I've worked with these founders over at Google. They were normal, middle-of-the-road SWEs working on some (fairly boring) DoubleClick teams, one of which eventually shut down. In a matter of a year, with no revenue, code, product, or customers, I can't believe they've raised over $100m.
Are investors just betting on pedigree at this point? In which case, is a Princeton undergrad degree really worth that much?
Moreover, their stint in Google Search lasted maybe 2 months, but is still prominently displayed in their bios. Is that worth another few million?
I can't think of a better example of the SV echo chamber when an investment like this is announced. Even color.com and Juicero had more experienced founders/prototypes.
The future looks bleak when you see fashionable SV outfits leading the blind. It's no wonder why diverse founders with great ideas have trouble getting funded when so much money is going to companies like this.
They must be good at selling if they can convince people to get 100+ million with no "revenue, code, product, or customers." You can't hate on someone for making it.
Without commenting on the validity of their business or the amount of money allocated, your premise is badly flawed. There’s no reason to think one’s SWE ranking at Google would correlate with success as an entrepreneur. (There’s fairly obvious arguments one could make for why they might be inversely correlated.) Furthermore a median engineer at Google is presumably at least a top decile engineer worldwide. Ultimately, life isn’t a report card, there’s lots of different paths to success.
It's pretty elitist to think that you can never accomplish anything worthwhile just because you were only a low level employee at Google, which by the way, is a position most engineers dream of.
It's not how I interpreted the parent, rather it's more that this type of investment is probably based a lot on previous experience, not future potential. As such I think it's relevant. Maybe they're geniuses but they haven't proved that yet.
I can't speak for their coding abilities (which are a poor proxy for company founding abilities anyways), but Nader and Lawrence are both very sharp guys.
A16Z also funded 21.co's earlier iteration when they made terrible mining rigs. The cynic in me says they believe the instant liquidity + their brand name will paper over all cracks.
MakerDAO's DAI coin (currently collateralized by ETH) has already proven quite stable in the face of several black swan events and the price of Ethereum crashing nearly 70% over the past couple of months. They're in the process of adding more assets to back the currency to improve stability. The supply is capped by a debt ceiling. There are sound principles behind the currency, and it being an ERC20 token, it's got all the advantages of being pluggable into the ETH ecosystem.
It's not a bad idea, it's actually a great idea and if DAI or BaseCoin turns out to be stable-ish over the long term, then it will be incredibly useful for the crypto ecosystem. Honestly, even if DAI fluctuates a few pennies here and there, if it's stable-ish it will be useful for a wide variety of services and applications.
DAI coin is just diversifying risk by using multiple underlying assets- So instead of a 10% chance of the value dropping 90% due to a failure of an asset guarantor, it will just have a 90% chance of dropping 10% in value. The MakerDAO organization can likely cover this 10% loss in asset value by using their enormous capital, but this is not a sustainable strategy for creating a stable synthetic asset.
I think sustainable synthetic blockchain assets are possible, but they will always have complicated risk/reward profiles that won't fully mirror the underlying asset they are designed to model: The dream of a truly "synthetic dollar" will always remain a dream.
EDIT: I should clarify that I think DAI coin may still be a useful construct for some situations, but it's going to be an asset with very different properties compared to any target real-world asset.
> sustainable synthetic blockchain assets are possible, but they will always have complicated risk/reward profiles that won't fully mirror the underlying asset they are designed to model
We figured out this doesn't work in the 19th century.
Reserves don't remove volatility, they just hides it. This is how banks work. And like a bank, a system of keeping "enormous capital" on the sidelines, ready to buy, works 90% of the time. When it doesn't, however, when people fear "enormous" is not enormous enough, they withdraw (i.e. sell), which prompts more selling, until eventually, since "enormous" isn't 100%, the buck breaks and the cards come crashing down.
Also people like to steal the "enormous capital," which is why we have regulations.
There's not really much reading on this- You simply can't take 10 assets that are worth less than $1 individually (because of guarantor risk) and mix them together to create an asset that's pegged at exactly $1- This is not a problem that can be solved by "diversification".
