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The following is a highlight recap of this AMA.
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Joy: From the Fed's perspective, cryptocurrencies sit between gold and growth stocks
Joy: I will share some views with you from the macro-level information and recent events, and predict future market trends.
There have been some important events recently, such as the SVP thunderstorm and Credit Suisse risk clearing, which have affected the market capital risk to a certain extent. In this process, Silicon Valley Bank may affect the pace of liquidity easing in the United States, because there are actually great risks and hidden dangers in the substantial expansion of bank liabilities and the sharp rise in financial asset prices. With the deepening of interest rate hikes, if the high interest rate situation remains unchanged, risks in the financial market will continue to erupt. However, our previous analysis believes that purely SVB and its affiliates do not have much risk, because their customer structure is relatively stable, and their risks are not contagious.
In the context of financial institutions' constant thunderstorms, the United States is under great pressure to raise interest rates. Since October last year, we have predicted that the interest rate hike this year may remain at around 5 percentage points. There will be an interest rate hike in May next, and the focus of interest rate hikes may appear. Recently, we've seen the market keep trading in expectations for June gains. The volatility of risky assets, as well as the demand for hedging and the collective demand for core assets have led to gold, high-tech stocks and other emerging assets becoming the focus of the market. With the thunder of banks, people found that cash assets are not absolutely stable. From the perspective of equity capital, the market will tend to hold assets such as cash, treasury bonds, bonds, gold and high-tech stocks.
There are currently two risk appetites in the market, leading to greater differences in holding gold and high-tech stocks. Hold gold because it has no implied yield and is the safest asset in a recession. The reason for holding high-tech stocks is that the risk of cash assets, treasury bonds and corporate bonds has risen and bond yields have risen and their values have fallen. When people hold interest-bearing assets, the risk of principal disappearing increases. During the SVB thunderstorm, the attitude of the Federal Reserve and the Ministry of Finance made people start to group core assets together.
In fact, the core of the problem is not these banks, which essentially have no particularly difficult assets. The long-term U.S. debt held by these banks is very sensitive to changes in interest rates, and their value will drop significantly if interest rates rise even slightly. From a technical perspective, most banks are now bankrupt, mainly because they classify these long-term bonds as "hold-to-maturity" subjects. Gains and losses on this account do not directly affect the banks' balance sheets and audit reports, so technically the banks are not bankrupt. The problem for small banks is that they face the risk of a run and can only sell long-term holdings of U.S. debt. However, when the long-term US debt is sold out, its losses have already been realized, and this is the problem.
This problem is essentially a U.S. debt problem. To fix this, the Fed can step in. It can directly acquire these U.S. debt, or accept these U.S. debt as fully qualified collateral, and then provide funds to banks. Therefore, according to Teacher Lou, this problem is not difficult to solve. Also, it provides a good excuse for the Fed to restart the zero interest rate policy. The Fed's policy cycle has been four years, with one year of tightening and three years of loosening, and it has lasted for nearly fifteen years. From 2008 to the present, the tightening phase of this cycle has come to an end. Therefore, the next stage should be the Fed's policy easing.
From a Fed perspective, we position cryptocurrencies between gold and growth stocks.
Bitcoin is similar to gold, while Ethereum is similar to growth stocks or tech stocks.
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Flex: HOPE is going to be Alipay on the chain connecting DeFi, CeFi, and TradFi
Flex: Last year, after PayPal had problems, I was called back by shareholders and creditors to see if there could be a restructuring to fix the problem. However, the risk contagion in the market did not stop at that time, from Luna to FTX, to BlockFi, to Sanjian, PayPal, and further contagion from these institutions, affecting Genesis, the largest lender in the industry. Unlike traditional markets, Crypto does not have a central bank, and this kind of contagion cannot be stopped at all. There will be no joint efforts of the Federal Reserve, FDIC, and the Ministry of Finance to solve the problem. Crypto did not have the ultimate lender, and Genesis assumed the role of a small lender, and when it was rescued, it was basically over. Faced with this situation, we and several major creditors have been trying to solve the problem. At that time, I just thought of what I wanted to do in 2019-distributed reserve stable currency. It was just an idea, because PayPal was so busy at the time that it didn't have the energy to do the ideal thing. After experiencing this drastic change in the industry, I wanted to move forward, so I had HOPE.
