How to define the primary base rate in the crypto world?

How to treat the public chain has long been one of the important topics for many investment institutions and researchers to think about. From   USV  nbsp; Joel Monegro  In   2016  In 1999, the author of theFat protocolThe concept of "is deeply rooted in people's hearts, and has been considered by many investors as an important starting point for the public chain narrative until now.

2021  1, Tascha  Proposed the "public chain"Country valuation"Logic, at that time in the market of the mainstream use of stock valuation model to evaluate the way of public chain, and believe that currency exchange rate model to value the public chain is more useful. 2022  By Jake Brukhman, 2001. Also proposed, blockchain technology is a new way of human collaboration, more like aPublic goodsBut blockchain holds the potential for profit.

Public chain provides a series of basic services, and no project based on public chain can stand on its own. From this perspective, I personally prefer to elevate the narrative of public chain from "company" to "country". Since the public chain is regarded as the state, it is natural to discuss the risk-free interest rate of the "state", which is the cornerstone of the pricing of the "state" assets.

When we start from a "national" narrative, the next step is to define currency. A country's currency is, of course, issued by its own "authority". In the blockchain world, the token of a public chain should be treated as the currency of that chain. For example, Ethereum's   ETH, Solana  nbsp; SOL, Fantom  nbsp; FTM  Etc.

2. Potential risk-free interest rate

The risk-free interest rate does not include credit risk, term risk, etc. Generally in the traditional world, it is regarded as the interest rate of short-term Treasury bonds, or the benchmark interest rate set by the central bank.

If we separate the nominal risk-free rate, we can see that one part is price expectation (inflation) and the other part is the growth expectation of the economy itself (real interest rate). The well-known Taylor Rule of the central bank benchmark interest rate pricing model also indicates that the risk-free rate is affected by these two factors. Of course, this rate still assumes that the country is relatively stable and that regulators are not undermined. So under the risk-free rate, it's not absolutely risk-free.

Now take a look at some of the major rates in the crypto market.

2.1. Stablecoin lending rate

Some investors in the market use stablecoin lending rates as risk-free rates in crypto markets. For example,   USDC, USDT  In   Aave, Compound  The interest rate at which it borrowings.

But if we think, USDC/USDT  Such as directly anchoring the dollar price, is not a public chain token, from this point of view can not be used as a risk-free interest rate of the public chain itself.

USDC  The price relationship between these stablecoins and public chain tokens is more like the exchange rate of foreign currencies, the interest rates of the two currencies, and the different interest rates between the dollar and other national currencies in an offshore center.

2.2. Native Token  Borrowing rate

ETH, SOL  There are pools of loans in the loan agreements, and the interest rates are very low most of the time. To exist. Aave  In   ETH  For example, most of the time. ETH  Interest rates are low.

Source:https://app.aave.com/reserve-overviewIn the graph, the higher interest rates occurred. ETH  2.0 & have spent The upgrade succeeds.

However, the lending of public chain tokens is subject to default risk and liquidity risk. The former is the counterparty risk caused by the lending and borrowing, while the latter is the overall market risk, which is not included in the "risk-free rate". So such lending rates cannot be used as a benchmark for the "risk-free rate".

2.3. Public chain   POS/POW  Rate of return

Whether   POS  Again   POW  Mechanisms, in order to keep the chain running, need to be miners /validator  Offer certain rewards. This rate of return includes the new issuance of public chain tokens, the inflation of "national money", as well as the level of activity on the chain.

Take   POS  For example, MEV  The main sources are: arbitrage, liquidation, sandwich attack, all related to the intensity of the activity on the chain. From Ethereum   MEV  The daily profit can also be seen in a bull market. MEV  More than the bear market. MEV  That's a lot less.

Source:https://explore.flashbots.net/

Source:https://explore.flashbots.net/

Another related indicator -- on-chain   gas fee  It also shows the corresponding characteristics.

Source:https://blockchair.com/zh/ethereum/charts/median-gas-price

However, from a risk point of view, Are yields really completely risk-free? Not really.

To achieve this revenue, you need to take hardware, software (client), network risks, etc., but these risks are necessary to keep the public chain running smoothly. What's more, POS  Returns also include potential. slashing  Fine, but this is still a public chain operation can not avoid the risk.

In general, miners /validator  On the one hand, it includes the inflation of the public chain token; on the other hand, it also has the income of the activity degree on the chain, which is better than the previous two interest rates. Yields are more closely aligned with the "risk-free rate" under the "national" narrative.

2.4. Understand interest rates in other currencies

Some friends may have such a question: "A lot of my operations on the chain are executed with the class  USDC  Stablecoin type, why can't I use stablecoin interest rate as the risk-free rate"?

Well, first of all, The interest rate of ", "is generated by users' borrowing behavior, which contains potential default risk and term risk. These risks are mainly generated by users' on-chain activities, including possible credit problems of counterparties. This is inconsistent with the" risk-free interest rate ", which only reflects the basic situation of money supply and economic growth.

Secondly, under the "national" narrative, public chain coins serve as the local currency of public chain, and other currencies should be regarded as "foreign exchange". Different from a country in the traditional sense, under normal circumstances, a country can only use its own currency for daily production and operation activities with the support of a violent institution. However, in the cryptocurrency market, there is no violent institution and some mechanism that mandates that only public chain coins can be used as the payment currency for any activities. Therefore, public chain seems more like an extremely open "country". Accept any currency as instrument of payment. Therefore, stablecoins and other non-public currencies can be regarded as "foreign exchange".

3. POS  The basic use of yield

The risk-free interest rate is a perspective to observe the overall situation of "public chain countries". The actual interest rate can assist in judging the maturity of the ecology, and also has certain guiding significance for investment strategy.

Now let's look at some of the public chains. POS  Rate of return, let's pick it up here. TVL  In   1  Over $100 million, yes. POS  Public chain items that yield and continue to inflate. Overall, the picture is very similar to that of the real world: the more mature the economy, the lower the interest rates it offers.

Data sources: DeFi Llama, Staking Rewards

Now let's look at the level of real interest rates. The level of real interest rates in an economy is mainly related toEconomies' potential growth, demographics, and asset returns divergeIndeed, healthy economies have positive real interest rates. Then, mapped to the domain of public chain, "population" can correspond to the number of addresses, the number of active addresses, and "potential growth rate" can correspond to the number of transactions, transaction costs, the growth rate of deployed contracts, etc.

StakingRewards  adjusted reward is given, which is calculated by adjusting for the inflation of network supply. adjusted reward  It can represent the real interest rate. As you can see from the chart below, most public chain projects are still growing.

Data sources: DeFi Llama, Staking Rewards

By simple observation   POS  Yield   TVL  The ranking is conducive to the deployment of different public chain investment strategies: for steady investors, should look for   POS  Yields are low and realistic. POS  The public chain project with a positive rate of return is taken as the target library; For aggressive investments, perhaps the profit and loss ratio is greater than that of larger projects. POS  Yields are high and realistic. POS  In a public chain with a negative yield.

After we've talked about the risk-free rate for the public chain, it's natural to want to use the risk-free rate in the pricing of the market. Directly related to the level of interest rates is the lending market and the bond market. The lending market is familiar, but the bond market has been tepid. In the next installment, we will discuss the current state of the bond market and discuss where the market is headed.

References:

1.Exploring the Opportunity for DeFi Interest Rate Markets, Multicoin Capital

2.Fat Protocols, USV

3.Price layer 1 blockchain tokens like countries, Tascha Labs

4.Crypto Networks Are Monetizable Public Goods, Jake Brukhman

5.Determinants of the real interest rate,European Central Bank