Panel 4 - Stabilisation Mechanisms: Keeping Stablecoins Stable

hi everyone great you all made it here to this talk discussing stabilization mechanism their risks their differences and how they will evolve in the long term let me kick off this panel by having the panelists introduce themselves their stable stable coin and the how the mechanism works for the stabilization themselves okay uh thanks very much so it's great to be here um I'm leis gajin I'm one of the co-founders of the gyroscope stable coin uh it's a stable coin that's about to launch um it's uh fully Reserve backed the idea of the stable coin is that the uh Reserve is as Diversified uh as possible so it aims for some type of maximal resilience uh in the diversification of the reserve assets um and then it combines this with a um new new Redemption mechanism that tries to ensure some orderly outflows from the reserve are we still thank you safe that's yeah I think we're good um hey guys my name is Benjamin I'm one of the core contributors for cheet out um cheet out for those who don't know is a stable coin CDP stable coin kind of like maker out um our big innovation was that we were the first Native cross chain protocol meaning that instead of just Ming your stable coin from one chain in this case ethereum you can me it from any chain um and this was pretty revolutionary because of how the bridging would have to work right there are a lot of risks involved with bridging and how the chains interact with each other and I'm sure we'll talk more about that um but the result is you know you get to be where the users are um because a lot of people are not on ethereum most people are not on ethereum so um yeah that's the high level interesting thanks yeah cross chain we're going to discuss about these specific risks later but Michael Michael do you want to quickly go ahead uh yeah so I mean I probably already introduced uh uh sure sure everyone knows you and we just had the fire side chat before discussing your protocol your mechanism so I guess we can Dive Right In um Ben what was the hardest part in designing your mechanism yeah I mean the hardest part by far was the lack of infrastructure at the time um this stable gun has been life for a very long time and um our thesis was cross train in a time where there were no Bridges and so how do you how do you do that right um well there were very very few Bridges and the bridges that existed were far from optimal and so we had to create this uh canonical bridging standard basically where you maintain the sovereignty of your token and you're the only one that can mint it and then you just allow different wh listed parties to exchange the stable coin um between different chains and if something happens to that bridge you can always like offboard them so the best example is multi-chain for example um at the time when we launched they were the only serious Bridge uh the only bridge that was on many chains and so obviously that's the only thing we went with uh at the time where they were let's call it hacked um we were able to offboard it in maybe like 3 minutes so taking out 100% of the M that was in that um in that bridge within 3 minutes now the hard thing is a different one is like uh the collaterals backing but yeah that's basically the hardest thing we had to go through super interesting thanks Lou so how does it compare to your experience on your end so I mean I think things things that were difficult for us to make I mean the the design of the system system itself the gyroscope stable coin um actually sort of pretty straightforward um just a diversified Reserve plus some Redemption mechanism that's a sort of decaying function um but we've also built some um sort of concentrated liquidity pools that use uh an ellipse to do the pricing so the Redemption curve and the uh ellipse to do the pricing like these are these are like kind of new uh uh pieces of innovation essentially that it's like a new type of way to do these things um so yeah the like implementation of them you know fairly fiddly uh but the the kind of the sort of high level idea uh certainly for the Redemption curve is is actually fairly straightforward I actually have a question for gyroscope as well like um you know for most cdps the the value is you know leverage or the value is financing in the case of garment's tokens um what do you see as the kind of like the reason for gyroscope uh stable coin to exist like what's kind of like the like the value at yeah so you know like sorry for jumping yeah so I mean no no issue at all with the with the CDP model um I think you know the more Innovation uh there the better obviously it caters to this like demand for leverage that's uh that's important obviously though this this itself comes with comes with like fairly significant risk um like we've seen like over and over again it's like just this like boring story now in defi of like what happens when asset prices crash for the underlying collateral and you end up with these like death spirals where uh you just like can't sort of keep loans uh from going underwater um this is obviously like the main or one of the main issues with the with the CDP model um that's not to say it's not like a very useful model in many situations definitely not like against that model but just to say it comes with this this sort of deleveraging spiral risk and so for gyroscope the idea is to um just you know essentially diversify uh the asset Holdings in the reserve um and so yeah it doesn't um at least for now it doesn't operate with this uh any type of CDP like vaults uh so instead um it aims to be exactly 100% Reserve backed uh rather than like you know 150 or 300 or what whatever the collateralization ratios are now um