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RE: Algo Stablecoins Won't Save You

in LeoFinance2 years ago (edited)

Well, I cannot disagree more.

But then again, the tone of your writing is not very conducive to reasoned argument.

First of all, the main use case for stablecoins is as payment instruments, a use case for which a crypto can only function if it underpins an economy, lest its volatility is too high.

Second, algo stablecoins are only doomed to fail if their monetary mass disconnects from the economy of the backing crypto. In economic terms, if M > (P*T / V). If the algorithm keeps (by adjusting interest rates, printing and redemption costs) M under control, a stablecoin becomes part of a "currency board" which is a well proven monetary tool in traditional finance and has functioned well in many cases (e.g Bulgaria in 1997 - 2000)

So no, your provocative take is shortsighted. But to your credit, so are most of the current promoters of poorly designed, ponzi-like stablecoins. Whether an algo stablecoin is a Ponzi in disguise or a currency board depends on whether there is real usage of the underlying crypto (outside self-referential DeFi) or not. Hive arguably has that with the "creator economy" around blogging and curating, and the gaming on Splinterlands and other. A small economy for now, but probably enough to give substance to a few million HBD.

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Can you show me proof the amount of volume stablecoins are doing in any sort of commerce? If you can't then you are only speculating, because I can point to every exchange and show you the volume of stablecoins traded between shitcoins and bitcoin which is probably 99% of its use, other than arbitrage between exchanges. Stablecoins were created for the sole purpose of clearing, trying to make a marginal use case the primary use case the reason for existence and growth is a stretch

Here's an easy way you can disprove me, pull up stablecoin wallets, look at how much of those transactions are going to wallets that are not exchanges and not attached to smart contracts, and ill give you the benefit of the doubt on all margin of error and you tell me the percentage of those transactions and we assume its commerce. How much do you think that would be? more than 1% I doubt it.

Algorithms aren't hard stops, they are automated jobs, if the liquidity is out of band no amount of automated correction is going to help, you're always going to be living and dying by the rate of redemptions, which NO Algorithm can force, either way, you can spoof it but there is no hard rule to stop it.

Calling me shortsighted doesn't provide any more validity to your argument in fact, it just shows that you have no merit to stand on

By "The main use case is" I didn't mean that's what they are used for now. I meant "that's what they could be most useful for" ... provided they could get regulated and mass adopted. I agree that now, they are used as you say for "greasing the wheels" of the crypto financial machinery.

About algorithms, you are wrong: youcan program them to check liquidity and stop redemptions if liquidity is out of band. I don't understand your reasoning when you write:

"the rate of redemptions, which NO Algorithm can force, either way, you can spoof it but there is no hard rule to stop it."

This is code, for Pete's sake, you can force whatever you can think of ! Why couldn't you program a rule to simply prevent redemptions, as long as redemptions are done by the algorithm ? You send your troubled algo stable to the smart contract to get back whatever the backing is. The algo checks a formula. Formula out of band ? Well, you get back the answer "sorry, the bank teller is closed, withdrawals are temporarily unavailable, check back later, don't call us, we'll call you !"

How am I wrong? UST proved that algorithmic stablising both with native and 3rd party assets is very much valuable.

LOL that's not how code works mate, because you're dealing with an oracle problem, if your coin is traded on a market and it has to reflect the market price or it will be clipped until your treasury is depleted.

Do you know these things work? because I do, a algo stablecoins market price is NOT set by the smart contract, it's set by the market, the market price feeds come from external service providers like exchanges. The more lisitngs you have the more exposure and the less control you have over managing the peg.

Its NOT a self contained system, so when someone shorts your stablecoin or collateral backing it, on one of the data providers, arb traders come in and clip the premium on exchanges yet to catch up and then the on-chain has to correct flooding those markets and being the floor, diluting its collateral and breaking the peg.

Can you walk me through this step by step? So say my algo A is traded on markets N1, N2, ... against other cryptos, including other stablecoins, say collaterlized like USDT or USDC.

Next an attacker borrows my algo A in a large quantity. However, the quantity he's able to borrow depends on M (the monetary mass), id est how much there is available. If you want to sell A (trying to break the peg), there needs to be someone out there to lend it to you. If the total monetary mass of A is reasonably controlled, how much can the attacker borrow ?

So now say the attacker has borrowed as much as he could find and sells enough A on the market N1 that the whole order book there is cleaned and the N1 market lists A as $0.01 because there are no more buyers on that market. Some people may call "break the peg" but that doesn't qualify, in my opinion. The smart contract might or might not be programmed to defend the peg on each and every market. Why would it ? That would be stupid and open A to manipulation. At any rate, that is a CHOICE of the programmers. I can have oracles, I can look at markets. So what ? What forces me to engage in defending the peg on individual markets ? The peg is guaranteed on the blockchain, nowhere else

"A" fails and the peg is broken only when there permanently is no way to redeem it at par from the issuing smart contract on the blockchain. That is the central authority which has ultimate responsibility over the peg, not an individual market, whichever that my be, not ANY number of individual markets.

The fact the UST failed proved that it was not programmed right, NOT that no algo can be programmed right and all are doomed to fail.

So what happens next, can you please indulge me with an exploration of the mechanics ?

I literally explained it already, check above, if you still don't understand here is an in-depth deep dive into the fundamental issues of algo stablecoins, please read it

Your explanation is based on an underlying assumption I do not share. Your assumption is that

[...], a algo stablecoins market price is NOT set by the smart contract, it's set by the market, the market price feeds come from external service providers like exchanges. The more lisitngs you have the more exposure and the less control you have over managing the peg.

An algo stablecoin "price" is indeed set by the markets. Just like the dollar price expressed in euros is set in the Forex markets. But if the goal of your stablecoin is to facilitate payments between individuals and businesses (rather than merely enabling meaningless financial shenanigans), then the price (expressed in, say, dollars) set by a market at any given moment is mostly irrelevant to what should be the main mission of a stablecoin, facilitating peer-to-peer transactions in the "flesh" economy. And that, at least as long as there is a credible theoretical path of returning to parity.

You need to see the evolution in time of the relationship between the stablcoin and its peg as a continuum. At one extreme, you have nearly microsecond-level parity, and then you need to manage the peg as you say, which can be very tenuous. At the other extreme, you have a "permanently unstable stablecoin" such as the SBD which lacks appropriate stabilization mechanisms and therefore sits most of the time far away from its peg, to the point where it completely lost credibility as a stablecoin.

In between, you have stablecoins such as HBD which are not that stable but still reasonably so.

In terms of stability, I measure the quality of a stablecoin by its ability to stake a serious claim at being "close to the peg most of the time". But one can be more or less strict in that definition and the stricter one is, the more difficult managing the peg becomes.

The article you quoted is intellectually shallow and mostly useless.

You're just spitting out word salad trying to obfuscate my points, let me cut this debate short because you're talking yourself in a circle.

Here's a simple issue the algo stablecoin backed by a native asset, relies on the market cap of the asset backing it, the market cap is set by the amount of buying pressure of the asset, if there isn't enough buying pressure for the underlying the market cap quickly evaporates as in the case of Luna, Bean and many others prior.

once the underlying breaks, there is nothing to support the debt issued in stablecoins and it collapses.

You might think you're safe because the so-called market cap shows backing, but the volume to maintain the market cap is razor-thin. The issue with algo versus real fiat is that central banks have unlimited liquidity and a bag holder in their citizens to keep shoring it up.

If you're going to keep talking around the point, then there's no point continuing the conversation and you can happily stay in your delusions.