Stuti Pandey, Kraken Ventures: The New Stablecoin Trilemma

next up we have stti Pandy from Kraken Ventures who will be presenting the new stable coin tremma please welcome stti everyone okay now so I'm stti I'm a partner at Kraken Ventures and today we're going to talk about the new stable coin trima can we get the door back there thanks all right so the world that we're building stable coins for has changed dramatically since the first stable coin was minted so today I'm proposing a new stable coin trilemma to match this new world order so first a little bit about Kraken Ventures so our thesis is that blockchain is better infrastructure for financial services and we invest at the early stage between preced and a we're anchored by Kraken and have an additional network of value ad LPS and our value ad is also our Kraken relationship as well as um the network and experience that the four of us also have in the industry this is a preview of our portfolio we've been very active in the stable coin and payment space but now back to the stable coin tralama so let's start with the past in the past we had the original stable coin trima where we were debating how can we prioritize against stability Capital efficiency and decentralization this early TR reflected defi sentiment when this world was born some of the things we were thinking about was just pure decentralization as an ideology but also as a reaction to tether um the world back then was really about building cool and just seeing what works we were this tremma inspired and guided early bu builders in the Defi and stable coin space and most importantly it influenced consumers who were mainly Defi and crypto natives but the world has changed since then so first of all stability back then was a spectrum we were genuinely okay with the possibility that some stable coins had widely deviating pegs but then we had a few famous D pegs in 2020 D had the famous black Thursday after which they then introduced the peg stability module we had 2021 iron Finance 2022 the infamous Terra collapse and then 2023 when usdc dep pegged due to the VB implosion so we've learned that an unstable stable coin is actually not a stable coin next decentralization so I believe that pure decentralization was def's Immaculate Conception law the types of decentralization when we're thinking about pure decentralization we are taking into account might include decentralized collateral decentralized governance ownership oracles or even identity but this is non-exhaustive but now we need to build for high utility and trust and you know some examples of where we can maybe retain some decentralizations but it is not necessarily pure is you know maker sky is still a dow but uses usdc T bills Athena might use Crypton native collateral but their counterparty are centralized exchanges usual we have decentralized ownership but they also use rw's collateral so the learning here is that virgin stable coin lore did serve Us in early defi but now it limits its proliferation and we shouldn't Abandon All decentralization I'm sure that's a big Topic at you know this event but I believe we are still building a new view on what this is going to mean for us in this new order next let's look at Capital efficiency so these ideals promised that defi would be as efficient as trafi some of the levers that we took into account were collateral type collateralization ratio Insurance funds Etc until that is a lot of fud ensued over the last years so we've had Perpetual usdt fud around whether or not it's fully collateralized once again there's the iron Finance collapse and then most famously the teral Luna collapse our learning after this was that highly highly Capital efficient stable coins are going to now receive capital finishment and under collateralization under collateralized and self collateralized stable coins are now somewhat considered insolvent instead of Highly efficient so I believe that the old stable coin trima is dead and it doesn't meet the needs of the world that we are serving now so now we're in the present where I'd like to present to you a new stable coin trima a different tremma is needed for def's new chapter this is a chapter where we need to take into account High utility high performance and increasing integration with macro very unlike the early defi days so the new stable coin trilemma on the first Corner we have yield the second capital scalability and the third risk so now we are looking for optimizations across yield capital scalability and risk so let's start with yield so the rise in interest rates over the last year plus has created an opportunity for defi to focus on yield bearing stable coins that bring in exogenous yield and there's a few models around this first you have Crypton native yields such as the first version of Athena and liquidy then you have rwa backed yield so that would be say a mountain protocol an Ando then you have mixed yield which is a spark a fra or a usual and then finally indirect yield where perhaps they are incentivizing distribution Partners such as an Agora or a py PayPal USD the ideal here is that ideal yield is high next we have Capital scalability so let's look at this from um tiers of scalability and the question is how much can scale a strategy before reaching its limit and impacting risk and yield so you have very low scalability which would have been this era of CDP stable coins that were based off of Dex emissions low to medium Athena right the um version at launch where there's a limit on how much collateral you can actually have access to before it flips the yield that is available medium s die and usual they use a mix of Crypt native yield and rwa yield and then High T Bill only and the ideal capital scalability