On The Brink with Castle Island - Patrick Dugan (Tradelayer) – HyperCryptoDollarization (EP.78)

Episode Date: May 11, 2020

In this episode, we talk to Patrick Dugan, coiner of the term 'crypto-dollarization'. Patrick has a wealth of knowledge regarding stablecoins and the prospects for public blockchains to carry fiat-denominated value. Covered in this episode:  His formative experiences living under capital controls in Argentina How Patrick's time in LatAm taught him about dollarization Political drivers of the dollar's predominance in LATAM How Patrick realized that crypto-dollarization would be important Patrick's experiences working for the Omni Layer Foundation Patrick's analysis of the earliest stablecoins like BitUSD, Nubits, and Tether (Omni) Patrick's analysis of the stablecoin models which are most likely to succeed long-term Likely geopolitical effects of crypto-dollarization

Hello and welcome back to another episode of On the Brank with Castle Island. I'm Nick Carter. Today on the show, we have Patrick Dugan. Patrick is the founder of Trade Layer, which is a protocol designed to bring financial expressiveness to Bitcoin and Lightcoin. So when I started this crypto dollarization series, it didn't really occur to me to look into who had coined the phrase. And I knew I hadn't coined it, but I wasn't sure who had. So I looked into it. So I looked into it. it. And as far as I can tell, the first mention of crypto-dollarization came from Patrick Dugan in 2018. So Patrick wrote this great essay called hyper-cryptodolarization, which is a play on hyper-bitquinization, saying, you know, the most interesting phenomenon in this industry is actually going to be the

ability for public blockchains to carry dollars with potentially really significant geopolitical consequences. So I wanted to get Patrick on the show to talk about how he had this insight long before anybody else realized that it would be the case. He's also had a front row seat to a whole bunch of early stable coin experiments. He was around when Tether was just getting started. And so he's kind of an amateur historian of sorts for some of these stable coin projects. So I wanted to talk about that. And I also wanted to get his take on the current stable coins. He brings a wealth of knowledge from derivatives trading and from having lived through capital controls in Latin America, in Chile and Argentina. But mostly, I wanted to talk about how he realized that crypto dollarization was an

important trend here. So without further ado, let's jump right into the show. Brought down by bad mortgage investments, Lehman, which has 25,000 employees, will be liquidated. The federal government loans American International Group, AIG, $85 billion. This is a different kind of market and the Fed is asleep. The federal government is stepping it to stabilize Fannie Mae and Freddie Mac, the two mortgage giants that have been threatened by the housing crisis. The bank of England has pumped 75 billion pounds more into Britain's ailing economy with a new round of quantitative easy. And a print a couple trillion dollars and all of a sudden people start to worry. So out of this worry, we have something called a Bitcoin. Bitcoin. Today we welcome Patrick Dugan onto the podcast.

So Patrick is the founder of Trade Lair. He has managed dollarized Bitcoin treasuries, and he's traded derivatives spreads for six years. On top of all that, according to my research, Patrick is the first person to have uttered the phrase crypto dollarization. So I'm informally going to credit Patrick with coining that phrase. So Patrick, welcome to the show. Well, thank you very much for having me and thanks for giving me that credit. It really means a lot to me. Well, you were, you know, to your credit, you were talking about it, you know, long before anybody else caught on to the idea as far as I can tell. Although maybe they called it something else.

But I think crypto dollarization is the right word for it. Yeah, well, I adapted it in sort of late 18 and 19 when I was talking with more Bitcoin maximal people to Bitcoin dollarization so it would be palatable to them. But certainly Ethereum, you know, got out in the lead. Although dollar for dollar, I mean, let's abstract out tether. Let's just look at the Bitcoin swap market, open interest. It is bigger than die, for example, right? And similar things on these. So actually, maybe Bitcoin still has the network effect lead there. But these numbers are in the retrospect, these numbers, oh, this was a 200 mil, this was N billion. Nobody, you know, nobody's going to care about what what one or two

billion dollars was because we're going to go, we're going to trillions, you know, even if the money supply doesn't go crazy just from the time value. So we'll get to that. That's the big theme. And yeah, I think the reason why I am this dude, and I've been like a profit in the wilderness for these like six years about this trend and this use case. A lot of Bitcoiners were just all about like their gains basically and like I'll pay it with the credit card and whatever and that's cool and then I you know I happen to be more sympathetic to the big blocker side of the Civil War so then I had to like reassess and I came back to the the other side and so I think I've cleaned my record of that but but going way back further going back to 2013 when I got into Bitcoin the first trade I did other than the

than selling the Bitcoin for pesos in the capital controls country where I'd been robbed at gunpoint, right? That's my like origin story. My next trade really was an ARB that I did for a client who was another guy in startup Chile and I made like a hundred bucks, right? And I was like, holy shit, that's so much easier to make money on than delivering organic food, which is what I was doing at the time. So because I have such a weird life where I was like flying into Argentina to like deliver cash to people, you know, and all this stuff. And then later, I was living in Argentina the next year under the capital controls. And I would have to go to a guy named Dante. And then there was like another guy. There were like two or three people that I would hit up to get money.

