico.sonm.io/)

------
seoseokho
Dumb question: does anyone know if any of the ICO-ing companies have "cashed
out" to actual hard currency?

~~~
ac29
Its a reasonable question: a lot of these articles (which I dont necessarily
disagree with otherwise) uses phrases like this one does:

"raised a record $144M" and "raising 9-digits cash"

Which isn't true. They raised 0 USD, and selling whatever the equivalent of
ETH they did raise would likely crash the value significantly, such that
they'd never see $100M+.

 _If_ they sold slowly, and _if_ ETH value stayed relatively stable during
that time, and _if_ the exchanges were reliable for large, frequent
withdrawls, and _if_ all of this didn't raise huge red flags with the banks
and governments in their jurisdictions, there might be something to it. That's
a lot of ifs.

~~~
sremani
They raised about 3 million in USD and 2 million or so in Euro. So, there is
cash involved, but most is BTC ETH LTC.

------
tronreg
Just wondering how those of you who have known about Ethereum for a while but
didn't buy it feel about missing out on >3000% returns this year. I didn't buy
any and dislike knowing I could've been rich.

~~~
mabbo
I used to go to these Wednesday night Bitcoin meetups at "Bitcoin Decentral"
in Toronto.

Half the people who attended these were idiots looking to make easy money for
no work. A quarter were guys who had gotten into bitcoins when they were cheap
and had decided that they were geniuses, and not simply fortunate. The first
half loved listening to these guys.

The last quarter were actually interesting people, into crypto and crypto-
currencies, doing cool stuff. And some of them were into this thing called
ethereum. Sometimes there were talks with that Vitalik guy.

And I did not buy even a single coin.

It was a bad investment. It was some random guy at that weird house on Spadina
Ave who said he was making a better Bitcoin. Sane people do not give money to
schemes like that. Those crazy idiots who wanted to get rich for no effort,
let them throw their money at this ethereum thing, just like they'll throw
money at every pyramid scheme and the Toronto housing market.

~~~
sonofaragorn
Wow. I could have written this and every word would still hold.

I think the one thing that was clear to me is that this Vitalik guy was some
kind of genius. But, still I didn't buy/mine.

I wish my coding skills had been better at the time and that I had looked into
the code (and not just the whitepaper which is kinda like a fairytale to me)
and realized its value.

~~~
mabbo
Were you at the creepy house on Spadina too? If so, we may have met. I only
went a handful of times, but if you really scouted them out the good people
there were fascinating. I wish I'd kept in touch.

~~~
sonofaragorn
Yeah I think it is (was) called Bitcoin Decentral. I think I was only there
two or three times but I definitely met all the types you described :)

------
jnordwick
We need a futures market for crypto currencies. It would massively aid in
hedging and price discovery. It would be easier for the price to adjust down
to since there would be an easy way to short them too.

~~~
kcanini
Possibly dumb question: What is the point of a futures market for a currency?

I understand why futures markets exist for e.g. oranges (seasonal production
cycles) and jet fuel (to avoid storing a years' worth yourself). But
currencies are available 24/7/365 and have zero storage cost.

~~~
dfabulich
1) You may not be aware that there are futures markets for all fiat
currencies, e.g. the USDX for dollars.

2) Currency futures markets exist to allow you to bet that the value of the
currency will decrease, by offering to sell you the currency at price below
the current market rate in the future.

In markets where there's no easy/legal way to bet that prices will decrease,
asset bubbles are common, as "bulls" bid up the price, and "bears" just sit on
the outside waiting for the bubble to pop.

If bears could bet that the value would decrease, this would lower the price
of the asset today. In this way, price signaling can allow the market to reach
an optimal shared opinion about the "true value" of an asset.

There are a lot of cryptocurrency bears who think that the long-term value of
Bitcoin and Ether are approximately zero, that cryptocurrencies are in an
asset bubble, and that this is wasting valuable time and money that the
economy should spend on other things. By betting against cryptocurrency, bears
could help to end the bubble in a safer and slower way.

(Or so they say. Sometimes future markets can exacerbate price instability
when the whole market behaves irrationally.)

