Adding Bonds Doesn't Make You "Not A Ponzi"
This time is different, is often the term used before history repeats itself, and as is the case of the ever-elusive perpetual money machine, a trend doomed to repeat itself time after time.
Bitcoin has given us a method of valuing time + energy/participation in the network, it's arguably one of the most elegant forms of measuring value ever created. It provides us with a consistent and accurate measuring stick, while the rest of the world creates subpar value systems, with massive inefficiency and misallocation.
I call it "shitcoin derangement syndrome", so many of the products built are variations on ponzis, that wall street has been using for years and now you're creating miniature versions of it.
Like the ouroboros, eating itself, I watch in less and less shock and horror as the desire for self-harm continues to reach new platitudes.
Hive Backed Interest
Over a week ago I gave my opinion on the unsustainability of %20 interest, why it isn't a real return and why the risk outweighs the return.
One of my key points on the interest payment was there was no borrower on the other side, footing the bill for the interest. I recently saw this post floating around about hive loans and bonds, the BTC backing I will tackle in a later post.
Otherwise, I won't do it properly justice.
So if there are HIVE bonds and loans that should cover my critique should they not?
Yes in theory it should, but we don't operate in theory, we operate in reality, and here is the reality of the shitcoin loan market.
Overcollaterlisation and liquidation
Cryptocurrencies are backed by the liquidity of their market, if there are enough buyers to meet the demand of sellers and inflation creators (miners, validators, stakers) covering expenses, the price can remain stable.
This is a balancing act no coin is able to achieve, even bitcoin struggles with it, and this is the most liquid of the entire market.
When you create a loan you HAVE to over collateralise the loan to value ratio to account for a possible price drop. Depending on the Loan to value, you will have to pay back a certain interest rate.
- The lower the LTV % the lower the interest rate
- The higher the LTV % the higher the interest rate
The reasons for loans
So the primary reason people borrow against their cryptocurrency holdings
- Access capital without losing their position
- Access capital gains without paying taxes
- Leverage up so they can take a new position
- Perpetual loans
It's still an extremely small niche, very few people have enough crypto that their capital gains would make a meaningful difference versus the interest rate they're paying.
In addition, very few people understand how these products work, so most stay away, those that do can get caught up in a liquidation, scaring them from ever using the service as they feel scammed by a contract they agreed to, but had no idea how to manage risk.
As for the leverage and perpetual loans, these are non-economic degen activities.
Chicken and egg and no equilibrium
The real issue with crypto lending markets is that it's hard to create a market out of nothing, to generate enough buyers and sellers to meet in the middle via your ecosystem. You have to have borrowers willing to take out loans and lenders willing to risk their capital.
In the shitcoin space, the amount of people willing to lend is high, but the amount willing to borrow is low.
If we have a look at the largest operators in the space, BlockFi, Celsius, and Nexo, their largest borrowers are exchanges and brokerage houses who take the capital to place trades or make available to leverage traders who they rek.
They use the capital to do market making and have offsetting business interests like mining, while they raise funds to stay capitalised as they hope to reach a point where they have a market where the income from borrowing is enough to cover their obligations.
You can see their desperation in how low borrowing interest rates are, you can see it in how they market offering cashback for taking loans, that this is a real problem.
A problem hive bonds and loans WILL not solve, you're speaking to an even smaller market, and the TAM is not sustainable. Trying to bootstrap it like UST requires serious ponzinomoics, hoping that you grow to a point where you can recapitalise and service debt obligations, you create by the mismatch in borrowers and lenders.
UST or CDO?
You can call me a hater, you can call me chicken little, but what you can't call me is naive. Trying to mirror UST is not a smart tactic and to some it up I leave you with this:
And so the $UST that you create is of the highest quality and of the highest value?
— FreddieRaynolds (@FreddieRaynolds) April 18, 2022
Absolutely
Are you at all concerned about what happens when @anchor_protocol’s variable rates kick in?
I assume no risk for those products myself Mark pic.twitter.com/nILTo7YoKi
Leaving this "I told you so" as a future redemption marked on this blockchain.
Have your say
What do you good people of HIVE think?
So have at it my Jessies! If you don't have something to comment, "I am a Jessie."
Let's connect
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