MakerDAO's system over-collateralizes on DAI. Currently, it takes at least $1.50 of ETH to create $1 of DAI. This is based on the volatility and risk profile of ETH. These parameters are adjustable by MakerDAO token holders. Suppose they added gold to the asset basket where 50% of DAI was backed by gold and 50% was backed by ETH. They could require 125% position on gold and 150% position on ETH. In this case, 50% of the supply of DAI would be subject to the whims of ETH price while 50% would depend on gold. If gold or ETH were both to drop to near zero at nearly the same time so rapidly that the CDPs could not be liquidated in time, then the system would be at risk. Seeing as how Gold and ETH are not correlated, this is an unlikely event. Adding 8 more uncorrelated assets to the protocol would only further improve the stability of the system.
The inherent problem is that even if you are heavily diversified, in order to back by 50% gold you'd need to have 50% gold PLUS 50% MULTIPLIED BY THE PROBABILITY THE GUARANTOR FAILS.
For ether, such overcollateralization isn't a problem, because you can package it as an ether derivative and have no counterparty risk... But for a gold collateral you would have a risk that cannot be mitigated in this way and the risk will need to increase the slippage of the asset.
As time progresses, other guarantors will place their assets on the blockchain similarly to Digix. And when other guarantors come online, Maker will be free to add those to the pool. As it stands, Digix provides Assay certificates and undergoes third party auditing. MakerDAO is off to a great start. They're doing all the right things to build a sustainable stable coin.
Well, maybe something like an ethereum on-chain dollar ETF and a decentralized oracle for determining the exchange rate, which is built out of bonds that allow people to get leverage against the underlying ether currency in exchange for providing collateral for the ETF. The problem with such a construct is that (1) the people providing the collateral will insist on high fees and (2) the amount of collateral provided will need to be limited for enough people to participate, so the design would always have a risk for a "broken peg" during extreme fluctuations.
It's not quite the same thing, but Stellar allows the implementation of pegged Assets (e.g. USD), though they are issued by an anchor that you must explicitly trust to redeem those deposits. That could be a bank or other well-capitalized institution however.
This is basically the BTC Tether model, except hopefully some anchors will step up that can actually complete an audit without breaking up with their auditors.
I'm not all that convinced that it will be possible to create a stable synthetic blockchain asset without either explicitly pegging to fiat (a la Stellar) or having a big and diverse enough slice of GDP flowing through the system so that speculative activities are a minority of transaction volume.
This is more or less how DAI works. And in the case of a broken peg, there's a global settlement option that can liquidate all the collateral. https://developer.makerdao.com/dai/1/stability
I think the defense of "nothing has happened yet" is a tough one to back, in particular given that during the build up to the last recession, 1) collateralized debt was claimed by wall street to be "as good as cash" and 2) the housing market would "always go up". It works until it doesn't.
DAI is set up so that it's not dependent on ETH always going up. People create DAI by locking up ETH (or in the future, other assets) as collateral. Currently for ETH, you have to lock up 150% of the value that you take out in DAI (but you can collateralize higher than that if you like). If the price of ETH falls below a certain value, then a position can be liquidated automatically by the system, to cover the position.
DAI has a goal of adding additional forms of collateral in the future. One could see a coin like DAI being backed by a mix of Gold, real estate, commodities, or securities to achieve greater stability.
He has a weird definition of "break". At no point did the value of collateralized ether backing each DAI go below $1 or even anywhere close to that.
There are valid arguments to be made against a DAI-like system like capital inefficiency, the appropriateness of the bounded volatility assumptions, and maybe sell spirals, but Preston Byrne's articles include a lot of invalid arguments.
Thats precisely his point. Contagion causes the break. Analogous to a bank run or the ruinous fall of the Thai baht in 97/98. Nobody has any real info on whether the bank has enough reserves, nor do they care. They just dont want to hold the asset.
In this case, they do. DAI's system is run entirely on the blockchain. It's auditable and decentralized. The biggest risk to DAI is if the value of the collateral crashed below the amount of DAI in circulation. The system has incentives in place to prevent this from happening. I'm not saying it's bullet proof, but I think it's a highly resilient system. I think adding multiple types of collateral should protect against the situation where ETH drops rapidly to near zero.
