Impossible Finance – The Zero Coupon Perpetual Bond | Hacker News Reader

Impossible Finance – The Zero Coupon Perpetual Bond

martincwwalker.medium.com

18 pointsourmandave43 comments

I am not a crypto lover by any means, but this article is centered around a meaningless gimmick. No insight is gained by making up an incoherent concept, the zero coupon perpetual bond, and declaring cryptocurrency an instance of this concept. It's just "crypto is a scam" for those who fancy themselves financial sophisticates because they know basic interest formulas.

Notably, obviously we can't value cryptocurrencies as bonds because then they would be worthless. Even the most ardent cryptosceptic would have to admit that a bitcoin is worth something, just as a memento of being part of the fun. Even if the exchange rate is 10k bitcoin/pizza.

It would be like valuing gold as a bond and determining the value is 0. The value is higher than that because the value isn't in a coupon.

Also, ironically, I suspect a zero-coupon bond would probably be worth something because it is likely that some central bank would happily overpay for it in a crisis.

Germany actually recently sold negative coupon bonds, i.e a buyer of this bond would pay more upfront than the maturity value.

https://www.reuters.com/article/germany-auction/update-2-ger...

I think you will find even mild cryptocritics think cryptocurrencies are worthless.

Zero coupon bonds exist, they work by being sold at a discount eg just making this up, a $1000 bond might be sold at $950 for 1 year term. So you pay $950 now and get $1000 in a year.

Nobody said they didn't. The article details that.

What's claimed not to exist is a Zero Coupon Perpetual Bond. A bond that never matures and pays no interest.

Of course then the article claims crypto is this type of bond. It's a mathy financial jargon gimmick argument.

> A bond that never matures and pays no interest

A modern printed dollar note perhaps does this. The perpetual part requires the government to not cancel the note, which occurred in India and Europe in past couple decades.

It's addressing what you get for "investing" (buying and holding) a cryptocurrency. Do you get coupons? No. Do you get a return of principal? Also no. Do you get an equity-like interest? No, that would make it an unlicensed security.

(Someone is arguing that there are cryptos that do pay coupons, which invites my favourite question: who's taking the other side of that trade?)

As others have pointed out, there are lots of things that are not bonds and therefore have no value when you try to analyze them as bonds. Potatoes, for example, do not pay interest or return principal, because they are not bonds.

If cryptocurrencies were marketed as bonds, it would be reasonable to point out that they do not pay interest or return principal. But no one thinks cryptocurrencies are bonds, just like no one thinks cryptocurrencies are potatoes.

Pointing out that cryptocurrencies completely fail at being potatoes due to their lack of starch has about the same value as this article.

Potatoes are a commodity, you can eat them. They are not a financial asset.

What do you get for investing in the US dollar or the Japanese yen?

People don't invest in those per se, they trade them or swap them for debt-like instruments at the first opportunity.

Nobody is buying and holding dollars?

Compared to T-Bills or various sorts of money market funds, the amount of just holding dollars for investment (rather than for cashflow needs of a business) is tiny.

One might say the same about cryptocurrency.

Fewer dollars or yen than you had yesterday?

I think, some people actually toyed with the idea of government zero coupon perpetuals in the mid-2010s when thinking about ways to counter deflation while rates are already at zero or negative.

I don't understand. Do you have any reasoning to back up your assertions?

The "zero coupon perpetual bond" is meaningless because it has nothing to do with a bond, ie. there is no exchange of wealth for income.

If you take the only two defining features of a concept and remove them both then you're left with something meaningless.

It’s a broken analogue in the first place, because bonds are debt instruments and cryptocurrency is not a debt instrument. The author also does not seem to know that blockchains do have economic activity and transaction fees that can form the element of interest or free cash flow. As a stretch, the article comparison could be made for a stock that never pay dividends, like Uber. It is still an interesting comparison, nevertheless,

Did the author? I mean by the very limited definition, aren't all "things" I buy at the store fitting of that description? Why does anyone buy anything at the store when it doesn't pay you interest and will never have a maturity date that you can be paid back?

Several people seem to think I'm comparing the comment with the author. I don't know how to ask for an explanation more simply.

The things you buy at the store are not financial assets

A zero coupon perpetual bond is obviously pointless. It's just a fancy way of saying "let's enter into a financial agreement where you pay me money and I will never pay you anything back, neither interest nor principal". The concept doesn't exist outside the author's head because there is no circumstance under which anyone would need the concept. If you want to give someone money and never get anything back, you don't need a bond.

