[v64]

I honestly don't understand where the perception comes from that this technology is only useful for laundering and speculation. Certainly it is currently being used for those purposes. But to say there is no imaginable use outside of that seems unwarranted.

I've commented in the past here that the use of public blockchains to automate the functions of clearinghouses and escrow services will be a huge cost reduction for many industries such as finance. The technology as of today is not ready to handle that use case, but with the developments currently in the pipeline for Ethereum v2, progress is being made in that direction.

If you look at what MakerDAO is doing with the Dai stablecoin, they've proven that it's possible to create a synthetic asset closely pegged to the dollar purely through financial incentives, and they did it all just using Ethereum v1. A holder of Dai can earn 4% APY through a Dai Savings Account, and a vote is currently in place to raise the rate to 6%.

I personally find it incredible that an asset exists on the blockchain that's equivalent in value to USD, with a higher APY than you can get from any US bank. And because everything is on the blockchain, there's a public ledger of exactly how much is being collected in interest from those who are collateralizing their Ether for a Dai loan, how much of that interest is being paid to savings account holders, and how much is being collected by the system as surplus. It's the closest thing we have right now to a decentralized bank.

Whether or not you buy into the technology, it's improving by the day and more and more use cases and applications are being tried out and built. If all you see in blockchain is money laundering and speculation, you haven't been paying attention.

[RcouF1uZ4gsC]

> If you look at what MakerDAO is doing with the Dai stablecoin, they've proven that it's possible to create a synthetic asset closely pegged to the dollar purely through financial incentives, and they did it all just using Ethereum v1. A holder of Dai can earn 4% APY through a Dai Savings Account, and a vote is currently in place to raise the rate to 6%. >I personally find it incredible that an asset exists on the blockchain that's equivalent in value to USD, with a higher APY than you can get from any US bank.

I also find this “incredible”, but in the old sense of the meaning as “not believable”.

[v64]

The complete functioning of the MakerDAO system is publicly documented here [1] and here [2]. Feel free to peruse the documentation and point out which parts seem unbelievable. The system is currently live and I hold a Dai Savings Account and can attest I've been paid according to the system's documentation.

[1] https://community-development.makerdao.com/makerdao-mcd-faqs

[2] https://docs.makerdao.com/

[nordsieck]

> Feel free to peruse the documentation and point out which parts seem unbelievable. The system is currently live and I hold a Dai Savings Account and can attest I've been paid according to the system's documentation.

The problem with bad financial instruments is not that they don't work at all, but that they work fine for a period of time and then blow up.

I think the point your parent was trying to make is that the long term interest rate of any security has an upper bound of the growth rate of the economy.

I don't know of anyone who things the US economy has a real growth rate of 6%.

[hnews_account_1]

> I think the point your parent was trying to make is that the long term interest rate of any security has an upper bound of the growth rate of the economy.

This is incorrect. Economists won't need it explained, but you're probably not one. Think about it like this - the growth of the economy is a weighted average of the growth of many different assets. By definition, a few of them will have higher rates of growth a few will have lower rates of growth.

What you should've said is that the higher rate ones are typically higher risk. So at the lowest possible risk, you probably cap out at the economic growth rate (also not a truism, but somewhat closer).

[v64]

There are certainly black swan scenarios, such as the value of Ether dropping largely overnight, that would test the system and possibly lead to a decoupling of the peg. The bubble bursting in early 2018 tested this aspect of the system and the peg was able to be maintained.

The 6% Dai savings rate is not static. Overtime, both the interest rate charged to those taking loans and the savings interest rate will need to be adjusted in response to economic conditions in order to maintain the peg. These adjustments have occurred many times and are part of the normal operation of the system.

That being said, MakerDAO has considered these scenarios and in the event that the peg can't be maintained, an emergency shutdown procedure occurs that gracefully shuts down the system. There's a separate token called MKR, and holders of the MKR token are the lenders of last resort. In the event of an emergency shutdown, MKR token is printed and auctioned off to settle debts in the system, devaluing the MKR token. Similarly, when a loan holder pays off their debts to the system, they pay that in MKR token and the MKR they paid is burned, creating scarcity of the token to reward MKR holders.

[ianferrel]

Seriously.