The crypto hate on HN is enormous, and someone who evaluates MakerDAO for 15 minutes will speak authoritatively over its inevitable failure.
The core thing to realize about Maker is that all Maker does is loan Dai against an asset! It's collateralized. Ethereum may be risky to use as collateral, but something like Digix, where tokens are issued one-to-one with gold stored in a vault, means that you are now issuing Dai against a real asset (gold). If you think Maker will fail, you are arguing that the value of the asset backing Maker will fall.
> Digix, where tokens are issued one-to-one with gold stored in a vault, means that you are now issuing Dai against a real asset (gold)
Marketable collateral is an old idea, and suffers certain intrinsic difficulties. One is counterparty risk. Here we have at least three trust points: the place(s) the gold is physically held, Maker and the mechanism by which one holds Digix.
The classic case: Maker lies about the amount of gold in the vault (or steals the gold). Less classic case: the person holding the gold does the same. More realistic case: someone in this chain runs into financial difficulties, or messes up their AML or sanctions compliance program, and has their assets frozen and/or seized by some authority somewhere in the world.
Once you have possession of a gold token, no one can stop you from trading it, because of the blockchain. Converting your gold token into gold and having it shipped to you may be problematic, but once you have the gold token, it's transferrable.
Maker is decentralized, the problem there would be a bug in the smart contract.
And Digix being a failure / scam, that is indeed a failure point.
But what MakerDAO and Dai represents is not some "magic blockchain thinking", it is based on rational economic incentives.
As with any asset you don't physically own, you are trusting that it exists. Digix is insured, and any token backed by a physical asset you would need to trust the organization that issued it. But this is not rocket science - these types of businesses and the industry surrounding them have existed for a long time. The innovation, if you believe it's innovative, is that the representation of the asset exists as an ERC20 token.
> these types of businesses and the industry surrounding them have existed for a long time
And they've failed, via common mechanisms, for as long. Hence why issuers of marketable collateral are tightly regulated. This "innovation" updates an administrative aspect that always worked fine while leaving the dicier back-end not only untouched, but less regulated than before. It's analogous to rolling back to an un-patched OS, changing the color scheme and calling it progress.
> If you think Maker will fail, you are arguing that the value of the asset backing Maker will fall.
Or the entity having the key to the gold vaults decides to buy themselves a nice tropical island. The real world, it seems, does not expose a blockchain API.
Digix is incorporated in Singapore and goes through the same audits as any other gold storage facility, has their gold insured, etc. If you own paper gold that is backed by gold in a similar facility, then this is no different. If you own gold futures then it is ultimately backed by physical gold in facilities (although perhaps warped through various contracts and leveraged 5x).
It just happens that Digix gold is issued as an ERC20 token rather than registered with a physical gold exchange.
I know people who do it. They expect a long-term rise in ETH value, but they want to spend some money now without paying capital gains. They use Maker to essentially take a loan out on their ETH collateral. (And yes, they talked with their tax advisors.)
Thats exactly what I had in mind. A reasonably intelligent trader doesnt want to make his operation more capital intensive however. Has use cases, but limited.
> MakerDAO's DAI coin (currently collateralized by ETH) has already proven quite stable in the face of several black swan events and the price of Ethereum crashing nearly 70% over the past couple of months.
That is an interesting claim. What were these black swan events which DAI passed with flying colors?
I would argue the value of ETH (the asset that backs DAI) crashing from nearly $1400 a couple months ago to a low of almost $350 a few weeks ago is pretty strong. What other asset has these sort of swings in such a low amount of time? The fact that the collateral backing DAI has dipped and yet DAI has remained stable is a testament to the systems underlying it.
What could kill DAI would be ETH crashing to near zero rapidly.
You could argue that. And that is a good point. But it is simply price swings or volatility. The job of the stable coin is to be stable during periods of volatility, even high one as that.
A black swan event is the one you pointed out about ETH crashing to zero. And there were none yet.
> If the value of ether held as collateral is worth less than the amount
> of Dai it’s supposed to be backing, then Dai would not be worth one dollar
> and the system could collapse.
