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Dust on Crust. (Any views expressed in the below are… | by Arthur Hayes | Mar, 2023

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(Any views expressed in the below are the personal views of the author and should not form the basis for making investment decisions, nor be construed as a recommendation or advice to engage in investment transactions.)

As winter in the Northern Hemisphere draws to a close, I must depart my winter wonderland of deep fluffy powder and return to the steaming hot jungle. The transition to spring has begun, and what was once a guaranteed sublime shredding experience has quickly become much dicier. We are entering what is called the “dust on crust” segment of the ski season.

During this transition period, temperature variation increases throughout the day, even reaching above-freezing on the days the sun is really shining. This causes the snow to melt during the day, and then re-freeze each night. If a fresh dusting of powder falls on this crusty layer overnight, then you wake to what looks like a beautiful snowpack — but when you get out there and your skis begin to carve, your legs scream out in agony as you fully engage them to power through the crud below for the first time in the season.

The crypto markets have a similar life cycle. From their sublime beginnings when Lord Satoshi first blessed the world with their teachings, his faithful have built many castles on top of dubious, crusty, and brittle foundations. At the moment, one of these foundations in particular — stablecoins, the connective tissue between the crypto and fiat financial markets — is the subject of much scrutiny and consternation. As concerns mount, it’s important that we revisit and remind ourselves of the raison d’etre of stablecoins. Only then can we understand why it remains important that they continue to exist, determine what the most appropriate form is for them to take, and identify how we can best remedy the current state of affairs.

Bitcoin comes into existence through the process of mining. Bitcoin miners expend energy and compete against each other to quickly solve a complex maths puzzle. The winner of this race is rewarded with newly created Bitcoin. This is one of a handful of ways to acquire Bitcoin.

The most common way to acquire Bitcoin is to purchase it from someone. In the beginning, the OG miners were basically the only folks you could buy it from (since circulation was so low and they were the ones effectively producing it). If you were buying some, you were (and still are) most likely using the US dollar, since it’s the global reserve currency. Therefore, the most widely quoted Bitcoin exchange rate was (and remains) BTC/USD.

As a fiat currency, USD must be held within the Western fiat financial system. Of course, you can use cash, but in a global economy where GDP is measured in trillions of USD, cash is not a practical means of exchange. This reality more or less necessitates that people looking to purchase Bitcoin use the Western banking system. Banks must be used to transfer USD from the buyer to the seller of Bitcoin.

The ultimate question is, how do we remove the need to use USD or any other fiat to purchase Bitcoin? Solving this riddle requires the majority of the world’s largest economic systems to pay for goods and receive wages in Bitcoin. This is the dream of any true Bitcoiner — and if we are successful, many will earn Bitcoin by working, and thus remove the need to use banking services. But for all our effort, there is still a chance that we will never reach this ultimate state.

Right now, we are stuck in a sort of purgatory. We have escaped the hell that was the purely fiat financial world of pre-2009, but we have not yet ascended to heaven with our Lord Satoshi, where we shall sit gazing down on the dastardly fiat devil from on high.

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

If you want to use Bitcoin as a financial asset and easily swap between it and a fiat currency like USD, you most likely use an exchange that can custody both your USD and BTC.

For the USD leg of a given transaction, the exchange requires a bank account. It is not easy for exchanges to obtain and retain bank accounts. Remember that, fundamentally, the whole goal of the righteous followers of Lord Satoshi is to create a parallel financial system that does not require the services of banks. You can see why banks might resist servicing crypto companies, when the ultimate aim of those companies is to syphon off a meaningful chunk of the banks’ business. The only real reason that some banks are willing to service crypto companies is because at the end of the day, banks are focused on maximising short-term profits, and crypto companies are willing to pay high fees while earning no interest on their fiat deposits. Basically, some managers are sacrificing the long-term profitability of the banking system to pad their bonuses for the next few years.

The BTC leg of a given transaction is easy. Download BitcoinCore, and in a few hours you have a fully functioning financial system. You can accept Bitcoin and transfer it in a permissionless fashion.

Real traders and market makers are agnostic to the success or failure of Bitcoin (and crypto in general). They have to be, as it isn’t their job to take a medium- or long-term view. Their sole focus is to turn a profit by providing liquidity 24/7.

