PANEL: Stablecoins Facilitating the Impact Economy

hello everyone um my name is nma I am a technical governance specialist at stable lab stable lab is the leading governance service provider we work across 25 different protocols and ecosystems um and we help protocols achieve their growth goals we prioritize active participation in governance and we work really to facilitate the governance process and undertak special initiatives within Dows today I'm going to be talking to you about defi governance and stable coins but first um a little bit about me I've been in crypto since 2016 been working in web 3 since 2020 across different protocols um and I currently work as a technical governance specialist across protocol Dows on eth L1 and L2 more specifically Lio safe um and I do some work with element and near protocol as well um I enjoy Dow drama Building Systems augmenting social structures and solving problems um first of all why is governance in defi important why does every defi protocol tend to have a da um there's a couple points here uh so the first is accountability we want to create checks and balances um for constant scrutiny and so things don't slip through the cracks um we also want to create transparency so reducing closed door decisions um and also reducing the amount of like people who can sort of like go behind the scenes and like do things without any social consensus um decision making also stakeholder alignment is really important um for these protocols that oversee funds to the tune of billions of dollars um we also have governance and defi to create opportunities for participation and inclusivity this creates an accessible environment um and we also have this for efficiency and speed which um it's really important to create this agility and response especially for like critical risk um emergencies and risk opportunities um and then it also creates flexibility and Innovation and opportunities for expansion and growth positive flywheel effects for the entire defi ecosystem and so now I'm going to compare and contrast how governance operates in D5 versus Trad by so on the decision-making angle uh decisions are typically community-driven in Dows whereas in chadf it's a lot of hierarchy decisions are made by Central authorities Executives and all the big wigs um on the transparency aspect things are open- source so all data is on the blockchain it's verifiable and accessible on the blockchain whereas in trapi it's very limited decisions are typically made behind closed doors on the participation and inclusivity angle anyone with a governance token can vote um while in trapes typically restricted to board members shareholders or high ranking officials efficiency and speed is also really important um in D5 because it facilitates faster sometimes faster decision- making through automated smart contracts whereas in trafi you typically have to go through slower processes um because of bureaucratic delays and on the flexibility and Innovation angle governance and defi typically makes it more agile and adaptive so it's quicker to implement new parameters protocol whereas in trefi you might find that it's more rigid and slower to adopt technological advancements but defi governance is still far from perfect um these are a couple headlines just to show you a little bit about what is happening in the space what has transpired over the past couple of years um we had this issue in soland where um there was a vote to liquidate a wh account um and it was sort of unilaterally decided decided to liquidate this will account without consulting the community um we have really sometimes lowquality discussions in governance forums where people just care about airdrops so it's a lot of when airdrop when airdrop um and then in beanock the founders dismissed concerns about governance attacks so flash loans and they ended up losing almost $200 million um very unfortunate so this is just some of the pitfalls some of the challenges that we've experienced in the space of governance um there are still lots of challenges to work through including lack of participation so a lot of Dow forums are empty or they often have the same few people the same governance service providers or individual contributors um as participants this leads to a very small sort of pool of contributors a lack of diversity in perspective and skills contributions um and because of this low level of participation a lot of forum proposals will not get the adequate amount of review the adequate amount of feedback for them to progress onto the next stage um or sometimes things slip through the cracks and they move forward without actually being scrutinized enough um another thing is low quality discussion so like I showed you in the previous slide there's often a lot of chatter about airdrops um and token price um which is sometimes detractive from some of the main ideals of the Dow and of the protocol and then another one that we see pretty often is on and offchain votes missing Quorum and so things are really not able to progress the way that they should and for core um protocols in the ecosystem this can actually prove to be pretty risky um another challenge is too few or too many checks and balances so you can see on on this slide we have a host of stakeholders in the Dow who have to sort of pass these decisions before it actually gets implemented on the other side we have a very complicated um flowchart depicting makeer Dow's real world asset um application process um and it's like who really wants to go through this before getting something passed right so sometimes it is a bit restrictive um to have too many