(The other reason futures markets exist is to allow people holding the
currency to reduce ("hedge") the risk that the value of the currency will
decrease. Thus they can make small bets against the currency, and if it rises,
they'll still make money, and if the value falls, well, at least they'll win
their bet.)

~~~
kcanini
Example: 1 USD is currently worth 0.79 GBP. If I wanted to bet that the USD
would decrease in value against the GBP, I could enter into a futures contract
(assuming the existence of a wiling counterparty) to purchase 0.75 GBP for 1
USD at a date 3 months in the future. If I was right, and the exchange rate
drops to 1 USD = 0.7 GBP, then I profit 0.75 - 0.7 = 0.05 GBP.

Instead, I could have just bought the 0.79 GBP immediately and then waited 3
months, and then I would have profited even more: 0.79 - 0.7 = 0.09 GBP.

What does the existence of the futures market allow me to do that I can't
already do in this scenario?

My point was that in cases where production is cyclical or storage fees are
nonzero, it might be difficult/impossible to trade on the spot market, or it
might be prohibitively expensive to hold the item yourself. But currencies
don't have either of these problems.

~~~
Veratyr
> What does the existence of the futures market allow me to do that I can't
> already do in this scenario?

Leverage.

So I had a look at live data for an example. As of writing, 1GBP = 1.28 USD.
Let's look at some example scenarios, assuming I believe 1 GBP will be worth
1.41 USD (+10%) in 3 months and want to make as much money as I can with a
$100k investment.

\- I buy USD from a regular bank or currency exchanger and wait 3 months. If
the price goes up 10%, I make $10k. If the price goes down 10%, I lose $10k.
If nothing happens, I lose nothing.

\- I buy GBPUSD futures contracts. I need $7346.25 margin to open the
contracts and $5877 to maintain them (per
[https://www.interactivebrokers.com/en/index.php?f=marginnew&...](https://www.interactivebrokers.com/en/index.php?f=marginnew&p=fut))
and I control 62500GBP ($80k) per contract. With $100k, I can buy 13 contracts
and control $1.04M. If the price goes up 10%, I make $100k. If it goes down
10%, I lose $100k.

And then, for fun:

\- I buy 86 options for a GBPUSD futures contract at a strike of $1.28 for
$99k. If the price goes up 10%, I make $593k. If the price is at ~$1.30, I
lose nothing. If the price is below $1.28, I lose $99k.

I'm no expert on futures however so there might be something wrong here,
though the answer is definitely leverage.

~~~
joosters
You don't need a forward/future to introduce leverage.

We can trade GBP/USD between each other with as much leverage as we like
without any future time conditions. All we need do is agree to pay each other
the difference in value as the price changes, multiplied by our agreed
leverage.

At some point, one or other of us can close the deal and settle the
outstanding amount.

If you can't strike a deal directly, you go to an exchange or clearinghouse of
some kind that will introduce buyers and sellers. Once again, leverage can be
created without any forward or future.

~~~
jnordwick
You basically just recreated a forward where either party is able to
unilaterally end the contract. (Forwards aren't standardized so can have weird
quirks like this.)

~~~
joosters
Fair point. So where does the definition of a forward end? Could you then
classify anything where you don't take delivery of the underlying entity as a
'forward', even if there is no end point and no promise of any kind of future
time (however negotiable)? Where does the boundary lie?

~~~
jnordwick
A forward is just a future that isn't standardized and not traded on an
exchange. Forwards are over the counter contracts that are written for each
deal.

Forwards came first. You would go to an investment bank tell them you wanted
to hedge whatever you had and they would write up the contract between you and
them. Obviously there is no secondary market for these things and two
contracts could have different terms in them.

So futures were invented. They standardized the underlying product (e.g. a
type of wheat, a particular duration on bonds, a fineness of metal, etc), the
expiration date, the delivery location (or financially settled), and the size.
Now since all these contracts are fungible a market can be formed to trade
them back and forth.

Those are basically the only differences.

~~~
joosters
I understand the terminology difference of forwards and futures, what I was
asking about was when does a deal become a forward? The standard "I'll agree
to buy oil from you at this price next year" is obviously a forward, but a
deal where there may be no particular timeline or even a promise of one seems
to be more hazy.

~~~
jnordwick
The dividing line would be the requirement for all contracts to be equivalent
and traded on a venue. So an expiration date is probably a requirement. I have
a hard time imagining such an open ended contract.

------
simplehuman
Wow, 144M. As a crypto n00b, can someone clarify if this is "real" money? Just
wondering since I have never heard of Bancor before and this amount of funding
is incredible.

~~~
isubkhankulov
its in ETH, not dollars, so it would be quite difficult to convert without
slippage because the markets are quite illiquid.

Basically, people trading their ETH paper gains as a diverisification play.

~~~
Animats
_Its in ETH, not dollars._

Oh. This suggests that ETH is way overvalued and illiquid.

