Comment by jmyeet
4 years ago
What's funny about this is that I can recall discussions here and elsewhere from only a few months ago questioning the "guaranteed" super-high returns. I forget who said this but someone awhile ago said in finance said that if someone is promising you consistent above-market returns it's either a scam or there is unknown or undisclosed risk.
And the Crypto Andys were all like "you just don't understand DeFi!" to which the retort is "No, you just don't understand finance".
Finance is the way it is for many reasons. There are thousands of years of lessons that have made the system the way it is. I get the innovator mentality of sweeping away the old but there seems to be a fine line between innovation and ignorance.
I'm just sitting on the sidelines watching people relearn all the lessons of finance the hard way, some because they think they understand finance because because they understand merkle trees and consensus protocols but really most just want to get rich quick.
What most people don't understand about finance is that there are fundamental rules that you really cannot break without consequences.
Anyone who has studied quantitative finance knows that it is a HARD science. I worked with a Nobel prize winner in economics, and the math dominated. There was no politics, no opinions, no ethics involved. It really is a science.
Most social media characterize finance as some ethical vice or organized political power structure - and those people simply don't understand finance.
Talking to people who are looking to just tear down modern finance are no different than climate change deniers, antivax, or flat earthers... and yes, they even exist in crypto (and on HN).
> Anyone who has studied quantitative finance knows that it is a HARD science. I worked with a Nobel prize winner in economics, and the math dominated. There was no politics, no opinions, no ethics involved. It really is a science.
Your comment makes no sense. Just because there's modeling involved that does not make it a hard science. A hard science requires stuff like the ability to perform controlled experiments and replicability, in order to arrive at a high degree of accuracy in predictions.
Throwing around partial differential equations does not turn something into a hard science. You need to meet way more requirements before you're in a position to claim that.
It doesn't necessarily invalidate your point, but I would say astrophysics is a hard science, and yet a ton of it is based on observation and modeling of events we can't control or reproduce.
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The controlled experiments are in the trading. The market validates the model, not the peers.
The scientific mindset is there, but not the publishing because the publishing destroys the value of the model. Once your model is known, others trade against your model and it becomes invalid.
> It really is a science.
Physics is a science. Math is. Or Biology. Finance is not. Because it deals with the madness of crowds.
> Recipe for Disaster: The Formula That Killed Wall Street
> And Li's Gaussian copula formula will go down in history as instrumental in causing the unfathomable losses that brought the world financial system to its knees.
> Nassim Nicholas Taleb is particularly harsh when it comes to the copula. "People got very excited about the Gaussian copula because of its mathematical elegance, but the thing never worked," he says. "Co-association between securities is not measurable using correlation," because past history can never prepare you for that one day when everything goes south. "Anything that relies on correlation is charlatanism."
https://www.wired.com/2009/02/wp-quant/
> Physics is a science. Math is. Or Biology. Finance is not. Because it deals with the madness of crowds.
If you follow the scientific method, it's science. If you write an observational essay, it's not. You can build theories around falsifiable, replicable experiments pertaining to the madness of crowds. The error bars are longer. But they are not infinite.
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Math is not science. Arithmetic and geometry were two of the original liberal arts (defined by Plato). Math doesn’t follow the scientific method. Math is a foundation for much of science and social science, but it is distinct from them.
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> Most social media characterize finance as some ethical vice or organized political power structure - and those people simply don't understand finance.
Just because quantitative analysis has solid grounding doesn't mean that its use is unrelated to ethics. The finance establishment is an organized power structure whose decisions are political.
If you want an analogy, I'm pretty sure that you'll find plenty of people who used ballistics to achieve goals that you would find pretty unethical.
That can also be said for nearly all specializations/ventures of us humans, right? Physics (nukes), chemistry (explosives and refined sugars), electronics engineering ("engagement optimization"), biology (human experiments maybe), philosophy (started many wars), etc. There doesn't seem to be many things where we haven't corrupted in some way. Everything is about ethics and politics(?)
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Using math does not make something scientific. Math is a language based on logic, physics is a science using that language. Economics is Scholasticism that uses math as a language.
This comment is why the humanities should be a prerequisite for all academical endeavors...
The maths used in economics is widely known to be wrong.
When informed the maths in economics is wrong, the economists don't go and fix their maths either.
