Money printer go rrrrrb

Tl;dr — The US dollar is not a Ponzi scheme.

Dollars go into the US bank system when the Federal Reserve lends them out. They retain value because borrowers have to buy them back to repay the loan. Our Sweep protocol works the same way. Sweep has a call mechanism. If the lender calls ALL of the currency, then the money printer runs rrrrrb all the way back to zero. We tried, this, and it’s HARD.

Every SWEEP that we use anywhere has to be borrowed by someone. For example, to get SWEEP for an AMM, we had to set up a DeFi strategy to mint, borrow, and hold LP tokens as collateral. We ran this process with real money as a system test. Then, we ran the process backward, collected the SWEEP, and repaid all of the loans.

There are two ways that this process can go wrong.

1. You can have bad debt. If a borrower goes bankrupt and has no intention of repaying the debt, then you have extra money compared with repayments, and the money is worth less (inflation).
2. You can charge interest. If the original lender of the money charges interest (the Fed, Sweep protocol) then borrowers will owe more money than exists. Nobody minted the interest. This creates a short squeeze on the value of money so the money is worth more (deflation).

If you run the money printer backward, you will get to a point where the currency is either 1) rapidly losing value because too much is for sale, or 2) skyrocketing in value due to a massive short squeeze. Running an actual monetary system requires balancing between these opposing forces.

Case 1 is the Ponzi case, with too much money due to writeoffs. If people expected this case, they would borrow freely, knowing that they would either not pay the money back, or benefit from buying back cheap money freed up by defaulters. They would be relatively insensitive to interest rates, and they would drive interest rates up with high borrowing demand.

We haven’t seen this behavior for decades. Instead, we see that borrowers have been reluctant to take money even at low rates of interest. In monetary systems like the Euro, banks were turning away money at zero interest. This reluctance indicates that they fully intend to pay back their loans, and they don’t expect (or see) the Ponzi case.

Case 2 results in a shortage of money to pay interest. If people expected this case, they would be careful about borrowing. They would call and repay loans quickly at the first sign of trouble — a classic financial panic. And, the rate of interest would decline over the long term as unpayable interest accumulates. We see both of these effects in the USD system.

There is a third way to end up with a shortage of money. Holders can lose interest, lose their keys, or lock money up in long-term agreements. All of these have an impact on the supply of cryptocurrency. So, shortages are likely to be amplified.

The USD system, and similar systems like Sweep, will hold value as long as most loans are repaid. Sweep holds enough collateral to make sure that the loans will be repaid. It’s likely that these systems are naturally deflationary whenever the money supply is not actively growing. In that case, the supply will be shrinking relative to interest payments.

In our alpha test, we ran into both types of shortages. We charged a very small interest rate as a protocol fee and ended up with some un-payable dust. And, we had to hunt down testers that weren’t tracking their SWEEP. In a real-life distribution, it would be even harder to recall all of the money. It’s likely that prices would spike during the callback process.

If the US Federal Reserve ever tried to call all of their loans and prove the system is not a Ponzi, it would wreak havoc. Dollars have been lent out, deposited, and lent out again, and again. Every borrower would get called and scramble for a shrinking supply of dollars. Loans would become expensive and then unpayable. In fact, the Fed is very careful to NOT create this situation. That is why they supply A LOT of dollars every time there is a financial panic. Borrowers need those dollars.

The thing that BTC maxis hate the most — the Fed’s willingness to supply trillions of dollars if necessary to meet demand — is what makes the US dollar so popular. It’s useful for liabilities and long term borrowing, as well as for short term payments. About $10T of US dollars are held by banks outside of the US. Every dollar results in a liability for a bank or nonfinancial borrower. They have confidence that they will be able to pay back their liabilities.

We’ll soon see how this works for Sweep pegging. Learn more in the documentation. Please follow our work through Maxos Labs on Medium.