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Preallocation, debt and voluntary confiscation

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2 hours ago, jag216 said:

I think the interesting issue in terms of gains is the impact of zero/negative interest rates globally.

This will be an interesting issue, for sure.

2 hours ago, jag216 said:

If more companies offer 8% compounded daily on stablecoins and the payment methods by card or app are liquid, they could start poaching the traditional banking service market.

With three rate cuts in the US and low rates already in place elsewhere, folks will get hammered with 0% cards and cheap refinancing. That's a lot of new money pumping globally, and no one is going to stick that in a bank account for 0% interest if they can get a liquid digital asset with real return potential.

First, thanks for the heads up on Nexo - I didn't know anything about them until your post (and it makes me wonder if you're not in sales for them). I will do my due diligence and consider an investment accordingly - always looking for a good ROI. Also, thanks for your post: as others have stated, I will reread and ponder some of what you posted.

That said, second, you will need many more companies offering (and actually consistently delivering,  for long periods of time!) these kinds of returns to start "poaching" bank customers. Most bank customers don't have the kind of money to make any percent of interest worth moving money to this kind of account. I mean, 15 years ago, when I was lucky to keep $1500 floating in a bank account over the course of a year, do you really think I would've given a thought to the $120 of interest I might have earned over the course of a year? Probably not. On the other hand, bank customers that do have amounts of capital (think money market) that are looking for steady returns can easily shift them to other staid avenues of revenue. For instance, I can easily get 5-6% dividends from the largest energy companies in the world. In the face of decreasing interest rates, I can easily invest in REITs, preferred or not, that can yield nearly as much (or more) under greater regulation and with significantly less risk. Hell, I can just buy real property...and in a negative interest rate environment, essentially get paid to do it. All I'm saying is that the crypto space is young...and it has a lot to prove.

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8 hours ago, jag216 said:

If more companies offer 8% compounded daily on stablecoins and the payment methods by card or app are liquid, they could start poaching the traditional banking service market

But where will they get this 8% from? I think @Grendel touched on the answer in his reply too - traditional investments that provide a yield are where the money has always gone - why should this change. Stablecoins are - well - stable - even if backed by currencies or securities (libra?) that appreciate in value, they can't generate 8% indefinitely - unless there's a ponzi scheme somewhere (BTC). I suppose you are implying that all the money going into these yield bearing opportunities is going to be going into tokenized versions of those yield bearing items and this is where the drive in the market will come from.

When the conversation flips back to xrp, then I _can_ see it as an investment in this category, but not at a rate of 8% - if money markets take your tokens and pay you interest on them, they are making the %8 by using your tokens as an exchange medium and they earn on the spread (but at a low rate) - this gives the token true 'value' in the traditional sense, and part of the spread that is earned by the markets goes into pushing up the price - in this way xrp becomes a true commodity and an appreciating asset (at least until the market saturates). For other tokens - I don't see the mechanism that gives them underlying value and if the 8% is coming from the underlying tokenized asset yields, then nothing has really changed - or has it?

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On 8/28/2019 at 5:30 AM, jag216 said:

It's not xrapid that is going to explode the price - its the lockup of digital assets in loans. Loans people are taking out now because they needed that seed capital

Kevin Cage did a video today reminding me of this interview of Miguel Vias from March of 2017. Start listening at 54:30. Fascinating how things are shaping up:


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On 8/28/2019 at 5:30 AM, jag216 said:

I've seen a number of youtube personalities discuss the idea of the XRP escrow being preallocated for use by global central banks as collateral for the issuance of digital fiat currency and effectively creating a montary value 'reset.' I've gone on their streams and tried to indicate a number of issues that rise with the use of digital assets as collateral, but I do think excitement has taken over the space and folks are just not taking the time to see this through.

Somewhere back in the past, I wrote comments about how I thought companies like OMNI were really important for the XRP ecosystem, because they were providing redeemable contracts on the XRP ledger attached to tangible assets.

When you establish a contract whereby an asset becomes redeemable in XRP - for example, by making a deposit for a leased object redeemable in XRP, or issuing a loan that is payable in XRP - you are increasing the market value of XRP by the amount of the redeemable asset. This is one of the thing that make open and free exchange markets so valuable to fiat economics - there are tangible assets, services, contracts, etc. that are redeemable.

