"I am death, the destroyer of the worlds, fully developed, and I am now active about the overthrow of the worlds. Even without you, the warriors standing in the adverse hosts, shall all cease to be." - Bhagavad Gita 11.32.
Creative destruction is a cornerstone to the advancement of society. That is a new competitor can build something that disrupts the status quo while bringing a new product / service that is faster / better / cheaper, etc.
While many are economic and technological enthusiasts, the emergence blockchains and their evolution to a Proof of Stake consensus mechanism, present the singular largest non-violent opportunity and threat to modern civilization we have ever seen.
Let me unpack this...
The US Dollar is by far the most integrated global currency which is used for trade within the US as well as overseas.
US Treasuries (aka government debt) are arguably the safest investment for US Dollar as they fundamentally represent a risk-less return to purchasers.
Investment managers spend their entire career optimizing risk to "beat the market" and reduce or even completely hedge their risk.
While Treasuries still have sovereign risk, they are the cornerstone for the financial markets. When yields on Treasuries move, the world listens and watches.
While the barriers to buy Treasuries are relatively low, they must be held in a brokerage account and somewhat difficult to access for the "unbanked" in the world.
Regardless, there are Japanese or European competitors to sovereign debt from virtually countries as virtually all nations borrow money from the capital markets.
While the world changed forever with the release of the Satoshi white paper creating bitcoin, a new asset class was born.
Representing a new speculative asset class, Bitcoin does not have a native yield associated with it.
In 2014, the Ethereum white paper was released. Ethereum envisioned a migration from a Proof of Work consensus to a Proof of Stake.
Ethereum had its growth pains since its launch (and that is being nice). Though in 20XX the CME (the largest commodity exchange) listed Futures for both Bitcoin and Ethereum.
The first foundational step was set forth.
In 2021, the price of Bitcoin and crypto, as a whole, exploded upward. While many attribute this price movement to covid or government spending, it my belief many where arbitraging buying the underlying while shorting the future.
This is hugely important as this "game" of arbitrage is no different that high frequency trading. While bots can move faster than people, as some point they put themselves out of business and there is an carry cost to shorting the future.
Insert the ETH merge
On or around 9/15, ETH will transition to a Proof of Stake consensus mechanism instead of Proof of Work.
That is to say, an average ETH holder can lock his / her ETH and put it at risk to operate the software to secure the network.
The action of making that deposit, impermanently removes that supply from the trading supply from the market.
In exchange for properly securing the network, this "validator" participants are compensated a predefined known yield (based on the quantity of other validators).
Zoom back and apply to traditional markets. This is the equivalent of having a 1000 acre farm and knowing your wheat crops would generate a known yield based on how many acres you allocated to wheat.
Like wheat (or any other commodity), that yield is based on operation "running smooth" and no nefarious actions. ETH (and running a validator) is different, though the "sweat effort of heavy lifting" is replaced by ensure validators are online and run updated software.
The action of operation is still unchanged though slightly different.
The above said, an ETH staker would then have his / her yield allocation denominated in ETH.
The challenge is of course the world understands yield, but it doesn't value of ETH yield. Enter the CME and other futures venues.
One can imagine a financial product that follows three fundamental steps.
1. Deposit fiat (USD or other)
2. Buy spot ETH then put them at stake
3. Short the futures market for the same amount of ETH.
Net result: The ETH price volatility is removed leaving a USD yield from the staking. The markets absolutely understand USD yield.
Today staking is viewed as having uncertain operational risk (and thus the possibility of being slashed or punished for nefarious conduct).
While possible, this concern while legitimate is blown out of proportion.
For the first time we have a system that can compete against sovereign governments on a yield basis without counter-party risk. Note: This is independent of the reference currency.
How long will it take to have pension funds slowly provide an allocation of fiat to this activity in exchange for a yield superior to Treasuries?
Of course, the truly interesting part is that the underlying ETH is scarce. Therefore, the operations as outlined above, increase scarcity.
While the merge is discounted by many as just a crypto-centric event, the implications when withdrawals are possible (in probably 6months) will cause a counterintuitive surge in staking.
This acquire then stake then hedge is effectively a springboard for the financial markets to trade futures of ETH against spot (which by my thesis will become scarcer with time).
The net result for an investor is a competitive yield with less risk (though that perception / fear will take time to dissipate.
Are the financial markets ready? No.
Are you? probably not.
Fast forward the video. Are governments ready for their sovereign debt to have to compete for investor appetite by offering a comparable risk adjusted return? Absolutely not.
What happens when counties that are accustomed to near zero costs of capital have to compete with a higher yield? Answer they spend more of their budget on interest.
This does basically nothing to Argentina but obliterates Japan or parts of the Eurozone (given enough time and the integration of these staking yield financial products).
I close where I started. Staking causes creative destruction and simultaneously is the destroyer of worlds. Arguably the ultimate competition with a participant that acts on a coordinated basis from all corners of earth.
You this this won't impact your country. Think again. It will cause all governments to run a balanced budget. It might take a few decades or centuries though. It is inevitable. Just a function of time.
Buckle up. The merge is coming.