Original title: "Dust on Crust》

Original compilation:GaryMa, Wu said blockchain

Summary

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Summary"Dust on crust"In this article, Arthur Hayes revisited the classic (Why, What, How) questions of why the cryptocurrency industry needs stablecoins, what to do with stablecoins, and how to use stablecoins, and conceived a method based on "Bitcoin margin + reverse forever". "Renewal Contract" is a synthetic USD stablecoin NakaDollar (NUSD) with no liquidation risk issued by the underlying mechanism. Arthur Hayes believes that due to regulatory restrictions, future market value growth of the compliant USD stablecoin will be limited and unable to match the growth scale of the industry, and hopes that the industry will If the talent team can devote itself to developing similar products to NakaDollar, it will help."dust"Spring is here and we are entering what is known as the "dust on crust" phase of the ski season."crust"is a skiing term that refers to a condition that occurs on a snow surface in which fresh, dry snow (

) above. The conditions are very challenging because this thin layer of ice can easily crack or become very slippery, making it difficult for skiers to control speed and direction. Powder snow on the snow surface also increases friction, making skiing more difficult. Therefore, skiers need to be extra careful, maintain control, and avoid being too aggressive when sliding in these conditions.

The cryptocurrency market has a similar life cycle. Since Satoshi's initial sermons, his disciples have built many castles on dubious, hard, and flimsy foundations. Stablecoins in particular, one of these foundations, the link between cryptocurrencies and fiat financial markets, are currently the subject of a great deal of scrutiny and panic. As concerns grow, it is worth revisiting and reminding ourselves of the raison d'être of stablecoins. Only then can we understand why their continued existence still matters, determine what form they most appropriately take, and determine how we can best remedy the current situation.

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Why Stablecoins Are Necessary

Bitcoins are produced through the process of mining. Bitcoin miners expend energy, competing against each other to quickly solve a complex mathematical puzzle. The winner of this contest is rewarded with newly created bitcoins. This is one of the few ways to earn bitcoins.

The most common way to get bitcoins is to buy them from other people. In the beginning, OG miners were basically the only way you could buy bitcoins (since circulating supply was low, they were effectively producers). You most likely bought (and still do) in US dollars because it is the global reserve currency. Therefore, the most widely cited Bitcoin trading pair was (and is) BTC/USD.

The ultimate question is, how do we eliminate the need to use dollars or any other fiat currency to buy bitcoin? Solving this puzzle requires most of the world's largest economies to pay for goods and receive wages in Bitcoin. This is the dream of any true bitcoiner, and if we succeed, many people will work to earn bitcoins, eliminating the need to use banking services. But despite all our efforts, it is still possible that we will never reach this ultimate state.

Right now, we're trapped in a kind of purgatory. We have escaped the hell of the pre-2009 pure fiat financial world, but we have not ascended to heaven with our Lord Satoshi Nakamoto, sitting on high and looking down on the dastardly fiat devil.

What to use stablecoins for

What do we need to use fiat currency for within the crypto capital market?

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deposit and withdrawal

The BTC portion of a transaction is easy. Download BitcoinCore, and in a few hours, you have a fully functional financial system. You can accept Bitcoin and transfer Bitcoin in a permissionless manner.

trade

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trade

One of the prerequisites for playing their role well is the ability to quickly and cheaply move between dollars and cryptocurrencies. But the western banking system doesn't make it easy for them because it's not designed to move money quickly and cheaply, whether you want to transfer money internally between depositors or externally between banks. Given that the banking industry is an oligopoly protected by government charters, banks have no incentive to try to become faster and cheaper.

Therefore, cryptocurrency traders need to move their funds back and forth between dollars and cryptocurrencies faster. To solve this problem, traders realized they needed to create a token on a public chain that could be moved as easily as Bitcoin, but would otherwise represent and have the exact same value as a dollar. This way, they can easily transfer their money in and out, functionally identical to transferring dollars in and out, but without waiting for the slow western banking system. If someone created such a product, traders would be able to move their digital dollar equivalents in and out of exchanges almost instantly and 24/7 at a cost of a few cents per transaction.

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How to use these stablecoins

This has led to the creation of stablecoins, which are tokens that exist on public chains like Bitcoin or Ethereum but are worth exactly one dollar (or another unit of legal tender, although the largest stablecoins are denominated in U.S. dollars) of). Tether was the first USD stablecoin, launched on the Omni network (hosted on top of Bitcoin) in 2014. Today, USDT can be used and traded on more blockchains, such as Ethereum, TRON, and Binance Chain.

