TFTC: A Bitcoin Podcast - #450: Bitcoin Money Market Funds with Théo Mogenet

Episode Date: October 1, 2023

Marty sits down with Théo Mogenet to discuss his piece written for Axiom on the financialization of Bitcoin. Théo's Twitter: https://twitter.com/theomogenet Théo's Substack: https://substack.com/@theomogenet 0:00 - Intro 7:00 - Théo’s background 11:06 - Explaining money market funds 16:46 - UK Gilt duration mismatch 22:32 - US bank failures 25:08 - Weaponization of monetary system 39:41 - How Bitcoin fixes this 49:26 - Bitcoin’s increasing demand 52:47 - Through the lens of monetary policy 55:28 - Perpetual markets 1:00:46 - DLCs for futures contracts 1:07:55 - Acquiring liquidity for DLCs 1:18:24 - Nascent companies 1:23:52 - Inciting hyperbitcoinization 1:29:12 - What drives further adoption? 1:40:47 - Théo’s upcoming writing Shoutout to our sponsors: ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Unchained⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠River⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Bitcoin Talent Co⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ TFTC Merch is Available: ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Shop Now⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ Join the TFTC Movement: Main ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠YT Channel⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ Clips ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠YT Channel⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Website⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Twitter⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Instagram⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ Follow Marty Bent: ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Twitter⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Newsletter⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Podcast⁠⁠⁠⁠

we good we're good now so freaks it's your boy marty here to introduce this rip of tftc i sat down with theo mojanae to talk about his latest research piece on the development of bitcoin money market funds he wrote this piece for axiom btc and is currently looking for a job as a researcher focusing on Bitcoin. I think if you listen to this conversation, you'll be thoroughly impressed. And if you're out there looking to hire research analysts, Theo is probably one of the top guys out there. Fascinating conversation.

Made me extremely bullish. You guys are going to like it. We have to read the top three boosts. We only have three boosts so far. We released episode 448 this morning. Opt out of Keynesian brain rot with Godfrey Bloom. very high octane rip here um and since we just released it a few hours ago we only have three boost at blockchain bug 25 000 sats truth sayers we need more of this thanks great guest thank you

blockchain bug and i agree was a great guest at dugan droop 625 sats great rip but show me the car sales room that will accept your bar of gold godfrey i tried selling a gold coin once took it to london dropped it in a starbucks ended up bringing it home again bloody pain in the arse um it's hard to sell gold it is there's more i think you guys need to show some um what's the word i'm looking grace no not grace i mean if you listen to the episode with godfrey he was pretty open like i want bitcoin to succeed we just need more merchant adoption which is coming at mcot 322 sats we're going to make it many people globally are aware of the monetary problems the word continues to spread thank you both for your continued efforts to get the message

out cheers emoji cheers to you at mcot appreciate you guys boosting this if you're not participating in the value for value model we have here with podcasting 2.0 by listening uh via podcasting 2.0 compatible apps like fountain, uh, consider it. Uh, if not, if you want to provide value to the show, if you're listening on Apple, Spotify, fountain, wherever you're listening, give us a rating. It was a five-star rating and a review. It helps us get more exposure. And as MCOT said there, we're trying to get the word out about Bitcoin and solutions, actionable advice in the digital age. Uh, so thank you to freaks for boosting. Thank you for supporting the show, whether you're doing that via podcasting 2.0 or simply giving us a subscribe and a five-star

rating and a review. We appreciate you. We also appreciate our sponsors. This report was brought to you by our good friends at River. River is here to provide you the best Bitcoin-only exchange in the world. You can DCA into Bitcoin with no fees and tight spreads. Other exchanges have fees and wider spreads. River has really worked hard to provide you an experience where you don't have pay if you dca for each buy and you get the tightest spreads in the industry they build their own infrastructure they don't have any third-party dependencies like prime trusts or fortress they built their own wallets their own libraries uh your bitcoin is backed one to one 100 in reserve in multi-sig cold storage if you hold bitcoin on the exchange but river doesn't

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out BitcoinTalent.co. BitcoinTalent.co. Tell them the TFTC sent you and enjoy this rip with Theo Mojane. I believe that in a world where central bankers are tripping over themselves to devalue their currency, Bitcoin wins. In the world of fiat currencies, Bitcoin is the victor. I mean, that's part of the bull case for Bitcoin. If you're not paying attention, you probably should be. Theo, welcome to the show. Thanks for inviting me.

Well, I'm very excited for this conversation. I think this is a very interesting topic I was just explaining to you before we hit record. But I think diving into the piece that you wrote for Axiom is going to be very fascinating because I do think this type of financialization of Bitcoin and doing it in a Bitcoin native way is something that's going to become more prominent as we move forward. But before we dive into the paper you wrote, Orange is the New Green, the Emergence of Bitcoin Money Market Funds, why don't you explain a little bit about yourself, how you found Bitcoin, and why you decided to write this particular research paper? Yeah. So I was trained as a data scientist, and it's in that capacity that I first learned about blockchain originally, basically solving a technical problem for my employer and I jumped into the bandwagon during the 2016-2017 bull run at the time not really understanding what I was doing

I understood Bitcoin like really superficially on a technical level and then a couple months later I was in vacation in Japan and I lost my wallet and I was faced with a really simple problem is that Japan is really expensive country I was staying there for three weeks more and I didn't had any cash I didn't I lost my credit card so I had to phone the credit card company to find solution and they basically told me that either they would send me a western union um up to a thousand dollars which is really little to spend three weeks in japan and it would cost me like something like 150 dollars or they would ship me a new credit card and it would take five days But I had no solution to manage the cost of living in the meantime.

And I remembered I had Bitcoin. I was in the tech capital in Southeast Asia, basically. And so I figured I could find a way to exchange Bitcoin for cash. So I just found a Bitcoin ATM, got in touch with the guy managing the ATM and decided to do a peer-to-peer exchange for physical yen enough to cover all my expenses for three weeks. And then it basically hits me in a really practical way that it was the best way to send value across the globe. And then it's basically at that moment that I decided to delve more into the subject and try to learn anything I could find about it. I was not properly trained in finance and economics. So it's at that time that I entered this rabbit hole, discovering the Austrians.

At the same time, the Bitcoin standards was released. I was totally convinced by safety and stasis and joined his online academy as an early member. And so for the past four years, I've been an independent consultant, basically helping my clients to better understand Bitcoin, develop products around this. and I'm currently stopping that and I'm looking for a job doing research in the industry. Yeah, that's about it.

Well, this paper is indicative of the quality of the research that you do. I don't think it'll be very hard for you to find a job in the industry, which provides us a good jumping off point to jump into it. The concept of Bitcoin emerging as a new type of money market fund

or money market funds that are native to Bitcoin emerging. And really what this type of product would do is solve the trade-off that many Bitcoiners face right now. They like Bitcoin, the asset, the hard asset, the fact that there will only ever be 21 million Bitcoin, that it's a great long-term store of value.

