Mantle - Rethinking Stablecoins from First Principles

[Music] happy to have a conversation actually since uh let me just you guys happy to participate you can use this one too right okay [Music] okay should we kick off so hi uh and everybody at home I'm Jordy um I'm a strategic advisor at mantle which is a layer two domestic roll up that's starting soon and uh you know one of the more fun things I have in my job is to evaluate projects and kind of decide which we want to invest in which we want to support and obviously stable coins are a very large part of the ecosystem and the defy I am kind of world right now so I wanted to give some of my thoughts and anecdotes and projects we're talking about what I look for what I want to not see in projects [Music] um so yeah a little Background by myself I've kind of started thinking about stable coins during the D5 summer obviously it was a crazy time Wild West we had Rock pools going on we have uh people thinking they can just be like market makers and you know going into uni swap pools and trying to farm stuff which was working great for a while so I kind of found myself in uh in 21 and then 22 and in the middle of the peak Mania so first we had a Olympus Dao which was you know claiming to be a decentralized they will not exactly a stablecoin it was a variable coin that um was supposed to be backed so by Treasury and uh you know I looked at the game theory behind this my background is in Game Theory and kind of realized that you know this is a nice diagram with the 3-3 and all this stuff but actually uh there's some holes and it doesn't really work and then uh you know I really got into thinking about these problems as Luna was kind of going up and there was this Infamous debate I had a few weeks before it collapsed um on Bank lists we're you know kind of talking uh about some of the issues potentially with Luna and and that kind of really got me thinking about uh you know what what are the issues that arise so you know generating a thought experiment about stable coins and what are the things that you definitely do not want to see that we found so on the left this is kind of like a simplification of what Olympus Dao actually was it was basically not thinking about the exit plan just the entry plan so you know we're all gonna go in we're gonna put our money and we're gonna keep buying and this thing's gonna go up and we're all going to be rich and the reason people are gonna all gonna be rich is because there is a market price but no one's thinking about exiting and if everyone's exiting you don't actually get that market price so it's it's easier to think that you have something valuable just because you've made it have a certain price without thinking about the liquidity um so you have to be very careful with these Game Theory Dynamics and not creating liquidity traps and then the other one you want to avoid is moral hazards moral hazard is you know things like FTX things like you know other things we saw last cycle where it's you know Tails I win heads you lose there's a party that has the upside but doesn't actually participate in the risk and they're incentivizing and marketing and really kind of pushing and promoting but if things go wrong there's somebody else holding the bag so these examples we've seen numerous of so uh yeah before I go to the next slide like talking about Luna um this was a complex one a lot of people were debating about it what is what is working about it what's not working about it and then ultimately it did fail even when it failed a few people were really understanding why it failed I think there was a lot of attention on anchor as being the culprit oh this yield is 20 and this is the problem but actually the yield of anchor wasn't actually causing the collapse of Luna the collapse of Luna was more systemic and was unavoidable regardless of anchor um I don't know if anybody like had any experience of printing through Luna as that happened or even after was anybody in Luna any UST no okay one person had USD okay two okay a few people had USD so um now that you look back like does anybody have a if somebody asks you guys like okay you know Luna blew up UST didn't depict what would you say is the reason that it depict like somebody out comes and says oh what happened what is it someone said it depict well it it did because you can't get your money back you know if you put in a certain amount but did we really like understand why there was a liability mismatch like would you would you have any explanation for it okay the yield look good but you'll look good fair enough so what happens is Luna ultimately you know even after that disaster happened it took me kind of weeks to really process and digest and and explain and um ultimately Luna the problem with USD is they try to become base money so when I see stable coins or any kind of crypto trying to create a new currency that is creating senior age so senior Rich means someone is getting rich out of thin air so Luna's example you know you could just print this stable coin and it's stable until somebody else sells enough of it that it breaks the peg so luno made the mistake of trying to be base money so whenever I see base money if it's not gold backed it's not actually gold which is you know a good kind of Base money this is like red alarm right away um so you know Olympus that was another example of trying to tell people this is a currency and we're gonna create it in a certain way in Luna's example the people that were making money from USD were people who bought Luna very cheap and then wrote it up so imagine you're a seed investor in Luna and you bought it at 20 cents and then suddenly Luna's worth a hundred dollars you can take your Luna and change it for a hundred