The risk adjusted return on whatever that crazy contraption is is almost certainly negative, and probably incalculably so.

The idea that any sane financial instrument could increase its return by two points by the holders of it voting to do so is... I haven't the words.

[v64]

> The idea that any sane financial instrument could increase its return by two points by the holders of it voting to do so is... I haven't the words.

Raising the savings rate will also raise the interest rate that those holding loans must pay. If a loan holder doesn't agree with the new interest rate, they are free to close out their loan.

[jacobsenscott]

I'm not familiar with this product. How do you "close out" one of these loans? If you mean pay it off, nobody would take a loan they can just pay off at anytime, or where the interest rate can be just arbitrarily voted up.

[v64]

> If you mean pay it off, nobody would take a loan they can just pay off at anytime, or where the interest rate can be just arbitrarily voted up.

It's true that the interest rate can be arbitrarily voted up. Despite this, 1.46% of all existing Ether (currently valued at $210,036,816) is staked as collateral in the system, so it's not accurate to say nobody would do this.

[vinniejames]

The loans are mostly used for leveraged trading or liquidity while maintaining a long position. Each loan is fully collateralized with the Ethereum token by the borrower

[thebean11]

> nobody would take a loan they can just pay off at anytime

Isn't this just a revolving credit line?

[induetimesir]

In a way, you're absolutely right.

In another way, you're totally missing the point.

Net ROI hasn't been great for people who were earning x% interest on their ETH while it tanked 50%+.

But the _idea_ the animates DAI, the dream of a decentralized synthetic digital bearer asset, that's a worthwhile dream imo. It's not a simple idea to understand. And it's not simple to implement technically/socially. But DAI has been a beautiful experiment in attempting to create this new-fangled thing. and while the jury is still out on whether the model/architecture they've chosen will hold up, the experiment itself should, in my view, be declared a massive success - it has, for the most part, worked very well. And DAI opens the door to new experiments. And they'll come. A trickle at first. but in 10yrs, it'll be an entirely different landscape when it comes to complex financial instruments. They'll be available in the way stocks can be had on Robinhood. and more. bcs financial instruments that are currently too complex or expensive to be practical, will be within reach. The rabbit hole is deep. and it is real. You can dive in and start learning. Or yell at clouds until your boat gets lifted by a wave of innovation...

[spir]

> whatever that crazy contraption is

The people who built "that crazy contraption" are pioneers in an industry that is going to help lift hundreds of millions out of poverty via cheap, non-predatory financial services and create trillions in wealth by further unifying the global market.

I am somebody who spends hundreds of hours per year reading about Ethereum and blockchain. I could stop doing this whenever I want, I'm not bound by my employer or anything.

I keep at it because the underlying technology and things being built with it are amazing and valuable.

If you take one thing away from this thread, let it be that Bitcoin is the "Ask Jeeves" of cryptocurrency and the future is actively being built on Ethereum.

[TylerE]

Paying 6%, or even 4%, on a savings account is a MASSIVE red flag to anyone with a bit of financial sense.

[v64]

Those with loans in the system will have to pay a 6% interest rate. Since not all holders of Dai have savings accounts, this allows for the system to use the interest charged to loan holders to pay out the savings rate while accumulating a surplus.

A 6% interest rate on USD would be a red flag, but Dai isn't USD. As far as I know, no banks allow you to use Ether as collateral for a USD loan, so the comparison isn't apples to apples.

[hnews_account_1]

> A 6% interest rate on USD would be a red flag, but Dai isn't USD.

Is this written in their documentation? Cos this is where the smart money gets out. The DAI competes against the USD. So all their transactions have to be in USD. No vendor for your products is accepting these magical tokens. No one in the economy except vanishingly small fractions accept digital tokens for trade.

Also, this is how the economy functions. All they've done is create a bank and sprinkled the fairy dust of "tokens" on it so the Fed stays away.

[v64]

> No vendor for your products is accepting these magical tokens. No one in the economy except vanishingly small fractions accept digital tokens for trade.

MakerDAO has a list of vendors who accept Dai today [1]. The list also contains a number of payment processors that enable businesses to accept Dai. It's true that it's not widely used now, but every product has to start somewhere. I don't think I'm going to be getting paychecks in Dai within my lifetime, but that's no reason to discourage its growth.

