Revelo Roundtable #13 - Stablecoins

In this episode of Revelo Intel’s Twitter Spaces on May 16, 2024, Kirk hosted Joey Roth from DYAD, James from Reserve Protocol, 0x-kingfish.eth from HAI, and Patrick from Ducata to discuss the various models and the inherent challenges within the stablecoin sector, including the stablecoin trilemma—decentralization, stability, and capital efficiency. Read our notes below to learn more.

Background

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

Joey Roth (Guest) – Founder at DYAD

jmg.eth (Guest) – Ecosystem Cultivator at Reserve Protocol

0x-kingfish.eth (Guest) – Contributor at HAI

Patrick Huisinga (Guest) – CEO & Founder at Ducata

Intro

James from Reserve Protocol says that Reserve allows anyone to create their own asset-backed stablecoin or flatcoin, highlighting its fully on-chain operations including asset backing, over-collateralization, programmable revenue sharing, and 24/7 minting and redeeming. He notes that the Reserve Protocol has around $100 million TVL in its ecosystem.
Joey from DYAD explains that DYAD addresses the capital inefficiency of overcollateralized, decentralized stablecoins like $DAI and Liquity by creating a second token that acts as a share token for the system’s over-collateralization buffer. He highlights DYAD’s focus on improving capital efficiency while maintaining the strengths of these stablecoins.
Patrick from Ducata describes Ducata’s creation of $DUCA, which they call programmatic money. He says that $DUCA solves the stablecoin trilemma and is set to go live next month, positioning it as a significant advancement in stablecoin technology.
Kingfish from HAI introduces HAI as a multi-collateral friendly fork of Reflexer Finance’s $RAI, operating on Optimism. He explains that $RAI was created to move away from centralized collaterals like those in $DAI and focuses on maintaining stability in an open, honest, decentralized, permissionless, and anti-fragile manner. He highlights HAI’s unique approach to stablecoin design and long-term stability.

Stablecoin Trilemma

Kingfish from HAI explains that there are different aspects of decentralization, starting with the type of collateral used. He mentions examples like Liquity and Reflexer Finance that use endogenous, uncensorable collateral. He highlights the challenges of capital efficiency versus risk, highlighting that good system design and technological advancements can improve all aspects of the trilemma simultaneously.
Kingfish states that HAI’s design philosophy acknowledges the inherent conflict between stablecoin holders and borrowers. HAI aims to minimize information asymmetry by transparently presenting the demand curves of both groups through their redemption rate mechanism, ensuring open and honest economic interactions.
Patrick from Ducata discusses Ducata’s approach to the stablecoin trilemma, focusing on the challenge of capital efficiency while maintaining decentralization and stability. He highlights the need for clear risk allocation and a lender of last resort, which in Ducata’s case is their utility token that benefits from the system’s growth but also carries the risk.
Patrick explains that Ducata mitigates the risks of dual-token economies by implementing a triple-token economy, disconnecting the symbiotic relationship between the stable asset and the utility token. He also stresses the importance of an incentive structure that is sustainable and not dependent on user activity to maintain stability, especially during market downturns.
Patrick highlights the necessity of having an automated and autonomous protocol to ensure stability, even in cases of a bank run, by transferring critical functions to the protocol itself. These elements are key to Ducata’s strategy for addressing the stablecoin trilemma.
Joey from DYAD explains that he doesn’t find the stablecoin trilemma a useful framework for designing stablecoins anymore. Instead, he focuses on minimizing the cost of external liquidity and internal backing collateral. DYAD has two tokens: the stablecoin DYAD and the volatile ERC-20 token Kerosene.
Joey describes how DYAD uses exogenous collateral like $wETH and $wstETH, which have value independent of DYAD. Users can mint $DYAD at a 150% collateralization ratio. Kerosene, the endogenous collateral, does not add to the protocol’s TVL but helps allocate the right to mint additional stablecoins against the exogenous buffer.
Joey explains that to earn Kerosene and mint more $DYAD, users provide liquidity for DYAD on external DEXs. This efficiently incentivizes external liquidity for redemptions and internal collateral for liquidations, making the system more scalable and cost-effective.
James from Reserve Protocol explains that Reserve allows anyone to create asset-backed stablecoins, known as RTokens, which are fully exogenous and usually backed by stable assets like $DAI, $USDC, and PayPal USD. Reserve stakers, who hold $RSR tokens, provide over-collateralization and receive revenue shares and governance rights.
James shares insights from the $USDC depeg event in March 2023, where the protocol’s automated mechanisms successfully managed the depeg by auctioning off failing collateral, buying backup collateral, and slashing the staker pool to restore the peg within 30 hours.
James highlights the importance of high-quality exogenous collateral and suggests that the level of over-collateralization can be optimized based on the quality of the underlying assets. He says that Reserve Protocol always maintains a one-to-one asset backing for RTokens, with varying over-collateralization levels based on the risk profile of the underlying assets.

