1/ ButtonZero Part 1: Zero-token, single-token, double-token debt
Implosions of #Celsius & #3AC make it clear that web3 needs alternatives to margin leverage.
ButtonZero’s approach involves what we call double-token debt. Let us explain using the history of debt innovation🧵:
Implosions of #Celsius & #3AC make it clear that web3 needs alternatives to margin leverage.
ButtonZero’s approach involves what we call double-token debt. Let us explain using the history of debt innovation🧵:
2/
It helps to think of debt as a transaction across time.
Most trades are instantaneous —Alice gives Apples to Bob, Bob gives Alice some Bananas.
With debt the “trade” is across time—Alice gives $100 to Bob today, conditional on Bob giving Alice $120 a year from now.
It helps to think of debt as a transaction across time.
Most trades are instantaneous —Alice gives Apples to Bob, Bob gives Alice some Bananas.
With debt the “trade” is across time—Alice gives $100 to Bob today, conditional on Bob giving Alice $120 a year from now.
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We call simple debts like this zero-token debt (ZTD), because they tie specific lenders to specific debtors.
They are contracts binding legal persons and legal parties through specific accounts. Imagine an uncle lending his nephew $1,000.
We call simple debts like this zero-token debt (ZTD), because they tie specific lenders to specific debtors.
They are contracts binding legal persons and legal parties through specific accounts. Imagine an uncle lending his nephew $1,000.
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The earliest known debt contracts are small Sumerian clay tablets.
They primarily specify legal parties and counterparties, loan sums, interest, and repayment. Enforcement was by the city authorities.
The earliest known debt contracts are small Sumerian clay tablets.
They primarily specify legal parties and counterparties, loan sums, interest, and repayment. Enforcement was by the city authorities.
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Consider this “Contract for Loan of Money, Fifth year of Nabonidus, 550 B.C.”
This loan offers no security or collateral to the creditor, but he received an interest of 20%.
Consider this “Contract for Loan of Money, Fifth year of Nabonidus, 550 B.C.”
This loan offers no security or collateral to the creditor, but he received an interest of 20%.
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Debt remained relatively unchanged, even when the loans in question were large.
European sovereign lending was zero-token in nature–or in academic terms “non-marketable” debt.
Consider just a few examples from the 500yrs between 1300 and 1800 (see Schmelzing, 2020).
Debt remained relatively unchanged, even when the loans in question were large.
European sovereign lending was zero-token in nature–or in academic terms “non-marketable” debt.
Consider just a few examples from the 500yrs between 1300 and 1800 (see Schmelzing, 2020).
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European private debt wasn’t any better.
Medieval promissory notes between merchants nicely illustrate how specific parties and counterparties were tied together (see A.P. Usher 1914).
European private debt wasn’t any better.
Medieval promissory notes between merchants nicely illustrate how specific parties and counterparties were tied together (see A.P. Usher 1914).
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Of course, the negotiable bill of exchange, a transferable bearer instrument, would evolve over the next 500yrs, following a broad set of changes to European legal codes. But that's a story for another time!
(see Meir Kohn, “Bills of Exchange and the Money Market to 1600”)
Of course, the negotiable bill of exchange, a transferable bearer instrument, would evolve over the next 500yrs, following a broad set of changes to European legal codes. But that's a story for another time!
(see Meir Kohn, “Bills of Exchange and the Money Market to 1600”)
9/
European sovereign bonds represented a watershed development in financial history.
The creditor’s position in the debt contract was replaced by a token—in traditional terminology, bonds offered a way for debts to become _bearer_ securities for creditors. ->
European sovereign bonds represented a watershed development in financial history.
The creditor’s position in the debt contract was replaced by a token—in traditional terminology, bonds offered a way for debts to become _bearer_ securities for creditors. ->
10/
-> Tokens—as we use the term—mean transferable AND fungible instruments (e.g. cash).
For this reason, we can think of traditional bonds as single-token debt (STD):
-> Tokens—as we use the term—mean transferable AND fungible instruments (e.g. cash).
For this reason, we can think of traditional bonds as single-token debt (STD):
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Bonds allowed sovereigns to borrow from a number of creditors. Sovereigns who could borrow could wage war more effectively
M. Bordo’s research shows that British financed wars against Napoleon through bonds. France couldn’t issue bonds, and relied on taxation & looting
Bonds allowed sovereigns to borrow from a number of creditors. Sovereigns who could borrow could wage war more effectively
M. Bordo’s research shows that British financed wars against Napoleon through bonds. France couldn’t issue bonds, and relied on taxation & looting
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This proved so powerful that over the next 100 years, that European absolute monarchs adopted the constitutional reforms needed to tap the bond market.
This proved so powerful that over the next 100 years, that European absolute monarchs adopted the constitutional reforms needed to tap the bond market.
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The Rothschild’s underwrote sterling-denominated bonds, ushering London’s rise as the world’s largest financial capital.
Even the Qing dynasty issued sterling bonds in London:
The Rothschild’s underwrote sterling-denominated bonds, ushering London’s rise as the world’s largest financial capital.
Even the Qing dynasty issued sterling bonds in London:
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Smart contracts now allow us to tokenize the debtor’s side of debt.
Historically, such arrangements are quite rare.
Smart contracts now allow us to tokenize the debtor’s side of debt.
Historically, such arrangements are quite rare.
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The closest analogy we have is selling hypothecated collateral without extinguishing the attached loan
i.e. selling a home to a new buyer with the mortgage still attached.
But even then this is not true hypothecation–since the underlying collateral is non-fungible.
The closest analogy we have is selling hypothecated collateral without extinguishing the attached loan
i.e. selling a home to a new buyer with the mortgage still attached.
But even then this is not true hypothecation–since the underlying collateral is non-fungible.
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On a blockchain, creditors and debtors could transact permissionlessly if instead of hypothecating non-fungible homes, the debt was backed by a fungible digital commodity (i.e. ETH).
On a blockchain, creditors and debtors could transact permissionlessly if instead of hypothecating non-fungible homes, the debt was backed by a fungible digital commodity (i.e. ETH).
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Debtors could borrow by selling “bonds” against fungible collateral.
What remains is the “equity” of their collateral, the upside, which is also a fungible token.
Debtors could borrow by selling “bonds” against fungible collateral.
What remains is the “equity” of their collateral, the upside, which is also a fungible token.
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In summary, all debt can be described in a simple 2x2 matrix tracking whether debtor and creditor positions are tokenized.
And smart contracts allow us, for the first time, to create large-scale double-token debt.
In summary, all debt can be described in a simple 2x2 matrix tracking whether debtor and creditor positions are tokenized.
And smart contracts allow us, for the first time, to create large-scale double-token debt.
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As we can see, almost all of DeFi today is single-token debt, since debtors are still bound by idiosyncratic vaults and borrowing positions.
Remember, to tokenize means to make something both transferable AND fungible.
As we can see, almost all of DeFi today is single-token debt, since debtors are still bound by idiosyncratic vaults and borrowing positions.
Remember, to tokenize means to make something both transferable AND fungible.
20/
In our next threads we will explore:
• the dangers of margin lending
• why double-token debt is non-callable • how double-token debts can link together large pools of creditors & debtors in a permissionless environment
In our next threads we will explore:
• the dangers of margin lending
• why double-token debt is non-callable • how double-token debts can link together large pools of creditors & debtors in a permissionless environment
• • •
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