Dialogue HOPE, understanding crypto-native distributed stablecoins

Host: Pear｜BinaryDAO

Guest: Flex Yang｜Founder of HOPE

"In the future complex changes of international politics, HOPE will become an important tool for us to reconnect with the world. As a platform that gathers the strengths of various parties, HOPE will promote more open, inclusive, trustworthy, and mutually beneficial international cooperation, driving the prosperity and stability of the global economy. My heart is bright #HOPE the #LIGHT be with you!" ---- Flex
Pear: Can you introduce the positioning of the HOPE project? What are its vision and goals?

Flex: The positioning of HOPE is very simple and direct: it is a distributed stablecoin. The original goal of cryptocurrency was to become a new currency. BTC and ETH are successful examples, but compared to traditional fiat currencies, their volatility is still too high, with annual volatility between 80-100%. Therefore, we still need a more stable cryptocurrency for payments, but it cannot deviate from the essence of decentralization.

Then we have to talk about the larger background of doing this. There were many coincidences. When I started thinking about this in September last year, the main driving reason was the collapse of Genesis during PayPal's restructuring. I left PayPal in November 2021, and after about seven or eight months of living a family life, PayPal faced a crisis in June 2022, and I returned to work on the restructuring. During the process, I found that Genesis's problems led to the loss of funds, so the logic of CeFi was falsified in this crisis.

Thus, I came up with the idea of creating a new decentralized stablecoin to serve the entire industry. After learning from the issues with LUNA, we believe that the most successful stablecoin is still the US dollar. From the gold standard from 1933 to 1972, and then from 1972 to the present with algorithmic stablecoins, it has gone through two cycles: first reserves, then algorithms.

Therefore, we believe that stablecoins should start with reserves because without reserves, there is no credit. In the early stages, without credit, it is difficult to expand, leading to very limited future use cases. So we chose the path of starting with reserves. It is worth mentioning that during our project, we increasingly noticed a macro trend: the conflict between the East and West is intensifying. From the Russia-Ukraine conflict to the China-US trade frictions, it indicates that the divisions between Eastern and Western countries, and different ideologies, are deepening. In this process, new things may emerge. For example, China needs a non-dollar settlement method, but the internationalization of the renminbi is a long and arduous process that has been slow for many years; this is Plan A, which will take a long time.

At this point, there is also a Plan B, which is to use non-dollar international trade currencies, such as the pound, yen, Singapore dollar, and Hong Kong dollar. However, the Russia-Ukraine war has set a precedent where the US froze and confiscated many Russians' overseas assets. Therefore, although Plan B is feasible, people do not fully trust it. At this time, Plan C emerged, which is what we call the crypto payment gateway, which directly led to the rapid opening of Hong Kong this year.

Hong Kong's crypto opening has two goals. First, as Plan C, it aims to become a port for China's foreign trade. As a bridge connecting China and the world, Hong Kong will continue to play an important role in the future. On the other hand, we need to reassure everyone to come to Hong Kong to invest, hoping that more overseas Chinese can return to Hong Kong to start businesses, whether in the crypto field or non-crypto fields.

Thus, HOPE's long-term goal is to become an international clearing and settlement currency, while the short-term goal is to establish it as a high-quality collateral. This means that it will serve as collateral across DeFi, CeFi, and TradFi. DeFi, which is protocol-based and coded, means that it cannot be easily changed, so we say DeFi is relatively secure. However, it also has its own problems, namely a lack of flexibility. We hope to link it to CeFi; FTX was very useful before, but ultimately it also failed.

So we used a protocol called Connect, an on-chain custody and clearing settlement protocol, which you can think of as an on-chain Alipay. Just like using Alipay in 2006, the main goal was to ensure that when a Taobao seller shipped goods to you, your money was still in Alipay. When you received the goods, you would confirm, and only then would the money transfer from Alipay to the seller. This is the custody function we envision. We hope that the clearing and settlement system will connect with DeFi in the future, first linking DeFi and CeFi.

We hope that HOPE can become a universal collateral across these three fields in this process. Through this planning, we hope that HOPE can gradually achieve its long-term goal, providing a new option for international trade settlement while offering high-quality collateral in the short term to meet the needs of all parties and promote the development of the entire cryptocurrency and financial ecosystem.

Pear: How will HOPE ensure the stability of its stablecoin?

Flex: Regarding the issue of stability, HOPE is expected to develop in two phases: In the first phase, we hope HOPE will become collateral for DeFi, CeFi, TradeFi, and other financial sectors, turning HOPE into a highly liquid and highly usable collateral. Initially, it will be generated by collateralizing BTC and ETH, and it will not be pegged to a price of 1 dollar at the start, but will fluctuate from around 0.5. Initially, its price will follow the prices of BTC and ETH, rising and falling, but HOPE can only rise to 1 dollar at most, and once it reaches 1 dollar, it will stabilize.

Then the value of the reserve assets will exceed the market value of HOPE, becoming over-collateralized. For example, if HOPE initially issued 10 billion and reserved 5 billion in dollar assets, assuming it starts at a price of 0.5, after a bull market cycle, the value of the BTC and ETH reserve assets could reach 50 billion dollars. At this point, HOPE has only issued 10 billion, thus becoming over-collateralized. At this time, HOPE will gradually exchange some of its future high-stability so-called distributed assets, such as crvUSD, Aave's USD, bonds from Hong Kong, the US, and Singapore, etc. After this exchange, it will equal about 40 billion in over-collateralization, which can support the issuance of more HOPE. We plan for the final reserve ratio to be around 105% to 110%.