And for those who want to go get off or get on Xero, excuse me, and live encapsulated under a full bitcoin standard individually they run into this problem of the volatility which doesn't make it very viable if you want to hold short-term cash balances the volatility can make can introduce a lot of uncertainty if you're trying to pay bills or do things whether you're an individual or a company alike and so the concept of a money market fund uh natively on bitcoin can sort of help solve this particular problem before we dive into the dynamics of how you would actually build this on bitcoin i think it's

important to understand how money market funds work in the incumbent financial system why they exist and why they're becoming more popular right now in this high interest rate environment so So before we dive into Bitcoin, I guess let's explain the nature and the landscape of the money market fund solutions that exist today and competing products that individuals and companies use, depending on where the market is at any given point in time. Yeah, sure. So basically, a money market fund is a piggy bank for financial institutions. many funds and other kind of financial institutions basically don't like depositing large sums of money into a bank first because there is a counterparty risk and second because it's most of the time it yields lower rates than what you could get at

the left end of the yield curve so with short-term rates and so a money market fund is a really simple fund in which the fund manager will hold short-term dated securities usually treasury bills with really low maturity like three months six months bills and it will issue shares on demands against those assets so it's not fractionally reserved it's just like a simple balance sheet with on the asset side a lot of short-term dated securities and because they are short term they don't have the downside effects of suffering losses when there are rate hikes like now, because there is basically no duration effect. So if, for example, you hold 20-year bonds right now, you have suffered a lot of losses because with a new bond insurance at

higher rates than existing bonds, the future cash flows you will get are rapidly depreciating in value but with short-term bonds you can just help them to maturity because it's only like three months or six months and so the value of the bonds doesn't fluctuate much and so it gives a good place for financial institutions to store cash balance on a short-term basis until they need this cash and deploy it in whatever assets they choose. And currently with the red hikes, your typical money market fund

would yield something like 5.5% on an annualized basis, which is more than you would get holding any kind of fixed income securities with the same level of risk as it is assessed in the traditional financial world. And it's way more than you would get at a deposit account in a traditional bank. So over the past 18 months, something like that, a lot of capital has poured into money market funds.

And yeah, interest for them has grown. And we also witnessed the emergence of with new fintech coming in of like consumer solutions that will allow you to you as an individual, as retail to put some of your capital in this with basically to click through an app. And so, yeah, basically the current macro environment makes it an attractive proposition. And historically, it also has been a piggy bank for financial institutions. So they have always been quite large in terms of assets and their management. Yeah, and really diving into the concept of duration mismatch, which you touched on a bit, I think in the paper you highlight a really important example of that, which is the UK gilt markets earlier this year, late last year, where they had their, it was earlier

this year, time flies, where they had their duration mismatch and almost took the whole UK pension system under. And so I think to highlight the problems in a high interest rate environment and what led to the the turmoil in the gilt markets would be uh worthwhile to jump into as well yeah of course so i think it was yeah late last year um so basically um new governments uh in england in the uk excuse me um put forwards a new budget uh with a lot of tax cuts so um It worried fixed income investors, so they decided to sell a lot of bonds, and then it triggered a kind of reflexive events whereby a lot of bonds were sold.

I must mention that a lot of the pension institutions in the UK used this kind of bond, so long term guilds as collateral to fund their operations through schemes called LDI. And so when the rates skyrocketed, it collapsed the value of the bonds. And because they have pledged so much of those bonds as collateral, they faced margin goals. So basically, their lenders told them, yeah, your collateral value is depreciating. We need you to post more collateral in order for us to keep the loans going. And the problem was that most of their books is also comprised of long-term guilds. And so, they had to sell more guilds at a moment where the value was already depreciating

fastly and to raise cash in order to meet their margin requirements. And so, it created this kind of feedback loop whereby lower guild prices led to lower guild prices and rendered the guild markets illiquid because most of the institutions that were used to buy those guilds were all selling at the same time. And so the markets teased on the brink of collapse and then the Bank of England stepped in and bought a lot of those deals to backstop the market drawdown, mostly because not doing so would have been basically horrible for the pension industry and would have wiped out a lot of British savings because most of people's retirements are managed by those

funds and so basically they they were at the risk of collapse and the the important thing I think here to understand is that had this kind of financial orthodoxy for the past 40 years that government securities are the more the most liquid instruments so most financial institutions whereas it is banks or other financial institutions use that as collateral to fund their daily operations but since the Covid episodes and inflation taking back banks central banks around the world decided to hike rates, which depreciates the market value of those securities.

And because most of the financial institutions use that as collateral for their borrowings to finance their operations, we have this kind of effect where the lower value of those Those bonds create illiquidity events as those institutions are faced with margin calls which force them to sell more of those bonds, and it was kind of a wake-up call for central bankers. A lot of central bankers and the BIS commented afterwards because it made them understand that, okay, we have to fight inflation by tightening monetary policy, but the problem is that by doing that we risk basically nuke our own bond markets on which all liquidity

relies in the current system. So there are kinds stuck between the rock and the hard place with the peril on inflation on the one side and risk of this kind of liquidation cascades rendering what is supposed to be the most liquid markets in the world, totally illiquid in a really short time frame. Yeah, it's the big problem with these markets that are liquid until they're not. When they're not, things start freaking out. And we saw this duration mismatch lead to a bunch of turmoil in our banking system here in the U.S. with SVB, Signature Bank, particularly First Republic as well.

And so this problem isn't just isolated to these pension plans, this use of treasuries, whether they be U.K. gilts or U.S. treasury bonds as liquid assets on bank balance sheets or pension balance sheets works until it doesn't. Yeah, and it's worth mentioning, it's not a UK problem. It's a global problem. It's just that in the US, following the SVB episode you mentioned, basically US regulators have found a more roundabout way to address this with the BTFP program. So basically, they told all financial institutions in the U.S., okay, so we know you are underwater because you are holding the securities that we basically nuked due to our monetary tightening. So we will put in place this facility in which you can deposit those bonds, and we will lend against it at collateral value, not at market value. So basically, it's a way to keep liquidity going without by up the losses, the notional losses that the bank faced. And since it has been enforced, the BTFP has not decreased in loans and one could make the argument that there is no reason it would in the future because the problem is ongoing. and we are in this weird situation where central bankers told us yeah we will tighten monetary policy to try to stifle inflation but at the same time we will

give liquidity against depreciating streets because we have to to keep the market's going and so it's kind of uh swatching the tightening effects uh um in to some extent yeah it's a bit of a catch-22 if you will and i i mean this just highlights one of the inherent risk of the fiat system run on debt and again using these debt instruments as liquidity providers or sort of liquid assets on your balance sheet. This is one of the big risks that exist out there. You're completely beholden to the whims of the central bankers at any given point in time and what they decide to do in regards to interest rate policy or the expansion or tightening of their balance sheets. That's one of the risks that exist. It makes it hard for capital allocators to

