> A true exchange, where you just buy and sell, will never pause withdrawals because they won't be acting with these ponzi-like methods
Coinbase is also offering APY on its deposits through Coinbase Rewards, as does Binance.
This "true exchange" sounds like the no-true-Scotsman fallacy. Literally no one does what you claim. Everyone in the cryptocoin world is doing this "staking" == crappy loans / bonds business.
You are referring to staking. FTX was giving a static yield on deposits. The funding for this came from their marketing budget. Very different from what Coinbase does.
>"staking" == crappy loans / bonds business.
Staking is not a loan. It is a component of proof of stake networks to maintain security. Coinbase provides stacking services, but all they do is pass the yield onto the customer while taking a cut for the resources required for staking (e.g. AWS bill).
Some token networks may market a mechanism as "staking" when it's just a way to keep people from selling. That's a different topic.
Yes it is. You give your money over to another organization, and that organization promises a % yield / APY in return. You aren't allowed the money back until later.
Its totally a bond.
> Some token networks may market a mechanism as "staking" when it's just a way to keep people from selling. That's a different topic.
I'm feeling some "no true Scotsman" fallacy here. If those guys call it staking, then its staking.
> You give your money over to another organization, and that organization promises a % yield / APY in return.
Coinbase is not promising a yield. It would be illegal for them to do so. They are advertising the current market rate defined by the token's network. That rate incentivizes stakers. It is defined in code. If too many people are staking on, for example Ethereum, the network would lower the rate automatically. Just as they are doing, you could stake the tokens yourself with your own hardware/connectivity, or use hosted resources (e.g. AWS).
> You aren't allowed the money back until later.
The yield is paid out according to a defined schedule. Unstaking is possible on some hosted platforms (e.g. Coinbase) even if the network doesn't allow it, but there is usually a penalty.
> "no true Scotsman" fallacy
It's nothing to do with it. I haven't made any qualitative judgements on which network is a "true" staking mechanism.
This article describes the confusion caused by some token networks:
"Somehow, over time, the word ‘staking’ has been repurposed and redefined. Instead of receiving rewards for contributing to chain security with collateral at stake, modern “staking” just seems to mean idk we give you more coins as a reward if you don’t sell your current coins lol."
> If those guys call it staking
I don't know which "guys" you're referring to. Different networks treat it differently. That's all. It's a designed mechanism. The Ethereum devs have no say in how the Solana devs implement staking. Platforms then just provide a hosting service.
I've only provided facts. I don't personal do any staking, or encourage others to do it. Seems you are only interested in arguing, and prefer to not understand reality. Good luck on your crusade!
> Yes it is. You give your money over to another organization, and that organization promises a % yield / APY in return. You aren't allowed the money back until later.
> Its totally a bond.
But in a bond and in a loan you are not guaranteed to get your money back (or the yield), while in staking, you are always guaranteed to get it back because of the consensus rules, right?
So I don't think it's the same thing, as in staking there is no such default risk because the staked coins remain yours [0] (with cryptographic assurance) and the yield is financed by currency inflation, which is guaranteed to happen (assuming there are no major bugs in the consensus rules, and that Coinbase and Binance don't become malicious and try to cheat the rules and get penalized for doing so).
[0] Well, technically they belong to Coinbase / Binance at that time if you use them to stake the coins, because in that case they are the holders of the cryptographic keys.
You're guaranteed to get your money back from an Overnight loan to the Fed. (literally a 1-day loan to the USA's central bank).
This "risk free rate" serves as the basis of the theory behind our entire banking system. The fact that Ethereum decided to recreate this under separate principles is somewhat amusing, but its just that. A recreation of what we're already familiar with in the financial world.
The next question is if the cryptocoin world realizes how important it is to set the risk-free rate as appropriate for their ecosystem to function. Given how arbitrary it was to set the Etherium rate however, I don't think there was much thought put into that in practice. But baby steps I guess. The cryptocoin world is learning things at a different rate than the historians / financial experts who already see where things are going. Bad things happen if you set the risk-free rate too high, or too low by the way.
> You're guaranteed to get your money back from an Overnight loan to the Fed. (literally a 1-day loan to the USA's central bank).
