[axg11]

The most important point in this article is that whether Tether is fully collateralized ultimately doesn't matter. As long as there are well-capitalized parties (Bitfinex, other exchanges) that want to prop up Tether, it will be fine. Nobody should be under the illusion that Tether is decentralized or anything other than a bet on Bitfinex.

[JumpCrisscross]

> whether Tether is fully collateralized ultimately doesn't matter. As long as there are well-capitalized parties (Bitfinex, other exchanges) that want to prop up Tether, it will be fine

This is true for every pile of toxic crap that's ever been financially engineered.

The problem is the entangled financial health of the backer (in this case, Bitfinex and other crypto exchanges) with the backee (Tether). If creditors to the system (in this case, lenders to and customers of the exchanges together with holders of Tether) don't have transparency into the health of the nodes, a small crisis of confidence can prompt a run. (How do you know the parties are "well capitalized"?)

Critically, this can occur even if the original impetus was survivable. The opacity causes people to doubt the system's survivability, which avalanches into a run that no system can survive. Perversely, everyone knows this pattern, which increases the chances of small perturbations careening out of control. Add in that a crisis in any part of this system creates a systemic risk and the outcome becomes, as it's been across history, inevitable.

Holding Tether is putting money into a 19th century free bank, except instead of interest you get to stick a finger to the Man.

[steveBK123]

“Holding Tether is putting money into a 19th century free bank, except instead of interest you get to stick a finger to the Man.”

LOL yes I am assuming some sarcasm here. Sticking ones finger up to the man by.. holding cash equivalents in forms not eligible for FDIC insurance, yes!!

[civilized]

Me sowing the wind: wow, this is so easy. I am going to reap so much. Can't believe everyone isn't already doing this.

Me reaping the whirlwind: this is not what I was told to expect! It's just what I put in, but more whirly! Huge disappointment.

[yxhuvud]

Or potentially like putting money into British Pounds or Swedish Crowns in early nineties - just waiting for someone with a bigger wallet to come around and break the capitalization by shorting.

[not2b]

Not the same at all: those currencies went down a little, they didn't completely collapse.

[ClumsyPilot]

> Holding Tether is putting money into a 19th century free bank, except instead of interest you get to stick a finger to the Man.

But tether only works if backed by well-capitalised entities, i.e. the Man, so you are sticking what?

[sizzle]

Just like when we put it all into Anchor protocol via UST, that worked out great

[CyanBird]

Want to stick it to the man for real?

Buy Iranian government bonds, Venezuelan government bonds, Bolivian government bonds, etc

Will you get a return? Not all that likely (not unlikely either) , but you would indeed be sticking it to "the man"

Buying tether? Ha heck no

[giaour]

I'm pretty sure the man will stick it back to you if you follow this advice.

[s1artibartfast]

It's not illegal afaik

[giaour]

It depends on your jurisdiction, of course, but I (as an American) wouldn't feel confident in the legality of buying Venezuelan government securities given https://www.state.gov/venezuela-related-sanctions/

Even if buying a bond issued by an unfriendly nation isn't illegal at a given moment, you might find yourself forced to divest if relations between your country and the issuer sour. I'm sure a few people who held Russian sovereign bonds lost their shirts when sanctions were levied and they had no choice but to dump their assets.

In the absolute worst case (e.g., if you held Japanese sovereign debt in December 1941 or Afghan sovereign debt in 2001), holding a bond might be grounds for you to be charged with treason or sponsoring terrorism.

[zionic]

>This is true for every pile of toxic crap that's ever been financially engineered.

I have a radical idea that I'm fairly sure would get me killed if I ever stood a chance of implementing it: A complete ban on all non-productive financial schemes. We have an entire parasite class that grown unfathomably wealthy while providing no real value to the rest of society.

The "futures trader" extracting value from the system buying/selling futures has done no "real" work, their profit comes exclusively from making others pay more. The financial world is full of middle-men parasites like this.

They love to use the "making the market more efficient" and "price discovery" BS, but I believe they know what they're doing is solely about enriching themselves.

[JumpCrisscross]

> complete ban on all non-productive financial schemes

I surprised myself by how sympathetic I am to this proposal, given I've made a career in finance. The problem, however, is separating productive from unproductive schemes ex ante.