so but its main value is to essentially diversify these these different assets um so you know an analogy that used quite often is like uh of the sort of you know if you had the Titanic but you had uh put the bulkhead doors so that they went all the way to the ceiling uh you would able you you would be able to compartmentalize the risk and so that's essentially what we want to do with the reserve but then plus using our new elliptic concentrated liquidity pools which are extremely Capital efficient to also generate yield from the reserve would you say where M stable went with a you guys went with balancer kind of a thing because it's like almost like a PSM into the underlying strategy but you choose like um concentrated liquidity that you built on top of balancer whereas let's say stable chose depositing a yeah I mean I guess we we think of the we think of the Redemption curve as sort of you know like completely new approach to to PSM um yeah I I think you know the the extent to which um yeah like the the extent to which sort of integration happens more broadly I guess we we have to see I I'll let you continue cool now that was super interesting then let's talk even more about risk so on a high level view how did you go about identifying this risk in the first place and making sure you cover everything risks risks yeah maybe we can let uh Michael jump in I wouldn't want to H the the panel interesting to hear what he has to say um yeah so um I guess um well first of all our stable coin is uh KD is CDP stable coin right so um the risks uh you get um let's say I guess the biggest risk um fortunately we seem to have troubles with yeah the biggest risk is internet connection I think but um yeah for us it's a obviously collateral risk and chain risk uh okay sorry completely went ahead uh you go ahead yeah that's okay it's just my internet dropped that's it uh anyway so um I guess the in in our case with CDP model most of the risks um come from how liquidations work uh um like if um typically if you have like traditional liquid you liquidate a lot at once and uh sometimes you really cannot do it um and you need to have all the liquidity on chain for that and if it's not on chain then you may end up uh with a bad Deb and this did happen in the past uh with Landing platforms um and with stable coins um so that's Pro kind of a big bottleneck of cdps so and how we address this risk is this soft liquidation mechanism which we have instead of traditional liquidations it actually uh like ensures that um uh you you need to exchange just a little bit of collateral to stable coin or in our case backwards as well uh and you don't really have to have all this liquidity available on chain you actually can Arbitrage this special or amm which liquidates the position uh uh with uh centralized exchanges or whatever so you actually uh look at how much liquidity you have in all like all the world rather than how much liquidity you have on chain so um that's uh I guess um the a big thing uh to to to Der risk liquidations but also like another thing which one needs to think about in cdps is uh price oracles and uh um like how safe they are how manipulatable they are so there was um great panel just before uh about that exactly thanks for mentioning price orle because with that you're touching third party dependency risks so I wanted to ask you how your mechanis Compares with what you rely on third parties what can go wrong there yeah I think third party risk is like the biggest thing um because for us I mean we never had any issues with liquidations due to price volatility and we've been through many crashes more crashes than I wish we would have been I think in one day we liquidated 400 million of debt and there was Zero bad debt that's when like the whole teruna thing happened so I I definitely think we nailed down the liquidation part the third party risk is the hardest um you look at like when you do um cuz we're not like your grandfather stable coin we're on many chains including a lot of l1s that might not be a safe as ethereum right um we're on Phantom we're in avalanche we're in moon beam you know we're in all sorts of chains like that and so what can go wrong I mean you can have catastrophic failure you can have the actual chain being corrupted right you can also have all of the assets on that chain completely uh becoming worthless in one block which is what happened on Phantom and so how do you uh Shi the other chains from like if I'm borrowing and un holding my on optimism how do I Shield myself from people borrowing and lending on Phantom and so that's something that we're addressing with our V3 because at the end of the day you you can only expect that to happen you can only expect them to be hacked um when it comes to oracles I love chain link I mean chain link is amazing it it can it be corrupted anything can be corrupted but I I think they've done an amazing job at providing this base layer infrastructure for so so many people and like free right uh recently they started charging some people but uh more for more most people it's free and I mean there are other options like Redstone and stuff so um yeah yeah I mean on the subject of oracles I uh would you struggle to believe anyone who wasn't able to say that they found uh oracles terrifying um it's a point uh like Central dependency for all protocols um or not all but most certainly most stable coin protocols they're absolutely uh you know the any uh significant errors can cause just like catastrophic damage um it's sort of you know in the stable coin world I guess it's one of the prices uh for paying for trying to tether to an asset that is like fundamentally an offchain asset like this this problem of like it somehow