The entire concept of a "stablecoin" reminds me a lot of something from SIGBOVIK 2014. Keep in mind, this was written in 2014, before any stablecoins actually existed, and that SIGBOVIK is supposed to be a joke conference where people present extremely silly ideas as if they were real breakthroughs.
> DollarCoin: We propose skipping the middleman and providing direct proof-of-dollar with a blockchain that consists of videos of burning US $1 notes. Each video will be unique as the hash of every block header is required to be written on the dollar bill to be burnt; the block header includes the previous block’s hash, which means that each block is forced to build on every previous block, forming a valid blockchain
The fact is, people have convinced themselves that this is somehow a good idea. And then half the time, the person behind it doesn't actually burn any money and just arbitrarily mints coins. It's absolute lunacy.
DollarCoin is the best summary of proof-of-work that I've ever seen. Just replace "burning US $1 notes" with "burning [x] Watts-hour of electricity" and it describes Bitcoin to a T.
that isn't actually at all the function or purpose of PoW though.
in the example, the burning of "real" dollars represents the validity of a single "DollarCoin" existing. the "burning" of electricity for bitcoin is the result of finding a schema that promotes verification of the network by awarding coins by consensus.
PoW is a /validation/ pattern, and while burning dollars on video and linking the hashes together can comprise a blockchain, there is no actual decentralized validation going on.
it's alright as a snarky line, but outright saying "the best summary of proof-of-work that I've ever seen" is misleading to people that didn't actually know, and now have a completely incorrect idea of what it is.
This is maybe a bit of a tangent, but the fact that transaction validation happens as part of Bitcoin’s proof-of-work process is incidental. It’s perfectly fine to mine an empty block, and the only incentive to include transactions is transaction fees. You earn rewards even if you conduct no transaction validation.
The analogous option for DollarCoin would be letting you put a placard in the video with some (valid) transactions on it and recoup a fee from each.
The point is that, it’s not such a bad analogy of just “proof-of-work”, which is a meaningfully separate concept than decentralized transaction validation. Though I agree, I mean a regular person might definitely be more confused than helped by the ‘dollars on fire’ analogy.
The difference between Tether and DollarCoin is that you can (if nobody is lying) exchange a tether for a USD. If each USD that bought a tether was burned as in DollarCoin, then it wouldn't have that property. You're not supposed to "burn any money" when you mint tether, you're supposed to put aside $1 that can be exchanged for that tether at a later date. I think what you're missing is that backed stablecoins don't involve burning any money at all, so whether or not that'd be a good idea is irrelevant.
Tether itself is shady and I have my doubts about them, but the concept is simple.
You mint some coins and sell them for $1 each.
Then watch the exchanges and any time the price is above $1 you mint some coins and sell them. Any time the price is below $1 you buy some coins and burn them. Doing this and only this you should always have more dollars in hand than the amount of coins in circulation.
If I want to pay Bob $100, I will buy 100 coins, never mind whether they currently cost $0.998 or $1.002 each on my particular exchange.
So the issuer needs to constantly mint or burn tokens to match the market demand in such a way that it stays as close to $1 as possible.[1]
>For someone to sell something someone else needs to buy the same thing.
That someone is not some rando person, that someone is marketmaker whose business is in filling out the orderbook.
[1] https://www.coingecko.com/en/coins/tether – see the chart for market cap, since the tokens costs $1 it is almost the same as the chart of total number of tokens over time
I don’t think there’s any serious risk of the price getting stuck above $1, because there’s no reason for anyone to buy at that price. Unless it de-pegs completely and becomes a totally speculative asset and everyone just ignores the offer to buy them for $1 I guess?
Considering that no serious and credible audit has ever before verified the backing of USDT, I think we all can agree it is a Ponzi scheme, through and through.
Here's a question for tether "investors": why are you investing in something whose stated goal is to maintain a peg to the USD instead of, you know, just holding money in US dollars?
You're adding a bunch of risk for literally no upside.
The only thing you gain is to to trade that on the blockchain, which is really a response to the oracle problem.
So you've greatly increased your risk with no upside to slightly increase your utility. That doesn't seem like a good deal.
My understanding is that people don't invest in stable coins (like you don't invest in USD when you have USD on your brokerage account).
Stable coins can be exchanged against other crypto currencies on chain. So if you are willing to trade crypto currencies, stable coins are more practical than USD.
There are also tax implications: Depending on where you live, crypto-to-crypto profits are not taxable. You will be taxed if you sell crypto currencies for USD, but not if you sell crypto currencies for a stable coin.
