Pether (3)
President Lentz didn’t waste any time. He went straight to the documents.
They laid out the assets of Pether Limited that had been gathered so far. There was no direct evidence attached, but the fact that he had obtained details this precise suggested he’d made contact with insiders more than once.
I slowly skimmed through it.
"They’ve definitely invested heavily in Chinese companies and firms in emerging markets."
"The only safe assets in there are U.S. Treasuries. Everything else would take a brutal loss if they had to liquidate quickly."
"Right. If they dumped that many promissory notes and bonds all at once, they wouldn’t get anywhere near face value."
"The Chinese property market hasn’t been looking good lately. There are even rumors that the Dao Group is on the verge of collapse."
"So Pether is holding the company’s notes and bonds?"
"Yes. We’re estimating the total at around ten billion dollars."
That made me laugh out loud.
President Lentz asked, "What’s so funny?"
"Ah, it just reminded me of something from the past."
Primus Fund had been exactly like this.
As he predicted, the Dao Group would go bankrupt and Pether would end up burning through the assets it had invested in. But even then, nothing dramatic would happen right away.
Unless a huge number of people tried to convert Pether into dollars at the same time, it didn’t matter much whether the assets were there or not.
Now that we knew there was a problem, the real question was how to attack it—and how to make money from it.
When you judged a company to be insolvent, you shorted its stock or bought put options.
But how was crypto supposed to be attacked?
Cryptocurrency was still a currency, so the logic was similar to attacking the foreign exchange market.
If I wanted to weaken the won, I would sell won and buy dollars in the FX market. That would flood the market with won and drain dollars out of it, and by the law of supply and demand the won would fall while the dollar rose.
But to sell won, I had to have won first.
The method was to deposit dollars and borrow won against them.
If the exchange rate was one dollar to one thousand won, then I could deposit ten billion dollars, borrow ten trillion won, and dump it on the foreign exchange market to buy dollars.
If I sold all ten trillion won I had borrowed, I would end up with ten billion dollars again.
Suppose the attack succeeded and the won collapsed to two thousand to the dollar.
Then I could sell five billion dollars on the market to buy back the ten trillion won, repay the won I had borrowed, and take back my original ten billion-dollar deposit.
From the attacker’s perspective, all that happened was that I borrowed ten trillion won and paid back ten trillion won. Yet the ten billion dollars had grown into fifteen billion.
Likewise, to short Pether, I first had to borrow Pether from somewhere.
I looked at President Lentz and said, "You probably already have a method in mind."
"That’s right."
"Shall I guess?"
"Go ahead."
I said the word that had come to mind. "DeFi."
He looked surprised for a moment, then broke into laughter.
"Hahaha! So Han really did see where I was going."
In the traditional financial system, there is a central bank, and beneath it, a network of commercial banks.
Banks take in deposits at a low interest rate and lend them out at a higher one. That spread between borrowing and lending is one of a bank’s main sources of income.
So how did lending work in a cryptocurrency market without a centralized institution like a bank?
Through DeFi, of course.
Short for Decentralized Finance, DeFi operated on blockchain smart contracts without a manager. Deposits, loans, and investments all moved according to prearranged protocols.
If someone created a DeFi platform that paid five percent interest for locking up one coin for six months, you could connect a digital wallet and place one coin into it.
Then, when six months passed, the automated algorithm would put 1.05 coins back into your wallet.
So where did the interest come from?
From the person who borrowed that coin.
Because the protocol, once set, could not be changed, nobody could step in halfway and steal the money, and since there were no administrative or maintenance costs, the platform could offer users far better returns.
Some DeFi projects even issued their own tokens.
It was like depositing money in DA Bank and receiving DA Coin as interest from the bank itself.
I wasn’t entirely sure what value that coin was supposed to have, but...
As the crypto market grew, the DeFi market was growing explosively too.
The amount of cryptocurrency staked in DeFi had been fifty billion dollars two years ago; last year, it had doubled to one hundred billion.
President Lentz explained the plan.
"We plan to stake Pether through a DeFi protocol for a fixed period."
"And then borrow that Pether and sell it short."
A stablecoin doesn’t stay pegged to one dollar just because you leave it alone.
Like an exchange rate, if demand suddenly floods in, the price rises; if supply suddenly floods the market, the price falls.
To prevent that kind of movement, the issuer runs a liquidity provision system.
That was called an LP, or liquidity provider: buying and selling repeatedly at the asset’s true value to keep the price pinned.
If a flood of sell orders hit Pether, Pether Limited would have to buy them up and keep the peg from breaking, matching the price to one dollar.
"What about the collateral for the DeFi side?" I asked.
The easiest thing would be to deposit dollars as collateral. But DeFi didn’t work by connecting to bank accounts; it worked by connecting to digital wallets.
So we would have to deposit cryptocurrency.
"I’m thinking of buying Vantcoin."
In the cryptocurrency market, Vantcoin was the safest asset there was.
But...
"If Pether is exposed as a fraud, the entire crypto market will be affected, and Vantcoin will crash too."
Of course, it wouldn’t compare to Pether’s eventual 99.99 percent collapse, but even so, it would probably be cut in half at minimum.
"I’ll hedge that by buying options."
"The financing costs won’t be trivial."
