From the "Jack and the Beanstalk" entry about the story at Wikipedia:
"""Outwitting the giant, Jack is able to retrieve many goods once stolen from his family, including a bag of gold, an enchanted goose that lays golden eggs and a magic golden harp that plays and sings by itself. Jack then escapes by chopping down the beanstalk."""
That's all from the 1807 moralized version, the 1734 version doesn't have any golden eggs, goose, or harp. In the older version the giant swings a sword at him and dies himself instead by the protection of a magic ring Jack found on the way up. Then the giant's human servants appoint him king of the castle.
I think you're both right, the 1807 version published by Tabart added the moral justification for the killing of the giant which is still common today. But the story may originate in pre-history oral tradition, where it's anyone's guess whether or not Jack is a remorseless violent thief.
> In crypto it is common for one exchange to do all of these things, to run the exchange that matches trades and also the website that takes customer orders and also the bank that lends customers money and also the market maker that buys what customers are selling and sells what they’re buying.
One thing, well there are thousands, but one thing traditional finance does far better than crypto as the above quote points out, is separation of duties.
Exchanges, allow for trading.
Clearing houses handle settlement.
Back offices/prime brokers handle custody of assets and margin allocation for those that want to trade on margin
Government and self regulating agencies handle compliance and oversite.
This means that when there is a failure at one of these, the rest go on mostly unaffected.
FTX was handling trading, settlement, holding of customer funds, margin allocation/loans and regulation.
So when FTX failed/was found out as a fraud, the entire thing went belly up.
Crypto will get there with separation, its considered a best practice, but it takes time for people to realize why traditional finance is structured the way it is.
The one retort you may come up with is that the major sell side institutions do alot of these, but you'll also be aware that they are very securely firewalled away from each other.
Some sell side institutions own their own trading venues, but they are ran as arms length separate companies.
When Lehman went bankrupt no one who primed with them lost their shares held by Lehman as those were firewalled away from Lehman's trading business and Lehman couldn't touch them to cover its own losses.
In each collapse we learn new lessons. In this latest crypto crash we learned a few things:
1) that you can't give unsecured loans to even the most blue chip of names( 3AC in this case) as everyone can go bankrupt, defi has seemed to learn this lesson and weathered the storm well
2) everyone was essentially doing the same trade, either piling into USDT's 20% farming premium or in the case of sell side institutions like Celsius, just lending out customer deposits to the big hedge funds. And when those trades stopped working, everyone lost their money at the same time and tried to recall their loans at the same time.
3) Exchange tokens are garbage. They have value as long as the exchange is going well, but as soon as the exchange has even the tiniest bit of trouble, they go to zero. And every exchange will have troubles at some point, even if they are well run and in no way fraudulent.
Exchange tokens, not even once.
4) Crypto is big enough to be called its own asset class now. That's great, but just like traditional finance's asset classes, there is no such thing as diversification in a single asset class when the entire asset class is going down.
or put another way. You can't have a portfolio of crypto only holdings and say you are diversified as there is no such thing in a bear market. You need to diversify across multiple asset classes if you want to preserve wealth
> One thing, well there are thousands, but one thing traditional finance does far better than crypto as the above quote points out, is separation of duties.
From the perspective of most technical people in crypto, FTX was traditional finance. Traditional finance doesn’t run on-chain, and you have to trust the people running it. See FTX and Coinbase for an example.
In opposition to traditional finance is decentralized finance. Decentralized finance is implemented via smart contracts and cannot steal your money. See uniswap for an example.
There’s a gray area in the middle with things like Tether, USDC, and rollups like zkSync where the creators have a privileged key that allows them to steal all the money deposited into it.
> “Decentralized finance is implemented via smart contracts and cannot steal your money.”
This sounds very good until you realize that “DeFi” also can’t receive or send you actual dollars or euros — the thing that people actually hope to get out of these trades. It can’t steal your money because the money to steal isn’t there.
So the toy financial system remains just a toy, and you’re at the mercy of such high-quality operators as FTX, Binance and Tether to get any of your profits out one day. Good luck.
IMO Levine’s article is too forgiving on this point when he writes that DeFi looks pretty good after the crash. Well, duh, it’s just a sideshow in the great crypto retail circus; a hall of mirrors to keep you busy while the exchanges pick your pockets.
All those gray areas also happen to be the only way for defi to interact with traditional markets. I think an important implication of your argument is that your entire economic life needs to happen in the crypto economy (from getting paid to buying groceries to paying your taxes) to be protected from the myriad scams that thrive at crypto's entry and exit points.
I see your point but I'm having a hard time figuring out how Tether is anyway different from FTX?
Both require trusting someone else and both have off chain components to how they work, it seems like a distinction without a difference here.
Can you add more colour as to how those are different because I can easily see how they are very similar?
I think the difference between traditional finance and FTX is the oversite piece and the separation of duties piece.
Traditional finance places a large roll on oversite and compliance to the point where people complain about all the rules and regulations that have been built up to protect people, and to be fair to allow government oversite.
FTX had no oversite and therefor its hard to lump it into traditional finance as compliance and oversite are bedrock must have pieces of traditional finance.
Also as was my main point, traditional finance requires separation of duties, given that FTX had none of these, its very hard to call it traditional finance without destroying the meaning of the term or watering it down so much that its meaningless.
