Crypto will eat fiat.

But it’s not in the way you think.

Monetary policy sovereignty of every country on earth will be weakened by crypto in coming decades.

A rundown of how it may play out, in short term & long term 👇

First off, to clear a common myth popularized by maxis of every stripe— large cap cryptos like BTC, ETH, SOL do not directly compete w/ fiat money & won’t replace latter in foreseeable future.

To be a good unit of account & medium of exchange (2 key value props of any currency), price of token vis-a-vis real world goods & services needs to be stable.

If 1 xyz token buys you an iPhone today, it’d better still buy you roughly the same iPhone 1 yr, 2 yrs…from now.

If instead, an iPhone = 10 tokens next yr b/c of token debasement, you’d be pissed. If iPhone = 0.1 token next yr b/c of token appreciation, Apple will be pissed since they’d have to constantly adjust price & renegotiate supply contracts & wages, which adds to cost of doing biz.

Stable money value v.s. goods & services allows economy to have a consistent measuring stick & is what makes or breaks a currency. That’s why the stated #1 mandate of central banks around the world is low & stable inflation, i.e. stable value of currency.

Alas, keeping currency value steady is a thankless job. When price is stable, everyone takes it for granted. But as inflation flares up, dunking on central banks becomes a world-wide sport that unites humanity.

Yet all seem to forget that BTC, ETH values fluctuate 300%-1000% a yr vis-a-vis USD alone, which makes even a shit fiat coin like Argentinian peso look like stable money.

Even in crypto, deFi lend/borrow are mostly in USD stablecoin. So is token denomination. Stability of fiat price gives market participants predictable yardstick of how much values are being exchanged in any transaction.

(You say, “Tascha I thought ’tis an article abt crypto eating fiat. But u r singing fiat praise, wtf??” I know. Bear w/ me for a sec.)

Instead of BTC, ETH or DOGE, stablecoins are the real Trojan horse that will eat away market shares of fiat in short- to medium- term.

Impacts of stablecoins vary depending on how they’re created—

In ST, stablecoins backed by actual USD (e.g. USDC, Paxos dollar, Tether) are a ready threat to countries’ monetary sovereignty.

These USD-backed stablecoins create a money supply that countries do not control. Here’s how it works.

(BTW, this section benefited from conversation w/ my super smart friend, D, inspired by reader question on my recent crypto Q&A video. You can check out the vid on YT .)

Since Circle (creator of USDC) is a registered US company, when you give Circle $1 to mint 1 USDC, Circle deposits $1 in its US bank account or give it to a securities dealer to buy US treasuries.

Either way your $1 enters US banking system, a.k.a. US money creation process. USDC & Paxos USD are akin to money market funds, which is part of M2, i.e. broad money, of US (though they’re not counted in official stats, yet.)

Something like Tether has a different effect. The company is not a client of US banks & keeps its $$ in offshore banks in the Bahamas & who-knows-where-else.

When you give Tether $1 it becomes part of USD denominated money supply of some non-US country, i.e. so-called “eurodollar” (same w/ USDC, Tether’s not counted in any country’s money supply stats).

So far, nothing special. Except the size of these stablecoins.

USDC market cap is > $30 billion. That makes it a top-50 US bank by size of balance sheet. Tether market cap is > $70 billion. That’s almost 20% of entire banking sector liability of South Africa (I’m not saying Tether keeps money in SA. Just to give a sense of magnitude).

Still these numbers are small. But if they continue growing at warp speed as they have been, things start to get interesting quickly.

The issue is money supply from these USD-backed stablecoins are driven by growth of crypto economy. It’s unrelated to business cycles of ‘real life’ economy & monetary policies of central banks have limited impact on them.

So as Tether & other offshore USD stablecoins grow, you have a growing part of a host country’s money supply that just does its own thing, making monetary policy more difficult.

But that’s only the beginning…

In MT, crypto-backed & algorithmic stablecoins will compete w/ fiat on massive scale once stablecoins start circulating in “real life”.

Newer stablecoins have nothing to do w/ real dollars. Dai, for example, is backed by USDC & ETH (backed = redeemable for).

Others like TerraUSD and Fei are not redeemable for anything else, but try to keep 1:1 price peg w/ USD through market buy/sell of their own tokens, just like how central banks keep their currency value stable through “open market operation”.

In other words, these are standalone currencies targeting a fixed exchange rate vis-a-vis USD just like Panama balboa or Saudi Arabia riyal.

Since these tokens do not interact w/ tradFi banking at all, they don’t create money supply through tradFi system like USD-backed stablecoins do… at least not yet.

“Not yet” b/c they are used only in the metaverse right now. You haven’t used Dai to directly pay for a pair of sneakers, have you?

But that’ll change once metaverse starts to infiltrate “real life”.

Speed & cost of L1 blockchain infrastructure are improving fast & so are end-user UX. It may not be long before we use stablecoins to buy & sell goods & services in physical world. Transition friction would be minimal since for most people these stablecoins are just like USD.