And before that I used Huala, which I talked about in that blog post, the crypto dollarization blog post, and how that works. And how Bitcoin is like a much faster settlement, essentially, Right, whereas I had to trust the shadow banker to show up like a week later and deliver me all the pissos. So it's weird, you know, instead of like I get a direct deposit, my auto bill comes in and I pay my credit cards and I pay my cable and so on. God forbid if you pay for cable, but you know what I mean? I would have to physically like run around Buenos Aires like once a month and spend all these hours just settling my monthly billing cycle, you know, and cash. going through selling for Bitcoin to dollars and then selling dollars for pesos. It was a really weird time.

And then I moved to Chile, which has a very, so in Argentina, they would have this weird sort of harmony with the socialist spending of the government where there was an official rate, which you'd get at the ATM, so you're getting super ripped off. And then there was the gray rate where people would buy bonds in New York and sell them in local currency and it was all legal and that would be a price sort of in the middle and then on the high end if you had cash in the streets you'd get the blue rate so now that we're back to the CFK they're back to this meanwhile in Chile very opposite political kind of place more fashy than socialist but you know they're not capital F fascist they're not literally Mussolini they're just

fashy they have a few you know they shoot a few people whatever now and then you know screw up the unions not pay people their benefits, whatever. And so this currency is rather, I mean, it is at new highs, but it's only creaking about 15% weaker against the dollar since the highs from 2002. So that's not bad as a Latin American currency goes. Yeah, right? I mean, look at all these charts.

They're all racks. Yeah, and so Chile's, yeah, and a lot of it has to do with the commodities being weak and the copper being weak, because it's copper export that fuels the dollar inflows to this country. So everybody became under this dollar system, basically commodity serfs to the Henry Kissinger World Order. And Chile was like all about it. But it wasn't the fascism and breaking up strikes and all this that got Chile to be the economic miracle that it was lauded as. It was because they invented their own inflation index and their own banker currency called the

Unidad de fomento, UF, and you can actually pull this up on trading view. You can look at the daily chart, and they'll quarter to quarter do an estimate of the inflation deflation. They'll kind of walk the dog up and down to recalibrate when they missed. And then sometimes it'll go way down in a deflationary event. I haven't checked it lately, but like in 2008, it went down 20%. But normally it works. So you can borrow money in this unit.

You pay whatever the inflation rate is and that re-index every year. plus 3%, you pay off your mortgage. You don't even notice the principal payment going out because you're, you know, you're paying less interest, right? So they kind of, they do the math and it looks smooth. You feel like you're just paying the same amount, unless there's higher than anticipated inflation. So the thing is anticipation, expectation, they all converge.

So from 1990, when they introduced it, they had 20%. By the end of the decade, it was 3, 4%. And, yeah, as Borat would say, great success. I mean, they really, they couldn't defeat that genie until, right? So everybody would hoard dollars, and Ecuador would hoard dollars, and Bolivia, their central bank. I was speaking with their director of payments at a conference in Miami. He was a big Hugo guy, not Hugo Shado, sorry, my dad. It's a completely different guy.

Evo, he was a big Evo fan, right? He, like, worked for Evo. And he didn't like, he didn't like Bitcoin. and they have enough. They had like $10 billion or $11 billion in the bank, and their whole M0 base was effectively like $8 or $9 billion. So the Bolivian people were totally safe from any kind of forex volatility, and they would give them a e-money wallet.

They're doing all the stuff that we bitcoiners like to talk about, like banking the unbanks or whatever. But they're like the socialist central bank, and then they just did it, like with an SQL, you know. And they like kick our ass on UX and they got cash preference down from 68 to 38%. So the lesson in all of this is you can do it with commodities. You can do it with your own thing. And Bitcoin has to compete with that.

So if you're small, like Bolivia doesn't really matter that much. It's like tether or something, right? I mean, really, it's like the Bolivian economy's money supply is like two tethers right now. And then in Argentina's case, it's funny because you think, oh, Argentina's the socialist basket case. I've had a bunch of conversations with like Paraguayan immigrants who talk about just the deflationary vibe, just the lack of stuff going on, the lack of just the sheer poverty of like living in Assuncian versus Buenos Aires, where there's a bunch of bigger economy. So it can kind of work. And then obviously there's Venezuela where people are starving and there's not enough medicine.

