Will Balaji Be Right About The U.S. Economy?

Often regarded as the most important asset in the world, the U.S. Treasury market is $25tn in size and sees hundreds of billions in volume traded on a daily basis. However, the government’s outstanding debt is now 5x larger than it was at the beginning of 2008 and Balaji isn't the only one warning us of gradual de-dollarization driven by infinite money printing.

If you expand your time horizon several decades out, Balaji will probably be right. He is not suggesting that U.S. civilization will collapse altogether. Instead, he argues that fundamental American values surrounding freedom and equal opportunity will continue to dominate while the country itself loses influence to other powers.

In his view, the next frontier for American values is the internet itself. And we can already see this dynamic playing out today.

With each passing day, more of us are opting out of traditional systems by working remote jobs, storing value on public blockchains, and participating in censorship-resistant digital town squares like Twitter and Farcaster. Through these alternatives, we are regaining some of the freedoms that we have historically deferred to large institutions.

While Americans exit to the internet in small but growing quantities, foreign investors may be exiting from Treasurys at a similar pace. Today, foreigners currently own about 30% of all outstanding U.S. government debt, down from 43% a decade ago. But according to the U.S. government, Treasury auctions continue to be well subscribed, with demand from mutual funds, money market funds, and pension funds all on the rise. So whats the big deal?

Well, some would argue that this is only the beginning of a multi-decade process in which demand for U.S. bonds shrinks as investors express a heightened concern over the country’s debt levels. A few months ago, researchers from Wharton suggested that financial markets could not sustain more than the next 20 years of planned governemnt deficits. IMO, this is kind of a big deal.

Should we panic? I’m not sure. But I do believe that we should be thinking longer and harder about the arguments brought forward by Balaji and others.

Staked Ether As The Internet Bond

Looking at the situation with optimism, if reliance on U.S. bonds begins to fade, then maybe something better will take its place. And if we are moving towards greater decentralization over time, then we are likely to see the emergence of multiple alternatives.

As part of our exit to the internet public blockchains like Ethereum and others may be favored as more netural, composable, and efficient alternatives to traditional financial networks managed by traditional governments and financial institutions. Over time, could we therefore see the ETH staking yield morph into some sort of internet-native savings rate?

In traditional finance, we look to the 10-year Treasury rate as a benchmark for the risk-free market return. In decentralized finance, could the ETH staking yield become one of the standards?

This idea was originally surfaced by Colin Myers and Mara Schmiedt in an essay from August 2020. More recently, the team behind Ethena Labs have announced their work on stUSDe - a synthetic USD-denominated digital dollar that accrues the ETH staking yield. You can read more about their vision here.

Ethena’s founding team have summarized Myers’ and Schmiedt’s thinking behind ETH as the Internet Bond as follows:

• Similar to traditional bond structures, staking at its core represents an agreement between the bond issuer (the protocol) and the bond holder (the validator or delegator)

• The Internet bond is an entirely new asset for financial markets. It would allow anyone in the world to invest, participate, and profit off an open-sourced, decentralized digital economy

• In a matured state, the yield of the internet’s new settlement layer can become the risk free rate of a decentralized financial ecosystem and a benchmark for valuing the cost of trustless value transfer

So Why Am I Interested in This?

There is a chance that ETH becomes the bedrock of a new internet-native financial network, with its staking yield serving as a savings rate for anyone around the world. Because the Ethereum network is decentralized by design, its staking yield would be more accessible than that of U.S. government debt by orders of magnitude.

How could I not find this interesting?

To better understand how the Ethereum ecosystem works in detail, I’m going to dedicate the next few posts towards unpacking how validators maintain the network and how token holders can get the most out of their staked ether.

For starters, how can token holders put theirs liquid staked ether to work, assuming they are willing to take on additional risk?