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Modern Economical Nonsense — The Treasury Problem

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Written by   34
1 month ago

I commented on how UST was collapsed and quoted: 

UST is a so-called algorithmic stablecoin, meaning that it’s not backed by assets like cash or cash-equivalents. Instead, it relies on trading and treasury management to maintain its value.

It is fake liquidity that will not work during the market correction.

Also, Cory Doctorow pointed out that it is similar to the 2008 housing crisis. 

I could not agree more simply that Terra just had its 1929-like crisis mode while the Defi industry is facing its 2008-like crisis now.

Using Bitcoin as the Treasury-backed management did not prevent the fall out of the Terra.

The worst is "hard money" economy cannot prevent default when the market is falling intensely.

So the crypto is doomed to fail 😱?

Not yet 🌋! 

1️⃣ Token liquidity is not currency liquidity

The way token liquidity works only happens within its ecosystem. It is a management of the treasury to swap assets around to control its supply and demand. 

The price appreciation does not realize recognized through the token valuation but within the supply and demand operations.

Burning tokens did not diminish its valuation either because, again, it is a maneuver through token supply and demand.

Defi liquidity builds upon the fundamental assumption that the market is stable. However, when the market fluctuates and goes into a bear, everything is not working anymore. 

Devaluation of the tokens will be faster than the liquidity can provide, and it can not make up for the loss of liquidity and valuation of the token at the same time.

Such losses will not be able to pay off unless the market has been restored. But by that time, many investors might have sold their losses and moved on.

2️⃣ Dollar liquidity 

The valuation of the dollar is given by the government

The difference between the dollar system to Defi is that the government can force debts to be paid off.

3️⃣ Valuation of the cryptocurrency is a philosophical question

The valuation of the cryptocurrency is blurred between exchange value, use value, and opportunity cost.

The modern economist likes to refer to the utility value that how much one person wants and needs and to pay such a price to obtain those goods or services.

Therefore, the value of the crypto in the Defi only flows out, but there is not enough cash to flow in.

🤔 One assumption of CBDC

CBDC may resolve liquidity issues by providing real liquidity to Defi. It then will become a Cefi-Defi platform for institutions to provide Defi products. 

🤔 Bitcoin's Utility

The Bitcoin is still working as it is. The current dollar is appreciated, and the cryptocurrencies are subsequently depreciated. However, Bitcoin is acting like hard money, similar to gold then its currency theory. 

Other cryptocurrencies are acting as a currency in the payment system. 

Money is what settles claims to pay off debts, and debt is a promise to deliver money. 

Cryptocurrencies all act as a debt rather than credit (money).

Instead of debts waiting to payoff, cryptocurrencies wait for owners to possess the debt, which is willing to sacrifice the opportunity cost of moderate growth by taking huge risks of potential exponential growth. Only the problem is it will consume more patience than you can imagine.

Of course, these are my opinions, and we should see how crypto continues playing out under this market condition.

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Written by   34
1 month ago
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