The Optimist Twitter Spaces - Stablecoin Round Table

In this Optimist’s Twitter Spaces which took place on November 22, 2023, Charlie hosted Garett Jonas from Blue Chip, Kmets from f(x) Protocol, Justin Bebis from Ethos Reserve, Bojan from Liquity, and Rhett from Gravita Protocol to discuss DeFi, crypto dynamics, stablecoin strategies, ratings, market evolution, and more! Read our notes below to learn more.

Background

Charlie (Host) – Co-Leader at The Optimist

Garett Jones (Guest) – Chief Economist at Bluechip

Kmets (Guest) – Core Contributor at AladdinDao

Justin Bebis (Guest) – Founder and CEO of Byte Masons

Bojan (Guest) – Food blogger at Liquity Protocol

Rhett Shipp (Guest) – Founder of Gravita Protocol

Bluechip – an independent, nonprofit stablecoin rating agency

f(x) Protocol – a protocol that creates a new class of decentralized low volatility asset paired with a new leveraged long $ETH perpetual token.

Ethos Reserve – a next-generation stable asset on Optimism

Liquity – a decentralized stablecoin platform that issues $LUSD

Gravita Protocol – a borrowing platform that allows users to borrow against their liquid Staking tokens

Insights on Stablecoins: DeFi and Crypto Rating

Garrett introduces himself as an economist at George Mason University and chief economist at Bluechip, the first stablecoin rating agency. He explains that Bluechip, a nonprofit, ranks stablecoins based on safety for moderately sophisticated users.
Garrett mentions their launch in Paris in July, 2023 and their mixed reception. He highlights the importance of intermediary groups in understanding stablecoin safety and the potential of Defi stables in crypto.
Kmets explains the protocol’s function of splitting staked $ETH into a low volatility token (fETH) and a zero liquidation amplified price exposure token (xETH) and f(x) Protocol‘s adoption.
Boyan describes his multifaceted role in operations at Liquity, which he joined three and a half years ago. He mentions Liquity’s functions, including borrowing and stablecoin issuance.
Rhett describes Gravita Protocol as a friendly fork of Liquity, highlighting its multi-collateral nature and commitment to censorship resistance. He explains the distinctions between Gravita and Liquity, including a broader collateral base, operation on mainnet and arbitrum, and the protocol’s non-immutable nature. Rhett highlights Gravita’s stablecoin ($GRAI) and its unique features catering to both long and short-term borrowers.
Justin Bibis reveals himself as a passionate advocate for Liquity, sharing a personal experience of investing in a liquity fork without research and losing a significant sum. He talks about Ethos Reserve, describing it as a CDP-backed stablecoin platform. Justin explains their approach, including multi-collateral strategies, an innovative rebate system, and a commitment to transparent and beneficial operations on the blockchain. He highlights their mission to offer a decentralized source of risk-free yield, independent of traditional finance interest rates, and announces upcoming support for liquid staking tokens on their platform.
Charlie asks Garett to explain Bluechip’s approach to rating stablecoins, including the metrics and considerations they use to assess safety and credibility.
Garrett mentions Bluechip’s rating framework, explaining that it draws lessons from traditional banking and focuses on the credibility of stablecoins being backed by substantial wealth. He mentions the importance of audits and management protocols, especially in DeFi, where governance is predominantly through smart contracts.
Garrett discusses the capital-intensive nature of DeFi stables due to crypto volatility, the trade-offs between on-chain and off-chain stables, and the transparency of their rating system. He shares that $LUSD is the only stablecoin rated by Bluechip so far and explains their grading system, highlighting their goal of providing clear, understandable ratings for average users.

Stablecoin Strategies: Bluechip Ratings, f(x) Protocol, and Liquity’s Market Dynamics

