The thing the author seems to be confused about is that when people talk about stable coin they aren't claiming that the market can't be irrational. They are claiming that over a sufficient period of time the coin will trend towards its target. In the case of DAI today, that target is 1 DAI == 1 USD. This means that while the market may irrationally buy/sell DAI for more or less than 1 USD, over time it will trend towards 1 USD.
For the vast majority of people looking for a stable coin, this is exactly what they want. They don't care so much that on a particular exchange DAI is worth more or less than $1, they care that in a week, or a month or a year DAI will still be worth "about a dollar" and not "100x USD" or "x/100 USD". DAI has the mechanisms necessary to make it profitable to drive the price of DAI back toward 1 USD if it loses its peg and those mechanisms have been shown to generally work in the wild so far.
I have personally made a few bucks when DAI transiently slipped its peg in the past. There are people actively authoring bots that profit off of DAI losing its peg and as those bots become more efficient and gain capital, I think we'll see DAI slip its peg less and less often.
> They are claiming that over a sufficient period of time the coin will trend towards its target
This is not what the MakerDAO team, nor any other stablecoin shill, is claiming. They are claiming the system "ensures" that the stablecoin is "a money that will always maintain its purchasing power."
"Ensure" and 'always' don't mean "trend towards over time." They mean always, as in all the time. If their intention is to sell a different product, I can only suggest they make more representations which are a little harder to falsify.
If what you want is "something that always is worth _exactly_ 1 USD then you are asking for the unatainable. As others have mentioned, it is _impossible_ in an open market to have a true 100% no variability peg. Markets work on supply and demand and the instant that one exceeds the other the peg will drift.
A good stable coin will have pressures that push that drift back toward the target, but it is impossible to stop the drift from ever occurring. The USD itself presumably targets some basket of goods, but it drifts away from that basket of goods. So even the USD isn't a "stable coin" by your definition.
But isn't 'hover around the same value long term' maintaing the purchasing power? I guess if you interpret the marketing as 'will literally always be worth $1.00' you'll be disappointed but it's weird to take that interpretation when it's not really attainable for anything that isn't a US dollar.
But how much is DAI straying long term? USDT tethers are also often worth a few percent more or less than a dollar in periods of volatility. Is there hope that the 80% will zero in closer to a few percent in the future like USDT?
As DAI gains trading volume and gets listed on more exchanges you'll likely see it stabilize. Any active trader who believes the price pressures will work has incentive to buy DAI when it is below 1 USD and sell DAI when it is over 1 USD as this is a low-risk trade (opportunity cost only). Right now, there isn't much volume so it is pretty easy for someone to come in and want a bunch of DAI or to liquidate a bunch of DAI and cause the market to shift suddenly. It will then take a few minutes for the market to correct, and with per-transaction fees the market is hesitant to correct small errors due to the lack of volume.
TL;DR: The more volume DAI has on public exchanges, the tighter it will hold its peg.
> Also, pegging a cryptocurrency to the dollar seems almost comedically perverse. What is it for?
The general thing you want is for your currency to have stable purchasing power (for goods and services) in the short term, maybe inflate it slowly to encourage investment - monetary policy basically. Targeting a USD peg is a way to do this, of course ideally you'd want your currency to have a monetary policy independent of USD
I mean presumably if you’re “tricking the arb bots” you’ve just found some additional arb of your own, which should make the market more efficient, and apparently in this case (I don’t know if this is correct, but this is the claim made by TFA), drive the price towards dollar parity because of this thing’s built in incentives. Or the arb isn’t from dollar parity mismatch but from the bots themselves, in which case it doesn’t matter to the market because it was dumb and you made it go away.
In this thread cryptocurrency community will rediscover banking and money.
We have stablecoins or tethers (manny attempts to create something people want) - people want some form of money for peer to peer value transfer, that will allow arbitrage between exchanges and connection to "real world" as almost nobody is pricing their services in ethereum/bitcoin.
Let's say we have 3 competing stablecoins and Gresham's law will apply = people will be moving to "best" coin and leaving others holding bad ones.
Imagine that you have 2 banks - one with good reputation and large reserves and second one - almost without them, yet both will be issuing private money redeemable for each other.
So how come one can attract customers to his specific stablecoins solution? By offering interest rate - a stablecoin that pays dividend will be better than stablecoin without it.
It's complicated - ideologically stablecoins are similar to economical perpetuum mobile devices, yet the first are impossible due to laws of physics and second one may work because economy depends on human behaviour and humans may act irrationally.
A stablecoin isn't a store of value. It's an instrument for holding pretend Fiat. It's a way for holders to pretend they are the Fed, and say "Now I have USD! You can have it. Just sell it back to someone else eventually because it's pretend."
It's an index basically, not an actual commodity.
(Except of course in the sense that Everything Is A Commodity in the crypto world.)
Eh, I wouldn't quite call it an index. While I agree that it isn't _actually_ 1USD (or whatever it is pegged to), it is backed by other assets (in the case of DAI today, it is backed by ETH) and the system is setup such that there should always be more ETH backing the DAI than necessary to make everyone whole.