Suddenly, it's available to entire businesses because they no longer need to worry about opening and maintaining bank accounts. Binance, for example, has not had a fiat bank account for years, even though it has become the largest spot exchange in the world. Even today, with Binance now allowing USD deposits via traditional banks, the most liquid trading pairs on the exchange are not USD, but other stablecoins like USDT, BUSD or USDC.

Trading companies using stablecoins also have an advantage because they don't have to worry about waiting for large amounts of dollars to flow in and out of the company's bank account. If they can convert their initial fiat capital into cryptocurrencies or fiat stablecoins, they can trade as fast as they want. When they need to fall back to "safe" fiat currency, they can instantly withdraw all their funds into stablecoins at virtually zero cost.

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Purpose

Today, stablecoins solve a very real pain point in the cryptocurrency capital market. They may not quite fit the core tenet of cryptocurrencies that they are not decentralized at all, but the point of stablecoins is not to create a decentralized product where it doesn’t need to. Instead, they are only intended to provide fiat currency tokenization services that banks refuse to provide.

Bear with me as I'm going to make a small entry point here, but it needs to be said: not everything needs or even should be decentralized. This is why I believe over-collateralized stablecoins like MakerDAO/DAI and algorithmic stablecoins like TerraUSD are fundamentally unnecessary. But unfortunately (and dangerously), the market tends to confuse the real reason for stablecoins to exist, which is to allow traders to quickly move between fiat and Threatening to create a decentralized alternative to centralized institutions or entities that create inequality for the masses.

The reality is that we already have a decentralized alternative to value exchange that curbs central bank risk. This is called Bitcoin. Stablecoins are not meant to be another decentralized store of value, their purpose is to bridge the gap between centralized and decentralized finance.

The problem with stablecoins today is not centralization. It's that none of the reputable, established banking institutions are willing to roll out their own. If the best run commercial bank in the world, JPMorgan Chase (JPM), launched a set of G 10 fiat stablecoins, it would put USDT, USDC (Circle), BUSD (Binance), etc. out of business immediately. Unlike the companies behind some of our existing stablecoin options. JP Morgan also fully understands how to use public blockchains and integrates the technology into a coherent workflow. The company's internal blockchain group, Onyx, has been doing this for years. And most importantly, JPMorgan is a too-big-to-fail bank and sits on the Treasury's Borrowing Advisory Committee (which advises the U.S. Treasury). If something goes wrong and JPMorgan can't pay, the Fed prints the money they need to compensate JPMorgan's clients.

JPM Token will attract hundreds of billions of dollars in assets in all major currencies. All exchanges and traders will adopt it immediately. The only problem is that it would also destroy the trillions of dollars that the global banking system makes every year from its transaction and foreign exchange fees.

Of course, this isn't all bad for JPMorgan, as they stand to benefit from the extra deposits. It can lend out those deposits and earn interest on them, with no risk to the Fed. However, this would destroy the business of other banking partners overnight and materially dampen the company's future earnings. A 2022 report by McKinsey estimated that, globally, banks would lose $2.1 trillion in annual revenue if a successful retail central bank digital currency (CBDC) were introduced.

This is why no bank with an account at the Fed will launch a stablecoin unless the government directs them to do so. That’s why, at this stage of the industry’s development, there has been, and likely will continue to be, room for some non-bank entities to provide the stablecoin services that crypto capital markets desperately need.

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break away

Our goal is to create a token worth $1 that does not require the services of the fiat currency banking system.

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Nakamoto Dollar, NakaDollar, NUSD

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bottom layer

1 NUSD = 1 USD of Bitcoin + short 1 BTC/USD inverse perpetual contract

• A Bitcoin inverse perpetual contract (e.g., a contract labeled XBTUSD on BitMEX) worth $1 in Bitcoin and paid in Bitcoin has a payout function as follows:

• Here's a comparison: $1 vs Bitcoin price in USD

• If Bitcoin is worth 1 USD, then the Bitcoin value of the perpetual contract is 1 BTC, 1 USD vs 1 USD.

If bitcoin is worth $0.5, then the bitcoin value of the perpetual contract is 2 BTC, $1 vs $0.5.

If bitcoin is worth $2, then the bitcoin value of the perpetual contract is 0.5 BTC, $1 vs $2.

This function has some interesting properties.

