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

The American ICO is Dead

Disclaimer: I’m not your lawyer, this is a blog, this is not legal advice, and I’m admitted only in England and Wales.

Before we talk about ICOs, let’s talk about marmots.

Writing last August, I predicted an event which I call the “Zombie Marmot Apocalypse” – a regulatory binge whereby the American federal authorities would decide that the whole “utility token” thing was cute but ultimately completely illegal. And whither America, whither the world.

At the time, this was an unpopular opinion, and not widely held. I argued that:

The list of enforcement actions in the various categories mentioned above (will be) a prelude to simultaneous dawn raids at the major exchanges and the homes and offices of the major ICO promoters, with a variety of agencies in a variety of countries co-ordinating their activities. Most liquidity (will dry) up; the few remaining legal on-ramps for liquidity (will) have nothing in which to put it. Billions in paper gains (will be) lost.

So why did I call this the “Zombie Marmot Apocalypse?”

Those who know me well will be aware that I use the word “marmot” in blog posts and elsewhere as a subtle dig at the overwhelming and everpresent Dunning-Kruger-fuelled sanctimony of blockchain entrepreneurs – the newer and more idealistic the entrepreneur is, the worse his affectation tends to be.

When I coined the term “Zombie Marmot Apocalypse” I was genuinely trying to convey some marmot imagery I encounter on a near-daily basis in marmot season in Connecticut. Close your eyes and imagine a horde of cute and fuzzy animals as adorable as they were unstoppable, advancing towards you, inch-by-inch, paw-by-paw, and gunning for your plants.

That is the true meaning of fear.

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What I live with every day (not kidding, this is the actual marmot)

I don’t really mind that much, if I can be completely honest with you. I’m glad that my garden makes the marmots happy, and I enjoy their company, even if it means I have to work from home to shoo the little bastards away from my peppers for most of the summer.

Those of you without gardens will have an even more positive experience still. If you haven’t broken any securities laws and you’re just doing normal stuff, like taking a hike in the Pacific Northwest, being attacked by a marmot can actually be a fairly pleasant experience:

But we’re not talking about normal people today. We’re talking about coin fundamentalists. People who are willing to go on the record to the New York Times and say garbage like this:

“Sometimes I think about what would happen to the future if a bomb went off at one of our meetings… it would set back civilization for years.”

If you’re a creature without a central nervous system – such as the individual quoted above, a venture capitalist, a head of lettuce or some other form of vegetable – encounters with marmots can be far more harrowing. Imagine, if you will, that you are a tomato plant, luxuriating in the summer sun. All is well in your world; a gardener tends to you and you live in a pleasant little universe hemmed in by a fence, accompanied by many other legumes just like you, safely protected from a dangerous world beyond.

In other words, you live in San Francisco.

Suddenly, a large, furry, foreign, dark, blob from the east appears, scales the fence, and is inside your little bubble/enclosure. It surveys its terrain. Then it looks straight at you. It approaches. Closer. Closer. Oh god, it’s almost here. You stand there, rooted to the ground. You realize your world is about to change. You’re just not sure how.

Then it eats you.

That, my friends, is the Zombie Marmot Apocalypse.

From my vantage point, this is what is happening in Silicon Valley this month: a bunch of people floating around in a mania-induced vegetative state have suddenly found a hungry ground squirrel in their proverbial back yard, and this is such an unexpected change of pace that abject panic has ensued. People have been running around for the last four years thinking that just because flogging unregistered crypto-coins was something that other people were getting away with right now meant everyone could get away with it forever.

So if we’re being honest with ourselves, where are we now?

1) ICO v. 1.0, at least in America, is dead.

Long live ICO 2.0.

The public-presale-of-tokens-that-pretend-not-to-be-securities field appears to be well and truly dead following the issuance of 100-ish subpoenas to market actors big and small by the Securities and Exchange Commission. Why anyone thought it was a smart idea to market these things in the Southern District of New York is anybody’s guess.

I’ve said chapter and verse about why certain types of ICO are rubbish, but what I haven’t said so often – in part because the platforms only recently came into existence – is that the ICO 2.0 platforms like Prometheum, T-Zero, Templum and Harbor are super interesting since they acknowledge, right off the bat, that blockchain capital markets tokens will be regulated and assume that a distributed system will be more efficient than existing solutions (which are not “centralized” as much as they are “multiple-centralized” with separate independent stacks each confirming for their owners the work done by other transaction counterparties).

