Brandon Iles - Designing Sound Money: Stablecoins as a Unit of Account & Refuge from Volatility

baby [Music] of course that's not Financial advice the yield right all right we've got one final talk so thank you all for making it through the first uh day and then after the talk uh there's gonna be another panel discussion to round it out but the final final person to um provide the chat Brandon ample fourth your stage all right thanks hi I am Brandon I'm one of the founders and developer on the m4th project today I'm going to talk about the spot decentralized flatcoin so for anyone who's been following the ample fourth ecosystem lately some of this should be familiar but for everyone else I suspect there's some new ideas here I don't think I've heard anyone at the summit yet talk about the approaches we take I don't know about any other projects that do either spot is the culmination of a five-year long effort and today I'm going to share the story of the Journey of ideas we took to get here we started with a simple goal to produce both an asset that serves a purpose and works in the long run and honestly never imagined how challenging this would be when we first started up 2018 was a very different time than 2023. so what do we mean by serving a purpose turns out there's a fairly quick and simple answer we just asked you know what's a better money going to look like right and economists have been thinking about this and writing about this for a very long time you can go back and read all of their ideas um and I think that's something that we should do collectively as a space read some economics since we're going into monetary systems and the simple answer is a better money is just something that is stable inflation resistant and would not rely on bailouts right so it would be free from the moral hazard that limits Fiat that comes from bailouts Fiat has a number of responsibilities it tries to do right if you look at the dollar in particular it tries to do three things tries to maximize employment it tries to maintain moderate long-term interest rates it also tries to maintain stability but the promise of an independent money is that it can focus on one thing and one thing only stability so given that we already have Fiat anything short of what I just said would not serve a long-term purpose uh so the economists you know hike he talked about a couple different ideas I think are relevant the first idea he talked about was the idea of opening up the free trade of money what this does is allow individuals to choose what currency they use when they transact and through this Choice it would raise the floor of money quality the second idea he talked about was the introduction of new independent monies and the idea behind this is they can help raise the ceiling of money quality so making it work a long and painful Journey I guess the key point from before is that if you simply bring Fiat to the blockchain you've not created better money right I think we've heard people will talk around this point a few times here but I think this is something that we just toward held core to the protocol and our goals of this project so we knew what we wanted to make but the process of actually making it work is also difficult so the no bailouts constraint so we knew from the work of people like kinland Prescott and other work in monetary economics that the nobelix constraint had to hold on whatever we built for you sorry I'm getting my my notes Here uh yeah so this single constraint made our work significantly more difficult to pull off made it significantly harder to pull off so this is I think the hard line that separates the ample fourth ecosystem from other projects out there and quite honestly we hit a ball immediately right so we came up with the litmus test that ruled everything up we simply asked can the system survive a sudden decrease in demand that remains at the depressed levels indefinitely and so we realized that all existing stable coins failed this Elizabeth test including our own so when we started in 2018 we had a design that we called fragments and it filled our own test for success and so we've ended it we got rid of crypto-backed Reserves we got rid of bonds that rely on continual growth and we got rid of the idea of liquidation-based Market approaches all back in 2018. so instead of the stable coin we created ample a centralized unit of account so ample stable contracts so what what's the big deal the virtue of ample was easily seen if you imagine world with only Bitcoin although a durable and unreliant on bailouts Bitcoin is too volatile for long-term contracted nomination as a basic building block Bitcoin cannot be used to denominate an annual salary a three-year car loan or a 15-year mortgage a green paint employee 10 BTC per year would be silly needless to say this inadequacy severely limits bitcoin's functionality as a money but the great thing about Bitcoin is that it is very very resilient it does not rely on bailouts ample is similarly volatile to bitcoin except in the quantity of units rather than the price per unit however using ample you can denominate long-term contracts so ample is similarly durable to Bitcoin in the most important sense that can function through extreme Market scenarios without ever requiring bailouts and stone just that it was launched in the summer of 2019. and it's been operating since you can see the equilibrium bands gradually going up especially over the last few years as inflation has increased of course we do not live in a world with only Bitcoin and not everyone can see that these existing designs would either be forced to centralize requiring permission removing the core purpose of blockchain infrastructure or feel catastrophically requiring bailouts so the market lacking this context struggle to understand ample even while clamoring to buy it in the height of Summer 2020. and still many