I do expect DAI to be more stable as adoption and trading volume grows.
Author of is article is a troll. In his last post he wrote literally:
> Having taken fifteen minutes to review the MakerDAO paper
MakerDAO is probably one of the most ambitious projects on Ethereum with pretty complicated structure. Draw conclusions on 15 minutes of review is nonsense.
He may have an incendiary and flippant writing style, but it’s worth noting that he was a founder and COO of Monax (née Eris) which released an open source private-chain fork of Ethereum in 2014. He’s qualified to have an opinion on complex smart contracts and not be called a troll. If anything he’s emblematic of the frustration felt by many early adopters who understand that the hype bubble is making it hard for this rather experimental technology to meet inflated expectations (Vitalik recently being another prime example).
"Author of this article is a troll" != "Author of this article doesn't have a technical background"
I also have a strong background in the field and the MakerDAO project took me a long time to understand. The author makes several mistakes in his opening paragraph.
I'm not entirely convinced that the project will work as intended, but the author clearly doesn't even understand the basic ideas.
False. He actually has went and reworked troll posts he made in the past. Thats what this guy does. He has no intellectual integrity. His technical background (calling yourself COO doesn't really count as a technical background)
I'm a bit skeptical of derivative-based stablecoins in general, but Dai dropped briefly and then went right back to about a dollar, currently $1.02. I don't think they ever claimed that their price stabilization mechanisms would work instantaneously.
And while it dropped momentarily, it dropped to 70%-80% of the USD. In the world where most other cryptocurrencies move that much in a regular day without anyone breaking a sweat - that seems like a very good deal to me.
It is funny because this guy also fundamentally doesn't understand how Basecoin works.
"If the price of 1 BASE is above $1, the blockchain prints new $BASE to holders of “BASE Shares” (mother of god), a standalone cryptocurrency which is issued in the genesis block and held by early adopters, which then distributes new Basecoins to them as a “dividend.” Holders of “BASE Shares” are free to either hold onto their Dividend-Basecoins (thus not bringing the price down) or sell them into the market, pushing out the supply curve and bringing down 1 BASE’s price. This process continues until the price of 1 BASE drops to $1."[0]
Actually, the Basecoin will first go to the Bond holders. I think there are reasons to be skeptical of Basecoin and stable cryptocurrencies, but this guy's "articles" don't really seem to touch on those.
Well, of course it's easy to ensure that the price doesn't stay above $1. You can make more of them. It's ensuring that the price doesn't stay below $1 that's hard. You have to draw value from some reserve. If that reserve is depleted, you're screwed. All attempts to peg currencies run into that problem.
Would it not be possible to just destroy some of the coins? If they were destroyed for everyone, proportionally to how much they hold, wouldn't that be in interest of everyone? Because it would make the coin itself worth more?
>"If the price of 1 BASE is above $1, the blockchain prints new $BASE to holders of “BASE Shares” (mother of god), a standalone cryptocurrency which is issued in the genesis block and held by early adopters, which then distributes new Basecoins to them as a “dividend.”
Isn't that a freakin' textbook definition of a Ponzi scheme?
In the past, this person trolled Bitshares to make a name for themselves. They selectively cut'n'pasted snippets of the Bitshares forum as some form of evidence in other posts. There is a ton of context there that was removed. A blockchain can give an asset value, but that doesn't mean every market will guarantee those prices. He is now going after the Maker coin. The guy does well SEOing his website with this rubbish but he doesn't seem to understand much outside of that. oh well, no big deal until google/ycombinator point to him as an authority.
It seems to me that any decentralized stablecoin would break the impossible trinity. [0]
Basically, since the interest rate is fixed (at 0 in this case, I believe), there's an incentive to sell DAI in favour of some higher-yielding currency, which creates a downward pressure on the price. So short of preventing DAI from being sold somehow, in order to maintain a peg, someone needs to pump money into DAI at a loss.
You can try to build a complicated system to hide all that, but it seems the goal of a stable peg is simply impossible. Even for nation states it is only possible in the case they have sufficient resources and the will to maintain a peg.
Author has misunderstandings of what he's criticizing. From the article I suspect he thought the crash was caused by undercollateralization at first before his friend corrected him. His 15 minute attempt to understand the system didn't include enough time to check the collateralization ratio limits.
Also claims that a collateralized stablecoins "only works if the collateral value keeps rising", and that selling something is equivalent to using it as collateral
Readit News
For the vast majority of people looking for a stable coin, this is exactly what they want. They don't care so much that on a particular exchange DAI is worth more or less than $1, they care that in a week, or a month or a year DAI will still be worth "about a dollar" and not "100x USD" or "x/100 USD". DAI has the mechanisms necessary to make it profitable to drive the price of DAI back toward 1 USD if it loses its peg and those mechanisms have been shown to generally work in the wild so far.
I have personally made a few bucks when DAI transiently slipped its peg in the past. There are people actively authoring bots that profit off of DAI losing its peg and as those bots become more efficient and gain capital, I think we'll see DAI slip its peg less and less often.
