So in other words, banks reinvest in the next hot thing hoping to make a buck?
Seems analogous to what u say about crypto investing in the next hot new 'coin', which very well is just a proxy to people trying to build something of value.
Seems analogous to what u say about crypto investing in the next hot new 'coin', which very well is just a proxy to people trying to build something of value.
The difference to some pretty much unregulated company that reinvests lots of its money in crypto because crypto has gone up in the past so ‘past performance must equal future growth right?’ is pretty obvious to me.
So the main difference is really that banks run a sustainable model by charging borrowers more than they pay depositors (who are lenders in the fractional reserve model); by orders of magnitude. Being paid out more than is put in should've been a massive red flag to anyone who entertained the Luna ponzi.
In the UK at least retail bank deposits are guaranteed up to £85k per account, so there's a real incentive for the banking industry to police their member as if one fails, they'll all take a hit.
Why does it need to be sustainable? The APR can simply lower once the high APR is no longer sustainable.
Smart contracts doesn't save you here, since the deposit happened when you bought their crypto coins, not when you signed the smart contract.
Stealing the deposits would require
a) Verification happens without any government id (I assume this is true) b) depends somehow on the bank / smart contract authors
Then it would be trivially easy to generate huge amount of "borrowers" who simply "default" on their "loan".
The irony here is that’s supposed to be a joke and not an actual business plan.
At which stage, people with savings withdraw funds because of the lower interest rate and the Ponzi scheme collapses.
The only thing that collapses would be the APY. Everyone can still withdraw their full deposit.
If I make £3000 in interest from borrowers on a set of money and give away £5000 in interest to depositors of those same funds, even before I account for the costs of operations (systems don't develop and run themselves) I'm making a loss.
You seem to be suggestion luring people in with a high rate and then dropping it later. That only really works if there's some kind of lock-up to prevent all your depositors fleeing as soon as you lower the rates again.
If you lock-up funds, generally you have to guarantee the rates for the period of the lock-up otherwise that's a bait-and-switch, which is generally going to get you into legal problems :)
Like a sibling comment you are not accounting for the profit that comes from the collateral.
Maybe a nondefi example would help. Imagine if a landlord got a loan using a rental property as collateral. In this example the lender will now get the payments of rent. Now the lender makes money from both the interest rate on the loan and from the renters of the property. Depending on the demand for the rental property the amount of rent you may collect can fluctuate. This means that some months you may make more money than others. So in order to sustain a certain level of profits the amount of rent you collect will need to be worth a certain amount.
[0]: https://www.investopedia.com/terms/r/rehypothecation.asp
Only if the amounts being borrowed and loaned are exactly the same.
I.e 20% on $100 is less than 10% on $1000
As you wrote it this doesn't make a lot of sense, so I'll explain, in the process I'll actually fix some errors too.
The UK government protects up to £85k per person per banking license. So if you have £40k in accounts at each of four brand name banks but they're actually all part of one huge corporation "Big Banks Inc." with a single license then the government only protects £85k total, 'cos that's just one license.
Unlike FDIC this is not insurance, instead it's a Last Man Standing system. If some banks fail, the government re-coups its loss over time from all remaining licensed banks. So for example if Santander fails, the costs of fixing that problem land on HSBC and other enormous banks. As indicated this produces an incentive to "police" your rivals because if you allow them to go under by not warning of risky practices, you're going to eat that cost yourself.
As an individual in the UK, if the £85k isn't enough you can invest in the NS&I which is a bank owned by the government. Unlike commercial banks NS&I isn't lending your savings to some unknown (to you) borrowers instead they're effectively lending everything to the government, which would otherwise need to borrow that money commercially (ie issue bonds) so it knows what that's worth. The rates aren't great but since it's owned by the government there aren't a lot of scummy for-profit shenanigans like "introductory" rates that then zero out unless you're constantly opening new accounts and moving your money. Since NS&I is owned by the government who also print the money your savings are denominated in, it can't go bankrupt. The money could become worthless, but in that case it doesn't really matter who you banked with and the whole country is fucked anyway.
Mind, the interest is currently so low that it doesn't really make much of a difference.
It turned out that persuading Aunt Sally to buy the new baby £100 of investment that will earn interest and might be worth something when the baby goes to college is hard - whereas Aunt Sally is much more interested in buying the baby £100 of scratch-offs with a tiny chance it wins big but most likely it gets nothing. This is before scatch-offs were legal in the UK as they are now but NS&I tweaked the numbers to offer a product that is (from their point of view as a bank with many savers) just a bond, but from the individual saver's point of view works like a lottery.
There is a reason why payday loans charge extortionate interest. Their bad loan rate is usually sky high. Their returns are substantially lower.
Basically whether it works or not depends on if they could print money that holds value. Obviously they couldn't.
probably why there is so many instances of banks getting caught laundering money for criminal organizations by the billions
> They are heavily audited and have strict rules about speculation.
you can audit blockchains. you can't audit a bank's database and have to way for the next panama papers leak
If only these "heavy" audits and "strict" rules could stop the incessant corruption we see all around the globe in federally insured banks.
People who think crypto is shockingly bad just haven't been paying attention to banking. Sure, crypto is full of small scams and because of most of cryptos open fundamentals you can expect those scams will never grow into federally insured banks. That isn't the case for private banks who have been getting away with the worst scams for far longer than I've been alive.
People are straight-up rug-pulling in the crypto world for tens of millions of dollars, outright scams, and the scale of crypto is a fraction of the banking world. I bet you'd be hard pressed to name a couple equivalent scams banks have pulled in a first-world, financially regulated economy. I'm not talking about some rogue employee ripping off accounts, I mean organized fraud.
Anyone who has ever actually worked with or in the financial industry knows how crazy the regulation is. It's far from perfect, but saying it's worse than the crypto world is laughable.
Gamestop was 140% short! Is this uncommon? Many people seem to think not.
The corruption in wall-street runs so deep that tax payers have to foot the bill when no middle class person would look over the toxic loans being packaged up pre-2008 and think that wasn't a scam. This crashed the world economy, it's hard to imagine a bigger scam ever being possible without the former bank CEOs running every financial branch of the government promising bail-outs to the "too big to fail" scammers.
We're still stuck on this[0]?
[0]: https://www.sec.gov/files/staff-report-equity-options-market... @ Page 25
Many people are confident naked shorting happens and GME hit 140%, the highest ever according to that report. So yeah, consider me skeptical that the SEC was able to find evidence of a non-scandal and used that evidence to report a non-controversial finding.
You can bury your head in the sand and pretend the market is fair if you want, but I'll stay skeptical.
Incompetent managers destroy companies. Sometimes those managers try to deflect blame for their own failings by whining about short sellers.
This is silly. Of course it is uncommon - if it was common we would see short squeezes all the time.
Unless your claim is that corruption and its effects somehow uniquely apply only to bankers, I don't see what's the purpose of pointing this out.
All investments are speculative and involve some risk. But outside of crypto, few of them are purely so.