Panel 6 - Navigating Liquidity Challenges: Stablecoin Collateralisation, Liquidations & Bridging Im

so yeah we're here to talk about uh collateralization liquidations you know the basic stuff maybe some bridging as well we'll see uh how spicy we can get um so first of all can you guys just introduce yourself real quick maybe two three sentences sure so I'm Pepe CTO at meld meld we bridging um traditional Finance with crypto so we are building products both in crypto and in normal Banks um CS normal sea transfers as well as lending and borrowing protocols staking and all of these things so the idea is to bring all the complex finances that people can find in the world right now to crypto so that everyone can access them hi everyone uh I'm sirl I'm the co-founder of swap swap is an automated Market maker that is engineered for liquidity providers um so if you've been helping being on volatile asset pairs in amm you probably underwent impermanent loss and faced uh potential losses in capital so we are solving that you can think of this as uh combining the infrastructure of uh D5 products so composable non-custodial transparent and accessible with uh the performance of a centralized actor hey everyone my name is ilis I'm from Gbox Gbox is composable leverage protocol uh which actually allows to apply leverage to anyi protocol so depending on use case it could be leverage trading leverage farming leverage tanking everything composable uh in a true native defway hi everyone I am Emilio from a I'm currently VP of engineering at a companies I am one of together with some other um friends and former colleagues and colleagues like one of the designers of the AA protocol in all the three iterations and excited to be here and talks about all the challenges and future innovations that we will have in the future yeah so I I guess let's uh talk about collateral first right like what what are the I guess interesting Parts about choosing collateral right I I guess there's some parts that are like kind of obvious of what is good collateral and not but um yeah how how how do you think about that I mean for me at the end collateral is how can you then sell that asset how can you ensure that the digital representation of something has meaning has value behind it we always talk about stable coins this this full event is about the stable coins but if we were to digitalize kuras or kebabs um they will still have to have collateral behind them so coll Al is what happens with this digital thing that you just built can I claim it for a kebab that's the collateral then you take a huge leap into financials you can create a dollar backed um stable coins you can create systems that allow you to to redeem your digital element for a more real one I guess also is important part that we actually consider is about like smart contract risk like even if it's like usually a C20 uh contract also there could be a lot of like hidden risks like it could be put on P or something like that so like smart contract is still like one of the important things to decide like how good this asset for collateral yeah I mean um some important aspects have already been discussed like Market liquidity first so is the asset liquid enough to be able to ensure the essentially covering the depth that was drawn against it so that's very important aspect smart Contra risk so like and checking from a a technology perspective that the asset is sound so there might be because of course a hack at the uh asset level means instantaneous insolvency and you basically not do anything about it there are other very important aspects like in a we have a framework which has actually been uh defined within the community so like in the community we have two uh companies service providers that actually manage risk and and together with some other members of the community they took like responsibility to build a fullblown framework to list an asset and these are two aspects but there are also very important uh ones that uh one is centralization risk so for example rapid BTC rap BT DTC has important important centralization risk because there is it's centrally controlled so validating how safe is listing a protocol uh uh that is Central centrally controlled in a protocol that this decentralized actually is and how much power by doing so you are giving to this entity that is controlling this particular asset uh another important aspect is is the asset native to the network where the market is being created or not because bridged assets have in inherent risk uh which is basically related to the security of the network itself so a mark an asset that is being listed on the other protocol for example on polygon and is an asset that is bridged for ethereum so for example R WRA e has inherent risks of being insolvent not only because of the asset itself but because the canonical Bridge of the of the chain could fail potentially uh we had actually a situation like this in harmony uh thankfully the market was very small back in the days but the harmony Bridge got hacked and the a market has sustained uh losses in like small losses in the order less than 1 million uh but uh still uh meaningful for the users and that's because not of the protocol itself or the asset itself but because of the underly technology of the security on the underlying liar that failed basically so there are many aspects that are very important very relevant and I think there are others that are probably missing but I guess you you guys get the point yeah and maybe just to add a last Point uh obviously agree with what what has been said previously uh