The Optimist Twitter Spaces - Let’s Get HAI!

In this episode of The Optimist Twitter Space, which aired on May 6, 2024, host Charlie dove into the intricate world of DeFi with Kingfish and Reza from Let’s Get HAI to discuss the complexities of decentralized stablecoins, the pivot from traditional finance to crypto, and the innovative solutions they’re crafting to address current financial system limitations. Read our notes below to learn more.

Background

Charlie (Host) – Co-Leader at The Optimist

Kingfish (Guest) – Contributor at Let’s Get HAI

Reza (Guest) – Contributor at Let’s Get HAI

Let’s Get HAI – a protocol that lets you borrow against LSTs & Optimism native assets to get $HAI (an overcollateralized & decentralized stablecoin)

Let’s Get HAI Intro

Reza’s journey into crypto began with Reflexer Finance and the decentralization of money, leading to the creation of the HAI protocol. He got involved with the project after being influenced by Amin, one of Reflexor’s founders.
Kingfish describes his background in traditional finance and his transition to crypto during the pandemic. He became disillusioned with traditional finance and found his way into the crypto libertarian space through $DAI and later Reflexor ($RAI).
Kingfish and Reza realized that no one was creating the decentralized stablecoin product they envisioned, so they decided to do it themselves with support from Amin.
They also mention the third key member of their team who is their lead developer and has been instrumental in managing the development of HAI’s infrastructure.

Let’s Get HAI’s $RAI

Charles asks about the background of $RAI and the thesis behind HAI, and why a truly decentralized stablecoin is important.
Reza explains that $RAI and Liquity emerged as responses to $DAI incorporating $USDC, which compromised its decentralization. He describes how $DAI initially promised trustless, immutable, permissionless collateral backing but struggled with stability, especially during the DeFi summer of 2020 when demand for leverage caused $DAI to trade above $1.
Reza states that MakerDAO‘s decision to integrate $USDC was intended to stabilize $DAI’s value by providing more collateral but at the cost of introducing centralized risk. He notes that while this decision allowed $DAI to scale, it also diluted its original decentralized ethos.
Reza highlights the fundamental innovation of $RAI, which uses ETH as collateral and incorporates a PID controller to manage market volatility, aiming to maintain stability without relying on centralized assets like $USDC.
Charles highlights the importance of stablecoins in onboarding new users to DeFi and points out the issues with $DAI’s reliance on $USDC, which he feels undermines its decentralization.
Reza says that while he sometimes uses $USDC and $DAI for practical reasons, he values building alternatives that prioritize decentralization, permissionlessness, and censorship resistance. He acknowledges that different users have different needs and that HAI offers a credible alternative for those who prioritize these values.
Kingfish mentions that while $USDC and $DAI have their place and have scaled significantly due to their model, there is a need for alternatives like HAI that remain true to the principles of decentralization and offer a hedge against centralized control.

Navigating the Challenge of Decentralized Stablecoins

Charles asks about the challenge of getting people to understand and accept a stablecoin that isn’t pegged to the familiar US dollar but instead derives its value from market activity and decentralization.
Kingfish explains that getting people to understand this concept is a significant barrier for $RAI and HAI. He notes that people are accustomed to thinking in terms of the dollar. He suggests continuing to promote the agenda of decentralized stables and experimenting with terminology to help people grasp the concept better. Terms like “controlled peg,” “floating peg,” and “float coin” have been tried to convey the idea.
Charles highlights the importance of reminding people about the core values of crypto, such as decentralization, sovereignty, and autonomy, which may have become diluted over the years.

Exploring Let’s Get HAI Usage

Charles asks for an expansion on what users actually do when they use Let’s Get HAI.
Reza begins by assuming that the audience has a basic understanding of $DAI and Collateralized Debt Positions (CDPs). He explains that users can deposit accepted collateral, like wrapped staked $ETH ($wstETH) or $SNX, into safes (vaults) and mint $HAI against it.
Kingfish explains that the value of the collateral is determined by Chainlink oracles. For example, if $ETH is valued at $10,000, a user can deposit one $ETH and borrow $HAI against it up to a certain percentage (125% liquidation ratio). He advises against borrowing up to the liquidation point to avoid liquidation risks.
Kingfish explains that users maintain exposure to their collateral ($ETH) while having the minted $HAI to use for various purposes, such as liquidity provision or real-world spending. The stability fee (interest rate) is charged by the protocol and goes to different buckets, including the keeper bucket for protocol maintenance and the surplus buffer for protocol health.
Reza and Kingfish highlight the similarities to MakerDAO but emphasize the focus on the right types of collateral and alignment with ecosystem values, like supporting synthetics and operating within the Optimism ecosystem.