put their money in yield bearing instruments with some form of certainty and then another emerging risk it's probably more emerging and more recognized over the last two years particularly is this risk of confiscation and the weaponization of the monetary rails to simply just cut people off from accessing dollars or liquid treasury assets and so i think that's another important risk to highlight here and describe um in the context of purveying the field and trying to figure out where the safest places to put your money are yeah yeah it's a good thing um one One thing we didn't address here is the over indebtedness of our governments. And so the problem with that is that in order to pay back those debts, you don't have many

solutions. Either you have like a big surge in real growth, which can only happen with a lot of productivity gains. For example, say tomorrow we have a clean net producing energy fusion or stuff like that. But it's really unlikely. You can also inflate the debt away. But of course, once you let inflation run, you risk getting into hyperinflation. And it's really difficult to put the genie back in the bottle once you left it out.

and you can also use another expedient which is called financial repression and basically it's financial jargon to say we will rob people slowly through maintaining bond yields below inflation so basically maintaining negative real bond yields for a long period of time and And the problem with that is that when you do that, you give a really important incentive to people to take their capital and invest it elsewhere, not in government securities, but in a different monetary zone or in different asset classes. So usually, historically speaking, when we had financial regression, we also had capital controls.

And in this perspective, if I'm a regulator or a treasury official, it would make sense for me to limit what you can do with your capital and to try to lean on financial institutions to force them to buy as much government securities as they can. and to try to lean politically or geopolitically on my allies to buy my government securities and stuff like that. And so this combined with the fact that servicing those debts became ever more difficult with rate hikes because it raises the interest expense on the outstanding stock of debt, you have a compelling case for governments seizing private wealth just to bail out self-altering regimes.

And in some sense, it's what we have witnessed over the past two years, And I would argue even more first in a more geopolitical context with the seizure of Russian assets by European member states, Switzerland and the US, which is basically a default on your debt. Also, you had a lot of hints about regulators being keen on severing some crypto on-ramps, maybe to avoid what I just described in terms of capital flights from the domestic markets to elsewhere in the context of financial repression. That was through Operation Chalk Point 2.0, a subject that has been masterfully explained by Bloomberg and also Nick Carter earlier this year. So basically, it was the FDIC telling to the different banks that were in turmoil during the March-April episodes that they would serve as an example because they were banking a lot of crypto startups and individuals. And that basically the FDIC doesn't like that. You also have Iran and other countries being kicked out of SWIFT. Also, during the COVID pandemics, you had global dollar shortages

and you had a lot of people in the government talking about basically weaponizing Fed swap lines, That is, lending facilities to other sovereign states for their short-term dollar funding requirements. So, in effect, for example, saying to Russia and China, we won't allow you to have access to those swap lines. But, for example, Denmark or France is okay because it's our allies. And so for capital allocators around the world, it means that they have to manage another risk that was quite absent from the landscape over the past four decades, which is government seizure and more broadly financial repression, which in a really broad way can be described as you will have less liberty to decide where you will put your money if it stays onshore in regulated vehicles.

Yeah, I mean, we're seeing a great example of this today with the announcement of Chase Bank preventing their customers in the United Kingdom from accessing bitcoin exchanges crypto exchanges more broadly i'm not sure if you saw that no i haven't seen that yeah so it's only in the uk there's a lot of screenshots going around everybody's trying to say that chase is um banning all of their customers from accessing bitcoin and crypto exchanges but it seems like it's isolated to the uk and i imagine that's stemming from some uk regulation that is just making its way through the market but again it cutely highlights

what you just described which is this this push for financial repression and access to this network that if it does succeed if it continues to succeed will prove to be a bit of a thorn in the side of ass of the people that want to contain and retain control of the monetary and financial system. So, the fight is here. You could also extend the reasoning with stablecoin providers, issuers. Because if I am in the situation of the US treasury right now, I could also decide to strike a bargain with the USDC and USDT of this world,

and say to them, okay, I don't like your products, but you are quite helpful to me because you buy that so much of my debts. So I don't want to basically shut you down and all these debts to hit the market at the same time. But I will define how you can operate maybe i will ask you to censor some addresses or to collaborate with different agencies to fight against different risks and yada yada but in exchange you will

pledge to only buy u.s treasuries and even by the maturity i tells you to buy And this will give a regulatory framework. Maybe a lot of people in crypto will cheer about that, saying, yeah, stablecoins are recognized as something legitimate. Whereas it also helps the government sustain its debt because it's a huge marginal buyer of treasuries. Yeah, it's a demand driver. And it's really interesting because Tether particularly is probably one of the most profitable companies on the planet right now when you consider the size of the company, its burn rate, and how much money it's printing just by holding treasuries on its balance sheet to provide the stable coin in Tether. Yeah. I mean, in a high-rate environment, it's a deal of the century. It's like, you can use the capital of your customers to earn yield on it at the rate of 5% per annum.

Yeah. And they're just rolling that into Bitcoin, or a good portion of that into Bitcoin. That scenario, the potential scenario that you just laid out has me thinking in my mind like, Does Tether have the superposition where, yes, they are one of the biggest or a large driver of demand for these treasuries to hold on their balance sheet to ensure that they have one-to-one stability with Tether at the end of the day. But they're using that to roll into this sovereign currency in Bitcoin that they also hold on their balance sheet. And if the government were to come to them and say, hey, we're going to let you do this, but you have to censor these transactions. It's a really interesting scenario because I could see Tether bending the knee to that, but also continuing to transition their profits in the Bitcoin and creating this somewhat superposition where they sort of weaponize the government to accumulate a bunch of Bitcoin and help aid the transition to a Bitcoin standard at the same time. It's not really a question there. It's just something that I think about because I do think the meme around stable coins and the fact that they are a overwhelming majority of the volume on these crypto networks and the individuals and people who think that this is the killer app of crypto are being a bit naive considering what you just explained, which is if the government knocks on your door and says, hey, you have to do this, that, and the other thing,

particularly around censorship of particular users, it sort of defeats the purpose of why Bitcoin exists in the first place and why people LARP about decentralized cryptocurrencies existing, being separate from the state. If we have these stable coins that are heavily dependent on fiat architecture and systems that are centralized points of failure, it's all for naught at the end of the day. Yeah. One last thing is that Tether guys were less naive than their competitors, I think. So they structured in a way where they rely less on the U.S. banking system. Whereas I think the low-hanging fruit for what I described is more like USDC, which decided to take the regulated approach in the US and I will basically be nice with the regulators and they will help me have a flourishing business.

