DeFi Revelations - Let's Get HAI

In this episode of DeFi Revelations which took place on August 23, 2024, Kirk from Revelo Intel hosted Luke and Kingfish from HAI to discuss the evolution of controlled peg stablecoins, the differences between hard peg stablecoins and controlled peg stablecoins, HAI’s growth strategy, arbitrage opportunities, and more! Read our notes below to learn more.

Background

Kirk (Host) – Head of Business Development at Revelo Intel

Luke (Guest) – Co-Founder of HAI

Kingfish (Guest) – Core Contributor at HAI

HAI – a multi-collateral, over-collateralized CDP-minted stablecoin, using a PID controller to induce stability

Evolution of Controlled Peg Stablecoins: HAI and Its Journey from Reflexer

Kirk introduces another episode of Defi Revelations, featuring the founders of HAI, a controlled peg stablecoin on Optimism. He mentions that HAI is similar to Reflexer and explains that the episode will cover the differences between hard peg stablecoins like $USDC and $DAI, and controlled peg stablecoins like Reflexer’s $RAI and $HAI.
Kirk highlights that the conversation will explore HAI’s evolution from the Reflexer project, focusing on its immutable aspects and the expansion to include different collaterals.
Luke introduces himself as the co-founder of HAI, handling the technical aspects. He shares his background as a web2 engineer who transitioned to crypto out of intellectual interest.
Kingfish describes himself as a “recovering tradfiholic” with seven years of experience in banking and private funds. He explains how he discovered crypto during the COVID lockdowns and eventually left his job to pursue crypto full-time. Kingfish mentions his involvement with Reflexer, where he started as a volunteer before being offered a paid position.
Kirk asks about the transition from Reflexer to HAI. Kingfish provides a historical context, starting with the early days of DeFi and the controversies surrounding $DAI and MakerDAO. He explains how MakerDAO’s decision to introduce $USDC as collateral led to a split in the community, with some members feeling this move went against the cypherpunk vision.
Kingfish describes how Reflexer was born out of this split, focusing on two main experiments: PID-controlled stability and ungovernance. He explains that while Reflexer was successful, its ungovernance model limited further experimentation.
The creation of HAI is presented as a response to the evolving DeFi space, including the rise of LSTs, LRTs, and L2s. Kingfish describes HAI as having a meme-friendly branding but underpinned by highly engineered, security-focused code. He explains that HAI aims to explore new experiments in being multi-collateral and operating on L2 while building on the strengths of Reflexer.

Understanding the Difference Between Hard Peg Stablecoins and PI-Controlled Stablecoins

Kirk asks about the difference between hard peg stablecoins and the controlled peg introduced by HAI and Reflexer.
He explains that $DAI’s value is maintained because Maker DAO values the debt generated in a CDP position as one dollar. Market forces are meant to balance this through arbitrage opportunities.
Kingfish introduces the concept of PID-controlled stablecoins, explaining that sometimes market forces aren’t enough to maintain the peg. He describes how the HAI and Reflexer protocols adjust the internal valuation of debt to create wider arbitrage opportunities, encouraging market participants to close the spread.
Kirk asks about the risk of increased liquidations in this model compared to $DAI and Maker.
Kingfish acknowledges this could happen over a long period but highlights the need to consider the entire complex system. He provides a hypothetical example of a borrower with $10,000 worth of collateral, borrowing $5,000 worth of $HAI.
He explains how the protocol would react if the market price of $HAI dropped to 90 cents. The controller would raise the internal price of the debt, incentivizing borrowers to buy $HAI on the open market to close their debt, thereby decreasing the supply of $HAI and increasing its market price.
Kingfish highlights that this mechanism creates a profit opportunity for market participants, either by avoiding future losses or capturing immediate profit, depending on their total P&L.

