Traversing this vast realm is a magical mystery. We must seek out the wise.

 Artwork by the artistic genius - @FantamSpooky

On your journey, you will embrace endless travellers, merchants, pickpockets and thieves; friends, enemies, allies and foes. It’s overwhelming. Whom can you trust? How do you differentiate between truth and tribulation? To begin with, you won’t.

Lies will be lapped up, promises will be broken, and candles will bleed. But, you will learn wanderer. You will begin to understand that you truly know nothing. We all know nothing. Don’t aimlessly wander. Open your mind, and entertain thoughts, but do not accept them. Once you can do this, the knowledge will kneel, education will erupt and wisdom will wave.

The journey is so much easier if you seek out the wise.

So, where does our wise wandering take us this week?

• Did someone say Chicken Bonds?!

• An interview with Marc Zeller of Aave

• The FED, inflation and the dollar - A Masterclass

Chicken Bonds (Liquity)

Chicken Bonds are a new novel bonding mechanism. It adds some additional innovations to an already highly utilized financial instrument. The wise Ceazor breaks down the concept concisely in this video, but first, let’s make sure we understand what a bond is.

What is a bond?

Bonds play a pivotal role in the global financial system. But, what is their use case?

A bond is usually a loan from an investor to a borrower such as a company or government. The borrower uses the money to fund its operations, and the investor receives interest on the investment. This “interest” is known as a coupon payment.

The borrower will pay out this rate until the bond reaches maturity and the original value that the investor purchased it for is paid back.

So, what’s a chicken bond?

Chicken Bonds incorporate Liquity’s stablecoin - (LUSD). A stablecoin that is minted by providing ETH as collateral. At this moment in time, the only way investors can create a bond is by using LUSD.

Chicken Bonds are “Principal Protected Bonds”. This essentially means that at any point, you can exit your bond and reclaim your principal investment. There is also no fixed maturity date. Additionally, a unique mechanism that chicken bonds incorporate is the use of NFTs

Upon bonding your LUSD, you will start to accrue interest. The interest for chicken bonds is paid out in BLUSD tokens. BLUSD is an interest-bearing version of LUSD, appreciating due to the underlying bonding mechanism. As we mentioned with bonds, the investor’s loan is used to fund other operations. So, what is your LUSD being used to do?

Pending Bucket

Firstly, your LUSD goes to the pending or “bonding” bucket. These LUSD tokens get sent to a LUSD stable pool, with rewards compounded back into LUSD. If you wish to exit the bond, your LUSD is removed from this bucket. The LUSD profits from the stable pool are then sent to two new buckets; the Reserve bucket and the Permanent bucket.

Reserve Bucket

The Reserve bucket backs the BLUSD tokens. The Reserve Buckets LUSD is always put into the LUSD stable pool to earn more, creating a flywheel. The LUSD that is within the reserve bucket gives a floor price to what these BLUSD tokens are worth.

Permanent Bucket

The permanent bucket sends the LUSD to different protocols to earn yield. These protocols are either Curve (a LUSD 3 pool) or B. Protocol ( an LUSD stable pool).

Chicken in vs Chicken out

As these bonds are “principle protected”, at any point, you can choose to chicken out. This action will redeem your underlying LUSD from the pending bucket but it will also give up any of the yield tokens that your bond has accrued. This is non-reversable.If after some time, the accrued rewards are greater than the LUSD you originally bonded, you can choose to Chicken In and claim your BLUSD tokens. This is also a permanent action.

What can you do with BLUSD tokens?

Swap

You could decide to swap those BLUSD tokens back into LUSD. This mechanism utilises a BLUSD / LUSD curve 3 pool LP. If BLUSD is trading above a dollar, you could then swap to LUSD and loop the process.

LP

Or, you could choose to provide this LP and earn rewards. 3% of all the rewards sent to both the Reserve and Permanent buckets are sent to this Liquidity Pool. Offering users stable incentives on a stable LP.

All this is summarised in this great graphic.

There are a couple more things to uncover with Chicken Bonds, but from initial research, they definitely have caught my attention. Naturally increasing floor price, instantly redeemable bonds, NFTs … Certainly intriguing. What I find really interesting is how this mechanism could be used for Protocol Owned Liquidity.

POL

Currently, you can only bond with LUSD, but incorporating a market for POL is in the works. As long as the token has a secondary yield source, a protocol/DAO could bond some of their own POL. This would allow protocols to bootstrap liquidity and fund a lending market at the same time. How?