> All they've done is create a bank and sprinkled the fairy dust of "tokens" on it so the Fed stays away.

You say that as if creating an automated decentralized bank that generates an asset pegged to the US dollar is something that just anybody could do. Regardless of how Dai is ultimately used, creating the system and deploying it to the public is a successful proof of concept in itself.

[1] https://github.com/makerdao/awesome-makerdao#spend-dai

[hnews_account_1]

> It's true that it's not widely used now, but every product has to start somewhere.

Fair enough. If it grows, it grows.

> You say that as if creating an automated decentralized bank that generates an asset pegged to the US dollar is something that just anybody could do.

If you have 100% collateralised loan, yes, anybody could do it in this day and age. Money can actually grow in an automated fashion without a central authority if we accept the inevitability of economic crashes and depressions.

Here's my thought experiment - say DAI suddenly overnight replaces the dollar. I don't know enough about the system, but I know finance very well. Next, say the day after the economy starts crashing. Manufacturers cannot see any orders coming in, consumers don't want to spend money etc etc. Run of the mill crash. What would DAI do?

I'll tell you how this works out in an uncontrolled money system - the crash goes on for more than a couple of years. People lose jobs, companies close etc. The federal reserve's one and only job (the regulation part is hogwash, they can't regulate for shit) is to cushion such an economic crash. What happens without it? Will the benevolent DAI system controllers step in?

[lokedhs]

The products being sold by vendors that accept these tokens still price their products in real currencies, and I'm assuming they immediately exchange it as soon as the transaction completes.

With that in mind, accepting cryptocurrencies is just a technicality and doesn't reflect any acceptance of it as a real currency.

Are there any vendors who actually price their products in a cryptocurrency?

[hendzen]

Why would someone agree to take out a loan with a 6% interest rate when the fed funds rate (not incl spread for various retail products etc) is 400+ bps lower. Even with the spread you are going to be paying less than that for a regular margin loan for trading, which is what I assume these loans are used for.

[hnews_account_1]

Most people? Personal loan rates are closer to 7-8% on average I think. The fed funds rate is the very basic rate of economic activity. I mean, you obviously included the caveat about the spreads for retail products. What did you think those spreads looked like?

[hendzen]

The effective cost of borrowing is going to be considerably higher than 6% if a regular person is trying to pay for their living expenses with the principal of a loan denominated in cryptocurrency. Think about exchange fees, taxes for any appreciation/depreciation upon sale, the cost of tracking/filing the taxes etc.

As I said it seems like most of the DAI borrowing is being done by people taking out margin loans to speculate on crypto. Perhaps this might make sense for the limited use case of people trading cryptocurrency (which is its most popular yet pointless application), but I don't see it being useful or economically viable for general purpose loans.

EDIT: upon further thought since the loan has to be secured with crypto assets, its not comparable to a personal loan. The equivalent regular finance product would be for a portfolio line of credit. Those have much lower interest rates, fed funds + 1-3% depending on the source.

[thedufer]

Personal loan rates aren't collateralized, which you're comparing with fully-collateralized loans. That's apples and oranges. Loans that are actually similar run <4%, not 7-8%.

[TylerE]

Who eats the cost when one of these borrowers defaults?

[v64]

If a borrower defaults, their account is flagged and their Ether collateral is eligible to be auctioned off to pay off their debt. The mechanism is designed so that a loan is closed at a point where auctioning the collateral will cover the debt.

In the event that the value of their collateral doesn't cover the debt, the Maker system has a surplus account that would cover the difference. In the event that the surplus can't cover the remainder of the debt, MKR token is created and auctioned off to to cover it.

Since this devalues MKR, holders of MKR token are incentivized to ensure that the system always runs at a sufficient surplus to cover these events and that loans are liquidated early enough to prevent having to dip into the surplus.

In addition to this, interest on loans are paid in MKR token and destroyed when the loan is closed, which also incentivizes holding MKR.

[vinniejames]

A default is not possible. The loans are fully secured by Ethereum. If collateral dips below an acceptable threshold, the collateral is liquidated and the debt is payed back to the system in full

[TylerE]

What’s the point of the loan then? Why not just use the collateral at 0%?

