1/ I've been hearing a lot of "why does this need a blockchain" talk recently (not unfairly) and I thought this interview between @JScottNelson of @sweetbridgeinc and @leashless that covered a super interesting use case for blockchain - blog.sweetbridge.com/scott-vinay-ta…
2/ The whole thing is worth watching/reading/listening to, but I will do my best to summarize the key thesis here. All errors and omissions are probably mine so check the transcript if something seems off.
3/ There are about 700 trillion dollars worth of valued assets in the world but only about 70 trillion of fiat and maybe another 100 trillion of things like stocks and bonds.
4/ Because there is way less money than valued assets, people are competing for access to that (relatively scarce) money.
5/ Why is there less money than valued assets?
6/ Historically there were both soft and hard currency.
7/ Hard currency is specie - gold, silver, etc.
8/ Soft currency was what you would use day to day like the farmer taking her crop to the pharaoh and getting a hieroglyphic tablet with a record of the transaction.
9/ She could change into specie if she wanted or just trade it for shoes or a table or whatever.
10/ The soft currency provided the liquidity and the hard currency provided the fungibility and store of value.
11/ In the late 18th century, we collapsed these both into one currency backed by national governments which outlawed other currencies.
12/ These were collapsed together because governments had been only taxing transactions done in specie and so there were all these soft currency transactions that they couldn't tax.
13/ Prior to that there were a lot of assets which were unvalued which created the imbalance.
14/ E.g. A European Lord was granted land by the king for being a good soldier without ever buying it. Or a homesteader in the US got land by just living there. There was no money required to get the valued asset.
15/ Nixon moved us off the gold standard because it exacerbated the lack of capital problem. There never would have been enough gold to create a large enough money supply and capital would be even more scarce.
16/ Nixon and co. believed we had to disconnect the gold standard because if we didn't then it was going to slow the growth of the economy through a lack of liquidity.
17/ If you have a currency pegged to a deflationary asset then no one wants to spend it because it is likely to be worth more in the future. See: Bitcoin.
18/ The two ways to grow an economy are increases in true efficiency and increase in the velocity of money.
19/ If currency is pegged to a deflationary asset then it decreases velocity which restricts growth.
20/ In a supply chain, the money needs to go from the big companies to the medium-sized ones to the individual coffee farmer (or whatever) and you want that to happen as quickly as possible. Inflation does that.
21/ A little bit of inflation every year encourages spending and investment rather than hoarding.
22/ This system worked better overall when you had two currencies. A hard, deflationary store of value currency and a soft, inflationary medium of exchange currency.
23/ The blockchain creates the possibility to separate these two again.
24/ For example, you could take your house to some entity that would issue tokens just like a bank or the pharaoh a thousand years ago would have issued you soft currency (script or bank notes).
25/ The one big difference being that once it is on the blockchain, there are many decentralized nodes maintaining the ledger so the bank that issued the script no longer needs to be trusted.
26/ Real Estate is a good starting point because most places in the world have a title register where you can prove that you own your house.
27/ So you make a legal agreement whereby that real estate is on the blockchain and there is a clause that the title will transfer if you don't pay back your debt. Then you can borrow from yourself off the blockchain by minting the currency.
28/ You need some trusted intermediary to get the asset on the blockchain, but once it is on the blockchain then there is a smart contract that I can't sell my house without paying back all the tokens I took out.
29/ By this same mechanism, you can do all asset-backed lending.
30/ So all the valued assets in the world could be converted into asset-backed currency creating much more liquidity, increasing the velocity of money, thereby increasing growth.
31/ You, the individual, are paying low or no interest because there is no trusted third party.
32/ My note: The tricky part of this seems to be custodial. If you are going to put gold on the blockchain and borrow against them then you need a trusted third party. There's also all the legal infrastructure that would need to get built which seems non-trivial.
33/ You can then go trade those tokens for other tokens or fiat or another commodity.
34/ Another Example: You have a bunch of steel that you need to paint in order to sell. You put the steel on the blockchain, use the tokens to buy paint, paint the steel, then finalize the sale and pay back what you borrowed to buy the paint. You keep the remainder as profit.
35/ What you're enabling is commerce to happen without possession of fiat currency which is scarce relative to the total value of assets.
36/ Right now if that steel manufacturing is happening in a poor country then they don't have the liquidity to buy the paint, they are taking out a loan at 20% interest rate (if they can even get one).
37/ In the blockchain scenario, the transparency removes a huge amount of risk. The entity loaning money for the paint can already see, on the blockchain, an order to buy the finished product so they can lend at a much lower rate because of commensurately lower risk.
38/ You can also reduce risk because you can reroute the money around bad actors in the system. It's all transparent on the blockchain.
39/ One way of looking at this that the blockchain collapses the space between the map and the territory.
40/ Because the blockchain (map) so accurately reflects the territory, you can more safely operate on the assumption that the two are the same so you need a much smaller risk premium to lend.
