The Spectrum of Stablecoin Permissioning, an Argument for Doubling Down on Decentralization | Slater

[Music] hey everybody thank you all for uh being here I'm Slater H I'm the founder of composable Corp and a few different protocols uh the one in question here being stake up it's a yield bearing stable coin with uh treasury bills as its backing and uh I wanted to talk today about kind of the first principles of stable coin what really is a stable coin how does permissioning work within stable coin systems and uh how do these rwa Integrations that have become very trendy lately kind of play into that permissioning Spectrum so what really is a stable coin I think the best analog for the regular person is kind of like a bank deposit or a bank liability basically if it's a system where collateral exists and Carries risks of redeemability for $1 related to its mechanisms of issuance and Redemption its collateralization and its accessibility and those risks play out in very different ways depending on if it's a more centralized system like a bank or if it's a more decentralized system like a protocol so just to make a few examples there right uh the risks of a bank deposit are are pretty clear and well understood uh you often have duration risk like we saw play out with Silicon Valley Bank and others in the last few years where let's say you're holding a long-dated bond with a very low interest rate and all of a sudden all of your depositors want to redeem their effectively stable coins or their deposits for an actual dollar you have to go and sell that collateral and if that collateral is sitting at a loss there's a chance not all users are going to be made whole so that's kind of how a traditional banking system works there are still of course clear rule sets but it's based a lot on human discretion within those rule sets which affects the risk of actually being able to redeem for a dollar with a protocol or a stable coin generally depending on how decentralized it is you have a much greater guarantee of redeemability but of course it still does carry risks and again those risks are related to the level of decentralization of the different components of the stable coin system so before we get into the details of different types of stable coins want to talk about just what's the point of defi right like why bring these onchain sorry why bring these Bank liabilities these IUS of dollars into the onchain ecosystem the first and foremost reason is that counterparty risk is the biggest hidden risk in all traditional Finance right there's the classic saying Know Thy counterparty because in stressful Black Swan Market situations that's really what ends up getting you even at a large scale uh when your counterparty blows up there's not a whole lot that you can do about it even though it generally only happens in pretty extreme Black Swan events so the point of defi at from a first principal's level is that we can trade off counterparty risk for smart contract risk instead we can write rules with systems that are going to self- execute and do exactly what they say they are going to do so we no longer have to trust a counterparty to do what they say they're going to do what this does at more specific level is eliminate the risk of discretion and collateral Integrity right so I already mentioned Silicon Valley Bank they were held in a bunch of of long-dated bonds at 1% interest rates went up to 5% all of a sudden they're s sitting on massive losses and none of the depositors can really know that right like without complete transparency about the backing of any specific bank and and and really how can you expect the average person to to understand that right the average depositor to understand that the last piece is is you can now enable Universal accessibility right so once you have a stable coin on chain anyone anywhere that can access the network that it's on can access the stable coin rather than having to go through the RGS kyc and uh identity verification processes that you need to have as well as regulations that you need to have in a banking system so there's a lot of value in bringing these things on chain so what does it mean for a stable coin to be less or more decentralized I think there's three different components here the first is its mechanism of issuance and Redemption right so in the example of tether the largest stable coin you have a pretty simple issuance Redemption mechanism but it's not really decentralized right where you have to have a tether account it's kind of a web two system you have some fee baked in there and they have an internal system that matches up the collateral with the Redemption now of course the actual issuance of the usdt is decentralized it's an erc20 it's true of every stable coin but the system of issuance Redemption is centralized the different a different side of that is like liquidy right where it's completely decentralized you put in one token and you get out the stable coin no matter what then of course there's decentralization of access which I kind of just spoke about um whether or not you have to go through kyc constraints to access the stable coin is a pretty big differentiator and that's one of the things that's starting to happen more and more with these rwa stable coins last but not least probably the most important piece is the decentralization of collateralization of the system right so there's a few different kind of models you can have here which we'll get into more as we go but this is by far the most important because humans can lie right so the point of this all is eliminating the risk of humans lying instead making smart contracts that always do what they say they're going to do here's kind of a nice spectrum of the most important stable coins in my view and and their levels of decentralization from liquidy down to the kind of rwa stable coins at the end if I had to give a level one through three of the levels of decentralization the first would be fully decentralized and autonomous absolutely no governance and no governance is very important right because even if your governance is decentralized people can still vote for the wrong outcome that's going to have a negative impact on the system the second is governance operated