Metaverse Musings Part One

Some people feel they are already living in the metaverse, given how much time they spend staring at screens and interacting with other humans via video conferences and chat groups. Others say we are way off the metaverse and the vision may never be realised.

I wanted to document some initial assumptions and hypotheses. For this post I’ll use “metaverse” very loosely and broadly to mean something like a multi-user virtual environment (island; planet; galaxy; etc) that can be accessed by an internet connected device (smartphone, computer, VR headset, whatever), perhaps with avatars, perhaps with some sort of economy.

At work, we are currently using the phrase “virtual worlds and experiences”. This seems broad enough, but then you might argue that Zoom is a virtual experience. But Zoom doesn’t feel very metaversey, at least to me, so it’s hard to draw bright-line boundaries. Maybe trying to define this isn’t a valuable use of time, given that meanings evolve with usage, and journalists and consultants love to overload buzzwords for fun and profit.

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What if USDT Tether depegged?

Having spoken with a number of industry participants, it’s clear to me that the large traders do not expect USDT to depeg.  They tend to believe Tether Inc has more than enough assets to cover its liabilities, though there may be a duration mismatch – ie some of Tether’s assets may not be readily convertible into cash (I’ll use the word “cash” to mean bank account money in regular demand deposit accounts), so if all of Tether’s clients wanted to redeem their USDT for bank account dollars right now, there wouldn’t be enough to go around, and some folks would have to wait. To compare, retail banks typically cannot cope with customers wanting to withdraw more than 10% of their aggregate deposits electronically, and even less physically!

This piece isn’t about if USDT is fully backed or not, or what might make up the composition of its assets, it’s about what might happen if for some reason it did lose its peg.

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How might USDT lose its peg?

The peg is maintained by Tether’s clients who are able to exchange between USDT and USD bank deposits at 1:1, less a small fee, versus Tether Inc. Note that not all USDT holders are clients of Tether. (for instance, I can hold USDT which I can get from exchanges, defi etc, but I am not a client of Tether).

If the market price of USDT falls below $1, clients can buy USDT in the market and redeem each USDT for 1 USD in the bank and make a profit on the difference.  A depeg would only happen if Tether’s clients are unable or unwilling to buy and redeem USDT.  This might happen if:
(1) they believe USDT is not fully backed (ie Tether doesn’t have enough money to give back to the redeemers) or
(2) they believe Tether’s assets exist but are illiquid AND its clients are unwilling to take on the duration risk by waiting a bit to have their USDT redeemed for USD.

What might happen if Tether loses its peg?

There are a few effects.

First, companies holding USDT on their balance sheet would see the value of their assets fall.  Depending on how much of their balance sheet is in USDT, this could cause the company to fail.  The second order effect here is that these companies may have to sell other assets (which may include cryptocurrencies) for USD to keep the business going, which could cause the price of those assets to fall.

Second, many “long-tail” (ie illiquid, smaller cap) crypto-assets will fall in value.  They haven’t done anything wrong, this is just a consequence of market structure.  Long-tail coins are typically priced against ETH or USDT (not USD) in their most liquid trading pairs, either because they trade in DeFi pools that were set up that way or because exchanges decided to list them that way (remember, Binance was original crypto-only and so listed coins against USDT rather than USD).

Example coin LRC whose most liquid pricing currency is USDT. Source:

All else being equal, when the value of USDT falls, the value of these long-tail assets fall too.  If you don’t intuitively get this, think about oil and USD – when USD falls, and the oil/USD price doesn’t change, the price of oil in your local (non-USD) currency also decreases.  Or if you’re crypto native, then you intuitively know that when ETH falls, all the ETH-priced shitcoins fall too even they haven’t done anything wrong.

This could also cause a bit of pricing chaos if some data providers don’t differentiate between the USD price of an asset vs the USDT price (as the price in USDT of large cap assets should increase).

Third, and I think this is a small effect but it’s my favourite: speculators who have lent USDT as collateral to borrow cryptocurrencies (most likely to short them) may get margin called and their short positions may become liquidated causing a short squeeze and possibly pushing up the price of those crypto assets 🙂

The Island of Crypto

or Why Crypto-for-Crypto is OK.

We often discuss how crypto and defi can be used to impact the “real” world. My view is that crypto-for-crypto is a normal part of a paradigm-changing shift, it’s to be expected, and follows a natural path – a similar path that the internet took. Crypto-for-crypto capital and tools create a flywheel effect that drives the ecosystem to get it to a stage ready to integrate with the “outside” world. Effort and time is needed to build an infrastructure that is useable by all, it doesn’t happen by magic.