Navigating HAI’s Internal Valuation Mechanism

Charles appreciates the addition of $SNX collateral and notes that it’s a rare feature among major CDPs. He explains that similar to Liquity or Maker, users can deposit assets to access liquidity without selling them, but HAI differs in its internal valuation mechanism.
Charles asks Reza about how HAI’s internal valuation mechanism works, highlighting the challenge of explaining it simply.
Kingfish explains that HAI uses a PID controller to maintain stability, aiming to remove human intervention from money management. The PID controller adjusts the internal price of $HAI based on real-time supply and demand. He notes that this controller will be activated soon, setting rates that adjust the internal price of $HAI in the system.
Kingfish details that there are two prices to consider: the market price (what $HAI trades for) and the redemption price (value set by the protocol). When the market price is above the redemption price, the controller sets a negative rate to signal that the price of $HAI will go down, prompting users to repay their debt and balance the system. Conversely, when the market price is below the redemption price, it sets a positive rate to bring the price closer to the system’s valuation.
Reza expands on this by asking why $DAI or $LUSD are worth a dollar, explaining that it’s because the protocol values them at a dollar, creating arbitrage opportunities. The PID controller for HAI automates this process, adjusting the debt’s value to incentivize market participants to react and maintain stability. He highlights that this dynamic adjustment promotes stability by constantly bending to market forces.
Charles summarizes that the PID controller is a perpetually dynamic reaction to supply and demand forces, adjusting $HAI’s value accordingly.
Reza further explains that designing a stablecoin involves balancing the opposing interests of borrowers and stablecoin holders. HAI’s use of the PID controller is seen as an effective way to balance these interests compared to other protocols that make different choices.

HAI’s Market Dynamics

Charles notes that the internal adjustments in $RAI and HAI are beneficial during different market phases, such as bullish and bearish trends. He explains how liquidity behaves differently in these phases, which impacts the stablecoin’s value.
Reza explains that HAI rubs the dynamic of market phases in users’ faces by showing the rate at which they are charged for stability, making the cost of stability transparent. He highlights that there is no such thing as risk-free stability, as the government hides it through inflation and money printing, which is a tax on all holders. HAI’s system provides a visible rate, allowing users to predict and react to market changes.
Charles mentions that this perpetual dynamic adjustment to supply and demand is a unique feature of HAI. He asks about the general use cases for HAI.
Kingfish explains that HAI can be used to leverage long ETH, make investments, or pay bills without selling assets. He mentions that he personally prefers not to sell his OP tokens at current prices and would instead use them as collateral in HAI to take out a loan for operational expenses.
Reza agrees and adds that all of DeFi is a risk product, and users need to find their personal risk tolerance and do their research. He highlights the importance of having tools that empower users to make their own financial decisions without needing permission from centralized entities.
Charles agrees and highlights the importance of financial education, particularly understanding what money is and how monetary systems work. He believes that more people would be opinionated about these topics if they were better educated.
Reza adds that people in western first-world countries often take their stable currencies for granted, while those in countries experiencing hyperinflation have a more urgent need to understand and control their financial stability. He explains that these people learn about monetary systems through real-life experiences, which makes them more aware of the importance of stablecoins and decentralization.

Understanding HAI’s Ecosystem Dynamics

Charles raises a point about the PID controller’s role in setting the redemption rate and internal price of $HAI. He suggests the possibility of using it to set an interest rate on balances but acknowledges the complexity involved.
Reza responds, explaining that using a PID controller to set interest rates on balances can lead to complex issues similar to those faced by rebasing tokens. He highlights that such a system might create unbacked tokens, leading to unintended consequences.
Kingfish adds that they explored various approaches to help people understand the different units of account in HAI but ultimately decided to stick with their current system.
Charles asks about the auction houses and how they serve the health of the system during market events, like a 20% drop in prices.
Kingfish explains the three types of auction houses within the HAI system: collateral auctions, debt auctions, and surplus auctions. He describes the process of collateral auctions, where seized collateral is auctioned off to maintain the protocol’s stability. He shares his personal experience with participating in liquidations and winning an auction.
Kingfish continues by explaining surplus auctions, where excess HAI from the protocol’s balance sheet is sold for kite tokens. He also describes debt auctions, which are used as a last resort to recapitalize the protocol’s balance sheet by minting new kite tokens and selling them for HAI to cover bad debt. He hopes that debt auctions will never be needed.

HAI’s Governance and Optimism Integration

Charles acknowledges the last resort nature of debt auctions, ensuring system health by clearing bad debt.
Reza confirms that debt auctions were tested on testnet and have worked as expected. He highlights the importance of governance setting correct parameters and acknowledges the inherent risks in defi.
Charles inquires about the surplus threshold and its relation to surplus and debt auctions. Reza explains that the protocol is still building its surplus buffer, and surplus auctions will become more common once the buffer reaches the desired level.
Charles asks about governance and how Kite holders participate in decision-making. Kingfish explains that anyone can make proposals on various aspects of the protocol, like collateral types and stability fees. Decisions are executed autonomously through Tally, ensuring a true decentralized governance process.
Reza highlights that governance is fully autonomous, unlike some protocols that still rely on multisig decisions. He adds that true on-chain governance ensures that proposals are implemented based on their merits.
Charles brings up the benefits of choosing Optimism for HAI. Kingfish mentions that the branding aligns well with Optimism, and the ecosystem’s growth potential makes it an attractive choice. The super chain and giga-brainin people at Optimism also contributed to the decision.
Reza adds that Coinbase’s choice of the Optimism tech stack and the untapped potential for utilizing $OP tokens influenced their decision. He believes HAI offers significant value to the Optimism ecosystem and vice versa.

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Show Information

Medium: Twitter Broadcast (Video)
Show: The Optimist Twitter Space
Show Title: Let’s Get HAI!
Show Date: May 6, 2024