But they could also find out that the bigger problem for the government is solvency, and so that they would basically be leaned on by the government to buy more treasuries, whereas it's harder to lean on Tether due to their structure. although it's not impossible at all completely agree and usdc seems pretty keen on bending the knee and trying to appease the government to the best of their abilities and say hey we want to be the regulated stable coin we'll do whatever you ask we just want to make sure that we're getting that flow and the fees that come from that flow which is not the the approach I would take or one I think is an overall benefit for humanity in the long run. But that's what Jeremy Allaire and Circle have decided to do. But I think we've done an incredible job of laying out the problem right now.

Whether you're an individual or a company, you want the ability to put your money in yield-bearing instruments that will allow you to increase the size of your balance sheet at relatively low risk. However, we live in this environment where governments are severely over indebted, increasing the amount of debt that they have. And then on top of that, getting increasingly Orwellian and using their ability to censor and prevent people from interacting with each other to dictate what happens throughout the financial system that they control. And so enter Bitcoin and attempting to replicate the yield that exists in these money market funds and other instruments, but then also provide the added benefit of being a non-sovereign

currency that doesn't have the ability to expand its monetary units or for central authority to control what happens within the network. And so I think in the paper, you do a really good job of laying out um sort of the primitives of these types of products uh that have been built or not necessarily even built just certain um functionalities of the industry whether it be on bitmex that have been leveraged to create sort of these synthetic uh money market funds and how we can actually institutionalize that or not even institutionalize it just make it legitimate and productize it more moving forward so jumping into how bitcoin fixes this problem how people have attempted to do it in the past and how it may look in the future yeah so um

as as we mentioned at the beginning um bitcoin is an exceptional um place to for your long-term savings because its monetary policy somewhat guarantees that you will get a real positive return in the long run but its monetary policy is also the thing that make it so volatile something cannot grow that much without showcasing that much volatility in the short term and so you can still benefits from bitcoin even if you are a no-coiner for example and you don't want to hold bitcoin in the long term just by understanding that such appreciation and volatility is your friend and what i mean by that is that using derivatives on bitcoin and more specifically perpetual swaps which has been invented by BitMEX in 2016, you can have your cash and carry arrangements

whereby you will short the dollar value of your Bitcoin holdings which gives you a stable balance in dollar whatever the price of Bitcoin does because if the price of Bitcoin for example rises then the value of your short will plummet, but your collateral in Bitcoin will appreciate proportionately. Conversely, if the price of Bitcoin drops, your short will thwart the depreciation of your collateral. And the interesting thing about this market is that basically Bitcoin returns have been so off the charts

for the past seven years, that the future prices almost always trade higher than the spot prices. And this means that by shorting Bitcoin that you held at the same time, you get a stable dollar value plus some form of yields, what is called a premium through basis trade. so maybe I should explain in more depth what perpetual swaps are so usually when you have the spot markets and a future market on top of this you will have different contracts that have different expiry dates so a future contract basically is just a contract that say I will have the ability I will be excuse

me, I will be shipped this commodity, this asset in the future at a certain date and I buy it now to have the underlying in the future. And Bitcoin being the first asset in history that trades around the clock, the guy at BitMEX decided to change the way future contracts are structured to create a novel instrument called perpetual swaps. And a perpetual swap is basically a future contract without an expiry date. You can maintain a position for as long as you like. And every eight hours, you will have peer-to-peer payments between long and short, reflecting

the spread between the futures and the spot prices, which mechanically will correct, annihilate the spreads between both markets. And this means that, for example, when the perpetuals are trading higher than the spots, which is the case most of the time, by being short Bitcoin, you will get a positive payment, a small payment every eight hours almost consistently. Conversely, if you are long Bitcoin, you will pay basically to borrow and gain leverage on your Bitcoin. And in most markets, spot prices and future prices tend to fluctuate with spot prices sometimes below future prices and future prices sometimes below spot prices.

Bitcoin what the article I wrote for Axiom shows is that at least 72% of the time it's in contango meaning that perpetual prices are higher than spot prices and I tried to outline the performance of such trades so let's say for example that you would have put 100 dollars in this trade since perpetual have been launched in 2016 it would have yielded something like 140 percent over this period and remember this is with the stable dollar balance so it's totally comparable to government securities or something like that because it's stable in dollars you don't really bear any risk except from the counterparty risk with the exchange which we will talk more about

later and you would get so something like 20% annualized which is completely of the charts compared to traditional benchmarks, so money market funds, long-dated treasuries and stuff like that. Another thing I tried to calculate is what would happen if an individual decided randomly at any point in time to use this trade as a cash balance. So I don't want exposure to Bitcoin anymore. I will short the value of my Bitcoin at a random time. So I calculated the returns of all possible portfolio for this trade.

That is any entry point and any exit point. Like you don't try to actively maximize the value you would get. You are just like looking for stability at any given moment. And if we look at the distribution of these returns, we also see that basically any position held over the current cycle, so since the last halving, would have maintained a stable dollar value and would have yielded on average something like 10% with really low volatility, which is, by comparison, way better than any return you would get from a money market fund or a deposit facility at a bank or through Fed fund rates or any other benchmark that you can think of.

Yeah, it's pretty stunning when you look at the numbers, which I'm doing now. I'm looking at the chart you have in the paper and then the Sharpe ratio of 3.79, which is pretty astounding when you benchmark it against every other thing that exists in the fiat world. Another thing that I didn't mention in the piece is that this Sharpe ratio is more or less in line with the Sharpe ratio of the S&P 500 over the same time span which somehow demonstrates that it's it looks legitimate like if it

were too high as you would get with something like UST and Luna or stuff like that, you should be worried because it could indicate that the yield that you get is really not sustainable. Whereas in this case, the yield you get is just demand for traders that want to leverage on Bitcoin because it has been a profitable trade, even though a lot of people lost their short trying doing that and so what we are describing because i i know it can sound like a crypto defied perpetual motion machine but in some sense it's a really healthy kind of yield because it's just someone buying your exposure on bitcoin it's not like you lend some money to

somebody else it's not that you count on somebody generating some returns so that you would get a share of it is just as long as there are people that want to be long bitcoin and there are more people that want to be long bitcoins and short bitcoin you will find people that won't buy this volatility from you and then you would have this arrangement where you could get a stable dollar balance with a yield on top of that yeah and it really makes sense i mean to take a step back and to try to break this down in layman's terms the fundamental thesis behind the trade is that there are many people out there who think that we're still in the early phases of bitcoin's monetization and so they want long exposure to that and sometimes leveraged long exposure to that and

there's another subset of the market that wants to lock in some stable value of the Bitcoin that they hold. And so another way to express or explain this trade is the people that want to lock in the stable value are lending out to the people that want to go levered long that are making what I would argue is a smart bet that Bitcoin is going to continue monetizing and accruing in value. And for providing the service of lending their exposure to these people who going long, they're getting a yield in return as people make money on that long trade. Is that correct? 16.

