Stablecoins are doomed to fail, Pt. III: SAGA

Previously on this blog, I’ve predicted that stablecoins are doomed to fail and I’ve pointed out when they do in fact fail. Logic, however, appears to have done little to curb the market’s enthusiasm for these schemes, nor does the prospect that the more ridiculous these schemes’ marketing becomes, the more likely it is that they will catch my attention and be summarily pilloried on this blog.

With that said it is my great pleasure to introduce you to SAGA Coin, through the medium of interpretive dance:

This is without a doubt the least informative piece of cryptocurrency marketing I have ever seen.

SAGA merits some attention in that it appears to have garnered a number of heavy-hitters on its advisory board including but not limited to Cornell’s Emin Gun Sirer, Jacob Frenkel, and Myron Scholes. I am naturally wary of “advisory boards” as, being one of the first enterprise blockchain entrepreneurs, I know that the only folks worth a damn on boards of any description are people who either work with you full time or have given you a substantial quantity of money. Given the recent episode with the Tapscotts claiming that Satoshi Nakamoto and Joseph P. Kennedy were on their advisory board, I therefore approach any claims that this person or that one is an “advisor” with a healthy degree of skepticism.

So how does the damn thing work?

I mean, if SAGA’s opening marketing gambit is a bunch of barefoot dancers, in various states of undress and pretending to have gross motor control issues, evolving into creatures capable of wearing a cheap suit, surely the product they’ve built is way too complicated for peons like us to understand, right?

Wrong:

By allowing participants to both buy and sell SGA, Saga’s smart contract acts as a market maker.

To buy SGA tokens, participants send funds to Saga’s Smart Contract, where they are kept as part of the variable reserve of conventional currencies, hosted by reputable banks.

The primary purpose of Saga’s reserve is to ensure participants can sell SGA; the contract will always offer to buy SGA, drawing on funds from the reserve.

The SGA token will be available for purchase starting Q4 2018.

Well that was easy. Basically SGA is giant pool of liquidity obtained from existing holders of Ether. The pool of liquidity exists to buy SGA at a particular Ether-denominated price.

I’m not sure how many times I have to say this before the market realizes what’s going on here, or before developers need to figure out that they should take a basic course in economics before trying to build an economic system, but here goes: what SAGA proposes is not anything new and it’s certainly not worthy of the name “stablecoin.” It’s a subsidy scheme which amasses a huge amount of collateral up front to create a price floor for a product the subsidy scheme sells in exchange for the collateral.

Governments do this all the time with, e.g., wheat or milk. It’s an expensive, low-tech solution that is dependent on having enough subsidy firepower to ensure that you can pay for any differences of opinion your scheme has with the market.

It works when governments do it because they use hundreds of millions of citizens as a source of liquidity. It works in crypto because people have a stupid amount of overnight gains they need to do something with, and there’s not enough dollar liquidity to immediately withdraw the entire wedge.

Given that much of the collateral will be denominated in Eth this means that the scheme will likely be exposed to Eth – although the scheme claims most of this will be exchanged out to USD, one wonders how consistently these liquidity facilities will be available or how efficient it will be to pay the punishing conversion/withdrawal fees from Coinbase and the like as compared to just going out and, y’know, buying actual dollars.

Screen Shot 2018-03-22 at 9.38.19 AM.png

This wouldn’t be so bad if it were fully-backed. Problem is, it’s not:Screen Shot 2018-03-22 at 10.22.21 AM.png

How I read this is: “if you invest 100 Eth for 100 SAGA, we’ll fix the price of SAGA at a multiple of what you invested in and use the collateral to support that inflated price.”

No bueno.

“B-but Myron Scholes is advising them! And he won a Nobel Prize!” I hear you exclaim. Well lah-dee-dah. I know an eminent economist, too, and we concluded that trying to go full-trustless in a system such as this is supremely inefficient from a cost of capital perspective and downright crazy from an investment perspective. I am willing to wager some different nobel prizewinners e.g. Paul Krugman or Robert Shiller, both of whom have chimed in critically on the crypto phenomenon in recent months, would agree.

