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FLR / XRP


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Just now, Seoulite said:

Wouldn't it always be easier to have it done automatically? The agent already needs to monitor so much. You could just set a redemption fee, and if the system selects you (remember it is going to select the lowest fees first) then it could take your FLR and automatically use it to buy XRP or DOGE or LTC. Since Hugo has already said the system is able to do this automatically anyway, it makes sense that this would work that way too.

The price of FLR isn't fixed, the price of XRP, DOGE, LTC, others are not fixed. Any agent will want to buy back the XRP/DOGE/LTC when FLR rises, or they fall. Doing it automatically would remove one degree of freedom from the decision making process.  

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50 minutes ago, brianwalden said:

The F-asset system is basically an exchange where the coin prices are pegged at one to one. So instead of bidding on a price, the agents bid based on what fee they'll make the trade for. Agents are the makers and we're the takers.

Someone else also characterized the system in the same way and came to a more liberal conclusion around taxation. I keep coming back to the taxation question because for XRP holders, the difference between participating in the F-Asset system vs not, is a huge one given the generous allocation of FLR against XRP. 

If we take away the minutia of how the system works, you are transferring tokens from your wallet to a system that effectively gives you an IOU for your assets on another system, redeemable at any point. This is very similar to transferring your tokens from a Ledger device to Binance/Coinbase. In both cases, the exchange is giving you IOUs against your original assets. And as long as the originating wallet (with the assets) and the target wallet (with the IOUs) belong to you, the internals of how the accounting of that is managed shouldn't matter. And from that point of view, one could take a liberal view that this is not taxable, with a conservative view that it is taxable.

Does that resonate with you ?

Note: I plan to keep thinking out loud around various tax related challenges around Flare, knowing fully well that we are only guessing, and that it is highly unlikely that IRS will provide guidance, and that I will personally most likely follow whatever my Crypto Tax software does (CoinTracker), and that it is always going to be a risk. Thanks for bearing with me.

Edited by Ripley
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4 minutes ago, jbjnr said:

The price of FLR isn't fixed, the price of XRP, DOGE, LTC, others are not fixed. Any agent will want to buy back the XRP/DOGE/LTC when FLR rises, or they fall. Doing it automatically would remove one degree of freedom from the decision making process.  

I guess I'm not understanding something here. The value in the F-asset system is only going to be FLR, is that correct? If so, then any agent who gets a 'redeem contract' will need to very quickly use that FLR to buy the XRP to redeem the FXRP, no matte what the price at the time. So making that automatic doesn't seem to make much difference.

However, if the F-assets can be redeemed with other value, say directly with XRP or using FDOGE or LTC, then I agree it makes sense to allow that freedom. But if everyone is only using FLR anyway, then isn't it just the same?

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9 minutes ago, Seoulite said:

Wouldn't it always be easier to have it done automatically? The agent already needs to monitor so much. You could just set a redemption fee, and if the system selects you (remember it is going to select the lowest fees first) then it could take your FLR and automatically use it to buy XRP or DOGE or LTC. Since Hugo has already said the system is able to do this automatically anyway, it makes sense that this would work that way too.

Agents will likely be market making across multiple blockchains. Their biggest incentive for participation is the arbitrage opportunity across these blockchains. Every wrap/unwrap transaction goes through an auction across multiple "exchanges" (Agents) each of which (who) has their own strategy for benefiting from arbitrage. Monitoring is not a burden because the whole system is likely to just be a sophisticated software bot utilizing the FTSO system.

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6 minutes ago, Ripley said:

In both cases, the exchange is giving you IOUs against your original assets.

I don't think that's how it's going to work in practice. You are not receiving an IOU, you are receiving a different token. You are basically trading XRP for FXRP. So in that case I think it is going to be taxable just as any trade. Hugo described the F-asset system as a cross-chain DEX. In theory yes it is like an IOU, but in actuality it is a different token that you get and can change any time. 

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1 minute ago, Ripley said:

Their biggest incentive for participation is the arbitrage opportunity across these blockchains.

Do you mind explaining that to me a bit more?

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3 minutes ago, Seoulite said:

If so, then any agent who gets a 'redeem contract' will need to very quickly use that FLR to buy the XRP to redeem the FXRP, no matte what the price at the time. So making that automatic doesn't seem to make much difference.

I think I misunderstood what you were asking. In general, yes what you say is quite reasonable. However, if an agent known that he has issued X FXRP at a price of $X and the price of XRP drops, he can buy back those FXRP any time and then redeem them against himself.

 

5 minutes ago, Ripley said:

This is very similar to transferring your tokens from a Ledger device to Binance/Coinbase. In both cases, the exchange is giving you IOUs against your original assets.

When you transfer your coins to an exchange, all you are doing is transferring them to an exchange.

When you exchange XRP for FXRP you are buying new tokens (you pay a fee), and get new tokens that have (at least in theory) new uses and utility that the old ones did not. (You would only do this if the new use cases that your FXRP can be used for are worth paying the fees for).

The fees are going to need to be quite high as well. Why would I lock up a million FLR for a one time fee of (say) 0.5% when they may remain locked up indefinitely. They have to remain as collateral until the FXRP minted using them are redeemed and if they never are ....

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6 minutes ago, Seoulite said:

Do you mind explaining that to me a bit more?