Take a 5 USD silver note - that was redeemable to the bearer, at one time, for $5 worth of silver. Asset-backed currencies have value because their notes are redeemable memos that can be settled for real assets.

Now consider the role that crypto lending in CDP or collateral debt positions play in transforming the landscape. When you have a mortgage on the book in your name that is secured by the home you have possession of, there are limitations to what you can do with that home. A home with liens against it is taken out of the inventory pool. It no longer contributes to the available assets that can be redeemed with fiat currency. In many ways, a cap on tangible productive assets (and people) introduces a cap to the aggregate value of the fiat currency of a country. No assets to trade = no monetary value. Money is worth nothing when there is nothing left to buy.

This is a significant issue for the digital asset space, because you have the transformation of asset classes into representative units of exchange (securitize assets, tokenized assets) that produce lien-like impositions on the underlying asset, and representative debt position that use digital assets as collateral (CDPs). And you will very soon have cascading combinations of both.

One day, you will have the ability to take Apple stock in your portfolio tokenized, and you will be able to draw digital asset credit lines based on the deposit of those tokens in your digital wallet. As the tokenization economy expands, more and more conventional stocks will be encumbered, translating the stock exchange mechanism from one of stock trading to one of securitized token trading. It will not be possible, one day, to own actual stock. It will only be possible to own and trade representative tokens of a given stock on various platforms. The impact this will have on the price during the shift will be volatile and then normal as volume shifts markets.

Today, you can deposit your tokens with a company like Nexo, get a credit line advance and spend it. This is non-taxable - its secured credit. But this also takes those assets out of circulation - staked tokens that have liens against them are off the exchanges, so far as I can tell. I have asked a question on Quora and requested David to respond regarding hte potential of rehypothecation of assets on the ledger.

For those who are unfamiliar with the practice, and how it contributed to the housing bubble and the inevitable collapse of the hyperinflated price bubble - the best way to think about it is like this: blockchain has many features that prevent the double-spend problem from occurring. Rehypothecation of collateral assets is a form of intentional double-spend - where the same underlying collateral asset is treated as if it is owned by two different parties (or more) at the same time. Max Keiser has done videos discussing how rehypothecation has been used between physical delivery and metals and paper metals contracts to manipulate the price of precious metals.

So assuming that blockchain ledgers, as a feature, make rehypothecation impossible - this single feature alone makes digital currency one of the most powerful asset classes in history - if ownership cannot be subverted and the books built on it can be made that much more sound, it is an absolute game changer and you can bet that banks are doing whatever they can to allocate and build their positions in it, even if they are dormant and waiting on regulation to actually put those assets into motion. They are buying the fields but waiting for zoning clearance to build houses.

What to do in the meantime? These banks are incentivized to keep prices low and sideways, particularly after a protracted bear market where investors have hyped in and are now overleveraged. Companies like Nexo (not saying they will do this) will be very clear about how safe their custody solutions are, and how large financial powerhouses like Lloyd's of London will back their deposits. People will read articles about how they can use a fusion of dollar cost average in bear phases and collateral debt reinvesting during bull phases to grow their stacks without adding more capital in changing market conditions.

But consider the impact this ever-increasing CDP market will have on scarcity of inventory, and the inflated pricing effects this creates for deflationary digital assets. More and more liens against digital assets that are not available for rehypothecation and are effectively digitally segregated from corporate funds are locked away from retail markets. Sure, the debt contracts can be traded - and you know this is going to be a new source of banking revenue. But if digital assets are not subject to the same dubious supply issues as precious metals, price increases are inevitable.

This is the first wave of the slow bull drive, but it is not the real issue.

In times of crises, we have already seen that the transition from asset-backed currency to others results in the confiscation of real assets when times get tough. Owning gold can be made illegal illegal. You can be asked to forcible sell your ounces of gold and silver for face value prices, only to watch the values of metals skyrocket once they are in government possession. History has taught this lesson, are cryptocurrency investors paying attention?

Mark my words, as more financial institutions get involved in the business of operating digital asset holding accounts backed by the FDIC we will see unusual shortages, hacks and losses that will amount to voluntary digital asset confiscation. Sorry, your assets are in another castle! ~the FDIC.

If I enter into agreement with Nexo by depositing my funds that the collateral assets I yield for consideration are protected to market value by Lloyd's of London, make no mistake that in the event of a fiscal crisis or pending shift in economic situations I will not be able to withdraw my digital asset, but will instead be bought out at market price by Lloyd's - who will then own my digital asset and I have cash.