And it's like almost a collapse. Anyway, so I don't want to get too into the weeds delving into Latin America. There's a whole lot of color about Latin America. But it's a great petri dish for lessons in dollarization. So that may also have led me to be this dollarization guy. Yeah. Because I'm a gringo who went to Latin America. to exploit the dollarization, right?

Yeah, I was much later to this topic not having lived in Latin America, but it did, maybe because it's like in some sense America's imperial backyard or at least used to be, you know, and the U.S. has intervened so many times in Latin America or, you know, trade volumes with the U.S. are very high, but dollarization is very pronounced throughout Latin America. And there's so many experiments there. Yeah, it's soft Monroe Doctrine. Right. Yeah.

That's without all the IMF loans and whatnot. And then I was mentioning to you, there are theorists who delve into this more, but there's definitely like a very political tiering in the world insofar as who has access to swap. Oh, I think it might have been Tankus. Nathan Tankus was talking about this. Yeah.

Just in time, just click. So you can see how like, you know, Nathan Tankus is like more interested in that side of it, but it's a thing, right? So it's the cantillion effect exacerbated. Who has priority access to the Fed swap lines? Right. And then, you know, also irrespective of that, this is one for the right-wingers, like Chile, by doing its own restraint and having a credible enough information flow between all these banks

and so on to establish this inflation index and then basing their banking system assets on that, they managed to earn legitimately, you know, through trade surplus, a lot of dollars, right? So the Chilean corporate sector and public sector both have, you know, instead of it like, you know, the Politburo is stockpiling dollars for the people, like in Bolivia, they just earned it, you know, through just a good old capitalism. And in Argentina, part of the leftist politic is exacerbated by the inequality, that's caused by the elite Argentines continually, you know, getting ahead of this game, right? Because it's not like, oh, as soon as Bernie gets elected, but, you know, like people will always

scheme, right? And it was the rich people who actually sort of benefited from the socialism because they could arbitrage more, you know? Yeah, it was kind of sick. So what works, right? That's MMT in action over there in Argentina. And there's only so much soy. income they can get. But at least soy, people are still feeding cows. All those supply chains, they're getting perfuffled there. There's no negative beef prices yet. So Argentina's, you know, it might, it might work for them. And they reduced inequality a lot through all the aggressive money printing. So instead of lowering, lowering rates and getting everybody to bid up US stocks like the Fed did, they like beat their currency to death every year.

And everybody gets used to this double-digit inflation rate. And then it's a game of fudging, how bad is it? But it never got so bad that small businesses couldn't just, you know, keep marking stuff up every quarter or whatever. It's not like they're marking it up twice a day. Like my, I knew a woman who grew up in Hooie and she, when she lives in the, hood in Argentina and she got the apartment through Eva Vita Peron's gifting sort of it was like two months salary to pay a fee and you got it and then

she lived she had that to hold on to in the next decade when she lived through the hyperinflation and she'd have to go shopping twice a day like before work and after work because they kept changing the prices that badly so in the modern era technology is enabled enough well actually I don't know I'm not sure if I want to comment too much in hyperinflation it's it's crazy I think what's more, I mean, it could happen, but what's more likely is this Argentine style kind of 70s pot boiler and we're in the pot, right? Yeah.

So. So one of the main reasons I want to get you on here was, you know, you've been an advocate for this theory of crypto dollarization and you have a great blog post which I'll link to called hyper crypto dollarization, which, you know, to me is written. partly is a response to the hyper-bitquinization thesis, which, you know, I don't know if that's a sincere thing, or it's a meme, or it's an attempted Overton window opening, but it's certainly a concept which exists in Bitcoin land. Yeah.

And I want to read an extract because it's very sensible. Oh, thank you. So, okay, so, and I quote, the big story for cryptocurrency is not going to, going to be hyper-bitquinization. It's going to be hyper-crypto-dollarization. You can still see parabolic trend moves in the underlying collateral blockchain securing commodity that is the base of the money supply expansion, but you need more functionality for people than just giving them digital gold. You need to give them a full reserve, decentralized banking system to turn that digital gold into digital currency. This creates a dynamic equilibrium price that satisfies all marginal demand

for either speculative capital to bet on a rise in demand for savings capital or for the savings capital. And you wrote this in February 2018. Back then, we were kind of in the middle of this long bear market. Still are, I guess. Well, it was just the beginning. Yeah. It was just the one of the beginning.

That's right. So we were still coming down from that high in 2017. The interesting thing is stable coins didn't really exist meaningfully in 2017. I mean, Tether grew, of course. but it was just like a tokenized IOU for Bitfenaxis balance sheet. Nobody at that point had realized that stable coins could have a transactional usage outside of just inter-exchange settlement. So I'm curious how and why you had this realization,

you know, how did you come to realize that this would be a significant theme? Well, I was looking at my initial trades for some startup Chile guys in 2013 as a dollar transfer alternative because you would pay like 1% to the bank to like, you know, on the currency spread. You know, it was something opaque that they could rip you off on, right? So I found a bank that would let me do it tighter. It was like a one peso spread and it was like a sun. It was like a Java applet. And then once I loaded the applet, I'd have to like call them and punch the ticket. It was cute, you know, but it was efficient.

