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patio11's profile
Patrick McKenzie
Patrick McKenzie
Patrick McKenzie
@patio11

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Patrick McKenzie

@patio11

I work for the Internet, at @stripe, mostly on accelerating startups. Opinions here are my own.

東京都 Tokyo
kalzumeus.com
Joined February 2009

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    1. Patrick McKenzie‏ @patio11 5 Apr 2018
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      A Bitcoin exchange has issued a product which they characterize as a Tether credit default swap. https://www.coinex.com/announcement/detail?id=26 … It will not surprise you that it is not actually a CDS, nor fit for the purpose you would want to use a CDS for, on *either side* of the bet.

      9 replies 35 retweets 101 likes
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    2. Patrick McKenzie‏ @patio11 5 Apr 2018
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      A CDS is, conceptually, insurance on a debtor defaulting. You can, for example, buy a bond from Bank of America and then purchase a CDS which says "If BoA defaults on $COMPLICATED_DETAIL_HERE, this contract pays $X." for some number wildly lower than $X. (14 bps per year)

      1 reply 2 retweets 6 likes
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    3. Patrick McKenzie‏ @patio11 5 Apr 2018
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      Importantly, you trust that if Bank of America defaults that your counterparty exists, has $X to their name, and still has payment rails to pay you $X. Otherwise, that's just stupid, right? Guess how these guarantees play out in Bitcoin-land.

      1 reply 3 retweets 18 likes
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    4. Patrick McKenzie‏ @patio11 5 Apr 2018
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      Since Bitcoiners are skeptical of contracts (unless they come with embedded bug bounties), the "CDS" is fully-collateralized, sorta. To write a $100k CDS on Tether you first give the exchange $100k and then they keep it until settlement. Wall Street chortles at wisdom of this.

      2 replies 4 retweets 23 likes
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    5. Patrick McKenzie‏ @patio11 5 Apr 2018
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      In the event a credit event happens to Tether, the Bitcoin exchange is going to vanish in a nuclear fireball, along with your $100k. Except it wasn't $100k, it was Bitcoin-denominated, because of course you wanted Bitcoin exposure when you tried to hedge your Tether exposure.

      1 reply 2 retweets 19 likes
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    6. Patrick McKenzie‏ @patio11 5 Apr 2018
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      But remember that complicated legal code which would define a default in the grown-up world of a CDS? Since Bitcoiners don't trust complicated English, they went with simple math: settlement is against a weighted average of the Tether price on a particular exchange.

      2 replies 1 retweet 9 likes
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    7. Patrick McKenzie‏ @patio11 5 Apr 2018
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      This seems to be based on the intuition that Tether prices would go lower than their $1 face value if Tether had a credit event. That is highly non-obvious to me. Consider, for example, the case where Tether is known to have the funds available to satisfy 20% of all claims.

      2 replies 2 retweets 5 likes
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    8. Patrick McKenzie‏ @patio11 5 Apr 2018
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      Does that mean the fair value of a tether is 20 cents on the dollar? Well, if Tether were being liquidated by an orderly process in a court that haircut all depositors equally, yes. But nobody should have the prior expectation of that happening.

      1 reply 1 retweet 6 likes
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      Patrick McKenzie‏ @patio11 5 Apr 2018
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      Instead, the scenario is probably "first 20% settled at par, next 80% remain in limbo forever." So if you have balances at a Bitcoin exchange which are notionally dollars but actual tether, and you can withdraw in physical tether, you should be willing to pay *more* than par.

      12:29 AM - 5 Apr 2018
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      • Joachim Schipper James Burns Andrew Hires John Lee Rhoads Falcon Darkstar Tristan Harward Aaron Wall
      1 reply 2 retweets 7 likes
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        2. Patrick McKenzie‏ @patio11 5 Apr 2018
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          "What?!" Your end objective is an actual USD in your hand. You have an account at an exchange with $100,000 in the balance but no USD banking. Your only offramps are to cryptocurrency; the only USD-denominated crypto is Tether. You should prefer paying $2+ per Tether today.

          2 replies 0 retweets 5 likes
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        3. Patrick McKenzie‏ @patio11 5 Apr 2018
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          Because tomorrow, Tether will be worthless. This causes the value of the Tether CDS to *decrease* when Tether becomes shakier and then increase (sharply) when the uncertainty is removed by Tether failing. This is not a desirable curve in a CDS product.

          1 reply 2 retweets 18 likes
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        4. End of conversation

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