16. 16. Yeah, exactly. You can also look at this through the lens of monetary policy. Like since the 80s and the introduction of floating exchange rates, most money managers are always looking for basically a positive cash and carry by looking at foreign bond markets. And with different countries having different monetary policies,

there are always bond markets that have higher real rates than others. So let's say, for example, I'm a Japanese pension manager And currently, I can get like 5.5% by holding U.S. treasuries and something like 0.5% by holding JGBs, Japanese government bonds. So what I would do is that I would buy U.S. treasuries and I would hedge my currency risk. And I would still get something like maybe 2% or 3% once I accounted for the cost of hedging. And I have to hedge because my liabilities are to Japanese nationals, so they want their pension paid in Japanese yen. So if there is, for example, tremendous depreciation of the dollars against the yen, I could be in some trouble if I don't hedge. And if you look at Bitcoin as a new continent of sorts, a new monetary zone, it has the best of all monetary policy because it doesn't have central planners, it has scheduled issuance, and you know what the supply will be at any point in time.

And so it's only logical that it commands real rates higher than any competitors. And so in the same manner that money managers have been used to put their capital in one monetary zone or the other, depending on which has the sounder monetary policy, what I'm forecasting is that now they will put it in the Bitcoin monetary zone. And as they did in the past, they will edge their currency risk. That is, they will edge against the volatility of Bitcoin. And they would be better served doing that because the yield they would get is higher than any yield they would get on foreign bond markets. Yeah, I know we touched on it briefly because BitMEX sort of figured this out.

But I think it's important to really dig in and highlight the benefit that the fact that Bitcoin trades 24-7, 365 and the liquidity profile that those perpetually open markets, to use a pun here, provides to individuals, businesses, sovereigns alike. Like it's almost going to be impossible to resist getting exposure to this type of product due to that liquidity profile provided by the fact that Bitcoin is just always running. Yeah, that's a really important point is that, as we mentioned before, like futures contracts usually have an expiry date. And also, like if I buy a hedge to shield myself against volatility of a foreign currency, this edge has an expiration too. And so I constantly need to manage my position. That is, when a contract expires, I will have to buy another contract. And unfortunately for the manager, these contracts can trade at different premiums, depending on what the market thinks they are worth. Another problem with that is that because you have a lot of different contracts trading in parallel, it fragments liquidity.

whereas with the perpetual markets what we can observe in the data is that most of the capital going into bitcoin futures go into perpetuals and so it's basically acts as a shedding point for people that want a future exposure on bitcoin and so it gathers capital and liquidity more efficiently than traditional futures contracts or even traditional financial markets in the TradFi world. And with the added benefits that you can peg and unpeg your Bitcoin basically whenever you want. In the piece, I use the example of the failure of SVB you mentioned earlier, Marty. So imagine, for example, you learn that the bank is failing when the market is closed and it's Friday and it won't open before Monday. If you are in the traditional financial world, you cannot take any position, you cannot edge yourself until Monday.

And when Monday's markets open, it will be a rush because everybody will do the same thing. So you will pay a premium because you will rush into the same trade as anyone and as everybody. And with Bitcoin, it's totally different because you could, for example, learn of the news and decide to unpack your Bitcoin at once. and basically making a directional bet on the fact that Bitcoin will benefit from this event and come through the turmoil in the banking system and decide to repeg your Bitcoin an hour afterwards if you want. And so because Bitcoin settles around the clock and because it can be traded at many venues

and it don't have a market authority that decides when trading begins and when it stops and what is the current price and stuff like that. You have this kind of flexibility where you can be shielded against a lot of risks that you cannot acquire insurance against through traditional channels. Yeah. Yeah. And so like if you see a run on the bank or you believe there's going to be one, you can unpeg that trade benefit from the value appreciation of Bitcoin in reaction to some stress in that market. And then when you want to get back to a stable value, just repeg, do it instantly.

Yeah. And also from a really practical standpoint, you can pay people on Sunday, which you cannot do through the banking system. And if, for example, you send me a bill and you want to be paid at once, I can just send you Bitcoin on a Sunday morning and you will get it in about 10 minutes. And then you can decide to peg it against the dollar as soon as you received it. And to all practical extent, you just got a dollar value on a Sunday when the bank is closed in 10 minutes across the Atlantic. and now this is where things get really interesting because the perpetual swap trade that we've been describing was made famous on bitmex it's been replicated in other exchanges but to a certain extent i mean i think bitmex is actually an example of doing things the right way they create a whole circular bitcoin economy and bitcoin leverage trading desk you couldn't put

dollars in there's no dollar accounts and they leverage multi-sig multi-jurisdictional multi-sig most importantly to ensure that they were able to facilitate trades 24 7 365 and even when a couple of their co-founders were were in prison it proved to be very hard for the authorities that be to prevent BitMEX from actually providing the services that they provide, which is very good to see. But still, even in that setup, there are some single points of failure, and it's definitely risky in some regards in terms of where pressure can be applied. But it is certainly an improvement on the incumbent system, but we can still move further down the spectrum of ensuring that these types of products

are not only yield-bearing, but are as seizure-resistant as possible. And this is by leveraging some of Bitcoin's native properties that can allow you to create these types of products without a BitMEX being involved at all. Yeah. One risk that we left out in the current discussion is counterparty risk,

Because if I were to peg my Bitcoin in such a fashion, for example, at FTX in October 2022, I would have nothing left. And so you are always assuming a counterparty risk because to enter such a trade, you have to deposit margin at an exchange. And there is no way around that. like they won't let you short bitcoin unless you are collateral but you can have the same kind of arrangements where you will short or long bitcoin directly through discrete log contracts which are basically an equivalence of what is usually termed smart contract on DeFi platforms but that can be done on Bitcoin either on Lightning or on the main chain. So to explain rapidly what this discrete lock contract is, basically it's an off-chain

agreement between two parties that will define a payout contingent on some external events and that is enforceable unilaterally even if the other party doesn't cooperate so let's say for example that me and marty bets on the outcome of the super bowl Then we can exchange pre-signed Bitcoin transaction where I will build a transaction that will spend some Bitcoin to Marty and he will build a transaction that will spend some Bitcoin to me. If we agree on the bet, we will then fund a multisig wallet with our wage, with our stakes. And basically, the transaction we built of the specificity that the signature that we used have been tweaked using an external party public key, which is called an oracle. Basically, the oracle is just someone attesting to the outcome of the event. and he does not even have to know that we have made a bet

or that even a bet has been made or what are the terms of this bet. And so once the Super Bowl is finished, this oracle will publish an attestation saying who the winner is and either me or Marty can use this oracle attestation to basically untwik the signature from the transaction we exchange, the off-chain pre-signed transaction I described. And we can use unilaterally, the winning party can unilaterally publish the correct transaction and get the Bitcoin payout,

