[Closi]

Well the difference is that banks are highly regulated, and invest in a diverse portfolio of stocks, bonds and financial services which are usually expected to be underpinned by fundamental analysis. They are heavily audited and have strict rules about speculation.

The difference to some pretty much unregulated company that reinvests lots of its money in crypto because crypto has gone up in the past so ‘past performance must equal future growth right?’ is pretty obvious to me.

[oarabbus_]

Like the OP said, UST was paying 19.5% to depositors. In contrast borrowers were only charged ~13%. A regulated bank could choose to do this if they really wanted to.

So the main difference is really that banks run a sustainable model by charging borrowers more than they pay depositors (who are lenders in the fractional reserve model); by orders of magnitude. Being paid out more than is put in should've been a massive red flag to anyone who entertained the Luna ponzi.

[starfallg]

To add to that, financially, it makes no sense to borrow at such a high interest rate unless you have issues with obtaining credit traditionally.

There is a reason why payday loans charge extortionate interest. Their bad loan rate is usually sky high. Their returns are substantially lower.

Basically whether it works or not depends on if they could print money that holds value. Obviously they couldn't.

[raesene9]

I would guess that in many countries a regulated bank offering more to depositors than they charged borrowers (without some kind of strict limits on the amount per customer) would get a visit from their regulators quite quickly to understand how this was sustainable and in-line with Banking regs.

In the UK at least retail bank deposits are guaranteed up to £85k per account, so there's a real incentive for the banking industry to police their member as if one fails, they'll all take a hit.

[tialaramex]

> In the UK at least retail bank deposits are guaranteed up to £85k per account, so there's a real incentive for the banking industry to police their member as if one fails, they'll all take a hit.

As you wrote it this doesn't make a lot of sense, so I'll explain, in the process I'll actually fix some errors too.

The UK government protects up to £85k per person per banking license. So if you have £40k in accounts at each of four brand name banks but they're actually all part of one huge corporation "Big Banks Inc." with a single license then the government only protects £85k total, 'cos that's just one license.

Unlike FDIC this is not insurance, instead it's a Last Man Standing system. If some banks fail, the government re-coups its loss over time from all remaining licensed banks. So for example if Santander fails, the costs of fixing that problem land on HSBC and other enormous banks. As indicated this produces an incentive to "police" your rivals because if you allow them to go under by not warning of risky practices, you're going to eat that cost yourself.

As an individual in the UK, if the £85k isn't enough you can invest in the NS&I which is a bank owned by the government. Unlike commercial banks NS&I isn't lending your savings to some unknown (to you) borrowers instead they're effectively lending everything to the government, which would otherwise need to borrow that money commercially (ie issue bonds) so it knows what that's worth. The rates aren't great but since it's owned by the government there aren't a lot of scummy for-profit shenanigans like "introductory" rates that then zero out unless you're constantly opening new accounts and moving your money. Since NS&I is owned by the government who also print the money your savings are denominated in, it can't go bankrupt. The money could become worthless, but in that case it doesn't really matter who you banked with and the whole country is fucked anyway.

[gpderetta]

Also for some NS&I accounts interest is tax free because technically they are lottery (although with a relatively predictable return for large savings).

Mind, the interest is currently so low that it doesn't really make much of a difference.

[tialaramex]

The rationale for Premium Bonds isn't really the tax it's the fact that people like gambling.

It turned out that persuading Aunt Sally to buy the new baby £100 of investment that will earn interest and might be worth something when the baby goes to college is hard - whereas Aunt Sally is much more interested in buying the baby £100 of scratch-offs with a tiny chance it wins big but most likely it gets nothing. This is before scatch-offs were legal in the UK as they are now but NS&I tweaked the numbers to offer a product that is (from their point of view as a bank with many savers) just a bond, but from the individual saver's point of view works like a lottery.

https://www.nsandi.com/products/premium-bonds

[Closi]

It’s often the tax, my parents have premium bonds and cite the tax benefits as they have maxed their ISA.

[charcircuit]

>how this was sustainable

Why does it need to be sustainable? The APR can simply lower once the high APR is no longer sustainable.

[raesene9]

If you offer more to depositors than you charge borrowers, it's never sustainable you're making a loss.

If I make £3000 in interest from borrowers on a set of money and give away £5000 in interest to depositors of those same funds, even before I account for the costs of operations (systems don't develop and run themselves) I'm making a loss.

