That's an interesting statement. The first question that occurred to me was: Why does banking have to be threatened? In other words, is this a solution looking for a problem?
A lot of people I know working in crypto saw their families hurt badly by that crises and will happily spend their lives trying to build something else (even if the odds are stacked against them). They protested at OWS and saw little political will for change.
Eventually we are left with the question: Do we just sit around voting every few years for another colour to be in charge, or do we try build something else, maybe it’ll work, maybe not, failure is ok we already live in a failed state, maybe all we need to do is threaten the existing political/financial institutions so that they do things differently or risk irrelevance. Who know. Trends and forces.
Given time, things were nowhere near as bad as you could have been forgiven for thinking at the height of it. But the risk created by the fact nobody knew that caused the credit “crunch” and liquidity to dry up, and while banks were bailed out and recovered, the downstream impacts were horrendous.
That scenario simply isn’t possible even with the craziest, risky-as-shit defi protocols. You can see how much is at risk in every contract for every address, reports could be built automatically, and the risk is defined by the code, there is no ISDA agreement or OTC contract that might cause someone to come along and say you actually owe a bunch more money than you put at risk, and every cent (or satoshi, or whatever) of collateral is accounted for.
So it’d have helped a lot. Albeit the whole financial system would look quite different to how it does today (that’s the goal!).
Also, although the general principles are good and the primitives are increasingly in place, the protocols (financial products) in defi are mostly still “toys” and not, for the most part, ready to replace the current system. There is no technical reason why they can’t though, and progress in that direction is happening even if a lot of defi doesn’t make it look that way.
I think a key idea to pursue is how we could provide privacy for individuals and transparency for institutions/corporations.
And I think it’s important to try ideas. Try something, anything. Accept that most things will fail, that 90% will be shit. Break things, take things apart and rebuild them, remake old ideas anew. Take the same energy i have to getting mods to run in a game, or monitoring the rain in my garden and doing it to money and banking and lending, community currencies, universal basic income, trust networks, etc.
That’s not to say don’t be critical, there is a lot to question and weird speculation(imo a result of the abusive financial system we live in, it didn’t just appear with crypto) but hackernews could do with more hacker mentality on crypto imo. It’s a massive design space for people to try out their ideas for money and debt and gift giving and public services and taxes and where digital worlds and communities meet real world politics and institutions and economies.
I’d like it if my bank was hentai death metal themed not hsbc blandness. And that I can build my own savings account logic on top of it that automatically sends half the profit to animal charities. I’d like to be able to spin up an instant bank account for my new guild of strangers around the world at the click of a button so we can share materials and grow together. I’d like my money to be pictures of dogs not pictures of a president or queen. I don’t think these ideas are silly, dangerous, or impractical. And it doesn’t require the permissions of tradfi. Just public and private keys. Wild.
Once a set of “trusted” actors can issue debt, you have monetary expansion.
In Crypto, we have Coinbase, Binance and Tether - the defacto crypto banks. They have the ability to expand the crypto money supply and promise IOUs multiples in excess of their true deposits.
The success of these centralized exchanges ought to give anyone pause with regards to how truly decentralization crypto really is.
Regardless, defi exchange won’t stop monetary expansion. People with a currency will want to gain a return on those currencies, since they don’t do anything productive sitting in a wallet. Therefore, banks would emerge with deposit accounts who would then lend out loans in excess of deposits. I don’t see a defi way of doing that which would replace institutional banking, because individuals and algorithms are not equipped or financed to analyze the lending risks, fraud, take legal actions, etc..
2008 was caused by starting with undercollateralized loans enabled in part by fake rating agency ratings, and failure of regulators to regulate. That system failed and the backstop FDIC can only write checks up to around a 3% failure.
USDP appears to be the most sound, with USDC after that. You may use any of those or none of those or make your own. You are free to choose. Your body, your choice.
To be clear, banks did not cause the 2008 economic implosion. If you run through root cause analysis, what comes out on top as the trigger event for the avalanche was US politicians distorting markets through legal action that enabled giving mortgages to people who would have never been able to buy a home otherwise. Sounds altruistic, yet, in reality, it ended-up being a destructive force. I remember a documentary where they interviewed various people who bought homes around that time. This one woman worked at McDonalds, essentially made minimum wage and was able to buy a $500K home due to laws that allowed such distortions as "no docs" loans with full federal guarantees.