So I found that. I cycled a little bit of that. So I was seeing myself as a dollar guy, you know, because I wasn't trying to like hold dozens of Bitcoin for the upside. Because it was, you know, it was too broke, right? I'm just trying to make, I'm just trying to make money. I'm just trying to find a business, right? And then when I went back to Argentina and I was talking with the Argentine guy

based out of New York who does the dollar Greece bond trading. And I was like, let's do this with Bitfinax. as the hedge, and it's like the same thing, but Bitcoin is the bond. And then I got involved with Omni, which was MasterCoin back then. I like pinged Brock Pierce on LinkedIn and he led me into the room and it was a pretty good career move for me. You know, it was like a well-funded, not super well-run, but a well-funded project in that time. And they were throwing money all over the place. The first I CO. I remember a while back I was writing a thread trying to piece. together the history and you gave me lots of very useful historical context.

It's like seven or eight chapters of a book, like the multi-year arc. Or yeah, I mean, maybe five depending on how, but yeah, there's a lot of story just in like what happened with Omni layer foundation like 2014 and 15. But ICOs maybe have moral hazard and that people are less likely to be judicious about spending. Right. And then also they weren't hedging. They were not dollarizing themselves.

So they had a weird treasury policy that was sort of a lack of a treasury policy. But it made a certain weird sense from a tax point of view where they would just pay people out in Bitcoin. And the idea is you're realizing gains as you deduct the total. So you don't have to worry about dealing with capital gains tax. But then they missed the chance to sell their treasury at 1K or at 650. and so on, which led to them being underfunded. Then there was a famous bait and switch that I undid a year later. And then Craig and I were like bros and I was like, hey, there's going to be these derivative coins.

But I think also there's room for USD receipts that are like exchange liabilities. Because obviously that's a thing. And I think BitFinex is a likely innovator to take that. This was when BitFinex was like the White Knight before they became the Rhoves Gallery, right? And this is how they became the Rokes Gallery is, okay, great. They're innovative. They adopt Heather. I went out on a trip to Hong Kong in 2014.

I met Jean-Louis, Vander Vendervilt. It's a very classy name. I thought I was very impressed by meeting him because he, he like lives up to that. You know, when you meet him, he's got like a good hair, like a little quaff and like a sweater and everything. And then I met Arthur and Ben downstairs at the bubble tea shop. And we were talking about their thing. And they were talking about how we're the central counterparty. And I said, bro, you got to, I didn't say bro at the time because I didn't adopt that.

No one cliche about them. I've been in the fact of the sense. But rather, I said, you know, look, what you got to do is give people this one-click experience to just get this dollar-dorized deal. And they like, they didn't like really go for it at the time. They thought it was more about the speculators and the spreads, which was Arthur's background, right? So Arthur was an Arab guy at Deutsche, and that's how he does his writing. And it helped. It really worked.

He, like, taught people, like, you can buy a Bitcoin and you can sell this and you get the cash carry, right? Like, he popularized that. But it took them – there was, like, a time lag. And in that time lag, there was the bear market. I was super broke. I didn't get the funding that I was going to get. But then I was looking at, so this is something I haven't mentioned on a podcast. There was this moment where I was looking at the accounting for the ICOs coin addresses.

And the word on the street. Which ICO? For Omni. Okay. For MasterCoin. Yeah. And the word on the street was that, you know, the money was all gone. This was like January 2015.

And then I looked, I did a little forensic accounting on the blockchain. And I saw like, there's a thousand bitcoins on this other, on this fourth address. Like what the fuck, right? And then and I was like really freaking out. I was like what is going on like is our JR and DJ like pulling one over on me or what and I asked him about it and Jair's like oh yeah one of our trustees gave us other Bitcoin and to hold that and cold and I was like okay sure that makes sense right these are fungible whatever this is the thing with trustees as well right this shit has to be documented So another like nine months later after doing things on no budget and like kind of joining the board and proposing how we spend the dev reward, which was this extra Omni that was left over. And then taking delivery of a bunch of coins and starting to post a lot of orders to try and improve the liquidity in it.

Then I looked into the accounting and I found, you know, basically there was like a self-dealing transaction at a very bad price. tax code was like punitive towards it. So I managed to like ring the ring that bucket. So then I was the treasurer and I stuck to basically like a 30 to 20% long exposure of under hedging, sometimes 50, which I thought was pretty good. But then, you know, it was like, what if we didn't have you managing the money and we just got the total return of Bitcoin like like before, right? So they like got their treasury racked by not hedging and then I underperformed by hedging. but that's life. Because the hedging period was 2013?