In the case of some of these projects there are very serious tech and investment heavy-hitters standing behind them (Chris Pallotta for Templum and David Sacks for Harbor, e.g.) which tells me immediately these companies will be doing things correctly from the start, unlike the 2014 blockchain set, and not be racking up a ton of legal-technical debt which they’ll have to pay down later.

So I’m actually optimistic about the prospects of the ICO 2.0 space. Which isn’t really going to be “ICO 2.0” as much as it’s going to be “Automated Securities Issuance 1.0.” Assuming these outfits get legal right, the demand for high-risk investment is as great as it’s ever been. ICO 2.0 has the potential to be 10x what ICO 1.0 was.

https://twitter.com/prestonjbyrne/status/971538036252200961

The European Union is another ball game. Although for the moment the EU/EEA jurisdictions are apparently friendlier to the ICO 1.0 schemes, as my friend David Gerard points out, European authorities appear appallingly poorly-advised and are failing to apply a even a modicum of skepticism to the claims presented to them by blockchain technologists. It’s not hard to understand how they could make this mistake; there is a blockchain echo chamber of sorts which is slowly eating the world, on account of the fact that there is a ton of money to be made in selling and promoting “blockchain,” and almost no money to be made in telling people to ratchet back their expectations.

2) Money Transmitter laws are back.

Back in 2014, when “coins” were all the rage rather than “DApps” or “smart contracts,” I remember attending panel after panel of “Bitcoin law” where the lawyers would constantly ram home KYC/AML and very little else. That aspect of compliance has been fairly comprehensively dealt with by big firms like Coinbase. As the market consolidated, the need for de novo legal opinions on that question surely subsided (as, no doubt, did the demand for lawyers to write them). KYC/AML lawyers thus became less popular on the conference circuits as securities lawyers were more in vogue.

Being a securitization bod, I enjoyed my profession’s fifteen minutes in the sun, and had waited for that moment for a long time – I was raising the securities law issue years before it was cool. And for the last 18 months or so, as the attention of developers everywhere has been focused squarely on the securities aspects of token issuance, a lot of expertise has spent a lot of hours considering the application of public offering rules in relation to tokens.

Different law firms adopted a range of different answers. Some firms operating in the EU and the US appear to have been willing to opine that ICO tokens are more akin to a kickstarter and not an investment (a conclusion so unreasonable I have trouble understanding how they reached it). Other firms endorsed a two-step issuance process using a contract called a “SAFT,” which I’ve written about before, and which is reportedly now under the regulatory microscope. Still others refused to provide favorable opinions of old-school ICO schemes and instead recommended treating the token as a security from day 1 (assuming for the purposes of this discussion that “ICO token” means companies pre-selling tokens as an investment product rather than a coupon tradable 1:1 for some physical asset or licence). For what it’s worth I fall into the latter camp.

What a lot of people have missed is that it’s possible for an ICO operator to be both a money transmitter and a securities issuer at the same time. As put here on the marmot blog in August and October, KYC/AML rules still apply if you’re issuing a crypto-token.

But, as usual, nobody listened to the half dozen or so good crypto-lawyers who saw this maelstrom coming a year ahead of time:

Following the decision of a very senior federal judge yesterday, we know that multiple federal agencies can have very broad jurisdiction where cryptocurrencies are concerned. Nor should we expect jurisdiction to be exclusive to one agency or another, even w/r/t the same conduct. Ergo we could see enforcement occurring on multiple prongs at the same time:

https://twitter.com/prestonjbyrne/status/971110306394066945

So goodbye securitizers, hello Bank Secrecy Act and Proceeds of Crime Act once again! The KYC/AML lawyers will be thrilled.

3) Exchanges, wallets, and more… Hoooo boy.

Huge:

And not just trading venues. Per the SEC’s announcement:

Some online trading platforms may not meet the definition of an exchange under the federal securities laws, but directly or indirectly offer trading or other services related to digital assets that are securities.  For example, some platforms offer digital wallet services (to hold or store digital assets) or transact in digital assets that are securities.  These and other services offered by platforms may trigger other registration requirements under the federal securities laws, including broker-dealer, transfer agent, or clearing agency registration, among other things.  In addition, a platform that offers digital assets that are securities may be participating in the unregistered offer and sale of securities if those securities are not registered or exempt from registration.

4) Lawsuits

Investors in ICOs are kind of like gremlins. They’re cute now, but if you don’t handle them with the utmost care they will transmogrify on you into these vengeful and extremely dangerous critters called “plaintiffs.”

I could list a number of class-action lawsuits here regarding ICO issuances or insider dealing which have been filed in the last 60 days, but will refrain from doing so. If you’re really keen to find out who’s suing whom Google is all the resource you need.