HOPE wanted to be a native stablecoin from the beginning. But with the gradual development of the market, we found some problems. In the beginning, we wanted to make HOPE a new security deposit, and then connect to various centralized platforms. But then there was a problem with FTX, and there was also a problem with the reserves behind USDC, and everyone's trust in these platforms declined. So, while it started out as a solution to PayPal's problems, then, we figured out that this project could be much bigger. It is more transparent and open than PayPal's business model, and it is a pure DeFi project. The goal it wants to achieve, like most DeFi projects, is to provide a financial service terminal that brings open, transparent, and frictionless financial services. It is no longer a financial service system controlled by middlemen like in the past.
However, as we worked on the project, we became increasingly aware of a macro trend of increasing conflict between the US and China. From the balloon resolution to the later draft involving China, the U.S. House of Representatives cast a rare result of zero opposition. Later, the Taiwan draft appeared.
This series of changes shows that the conflict between China and the United States is intensifying. In the process, something new may emerge. For example, China needs to de-dollarize and gradually remove the US dollar from China's settlement process. However, the internationalization of RMB is a very difficult thing, and it has been difficult to advance for many years. This is Plan A, and it's going to take a long time.
China needs to de-dollarize
At this time, there is also a Plan B, which is to use non-US dollar international trade currencies, such as British pound, Japanese yen, Singapore dollar and Hong Kong dollar. However, the Russo-Ukrainian War gave everyone a precedent. The United States froze and confiscated the overseas assets of many Russians. So while Plan B is doable, people don't fully trust it. At this time, Plan C appeared, which is what we call an encrypted payment gateway, which directly led to the rapid opening of Hong Kong.
Hong Kong’s crypto liberalization has two goals. First, as Plan C, it becomes a port for China's foreign trade. As a bridgehead connecting China and the world, Hong Kong will still play an important role in the future. On the other hand, we need to allow everyone to invest in Hong Kong with peace of mind, and hope that more overseas Chinese can return to Hong Kong to start businesses, whether in the encrypted field or in the non-encrypted field.
Therefore, from these three aspects, the encryption opportunity in Hong Kong is very large. For HOPE, it can be regarded as conforming to this new trend. In the course of future international geopolitical changes, it helps the region's foreign trade. If we think of Plan A as the flagship, then Plan B is the destroyer, and cryptocurrency acts as the pirate ship. In fact, this is a long-term vision, hoping to become an international trade settlement currency in the future. In the short term, it is still a project similar to BTC/ETH tracking token. We hope to make it a very good collateral-collateral with a highly liquid, interest rate market. Therefore, we will use hope swap to realize its liquidity market, and hope lend to realize its currency market, thus forming a highly liquid exchange rate market and interest rate market. Only in this way can it be used as a very good collateral and be applied to various affairs.
Therefore, our long-term goal is to become an international settlement currency from 2026 to 2029, and our short-term goal is to make it a very high-quality collateral from 2023 to 2025. That is what I call collateral across DeFi, CeFi, and TradFi. DeFi, that is, Protocol, is coded, which means that you cannot change it easily, so we say that DeFi is relatively safe. But it also has its own problems, that is, it is not flexible enough. We hope to push it to CeFi. At this time, we have used a protocol called Connect, which is a light protocol on the chain. You can think of it as Alipay on the chain. Just like when Alipay was used in 2006, the main goal was to keep your money in Alipay when the Taobao seller shipped it to you. When the goods are received, you click to confirm, and the money can be transferred from Alipay to the seller. This is such an escrow function. And we hope that the light settlement system will connect to DeFi in the future, and connect DeFi and CeFi first.