That and other legal components that eventually resulted in the creation of derivatives where banks could package small fractions of thousands of mortgages into investment vehicles. The game, then, was to write mortgages, slice, dice and package them into CDO's and sell them as quickly as possible at a profit.
Sure, one could blame banks and investment firms for this. No doubt. However, I think the important element to understand here is that, if the government tells you that, not only it is legal to do these things, but they actually want you to --because they want everyone to own a home-- well, what do you do?
Not a good analogy, but, on our roads we have speed limits set by government action. Around where I live it's 65 miles per hour. People drive anywhere between 60 and 80. Lots of people (most?) drive well above the limit. In other words, there's an argument that says it is human nature to push things a bit. Absent enforcement, some people would drive 100+ on a regular basis.
The genesis of the 2008 crisis is related to the removal of financial speed limit signs by government. Not only that, they also effectively said "we want you to drive at speeds we all know are dangerous and irresponsible". Politicians got votes when people were happy because they could buy homes. When the house of cards they created collapsed, we all ended-up paying for it.
I don't blame banks. There is no way in hell 2008 would have happened --no way-- without government removing the speed limit signs. This business of buying votes with handouts has destroyed many countries. The 2008 economic implosion was just one example of this. Latin America and other nations have lots of examples in their history of governments using money and economic policy to buy short-term happiness from the masses in exchange for votes...only to drop them on their heads after the fact.
The fundamental problem is the belief that money is a thing that can be owned and stored when in reality it is just a relationship or a contractual agreement among humans.
The fact that you can own cash and get a guaranteed 0% interest rate even though nobody has signed that contract. E.g. nobody promised that you will get exactly $1 of value in the future. The 2% inflation target is just an expression that this idea is flawed from the start. Think about it this way. The inflation target reduces the effective interest rate that cash holders can demand without anyone agreeing to them receiving 0% interest.
What I am getting at is the fact that everyone, including the economists, assumes that money should be nominally durable. Money is not durable in real terms. It's a market distorting fallacy.
If we assume a barter economy with the option of having money denominated loans but no way to "own" money via cash then interest rates would be dictated by supply and demand and nobody would find it strange that interest rates could be negative when there is an oversupply of grains as the excess grains start spoiling and a negative interest rate could still be more profitable than the spoilage of grains. It's only once you introduce cash, that people perceive the right to pass the cost of spoilage onto everyone else as god given.
Now lets go back to how the modern money system actually works. You go to a bank and you basically promise payment (e.g. through work which ultimately boils down to your time) known as debt to the bank. The bank grants liquid credit which is basically a divisible claim to the debt and thereby a claim to your time. So money is an accounting system for abstract time/labor units.
Well, the unemployed still need to eat and they still need a place to live in. If we are going to be very cold hearted we can call these the storage costs of labor. If you don't pay them, your labor is gone (person is dead). Money lets you pretend that this is someone else's problem, e.g. the government is supposed to take care of the labor (welfare) that you haven't decided to utilize and keep maintaining it.
It's only logical that your money becomes worth less over time (if you assume it is durable). Keeping something in pristine condition requires an external energy input.
Okay, now onto the actual point I am trying to make. The assumption that human needs are endless is wrong, it was only true on a societal level because of endless population growth that is massively slowing doing. Human needs are no longer growing as fast as they used to. There are very few growth opportunities left that let you paper over the inability to express negative interest rates. This also means that the need for investment is going down significantly. Markets are starting to become saturated. Almost nobody but the government is borrowing anymore and this borrowing is meant to raise the interest rate above zero through fiscal stimulus.
If you are a company and you expand production in this environment, then your additional capacity will not earn a profit and even currently unused production capacity is becoming a drag to the economy as it requires staffing and periodic maintenance. Strictly speaking, there is more financial capital in the economy than there are investment opportunities. If saving and investment are balanced, then interest rates must be at 0%. If there is excess saving then the interest rate must go down (even below zero) to encourage people to pay off their debt and get rid of excess capital as the interest on loans slowly approaches 0%.
So there was this final last ditch attempt. Corporations and the rich became net lenders and they simply lent to (risky) households who were buying homes. Bankers noticed some regulatory loopholes and stopped caring about who they are lending to. After all, they are being flooded with money.