One of the prerequisites of performing their role well is the ability to move between USD and crypto quickly and cheaply. But the Western banking system doesn’t make it easy for them, as it isn’t set up to move money quickly and affordably — regardless of whether you are trying to pass funds internally between depositors, or externally amongst banks. And given that banking is an oligopoly protected by government charters, there is zero incentive for banks to make an effort to become faster or cheaper.

Therefore, there arose a need among crypto traders to move their funds back and forth more quickly between USD and crypto. To solve this issue, traders realised that they needed to create a token on a public blockchain that could be moved around as easily as Bitcoin, but that would otherwise represent and have the exact same value as a US dollar. That way, they could easily move their money in and out of it and it would be functionally identical to moving in and out of USD — but without the need to wait on the slow-moving Western banking system. If someone created such a product, traders would be able to move their digital USD equivalent onto and off of exchanges nearly instantly and 24/7 for the cost of a few cents per transaction.

This led to the creation of stablecoins, which are tokens that exist on a public blockchain like Bitcoin or Ethereum, but that retain a value equal to exactly one USD (or one note of another fiat currency, although the largest stablecoins are USD-denominated). Tether was the first USD stablecoin, and it was issued on the Omni network in 2014 (which is hosted on top of Bitcoin). Today, USDT can be used and traded across a wide range of blockchains, such as Ethereum, Tron, and Binance Smart Chain.

Exchanges and traders flocked to USDT (and stablecoins in general) because it removed the need for each participant to obtain their own bank account to hold fiat. This allowed them to focus on what they came to crypto to do — which was to help create a new financial system, and not play patty-cake with bank officers who work 9 to 5 from Monday through Friday. So long as the Tether organisation could satisfy its banking partner and prove to them that Tether held 1 USD or USD cash equivalent (e.g., short-term US Treasury debt) for each USDT that it minted, then USDT could trade as if it was USD within the crypto capital markets. When USDT was tendered back to Tether to be redeemed, Tether would instruct its bank where to wire the equivalent USD it held in its accounts.

Entire businesses were suddenly enabled because they no longer had to worry about opening and retaining a bank account. For example, Binance did not have a fiat bank account for many years, even as it rose to become the largest spot exchange globally. Even today, with Binance now allowing USD to be deposited via traditional banks, the exchange’s most liquid trading pairs are not vs. USD, but vs. other stablecoins such as USDT, BUSD, or USDC.

Trading firms using stablecoins were also at an advantage because they did not have to worry about waiting on large incoming and outgoing USD wires from their corporate bank accounts. If they could get initial fiat capital exchanged for crypto or a fiat stablecoin, they could trade as much as they liked as quickly as they liked. And whenever they needed to retreat to the “safety” of fiat, they could pull all of their funds out into a stablecoin at a moment’s notice with almost zero cost.

Today, stablecoins solve a very real pain point in the crypto capital markets. They may not totally line up with the core tenets of crypto — namely, they are not decentralised whatsoever — but the point of stablecoins is not to create a decentralised product where it isn’t needed. Instead, they are simply intended to provide a fiat tokenisation service the banks refuse to offer.

Bear with me, as I’m going to go on a slight tangent here, but it needs to be said: not everything needs to — or even should — be decentralised. That’s why I believe overcollateralised stablecoins such as MakerDAO / DAI and algorithmic stablecoins such as TerraUSD are fundamentally unnecessary. But unfortunately (and to its peril), the market tends to conflate the real reason why stablecoins exist — i.e., to allow traders to quickly move between fiat and crypto — with the goal of the broader decentralisation movement, which is to create a decentralised alternative for any centralised institution or entity that threatens to create inequity for the masses.

The reality is that we already have a decentralised alternative for exchanging value that curbs the risks of centralised banking. It’s called Bitcoin. Stablecoins aren’t meant to serve as yet another decentralised store of value — again, their purpose is to bridge the gap between centralised and decentralised finance.

The problem with today’s stablecoins isn’t centralisation. It’s that no reputable, established banking institution is willing to launch their own. If JP Morgan (JPM) — the best run commercial bank in the world — launched a suite of G10 fiat currency stablecoins, it would put USDT, USDC (Circle), BUSD (Binance), etc., out of business immediately. Unlike the companies behind some of our existing stablecoin options, no one doubts that Jamie Dimon’s outfit knows how to take deposits and redeem them when required. JPM also fully understands how to use a public blockchain and integrate the technology into a coherent workflow. The company’s internal blockchain group, Onyx, has been at it for many years. And most importantly, JPM is a Too Big to Fail bank that serves as a member of the Treasury Borrowing Advisory Committee (which advises the US Treasury). If there’s an issue and JPM can’t pay out, the Fed would print the money they need to make JPM’s customers whole.