can't imagine why anyone would bother introducing stable denomination without stable value storage for years we believe the ample was as far as you could take to centralize money without reintroducing centralization mechanisms or mechanisms that could result in catastrophic failures we watched as you did the collapse of crypto vac Stables we watched as you did the self-defeat of turning to usdc as collateral except having painfully proven to ourselves that these outcomes were inevitable from our Vantage Point what happened simply looked Reckless and insane then one day our advisor came to us with a new idea tranchin so going back to the very basic idea of what we're all trying to achieve with these stable monetary systems the idea is that you can't magically destroy risk it can't just be magically destroyed like energy in the universe we can shift it around you can move it you can segment it or it could turn it into some other form of risk so tranches do exactly this it re-segments risk enter one or more derivatives with different volatility profiles trashing itself is not a New Concept by any means it's used all the time on Wall Street there's something qualitatively different important about the button tranche approach so it's transparent everything is just on chain allowing all risk to be priced it didn't rely on Oracle and it didn't rely on liquidations the flexibility and durability of this new tool inspired us to revisit our original goal so returning to the task of creating an instrument of long-lived purpose that doesn't inevitably rely on bailouts we frame the problem simply and more completely we accepted that no asset can promise stability forever so if no asking promisability forever how long must an asset be able to preserve stability in order to matter well considering the timeline of inflation we just needed something that could function on the order of decades and centuries fundamentally to provide a check against existing systems though there needs to be an ever-present threat of future Capital flight to inflation resistant stable Alternatives right the system couldn't be designed in simply horse ability for a long while and then explode or stop if you have a stable coin that doesn't work in a situation where you actually need it then it's not serving the purpose that it needs in the marketplace if it's not stable in the most extreme scenarios then maybe there's never a stable coin to begin with so in short we need a system capable of holding decades or centuries of stability that would bend safely rather than break catastrophically in the face of extreme Market events and the system needed to always be capable of resuming value storage after disruption without requiring billets so in the spring of 22 we sketched out the spot protocol as our advisor proposed spot could use low volatility senior ample tranches as collateral Force stability who still want obstacle the problem with the tranche is that at some point it matures to the underlying collateral at some point you pay out the different tranches the seniors and the Juniors attractions provide stability right if you take the low volatility segment of a volatility profile you get stability but at the cost of fungibility because at some point there's a maturation date so our challenge would be to create a Perpetual senior tranche that incentivizes rotating out in Terrain tranches in exchange for rotating in fresh ranches in a time we didn't realize this but this byproductometry entrances also became a defining quality of the system in terms of how it degrades when it needs to grade automatic trance exploration was also the key to graceful degradation so like ice progression progressively melting into water during a heat wave spots tranches would progressively mature into the raw ample in an extreme Market stress rotations ever slowed so imagine a stable coin that instead of breaking simply devolves to its underlying collateral that's essentially what spot is doing here and like water progressively freezing back into ice raw info would be rotated out for senior tranches after a shock settles and rotations resumed so when faced with extreme Market turmoil the crisis spot would become temporarily more volatile bending safely rather than breaking catastrophically and system with thereafter be able to resume value storage without Reliance on bailouts I think the market still last context on what we consider to be responsible or what we consider to have purpose we still need to cut through a lot of the noise and again we could use your help right this time however we've spared everyone the anguish of differentiating between a stable store of value and unit of account so the solution may appear new and Stranger Than Fiction but the proposition is simple it's helpful you might consider a spot of very proof versus proof that blockchain technology can solve a problem substance that otherwise truly cannot be solved inflation so so to recap spot is a purely decentralized flatcoin that does not rely on any permissioned asset there are no real world assets no centralized custodians does not rely on liquidations it's a simple feed forward system that is not used in Oracle as part of its stability mechanism it bends safely rather than breakly breaking I didn't talk about this today either but it's also not subject to bank runs we give the proof in the white paper I'm happy to talk about that more afterwards if you want and most importantly it's a system that can survive any extreme Market turmoil right so excuse the dramatic inside but if you've been nodding along with anything we said here definitely come out and talk with us um this is the result of the work of many people I'm just one messenger from the info fourth community so I want to give a shout out to Evan Manny and the rest of the fourth ecosystem if you want to check out more about the protocol uh head over to spot.