checks and balances in a dow it can sometimes lead to a couple things including gridlock in decision making reduced efficiency and speed um and on the other hand too few can lead to a lack of accountability systems opaque processes mismanagement and misuse of funds and lack of coordination all [Music] around um some other challenges currently faced in defi include voter apathy um so this is when people typically feel like they don't have to vote because it's not going to make much of a difference and as you can see um it can easily devolve into voter atrophy um we also have centralization of power so when token holders typically control large um perent percentages of the tokens in circulation and they end up being the decider in votes so a lot of people can feel very discouraged to participate in governance when there is a lot of centralization of power in the da another thing that Dows face in terms of challenges is this legal and Regulatory uncertainty um it's pretty gray right now a lot of people don't really know um what they should be doing or what the right um legal Frameworks are to follow um so that can create a lot of challenges when participating in defi governance um and now I'm going to talk a little bit about stable coins just some background I'm sure we already know a couple of these but I'm going to be talking about the three main types of stable coins that you'll find in defi um the first is feia collateralized stable coins which are backed by thear currencies like USD usually held in reserve so we have usdt which is one of the earliest and most widely used stable coins backed by USD reserves and we have usdc which is issued by Circle and coinbase also backed by USD reserved and um audited regularly and the the mechanism of stability for Fiat backed um stable coins is typically collateral reserves or Redemption so users can redeem stable coins for the equivalent um amount of fiat currency um or collateral reserves they have an equivalent amount held in reserve the next type is crypto collateralized so um die which is issued by make or Dow is backed by crypto assets like eth or other ERC tokens we also have go which is issued by a um it's a decentralized over collateralized stable coin the mechanisms of stability for this particular stable coin is typically over collateralization so this accounts for the volatility of crypto assets um they're backed by a higher value of collateral than the stable coin issued um collateralization ratios this ensures that the value of the collateral exceeds the value of the stable coin to maintain stability and then automated liquidation so positions will typically get Auto automatically um liquidated if the collateral value drops below a certain threshold and then we have algorithmic stable coins one of the more interesting Primitives exp um experiments in defi they are stable coins um that use algorithms to control the supply and demand to maintain the peg without collateral backing the one of the more popular examples of algorithmic stable coins is US Terra USD which was an algorithmic stable coin that used to be pegged to USD it's now defunct um unfortunately and we'll get more into that case study um so the mechanism typically for algorithmic stable coins is Supply adjustment so the algorithm will adjust the supply of the stable coin to meet demand and maintain the Peg and a burn and mint mechanism is typically where users can Mint new stable coins by burning the reserve asset or vice versa to adjust the supply um and now let's we've talked about de governance we've talked about stable coins um so we want to explore how they actually interact and how defi governance can influence the stability of these Primitives um and assure their security and so on so one is the governance framework governance uh Frameworks are typically um what orchestrates or what dictates how decisions are made in defi Dows um and they can typically impact the stability of and functionality of stable coins um they often include risk management strategies crucial for maintaining stability um also collateral management so most STS will have collateral onboarding and offboarding templates which will decide what assets can be used as collateral and dictates the criteria for actually adding this collateral to the protocol um and then the collateralization ratios um are like a Investments to collateralization ratios often governed by the community um to ensure it stability um on the other hand we have protocol upgrades and changes so defi governance um also govern governs smart contract upgrades typically through onchain governance um governance will vote on and Implement upgrades to the protocol smart contracts especially you know managing its stable coins it'll adjust different parameters such as stability debt ceilings auction mechanisms and so on but something really interesting is also there's a couple protocols um that have taken a different approach to this um we have IBU we have liquidy who have actually adopted the minimal governance um strategy um because they essentially have these preset and immutable parameters that cannot be changed with governance and this might actually be more suitable for risk Aver protocols or users um and it can assure a more predictable experience uh crisis management is also really interesting how defi governance um can affect crisis management so governance can take immediate actions during market downturns during um Network outages to protect the stability of stable coins and other assets of course um also emergency proposals um we typically see those go through governance to address emergencies and ensure