TL:DR; FBCH Coupons grant extreme assurance and can be written with really extreme leverage.
At first glance, Future Bitcoin Cash (FBCH) may look like a rehash two bad ideas: a bad staking idea paired with a bad giveway idea.
Both of these ideas have failed to lead the way to global crypto adoption, so FBCH be dead on arrival, right?
Well no, because it’s not.
There’s a bit more going on here. There is some super simple math concepts that might be clear to enough people without actually doing much math. Let’s get into it.
Fully-backed banking certainty verses guaranteed fractional reserve defaults.
Regardless of whether someone is interested in using Future BCH, understanding bitcoin’s fixed inflation schedule is crucial to making rational long-term decisions with any financial instrument backed by finite resources.
Since January 2009, new bitcoins have been rewarded to miners each block according to a regular halving emission schedule. The block reward is the predominant feature controlling inflation. Currently inflation is 3.25 coins per block, 0.84% of the total supply annually; the rate bitcoins are emitted is “fixed” and bitcoin-like half-life inflation ends up being deflationary relative to most other currencies.
The “fixedness” is more important than the specific current rate, because in a fixed-inflation monetary system like bitcoin, there isn’t much of a place for high-interest coin denominated debts, or even low/no-interest bitcoin denominated obligations. Because… in bitcoin, monetary policy is completely inelastic to loan failures or a cascade of toxic obligations. In short, there is no central bank to bail out buddies or change rates because people wrote bad loans. So one survival trick is to never allow coin-denominated debts in any sound decentralized financial system.
Now, some people offering a return on bitcoins can seem VERY established and smart, therefore it’s necessary to elaborate further: neither the creditworthiness of the counter-party nor the rate of interest really matters much once bitcoins start getting loaned, because if you’re doing business with a party stupid enough to owe bitcoins, they’ll quickly pass along incrementally increasing risk until someone is shorting tens of thousands of Bitcoin Cash from an omnibus account on a unlicensed fractional-reserve combination exchange/broker.
For example, if Satoshi Nakamoto loaned a million bitcoins to the US Government, The Government of the United States of America (in all it’s freight trainesque glory) would have to encumber those bitcoins to the Fed (as collateral for bombs built but not yet deployed), The Bank would loan them to it’s big New York shareholders (Citi and Chase), who’d loan them to hedge funds like Jane Street and Jump Capital, who’d loan them to FTX, who’d loan them to the likes of Three Arrows and Shilong’s Web and all kinds of colorful characters. If thee most reputable actor loans bitcoins to the second most reputable actor, it’s game over. It won’t be long until a degenerate in a penthouse who can’t comprehend compound interest and deflationary currencies is taking on high-interest coin denominated debt. This is a lesson cryptocurrency markets learned (again) in November of 2022.
So, if some bitcoin “investor” is seeking (or offering) a “return” on their deflationary fixed-supply currency, it’s a huge red flag and a big disappointment because it shows they may have missed some of the math behind bitcoin and some lessons from very recent crypto history. That whale is probably going to get harpooned, which hurts everyone.
If we’re staking coins to have them reloaned at a slightly higher rate, some fraction of those bitcoins are a total LOSS. It’s a mathematical certainty that systems which need more bitcoin than will exist to function aren’t going to work; those lending schemes are just a method to relieve people of their coins―they collapse really quickly and regularly. Regulators and market builders aren’t dumb; whenever such schemes are allowed to run, it’s to damage cryptocurrency markets and shuttle people back to the other casinos.
But we’re going back to a boom hype cycle now, and in the real bitcoin anything is possible. So let’s take another stab at this staking thing, but now knowing the rules of bitcoin, let’s try to delete the counter-party risk and the bitcoin denominated obligation component.
So the coins have to be locked by a protocol instead of a party, and it has to always clear paper bitcoin obligations aren’t being created through a chain of obligations. If the bitcoin stays locked, we could get to a different paradigm.
Imagine if a vault just held money for depositors in trust as a kind of logical fiduciary. And everyone could withdraw ALL their money from the vault―because the vault always just kept all their money.
In what’s called narrow banking, all depositors have 100% of their assets held as reserves—so the staking situation is a bit different. If it’s trivial to prove that everyone’s bitcoin is 100% backed 1:1 by 100% of the bitcoin that should be there, then it might not be a chain of exploding risks―and, fortunately, keeping an open running tabulation of accounts is something bitcoin is (suppose to be) really good at―but this simple kind of full-backed banking probably wouldn’t be allowed outside crypto.
