Crypto Dollar, The New Global Banking – Trustnodes

The industry, while still somewhat experimental and risky, is getting close to the point where it can be declared mature as it has been running for a sufficiently long enough time without any decisive problems.

Tether is the oldest, invented in 2015 as a way to address the many problems Bitfinex, one of the OG crypto exchanges, was facing with traditional banking.

It took about two years for anyone to care about Tether’s USDt however, but gradually it found adoption in crypto only exchanges, setting a base then for fast arbitrage, and has now reached the point where it is one of the foundations in the whole, what we are calling, crypto banking.

The intense skepticism and scrutiny tether faced reached its peak on April 24th 2017 when it temporarily lost its peg, dropping to $0.8 on some exchanges and $0.91 across all exchanges from its supposed $1 per token.

Rumors were speculating they had lost their banking facilities, which was later pretty much confirmed with Bitfinex getting a new bank account.

Some $400 million were seized in that new bank, leading to what by a very big stretch can be called the first crypto bailout as Bitfinex raised $1 billion.

The New York Attorney General then took over the matter and found Tether was fully backed, though not necessarily with just fiat dollars.

That was sufficient to close one of the most interesting chapter in crypto history as it satisfied critics within the industry that this thing is actually fairly legit.

A chapter we recount to point out what is now called defi or crypto banking was forged in fire, and maybe has gone through sufficient testing in the experimental and prototyping stage to start moving towards grandma, dare we say, and the mainstream.

The New Banking

Is arguably not quite here yet, but this space has grown sufficiently to begin the creation of a new class, which we can give many names, such as the crypto investment manager, or the crypto ordinary family office kid, or the young banker.

His mother or sister is getting 0.5% in interest on their bank deposits. Crypto itself, like bitcoin or eth, would be too risky, but stables have no price fluctuation, and thus there is no volatility risk.

Rather than this 0.5% on their dollars therefore, they can get as much as 7% a year on crypto dollars.

aDAI is dai dollars that are sent to Aave. The dai itself deposited on Aave gets 0.5% APR or 2.5% APY, and for that dai plus the interest you get aDai.

This aDai is dai in as far as you give the token back and you get the dai, but it also isn’t in as far as the adai is specific to the Aave pool and thus has specific demand from those that borrowed adai.

Thus we can send this adai to the Curve pool, and now we get the Aave 0.5% interest as well as the Curve 7.28% interest on say our $10,000 that we converted to dai dollars.

We then get about $800 a year on that, rather than $50, with the appeal so becoming self evident.

Still, the young bankers may be comfortable to do all this with their own money, but with someone else’s, like their own mum, it is arguably still too new to take that step as it is still crypto, but arguably not too new to dabble in it.

Comforting the Edges

It was probably in 2017 or 2018 when it was declared bitcoin is no longer experimental. Until then it was taken for granted that it might fail, that the whole thing might stop working for some reason. But following numerous chain-splits and the numerous fixing of some bugs, it became somewhat clear that there wasn’t any reasonably conceivable way it could fail from a technical perspective.

It would perhaps be brave in this 2022 to say the same of defi as we know it today, in regards to the basic system of the smart contract based facilitation of lending and borrowing.

This system has gone through plenty of tests so far, March 2020 being the biggest when a huge crash in crypto assets with an immense speed occured.

Dai was unaffected, the token itself. There were some problems in the underlying pipelines. Collateral Position Depositors (CPD) lost about $6 million due to the bots being overwhelmed and the price feed lagging.

The dai peg barely went to $0.98 however. As such, dai holders encountered no risk despite the system going through a conceptual stress test.

That’s a huge under-appreciated achievement as it proved the algorithmic stablecoin system, and the whole collateralization upon which it is based, does actually work.

Global Banking

Banking the unbanked has been the mantra in this space, but as we move from the fringes, what we may begin doing is more open the system of banking to the entire globe.

