Transparency will kill stablecoins | Interview with Mikko

), Author: Tang Han, forwarded with authorization.

Currency is a delicate trick.

Profile of the interviewee: Mikko, the author of "Handbook on Stable Digital Currency", is a pure currency scholar.

First, let’s talk about the original intention of this interview.

Stable currency is a hot topic in the bear market. In the past few weeks, news of stable currency issuance has been heard endlessly. The plunge of USDT has caused panic in the circle and intensified people's attention to stable currency.

Mikko once wrote a widely circulated article - "Handbook of Stable Digital Currency". This article has supported many writers in the industry. They adopted or even plagiarized the views in this article, but did not give the source. However, those articles are always half-understood, because they do not have the knowledge structure and reserves like Mikko.

secondary titleStablecoins do not consider the need for decentralization

MikkoCarbon chain value:

I saw that you once said in the article "Handbook of Stable Digital Currency" that the stable currency design based on the quantity theory of money and Fisher's formula is meaningless, and even the algorithmic central bank is meaningless. But the problem is that most stablecoins are now designed based on these theories.

: It cannot be said that it is meaningless. But there will be a problem, that is, who will decide the rules of this system. Take the Taylor rule for example. If Taylor is the president of the Federal Reserve, he may use the Taylor rule because that is the theory he put forward.

In this way, in fact, everyone has their own algorithm. For example, on the issue of monetary policy operation, you want to formulate a benchmark, but everyone has different benchmarks, so who will decide which benchmark to use? It has a centralization problem, which cannot be avoided.The so-called Code is Law comes with an additional question. Since Code is Law, who decides the code? So I always think that there are many projects that do not need to be decentralized. Centralize what should be centralized, and consider decentralization when it should be decentralized.

MikkoCarbon chain value:

:yes. In this way, it is actually equivalent to accepting the supervision of traditional industries. Your entire regulatory system, legal system, and legal framework must be mapped from that traditional industry.

secondary titleThe lower the issuer's profile, the better

Mikko：Carbon chain value:

So you think that outside the existing legal system, there should be a separate currency in cyberspace, which is not very linked to legal currency.

(Yes, but) it doesn't have to be electronic or non-electronic, network or non-network in nature. I think the most important thing is to externalize the entire traditional sovereign and hierarchical monetary system. It has nothing to do with the administration as a whole.

Now, people's distribution system is actually a complete framework of currency, taxation, and government. But if it is in the category of numbers, if we look at BTC and gold, we will find that one of their commonalities is that there is no issuer (non-issuer), which is their brilliance.Then if there is an issuer, or the founder's digital currency, there will be founder risk, similar to the sovereign risk of sovereign currency. For example, ETH and EOS have this risk. Everyone always pays attention to the founder, your knowledge structure, and your orientation, so as to value the projects you initiate. Once there is something wrong with you, for example, you have a crazy idea one day, or your brain is short-circuited one day, and you do some extreme things to your project, the digital currency you issue will be seriously affected.

Mikko：Carbon chain value:

This is actually the best. In my opinion, if you issue a currency, you'd better be low-key and low-key. Otherwise, the market will easily value the entire project you initiated based on you, which is equivalent to valuing you as a person.

secondary titleStablecoins are a great business for borrowing money for free

Mikko：Carbon chain value:

Why do you want to make stablecoins? Basically every week we see news about stablecoins.

As a stable currency, there is no large amount of income that can be cashed out immediately, but from the perspective of the business model, small profits can still be made.You take GUSD for example. In real life, the issuer of the stablecoin earns interest on depositing the U.S. dollar in the custodian bank, but if you use the stablecoin, you have no interest. It is equivalent to letting him take a free interest. It deposits that money in a trust, and the trust company will definitely pay it interest. In the US currency market, this means at least 2% risk-free arbitrage.

Mikko：Carbon chain value:

Recently, several major domestic exchanges, such as Huobi and OK, have said that they will issue their own stable coins. Logically speaking, if they issue 1 million yuan of stable currency, there should be 1 million yuan of RMB lying in the bank correspondingly, earning a little interest. But I always feel that this is a pity. This year is the trough of asset prices, and it is actually more cost-effective to invest.Yes. From a mechanism point of view, stablecoins are not much different from banks absorbing deposits or issuing short-term redeemable debts.

MikkoCarbon chain value:

Then can I understand it this way: so many companies and institutions now want to issue stable coins, which is actually a financing behavior?: It can be understood almost like this. From the perspective of the capital structure of stocks and bonds, it is even clearer. ICO is like equity financing, and stable currency is similar to debt financing. During the bull market of digital currency, everyone has a great desire to raise funds through equity, because the whole market is in a risk-taking mood, scrambling to issue coins for hype. Later, after finding out that there are chicken feathers all over the place, investors are more pursuing safety-needs. Focusing on redemption rather than capital appreciation, stablecoins emerge as debt financing and safe assets. This is very consistent with the traditional financial market, and the fundamental logic has not changed.

