“Synthetic Dollars” - Stablecoins or Not?

so having said that if you have a few spare minutes feel free to join there might be some fun stories maybe not so fun maybe more serious maybe less but feel free to join anyway and yeah I think it's hard to make people talk less loud right no worries so glad to be here today in Brussels glad to see everyone on a Saturday which is not a business day but people still put their time and efforts to come here and maybe learn something new and that's always great so since it's the first time I am speaking at stable Summit I'll just g a brief intro about who I am and what I do and what I love and what I don't so um I'm a co-founder of resolve Labs uh I graduated as an applied physicist but went into Finance worked for 12 years there and um yeah it's a little bit loud now here but what can I do with that whatever so um I worked in tread five for quite a while for more than 12 years doing der I atives structure products uh complex Solutions Hing large corporates oh now I lost my deck and at some point in time I shifted fulltime into crypto from trefi so I'm kind of a extra fi guy and that's how I look at things um wanted to catch your attention with a brief of an interesting intro and I'll start with the fact that I have a full hour to talk about stuff so I'm an ex trfy guy building a delta neutral stable coin the style what I want to have today within like almost an hour of conversation is a bit more conversational to make it a bit more fun and a little bit less formal and the level of complexity of this material well you know when you have a conversation you can talk to people and adjust what you're talking about make it more in depth or make it more simple that's not the case here I think so I'll just picked something in between so the complexity will be two and a half out of five potential level of complexity in this discussion and I'll start with a fun fact it is that some time ago actually three months ago deuts Bank conducted a full-blown survey of 3 and a half thousand people in European Union UK and the US and asked a simple question looking at stable coins you think they will be disappearing or they will still be around so do you think stable coins Will Survive or do you think stable coins will die that's the question that was asked and I myself was surprised maybe you are not surprised but I am that 42% of people said that stable coins will not survive they will be disappearing strange right only 18% of people on the streets said the stable coins will still be around that's a bit weird for us who gathered today on this uh rainy Saturday to know more about it but that's how the public perceives this and there is actually an interesting point on this that generally stable coins failed in some way to usable instrument and there is not enough confidence in general in how stable coins work and if they actually provide value and basically we'll have a look at that in more detail and how I'll take a look at this is basically I start with some formal stuff like the definitions of staes which may seem a bit boring but actually there is interesting thing to see there then I'll continue with the analysis framework of stable coins like how we could look at different stables and think if they are okay or not okay and understand what the risks are then I talk a bit more about delta neutral stable coins uh how they've been created what's the background how they work because it's a big new thing actually it seems at least in terms of tvl then I'll present an alternative approach to how we build this and how some of the concerns may be elevated and we'll talk a bit about what's next in this stuff so the fact is that in just a year synthetic dollars or delta neutral stable coins for that matter went from being almost non-existent because there was nothing just a year ago I'd say I still recall talking to people a year ago on E Belgrade and people saying why would you build something like this nobody does that so they went from being non-existent to form in a separate category now there is a separate category on the file Lama which is called like the basis trade and there is about three and a half billion tvl in these instruments okay great but can these instruments be called stable coins for that matter or if they can't what are the risks or if they can what are the risks so let's take a closer look at it and the question is what it is a stable coin it's a stupid one right everybody knows it everybody understands what a stable coin is but not quite the thing is that people still argue about if something is a stable coin or it's a synthetic dollar or it's not a stable coin or anything and when you talk about definitions actually um since I'm a tread fi guy I have respect for regulators and these guys usually know their job when talking about definitions because that's what they do so we could just look at take a look at how Regulators globally think about stable coins and if something can be called a stable coin the fact is that in many jurisdictions there is no such term as a stable coin at all really there are different terms like e- money asset reference tokens electronic payment methods etc etc but not stable coins and turns out that basically if you take a closer look at it the thing is that for most Regulators out there at least in the current stage of development things that can be called digital money are the stable coins so that's are assets which are being backed by Fiat or liquid real world assets