one thing that is interesting to look at is like um how we pile up risk in terms of collateral and then liquidity management so maybe just to take an example some stable coins are backed by usdc and then uh they are paired against usdc uh in terms of Market liquidity so when we had like this um usdc Peg um a few months ago they were actually double exposed to uh the the dpeg uh first in terms of collateral and second in terms of liquidity because the way that the pools are structured uh currently in in in curve for instance is that um when an asset start to drop in value the pool starts to accumulate more of these assets so as a stable coin if you are backed by usdc um so you're losing on your collateral and you're also losing your liquidity uh because it gets trained by the US by the dpeg so I think those are there are some interesting like second hand effects that can come into play yeah so for liquidity of a collateral um how do you think about that like I I think liquidity is a very very big word to to Me Maybe the way I would uh describe it is there's like instant liquidity right if you need to sell something in zero seconds there's some amount of liquidity I think this is probably pretty easy to measure right you can just check you the the curve pool and like how much can I dump but that's usually like if you're trying to liquidate large amounts that's actually not what you care about there's like also liquidity with some kind of uh time Factor so how do you think about that yeah I think it's is definitely very interesting not only in terms of amounts because yes usdc is liquid probably yes for like thousands of dollars but maybe when you get into the millions of dollars it's not that liquid and I think to to the point that that was made before when we start bridging to a smaller networks then it adds like there's different types of bridges there is Bridges based on liquidity pools bridges made on blocking and minting assets and I think that adds to the liquidity Factor so bridges that are based on liquidity pools are very liquid or are very limited in the liquidity that they can get bridges that are based on wrapping assets maybe not so much because you hold the full amount of liquidity um so yeah I think instant capacity to execute on things is not only a a threshold or it's not like a progression on amounts it's also a progression on like networks and and where you operate your protocols yeah um there are also I think things to explore regarding liquidations more in terms of um how we can better optimize the flows for for this type of of trading volumes so from the perspective of like um an amm you want to discriminate the flows that you are exposed to so not trading volume is created equal so you have some trading volume that is uh considered as toxic um which is mainly volume that is informed and that so for instance um some hedge fund that knows that has a fundamental view on the price or that has some trading signals um you would want to price them a higher price than someone who doesn't have a view on the future price of the asset and actually in trat fi that's what happens like um like cadel Securities they get much worse prices by market makers than uh your Retail Bank your local Retail Bank um and I think liquidations are very interesting in the sense that they're not informed price volumes so I'm definitely Keen to explore like how we can better facilitate liquidations by giving better price to Liquidators on chain and to uh enable more like easier um yeah liquidity for for such products yeah I mean also another important aspect uh like on how we quantify liquidity is are we able to have a reliable Oracle because like liquidity is a very comprehensive term like it can mean many things so in a for example we evaluate where is the liquidity distributed is it mostly onchain is it mostly offchain so traded against uh in centralized exchanges how easy is for Liquidators to obtain this liquidity and actually a meaningfully liquidate a position on a that can reach tens or even hundreds of millions right so there must be uh hundreds of millions readily available we experience this situation for example if you guys remember the the CRV short on on a which and and ended up which was quite amazing was actually pretty interesting to watch in real time unfolding itself it ended up in a very very small bad depth for the other protocol despite the position being um like 8 million worth of collateral and most of the collateral being actually offchain being traded from from binance so and all of this also affect the Oracle design because for example if most of the liquidity is on chain then how easily is how easy is to manipulate that liquidity and manipulate the price Oracle which can um essentially bring a whole set of different risks because an oracle that can be manipulated can be eventually source of insolvency within the market itself and also an aspect that I want to I wanted to mention on before as well and I was kind kind of forgetting about it is how an asset can be very liquid on the market but if there is a a lot of um for example sell liquidity on outside the market so one aspect that we evaluate in a when an asset and gets listed is are there big holders that are not Trading and then can potentially massively halter the price an asset can be very liquid but if there is if there are lock ups for example that get unlocked over time and they are very large compared to the amounts that that are um that are present in the market the asset can quickly become liquid on on the buy side because there is uh an overflow of uh on the