So, if it were possible to have such a system, we could identify two classes of possible returns that could exist in defi markets. We are familiar with fractional reserve style rates, which will always lead to a certain fraction of loss. Or there could be NARROW return rates, where the total reserves have to be 100% accounted for at all times―and since we’re not doing coin denominated obligations, the promised returns should also be paid-in-full upfront.
So users of decentralized financial protocols must ask, whenever some “return” incentive is dangled in front of them, whether the nature of the system they’re engaging with is fully-backed or fractional. Is it really designed to return their money or has it been designed to separate them from their coins. Drawing a box around a system, or each component, is the grand total of obligations clearly and provably met at all times by the total held in reserves, or have we slipped back to fractions?
[As an additional warning, (even if we got this far): there can sometimes be a bit of technological trickery by presenting something as full-backed when there’s actually a trapdoor under the rug the Vault was placed on. So we also have to check the complexity of the swap. Is the swap designed to be trustless, or is the swap actually controlled by a “trusted” party? Is it an L1 swap, or a complicated zero-knowledge proof side chain affair? etc. Did they choose to use a few dozen operations or a thousand lines of code to build their swap? Can the logic be understood by a layman? Can the reserves easily be proven by linking to a block explorer? This due diligence can help appropriately price risk and expectations. Basically, is there an obvious effing rug under the vault? Yes, maybe (yes) or NO.]
The FBCH Vault is five lines of CashScript, two of the lines were new.
So, in fixed inflation systems, trustless fully-backed returns are very different from trusted fractional-backed returns―but given the repetition above, we can all see these are apples and oranges, or maybe orange grove tracts and hand-grenades.
If a narrow staking protocol was offering a 0.6% APY, and the US Treasury was offering a 1.5% APY on some fork of bitcoin loaned to them, knowing that bitcoin inflation is 0.84% should raise a lot of questions as to how one of those schemes was going to find bitcoins at twice they’re currently being created.
People trying to separate people from coins don’t want to make this distinction, but we know the difference here.
Coupons aren’t a giveaway; and there’s no cap on leverage.
Throughout the history of bitcoin, there have been faucets, giveaways and tips to onboard people into the ecosystem.
Lots of people mined early bitcoin with home computers, or got tipped on reddit, or perhaps downloaded some wallet which gave them a trivial amount of bitcoin―it’s how many people first interacted with bitcoin. (Mining is still something that new users want to this day; if someone wanted to make a viral CashToken project.)
With the exception of mining (that maintains the network in a decentralized way), all of these “giveaway” schemes ultimately traded something hard and finite for something soft and infinite, i.e. a social media interaction, or downloading an app (which can be automated). Most of these schemes ran out of funds (or were halted) when it became abundantly clear that the bots were winning the trade. A bitcoin giveaway, in 2024, would just be a programming challenge to get the thing to dump out all the coins for free.
We’ve seen the outcome of FBCH coupons before, right?
Future Bitcoin Cash Coupons are a bid for anyone to lock BCH as FBCH, but it’s NOT a giveaway. Big blocks or small, bitcoins are neither free nor infinite. Time is NOT free and time is not infinite.
Coin lockers are putting up something real, valuable and finite. Users that place BCH as time-locked FBCH are fulfilling a valuable economic function and offering a powerful economic signal.
Coupon writing does offer simple guarantees to the coupon taker, but it’s not altruistic. While a coupon writer is NOT gaining access to someone else’s bitcoins, they are causing those coins to be encumbered for a time, which has value. Coupon writing can also affect the liquidity (and price) of future tokens on secondary markets.
As an extreme example of this leverage, it’s theoretically possible for someone to take a tip they got on memo and write a coupon to lock a million BCH for a year or longer, which would create an essentially guaranteed coin-denominated profit to any party with a million coins―but is probably not likely to be taken as a coupon.
The gap between “will someone lock XeX number of coins” for “XeX number of satoshis” is developing and being tested across FBCH markets. These are the ideas converging to make the market.
Given the leverage available to coupon writers and the assurances granted, coupon writers are NOT going to run out of sats before coin lockers run out of bitcoins. This is not a giveaway that is going to end in the best bot taking all the coupons.
