Algorithmic stablecoins are provably impossible without continuous funding

This doesn&#x27;t go far enough.<p>The only thing that maintains the value of <i>any</i> asset (or currency) is the collective belief in that asset or currency. Put another way: there is an <i>inescapable</i> component of <i>trust</i> in <i>every</i> asset.<p>Crypto in any form doesn&#x27;t solve the trust problem other than a very narrow slice because as soon as you interact with anything outside of the blockchain, you&#x27;re adding trust. Even on the blockchain, all the math in the world doesn&#x27;t avoid the trust problem (eg it&#x27;s been estimated that over half the Ethereum are owned by less than 10 entities).<p>Even backing a currency with gold (or any other asset) doesn&#x27;t solve this problem. Additionally, it&#x27;s not even correct. In years long gone the US government just maintained a peg between the US dollar and the gold price. Any reserves (which were never 100% anyway) are irrelevant to this. You don&#x27;t need them. You just need sufficient capital to maintain the peg. Even if you had 100% reserves you still have to trust the government to honor redemptions and not to change the peg. If you have sufficiently deep pockets, you end up not even having to spend much money because no one challenges your peg.<p>So what <i>actually</i> makes the US dollar work as a currency is that it is backed by the long dick of the US government. This is a combination of economic, military and even cultural might.<p>So going back to algorithmic stablecoins, it doesn&#x27;t matter how much you have in reserve. It doesn&#x27;t even matter if there&#x27;s new money entering the system (as this article claims) to maintain the peg. If people lose faith in the &quot;stable&quot; coin, it&#x27;s finished.

Analysis aside, common sense suggests that it is very difficult if not impossible to <i>manufacture</i> long term stability in any system based mostly on speculation with limited hard assets to back it up.

A lot of finacial theory jargon here but not a very clear explanation.<p>Definitely not a “proof” in the logical sense.<p>Likely the Vitalik post linked in this article will have some insight.

I&#x27;m not sure I know enough to have a credible opinion about his underlying thesis, but it seems to me this article is wrong in lots of specific details:<p>1. &quot;Stablecoin insurers&quot; (in the author&#x27;s terminology) are not short puts on the stablecoin, because noone has a specific right to force them to buy the stablecoin. Their position (as I understand it) is much more akin to some sort of swap where they pay&#x2F;receive the difference between the stablecoin and the volcoin<p>2. Since it&#x27;s a swap, then their position has 1 delta, so they don&#x27;t &quot;delta hedge&quot;. They need to make good losses on the stablecoin (and collect profits in good times)<p>3. There is no expiry so they are not long theta. They are collecting carry on the swap

Algorithmic stablecoins are impossible simply because all crypto not tied to outside assets can suddenly go to 0 value, and then any stablecoin is going to be worthless unless they are claims to outside assets (which requires trust in the issuer honoring them).

Sorry for hijacking this thread, but can somebody explain like I&#x27;m five, what&#x27;s the point of algorithmic stablecoins?<p>My understanding of the term &#x27;stablecoin&#x27; means that it is a crypto &#x27;proxy&#x27; to some fiat currency, typically US dollar, just to avoid the actual conversion between crypto and fiat (because of taxes etc). So why isn&#x27;t there just a DumbCoin(tm) that simply is 1-to-1 backed by the dollars? You give me a dollar, I mint you a coin. Somebody sends the coin back, I return them the dollar.

LOL. “Transaction tax” and “devaluing their asset to pay insurers”. Both things that are handled by Base rate inflation. The missing part of this analysis is that it is very hard to peg a deflating asset. The other problem is that from a monetary policy POV, you can’t defend it in a deflationary system without capital inflow because the whole system is denominated in a different currency which is inflating.

&gt; To be in balance, the Stablecoin must provide real utility to the Outside World that transcends the Stablecoin&#x2F;Insurer construct. Specifically:<p>&gt; 1. There must be a transaction tax for real utility provided by the Stablecoin.<p>Don&#x27;t all major reserve-based algorithmic stablecoins charge some kind of minting&#x2F;redemption fee, to reward the risk taken on by reserve holders? And that makes this whole argument somewhat moot, since it&#x27;s not a purely closed construct like they&#x27;re describing. Though perhaps this line of reasoning (equivocating to other financial constructs) could lead to fee pricing equations required for some notion of stability.

Not a crypto fan but I&#x27;m beginning to see that our entire economy is proving impossible without continuous manipulation by the fed

The only way I think a stablecoin can work without trust is to be backed by another coin which is deflationary and always in demand. Such as a gas coin that has no block rewards but burns some percent of the mining fees on every transaction. As long as the network is used for transactions, people will voluntarily pay gas fees and deflate the coin (unlike Safemoon which burns it on transfer, paying to secure transactions is a service and the miners can just raise their fees if they want to make more).<p>Then theoretically as long as there is demand for this coin, it will go up in price and therefore can back any sidechain coin that will grow slower in price (or better yet, gradually drop in price relatively to it like the dollar).<p>That’s what we are planning to do with Intercoin:<p><a href="https:&#x2F;&#x2F;community.intercoin.org&#x2F;t&#x2F;intercoin-application-virtual-currency&#x2F;" rel="nofollow">https:&#x2F;&#x2F;community.intercoin.org&#x2F;t&#x2F;intercoin-application-virt...</a>

&gt;In the event that the funding comes from new entrants into the Stablecoin&#x2F;Insurer ecosystem, the system is definitionally a Ponzi Scheme and is unstable.<p>No, that is not the definition of a Ponzi scheme. A Ponzi needs funding from outside money to continue to operate, but not everything that needs outside funding to operate is a Ponzi scheme.<p>As an example let&#x27;s create a gambling system. Any deposits made into the house account gives you a proportional share of the profits of the system. If the house gets lucky investors can make money. If they are unlucky the house account can run out of money and require outside money to work again. This gambling system isn&#x27;t a Ponzi scheme at no point are you paid out with new investor&#x27;s money. If you are lucky you are paid out with gambler&#x27;s money and if you unlucky your investment goes to 0.<p>Edit: Even with a positive house edge the house can get unlucky and go bankrupt.