JPM Coin would attract hundreds of billions of dollars of assets in all major currencies. All exchanges and traders would adopt it instantly. The only issue is that it would also destroy the trillions of dollars that the global banking system earns annually from its transaction and foreign exchange fees.

There would suddenly be no need to pay egregious bank fees to move your money. Just send JPM Coin over the Ethereum network, which would cost you a few dollars in network fees at most. Paying ridiculous spreads to switch between currencies — say, between USD and the Euro — would be a thing of the past, as you could freely and cheaply swap between USD JPM Coin and EUR JPM Coin. Curve would just stand up a JPM EUR/USD pool, and you could conduct FX transactions 24/7 for less than 0.01%.

Of course, it wouldn’t be all bad for JPM, as they would benefit from the additional deposits. It could lend those deposits and earn interest on them with no risk to the Fed. But, it would destroy other banking partners’ businesses overnight, and materially dampen future earnings of the company. McKinsey in a 2022 report estimated that globally, banks stand to lose $2.1 trillion in annual revenue if a successful retail Central Bank Digital Currency (CBDC) is introduced.

That’s why no bank with an account at the Fed will ever launch a stablecoin unless the government instructs them to do so. It’s also why, at this stage of the industry’s development, there has been — and will likely continue to be — space for some non-bank entity to offer the stablecoin services that the crypto capital markets desperately require.

Given the recent banking tremors reverberating through the crypto space following Silvergate’s and various other banks’ decisions to stop servicing stablecoins such as USDC and BUSD, the industry must come together and create a new product.

The goal is to create a token that is worth 1 USD but does not require the services of the fiat banking system.

The goal is not to create a decentralised fiat currency. MakerDAO is great, assuming it actually is decentralised, but for 1 USD of value it requires locking up >1 USD worth of crypto. It removes more liquidity than it adds, which is a net negative for the system. What we need is a mechanism that allows you to lock up 1 USD worth of crypto to obtain 1 USD worth of a stablecoin.

For those of you who do not like maths, please accept my condolences in advance. I promise that when you are done reading this, you can go back to reducing your cognitive abilities watching TikTok thirst traps.

1 NUSD = $1 of Bitcoin + Short 1 Bitcoin / USD Inverse Perpetual Swap

A Bitcoin inverse perpetual swap (e.g., Ticker: XBTUSD on BitMEX) which is worth $1 of Bitcoin paid out in Bitcoin has the following payoff function:

$1 / Bitcoin Price in USD

If Bitcoin is worth $1, then the Bitcoin value of the perpetual swap is 1 BTC, $1 / $1.

If Bitcoin is worth $0.5, then the Bitcoin value of the perpetual swap is 2 BTC, $1 / $0.5.

If Bitcoin is worth $2, then the Bitcoin value of the perpetual swap is 0.5 BTC, $1 / $2.

This function has some interesting properties.

As the value of Bitcoin in USD falls and approaches $0, the value of the swap in Bitcoin terms approaches infinity. This is a risk factor to the product, as there will only ever be 21 million Bitcoin. The Bitcoin value increases in an exponential fashion as the USD price declines. This means if the price of Bitcoin falls quickly, and the liquidity on the exchange where these derivatives are traded is thin, there is an increased chance of a socialised loss situation. I will address why this is important later.

As the value of Bitcoin in USD increases and approaches infinity, the value of the swap in Bitcoin terms approaches 0. This is extremely helpful, because it means if you have a fully funded position whereby at entry you deposit the exact amount of Bitcoin that the swap represents, there is no chance you can ever go bankrupt or get liquidated.

Let’s prove this out quickly.

Assume that you would like to create a synthetic USD or 1 unit of NUSD, and the price of Bitcoin is $1, and each XBTUSD swap is worth $1 of Bitcoin at any price.

To create 1 NUSD, I need to deposit 1 BTC on a derivatives exchange (e.g. BitMEX) and short 1 XBTUSD swap.

Now the Bitcoin price falls from $1 to $0.1.

Value of XBTUSD Swap in BTC = $1 / $0.1 = 10 BTC

PNL of XBTUSD Swap Position = 10 BTC (current value) — 1 BTC (initial value) = +9 BTC (I’m making money)

I have 1 BTC deposited as margin with the exchange.