Let’s use an analogy, which by definition is imperfect, but is helpful for building a mental model. The analogy is a physical one, but we’re using it to try to understand a new digital crypto-native economy.

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Top 20 Coins: Uncommon Core Podcast Episode 15

Throwing this up for discoverability: I enjoy the Uncommon Core podcast and this is a helpful episode for those looking to get a quick summary of the top coins by market cap as at December 2020, as discussed by prominent crypto trader Su Zhu of Three Arrows Capital and prominent researcher Hasu of Deribit.

Errors in summary notes are my own. I haven’t fact-checked. Assume the podcasters may have long or short positions in any of these coins. I note the the podcasters are quite diplomatic about how they describe these coins.

Note: This was broadcast on Dec 11, before Bitcoin reached its all time high and before the SEC lawsuit against Ripple and its cofounders.

20) 1:10 Compound DAI (cDAI)
19) 5:55 Tezos (XTZ)
18) 12:26 NEM (XEM)
17) 13:56 Tron (TRX)
16) 17:11 Wrapped Bitcoin (WBTC)
15) 21:59 Monero (XMR)
14) 29:46 EOS (EOS)
13) 35:04 USD Coin (USDC)
12) 40:48 Bitcoin SV (BSV)
11) 46:26 Stellar (XLM)
10) 50:24 Binance Coin (BNB)
9) 56:50 Polkadot (DOT)
8) 1:03:09 Cardano (ADA)
7) 1:05:25 Chainlink (LINK)
6) 1:08:44 Bitcoin Cash (BCH)
5) 1:19:32 Litecoin (LTC)
4) 1:24:40 Tether (USDT)
3) 1:28:03 XRP (XRP)
2) 1:33:35 Ethereum (ETH)
1) 1:46:51 Bitcoin (BTC)

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It ain’t just about programmability

I read with interest JP Koning’s post “Programmable money isn’t new, we’ve had it for ages“. As an independent monetary economist, JP is well worth following on Twitter, and his blog Moneyness is one of the most thoughtful sources of fact-based commentary on how money is evolving.

Although I agree with the post’s content, I feel it’s missing a few key points about public blockchain based money vs the programmability of payment instructions today. This post is a respectful response and addition to the narrative, and should be read after reading and appreciating JP’s post.

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Tokens vs Accounts: A love letter to the NY Fed (and a quibble)

I was just reading an excellent recent post on the New York Fed’s blog Liberty Street Economics, entitled “Token- or Account-Based? A Digital Currency Can Be Both” by Rod Garratt, Michael Lee, Brendan Malone, and Antoine Martin.

The post is right, of course (except for a paragraph right at the end). The “tokens vs accounts” distinction no longer works in the world of blockchains. In some ways it’s a helpful distinction, in other ways it creates confusion.

Crypto tokens, especially those on Ethereum shouldn’t have a claim on the word “token”.


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CBDCs – Asking the Hard Questions

I’ve been following along the CBDC narrative for a number of years. It has been fun watching how the talking points have rapidly evolved. CBDCs seem to be getting closer to reality, driven by central banks (rather than customer demand). But there are some harder questions that are still not (in my view) adequately explored.

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Money, Programmable Money and Central Bank Digital Currencies (CBDC)

Note: This article was first published on 19 Aug 2020 on the OpenNodes blog, republished here with permission.

The greatest trick played on modern society is calling a whole bunch of different instruments with different credit ratings and characteristics “money”, and conflating them.  It is a neat trick, and very useful in some situations, for instance when businesses invoice each other and make payments.

It is much more convenient to say “Please send me money” than to say “Can you tell your bank to reduce its debt to you, such that my bank increases its debt to me?”  But by using these more accurate words, we can already get a sense that no asset, or instrument, moves all the way from end to end, but rather there are some coordinated accounting adjustments that make the appearance of an asset moving.

Conflating these different instruments and bundling them into one called “money” has enormous positive effects – it has reduced friction and created a common language which is used across the world to enhance trade.

Yet, calling everything “money” can sometimes be unhelpful when we start thinking more deeply about money.  So in these cases, it is helpful to think about two things:

  1. The asset itself
  2. The medium of record
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The Sweet Spot for Programmable Money

Bank of Thailand just announced a project to develop a prototype system for a CBDC issued on a blockchain, accessible to businesses.

This is meaningful to me for two reasons:

  1. I was part of the original team that created the Inthanon series of projects in 2018, and it’s great to see that these early pioneering efforts continue to be built upon.
  2. I think that they have hit the near-term sweet spot for programmable money. They really seem to get it.
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