[spir]

The interest rates are set by a governance group that collects data on supply/demand for the DAI stablecoin. The interest rates are a reactionary function of global spot supply and demand for DAI.

Their governance calls are open, you can join and watch them be money scientists.

Here's the link to the most recent governance call https://forum.makerdao.com/t/agenda-discussion-scientific-go...

[cesarb]

> Paying 6%, or even 4%, on a savings account is a MASSIVE red flag to anyone with a bit of financial sense.

Not necessarily. Our equivalent to a savings account (caderneta de poupança) had a return above 6% per year until a couple of years ago (it's down to slightly above 4% per year now). It's very easy to beat that (for instance, the 5-year prefixed federal government bond has a return of 6,39% per year at this moment). So a return of 6% per year would be considered normal around here, not a red flag.

[thedufer]

6% in a currency that was inflating 6-9% each year (the comment you were replying to was almost certainly referencing USD, which has recently inflated at a little under 2%). The real rate would've likely been no more than .5% on those accounts, and probably negative some years. Does dai inflate at 5.5%+ per year?

[BookmarkSaver]

I can easily believe it. I believe there was another famous pre-crypto version of this run by a guy... Madoff or something? I wonder how that's going today.

[v64]

The difference between MakerDAO and Madoff is that MakerDAO, being on the blockchain, is completely auditable. You can see exactly where money is coming in and where money is going out. Websites such as DaiStats [1] provide basic stats based on this ability to audit MakerDAO. For instance, as of this post, there are 74,223,081.54 Dai in existence, 1,591,183 Ether currently being collateralized for Dai loans, and a bank surplus of 257,346.17 Dai collected in interest.

This level of transparency is the very opposite of Madoff.

[1] https://daistats.com/

[kspacewalk2]

>the use of public blockchains to automate the functions of clearinghouses and escrow services will be a huge cost reduction for many industries such as finance.

But we don't want financial transactions to be fully automated and immutable. We want escrow services to be subject to laws, we want a judicial undo and modify button. So if you remove the whole "no one can change history" bit because it's an anti-feature, it is unclear why we need blockchain in the first place.

I'll redily accept that my understanding of blockchain is limited, so I'm open to being told why I'm wrong. Consider this a strong opinion weakly held.

[v64]

There are definitely cases where transactions need to be reversed, and this functionality can be built into a clearinghouse system. Immutability is a plus here because you have an unalterable audit log showing the original transaction and then the subsequent transaction that reverses the first. The cost savings comes from the fact that instead of having to hire independent auditors to verify the paper trail, the blockchain serves as an immutable audit log and can be verified programmatically.

[99052882514569]

>The cost savings comes from the fact that instead of having to hire independent auditors to verify the paper trail, the blockchain serves as an immutable audit log and can be verified programmatically.

I don't know enough about the financial industry to know if a real actual problem is being solved here. I do assume that any bank in this industry is already required by law to keep a record of all transactions, and that it's all digitally processed and stored. You'd have to hire an auditor to verify the blockchain software too, and even on the ongoing basis, to audit the infrastructure to make sure it hasn't been improperly modified.

[v64]

> I do assume that any bank in this industry is already required by law to keep a record of all transactions, and that it's all digitally processed and stored.

This is true, but it's not necessarily organized in a straightforward way, and standards can differ from organization to organization despite everyone attempting to follow GAAP. This is why entire firms exist to audit large corporations.

> You'd have to hire an auditor to verify the blockchain software too, and even on the ongoing basis, to audit the infrastructure to make sure it hasn't been improperly modified.

Not necessarily. Each transaction on the blockchain is cryptographically signed, so all you would need to audit for each transaction is that the claimed signatures verify. It's not possible, even through a bug, to forge a signature if you don't hold the private key.

[vinniejames]

Blockchain ledgers are nearly impossible to improperly modify. Once a transaction is made it is permanent and verified by all nodes in the system

[invisiblerobot]

>> You'd have to hire an auditor to verify the blockchain software too

No. You wouldn't.

[vinniejames]

"we" want these types of services only when the escrow and judicial systems can be trusted. That opinion changes rapidly when living under corrupt a regime

[RcouF1uZ4gsC]

> But we don't want financial transactions to be fully automated and immutable.