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

The Bitcoin price is now $0.1, but I have 10 BTC, and therefore the USD value of my total portfolio is unchanged at $1, $0.1 * 10 BTC.

Now the Bitcoin price rises from $1 to $100.

Value of XBTUSD Swap in BTC = $1 / $100 = 0.01 BTC

PNL of XBTUSD Swap Position = 0.01 BTC (current value) — 1 BTC (initial value) = -0.99 BTC (i’m losing money)

I have 1 BTC deposited as margin with the exchange.

My total equity balance on the exchange is 1 BTC (my initial deposit) — 0.99 BTC (my loss from my XBTUSD position), and my total balance is now 0.01 BTC.

The Bitcoin price is now $100, but I have 0.01 BTC, and therefore the USD value of my total portfolio is unchanged at $1, $100 * 0.01 BTC.

As you can see, as the price went up 100x, I did not go bankrupt.

This Bitcoin + Bitcoin / USD Inverse Perpetual Swap relationship is so fundamental and important that I must go through the maths every time I talk about it. This relationship allows us to synthetically create a USD equivalent, without ever touching USD held in the fiat banking system or a stablecoin that exists in crypto. It also does not encumber more crypto collateral than it creates in fiat value, like MakerDAO.

This is extremely important: rather than relying on hostile fiat banks to custody USD so that it may be tokenised, the NakaDollar would rely upon derivatives exchanges that list liquid inverse perpetual swaps. It would not be decentralised — the points of failure in the NakaDollar solution would be centralised crypto derivatives exchanges. I excluded decentralised derivative exchanges because they are nowhere near as liquid as their centralised counterparts, and their pricing oracles rely upon feeds from centralised spot exchanges.

The first step is to create an organisation that exists both in the legacy legal system and as a crypto native DAO. The DAO must have a legacy legal existence because it will need an account on all the member exchanges.

The DAO would issue its own governance token: NAKA. There would be a finite amount of NAKA tokens created at inception. The first raise would be to fund a sinking pool, whose use case I will describe later, and to create an initial stock of NUSD supply. Subsequently, the NAKAs would be distributed from the DAO in exchange for the provision of liquidity across the DeFi ecosystem. E.g., NAKAs could be emitted to providers of NUSD vs. another asset liquidity on Uniswap or Curve pools. Also, if the NAKA token was in high demand, the DAO could decide to sell more NAKA to further bolster the size of the sinking fund.

NAKA holders could vote on operational matters such as who the member exchanges are. Member exchanges would hold the BTC and short inverse perpetual swap positions that underpin the 1 NUSD = 1 USD exchange rate. The member exchange account would be in the name of the DAO. Member exchanges would need to at a minimum offer a Bitcoin-margined Bitcoin / USD inverse perpetual swap. There would need to be more than one member exchange, as the point is to involve as many stewards of the crypto ecosystem as possible, and reduce single points of failure.

NAKA governance tokens and NUSD would be ERC-20 tokens that live on the Ethereum blockchain.

For the purposes of the following examples, assume there are two member exchanges — BitMEX and Deribit. Both exchanges offer a Bitcoin-margined Bitcoin / USD inverse perpetual swap, XBTUSD.

The NAKA holders would also vote on how to distribute the net interest margin. The swaps historically have net paid interest to shorts — this is called funding, and most swaps pay funding every eight hours. Over time, the net equity balance of the DAO in USD terms would exceed the value of NUSD tokens outstanding. In accounting terms, the shareholder’s equity of NakaDAO would be positive and growing.

Only a few firms or individuals would be allowed to create and redeem NUSD directly from the DAO.

I envision the following requirements to become an AP:

  1. Have a fully verified account on each member exchange.
  2. Meet any identity verification requirements of the DAO.

NUSD would trade at an explicit (e.g., NUSD / USD) or implicit (e.g., BTC / NUSD that is at a premium or discount to BTC / USD) value vs. a fiat USD. If NUSD is trading at a premium, APs would create 1 NUSD at a rate of 1 NUSD = 1 USD, and sell 1 NUSD and receive more than 1 USD in order to earn a profit. If NUSD is trading at a discount, APs would buy 1 NUSD for less than 1 USD, and redeem 1 NUSD and receive 1 USD in order to earn a profit.

The DAO would need to have its own opinion on what the USD value of Bitcoin is on a spot basis. This would inform how many swaps are needed to properly create units of NUSD.

Each member exchange has their own view on what the spot price of BTC/USD is.