We hope that HOPE can become a universal margin in the three fields in this process. Through such planning, we hope that HOPE can gradually achieve its long-term goals, provide a new option for international trade settlement, and provide high-quality collateral in the short term to meet the needs of all walks of life and promote the development of the entire cryptocurrency and financial ecology.
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Joy and Flex look back at the history of stablecoins
Joy: The first batch of stablecoins should have been issued in 2014 as an asset-backed stablecoin for BTC, but at that time the regulation in various countries and regions had not reached the level it is today. But with the gradual changes in regulation, it has developed into today's pattern.
Flex: USDT becomes a middleware. There are various reasons for the development of USDT, USDC, etc., including endorsers, interest-bearing capacity, security, etc.
Joy: Different types of stablecoins such as USDT and USDC have their own advantages and disadvantages in the market, and may develop into a decentralized management model in the future. The U.S. political environment has had an impact on start-ups like Coinbase.
Flex: The rise and decline of Terra Luna are closely related to market risk-free arbitrage, capital flow and other factors. The HOPE project responds to market fluctuations and attacks through advance reserves.
Joy: One of the reasons why USDT has developed better in recent years is that the asset support behind it is more diversified, including commercial paper, corporate bonds, and money market funds. The anchor of USDC is relatively simple, 74% is cash and cash equivalents, and 26% is short-term government bonds. From this point of view, USDT has stronger interest-bearing ability and is safer.
Flex: USDT development process:
At first, exchanging USDT was relatively difficult.
Bitfinex supports USDT, so a certain market has formed.
USDC is institutionalized in the United States, launched by Coinbase and Circle, and is compliant and legal, so American institutions are more willing to use it.
BUSD is the product of the cooperation between Binance and Paxos, and Binance has also held a series of activities for BUSD.
Joy: We believe that all public chains, Layer 1, Layer 2 and even Layer 3, will be treated as internal decentralization in Web3.0 for management. Currently, the CFTC and the SEC are already vying for regulatory power.
Flex: Coinbase is not actually where the interests of the American establishment lie. The interests of the establishment lie in Nasdaq, the New York Stock Exchange and banks. Therefore, the establishment may abolish these emerging cryptocurrency exchanges in the future, which is determined by the political environment in the United States.
Joy: FTX’s thunderstorm was affected by the aftermath of Luna. As a representative of over-collateralized stablecoins, the rise and fall of Terra and Luna cannot be used as a criterion for judging whether over-collateralized stablecoins are feasible.
Flex: Luna's ecology and Swap are doing well, and the mechanism is also good. The innovation of Base Rate is also okay. The reason why Terra rises and collapses quickly is that the market surge in 2021 has brought many opportunities, especially the risk-free arbitrage in the encryption market, with an annualized rate of return of 40% to 50%. However, after May 19th, that opportunity disappeared. However, due to reasons such as high friction in deposits and withdrawals, funds are still reluctant to leave the market. With nowhere to go, the money flowed into Luna and Terra, which went from $50 million to $100 million in less than a year. However, the market heat is not high, a large amount of funds are pouring in, and the pressure is too great, so they turn to reserve BTC, use Luna to mint Terra, and then use Terra to buy BTC. Although the purchase of BTC by Luna caused a small bull market, when Luna was attacked, it triggered a big volatility in the market. At that time, FTX was the largest liquidity provider in the market, but its algorithm did not take into account the problem of the market going to zero, so it finally collapsed.
In order to deal with various attacks, HOPE plans to make reserves first, and then make algorithms.
Joy: I have summed it up and think that algorithmic stablecoins have an impossible triangle. The three corners are its stability, degree of decentralization, and capital efficiency. It is impossible for these three points to coexist.
HOPE chooses to use assets as the underlying mortgage at the current point in time, which cannot take into account the degree of decentralization, but its distributed storage and capital efficiency perform well. The Impossible Triangle will change with the change of market capital risk, and there may be many development possibilities in the future. HOPE will launch functions such as Lend and Swap successively, which is an iteration and further development of the product.
