The myth of "stable coin"

Stablecoins act as a proxy for fiat currency in the crypto-economy, and ostensibly balance the amount issued with the amount of fiat on deposit. They are also ostensibly an on-chain equivalent of fiat currency. This is a cleverly constructed myth, and it is a mechanism by which token holders and exchanges are exposed to extreme systemic risk.

Firstly, the myth that whoever is stabilizing the coin holds dollars equal to issued stablecoins. Of course they don't. In truth, they have assets putatively "worth" the amount of stablecoins issued, but who decides this worth? Well, "trust me bro, I've got it." That's your answer.

When we ask for audits, we get snapshots in time. That should set off major alarm bells. We have no idea whether there was a clever deal with a complicit banker to momentarily swap all the toxic crap on the balance sheet for good stuff, snapshot the balance sheet for the audit while it's stuffed with good stuff, and then swap the crap back. This is of course essentially "renting" real fiat for a very short period of time. This is essentially risk-free if it's arranged well in advance, and the holder of real fiat gets a kicker for their trouble. Furthermore, if the exchange of crap-for-fiat and then fiat-for-crap-plus-kicker is used as a mechanism to value the crap as if it is at par with fiat... then we have a real problem. Because a different accountant can then record the pile of crap on the balance sheet, legitimately, at an established value equal to that pile of fiat. When I say we have no idea, that's actually false. Some of us actually have a very very good idea of what is going on, but most people don't. Because they're very trusting. Like lambs to the slaughter.

The worst part is that exchanges completely control this process. They can play a different game. They can show that ten million crapcoins that nobody is buying but a few fools and thousands of bots trading back and forth on ledger appear to be worth a buck each - because that's what the last two bots swapped them for... wait for a fool who thinks he's caught the next rocket to the moon to buy in with a real dollar, and then claim that the total in all their accounts adds up to ten million dollars. Presto... they just wrote ten million dollars onto their balance sheet, minus a million or so in liabilities (represented by the million crapcoins held by all the bot accounts trading 'em back and forth to make a market and a few thousand crapcoins held by suckers thinking they are trading their way to a lambo). It's that easy.

This might be tolerable if the exchanges and the stablecons (haha... not correcting my typo) were fully at arm's length. But they aren't. It's in the interest of stablecoins to be able lend and borrow, and it's in the interest of those who run exchanges to be able to convert crap into dollars so they can purchase lambos.

This thing is an entire house of cards. And FTX is the latest of the cards at the base to be pulled. The usual process in the wake of something like FTX is a massive investigation, which illuminates how these schemes are played, and changes some rules. Unfortunately, the only way out of this mess for existing stablecoin issuers is to put real fiat on their balance sheets. What that means is getting crap off the balance sheet. And the only way they can do that is if either (a) someone pays fiat for crap, or (b) the crap goes to zero in value. Both of these are bad news for "investors" and/or anyone holding claims on the crap. Self custody or otherwise.

There is a third way however. Trust nobody. That's actually the whole point of crypto anyway, so it's not like it's an outrageous suggestion.

Don't take your dollar and hand it to someone to keep for you, and TRUST them to continue to hold that dollar. For certain, if the pile grows big enough they will eventually give way to the temptation to turn some of it into a piece of their lambo. The "trust nobody" approach means that you take fiat, deposit it at an exchange, and turn it into an actual native crypto you can hold in self-custody. It's that simple. If you feel like playing arbitrage, arbitrage that crypto against other cryptos. If you think it's going to go up up up (relative to other crypto or fiat), then hold it. If you think it's going down (relative to other crypto or fiat) then sell. If you absolutely feel the need to use a "stable coin", then buy it in the moment, use it, and sell it when the moment passes, and expose yourself to "trust-me-bro" risk for as short a period of time as possible. But **DO NOT hold stablecoins on deposit, even in "self custody"**. If you do, then do so KNOWING and ACCEPTING you are holding a bag containing a partial claim on liquid dollars, supplemented with illiquid crap. And if you do, then when the crap hits the fan (because it always does), don't be whining about the crooks who deceived you. Because you trusted them, in the trustless economy. Which is a fundamental breach of the whole point of crypto.

Not your keys, not your crypto. Trust nobody.