Economics is more like sociology with some random incorrect formulas written on the black board as set dressing.
Economics might in self loathing claim they are the "dismal science", but the cold hard truth is they simply speaking are not doing their jobs properly. It's a broken research field.
You're not talking about the same "economics". Quantitative analysis, as the person wrote, is pretty good at predicting things.
> There was no politics, no opinions, no ethics involved. It really is a science.
Except that there are humans involved. How do you boil arbitrary human action down to a HARD science?
> social media ... organized political power structure
It's not just social media and it is somewhat disingenuous to dismiss the idea that finance, specially specially international finance, does not have (some form of) power [that actually trumps and transcends political power].
This is a somewhat interesting film that I was watching the other day. It's mere existence addresses the first bit -- that perception is certainly not limited to "social media". And of course the film itself is about a super secret gathering of G8 ministers where they struggle with the decision to put in place some (undisclosed) policy change that they all know will have very drastic consequences for the global average joe.
The Confessions (2016): https://www.imdb.com/title/tt4647784
As a single actor you can bend, but never break the rules. So you can achieve way better returns than the market as a whole does. Over time 10 - 200 x returns is achievable, don't think it comes cheap though, you need to dedicate large chunks of your life to it, and nothing is a guarantee.
However, the math approach to finance works because in its essence it is quantifying human reactions and or emotions, which in large crowds turns out to be more predictable. In the short run, still, software holds its edge with its probability approach but its not smart so that it is basically a rent seeker.
If finance is a HARD science, where are replicated experiments? How did they account for alternative hypothesis?
Will understanding the math make me rich? :)
It won't make you rich but it'll at the very least keep you from making yourself more poor.
Work at a HFT firm in Amsterdam. That type of finance knowledge will make you rich.
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It's really striking how in recent years the Godwin point has been replaced from "everybody who disagrees is Hitler" to "everybody who disagrees is a anti-climate flat-vax earth-denier". It's really not helping getting any point across. In a way it is self-realizing polarization: because you are casting any criticism of "modern finance" into this "bundle of badness" this is likely to reinforce their position.
I think you have the point, and it makes me worried to see your comment downvoted to oblivion.
It is worrying to see that people tend to just click thumbs down when they don't agree rather than to pick the towel and build a strong argument against what they don't agree with.
its the Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel, not a Nobel Prize.
Is the math meaningful though?
> Is the math meaningful though?
"Meaningful" is squishy. Is it strongly predictive, and in some cases, definitive? Yes.
If we could all get a stable (guaranteed) 15% per year, everyone would invest. But the world economy doesn’t grow at 15%.
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To the same extent that money is meaningful.
The 20% APY provided by Anchor was way above the average yields for safe DeFi lending. Which indicated that even among crypto users, this was considered a degen play!
The whole Terra saga was a typical example of speculative bubble. Everyone knew it was risky, but its sheer size and the caliber of people endorsing it (https://twitter.com/novogratz/status/1478535972560195585) was providing an aura of safety. Too big to fail.
It's also similar to the stock market as a whole before it started correcting. Everyone knew valuations were detached from every fundamental except liquidity, yet everyone went along thinking the music just had to keep going.
Every fundamental except liquidity - nice phrasing. It would be illuminating to see more analysis of liquidity in crypto markets and less purely technical analysis.
In the linked Terra Revival post there's this gem of a term:
> Pre-attack Luna
I love how we went straight from "what happened" to "it was an attack."
I'm not surprised the attack narrative is so popular and rarely challenged. Whether there was an actual attack or not, the attack narrative gives everyone a convenient out. The creator can disavow responsibility for creating a stablecoin that doesn't work and the investors get to feel like they weren't taken in by a con but we're instead attacked by an outside entity.
Also the straight up call to start shilling the new network immediately or you won't get a cut:
> Essential app developers looking to join for emergency allocation should signal public support for the net network on Twitter and social channels.
The fact that people are putting their money on the line without realising this extremely basic fact of finance is concerning to say the least.
And the fact that YC actually invested in this company which claimed to contravene that basic rule is staggering.
> And the fact that YC actually invested in this company which claimed to contravene that basic rule is staggering.
StableGains was skimming off the top so they weren’t directly exposed to the risk of the underlying asset.
> without realising this extremely basic fact of finance
More like claiming they didn’t know when they lose it all. Admitting “I gambled and I lost” isn’t a recipe for sympathy and possible compensation.