So far there is only evidence that Tether has mis-appropriated SOME of the money it claims to be holding, whereas FTX lost basically ALL of the money. As long as you are optimistic on the "SOME" fraction being small in comparison to the gigantic size of Tether, you can hope that Tether is still a low risk for losing your value.
>As long as you are optimistic on the "SOME" fraction being small in comparison to the gigantic size of Tether, you can hope that Tether is still a low risk for losing your value.
What is the "size of Tether"? Do you mean the total customer deposits, or do you mean the assets of Tether Limited Inc?
The percentage of customer deposits lost and whether any customer deposits are lost are distinct things.
Once the owners' net equity is negative, who will be holding the bag if not customers?
In the event that whoever runs Tether has committed financial fraud on a large enough scale to lose, say, 5% if the total value, which is billions of dollars, and they are now felons and fugitives facing certain lifetime confinement, what possible incentive could they have to return the other 95% to you?
How, exactly, do you think the story here is going to end?
What if there was an organization that served the same purpose as Tether, but was overseen by a well-regarded US regulator that also regulates depository banks? Would that make any difference to the analysis here?
Ditto. The people who get off on unregulated things irritate me. Regulation came about for a reason. It’s not just to control you and make the rich richer. It’s also to help prevent exactly the sort of thing FTX did.
> Crypto is big enough to be called its own asset class now.
I'm not sure this is true. Crypto is certainly a big pile of assets, but it seems (to my non-expert eyes) to be an amalgamation of corporate bonds, stocks, futures contracts, etc, all traded on a special platform. Does the platform make a DeFi governance token fundamentally different from common stock? Or are these assets just extra sketchy members of existing asset classes?
You do have a point that crypto assets are vulnerable to total ecosystem collapse across asset classes, but that would also be true for assets originating from a single country (e.g., if the UK or Japan somehow collapsed overnight, I would expect that to impact all assets from that country).
There are no corporate bonds or stocks traded in crypto. There are some tokens that are made look that way, but when you scratch the surface they are nothing more than company loyalty points because legally it’s not backed by any asset or cash flow. FTX’s now infamous FTT token was such a pseudo-asset.
I found Nicholas Weaver's argument in [0] that a DAO governance token is conceptually indistinguishable from stock to be pretty compelling. Similarly, how is an "ICO" conceptually different from issuing a corporate bond?
Legally speaking, of course, you are 100% correct that there are no corporate bonds or stocks traded in crypto. My firm belief is that this is not because crypto is unique or special, but simply because the crypto community normalized ignoring securities law, and enforcement agencies have not yet caught up.
Is the ICO is an illegal confidence scam because an ICO is a genuinely novel thing to do or just because the issuers were criminals? I would argue for the latter.
Assume a non-criminal company filed the correct paperwork to issue a bond, set normal terms for when and for how much the matured bond could be redeemed, and then somehow legally allowed it to be traded on a blockchain instead of on a traditional exchange. That's just a corporate bond, right? The fact that it's on a blockchain doesn't make it special.
Tone is hard to convey online, so let me clarify that I am arguing that all ICOs are illegal, with the absolute best case being that the issuer is "just" a scofflaw selling an unregistered security and flouting all relevant regulation.
> Is the ICO is an illegal confidence scam because … the issuers were criminals?
The causality works the other direction.
> Assume a non-criminal company …
Yes if you assume a normal and legal thing (a legal corporate bond) was in fact another thing (an ICO token) then it would be legal.
Much in the way that if you took a Honda Civic and modified it sufficiently that it could fly it would be an aircraft. Until I see someone do that a Honda Civic is a compact car.
I don't think we're disagreeing so much as making unrelated points. I'm arguing that if someone modified a Honda Civic so that it could fly and then said, "this is an airplane now, so I don't need to register it as a car or obey the speed limit when I drive it on the highway," then they are either full of shit or lying to themselves. If you use it as a car, you need to comply with laws for cars.
It's hard to tell whether a crypto advocate believes what they're saying.
Obviously, crypto is pretty much wall-to-wall criminality, but sometimes someone looking to ride the coattails of that might actually be sincere in speaking of it like it's a legitimate institution, because they want it to be.
IMHO, HN should stop humoring it, and consider outright banning advocating a criminal enterprise.
I can't tell if your comment was made in earnest or meant to troll, but yes, the #1 problem with crypto is that it assumes it can solve a human problem with technology alone.
Banning crypto would probably be self-defeating, but applying existing regulations to crypto would take care of most issues.
If we could collectively stop pretending that a financial instrument is unprecedented just because it's done on a computer, we could leverage existing laws. It's not like we have to ban a new kind of murder every time someone synthesizes a new poison.
Once people are literally throwing billions of dollars at you, I have trouble imagining a person who is immune to having it warp their perception of what is normal and socially acceptable.
Crypto is solely, and entirely, a means to commit crime. Some of that crime is “OK” like evading currency controls in places we don’t like or buying drugs we think should be legal. The rest is normal kinds if crime.
It’s not an asset, it has no productive value whatsoever.
Nobody is going to learn anything except “wow that was fucking stupid we shouldn’t do that again” and then all the people who learned that will die, and then we will, in fact, do it again.
Investment scams are literally as old as the concept of investment.
Every ounce of energy and mental effort spent on crypto will be wasted.
