We are approaching times where some alt chains will become desperate and make decisions such as setting up a Bitcoin treasury as a means to hedge against the potential underperformance of their own native assets.
But it would not be the wisest thing to do. But before I get into why I've drawn this conclusion, let me quickly highlight the report that prompted this article.
The Cardano ecosystem could soon undergo a strategic treasury shift to energize its DeFi and stablecoin sectors.
On June 13, the network founder Charles Hoskinson suggested allocating around $100 million worth of ADA from the network’s treasury towards a mix of stablecoins and Bitcoin.
“[W]e take about a hundred million worth of ADA in the treasury and convert it to a blend of a collection of stablecoins incumbent in Cardano, so USDM, USDA, as well as ADA-backed stable synthetics like iUSD and also convert some of it to Bitcoin to prime the Bitcoin DeFi.”
Hoskinson emphasized that this move would address a key weakness within the Cardano ecosystem: the limited adoption of stablecoins, which has hampered its competitiveness in the DeFi space.
“What is killing Cardano is our stablecoin situation. This would start to solve it. Generate some non-inflationary revenue for the treasury, and help build up our DeFi economy.” — Cryptoslate Reports
Key things to note:
— $100 million’s worth of ADA gets dumped on the markets.
— These aren't tokens earned from revenue, they are minted and reserved supply, so basically market dilution(inflation).
— Value goes towards buying stablecoins and Bitcoin
— Cardano hopes to solve its DeFi problem with this.
A couple of things are wrong with this idea but what should be painfully obvious is that holding bitcoin and some random third-party stablecoins isn't going to magically solve the chain’s DeFi problems.
History has shown that even as a hedge for market support in times of chaos, bitcoin is the worst asset. For those unaware, I am talking about LUNA, where the protocol’s Bitcoin reserve couldn't save it when it was needed.
Betting on a secondary asset for revenue is bad bet
To clarify, this has nothing to do with how Bitcoin will perform long-term, it's more about how said chain will perform without bitcoin.
If Cardano’s main source of fresh capital to pump ADA is bitcoin, then it would have essentially failed as a blockchain.
It's to be expected that some may be tempted to ask how it is that we accept the idea of traditional companies setting up Bitcoin treasuries to be a positive but find it a negative when alt blockchains or DAOs do it?
It's rather pretty simple.
Traditional companies leverage their income and this is because they expect the USD to fall, Cardano on the other hand is buying from tokens printed out of thin air and would effectively be trading against its own native assets.
In other cases, traditional companies issue debt instruments for capital for purchases, Cardano, again, isn't using new capital, it's directly dumping it's tokens for Bitcoin in hopes of bitcoin outperforming its native assets.
Of course, people don't generally understand that this is the message that is being passed across. There's a reason the United States government wants a neutral way to acquire bitcoin, because any other execution would generally send the message that the US government expects Bitcoin to outperform the USD.
Alt chains and DAOs ought to direct their assets towards developments of products and services that can organically attract liquidity from varying ecosystems.
If alt chains want Bitcoin exposure, the best way to gain that would be to invest in native services that would attract bitcoin holders to bridge bitcoin to the chain.
This creates a neutral way to not only achieve DeFi liquidity bridge from Bitcoin to an alt chain, but also an opportunity to generate BTC-denominated revenue through platform fees, for example.
A direct dumping of any chain’s native asset for Bitcoin or any other coin or token, is a rather stupid move from any chain.
It shows desperation and lack of trust in the potential of the chain’s native assets performing well, in the long term.
Alt chains and DAOs don't need to create Bitcoin treasuries by dumping native treasury assets, they can however set up services to attract bitcoin liquidity to solidify their native assets in the general markets. Outrightly acquiring for storage is not the wisest move.