Well, then those loans are also risk-free, right? Because they are also financed by increasing the money supply and the Fed can't spend the money that was loaned to them.
But normal loans and bonds are not risk-free, they have a default risk. Which is the entire reason why when you loan your money, sometimes you can't get it back.
Staking, however, is risk-free, so the following statements of yours are wrong.
> Everyone in the cryptocoin world is doing this "staking" == crappy loans / bonds business.
> > Staking is not a loan.
> Yes it is. You give your money over to another organization, and that organization promises a % yield / APY in return. You aren't allowed the money back until later.
I think the confusion is that they believe the token that is staked is a sunk cost, the same way a business would spend the money from a loan. Like you said, the token will be returned when unstaked.
If I take a loan out to buy and run a pizza restaurant, I can't just give the principal back if it fails. I would have to liquidate the business, which would not be equivalent to the starting capital costs.
The Fed always can return the money, because they control how much money is printed. Therefore, the money loaned to the Fed through the overnight rate is risk-free. That's why its called the risk-free rate.
It may only be a singular day worth of bond / IOU, but its still a loan/bond/debt instrument.
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Similarly, the Ethereum rewards are printed out of thin air, are they not? By the Ethereum staking system? Its not like the Ethereum they print existed beforehand.
> Frankly, I see no contradiction, with what I said in any of my posts. Could you lay out more clearly where you think a contradiction has occurred?
Sure. You said (in the context of talking about Binance and Coinbase):
> Everyone in the cryptocoin world is doing this "staking" == crappy loans / bonds business.
This phrase, in the context of the news we're discussing (about suspending withdrawals), implies that Coinbase and Binance are also incurring in a risk of suspending withdrawals because they might run out of liquidity due to staking (which you said is equivalent to a "crappy loans / bonds business").
However, staking is not equivalent to a "crappy loans / bonds business".
To argue that point, someone said that "Staking is not a loan", implying that unlike loans you can't lose money because of staking, but you said "it's totally a bond" because, I suppose, you're not allowed to get the money back until a certain time.
However, I think that you are missing the fact that unlike with loans and bonds, there is no risk of running out of liquidity because of staking.
If Coinbase and Binance were operating a real loans and bonds business (like banks do), and suddenly all customers demanded their deposits back, these exchanges couldn't force the borrowers to pay back their loans/bonds immediately so that they could fulfill the withdrawal demand. Not to mention that if the borrowers went bankrupt, the money would be lost, which would lead to Coinbase and Binance potentially losing customer funds, also becoming bankrupt and suspending withdrawals.
This seems to be more or less what is happening with some of these exchanges that are running out of liquidity, because they seem to be essentially gambling with customer funds.
But I think in staking it's completely different, because, as I argued, in staking there is no risk that borrowers go bankrupt and default on the loan/bond, as there are no borrowers. Instead, the yield is financed through inflation and the staked coins remain your property throughout the whole staking process -- nobody can spend them, so there is no risk that they can't be payed back.
And on top of that, customers aren't allowed to withdraw the staked amount until the staking expires, so there is no risk that Coinbase and Binance can't fulfill withdrawals because of staking.
Which means there is no risk of running out of liquidity because of staking.
In fact, coins can only be staked if the customer decides to stake them. Which is also completely unlike the loans/bonds business, which happens behind the customer's back, essentially. The latter leads to broken customer expectations (and ruined lives) if/when the loans/bonds business goes under.
Well, that's my understanding at least, but I'm sure I may be missing some points as I'm not actually an expert (or anything close to it) on staking.
VMFXX has federal regulations, where it is _required_ to prove your liquidity reserves _DAILY_. EVERY SINGLE DAY, VMFXX publishes how much money they have that can be satisfied within 1-day, 1-week, and other such benchmarks.
The entire publication is available online, every single day, not only from VMFXX, but also all of VMFXX's competitors (such as SWVXX).
What Coinbase / Binance is doing is "Crappy" because their reporting guidelines are so much worse than what "the real banks" are doing. There's no one checking or double-checking these reserves.
Every single dollar (and even penny) is tracked in a money market fund. The _EXACT_ makeup of the loans is also tracked. The rules for how a "bank run" would be handled, are regulated and stated in advance. Everything has been planned out, discussed, debated, in Congress over-and-over again for the past 100 years as our laws have evolved.