I'm not picking on Nexo - I use them a little bit. I may use them more when I wish to cash out without cashing out. I think the service that they and Binance and others will offer is a valuable service. But I keep the big bags away from these services. Because there will be a voluntary confiscation event where you will have your digital asset deposits cashed out because the terms allow for it. Folks will go to their account one day and see the cash equivalent of all of their crypto assets in their account. This may be caused by a manipulated price event that allows these financial institutions to liquidate your positions to pay off outstanding debt. It may be a "massive security event" that forces insurance to buy out your positions. PR folks are creative. Terms of service that include bail-in clauses are not the only tripwire to watch out for for investors right now in finance.

But to go back, there does not need to be a preallocation event for this to occur - it is already starting now. Go look at nexo's growth numbers, just as an example because they seem to be playing a leading role in the hype behind crypto loans. It would only take a few major household name banks to start offering remarkable credit lines and paying out on crypto loan investments to pull many of these assets off the market while stablecoins are floating around. The volume of encumbered assets of just a few major financial institutions would be enough to significantly increase the scarcity of inventory for most of the top ten assets - and who knows how far down the chain this value would trickle as the top ten coins grow out of reach.

The idea that XRP - the escrow - of 55 billion XRP is preallocated to banks and slowly being released to prevent scarcity from spiking is an interesting one, but seems both unrealistic and unnecessary. It would drastically cut the supply of available inventory for trade and ledger functionality - and that is likely going to happen anyway as crypto loans take off and fill the economic role that housing did in the 2003-2007 era. It's not xrapid that is going to explode the price - its the lockup of digital assets in loans. Loans people are taking out now because they needed that seed capital - or someo f it - or they just don't want to sell and deal with taxable events. Etc. Etc.

Eventually there will be a time when the underlying digital assets we are able to buy today will simply not be available for purchase - only their derivative products. It's going to be a totally remade financial landscape. And if digital assets do become part of a collateral plan to convert to digital currency, hold on to your butts and resist every temptation/trick to sell until you are absolutely ready to let your assets go - I definitely assume that any crypto I put up for loan collateral - even if I have no outstanding credit lines - will eventually be converted to fiat without my consent before this is all over. But those cold storage hodl bags... not your keys, not your crypto.

When you originally posted this I found it very informative. I find it even more relevant now. I wonder if you would be willing to follow up given todays current events, noting especially that in the US pending (it may be enacted by now) legislation will create the digital dollar and corresponding digital wallets?

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I haven't spent much time on the forums lately as work has picked up and I'm researching more conventional old fashioned investments to compliment my current holdings.

If you have not seen David Schwartz' video on creating collateralized stable coins or other assets on the XRP ledger, watching this in light of what I said before should serve as a solid sell on the concept of what sort of redemption powers XRP will be capable of in the future.

Taking into account the debacle of Nexo liquidations on March 12, 2020, there are a number of significant lessons and mile markers worth paying attention to on the road to decentralized finance and the derivative token economy.

Custody held by Bitgo seems to be reliable enough for enterprise class banking institutions but transparency for retail customers relying on the system is spotty at best. But this is less of an issue than other issues that are more pressing.

Ethereum is not the right platform for DeFi under the present performance constraints. There are many complaints across the board of individuals getting notification regarding their LTV dipping below the 83% threshold (or whatever it is depending on your asset portfolio), depositing funds reliant on the ethereum blockchain, and congestion on the blockchain preventing their deposit transactions from being committed before their funds were liquidated.

The main problem here seems to be that companies serving their best interest are incentivized to move liquidation orders ahead of deposits when they are simultaneously generating interest revenue for stablecoin depositors. It is true that they make money when they service loans, however the complication of also being accountible to depositers directly - really, the effect of having a more honest banking system - is that you have less float to recover from margins if you are dedicated to maintaining the integrity of all accounts hosted on the platform. The consequences of having a system that protects depositors is less wiggle room for borrowers - but I believe this is as it should be - why should depositors own the lion's share of the risk (as happens now in conventional banking, which based on the global bailout numbers favors leverage and risk taking). We got into this mess because there is a LOT of leveraged money propping up the prices of the stock markets and as a result there are no real safe havens where bad money has not already chased out the good (Gresham's Law) and people who are afraid of the risks being levied on the current economic systems take the earliest flight to cash.