No, the hedging, the non-hedge period was 2014. Okay. And then the hedge, the period, hence, was a lot less money than they originally realized as well. So that was a part of it. Otherwise, I would have, you know, I could have punted on a long, on a big, big long on factum and stuff.

I just didn't want to, you know, I could have taken one on ETH. I was like, it's not my project. So anyway, so I, one, one thing about me as a money manager is I don't take that much risk, which is why I'm obsessed with this stuff. If I take more risk, I have maybe made more money. But when you're fiduciary and you're doing payroll, right, or if you're like a single mom and you've got, you got to buy huggies, you know, you can't take those time horizons. Yeah. And this is why this is why we need

this. And at the time, so Dan Larimer had kind of kicked forward the idea in his blog posts about BitUSD. Yeah. And basically bit USD. So like all dollars, it's like a sort of abstract accounting brand, you might say, based on essentially redeemable liabilities, right? So in the U.S.'s case, it's redeemable against this liability that they're generating all the time, which is anytime someone makes money in the U.S. economy, they owe tax.

And you've discussed this at length in other podcasts, you know. the Fed, the military, everything, right? Great. So we understand that this is kind of unfair. And then and there's a lot of the financialization since the 80s has been driven by a shift from secured lending in business or sort of loose lightly unsecured lending in business like commercial paper going back to the 1880s, right? But then you got into the the retail, right, in the 70s and really in the 80s with the Kissinger Petro. dollar and the growing money supply with less inflation. I showed a chart of that to a bunch of Latin American bankers to explain.

Like, this is why your career has been different than this, you know? This is what it was like to work at Citibank. You guys were doing something else, you know? And so the U.S. created this Goldilocks situation for themselves, and you could just expand, expand. But anyway, we're going back. So, like, Dan Larimer's point was, let's go back to secured. We can create a dollar as a secured loan. against these bit shows. But with a big, it was like a very low loan to value ratio.

Right. And I met a guy in the Bitcoin embassy in Buenos Aires in early 2015 who was working on a dollar wallet, 4-bit USD. So, you know, they were trying to get the last mile part in place. But I think a big part of the reason why that didn't take off is, A, timing with the cycle, right? So that was the child of that 2013 cycle. And by 2017, we were on to basically BitUSD 2.0 with Maker and some of these other Heath-based. Yeah. Fancy. I mean, Maker is like very similar to BitUSD, right? Pretty much. It has a more generous loan to value ratio. And to be fair, the underlying asset is like, you know, a hundred times bigger market cap than the USDA. That helps. That helps. Yeah, as opposed to bit shares being the collateral, yeah. Well, yeah, because all these models, and mine included, right, full disclosure,

rely on there being demand and Bitcoin, like if you did a full simplicity, mass, whatever, to do it all in Bitcoin, it all, you know, and the security model Bitcoin, all of this stuff relies on there being demand. Now, fortunately, so like the problem with BitUSD or like new bits, in, well, in BitUSD's case, Bit Shares was a proof of stake. So there was no senior George. It was all fee shuffling and you know it works as well as it works but how well does it scale could a state after knock it over if it were worth 10 billion right so this never i mean now this question's up with the with ethereum which has belayed the question by six years uh because it's a really scary question but that's a separate you know that's a separate thing and then new bits was what was hot

so i was going to start market making and tether on poloniacs and the word from tristan the CEO uh via Craig was that like we really need to like get this up because they want to like de-list tether and list new bits really when was that this was March 2015 what was their preference for new bits over tether it was just doing like 90 bitcoins a day which back then was not a whole lot of money either it's like 100 grand right but like but um but yeah basically just because it was doing more volume so they needed the market maker to like kick it up um but the reason why tether succeeded and the reason why I like also trade layer is built on on Omni still and why I want to do the same thing with these this decentralized successor hopefully is it was really easy to install right you just spin up a Bitcoin node you're ready running it you've already got the blockchain and your that that files on your local maybe maybe don't you know point two instances to the same folder or whatever if there's any that might have some edge cases but yeah I mean it's simple enough to install right

It's just an alternative Bitcoin note. Omni, that is, right? Well, and trade layer. Oh, yeah. Well, and for Lightcoin and then we got the Bitcoin port. Yeah, so it's the same idea. The whole idea with OP return is instead of designing particular op codes and then trying to get through the hard fork process or trying to do user activated soft forks, but then

how reliable is the counterparty risk there if there, it happens to be a miner who who mines your transaction, like somebody exit scams you in violation of the op code. Yeah. Right. It's, it's, you know, and you know, most miners are going to mine it right vis-a-vis the USAF, but then Jehan can get you or whatever, right? He could even be your counterparty and then you get exit scams, you know, like that. So it's not the most, as far as like, I'm a financial institution, I want to like plug into

a TSR with Goldman who's going through State Street, is going through ICE. who's plugging into this liquidity complex where I can get, you know, whatever it's going to be, 10, 7% a year in USDA or something like that as these things mature. Right now they're a lot higher, but that's just because it's a small speculators market. I mean, you know, I'm not going to speculate about rates, but the point is it needs to be like that and every layer of the stack from which that yields springs, because obviously it's driven by the decentralization of the demand for the bearer collateral in the underlying. So there's performance in the underlying so that the punters can pay swap to the savers and still come out ahead.

