I think this shows why having sound reserves matters. Whether it’s China’s Evergrande or Tether or Luna, people are relying on some assets to back the currency. But what happens when those assets themselves become less in demand (say, because the central bank raises interest rates?) Or if we find out (as in the case of Lehman Brothers) that the third party auditors cannot be trusted?
Intercoin should be different as it can be “backed by” the community currencies themselves, ie the goods and services that you can get in a growing number of communities is what gives value to the Intercoin money system. That’s why the dollar and other national currencies are more stable (assuming they aren’t hyperinflated by their issuers).
But in the beginning, people who get paid in local currencies will want to know what “backs” them. And Intercoin “backs” them, in that they are exchangeable for it. But what backs Intercoin? Well, what backs gold? The fact is that there has always been some demand for gold from “whales” (royalty, etc.) and that made people comfortable to use it as a store of value. Same with Bitcoin and so on — the “whales” make the market. Eventually the pension funds may choose to use it as reserves etc. But that is a self-fulfilling prophecy … it is a reserve until it isn’t.
What actually matters is how many goods and services it can be exchanged for. And Intercoin is almost unique in being designed as a scarce currency that is explicitly designed with maximum utility in mind. So that eventually, anywhere you go, eventually, you can exchange it for goods and services. Because of the network effect and the social software. And that’s what really matters, rather than collective mythos behind a coin, because the latter can just as easily give way to something else.
At the end of the day, what gives value to the bank’s money, and the dollar, isn’t so much the gold or “the full faith and credit of the United States” but the fact that people will sell you things for that money, and will work hard to repay loans to the bank given in that money. At the end of the day, that is what gives any currency value.
Luna committed the cardinal sin of issuing debt in a non native currency. Many developing countries did the same thing, of issuing debt denominated in USD when they themselves cannot print USD. To do this properly id imagine you need to coninuously hedge your exchange rates with options somehow but obviously Luna did not do that, so now they are screwed
This is Tether right now.
A bit scary
I still bought some today. Hopefully it comes back for a 100x
It may be worse than we thought for the crypto world…
Update: We got to #1 on Hacker News with this article on our forum:
The Fed raising interest rates creates this massive pressure and instability in the markets. One wonders whether it is worth it… a few years ago I started to say that the Fed may be causing the very recessions and market cycles that it later helps get us out of, when it raises interest rates.
Sadly, this “untethering” of Tether may lead to massive instability in the crypto space, and trillions of dollars wiped out if people start questioning the value of Bitcoin and other crypto assets.
USDT is held by more people and has higher volume than BTC even. And it might be a matter of time for people to start questioning the collective “store of value” narrative of Bitcoin too. Its features, unique in 2008, are not necessarily sufficient as it is “backed by” USDT and vice versa. If belief falters, this can be seen as a “house of cards” that may go down to a lower point.
Most unregulated exchanges use USDT to represent an internal USD balance. They may have a fractional reserve of USDT for cashing it out on various blockchains but they would be hard pressed to switch over to USDC as they hardly have large enough reserves.
A year ago I advocated a “riskless” strategy of highly leveraged USDT vs DAI stablecoin, and posted it on Hacker News. If any of you did it back then, and continued this strategy until today, then that strategy would pay off massively. @Norman do you remember this?
Tether is 96 cents as I write this. But it happened a year later, I advocated this strategy a year in advance, but I didn’t know how long one has to hold the position until it happened.
I write this late at night but eventually Intercoin could help solve this problem.
If Tether drops this could undermine the thesis that Bitcoin and other similar cryptos are good stores of value, because currently their value comes 1% from their utility and 99% from the collective belief (HODL etc.) which is circular and self-reinforcing, similar to various religions etc.
The “full faith and credit of the United States” or the exchangeability of banknotes for gold isn’t the main factor that has been backing the money we use. Real-world currencies that enjoy mainstream adoption in a given area are actually backed by goods and services they can be exchanged for readily in a certain area. Not so for cryptos (excluding services of remote workers such as software developers, which does represent a serious economy).
Here is what we would need to do in order to move the crypto space towards web5 and finally gain mainstream adoption of crypto in the real world:
I would like to share some info that recently received about it as Blackrock/Citadel are involved in self-reinforcing (or NOT?)
Blackrock and Citadel borrowed 100K BTC from Gemini (as stated in their credit book)
They exchanged 25 thousand BTC for UST (all done quietly in anticipation of the attack.)
When the time came, they called Do Kwon from the Terra Foundation and said they wanted to sell a lot of BTC for UST. Since it was a big deal, they told him they didn’t want to move the market and asked him if he would like to buy their big block of BTC at a discount with UST?
Do Kwan take the bait? He gave them a huge chunk of UST, thereby significantly reducing the liquidity of UST in the liquidity pools.
At this point, Blackrock/Citadel promptly dumped all BTC and UST, causing massive slippage and triggering a cascade of forced sales of both assets.
We can see where it goes…
Omg I wish it only dropped 100% it continues to die more & more. On the chance it comes back I keep placing small orders unreasonably low and they keep getting filled.
I wonder if regulators will step in as this is huge!
Unfortunately some people believe in Luna.
Despite being a fan of Cosmos and IBC I never bought Luna. I seen a long conversation/argument on twitter that projected this exact scenario. it was well outwith with my technical remit, but the fact the conversation from two experts could even take place made me uncomfortable. People said no one could see this coming but that just isn’t true.
Heres an interesting post from 2018