cell side therefore that's another very important aspect that need to to be evaluated it's very wide topic but like I think we pretty much covered everything yeah yeah I think like fragmentation of liquidity is one thing that very important and here like for me it's like what's interesting I guess what's happens right now is like Rising all this RFQ infrastructure intense based uh different liquidity and maybe like in year on two we'll see like good progress here and uh actually like problem fragmentation of liquidity between chains rollups between sex and de actually could be solved and that valuation risks here will be like much much easier so I think something very important that you mention is Oracles because at the end coming back to to what we were mentioning before a stable coin or a token we need to compare it with something else in order to know the the value and Oracle is is something that if they want to manipulate the price either directly or indirectly is going to affect a lot of potential protocols like if chain link suddenly says usdc is worth 30 cents we probably know have a job in tomorrow like most of us um so Oracle and risk factors are something that will Define the success of protocols like a has done it pretty well over the last years like risk factors and and how you handle collateral how you handle liquidation thresholds those are things that need to be accounting for Oracle risk liquidity and bridging liquidity around the the different networks it's not the same if we have a very liquid asset in our Network or if that asset is very liquid somewhere else and it not needs to come to us before we can actually use it so I think oracles and risk factors are also something very very important for protocols that use stable coins um because you also cannot trust that usdc equals $1 there has been or there were protocols that had a lot of problems when when Tera collapsed because they said this is a stable coin true $1 and then suddenly went went badly um yeah it's actually a good point with the fragmentation between chains or even just fragmentation in between markets right like if you have your offchain and your onchain markets it just takes some time for the Arbitrage to happen but it does happen like it is actually incentivized for the liquidity to move around to where it is necessary so I guess um considering that do you think it might make sense to actually um extend the auction durations for liquidations so as far as I understand most protocols today actually have very short liquidations right they try to liquidate everything immediately um so that they aren't further exposed to the price but could you see uh benefit of actually increasing the duration so that this liquidity has more time to move around anyone yeah I mean um the Readiness of a liquidation and the duration of the Liquidator liquidation itself is a fine balance mhm basically of course there is no free lunch so the more you wait the more risk for insolvency there is for the protocol essentially because there is no predictability on what the price movement can be so um maker has a slightly different uh mechanism because they actually implemented like auctions but because it's basically uh um it's the design itself that makes it very much easier to implement that way with kind of a delayed auction uh it's not really delayed auction it's delayed Oracle so they have an oracle that is not like and therefore the auction is delayed because the Oracle is not instantaneous so it's kind of air delay but the architecture is different because they don't necessarily need to cover instantaneously liquidity that might be withdrawn like in the case of a a it could potentially the whole liquidity of a could potentially completely unrap in 10 seconds for example if everyone gets liquidated liquidated or repays instantaneously and suppliers want to windw instantaneously the protocol can do it right because there are two sides there are the supply side and the borrow side uh I do think that like in AA for example we have this mechanism where there is an L factor that is calculated depending on the risk parameters of each particular collateral and this this risk uh this h factor basically decides how safe is the position and there is a certain point that depends again on the uh collateral composition of the user where the protocol is insolvent and there is nothing you basically can do unless unless for example there is a sudden market movement where collateral starts Rising again very very high in value but the the lower the health Factor goes the more you need to Collateral to ra is until you reach a certain point where the health factor is zero and if you have outstanding dep left that's bad depth that is accured to to the protocol so it is a fine balance that needs to be uh like uh Readiness and duration of liquidation and risk of uh insolvency that we basically try to model through risk management I guess also it comes with like balance this product actually yeah because like if you should wait for example I don't know one day for liquidations what kind of or calculation actually you allows to have and is it good product if you allows like five % to borrow actually against your collateral value so yeah I think something very important is everyone in crypto is greedy so building security by incentivizing or utilizing and benefiting from that grid is something that a lot of protocols have done in the past and I think it's going to spand farther and farther so obviously we need to have smart contract security we have to ensure everything is is playing around as as