> "futures trader" extracting value from the system buying/selling futures has done no "real" work, their profit comes exclusively from making others pay more

Great example. In 1958, the Congress banned "the trading of futures contracts on onions" [1]. By the 2000s, increased price volatility--which had to be borne solely by farmers and distributors--prompted "the son of a farmer who initially lobbied for the ban to advocate a return to onion futures trading" [2].

There is a middle ground between banning and a free for all. In the former, useful financial products and innovation is suppressed. Finance is about allocating real resources in our economy. Bad finance is bad. But on the other end, everyone steals everything, and investor self-interest gives way to the animal spirits we saw leading up to the Panic of 1907, the Great Depression, the S&L crisis, the Financial Crisis and whatever we'll call crypto.

[1] https://en.wikipedia.org/wiki/Onion_Futures_Act#cite_note-fo...

[2] https://archive.fortune.com/2008/06/27/news/economy/The_onio...

[NovemberWhiskey]

Right. I used to sit on a trading floor next to a commodities sales desk. If the GP's mental model is that people who are involved in futures are, by definition, involved in speculation, then that is a wrong model: a lot of "real economy" manufacturers hedge their exposure to price changes for their inputs or outputs through the futures market.

[jtbayly]

Precisely. A friend of mine trades futures for a non-profit made up of growers as members. It is more efficient insurance than the federal government offers them and saves them millions.

[steveBK123]

Exactly. The problem is that “good/useful” is in the eye of the beholder.

For example, bank prop trading bans went into effect but really how does one differentiate prop from “customer facilitation” or heding. Its a sliding scale of grays.

So instead of Citi having a trader going “I think I’ll buy some S&P calls today and bet on the index” he instead can only do that if 1) a client wants to sell some & he takes the other side, or 2) there is some other exposures accumulated do to customer facilitation such that he can justify buying S&P as a hedge.

The same risk is being put on, but for different reasons. Or you could say the only thing that is changed is who has initiated the risk - customer, instead of bank.

Futures of course exist for very good, historical reasons. How do people think their home heating oil company offers you fixed price contracts for the season, etc?

Reducing the number of players in a market usually only increases volatility, transaction costs and illiquidity.

[api]

> I surprised myself by how sympathetic I am to this proposal, given I've made a career in finance. The problem, however, is separating productive from unproductive schemes ex ante.

This is just the finance sector subset of the larger problem of bullshit jobs. We know a substantial fraction of jobs are bullshit (non-value-creating), but which ones? I have a strong suspicion this is unsolvable because any metric you start using to decide which jobs are bullshit will instantly be gamed. The system will work as hard as it can to prevent you from figuring it out, and since it's made of people it is at least as intelligent as you are.

The only foolproof way we know of to reduce the number of bullshit jobs is brutal recession, but unfortunately that also takes a ton of fragile but very innovative and promising things down with it. Recession is a bit like extreme chemotherapy. It might kill some cancer cells but it also kills a shitload of healthy ones and sometimes the treatment ultimately fails because it doesn't kill enough of the former to justify the latter.

Similar principles exist in other areas like advertising. There's a saying in the ad business: "I know I'm wasting 80% of my ad spend. I just don't know which 80%."

[imtringued]

>The only foolproof way we know of to reduce the number of bullshit jobs is brutal recession,

That is a very convoluted way of implementing negative yields.

Because people want to avoid losses associated with negative interests they instead do the inflation thing and pretend there are no losses, the discrepancy between book value and real world value grows ever bigger as the book value is not representing losses in the real economy. The moment sentiment even dares to look at a downward trend poof reality has come back from its slumber. Negative yield is coming out of hiding, all at once.

[randbox]

> There is a middle ground between banning and a free for all.

Providing basic banking as a public utility so most deposits by individuals, local governments, and small businesses are not stored with investment banks engaged in speculation. Public banks can be limited to originating loans on 100% security of material personal property such as crops, livestock, cheese, gold, lumber, steel and prohibited from originating loans on security of state property such as money (which might be obtained via leveraged loan from another lender) or on security of common property such as excess real estate values attributable to land scarcity.

[JumpCrisscross]

> banks can be limited to originating loans on 100% security of material personal property such as crops, livestock, cheese, gold, lumber, steel

The problem isn't getting loans on one's crops. It's transferring the price risk to someone better able to bear it.