parameters and discretion of collateral but smart contract issuance so this is something like maker Dow where it is all decentralized in a widely distributed governance mechanism however uh there still can make the wrong decision as I mentioned but once those decisions are made the actual issuance is completely done by smart contracts it's guaranteed to do what it says it's going to do the third is fully centralized and permissioned usdc usdt fit in this bucket as well as the ones that have a little bit more of a layer of permissioning like Athena's USD usdm from Mountain protocol and USD y from Ando they introduce an additional layer of permissioning where you actually have to be kyc to issue and redeem which is kind of against the ethos of web 3 why does decentralization of access matter I think this is a a fairly self-explanatory question but of course the goal of defi is to democratize finance right to make the best available Financial products available to all of the world not just the privileged and the more important piece which is maybe a little bit less spoken about is composability the real value of bringing an asset on chain from a practical perspective is pretty much entirely predicated on composability on the ability to start with one asset add it into another system to make more yields or provide liquidity whatever you're trying to do composability is essential to really the function of all of defi however the issuance of redemption decentralization is is probably the most important part because if you have a centralized issuance Redemption process uh regulatory concerns could for example lead to a total loss for a holder right like maybe tether for example were to get enforced on and their Treasures seized in that Black Swan scenario all of a sudden the millions of people around the world holding tether could be subject to losses and of course like we already discussed like the Silicon Valley Bank example uh a centralized issuer and redemer can make a bad decision about collateralization um they can make mistakes or they could even perform fraud right and issue more than they truly have the collateralization for when a smart contract does it this is no longer possible last again it threatens composability if if there is a kyc process to issue in some Redemption generally you can't have full composability and stack those yields on with others most important thing again I've hammered the point home a few times but humans are flawed that's why we're inventing the system that's why we're moving to a defi standard so we no longer have to rely on the decision making of people which are by definition flawed instead we can guarantee we get the right output from our inputs using smart contracts so the big trend of the year so far has been yield bearing stable coins and the reason I wanted to give this talk is because I think there's Fair reason to be concerned about the decentralization tradeoffs that occur for most yield bearing stable coin models the trend however is very positive right the ethos of web 3 is to Share value with your users as much as possible so seeing people or seeing stable coin issuers go from a model of hoarding all the yield from the backing collateral to now sharing that yield with their users is overall a very positive trend however the trade-off is centralization in a lot of cases as well as kyc constraints so kyc constraints period are I think generally against the ethos of web 3 but more important from the composability perspective if your token has a whit listed permissioned transferring system it just can't be compatible with defi because defi is permissionless by nature not only are Dows not going to want to take the risk of adding on a kyc potential security asset into their permissionless protocol it often might not even be possible if your asset could only be transferred within a wh listed system a lot of these stable coins also Market themselves as permissionless but they have us users blocked right so that's kind of a a contradiction um there are some somewhat clever regulatory arbitrages happening where the layer one the first issuer of the stable coin that's actually interacting with the customer or sorry with the issuer is kyc and then permissionless transfer is enabled thereafter and this is kind of a clever way to get around kyc constraints but the problem is that other protocols that are fully composable and permissionless are still not going to be able to integrate those assets because now they're taking the risk of sharing those assets with us users which are not supposed to be able to access them so this is not a long-term solution like I said if you're not truly permissionless you're going to limit yourself on defi Integrations maybe you'll get a few different partners to integrate here and there but if you're transferring regulatory risk to the partners that are integrating your products it's not going to be a good long-term solution and then of course even if you are starting to share more and more of the value of the collateral backing of a stable coin with your users as long as you have a centralized entity in existence behind the issuance process you're still going to be extracting some level of value right so as long as you're not a full Dow Full token operated protocol uh if you have a centralized issuer somewhere in the process that's taking fees it's still value extractive which is going to make it difficult to compete with rwas on a a net net yield basis so one of the things we're trying to do at composable Corp my company is uh introduce what we think is the closest thing possible to the perfect yield bearing rwa stable coin the first piece of course is decentralization on all the strata we mentioned the second piece is yield bearing with negligible economic risk so in my view this means only pulling interest from the risk-free rate the third piece is 100% value sharing with its users no value extraction from any centralized entity and the fourth piece is Regulatory Compliance and non-security status you can learn more about how uh stup does this on on her ex account which is kind of posted there and that's it I think I'm a little short on time but uh yeah thank you guys for coming and listening to my talk