good as possible the product needs to be like you cannot have like only borrow 5% of your collateral of course but I think for ensure that all positions in lending and borrowing protocols but also other defi applications are healthy use the GED of external users in your favor incentivize liquidations enough that people will be like they will not care to bring liquidity from other networks because they understand that the simple possibility that I could liquidate and earn $1 million they are going to have that liquidity ready for that to happen and therefore if you incentivize that enough everything and everyone will move things will move the pieces so that at the end the the Financial Security of the protocols are robust and is is an interesting term like security by greediness it's something I think crypto will heavily evolve in the next couple of years yeah I I guess if the incentive to liquidate is high enough then people can actually also afford to hedge their positions right like maybe I don't want eth exposure but I need eth ready to liquidate positions but then if it is actually you know highly incentivized I can just short e somewhere and hold the eth be delta neutral I have some Capital cost but I am being incentivized for that y definitely and also when you liquidate you may get assets that you are not super interested into or that that you not you don't have like a lot of liquidity right now to swap into a stable coin so using that like kind of short in or long in or like using other Financial tools to slowly U minimize the impact that like if if an asset is Free Falling and goes to zero you're done but if it slide up and downs then you can expose yourself to less Risk by hedging or doing other financial instruments while having all of that liquidity available to say hey there is 20 million that may be liquidated in in na tomorrow let me have it ready um yeah so the other topic we have also is bridging so I mean it's kind of the trend now that some stable coins are are going multi- chain um it used to be there was only one chain that a stable coin was on there's a couple different ways um of doing that you know you could just redeploy the system on a different chain you can actually try to use um the bridges so what do you guys think is are like the best uh choices to to make the stable coins available on on multiple chains I actually had like two presentations already on this topic because we are about to propose like the today a community like one potential strategy to bring go uh on different chains uh of course the a market is like um deployed in I don't I don't remember now I think nine or 10 different networks and like go is like a stable coin it was released like four months ago more or less and it's still growing and still with some uh pain points that we are trying to improve over and one of the things that of course we want to do to improve like uh create new use case for go is to bring go uh in other chains where the other protocol is available uh so in in the strategy that we want to propose is actually going to try to there are many painful points right now for assets like even for us like protocol developers and U that we take care of deploying uh depending on what the community decides like the market on have a market on different networks it happens very often that for example you have you start uh with uh bridged uh stable coins because the network is I don't know new it doesn't have uh Native assets me minted on it and then like like I don't know Circle or tether come and say you know what from now on like the bridged version from ethereum is deprecated we are going to Mint uh and generate the stable coins directly on on the particular happened on arbitrum for example it happened on Avalanche and so if you go on the arbit room V3 Market you see uh two versions of usdc one is the bridged one and one is the native one and this creates a lot of problems for the users because if I'm coming from ethereum or I want to go to ethereum is that I need to trade uh first so the approach that that we want uh hopefully we will be able to implement with go is to have um Native uh versions deployed on any chain controlled by the other governance because have thanks to bgd labs and like the we built on a delivery infrastructure uh to be able to send messages to any network where a is present and uh so there will be a native version of every Network controlled by the a governance and then uh at least at the beginning the asset will be uh U minted only on ethereum which will remain the main Network where be can be generated natively by drawing dep from V3 a a V3 and then basically with the bridging uh there will be a lock and mint mechanism or uh unlock and Bar where um to bring liquidity you basically lock the liquidity on ethereum and you get like I an IOU of go through the canonical version of go which will be deployed together with the architecture to avoid for example having the the main uh canonical Bridge of the network handling and go this could create a lot of issues so we'll going to try to use ccip to try and minimize this ux complexities and maybe just to add on that on the like the B version of usdc um that's something I think you really want to nail as a stable coin like when you actually deploys a native asset because I think in the case of usdc it creates a lot of friction um for even for for the protocol themselves because um so in terms of liquidity today you have both of this version of usdc and usdc doe which means that and and I mean the the the migration is pretty slow so I think at the moment we still see