Disclaimer: The views in this article are only valid under certain conditions and context.
1. There is endless money to spend: Without labor, the disposable legal currency gradually increases over time.
2. Preconditions:
The logic of Bitcoin as a "digital gold" to hedge against inflation has been established for a long time, that is, despite price fluctuations, Bitcoin will appreciate relative to credit currencies over a longer time scale.
There will be no black swan events that change the logic of social operations.
Endless money
When it comes to "spending money", the default concept in everyone's mind is still "consuming legal currency". The editor will only send messages to the boss: "Tomorrow's Crazy Thursday, can you V me 50 Bitcoins?", but not "Tomorrow's Crazy Thursday, can you V me 50 Bitcoins?"; one is for fear of being beaten, and the other is domestic It is true that KFC does not yet support Bitcoin payments.
Bitcoin’s “digital cash” narrative doesn’t work. Someone once asked Micheal Saylor, the well-known Bitcoin bull and CEO of MicroStrategy: "Why do so few people exchange a bit of Bitcoin for a cup of coffee?" Saylor replied: "If you own a building, you will exchange a corner of the building for it. A cup of coffee?" This is a bit sophistical. It is indeed inconvenient to "spend money" in daily life by just holding Bitcoin.
However, the narrative of Bitcoin as “digital gold”, a store of value asset (Store of Value Asset) has not been falsified. Through Bitcoin, perhaps we can really have "inexhaustible money" - if its logic of hedging inflation holds true for a long time, it will definitely appreciate relative to credit currency (fiat currency) over a longer time scale. We only need to simply hold Bitcoin, and the value of its corresponding legal currency will eventually gradually rise. No need to work, just lie down beautifully.
But as mentioned above, it is inconvenient to "spend Bitcoins", and whether you spend it or sell it, the number of Bitcoins will always gradually decrease, so why can't you spend it all?
The answer is mortgage lending.
mortgage loan
If there is asset A that has been appreciating relative to asset B, then asset A is mortgaged to lend asset B. As time goes by, asset B can theoretically be loaned out continuously. A does not have to be sold and B does not have to be repaid.
In a specific case, if Bitcoin is mortgaged to lend legal currency (or stablecoins such as $USDT and $USDC), since credit currencies naturally have a tendency of excessive issuance and long-term depreciation, Bitcoin will gradually appreciate relative to credit currencies (i.e., this article The premise for establishment), and gradually lend more legal currency in the process, we can gradually increase the disposable legal currency over time without selling Bitcoins or laboring, that is, "having money that can't be spent" ”.
But there is a problem here. Mortgage lending is subject to "liquidation risk." The appreciation of Bitcoin relative to credit currencies is a long-term trend, but there are still price fluctuations in the short term. Even leaving aside incidents such as "pin insertion", there are often 50% or even 70% or more fluctuations from the high point to the low point of a cycle. amplitude.
Being liquidated is equivalent to being forced to sell Bitcoin at a low price in exchange for legal currency to repay debts. The attempt to "spent all the money" failed again. At the same time, due to the violent market fluctuations, there may be a situation where a K-line falls below the liquidation price, causing liquidation, and then the currency price quickly pulls back, causing huge losses to the borrowers.
One way to avoid liquidation is to maintain an extremely low LTV (Loan to Value). For example, if you only lend $300,000 of Bitcoin worth $1 million as collateral, you can almost avoid liquidation caused by short-term price fluctuations. But on the one hand, there is no "absolute insurance", and on the other hand, the capital utilization rate of doing so is too low.
So what to do?
soft liquidation
Lending with a soft liquidation mechanism can be used to avoid short-term currency price fluctuations causing us to lose our Bitcoin positions. Take borrowing crvUSD as collateral for Bitcoin as an example:
In Curve Finance's crvUSD product, the liquidation of collateral is carried out through AMM and is a progressive soft liquidation method, and the collateral will be gradually liquidated as the price drops. But liquidation in AMM is reversible. After the price of collateral rises, AMM will help users buy back the assets.
Liquidating AMM
crvUSD implements soft liquidation through LLAMMA (Lending-Liquidating AMM Algorithm) and designs a special AMM pool for mortgage 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 price of the collateral drops to the liquidation start price, the collateral in the AMM begins to be sold for stablecoins, and then the collateral is gradually sold as the price drops. When the collateral price falls below the liquidation termination price, only stablecoins are left in the AMM.
LLAMMA’s liquidation process 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 Bitcoin. When the price of Bitcoin is within the range, there are two Tokens in the AMM that can be exchanged for each other. When the price is outside the price range, there is only one Token in the AMM pool. This is also the design idea of LLAMMA liquidation start price and end price. When the collateral is Bitcoin, and the price is higher than the range, the AMM pool is all Bitcoin. When the price is within the range, Bitcoin is gradually liquidated into USD, as shown in the figure.
The difference from Uniswap V3 is that the higher the Bitcoin price in Uni V3, the greater the amount of USD in the AMM pool. In LLAMMA, the lower the Bitcoin price, the greater the amount of $USD in the AMM pool, because Bitcoin needs to be sold for liquidation. When the price of Bitcoin rises, the Bitcoin mortgage assets can also be bought back to ensure that the user's exposure remains unchanged.
Source: Foresight News
Under the soft liquidation mechanism, even if liquidation occurs, we will buy back the collateral at almost the same price as when the price rises, ensuring that the position remains almost unchanged. And due to the premise that Bitcoin will appreciate relative to credit currencies over a longer time scale, the liquidated currency will inevitably rise back in the future. (Soft liquidation is initiated by external arbitrageurs. Borrowers will suffer very little losses compared to hard liquidation and need to avoid falling into the liquidation range frequently. This also reflects the opposite design philosophy to Uni v3: LP hopes that the price will fall within the range as much as possible Harvest fees, borrowers hope that the price will fall within the range as little as possible to reduce losses).
At this point, the logic is closed: 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. With a certain amount of Bitcoin held, the amount of fiat currency available without labor gradually increases over time. Does this count as having “endless money”?
Conclusion
This article introduces an investment and consumption strategy that guarantees Bitcoin positions while having continuous cash flow through a lending strategy, and introduces the advantages of using a soft liquidation mechanism. If you hold a large amount of Bitcoin, this plan is practical and may be one of the best strategies for people to stay calm without having to work. However, this plan also has a flaw, which prevents students like the author from settling down and has to work hard - it does not point out where to get Bitcoins that are enough to lay down...
So the editor decided to break through, took out his mobile phone, and sent a message to his boss, "It's Crazy Thursday tomorrow, can you give me 50 Bitcoins?"
[Disclaimer] There are risks in the market, so investment needs to be cautious. This article does not constitute investment advice, and users should consider whether any opinions, views or conclusions contained in this article are appropriate for their particular circumstances. Invest accordingly and do so at your own risk.
This article is reprinted with permission from: "Foresight News"
Original article by Alex Liu, Foresight News
