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On elastic collateral and its usage.
A thread inspired by you, viscous hordes, who have accurately noted that my flamboyant hand waving was inadequately descriptive.
For the record, I only claimed it was a love letter…1/
A thread inspired by you, viscous hordes, who have accurately noted that my flamboyant hand waving was inadequately descriptive.
For the record, I only claimed it was a love letter…1/
2/ As many of you have pointed out, BTC alone is not an alternate financial system. For that, we need a time-centric cost of capital.
First, let’s finish describing Bitcoin.
First, let’s finish describing Bitcoin.
3/ Bitcoin is a “proof of work” protocol. This means ‘labor,’ of a sort, is what yields the return.
It is an algorithm for the Labor Theory of Value. But in Bitcoin’s case, the labor is done by computers.
It is an algorithm for the Labor Theory of Value. But in Bitcoin’s case, the labor is done by computers.
4/ May seem like a weird claim at first, but an employer receiving the benefits of labor (say, of a company full of people) is a reasonable proxy for someone owning a mining rig.
If you hate that “controlling the means of production” is how the economy works, go sit with Marx.
If you hate that “controlling the means of production” is how the economy works, go sit with Marx.
5/ So that’s proof of work, and it’s one piece. It’s the piece that turns labor into money.
Just like how labor takes gold out of the ground.
Labor into money. ← Proof of Work.
Just like how labor takes gold out of the ground.
Labor into money. ← Proof of Work.
6/ Proof of stake is a protocol for turning “faith in a sovereign” into money, though in this case, our sovereigns will not be countries, they will be crypto tokens.
Faith into money ← Proof of Stake.
But first let’s talk sovereigns.
Faith into money ← Proof of Stake.
But first let’s talk sovereigns.
7/ When you buy a bond and it pays 5% over time, you are saying “I will lock my value into this one currency for <duration> for a 5% yearly coupon.”
You have faith that 5% per year is the price of risks like inflation or that sovereign defaulting.
You have faith that 5% per year is the price of risks like inflation or that sovereign defaulting.
8/ Which is why smaller, less stable countries have higher yields than more advanced countries. The risks -- both of inflation and of default -- are seen by the market to be higher.
But what of crypto?
But what of crypto?
9/ “Staking” works like a bond. You pledge some of your value to the underlying currency for some known period of time. Right now it’s usually like a month or something.
Cryptos with less stable value pay higher yields, like countries.
Cryptos with less stable value pay higher yields, like countries.
10/ Right now proof of stake is in its infancy. We only have “genesis bonds” available to us: primordial bond-like archetypes of a single, short duration.
And that’s fine for now, it’s all very new.
And that’s fine for now, it’s all very new.
11/ But as the space evolves we should expect to see two new features of proof of stake:
1) Multi-duration staking periods.
2) A market for staked assets
I have been thinking about building the second one, but I’m also fine if one of you does it.
I’d be a great board member.
1) Multi-duration staking periods.
2) A market for staked assets
I have been thinking about building the second one, but I’m also fine if one of you does it.
I’d be a great board member.
12/ These two innovations would lead us to a proper proxy for our current capital markets, as they would allow us to price the cost of capital over time (replicating the entire yield curve with multi-duration staked assets).
Now back to BTC
Now back to BTC
13/ If we have a cost of capital over time, this cost of capital and the elasticity of bitcoin as collateral exert pressure on one another, constantly in tension.
If lending/borrowing declines, value of collateral rises.
If lending/borrowing declines, value of collateral rises.
14/ And because these two are now entirely market dynamics (with no small set of parties able to control them), we can envision a properly free capital market.
It’s very exciting.
It’s very exciting.
15/ Now: I didn’t want to write this thread today. I may or may not have already indulged in libations because it’s Friday and we have friends over, so this is admittedly B- work here at best.
This thread was supposed to be your present on Monday.
This thread was supposed to be your present on Monday.
16/ But some of you were so loud I sat down and did it early. Forgive any mistakes, clumsiness, or oversights. If it doesn’t make sense yet that’s fine -- I’ll be back to chat more like usual, just try and not be pricks about your questions until then.
Bon week-end, mes amis.
Bon week-end, mes amis.