like Swift decision- making so most STS will have some arrangements or some procedures to take when there are um emergencies our first case study is going to be about maker da and the stability of D so some of the main governance actions that you will find um happening in maker da around d are typically introducing new collateral types to diversify the collateral pool of D of D um so makeer holders will vote on proposals to add or remove collateral types based on their risk assessments um successful proposals will lead to the integration of new collateral types and executive votes which ends up improving the stability of Dow of di um and then stability fee adjustments which is typically just the interest rate um it helps to influence the supply and demand of D so sometimes the interest rates will go down or up and you will see fluctuations in demand for the asset um there's also typically a lot of proposals very often to adjust stability fees they're discussed um and voted on by the community and if it's successful it's passed and these regular adjustments help to maintain the peg to the USD and it manages inflationary and deflationary pressures on the die asset there is also an impact on the stability of the coin so these decisions help to mitigate risks um and also introduce economic incentives to ensure the die Supply matches market demand um so I'm sure a couple of us remember black Thursday in March of 2020 when there was a really sharp drop in eth prices and coupled with some Network congestion it led to a lot of liquidations which posed a very critical threat to D stability um but the Dow acted really swiftly and it raised a debt ceiling added usdc as a collateral option and these Swift actions through defi governance helped to stabilize D and restore confidence and Trust in the protocol so that's just one example of how governance has been able to support um stable coins their adoption their stability um and also address some emergency situations another case study is Tera and the collapse of us so Tera the blockchain protocol that issued us an algorithmic stable coin um designed to M maintain its Peg to USD through a dual token system with Luna so Luna token holders will have governance rights they will propose and vote on changes affecting the protocol um so some of the main governance actions here were parameter adjustments so the minting and burning mechanism to maintain the peg they would vote on these to adjust the supply of of Luna and Tera of us um and then these approved proposals will lead to changes in the algorithmic mechanisms that govern us Supply also defi governance plays a really big role in expanding use cases so you'll typically see people um or teams come on the Forum to propose Integrations new use cases um and have more Primitives built on top of the stable coins to increase demand to increase adoption um and also strategic Partnerships um typically governed by the Dow play a huge role in this so the collapse of us in May of 2022 us lost its Peg to USD it dropped from its intended dollar Peg along with dreams and hopes of users I was affected as well the emergency measures were proposed to stabilize us including massive Luna minting to absorb us but despite these interventions us failed to regain its Peg and it led to the collapse of both us and Luna um so some of the lessons we can learn from this case study are there's a lot of risk associated with algorithmic stable coins in general and governance can actually be pretty Limited in managing this extreme level of volatility there's also a need for collateralization um I love defi experiments but um it's pretty important to have collateralized stable coins for maintaining stability in volatile markets um such as the one that we have so some of the key takeaways here are transparent and well-defined governance Frameworks are really crucial for stable coin stability um we can also say that effective governance processes are key to resilience and stability of stable coins um flexibility in governance allows effective risk management during crisis such as the Tera Luna collapse such as um the makeer da die dpeg and governance can also have an outsized impact on stable coin adoption via Integrations and this enhances utility and demand it's also really important to engage and educate Community um this ensures informed decision making that can lead to increased stakeholder engagement um this is something that stable lab is constantly advocating for compliance with evolving legal Frameworks is vital for legitimacy not a legal professional but we always advise that protocols D's foundations have a team of legal professionals um who are sort of staring them in this way and also from the approach of liquidity and Abu we could see that minimal governance may be useful in predict in creating predictable experiences for more risk adverse users so now I'm going to give the mic to anyone who wants to suggest any ideas or strategies that could enhance governance mechanisms in Defi and how they might be able to improve stakeholder stakeholder alignment and the overall effectiveness and Adoption of stable coins if you have any ideas uh yeah so I'm curious what you think about requiring uh governance participants to stake and then potentially slashing them for not performing well um you know one of the things even when you do have active governance participants is that lack of feedback in a timely fashion lack of like even enough like even one revision of a proposal is not enough like if you look at any business like you want to actually drill into something a lot before you get a a really high quality