VMFXX handles over $200 Billion of assets, and has been doing so for decades, in a tradition that follows US legal rules for nearly a hundred years (established since the times when the banks did lose a lot of money: back in the Great Depression). Its battle tested, pragmatic, and cheap (0.11% fees/year), extremely transparent, well regulated, well understood.
The comparison to Coinbase and Binance is laughable. There's no regulations, they haven't even been around for a decade, Binance isn't even being checked by anybody (being an offshore accounts), though I admit that Coinbase is at least in the USA and subject to US Law. But even Coinbase's reports on their assets pales in comparison to the information I get from VMFXX's pages.
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I'm trying to show you what a "real bank" does, such as VMFXX / Vanguard, with their "equivalent stablecoins" (aka, money market fund).
No, I mean like when a bank buys government bonds, company bonds, or loans money to customers and businesses.
That's the kind of business that leads to bankruptcy if all your customers suddenly ask for their money back (which you have been lending behind their backs).
> What Coinbase / Binance is doing is "Crappy" because their reporting guidelines are so much worse than what "the real banks" are doing. There's no one checking or double-checking these reserves.
I'm not sure if that's the case, but if it is, then I agree with you.
Crypto exchanges should be the subject of periodic financial audits by reputable firms and as far as I know, some of the more reputable ones are already moving in that direction out of their own free will (to assure customers that are getting worried by their less reputable competitors that are now going bankrupt), even going so far as publishing cryptographic Merkle proofs of crypto reserves (but traditional financial audits are also necessary).
> Every single dollar (and even penny) is tracked in a money market fund. The _EXACT_ makeup of the loans is also tracked. The rules for how a "bank run" would be handled, are regulated and stated in advance. Everything has been planned out, discussed, debated, in Congress over-and-over again for the past 100 years as our laws have evolved.
It doesn't matter, bank runs can still happen when you're in the crappy loans and bonds business.
And when they do, nowadays not only banks get rewarded with government bailouts, but it's always the tax payer that ends up paying the bill, even though those tax payers are not responsible for the bank's risky and immoral (due to lack of customer consent) money managing policies. And the vast majority of those tax payers are not even customers of the bank!
> No, I mean like when a bank buys government bonds, company bonds, or loans money to customers and businesses.
Did you see the asset sheets on VMFXX? Its all government bonds, loans, and so forth. There's no "cash" just sitting there. Its all, completely composed of various kinds of loans (averaging 11-days in maturity).
I've given you a "real bank" (Vanguard, an investment bank specifically but yes, a bank), that's conducting these "loans" / bonds that you're talking about.
I've also brought up SWVXX, Schwab's competitor fund, is a "prime" MMF that consists _mostly_ of commecial paper (ie: loans to non-government entities), with higher levels of risk involved.
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Based on how this discussion is going, perhaps I should focus on SWVXX instead.
There's even "less cash" here than in VMFXX. That's why I'm talking about these money-market funds. These are... the things you're trying to talk about, right? These banks / entities that are making a ton of loans / bonds to each other?
I'm thinking of real-world entities and trying to match them up to what you're talking about. These things have names ya know. They're not just mysterious "banks" out there. People invest into SWVXX or VMFXX, or other such tickers / funds.
> Weighted Average Maturity: 9 days
You see that? It will take 9 days for most of those funds to mature and turn into cash, on the average for SWVXX today. This isn't "cash", its a pile of loans. Very short-term high-quality loans, but its a pile of loans. Is this not what you were trying to talk about?
> That's the kind of business that leads to bankruptcy if all your customers suddenly ask for their money back (which you have been lending behind their backs).
Yes. That's why there's strict liquidity tests, liquidity reserves, and publication requirements for entities such as SWVXX. The risk is real, and we need to keep an eye on it to make sure that Schwab and Vanguard aren't cheating the books.
Those publication requirements simply do not exist for Binance or Coinbase. There's no asset sheet vs liabilities sheets. There's no reporting guidelines. There's nothing.
> I've given you a "real bank" (Vanguard, an investment bank specifically but yes, a bank), that's conducting these "loans" / bonds that you're talking about.
