So yesterday I watched this Taskmaster video explaining why a BTC stable-coin is a terrible idea. Apparently CZ is talking about pegging BUSD with a big chonk of BTC, which I think is probably a good idea. Of course Taskmaster was quick to unknowingly call me an idiot for thinking the idea was a sound one... and the entire video is basically about why it's a bad idea. He's not wrong: it's a bad idea for a lot of reasons.
But I'd still like the take the other side of that trade.
I haven't been able to find CZ talking about this or any news reports on the idea of backing BUSD with BTC. A source would be nice, but it doesn't matter. I have seen other projects popping up that are doing just that.
link
What I have seen is this...
The idea of backing a stable-coin with Bitcoin is not a new one. Will be interesting to see what happens with this DLLR token. You can already see what I think about it above. How the oracles work and how it prevents itself from death-spiraling are of critical importance. Of course when marketing an asset you never talk about the most important things, so I haven't looked into it further. After all, it doesn't even exist yet and DLLR is nowhere to be found on aggregators.
What can be found is the native Sovryn token... which I have no idea what it is or why you'd call the stable-coin backed by BTC the Sovryn dollar. At a market cap of #764... I'm pretty skeptical to say the least.
How to win a debate 101
So even though both Taskmaster and I are on the same page and extremely skeptical about all this, what if I wanted to argue the opposite point and play Devil's Advocate? Wouldn't be too hard. I already know for a fact that he thinks HBD is pretty solid.
With this in mind, my argument would simply be:
How can you claim that backing a stable-coin with BTC is a bad idea when when HBD is backed by Hive?
Obviously if I presented a solution that was exactly like Hive's HBD he'd probably have to concede the argument. Essentially there'd be a haircut where if the collateral backing the stablecoin became too risky the peg would break to the downside until it could recover. This essentially makes it impossible to crash to zero like UST did. UST/LUNA had zero mechanics in place to stop the debt-ratio from ballooning to infinity during the death-spiral.
Now is ultimately the best possible time to back a stable coin with BTC.
Why? Because we are in a bear market and BTC is comically oversold. Not only that demand to hold BUSD has plummeted because of the attacks against it. Demand for both BTC and BUSD can really only go up from here in the vast majority of situations, making this the perfect time to pull the trigger on something like this. Even if it floundered in the beginning Binance has more than enough money to cover the short-term losses.
"What if BTC goes down in spot price?"
If you peg BTC 1:1 with a stable-coin and BTC price goes down you no longer have 100% collateral.
Well, yeah sure... that's true... in the short term.
- In the long-term it is absolutely not true.
- What happens in the exact opposite situation?
- What happens when BTC goes x2 but it's only collateralizing half as much stable-coin? Many are assuming that this extra BTC would be... sold? For what purpose? Into what asset? No, that's not how this works.
Thus as long as we believe that Bitcoin value is still going to go up over time on average it doesn't really matter if we take some early hits. This is especially true considering Binance is a multi-BILLION dollar company with the highest volume in the entire industry. If BTC tanks and the stable-coin is only 50% collateralized it's not that big of a deal especially if Binance was planning on buying the dip anyway. They can just buy the dip and re-colateralize the asset to 100%. This only needs to happen one time before Bitcoin rips and BUSD becomes permanently overcollateralized by exponential margins.
Greater BTC market absorbs volatility.
One of the big reasons why UST/LUNA crashed to zero is that demand for UST artificially pushed the value of LUNA to the moon, and vice versa the bank run crippled the value. LUNA went x100 in a year. VCs and retail didn't realize what was happening. They did not realize that by yoloing billions into UST 'risk free' what they were really doing was going long on LUNA and jacking up the debt ratio to a wholly unacceptable level with no kind of backstop in sight. The resulting death-spiral was swift, brutal, and unrelenting.
That can't happen with a stable-coin backed by BTC.
- Look at the numbers.
- BUSD has a market cap of $8B
- BTC has a market cap of $500B.
- No amount of demand for BUSD is going to jack up the price of Bitcoin in this scenario. There is no conversion mechanic in play that would cause this to happen. BTC does not get burned when BUSD is minted. In fact BUSD is only minted to buy BTC when BUSD peg breaks to the upside.
- UST going under pushed LUNA down in price from conversions. When price of Bitcoin goes down the debt-ratio would not get crippled because demand for BUSD is not propped up on 20% yields being farmed by greedy VCs who have no idea of the risks they are taking. All of BUSD's demand is organic because it doesn't provide such yield.