When the value of Bitcoin in USD drops and approaches $0, the value of the perpetual contract in Bitcoin will approach infinity. This is a risk factor for the product, as there will only ever be 21 million bitcoins. The value of bitcoin increases exponentially as the price of the dollar falls. This means that if the price of Bitcoin falls rapidly, and the exchanges that trade these derivatives are illiquid, there will be socialized losses (commonly used to describe the situation in which losses in an industry or business will be compensated by the entire society) or government-borne phenomena) the chances of situations will increase. I'll discuss why this is important later.

As the value of Bitcoin in USD increases and approaches infinity, the value of the perpetual contract in Bitcoin also approaches 0. This is helpful because it means that if you hold a position that is fully funded, i.e. you deposit exactly the amount of Bitcoin that you deposited at the time of entry, then it is impossible for you to go broke or was forced to liquidate.

Let's demonstrate this quickly.

Say you want to create a synthetic dollar or 1 unit of NUSD, and the price of Bitcoin is $1, each XBTUSD contract is worth $1 of Bitcoin at any price.

In order to create 1 NUSD, I need to deposit 1 BTC on a derivatives exchange (eg BitMEX) and short 1 XBTUSD contract.

Now, the price of Bitcoin has dropped from $1 to $0.1.

Value of XBTUSD contract (BTC) = $1 / $0.1 = 10 BTC

PNL for XBTUSD contract position = 10 BTC (current value) - 1 BTC (initial value) = + 9 BTC (I am making money).

I have 1 BTC deposited on the exchange as margin.

My total asset balance on the exchange is 1 BTC (my initial deposit) + 9 BTC (my profit from the XBTUSD position), my total balance is now 10 BTC.

The bitcoin price is now $0.1, but I have 10 BTC, so the dollar value of my total portfolio has not changed, which is $1, which is $0.1 * 10 BTC.

Right now, the bitcoin price has gone from $1 to $100.

Value of XBTUSD contract (BTC) = $1 / $100 = 0.01 BTC

PNL for XBTUSD contract position = 0.01 BTC (current value) - 1 BTC (initial value) = -0.99 BTC (I am losing money).

I have 1 BTC deposited on the exchange as margin.

My total asset balance on the exchange is 1 BTC (my initial deposit) - 0.99 BTC (my XBTUSD loss), my total balance is now 0.01 BTC.

As you can see, the price went up 100x and I wasn't broke.

This BTC + BTC/USD inverse perpetual relationship is so fundamental and important that I have to go through the math every time I talk about it. This relationship allows us to synthesize a dollar equivalent without touching the dollars in the fiat banking system or the stablecoins that exist in cryptocurrencies. It also won’t be collateralized with more crypto collateral than the value of the fiat currency it creates, as MakerDAO does.

Custodian

NakaUSD DAO

This is extremely important: NakaDollar does not rely on hostile fiat currency banks to keep U.S. dollars in order to tokenize them, but instead relies on derivatives exchanges to list reverse perpetual contracts. It will not be decentralized, the point of failure in the NakaDollar solution will be the centralized cryptocurrency derivatives exchange. I ruled out decentralized derivatives exchanges because they are far less liquid than their centralized counterparts and their pricing oracles rely on feedback from centralized spot exchanges.

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The first step is to create an organization that exists both within the traditional legal system and as a cryptocurrency-native DAO. The DAO must have a traditional legal existence as it needs to have an account on all member exchanges.

The DAO will issue its own governance token: NAKA. At the beginning of its establishment, there will be a limited number of NAKA Token generated. Funds raised for the first time will be used to fund a sedimentation tank, the use of which I describe later, and to create an initial NUSD supply inventory. NAKA will then be distributed from the DAO in exchange for the opportunity to provide liquidity throughout the DeFi ecosystem. For example, NAKA can be discharged to NUSD and other asset liquidity providers on Uniswap or Curve pools. In addition, if the demand for NAKA Token is high, DAO can decide to sell more NAKA to further strengthen the size of the sinking fund.

NAKA holders can vote on operational matters such as who is a member exchange. Member exchanges will hold short positions in BTC and inverse perpetual contracts that underpin the 1 NUSD = 1 USD exchange rate. Accounts of member exchanges will exist in the name of DAO. Member exchanges need to provide at least one BTC/USD inverse perpetual contract trading pair with Bitcoin as margin. There needs to be more than one member exchange, as the focus is to involve as many curators of the cryptocurrency ecosystem as possible and reduce single points of failure.