much more volume on both arbitrum and polygon on usdc doe rather than native usdc so usdc is a bridge version uh from ethereum um and what it means essentially is that you have two type like you have pools of liquidity which are with usdc others which are with usdc doe you have volume which is Flowing on both ends so it means that liquidity providers are essentially split between those two assets you're essentially dividing your liquidity by two and if you don't provide incentives for people strong incentives for people to migrate the situation might stay for a very long time and it hurts both like um the the peg of the of the asset um it hurts like the yeah obviously like the uh the utility of the stable coin it hurts like the demand because um if you split the um uh like the asset in two it means that some flow is going to um to one uh like version and some other is going to the other so the the yields are kind of split so it's really a nightmare actually for for for everyone and so I think it's great that you guys are addressing it from the start I think yeah nailing the timing for that is is really critical I mean the thing is also that like as you mentioned uh if a non-conical version take gets truction like you mention at usdc on arbitrum then it's it's really really hard to convince people to move to the canonical version so that's why we are want to and this is more like uh actually a community kind of um I would say synchronization collaboration issue on the on the social aspect like social synchronization rather than an actual technicial challenge because you can deploy native version but if people somehow start actually to use the noncanonical version there is nothing that you can do and then when once it gets truction then it's really really hard as you were mentioning to to convince people to use the canonical version that's partially the beauty of defi it's decentralized so you can you you can choose whatever token you want it's just that the official one may not be the one you choose like to actually like there is another problem actually that this first person Never Dies and if you remember like single collateral die I guess it's it still exist and it's priced like not $1 but like I don't know two or three and actually there is no like liquidity you can just go sell it or buy it and it still exists yeah and what's funny as well is that you see the same problem happening in liquid staking I think with the the Lio like um yeah layer zero kind of drama so it's not only for stable coins drama is everywhere um for me for bridging I think there is two main points that U we part ially touch based on first is centralization and second is backups um if you want a protocol to be cross chain or multi-chain it's very important that the bridges that you use are resilient and are secure so there is a lot of projects working on IBC for evm um but there is some people that go for like multi some people that say that like TSS thrh IND you're sharing is basically nothing so they simply centralize it um so the security of the bridges that you use and that you uh base your liquidation and your risk factors on is very important but it is also the backup you can have as like the best bridge in the world that it can stop at some point things fail things protocols stop operating for whatever reason so it's very important that you have backups in place for your network for your produ to be able to move across and give the people give the users the capacity and the flexibility to choose how they do it because some users may have a more risk friendly appetite and say you know what I'm fine on like a centralized entity bridging my tokens um While others may want to pay a higher fee for it to be fully trustless or fully decentralized yeah I I think it's a good point with especially like external dependencies that you build right so one example is actually the um chain link VF for generating random numbers they came out with chain link VF version to right and so now if you have an immutable contract that's pointing on version one it's deprecated right and you know you're trying to build these immutable contracts that like last forever but then if you have an external dependency that isn't immutable and can stop operating then it's a big problem and I guess a similar thing could happen in terms of bridges yeah on this topic like I really think this is a topic that pops up frequently on crypto Twitter for example like and there are the two sides like the immutable uh side and the the guys for example I do believe in the power of immutability and I think it should be the goal for for everyone building uh different protocols long term to actually build something that is uh immutable and can live forever by itself but I am also very pragmatic like this like kind of relates to what you just mentioned that what we are building right now is EXA is basically experiments you know like they they are uh technology that in my opinion is still not even close to be uh production to scale two trillion of dollars just because we still are figure figuring out things and there are dependencies and there are uh we build often on top of other protocols like vrf for example so you may want to retain some ability to actually uh fix stuff or to leverage some technology like VF version two for example or Implement change some mechanism that you might figure out to how to do better on chain without because then it becomes hustle not only for the developers that need to redeploy and redo everything from scratch but also for the users especially in protocols like a DEX is