As demand for BTC goes down so does stable-coins. People cash out to their bank accounts in these situations (bear markets). We see this time and time again. The market caps of all cryptos rise and fall together in the same ocean. It doesn't matter that it "makes sense" that stable-coins would have more demand during a bear market. They simply don't, and this has been proven in practice across multiple bear-markets.
What are the acceptable price fluctuations?
It's easy to say that BUSD could be structured like HBD, but also HBD is way more volatile than regular stable coins. Seeing HBD at 95 cents or $1.05 is not uncommon, and some of the bigger pumps can even get us all the way up to $1.25. If this were to happen to BUSD it would be deemed wholly unacceptable, so the range would have to be much tighter. At least $0.995 to $1.005 at worst, and even this range is considered a failure for some of these tokens pegged to dollars. Personally I would say half a percent deviation from the peg is fine.
It's a lot like AMM
When demand for BUSD goes up, price of BUSD goes up. When price of BUSD is above the peg Binance can print out tokens from nowhere and dump them on the market, banking the BTC collected to reinforce the peg when it comes back down later.
This is very akin to AMM. It's like DCAing on the way up and on the way down. As long as BTC is not sold off when the stable coin is overcollateralized during the bull market: everything if fine. As long is BTC is worth less today than it is in 5 years: everything is fine.
Systemic failure
The biggest reason to not collateralize BUSD to BTC is that BUSD does not control the BTC network. If something terrible happened with HBD technically we could just rollback the network and fix the problem. It's not really possible to muck up Hive >> HBD conversions or HBD >> Hive conversions. All the nodes are confirming that consensus is in order. Our consensus is decentralized and theirs is absolutely not.
With a centralized token like BUSD... what happens if the BTC gets stolen? Doesn't matter how secure it is or how many multisigs enforce it... it can be stolen. That scenario is simply not possible on a network like Hive.
At the same time if Binance were to peg BUSD to dollars in the bank, they have the exact same problem. Binance doesn't control the bank, and the bank can become illiquid at any time. This lack of control somewhat counteracts the previous argument when comparing pegs using dollars in a bank or with raw crypto: in both situations there is a centralized lack of control involved. One is not necessarily better than the other. It depends on the exact situation at hand.
Another thing to take into consideration is what it takes to peg a stable-coin in the first place. If the stablecoin unpegs downward and the market pair is BTC/BUSD... then the only way to balance this market is by dumping BTC into the market to make the BUSD more valuable. It actually makes sense in a lot of ways to hold a lot of BTC on hand to make sure the BUSD peg never drops below the predetermined acceptable range. This is likely what Bitfinex has done many times with USDT and they are constantly crucified for it even though it makes their product better.
Conclusion
Ultimately creating a stable asset in crypto is no easy task. No matter how it's done there are unique risks involved when considering all strategies. Regardless, I think it's pretty apparent at this point that "dollars in a bank" is not nearly as safe as everyone assumed during the last bear market in 2018. In fact dollars in a bank are completely worthless if the bank goes insolvent. It's also worthless if you're under constant attack from the regulators. Binance is exposed to both of these threats. Massing up a gigantic BTC bag to hedge against further fuckery is a pretty good idea.
Because BUSD is a centralized asset, Binance can maintain the peg in any way they see fit. If CZ is talking about using Bitcoin, we should not assume that suddenly that's going to be the only way that BUSD is pegged to a dollar (especially considering how many BUSD markets there are). We should also not assume that it would be 1:1 collateralized during a raging bull market. In that case the collateral should vastly overcollateralize the asset because it went up in value and BUSD did not. Assuming otherwise means Binance used the collateral for something else at some point.
Don't be surprised when the entire banking sector collapses and assets like USDC and TUSD drop to zero while USDT and BUSD are standing strong. This is all a matter of trust. Who do you trust more? A random corporation like Binance or Bitfinex? Or the full might of the regulated fractional reserve banking sector? Used to be the banking sector was the obvious answer. Well... it's not anymore. Times are changing.
All this being said I personally have no reason to use any of these stablecoins. I trust Hive more; as do we all. I still firmly believe that at the current debt-ratio HBD outclasses everything in the entire sector and most crypto degens don't have the slightest clue. And then the degens that do know don't want 20% yield we want to x10+ our crypto bags. Such a wild situation. As HBD increases in adoption and liquidity the situation can only improve.