It will be a major problem for countries whose native currency is less stable than USD, which is most of emerging markets & developing world. It’ll be dollarization on steroid.

But even for countries w/ stable currency, including America, the metaverse coins pegged to fiat, if used in real commerce, introduces a separate money supply outside the purview of central bank.

For the algebraically inclined, it used to be that price level of goods & services denominated in fiat (P) is a function of money supply (M), money velocity (V) & real GDP (Y). Central bank can influence the entire M through monetary policy:

But w/ stablecoins from metaverse circulating in real life, price level is determined by both tradFi money supply (M_tradFi) & metaverse money supply (M_mv), the latter not much affected by central bank actions:

What affects metaverse money supply (M_mv) & its velocity (V_mv) then?

This brings me to—

Rehypothecation is the fractional reserve banking for crypto.

(BTW, like this so far? I write about ideas on investment, macro and human potential. Subscribe to my newsletter for updates )

Fractional reserve system was the old way of money creation: Alice deposits $100 at Bank A. Bank A lends $60 to Bob. Bob deposits the $60 at Bank B. You now have $160 created in banking system from original $100.

But nowadays money creation more & more relies on collateral reuse, or the fancy name “Rehypothecation”: Alice borrows $100 from Bank A using her house as collateral. Bank A re-pledges the house to borrow $60 from Bank B. The same collateral is now used to create two loans.

Rehypothecation & securitization are the main ways of money creation in deFi. Just replace “house” with BTC or ETH (and soon, NFTs).

Large cap crypto tokens used as deFi collaterals, e.g. BTC, ETH, are similar to ‘base money’, or M0 in tradFi system. Even though they’re no good as unit of account in real life b/c of volatile valuation, they support large amount of credit creation through stablecoins.

Thus the valuations of BTC/ETH/NFTs hugely affect the amount of money creation in deFi. Crypto bull market, i.e. collateral appreciation, is associated w/ increasing money supply. Vice versa.

Here comes the trippy part.

Money supply in stablecoins will grow exponentially. But keeping USD prices of goods & services stable is still the job of the Fed, not of the stablecoin issuers. The latter simply look to the Fed to maintain stable prices & tag along for the ride.

And yet, these tag-alongers make the Fed’s job harder, since the part of money supply US central bank can influence becomes smaller as metaverse infiltration grows.

So, the Fed is expected to hold the fort on price stability of USD & by association, of stablecoins, even though it has little influence over the latter.

This irony will become increasingly obvious, and unsustainable, as algorithmic & crypto-backed stablecoins expand their reach.

That’s why—

Metaverse will eventually develop its native unit-of-account currencies.

Instead of relying on a tradFi central bank to set stable currency yardstick, metaverse will need its own unit of account that keeps pace w/ growth of virtual economy.

You may say projects like OlympusDao already try to do this. But interesting as they are, these’re version 0 attempts at best.

The truth is it’s early. We’re far from a CPI equivalent for metaverse. We don’t know what shapes virtual goods & services will take. It’ll be a while b/f a metaverse native stablecoin even knows what benchmark to target.

So for foreseeable future, fiat-pegged stablecoins of various types will be the bridge btw physical & virtual economies & eat away central bank influence in money creation.



  1. This is a great explanation and overview. Thank you!

  2. Fascinating explanation!! and sense of correlation “which makes even a shit fiat coin like Argentinian peso look like stable money”

  3. but central banks won’t sit idle watching stable coins grow in influence.

  4. Interesting thesis and very clear explanation. Food for thought.
    Thanks for sharing.

  5. Matteo Gomez Reply

    Great read, thanks Tascha. What are your thoughts on Tether specifically? Are the systemic and regulatory risks going to limit its growth?

  6. Either way your $1 enters US banking system, a.k.a. US money creation process.

    If you have $1, then by definition it is already part of the US banking system, so how does it increase the money supply? It does not make sense. Banks are the only ones who can increase the money supply by creating loans and deposits on the opposite sides of their balance sheet at the risk of their own capital.

  7. As a layman it seems to me that until stablecoins such as USDC are accepted as payment in commerce the velocity of stablecoins is zero and have no impact on the money supply. If so, I think the government would never allow ST as legal tender so as to not let the money supply get out of control. El Salvador’s use of the BTC Lightning network does not appear to have any effect on the money supply since when a payment is made (ie US to Salvador), dollars are converted to BTC, sent to Salavador then converted back to the local currency. BTC in that case are really never used directly in commerce.
    Just saying……

  8. I don’t understand this – If Stable coins are pegged to the US dollar (1 2 1), It will not increase the money supply. However, it will increase the portion of the dollars that are allocated to the metaverse. Fed will simply add metaverse growth in it’s GDP numbers – and will inflate away to due to increased demand for the dollar, as it has been doing for decades now.
    If you are using stable-coins backed by USD to pay for real life goods – well, it’s just like paying it with USD.
    What am i missing folks?

    • one thing i admit is that – hypothecation rate inside the defi ecosystem is pretty high compared to spend on real life goods. For example, NFT vs real -art.


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