Cryptocurrency, on the other hand, is at least potentially valuable, if people find a way to use it to do real things. Which they have: for example, it is used extensively for remittances in countries with unreliable financial systems.

Since the article author provides zero evidence for their claim, the OP's statement is reasonable.

I think I get the author is trying to be cute, but really it’s a poor analogy. Bonds are basically financial contracts with well defined counter parties and currency changing hands.

Crypto stuff..isn’t.

Note that new blockchain designs based on proof of stake have analogues of cashflows and revenue in the form of transactions fees. Thus, the article is misleading claiming all cryptocurrencies are zero coupon schemes.

- Proof of stakes and validators secure the network

- Users pay for this security in the form of transaction fees

- You can choose if you want to participate validating (lock your tokens to net on the transaction fees) or use them to pay the fees (use them for utility)

Thus, zero coupon perpetual bond analog works only for certain types of blockchains like Bitcoin, where the network security is a separate function. It does not apply well for Ethereum in its current proof of stake form. This distinction can be done regardless if you think cryptocurrencies are scam or not, and is purely technical.

> blockchain designs based on proof of stake have ... transactions fees.

To clarify this, regardless if proof of work or proof of stake, all chains need transaction fees to reduce spam. If transactions were free like email, it would be harmful.

PoS and PoW often use inflation and/or transaction fees to encourage validators to create the next block.

Sophisticated block producers can sometimes use MEV (like front-running on NYSE) to capture more value. MEV is not in the protocol.

The sequel

https://davidgerard.co.uk/blockchain/2022/12/24/return-to-no...

Didn't read the article, but aren't US dollars zero coupon perpetual bonds? I think they might technically be called securities but either way they're a liability on the fed balance sheet.

I'm not getting at anything here, just asking/pointing out an inconsequential detail.

Yes, that is a possible view. In terms of valuation it might not always be equivalent, though, because one dollar in cash is worth one dollar, for example, while a zero coupon perpetual bond could have paths to (some) redemption via default or restructuring, for example.

Sort of, with the proviso that you can call it and exchange for goods and services at any time.

But uninvested cash cash would obviously be lousy as an investment vehicle in general.

So you can also exchange bonds for goods and services. If you are using an interest bearing bank account, this is basically exactly what you are doing-- your dollars in the account are not actual dollars, but have been pooled into a fund that buys short term treasuries or other debt. The bank is paying you the interest on those treasuries, while taking a fee, and betting that a run on the bank doesn't render them insolvent.

I think the point to be made is that government bonds don't have any collateral baking them. For example, if a corporation has secured debt, the holders of those bonds might get first liquidation preference-- if the company can't pay its debt, the company's assets are distributed to bond holders, so you get something back. Governments have assets, but since they also have central banks which can issue dollars, in the even of a default, it seems far fetched to think government bond holders would claim government assets-- instead the central bank would just dilute its currency. This was not the case by the way in the gold standard, where government bond holders could redeem the dollar bonds and then also redeem them for gold, which would still have value outside of the failed state.

You have a point. I'd say all irredeemable currencies fit that description.

Cryptocurrencies are not bonds, stocks, tokens, “digital assets”, commodities, etc. Cryptocurrencies are _money_.

Governments are not the only sacred emitters of money. There is no divine right of kings, or kings-replacing bureaucracy. Everyone can issue money. Giving it value is hard work, though.

That's a strange definition of money. Are you suggesting that if I write "runeks money" on a piece of paper then I have created money? I don't think that's a useful definition of money.

Arguably, yes. A fun example, the "Black Sheep Bank": https://coincraft.com/black-sheep-bank-wales-10-laugherne-ca...

That's a promissory note. It was redeemable in pound sterling.

It's a large denomination note whose purpose and function is to extend credit to the issuing company. It was traded at a discount of its face value, since no business in their right mind would lend money to the issuing company without being compensated. It's an example of a zero coupon bond.

This has very little to do with the irredeemable currency I would allegedly create by writing "runeks money" on a piece of paper.

Well, imagine some newly created state (South Sudan etc). They can, too, issue notes that initially will be worthless.

What do they need to do so their notes will: a) have value for their own population, b) be freely converted to other world’s currencies at some price?

The article should be market satire, but it seems the author actually believes they demonstrated that cryptocurrency is actually worthless, against all evidence that it is not.

Such as…

You could say the same thing about baseball cards but they skyrocketed after the pandemic.

It’s a bubble

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