1. Essentially let’s say a DEX has POL in a token called NALY.

2. They bond this NALY and start accruing bNALY.

3. NALY is sent to a lending market and starts accruing yield

4. A portion of rewards are sent to the reserve bucket that rises the floor of bNALY

5. NALY is sent to other markets to earn a yield

6. To ensure that there is an open market for bNALY, the DEX opens a bNALY/NALY Liquidity Pool.

7. Some of the rewards are sent to this LP as incentives

8. Users can arb and enter the LP on the DEX (increasing DEX liquidity)

9. Once the DEX bond reaches maturity, they chicken in and claim the bNALY

10. bNALY is trading at a premium to NALY so they swap back for NALY

11. They bond the NALY again

The DEX has increased the liquidity on the protocol, funded a lending market and increased its POL. Pretty cool concept!

So far, chicken bonds have seen some strong growth. Check out this Dune Dashboard for some statistics:

An interview with Marc Zeller of Aave

Aave is one of the DeFi big boys. @alpha_pls recently wrote a great piece on his interview with @lemiscate 

You should 100% go and check It out, but we will summarise the key points here. There was a lot of alpha dropped! Marc is a renowned and wise wanderer in space, let us see what wisdom we can reap.

Marc’s story

Marc got involved in Bitcoin back in 2013. Was it through the fascination with the technology? The financial revolution? Not quite, he bought some of the devil’s lettuce instead. He actually thought Bitcoin was a pretty stupid idea at the time. However, Ethereum piqued his interest with the introduction of Smart Contracts.With the premise of actual utility and the potential for financial instruments to be built with code, he started digging a little deeper. Curiosity is often the fuel for ambition and in 2019, after setting up a yearly Ethereum community conference, Marc joined ETHlend which went on to become the Aave we know today.

A background on Aave

Aava is not only one of the biggest DeFi protocols, but it is also one of the only early DeFi protocols that have never been exploited or hacked - pretty impressive. Marc predicts that this is largely due to the $1.6 million they spent on Audits between 2020 and 2022.

Aave has big visions. It has been evolving since its creation and has already hit some important milestones. Flash loans, stable rates, aTokens, slashed gas costs, the list goes on. But, what get’s exciting is when Marc talks about where Aave is heading…

GHO

One of the biggest catalysts for growth on the horizon is the introduction of GHO; Aave’s own stablecoin. What’s the need for this? Having already built up a “critical mass” of liquidity, GHO can serve as a centre of mass for all the protocol’s new innovations to work seamlessly together. So, what are some of these other innovations?

LENS

Marc mentions they are focused on building a monetized social media platform - LENS. GHO will be interwoven within this platform. Users would use an integrated on-ramp to buy GHO with their credit card to support their favourite creators. Marc says that the current content creation space has huge flaws, with centralized entities taking a majority of all content creators revenue. This will all change with Lens.

Institutional Adoption

There is a lot in the works that aren’t in the public eye. Institutional adoption is coming, and Aave is already working hard on it. When these institutions do roll in, there is going to be a shit ton of capital coming with them. Keep an eye out.

Debit card

Aave also have a “full electronic money institution license” and is bringing out its own Debit Card that will use GHO as the main currency for a collection of DeFi, social media and Fintech services!

GHO revenue

So, we have a multi-billion dollar lending protocol, institutionalised adoption and a monetized social media site, all utilising a native Aave stablecoin?! Does the revenue from this flow to the protocol only? It doesn’t seem like it. Marc hints that a portion of this revenue will actually flow to AAVE stakers. The AAVE token is certainly looking a bit more appealing to pick up now. Accumulating solid tokens with a ton of shit being built, is one way to make some returns in the years to come.

Portals and CCIP

Portals and ChainLinks Cross Chain Interoperability Protocol infrastructure (CCIP) unlock an avenue for cross-chain borrowing and lending. The tech isn’t yet ready but it sounds pretty darn cool. A portal would essentially allow you to use collateral on one chain and have debt on another.

Starknet

Starknet offers a lot for Aave as a new non-EVM blockchain. The main benefit is in the form of computation. Doing any math on Ethereum is costly, on Starknet it’s pretty much free. This will allow an Aave V4 with far more “eloquent mathematics, optimisation and efficiency”.

Finally, what is Marc bullish on?

LSDs (Liquidity Staked Derivatives). The future is interest-bearing. Marc believes this narrative will continue to grow. Why would you take a loan out on ETH when you could use stETH? Why hold ETH when it could appreciate naturally? Also, Marc sees users using LPs as collateral. Users could use CRV LP tokens to borrow stables and make leveraged bets. It opens up a lot of doors for creativity.

