How to have endless money?

Author: Alex Liu, Foresight News

Statement: The views in this article are valid only under certain conditions and contexts.

1. Money that can't be spent: Disposable legal currency gradually increases over time without the need for labor.
2. Preconditions:

• The logic of Bitcoin as "digital gold" to hedge against inflation holds true in the long term, meaning that despite price fluctuations, Bitcoin will appreciate relative to fiat currency over a longer time scale.
• No black swan events that change the logic of social operation occur.

Money That Can't Be Spent

When it comes to "spending money," the default concept in everyone's mind is still "consuming fiat currency." I would only ask my boss, "Can you send me 50 tomorrow for Crazy Thursday?" and wouldn't say, "Can you send me 50 BTC tomorrow for Crazy Thursday?"; one, because I'm afraid of getting hit, and two, because KFC in China indeed does not support BTC payments yet.

The narrative of Bitcoin as "digital cash" has not taken off. Someone once asked the well-known Bitcoin bull and MicroStrategy CEO Micheal Saylor, "Why do so few people use a little Bitcoin to buy a cup of coffee?" Saylor replied, "If you own a building, would you use a corner of it to buy a cup of coffee?" This is somewhat of a sophistry; simply holding Bitcoin makes it indeed inconvenient to "spend money" in daily life.

However, as Bitcoin as "digital gold," a narrative of a store of value asset has not been disproven. Through Bitcoin, perhaps we can truly have "money that can't be spent" ------ if its logic of hedging against inflation holds true in the long term, it will certainly appreciate relative to fiat currency (legal tender) over a longer time scale. We just need to hold BTC simply, and its corresponding fiat value will eventually rise gradually. No labor required, just relax.

But as mentioned earlier, "spending Bitcoin" is inconvenient, and whether spending or selling, the quantity of Bitcoin will always gradually decrease, so how can we talk about "money that can't be spent"?

The answer is collateralized lending.

Collateralized Lending

If asset A continues to appreciate relative to asset B, then by collateralizing asset A to borrow asset B, theoretically, one can continuously borrow asset B over time without having to sell A or repay B.

In a specific case, by collateralizing BTC to borrow fiat currency (or stablecoins like USDT, USDC), since fiat currency inherently has a tendency for over-issuance and long-term depreciation, BTC will gradually appreciate relative to fiat currency (which is the premise of this article). In this process, by gradually borrowing more fiat currency, we can see our disposable legal currency increase over time without selling BTC or working, thus achieving "money that can't be spent."

However, there is a problem here: collateralized lending carries liquidation risk. The appreciation of BTC relative to fiat currency is a long-term trend, but there are still price fluctuations in the short term. Even disregarding events like "flash crashes," there can often be a fluctuation of 50% or even more from a cycle's peak to trough.

Being liquidated means being forced to sell BTC at a low price to repay debts, and the attempt at "money that can't be spent" fails again. Additionally, due to the volatility of the market, it is possible for a single candlestick to drop below the liquidation price, leading to liquidation, and then the price quickly rebounds, causing huge losses for the borrower.

One way to avoid liquidation is to maintain a very low LTV (Loan to Value), such as collateralizing BTC worth $1 million and only borrowing $300,000, which can almost exempt one from liquidation due to short-term price fluctuations. However, on one hand, there is no "absolute insurance," and on the other hand, the capital utilization rate is too low.

So what should be done?

Soft Liquidation

We can use a soft liquidation mechanism for lending to avoid losing our BTC position due to short-term price fluctuations. Taking the example of collateralizing BTC to borrow crvUSD:

In the crvUSD product of Curve Finance, the liquidation of collateral is done through an AMM and is carried out in a gradual soft liquidation manner, where the collateral is gradually liquidated as the price drops. However, the liquidation in the AMM is reversible; when the collateral price rises, the AMM will help users buy back the asset.

Liquidation AMM

crvUSD achieves soft liquidation through LLAMMA (Lending-Liquidating AMM Algorithm), designing a special AMM pool for collateralized assets to gradually liquidate when the asset price drops. There are two liquidation lines: the starting liquidation price and the termination liquidation price. When the collateral asset is above the liquidation price, the AMM pool is filled with collateral. When the collateral price drops to the starting liquidation price, the collateral in the AMM begins to be sold for stablecoins, and then the collateral is gradually sold during the price decline. When the collateral price falls below the termination liquidation price, only stablecoins remain in the AMM.

The liquidation process of LLAMMA can be understood as a "reverse Uniswap V3." Suppose the AMM is handling the BTC-crvUSD trading pair; in Uniswap V3, liquidity providers (LPs) need to set a price range for BTC. When the price of BTC is within the range, there are two tokens that can be exchanged in the AMM; when outside the price range, there is only one token in the AMM pool. This is also the design philosophy behind the starting and ending liquidation prices of LLAMMA. When the collateral is BTC, if the price is above the range, the AMM pool is filled with BTC; when within the price range, BTC is gradually liquidated for USD, as shown in the diagram.

The difference from Uniswap V3 is that in Uni V3, the higher the BTC price, the more USD there is in the AMM pool. In LLAMMA, the lower the BTC price, the more USD there is in the AMM pool because BTC needs to be sold for liquidation. When the BTC price rises, BTC collateral can be bought back to maintain the user's exposure as much as possible.

Under the soft liquidation mechanism, even if liquidation occurs, we will buy back the collateral at a price almost the same as selling it during the price rebound, ensuring that our position remains almost unchanged. And since Bitcoin will appreciate relative to fiat currency over a longer time scale, liquidation will inevitably rebound in the future. (Soft liquidation is initiated by external arbitrageurs, and borrowers will incur relatively minimal losses compared to hard liquidation, needing to avoid frequently falling into the liquidation range. This also reflects a design philosophy opposite to that of Uni V3: LPs hope the price stays within the range to earn fees, while borrowers hope the price stays out of the range to minimize losses.)

Thus, the logic closes: by holding Bitcoin and using the soft liquidation mechanism for fiat lending, we can obtain a continuous cash flow during the appreciation of Bitcoin without having to sell Bitcoin or worry about short-term price fluctuations causing liquidation to ruin everything. With a certain amount of Bitcoin held, disposable legal currency gradually increases over time without labor. Does this count as having "money that can't be spent"?

Conclusion

This article introduces a strategy for investment and consumption, which ensures BTC positions while having continuous cash flow through lending strategies, and discusses the advantages of using a soft liquidation mechanism. If one holds a large amount of BTC, this plan is practical and may truly be one of the best strategies for relaxing without labor. However, this plan also has a flaw, leaving students like the author unable to relax and forced to work hard ------ not pointing out where to get enough BTC to relax…

So I decided to break through myself, resolutely took out my phone, and sent to my boss, "Can you send me 50 BTC tomorrow for Crazy Thursday?" and promptly got blocked.