and everything else is not so for that matter it doesn't matter if it's Terra if it's some kind of weird algorithmic stuff if it's die if it's liquidity it's not a stable coin or it's not digital money so answering the question which I asked is a delta neutral stable coin a delta neutral stable coin is the one when you take onchain asset for example ether and hget from Price risks and monetize that uh these stable coins say like Athena potentially can be called stable coins in a regulatory sense of the word but okay um let's not go into the form over substance and think about what actually is there uh and understand that still it's a stable coin in a broader minion of sense what we understand as a stable coin and just dig deeper into what are the risks and what are concerns about it so what are the factors we should look at when we analyze any stable coin and I must say I grateful to S&P Global Who provided a brief framework for that I believe they'll be talking about it a bit later we took that framework and reworked it a bit to our liking because that's always fun to do uh and there are specific aspects which you should look at when analyzing if the stable coin is good or stable the there are key factors first of all is asset quality uh and this asset quality is affected by credit risk Market risk custody risk and other risks which is a very convenient category to put everything else into place then there is additional coverage and liquidation which is again a key factor because nothing in this world is perfect and even the best stable coin can just easily deeg if it's not being covered by a protection layer and even if you have the best assets in a stable coin if you can sell them off at a decent price that means that the backing is bad and the final one even if you have the best stable coin in the world but nobody's going to buy it and you can't transfer it you can't redeem it that's not a great instrument to have and then there are additional factors but these are more matter of fact like track rack heard regulatory operational third party dependencies Etc we don't dive into this because it's not that important so if you use this approach and take a look at the current stable coins and typical designs what are the key risks of those it's mostly credit custody and Reserve funds risks for Fiat or real world assb ones it's Market risk smart contract risk and liquidation for cdps or collateralized that positions like die curve uh go liquid Etc and there are a lot of different risks for algorithmic stable coins and algorithmic here I mean non fatback and non CDP it doesn't mean that I compare fra to Terra for example not at all so let's take a closer look at this final category right the delta neutral stable coins so as I stated it's that a stable coin being backed by part P folio which is delta neutral and doesn't depend on price of the crypto asset and there are different ways to create that asset but the fact is that usually most of the time people just use Perpetual Futures and so when we talk about it it's interesting to take a look how the Perpetual future started because it's a massive instrument right and it turns out that perss take their start in 1992 when Robert Schiller was thinking about how can enable derivatives in non-liquid markets later it was developed more by Alexi bragin by Ice bit and popularized by bitmax and we usually associate Perpetual Futures with bitmax though it's not historically accurate and then in 2021 there was the first I believe delta neutral stable coin it was built on salana and it didn't go too well but it still laid the foundations and then the person starts to get the story starts to get personal and we're getting into the usdc deeg last March which fueled the development of next weight of delta neutral stable coins out there and what happens now just after a year is that we see a broader range of Delta neutrals uh being present and we'll see more and more designs because this thing starts to become larger and larger being like almost 4 billion in TV right now so having said that let's take a look look into how the basic mechanics look how they work what is the delta neutral stable coin in itself which is again a new and rather large category the concept on the surface is pretty simple it's pretty complicated to implement in the right way but in the surface it's relatively simple you take onchain asset like ether you hedge it with a derivative in such a way that this position is delta neutral meaning that any price movement of ether is offset by the price movement of Futures and that means that this is a stable dollar value so you have stable dollar value here great what's not to like but there's more to it because you can also stake ether and you can get the stake in returns you can also get cool funding rates from these Futures positions and it's a separate topic but this stuff is usually pretty good at least from 5% to 20% to 50% we've seen 120% one day just in March and basically you have the stable backing you have returns and that's the basis for a yield bearing stable coin great stuff right I mean what's not to like it's Capital efficient it doesn't rely on actual dollars on rwa it generates good yield it's cool the problem is that this part with the Futures actually introduc usces quite a bit of risks specifically what are these risks if you take a closer look well I can't say that they're massive otherwise all the strategies doesn't mean any mean anything but they can be pretty material