Farmers want a guaranteed profit when they plant. Loans don't address that. Futures do. (It's why they were invented, in the 17th century, by the Dutch and Japanese.) The only real alternative is government guarantees. Those bring their own host of problems.

[clairity]

futures don't guarantee a profit, only a price. it's up to the farmer to decide whether the price is worth the planting (regardless of profit). and the pricing function only works well in an uncorrupt market.

the problem isn't the existence of the futures markets, but the same kind of over-consolidation that corrupts every laissez faire market, making them inefficient and brittle in the long-run. if regulation encouraged primarily mid-sized firms, rather than a few large ones, we'd have better informed and more efficient markets, albeit less lucrative since the firms wouldn't have undue (read: corrupting) influence.

note that insurance is another alternative to futures or gov guarantees, though i'd question the need to externalize risk, which manifests a critical market-shaping signal.

[randbox]

> The problem isn't getting loans on one's crops. It's transferring the price risk to someone else. When a farmer plants, they want a guaranteed profit. Loans don't address that problem. Futures do. (It's why they were invented, in the 17th century, by the Dutch and Japanese.)

The problem is excess credit available to financial firms engaging in leveraged speculation and financial services investment, resulting in financial sector employment and compensation that is super-proportionate to any real savings generated for non-financial producers. This leverage is enhanced by the lack of free (zero-fee) public alternative for basic banking services. It is not necessary for public banks providing basic banking services to guarantee profits for farmers. Provide savings, transfers, and liquidity loans at present values at what an option to sell existing previously planted crops would be worth might be sufficient to reduce deposits held by banks engaging in leveraged speculation. Providing basic banking as a public utility is the middle way the parent commenter advocated because it does not require banning anything.

[rsync]

"The "futures trader" extracting value from the system buying/selling futures has done no "real" work"

Small farmers hedging next years crop would like a word with you ...

... and there are one hundred examples just like that.

Did you ever convert foreign currencies in advance of an international trip when you saw the currency pair move favorably ? Have you ever bought an ETF ? Do you have a mortgage in the United States ?

All of these things are possible because of a highly liquid, regulated market with diverse participants ...

... which brings us to the obligatory Margin Call[1] quote:

"Jesus, Seth. Listen, if you really wanna do this with your life you have to believe you're necessary and you are. People wanna live like this in their cars and big fuckin' houses they can't even pay for, then you're necessary. The only reason that they all get to continue living like kings is cause we got our fingers on the scales in their favor. I take my hand off and then the whole world gets really fuckin' fair really fuckin' quickly and nobody actually wants that. They say they do but they don't. They want what we have to give them but they also wanna, you know, play innocent and pretend they have no idea where it came from."

[1] https://en.wikipedia.org/wiki/Margin_Call

[ceeplusplus]

Comparing sophisticated market makers trading using their own money to "hedge funds" run by some rich guy's son charging 2 and 20 are hardly the same.

The bank in Margin Call was packaging MBS out of mortgages, not speculating on the price of commodities using derivatives to gain leverage.

[rsync]

"The bank in Margin Call was packaging MBS out of mortgages, not speculating on the price of commodities using derivatives to gain leverage."

Correct. That's my point.

It's not merely that you can't have one without the other ... it's that you very likely wouldn't want to eliminate the (margin call guys) even if you could.

[robertlagrant]

The person you're replying to was talking about futures traders. Where did you get a rich guy's son from?

[ceeplusplus]

Speculating on futures and other derivatives is basically what those rich guy's sons are doing in their hedge funds. Most hedge funds get worse returns than the S&P 500.

[steveBK123]

As a non sarcastic response I would note that financial intermediation exists for the purposes of transforming types and durations of risks between people/firms trying to offload from / take on that risk.

This is how things like 30 year fixed rate mortgages, low fee index ETFs, target date retirement funds, fixed price home heating oil contracts, every form of insurance, etc can exist in the consumer space.

In the B2B space you have all the companies with needs to lock in prices for future inputs in order to control costs & plan their own output pricing, etc.

All of this has greatly reduced the boom-bust cycle of the pre-Fed economy. As bad as 2000 or 2008 may have felt, they were nothing like the great depression of numerous 19th century recessions & depressions.