Otherwise, they go broke and the rates go away, right? So what I'm trying to say is it's harder with Bitcoin. So without return, you can just say, okay, we're going to design a TX. We're going to put in a payload. We're going to parse that. Here's C++ logic. We infer changes to a data structure. We hash that so that nodes can make sure they're running the same state of reality together.

And then we can use the Bitcoin ledger rather freely. So this was like a really early way of trying to add Ethereum like functionality, like tokens, or like dividend payouts or whatever. That was too big. That was the whole premise of MasterCoin. Yes. And it even had a new bits like peg currency feature and a derivative like bet feature. But the derivative bets were all very bespoke OTC.

And then of course the peg currency is new bits. It's not going to work. You can't just wish away units and have it. That was like basis, right? So the so basis is a funny word because what actually does work is derivatives. And derivatives have basis, right? They have some difference between where you trade it and what the underlying references that give the value. Therefore, there's time value.

So it's an alternative to paying interest. And if you're counterparty, if you are fully collateralized in your one X short, your counterparty may well not be. And even if they have the one Bitcoin for the one Bitcoin notional, they still get racked at a 50%. Right. That's how the inverse quoting works. So there is no, you know, full reserve capital F, capital R. but you, the hedger, are fully reserved and therefore can never get liquidated. So your Bitcoin at $1 million would still be the same $10,000 you hedge today plus whatever

you got paid, but the Bitcoin underneath of it would be much less, right? But it's still wealth, you know, and it's that stability and the basis that on which the whole thing hinges. So you were around as some of these really... early stable coin ideas were being kicked around and then it's interesting that like six or seven years later they're being replicated in in new on new blockchains in with slightly different tweaks in new context like omni has you know or tether has just for the most part migrated fully to a theorem now um you know we we see bit usd in make or die you know new bits, those ideas are reincarnated in basis, which is now in other projects like Terra and Sello.

Which of these models for stable coins? And there's new ones. Like you have your idea about swaps or derivatives is now being popularized by the value folks who are using hedging on BitFenix. So on Bitmax to create dollar exposure with Bitcoin. So You know, it's clear that that's your preferred method, but I'm curious as to how you break down the relative advantages. Well, I mean, just like use an analogy of, you got like Hong Kong and Saudi Arabia, and they've had dollar pegs that have endured or like UAE, right? Yeah. Their dollar pegs have endured with like no volatility, right? Like if you could sell options on them, how would you price them?

Right. I mean, there'd be something, and that would be like the CDS-like yield on the sovereign, basically, right? That's how you price them. So that's because they just, like, have enough money, right? So then you've got things, like what Argentina did in the 90s, where they did it kind of fractional reserve. And then that broke. I remember listening to your last guest to talk about that, so I want to delve too deeply. So, you know, I think that the derivatives model, like what happened in the 80s is that banks started

creating dollars notionally as M3 essentially between each other. And you got this huge web of like hundreds of trillions by the 2000s, by the financial crisis is time to come around of interest rate swaps to manage your risk of rolling over debts. Of course, everybody's got a lot of debt in this era, so it's a popular product. And then, you know, the open interest is because they don't net neatly, right? So like net notional might be a lot lower, right? And dot Frank has helped with that and that's led to more more sucking sound. Because what happens is when there's a... So imagine if this Bitcoin thing caught on.

This might be illustrated, right? And we created a global financial crisis because everybody was trusting in, you know, my idea of a decentralized dollar, right? What would happen is you might have, you know, Bitcoin at N trillion, and a fraction of that is in money float. And then a derivative open interest

might be like approaching Bitcoin's market cap, if that, you know, or bigger. Maybe like 50. So the nice thing about Bitcoin is it can't become 200x bigger because that's just very easy to knock, knock into de-leveraging with any real volatility, which Bitcoin is also great for. But like, for instance, I could be clever, Chad, long, a bunch of futures and short, a bunch of swaps, and I have this big balance sheet, right? So my actual capital, I'm just sort of taking a little bit of risk to earn time value with leverage. And it seems safe enough per my bar model. Okay. So like, I do this stuff today, right?