even if the other party says, no, I don't want to pay, I disagree with the results, I don't think you won, and stuff like that. And so, in effect, to get back to our discussion, this means that you can do future contracts on Bitcoin without abandoning custody of all your funds. You just have to construct a DLC that will reflect the outcome of a future contract. And there you go. you have in the example that we gave you can have like your bitcoin on chain or in the lightning channel and be hedged so that the amounts of bitcoin you own will fluctuate with regards to the bitcoin usd price without any counterparty risk and hence to a practical extent you will

have a stable dollar balance in Bitcoin directly in a lightning channel or on the main chain without abandoning custody over your Bitcoin. Yeah, it's a pretty beautiful thing. It's insane to think that we can do this now in a completely non-custodial way. I mean, there are obviously still a couple of things that need to mature on the wallet side of things, on the Oracle side of things. I mean, you mentioned the Oracle thing. Many people view that as a point of failure or a single point of failure.

Like, what if the Oracle attests to a bad outcome? And Bitcoiners have thought of this. You can use many Oracles and make sure that their attestation is with a particular range. So if you don't want to depend on an individual Oracle, you can expand the Oracle options that are attesting to the outcome of particular events. um and so i guess another really important hurdle to overcome which we should definitely talk about is in the context of non-custodial dlcs how do you envision liquidity for these types of markets to develop is it going to be hard is it an impossible problem to solve um what does like how can dlcs provide a similar experience to this type of strategy employed on

something like a bitmex, where people would argue that the relative centralization of a bitmex and their ability to create a market and maintain a market may make it harder for DLCs to achieve the same level of success. Yeah. So it's a really good point. When you have this kind of non-custodial arrangements, by definition, you will have to post enough collateral within the funding transaction to cover all the outcomes of the contract. And this means capital inefficiency, because as you mentioned, when you do the same thing through a centralized exchange, usually centralized exchanges keep a capital buffer in line with net positioning of the participants meaning that they don't have to keep one bitcoin of

reserves for one bitcoin worth of contract because if for example i'm long one bitcoin you are short one bitcoin in nets they are neutral and in dlcs it cannot work that way because as i mentioned You have to have pledged the Bitcoin you might lose in advance. It's a price you have to pay for trustlessness. And so this, of course, could hinder the trading experience and the UX for people using that. Because if, for example, I want to have many DLCs in parallel, I have to lock Bitcoins in many channels or in many UTXOs at the same time. And I cannot reuse collateral from one DLC to another.

And especially if you want to roll your position, which is kind of needed to achieve what we described in terms of getting a stable balance in dollars on Bitcoin. you would have to close your dlc get back your collateral and then open a new dlc and of course with that comes costs because for example between the time lag between the closure and the opening of the new dlc you won't be edged anymore so you will have an exposure on the market which is a risk and that entails a cost also closing a DLC means publishing an unchanged transaction and opening a fresh DLC also means opening a new transaction so it comes at a cost and especially in some fees environments it could be a non-negligible cost and if what you want

is just have a stable balance in dollar like let's imagine you are like a total no-coiner you just use some kind of fintech app to have this kind of sovereign bank accounts that gives you an interesting yield the user expense you want is just like always a stable value custody over my funds and I don't want to understand the complexity about this and so um for a moment uh if anyone wants uh to uh do a transaction on the main chain or um if a lot of degents are minting ordinals and stuff like that as we have witnessed uh um recently uh then you will be forced to pay a high fee because you don't want to remain unpegged for too long because um bitcoin volatility could uh

diminish your your capital value and um it's it's a kind of a big problem especially in the sense that um you can imagine that a lot of people would want to do this this thing when bitcoin plummets and so as um many people rush to and hike the fee on their transaction to have their transaction in the next block, you could be forced to pay a high fee to do that. That being said, given the analysis I've laid out in the piece regarding the returns of such a trade, I don't think that rolling costs would be such a problem. But it means that companies that try to package this trade into a product would have to find solutions to make the user experience as seamless as possible.

And to get back on your exact questions, I don't really think that such derivatives markets could really be competitive compared to derivatives markets on centralized exchanges. Because the trading experience, like having that order book debt, being able to trade with that many counterparty and having swift liquidity and stuff like that, would be really difficult to replicate in a decentralized marketplace. place. And it's kind of an open problem at the moment. We don't really know how to build a purely decentralized marketplace for DLC derivatives on Bitcoin. Because in essence, an order book is a centralized stuff. It's just like aggregating all the trades in the same place and so we don't have that good a solution at the moment but giving a hint at what it could look like which I should say is not a design that I've seen as of now could be something like what Taser currently does so as we

mentioned before like with tether you send them like dollars and whatever and they give you um a new token and they use um the the fiats to buy um treasury securities and they get the they get the yield and you get a stable coin so a better dollar one could say and so you're happy they're happy and um now it's it's it means uh in the right environment we're in that as you mentioned And it's one of the most profitable companies in the world. You could do the same thing with DLCs. Like, for example, you could create a Bitcoin wallet. Let's say that you want to peg your Bitcoin to the dollar.

I will take the opposite side of the trade and tie collateral in a DLC with you. And then I will edge my exposure through a centralized exchange. and you won't get any yield you will just have the benefit of having a stable dollar balance which is already kind of nice and I think it's something that with some it's a product that would have good market fit and on my side as as the company offering the wallet I basically would have to lock collateral on the DLC and also lock some collateral on the exchange where I edge but the benefit for me is that I get your positive yield and so I used basically external

capital that is seeking for censorship resistance dollar natively on Bitcoin to to basically generate cash flow for my business and grow and have better infrastructure, better marketing and stuff like that. That's a way to solve this problem and there are many more. It's more a matter of what kind of market segment you want to address because of course You can use DLCs to offer a new form of wallet to Bitcoin plebs. It's what 10.10.1, for example, is doing and I'm on their beta and it kind of works. It's still buggy and stuff, of course.

But if you look, for example, to offer a kind of money market fund for hedge funds or other financial institutions um you will hardly do that through lightning and um you would have to to package the product differently to um better fit better cater to the the needs of those kind of users um and so i expect that uh in the long run you will have different uh products catering through different needs for different market segments yeah i mean i think it's very obvious that there's something here and we're definitely in the nascent stages of this market developing i mean you mentioned 10101 there's atomic finance out there on the lightning network we have i mean 10101's building on lightning we have ellen markets blink btc you can begin to see

if you squint hard enough the the formation of this particular vertical within the bitcoin financial products landscape beginning to develop a fundamental base and if you squint even harder you can see like yes it may be buggy it's a little bit clunky in some areas ux needs improvement but there's definitely something there that can be improved upon and it isn't hard to imagine that over the next five, 10, 20 years that people dedicated to this particular problem will come up with a solution that is at parity with some of the more centralized solutions that exist today. It's just going to take time.