Regulatory Landscape for Stablecoins

Kirk asks the panelists how the US legislation on stablecoins might affect decentralized stablecoins versus fiat-backed stablecoins.
James from Reserve Protocol comments on the potential impact of regulatory clarity, noting that while centralized stablecoins are easier to regulate due to identifiable entities, defining DeFi and decentralized stablecoins will be more challenging. He expresses optimism about regulatory clarity bringing more people into the crypto space but acknowledges that comprehensive regulation of DeFi is likely years away.
Kingfish from HAI expresses pessimism about current legislation benefiting decentralized stablecoins, suggesting that regulations would favor large, entrenched centralized stablecoin issuers like Circle, who can afford substantial compliance costs. He says that regulators lack an understanding of DeFi, and there’s no lobby for decentralized stables to counteract the influence of centralized entities. Kingfish suggests other jurisdictions might take a smarter approach by focusing on risk disclosure and preventing bad actors while allowing experimentation.
Patrick from Ducata highlights the importance of true decentralization to prevent regulatory interference. He explains that Ducata’s approach has been to ensure regulatory compliance from the start by designing a truly decentralized protocol, which cannot be regulated once launched, though it could be banned. Patrick foresees the U.S. government favoring fiat-backed stablecoins like $USDT and $USDC, possibly using them to extend U.S. financial influence globally.
Patrick explains that Ducata aims to create a scalable, decentralized alternative to fiat-backed stablecoins. Ducata’s $DUCA is designed to be programmatic money, not pegged to any fiat currency, and scalable into the trillions. This would provide users worldwide with a truly decentralized and interference-free financial tool, offering a superior alternative to traditional stablecoins.
Joey from DYAD says that as an American, he sees the political landscape as a significant factor. He argues that if a project demonstrates low harm potential and high-value potential, it becomes harder to justify regulatory actions against it. Joey highlights the importance of creating systems that are clearly beneficial and not harmful, which makes them harder to ban or regulate negatively.
James from Reserve Protocol revisits Kingfish’s earlier point about the need for a DeFi lobby. He suggests that DeFi projects should focus on building great products, growing adoption, and learning from their experiences. James believes that the open-source nature and composability of DeFi can outpace centralized incumbents and highlights the potential for a community-driven movement to accelerate DeFi’s growth.

Integrating Immutability and Governance in Stablecoin Protocols

Kirk raises the topic of immutability in the context of regulatory protection, asking the panelists how they integrate immutability into their protocols.
Joey explains that DYAD incorporates immutability in stages. The base layer, comprising DYAD NFTs (called Notes), is immutable from the start. Subsequent functionalities have a period where changes can be made before they are locked down. Governance mechanisms based on NFTs allow holders to decide on changes and when to make components immutable. Joey highlights the need for a balance between initial flexibility and eventual immutability to adapt and optimize the protocol post-launch.
Joey says that while ongoing governance is not ideal, aiming for immutability after a period of testing and adjustment is crucial to ensure the protocol can respond to real-world conditions before becoming fully immutable.
Patrick from Ducata agrees with Joey’s staged approach towards immutability, highlighting the practical impossibility of launching perfect code from day one. He highlights the necessity of market input to refine and improve protocols. Patrick mentions that their governance approach also aims to decentralize authority early on, reducing regulatory influence, and progressing towards immutability.
Patrick explains that $DUCA aims to be desirable by maintaining purchasing power and generating autonomous, sustainable yield. He suggests that these financial benefits will drive initial demand and adoption. To facilitate everyday use, Ducata plans to develop a regulated bank to enable self-sovereign banking. This bank would combine crypto wallet features with on/off-ramp capabilities, allowing users to hold their wealth in crypto while making traditional payments seamlessly.
Patrick acknowledges that this approach involves a trade-off in decentralization but believes it is acceptable to most people as it reduces crypto-related friction and integrates with the traditional financial infrastructure. This solution aims to enable mass adoption and practical use of $DUCA for normal payments while maintaining control over assets.
Kirk invites James to share how Reserve Protocol is being used in developing countries and to provide insights into practical uses of their stablecoins.
James explains that Reserve spent about four years building a banking system in Latin America using stablecoins, leading to the creation of the reserve protocol. This effort resulted in a neobank called Ugly Cash, which uses stablecoin rails to facilitate money transfers to countries like Venezuela, Argentina, and Mexico. Recently, three RTokens from Reserve Protocol were integrated into Ugly Cash, enabling balances and transfers in these stablecoins.
James highlights historical parallels to illustrate the importance of significant off-chain integrations for stablecoins to achieve widespread adoption. He compares the success of Tether and Circle, both of which relied on off-chain entities (Bitfinex and Circle’s partnerships with exchanges) to gain traction. He also draws a parallel to the US dollar’s global dominance, which was significantly boosted by a deal with Saudi Arabia to price oil in dollars.
James highlights that the ultimate success of stablecoins will likely depend on integrating with large, off-chain industries and entities, such as governments, energy sectors, or the creator economy. These integrations can provide substantial network effects and drive adoption beyond the current on-chain user base.
Joey from DYAD adds that a compelling consumer product could be built around stablecoins, such as a debit card linked to yield-bearing collateral. This card would allow users to borrow stablecoins against their collateral for purchases, with the collateral’s yield paying off the debt. Such a product could attract non-crypto-native consumers by offering a high-yield savings account that provides liquidity for everyday spending.
Joey also suggests incorporating a point system that rewards users with endogenous collateral (Kerosene) for spending, creating incentives similar to credit without actually forming credit, thereby maintaining the stablecoin’s over-collateralization. This approach aligns stablecoin design with consumer needs and enhances its utility in everyday transactions.