In the example below, assume there are two member exchanges: BitMEX and Deribit. Both exchanges offer a Bitcoin-margined BTC/USD inverse perpetual contract pair: XBTUSD.

NAKA holders will also vote on how the net spread will be distributed. Historically, these perpetual contracts have paid net interest to short sellers, which is known as a funding fee, and most perpetual contracts pay funding fees every eight hours. Over time, the DAO's net asset balance will exceed the outstanding NUSD Token value. In accounting terms, NakaDAO's shareholder equity will be positive and growing.

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Authorized Participant (AP)

Only a few companies or individuals are allowed to create and redeem NUSD directly from the DAO.

I envision the following requirements for becoming an AP:

2. Satisfy any authentication requirements for the DAO.

NUSD can trade at an explicit (such as NUSD/USD) or implicit (such as BTC/NUSD, which has a premium or discount to the price of BTC/USD) value, as opposed to fiat dollars. If NUSD is trading above fiat USD, authorized participants will create 1 NUSD at a rate of 1 NUSD = 1 USD and sell 1 NUSD at a price above USD 1 for a profit. If NUSD is trading below fiat USD, authorized participants will buy 1 NUSD for less than 1 USD and redeem 1 NUSD for a profit of 1 USD.

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NakaDAO BTC/USD spot price feed

Each member exchange has its own opinion on the spot price of BTC/USD.

For example:

• Spot price = sum (member weight * member BTC/USD spot index)

• For example:

• BitMEX weight = 50%

• Deribit Weight = 50%

• NakaDAO BTC/USD spot price = (50% * $100) + (50% * $110) = $105

casting

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casting

An AP wishes to mint 100 NUSD.

The spot price of NakaDAO BTC/USD is $100.

There are two member exchanges (BitMEX and Deribit), each with a 50% weight.

A BTC/USD price of $100 is equivalent to 1 BTC.

If each XBTUSD contract is worth $1 of Bitcoin at any price, then to have a contract worth $100 notional, I need 100 contracts.

In each member exchange, AP needs to meet the following conditions:

0.5 BTC usable margin = 50% * 1 BTC

Short 50 XBTUSD contracts = 50% * Short 100 XBTUSD contracts

A block transaction messaging protocol like Paradigm will be used to cross-trade Bitcoin and perpetual contracts between DAO and AP. (Note: Cross-trading means trading can be automatically carried out between two exchanges in order to complete the transaction at a faster and better price)

This is what happens when AP and DAO cross-trade on two exchanges:

AP ERC-20 address:

● Receive 100 NUSD

APs on BitMEX:

● Loss of 0.5 BTC deposit

● Close 50 XBTUSD short contracts or open 50 XBTUSD long contracts

AP on Deribit:

● Loss of 0.5 BTC deposit

● Close 50 XBTUSD short contracts or open 50 XBTUSD long contracts

DAO on BitMEX:

● Get 0.5 BTC deposit

● Open a short position of 50 XBTUSD contracts

DAOs on Deribit:

● Get 0.5 BTC deposit

● Open a short position of 50 XBTUSD contracts

● Added 100 NUSD to the liability, meaning it issued 100 NUSD

● In order to mint NUSD, AP will pay a fee to DAO.

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redemption

An AP wishes to redeem 100 NUSD.

NakaDAO's BTC/USD spot price is $100.

AP must have 100 NUSD on ERC-20 address.

Block transaction message protocols like Paradigm will be used to cross-trade Bitcoin and perpetual contracts between DAO and AP.

AP ERC-20 address:

● Send 100 NUSD to DAO’s wallet address

APs on BitMEX:

● Get 0.5 BTC deposit

● Open a short position of 50 XBTUSD contracts

APs on Deribit:

● Get 0.5 BTC deposit

● Open a short position of 50 XBTUSD contracts

DAO on BitMEX:

● Loss of 0.5 BTC deposit

● Close 50 XBTUSD short contracts

● Loss of 0.5 BTC deposit

● Close 50 XBTUSD short contracts

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DAO Treasury:

● In order to redeem NUSD, AP will pay a fee to DAO

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assets:

NakaDAO Balance Sheet

assets:

● Bitcoin and short-term inverse perpetual contracts held on member exchanges.

Liabilities:

In order to verify that NakaDAO is not playing with its money, we need an Ethereum blockchain explorer such as etherscan.io, and proofs from exchanges of the DAO's bitcoin balance and the DAO's total open short position. Then, using the simple math described above, we can calculate the DAO's shareholders' equity, ensuring that assets are greater than or equal to liabilities.