Investment banks are not problematic because the customer is the one who decides how much and where their money is getting invested (therefore he knows how much he is risking, and how it is getting risked).
This is unlike what happens with traditional banks, which is what I was referring to when talking about the crappy loans and bonds business (and lending the customer's funds behind their backs, even if the customer is aware of it and does not consent).
> Those publication requirements simply do not exist for Binance or Coinbase. There's no asset sheet vs liabilities sheets. There's no reporting guidelines. There's nothing.
If that's the case, then I agree, this should change. I would prefer if exchanges themselves would do this and customers would verify this, but even though I'm a libertarian, I wouldn't object to the government requiring reasonable, periodic financial audits of crypto exchanges by reputable financial audit firms because I am in favor of complete transparency[0] (be it regarding government or companies) and I recognize that too many bad apples are entering the crypto business and ruining its reputation (and customers of crypto exchanges are obviously not doing sufficient due diligence).
[0] More transparency can greatly increase the benefits of market-based capitalism, because it works more efficiently (i.e. market participants make better decisions and get more value out of it) when the participants are acting with more information than when they are acting with less information.
> Investment banks are not problematic because the customer is the one who decides how much and where their money is getting invested (therefore he knows how much he is risking, and how it is getting risked).
Do... you know what a MMF is? (money market fund)
A MMF is a federally regulated investment product where 1-share equals $1. Investors invest into MMFs because they are "safe", and have a huge amount of federal regulations to almost-guarantee the 1-share == $1 price point. (but not "totally" guarantee). Small levels of risk are acceptable.
Yes, they're offered by investment banks rather than traditional banks. But the "fundamental trust" that 1-share in VMFXX == $1 is extremely deep.
That's why I keep bringing up this comparison. MMFs are allowed to loan out their money and partake in various investment schemes to generate a yield. HOWEVER, there's reporting requirements, there's investment requirements, there's rating requirements, there's transparency, etc. etc.
All of this giant exercise with crytocoins trying to "make a stablecoin", where 1-stablecoin == $1 all the time is just a crazy scheme to recreate MMFs. That's my overall point and viewpoint.
> That's why I keep bringing up this comparison. MMFs are allowed to loan out their money and partake in various investment schemes to generate a yield. HOWEVER, there's reporting requirements, there's investment requirements, there's rating requirements, there's transparency, etc. etc.
I think that's a good thing, although there are 2 things I disagree with:
1) I believe the investment requirements are a scheme that is unfair and can lead to forced (and unnatural) inequality.
I would replace this with (sufficiently strict) tests of investment knowledge for new investors.
2) In practice the ratings agencies have a less than stellar record, as the way they are set up, they have an inherent conflict of interest. This leads to a false sense of security.
So I would just get rid of these, but I don't see anything wrong with the rest in general (I'm sure there would be some specifics I would disagree with).
> All of this giant exercise with crytocoins trying to "make a stablecoin", where 1-stablecoin == $1 all the time is just a crazy scheme to recreate MMFs. That's my overall point and viewpoint.
It's quite different, as stablecoins can be traded in a completely decentralized way (i.e. peer-to-peer) with blockchain protocols using cryptographic assurances.
But yes, in theory an MMF-backed stablecoin could be traded on a blockchain, and I see nothing wrong with that. That said, an MMF-backed stablecoin would be a bit more risky than a USD-backed stablecoin, due to an MMF being inherently a bit more risky than the USD.
However, yeah.. another point is that the companies that issue stablecoins are also quite far from being sufficiently transparent. They also need to be subject to the same periodic financial audit requirements by a reputable firm as a crypto exchange should!
USDC doesn't keep its USD in "cash". Its claiming its got "commercial paper" backing it. ("Commercial paper" being a codeword for loans, the same 5-day / 9-day loans that make up an entity such as SWVXX). Or government loans, etc. etc. Its the same thing, but worse.
Its no more secure than an MMF as it is. In fact, due to the much weaker reporting guidelines, USDC is likely worse than an MMF like SWVXX.
No stablecoin promises "cash" holdings. Literally none. The best you've got in the cryptocoin world is MMF-like promises, except without any of the MMF regulations.