So if, you know, people like me with a lot more capital were doing this at a bigger scale. And then they started to unwind because the basis got crushed, right? The futures came down. The swap's not paying anymore. It's time to unwind this trade, dump the coin, you know, go back into a 0% interest base or whatever. Maybe Fiat's will be negative at that time, right? So it's so that doesn't exist anymore. And that's interesting.

But theoretically it does, right? So, yeah, that system could have problems, right? And because it's inverse quoted, the hedgers are like holding a ton of coin. And then, you know, so the spot selling can can even go, you know, it can go on proportionally to the downside until, you know, there's got to be something. Right. So in Bitcoin's case, it's that you believe in the ledger and this is like the best monetary game in town and the scarcity, right? Really, the scarcity is last. The scarcity is definitely important, but I'm not like a stock to flow alkaliate as much.

But okay, sure. We all buy it because we like that at some level. And then, you know, if it's something like our Metacoin, you know, it doesn't have the base, right? So it needs the cash flow from the oracles. So the oracles are kind of like the external reference. And if there's commerce there, then there's sort of cash flow for the nation of total or the nation of ALA. well on Bitcoin and Bitcoin respectively. So without that kind of inflow and without a proper pricing of the time value of money, all of these models, which are sort of loan models, you know, they don't work. And the whole problem with the legacy system is the politicization of the price discovery of time value of money.

Right. It's sort of a big propaganda play that we're in with that. hence we work, et cetera. So by retaking that, not only do we create better information from just sort of like a high act point of view, but from like a populist sort of prude on, let's open, you know, money to everybody and have a more egalitarian society. It's egalitarian in the sense that a poor man can access a lot of capital at leverage and like get margin called or maybe do really well, right?

And that's something that we haven't really had in humanity is that completely, like anyone has a phone and now you can put up 10 bucks and borrow technically a thousand notional. You know, that's risky. But it's it's there today on centralized exchanges, right? Yeah. So then there's caveats with those. But when you can factor out the custodial risk entirely. And then you have, of course, your operational risk, you shoot yourself in the foot. not managing your keys, right? So we have to solve that. And I think trustees will play a role

because most people can't do that, right, to get this to be, you know, institutions don't want to mess with it on one side. And like, grandma can't, can't have, you know, she doesn't want to hassle it either, right? So I'm hoping to move towards that you act so that everybody in the world can just have dollars. I'm not saying everybody should go into it. I've studied myron Scholes a lot. he really screwed up. People get over enthusiastic about financial models and they get popular and you become like a celebrity, whatever. You go hang out with Noriel Rubini and drink cocktails and like make women nervous together or whatever. But right, that was your, your theory was that, or wait, was that my theory that he was afraid of me too and that's why he's engaging with all the

the crypto Twitter guys. Noriel. Norian, right? Plausible, I guess. Yeah. So. Yeah. So given that you expect dollarization to accelerate, you know, I mean, we've seen Argentina. It looks like they're going to default. I think that was actually announced today. What effect do you see that having geopolitically in particular in Latam? So I think, you know, sovereign death's kind of an interesting edge case because the bigger story is the stealth defaulting through like the long term boiling of. either inflation, if they can get it, they can't get it in the developing countries, or they create a sort of artificially suppressed real yield in the asset base, which makes leverage

more profitable and so on. So it's like zombie corporations in Japan, but for all, for the developing countries banking systems, right? So meanwhile, in countries like Argentina, obviously if you're a bank in Argentina, you can't lend, it's really hard to build up an M2 with that, you'd have to lend, you have to lend a ridiculous interest rates to make it a positive real yield for you. And so they depend on dollarization at a, so under Macri, it was like legal to just, you could just openly do it instead of this stance. So yeah, I mean, it's sad to see, you know, I spent enough time in Argentina, I'd like for Argentina to move forward. When they went neoliberal, everybody hated Macri because their gas bill went up and that's what they see. Right. So,

there's like, yeah, like not everybody's like us, right? Like, and it's actually, you know, it's just MMT in action. And if they default, that's just them holding on some more dollars, basically. So I think it's a great scam for them. They managed to sell a hundred year bond. That's completely unbelievable. I'm hoping that the U.S. Treasury manages to pull off a 50 so they can do the same scam and then we'll be really cooking. But I don't think it's likely like, you know, obviously speaking seriously, developed countries don't do business that way, right? But yeah, it'll shake up. I mean, the Argentine currency has always been inflationary, right? So Argentine people are not going to become more dollarization oriented than they already are,

except perhaps that lower income people will start to buy dollars because they can afford to if there's enough economic growth. Right. So that's the thing about that's kind of the sad subtext of this is that dollarization won't save everybody. It only saves the sort of bourgeoisie people who, who sock them under the mattress, right? And it's always to the benefit of the first, the first movers who can get out before the local currency depreciates even more. Well, like those guys who robbed me were sort of beneficiaries of a political posture that is like very sympathetic to them more than it is sympathetic to me. Right.