I invested money with Stablegains rather than in UST/Anchor more directly because of the YCombinator branding.
I figured that if the system collapsed, I would be able to notice it early and withdraw, and that YC-affiliated investor money would help compensate me with more luck than if I had to liquidate out of the system myself.
I withdrew after seeing a friend on Cryptography Twitter send a message showing the destabilization; this turned out to be many hours before Stablegains announced "we will honor withdrawals before this announcement at 1:1", and I got all my money back out.
The YC brand worked here, I think.
> The YC brand worked here, I think.
Congratulations? You weren't one of those who lost all of their money to this YC supported scam. Scams and get-rich-quick or get-more-rich off of the backs of others: that's the YC brand here and increasingly elsewhere. Paul Graham started this accelerator to make himself and his wife rich. YC exists to enrich its owners not as your litmus test for trustworthiness. Money over morality is the motto here. Libertarian values, limited government, startups as silver bullets, founding workers working themselves to death to enrich venture capitalists, and Dunning-Kruger for days in the form of Paul Graham. Are you poor? 'Have you tried making a startup?' is Paul Graham's solution to poverty as with everything else. You might as well ask 'Have you tried not being poor?'
> YC-affiliated investor money would help compensate me
Not sure why you believe a mere investor is liable for any compensation if the 15% APY gambling scheme goes under.
It seems like what worked for you was having a source who was paying close attention, not the branding at all.
Never forget, its always "different this time", even though as you've said its reached the place its in over thousands of years. The mistakes made and mania's are in all the text books and histories so really people should know better, but its seems that nothing is more influential on a person than greed.
> I get the innovator mentality of sweeping away the old but there seems to be a fine line between innovation and ignorance.
I think that this is the "innovator mentality" insofar that, as a group, we tend to idolize/cargo cult innovation as if it was always a good thing. As the pile of things that I miss grows much faster than the things that I feel that I've gained I have come to think of "innovation" as a force for destruction, rent-seeking, and greed, just as much as it can be a force for improvement.
As you say, in many cases things are the way they are because reasons. And some snot-nosed wanterpreneur is just as likely to degrade the situation as they are to improve it.
Here's a funny little anecdote. In the early life of bitfinex, you could lend money to levered traders at ~1000% interest. I did so personally, but only fairly small sums, and I did not sleep easy at night lol. It was pretty obvious it could blow up at any time, but somehow it didn't. Times were different then of course, ecosystem so much smaller - more room to grow.
https://web.archive.org/web/20130411113418/https://www.bitfi...
What I find upsetting about these developments is that over a year ago I shopped around an offer to borrow at higher rates with an early repayment option, backed by an actual arbitrage opportunity, and raised way less than these scammers.
Usually there is an answer, I’m not familiar with the stablegains service but usually there is enough information for you to tell objectively why to use or avoid a service according to your risk profile.
There was enough in the terra ecosystem to come to a conclusion of avoiding completely
> There was enough in the terra ecosystem to come to a conclusion of avoiding completely
There is enough information in a ten or 20% yield to come to a conclusion. That doesn't stop unsophisticated investors from getting screwed.
When they do so because they bought magic beans, I have no sympathy. When are lied to and sold deposit-like products [1], it's infuriating.
[1] https://stablegains.zendesk.com/hc/en-us/articles/4402680375...
Consider what we see if there isn't enough information: https://en.wikipedia.org/wiki/The_Market_for_Lemons And on a totally separate note, consider what we see in DeFi.
That's a great point. Even if there were actually legitimate products that could somewhat use cryptocurrency as part of their offering, they would probably get rid of it eventually just to avoid the association with the endless scams that fester in the ecosystem.
> Finance is the way it is for many reasons. There are thousands of years of lessons that have made the system the way it is. I get the innovator mentality of sweeping away the old but there seems to be a fine line between innovation and ignorance.
I feel like the only benefit of all this is being able to see posttrade services rewritten with some sane API instead of crazy legacy garbage riddled with CSVs.
And the Crypto Andys were all like "you just don't understand DeFi!" to which the retort is "No, you just don't understand finance".
If you believe the statement "if someone is promising you consistent above-market returns it's either a scam or there is unknown or undisclosed risk" it might be true that you don't understand DeFi to some degree. DeFi isn't a single market, it's millions of micro markets that are accessible through what amounts to a single API.