already a bit different in protocols like aware the liquidity is very sticky because borrowers are usually there are tax impli ations there are borrowers might just not a able to repay at a certain point uh suppliers are uh somehow lazy and they prefer like if they I'm earning the same interest like i' rather say on V2 where I've been staying for the last year and a half rather than moving on V3 to V3 and for dexus is already a bit simpler so you take uniswap for example it's very self-contained uh and very simple use case and very self-contained architecture then that probably is much easier to build uh immutable from day one but there are trade-offs as well on on that aspect yeah I I think with the mutability it's important to notice it's not just a binary thing right like kind of the the normal approach that is being taken today is if your contract is is upgradeable you can replace the whole thing right but you could actually make it much more fine grained where you have like some functionality that is immutable some things that you can change um you can also add the time locks of course right um so if if the issue you're facing really is that like your external dependency is being deprecated it's fine if you have like a one month time lock right this is not probably what you want if you want to be fixing bugs but if that is the reason why you want to be upgradeable you can even have like a very long time lock where people know they're not going to get rugged right because they have enough time to react um but you still leave yourself open for these kind kind of future uh options where you have to like adapt to the to the new state cool so I I think we do have time for a couple of questions from the audience uh does anyone have a question they want to ask I don't see any oh she wants to know she wants to know what we're most bullish on um maybe for me I'm I'm bullish on uh Oracle free defi right we talked about like you need good oracles maybe you don't uh there are some some interesting things out there like uh uh there's a lending protocol called asna and a stable coin called Franken coin they're experimenting with like Oracle free defi where you are getting rid of this external dependency on on a price um it works there are some trade-offs but it's uh probably the most interesting thing I've seen recently for me I think is user experience we've been working on crypto I've been working in crypto since 2016 more or less and my friends still don't know what I do and that's because yes they they understand there is the concept of tokens you can transfer them you can do things with them um but we are still most of our tools most of our talks are very very technical focused so making sure that we keep that technical discussions H flowing while giving a good product ux wise for all users is very important my mom doesn't have to know how a token transfer of balances works but but these uh kind of panels needs to still happening so I think it's very important we start the coupling um same as in traditional Technologies like no one really knows what happens underneath when they check their email um some people have studied it some people have more experience with it um but you just click on like send email and things happen that's the same ux that people will need to have with crypto to interact with protocols in multi-chain environments in a secure way and I think that's what the highest leap is going to be on the next three years um so that we can get that adoption that we've been talking for the for the Last 5 Years so on my end um I think the ultimate purpose of Def should be to be the new infrastructure of the whole financial system and I think that there are currently like four major things that are like preventing us from from being that uh that infrastructure the first one is I think our blockchains are not fast enough I mean okay today we're not using all the block space but still if we want to host the whole financial system uh in defi will need like much faster blockchains and with lower transaction costs the second thing I think is uh better Financial Primitives I think we're still super far away from the efficiency of tref and I think with defi we can do much better um thanks to composability for instance um so that's what we're focusing at uh on with swap um the third thing I think is security so um yeah I mean we cannot run a financial system with hacks uh every day or like scams or whatever it just doesn't fly um and the last thing unfortunately I think is regulation uh we'll need to have uh regulation which I hope aligns with our values but will need to be integrated into uh Society to be accepted and so I'm bullish on anything that contributes to either of these four uh core things on account abstraction and and think like it actually allows to abstract all this complexity like uh private Cas uh fees paying for gas and so on uh from user and actually provide like very good user experience for user I'm bullish on a just just kidding I mean of course I am but like uh no I'm bullish on Builders I think like this um bare Mark showed that a lot of the people that was actually building uh stuck around and it's still there and still trying to figure out things I think we have a lot of problems to overcome in uh in crypto in general uh some have been mentioned like blockchain complexities like uh regulation and so on and so forth but I think eventually we will manage to figure this thing out like yeah that's the hope at least awesome we're all going to make it huh once again thank you very much thank you for to our speakers that's it