dollars worth of UST you just made 98 dollars in in 90 cents out of out of thin air that when you exit it into usdc or usdt somebody has to pay that and you're kind of playing God in a way you're just deciding I'm just making this money so the investors of Luna were actually creating base money and this was not sustainable so this is something uh you know red flag Don't Be base money rule number one so the dollar that's an amazing question uh so two things to say about that one if people bring up the dollar and they bring it up in the context of well the dollar is not back to anything so my coin can equally be the same and it's the same category that doesn't cut it like yes the dollar has a problem and I think it will continue to devalue and it has issues and fiat currency generally is mismanaged but it doesn't mean that you know Mr uh you know pseudonymous founder founding a coin can have the nuclear bombs in the tanks and weapons of the US dollar and the economy US dollar it doesn't it's the military power right so you know the Anon with uh the monkey pfp is is probably not going to have that um so the second thing and and you talked about yield you know you saw the yield I you know if I if I see a coin a stable coin trying to create yields I'm immediately going into like you know how does this go into the future is this sustainable so there's different kinds of yield you know the the more like safe one you could say is like uh things like money market funds and we're starting to see those so those are great I think usdc usdt they don't actually give you any of the yield it's the companies that are making billions of dollars right like tether is announcing like a billion dollars a quarter circle is doing very well this is like a great environment the users are not getting anything and you're just getting devalued so now there's projects that are looking to bring those on chain now there is there's two types there's the ones that are going to the government and getting kyc and you know everything is very carefully done and then there's kind of more like decentralized maker Dao style where there's an intermediary that does it for you so I think these are very interesting and they actually give the user an opportunity to participate in the money market of the fiat currency you know dirty Fiat yield central bank money another type is native stating you mistaking yield the issue with the staking yield is that it's variable right you have a variable coin you have ethereum stake the use four or five percent you can use that then you have to short an equivalent uh you know version of the long with a short so there's a bunch of coins right now I think lst5 is very popular I don't have a strong opinion on uh you know whether it's good or not but it's a trend that we're seeing we've seen it before the problem is you do have to put on the short as well as the long so if the stable coin is long stake teeth you have to go to a derivative and short short Eve right to to create the balance um there's people thinking through this problem and some solutions are good some are not good the problem is the second part if you're shorting a future you don't actually know what the yield is the yield can be positive the yield can be negative if you're if you've ever traded perpetuals every eight hours the funding changes and you don't know what it's going to be and the problem with these things potentially is like they don't scale as more people short the future there's an imbalance and the yield goes negative so you can have four percent on the E and you might have minus ten percent on on the shorting derivative so you end up with negative yield which is a bad bad outcome so I'm very careful about uh thinking through these things it's not as bad as this guy right here I don't know like back uh back when the Olympus Forks were were kind of wild you start seeing like 300 000 apy 79th it's a bit more than the seven percent and you know this stuff is is going into like the monkey brain and it's trying to make you think like well even if it goes down 50 I'm gonna make 300 000 so it's still a good deal which of course you know it doesn't actually even make it past like a few days sometimes if it's if it's like so crazy um another type of yield you know curvy this type of curb USD these type of things where you're getting in essence trading fees or some kind of protocol fees um these are fine in a way like they're a sustainable yield but you are getting multiple risks so you might be exposed to three stable coins instead of one and if any of them depegs then you're you're liable right because the pool is going to get imbalanced so risk to know and then finally yeah like so what we saw in D5 summer where you just have incentives um now there's times where it's okay like frax is an interesting situation because they are incentivizing uh bootstrapping their ecosystem and in a way you're participating you're getting some yield so that's okay but as these things start to go to Infinity uh they become less sustainable so red flags for me is like is it just incentives that make sense within the ecosystem or is it something that is like way out of a person so uh another thing that immediately is coming to my head okay you've created a stable coin you've can't you've come to me you want 20 million dollars what exactly are you trying to solve like are you trying to play a Ponzi game and trying to present yield as a savings account are you trying to give people an opportunity to just put money get yields and is that safe uh are you trying to use it for transfers and you're trying to create money in the sense of transaction so between you know two parties they want to pay each other is this what you're trying to do in which