Summing up

Between

  • the ramping up of enforcement actions against non-compliant ICOs; and
  • the emergence of compliant “ICOs” using blockchain back-ends which are actually taking aim at legacy infrastructure,

it’s shaping up to be a very interesting year in blockchain tech.

Live Free or DAICO

If you want to lose your liberty in a hurry, there’s no better way to do it than a DAICO.

What’s a “DAICO,” I hear you ask? Well, it’s a new kind of automatic, Ethereum-based investment scheme that allegedly combines

  • “the best aspects of DAOs” – “distributed autonomous organizations,” a long-winded neologism for “software that runs on a blockchain” – and
  • ICOs, or “initial coin offerings,” schemes where companies launch their own “coins” and sell them as investments to the public without filing a registration statement or publishing a prospectus.

Oh, I should add that Vitalik came up with the DAICO concept. It is, therefore, automatically brilliant.

Except it isn’t.

Given the fact that the original DAO’s inflexibility caused its implosion, and given recent regulatory developments, I am astounded that anybody would think it prudent to launch one. But launch one they have.

DV4ko6aVwAAdZG_.jpg

The basic idea behind this new crypto hustle is that ICO investors can prevent their dev teams from absconding with investor funds, or withdrawing too much funding too quickly, by locking up the Ether they give to these developer teams in a smart contract, and granting the investors a right to vote to either

  • increase disbursements from the pool, or
  • blow up the deal and return the ICO funds to investors on a pro rata basis.
DV4lOZEVQAAFWjo.jpg

There are, of course, problems with this approach. The first is that tokenholders are generally passive rather than active investors: the original DAO could pass resolutions with a simple majority drawn from quorum of 20% (meaning as little as 10% +1 of the investors could bind the remaining 90%). No resolution ever passed because none of the tokenholders actually cared enough about what the DAO was doing in order to participate. Their primary motivation was to sit on their hands and wait for their investment to pay off.

When we consider that there are more responsive ways to ensure capital is used well (such as, say, putting an investor director with wide discretion and a veto power on a startup’s board) it strikes me that the existing solution is more responsive and fit for purpose than the quite binary, all-or-nothing DAO solution.

Second, I feel like I’m taking crazy pills here, because the SEC literally wrote a report about the original DAO scheme, likened it to a security, and cited as authority for this proposition not one but TWO cases relating to an infamous 1970s pyramid scheme that landed its promoter in federal prison for nearly a decade.

These facts diminished the ability of DAO Token holders to exercise meaningful control over the enterprise through the voting process, rendering the voting rights of DAO Token holders akin to those of a corporate shareholder. Steinhardt Group, Inc. v. Citicorp., 126 F.3d 144, 152 (3d Cir. 1997) (“It must be emphasized that the assignment of nominal or limited responsibilities to the participant does not negate the existence of an investment contract; where the duties assigned are so narrowly circumscribed as to involve little real choice of action … a security may be found to exist … .

[The] emphasis must be placed on economic reality.”) (citing SEC v. Koscot Interplanetary, Inc., 497 F.2d 473, 483 n. 14 (5th Cir. 1974)). By contract and in reality, DAO Token holders relied on the significant managerial efforts provided by Slock.it and its co-founders, and The DAO’s Curators, as described above. Their efforts, not those of DAO Token holders, were the “undeniably significant” ones, essential to the overall success and profitability of any investment into The DAO. See Glenn W. Turner, 474 F.2d at 482.

To which the crypto world responded, “whatever, YOLO, we’ll just launch it in Switzerland.” Putting philosophical arguments about the moral case for exercising extraterritorial jurisdiction to one side for the moment, recent litigation in the ICO world has shown that U.S. federal courts are willing to reach across borders in securities litigation. Ignore America at your peril.

Third, if you haven’t seen Jay Clayton’s testimony before the Senate last week on ICOs, it was savage:

There should be no misunderstanding about the law. When investors are offered and sold securities – which to date ICOs have largely been –they are entitled to the benefits of state and federal securities laws and sellers and other market participants must follow these laws…

I believe every ICO I’ve seen is a security.

Unless you’re a tech journalist in which case it was “cautiously optimistic” – an opinion no lawyer I have spoken to since shares:

So where we’re left is this:
Most DAOs appear to be a legal no-no, per the SEC (and likely other national securities regulators as well).
Most ICOs appear to be a legal no-no, also per the SEC (and likely other national securities regulators as well).
Most DAO users are less interested in managing their chosen project than they are in offloading their coins at a massive profit on new entrants as quickly as possible.

https://twitter.com/prestonjbyrne/status/963256287923507200

To close, a DAICO is nothing more than a new acronym for the same old bad ideas. The broken DAO concept, in particular, requires extensive rethinking and movement onto private/permissioned blockchains in order to shed its pyramid scheme-like qualities and serve a useful function. On account of which I am completely amazed that anyone would want to combine the DAO and ICO concepts under any circumstances.

