Crypto money markets.
Cryptocurrency markets keep rediscovering financial history for themselves, I keep saying every day, and now they have discovered money-market funds:
A new startup called Compound Labs Inc. is creating money markets for crypto assets, which generally are held in exchanges or wallets but remain idle and don’t earn anything.
To address this, San Francisco-based Compound has set up smart contracts on the Ethereum blockchain that would earn interest on crypto assets for exchanges, consumers and investors. It would work like overnight money-market sweep accounts.
“Every dollar you have that’s not paper gets swept into an overnight rate somewhere,” said Robert Leshner, founder and chief executive at Compound. “That’s exactly what we’re trying to create.”
So, first of all, what is your numéraire? Money-market funds aim to achieve a stable value, but in what currency? One assumes it is whatever gets swept: If you have 100 Bitcoins that get swept overnight on Monday, you’d hope that they’d come back worth like 100.01 Bitcoins on Tuesday, even if those 100.01 Tuesday Bitcoins are worth twice, or half, as many dollars as the 100 Monday ones. Leshner explains by email:
You have 100 bitcoins, and you send them to Compound’s smart contract.
They get loaned to traders who want to buy even more volatile investments (like other tokens) using the bitcoin, or to short-sellers who hate bitcoin, and want to sell it for dollars. Those borrowers have to maintain an excess of collateral (any other tokenized asset) at Compound.
The next day you have … 100.01 bitcoins inside Compound.
Okay sure but … “even more volatile” is … pretty volatile? Like, if I borrow $100 from you to buy three magic beans, and I overcollateralize that loan by leaving six magic beans with you, you are still exposed to the vagaries of the magic-bean market, you know? I worry that a Bitcoin money-market fund that makes its money by, like, margin lending to initial-coin-offering speculators might run the risk of breaking the buck…