Yeah. And what's interesting is also that all the companies that you mentioned are developing kind of different products, like Atomic Finance, they leverage DLC to offer options. 10.10.1, they focus on futures and dollar stable balance. BlinkBTC, which was formerly Bitcoin Beach Wallet, is a more centralized design. So it doesn't use DLCs. It uses exchange APIs to place the trades. And so it's a custodial wallet and you transfer custody over your Bitcoin when you use it.

But by definition, it also means that it's cheaper, easier to build, less expensive and stuff like that. And LNMarket, they are currently building a notici trading desk for that. because as they understand what I just explained, it's kind of difficult to build a market on that from scratch because you will have a hard time finding liquidity providers, market makers, and building the whole market infrastructure. So they decided to start by basically building an OTC desk, desk, which is just a meeting point for people wanting to match together because they want

to do opposite trades. So in this fashion, this could be used, for example, by miners that want to edge their exposure to Bitcoin. It could be also used by power companies that want to edge their exposure to miners because they provide electricity up front to miners that can get bankrupt really fast when either the hash rates or Bitcoin's volatility explodes, or both, by the way. And so there is lag between the moment they supply electricity and the moment they are paid. You could imagine some scheme through which the miner would pay the power company over lightning

at-cost basis, sort of a flow of what they consume. And the power company could use this kind of OTC desk to edge the value of their Bitcoin. They will be much against edge fund, for example, that want to make a directional bets on Bitcoin with a small leverage. And so the company in the middle here, Allen Markets, would only supply technical services to do that, such as oracles, backup of transactions, so that you be sure that even if you're not trash or something like that, you could still execute the contract when you win and stuff like that.

And yeah, so it's an exciting space. It's really early, I would say. I don't expect what I described to happen tomorrow. But for example, I had a conversation with a big ETF provider, a big asset manager that is already looking at that and is interested to propose that as an ETF, as security, it could be quite challenging on the legal front. And I don't think the technology and the decentralized market

for derivatives on Bitcoin is mature enough. But let's fantasize about that. And if you bring such product to market, given the macro backdrop that we described, I think it would garner a lot of attention and it would attract a lot of liquidity because it would be a legal security that anyone can trade and it would be a good place to hold synthetic dollars and get a yield for it. yeah which gets to the conclusion of your piece and the bullish aspects of this uh these money market funds being a sly roundabout way to incite hyper bitcoinization um if the products do mature they do drive a lot of demand and they do pull a lot of bitcoin off the market like this could this could really be some jet fuel for the price of bitcoin at the end of the day and then it becomes like a self-perpetuating cycle because the product exists that people want to go lever

long even more and it becomes more of a profitable trade at least until we reach a point of monetization where it's sufficient yeah it's it's kind of um tantalizing proposition because um what i try to explain into the piece is that um by definition our financial system is is geared towards a low time preference uh high time preference finance and so most of the capital that is circulating in the financial system is short-term capital that is in search for a short-term yield and it's also why money market funds are all the rage right now but it's also why this kind of product could attract a lot of capital to bitcoin because Because when you think about it, as we mentioned, it's inflation resistant, it's seizure resistant.

You don't have counterparty risk. You can access it from anywhere on the planet. It can be marketed as not a Bitcoin product. It's more like here are the properties of this and it's just you do that or you are underperforming your competitors as a money manager. So it's not a good proposition to avoid that. And also, you can imagine for now, like derivative markets on Bitcoin have not enough depth and liquidity to attract that much capital. But as Bitcoin grows and as it monetizes further, what we can expect is derivative markets growing in tandem.

And so it could kind of fill a virtuous cycle whereby this attracts more capital, this forces people to enter this trade, to buy Bitcoin spots, then short it. And it makes both the spots and the derivatives market more liquid and it makes it more deep. And this compels like traders to leverage on Bitcoin because it helps Bitcoin appreciate and thus making the market even more in contango because a lot of people buy leverage on Bitcoin. So it's right. It increases the yield you would get on your stable balances, which further incentivize people to access the stable tax trade and so on and so on and so on. And so it's why I talked about a slight roundabout way, because over the last cycle, we have been focused on this kind of store value narrative, whereby like people will adopt Bitcoin as a long term saving instrument. But the reality of it is that like long term savings are really, really, really small parts of the financial capital out there. And like the lion's share of the capital is like short-term capital sinking like liquidity and de-risk vehicle with bearing a yield. And so once we have some products that are mature enough on Bitcoin to do that,

yeah it could open the floodgates and tremendously helps first legitimizing bitcoin as the bedrock of a new financial system because due to the incentives in the tri-fi worlds as i tried to argue in the piece you could imagine a lot of financial institution adopting this just because it's better yields and better properties than the alternatives and it will also help grow Bitcoin's liquidity faster than with Bitcoin PLEBs

DCA-ing on Bitcoin which is good by the way but it's a different order of magnitude we are talking about. Yes, completely agree and to that point in your mind

what is the bigger driver of this trade moving forward? Better UX and accessibility to the trade or turmoil in the TradFi world that forces capital allocators to seriously consider this and figure out a way to get into the trade despite the maturity of the products that exist? Well, I think it's UX predominantly.

Like, once you have a well-capitalized enough company offering, like, Bitcoin wallets with a good UX, that allows you to do that, I think it will spread fast and it will give ideas. And I think in the medium term, I think it will grow with stable dollar balances and just people like me that don't want to phone their bankers or just have to deal with a bank or financial institutions for their daily lives

that would rather use only Bitcoin, but that has this kind of, I have to keep some cash on hand because I have my rent to pay, I have my utility bills to pay. And so being fully exposed on Bitcoin volatility can be a dangerous proposition. and as you have this kind of attraction then you will garner more liquidity and more market depths and these instruments would appear to be

de-risked for outside observers and then you can I think imagine more like financial institutions maybe on Bitcoin, like I can make the case, for example, for a DCA company, like, I don't know, like reverse one or stuff like that, just offering that kind of Bitcoin dollar account to their customers and outsourcing the liquidity and then helping like institutional players to access this trade until the point where you get institutional wrappers for that like stuff like ETFs that replicates that by managing the

underlying and then yeah it's widely distributed globally accessible and many financial institution will have the mandate to to invest in that and yeah that could change a lot of things of course it will take years maybe the whole decade but there is no worry and as far as I can tell the tech is working right now like it's more the companies have to be built and liquidity has to be build the ux has to be built um but all the technical components are in place yeah you're getting me all excited theo this is uh as somebody and another part important part of these types of products materializing too i imagine is more merchants and individuals

