PaperImperium

I’ve been busy with other things and haven’t checked in on MakerDAO/Sky in detail for a while. So I perused this announcement and went to the official site where financial statements are published. I think they are misleading (probably by accident). This is a thread about the importance of correct accounting characterizations, so leave now if you’re not left sputtering in dismay by weird financial statements. A big question mark in Sky accounting has always been around the treatment of Primes (previously called Stars, and subDAOs before that). That continues to be the source of the biggest issues I see in their books today. Are Primes subsidiaries or not? Because accounting characterizations are currently made that are inconsistent with any answer to this question. You may notice that Spark-related items are inconsistently treated even amongst themselves. In the loan book, the debt owed to Sky by Spark is treaded as an unadjusted receivable. This treats Spark as *outside* the entity of Sky. The Spark backstop is carried as an internal balance. This treats Spark as *inside* the entity. The SPK token is held in the treasury at fair value. This treats Spark as *outside* the entity AND less than 20% ownership. This treatment ALSO comes with an obligation to book *unrealized* gain/loss in your income statement. This has not been done for SPK, which would have decreased profit over most time periods. In general, the above treatments are incorrect - you should define what is inside or outside Sky once, while Sky’s financials do this on a line-by-line basis. But the inconsistency grows as you view the treatment of Grove, which is a direct comparable to Spark. GROVE token is accounted for as an off-balance-sheet memo. Regardless of whether Spark and Grove are subsidiaries, they certainly deserve consistent treatment since they are the same relationship with Sky. That is not to suggest it is correct to hold GROVE and SPK in the treasury at fair value, though! Sky owns >50% of SPK and >69% of GROVE. This makes them subsidiaries under standard accounting regimes, and Spark and Grove’s own financials should be consolidated into Sky’s, then adjusted for any non-controlling interest. This means the published financials cannot be relied upon, and not just because the SPK and GROVE token values both disappear from the capital and memo sections. The $6.43b of debt to all of the Primes (not just Spark and Grove) is the biggest line item in the whole balance sheet. This collapses into offsetting payables and receivables between the parent and subsidiary, and disappears completely. Similarly, you would usually see the interest income from the Primes disappear as the income to Sky is offset by the expense from the Prime. What you would end up with is the aggregate balance sheet and income statement for Sky + all Primes. After adding 100% of Spark/Grove/etc net assets to Sky’s balance sheet, you have a final task, which is to revisit the equity (“Sky Capital”) section and peel off the ~49% of Spark and ~31% of Grove equity that isn’t owned by Sky (aka non-controlling interest). On the PnL, you also need to adjust for NCI. All of this is to say, the financials being published cannot be relied upon. They incorrectly treat clear subsidiaries as independent entities. They also are inconsistent in how they treat substantially similar relationships (e.g. Spark vs other Primes). Unfortunately, you can’t really fill in the correct numbers without the financial statements of ALL the Primes. 1 of 2

People invoke Gresham’s Law on here all the time, and I suspect ~0 of them (even economists) have actually gone back to read what Gresham said. Most invocations of Sir Thomas Gresham take the wrong lesson, and I see it a lot, so let’s sort it out. What did Gresham say in his correspondence to Queen Elizabeth I in 1558? He was explaining why the circulating coinage was primarily the heavily debased coins of her late brother and father. But people did not hold onto or hoard the older, more valuable coins. “all your fyne gold was conveyed out of this your realm” should be the dead giveaway to anyone parsing the Elizabethan English of the letter that he was explaining all the sound currency had been exported (to Flanders and Holland, primarily). He explains also that this is a phenomenon of the legal tender status of the coinage. Foreign partners were under no obligation to accept underweight coins, so the best coins had to be used instead, causing a net outflow of gold and silver to the Continent from England. This is NOT the story of “bad money drives out good” that gets told on Crypto Twitter, for a couple reasons. First, Gresham’s Law ONLY applies to legal tender money. Private currencies nearly always have to compete by being better than alternatives. It is only because the heavy hand of the law compelled acceptance of Henry VII’s and Edward VI’s crappy coins that could circulate at face value. Second, part of what was in play is the Alchian-Allen Theory, which explains why the best apples, best seafood, best whatever, are often exported and not available in their local markets. Transport of money was not trivial in terms of costs, and it is less expensive to ship a single chest of “good” coins than two chests of “bad” coins across the English Channel to trade partners who will discount the “bad” coins to a lower denomination. This is why large denominations existed in the first place, and why small denomination money has usually been undersupplied across all of history. Fixed transport and production costs make it relatively more expensive. So what lessons does Gresham’s Law have for crypto? Not a ton, unless some government or very powerful group enforces two stablecoins to have the same face value, despite differing actual values. Then you see those inside the ringfence of that government get left holding more and more “bad” money as the “good” money is used up trading with partners who aren’t compelled to accept the “bad” money.

Strong disagree. ETH (and BTC) never had a credible path to becoming money. Successful currencies that are arbitrary values are as rare as hen’s teeth. It’s a dead end path very early in the evolutionary tree of money. Commodity money arose because it linked units of account to tangible goods, like grains or metals. Book money, used as abstract units of account, still tied back to this - the £ was originally a pound of silver; the koku was ~330 lbs of rice. Coinage, and the shenanigans related to it, created a Cambrian explosion that eventually resulted in a mass extinction event, with most of the successful currencies today sharing a common ancestor. The Bohemian silver dollar birthed many other thalers, tolars, and dollars. Including the Spanish dollar and Austrian (Maria Theresa) thaler. The US dollar, Yen, Yuan, Won, Mexican pesos (5 rather than 1) all descend from the Spanish Silver Dollar. Also the now defunct Straits Dollar. The Straits Dollar gave us Ringgit, HK dollar, Singaporean dollar. The Ethiopian Birr and Saudi Riyal descend from the Austrian silver thaler. And of course the US dollar led to NZ, Australian, Canadian dollars, which have subsequently floated away from their launch values. There’s a whole host of currently USD-pegged currencies, from Caribbean dollars to Jordanian dinars. To say nothing of fully dollarized economies. Even the Euro can trace an unbroken series of redenominations and predecessor currencies back to that silver coin in Bohemia. The Russian ruble married into the family tree when Peter the Great aligned the silver content of the ruble to the silver dollar. Central Asia and Slavic currencies mostly descend from the Soviet ruble, which comes from the Russian ruble. The original silver dollar and its descendants are evolution’s favored child, and the only significant currency family outside of the dollar is the rupee, which had the benefit of being invented roughly the same time and India already being an economic center of gravity. Sterling still has a small family, but has mostly lost members to the dollar family, from America to various dirhams/dinars that were born pegged to £ but now to $. How was ETH (or BTC), completely alien to any preexisting unit of account or store of value, ever going to be *money*? The last 500 years have been the utter and still-growing dominance (hello stablecoins!) of the descendants of that silver dollar in Bohemia. “ETH is money” was never a credible case and anyone who believed it was needs to be more familiar with money and the history of money.

I think "ETH is money" was always the best case for its value, and people who couldn't grok it ended up undermining Ethereum