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There's no guarantees that USDC's backing of "commercial paper" has any good rating at all. What 5-day loans are USDC banking on? Is it Bank of America? Or is it a loan to Binance? No one knows.
> USDC has always been backed by the equivalent value of U.S. dollar denominated assets; USDC reserves are kept in the management and custody of leading U.S. financial institutions, including BlackRock and Bank of New York Mellon
Yeah, I know... what these companies are doing is absolute crap and I suspect that in the future this is going to lead to an even bigger crisis than what's happening right now in the crypto industry.
I suspect that this is a side effect of 1) being impossible to store large amounts of USD cash in a bank, at least without incurring into significant risks of losing it or actually even losing money over time due to negative interest rates and/or 2) being more lucrative to hold these paper products rather than keep everything strictly in cash, perhaps even also 3) lack of moral standards? I don't know.
I think this is even worse than what the traditional banks are doing and I'm completely against it. Especially due to the lack of transparency that you are mentioning.
Just because its a complicated loan/bond doesn't mean its not a loan/bond.
Lending money to somebody else, with a promise for future returns, is fundamentally a bond. It will act like a bond, subject to the economic principles of a bond / loans / etc. etc.
It is an alternative to proof-of-work, which requires capital investment to provide security to the network (e.g. purchase and run Bitcoin mining machines). Staking is a substitute for that capital requirement. You are refusing to understand this simple fact.
If you loan a business money or buy a government bond, they are SPENDING that money to run the business/government. The Ethereum network is not selling your staked ETH to maintain security.
So lets say I own 10 ETH. Explain to me how I get my staking rewards.
Because step #1 involves me transferring that ETH to Coinbase (or some other entity with a large enough ETH basis to serve as a trusted staking entity). That is a loan. I don't own ETH anymore, I gave it to Coinbase.
Coinbase creates an "IOU", saying "I promise that dragontamer will get his 10 ETH back", through some system of trust, contracts, databases and whatnot. It doesn't really matter what the details are, the whole thing is an IOU, a promise to return my ETH later.
Similarly, when I deposit $10,000 into a bank (be it a savings account, or money market account), the Bank writes down an IOU saying it owes me $10,000. The bank then sends the money to the market (and worst-case, to the Fed Overnight loans), and lends the money out. Later, I withdraw the money, the bank undoes the process.
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The only difference is that ETH doesn't allow you to withdraw the money as often as a savings account or money-market account/fund. So its kind of crappier than a normal savings/money market style loan that goes on.
I guess ETH also gives a different level of rewards, seems to be 4.4% (though denominated in ETH rather than dollars).
You DO own the ETH. Regardless of whether you are staking it yourself, or have given it to Coinbase to stake. Similar to how you maintain ownership of your rental property even if you allow a property management company to run it.
This is true if you move your ETH from a self-custody wallet to coinbase (custodial wallet). Either way, you maintain ownership. The tokens earned are taxable as income, just as income from a paying tenant on your rental property is taxed.
Also, the IRS defines crypto tokens as "property." As far as I know, there is no such distinction for bonds or loans.
Personal wallets cannot participate in ETH staking and you know it. The first step is to transfer your ETH to a large scale, trusted wallet, like Coinbase's wallet.
What you own is an IOU from Coinbase saying they owe you the ETH at a future date. The value of this IOU is taxable of course. But the important thing is that if Coinbase goes bankrupt, it is an unsecured IOU / bond that is junior to Coinbase's other creditors.
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Just like how depositors into Celsius "owned" IOUs saying they had BTC or ETH or USDC in Celsius... it turns out that the value of those IOUs is worthless as the bankruptcy proceedings carried forward. Customer deposits, in the USA, are junior to investment banker's bonds that funded the business to begin with.
> The first step is to transfer your ETH to a large scale, trusted wallet, like Coinbase's wallet.
Absolutely FALSE. I don't know how you could possibly be so confidently wrong. One of the big selling points of PoS is that you don't need mining facility/hardware. You only need 32 ETH, and the resources to run the node. NO central entity is required.
"Solo staking on Ethereum is the gold standard for staking. It provides full participation rewards, improves the decentralization of the network, and never requires trusting anyone else with your funds."