Charlie asks about Bluechip’s criteria for selecting stablecoins to rate, specifically asking if there’s a minimum market cap requirement.
Garrett says that Bluechip does not have a minimum market cap requirement for rating stablecoins, mentioning their willingness to rate smaller ones. He shares their strategy to inform the public about potentially dangerous or scammy cryptocurrencies, especially those with self-collateralization or based on the organizer’s equity. He expresses hope that in early 2024, they can provide more ratings for low-quality, low-volume coins to guide public investment decisions away from risky options.
Charlie asks Kmets to talk about f(x), a protocol distinct from others in the stablecoin space. He expresses interest in hearing about the challenges of scaling and securing $fETH.
Kmets talks about the background of f(x), explaining its inception following the depegging event of $USDC due to Silicon Valley Bank’s failure. He explains f(x)’s design, where users mint $fETH, a stablecoin, by staking another currency, and highlights the unique aspects of f(x), including its stability system and the role of another token, $xETH, in maintaining $fETH’s stability. Kmets highlights f(x)’s difference from other models, its scalability, and the positive reception it has received since its launch.
Garrett compares between f(x)’s approach and real-world floating exchange rates. He says that the stablecoin field is evolving to embrace ‘floating stables’ as a viable alternative to rigid pegs, noting the historical lessons from international exchange rate crises. Garrett appreciates the experimentation with floating stables and sees f(x) as a significant part of this journey.
Garrett explains the challenges of maintaining strict pegs in stablecoins, suggesting that a slightly floating exchange rate might be more practical and less resource-intensive. He highlights the real-world relevance of protecting against significant financial crises rather than minor deviations in value and recognizes that different users might have varying preferences for the stability of their currency.
Charlie asks about the challenges of scaling Liquity in DeFi, particularly about investor perspectives and the necessity of being invested in $ETH as a hard asset.
Bojan talks about his views on floating pegs, indicating a belief that users are not ready for such a system. He shares that from his experience, users are highly concerned about stablecoin pegs.
Bojan recounts the rapid growth of Liquity following its launch during the bull mania, attributing the success to good timing and heavy incentivization in crucial areas. He recognizes that they might have over-incentivized certain aspects and discusses the challenges they faced, including managing liquidity and ensuring the protocol’s reliability.
Justin comments on the difficulty of growing a platform in a bear market, highlighting the high cost of capital and the challenge of capturing users’ attention. He discusses the strategy of focusing on business-to-business processes and the benefits of launching during a slower period, which allows for fine-tuning of the platform’s economics and reliability.
Justin speaks about positioning their token as prime collateral and the importance of building positive relationships with other stablecoin protocols. He stresses the technical complexities involved in managing a DeFi platform and the constant effort required to maintain reliability and awareness in the market.
Bojan agrees with the previous statement and raises concerns about the oversaturation of stablecoin offerings, making it hard to stand out. He is curious about strategies for attracting user attention amidst these challenges.
Justin highlights a B2B focus rather than heavy marketing. He believes in product quality and technology as the main attractions for users. Justin views extensive marketing and incentives as ineffective in the current environment.

DeFi Stablecoins: Navigating Collateralization and Market Challenges

Garett asks about the challenges of over-collateralization in DeFi stablecoins backed by volatile assets like $ETH. He asks about how users manage the high collateral requirements.
Bojan recognizes the issue of capital inefficiency in stablecoins. He describes their approach with a low over-collateralization ratio and the impact of external factors like Federal Reserve policies. Bojan highlights the individual choices of users in managing their risk levels.
Garett asks if decentralized stablecoins have higher turnover and shorter holding periods compared to fiat-backed stablecoins like $USDT or $USDC.
Bojan shares his findings that about half of their stablecoin users hold, while the other half sell. He discusses the challenges in establishing a stablecoin in the market and the importance of integrations with other protocols.
Justin comments on the low velocity of decentralized stablecoins except for the undercollateralized ones. He sees them more as tools in portfolio management rather than as units of transfer. Justin highlights their focus on providing a hedging tool and yield instrument.
Justin talks about their approach to collateralization, aiming for efficiency and resilience. He mentions the influx of users interested in shorting their stablecoin as a significant use case. Justin believes in the importance of decentralized stablecoins for uncensorability and insulation from traditional finance instabilities.
Garrett discusses the benefits of holding assets with uncorrelated risks in traditional finance and DeFi, using Silicon Valley Bank’s situation as an example. He mentions that despite DeFi’s unique problems, its risks are uncorrelated with traditional finance, which is valuable. He talks about the high collateralization ratios in DeFi, noting that both user experience and his calculations suggest a ratio of 200-250% to avoid problems.
Justin highlights the importance of high collateralization ratios for user safety and recognizes the role of mathematical and academic concepts in informing user decisions in DeFi.
Rhett shares his thoughts on the capital inefficiency of Liquity in DeFi. He views the high collateralization ratio as necessary and temporary, suggesting that as Ethereum grows and becomes less volatile, the market may accept a lower collateralization ratio. He says this issue will resolve over time, contributing to the sustainable growth of decentralized stablecoins.
Garrett is open to the idea of Ethereum becoming a stable financial asset like a bond but recognizes the uncertainty around its future, which could lead to volatility. He says that innovation in the stablecoin ecosystem might contribute to this volatility.
Rhett adds that volatility in Ethereum can lead to economic activity and is not always negative. He mentions low liquidation rates in their systems and discusses the challenges of building a stablecoin in current economic conditions, such as high-interest rates and the need for efficient strategies. He notes the cooperative growth among various stablecoin projects and the expected future expansion of the stablecoin market.

Exploring the Future of Decentralization, Stablecoins, and DeFi in Crypto Markets