Depending on how much liquidity you have access to, you can do various things including,

  • Conservatively just maintain your collateral ratios against FLR and just make money off of arbitrage involved in maintaining the FXRP peg to XRP. This is how the issuers of USDC/USDT etc. make their money.
  • Lend partial proceeds of assets (XRP, XLM, etc.) and make extra money, if your risk models say that chances of getting redemption requests across all your crypto at the same time is highly unlikely. 
  • Have bots deployed to measure volatility across currencies and make money off of trading volatility.
  • Do all of the above.
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7 minutes ago, jbjnr said:

When you exchange XRP for FXRP you are buying new tokens (you pay a fee), and get new tokens that have (at least in theory) new uses and utility that the old ones did not. (You would only do this if the new use cases that your FXRP can be used for are worth paying the fees for).

Not disagreeing with your statements. Just playing the devil's advocate here. 

You pay a fee to transfer to/off exchanges too. Network fees. And if your wallet doesn't support staking but the exchange does, then that's an IOU that gives you utility by virtue of being on the exchange. For all we know Coinbase just maintains IOUs for various accounts on their internal private ledger. Does the fact that Flare is a public ledger change how the transaction is treated? 

If there was an Agent that let you park your XRP through a business purely run on the XRPL and has a website abstracting everything out, but internally moves around your XRP through the F-Asset system and gives you your rewards, would that be treated differently from a taxation point of view? Would it matter if the Agent is registered as a VASP ?

A genuine question - Is the Flare Agent system fundamentally any different from the Ren system that lets you wrap BTC ? 

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45 minutes ago, Seoulite said:

Wouldn't it always be easier to have it done automatically? The agent already needs to monitor so much. You could just set a redemption fee, and if the system selects you (remember it is going to select the lowest fees first) then it could take your FLR and automatically use it to buy XRP or DOGE or LTC. Since Hugo has already said the system is able to do this automatically anyway, it makes sense that this would work that way too.

The agents will essentially be cross-network trading bots, their processes will be automatic.

Flare can't automatically buy assets on other networks. That's one of the main problems this whole F-asset system is trying to get around. A smart contract on a distributed public ledger can't have secret keys to perform transactions on other ledgers within it - there's no way to keep them secret.

When an agent gets liquidated his FLR automatically gets sold for an F-asset (I suspect the offer will just go out to other agents using the same system they use to take minting and redeeming orders, but we don't know the details). It's all within the Flare Network. That's what makes it different from minting and redeeming F-assets. Whenever more than one network is involved, Flare uses agents to bridge them.  It's kind of analogous to how Interledger works.

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19 minutes ago, Shime said:

My brain hurts...

Flare is like a sausage maker who instead of just waiting until he had a finished product and handing out free samples for us all to try, handed out blueprints to the factory before the first groundbreaking and left us all to speculate on how the sausage would be made and what it would taste like.

Edited by brianwalden
That's a long sentence.
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1 hour ago, Ripley said:

Does that resonate with you ?

Yes. I see the argument from both sides.

Flare is a coat check service without a coat check room. You give your coat to somebody with a coat check ticket; they give you the ticket and walk off with your coat. When you want a coat back you go back to the counter and give your ticket to somebody else with a coat. How's that work from a tax perspective? I don't know.

Metaphysically, FXRP is XRP, just represented on Flare instead of the XRPL. I don't think anyone would argue about regular wrapped coins.

The difficulty is that pragmatically it's not implemented that way. This solves a number of problems: it removes trust, it gets around money services regulations because nothing is held in custody, etc. But it does this by explicitly not using the wrapped coin model.

I'm more of a conceptual guy than a practical one. I'd like to follow the metaphysical model that F-assets are what they represent. I just don't know that regulators are going to let them have it both ways. Either it's not a wrapped coin meaning agents don't fall under MSB regulations, but exchanges are taxable. Or it is a wrapped coin so it's not taxable, but agents are now MSBs.

Flare is trying to have its cake and eat it too. I hope they find a way to pull it off.

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1 hour ago, Seoulite said:

I guess I'm not understanding something here. The value in the F-asset system is only going to be FLR, is that correct? If so, then any agent who gets a 'redeem contract' will need to very quickly use that FLR to buy the XRP to redeem the FXRP, no matte what the price at the time. So making that automatic doesn't seem to make much difference.

However, if the F-assets can be redeemed with other value, say directly with XRP or using FDOGE or LTC, then I agree it makes sense to allow that freedom. But if everyone is only using FLR anyway, then isn't it just the same?

In a redeem transaction the agents are going to receive FXRP and have to pay XRP to the end user. How they pay out that XRP is up to them. I'm guessing agents are going to want to keep enough XRP on hand to cover their transaction volume, but they're not going to hold onto XRP for each FXRP that they've minted. In fact they're probably going to sell a bunch of it to buy FXRP to "unmint" it and free up their collateral.

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1 hour ago, jbjnr said:

They have to remain as collateral until the FXRP minted using them are redeemed and if they never are ....

The agent himself can redeem the FXRP he has minted. He doesn't have to wait for whoever bought it to convert it back to XRP. He can go buy FXRP himself (or acquire it from doing transactions in the other direction) and repay it to free up his collateral.

If you've ever used DeFi/CeFi collateralized loans, this is essentially what this is. Agents put up FLR as collateral to take out an interest-free FXRP loan from the FXRP-minting smart contract. They can keep the loan for as long or as short as they want, but if the value of their collateral falls too low relative to the loan, it gets liquidated to pay off the loan and square things up again.

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