Even if you move it to Coinbase for them to do the staking, the custodial wallet is in your name. The same happens with ETH held for trading. You can move it from one exchange to another, and still not trigger a taxable event as long as you own both accounts/wallets.
> Similarly, when I deposit $10,000 into a bank (be it a savings account, or money market account), the Bank writes down an IOU saying it owes me $10,000. The bank then sends the money to the market (and worst-case, to the Fed Overnight loans), and lends the money out.
Incorrect! My understanding is it would be illegal for them to give away your deposits. That includes the Reverse-Repo market (RRP), which is the source of the overnight rate you referring to. The RRP is a contract, not a transfer. Factional-reserve banking means they don't loan out customer's deposits.
Also, you are confused about the users of RRP. It is overwhelmingly money-market funds, NOT checking/saving accounts. This would include Vanguard, Fidelity, Schwab, etc. which are not banks.
"In practice, the vast majority of ON RRP usage is done by MMFs, who have $4.5 trillion in assets. That enormous pool of capital is the mechanism through which Fed policy is transmitted in the money markets."
ON RRP = Overnight Reverse-Repo
MMF = Money-Market Fund
And it is never "spent" by the fed. It is held as a liability on their balance sheet. The reason you see such a high RRP now is due to a shortage of low duration treasuries. They want the RRP to be high in case there is a run on MMFs like in 2008.
Real life bonds range from Savings accounts (which are tied to the overnight Fed rate, with an assumed repayment within days or one week at the worst), to "Junk" bonds to companies and/or governments that are currently going through default and/or bankruptcy (See Greek bonds between 2009 and 2017)
At the lowest risk end, we have the "risk-free rate", guaranteed by the central bank. At the higher risk end, we have highly risky loans (ex: Greek Bonds in 2014 or so). Or mortgaged backed securities. Or student loans. Etc. etc.
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Bonds / loans are a very old economic subject that have been around for hundreds of years (maybe thousands?). There's a myriad of historical subjects and writings on this subject.
In general, the more trustworthy the issuer and the shorter the maturity, the safer the loan is. An overnight loan with the Fed (aka: Central bank of the United States) will be lower risk than a 30-year subprime mortgage. The economics will demand that the longer-loan will (usually) be priced higher (except in times of inverted yield curves, where people think there's more near-term risk than long-term risks). Etc. etc. Its a big complex subject.
But its all about loans and bonds, and money and IOUs and promises and trust.
>Coinbase is also offering APY on its deposits through Coinbase Rewards, as does Binance.
>This "true exchange" sounds like the no-true-Scotsman fallacy. Literally no one does what you claim. Everyone in the cryptocoin world is doing this "staking" == crappy loans / bonds business.
If coinbase statements[1] and SEC filings[2] are to be believed, customer funds should be segregated and not used for loans.
>We will never repurpose your funds: We do not lend or take any action with your assets, unless you specifically instruct us to. Many banks and financial institutions use customer funds for commercial purposes including lending and trading, meaning that they often hold only a fraction of their customer assets at any given time. Coinbase always holds customer assets 1:1. This means that funds are available to our customers 24 hours a day, 7 days a week, 365 days of the year.
Presumably the coinbase rewards product is treated separately. ie. if you put your money there and whatever difi lending platform it's being invested in blows up, you'll lose your money that's in coinbase rewards, but everything else should be fine.
I mean, what are they doing to generate you that money, and how safe is it?
FTX gave customer deposits to Alameda, without much knowledge I'd guess they wanted Alameda to generate that 8% APY, but customers weren't in the know
"literally no one does what you claim", except in the FIAT world, which I see crypto enthusiasts claim FTX was under just as strict government oversight as a FIAT exchange/bank
If your point is to say, even Coinbase are risking traders money, then yeah they are. If someone were to build "the TD ameritrade" of the crypto world, I guess they'd fail because they aren't giving away free money
Coinbase is also offering APY on its deposits through Coinbase Rewards, as does Binance.
This "true exchange" sounds like the no-true-Scotsman fallacy. Literally no one does what you claim. Everyone in the cryptocoin world is doing this "staking" == crappy loans / bonds business.