So when you have millions of markets with different returns that can be traded in every imaginable way (and some you probably haven't imagined), throw in an insane amount of dumb money, people willing to borrow at high interest rates (relative to the real world), and a laundry list of factors that introduce inefficiencies into the market, it's quite easy to find pockets of above-average returns if you're smart. I have no idea if Stablegains was actually smart, but it's more than possible to achieve above-market gains in DeFi without exposing yourself to outsized risks.
> it's more than possible to achieve above-market gains in DeFi without overexposing yourself to insane risks
"Insane" is subjective. The point is nothing safe yields ten or 20%. Someone saying "you will not lose your funds" [1] when paying above-market yields is lying.
[1] https://stablegains.zendesk.com/hc/en-us/articles/4402680425...
I run arb and loan liquidation bots, and have for over a year now. These are atomic transactions almost always using flash swaps/loans that exist only exist for the life of the transaction. I am only exposed to potential losses on transaction fees, but have never had a losing day while running production code. My yield on my investment (mostly infrastructure costs) is closer to 5,000%...per month. I will not lose my funds, whether the market is good or bad.
There are funds out there that conduct these activities, I know because I recently consulted for one. They are promising risk free returns and getting them.
There are things that exist in DeFi (such as flash loans) that have no real world equivalent, which is why blanket statements made about traditional markets don't necessarily apply. If used properly, these things do in fact offer "too good to be true" types of returns.
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> DeFi isn't a single market, it's millions of micro markets that are accessible through what amounts to a single API.
Millions of micro markets that produce what, exactly? Last time I checked there has to be at least something on the other side of the calculation what a coin is worth.
You think crypto coins magically make people work harder, better, faster, stronger?
That's not how the constraints of the physical world work.
Millions of micro markets that produce what, exactly?
You seem to be asking me to defend the merits of crypto, which is beyond the scope of this conversation. But generally speaking, most of the coins people actually buy are tied to protocols that are attempting to do things that interesting to at least some part of the population.
But, the ability to prove the provenance and ownership of any asset, whether physical or digital, has value. The ability to move value across borders instantly, cheaply, and reliably, has value.
In a world where so much has been made of fake news, imagine if you could know with absolute certainty that a given quote you read from someone in an article is authentic and given to the specific outlet you are reading it at, not taken from somewhere else, perhaps out of context. Imagine if Google integrated such information/quote verification into its search results, and could use it to prioritize sites with real quotes or information. SERPs wouldn’t be full of trash, and small sites that manage to scoop large ones could get instant #1 rankings. Authenticity verification has value.
The possibilities are endless.
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> it's quite easy to find pockets of above-average returns if you're smart…
Right, but even then how deep are those pockets (what amount of investment can they absorb without being tapped out), how big a time window will they exist for, how will you know if those limits are being reached, and are you really sure you can quantify all the risks?
By definition if it’s a pocket of opportunity, it’s very constrained opportunity. As soon as those constraints are breached it will suddenly stop being low risk and might collapse completely. A lot of people have lost a lot of money on sure fire pockets of opportunity that were great when they lasted.
Of course there are limits to every opportunity. I make money everyday from opportunities that exist on microsecond timescales. I run arb and loan liquidation bots, so I haven't had a single losing day, ever. The last two weeks were quite profitable for me, actually the best two week period I have ever had. There are other strategies that are easier to pull off, such as market making, that have moderate risks and outsized returns.
The point is that these opportunities exist, and they always will exist, you just have to be smart enough to be able to get into them. If someone needed money for infrastructure to run an arb bot, for example, and offered you above market, risk-free returns, it's at least possible they aren't lying to you. That was my point.
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A market where, with work, you can "find pockets of above-average returns if you're smart" is MILES away from one where companies are "promising you consistent above-market returns"
You’ve kind of just demonstrated the OP’s point. What do you think modern finance looks like?
I'm looking forward to your followup post where you lost all your money and can't figure out where you went wrong.
It always happens with people who think they are smarter than the "dumb money" they're taking advantage of. "Sure it's a scam, but I'm smart enough to not be the one getting scammed!"
[[This is what DeFI people actually believe]]
Whoever thinks "millions of markets trading in every way" is a guarantee of making money is in for an awful surprise