At this point, we can say that the stability of HOPE comes from its reserves, which is also the meaning of HOPE's logo. This object is called a Gomboc, an invention from Hungary. It is a man-made object with only two balance points, derived from a turtle. If you throw it on the ground or into the air, it will eventually return to the shape of the logo. We want to express that stablecoins will have fluctuations up and down, but ultimately they will return to a relatively stable state.

Pear: How does HOPE ensure the safety of user assets?

Flex: This question also answers what is meant by a distributed stablecoin. It mainly refers to the way its reserves are distributed. We are currently using Coinbase to reserve BTC and ETH. Although it has a centralized label, the security of the assets is still guaranteed. This also shields the team from issues related to private key management and addresses traditional funding compliance considerations.

The second aspect is the distributed cooperation with commercial banks. We will cooperate with banks in Hong Kong, the Middle East, Europe, and the United States to establish more compliant custody in different regions. The benefit of this approach is that if we are deemed problematic by one party and cooperation is terminated, cooperation in other regions will continue, thus avoiding a single point of failure causing an overall failure.

The third aspect is that our chain is distributed. Currently, about 50% of Ethereum nodes run in the US, which is a potential risk. Therefore, we are not only running the protocol on Ethereum but will also deploy the protocol on various chains.

These three distributions fundamentally ensure the safety of customer assets.

Pear: How is HOPE's ecosystem and token economic model designed? What are the similarities and differences between the LT token's Ve model and Curve?

Flex: LT is essentially similar to Curve because the Ve model is very important for liquidity competition. Curve's design is beneficial for its various pools to compete for liquidity. For HOPE's mechanism, we expect there will be competition for the control of the over-collateralization. Assuming our previous assumption occurs, where the initial reserve of 5 billion rises to 50 billion, at this point, the 40 billion in over-collateralization will create a game. This will be a significant gain for the value of LT itself.

In the economic model, 60% is allocated to the community, which is similar to Curve, but with slight algorithmic adjustments. LT will also take 10 years to distribute over 90% of its tokens, so it is also a continuous mining process.

Pear: The development expectations of HOPE depend on your correct judgment of the cycles, meaning that the collateralized BTC and ETH must have sufficient appreciation, and to become an over-collateralized stablecoin, it needs to be exchanged for other stablecoin assets at a certain point in time. What if the market does not develop as expected? How do you grasp and decide the timing of asset exchanges?

Flex: The Federal Reserve's monetary policy cycle is three years of easing followed by one year of tightening. After 2014, US fiscal policy has depended more on which party is in power. When the Democratic Party is in power, fiscal policy tends to be more expansionary; when the Republican Party is in power, it tends to be more contractionary. The Democratic Party is primarily left-leaning and considers ordinary people more, so whenever the Democratic Party is in power, medical subsidies and various benefits will follow, increasing government spending, which will enter the monetary circulation. Additionally, the industry believes that BTC operates on a four-year cycle, which is strongly correlated with halving. I believe that halving is just a micro factor; the macro factors are the Federal Reserve's four-year cycle and the US fiscal four-year cycle, which is the monetary policy's four-year cycle.

Next, this is why I believe Bitcoin has entered a major bull market cycle again because the Federal Reserve is about to start easing again, and they have found a perfect excuse, such as the banking industry facing collapse. If interest rates remain at this level, the vast majority of banks in the US are in a state of technical bankruptcy because most of their long-term US Treasury holdings have incurred significant losses, exceeding 5%. The reserve requirement ratio for US banks is 5%, so most banks are facing a bankruptcy crisis. Moreover, next year is an election year, which means fiscal policy will be relatively expansionary and more friendly.

Furthermore, whether it is the Russia-Ukraine war or the China-US relationship, there will be an increase in the US military budget, and military spending is the largest, with a long supply chain. Therefore, this money will actually reach society, promoting asset prices to rise. So I believe BTC has entered a bull market cycle again, and in the next bull market, the total assets on the Federal Reserve's balance sheet may expand by an order of magnitude, from the current 8 trillion to over 20 trillion in two years; otherwise, it cannot bear the debt. This is my reasoning. But what if the price of BTC does not rise? If the best assets in this industry do not rise, then there is nothing we can do.

Larry: Is there a connection between HOPE and PayPal's debts?

Flex: HOPE is unrelated to whether PayPal is restructured. The matter of HOPE actually brings an opportunity and hope to the creditors because I, as the largest shareholder of PayPal, am also one of the largest creditors. Many creditors have supported HOPE throughout the process, not because I owe them money, but because I want to thank them for their support; the debts have nothing to do with me; that was a problem of PayPal before.

I hope to use something new to bring some possibilities to everyone’s previous losses, so I will share some personal interests, such as my personal token rights in this project; I will transfer part of it, but this will not affect the interests of any new participants or any new parties; it is purely two separate matters.

If there is no restructuring, for example, if the court announces on April 17 that it does not support PayPal's restructuring and orders liquidation. In that case, although creditors will get nothing from the liquidation process, I will still give some token rights to some supporters or creditors who have helped me; these rights come from me personally, not from the new project itself, so the relationship is quite isolated. (Information update: On April 17, PayPal has undergone a hearing in the Singapore High Court, officially starting the court restructuring process.)