Robustness and Sustainability of HAI Protocol During Market Stress and Liquidation Events

Kirk asks about the liquidation process in HAI. Luke explains that when the value of collateral drops below a certain safety ratio, external keepers can initiate liquidation. The protocol then takes control of the collateral and auctions it off to cover the debt, with any surplus returned to the user.
Kingfish adds that HAI’s auction system is designed to be more user-friendly than other protocols. While bots and MEV traders participate, HAI’s front end allows regular users to take part in auctions, democratizing the process.
Luke mentions that he has auction bots but doesn’t run them, preferring to let users participate and feel more involved in the community.
Kirk asks about the sustainability of the HAI team’s business model. Kingfish reveals that the project is self-funded, with no VC money involved. The team has been working mostly without pay and is seeking grants for sustainability.
Luke adds that they only started paying themselves last month after running the protocol for nine months, highlighting their commitment to building a valuable product without “shifty” practices.
Kirk asks about HAI’s performance during the recent market downturn.
Kingfish reports that the protocol performed well during this stress test, with 32 liquidation auctions processed successfully. He provides details on the protocol’s financial performance:
- The protocol had about $40,000 in surplus buffer before the event.
- It made another $40,000 of $HAI to cover bad debt during the event.
- There’s currently about $8,000 of bad debt in the system.
- The bad debt was more than covered by existing surplus and liquidation penalties.
Kingfish highlights that the protocol remained fully solvent throughout the stress test and actually made money from the liquidation penalties. He says that this performance demonstrates the robustness of HAI’s system, even during significant market volatility.

DeFi Market Volatility: Liquidation Processes, Technical Adjustments, and Strategic Initiatives

Kirk asks about the duration of the liquidations and auctions during the recent market downturn. Luke responds that it took a couple of hours, noting that profit opportunities are quickly seized.
Kingfish elaborates that their system has a one-hour grace period for users to adjust their positions before liquidation. Auctions start at zero discount and increase over two hours, with different maximum discounts for various collaterals.
Kirk inquires about any technical adjustments needed after the event. Kingfish mentions they discovered some inconsistencies with the HAI Oracle, likely due to an order of operations issue in their calculations. They’re currently working on resolving this minor error.
Kirk then asks about the concept of market price versus redemption price. Kingfish explains that the market price is determined by their Uniswap V3 $wETH-$HAI pool on Optimism, which they consider their “Bible” for pricing. Luke describes the redemption price as the value the system assigns to debt, creating a spread that arbitrageurs can exploit.
Regarding growth strategy, Kingfish discusses several initiatives. They’re exploring ways to allow borrowing against Velodrome LP tokens, potentially using Beefy Finance’s auto-compounding vaults. This feature would be launched with caution, starting with a small debt ceiling of $50,000 due to the use of unaudited code. They’ve also announced a partnership with Dinero (formerly Redacted Cartel) for their liquid staking token.
Luke talks about their cross-chain strategy, mentioning frequent requests to deploy HAI on other L2s. They’re working with Chainlink’s CCIP (Cross-Chain Interoperability Protocol) to enable secure cross-chain functionality. Their roadmap includes enabling $HAI bridging to other chains like Base in the near term, and developing a proof of concept where users can interact with $HAI on other chains while the core minting remains on Optimism.

Roadmap, Cross-Chain Strategy, and Future Plans for Platform Expansion and Governance Overhaul

Kirk acknowledges the complexity of implementing a cross-chain strategy. Luke outlines their roadmap, aiming for a testnet deployment on Base L2 within three months. He describes their current HAI as V1, with V1.5 being a full production mainnet deployment to another chain like Base. Luke mentions potential expansion to other chains in the superchain ecosystem, such as Mode. He views the cross-chain work as the most technically interesting aspect of their development.
Kirk expresses interest in the team’s growth strategies, particularly the plan to allow borrowing against LP tokens. He notes the difficulty in pricing these exotic assets and the potential catalyst this feature could be, given the TVL on platforms like Velodrome.
Kingfish discusses longer-term plans, including a concept for a redemption module inspired by Liquity V1 but aiming to balance the interests of borrowers and holders better. He explains the inherent conflict between these two stakeholder groups in CDP-style stablecoins and suggests they’ve found a way to offer a “choose your own adventure” style solution.
Kingfish also mentions plans to propose an overhaul of the $KITE tokenonomics (their governance token). This would involve changes to how the token interacts with liquidations, the redemption module, and their surplus buffer. He highlights that these ideas are still in the planning stages and avoids giving too many details to prevent overpromising.

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Show Information

Medium: YouTube (Video)
Show: Revelo Intel – DeFi Revelations
Show Title: HAI – A New Take on Multi-Collateral & Decentralized Stablecoins
Show Date: August 23, 2024