It's Time we Reconsider Algo Stables

GM stablecoin enthusiasts. Uh I am here to convince everyone that it is time we reconsider Algo stables. I believe that the lack I see a good reaction out of this guy. I'm excited. I believe that the lack of a censorship resistant stable asset in our space poses an existential threat.

In particular, modern economies rely on a low volatility medium of exchange and unit of account to function. The modern solutions, the current market winners, USDT and USDC are censorable. And I believe that this poses an existential threat to our entire space because so much of the value on our chains are dependent on censorship resistant medium mediums of exchange and units of account that the entire networks themselves are vulnerable. Fundamentally, the only way for us to untether the crypto economy from Tradfi is with a censorship resistant medium of exchange and unit of account. We've tried onchain collateral and it simply doesn't scale.

Models like DI have been forced to switch to centralized uh sensorable collateral and liquidity was never able to scale. This is from the fact that collateral simply has way too high opportunity costs and has a negative feedback loop. Fundamentally, we must move past collateral and move to endogenous value, which I know is very scary, uh, in order to create a sensor a censorship resistant medium of exchange and unit of account aka an algo stable. Now, I can imagine what's going on in people's minds. What about Terra Luna?

Alarm bells must be going off. Is this guy crazy? Uh, maybe a little bit. But I believe that we must be brave in the face of this existential threat. and that the only way for us to move forward is not to throw the baby out with the bathwater and give up entirely, but instead to learn from their mistakes and move forward.

So, I want to use the rest of my time to talk uh briefly about some of the existential problems with Tara uh and then juxtapose them with some hope uh some potential solutions to these problems. So Tara had a couple really big problems but most importantly was that they chose equity as their source of endogenous value and through the experimentation of Teral Luna we learned that equity has no positive feedback loop it doesn't scale and there's no bankr run protection. Uh the example that I think is or maybe an analogy that is most helpful for people is to think about what if Microsoft started to issue micro bucks and Microsoft is a real business a successful business three and a half four trillion market cap. Naturally you may start to think oh well we can surely issue up to 4 trillion micro bucks against the Microsoft market cap. Uh but what Terara demonstrated and taught us is that fundamentally it's not the market cap that is the endogenous value in an equitybased model.

It's the bid for the equity in the market. So even if Microsoft is worth $ three and a half trillion dollars at any given moment, there's only maybe 10 billion dollars willing to buy Microsoft in that moment. Uh this obviously is not a scalable source of endogenous value. The other thing that's really important to note here is that equity because of its fungeability has no bankrun protection. So if we go back to this Microsoft example and you think about there are people right now that hold proudly Microsoft stock and could talk to you for hours about how great Microsoft is.

I don't want to hear it, but they could tell you. The issue is when the bank run starts in a Terra Luna model, when everyone knows there's all this supply coming to market, even if you're a big believer of Microsoft and holding the stock, you want the stock, when that bank run starts, you are not incentivized to hold the stock, you are incentivized to participate in the bank run. So I think in this context, it's much more clear no matter how good the equity is, equity is not a good source of endogenous value. When you combine the fact that Ankor uh subsidized uh the entire system to grow a totally inorganic yield, the result uh is quite obvious. Obviously, it's in post so everyone knows it's obvious.

But I think if we really think rigorously about how all these things work, we can move forward in a much more productive fashion. So with these flaws in mind, I have sources for hope for everyone. The first is that we have discovered that credit is a scalable source of endogenous value with a positive feedback loop which I'll talk about in a sec. Second, through our work on beantock and Pinto, we have discovered that there are promising bankr run minimization mechanisms that we can implement in the wild and we have data to prove it. Third, uh one of the most interesting things is that the source of yield on the networks there was a panel saying that yield is real real.

I disagree and I believe that we need new innovation at the exchange level in order to create sustainable yield but that is coming soon as well. And finally, if we reframe the algo stable problem, I think it becomes a lot more palatable and a lot more possible to solve. So I'm going to talk briefly about each of these sources of hope uh as I wrap up my talk. First, credit. Credit has two amazing properties.

One, it's infinite infinitely scalable. And two, there's a positive feedback loop. If you lend to me $100 at some interest rate or hundred euros, we are incon. If you lend to me hundred euros and I pay you back, maybe next time you're willing to lend me $1,000 at a lower interest rate. And if I pay back that back, maybe you're willing to lend me €10,000 at an even lower interest rate.

So credit in juxtaposition with collateral which doesn't scale and equity which doesn't scale actually does scale infinitely and has a positive feedback loop on the interest rate side. Very interesting. The stock system uh which is a little bit nuanced but the point is we have discovered in practice a timebased incentive mechanism that creates explicit opportunity cost for people to participate in bank runs. So in that Microsoft example, we've created a system where the people that really believe in Microsoft are now finally paid to hold on even during a bank run. And we have promising data that this shows that in practice this actually does minimize the bank runs uh both the duration and the magnitude.

Now Nebula is a solution to a problem which is that the stock system actually loses the fungeability of the ERC20 standard. And so we've been working now for three years to try to figure out how do we take this bankr run prevention mechanism and plug it into DeFi and our work there has been to divi design a new VM. It's been quite intense but the time is now. This is coming to market soon. I believe that this will provide for the first time potential for an organic nonspeculative supply of yield that will create demand for something like this.

Okay. So I want to leave everyone with a reframing of the algo stable problem. Now I believe and we've seen it in practice with something like Teral Luna that if you try to create a perfectly stable endogenous value, you will fail. It's not possible. I think about Bitcoin as a currency with a monetary policy that takes no position whatsoever on its value.

In this framework, we can think of an algo stable as a currency with monetary policy that does care about its value. and in particular cares about keeping its value as stable as possible. So with this in mind, I propose a new problem for us to solve in the algo stable space. A much more solvable problem. The question is, is it possible to create an algorithmic monetary policy that is able to sufficiently dampen the volatility of its currency to create competitive utility with sensorable mediums of exchange and units of account?

I think this is a much more solvable problem than can we create a perfectly stable endogenous value source. We don't know if it's possible, but I am determined to find out. Uh anyone that's interested in following along, participating or engaging in discussion, uh please come chat with me or follow me on Twitter. Thank you very much.