Original author: Alex Liu, Foresight News
Disclaimer: The views in this article are only valid under certain conditions and contexts.
There is no running out of money: disposable fiat currency increases over time without requiring labor.
Prerequisites:
The logic of Bitcoin as "digital gold" to hedge against inflation has long been valid, that is, although there are price fluctuations, Bitcoin will appreciate relative to credit currency over a longer time scale.
There will be no black swan events that change the logic of social operation.
Endless money
When it comes to “spending money”, the default concept in everyone’s mind is still “spending fiat currency”. I would only send a message to my boss: “Tomorrow is Crazy Thursday, can you V me 50?” instead of “Tomorrow is Crazy Thursday, can you V me 50 BTC?”. First, I’m afraid of being beaten, and second, KFC in China does not support BTC payment yet.
The "digital cash" narrative of Bitcoin has not worked. Someone once asked the well-known Bitcoin bull and MicroStrategy CEO Micheal Saylor: "Why do few people exchange a little Bitcoin for a cup of coffee?" Saylor replied: "If you own a building, would you exchange a corner of the building for a cup of coffee?" This is a bit of a sophistry. It is indeed inconvenient to "spend money" in daily life if you only hold Bitcoin.
But the narrative of BTC as a "digital gold" and a store of value asset has not been disproven. Through Bitcoin, perhaps we can really have "unending money" - if its logic of hedging against inflation holds true in the long term, it will definitely appreciate relative to credit currency (legal currency) over a longer time scale. We only need to simply hold BTC, and the value of its corresponding legal currency will eventually gradually increase. No need to work, just lie down and relax.
But as mentioned in the previous article, "spending Bitcoin" is not convenient, and whether it is spent or sold, the number of Bitcoins will always gradually decrease, so how can it be "infinitely spendable"?
The answer is mortgage lending.
Mortgage Loans
If there is an asset A that keeps appreciating relative to asset B, then by mortgaging asset A to borrow asset B, over time, theoretically, asset B can be borrowed continuously without having to sell A or repay B.
In a specific case, if BTC is pledged to borrow fiat currency (or stablecoins such as USDT and USDC), since credit currency naturally has a tendency to be over-issued and depreciate in the long term, BTC will gradually appreciate relative to credit currency (that is, the premise of this article). In this process, more fiat currency is gradually borrowed, so that we can increase the disposable fiat currency over time without selling BTC or working, that is, "having endless money."
But there is a problem here. Mortgage lending has "liquidation risk". The appreciation of BTC relative to credit currency is a long-term trend, but there are still price fluctuations in the short term. Even if we put aside events such as "pin insertion", the amplitude from the high point to the low point of a cycle is often more than 50% or even 70%.
Being liquidated is equivalent to being forced to sell BTC at a low price in exchange for fiat currency to repay debts, and the attempt to "have endless money" has failed again. At the same time, due to the volatile market conditions, it is possible that a K-line falls below the liquidation price, resulting in liquidation, and then the currency price quickly pulls back, causing huge losses to borrowers.
One way to avoid liquidation is to maintain a very low LTV (Loan to Value), such as only lending out $300,000 for a BTC worth $1 million, which is almost immune to liquidation caused by short-term price fluctuations. However, there is no "absolute insurance" on the one hand, and the capital utilization rate of doing so is too low on the other.
So what to do?
Soft Liquidation
We can use the soft liquidation mechanism to avoid losing our BTC position due to short-term currency price fluctuations. Take the example of using BTC to borrow crvUSD:
In Curve Finance's crvUSD product, the liquidation of collateral is carried out through AMM, and it is a progressive soft liquidation method. The collateral will be gradually liquidated as the price falls. However, the liquidation in AMM is reversible. After the collateral price rises, AMM will help users buy back the assets.
Liquidating AMMs
crvUSD implements soft liquidation through LLAMMA (Lending-Liquidating AMM Algorithm), and designs a special AMM pool for collateral assets to achieve gradual liquidation when asset prices fall. There are two liquidation lines, namely the liquidation start price and the liquidation end price. When the collateral assets are higher than the liquidation price, the AMM pool is full of collateral. When the collateral price falls to the liquidation start price, the collateral in the AMM begins to be sold for stablecoins, and then the collateral is gradually sold during the price decline. When the collateral price falls below the liquidation end price, only stablecoins are left in the AMM.
The liquidation process of LLAMMA can be understood as a "reverse Uniswap V3". Assuming that the AMM is processing the BTC-crvUSD trading pair, in Uniswap V3, the liquidity provider (LP) needs to set the price range of BTC. When the price of BTC is within the range, there are two tokens in the AMM that can be exchanged for each other. When it is outside the price range, there is only one token in the AMM pool. This is also the design idea of the LLAMMA liquidation start price and end price. When the collateral is BTC, the price is higher than the range and all the AMM pools are BTC. When it is within the price range, BTC is gradually liquidated to USD, see figure.
The difference from Uniswap V3 is that the higher the BTC price in Uni V3, the more USD there is in the AMM pool. In LLAMMA, the lower the BTC price, the more USD there is in the AMM pool, because BTC needs to be sold for liquidation. When the BTC price rises, BTC collateral assets can be bought back to try to keep the user's exposure unchanged.
Under the soft liquidation mechanism, even if liquidation occurs, we will buy back the collateral at almost the same price as the selling price during the price recovery process to ensure that the position remains almost unchanged. However, due to the premise that Bitcoin will appreciate relative to credit currency over a longer time scale, liquidation will inevitably rise in the future. (Soft liquidation is initiated by external arbitrageurs, and borrowers will suffer relatively little loss compared to hard liquidation, and need to avoid falling into the liquidation range frequently. This also reflects the design philosophy opposite to Uni v3: LP hopes that the price will fall within the range as much as possible to earn fees, and borrowers hope that the price will fall within the range as little as possible to reduce losses.)
This is the logical loop: holding Bitcoin and using the soft liquidation mechanism for fiat currency lending, we can obtain continuous cash flow during the appreciation of Bitcoin, without having to sell Bitcoin or worry about liquidation caused by short-term price fluctuations messing it up. With a certain amount of Bitcoin, the fiat currency that can be used without labor gradually increases over time. Does this count as having "unspendable money"?
Conclusion
This article introduces an investment and consumption strategy, which is to ensure BTC positions while maintaining a continuous cash flow through a lending strategy, and introduces the advantages of using a soft liquidation mechanism. If you hold a large amount of BTC, this solution is practical and may be one of the best strategies for people to lie down and do nothing. However, this solution also has a flaw, which makes students like the author unable to lie down and can only work hard - it does not point out where to get enough BTC to lie down...
So the editor decided to break through himself, resolutely took out his mobile phone, and sent a message to his boss, "Tomorrow is Crazy Thursday, can you V me 50 BTC?", and was happily blocked.
Reference articles:
Understanding Curve Stablecoin crvUSD https://foresightnews.pro/article/detail/37304
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