E-piphany

This is just a brief note to clarify something about the construction of USDi, about which I’ve gotten a number of calls. Before I do, let me also tell you to be on the lookout for my blog next week, when I’ll tell you what I think about Probable-Next-Fed-Chairman Kevin Warsh. (In the behavioral economics world we call that a ‘precommitment’ strategy that has the effect of forcing me into doing it. It’s overdue anyway.)

In May, the USDi token (freely mintable at https://usdicoin.com/coin/ ) will return 12.59% annualized. That’s not an estimate, and it isn’t a typo. As I type this, USDi is in the midst of a month wherein its price is increasing at a 5.65% annualized pace. Its current price at the moment when I am writing this is 1.034237. At the end of April, its price will be 1.035424. At the end of May, its price will be 1.046286. The movement from the end-of-April price to the end-of-May price is 1.049% for the month, which annualizes to 12.59%.

Note that I am not saying its price ‘may be’ or ‘will be approximately.’ While the price you see if you buy USDi on Uniswap or another liquidity pool may not be exactly that, those are precisely the prices you can buy or sell at on our website if you do it at exactly the end/beginning of the months in question. (To be fair, I’ll also note there is a small fee to mint or burn. These are listed on the minting page under the header ‘What are the transaction fees,’ and they range from a low of 0% if you mint over $5mm, to a high of 0.05% – but at least a dollar – if you mint less than $100,000. So, your return will more likely be 0.99% for the month, or 11.88% annualized. Still pretty good).

This is an important nuance. USDi is not a tokenized money market fund, or some other tokenized fund, where the buyer gets a small share of the fund’s performance. If it was, then USDi would be a security and you couldn’t buy it at all in the U.S. unless we filed a Form D and performed AML and KYC on you. That wouldn’t be a very useful crypto tool. So we made USDi an indexed currency, similar to the Unidad de Fomento in Chile, that depends only on the value of the Non-Seasonally-Adjusted CPI index, mechanically. It accretes just like a TIPS bond, except that it does it every block, not just every day. I walked through the particulars last year in How to Calculate USDi’s Current Value.

Now, a TIPS bond – even a short-dated TIPS bond – also experiences changes in price. So while the principal of the October 2026 TIPS, and every other TIPS, will accrete 1.049% for the month of May…those bonds will also experience price changes. In particular, it is extremely likely that they (at least the short-dated ones) will decline in price over the course of the month since each successive buyer will have the right to less and less of that sweet accretion. Either way, you don’t know what you’ll have in a month if you buy a TIPS bond. But USDi has no maturity date. It is not a bond whose price declines when interest rates rise. It is inflation-indexed cash, or (if you prefer) analogous to an inflation-linked CD where the bank is paying you 12.59% for the month, but which you can cash out at any time with no penalty.

This remarkable return – which is likely to remain pretty attractive in June if the inflation swaps market is right about where NSA CPI will print when we get that data next month – is due to the spike in gasoline prices last month, which passed through fairly directly to the CPI.

The next logical question is ‘where does that return come from?’ I am going to skip that answer for now because when I talk about the underlying investment dynamics people tend to get confused and think that the underlying investment dynamics determines how USDi behaves. It doesn’t. Furthermore, the answer to that question does involve a fund that is a privately-placed security and which (therefore) it’s awkward to discuss on a public forum.

But mainly, I don’t want to confuse you. USDi this month is earning 5.65% annualized, and it will earn 12.59% annualized next month. The first estimate concerns June, and an estimate based on the inflation swap market suggests USDi will earn around 9% annualized in June. When we get the CPI in a few weeks, that return will crystallize and we will know June’s return absolutely.

I repeated this point about five times because it seems to me people are being very cautious about buying USDi at the very time that people should be agog over the known future returns and grabbing it. I understand why a big hedge fund might not want to buy $50mm of USDi without ever having experimented before. It is more confusing to me why folks aren’t buying $5k or $10k to try it out and see how it works. Don’t get me wrong, the flows are positive. They’re just…very timid. So just in case the concern is that ‘maybe this return won’t really happen after all,’ I wanted to be clear (here comes #6) that May’s return is baked in the cake. Go get some cake.