A -6% negative interest rate on cash would basically make QE irrelevant and allow price level targeting i.e. perfect price stability with zero inflation. Because liquid money is now freely circulating there is no risk of deflation which means governments can pay off their debts to reduce the supply of money which stops inflation. Unemployment would be very low as the cost of financing in a saturated market becomes 0% and no longer acts as a profitability gate that keeps people unemployed (e.g. growth dependence is gone). I am optimistic enough to believe that any further productivity growth would simply reduce people's working hours rather than keep them unemployed.
Also, if long term interest rates are near 0% then short term interest rates (e.g. on cash and deposits) must be negative to maintain a steep yield curve. Even if all you believe in is a 0% interest rate on loans you'll still need negative interest on cash to encourage people to lend their money out for a longer duration (certificate of deposit). When you think about it, a bank is using your short term deposits to stay liquid, while writing loans that can last many years. You can, without notice, pull out your deposits and the bank is then basically stuck being insolvent for the duration of those loans. That is what threatened banks in 2008 and this is why we did the bailsouts and are still doing QE. To pretend the damn banks are solvent when they aren't. They are being flooded with an endless amount of short term deposits that can disappear at any time.
I know the only attempt at demurrage went so well that they shut it down after not to long, but what do you think this would have an effect on assets over time? Would the demurrage keep the money supply in check long-term? Would people still do what they do now and take out loans to buy assets? I fear that Cantillion Effects would lead to the same cycles we see today. Is your stance that there should never be an interest rate above 0%? Going to have to think more about this, but my gut is thinking is you don't need demurrage except to fix the system we're currently in, in which case it does a great job. But once it's fixed holding cash would go back to 0%.
> It's only logical that your money becomes worth less over time (if you assume it is durable). Keeping something in pristine condition requires an external energy input.
If there was one thing that was going to be durable, it should be financial in nature. I'd much rather see people hoarding cash than houses. PoW coins on the other hand, totally agree with you here. So I suppose I think the demurrage would be based on the upkeep required, and typical currency upkeep is small while PoW is large.
The first thought that came to mind was the Weimar Republic's hyperinflation:
https://en.wikipedia.org/wiki/Hyperinflation_in_the_Weimar_R...
Crypto, and Blockchain, are like little fiefdoms that are being created, and the people who create them, and in the process mine the first couple million blocks, will be the Lords.
As you say, the rich getting richer. And doing it all by hijacking this message of the “little guys” banding together against the establishment.
However that is an implementation decision for each individual project, mostly around how supply is distributed and redistributed, and the inflationary mechanics of the asset. These can be innovated on by forking the original. They are also changeable (technically even in bitcoin, though in reality it seems unlikely), with the risk of forks acting as pressure to make beneficial changes.
What I’m saying here is that it is possible and even desirable to design a cryptocurrency which doesn’t work that way, either from the start or perhaps via an “exit to the community” that over time devalues the stakes of founders and early investors and prioritises the users and value creators within the network.
There are lots of mechanics that can be used for this, and most experiments so far have been limited or naive but I expect to and we need to see more of this if cryptocurrencies etc. are to succeed.
And crypto isn't? The whole thing runs on FOMO
I keep reading versions of this assertion and have yet to read anyone publish a clear list of these "lots" of problems. I am trying to understand. So far, I don't.
In other words, so far I still think crypto is a solution looking for a problem.
Even worse, to me it feels like early entrants and those with millions to throw at crypto made out like bandits and everyone else is in the grips of a Ponzi scheme that will end badly at some point. I could be wrong, of course, I just know too many people who jumped in and got hurt.
An unproven fantasy.
Is this a real question?
You seem to think the answer is obvious. Well, what is it then?
Ok I agree here.
> Well, what is it then?
Banks connected to the political/government controlled currencies tend toward corruption. Banks are part of corruptible scheme. Humans are too greedy with the power of money control.
History backs it up over and over again.
Can you give examples of this in modern first world economies? I am sure there are plenty of examples of banking issues and corruption in third world countries. I am interested in understanding your conclusion that banks tend towards corruption. In other words, it seems you are saying that all banking asymptotically (and inevitably?) end up on the corrupt side of the equation. Not sure I know how to identify that or point out examples myself. Can you help with this?
The broken window fallacy is an answer to getting positive interest in an economy that isn't growing. They are both equally illogical and for the same reason.
The idea of a god given right to 0% interest is the reason why currencies collapse and Bitcoin is sharing that flaw instead of getting rid of it.