Road to Productive asset backed money

This article is going to skip the theory about what can be used as money etc and boil it down to its very essentials and lay down our vision for how we intend to create a better form of money that is backed by productive assets.

The 4 pointed star

In order for something to be used as money it needs to have the following 4 key attributes

  1. It needs to be backed by something valuable
  2. Someone else who already has other things that are seen as valuable things is willing to accept it in exchange of them (Network effect)
  3. It can be used to do perform day to day transactions
  4. Can be scaled in an almost unlimited manner to meet the needs of an ever expanding economy

Let's consider 4 different forms of money and see how each one of them measures against it

  1. Fiat money
  2. Gold
  3. Bitcoin
  4. Stable coins

Within stable coins we will investigate some of the key ones such as USDT, USDC, DAI and sUSD each of which is pegged to the USD but achieves the outcomes in a different manner which leads to limitations in scaling it.

FIAT

Fiat is the most common form of money. It is backed by something, the word of the government. A system of fair laws or the threat of guns. Either are valuable.

Within the sovereign nation that is issuing the currency it will be accepted (generally everywhere).

Note that in certain scenarios when a country's system of governance is failing the fiat money issued by the government becomes unacceptable even within that country. Exhibit A: the Zimbabwe Dollar.

But generally speaking you can use fiat money for all day to day transactions, shopping, investing, speculative trading etc.

And a country can mint its own currency in an almost unlimited fashion. It is subject to certain pressures (such as inflation) but no hard constraints.

Banks

Within fiat there is an interesting sub category which merits attention.

Most money in circulation today is not issued by the state, but rather created by Banks. I am not going to go into the details of the fractional reserve, but essentially they create money when they issue a loan.

All that is done is they take charge over some valuable collateral and then make a ledger entry in their system that the person borrowing has a claim of certain amount with them.

Presto you have money!

The reason it works is it measures against the 4 pointed star.

It is backed by something valuable. Because the bank is part of an interconnected network of banks and has recognition from the state they will accept its ledger entry as a valid claim. What this means is you can withdraw your claim in the form of hard notes from the bank or transfer that balance to someone else with some other or the same bank. The bank effectively acts a node among a network of nodes that has the right to mint money provided it meets certain benchmarks.

GOLD

Gold meets the first 2 criterias, it is backed by something valuable and most other people will be willing to accept in exchange of other valuable things.

However it fails on the next 2 criteria, it is no longer used for day to day transactions (albeit it once was) and the reason it is not able to do so is because it could not be dynamically adjusted to the needs of an expanding economy. One of the big reasons depressions used to last long was because once demand was destroyed the economy would enter a mexican standoff where everyone was waiting for everyone else to take the initiative.

Only when the gold standard was dropped conclusively it became possible for governments to step in and create back stop demand and address market failure situations.

BITCOIN

Bitcoin is often called Digital Gold by its proponents and that is true based on some criteria but not others. One major difference between BTC and Gold is that atleast Gold was used as money for a large period of history. BTC never got going as a meaningful way as a mode of conducting transactions. BTC also suffers the same flaw that gold has that it cannot be dynamically adjusted to meet the needs of a growing economy and ends up being deflationary.

STABLE COINS

Stable coins start making things a bit more meaningful.

They are pegged typically to USD which is valuable and the successful stable coins are accepted as a means of exchange by others who are willing to accept them in return of other goods and services.

USDC is purely custodial and is backed 1:1 with actual dollars. USDT is make belief where they claim it is backed but offer no evidence (believe it or not this is the biggest stable coin). DAI is backed by an algorithm and a range of collateral which is predominantly ETH. sUSD is backed by SNX and has a different mechanism to DAI to achieve its peg.

All 4 meet the first 2 parameters.

USDC is unlikely to scale beyond a point as it requires collateralization of actual cash. USDT is magic money based on collective delusion.

Proponents might argue that fiat is based on collective delusion as well. However fiat has the backing of rule of law and enforcement via the threat of guns. USDT has often flirted with oblivion and one day it will likely meet its fate.

DAI and sUSD are interesting applications. DAI has recently moved beyond ETH as collateral and plans to accept invoices, real estate and other real world assets as collateral.

Its mechanism is fairly complex where a synthetic is minted by locking in some collateral and a system of arbitrage by 3rd parties ensures that the peg is met.

sUSD has a crude but effective self sealing mechanism.

Its native token SNX is used as collateral and on staking you get sUSD. They have network effects where they have built a trading platform where the sUSD is accepted and they also incentivize those who provide liquidity to sUSD on Uniswap.

sUSD struggles on the first criteria. It is backed by SNX but that may or may not be valuable in the long run. It is like sitting on a stool and trying to lift it. Although to their credit they have managed to do it.

SNX value is linked to the adoption of its trading platform and given its success in driving the adoption of that SNX is valuable. Hence for now sUSD is backed by something valuable.

But by providing incentivization to those who accept sUSD outside of the system they have managed to meet the second benchmark effectively. Being pegged to sUSD it can be used for day to day transactions and is already used for something interesting which is its trading platform.

sUSD however might struggle on the 4th criteria, as the value of sUSD is linked directly to the success of its trading platform.

SNX value is derived from the trading platform and you cannot mint more SNX than what the traction of the trading platform dictates. sUSD cannot be minted at scale.

DAI technically can scale especially now that it can allow other assets beyond ETH. However where DAI has been struggling is its ability to hold its peg.

It has a significantly complicated arbitrage system that it uses to meet its peg. It has multiple levels of levers which it tries to pull actively to achieve the peg but it routinely struggles with that goal.

DAI has been losing market share steadily due to this inability.

That potentially leaves an opportunity open for

A stable coin that accepts various different forms of collateral like DAI but has a SNX like mechanism to achieve its peg.

It would have a trading system, money market and various other applications built that would accept that token and would also have an incentivized liquidity pool against other stable coins where those who provide liquidity are rewarded with the yield as well as governance tokens.

The governance token holders can then vote on which collateral can be accepted as collateral as well as get fees from the platform.

Initially only the most liquid onchain assets should be accepted as collateral. renBTC is a good candidate to start as BTC has orders of magnitude higher liquidity than ETH as well as other chains.

Later real world assets can be directly added as collateral and be used to mint the stable coin. The minting can be done in a federated manner where anyone who has the assets that meet the benchmark is able to mint it.

The road map for collaterals would look something like this

LTC -> XRP -> BCH -> BSV -> BTC -> Listed shares -> Receivables -> Real Estate

Note that we are starting with smaller asset pools so that the system can steadily scale. Such a stable coin would be accepted in our OTL as well.