As I mentioned above, perpetual contracts have historically paid net interest to shorts. This interest is denominated in bitcoins, so holdings of bitcoins on member exchanges should grow. If so, when you offset the assets and liabilities, there will be a surplus. There will also be periods when shorts pay out net funds, in which case a deficit may also appear.

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NakaDAO Sinking Fund

Now I will introduce three risks. As I review these risks, keep in mind that the initial sinking fund and subsequent sale of the NAKA governance token can help address any capital shortfalls.

Risk 1: Member exchanges lose bitcoins

Member exchanges may lose customers' bitcoin deposits for various reasons. The most likely culprits could be either insider theft or outside hackers. In either case, a sinking fund must be used to help make up the difference.

Risk 2: Negative Funding Rates

Risk 3: Socialization Loss

As I described above, when the price of Bitcoin falls, short contract holders have unrealized profits. Given that the margin currency is Bitcoin, and the value of Bitcoin owed by long contract holders multiplies as the price falls, in some cases, the longs will not be able to pay the money they owe the shorts. At this time, the exchange will step in, either to reduce the profit of the short position, or to close part of the position of the short position. Either way, once the correct ratio of bitcoin to short contracts is re-established, the DAO may be short of bitcoin for not being paid in full or not being allowed to maintain its full desired position. At this point, the sinking fund must be tapped to try to make up the difference.

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industry support

For various reasons, the ecosystem of major centralized exchanges should support this type of stablecoin, and in doing so, they should match all trading pairs in NUSD. This will create a built-in demand among traders to mint and hold NUSD, making holding NUSD a prerequisite for trading cryptocurrencies.

Using NUSD versus other stablecoins will remove a core pillar of cryptophobia. I'm tired of reading "stablecoins are a Ponzi scheme" or "the whole crypto house of cards will collapse once someone exposes them or their bank dumps them". The repetition of this phobia keeps traders away while we can easily eradicate it completely.

Widespread adoption of NUSD will prevent every major exchange from racing to create its own stablecoin in search of a competitive advantage. If most of the big players are member exchanges, everyone benefits from the growth of NUSD. This will greatly benefit the current situation, which is that there are a variety of USD stablecoins. Imagine how bad it would be if SBF managed to scam people's trust in his FTX agency to back the stablecoin with more dollars. Believe it or not, FTX is actively discussing seeking approval to launch such a product. Thankfully, that fell apart before they had a chance to steal more people's money.

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we have power

Cryptocurrency exchanges and their depositors are rightfully very wary of any centralized entity holding their wealth. Financial regulators around the world now have a real-world example of what can happen when crypto fiat deposits suddenly drain – Silvergate is in trouble for failing to properly risk manage the swift exit of its crypto deposits. It doesn't matter whether Silvergate is a US-regulated bank. Do you want to take the risk and experience the bank bankruptcy process firsthand? Of course not, you will transfer your money to a banking institution that is considered safer at the first clue.

The failure of a small, run-of-the-mill bank run by a bunch of puppets is one thing. The aspect of the dollar stablecoin ecosystem that scares the Fed and the U.S. Treasury the most is if the nearly $100 billion worth of U.S. Treasuries, notes, and bills collectively held by Tether, Circle, and Binance have to be disposed of within a few trading days. What happens if the redemption requirement is met? The U.S. Treasury market is much less liquid than it has been historically due to banking regulations introduced after the Great Financial Crisis of 2008. It is no longer profitable (or possible) for banks to provide the same depth of liquidity in the US Treasury market as it has in the past. So, in this era of heightened volatility and reduced liquidity, a $100 billion market order dump for these bonds will cause some serious market dysfunction.

USD fiat stablecoins simply will not be allowed to scale to the size needed to make the market cap of cryptocurrencies more than trillions of dollars (assuming you believe that the total market cap of cryptocurrencies is positively correlated with the total number of USD stablecoins in circulation). It is simply too risky for the U.S. financial system to have all those dollars in the hands of institutions that must immediately liquidate their holdings to honor their promises to customers. Therefore, while the Big Three (USDT, USDC, BUSD) may continue to exist, there is a limit to how large their total deposits can grow.

The reason these mainstream stablecoins hold large amounts of U.S. Treasuries is that it pays interest and is virtually risk-free in U.S. dollar terms. Stablecoin issuers do not pay interest to the stablecoin holders themselves. This is how they generate income.