Decryption White Paper Series
As the airdrop approaches, we have begun to publish DW20 white papers, chainless white papers, and comments from experts. The knowledge span of cryptocurrency is enormous. Based on our learning experience, we have launched a white paper series with various authors and perspectives. There will always be one that suits you. There are five versions of the DW20 white paper; there are two versions of the chainless white paper, suitable for different readers. We will publish them starting with the most readable version. Interspersed with commentaries.
Written in the front: Ms. He Bing is my good friend; she graduated from the Graduate School of the People’s Bank of China (now merged into Tsinghua University to become Tsinghua PBC School of Finance) and once owned and operated her own securities company in China. Currently living in the United States. Her specialty is foreign exchange trading. The analysis part is my interpretation of Mr. He’s article. Quite a question and answer.
Zhu Weisha June 23, 2023
He Bing commented:
There are two facts about the pricing of U.S. dollars in the article:
1. The multiple of U.S. dollar transactions is more than 20 to 50 times, and Britain, Australia, and other countries allow 400 times or more;
2. The U.S. government’s policies will affect the supply and demand of U.S. dollars intentionally or unintentionally. The expansion of the Fed’s balance sheet increases the supply of U.S. dollars, and the reduction of the balance sheet reduces the supply; Any world turmoil will increase the demand for U.S. dollars, which is why some conspiracy theorists believe that some wars are to defend the status of the U.S. dollar (people who believe this theory hold digital currency in the United States). Some interpreted the recent SEC investigation of Binance and Coinbase as cutting off the supply of dollars to facilitate the issuance of huge national debt by the Ministry of Finance. It is difficult for any other currency to simulate dollar pricing.
Analysis: The U.S. government influences the pricing of the U.S. dollar in disguise through buying and lending, raising and lowering interest rates, as well as currency issuance and tightening. Its leading position is difficult for other countries to imitate, which is what Ms. He said: “it is difficult for any other currency to imitate the U.S. dollar pricing.”
Because DW20 is regarded as a commodity, there is actually no financial concept in it, and there is no need to follow the rules of the financial industry. But we chose to follow the principle of currency issuance to design DW20. Satoshi Nakamoto said in his first statement that he wanted to solve three problems: the central bank’s over-issued currency, commercial bank bubble mortgages, and the inconvenience of micropayments. Bitcoin solved the first two problems in one fell swoop, and the third problem I don’t know the meaning of. (Because in the United States, there is no problem with micropayments in legal currency.) Why do you say Bitcoin solved the first two problems in one fell swoop? Currency issuance in the United States is through the Federal Reserve, to issue commercial and commercial bank loans to enterprises and individuals. The Fed is indirect and commercial banks are direct. If commercial banks are unwilling to lend, currency issuance will stop. Therefore, Bitcoin has solved the first two problems (actually the same problem) through limited issuance. Of course, this is the prospect after the Bitcoin standard is realized in the future (not necessarily by sovereign countries). Since DW20 imitates the issuance and operation of Bitcoin if the future development makes it naturally have the function of currency, then like Bitcoin, there will be no problems of excessive central bank issuance and excessive loan issuance by commercial banks.
Analysis: In my article, I said that Satoshi Nakamoto only solved half of the bubble lending, and there is no bubble lending in pure peer-to-peer. It is hard to say once there are centralized nodes participating in it. Both centralized exchanges and stable coins contain bubble elements.
In the same way, DW20 does not need to follow existing financial rules but only reasonable rules that can consider the main issues and help realize its design mission.
The most essential feature of money is the universal equivalent. The condition for establishing cryptocurrency is the community’s consensus composed of users. If the community is willing to use DW20 for payment, and merchants who sell goods and services are willing to accept DW20 payment, DW20 has the attribute of universal equivalent. At this time, no matter how the government treats it, the currency attribute of DW20 cannot be denied. If the government continues to treat it as a commodity, that doesn’t prevent usage: the exchange of DW20 for any good or service can be considered barter.
In the entire DW20, there is only the problem of currency issuance in the airdrop stage, and there are financial problems after starting to mortgage Bitcoin (because there are mortgages and stabilization funds, these two things belong to the financial category).
Currency issuance requires two elements: one is credit; the airdrop issuance method is the first good move to establish credit; inducing users to mortgage Bitcoin is the path to upgrade DW20 credit. The second factor for successfully issuing currency is already found; sound institutions are the second factor. The system must be not only transparent but also sustainable. Its sustainability depends on a stability fund and its core members’ generation, appointment, and renewal mechanism. Disclosure of core membership is a requirement. In addition, how the DW20 maintenance team builds credibility is a question that must be answered and fully communicated with the community.
Analysis: Ms. He is not a blockchain expert, and she doesn’t quite understand the principle of machine trustworthiness. But the problem is acute.
The design of the collateralization mechanism looks good. In-depth design is also needed to answer these questions: How to deal with collateral? Please let me know if you will keep it in your account. Can the community supervise? When redemption occurs, how to let the community understand that it is not misappropriation but redemption; if other uses of the collateral are considered, it is also necessary to understand the announcement.
Analysis: Same as the reasoning above, Ms. He does not understand the blockchain. The small partners of cryptocurrency are not free, and the power of smart contracts has been demonstrated. DAI and Luna provide both positive and negative experiences.
The setting of the stabilization fund is indeed easy to advance and retreat. Generally speaking, stable funds are profitable, but there will be unrealized losses at certain stages.
Analysis: The stable fund here refers to the market-making fund. Ms. He read the version relatively early, and the description of the market-making fund was not clear enough. It was with the help of a large number of friends that the article became more and more rigorous. What she said is very professional, and market making is risky.
The financial part of DW20 only involves the management of Bitcoin collateral and stable funds, which is also relatively simple. Things to consider: Should the borrower be charged interest? Since there is no inflation in DW20, the interest rate can be set relatively low. For example, the annual loan interest rate is 2%. Here comes the problem again: if a lending rate exists, there can be a deposit rate. Do you want to start a deposit business? For example, a commodity can be a storage business, and the storage fee is 0.5% per year.
Analysis: The mortgage issuance mechanism of DW20 is the same as the stablecoin stabilization mechanism, and the mortgagers take away the profits generated by the rising demand for DW20.
Hope there are more questions; let’s discuss them together.