And they may have been, you know, certainly secondarily the beneficiary of subsidies and maybe directly or like their mom or whatever because they were like 20. These kids live in, you know, you live with your mom, but you have a gun so you can like rob some people. I get it. So I'd say like the really big story of 2020 so far has just been the like eye water and growth of tether. Yeah. Tether is very controversial and so on. It seems to be getting usage just from what I've heard anecdotally. Not just for crypto purposes, but just for, you know, B2B payments, remittances, et cetera, in particular in Southeast Asia. The monetary base is over $7 billion now. which is kind of monstrous.

What do you make of its long-term prospects in terms of resiliency and its ability, A, for the currency board model to work, or B, to resist the NYUG and rogue governments? Okay, so we're just talking about Tether. I mean, yeah, the Tether's problem has always been AML, right? They took on BTCE's balance sheet in 2017 and effectively irradiated themselves forever

with, you know, Bulgarian dollar. And, you know, offshore money may be in Bulgarian banks that couldn't be moved. I suspect that they've, because they have access to a webbing of counterparty relationships, order books, open interest books, hedge books and the like, right? In BitFinex originally and now throughout the wider Tether Federation, that Tether's assets are largely made up of basically dollarized crypto. And with some degree of rehypification, which is expressed, in beneficial borrowing relationships that traders can use in combination with lower tiered fees

to either arbitrage micro-opportunities or throw around 100, 200 Bitcoin orders on Binance to try and move the derivatives around through short-term market impact. It's very sad. I basically see it as an alternative to the Bitmac swap where you have a similar ratio between the actual amount of Bitcoin and on deposit and the order book and the total volume and open interest is somewhat larger, right? Not everybody who is short a swap on Bitmax is fully collateralized, right? Yeah. So it's this Wild West kind of thing. I think the United States though instead of coming at this like, oh, you ruffians, the United States has got to step up in its game,

you know and so we've gotten some things approved we've got the infrastructure wall street hasn't quite jumped at it um so i think the since we're coming up on our time here like the the essay that you're trying to to weave here is this the narrative and the history of this story right and um so i was going to talk a little bit about usdc and white list versus blacklist travel rule i think i'm going to like logjam that basically like i think fdif t's going to put down more but things like USC can certainly adapt to that. Trade layer supports white list. You can also do it p-to-p. Real businesses are probably going to prefer not to go through a third-party KYC group and just p-to-p. So we're going to have this white trading zone where addresses that have more metadata on them and therefore it's easier to

enforce the travel role and other tracking are going to probably be segregated from all the guys who are off doing coin join and who are using taproot. And so they're both going to exist, right? And we're going to onboard a lot more capital that doesn't really care about being Bitcoin denominated, but it uses the Bitcoin. It soaks up the spot supply. And we need that engine to catalyptically move the market higher, which creates a positive feedback loop in scarcity of the spot market and having a positive sloping derivative structure

so that people can have these dollar positions and get paid. then it's like, well, why don't I do that? Once institutions and then regular people appreciate this trade, and then the clever people will borrow or they'll short things, and so they'll be like short one funding rate and earning this other funding rate, like there's a lot of ways to speculatively attack this positive real yield as long as it persists. So the real constraints are the number of people long, and obviously net inflows and fiat, like fueling that, right?

because obviously once there's that little trickle and it starts to really move, then more speculators will lever more and so on. And my thing is to not let the little guy get fallen behind in all of this, but to try to encourage the so-called little guy to trade or to save, depending on what their personal profile is. Trade, you know, trend follow, not necessarily day trade. People can't make it like that. but use the leverage to participate in the secular shift and this global debt jubilee that's implied by Bitcoin getting repriced into the six and seven figures. And I'm trying to fuel that. So Patrick, this has been a really interesting journey through the origins of stable coins all the way through where they are today. And you've had a front row seat of that pretty much the whole time.

I'll definitely post your hyper crypto dollarization piece, which at some point may be considered seminal. Where would you recommend people follow you? How should they follow your work? Well, you can follow me as Duganist on Twitter at Duganist. And I'm a bit colorful, a bit zany. I like to talk about physics and game design and other things. And really my new trading stuff, it might be over people's heads. But I'd love it if you would all go follow.

trade layer because we're getting ready to launch our beta for real this time. And so it would be good to port some of my audience over there and get some new followers. On Twitter? That'll, yeah, yeah, at TradeLayer. So that'll all just be clean updates. Okay. Nothing off color. Great.

Well, I'll post the links. Thanks so much for coming on, man. It's been a pleasure. I really appreciate you having you now.