[steveBK123]

I propose a ban on all non-productive trips by car. Only good people should be allowed to emit carbon unless for productive reasons that pass the carbon threshhold for the amount of carbon the trips will emit.

Good people as defined by a social credit system. I will decide what is a productive reason & what is the carbon threshhold!

People totally have the option of living under this type of government - it exists in top down centralized places like China.

[kristjansson]

This is a great idea! We could break ones social credit down into units. What to call them ... Rallods, maybe? Everyone could earn Rallods for doing productive, pro-social things. People could even send some of the Rallods to each other, in exchange for taking on productive, pro-social task they'd prefer not to do. Rallods could even be exchanged for goods!

Oh wait ...

[imtringued]

A lot of rich people want more money not because they need it but rather because they want money to act as social credit and therefore they want to maximize this number even though other people need the money more.

[steveBK123]

There are a class of people for which money is more of a scoreboard which I think is what you are getting at here.

I think for most rich people, having a lot of money means, as ironic as it sounds, not having to think about money.

Growing up fairly middle class and eventually making a lot of money once I made it out on my own, the types of tortured price comparison shopping & concerns that my parents made (and I did my first 5 years of career) are just not something I worry about.

Being able to just go to a grocery store and fill the basket/cart until I have everything I want (NOT need, and without checking every items price and cross checking every price option for every items competitors), and then pay whatever it rings up to.

Doing weird as it sounds things like - cross shopping a $40k & $120k car because, well, they both sort of hit different parts of my interest lists.. and maybe I just keep my current car + add the $40k, vs trading in towards the $120k.. or really.. who cares, just buy the $120k car anyway.

Being able to knowingly overpay for home repair/renovation contractors because they give you a much higher level of confidence, communication and convenience. We got 3 bids, the guy who was 2x the price of the other guys was just such a professional we decided to go with him. He was like dealing with a professional tech/bank project manager rather than a squirrel guy you can't get hold of.. He started on time, finished days early, went not a penny over budget and gave us start&end of day updates with plans of attack for the next day.

Meanwhile some of our friends who did not have budget to pick the highest bidder had contractors disappearing to do work on other houses, had to call their contractor daily to force him to show up, had guy starting the work day at 2pm and then taking an hour lunch break, and every other crazy home renovation story you hear where 2 weeks of work takes 3 months.

So for those outside the billionaire class, being rich mostly means not having to deal with the inconveniences of being on a budget.

[tonguez]

“People totally have the option of living under this type of government - it exists in top down centralized places like China.”

you’re right, i much prefer to live under a decentralized government like the United States.

[steveBK123]

This is one of the benefits of the federal / state divide in the US too. If you are worried about the other side being crazy, you can live in a state that solidly on your side of the aisle, and be insulated from when the other side is in power at the federal level.

[dasudasu]

There is a counterparty to every financial transaction. Presumably, both sides are happy if they agree to trade with each other. All of what you call "unproductive financial schemes" are mostly about exchanging risks, just like insurance.

[jandrese]

Casino gambling is a form of "exchanging risk".

[ClumsyPilot]

For example when people themselves into slavery

Any conman worth his salt can sell a lemon, a toxic financial product or snake oil.

In UK naive homebuyers bought leaseholds where service charge and ground rent increased EXPONENTIALLY every 10 years. They even had lawyers, and those greenlit the deal.

Or when banks handed loans to strippers and then sold the loan to 'investors' causing subprime mortgage loan crisis of 2008. S&P were meant to do due dilligence, the 'sophisticated investors' were meant to do due dilligence, but here we are

[alasdair_]

>The "futures trader" extracting value from the system buying/selling futures has done no "real" work, their profit comes exclusively from making others pay more. The financial world is full of middle-men parasites like this.

If I am a farmer and I want to lock in a price for my crops right now, who am I supposed to sell that future to?

Sure, a small percentage of the time, I can sell to someone who knows that they need my crops on exactly that date of delivery, but a lot of the time there simply won't be anyone who knows at that exact moment that they need exactly what I am selling.

Having traders in the system means that I always have a buyer when I want to sell (and similarly when a user of the item wants to buy).

>They love to use the "making the market more efficient" and "price discovery" BS, but I believe they know what they're doing is solely about enriching themselves.