MikkoCarbon chain value:

There is deposit insurance for the money stored in the bank, but if it is exchanged for the stable currency issued by these exchanges, will it be impossible to withdraw it?

: Credit risk always exists. But I don’t think those big exchanges are that stupid, and they will definitely give priority to guaranteeing payment.

If you use reserves to buy treasury bonds, the liquidity problem will not be too big. Even if you get run on, you can repurchase at any time to raise a sum of money, and then use this money to redeem, or directly liquidate these assets in the market.

Carbon chain valueStablecoins are now "old wine in new bottles"

Mikko：Carbon chain value

Many stablecoin projects just package themselves as stable. In essence, it may be an ABS (asset-backed securitization) project, or a monetary fund. ——In fact, many of them are monetary funds. For example, if you buy a bunch of risk-free assets, you use these assets as collateral to issue a certain currency, which is not much different from a currency fund in essence. For example Yu'e Bao.

Carbon chain valueThat's why I don't think there's much new in this trend right now. Because it is not scalable enough, it is actually a limitation, or it has regressed to the old currency level, applying a new concept to the old thing, and everyone is still playing the old one.

MikkoCarbon chain value

: Have you considered the stable currency that does not use legal currency as collateral? For example, BCH tries to build an ecological closed loop by investing in some local companies, digital currency banks, etc. offline, and then promote its BCH. It tries to open up a new path outside the legal currency, allowing people to use the currency it directly issues instead of being linked to the legal currency system.

: I don’t know much about BCH, I don’t understand why people want to use BCH, just like when buying Bitcoin in the early days, there were also many currency holders who hoped that Bitcoin could be circulated as a medium, but at that time, as a currency holder But I couldn't find a reason, which also bothered me very much. Currency does not urge people to use it because of "environment" or "ecology", and cars cannot be driven just because they are full of gas, there must be motivation for people to use them.

The reason why money can become money is because all goods or services are traded through it. When we trade, we must want to convert the commodity in our hands into something that is more reliable and stable, or something that is widely accepted by everyone, right? As long as you think like this, the payment medium you use must be legal tender, not BCH.

Why? Because the legal currency in the old system has a natural advantage: all goods and services can be connected and traded with it as the core. If you continue to ask, why can fiat currency obtain this connection of purchasing power? Pushing forward to the history of gold as a currency, why can gold obtain this connection? We don't know anything about it, or it's hard to attribute it, it's a process of historical evolution.

JPKoning has a blog post that talks about this evolution process—that is, the change from the gold standard to the credit currency standard. At the beginning, in the balance sheet of the central bank, the asset side was gold, and the liability side was the issued currency. If the central bank is privately owned, the shareholders of the central bank will feel that there is nothing to do with gold here, why not lend it out to collect interest? Shareholders have a right to demand returns, right?

Why? Because he exchanged gold for claims on the state. Then it further closed all the redemption windows for this gold, why? It is because he used all the gold to buy national debt, and then migrated to the current legal currency system. Therefore, what you hold in dollars is essentially a claim on the U.S. government, because the Federal Reserve holds all U.S. debt and national assets, so the current currency is a claim.

secondary titleA Conception Based on Tax Power

Mikko：Carbon chain value:

The current stablecoin approach is that it is equivalent to nesting layer by layer, and he accepted the original system. When you accept USDT, USDT holds U.S. dollars, U.S. dollars hold U.S. debt, and U.S. debt is the liability of the U.S. Treasury Department. The U.S. Treasury Department holds the tax rights and their rule over all entity citizens rights, such as the right to put you in jail.

Carbon chain valueThen I once thought that if the private currency wants to get rid of this framework, then he must first find a similar digital currency tax right. If a project has the power to tax digital citizens, then this can be a source of digital government currency. It is mirroring traditional government, but it is not traditional government.

Mikko：: I think it should be a big concept. First, there is a digital community, and then there are a group of digital citizens in this digital community, and then they can be taxed, and then there will be a real digital currency.

Carbon chain valueIt's not about taxing them first, it's about fulfilling certain obligations first. Because rights and obligations are equal. The source of power must be because you have assumed certain obligations, such as the government providing a good governance system and infrastructure; mapping to the blockchain project is the relationship between the project party and the currency holder.

Mikko：Carbon chain value

: When it comes to tax rights, I suddenly find it very interesting. I saw before that BCH was still discussing whether to charge miners a handling fee at a certain meeting, which is actually a bit like the concept of tax rights.Yes, concepts like gas are actually taxes, but the premise of taxing them is to fulfill their obligations. If the project party wants to map such a traditional system, it must first have code is law. Secondly I have to have the Ministry of Finance. Like I communicated with some teams before, I said that many teams will issue a digital currency now, but they will not issue bonds denominated in their own currency.