and they have to be managed so the fact is first you trade this Futures with exchanges this can be centralized or decentralized if they're centralized there risk of centralized exchanges present if it goes down then you're off imagine FTX and you trade Futures with an FTX not a great case Market it's important to note that the delta neutral design means that the assets do not depend on the movement of the price of ether but there is still risk on the funding rates of Futures and they are pretty volatile and that may destroy your peg actually and then again don't forget that these hedging positions need to be managed and to do that you need to run a material operations and in the case of bank run this can backfire then there is a question of custody again guy was talking about this in his uh Speech just now the fact is that custody doesn't help uh 400% there are still residual risks and the custody itself is a risk in itself and then there are reserves like in such a case um you know like Spider-Man said that being a stable coin is a great power and also a great responsibility you can't let anything bad happen in terms of Peg you can't let the peg be destroyed so you need Reserve to cover any shortfall for these ones and the reserve should be transparent and the last one is the other but the smart contract risks and they can be pretty material especially if you use dexes instead of taxes for now um what we do to address all these five issues here and we build a different approach to stable coin designs we haven't seen it anywhere I don't think we'll see um what we do we effectively create a decentralized protection layer and we create a case where the stable coin is over collateralized without reducing the capital efficiency that means for $1 I can mint $1 of small stable coin but it will be overprotected and how it works is that we take this left part which is the same and then we split it in two tranches the senior trench is the stable coin and the junior is the protection layer and the fact is that the stable coin is backed by own chain assets so we remove the issues with the custody remove the issues with trust transparency and at the same time this protection layer it's scalable and it's Capital efficient and it's an instrument which provides leveraged yield to users so in brief how this risk absorption mechanics work is that if anything bad happens in any kind of risk materialize then the loss absorption mechanism just cuts out from the reserves so we basically handle all these risks we have a thick layer of reserves which is much thicker than in any other design and we also have self custody for the own chain but with that out of the way let's talk a bit about how the space May evolve uh and it's an open question um one of it is why are there so many stable coins do we need those what's the point the thing is that they have a product Market fit and that's obvious I won't even dive into this but the fact is that different stable coin designs have different different use cases fat backed ones are great for R ramping and off ramping that's why they're so popular that's why people use them that's why people go for them that's why they have the highest tvl DDP ones allow to create leverage Crypt positions and it's great it's also a take on creating a truly Crypton native backing for the stable coin which is a great idea the delta neutral ones at the same time we view them less stable coins per se more is a base for investment instruments because they are so great in this regard and then that means that this space May evolve in such a way that we'll see this space I mean the delta neutral designs the delta neutral stable coins the delta neutral projects yada yada we'll see new setups working with dexes working with Sexes working with trefi we'll see different user segments risk averse less risk averse that's what we try to Target with our design to we'll see different chain we'll see different underlines trying to build the same stuff and extract more yield and this can be a base and it will be a base for a line of investment products and this is potentially huge and massive because again as guyan stated why Fina took off because of the yields people were saying 20 30 40% in yields it's an investment instrument it's not a transactional stable coin someone's going to use to buy bananas it's not not the case it provides a good lay to access yields which are Crypton native and there is Alpha in it and that's why it's attractive um and the last question you know there is a book called start with why I'll finish with why why is this needed why do we build delta neutral stuff why it's cool maybe it's just a fud like strange stuff the thing is that these products increase market efficiency and the increase adoption and when we started to build this we got majority of the tvl from tread people who was saying like I can get 10 plus per on USD wow that's cool please get me in and I was like un booring people into crypto from tread fi and the last point is that while doing this will'll also uncover new narratives we'll just develop the market we'll bring more capital in there we'll bring more attention we'll find new ways will create a base for investment instruments and we'll just drive forward the innovation in space and that's always great with that if there are any other questions or interest in thinking and learning more about it get in touch otherwise the main important thing is that I wish you a great day ahead thanks for your attention