So what? If, through the trader solely enriching themselves, we get something useful from it, why does their motivation matter?

A baker bakes solely to enrich themselves as well - this is the nature of capitalism. The end result is what I care about.

[throwaway0x7E6]

why stop there? lets ban all activity that doesn't produce tangible goods. the number of parasites, i.e. people who consume tangible goods but don't produce them, is probably higher than the number of people who do

fields, mines and factories. we don't need anything else

[randbox]

Material production still requires accounting, installation, transportation, delivery, disposition, optimization. Financial parasitism more clearly occurs when someone pledges something to lenders which they do not actually own. For example in the 19th century when JP Morgan lent to planters on security of chattel slaves, the planters pledged the bodies of other people as collateral. Arguably loans should only be issued on security of personal property which does not deny the personal property rights of others. This might exclude leveraged lending of money on security of money (arguably lending on security of state property) and excess real values due to land scarcity (arguably lending on security of common property).

[imtringued]

That would eliminate most engineering jobs because engineering doesn't produce tangible goods, only manufacturable designs of tangible goods.

[jonahbenton]

Eye of the beholder, as others have said.

I would point you to Stuart Banner's Speculation: A History of the Fine Line between Gambling and Investing

https://www.amazon.com/dp/0190623047/

Excellent coverage of the history of the attempt to make a distinction.

[caffeine]

The problem is this:

One day, people who think like you will come to power and decide that under their administration, [activity your livelihood is based on] constitutes “extracting value from the system” and is no longer permitted.

Maybe you are a golfer, or a restaurateur. But “what you’re doing is solely about enriching yourself.” Your fine cuisine is not feeding the poor. It is immoral to play golf while children go hungry. You have clearly become wealthy while doing nothing for the greater good.

They will come to you holding guns and demand that you cease your activity, and hand over your “wealth” - maybe your house, your savings, the food in your pantry, the clothes on your bank, maybe your wife or your daughter.

“We will take back for the People what is theirs” they will say. If you refuse, you will starve in prison, and they will take your life anyway. If you accept, you will starve in the street.

[imtringued]

This is like the Christian ban on charging interest in theory it is doing it for a worthy cause but in practice just banning something isn't the answer because it doesn't address the source of the problem.

In efficient markets profits trend toward zero so having more traders will accomplish that goal better than banning traders. It is the same with interest, interest goes to 0% if there is enough saved capital to fund all investments banning interest makes it harder for the interest rate to go down.

It would be better if we built an economy that can handle low amounts or even zero profit by eliminating the dependency on yearly growth.

[runarberg]

I would really like to know what would happen if—in a wave of international solidarity between all the workers in the world—workers would take their profits in their own hands and away from any shareholder and overpaid non-contributing CEOs. What would happen to all these markets.

Would a company controlled by their own workers choice to funnel parts of their profits to wall street traders? Probably not. Would there be any money to be gained on the stock market in such an environment? Probably not.

So a natural question to ask then is. What value is there in the stock market which does not rely on money being siphoned away from workers?

[nradov]

Eventually most of those companies controlled by their own workers would need to raise capital again, and then we'd quickly end up back where we started. Plus employee control hasn't worked well in most of the companies where it was tried. Look what happened to United Airlines. They were majority employee owned for a while, but the different groups of employees never agreed on how to run the company.

[secondcoming]

> We have an entire parasite class that grown unfathomably wealthy while providing no real value to the rest of society.

Measuring people by how much 'value' they bring to society is a real slippery slope, my friend

[steveBK123]

Yeah. Big “social credit system is good, actually” brain there..

[tick_tock_tick]

Dude go look up why futures were even created. They fix a real problem.

[MrMan]

what do you do sell us ads?

[kirse]

As long as there are well-capitalized parties that want to prop up Tether

That's been my personal conclusion as well but it led me to the next question of what # is the breaking point for these well-capitalized parties?

I tried looking at the size of other well-known collapses like Enron, LTCM, Lehman Bros, etc. LB reportedly had $700B in assets and liabilities before the underlying asset devaluation precipitated their cave in. Tether survived the recent de-peg due to trading shops like Alameda absorbing the free 1-5% with their cash flow, which I believe is also responsible for the recent 11% drawdown in Market Cap (I assume due to redemptions). That said I'm not really experienced enough to know how these backroom overnight liquidity issues get resolved.