We're about to find out how liquid Bitcoin really is. The Mt. Gox bankruptcy
trustee has 202,185 Bitcoins and may have to convert them to yen.

------
sushid
I feel like the article definitely has some merit but the timing of it (days
before a TBD announcement on token trading), the inclusion of very obvious
non-unique points (i.e. not scalable, anything Bancor can do Ethereum can do -
uh, why not include the definition of Turing complete here) and the false
assumption that Bancor's use case is for a groundbreaking ERC20 token that's
going to be traded on every exchange makes the author's claim dubious.

A more likely use case for Bancor is some SMB (store/restaurant) or content
creator issuing tokens to be used for membership reward/points or for voting
on a new video/project idea, not for Augur/Steem/Gnosis 2.0 to issue an ICO.

If you take this gross assumption of the equation, his whole argument about
slippage or "trailing the market", etc are gone. You're issuing some small
time tokens. There no reason to always buy back from the market and there are
no big players trying to "deplete your reserve." The author makes it sound
like I'm selling some popular cryptocurrency at a fixed price and am being
left to bleed dry when in actuality, I'm issuing my_random_token for friends
and customers.

I didn't review the code but if what he's saying is correct, there is a reason
for alarm regarding their reimplementation of basic arithmetic functions(!!!)
and user overpaying.

By trying to make this into a laundry list, it comes more off as a FUD
argument, very similar to what Bitcoin maximalists were doing post the DAO
hack to Ethereum.

(Disclaimer: my Bancor holding is about 0.5% of my total Crypto portfolio).

~~~
MichaelGG
>(store/restaurant) or content creator issuing tokens to be used for
membership reward/points

Why would a restaurant use this for membership point when a glorified Access
db would work just as well?

~~~
Noxchi
We are witnessing the dotcom bubble version 2: crypto bugaloo

~~~
edoceo
We're gonna rock down to electric revenue.

And then we'll take it higher!!

------
RichardHeart
Is there a way to fix no one being able to short these things? The counter
party risk and irrational exuberance outlasting ones solvency should be
solvable somehow?

~~~
sidko
Remember the market can remain irrational longer than you can remain solvent.
It is seldom a good idea to short an asset just because you think it is a
bubble, unless you're able to call the peak.

~~~
Bartweiss
True, but even so. Most bubbles see at least a few players stake long bets
against them (e.g. housing), usually whoever is rich enough to eat months or
years of margin calls.

Letting pessimists enter the market rationalizes things that much faster. For
something like BTC, the market is actively pressured to stay irrational
because any non-holder who expects prices to drop can't enter - you only play
if you're bullish.

------
momo36
I bought some BNT... Now the price is only 2.72$ :[
([http://bancorprice.org/](http://bancorprice.org/))

------
dahoramanodoceu
As an experienced trader in FX and us stocks, and as a bit of a budding
technologist, how can I best get into speculating Ethereum?

I've tried getting into ethereum, and am super interested in programming
numerous smart contracts, but have showed up late to the party, so all the
docs are in varying levels of accuracy (out of date) and it seems like i have
to download a million and a half heavy applications just to participate. Red
flag. It seems weird that company with so much interest and participation
doesn't have proper documentation.

Is there a way to go short; are there options markets; is it currently
possible to bet against the price of a smart-contract like Bancor?

~~~
flaviuspopan
IMHO, I wouldn't consider yourself late to the party. There's a ton of work
being done on the EVM (Ethereum Virtual Machine) and new languages are coming
out for it (like Viper). The biggest challenge at the moment is knowing which
resources are still relevant and worth grokking. As long as you stay curious,
I'd say there's a great chance your future in the market will be mildly
prosperous at worst.

------
zby
I would like to know if anyone reading Hacker News invested in BNT. Or any
other token.

They look so obviously overpriced - it is difficult for me to understand why
people are buying into this.

------
Razaberry
Official response [https://blog.bancor.network/this-analysis-of-bancor-is-
flawe...](https://blog.bancor.network/this-analysis-of-bancor-is-
flawed-18ab8a000d43)

------
Angostura
I wish I knew what an ICO was

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

------
digi_owl
Of all the names they could have used...

------
glorious
All you have to do is throw a rock at the button on the wall, and a gate will
drop on its head. Wait, that's Rancor.

------
riffraff
how did this thing even get 140M? Is this "funny money" ?

------
ex3ndr
I hope hard fork is not going to happen in the future because of them.

------
Radim
Jesus christ. I read that as "bacon is flawed" for a second and nearly got a
heart attack.

Bacon is perfect.