Mikko：Carbon chain value:

Yes, few teams issue bonds denominated in their digital currency.In fact, isn’t STO very popular recently? STO is moving closer to the traditional capital market, further strengthening the compliance of equity and creditor's rights in the field of digital currency. We invented another new word, but nothing fundamentally changed. It is actually securitization, a way of playing traditional financial assets. These new words are always derived from traditional concepts, just repackaged.

Mikko：Carbon chain value:

Is block.one of EOS similar to the governance department of a digital community?If they can clarify their obligations to perform, then he can create certain tax rights, rights and obligations are reciprocal. If they can't create this balance, for example, don't fulfill any obligations, but impose a lot of taxes on users, this kind of currency system must not be sustainable.

MikkoHowever, I feel that these teams do not actually have that much ability to fulfill their decent obligations.

secondary titleCan other assets replace tax rights as collateral for currency issuance?

Mikko：Carbon chain value:

I would like to take issue with the issuance of money based on tax rights. In some African countries, people use phone credits to offset debts and even use phone credits to buy goods. Does this mean that people may issue currency based on some infrastructure in the future? Considering that human beings may live in a highly digitalized world in the future, computing resources are as indispensable as water and air, why can't we issue currency with computing power resources?

So what kind of collateral is better to choose? Because your currency is perpetual, you issue it and it will exist forever, so for a perpetual liability or a perpetual currency, does it have to correspond to a perpetual value?Yes.

Mikko：Carbon chain value:

Yes.

In fact, why we say that the currency of the current fiat currency system is valuable is because people recognize a prerequisite (assumption): the government will exist forever. It is different from the family sector. The family sector may die and there is no way to continue, so its value model is not sustainable. But the government's model is perpetual.

In fact, I have also asked many numismatists around me before, and I said that if you were looking for a perpetual asset, what would you choose.

I am also thinking about this issue myself. Only time is eternal. Therefore, all perpetual assets are actually eternal and indefinite things in the creation time dimension.

Therefore, many people think that: a commodity, a certain asset with a time limit, or a certain service, as long as it has value, it can be used as a mortgage to make a stable currency. This idea is wrong. why? Because none of them are sustainable. You take ten-year U.S. bonds as collateral, what will happen after ten years?

The maturity mismatch problem in traditional finance also exists, which is also a headache for the administrative authorities. This is the case with many insurance companies today, with long-duration liabilities and short-duration assets. For example, when allocating bonds, he can only allocate ten-year treasury bonds, because there may be no longer-term treasury bonds, or the amount of long-term debt is very small compared to the amount of debt. In this way, there will be a reverse term mismatch in its balance sheet. Most people cover the pot every day, borrowing short-term money and then buying long-term assets. It is debt long-term money invested in short-term assets.Imagine an aging society, with more and more elderly people, pension liabilities are increasing, but there are fewer and fewer assets that can be purchased (because the elderly have low investment preferences). This is an economic issue.

Mikko：Carbon chain value:

Can we directly assume that this kind of infrastructure can only be purchased with this currency in the future? This kind of infrastructure is essential, such as network fees and computing power.

You have to assume that something can only be subscribed with this currency, right? But why do you want to set this mandatory? Why does it have to be purchased with a specific currency as a commodity? Intuitively he doesn't make sense to me.

Taking bitcoin as an example, early players are willing to settle some commodities and even frameworks directly with bitcoin, so the currency circulation of this system has not been eroded by the fiat currency system. But later, with Taobao buying coins and exchanges buying coins, they had to be embedded in the purchasing power benchmark of fiat currency, and the problem became completely different.

Carbon chain valueI used to buy things directly with RMB, but now I have to exchange RMB for a certain currency, and then use a certain currency to buy this commodity. For ordinary people, isn’t this adding more transaction links in vain? I never thought of buying coins for spending. The idea at the time was simple, it was an asset, nothing more.

Mikko: But like the Ethereum network, if you want to use the computing power on it, you can only use gas.

Carbon chain value：ETH。

Mikko：: Then what do you use to buy gas?

Carbon chain valueHow do you get ETH? Did you dig it out?

Mikko：Carbon chain value:

No, I bought it in RMB.

That's right. So the settlement currency you finally approve is legal currency, not Ethereum. You can guarantee that he will use this currency to buy this product, which is no problem, but you cannot guarantee what people will use to buy this currency. You cannot guarantee the means of obtaining this currency.In other words, even if you get it from mining, people will trade it over-the-counter, so it is impossible for you to set restrictions on him (no exchange with the fiat currency system).

