Summary: Author: Weisha Zhu ——Answers to the concepts in the article "Invite Satoshi Nakamoto to Welcome the New World" 4.3 Comparing the Fed and Stablecoins The Federal Reserve is the issuer of the US dollar. It is correct to say that the Federal Reserve should be compared with the issuer of the stablecoin. If the blockchain ...
Author: Weisha Zhu
——Answers to the concepts in the article "Invite Satoshi Nakamoto to Welcome the New World"
4.3 Comparing the Fed and Stablecoins
The Federal Reserve is the issuer of the US dollar. It is correct to say that the Federal Reserve should be compared with the issuer of the stablecoin. If the blockchain is regarded as an ecology, there are several different issuers of the stablecoin, and it is not appropriate to refer to any issuer. The stablecoin here represents a common issuance mechanism for them.
Going back to the original intention of Satoshi Nakamoto, Bitcoin is to overthrow fiat currency. It is a brand new perspective. In the previous section, we analyzed Luna, which is far more complex than the theoretical framework of modern economics. It's just a project of the blockchain. The 14-year practice of blockchain and Bitcoin has accumulated a wealth of cases for us, making analysis and comparison possible. This way, the problem returns to the same problem as finding Satoshi Nakamoto, and the required method is the same. Let us start with the portrait of the Federal Reserve.
4.3.1 There is no Fed in the blockchain
If we regard world finance as an ecology, it is very similar to blockchain ecology. But the blockchain ecology is more complicated. To say that the blockchain ecology is more complicated, everyone must be laughing at my ignorance. In fact, simply think about it and you will know, is a disordered system complex or an orderly system complex? From the perspective of one currency, one country, tens of thousands of "countries" are born in the blockchain. There are also far more "countries" alive than there are countries in the world. Luna's ecological production relationship goes beyond modern financial theory. In the blockchain, there is no power, only finance. "Law" is stipulated by procedures, and everything is formed naturally, including compliance with social laws. The blockchain does not even have patents. Full of trial and error and competition, it is the cruelest Colosseum for humanity. The devil and hope are together. The things left by the brutal fight and the failures are worth studying to compare the global financial ecology. What are the similarities between the two, and what are the differences?
Does the blockchain have an institution like the Federal Reserve? No. However, some stablecoins perform some of the functions of the Federal Reserve. The Federal Reserve has the function of issuing currency. The US dollar it issues is the de facto anchor currency globally. Bitcoin and Ethereum initially anchored the blockchain. When Ethereum rose, the prices of projects in the Ethereum ecosystem also increased, which is against common sense. This situation also happens in modern finance. When an asset needs to be traded the next day, it is found that the exchange rate has changed, the value of the asset has changed, and the contract needs to be renegotiated. The issuer of the stablecoin has some powers of the Federal Reserve and can issue stable currency. It acts as a ruler of the value of the blockchain.
4.3.2 The Federal Reserve has given us an often-changing ruler
A thing whose price often changes is not suitable as a ruler. The scale requirements remain unchanged. This sentence is critical. We don't accept any cheating on the scale. Why do you agree with all the methods to devalue the currency? Are you stupid? No, because there is no choice. Satoshi Nakamoto said in the first published Bitcoin system that the central bank should maintain currency stability, but it has repeatedly damaged his credit and devalued the currency.
The second function of the stablecoin is to maintain its price stability, which meets the requirements of Satoshi Nakamoto. It is better than the Fed. Why should fiat currency be devalued? There is no reason. No matter how well the theory is packaged, this is the logic of liars, and the economists who advocate for it are either crazy or bastards. The most obvious truth is that saving money should increase its value or preserve it. The interest the bank gives us is supposed to maintain the value of our currency. It is not the case.
Can it work without the Fed? Blockchain survives without the Fed. Obviously, the Fed is not necessary. The purpose of the Fed's existence is that it must maintain the stability of the currency it issues. Just like a stablecoin itself stabilizes its currency. The logic of leaving the market stable does not hold in the blockchain. It is what blockchain experimentation is about. What a stablecoin looks like is a natural development, not artificially promoted. So it has persuasive.
The reason for the Fed to continue to exist is to solve the ask of Satoshi Nakamoto and keep the dollar from depreciating. Economic development under the condition of currency depreciation is a numbers game. If the unit of measurement is adjusted, is the economy actual development? Just liar figures makeup. After three years of the epidemic, the economy has grown? Do the math on your toes and know it's not real growth. Our feelings are the most authentic. We have no evidence because there is no source for the data, and we suspect that what we bought is water-injected meat. The destruction of credit begins with suspicion, and in my heart, the credit of all governments in the world has dropped to a new level. When the credit is gone, the value of the fiat currency goes to zero.
