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ETH Brno: How can real digital money look like?

A short talk on the quest to bring (or create) digital money in the crypto world.

1 of 12
9. ŘÍJNA 2021
David Antoš
How can real digital money look
like?
1
Copyright
©
2021
by
Boston
Consulting
Group.
All
rights
reserved.
Crypto & I: A skeptical Ethereum maximalist
$1
$45,000
$500
$180 $200
2018
2010 2012 2014 2022
2016 2020
$3,000
$46
$1,200 ETH
$200
BTC
Tyler Cowen: "Will fall
to near-zero in value.
Hold it at your own
risk. The original issuers
will have kept some of
their initial gains. The
new Bitcoin asset simply
isn’t a useful one."
Friend/colleague:
"Bitcoin is a really cool
technology, put in one
month of salary and
you'll seen one day."
(Would be worth $2M
today.)
Balaji Srinivasan:
"Internet lacks a
transaction
protocol,
programmable
money could disrupt
platforms like AWS."
I buy my
first ETH,
price falls
80%
eventually.
I upgrade
my
iPhone,
lose my
keys and
all ETH.
Buying in again
during the
covid spring
bottom.
Majority of my
savings now.
2
Copyright
©
2021
by
Boston
Consulting
Group.
All
rights
reserved.
Nevertheless, bitcoin &
ether are still not money.
And definitely not sound or
ultrasound.
3
Copyright
©
2021
by
Boston
Consulting
Group.
All
rights
reserved.
By definition, money serve three purposes
Medium of exchanges
• Widely accepted
• Highly liquid
• Stable esp. in the very
short horizon (the duration
of a single transaction)
• Better inflationary than
deflationary
Accounting unit
• Stable in short and medium
term – no need to
frequently update
• Intuitively known,
understood and accepted
Store of value
• Resistant to short-term
fluctuations
• Long-term preserving value as a
% of GDP (=deflationary)
4
Copyright
©
2021
by
Boston
Consulting
Group.
All
rights
reserved.
Neither bitcoin nor ether are money because they
cannot be accounting units
Medium of exchange Accounting unit
Store of value
Medium of exchange Accounting unit
Store of value
Medium of exchange Accounting unit
Store of value
Dolar Bitcoin Ether
• Universally accepted and liquid globally
• Intuitivelly understood value, highly
stable vs. CPI (consumer basket)
• Minimal short-term fluctuation
• Long-term steady (and predictable) loss
of value due to inflation
• Quite liquid, rising acceptance
• Extremely volatile in all time horizons
• Value based on a (Ponzi) meme, during
crisis declined just as other assets
• Quite liquid, rising acceptance
• Extremely volatile in all time horizons
• Value based on future rent from operating
the Ethereum blockchain DB (but
realistic?), can be roughly stable as a % of
GDP
But: NFTs are
often
denominated
and stable in
ETH, not USD
5
Copyright
©
2021
by
Boston
Consulting
Group.
All
rights
reserved.
Money cannot be a store of long-
term value. Money needs a
controlled expansion & contraction
for stable price levels.

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ETH Brno: How can real digital money look like?