Mikko：Carbon chain value:

I see. You want to use it as an underlying currency, but everyone does not recognize it, and unconsciously returns to the dependence on legal currency.

Yes. Everyone's ultimate goal is to exchange this currency with fiat currency to buy gas. People don't use gas as a normal exchange holding currency, because it is not beneficial for everyone to do so compared to holding fiat currency. Why do I have to hold gas to shop? You have to give me a reason first.So you can't force users to use a currency and claim it's stable.

Mikko：Carbon chain value:

Not to mention that you don't even have the ability to force everyone to use this currency.

And even if there is a stable thing behind it, you have no way to force everyone to use it, just like when you issue gold round coupons, people will not use it if they don’t trust it. As long as there is an issuer, there will be a layer of credit risk nested.

Stability does not guarantee you currency. Stability is not a prerequisite for a currency. Many people think that as long as this thing is anchored to legal currency, I will definitely use it, but in fact it will not. For example, if your USDT is bound to the U.S. dollar and anchored at 1:1, will I exchange the U.S. dollar for USDT when I hold the U.S. dollar? Won't. Why should I do this for no reason? I have to have this kind of motivation. Unless there is a motivation, for example, if I want to use USDT to buy other digital assets, I will exchange USD for USDT; not because your USDT is very stable, so I have to hold it. People don't do that.Because I think that the purpose of people holding currency must be mixed, and it is impossible to have a single demand. It must be because your currency has been coupled, or connected, with all the broad goods and services in the world. I think that after holding your currency, I have the possibility of holding many other things. to hold.

Mikko：Carbon chain value:

I see. This is a bit like we want to exchange RMB for Japanese yen or US dollars. I hold US dollars because I can use US dollars to invest in various assets in the United States. I hold Japanese yen because I can use Japanese yen to invest in Japanese assets. He connects a possibility.

No matter how advanced your technology is, there are still so many people who want to press gold bars under their pillows and under their mattresses. It's just that it looks stupid, but it's people's choice, you can say he's primitive, right? But people feel that there is a sense of security. Then you put USDT in the person must make him feel insecure.

secondary titleTransparency will destroy the stablecoin system

Mikko：Carbon chain value:

What is being transparent will destroy it?

If all these things are transparent, you know that the US dollar corresponding to USDT is stored in a problematic bank, and you know exactly how the bank’s assets are. You can see that there is a large A pile of bad debts that may be about to default, will you still hold USDT? Won't……

Carbon chain valueIn other words, the more transparent this institution is, the more likely it will die. Why? Because all his balance sheets are displayed in front of you, as long as you are a normal person with financial knowledge, you can see the liquidity, redemption and solvency issues on the entire balance sheet at a glance, so the more transparent you are In fact, it will definitely lead to a run, so the 100% existence of a certain bank cannot guarantee that there is no risk at all, because the bank also has its own balance sheet.

Mikko：Carbon chain value

: If I have sufficient savings in US dollars, can I avoid a run on it?

Have it? There must be a maturity mismatch in financial business. The shortest term risk may be the overnight risk.

What's the meaning? That is, USDT usually has very good liquidity, but everyone does not know which bank the USDT money is stored in, whether there is any problem with this bank, and whether he has misappropriated the money. At this time, it has good liquidity, and no one questions it. But one day, if there is a sudden tail event, assuming that the asset side of the USDT custodian bank defaults, everyone will redeem the USDT.

Carbon chain valueJust like I told you just now, how do we go from the gold standard to the legal currency standard. On the first day, everyone saw that the central bank's balance sheet contained 100% gold, so they felt safe. If you see 70% of the gold the next day, it’s okay if you see 30% of the national debt, but if you see 70% of the national debt, but the remaining 30% is financed to a very, very bad credit Individuals, people will definitely run on the legal currency.

Mikko：Carbon chain value

: This sounds like a very subtle trick.

This is a very self-deceiving point in modern monetary science or the financial industry, that is, everyone actually knows that there is a maturity mismatch, but everyone has to accept it.

If you don't accept it, then the system will collapse, there will be no credit expansion and monetary expansion, then everyone will be in a more "monk" state, that is, austerity, that is, you can't borrow money—or no Borrowing exists. Bank credit cards and Ant Huabei no longer exist, because these loans are all given to you by the bank, and there is a mismatch in terms of maturity.

If the entire modern monetary system loses credit, it will become no credit no money. But once there is credit, there will be a risk of redemption.

It is not the same as equity. If you take a bunch of stocks and ask others to cash them, they will say that you are crazy. But debt is different. The essence of money is debt. If you go to the bank to save money, you will be very angry if the bank doesn’t give it to you, but if you invest in bank stocks and lose money, that’s another matter.