Be smart. Don’t let smooth-talking marketers convince you otherwise – find a straight-shooting lawyer who will tell you what you need to hear. (If you’re of two minds about it, I know a few good lawyers in this space and would be happy to point you in their direction.)

The Cryptopocalypse

Recorded last week, out this morning.

“Cryptopocalypse.” Quite timely title for it, too:

Screen Shot 2018-01-16 at 7.55.24 PM.png

Listen to the whole thing.

Stablecoins are doomed to fail, Part II: MakerDAO’s “DAI” stablecoin is breaking, as predicted

Background

This is a follow-up from an earlier post, “Stablecoins are doomed to fail,” from December 10th. I’ll keep this one short.

Long have I been a critic of the “stablecoin” concept – the techno-magical idea that a cryptocurrency can tell the market what its price should be, rather than the market determining what a cryptocurrency’s price should be (the usual way these things work).

My first encounter with stablecoins was with the Bitshares/BitUSD scheme in 2014. I pilloried it. Following which it fell on its face 100 hours after launch.

In October, I moved on to point out how harebrained a new scheme called Basecoin was. This scheme is similar to Bitshares, only with different names and slightly different functionality for the various moving parts. Incredibly, this profoundly ill-considered project attracted investment from A16Z, a smattering of new cryptocurrency-only VCs and Bain Capital Ventures.

Then, last month, after a developer from the “MakerDAO” team told a reporter that the fact I hadn’t commented on their “Dai” stablecoin project “spoke volumes” about its legitimacy and quality, I wrote a brief post in the space of 20 minutes pointing out that I thought “Dai”, too, was a bunch of twaddle.

The nice thing about predicting the demise of a stablecoin is that, in any free (i.e. unmanipulated) market, you are 100% guaranteed to be right. You just need to wait for your day to arrive.

Today is that day.

1. What I said about MakerDAO

Four weeks ago, I wrote:

Having taken fifteen minutes to review the MakerDAO paper, the Dai system is at its core a very simple cryptocurrency-collateralised derivative contract, with a lot of intermediate steps to confuse its buyers of the facts that (a) that contract is massively overcollateralized in the underlying cryptocurrency (which is Ethereum by default) and (b) in the event of an Ethereum black swan event the value of the underlying collateral, and therefore the value of the stablecoin, will also be wiped out.

 

Speaking generally, the system requires someone who wishes to obtain $100 worth of Dai to post, say, $150 Ethers’ worth of collateral. This, of course, is insane, because it would be easier for the user to simply go to Coinbase and sell his Ether for actual dollars, and he’d have $50 worth of Eth left over to go spend on other things.

 

The system also assumes that overcollateralising will protect the value of the Dai. Not so; it simply increases a Dai holder’s exposure to the price of the underlying Ether. If Ether gets wiped out, the Dai collateral will be worthless, so the user will have lost $150 in an effort to create $100.

2. What MakerDAO said about me

Cryptocurrency projects don’t like being criticized.

Well, nobody likes being criticized. But cryptocurrency projects in particular, with their communities of thousands of financially invested scheme participants eager for the value of their investment to rise, are known to dislike it a great deal. A sample:

The problem with Preston’s brash, hyperbolic, stance is that it favors showmanship over facts. While it may be great for increasing clicks he has backed himself into a corner of never being able to admit he groks it even when he does.

 

Saying something will eventually fail is the safe position of never having to be wrong with the chance of maybe being right some day.

Or this:

 if you didn’t spend enough time to understand this point, you end up saying incorrect things like “[issuing DAI] is insane, because it would be easier for the user to simply go to Coinbase and sell his Ether for actual dollars, and he’d have $50 worth of Eth left over” – selling ether directly for fiat or DAI, and opening a CDP, expose you to completely different “risk profiles” (margin long vs closing a regular long position).

 

It’s not true that the system “only works if the price of Ether goes up”. The whitepaper specifically discusses what happens if the collateral starts losing value, with different “lines of defence” that need to be used depending roughly on how fast it loses value – liquidating CDPs, then minting MKR, then the foundation.

“Read the white paper, bro.” Cute.