Spot Price = Sum (Member Weight * Member BTC/USD Spot Index)

E.g.:

BitMEX Weight = 50%

Deribit Weight = 50%

BitMEX BTC/USD Spot Price = $100

Deribit BTC/USD Spot Price = $110

NakaDAO BTC/USD Spot Price = (50% * $100) + (50% * $110) = $105

An AP wishes to create 100 NUSD.

NakaDAO BTC/USD spot price is $100.

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

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

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

On each member exchange, the AP would need to have the following:

0.5 BTC margin available = 50% * 1 BTC

Short 50 XBTUSD swaps = 50% * Short 100 XBTUSD Swaps

A block trading messaging protocol like Paradigm would be used to cross the Bitcoin and swaps between the DAO and the AP.

This is what happens when the AP and the DAO cross on both exchanges:

AP ERC-20 Address:

Receives 100 NUSD ERC-20 tokens

AP on BitMEX:

Loses 0.5 BTC margin

Closes 50 short XBTUSD swaps or Opens 50 long XBTUSD swaps

AP on Deribit:

Loses 0.5 BTC margin

Closes 50 short XBTUSD swaps or Opens 50 long XBTUSD swaps

DAO on BitMEX:

Gains 0.5 BTC margin

Opens 50 short XBTUSD swaps

DAO on Deribit:

Gains 0.5 BTC margin

Opens 50 short XBTUSD swaps

DAO Treasury:

Increases NUSD liability by 100, meaning it issued 100 NUSD

A fee would be paid by the AP to the DAO in order to create NUSD.

An AP wishes to redeem 100 NUSD.

NakaDAO BTC/USD spot price is $100.

The AP must possess 100 NUSD on an ERC-20 address.

A blocktrading messaging protocol like Paradigm would be used to cross the Bitcoin and swaps between the DAO and the AP.

AP ERC-20 Address:

Sends 100 NUSD to the DAO’s wallet address

AP on BitMEX:

Gains 0.5 BTC margin

Opens 50 short XBTUSD swaps

AP on Deribit:

Gains 0.5 BTC margin

Opens 50 short XBTUSD swaps

DAO on BitMEX:

Loses 0.5 BTC margin

Closes 50 short XBTUSD swaps

DAO on Deribit:

Loses 0.5 BTC margin

Closes 50 short XBTUSD swaps

DAO Treasury:

Decreases NUSD liability by 100, meaning it burned 100 NUSD

A fee will be paid by the AP to the DAO in order to redeem NUSD.

As you can see, creating and redeeming moves NUSD, BTC, and swaps between the AP, the DAO, and their respective accounts on the member exchanges. There are no movements of USD which require the services of banks.

Assets:

Bitcoin and short inverse perpetual swaps held on the member exchanges.

Liabilities:

The total amount of NUSD issued.

To verify that the NakaDAO is not playing funny with the money, we would need an Ethereum blockchain explorer like etherscan.io, and attestations from the exchanges on the DAO’s Bitcoin balance and the DAO’s total open short swap position. Then, using the simple maths described above, we can compute the DAO’s shareholder equity and ensure assets are greater than or equal to liabilities.

As I mentioned above, the swaps have historically net paid interest to shorts. The interest is in Bitcoin, and therefore, the Bitcoin held at the member exchanges should grow. If that is the case, when you net assets and liabilities, there would be a surplus. There would also be periods where shorts net paid funding, and in that case there could also be a deficit.

There are three risks that I will now cover. As I walk through these risks, remember that the initial sinking fund and subsequent sales of NAKA governance tokens can help address any capital shortfalls.

Risk 1: Member Exchange Loses Bitcoin

The member exchange could lose customer Bitcoin deposits for a variety of reasons. The most likely culprits are probably insider theft or an external hack. Either way, the sinking fund must be employed to help make up the difference.

Risk 2: Negative Funding

When funding is negative, short swap holders pay interest to the longs. This could cause the balance of Bitcoin to fall to such a degree that 1 NUSD is synthetically worth less than 1 USD. This will be clear as the DAO assets will be worth less than the liabilities. At that point, the sinking fund must be employed to help make up the difference.

Risk 3: Socialised Loss

As I described above, when the price of Bitcoin falls, the short swap holder has an unrealised profit. Given that the margin currency is in Bitcoin, and the value of the Bitcoin a long swap holder owes increases exponentially as the price falls, in some cases the longs would be unable to pay what they owe the shorts. This is when the exchange would step in and either reduce the profit of the shorts, or close a portion of the shorts’ position. Either way, once the correct ratio of Bitcoin to short swap is re-established, the DAO may be short on Bitcoin because it was not paid out in full or allowed to keep its total desired position. At this point, the sinking fund must be employed in an attempt to make up the difference.