and companies accepting bitcoin as payment because i would go full into this trade uh in a product that provides this service especially if i'm able to get yield on it if i were able to pay my rent in it my utility bill in it uh pay my bill at the grocery store there'll be no reason to have a bank account um so it's like i don't even know if it's a chicken and egg problem these things probably have to mature in parallel um with each other but yeah i mean you can see this side of the market with a stable value and a yield on that stable value maturing at the same time where more individuals and more companies become aware of how their native currencies are being debased and why they may want to accept bitcoin as payment to prevent the debasement of of their balance

sheets over time um yeah i think those are two things that probably had to progress in parallel with each other to really throw fuel in the fire of this particular product. And I mean, just in my own life yesterday, I tweeted this out yesterday, but, um, sorry, on the merchant side of things already beginning to see it on, uh, my side, I got a message from our primary care doctor. We do a private, uh, direct private care here in the United States where I pay monthly fee, um, for my children and my wife, um, to go to the doctor whenever they want. And, uh, she reached out to us yesterday and was like hey we're accepting bitcoin if you should not just us all the members of this direct private care company so like hey we're gonna accept bitcoin as payment so that's

an example of like if i had this product and i'm able to pay for my my doctor fee every month in it like it's a no-brainer yeah that's good to it's good to see unfortunately here in france we are far from that we still have communist health care um but um yeah i i can tell from personal experience um and even if you look for example at people using like usdt on chrome in argentina like uh most of the people in uh developing countries facing inflation um they just want to hold dollars on their phone so as long as we are able to give an opportunity that has

better properties than the alternatives, which is the case because there is no issuer, so there is no counterparty risk, then it's just a matter of do it. They don't have to struggle with what is the DLT, what is that,

why, just like a button, stabilize, unstabilize and yeah and it works and like we we can see it with the adoption of stable coin it's yeah it's a use case for crypto the problem is that there is an issuer in the middle of it so let's get rid of that and then i think it's the time where bitcoin can address to the masses and they will adopt it even without

knowing it and the next step from that is like oh i have this button that i can stabilize i i can unstabilize um let's imagine um the bull market is brewing um i can strongly imagine a lot of people deciding to adopt bitcoin this way because they have the thing in their hands and And they will have a better gateway to the assets and a better UX. And also in France, we have some merchants that try to accept Bitcoin. But the fiscal declaration of it and stuff like that is really painful. and so yeah I can totally see how it can help it could help merchants at the margin adopting Bitcoin and you have to remember that it's not legal tenure like

it's stabilized against the dollar but it's not a dollar so it's it helps but I I expect it would be a slow process, even if it materializes, even if we have wallets soon that support these functionalities, because you still have this problem that merchants have to accept Bitcoin, Bitcoin even if they can be paid in a stable value in dollar and don't experience the volatility it's still a difficult thing to wrap your head around and you still have a lot of regulatory barriers to this kind of uh experience uh um being uh massively uh adopted yeah yeah it feels like it's forming this is an incredible piece and i think it's gonna start a lot of chatter in the space and

hopefully stoke a lot of ideas on the product side of things for people to get building this I mean, I think if people have these stabilized, unstabilized buttons and the UX is perfect and people at the institutional level, not even at the institutional level, just your average business that wants to put some of their cash on their balance sheet into a Bitcoin money market fund have the ability to do so. could be massive for the market and just highlights the the possibilities that exist out there natively on bitcoin and just the dynamics that exist with this new monetary good with a fixed supply and no central issuer it can actually provide better products for individuals in terms of giving them the ability to save not only save money but get a yield on their money for providing the service of helping leverage longs make more bitcoin um beyond this and oh go ahead also i i i'm in the piece i focus on the stable dollar use case because uh to me it's what

has more value but in the distant future you could also like expect different kinds of of DLC-based derivatives markets, let's say I don't want to give custody of all my funds to anyone, but I want to be long oil, to be short yuan, to be... As soon as I find an oracle that can attest to the future price of those assets, and that I find a counterparty for my trade, either through an app or through an OTC desk. I can collateralize a bet in Bitcoin to wage a bet on those asset classes, which could be of interest maybe more to traders, but could also have practical interest for traditional companies trying to edge their risks like for example airlines trying to edge against

all the rising or stuff like that yeah yeah it's really fascinating the bold future it's right at our fingertips freaks you just got to go build it and make people aware of it which i think this conversation hopefully i think it will help i know it will help many people um so thank you for writing the piece and beyond this what else interests you what other research are you looking at or would you like to begin tackling beyond the idea of a bitcoin money market fund um i'm currently writing another piece uh i don't know when it will be released i think in a couple of months it's quite different it's more towards like financial understanding of the Bitcoin markets like how it organizes what drives it and basically

shattering a long history of false ideas about how market functions coming from the chat finance apparatus all this about the modern finance theory efficient market hypothesis the capm model and all this all the stuff um and there are alternatives um to explain how the order is um is is made in markets and um the interesting thing is that we can apply this to to Bitcoin and test those hypotheses against Bitcoin, because it has so much volatility, even with 14 years of price, that statistically speaking, it's a better market to test ideas than any other markets, not mentioning the fact that there is not a given price of Bitcoin. there are multiple prices so it helps to have like uh more signal and less noise um and yeah so

testing those concepts and uh um and explaining how yeah how the what are the dynamics of the bitcoin markets uh don't get up your horses it won't be of any use to trade or stuff like that unless you may be a really, really sophisticated hedge fund with a lot of researchers and stuff like that. But it's more like an intellectual endeavor to try to have a better understanding of how financial markets work and what we are witnessing with Bitcoin adoption and its relation to price and stuff like that fascinating well i can't wait to read it when it comes out i'm sure you've piqued the interest of everybody listening to this as well theo mojana freaks up-and-coming research analysts in the bitcoin space i'm very happy that we uh had the last

hour in 40 plus minutes to dissect your latest piece uh by the time this episode airs it will will be live. We'll obviously be linking it in the show notes. Um, for anybody that wants to read it, highly recommend you dive in. Uh, this podcast is a good companion to the piece itself, but, uh, I think you have to read the whole thing as well on top of this show. So Theo, thank you for joining us. Is there anything before we wrap up here that we maybe didn't touch or any words of wisdom that you'd like to leave the freaks before we end the show? no i think it was really complete um maybe just uh yeah um thanking all the people that helped uh editing and giving subject suggestions while i was writing the piece um also thanking axiom

btc for publishing it um thanking you to invite me on the show and yeah as i mentioned at the beginning if you like the piece um uh there is my contact on it don't hesitate to send me an email i'm currently looking for a position as a researcher so if you think that this kind of research can benefit your firm yeah please contact me awesome deal you go enjoy your night and uh thank you thank you for all this is a great episode yeah thanks for the invite marty and i guess have a good afternoon good afternoon yeah we're getting into the mid-afternoon here so i'm gonna have a good mid-afternoon peace and love freaks