inferring this offchain price onchain um is is very difficult without relying on centralized providers so I mean for for the gyroscope stable coin specifically um something that we've done is implemented something it's called the Consolidated price feed that essentially takes like multiple different checks and cross references them to try to uh take you know something that's like a bit bit like an average of different Oracle feeds um but it's yeah I it's uh it's our very best shot at insuring Oracle safety uh but this is like a like difficult um important and scary problem definitely um and I agree with you like the number one attack Vector for our protocol for any protocol that's like a CDP is the Oracle and we've seen many people that don't read chain Securities articles um getting hacked through the famous curv LP you know reury hack um um but yeah it's usually not like I mean any Oracle can be manipulated that's like at a base if you have enough money you can manipulate an oracle now whether or not you make money on it that's a function of how you manage your debt ceilings right so like don't make it profitable for somebody to to um manipulate your Oracle but I think yeah a lot of people are not getting hit on the maybe like at the base layer like chain link just gives you eth price I think they get hit on like compounded um like assets like s like LPS or maybe like a strategy on Ur like that's really when you you have issues or like vgos I think that was like a really famous One in polygon cool um anyone wants to share an idea you explored during development or during design but in the end couldn't follow up because you just couldn't mitigate the risk it introduced so many so many men I think the the number one principle we have for Designing Chow is uh simplicity cuz if you add extra stuff for the sake of adding extra stuff you're going to get hacked and we've seen that with recent events I can't name names because marketing will kill me um but you know don't don't try to be too fancy with it I I think has been our number one thing now one of these ideas that I had was like making the the limits for outflow and inflow of my from a chain Dynamic based on the ratio between circulating Supply and Deb what does that mean um how much excess M there is compared to how much M has been Meed on a chain um is your bad debt risk from another chain right because as M has minted from other cdps in another chain and so if you can limit that percentage um you can kind of have like a limited downside the problem with that is that it relies on so many like um web 2 infrastructure uh to count circulating Supply to count total debt that it is highly gameable so we ended up not doing it it's super interesting you're telling us about this cross chain interaction did you already tell us all the cross chain risks or is other other keywords we should the risks any more cross oh so many I mean yeah just the keywords if it's too yeah I I think I think I named the important ones I I don't want to like Ramble On good good uh Michael L do you want to add something you experience during the design phase what you had to add yeah well I mean one yeah one thing I would add is still about price oracles so we actually ended up not using uh chain link or any centralized price Oracle we uh developed oracles which uh which derive their prices from from curve pools but made in a way that uh it it's like extremely hard to to manipulate um so well I mean you still uh need to think about those things like what if you can control multiple blocks in a row and can actually change prices during a prolonged time uh like that kind of stuff is is when you uh when when you can get funny but uh other than that it's uh they seem to uh to work um really really well and uh um we like found that in in our case uh working better than uh than chain link simply because the uh chain link is probably working better with traditional liquidations uh and for for soft liquidations you actually need something which is much more smooth and um that's uh why we kind of had had to um to derive the price Oracle from from the pools but so so it's fully decentralized uh but yes uh it's uh um they although they they are kind of simple but they need to be thought of really well to to make sure they're not manipulatable thanks um Louis what brings your stable coin to the Limit um in terms of stabilization stabilization [Music] um so I mean most of most of the mech like 90% of the uh system or more you know basically all of it is supposed to be operative um and supported just by the Diversified Assets in the reserve so we have these like different sort of safety checks and other things that try to ensure this balance in the reserve uh however in the situation where um there's sort of extreme Redemption pressure um or in the situation where um one or several Assets in the reserve um deegs so yeah just one one thing I should just probably make clear is that um The Reserve is supposed to um primarily contain stable coins itself so we're much less concerned with this sort of um prices associated with like you know like eth prices for example called cusing liquidation uh just by construction um but then if one of these stable assets uh deegs or under goes uh trouble which is uh not impossible to imagine then we in that situation our sort of fullback mechanism this Redemption curve has to kind of kick in um and try to price redemptions based on these outflows um so yeah a lot of like I I think quite a quite a few people I I've sort of you know heard uh talk about the gyroscope stable coin system as like being like somehow very complex um but actually the Redemption curve is is only used in this sort of situation of some um some kind of