On Monetary Premium
Decomposing Monetary Premium: Collateralization as a Driver of Demand - if we tokenize frozen orange juice and make it collateralizable for fiat borrowing, how will the monetary premium be reflected?
To what extent does an asset being collateralizable for fiat borrowing add to that asset's monetary premium?
Suppose the market price of an asset is $P = V + M, where
- V is its fundamental value (cashflows, consumption, staking yield), and;
- M is its monetary premium.
If we decompose M as M = Mₛ + M_c + Mₗ where:
- Mₛ: store-of-value premium
- M_c: collateral premium
- Mₗ: liquidity/payment premium
Mₛ is clearly some whooey approximation of mass human economic psychology - not sure if there's anything easy to analyze there.
In this metaphysic, we give substance to M_c supposing because the asset can be used to borrow fiat or stablecoins without being sold. Suppose that unlocking of leverage, carry trades, consumption smoothing, and refinancing translates into increased demand, and therefore premium.
Collateral premium is the present value of those expected liquidity advantages:
Bₜ: expected borrowable amount (e.g. via LTV)
θₜ: expected spread between return on borrowed funds and borrowing cost
r: discount rate
The higher the LTV, stability, market trust, and fiat yield opportunities, the higher the premium.
ETH has a higher M_c than BTC in DeFi because it is natively accepted as collateral across protocols. BTC must be wrapped, and even then is less composable.
If the above analysis has any merit, does it stand to reason then by creating a crypto-economic version of a real world asset, issuable and redeemable, that we can then increase its monetary premium? If we tokenize frozen orange juice as a commodity, where the Frozen Orange Juice Token (FOJT) is issueable by and redeemable for a physical delivery of frozen orange juice, and we proceed to make it lendable on Aave or Kamino, does that give that frozen orange juice premium? Ok, now, suppose it does, how does that affect the actual frozen orange juice market - especially those who consume orange juice?