> There are also tax implications: Depending on where you live, crypto-to-crypto profits are not taxable. You will be taxed if you sell crypto currencies for USD, but not if you sell crypto currencies for a stable coin.
At least in the US, this is not true.
e: Not sure why I'm downvoted - crypto to crypto conversions are taxable in the US.
As a US citizen try to send dollars to a Hong Kong or Singapore registered exchange.
I think the "investing" in tether is really only the best match to "Let me see, where can I park my money in the least volatile way on this crypto exchange".
EDIT: Interestingly, if tether breaks, then USDC is the last man standing and will have to work hard to maintain the peg. Under such circumstances it's quite possible that BTC is the next best "stable" coin.
If USDC is truly backed 100% as stated then it shouldn't be a problem. In fact it might help them gain market share if coins with less backing de-pegged. Though I guess it could also lead to a general loss of faith in stable coins and folks as a whole would shy away from them.
Either way, most stable coins are built on some form of trust, and I'm much more inclined to trust Coinbase than most others. (Disclaimer: I have no dog in this hunt, I don't own any crypto whatsoever.)
There aren't Tether investors, it's just used in exchanges. It wouldn't make much sense to "invest" in an asset which has the primary goal of never changing price.
>The only thing you gain is to to trade that on the blockchain,
Well, yes? Isn't that enough to explain it? Normal US electronic dollars can't interface with Blockchain smartcontracts. So if you wanted to invest in e.g. a vault or liquidity pool, you would need to turn it into a stablecoin first.
> You're adding a bunch of risk for literally no upside.
You mine a Bitcoin that 'should' be worth 5k USD, but is instead selling 60k USDT. So instead of selling that Bitcoin for 5k, you instead sell ~8% of your Bitcoin for 5k USDT, pay your expenses, and keep the other 92% of the Bitcoin you mined.
How is that in any way not a scheme? Barring endless minting, market efficiency would guarantee either unlimited funds or the collapse of the currency.
Mind that... it actually was a good idea. Until people started cheating with it, exactly as you say.
Tokenized dollars allow to benefit from the tech (smart contracts), which is itself great and opens a lot of possibilities.
What's not is: Ponzi schemes (Terra), crooks (Tether?).
Edit: There are valid stablecoins like USDC (they hold sufficient reserves) and even valid algorithmic stablecoins e.g. LUSD, backed by Ethers and with a legit protocol for ensuring over-collateralization that is also immutable.
> There are valid stablecoins like USDC (they hold sufficient reserves)
Those reserves are sufficient until they are not. There are always risks of losing the peg and anyone investing in them should be aware of and track the main ones. My 2c.
(I live in a country with well done digital currency regulation that is comparable to what banks have to do - let's not limit this to the case of Tether only).
Depends on the country. In the US, FDIC insurance requirements mean that depositors will be reimbursed up to $250,000 if a bank collapses, so there's very little risk. If you need more than $250,000 in cash then you should probably have multiple accounts at different banks or park the money in some other highly liquid low-risk assets that are, as much as possible, uncorrelated.
Which country and which stablecoin do you have in mind, if I may ask; just curious.
A big difference with banks is that in most countries with well regulated banking the government will step in to bail out the account holder in a registered bank if that bank goes under. While most government officials will sing and dance if a stablecoin (which complicates their monetary decisions and, if big enough, can even arbitrage those away) fails.
Government support is not the only thing that matters, but it is an important thing to consider when comparing a stablecoin vs fiat.
Burning US $1 notes could not provide backing for minted coins. A better analogy is currency backed with gold without enough in reserve to handle a run on the bank.
It could provide some level of scarcity, so if there was demand you could achieve some sort of value. It wouldn't be stable though - you couldn't make a stablecoin on proof of work either AFAIK. I guess it'd have an upper bound at $1 (why buy it for $2 if you can just burn $1), but no lower bound. So.. maybe it is a stablecoin :)
It's useful mostly because the traditional system hasn't adapted. It is ridiculous that our large banks still basically use FTP transfers of text files to move money, and those transfers typically take 48+ hours to settle.
Waiting 2 days isn't good enough for many applications, that's a lot of risk to take on.
> DollarCoin: We propose skipping the middleman and providing direct proof-of-dollar with a blockchain that consists of videos of burning US $1 notes. Each video will be unique as the hash of every block header is required to be written on the dollar bill to be burnt; the block header includes the previous block’s hash, which means that each block is forced to build on every previous block, forming a valid blockchain
http://sigbovik.org/2014/proceedings.pdf
The fact is, people have convinced themselves that this is somehow a good idea. And then half the time, the person behind it doesn't actually burn any money and just arbitrarily mints coins. It's absolute lunacy.