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How does HOPE solve the "impossible triangle" of stablecoins?
Flex: In order to avoid the dilemma of the impossible triangle, HOPE trades time for space and gives up the current capital efficiency in exchange for future capital efficiency. The next phase is expected to be one of easing, with both monetary and fiscal policy loose. Next year may be a turning point. Both monetary policy and fiscal policy will be loose, which will help emerging assets such as BTC and ETH rise. In a bear market period, we reserve first, and in a bull market period, we will have a lot of room for easing. Afterwards, we can exchange BTC, ETH reserves for stable reserves, including fifth-generation stable coins such as CurveUSD, AAveUSD, etc. These stablecoins may become HOPE's reserve objects in the future.
Joy: The current debt structure is in the form of triangular debt. A is embedded in B, B is embedded in C, and C is embedded in A. The core and essence lies in the price of the underlying assets. As long as the underlying asset price recovers, the entire price can recover. Now, the friendliness of banks, the difficulty of depositing and withdrawing funds, and the application scenarios of stable coins are all facing great challenges. This is where the opportunities and challenges of Flex and HOPE lie. Hong Kong's compliance measures in custody, trading, asset management, and stablecoins will expand the market size and lower the entry threshold.
Flex: Hong Kong has two major advantages: one is stricter regulation of speculation; the other is stronger regulation of stablecoins.
Joy: The cooperation of Hong Kong's regulatory environment and other business forms will help the rapid development of stablecoins. For example, many banks in Hong Kong are more stablecoin-friendly than banks in regions such as Singapore. In general, the access to gold in Asia is smoother than that in Europe and the United States. With the theme of rising in the east and falling in the west, the development prospects of HOPE's stable currency are full of hope. This is like Wang Huiwen in the Web3 field. From Meituan Entrepreneurship to AI, he has entered a larger and more deterministic track, and the probability of success is very high.
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Q&A: How does HOPE plan to host BTC? How to realize the protocol reserve?
Flex: In essence, we are a DeFi project, but we made some compromises for two reasons. First of all, in order to develop incremental markets, we need to make it easier for funds from Hong Kong, the Middle East and Europe to enter the market. So, for the first few years, we chose distributed hosting, initially Coinbase because it had the best custody support, user experience, and compliance.
Second, we need to solve the BTC contract problem. Although HOPE aims to be decentralized, we actually use centralized hosting. Coinbase offers segregated accounts, which allows us to do something similar to what Bank of China, Standard Chartered, and HSBC do with HKMA. These banks can reserve US dollars with the HKMA and then issue Hong Kong dollars with their own logos. In HOPE, we are similar to HKMA as the issuer of stablecoins. We do not face customers directly, but through distributors. When customers deposit BTC into Coinbase's designated address, we will confirm their reserves and allow them to mint the corresponding amount of HOPE in the HOPE protocol. When a customer wants to withdraw the reserve fund, they need to destroy $HOPE first, then initiate a withdrawal application, and after approval by the Power Oracle, the withdrawal is approved by Coinbase.
The initial approach of HOPE is to use the Coinbase Reserve Reserve, but the long-term goal is to achieve a protocol reserve. At present, HOPE is similar to the operation method of the US dollar: reserve first, and then purchase. Our essential goal is also the same, that is, reserve HOPE first, and when the reserve assets greatly exceed the issued HOPE, we can issue HOPE in excess. The excess issued HOPE will return to the community, and the team will charge 30% of the handling fee. In fact, the newly issued HOPE can operate in various DeFi protocols and generate more value. At this time, HOPE reserves become a means of marketing.
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Q&A: What is the casting process of HOPE? How to solve the problem of price anchoring?
