Lending Does Not Work Without Inflation


Bitflate is a cryptocurrency with constant inflation of 7% per year. Its goal is to be a Medium of Exchange.

Traditional value investors (e.g. Howard Marks) point out a problem with crypto assets: They have no cash flow. There is no way to value these assets. The only use case is speculation. To address this problem, some crypto builders have worked on lending. Crypto owners can put their assets to work through lending. Borrowers can use the money for business activities. They pay interest to lenders. Crypto assets can generate cash flow through this mechanism. Lending seems to be a good way to create utilities for crypto assets. In this article, I point out the problem with existing crypto lending. I believe a potential solution is inflation.

Crypto assets have limited supplies. Some are more extreme than others. Bitcoin has a hard limit of 21 million. Ethereum uses minimum necessary issuance. It’s a fancy term for limited supply. This property is designed to make the assets valuable. As they become scarcer, prices would go up. The side effect is price volatility. Crypto owners make money through Store of Value appreciation.

With lending, crypto owners will also make money through interest. Borrowers are supposed to create businesses with the money they lend. These businesses generate cash flow. To use cryptocurrencies for businesses, they have to convert to tangible money like fiat currencies. With fiat lending, borrowers repay loans in the same currency plus interest. With crypto lending, they need to manage the underlying asset’s volatility.

Crypto owners want to make money through both SoV appreciation and interest. Borrowers need to create return and manage price volatility. Given the high amount of risks, they will need to pay high-interest rates on the loans. Such a system is unstable. It will blow up at some point.

Making money through SoV appreciation and interest is extremely greedy. Crypto owners are likely to lose their assets when the system fails. Borrowers may not be able to repay the loans. The price peg can fail because of speculation. We have examples of lending SoV in the past. Feudal landlords extracted high rent on peasants. Real estate landlords can block housing development to pump value and extract rent. Lending an SoV creates extreme rent-seeking behavior. Hoarding a scarce asset is bad. Hoarding and rent-seeking is worse.

When the underlying asset is inflationary, the system can correct itself. The asset’s price would be less volatile. The asset depreciates over time. Owners are discouraged from hoarding. They will want to use the asset for businesses. It’s easier for borrowers to acquire the asset to repay loans. Interest return is a solution to value depreciation. Lending is viable when the asset is inflationary.

Bitflate is a cryptocurrency with constant inflation of 7% per year. Its goal is to be a Medium of Exchange.


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