Thanks @anon10525910 this is awesome. I’m glad we are sharing readings and lessons for IC.
One of the major drivers for my thinking lately has been the works from economist Bengt Holmstrom. This has shaped how I think about our IIP-32: Index Sale and the SYI - Stable Yield Index.
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He has a really good paper called Understanding the Role of Debt in Financial Markets. In the paper he argues that debt is fundamentally different than equity and built around diametric opposed logic. Equity aggregates risk across market participants, while debt creates liquidity.
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Debt acts as a damper on volatility. Much of the volatility in current crypto markets comes from the fact that these markets are almost purely equity. Bitcoin does not have a native financial system built around it. This means that significant liquidity demands directly result in price discovery as BTC holders sell their assets in exchange for liquidity. In DeFi we are in the very nascent stages of developing sophisticated debt markets - as these markets develop they will help smooth out some of cryptos volatility.
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For the stable yield index (@Matthew_Graham ) this intersection of debt and volatility is super important. When we tranche risk we are really categorizing debt/yield by degrees of information sensitivity. High-quality debt (AAA in traditional finance) is the least sensitive to new information.
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When debt is sufficiently over-collateralized price changes of the underlying collateral do not matter very much. On the other hand, when debt can be under collateralized, it becomes highly information sensitive. Any new information on the price of the collateral can trigger a default. This dynamic explains the dichotomy between stability and urgency in debt markets. Most debt is highly over-collateralized to ensure maximum liquidity and stability. Trading can occur with minimal information from both parties. However, the value of information for debt when it is close to default or under-collateralization becomes very high. Thus, any new information can lead to a default on the debt, creating a sudden high degree of urgency.
When building different tranches in the Stable Yield Index we are essentially categorizing yield by its volatility / exposure to market based fluctuations with the most stable yields being the lowest risk and the least stable being the highest risk.
This has also changed how I think about our treasury diversification - by bringing in stable assets in exchange for equity we are dampening volatility and lowering our exposure to price discovery. This should lead to steady long-term growth in a way that cannot be sustained by a remaining 100% equity funded.
Another paper that has really shaped my thought over the past few months is "Crypto Wants to Be Seen," Op-ed By Kayvon Tehranian - The Defiant - DeFi News . The conversation around how much crypto can be abstracted away remains extremely relevant. During conversations with traditional funds we see are seeing a big desire to hold assets on chain - a desire that directly results from these firms having a better understanding of crypto itself and wanting to control these assets. I think we overestimate how much abstraction is needed - these funds are willing to learn and quickly growing comfortable with on-chain custody and interactions.
Excited to hear what everyone else is reading and how it applies to the Coop!