4.3.3 Which is better, the stablecoin mechanism or the Fed's regulation?
It took six years for the blockchain to solve the problem of anchoring the currency to be stable. In February 2015, the USDT pegged to the U.S. dollar came out, and the blockchain has come from ancient times to modern times. People are not stupid. It took USDT only seven years to reach the third position in the blockchain. There are three stablecoins in the top ten cryptocurrencies: the third, fourth and seventh, respectively. The 130 billion stable currency supports the market value of the blockchain of more than 700 billion. You can know the rise and fall of various coins in the blockchain by observing the increase and decrease of stablecoins because it is equivalent to the central bank releasing water. The ratio of the stablecoin to the total market value of the blockchain is about 5.4, and we found that the percentage generated by the market's spontaneous adjustment is lower than that of the fiat currency system. The Federal Reserve is the central bank of the world. Its total assets are 9 trillion U.S. dollars, but it isn't easy to count the corresponding globally relevant total assets. China is equivalent to an independent ecology, and the comparison with the blockchain is better. The total asset value of the People's Bank of China is about 39 trillion RMB, while the value of China's financial assets is 400 trillion RMB, which is about 14 times. Who has the giant bubble? Whose regulation is more efficient? I have no idea.
4.3.4 The corresponding relationship between the total market value of the blockchain and the total market value of the stablecoin inspires the Federal Reserve
Blockchain and fiat currency are two systems, equivalent to chicken and duck, each with its laws. The fiat currency system has a big gap between the M1 and M2 of the central bank's statement and what the market says. For example, at the end of 2021, the total assets of the People's Bank of China are 39 trillion RMB, while the CEIC data M1 alone is 9.9 trillion US dollars. Both data must be correct. Only people in the fiat currency industry understand the mystery between them, just like chicken experts understand chickens, but chicken experts may not understand ducks. When comparing chickens and ducks, it is necessary to look for commonalities between them as birds. The central bank's total assets and market total financial assets are comparable commonalities. The overall market value of blockchain stablecoins can be compared with an ecological one, such as China's entire financial market value. Due to the problem of reserve currency in the central banks of various countries, there may be a significant gap in comparing the whole fiat currency ecology.
The history of stablecoins is shorter than the history of blockchains. Stablecoins have a gradual adoption process, and an accurate correspondence with the history of total market value cannot be found in the data of stablecoins. Statistics may be effective year by year from 2020 onwards.
4.3.5 The Federal Reserve does not maintain the currency price, right or wrong
It was said earlier that stablecoins are equivalent to the role of the central bank in the blockchain. It is responsible for currency issuance and maintains the stability of its currency itself. But the Federal Reserve is not responsible for maintaining the stability of the currency it issues; it is maintained by the market, right? We analyzed earlier that the pricing funds required for fiat currencies are less than 0.03% of the total. Among them, the fiat currency pricing funds include 20-50 times leverage. From the perspective of blockchain practice, stablecoins have no leverage, and only 0.6% of stable funds are needed based on fiat currency calculations; that is, 5% of liquidity can handle redemption and pricing. The renminbi maintains its currency price, as does the Hong Kong dollar. And the Fed is not; is it necessary to control the currency to keep the price? Blockchain stablecoins provide the answer. The condition is that your algorithm must be scientific and have enough reserve assets to match the algorithm. In Chapter 12, I devised a method of stabilizing the pegged currency.
4.3.6 Stablecoin does not have the economic adjustment function of the Federal Reserve
The function of the stablecoin is very simple and does not regulate the blockchain ecology. The blockchain ecosystem works well under normal circumstances. That is, no intervention is required. In the previous section, we analyzed Luna; if there is a lender of last resort, Luna will not collapse. It is a function that the Bitcoin standard reserves for the Federal Reserve. Is this function correct? Like Luna, the adjustment is completed in 6 days, and even the ultimate lender cannot rescue it. Under what conditions can it help? How to evaluate the effect of rescue? We will discuss it in detail in the next section.
4.3.7 The centralized issuance of stablecoins is different from that issued by the Federal Reserve
Stablecoins are issued centrally, but they are transparent. Therefore, its asset quality is clear. The transparency of stablecoins determines their market value changes, and transparency is also a question of the Federal Reserve. The biggest problem is the questionable quality of the liability assets on the Fed's balance sheet.
4.3.8 The decision-making mechanisms of stablecoins and the Federal Reserve are different
Stablecoins and the Federal Reserve both have assets before issuing currencies. The collateral assets of stablecoins, such as the US dollar, are determined in advance. And what the Fed buys assets is determined by the Fed. As for how much assets to buy, no one has a say except the central bank. The issuance of stablecoins is a clear customer demand, and the issuer has no power. Why is the Hong Kong dollar a stable currency? Its issuance mechanism is almost identical to a blockchain stablecoin. Under the conditions of unequal risks and benefits, people can do bad things. They must be transparent if they have the power not to be supervised. Just like the fiat currency stored in USDT, although it has an audit, is the audit department credible? If it is credible, Arthur Andersen accounting firm will not fail. So $14 billion voted no confidence in USDT in the Luna turmoil.
4.3.9 What is an Advanced Mechanism
We all know that automation is advanced. The work that machines can do is better than that of humans. After comparing the mechanism of stablecoin and the Federal Reserve, who should improve? After the emergence of Bitcoin and the blockchain, both the fiat currency mechanism and the Federal Reserve's mechanism have objects to consider and compare. The practice of blockchain helps to deny the irrationality of the fiat currency system. The Fed's economic regulation discussed in the next section is something stablecoins do not have.