Open banking sounds like a boring term and hardly revolutionary. Instead of helping the poor in Africa by giving them crypto banking, or in addition to helping the outcasts that have been cancelled, we may be moving more towards chiefly empowering the middle class.

Chiefly, because crypto is not a leveling in absolute terms, it is more instead a leveling up of all, each according to their means and capabilities.

That’s where this banking itself is concerned. Investing in crypto is something else, but where opening the banking system is concerned it isn’t clear how much the poor would benefit since they rarely have savings, or how much the rich would benefit since they have had this banking system for decades where the banks give them however much they want based on collateralized wealth or income they put down.

The middle class of course at least in the west has had some access to this system, but crypto banking may bring it to the same level of facility as that offered to the rich, whereby you can no questions asked borrow half of your savings.

To try and articulate the consequences of that, we first might need to point out that permissionless banking, open banking, or crypto banking, confuses by the inclusion of the word banking in it because there is no bank.

Yet the word defi also is perhaps not accessible to the uninitiated because it does not instantly point out that there is actually a bank and all of this is actually about banking.

Just a different sort of banking where there is no actual bank as smart contracts autonomously operate as the custodians and facilitators of banking services.

This is a difference in both substance and form. In form self evidently as it is different, but also in substance in that banking becomes a global public infrastructure.

Banking services, in both providing and consuming them, become more a tool that everyone uses like Instagram, Facebook or even 4chan.

That is almost a millennium since banking itself was invented that it now begins to start reaching the peasants who have finally gained the ability to themselves be bankers and perform banking functions.

Globally. In what is revolutionary because your bank is now as accessible as Instagram, and has some advantages even over that in that you don’t need to sign up for anything and in that you can manipulate Instagram as a coder, while for an ordinary user it is the same as writing or posting on Instagram.

But rather than vain pictures of yourself however, we are talking about arguably the ultimate coordinator of power in the world, that of money itself.

Keeping Up

A Decentralized Autonomous Organization (DAO) may open itself up to the accusation that it is just an unincorporated company.

Rather than re-inventing the concept of a company, however, a DAO redesigns it, or upgrades it.

A shareholder of a public company, for example, does have numerous rights, but we haven’t quite come across a dashboard that highlights what big decisions are to be made by shareholders, furnished with past votes.

Because such digital dashboards did not exist when the company structure was invented, and did not exist even prior to the 90s.

The voting of shareholders does exist however, but you – or your broker – have to physically go to a shareholders meeting.

The invention of the phone maybe lessened that ‘physically’ requirement, and now the internet maybe has even led to some companies bothering with having an internal dashboard.

But they’re still paper systems generally speaking, with new technology added on top of the design that still remains unchanged for now half a millenia.

For the first time in 500 years, this generation has the opportunity to look again at that design. It might not change much, but they will be digital companies first, and that means they will employ natively all the capabilities of digital tech.

Like much in this space, this gives us the ability to poem to the sky such transformation, or make it sound so boring that nothing is happening, because in many ways nothing quite changes, while in many other ways, everything changes too.

Likewise we are not re-inventing banking, but re-designing it so that it is digitally native first, and that comes with all the power of digital: global, open, undiscriminatory, fast, and with the real invention of the rule of code.

Managing the Upgrade

From a technical perspective, the task is easy: incremental improvements until all edges are smoothed out to a reasonable degree.

From a governance perspective, the question of risk and the natural desire to eliminate it or minimize it presents this generation a dilemma through a choice that we’ll exaggerate and simplify to that of communism or risk taking capitalism.

Custodian stablecoins for example are being proposed to be brought under the same banking system which this space is trying to upgrade.

“Fortunately, we have an effective tool to mitigate run risk: bank regulation. Stablecoin issuers subject to bank regulation would give holders of those stablecoins confidence that those coins were as reliable and ‘money good’ as bank deposits,” said earlier this month OCC’s Acting Comptroller Michael J. Hsu.