Market stress so for most of the time the logic that's running it is relatively straightforward yeah I it reminds me of also the angle has some sort of like PSM like thing um and in an event like there's like under collateralization if you will given like a dpeg um they also have some sort of like a a keyin I think that's really interesting um to take a look at if you guys haven't similar but a bit from another angle Are there specific risk Regulators bring I mean Regulators for us not as much I think a lot of stable coins during the bear kind of got anxy about um growth and also about like um like this yield necessity that retail is bringing because of higher yields like t- bills and so they've all added like a bunch of centralized assets like t- bills um and it goes beyond like you know usdc it's like these the centralized Finance platforms that are on the verge of you know being legal not legal have now companies that are holding t- bills and so those people have very high risk of regulatory overhead right for us we've kept this ethos of only decentralized assets as collateral or at least what our Dow deems as decentralized assets so like usdc wouldn't count for example and what we attempt to do is find a niche in which you know people don't have to worry about these kind of regulatory overheads because maker has already done a great job about creating a CDP that has both right like the centralized aspect and de centralized aspect and we're not in the business of forking or copying right we're trying to make something new nice um how much do users or should users be aware of the risk and are they I I I don't know maybe we lost Michael but um for for us um remember Luna you know you couldn't say anything bad about Luna you couldn't talk about Luna and and the result is that people all over the world now hate crypto yeah right terrible and so if you go to our docks maybe like 30% of the dock is like chain risk collateral risk like this risk and like all these disclosures about risk so everybody can you know read and see what what uh what can go wrong and I think if we're very honest about the limitations of our systems and we don't hide behind marketing gizmos I think we can keep people safe because most people will make good decisions I mean you'll still make have people that just do dumb things but at least give them the information I guess an obvious point to make as well is that we should just try to reduce the level of risk overall like for most most products I think if if you were about to use it and you received this like long list of things that could go wrong or you know all all of these many issues like right up front um it might sort of make you wonder like just like how safe is this and I think for um and but yeah I completely agree about like the importance of like disclosing all risks certainly so people are able to find out this information um but yeah I'm I think particularly for stable coins which are assets that people can really rely on to store wealth and to you know be a very significant part of their like total wealth ultimately this like like you if people have their funds in an asset like a sable coin it' better be safe like this is not like we saw the Fallout from um the collapse of Terror I mean sort of the level of like the human damage that was done I think this is I you know catastrophic um and it just like yeah it's like obviously we should disclose the risks but we should just also try to reduce the extent to which this sort of thing can happen I would just say nobody's safe like there's no such thing as being safe I mean every model works until it doesn't you know if you're live long enough you will find that things always go wrong uh things that you never thought could go wrong wrong I mean Michael can can say this too I mean four years now Congratulations by the way I mean if you're long Al long enough you eventually find issues um and you just have to be able to overcome them yeah that brings us to long-term viability of the stable coins and their mechanism um first why do we have to discuss this what changes over time that affects a mechanism that is working now under various circumstances why would that change in the future uh I'm sorry well the long time long-term viability of this mechanism viability yeah yeah yeah I think you need to bake in upgradability into your system in a way that doesn't sacrifice the initial people and like their uh kind of like contract with you um because things change things change a lot look at maker how much it's changed since it started look at Curve look at everybody unisoft we're all already at unisoft before uh similarly we are now the verge of Cheeto V3 uh which will completely change everything about Cheeto uh but we will not let go of the people like like behind right cuz um if you don't have backwards compatibility you're not building up you're building sideways but if you would if your system would stay like it is now the same stabilization mechanism would continue to work yeah I mean well unless you know Avalanche decides to rug or you know uh ethereum ceases to exist and these are are things that are like possible are they like likely no but um that's that's why I don't really I don't think any Financial system in crypto today you can just leave it alone and walk away uh because the fact is whether while you don't change the world around you changes and and if you don't bake that into your system you're going to eventually get wrecked Lis do you want to add on this or is your system stable just runs one short point I guess is that it's it's pretty clear that stable coin systems like shouldn't depend on like they shouldn't only work when markets are very healthy yeah um this like this