3. What happens when reality strikes

This was the dream:

Screen Shot 2018-01-12 at 11.54.10 AM.png

“Always maintain.” Strong language there.

The language sets the standard to which this stablecoin project must be held. For Dai to live up to its promise, a person seeking to redeem 1 Dai for money or money’s worth should reasonably expect to be able to convert it for $1, every single time, without exception.

Even if the marketing were more nuanced, we would do well to remember that near-perfection is also the standard in the grown-up world of finance which many of these crypto projects aspire to supplant.

If a money market fund’s investment income is less than its expenses, it breaks the buck (something that has only happened once in the United States in the last 47 years). If a bank can’t satisfy depositor withdrawals, it collapses. If an SPV can’t redeem bonds that have matured, it defaults. If a company cannot satisfy its debts as they fall due, it is insolvent.

If a stablecoin can’t hold its peg, all the time, every time, it’s simply not a stable coin. It is a mere aspiration of stability, clothed in technobabble, that has broken the buck, and a stablecoin’s users – if stability is indeed what they seek – would be better off just withdrawing cash, depositing money in a FDIC-insured bank or making an investment in a money market fund.

For Dai, then, this is reality:

1ExHDqYV.jpg

The markets are crashing and, as this marmot predicted, Dai is trading at $0.80 on the dollar. It dipped to as low as $0.72.

The coin launched on December 30th. It lasted a grand total of 12 days before breaking. This is better than Bitshares’ BitUSD, whose freshman attempt lasted just over four days. TBD: whether Basecoin can set a new record by making it two whole weeks.

Rather speaks for itself, doesn’t it.

Why this happened, we cannot say. The coin, my friend Rick Dudley points out, remained over-collateralized despite the fact that the value of the collateral dropped 12.5% overnight. This lends itself to the suggestion that not only are stablecoins super inefficient from a cost of capital perspective, but also that stablecoins are not “stable” at all.

Furthermore, this episode suggests that, like markets for every other security in human history, stablecoins are not closed systems and are therefore subject to the vagaries of supply and demand and contagion from the wider markets beyond. In this instance, one market circumstance which might have caused the seemingly irrational selloff could have been a Dai holder getting margin called with respect to some other, unrelated, exposure and needing to liquidate his or her Dai at a loss then and there in order to cover.

If we were talking about any other security traded by grown-ups, mind you, we would not need to have this discussion, as the point would be taken as read by everyone, including the interns. Yet this point does not appear to be something that the existing stablecoin projects, the VCs investing in them, or the media covering them have considered at all.

Mic drop

It may be that this “stablecoin” will recover when the market recovers, or when those with an interest in seeing the project succeed deploy Ether to ensure its price reaches the “correct level.” A return to dollar “parity” for Dai should not surprise us. Stablecoins work as long as the price of the underlying collateral rises, or as long as traders with a financial interest in the coins’ success have sufficient firepower to paint the tape or otherwise subsidize their differences of opinion with the market.

It is not reasonable to assume Ether’s price can  or will rise forever, or that the MakerDAO people have infinite financial resources. Eternal inflation works in cosmology. It does not work in economics.

The teachable moment here is the same as the teachable moment from Bitshares back in 2014. When you make a “coin” which is in form and substance a repackaged exposure to another underlying cryptocurrency, as Dai is simply repackaged Ether, and Basecoin is simply an abstraction of demand for “Base bonds,” and peg that exposure to some meatspace asset like an ounce of gold or a U.S. dollar, a sudden move against the underlying collateral – in this case, 12% – can trigger a sell-off that breaks that peg, and breaks it hard.

Which means that despite all the marketing budget and smooth pitchmen dedicated to this folly, if we’re being responsible and/or honest with ourselves, maybe we should think twice before we use “stable” and “coin” in the same document, let alone the same word.

At this juncture, all I’ve left to say is:

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UPDATE: DAI has a bot problem

Remember what I wrote above?

It may be that this “stablecoin” will recover when the market recovers, or when those with an interest in seeing the project succeed deploy Ether to ensure its price reaches the “correct level.”

Welp, it turns out that was a pretty good guess: the only reason the DAI “stablecoin” was stable is because a bot was wash trading most of the volume in the markets back and forth around the $1.00 mark.

poss_manipulation.png

In case you’re wondering how much volume this exchange was pushing through at the time, on 10 January 2018 (when the bot went down and the peg was briefly lost) Bibox’s Eth/Dai market traded 1981 Eth at $1,200/Eth.

Bibox.png

That’s a market doing $2.6 million of daily volume, but lose one bot – one – and volume collapses to $300.

Draw your own conclusions.