At Dialectic, our Defi yielding represents a significant component of how we allocate our time and capital. Further, very core to our thesis is the idea that a New World Order is emerging, where wealth is transferring from West to East and distributing among emergent geographies. This New World Order implies that what has historically been a good store of value, such as the USD or Euro, may no longer be, as we peer into the future. Over the coming years we are likely to see strong appreciation in certain assets such as “boutique country” currencies (Swiss Franc, Singaporean Dollar, Scandinavian Kroners, etc.), an array of commodities (gold, white metals, lumber, etc.), and certain high-quality cryptos (ETH, BTC, etc.). We must have a unit of account based on a forward-looking basket of globally recognized store-of-value assets that is future-forward to yield without undue inflation risk akin to what the SDR was supposed to be, but never materialized into.
The problem with USD-Stablecoins in Defi
Current stablecoins in crypto present a series of individual trade-offs that I would prefer not to have in Defi yielding farms. USD is headed for significant inflation, and other reserve currencies such as the Euro are not any healthier. It is ridiculous that the now 50+ billion in Defi farming is occurring almost entirely in USD-pegged stable-coins with considerable points of centralization. The vast majority of people I’ve met who are in crypto took the trip down the rabbit hole, at least in part, because of their mistrust in reserve currencies like the USD and EUR. The ethos of the space and its current reality is not congruent.
When we wrote the original MakerDAO white-paper, Dai was intended to be free-floating against an original reference point of the SDR. In fact, this is how I learned about the SDR, which has become somewhat of an obsession over the years (more on that below). However, somewhere along the way, DAI became USD-pegged and is now collateralized in USDc, a centralized stable-coin controlled by Circle, Coinbase, and Goldman Sachs backed by USD sitting in bulge-bracket deposit banks. Very seriously, why are we building this decentralized software stack if we are just going to give the money (and thus the power) back to the banks? Potentially draconian regulation is on the horizon with respect to stable-coins, and we should be cautious as a community about our trust in banks while we’re working to disrupt them.
While we are impressed with algorithmic stablecoins and over-collateralized CDPs such as Synthetix and MakerDAO are enthusiastic supporters of both communities, we do believe that there is a place for a fully asset-backed crypto-asset. Synths and Dai are, in the end, a derivative of the underlying collateral and thus subject to Black Swan risk (which is an acceptable risk to many participants). As the current cycle in crypto ends, and the debt positions in the space experience drawdowns, we will need a range of stable assets for downside protection.
The Failure of the SDR (XDR)
The SDR (ticker = XDR) is an over-politicized failed project by the World Bank to define special drawing rights for reserve-currency countries. The XDR is obviously outdated and far too Anglo-Saxon-dominated. The USD and Euro make up 73% of the basket, and CNY was not even added until 2017 and is still grossly underrepresented. Further, the basket completely disregards important boutique country currencies such as the Swiss Franc or Singaporean dollars along with globally recognized commodities such as gold or white metals. Realistically, we couldn't expect to see any representation of crypto in the XDR before the end of the decade or longer. As a global community, we really could do better.
The Store-of-Value Reigns Supreme
We propose Sovreign, a novel forward-looking stable crypto-asset backed by a basket of store-of-value assets that is community-driven.
We invite you to join us and open a conversation about what assets represent good “store of value” properties and thus what should be contained in the basket.
Generally, as a starting point, we would want store-of-value to contain a majority of the following characteristics:
- Globally recognized and accepted as value-bearing
- Scarce: provable scarcity and certainty of inflation over a long period of time
- Medium of Exchange and therefore transferable and fungible
- Lindy Effect: resiliency over a long period of time and also non-perishable/depreciable
- Store-hold of Wealth: low volatility (beta) and ideally low correlation with financial markets
Generally, we would propose to start with a basket that combines the following categories:
- Currencies: including boutique currencies (CHF) as well as a strong representation of high growth economies such as CNY
- Commodities: including some gold, white metals, and a long tail of other globally recognized commodities
- Cryptos: including some BTC, ETH, and a basket of other well-established high-quality liquid crypto-assets.
Overall, for the sake of simplicity in the initial basket, I would recommend to the community to use the Pareto principle (80/20 rule) and pair a strong position with a leading asset in each of the above categories with a long-tail of secondary assets. In any case, we are excited about the debate of how best to balance the Sovreign basket.
Pragmatism towards the decentralization future of Web3
Over the years, one of my most frequent recommendations to teams in the space is to launch an MVP and grandfather-in decentralization over time. I prefer to have practical use-cases in the wild that will tend towards the idealistic realization of the fully decentralized dream over time. After talking with dozens of crypto-asset projects in the space, we have realized that there is absolutely no way today to have a fully trustless asset-backed basket of tokens today. This is why we believe that PHATs is a fundamental building block of a decentralized future, and we plan on working with the community towards the launch of this underlying infrastructure project in order to realize the dream of Sovreign as both fully decentralized and fully physical-asset-backed. We invite the community to make comments and contributions to PHATs by joining the Discord. PHATs is a significant and ambitious undertaking that will require involvement from a range of contributors.
While we are testing the complex crypto-economic equilibrium that PHATs require, we propose to consolidate a reasonable basket of store-of-value assets using generally available protocols in the space that have been appropriately vetted by community workers paid by the Sovreign TreasuryDAO. Over time, I hope that the community would balance centralization and collateralization risks and will hopefully lean towards decentralized asset-backed options such as PHATs, but we would prefer to use and yield with SOV now rather than wait. Important lessons can be aggregated over this next phase as we evolve towards the best store-of-value basket of assets available in the space, a ‘stabler coin’ so to speak.
Fair Launch, No ICO/VCs/Whales, Community Driven
It is important to note that we didn't build this project to make money as a group from launching a token. We brought Sovreign to this point because we want to be a primary user, both in our yielding activities and preserving wealth for Dialectic’s members. To this end, we have put forward a fair-launch token distribution that generously favours contributors and LPs moving forward. There is no ICO, there wasn't a pre-mine fundraise or SAFT round or any other payment for building out V0.1 of Sovreign and all funds contributed shall go exclusively into the Sovreign TreasuryDAO to develop and maintain the ecosystem rather than any firm. We receive no payment for producing the codebase and while we have paid for audits to ensure some reasonable security in the MVP, Dialectic expressly disclaims any responsibility for where this project will go or any positive or negative impacts realized by any group or individual. Sovreign is and will be decentralized and community-led governance from the moment of genesis. There are many ways for individuals and companies to get involved and earn rewards for performing tasks for the Sovreign TreasuryDAO and no favour will be shown to any early team member. Building the decentralized future of Web3 is a long road ahead, and we wanted to make sure that there are sufficient funds and competitive rewards to remunerate a talented and thoughtful community that have a considerable opportunity cost for their time and resources.
What Constitutes a Good Store-of-Value Asset?
In these highly uncertain times where the global landscape is rapidly changing, we spend a lot of time debating “what is a good store of value?”. What assets would we want in a global basket of store-of-value components? We invite the community of crypto-economists, software developers and financial engineers to join us on this journey to drive at the truth of this matter.
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