Macro-economics
Escaping Debt-money
Backing stablecoins with derivatives and cryptocurrency is an alternative to debt-based money that took over the world in the last 150 years and that continues to dominate DeFi in the form of US treasury bill-backed stablecoins.Commodity money systems lack the political guarantees and infinite printing press of debt-based systems, but they also are free of the blood on the hands of world powers and the extractive effect of inflation and interest-driven rent-seeking, there’s a moral imperative and a practical imperative to at least creating a second type of money.The free flow of capital is also threatened by centralized control and this can entrap people in failing currencies with high inflation - now that we’ve covered the classic crypto-libertarian talking points let’s analyze the downsides.
LUNA and UST were based on the same model as penny stocks where the insiders can’t raise 100k dumping shares but they can take a 100k note from a shark lender who gets unlimited dilution rights to dump on retail, retail comes in for a pump from a penny to a nickel and the share supply ends up going from 100M to 10B and the price ends up at 0.0001 USD, the lender gets 50k profit out of the deal.Not great.
If LUNA had perpetual swaps backing each UST with notional value and the inverse-quoted supply of LUNA that future longs would provide as they buy the liquidations of other longs, then UST wouldn’t have had that sweet 20% Anchor interest rate, it’d have faced variable yield and negative funding in hard times.With inverse contracts you lose twice as many tokens to back the same # of USD liabilities each 50% drop, so LUNA going from $100 to $50 is one cycle, $25, $12.5, $6.25, $3.125, that’s five doublings.
The 10B in UST liabilities would have crunched in half at least once as people redeemed for LUNA to escape negative perp funding and continued dumping tokens, fueling more liquidations, but maybe just maybe, at $3 around a 1B valuation LUNA could have stabilized based on fee revenues now at a modest 40x Price/Earnings ratio and a public memetic perception of moneyness and future value in the ecosystem.Maybe the insurance fund would have emptied out and UST holders would have taken hits of perhaps 10% in perp-swap socializations as liquidations cascaded, losing 500M, the doubling of the money supply would lead to a lower range and cap any rallies in the $10-20 range, but speculators would have gone for it and the system could have lived to fight another day.If there was real demand for UST as an alternative to USDT or USDC that could have floated things along, stabilized yields slightly above 0, and lead people to, as Journey would say, not stop believing.
Stonks
Consider examples in the stock market where corporate buybacks failed to juice returns; Facebook/META sterilizing employee option grants with debt-fueled buybacks isn’t a great example, a great example is JC Penny.JC Penny is a real business based on real goods in real locations with real logistics, bought by real moms who want real clothes.Unlike DEx fees in a race to the bottom, relentlessly gunning for volume expansion based on more minute liquidity increments, JC Penny is only going to sell so many blouses in a year, competing with Target and many others, economy-priced but the margins are still decent, paying rent on shelf space, but with room for optimizations in supply chain, marketing, or even just raising prices and optimizing the demand curve.JC Penny’s revenue has room to grow, not by an order of magnitude, but maybe by 30%.However the stock declined from ~$23 to $0.18 during COVID, where they filed for bankruptcy from the revenue freeze vs.all that debt they issued.They ended up bought out by a Private Equity group, the ultimate OTC sale, restructured their 4B in debt and have it down to 500M 4 years after their equivalent of the LUNA crash.
If JCP had not used leverage to buyback the shares and just used free cashflow, they’d probably still be a public company, and the natural decline of the stock would have been met with an accelerated reduction in float.Maybe they’d even see $23 again, even if at half the market cap or lower.That’s supply deflation.It’s worth considering that the moneyness of a token that is used as backing for a decentralized stablecoin is based on its perceived value-retention while people load up liabilities against it, the derivatives represent a liability for any leveraged long (which, for inverse-quoted contracts, is all longs) and the 100% backed short positions (the decentralized stablecoin) represent the sum of those liabilities, because those holders are really counting on the longs staying solvent even if there is a line of dip buyers behind the liquidation of the current longs.
Debt
Fiat is stability, yet, fiat is debt, and debt is instability, this is the paradox of money we face when we contemplate stablecoins.Only debt backed by the world’s most powerful empires and their humanity-annihilating military capability has the existential weight of escaping this paradox, until the world order fractures.Like with the FTX bankruptcy, you might think it’s not worthing thinking about that because what kind of world would that be anyway, but thinking about that is rather the whole point of this project that started with the Bitcoin whitepaper on Oct.31 2008, and the Chancellor on the brink of the second bailout for banks.
Ray Dalio called the post 2009 QE system a “beautiful deleveraging” though the results were a decade of bizarre zombie economics, WeWork, millennial consulting jobs, crypto pumps and other distortions of market signals.Yet a beautiful deleveraging of the politically captured status quo of debt money may be possible through peaceful co-ordination of many nations rallying energy resources to power Proof of Work cryptocurrency, a vision like Buckminster Fuller meets Milton Friedman.
Bitcoin Futures
We’re obviously not Bitcoin Maximalists because we’re not obeying religious dogmas about only using UTXOs.But we are Bitcoin Minimalists.Bitcoin as money is going to be an essential component of this picture.There should be room for something like Scrypt to drive similar energy economics and provide additional block capacity and fee competition to Bitcoin, but ultimately sLTC and sBTC are going to be a phase 2, with phase 1 being reliance of supplementary liquidity from debt-based stablecoins, and phase 3 will be tapping into the BTC and adjunct money supplies directly as the power money behind our decentralized stablecoin working capital.
Consider Ethena, this is an attempt to bypass all the operational risk of DeFi, from contract quirks to layer 2 shuddering to regulatory twists to oracle lapses to restaker liquidity crises, and just put some tokens on Derbit, Binance et al.and hedge them with the most liquid CeFi perps, then mint a token backed by that, wrap it in an off-shore Trust and call it a stablecoin.It’s done reasonably well though it seems unlikely to overtake USDC and USDT due to the scale limitations of its yield-harvesting model.As US regulated futures list smaller-scale contracts at competitive fee rates, a lot of capital will come in to both go long and capture the cash-carry yield from the contract premiums, this will compress yields and increase Open Interest overall, effectively increasing the total supply of centralized BTC and ETH-backed synthetic dollars and competing with USDT+USDC for total size.
For Bitcoin, probably OP_Cat is going to get activated, facilitating Taproot Lamport signatures for Quantum resistance, multiple KB publishing of ZK proofs, and BitVM contraptions to lock BTC into sidechains where we can have semi-centralized perps instead of the centralized ones Ethena is remarketing.Infrastructure like this could beef up the Chain Abstraction roadmap we’re pursuing and make the vaulting of UTXOs more interactive with smart contracts with cleaner virtualization of chain state; in other words instead of putting the blocks on a chain and implementing Bitcoin or Litecoin in smart contracts to re-create state the hard way, we can make ZK proofs off-chain and verify them in smart contracts and wrap decentralized deposits of BTC in multisigs controlled by those contracts and settle decentralized derivatives that way.The last 20% of the technical puzzle isn’t totally clear at this time of launch but there’s room in TradeLayer’s tx types for additional modularity to complete the picture.Ooh, it’s a lighthouse, what a rewarding puzzle to complete.
Last updated: [1082024]