You seem to be suggestion luring people in with a high rate and then dropping it later. That only really works if there's some kind of lock-up to prevent all your depositors fleeing as soon as you lower the rates again.

If you lock-up funds, generally you have to guarantee the rates for the period of the lock-up otherwise that's a bait-and-switch, which is generally going to get you into legal problems :)

[rawoke083600]

>If you offer more to depositors than you charge borrowers, it's never sustainable you're making a loss.

Only if the amounts being borrowed and loaned are exactly the same.

I.e 20% on $100 is less than 10% on $1000

[charcircuit]

>If you offer more to depositors than you charge borrowers, it's never sustainable you're making a loss.

Like a sibling comment you are not accounting for the profit that comes from the collateral.

Maybe a nondefi example would help. Imagine if a landlord got a loan using a rental property as collateral. In this example the lender will now get the payments of rent. Now the lender makes money from both the interest rate on the loan and from the renters of the property. Depending on the demand for the rental property the amount of rent you may collect can fluctuate. This means that some months you may make more money than others. So in order to sustain a certain level of profits the amount of rent you collect will need to be worth a certain amount.

[stephen_g]

That’s not how it works in the real world though. A landlord takes out a loan at a particular interest rate, and makes repayments based on that. The bank doesn’t “get” the rent, they get the repayment that ideally for the landlord is less than the rental income, unless they’re relying on capital gains. The collateral only comes into account if the borrower defaults, for the lender to sell to make back what they were owed. Otherwise they have no claim on anything to do with the collateral - neither the rent nor capital gains.

[Closi]

> Why does it need to be sustainable? The APR can simply lower once the high APR is no longer sustainable.

At which stage, people with savings withdraw funds because of the lower interest rate and the Ponzi scheme collapses.

[charcircuit]

>the Ponzi scheme collapses

The only thing that collapses would be the APY. Everyone can still withdraw their full deposit.

[Closi]

Their deposit has been loaned. No free lunch here…

[UncleEntity]

As in they lose money on every loan but make it up in volume?

The irony here is that’s supposed to be a joke and not an actual business plan.

[charcircuit]

I think you missed a key detail. The collateral for taking out a loan earns staking rewards that get distributed to the depositors. The amount of money staking rewards are worth can fluctuate too depending on the state of the project / cryptocurrency ecosystem.

[Tenoke]

A lot of businesses operate at a loss for the sake of growth early on, including a lot of the unicorns from the last decade or more.

[SAI_Peregrinus]

Yes, but most of them have a business plan that doesn't involve taking a loss, once they've reached a certain scale. And while they're taking that "loss" it's not usually due to revenues being below the cost of goods sold, it's because they're spending all profits + some investor money to grow. Many (though not all) can simply stop growing and be instantly profitable. Businesses that sell you $10 for $5 tend to fail as soon as they run out of capital, because they've got no path to profitability.

[jannes]

So you are saying it was sustainable at some point?

[charcircuit]

Yes, it was sustainable for a period of time.

[Jensson]

The most likely reason to pay much higher interest on money deposited than money they lend out is to steal the deposited money. It isn't illegal to do it, but it is a huge red flag which is why it would warrant an inspection.

Smart contracts doesn't save you here, since the deposit happened when you bought their crypto coins, not when you signed the smart contract.

[Grustaf]

The sky high interest is its sole raison d'être

[UncleMeat]

How do they prevent people from borrowing to deposit? If I own two wallets, would I be able to borrow some coins, transfer them to my other wallet, and then deposit them so I'm netting 6.5% for free?

[jboy55]

Well, the rigorous KYC regulations and policies mean they can ensure every person owns just one wallet... /s

[toolz]

> They are heavily audited and have strict rules about speculation.

If only these "heavy" audits and "strict" rules could stop the incessant corruption we see all around the globe in federally insured banks.

People who think crypto is shockingly bad just haven't been paying attention to banking. Sure, crypto is full of small scams and because of most of cryptos open fundamentals you can expect those scams will never grow into federally insured banks. That isn't the case for private banks who have been getting away with the worst scams for far longer than I've been alive.

[itsoktocry]

>That isn't the case for private banks who have been getting away with the worst scams

People are straight-up rug-pulling in the crypto world for tens of millions of dollars, outright scams, and the scale of crypto is a fraction of the banking world. I bet you'd be hard pressed to name a couple equivalent scams banks have pulled in a first-world, financially regulated economy. I'm not talking about some rogue employee ripping off accounts, I mean organized fraud.