> Maker combats this by liquidating CDPs and auctioning off the ether inside before the
> value of the ether is less than the amount of Dai it is backing.
Note combats not prevents, it will go to zero with probability 1 [0].
Stablecoins are fundamentally broken and unsound. Ignoring the tech-stack that achieves price stability, and looking at them purely economically, the math simply breaks down.
This is a great writeup on Basecoin, but there's another player in town called Carbon (https://www.carbon.money/). Directly from their whitepaper:
"Carbon utilizes a decentralized schelling point scheme to achieve distributed con-
sensus on Carbon’s exchange rate. Every 24 hours, also known as the rebasement
period, a schelling point scheme is initiated where nodes submit bids for what
they believe the true exchange rate of Carbon to be. Each bid is weighted by
a collateral, denominated in Carbon. At the end of the 24 hours, bids are to-
taled and the protocol takes a weighted average of the bids. Anyone who bids
outside the 25th and 75th percentiles will have their balances slashed. Anyone
within the 25th and 75th percentiles receive a normal distribution of the loser’s
balances, with the highest reward distribution at 50% and normally diminishing
on the right and left respectively"
This has security issues. Unless they own all the participating nodes, then -- as written -- this protocol has several ways that it can be gamed with enough Byzantine players so that the Byzantine parties are w.h.p. in between the 25-75 range and correct nodes are at the edges, which then get their funds slashed. They use several (also broken) mechanisms for contraction and expansion depending on the agreed-upon exchange rate, but supposing they are not broken, the true value of the coin can be gamed which then invalidates these mechanisms. We are truly so deep in mania.
EDIT: Also to add a bit more to Carbon: Hashgraph is also simply a BFT protocol that requires a permissioned setup. If we are going to deploy a smart-contract-enabled stable cryptocurrency on a permissioned network, then it is unclear why this complicated and unproven stack is even needed.
> Stablecoins are fundamentally broken and unsound. Ignoring the tech-stack that achieves price stability, and looking at them purely economically, the math simply breaks down.
You seem to be making a claim about the space of all possible stablecoin designs, and then then proceeding to demonstrate weaknesses in one particular stablecoin design.
First you must define what you mean by "stabecoin" and "leveraged". I can think of at least two definitions for each one that do not completely overlap.
Before you read this 2000-word treatise, know that the author, Preston Byrne, has a history of misunderstanding fundamental concepts about money and markets.
Example 1: He believes Bitcoin is a fractional reserve system.
Example 2: He doesn't understand that market participants bring liquidity to exchanges, so he thinks exchanges themselves go bankrupt if market prices decline.
It's called an analogy. I analogized the Bitcoin markets to a fractional reserve system, as the dollar value of Bitcoins in the Bitcoin market far exceeds the amount of dollars that have been spent chasing after them. The system is accordingly very vulnerable to liquidity shocks.
Re: liquidity facilities, I know for a fact certain exchanges have liquidity facilities from banks that they draw down in times of increased withdrawal demand. If market conditions deteriorate quickly enough those facilities will be withdrawn, which could result in the exchange getting caught with its pants down with a large, dollar-denominated obligation to its banks and no means to get the dollars to repay it. That is the stuff of which insolvency is made.
Generally agree, but those are pretty damning comments showing a weak understanding of money mechanics, and this project is fundamentally about money mechanics.
Author doesn't understand that prices are only determined by what people are willing to trade for, rather than them being some external thing that exchanges have to guarantee.
Thanks for pointing this out. Example 2 clearly demonstrates that he doesn't understand how a currency exchange works, which is strange for someone of his professed experience.
This article is also rather obnoxiously written and there's only one substantive point in the whole thing. However, I think he probably isn't wrong in this case. "BASE bonds" are more like futures or options than bonds, and when the price falls the incentive of being paid in the falling currency probably isn't enough to attract the investment needed to maintain the peg.
Thanks for the links, he really doesn't understand how exchanges work. I am not sure how someone who wants to be an authority on a subject does so little research.
Pointing this out is a DH1 in Paul Graham's hierarchy of how to disagree -- essentially a form of ad hominem [1]. Even people who get things wrong do occasionally get things very right, so more useful would be to address the points the author of the post is actually making. Are they valid? Why/why not?