Marc’s closing words: “DCA is good”

A FED, inflation and dollar masterclass

Wise George and Joseph

George Gammon and Joseph Wang are some of the most highly respected macroeconomists in the space. Every interview with the two is insightful and educational. In this discussion, they break down the overarching monetary system, some common misconceptions and why inflation is here to stay. It gets pretty damn technical but we will break it down simply.

Rates will rise till something breaks

How high will rates go? Both Joseph and George believe this level is much higher than most people think. Why? The FED has multiple new “tools” at its disposal. If something cracks, they can easily taper over it, call it “monetary duct tape” if you will.

This time is different

Wang believes that this time will be different. It won’t be the normal FED cuts rates, and risk assets go to the moon. If something breaks, they can still continue to tighten. The FED acts as a lender of last resort to multiple financial markets, they are not restrained by the fragility of the financial system and can work with “surgical precision” to mitigate risk whilst still increasing rates. And if something does break, it’s more than likely to be something outside the US.

Why would it break outside the US?

Each country transmits monetary policy slightly differently in the world due to differing financial systems. In Canada and the UK, a pivotal part of the economy is the mortgage market. As these mortgage payments are reset every 2-5 years, when interest rates increase, mortgage payments increase alongside them. This is unlike the US which has fixed 30-year mortgage rates. What does this mean? When other countries start hiking, it immediately impacts the economy.

The FED, has an infinite balance sheet and they can use this to pretty much backstop everything. However, saying this, if there were a black swan event they both do believe the equity market could have a massive sell-off. Although they feel that the FED might not actually be motivated to do anything, they might actually welcome it.

Quantitative Easing misconception

George has a problem with people stating “ The FED is injecting liquidity” when discussing QE. He goes on to say that even if the FED is increasing M2 (See below) by buying from the average joe, that isn’t injecting liquidity into the markets. It is a transfer of one liquid asset to another.

It is an important statement that Wang agrees with, “QE is a change in the composition of liquid assets, not the quantity”. The FED removed cash to replace it with treasuries. This pushes treasury prices up, which pushes rates low and makes other assets more attractive (such as apple stock). Wang says the overarching effect of this is asset inflation, but not so much real economy inflation.

The same goes for fiscal spending

Joseph takes this example one step further with fiscal spending. What is Fiscal spending? This is the government spending policy. Both fiscal spending and the monetary policies of the FED are used in conjunction to control the expansion and contraction of the economy. Expansionary Fiscal Policy, similar to QE is a measure to put more money into the economy. The government does this by spending, and/or reducing TAX rates.

George and Joseph say that fiscal spending is inflationary for the exact same reason as QE. If the average joe buys treasury funds without involving the FED at all, the treasuries they receive are as liquid or have as much purchasing power as the cash they traded for. The more government deficit spending there is, although it doesn’t impact the monetary supply on net balance, it could increase purchasing power due to the increased liquidity.

“And that’s why we’re so screwed”. Everything is inflationary.

Inflation is here to stay

This M2 chart shows the monetary supply. You can see that it rampantly increases in the shaded area, why? This shaded area indicated a recession, which by their definition means 2 contracting GDP months. To combat this, the FED floods the economy with capital. During this period, there were doing around a trillion dollars of QE a month. Treasuries were moving from the average joe to the FED, and money was moving from the FED into the average joe’s bank account. But, you can see this begin to flatline. Why?

1. The FED is now Quantitative Tightening

2. Banks are issuing lots of loans

But, Joseph’s view is that this line should continue to go up, and this line flat-lining, doesn’t actually mean there is a flat line in purchasing power. Just like the analogy with fiscal spending, although the FED is utilising QT, the government is replacing cash with more treasuries. But those treasuries are just as liquid as cash and the system still has the same form of purchasing power. Just like money continuing to flow into the system, this causes inflation.

The future outlook on the dollar

Joseph believes that the dollar will continue to strengthen. One reason for this is that foreign central banks will be unable to keep up with the FED. Their financial markets are a lot weaker and will have to put a ceiling on their yields eventually. Also, due to floating mortgage rates, foreign banks don’t need to go as high on interest rates as the US to get the same effect.

Joseph believes that dollar strength is all part of the plan and doesn't see an ever-increasing dollar price causing the US a problem. Why? A majority of the things in the world are priced in dollars, Joseph gives crude oil as an example. If the price of the dollar goes really high, crude oil becomes more expensive to everyone outside of the US. This forces foreign parties to consume less, pushing the price of crude oil back down and aiding US inflation.

Joseph states, that with the dollar rising, the US benefits by “everyone else having to tighten their belts”. This is evident in all markets, and with all commodities prices in dollars, it has a huge impact on everything. It is a huge privilege that the US has.

Do you want to continue on the voyage for wisdom? Make sure to hit subscribe!