is high third we have risk and this is very non-exhaustive there's an entire crypto industry around risk risk curators Risk Managers risk platforms but some of the factors around risk can include counterparty risk collateral quality operational design um Redemption mechanisms and this is not just about having high low or medium risk there's also a concept of having Diversified risk and building a portfolio where you have different types of counterparty risk um but these are just rough inputs for risk so now I want to run you through a couple of examples of stable coins going through this new trilemma so first example is Athena let's just take around the time that they launched where it was entirely collateralized by the basis trade so at that point yield was high as it was reflecting the funding rates at the time Capital scalability low to medium because this really tracks the scale of the crypto market and how much open interest you can constitute without actually FL flipping the yield and the risk I would say was medium to high the counterparty is centralized exchanges and Crypton native collateral which is not necessarily better or worse but it is different and it is higher risk than say just the US government next let's take the example of usual which is one of the fastest growing stable coins in the market right now the yield is medium the floor for the yield is the t- bill rate but because of the governance mechanics we can um it means that the ceiling can be higher than this capital scalability is medium to high while they are backed by rwas it also comes from rwas minted on other platforms and the risk I would say is low to medium third let's take the example of Agora so with Agora yield is low and indirect they pass through t-o rates to distribution partners and they're focused on very um safe operational design which is why the risk is low given their focus on compliance as well and the capital scalability given their collateral type is quite High finally let's take the example of Sparky I would say that they sit right in the middle across a lot of these different factors where the yield is medium you know it's collateralized by a combination of T bills as well as Crypton native collaterals such as actually Athena I'd say the capital scalability is also medium for this reason and the risk is also medium for this reason so with this in mind I'd like to now consider what is the future of stable coins going to be so managing the stable coin trima the new stable coin trima is a go to market and growth exercise as you search for customer segments that have unique needs you're looking for ones that you can service better than incumbents and that's why you make these trade-offs across the tril but your design isn't static stable coins proactively iterate and update their strategy to reflect micet conditions and their state of of scale for example Athena is now adding treasury bills or SDI is adding Athena so I believe that at Scales designs will start to converge because at scale you need scalable collateral and as a result yield and risk will likely come down and you're going to need another way to stand out operating at scale is going to require different expertise than what was required to go to market and grow your stable coin how do you actually prove that your $1 is better than somebody else's $1 I believe that at convergence the reason you retain a loyal community of users has to transcend design and I propose it has to do with values alignment and ideology so why values advocacy let's take the example of two white t-shirts you need to be buy a white T-shirt they are both roughly similar price similar style which one do you choose you know maybe you check out the brand and you decide to align with the identity that you identify the most with or you aspire to or maybe it's a coin toss and brands are very effective at creating these elements of desire and emotional experiences when it comes to how you you make your purchase decisions and I think that this learning has yet to be adopted by Defi and I think this is the first opportunity for how you scale and um manage a stable coin at scale but actually I don't think that this is enough we need to go one step further what if one t-shirt was sending profits to the kamla Harris campaign and the other one was sending profits to the Donald Trump campaign now we're moving beyond brand and we're going straight for values and ideology which is much more effective for stickiness and Community ID activation but it requires a lot like far more guts than just building a brand stable coins $1 can and will differ from each other based on the characters that they espouse their moral stances the way that they govern their protocols the philosophies that they're aligned with the way that they engage with their communities and how and where they promote their actions this will enable stable coins to create stickiness around their liquidity and attract users especially when the market slows down in growth so at scale you know we start to see so far crypto protocols tend to converge on having non-controversial Brands but I believe that this is a huge opportunity for change the other thing that we also see is that defi protocols they often focus on interesting design around math technology and economics to distinguish between themselves and I'm sure a lot of you might be defi Founders in this room and this is something that you're very proud of right but as decentralized Finance becomes Global Finance brand values will need to have to trans send just these Design Elements and the next chapter for Defi and stable coins is going to be about designing values-based emotional experiences so thank you and I'd love your feedback on this as well