Actually the links are useful. The author has a a huge misunderstanding about how exchanges work. I know enough about exchanges that I know he is not only wrong but doesn't understand them at all. Therefore I have to treat his other work with a similar degree of scepticism.
I would also argue the author (in the article) spends more time musing in his own ad hominems rather than addressing his own arguments on their merits.
Cryptocurrencies have reached the 1980s, with "stable coins" attempting to achieve the "impossible trinity" [1] of a fixed foreign exchange rate (i.e. "stable"), free capital movement (i.e. liquidity) and an independent monetary policy (i.e. reasonable collateral rates).
Prediction: to prevent a breakdown of stability, the marketing point for these schemes, we'll see, for coins without a centralized bottleneck, stupid collateral rates, and for coins with one, redemption restrictions.
> The formal model underlying the hypothesis is the uncovered Interest Rate Parity condition which states that in absence of a risk premium, arbitrage will ensure that the depreciation or appreciation of a country's currency vis-à-vis another will be equal to the nominal interest rate differential between them. Since under a peg, i.e. a fixed exchange rate, short of devaluation or abandonment of the fixed rate, the model implies that the two countries' nominal interest rates will be equalized. An example of which was the consequential devaluation of the Peso, that was pegged to the US dollar at 0.08, eventually depreciating by 46%.
Stablecoins don't set their own monetary policy. The interest rate on a stablecoin will be set by the market, not a central bank. The interest rate here is the escape valve that allows the exchange rate to be fixed. The interest rate floats, the exchange rate remains constant.
> The interest rate floats, the exchange rate remains constant
Collateral rates have a practical cap, particularly in a time of broader financial crisis. This structure is identical to the "always redeemable" structured products from a few decades ago. There is zero innovation in the financial engineering, just the presentation.
The last bondholders will be left holding worthless obligations when no new buyers are there to create demand.
The institutional investors seem to recognize the ponzi nature of this; first money in, first money out at several X. The veil of "crypto-economics" around this gives them plausible deniability in engaging in this wealth transfer mechanism.
Something is unstable because market wants it to be unstable. There are no mathematically underpinnings which can stop them from a long time. This is a fallacy which cryptocurrency groups need to wake up from. Sure it looks like math can solve this problem and many have over the years relied on solid math only to fail. See:
> The money to keep the machine going must come from somewhere, and in this case that somewhere is a new investor willing to subsidize profit-taking by earlier participants in the scheme by committing risk capital of his own.
This exact thing could be said about bitcoin and other cryptos and any other scarcity based investment vessel. It sounds like a horrible flaw but it didn't stop anyone thus far.
The only thing this indicates is that at some point in time baecoin will loose its peg. But it might be decades in the future.
Although I think author is spot on with overall assesment. And failure after loosinh the peg will probably be anything but graceful.
The crazy thing about stable-coins is that they're really trying to replace/disrupt fiat money, more so than normal cryptocurrencies like Bitcoin or Ethereum.
"Normal" cryptocurrencies are way too volatile to actually be a store of value, as of yet, so stable coins really do fill a void and have one of the features of a fiat currency such as the U.S. dollar, that of relative stability.
This is good but the author makes a common mistake referencing fractional reserve banking. Fractional reserve banking really isn't a thing. Most central banks in the world don't have reserve requirements. Even in the USA, only a small subset of debt requires reserves. And even then the reserves can be met in 30 days.
His review from 2014 may hold water in a low liquid scenario, but even for a mildly strong market, it's always been a better alternative than, say, the magically backed world of Tether.
He basically says the Bitshares approach is unsound because it requires market forces to be > 0. I agree that you can't have a stable pegged asset when nobody wants to participate in that market. However, if nobody wants to participate, then why do we care about stable pegged assets in the first place.
Oh I just meant that when you said "it's always been a better alternative than, say, the magically backed world of Tether," it was pretty faint praise.
This scheme will always have one of these problems: (1) people will be required to lock a large amount of collateral to cover their bet that is uneconomical or (2) the peg will break during extreme fluctuations.
If you are interested in this, people tried the long/short strategy in currencies (forex) and called it a grid trade.