Anyone who has ever actually worked with or in the financial industry knows how crazy the regulation is. It's far from perfect, but saying it's worse than the crypto world is laughable.

[toolz]

"far from perfect" - well that misses the mark by a long shot. We still have unsettled shorts happening every day that are often naked and regularly stay naked for months on end - companies are destroyed from this blatant market manipulation.

Gamestop was 140% short! Is this uncommon? Many people seem to think not.

The corruption in wall-street runs so deep that tax payers have to foot the bill when no middle class person would look over the toxic loans being packaged up pre-2008 and think that wasn't a scam. This crashed the world economy, it's hard to imagine a bigger scam ever being possible without the former bank CEOs running every financial branch of the government promising bail-outs to the "too big to fail" scammers.

[kristjansson]

> 140%

We're still stuck on this[0]?

[0]: https://www.sec.gov/files/staff-report-equity-options-market... @ Page 25

[toolz]

Yes I'm still stuck on that, it's a story people often recognize and just because there has been no naked shorting found as of that report doesn't mean there isn't significant naked shorting involved. With the shorting moved to dark pools on top of the fact there were likely 45 million shares still shorted after that reporting data shows, it's not as clear cut as you might be implying.

Many people are confident naked shorting happens and GME hit 140%, the highest ever according to that report. So yeah, consider me skeptical that the SEC was able to find evidence of a non-scandal and used that evidence to report a non-controversial finding.

You can bury your head in the sand and pretend the market is fair if you want, but I'll stay skeptical.

[kristjansson]

I don’t know that I’d go so far the other way to infer the market is _fair_ to retail traders, but the 140% short number is not itself evidence of impropriety. All it requires a lot of longs allowing their shares to be lent (check) and a lot of shorts with appetite, conviction, and deep pockets (check).

[nradov]

Naked shorting doesn't destroy companies. Hypothetically even if the stock price goes to zero that doesn't prevent the company from operating as a going concern.

Incompetent managers destroy companies. Sometimes those managers try to deflect blame for their own failings by whining about short sellers.

[Closi]

> Gamestop was 140% short! Is this uncommon? Many people seem to think not.

This is silly. Of course it is uncommon - if it was common we would see short squeezes all the time.

[MrMan]

this is foolish commentary. its like a trader on Wall Street complaining about javascript frameworks

[yifanl]

> If only these "heavy" audits and "strict" rules could stop the incessant corruption we see all around the globe in federally insured banks.

Unless your claim is that corruption and its effects somehow uniquely apply only to bankers, I don't see what's the purpose of pointing this out.

[babypuncher]

The popular trend lately is to point out flaws in our regulated institutions in a feeble attempt to suggest that the solution is to abandon regulated institutions altogether in favor of some techno-libertarian hellscape. Because why fix a broken thing when you can throw it away and replace it with something even more broken.

[landemva]

What was actually fixed after 2018? Which banksters went to prison?

[toolz]

The internet (just like crypto) is a global distributed network with only local regulations (that are easily bypassed, again, just like crypto) and I would argue this "techon-libertarian hellscape" is the most valuable and important invention mankind has ever created.

[babypuncher]

I used to feel far more optimistic about the internet. Today I see the social aspects of it as a net negative; Social media in general is a cesspool, user privacy means nothing to the big internet players, ads and tracking are absolutely pervasive, and the quality of online discourse has been on a steep downward trajectory for the better part of a decade.

[yifanl]

I'm not seeing how using the internet as analogy is at all relevant to the discussion about corruption. The internet, if it has resistance to catering to special financial interests at all, is only so because it is far removed from that sector, not because of any special attributes from being a distributed network.

[spinny]

> Well the difference is that banks are highly regulated ...

probably why there is so many instances of banks getting caught laundering money for criminal organizations by the billions

> They are heavily audited and have strict rules about speculation.

you can audit blockchains. you can't audit a bank's database and have to way for the next panama papers leak

[jboy55]

Come on, what percentage of banking activity is money laundering, and what percentage of NFTs sold is money laundering? I think there is an order of magnitude, order of magnitude difference.

[spinny]

that is the wrong comparison IMHO. if you are talking about money laundering using NFT's as in pics of cartoon monkeys (an NFT is just a digital deed, the monkey pic is actually an extension), you should be comparing them to money laundering using art.