plan of action that you can execute um so I'm curious what you think about yeah slashing um and penalizing for like not hitting certain performance metrics for governance participants very good suggestion um I think that strategy is really interesting because when you have governance participants stake it also means that they have a vested interest in decis ision making um in Lio da for example dual governance has recently been implemented to ensure that node operators also have some stake in the governance process and they're able to veto um proposals and so this is an interesting way to align stakeholders who are really important to the Dow and node operators also get slashed um as penalty for some of these things so I think staking is a really interesting mechanism to ensure that people who are participating in govern governance have a vested interest and are able to participate as deeply as is required to make sure that the right proposals get passed the right service providers get onboarded um the right treasury decisions are being made funds are being allocated in the right way there are enough um checks and balances for the different um stakeholders in the Dow so I really I really like that suggestion I think staking is a really good option any other suggestions options if not I think I can give you a couple um of my suggestions um so I really like the idea of dynamic governance models so adaptive building and we've already seen quadratic building being implemented um I think it's a really interesting way to have governance um that is dynamic and that's able to adapt to the changes in the ecosystem in risk in market conditions in fluctuations and so on incentives are also really interesting um and something that we also advocate for at stable lab we've pioneered quite a few compensation initiatives for governance participants so in Unis swap more recently for example we authored the proposal for delegate compensation um we advocate for th for that in the Dows that we we work in like arbitrum uh safe a and we already have um been able to administer some of these incentive programs um and just like you mentioned um staking for engaged governance with vested interest um transparency is something that I think in you can never get enough transparency right so realtime data on governance decisions and their impact I think is going to be really useful and it's already proving to be useful um I'll speak a little bit more about realtime data on governance decisions in our next slide um I really like Community funds so allocating a portion of the DS treasury to Grants to bounties for Innovation um bug bounties making sure your Protocols are constantly being audited um cross-chain governance there are some really interesting things happening there uh recently tally and a couple other teams like wormhole um like scope LIF have collaborated to come up with multi-v which is a multi-chain governance primitive um that I think will really widen participation and cohesiveness um in governance decisions across all the different ecosystems and as we you know deploy more of these layers layer ones twos threes ecosystems tend to get more fragmented um so I think better cross-chain infrastructure structure um will really facilitate more seamless governance across chains risk management so automated tools and insurance products to manage risk um Gauntlet is doing some really interesting work here education of course so informative programs constantly paying attention to the inflow of participants in the Dow and making sure everyone is up to speed with regular updates is really important um and then AI more resar has become very interesting to see how machine learning can be applied for predictive governance and uh measuring the outcome of proposals as well and yeah stable lab recently launched our Flagship product force force is a data analytics and intelligence platform to drive doubt growth and sustainability it provides comprehensive performance metrics and insights so some of the key features are Advanced data analytics it takes a governance first approach it has a lot of robust data Integrations both on and offchain and expert guidance powered by AI so we have our mascot Gigi on the platform that is there to help you with your governance questions and really help you understand the data that's being presented to you and this is really beneficial to stable coins because data D data driven decisions definitely will improve Roi measurement and strategic Effectiveness um optimize incentives will enhance design and impact for incentive programs um you can see our arbitrum stip dashboard which really is a great example of this and of course increased transparency as we've spoken about it'll Foster more accountability more professionalism and governance and uh some of the future development that you can look forward to with force is more predictive analysis so we're going to um increase our capabilities Advance them further with deeper Integrations leading protocol communities Dows and so on and we also have custom templates for common use cases um and yeah that brings me to the end of the presentation have this QR right here it's a link tree for stable lab where you can access the platform um you can learn more about we do and the services that we offer you can learn more about our client work the successful initiatives that we've undertaken and you can also get in contact with us if you have any governance needs if you need advisory and so on um thank you all for listening thank you all for being here on a Sunday and thanks to the stable Summit team for putting this together [Applause]