My hunch is given the true global reach of the crypto market Tether could easily get to $nnnB or $nT before we experience a black swan event that results in a liquidity crisis. Assuming they survive these short-term recessionary pressures, my long-term prediction is we're just setting ourselves up for another roaring '20s again, with crypto eventually learning all the same fundamental financial lessons we did back then.

[dwater]

I don't have the time, but I'd love to see someone rewrite "Reminiscences of a Stock Operator" as "Reminiscences of a Crypto Operator". I don't think you'd have to change any of the scams, only the context. Partner with a good illustrator and it would make a lovely coffee table book.

https://en.wikipedia.org/wiki/Reminiscences_of_a_Stock_Opera...

[overtonwhy]

The majority of this scam is happening on unlicensed unregulated off shore exchanges. They don't keep client funds segregated either. When the bubble pops they all go down. The bag holders won't even realize it until the website domains stop resolving. It's musical chairs and the music stopped playing earlier this year when the audits of Tether's reserves came out. Now people that were listening are getting as much out as possible before the seats are all gone.

[astoor]

So Tether has become something like an international reserve cryptocurrency, which gives them an "exorbitant privilege"[0], meaning they can do pretty much whatever they want safe in the knowledge that everyone else will do everything they can to prevent them from failing because everyone else would have too much to lose if they did fail. That has kept it going for a long time, and might (or might not) keep it going for a lot longer, but ultimately a replacement reserve cryptocurrency will come.

[0] https://en.wikipedia.org/wiki/Exorbitant_privilege

[puranjay]

By most measures, it appears that Tether is slowly going to die out and replaced by USDC. Among retail users, Tether has increasingly lost sway and is largely used only on exchanges (which is still massive, but not the only game in town anymore).

Roughly half of USDT is circulating on Tron, which is a dead chain. This TRC20 Tether is almost exclusively used for inter-exchange transfers (since fee is capped at $1/transaction)

On Ethereum, USDC is now bigger than Tether. Over a month, Tether on-chain supply has dropped nearly 12% [0]

[0] https://defillama.com/peggedassets/stablecoins

[lkrubner]

The "exorbitant privilege" usually belongs to a government with a vast military, and/or substantial colonial possessions -- something that allows force to be used in an emergency. There is a reason why the US dollar, but not the Swiss franc, is an international reserve currency.

[nradov]

The UK Pound is still considered an international reserve currency by virtue of being incorporated into IMF special drawing rights, even though the UK no longer really has a vast military or substantial colonial possessions.

[JumpCrisscross]

> the UK no longer really has a vast military

Beyond the nukes another comment mentioned, the UK is also a permanent UN Security Council member, a founding NATO member and a productive member of the Five Eyes and AUKUS [1]. And it still has the world's fifth most powerful navy [2].

> substantial colonial possessions

No, but they have overseas military installations in Gibraltar and on Cyprus, the Falkland Islands and Diego Garcia. Smaller installations at Ascension Island, in Singapore and Brunei "provide important staging posts and logistical support facilities for British and allied forces passing nearby" [3]. In terms of practical force projection radius, they're in a very small club of nations.

[1] https://en.wikipedia.org/wiki/British_Armed_Forces#cite_note...

[2] https://worldpopulationreview.com/country-rankings/largest-n...

[3] https://www.europarl.europa.eu/meetdocs/2004_2009/documents/...

[jeffdn]

They still have the ability to put nuclear warheads anywhere on the globe, by virtue of their ballistic missile submarines and the nuclear warheads those ballistic missiles carry. The Trident D5 missiles have a range of more than 7,500 miles, and the submarines move.

That, in and of itself, is worth a lot -- potentially even more than having a large military.

[ClumsyPilot]

'They still have the ability to put nuclear warheads anywhere on the globe'

I think most of UK public would consider that a prime minister that plans using nukes in offensive capacity belong in a padded cell.

[jeffdn]

I completely agree, I was just responding to the parent commenter's assertion that the UK didn't have the offensive power to have "exorbitant privilege"

[dr_dshiv]

I saw a trident missile launch once in 2017. Didn’t know it at the time. Everyone should know about those missiles—they are the reason we don’t have “real” war.

They are so unbelievably powerful it blows my mind.