The ecosystem of large, centralised exchanges should support this type of stablecoin for a variety of reasons — and in doing so, they should denominate all their crypto-to-fiat pairs as crypto-to-NUSD. This would create an inherent demand amongst traders to create and hold NUSD, with holding NUSD becoming a prerequisite for trading crypto.

Using NUSD vs. other bank-dependent stablecoins would remove the anxiety many traders face regarding whether the stablecoin they are using will exist tomorrow, next month, next year, etc. Extinguishing that anxiety would allow for more trading because traders would no longer be worried that they might get stuck with a bunch of stablecoins that they cannot redeem for 1:1 of their USD value.

Using NUSD vs. other stablecoins would remove a central pillar of crypto FUD. I’m fucking sick and tired of reading about how such and such stablecoin is a ponzi scheme, and once someone exposes them or their bank ditches them, the whole crypto house of cards will come tumbling down. The repetition of this FUD keeps traders away, and we can easily eradicate it for good.

Wide adoption of NUSD would stop every large exchange from racing to create its own stablecoin in search of a competitive advantage. If most of the large players were member exchanges, then everyone would benefit from the growth of NUSD. It would be substantially more beneficial than the current state of affairs, which features a multitude of USD stables. Imagine how fucked up it would have been if Sam Bankman-Fried had succeeded in fooling people to trust his FTX organsation with even more USD in order to back a stablecoin. Believe it or not, FTX was in active discussions seeking the relevant approvals to launch such a product. Thankfully, the polycule blew up before they had the chance to steal even more people’s money.

Crypto exchanges and their depositors are rightfully very wary of any centralised entity holding their wealth. Financial regulators around the world now have a real-world example of what happens when crypto fiat deposits scurry in a hurry — Silvergate is fucked because it didn’t properly risk manage a swift exit of its crypto deposits. It doesn’t matter that Silvergate is a US-regulated bank. Do you want to fuck around and find out how the banking bankruptcy process works first-hand? Fuck no — you’re going to pull your money out to a banking institution that is perceived as safer at the first hint hint of danger.

The failure of a small, backwater bank run by a bunch of muppets is one thing. The facet of the USD stablecoin ecosystem that scares the Fed and US Treasury the most is this: what if the nearly $100 billion worth of US Treasury bonds, bills, and notes that Tether, Circle, and Binance collectively hold had to be disposed of in a few trading days to meet redemption requests? Liquidity in the US Treasury market is much lower than it has been historically due to banking regulations put in place after the 2008 Great Financial Crisis. It is no longer profitable (or possible) for banks to provide the same depth of liquidity in the US Treasury market as they used to. And therefore, in these times of heightened volatility and lower liquidity, a $100 billion market order dump of these bonds would cause some serious market dysfunction.

USD fiat stablecoins simply won’t be allowed to scale to the size needed to take crypto trillions of dollars higher in market cap (assuming you believe total crypto market cap is positively correlated to the total amount of USD stablecoins outstanding). It is just too risky to the US financial system to have all those dollars in the hands of organisations that must immediately liquidate their debt holdings to make good on their promises to their customers. And so, while the three majors (USDT, USDC, BUSD) might continue to exist, there is a ceiling on how large they can grow their deposit base in aggregate.

The reason why these large stablecoins hold large amounts of US Treasury debt is because it pays interest and is almost risk-free in USD terms. The stablecoin issuers pay no interest to holders of the stablecoins themselves. This is how they generate revenue.

But this is not a reason for concern. We, the crypto faithful, have the tools and the organisations needed to support $1 trillion or more worth of NakaUSD outstanding. If this solution were embraced by traders and exchanges, it would lead to a large growth in Bitcoin derivatives open interest, which would in turn create deep liquidity. This would help both speculators and hedgers. It would become a positive flywheel that would not only benefit the member exchanges, but also DeFi users and anyone else who needs a USD token that can be moved 24/7 with a low fee.

It is my sincere hope that a team of motivated individuals starts work on such a product. This is not something that should be owned (e.g., via large governance token holdings), or led by any of the large, centralised exchanges. If I see any credible, independent team working on a similar product, I will do all that is in my power to help them bring it to fruition.

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