Flex: For the rules and design of HOPE, it may indeed be challenging to track prices in the early stages of the project. In order to achieve decentralization under the premise of ensuring security, HOPE adopts the dealer model, and the dedicated distributor conducts wholesale and market expansion. At the same time, individuals can directly purchase HOPE with various coins on the decentralized trading platform.
Regarding the issue of tracking prices, the initial value of HOPE is 0.5. In theory, when the mortgage assets double, the price of HOPE should track to 1. However, there may be some challenges in practice. For example, in the early days, the price of DAI was lower than 1 for a long time because there were not enough usage scenarios. When ETH plummets, people who need to buy back DAI will push the price of DAI back to 1.
Similarly, HOPE may also face difficulties in price tracking in the early stages of the project. Since the redemption process is not smooth enough, it may be necessary to find a trustee, and the friction cost and time cost in the middle may lead to price tracking deviation. But with the development of the project and the enrichment of scenes, this situation should gradually improve.
For the HOPE project, the key is to gradually realize decentralization and enrich usage scenarios under the premise of ensuring security and compliance, and improve the practicability and value of the project. Over time, project teams can refine and improve product designs to better address these challenges.
The development of the HOPE project can be divided into three phases:
The first stage: as a margin for derivatives transactions on centralized exchanges. The customer puts HOPE on the chain, and through a mechanism similar to Maker, USD can be minted after HOPE is recognized. This USD has a designated purpose and can be used for brokerage accounts to trade on exchanges.
The second stage: decentralized financial management. The customer puts the currency on the chain to generate USD, and HOPE grants credit to the fund manager. After the fund manager completes the transaction on the centralized exchange, the profit returns to the chain to realize the clearing and settlement plan.
The third stage: connect DeFi, CeFi and TradeFi. Cooperate with global brokerages, so that the USB generated by CDP can directly purchase synthetic assets, stocks, etc., so that stocks can be traded without withdrawing money.
The initial goal of HOPE is as a deposit, but the most important function in the future is payment and global settlement. The vision of the project is not just to make HOPE useful for profit, but to make HOPE practical. Open and transparent light settlement will reduce the possibility of malicious behavior.
The HOPE project is similar to Alipay, which first makes financial products and then makes payment functions. The reason why financial products are first is that HOPE is not a stable currency in the early stage and needs to ensure liquidity, so the margin function is implemented first. In the future, when HOPE becomes a stable currency, the entrustment function will become more important.
In the future, the project will decide on the custodian in a decentralized manner, with the core goal of establishing a DAO.
The first is to give young people hope and build a better community of their own. The second goal is to carry out work aboveboard and provide people with a fair, open and transparent platform.
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Q&A: How to understand the exchange of reserves in the third stage of HOPE? If you want to change in the future, why choose BTC and ETH now?
Flex: During the development of HOPE, the third stage will be swapping. In the initial stage, HOPE will use BTC and ETH as reserves, which indeed has the characteristics of cryptocurrency. But at a later stage, the reserves will shift to decentralized stablecoins. Such a change does not mean the loss of self-distinctiveness, but for the following reasons:
Use time for space: In order for HOPE to quickly become a large-scale stable currency, the project needs to take advantage of the rising process of BTC and ETH. Additionally, using BTC and ETH as a reserve can add enormous value to LT, making it a perpetual call option.
The future stablecoin market: The goal of the exchange is not the existing stablecoins, but the excellent stablecoins in the market after 2 years, such as CurveUSD and AaveUSD. These stablecoins have unique natural advantages, such as curve can be quickly converted to other stablecoins. More diversified reserves, including non-US dollar assets such as US dollar bonds, Hong Kong government bonds, Singapore government bonds, etc., can also be used as reserves. This choice has to do with improving capital efficiency, which increases reserve efficiency by reducing excess reserves.
In the longer future, when the HOPE protocol has good credit, there may be more application scenarios. For example, as a system side, Curve’s on-chain debt may be directly purchased and reserved by HOPE, making HOPE an important part of a certain pool. This will gradually evolve HOPE into an algorithmic stablecoin.