was in essence like the reason that um all of the sort of kind of pure algorithmic stable coin attempts uh rightfully failed um and yeah we we just like it shouldn't be the case that you depend on some volatile asset uh exclusively as a sort of means of collateral and that you know if you have um if you have uh in the sort of algorithmic stable coin sense not the CDP sense um but it shouldn't be the case that yeah if you have some market downturn then everything just just falls apart I think that's it's pretty clear lesson from the last couple of years yeah I think that's a good point but I think those Founders don't really care because those are like one cycle Founders and a lot of them are in Dubai right now in big vas so like they they did what they wanted to do and they achieved it so but I agree with you they shouldn't just last one cycle yeah cool um what progress in the underlying blockchain technology or in the defi space or even if the user base grow what change would require the next generation of stabilization mechanism or where do we see the evolution from stabilization mechanism from here I mean especially in the cross chain world I'm sure you have interesting insights I think we're seeing a slow everchanging Improvement of these systems like if you like you have different kind of buckets of stable coins you have what I like to call the PSM like pass through uh stable coins we started with very simple like things like M stable you know just deposit a you get the yield kind of a thing now we have way more complex things like with gyroscope not saying it's complex but like it's much it's much more like let's say sophisticated like the idea um also CDP side right like chetah V3 I think is going to completely change um you know how what we think about a stable coin uh in cdps just like curve did with their self- liquidations and so I I mean I don't think there's going to be like a you know run comes back from his Slumber and then like you know suddenly this is the next stage of stable coins I think it's going to be a very like you know boring and long you know Improvement um yeah with like like maybe spikes of innovation but not nothing crazy if it's mostly just like marketing I think cool and so we talked about how important it is to mitigate risk reduce risks so that the stable coins safe for the user holding them holding them over a long time um these mechanisms have evolved a lot over the last years nevertheless today there are different stable coins with different mechanism right so are we optimizing for different objectives and there will always be different stable con with different mechanism or will this converge once we figured out the perfect mechanism what do you guys think I don't want to hug the mic I I think still will be there will be different so different flavors of stable coins for different uh purposes and different audiences so I don't think there is one the one which wishes wish fits all sure but there will be learnings to share and then individual solutions to this problem of course yeah and there there will be cross sharing of ideas and uh you know ideas in one stable coin when will improve the other and whatever um but yeah it's like U even here like gyroscope is so much different from cdps uh and uh it's still like both a very rightful models yeah I I agree with this I think there's no but probably no perfect model for a stable coin there are clearly models that like don't work and I think it's like important that we like learn from things that don't work absolutely um but it's definitely a space that's like ripe for experimentation I think it's very exciting space um and it's also it's not it's not clear that you know that like you have different stable coins for different use cases or you certainly can do so it makes sense that um you know I would imagine the future as a multi-stable coin World essentially with different stable coins for different uses yeah I agree with that and because this stable Co are not the dollar like the dollar does not exist on the blockchain I mean we can get that over with they're derivatives and these derivatives have different use cases uh for us it's like financing it's like being the opposite bet to the person that has like collateral for example for others it can be you know earning yield from underlying strategy so that collateral and and which has nothing to do with each other the only thing that binds them I guess is that they're worth a dollar but um I would even say they're different class of of derivatives altogether nice um I was told to put aside a few minutes of questions for the audience does anyone have a question for our speakers otherwise we continue here if you have any closing remarks anything you want to share about risk mitigation yeah I mean I would just say that um you know as an industry we should Champion people that are building new things um like gyroscope like CRV USD you know like our new V3 like let's stop forking liquidity and let's start like making you know I mean liquid I love liquidy uh but even them they're doing A2 so um let's push ourselves to innovate and experiment because it's not like we are in our end State we're incredibly small compared to trafi and I would hope that we still have more Innovation to do no I would just add that the launch of gyroscope is sort of incredibly imminent so look out for it good luck yeah excited Michael do you have any final words to add I guess we lost the internet again last change for audience questions cool then let's wrap up thanks a lot for the participation in panel I guess all speakers will be here around all day if you have question don't hesitate to talk to them thanks for listening in thank you thank [Applause] you