And cryptocurrency does not provide immutability anyway. Remember the DAO Ethereum fiasco where they lost a bunch of money and decided to roll it back.

[vinniejames]

They didn't roll anything back. That ledger, with the loss, exists today unchanged.

What did happen was a superset of users decided to create a new ledger to run in parallel, containing transactions up until but not including the loss.

The market determined the new ledger to be more valuable

[v64]

This is a legitimate point to bring up, but seeing as how the community rejected a second fork in order to fix a bug in a smart contract that destroyed millions of dollars worth of Ether [1], I feel confident at this point saying that another similar hard fork will not occur.

[1] https://www.cnbc.com/2017/11/08/accidental-bug-may-have-froz...

[hanniabu]

Also it wasn't a rollback of the chain. It was the movement of the funds out of the thieves address, which was voted on by the network.

[induetimesir]

Well said.

pegged decentralized synthetic digital bearer assets.

That's a mouthful. Each word has a purpose and together they describe a hugely innovative and valuable technology. It is my belief that there are very, very few people who have an understanding of how important this innovation is.

And too few people understand the importance of the more simple digital bearer asset, of which bitcoin is the prime example. This still surprises me, especially amongst HN readers, who are certainly more insightful than the average bear when it comes to most existing and emerging technologies...

Surprises me. but also gives me hope.

There is so much room to grow. Long road. Massive upside.

[asdfasgasdgasdg]

This is exactly what I'm talking about, though. Bearer bonds have been illegal to issue in the US for the last forty years precisely because their principle advantage over registered bonds is that they make it easier to break the law. I'm not saying I can't see the utility of Bitcoin or blockchains in general for criminals. That much is plain. Speculators as well. The question is whether there is any utility for anyone else.

[Sargos]

The government doesn't have to use it. Or like it. We don't really care what they think of these decentralized instruments. They are for us to use as we see fit and to build on top of and so far they have shown they are very useful and overall a great thing for the financial system they live in. Like you say we will find out if people find them useful but even now nearly a billion dollars is being used in defi for legal and top of the table use cases so at least some people already find it useful to them.

We are seeing a flourishing system of financial experiments being built as truly anything goes in this new digital worldwide ecosystem. Not all of the experiments will work but at least they will be tried and the market will decide whether or not they are useful and valuable to this digital society.

[nradov]

Please explain exactly how blockchain technology can reduce costs for clearinghouses. Because they're already extremely efficient. There is very little transaction cost left to cut.

[v64]

Ernst & Young have published some interesting data about the costs of private vs public blockchains, and how they've developed tools built on Ethereum to reduce those costs.

https://www.forbes.com/sites/benjessel/2020/01/06/ernst--you...

https://www.ey.com/Publication/vwLUAssets/ey-total-cost-of-o...

[Can_Not]

I think your average developer will interpret everything you said as mostly technobabble and not understand why something like MySQL wouldn't just work.

[iamaelephant]

> A holder of Dai can earn 4% APY through a Dai Savings Account, and a vote is currently in place to raise the rate to 6%.

Why not just vote to make it a million percent?

[v64]

Because then you'd have to change the interest rate charged to loan holders to a million percent, and those people would close their loans rather than pay that interest rate.

[asdfasgasdgasdg]

But why are the lenders even paying 6% when they could go get a SoFi loan for four percent and on top of that have the balance in a more convenient form?

[v64]

Because SoFi doesn't allow you to use Ether as collateral for a loan. Many holders of Ether may not necessarily have the credit required to get a loan on more favorable terms.

[asdfasgasdgasdg]

I don't understand. Cash and other liquid assets are not typically used as collateral for a loan. Etherium is a crypto-currency, right? I.e. it's liquid? Collateral is almost always something like a house, or shares in a business. If you already have liquid assets in the amount you're borrowing, why are you taking a loan and paying interest as opposed to just using those liquid assets?

[v64]

If you sell the Ether, you no longer have the Ether. If while you're holding the loan the price of Ether goes up, you benefit from that. Of course, if the price of Ether goes down, you're at risk of having your loan liquidated, but that's a requirement imposed by the system to maintain the Dai peg.