That sounds appealing. Our mum won’t have to worry that USDt or USDc loses its peg because the American taxpayer collectively will give her $1 for a USDt whatever happens.

Why should they, is the first obvious question from a fairness perspective. The McDonalds worker that now has to pay higher direct taxes, or indirectly through inflation, did not take the risk – and benefits – our mum did by chasing this higher yield. So why should that burger flipper subsidies our mum?

Hsu may well say because that’s the deal we made in 2008, but if everyone thought that was a good deal, then there wouldn’t be a bitcoin to begin with.

That deal doesn’t minimize risk, it communizes it and in the process arguably increases risk as the one taking the risk doesn’t have the incentive of punishment to be prudent.

In addition, the 7 years of Tether maintaining its peg is a testament to the fact it doesn’t need someone like Hsu, for it has had plenty of ‘bank runs’ and has managed fine because unlike fractional banking, it can actually meet all of deposits on demand.

If something like Tether is turned into a bank instead, then it would have the ability to operate on fractional reserves, which means a depositor can’t quite be sure they’ll get $1, but $0.10 because even though the unit of account will be 1 to 1, the value of that unit will be inflated by 90% if they are to meet all deposits on demand during a bankrun.

You might say the confidence trick is that there won’t be a bankrun if they can meet the deposits, but we’d say the deception trick is that the unit of account has already been inflated 90%, and so you don’t even have the option of 1 to 1 ad initio with only 1 to 0.10 offered from the beginning.

You may say that’s what’s being offered anyway since crypto dollars are only a small part of the dollar system which has this inbuilt deception trick that crypto dollars are subject to as well because they track the dollar.

But if that same fractioning is opened to stablecoins, then we’re increasing the whole trick by 90% and more importantly, we’re denying ourselves the option of not engaging in the same trick.

Banks can of course offer such tricky option, but to deny them competition through a 100% reserves option is not even a political choice, but a straight out abuse of power.

Because things like Tether or Coinbase and Circle’s USDc are not banks, they’re trusts. They’re in a fiduciary relationship where they hold on trust 1 analogue dollar with the beneficiary given 1 crypto dollar.

If Tether or Coinbase abuse that trust, they should be sent to prison just as any trustee running away with the money would be in a functioning system.

That system has worked fine so far so why does it need Hsu beyond the potential desire of banks, which he effectively represents, to corrupt the whole thing?

And if the guarantee of 1 to 1 is desired, then Tether or Coinbase should get private insurance so that they and their users pay the extra tax, rather than the burger flipper.

Things like dai or sUSD can further give them all competition, and so young bankers can choose what level of risk they want for themselves and their mothers. Rather than this Hsu deciding for everyone as if he is running some command economy instead of leaving it up to the free market.

Something they don’t like anymore. The free market nearly collapsed banks apparently, not the non existent competition in banking, a monopoly that now risks collapsing governments or countries through crazy debt levels that greet inflation.

Those same banks now finally have some competition, and on cue we get these captured supernintendos suggesting the law may force you to stop competing and get back to the old way of bankrupting countries through monopoly privileges.

They don’t have a say on things like dai however, where their system is completely replicated with more than 100% reserves, and thus they can’t quite stop proper competition.

They may be gradually subsumed instead, as they tinker at the edges, because we now have systems where the whole thing can be code replicated with stuff like tether probably more a transition device at a time when smart contracts did not quite exist.

As what those smart contracts have now made available is literally global banking, furnished with company formation in DAOs, public capital formation in tokenization, custody in the smart contract itself, and the lending and borrowing with interest.

This banking protocol further has the agility of being made part of a stack, so that you just copy and paste the crypto-banking library to incorporate it into your website or app.

Making it possible thus for anyone to be a banker, without any jurisdictions, without any protocol level firewalls.

And it has only began for the ‘toys’ are now becoming actual competitive products, with an actual edge, that can appeal far beyond this space.