From the rapid growth of crypto to the dramatic volatility of the asset class, governments around the world are responding through regulatory and legislative actions. Some jurisdictions have announced clear and accommodating frameworks in the hope to create the crypto hubs […]
I generally think the bar for banning things should be very, very high and this does not come close to reaching it. But purely algorithmic stablecoins don't work, so it's probably no great loss if they do ban them.
“The expectation of an event creates a much deeper impression upon the [stock] exchange than the event itself.”
— Josef de la Vega, Confusión de Confusiones,1688
Thursday Sell-the-news Mailbag
Q: What’s endogenous collateral mean?
“Endogenous collateral,”I think was invented by the DeFi wordsmith Luca Prosperi and adopted this week by Congressional legislators who proposed to ban its use in DeFi.
The term refers to algorithmic stablecoins that are “collateralized” with a crypto token of their own invention, as UST was collateralized by LUNA.
UST/LUNA was bad, so the government thinks it’s only logical to ban any future attempts at the same.
I generally think the bar for banning things should be very, very high, and this does not come close to reaching it. But purely algorithmic stablecoins don't work, so it's probably no great loss if they do ban them.
And there is some logic to their thinking: Algo stablecoins are a lot like currency-issuing banks, and the government regulates all banks.
But it’s important to differentiate.
MakerDAO, for example, doesn't own the ETH you deposit with them in return for DAI, so they are not a bank in any relevant way.
You might say FRAX is a bank on that logic: But if so, it’s an incredibly transparent, rules-based, conservative one — only slightly riskier than a money market fund.
I don't think we should ban conservative DeFi banks and, so far, that doesn’t seem to be the government’s intention.
It's a slippery slope, however, so we should remain vigilant.
First, they come for your endogenously backed stablecoins, then they come for your DAI, FRAX, GHO, crvUSD…
Q: Should “endogenous collateral” be banned in TradFi, too?
The hardest of hard-money types would love to take the money printer away from commercial banks, but that would not be a good idea.
Banks hold a small amount of collateral in the form of cash in their ATMs and reserves at the Fed, and the rest of their lending is backed by the endogenous collateral of their stock price (basically).
If that sounds a lot like UST being backed by a small amount of bitcoin and a large amount of LUNA, well, that’s because it is.
But a banking system that only intermediates between borrowers and lenders (like MakerDAO, sort of) would be a horribly inefficient one.
Imagine a fitness club that limits the memberships it sells to the number of people that can work out at its gym all at the same time.
You might want to belong to that gym — you'd always be guaranteed a spot — but it would cost $5,000 a month.
That’s a lot. Especially since you know you're never gonna go anyway.
Q: Can crypto rally if rates are going to 4.5%?
Nasdaq was up nearly 600% in the second half of the 1990s.
In 1995, Fed funds was 6%. In 2000, it was still 6%.
Crypto needs to prove it can do the same.
In the short run, tech stocks are interest-rate sensitive because higher discount rates mean lower valuations.
Over time, though, tech is still a growth industry, and stock prices follow earnings and revenue growth.
If crypto is also a growth industry, we shouldn’t much care whether the discount rate is 1% or 5% — starting valuations should be lower, but gud tokens should still go up.
It doesn’t feel that way at the moment: Crypto natives talk about macro as if it’s affecting more than just prices and valuations — they make it sound like crypto itself cannot grow if the Fed doesn’t allow it.
It’s a little dog-ate-my-homework, in my opinion.
But maybe they’re right: Maybe price and utility are so intertwined in crypto that the industry cannot grow unless monetary policy is easy and getting easier.
Hopefully not, though. Crypto has a chance over the next year or so to show that it's a growth industry and not just a proxy for central-bank-driven liquidity.
If we can’t rally with Fed funds at 4.5%, then what are we even doing here?
Q: What ARE we doing here?
Building stuff!!! (I hope.)
VCs are still investing, and at this point, I don’t think you can say they are only in crypto to dump worthless governance tokens onto the heads of unsuspecting retail.
Anyone committing money in this environment surely believes that useful things can be built.
And VCs are still committing lots of money, so I take that as a hopeful sign of utility to come.
Q: I thought the Merge was supposed to be bullish?
The Merge turned out to be a classic sell-the-news event — a financial-markets tradition dating back to at least 1688 (per the quote at the top).
Unusually for crypto, there is some fundamental basis for the price action, however: Activity on the Ethereum network has been low, with GWEI spending a lot of time in the single digits this week and last.
The result is a current staking yield of 5.2%, which is disappointing relative to some expectations of 10%+.
Blockworks Research analyst Sam Martin was spot-on predicting 5%-7%, however. And he sees upside from there once activity picks up: “We could see staking yields north of 8%.”
He cautions as well, though, that “as yields go up so will staked ETH which will act as gravity for staking yields.”
To buy ETH at the moment, I think you have to believe in either higher GWEI fees or lower Fed funds — neither of which seems particularly imminent to me.
That, I think, is solid evidence that NFTs, despite so many of them going to zero, remain one of the best use cases for crypto.
But I suspect the real upside will come not from weirdly expensive, flex-worthy NFTs, but from the ones that start at zero.
As things stand, you need to acquire ETH (or SOL) before you can acquire an NFT. That eliminates about 99% of the world’s potential buyers.
So why not turn it around?
Maybe the way to get more people into crypto is to start with the NFT: Gift millions of people free NFTs for all kinds of different things — like attending a sporting event or a concert or playing a video game. Or because they want a free Lorcana trading card.
Some of those NFTs will randomly accrue value, allowing their otherwise-crypto-disinterested owners to sell them for ETH or SOL.
Presto-chango, you’ve turned a whole lot of music, sports and Lorcana fans into fans of crypto.
NFTs first, crypto second might be the best way to grow the space.
Q: Is MKR valueless?
You do have to wonder when the co-founder, Rune Christensen, refers to his co-creation as “near valueless” as he did in a Discord post this week.
I think, though, that he was referring to the market’s judgment, which currently values MakerDAO at just $600 million, more so than his own.
His own judgment is pretty scathing as well, though: He cites “millions being wasted/extracted with nobody having any clue…or even a pathway to accountability.”
“Vested interests,” he says, are using “garbage politics” to keep “the budgets flowing.”
The $600 million market cap doesn’t exactly make MKR “valueless.” But it is highly disappointing to token holders: MKR is worth no more than it was in early 2020, despite a 20-fold increase in TVL.
The OG DeFi protocol has not been able to monetize that TVL in any significant way.
Another DAO contributor suggested this week that Maker would trade on 3.6x P/E if it simply invested its protocol-owned assets in short-term Treasurys.
That seems like a good idea, but I think MKR’s market cap is telling you it won’t ever happen.
Thanks for reading, and see you tomorrow for some no-doubt valuable charts.