It strikes me that the SAGA scheme, as with many others, invites those with more Ether than brains to part ways with their cryptocurrency in exchange for something which promises to hold value pegged to some third assets, like a dollar, when they would be better off just going out and buying actual dollars instead.

But hey, at least it’s got a cool dance video. Eat your heart out, Basecoin.

Careful ICO investing, my friends.

Epilogue

7 Comments

  1. The Coinonomist

    Am I the only person who associates the name “Myron Scholes” not just with Black-Scholes (nifty) but with Long-Term Capital Management? Come-on people! LTCM were CDO’s before CDO’s were CDO’s. A spectacular crash in just 1998.
    If you want to go back a wee bit earlier – I also recall the Bank of England’s feeble attempts to resist gravity and stay in the European Exchange Rate Mechanism, which collapsed on Black Wednesday (1992).
    For all of you folks thinking that a bunch of LARP-ing crypto-central bankers can run a stable coin, even the British Government couldn’t do it – at a cost of over 3 billion poinds. 26 years ago.

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  2. Anonymous

    Interesting but surely the point of SGA is to escape high fees on cross-border, cross-currency payments (in fact there is little other point). I buy SGA (I didn’t realise it went via Ether – is that necessary?) with one currency then almost instantly (? you hope, unlike Bitcoin) you sell it for another. If this works to bring greater efficiency and lower costs…

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  3. vikramml

    I’m curious to know how you would evaluate Abra: a wallet that uses a stablecoin-type contract for fiat and other altcoins:
    https://www.ccn.com/bitcoin-app-abra-adds-support-70-cryptocurrency-fiat-stablecoins/

    I guess the risks for synthetic altcoin contracts is obvious: higher fees and spreads than exchanges, however, I was wondering if there is a parallel to the synthetic altcoin futures contracts on Bitmex. The altcoin synthetic futures seem to be working well on Bitmex. I’m not quite sure why though. Why do the Bitmex synthetic products hold up despite there being no asset backing the synthetic contract?

    And, looking at just the fiat stablecoin arrangement in Abra, do you think it has a chance to work. I guess it would depend on their hedging process?
    https://support.abra.com/hc/en-us/articles/115003984608-Can-you-share-more-about-Abra-s-Smart-Contracts-and-Hedging-
    Thanks.

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  4. Anonymous

    This is not about SAGA, but perhaps I thought I would feed you some ammunition to pick on MakerDAO.
    Dai is supported by collateral held in various CDPs.
    If the value of collateral in a CDP falls below (I think) 125% of the Dai it supports, the position is liquidated and the ether collateral is auctioned off to repurchase outstanding Dai.
    This automated behavior can be exploited for profit.
    The first large liquidation occurred on March 18th.
    About $4 million USD were auctioned off to repurchase 4 million in Dai. When this auction occurred, the price of Dai spiked from $1.00 to $1.11.
    Perhaps the average auction price was $1.07. So here the seller used market manipulation to earn an estimated 7% * $4 million = $280,000 in profit.
    The same manipulation occurs in bitUSD during liquidations. Unsurprising because MakerDAO is based on ‘bitshares’ technology.
    You might think that competition among sellers would eliminate this. There is nothing to stop a whale from buying all the DAI on the market.
    Note: The auction really isn’t that important. Closing a position always requires purchasing DAI, so everyone is likely to be held for ransom when they try to exit.
    MakerDAO Small Print: A 7% ransom fee is charged for attempting to pay back your loan.

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    1. Thanks. That’s really helpful.

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  5. […] about how “stable coins” do not work for some time now, with an entire series (part 1, part 2, part 3) dedicated to the scalability and economic sustainability of the […]

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  6. zer0sum

    Now that we have gone full Myron Scholes… the options market can be viewed as building blocks to create “stability” versus the USD. Some people sell volatility and others buy volatility. Is it all a scam because you can just liquidate your underlying position and buy USD?

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