This is a market where each side gets something they want. The assurance for coupon writers have is that they get to cause a disproportionate amount of capital to be encumbered. The assurance for coupon takers is the prebate, a trustless swap and the fully-backed nature of the instrument.
Coupons ain’t free. Coupons cost time ⨯ money.
More automated coupon takers are REALLY GREAT for coupon writers.
Imagine Alice has a budget of 1 coin a year to write coupons. We could ask: What will Alice get in return?
Before Alice spends a sat, a small investment in an educated market will REALLY help returns.
If a narrow fully-backed yield is conflated with a fractional-style yield, Alice wants everyone seeing rates to know the difference, and Alice wants every market participant to be able to point out the difference to anyone conflating the two types of yield.
Alice also wants the market to know the difference between a future and a swap. Which is to say, if there’s a prebate being offered to place bitcoins in a swap contract, and that contract settles based on the difference in price from an oracle (and there is a possibility for liquidation to one party), Alice very much wants it to be a common knowledge that a simple fully backed future doesn’t have liquidations and doesn’t fluctuate in value based on oracles―one bitcoin in the future will be one bitcoin.
If we got Futures straight, it’s time to bring Bob out.
If Bob is the sole coupon taker in the market, then Bob alone is going to set the prevailing rate at which coupons are taken. If Bob keeps his bitcoin and ONLY takes coupons as they exceed a 10% yield, then Bob has dictated that Alice will see about 10 coins locked for her coupons emitted at a rate of 1 coin a year.
But Charlie can also see the return Bob is getting, and if Charlie has a lot more coins, there is nothing to prevent Charlie from taking every coupon as it crosses a 1% annualized yield. If Alice’s budget of 1 coin annually stays fixed, it would give Charlie a 1% return on up to 100 coins. Bob’s your uncle.
If David has a lot of coins and feels some return is better than no return, he might go into the market to take any coupon offering a yield above 10 basis points, then Alice gets a 1,000 coins locked on her budget.
Suppose Fred has amassed a million BCH because they actually hate Bitcoin Cash and don’t want it to be around, and they REALLY don’t like Alice’s coupons. If Fred decides nobody is going to get a positive yield and the coupon rate is going negative (after network fees)―well, as already mentioned, Alice could write one small coupon to lock a million coins or ten small coupons to lock 100k coins each, etc. In short, it doesn’t matter how well capitalized Fred is, if a party tried to suppress or depress yield rates by locking coins, they’d just lock all their coins while making Alice way more powerful.
Coupon writers aren’t going to run out of sats because the thing the coupons get applied to is way about a hundred million times more finite. There are always going to be coupons in the market offering a positive rate of yield. It is a market, not a giveaway. And Alice is going to have the upper hand regardless of the counter-parties.
Satoshi Nakamoto, the Federal Reserve, the US Treasury, the Digital Currency Group, iFinex, Coinbase, Letitia James and the unnameable dude who makes all the crypto markets can all join forces to try to break Alice’s little coupon market―good fucking luck to them all with Alice’s math.
More people win when more people participate in the market.
So, we’ve covered how fully-backed instruments paying yield up front are different from traditional “yield” in fix-supply monetary systems. And we’ve covered how more market participants taking yield is actually GREAT for lowering yield rates that market participants pay to have coins locked.
If all the Future contracts work as intended, every coupon taker placing coins and holding tokens until redemption should be able to easily make money. It may not always be a tremendous amount of money, but sats are sats.
Both the primary Futures coupon markets and the secondary markets that will grow around them offer a place and incentive system for long-term holders to be rewarded by short term speculators, and that may eventually be a step toward stabilizing our favorite currency in a long-term outlook.
While a webapp is great for showing people an idea, ideally, it’d be great to have everyone that wants some yield on their Bitcoin Cash to be pop open Electron Cash and start taking all the coupons above a certain threshold within a given time window, and for those coupons to redeem automatically.
A lot more liquidity and a lot more coupon takers will be really really great for Futures markets and the wallets of coupon writers. The process should benefit the whole ecosystem.
So if you want free money, or want to save on a coupon writing budget, or you want a less volatile currency, please consider a donation to my FBCH Electron Cash Plugin flipstarter HERE.