This puts into light how the usd works. And how inflationary money printing is. Every dollar printed might as well be seen as debt or burden. That&#x27;s an interesting aside.<p>More relevant to stablecoins:<p>If the stablecoins need constant funding then what is their real value? Why should someone hold them? Why spend them? Why owe them? Constant funding itself isn&#x27;t bad as such but how much and how often are what decide value.<p>This is not to say they are useful or useless. But it certainly seems like the market hasn&#x27;t got a firm answer either. The greater market is at least certainly ambivalent about them.<p>Contrast what would happen if any of these stablecoins were used for purchasing crude oil or wheat or some other international commodity. In that case we&#x27;d see very different views on their value.

The article uses fuzzy terms that conflates some essential points, and then uses this confusion to demand regulation. All about this is bad. Yes pegging has some essential limitations, but capital flow is a condition for most financial sytems.<p>&gt; Investments that are provably problematic should be appropriately regulated and efforts should be made to protect consumers against them.<p>Not at all. Regulate yourself and don&#x27;t buy things that exceed your risk threshold, or if you are a child incapable of that, tell your parents to regulate you.

I find it interesting that the CHF peg example is always missing articles like these. The Swiss Central Bank had decided to defend the peg the CHF at 1.2. This wasn&#x27;t broken until the Central Bank decided to drop it in 2015. I guess unless it became a big trade it doesn&#x27;t really matter.

So a pyramid scheme. The coins need more and more suckers to sustain it and fails when that supply dries up.

The lesson I learned: One who invests in stablecoins is soon to be &quot;pegged&quot;.

The problem here is the abuse of the word &quot;stable&quot;.<p>It&#x27;s being conflated with the word &quot;pegged&quot;.<p>Pegging something to something else that is unstable doesn&#x27;t make it stable.<p>For as long as monetary policy in fiat continues to ease, you&#x27;ll have more dollars around, inflating the money supply.<p>The pegged item will need to match this in the long run to maintain the peg. Which won&#x27;t be possible without further minting of the so-called stablecoin.<p>The real solution, which I admit is a long time away, is to just stop using fiat and their &quot;stablecoin&quot; proxies altogether and just use another currency altogether.

This is the problem with &quot;analysis&quot; on stablecoins. He dreams up a &#x27;potential stablecoin&#x27;, inherently designs it with flaws and says all algorithmic stablecoins will fail without contiinuous funding.<p>The sky is the limit with Algorithmic stablecoins and you can&#x27;t throw the baby out with the bath water. All this is simply not true in every case.<p>Imagine a stablecoin over-collateralized with interest bearing crypto (basket of POS coins) and certified tokenized REITS, synthetic S&amp;P, commodity futures, etc.

You cannot prove things in the real world by running a computer program. Traditional financial systems have trust, belief, demand all factored in. They are constantly prodded and tweaked by powerful entities, with cultural, legal and military might to keep things running. However it turns out these are all features, and in the speed run to invent finance 2.0, deluded tech bros forgot that reality exists, or they were complicit in implementing a pyramid scheme.

Well, of course.<p>An algorithmic stablecoin with a backing system can survive some stress. What they can&#x27;t survive is a net outflow, because they can&#x27;t reprice downwards. The era of &quot;line goes up&quot; is now over, and we see net outflows in many financial sectors.<p>A lot of faith-based financial instruments are going to tank.

Is this true of any currency pegged to an exchange rate, such as yuan, ruble, and riyal?

A related article : <a href="https:&#x2F;&#x2F;voxeu.org&#x2F;article&#x2F;algorithmic-stablecoins-and-devaluation-risk" rel="nofollow">https:&#x2F;&#x2F;voxeu.org&#x2F;article&#x2F;algorithmic-stablecoins-and-devalu...</a>

I&#x27;m looking for a reliable source on why LUNA crashed, and am unsure where to find one. Anyone know of a good article or video explainer? Thanks.

What else needs continuous funding? Pyramid schemes.

Next: all crypto and NFTs are probably worthless

Surely, you mean liquidity?

Seems like this is actually a proof against fractional reserve banking in favor of full-reserve banking.

Ya? So is the US dollar.

Cryptocurrencies are built on a deck of lies and scams. You equivocate about &#x27;fiat&#x27; or real dollars being &#x27;the same.&#x27; They&#x27;re not. If you support this drivel, you&#x27;ll only perpetuate and prolong the pain.

Let me share my theory that the economy is impossible or paradoxical and that the American dream is impossible and that everything is built on by faith.<p>To buy a loaf of bread, the price needs to pay for the wheat, ovens, energy and the employee costs. This relationship is recursion. The staff of the bread company need to afford bread of their own and shelter and energy and transportation.<p>Everyone is thereby supporting themselves and everyone else with what they purchase. This guarantees poverty as not everyone can scale their earnings to provide for themselves and everyone else as the prices all come from the same money supply. Inflation is baked in. This is why central banks don&#x27;t want wage growth. If you understand recursion and recursive relationships then you understand that poverty is baked into the system. (Edit: due to not everyone producing more than they cost)<p>Think what this means for people at the bottom and give to the poor.