[davidgay]

> ... even though the UK no longer really has a vast military

https://worldpopulationreview.com/country-rankings/military-...

At #5 world-wide by expenditure this may be a bit over-stated. Or else "vast military" is just a standin for "US or China".

[nradov]

Expenditures don't mean much. Look at purchasing power parity, and actual capabilities. The UK military lost the ability to conduct large-scale independent operations without US support decades ago. Capabilities are minimal in many crucial areas including logistics, aerial refueling, strategic bombing, amphibious lift, ballistic missile defense, and space dominance. Even their nuclear deterrent is completely dependent on the US military-industrial complex.

[giaour]

You could save some time and keystrokes by just typing out "too big to fail."

[jandrese]

As an outsider this reads like someone in 2006 saying that these risky looking mortgage based products are fine because they'll be propped up by Fannie Mae and Freddie Mac.

[dboreham]

And they were pretty much correct. So probably not the same as that.

[jandrese]

They certainly weren't correct for the people who bought those Mortgage Backed Securities. Unless you were a huge institutional investor with the inside track you got skinned alive. Even the big boys got burned pretty badly. Lehman Brothers was the fourth largest investment bank at the start of 2008.

[ceejayoz]

We had an international financial crisis over it. That seems less than fine.

[tlb]

You have to predict what those well-capitalized parties will do during a market panic. Decision making seems to change quickly when half the money has just disappeared, to focus on salvaging as much as possible.

[Salgat]

Exactly. It's not whether Bitfinex is able to prop it up, it's whether Bitfinex thinks Tether can be propped up without too much expense. At a certain point it no longer becomes worth propping up, and that number is very far from the current $74B market cap it's currently at.

[DebtDeflation]

>whether Tether is fully collateralized ultimately doesn't matter

There's a nuance here.

If Tether IS full collateralized, then it does not matter since a run on Tether is by definition impossible.

If Tether IS NOT fully collateralized then it may or may not matter depending on the size of the run and the ability of Bitfinex etc. to contribute capital.

[lottin]

Full collateralisation isn't enough to rule out a run on USDT, since the value of the collateral can vary depending on market conditions. We can be certain that one USDT will always be redeemable for one USD, as long as USDT is fully backed with USD, but we already know from the attestations this is not the case.

[DebtDeflation]

Right, I'm assuming collateralization by bank accounts, money market accounts, and short term Treasuries. Not commercial paper issued by Binance and Bitfinex.

[lacker]

It's such a weird "bet", though. Pay $1, get back $1 if you win, get back $0 if you lose.

[PKop]

If you just sit in Tether sure, but the ecosystem of stablecoins gives you access to DeFi yield opportunities with much better "passive" interest than bank deposits or treasuries, so the bet is a little more sophisticated than dollar for dollar.

[ironlake]

Terra Luna offered some great DeFi yield opportunities.

Unrealistic yield is one of the hallmarks of a ponzi scheme. The DeFi yield opportunities require more money to flow in than to flow out.

Apple stock, for example, pays a dividend that is not dependent on more people buying Apple stock but on the company profits for the next quarter.

[SkyMarshal]

>The DeFi yield opportunities require more money to flow in than to flow out.

Not exactly. In DeFi they just give you newly printed tokens. That's the "yield". Why wait for money to flow in when you can instead print it at will.

[nradov]

Actually the DeFi yield opportunities are not any better than Treasuries on a risk-adjusted basis. You might not be familiar with the actual risk level, including counterparty risk. Some of the cryptocurrency grifters have intentionally obscured that issue.

[PKop]

Treasuries pay negative real yields, so I'm not sure there's any opportunity there. More of a guaranteed loss.

[blitzar]

Luna had a real negative yield as well

[runarberg]

I’m confused. Banks and credit unions pay interest on savings because they can loan or invest that money with higher yields then the interest they pay to the customer/member.

How exactly do cryptocurrencies finance their DeFi yields to their investors? The only way I can think of is with the money of future investors, but that is a pretty blatant Ponzi scheme.

[tyrfing]

Loans.

[runarberg]

Yeah, that still doesn’t make sense. If that were to be sustainable you would have charge higher interest on the loans then you give to savings. That means a customer has the potential of getting a loan in an alien currency which they’d have to sell to USD, and then buy some more of that alien currency to pay it back with much higher interest then if they would have just gone to a bank/credit union/loan agency.