Vantcoin had already moved partway into the institutional world, and a variety of related options had been listed. But because it was such an unstable product, the fees could be as much as ten times higher than stock or bond options.
President Lentz looked at me and asked, "Do you have a better way?"
"Yes."
He brightened. "What is it?"
"We issue our own stablecoin and use that as collateral."
It was so far outside his expectations that he stared at me in disbelief.
"...Excuse me?"
In other words, instead of borrowing a one-dollar Pether, we would post a one-dollar stablecoin as collateral.
"Would people trust the coin?"
Anyone could issue a coin if they wanted to. The hard part was earning the market’s trust.
"If a credible institution issues it and provides a solid guarantee, why wouldn’t they?"
"You’re saying Continue Capital would issue it?"
I said confidently, "No. Snow Crash will issue it."
After I finished talking with President Lentz, I went back to Continue Capital.
After hearing the story, David said carefully, "Are you really planning to go through with it?"
"Yes. If a bubble is going to burst anyway, wouldn’t it be better to burst it a little sooner?"
If Pether were left alone, it would grow to four times its current size and cause catastrophic damage. So popping it a day earlier was, in fact, the way to reduce the harm done to the market.
"Is that the only reason?"
"There are practical reasons too."
Originally, Snow Crash would still have Alex Preston and Rolf Buchi as co-CEOs, and once it went public it would draw in more investment capital.
But this time, I had driven them both out, and we hadn’t gone public. That had sped up Snow Crash’s growth, but it had also left us short on capital.
And on top of that, we still needed to acquire LinkLabs.
"If this works, we should be able to earn enough to cover the acquisition cost of LinkLabs without much trouble."
At the moment, the LinkLabs deal was in the contract stage.
If we could earn that money with a single trade, then we would effectively be acquiring it without spending a penny.
"Are you certain of success?"
"I’m not sure. We’ll have to try it and see."
Attacking Pether was something that had never happened in the original timeline. Because of that, I couldn’t claim a hundred percent certainty of success either.
"But the risk is small, isn’t it? If it fails, we only lose the financing costs."
"How much capital do you think the operation will require?"
"If we pour in everything we have right now, it should about cover it."
They would defend it with everything they had, so we would have to keep shorting Pether until they gave up on the peg.
"If we can just break people’s faith in Pether, then everyone who holds it will rush to convert to dollars."
Pether’s current supply was worth about 150 billion dollars. They would probably manage to defend it somehow until it reached 100 billion, but...
"Once they can no longer hand out dollars, we’ll be looking at a Nixon Shock–style collapse."
People had largely forgotten it now, but the dollar had originally been a gold-backed currency. If you brought 35 dollars to the central bank, they would exchange it for one ounce of gold.
But during the Vietnam War, after other countries saw the U.S. government printing dollars like mad, they began asking to redeem the dollars they held for gold.
Needless to say, the United States did not have enough gold to cover the dollars it had issued.
President Nixon declared that the dollar’s gold convertibility would be suspended, and with the end of the Bretton Woods system that had lasted since World War II, the world was thrown into shock.
That was the famous Nixon Shock.
After that, the value of the U.S. dollar collapsed.
Gold was now over 1,700 dollars an ounce, so compared to before the Nixon Shock, it had lost 98 percent of its value.
"Still, at least the dollar has the United States behind it."
The reason the dollar retained its value even after gold convertibility was suspended was simple: the United States was the strongest country in the world. But if Pether lost convertibility, nothing would be left behind it.
"How are you planning to issue the stablecoin and build the DeFi protocol?"
"By leaving it to the experts, of course."
Fortunately, the world’s greatest genius was on our side.
Unfortunately, because he was so busy, if I wanted to see him I had to go to him in person.
"I’ll make a quick trip to California."
* * *
The moment I landed at San Francisco Airport, I got into the waiting limousine and headed straight for Snow Crash headquarters.
Syd was, as always, working with his headphones on.
I tapped him lightly on the shoulder. He looked up, broke into a pleased smile when he saw my face, and pulled off his headphones.
"Hyung! What brings you here all of a sudden?"
"I wanted to talk to you about something."
It was a conversation too long for the phone.
I led Syd into a conference room.
"What do you think about cryptocurrency?"
"I think it’s the currency that fits the digital world. Distributed ledger technology is useful in a lot of ways. But I don’t think its price should fluctuate."
"Why not?"
"Because if the price fluctuates, it’ll just become a speculative asset."
"Then what do you think about Snow Crash issuing a stablecoin?"
Instead of answering, Syd asked, "What kind of structure?"
Stablecoins were broadly divided into three types.
First were fiat-backed coins.
That was the method Pether used: issuing coins equal to the amount of dollars the issuer had put on deposit.
Second were crypto-backed coins.
These worked almost the same way, except that they were issued against coins rather than dollars. The issuer would deposit Vantcoin or Etherium as collateral.
The problem, though, was that the value of the collateral changed as the coin price moved.
Finally, there were algorithmic coins.
They didn’t convert into dollars or other cryptocurrencies, but they maintained a stable price by adjusting supply according to demand through an algorithm.
"Fiat-backed. I don’t think Snow Crash should take any profit from issuing the stablecoin."
Syd smiled brightly.
"As expected, Hyung, you’re the best."