This is not what the MakerDAO team, nor any other stablecoin shill, is claiming. They are claiming the system "ensures" that the stablecoin is "a money that will always maintain its purchasing power."
"Ensure" and 'always' don't mean "trend towards over time." They mean always, as in all the time. If their intention is to sell a different product, I can only suggest they make more representations which are a little harder to falsify.
A good stable coin will have pressures that push that drift back toward the target, but it is impossible to stop the drift from ever occurring. The USD itself presumably targets some basket of goods, but it drifts away from that basket of goods. So even the USD isn't a "stable coin" by your definition.
You make some good points but I'm not sure labeling everyone and everything as "shilling" is helping your case at all.
Dead Comment
"The market can remain irrational longer than you can remain solvent", springs immediately to mind.
edit: Also, pegging a cryptocurrency to the dollar seems almost comedically perverse. What is it for?
The frequently cited money transmission benefits of a cryptocurrency, without value instability of playing games with monetary policy.
TL;DR: The more volume DAI has on public exchanges, the tighter it will hold its peg.
The general thing you want is for your currency to have stable purchasing power (for goods and services) in the short term, maybe inflate it slowly to encourage investment - monetary policy basically. Targeting a USD peg is a way to do this, of course ideally you'd want your currency to have a monetary policy independent of USD
Not saying it's easy, or I could do it... just that it's an inevitability, right? What happens then?
We have stablecoins or tethers (manny attempts to create something people want) - people want some form of money for peer to peer value transfer, that will allow arbitrage between exchanges and connection to "real world" as almost nobody is pricing their services in ethereum/bitcoin.
Let's say we have 3 competing stablecoins and Gresham's law will apply = people will be moving to "best" coin and leaving others holding bad ones. Imagine that you have 2 banks - one with good reputation and large reserves and second one - almost without them, yet both will be issuing private money redeemable for each other. So how come one can attract customers to his specific stablecoins solution? By offering interest rate - a stablecoin that pays dividend will be better than stablecoin without it.
It's complicated - ideologically stablecoins are similar to economical perpetuum mobile devices, yet the first are impossible due to laws of physics and second one may work because economy depends on human behaviour and humans may act irrationally.
It's an index basically, not an actual commodity.
(Except of course in the sense that Everything Is A Commodity in the crypto world.)
https://coinmarketcap.com/currencies/dai/#markets
I do expect DAI to be more stable as adoption and trading volume grows.
Author of is article is a troll. In his last post he wrote literally:
> Having taken fifteen minutes to review the MakerDAO paper
MakerDAO is probably one of the most ambitious projects on Ethereum with pretty complicated structure. Draw conclusions on 15 minutes of review is nonsense.
He may have an incendiary and flippant writing style, but it’s worth noting that he was a founder and COO of Monax (née Eris) which released an open source private-chain fork of Ethereum in 2014. He’s qualified to have an opinion on complex smart contracts and not be called a troll. If anything he’s emblematic of the frustration felt by many early adopters who understand that the hype bubble is making it hard for this rather experimental technology to meet inflated expectations (Vitalik recently being another prime example).
http://www.businessinsider.com/ethereum-founder-threatens-to...
I also have a strong background in the field and the MakerDAO project took me a long time to understand. The author makes several mistakes in his opening paragraph.
I'm not entirely convinced that the project will work as intended, but the author clearly doesn't even understand the basic ideas.
"If the price of 1 BASE is above $1, the blockchain prints new $BASE to holders of “BASE Shares” (mother of god), a standalone cryptocurrency which is issued in the genesis block and held by early adopters, which then distributes new Basecoins to them as a “dividend.” Holders of “BASE Shares” are free to either hold onto their Dividend-Basecoins (thus not bringing the price down) or sell them into the market, pushing out the supply curve and bringing down 1 BASE’s price. This process continues until the price of 1 BASE drops to $1."[0]
Actually, the Basecoin will first go to the Bond holders. I think there are reasons to be skeptical of Basecoin and stable cryptocurrencies, but this guy's "articles" don't really seem to touch on those.
https://prestonbyrne.com/2017/10/13/basecoin-bitshares-2-ele...
Isn't that a freakin' textbook definition of a Ponzi scheme?
Only if the price is below $1. You have to read the next paragraph of the blog post to get to that.
Basically, since the interest rate is fixed (at 0 in this case, I believe), there's an incentive to sell DAI in favour of some higher-yielding currency, which creates a downward pressure on the price. So short of preventing DAI from being sold somehow, in order to maintain a peg, someone needs to pump money into DAI at a loss.
You can try to build a complicated system to hide all that, but it seems the goal of a stable peg is simply impossible. Even for nation states it is only possible in the case they have sufficient resources and the will to maintain a peg.
[0]:https://en.wikipedia.org/wiki/Impossible_trinity
Also claims that a collateralized stablecoins "only works if the collateral value keeps rising", and that selling something is equivalent to using it as collateral