The system would be both long and short the same contract and take profit at a given interval on both sides. When they took a profit, they would reopen a trade on the same side.
Ultimately it was just a mean reversion strategy where one would not close out their losses. So the profit was linear while the losses often became geometric until the time the market came back to where they started the grid.
If you just want to buy both sides and never close either trade, there is no profit just a loss of spread/commission on both legs.
Most of the people who did it looked at their account balance rather than NAV, so they were mostly just abusing leverage until a margin call.
Edit: To be fair, some grids were smarter in their allocation and weighted to be positive to the carry, so at least they would collect interest everyday when the contracts swapped.
One thing that jumped out at me was that the article compares modern cryptocurrency to the dot com situation in 1997-1999, and is using it to criticize cryptocurrency.
27 billion dollars were raised in 1997-1999. Perhaps most of that was wasted. But just one company started in that time period, Google, is now worth 700 billion dollars. From an overall point of view, the dot com investment era was good investment. People just weren't sure which companies were going to be the winners.
Net losses are different from nominal losses. If someone buys at 10, the stock hits 15$ then drops to 5$, they lost 5$ a share not 10$ a share. We are easily talking about 100's of billions in losses, but 1.7 trillion is an over estimate.
Vastly more than 27 billion was pushed into the dot com bubble. You need to look at both private equity and public stock purchases over a significantly longer time frame of around 1991-1999. Further, you would expect gains over 20 years from such investments.
S&P 500 went from 325.49 in 1991 to 2,714.24 today (8.34x), even inflation 1.85x over that time frame.
Also, Amazon.com. That's over a trillion dollars of value between them.
The Dotcom craziness gave us hundreds of companies of which only a much smaller amount survived and just a few thrived. But those few more than made up for the total aggregate investment. Likewise with cryptocurrencies. I would not be surprised, in fact I fully expect that most of the crypto coins and tokens out there will fail, investment in them being for nought. But 10-20 years from now, I would be very surprised if the total cryptocurrency industry, consisting of the winners and their descendants, is not orders of magnitude larger than it is today. Just like with the Dotcom era.
Preston takes an insulting tone towards the basis team. Fine to critique, but assumes the visionaries of this project are uneducated, or haven't given things proper thought. I assure you they are thoughtful...
I think perhaps the right way to approach critique of the OP is to provide citations or proof against the author's claims. It isn't a productive conversation to take offense at the general tone.
It also shows quite a bit of bias when you describe the people involved with the project as 'visionaries' and a vague assurance that aforementioned visionaries are thoughtful.
I thought you were arguing from a position of authority but looking at your comment history all I can find is "I'm a blockchain investor at [redacted]" which leads me to a placeholder website. You'll have to come up with something a little more convincing if you want us to trust your judgment.
If you glance at their whitepaper, stability analysis, or old FAQs they had up, it’s clear they’re thoughtful.
Therefore, comments like these underestimate the founders:
“Please. Figure out what a government bond is, first. Then we can have a little chat about scalability.”
"electric boogalo"
"But you need to study politics, economics and history to learn things like this, which I understand are not computer science and are therefore unpopular"
If they actually wrote "one day, Basecoin might become so widely used as a medium of exchange that it actually starts to displace the USD in transaction volume" then they deserve whatever is thrown at them
The problem is that synthetic blockchain assets are an idea where we already have a significant history of competent, serious people misjudging the tech and making unrealistic promises. Hence, you can't just argue away problems by claiming the devs are "competent and serious".
That said, I agree Preston's writings should be taken with a grain of salt: he's a curmudgeon at heart and provides value to the community from that perspective.
Are investors just betting on pedigree at this point? In which case, is a Princeton undergrad degree really worth that much?
Moreover, their stint in Google Search lasted maybe 2 months, but is still prominently displayed in their bios. Is that worth another few million?
I can't think of a better example of the SV echo chamber when an investment like this is announced. Even color.com and Juicero had more experienced founders/prototypes.
The future looks bleak when you see fashionable SV outfits leading the blind. It's no wonder why diverse founders with great ideas have trouble getting funded when so much money is going to companies like this.