cash so thanks [Applause] hey thank you very much uh maybe two questions if you'll allow first can you explain the uh reason you guys decided to tranch ample as opposed to something like eth yeah great question so there are a few reasons why ample makes a great collateral so one is it already has the unit account baked in right so that allows spot to not introduce any more Oracle now you could tranche other assets and introduce the Oracle there but ample also provides an extra layer of buffer against sudden Market swings right so because the the way ample rebases right it's um it rebases according to a rebase curve and so it can only rebase a maximum amount per day right so the spot only responds to ample Supply so this means that you know people have talked about the dangers of liquidations where there's sudden one Wicked down and back up and get liquidated in the meantime uh with spot it would take a very prolonged period of time of a very low price of the ample token for the supply changes to matter um so we have some arguments that point to some good qualities of ample but to be honest I'm not convinced that everyone will agree with us and so we are also a plan to launch an eth-backed version of this this is if this is something that you're interested in helping out with come talk to us for sure because this is that's best done with partners thank you and second question is can you talk about how you think about a unit of account becoming a good money as opposed to something like a medium of exchange or a store of value uh sure yeah so people talk about the three qualities of money a lot they exist in economics one-on-one textbooks but beyond that most economists don't really talk about it very much and different people come to have slightly different you know colors of these definitions what I would say is that Medium of exchange is a property of how people use it right it has to be already widely available and just the most convenient thing so it's not so much a property of the thing itself but it's an emergent property once everything else is in place um the store of value is something that can maintain relatively predictable amounts of storage you know out into the future for for every way that you measure storage unit account is just how you you go about denominating contracts right so ample I think is the most useful for long-term contract denomination right um and crypto right now is very short-term focused but I think if crypto needs to or wants to mature it needs to move Beyond these short-term use cases and of mostly speculation into more longer term Financial contracts got more time for questions yeah so in a sense it's put and tell me if I'm correct spot is a senior trench on some Amper and who is providing the junior launch uh great question so when you mint the spot you only need to come to the table with ample right and so it automatically tranches the ample for you submits the senior low volatility tranches in the ecosystem provides you the spot notes on the collateral set then you as the original holder get to keep the junior tranches so if you are someone who fits the profile of wine to Mint spot you can mint spot and keep all of the exposure to the underlying ample I suspect that most people who interact with spot will do it directly through the marketplace if you look at tether for example how many people have used tether yeah how many people have interacted with the tether Corporation yeah not very many so I think you know the the primary way that average users will interact with these is which is by buying them off the market it'll be mostly large players and arbitragers who go back and forth oh please because then you will throw the path of all the protocols like liquidity or make it out back in the days where if you don't have the Arbitrage because it's a speculative position and you need to get some kind of Leverage what will happen if there's no Arbitrage yeah because you need someone to take a risk because it's not a one-to-one and you take the rage models if you borrow a few borrow a spot to sell it on the market to make a profit margin then you still have a short position in spot and you need to hope that at some point it will go back to to one dollar or one amp so what happens to be sure that the price of spot remains close to one so I think the question you're asking applies to any asset and the question essentially boils down to what happens if there's no Arbitrage that takes place yeah and we know that liquidity or make a doubt that this Arbitrage not doesn't work if 100 well so the short answer is that if there's no Arbitrage and there's no Arbitrage that's the point and if it works it works um yes so we could we could launch a stable coin and have a big pile of capital on each side of the market and Bully the price to within three bits of the target I think some projects have tried to do this right but I would prefer to do it the opposite way right so that doesn't tell you anything about the consistency or the resilience of the protocol underneath I'd rather just launch it out into the marketplace let the marketplace grow and maturity with the protocol but the protocol do its thing and then as long as there is healthy Arbitrage opportunities and profit to be had then people will come if in the first you know few months after launch that Arbitrage Gap needs to be 10 and it needs to be 10 but it means that you don't have to if you're an early player in this you don't have to compete with big hedge funds right so if there's a lot of money on the table to pick up you can do that and people in the community have already started doing that you can see that aren't you thanks all right one more question or are you all eager to get to the last panel all right big hand ampliforth Brendan