case you need you know cheap transfers you need potentially the cross chain transfers maybe off rails so like these types of things um do you want to use it for collateral right so this is one useful way to use it you you get your stable coin and then you you do trading with it you're basically going to a third party and you're saying look I have money I have this stable coin that that allows me a certain amount of credit into your Casino into your protocol whatever whatever it might be um and you know finally the most important rule are you gonna stay stable so we have like uh Louis CK which is like yeah of course of course this thing is going to stay stable but maybe and you have to you have to think about the maybe because ultimately extreme events happen all the time in crypto like we think it's one out of a blue moon we think it's like a Six Sigma event but these things seem to happen all the time right so uh first of all like is there liquidity for people to exit in Mass because when it rains it pours everybody wants to exit at the same time we saw that last year you know 3ac at snake deep and snake deep is is a good product right like it's it's not a scam or anything but everybody wanted to exit at the same time you have like uh huge amounts of demand and no supply for for exiting so you have to think through uh the exit rails and then you know the more interesting part so with algorithmic stable coins that are not one-to-one with a bank account like a circle you usually have backing you need backing I don't think it's possible to have non-backing because then you know we get back to base money which we don't want to do but if you have backing there's two types of backing there's stable coin backing but this doesn't make any sense right so we saw this with die you get usdc and then you give people die and does it what are you what have you achieved like you have the equal product and it's the same risk or you have variable so variable is fine it's good the problem with variable uh sometimes assets are moving and they can move below the Threshold at which you're backing so you know synthetics is an example where they're very conservative they have the ratio to get synthetics USD susd it's like 400 they've increased it from 200 three or four it's like four or five hundred percent that you need to have but synthetics is uh you know it's a defy coin and these things can go up and down 90 so ultimately there is still a risk even with 500 backing now ethereum maybe is not going to go down 90 you know maybe it'll go down 20 30 40 and you you have a bit more space um so what I like to see is like are you trying to liquidate people if you are like maker Dao uh how are you doing liquidation is it is it a fair liquidation are users getting hurt and uh you know the most exciting thing that I'm looking forward to is the next development of stable coins is having a version of variable coins being backing without liquidations so what does it mean so uh if the coin drops a lot in value you want to have a third counterpart be able to backstop and fill it back up so why would they do it they need to have an incentive so we've seen uh in D5 for example vaults like ribbon these types of like options vaults what they intentionally do is do a covered call so you say okay I have some ethereum the price is two thousand dollars I just want to get 10 yield so I just want to have twenty two hundred dollars next time if the price goes up I understand that you know I'm gonna have less ethereum but I'm still gonna get the yield so in essence a covered call is a way to give upside how does it relate to stable coins it's the opposite so you have a put that essentially somebody is underwriting so I tell you okay you have a backing whether it's ethereum or something else if the price goes below the backing I will step in and fill back the reserve so that people can still exit and in exchange I need some yield or potentially I need to get a covered call so I'm getting the upside if if the thing goes up if the variable thing goes up I get the upside and I'll cover your downside these types of designs I think are the next iteration for creating a backed stable coin and this is the kind of stuff on mantle that we're working on or hoping to see and uh yeah I think this is the next Evolution so happy to take any questions on any topic that we discussed or any comments any thoughts let's just start the comment that there are so many projects yes also there are many more table calling ideas and projects people using it for I mean payments for instance that's true but we have that in nfts as well where you have infinite nft projects and then ultimately just a few really catch on and make enough and even at this like cool Summit there's a lot of people thinking about these these problems I talk to five different people and three of them actually might have the same idea especially right now a lot of a lot of them come back to the uh you know State Thief long stake teeth use that yield and short it somewhere else and you know there's different approaches on how you short it you're right there's a lot of options they're slightly different each one is slightly different I think some will be maybe better at some of the details hopefully it's not just about marketing because that's what I mean dokon was an incredible marketer uh he really made a huge success out of something that should not have been a success because of how good he was at you know talking and creating Partnerships so hopefully we've learned a lesson and next time the the winners will be the ones that have really gotten it right um but yeah a lot of ideas out there so it's a hot space that's for sure any other thoughts cool well thank you guys thanks for coming