I ran into this issue myself, when I first tried sending ERC-20 Tether to cover collateral and found it took too long. That being said, there is a solid business case for leveraging assets yielding confidently asymmetric returns. As someone who persistently leveraged at 10-15% peaks and reinvested at 20% drops I was doing quite well with my holdings, however those gains did disappear on Mar 12. I take full responsibility for those losses, of course. 

A safer strategy on leverage would be to pull on strong runs and do a calculated reinvestment that took into account what the worst case price scenario would be - the bottom out - and deposit enough stablecoin to keep your account above the liquidation threshold with regard to your token holdings.

I gave this example on reddit. Say you have a $1000 loan balance and your threshold is $800. Under normal credit line limits say you have your balance in XRP and you normally have assets valued at around $4000. If you do not have stablecoins in your account and the price goes as it did - from $0.36 to $0.105 - at least if your reinvested 100% of your loan back into collateral you would most likely not get completely wiped out by the oracle - assuming you have a v-shaped price recovery on the minute. If it was sustained, the odds of you getting cleared out beforehand are pretty high.

At the very least, if you took into account the value of your tokens at your own personal worst case scenario pricing and then made up the difference between that total and the liquidation threshold LTV amount you would be buying yourself a little bit of insurance during flash crashes. This would have the same effect to paying down the loan on that account, but with the advantages being that you could release that capital as the values went higher - but those coins are all locked down until the market recovers. You could also pay down the loan if you felt that made more sense, since the interest you are paying on the amount is far higher than what you gain through having the stablecoins on deposit - it really depends on how protracted the price crash is expected to be. These are all up to you.

But my point here is that ethereum is too prone to congestion to provide efficient and reliable DeFi services.

I'd like to see a stablecoin issued on the XRPL if for no other reason than speed and reliability. It will serve a significant purpose in the future in terms of providing rapid collateral protection applications as digital lending and finance takes off. Combined with enterprise-grade secure custody (Polysign, I'm looking in your direction) this is going to be a knockout win for DeFi.

Until the congestion issues of decentralized finance of digital assets are resolved in times of crisis, the public is right to be very skeptical of the safety and forthrightness of DeFi. If XRPL is pushed to the limits and a proper DeFi platform is developed that can successfully leverage the speed and clarity of XRP it will likely earn people's trust and become a massive use case for the token.

The funny thing is that many people are stating that Nexo is a scam because they were not given the amount of float they normally expect from financial outfits that have more risk tolerance and are willing to put savers at risk in order to cater to leveraged (and sometimes far overleveraged) traders. It is hard for many to swallow the bad financial habits the world has grown accustomed to. If the fixed-income classes were not so old and ignored there would be a serious revolt. They are the ones being given the shaft by all of this clown world finance.

I don't know if crypto is immune - I don't believe it is. I've been shouted down by many young traders who insisted bitcoin was isolated and different, we could not use convention market movements to understand bitcoin - it was a 'new market' and old the old rules don't apply.

Down with banks (flip sign) welcome institutional money.

Independent markets (flips sign) where's our ETF and derivatives.

There is a lot of borrowed money feeding the cryptocurrency markets now. That is only going to get crazier and crazier as hyperinflation hits and people understand that some finite asset networks have irreplaceable value added services attached. It is easier to fork bitcoin than it is to duplicate the ripplenet partner network. It remains to be seen how loyal bitcoin users will be to the bitcoin payment network as DeFi rolls out - I think this could realy push PoW to its breaking point and open up the space to faster assets with less congestion risks during times of high transaction volume.

I've said it in other places, don't sell too early - the value of your millions may expire quicker than you expect - while assets, particularly deflationary assets, are where the real value will last longer.

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2 hours ago, rippledigital said:

To avoid securities laws?! 

I didn't get the sense that was it. The guy was very transparent with me, and I was asking questions about their financial engineering and business model. That usually involves corporate strategies to gain a competitive advantage, that only the executive level knows.

Cant find the guy's number after my move/divorce all my stuff is "somewhere", or maybe trashed. Will sesrch my email and see if there is anything there.

They were PayPal guys, trying to facilitate market making for gaming digital goods. That was the real world use case, not Lending alone.

Maybe they are making markets between LBA and the gaming assets, like XRP as a bridge currency, but with Cred is the marketmaker? Idk.

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