These DeFi yields must be funded in other ways than just loans.

[tyrfing]

> If that were to be sustainable you would have charge higher interest on the loans then you give to savings.

Which is exactly how protocols like Compound work, although 'governance tokens' are also issued simply for using the system.

> These DeFi yields must be funded in other ways than just loans.

Which? DeFi stands for Decentralized Finance, which pretty much means the rules are easily available - as long as you talk about a specific example, not spherical cows.

[lottin]

Why would anyone pay 30% interest on a loan, in an environment of negative interest rates?

[tyrfing]

Can you explain where the 30% number comes from?

[jazzyjackson]

> sophisticated

aka obfuscated

does the yield come from anywhere other than funds deposited by new users?

[PKop]

Interest on lending, and trading fees from liquidity pools. During a bear market in crypto certainly these yields will decline.

The 2 sources I mentioned above are essentially flows that accrue during the bull markets. It's not magic, when people want to long assets they borrow stables. If you lend into these markets you'll get the yield. With liquidity pools you can get some transaction fees even during market volatility and draw-downs, in the short term at least.

[jazzyjackson]

Am I to believe people are paying > 20% interest to borrow crypto ?

[mbg721]

I hope not, or else I'm missing out on a lucrative counter-position.

[tigershark]

No

[jfk13]

> ecosystem of stablecoins

"stable" coins... yes, that's been an interesting ecosystem lately.

> access to DeFi yield opportunities with much better "passive" interest than bank deposits or treasuries

Not to mention much greater risk of losing everything.

[muttantt]

The "DeFi yield opportunities" of today were the HYIP ponzis of years past.

[chinathrow]

Have you ever thought where that yield comes from?

[tlb]

You can make 30% interest on deposits. It's better than picking up pennies in front of the proverbial steamroller. More like quarters.

[lottin]

When you hold Tether, you're taking a risk that your Tethers might not be redeemable in USD. As far as I know, this risk isn't compensated in any way, shape or form.

When you deposit your Tethers somewhere, you're taking an additional risk, namely the risk that you might not get the deposit back. The interest that you get on deposits is compensation for taking that risk, but not for the other risk.

[tlb]

For sure, holding tether (or any stablecoin) without investing it is pointless. It can't go up, but might go down. The only reason to hold it (longer than to do a transaction) is if you're making a return.

[parkingrift]

It matters deeply. Neither Bitfinex nor any other exchanges are required to rescue Tether. Additionally, these other exchanges may not have the collateral to rescue Tether in a simultaneous market and crypto downturn.

This is a ticking bomb.

[anotheracctfo]

Yeah that's the whole point behind fractional banking. The government regulates how much money you need to hold to satisfy demand.

Oh wait, I'm just getting word that Tether isn't a bank. I wonder what ratio you can have if you aren't a bank?

Weird to think about because I thought that it was very illegal to have an unregulated bank. Oh well, I'm sure nothing bad ever happened before bank regulation.

[tootie]

Backed by the full faith and credit of Bitfinex

[dpierce9]

“that want to prop up Tether” AND are able to do so.

Crypto risks are highly correlated. The ability to bail out Tether is not a given.

[Dangeranger]

> As long as there are well-capitalized parties (Bitfinex, other exchanges) that want to prop up Tether, it will be fine.

This reads like the honest description of a Ponzi scheme.

As long as the originating parties, or newbie rubes, continue to prop up this sham it will not collapse.

[bendtheblock]

For anything to work efficiently in crypto it always needs to be centralised e.g. OpenSea, Coinbase. Both of which hilariously are backed by a16z. As Scott G says... "meet the new boss... it's your old boss"

More examples: Metamask, Moralis, Blockchain.com, Kraken, Binance

[giaour]

> As long as there are well-capitalized parties (Bitfinex, other exchanges) that want to prop up Tether, it will be fine.

Doesn't that make Tether a fiat currency?

[nradov]

As long as there are well-capitalized parties that want to prop up the UK Pound, it will be fine. Whoops.

https://www.investopedia.com/ask/answers/08/george-soros-ban...

[chinathrow]

They want to prop up Tether until they don't want any longer.

Nothing lasts forever, especially in cryptoland.