Prioritizing Stability Systems Over Payment Solutions

Kingfish from HAI shares his differing view on payments, stating that he doesn’t prioritize creating payment solutions within DeFi. He believes in focusing on making robust and anti-fragile stability systems and letting others develop payment rails. Kingfish envisions traditional payment processors like credit cards becoming obsolete due to lower fees offered by decentralized alternatives.
Kingfish mentions that HAI is working on refining their stability mechanisms and hints at future developments inspired by Vitalik’s ideas, aiming to balance the interests of holders and borrowers while enhancing stability and yield opportunities. He stresses the importance of security and information disclosure to ensure true stability in stablecoins.
Joey from DYAD discusses under-collateralization in traditional finance, highlighting its capital efficiency due to the integration of central banking with the government. He believes that over-collateralization is underexplored and that blockchain technology could make it more capital-efficient, which is crucial for decentralized finance to operate independently of state-backed systems.
Patrick from Ducata shares that after six years of development, they are one month away from launching $DUCA and the Ducata protocol. He highlights their mission to create a stable, decentralized alternative to traditional financial systems, highlighting the necessity of achieving native stability on-chain.
Patrick believes $DUCA will address the shortcomings of fiat-backed stablecoins and offer a viable solution for people in countries with unstable currencies. He mentions their ongoing presale and upcoming launch as major milestones.
Joey from DYAD announces the completion of their Code4Arena audit, the final step before deploying their main DYAD flywheel. He anticipates significant interest due to the high APR on $DYAD-$USDC pairs, driven by their innovative yield farming setup.
Joey explains that their design ensures that the more participants in the yield farm, the higher the TVL, which increases the deterministic value of their volatile token, Kerosene. He highlights the arbitrage opportunity where kerosene’s market value aligns with its deterministic value, ensuring stability and efficiency. Joey mentions the excitement within the community and the anticipated launch of the flywheel within days, aiming to attract significant liquidity into their system.
Kingfish from HAI reiterates his focus on making robust, anti-fragile stability systems rather than payment solutions. He mentions upcoming blog posts and governance proposals, including new ideas for enhancing stability mechanisms and yield opportunities within the protocol.
Kingfish highlights the importance of understanding and managing risk, aiming to design systems that increase stability at a machine level with strong economic design. He highlights that true stability is fundamental, and HAI is committed to advancing in this direction, avoiding the pitfalls of traditional fiat-backed stablecoins.

Building Diverse Asset Baskets for Long-Term Stability

James from Reserve Protocol discusses their long-term vision of building diverse baskets for asset-backed currencies, potentially backed by a wide range of tokenized real-world assets like commodities, stocks, and bonds. He highlights that such diversity reduces counterparty risk and can be covered with over-collateralization.
James mentions that in the shorter term, Reserve is focusing on improving governance for asset-backed currencies and aligning incentives for ecosystem participants. He highlights the importance of strong governance, inspired by models like Curve and Aerodrome, and hints at upcoming announcements related to governance improvements.
James says that the Reserve Protocol allows anyone to launch their own asset-backed currency quickly and easily. He mentions that Reserve supports deployers with resources, grant programs, and liquidity pools.

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Show Information

Medium: Twitter (Audio)
Show: Arbitrum Twitter Space
Show Title: Revelo Roundtable #13 – Stablecoins
Show Date: May 16, 2024