  • 1. 9. ŘÍJNA 2021 David Antoš How can real digital money look like?
  • 2. 1 Copyright © 2021 by Boston Consulting Group. All rights reserved. Crypto & I: A skeptical Ethereum maximalist $1 $45,000 $500 $180 $200 2018 2010 2012 2014 2022 2016 2020 $3,000 $46 $1,200 ETH $200 BTC Tyler Cowen: "Will fall to near-zero in value. Hold it at your own risk. The original issuers will have kept some of their initial gains. The new Bitcoin asset simply isn’t a useful one." Friend/colleague: "Bitcoin is a really cool technology, put in one month of salary and you'll seen one day." (Would be worth $2M today.) Balaji Srinivasan: "Internet lacks a transaction protocol, programmable money could disrupt platforms like AWS." I buy my first ETH, price falls 80% eventually. I upgrade my iPhone, lose my keys and all ETH. Buying in again during the covid spring bottom. Majority of my savings now.
  • 4. 3 Copyright © 2021 by Boston Consulting Group. All rights reserved. By definition, money serve three purposes Medium of exchanges • Widely accepted • Highly liquid • Stable esp. in the very short horizon (the duration of a single transaction) • Better inflationary than deflationary Accounting unit • Stable in short and medium term – no need to frequently update • Intuitively known, understood and accepted Store of value • Resistant to short-term fluctuations • Long-term preserving value as a % of GDP (=deflationary)
  • 5. 4 Copyright © 2021 by Boston Consulting Group. All rights reserved. Neither bitcoin nor ether are money because they cannot be accounting units Medium of exchange Accounting unit Store of value Medium of exchange Accounting unit Store of value Medium of exchange Accounting unit Store of value Dolar Bitcoin Ether • Universally accepted and liquid globally • Intuitivelly understood value, highly stable vs. CPI (consumer basket) • Minimal short-term fluctuation • Long-term steady (and predictable) loss of value due to inflation • Quite liquid, rising acceptance • Extremely volatile in all time horizons • Value based on a (Ponzi) meme, during crisis declined just as other assets • Quite liquid, rising acceptance • Extremely volatile in all time horizons • Value based on future rent from operating the Ethereum blockchain DB (but realistic?), can be roughly stable as a % of GDP But: NFTs are often denominated and stable in ETH, not USD
  • 6. 5 Copyright © 2021 by Boston Consulting Group. All rights reserved. Money cannot be a store of long- term value. Money needs a controlled expansion & contraction for stable price levels.
  • 7. 6 Copyright © 2021 by Boston Consulting Group. All rights reserved. 100.00 BTC (just as ETH) is not good for setting prices due to extreme instability – even gold was bad money 2.66 0.19 0.54 0.28 0.11 0.02 0.01 0.01 106.69 108.96 111.62 113.64 115.04 122.60 2012 3.44 2015 103.56 105.24 102.07 2013 2014 105.36 2016 2017 2018 2019 90.38 2020 BTC USD Gold Value of $100 in 2011 adjusted for inflation and commodity price changes Instability and unpredictable changes hurt the economy • Commodities are affected by random events shifting value up and down (see gold) in line with market sentiment, supply volume etc. • Deflation deters people from spending money – they rather save them. Good money is primarily for transactions, not hoarding • Price changes are costly if not automated ("menu costs") • Price of goods can go down, but wages are sticky, deflation distorts the labor market • Hence, central banks replaced random inflation and deflation with a 2% inflation strategy
  • 8. 7 Copyright © 2021 by Boston Consulting Group. All rights reserved. However, web 3.0/DeFi needs tokenized money – and perhaps it can even innovate better money Money is better medium of exchange than collectible coins like BTC or "stocks" like ETH even in the digital world – we need money that works directly on blockchain On to of that, not all countries have well-functioning central banks that protect stable money – and a non-state "unstoppable" alternative can be better than "dollarization" Even quality central banks pose a risk – we need to trust their leadership that the arbitrary "money printing" decision will continue to be good long-term and forever Competition of state and non-state money can open the doors to experimentation and innovations; in principle, should be as beneficial as in other industries At the same time, the world is not an Optimal Monetary Zone – even the digital world we probably need multiple "local" currencies – digital euro? digital crown?
  • 9. 8 Copyright © 2021 by Boston Consulting Group. All rights reserved. • From the central bank directly without intermediaries • BUT: Central banks hesitate so far; they do not want to launch on open blockchains. CBDC will likely be more controlled than paper money (for quite good reasons) • Synthetic stablecoins printed by a private entity • The dominant for of crypto money today, "second best" approach • BUT: Uncleat backing of tokens with assets, ultimately controllable by officials, not independent from fiat money • Synthetic stablecoins printed against a collateral locked in smart contracts • BUT: Over 50 % of DAI collateral is USDC (with all the risks), overcollateralization is wasteful, peg is enforced through governance voting, extra smart contract risks, not independent from fiat money • Synthetic stablecoins printed against undercollateralization • BUT: Much higher risks, possibility of a "bank run" and value collapse • Simulate how central banks operate through (algorithmic) monetary policy to preserve stable (but moving) value • BUT: Can be only reactive (CBs predict and act proactively through sophisticated modelling); not validated that RAI wouldn't just follow dollar inflation There are five types of candidates for digital money CBDC Centralized Pegged to fiat & (over)collateralized Pegged to fiat & un(der)collateralized Unpegged to fiat Pegged to CPI?
  • 10. 9 Copyright © 2021 by Boston Consulting Group. All rights reserved. AMPL: Stable price but not value • Every 24 hours, Ampleforth adjusts the total number of tokens according to their current price to reach $1 (in 2019 value) • Value in the wallet stays the same as price changes by same amount as number of tokens for each user • Through this trick, AMPL preserve same nominal value; number of tokens owned fluctuates instead • Does not require any collateral –AMPL value collapse would simply lower number of tokens all the way to zero • It's an entertaining mechanism but delivers no practical advantage (inflation and deflation still happens just expressed differently) AMPL/USD Market Cap Backup
  • 11. 10 Copyright © 2021 by Boston Consulting Group. All rights reserved. FRAX: Undercollateralized money • Frax is 60% backed by a stablecoin collateral (USDC), rest is printed and paid back in governance token FXS • USDC generates extra income from Aave etc. • If the value of FRAX rises over $1, FXS and USDC holder can print a new coin and sell with profit • If the value of FRAX falls below $1, any holder can exchange it for an equivalent in USDC and FXS and sell with profit • The dual tokens are accompanied by FXB "bond" for adding liquidity in the case of a large drop • Frax is a classical algorithmic stablecoin with a bit lower risk of collapse (60c USDC is always left) FRAX/USD Market Cap Backup
  • 12. 11 Copyright © 2021 by Boston Consulting Group. All rights reserved. RAI: Unpegged money – yet stable • Reflexer / RAI functions very similar to Maker / DAI: RAI is printed against a collateral (exclusively ETH) for "target price" • If market prices rises above the "target price", "target price" starts to get steadily decline • If market prices declines below the "target price", "target price" starts to get steadily increase • Both motivates to return to stability (the larger the gap the higher the arbitrage opportunity) • Open question: Will RAI track USD or would it be less sensitive to the underlying fiat inflation as it is not pegged directly? RAI/USD Market Cap Backup