Hi everyone, I'm Ethan from Abisu and today I'm going to be talking about assetbacked stable coins and discovering the true cost of borrowing in DeFi. So preface something we're all familiar with. There's like three main types of stable coins. Fiatbacked strategybacked like Athena and then assetbacked stable coins which are the product of onchain loans that use tokens as collateral. So we're all familiar with this chart.
Um it kind of shows that stable coins have found most of their product market fit around being tokenized banknotes. Today I want to explore the thesis that assetbacked stable coins are going to rise in volume similarly to how the M2 money supply has increased as banks do lending on their deposits. Um let's double click on this comparison to the money supply for a second. Um this is courtesy of like 246 club but um in DeFi the M0 money supply represents raw capital from net new inflows. So this is fiat to crypto on-ramp and tokenized rwas.
M1 money supply which is traditionally spendable money like the money in your checking account. Um in DeFi the equivalent is stable coins and tokenized rappers which transmute raw capital uh into a standardized unit that can be used across protocols. Think how D is backed by Bidd, Athena, USDC. But D itself has deep liquidity that can be used across DeFi and M2 money supply traditionally represents money supply amplification due to fractional reserve uh banking. In crypto, the equivalent is lending protocols that do credit expansion um by creating like new forms of liquidity.
So yeah, why is credit expansion important? uh as we see more assets come on chain um more collateral means like more demand for people to seek leverage and leverage is a good thing. Um it fuels investment and spending and it also attracts um new liquidity in the form of like lender side liquidity seeking yield to to match the borrower appetite and these are good things because it fuels economic growth on chain and as well like increases the amount of net new inflows that are coming on chain. Um, IU wants to build products that help to facilitate onchain credit expansion. And our first product is a stablecoin credit market on Ethereum and soon plasma that is built on liquidity v2.
So it lets users borrow EBUSD against blue chip crypto assets like ETH, Bitcoin USD derivatives at market set rates. It lets users earn yield by uh depositing EBUSD into the protocol. And the the resulting product is EB EBUSD itself which is a assetbacked stable coin collateralized by the basket of collateral posted by borrowers. So we have some requirements for the protocol. It needs to remain solvent because remember it's an asset backed stable backed by crypto which is inherently volatile.
Um EBUSD needs to keep its peg in order for it to be useful. uh in order for people to come participate in the system, it needs to offer one attractive borrow rates to to borrowers and two competitive yields to people who hold EBUSD. Like if you can't hold it and earn um competitive yield, there's there's not much reason to hold it uh in the early days. And lastly, we need deep secondary liquidity. So this is so users can like swap EBUSD for other crypto assets.
So how does it work? I'm going to go uh real quick. It's very similar to liquid EV2 where EBUSD is minted against blue chip collateral. Um these these loans are at user set rates which is our most important feature. Um whenever you open a loan you can set your own rate and change it at any time.
And you may think okay why don't I just set my rate to zero. Well the lower you set your rate the higher your redemption risk is. The higher you set your rate the more you pay but the lower your redemption risk is. So so what is redemption? EBUSD is always onetoone redeemable for a dollar of underlying collateral.
This is how we ensure a hard peg. So let's say it EBUSD is trading at a discount. Um there's incentive for an arbiter to come buy it up at a discount and redeem it for $1 and profit the spread. Uh where does this collateral that they got come from? It comes from the user who's paying the lowest rate.
So redemption has the effect of one bringing the peg back up to a dollar but two raising the systems average interest rate by knocking out the lowest interest paying loans. Um this is how the system self-regulates. So next we have stability pool. It's our liquidation engine that keeps the system solvent. Uh 75% of revenue the protocol makes goes towards in incentivizing EBUSD deposits in the stability pool.
If a loan is going to be uh approaching under collateralization, it's going to be liquidated and stable coins from the stability pool is burned to cancel that loan's debt. And collateral from that liquidated loan is given to stability pool depositors. So if you deposit here, you're earning interest revenue and also liquidation profit. It's the main source of demand for the stable coin uh in the early days. Um so where does the remaining 25% of protocol revenue go?
it goes back towards stable coin holders to incentivize um use cases outside the protocol. So we have gauges that uh stream this 25% interest revenue towards like dex pools, lending markets and eventually towards like protocol governance token buybacks. So so what like why is this user set interest rate thing so cool? Uh it's because it allows the protocol to discover the true cost of borrowing in DeFi. So while other protocols set interest rates through like governance like or the team trying to mimic tradfi or through utilization curves which which are great but are sometimes volatile um user set rates letu self-regulate towards the true cost of capital collateral completely autonomously only using uh free market forces.
So you can think like similar to how prediction market has the ability to predict the future by aggregating market insight. um Ibisu and user set rates is able to find like the true interest rate for um borrowing dollars against the given collateral. So before I end I'll like go through a quick example. Um this example is going to be like highlighting that the system relies on a rate equilibrium between borrowers who are like rate makers. They they they set what rate they think is fair and EBUSD holders who are rate takers.
They take the rate if they think it's justified in the in the form of yield that's paid to them by borrowers. So uh if we look at like uh on the bottom side like uh over here price decrease that's like where we're going to start. So let's say everyone sets the rates too low like relative to the borrowing rate on a EBUSD is going to dep because one people are going to be swapping EBUSD to other stable coins to do a carry trade and two because if the rates are low relative to the market there's not much demand to buy EBUSD for the stability pool. So price decreases, EBUSD dgs, and arbitrageers come in and buy EBUSD at a discount. Um, they're going to redeem it for $1 of collateral, which pushes the peg back up by contracting the circulating supply.
And it also kicks out the lowest interest rate borrowers from the system. So raising the rates further. And if I'm a borrower, I'm going to say, hm, like, oh the rates are uh people are getting redeemed. Let me also raise my rates. So this causes the protocol's average rate to further rise.
And what happens when rates rise? the amount of interest revenue going to the stability pool also rises and at one at a certain point the yield going to stability pool becomes competitive relative to defy. So okay people are going to start to buy EBUSD on the open market to now farm this yield. uh this buy pressure further strengthens the peg and when the peg is stronger there's less redemption risk so borrowers feel comfortable to lower their rates and like this example exemplifies like the push and pull um how like market forces are constantly adjusting rates towards what they what is like a true fair cost of capital so yeah I want to caveat by saying like this is an experimental system it's not without risks um but yeah we're excited to to build and um I'm happy to chat more if you guys are are wanting to. But yeah, thank you
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