Charlie asks how the market proportion valuing decentralization will grow compared to those indifferent to it. He asks if decentralization’s value will increase even if it means traditional banks and financial systems failing. Charlie discusses scenarios where $DAI raised its savings rate and the resulting carry trades, indicating that users didn’t care about the backing of stablecoins like $USDC.
Garrett questions if crypto’s goal to replace traditional systems is really necessary, wondering if those systems might not be as bad as thought.
Justin comments on decentralization, viewing it as a spectrum. He says that transparency and accessibility of information are more important than mechanical decentralization. He discusses the value proposition of decentralization in terms of uncorrelated assets and its potential inclusion in significant portfolios.
Justin mentions the innovation on Ethereum, highlighting the importance of liquidity and price action rather than innovation itself. He talks about the potential value of decentralized financial products and yields products in a low-interest environment.
Justin explains that the appeal of DeFi lies in its ability to provide uncorrelated financial instruments and yield opportunities, not just in mechanical decentralization. He shares his journey into crypto, stating that the system’s accounting and financial capabilities, rather than its decentralization, attracted him. Justin sees DeFi as a tool for creating successful financial outcomes and anticipates its growing acceptance in traditional finance portfolios.
Rhett mentions that the interest in decentralization and censorship resistance is currently limited to a smaller group but believes this will grow over time. The growth rate depends on the performance of traditional banking systems and the political climate in various countries. He views the niche for non-fiat stablecoins as significant and expanding, influenced by factors such as potential bank failures and the policies of totalitarian regimes.
Charlie adds that DeFi offers people in countries with unstable currencies the chance to access more stable ones. He asks about the predominance of stablecoins pegged to the US dollar and the potential for other models.
Kmets discuss their work with $fETH, a low-floating stablecoin they view as a future currency, somewhat independent of fiat currencies but still referencing the dollar due to its status as a global reserve currency. He mentions their internal discussions about introducing $fUSD and the flexibility of their f(x) model to maintain a stable dollar peg.
Kmets highlights $fETH‘s efficiency, its role as an inflation hedge, and its integration within the Ethereum economy. He highlights the importance of education in understanding f(x)’s unique system.
Charlie recognizes the significance of educating people about DeFi products and their functionalities. He suggests that there is a general lack of awareness about the decentralized nature of these products.
Rhett adds his excitement about f(x) and its approach in the stablecoin space. He finds the experimentation with pegged and free-floating stablecoins, as well as what they reference (whether it’s the dollar, inflation rates, etc.), to be particularly intriguing. Rhett praises f(x) and other similar initiatives for their innovative approaches to monetary instruments, highlighting the need for a variety of stablecoin models.
Justin highlights the potential of the decentralized stablecoin industry and the importance of transparency, accessibility, and auditability in crypto markets.
Charlie asks about the expansion of f(x)’s model to other networks or assets, considering the significance of Ethereum in DeFi and the possibility of using more exotic collateral.
Kmets says that f(x) plans to introduce new collateral types, focusing on yield-bearing tokens for creating stablecoins. He mentions that these stablecoins will have specific use cases rather than universal applications. The flagship model of f(x), backed by staked $ETH, aims for a global presence and deep liquidity on all networks, with the goal of ‘galactic domination’.
Garett encourages people to visit bluechip.org to view and discuss their ratings. He highlights the transparency of their model and invites disagreements to improve their system. He advocates for more concrete analysis and ratings in the industry instead of relying on memes and emotions.
Charlie agrees with Garett’s views on the need for more rating agencies and notes that $FRAX received a lower rating on Bluechip. He hopes to see public debates or disagreements over these ratings.

Stablecoins, DeFi Challenges, and the Future of f(x) Products

Charlie asks about the fluctuating pegs of decentralized stablecoins.
Rhett highlights the influence of interest rates on peg stability. He explains that high-interest rates increase peg stability costs, leading to a one to two-cent deviation in value. Rhett mentions that for their borrowers and stablecoin liquidity providers, a minor deviation is acceptable compared to a significant, prolonged deviation.
Charlie agrees with Rhett’s points, noting the inverse correlation between bull markets and interest rates, and the importance of focusing on interest rates rather than just price increases.
Justin adds that while a bull market won’t reduce the cost of capital, it will improve access to capital. He expects smoother business operations and high yield expectations in the current economic environment.
Charlie asks Kmets about rumors of a new f(x)’s frxETH product. Kmets says that the addition of such assets depends on community input and the ability to integrate them. He discusses the liquidity challenges of staked frxETH and the potential for applying the f(x) model to various LSDs.
Rhett asks about the impact of withdrawals on liquidity and peg stability. He says that the ability to redeem underlying assets, like Ethereum, could mitigate prolonged trading below the peg.
Kmets recognize the need to consider the design and impact on the Oracle, agreeing with Rhett that enabling withdrawals could reduce the likelihood of trading below the peg for an extended period.
Charlie talks about the progress in on-ramp and off-ramp options between fiat and stablecoins in the DeFi space, noting the current inadequacies in this area. He asks for insights on advancements in transitioning between on-chain and off-chain resources.
Justin discusses the decreased boldness of on-ramps and off-ramps during the bear market, especially in the U.S. He highlights the challenges in onboarding people to DeFi, pointing out the lack of mass marketing and general readiness of people. Justin says that traditional apps, rather than DeFi, are more effective for onboarding. He highlights the importance of institutions and funds in making DeFi more accessible and understandable.
Charlie shares his experience of the difficulties in introducing DeFi to his non-expert friends. He finds the process unnecessarily complicated.
Justin explains that most people do not think about yields as intensely as DeFi enthusiasts. He predicts that exposure to DeFi will gradually increase through conventional financial activities like 401(k)s.

Check out these important links

Show Information

Medium: Twitter (Audio)
Show: The Optimist Twitter Space
Show Title: The Optimist: Stablecoin Round Table
Show Date: November 22, 2023