Nadiem - Evaluating Stablecoin Distribution Infrastructure & its Impact on Network Architecture &

all right next up we have Nadine susuno uh give him a welcome [Applause] yeah hi great to be here waiting for art great yeah um my name is Nadeem I'm part of Mentor Labs we're working on Mentor it's a stable coin on cello we have been around yeah since the start because um cusd which is the dollar pack stable was on cello yeah very much from the lounge in 2020. um yeah I'm in the space of markets for a long time I worked in banking before so um I had a lot of experience with market dynamics whether this is on I don't know risk side whether this is the pricing side um and what I'm going to talk about is pretty much around this I mean the title is a bit edgy and big sorry for that um um I want to touch a mantra that is like very essential to blockchain which is the idea of removing intermediaries um by a system where people can transact directly with each other um just two random quotes I mean one a bit more indirect the other one directly talking about the disintermediation of uh yeah middlemen um but let's have a look at intermediaries in the space of stable coins um so let's assume we have a stable coin issuer and we have the consumer on the other side so what kind of intermediaries do we have um I simplified and yeah probably I missed a few but I think the most important ones are Brokers or it is OTC desks market makers and RAM providers um yeah um the consumer usually interacts with Brokers and run providers directly it doesn't have any like contact with market makers but here is um in contact with them why I'm a retailer which is a centralized exchange or a decks um and yeah I mean like we know there is a like a lot of negative feelings against intermediaries um but I mean let's try to understand what they are doing actually and if you look at the services that intermediaries are providing then we can see they are actually doing quite important things so if you look at the market maker the role in the system is a bit like the wholesaler I mean he's providing liquidity in the markets of course but this entails more it also entails to narrow the spreads between the bid price and the ask price because yeah absorbing imbalances so what a market maker is doing if he's expecting some selling pressure or buying pressure he's adjusting liquidity and in the end this leads to price stabilization because and this is happening in crypto a lot if you look at the order books sometimes they're very thin and then the price starts to jump like very erratically and this comes from a bad Market maker or no Market maker um then looking at Brokers and OTC desk they have a bit of a mixed role they have wholesalers and retailers at the same time and if you look at their roles usually what they're doing they are enabling less liquid markets so if you have a partner that would like to trade your token usually they don't know how to reach your token then they will contact a broker or RTC desk and um in terms of services it's more like a convenience service I mean it's important but it's less important I would say than the market maker um then you have ramps they are definitely retailers and what is the service that they're providing they're providing crypto Fiat conversion similar to centralized exchanges but they're doing more so they are providing a koac as a service they are providing fear transfers and they provide feared Price Market making because like if you consider decentralized um exchanges they can only provide you a crypto crypto price but we want because I mean we live in the world in which field prices are important and it will be for some time that they are important we need someone to make the price for our Assets in Fiat um and then the last one it's not an intermediary in the sense of the other four but we need arbitrages because someone has to make sure that all the prices across the different places have to be consistent and uh what I I like to think about the Arbitrage and the service that they provide um it's a bit like a consensus mechanism it's like you have these arbitrages and they are kind of agreeing on one price and if they fail and crypto it happens a lot that you have a different price on binance and you have on coinbase because of some like local I don't know binance stops withdrawal is for one coin or uh coinbase us I know binance us recently uh stopped the deposits and withdrawals and then the price changes it's not the wrong price it's just a low contemporary price and the other projects don't manage to come to a consensus about what the price is um so why are they so important and the big word is market efficiency what does it mean market efficiency I mean it means that the buy-in sale prices or the bit and the asks should be closed because if you have to pay if there's a big spread between the buy and the sale price you will not have a lot of transactions because every time you buy and sell you will lose the spread between the two prices so people will not do a transaction and for Stables this is really important because I mean Stables are supposed to be a medium of transfer so no one is going to transfer if you have like a widespread then the price convergence across different marketplaces just imagine you would live in a street there's this grocery store up the street and down the street one is selling butter for five euros the other one for two okay you would buy for two but you would be puzzled and you would think what's wrong here I mean there's something unsettling in this scenario of having two stores that have a very different price then there is um the independence of the traded amount I mean you don't want to see what is also called slippage you don't want if you buy the twice the amount three times the amount you don't want to have a massive massive slippage and also this is something that the intermediaries are providing for you um and the last thing is availability you want to be able to have a convenient access to your goods this is also something that the intermediaries are doing and as a result of all of what they're doing you gain trust in the system and this is something very important I mean blockchain is all about trust the thing is intermediaries are creating trust in the financial system and the market because of all these things that they are doing um so but why do we want to replace them and then there's also good reasons for that I mean the first thing is to perform their services intermediaries are granted significant privileges like if you look at for example at tether or Circle intermediaries in this setup they have the right to issue and redeem and it's a crazy privilege I mean if you are like a standard user you're not able to go to tether or Circle and redeem your coins so and there are many more examples of these Privileges and because of these privileges if they are like misbehaving the effect is massive and this is what basically caused all the yeah resentment that we have towards these intermediaries I mean the distrust comes from like a history of these intermediaries um abusing their privileges and then the last point and this also touches the first point that I mentioned um just think about tether or or Circle if you want to redeem your coin in case of a d-pack you will not be able to because you have to go to the market you will have to pay the market price only the institutional will be able to go to the tether company the circle company and redeem one to one so this is I think really important for for stable coin projects that basically want to offer Redemption and issuance at um at the um like yeah promised price um so my mouth is really dry sorry yeah so here's just a big list probably longer of all these things that can go wrong around intermediaries there is transparency of course there is additional costs that come through the intermediary Services there is gatekeeping that is happening because the intermediaries are kind of creating a monopole there's lack of control of the user I mean we all know this the inefficiencies delay single point of failure and of course there's fraud and misconductor like there are two sides there's one side they are really important on the other side they can really up our systems I mean as we have seen um so how is this mitigated in traditional markets in traditional markets we are adding two components one component I mean it is Law and regulation so we're basically adding contracts between the issuer and all the intermediaries and we are adding regulation to protect the consumer so what we're creating is is kind of a legal embedding for of the intermediaries um so loan regulation is embedding decentralized intermediaries and what we are increasing is transparency control and commitment if everything works well so this is kind of the the positive uh view on regulation just imagine it as um yeah really in in embedding that should yeah kind of make the intermediaries safer um and now we are jumping a little bit I mean we have been talking intermediaries but this topic of intermediation is linked to another topic which is distribution of goods so if you're like in the traditional business there is this idea of Distributing your goods to the customer and there is the external distribution model and there's the direct distribution model and the external distribution model could be defined by saying that it is relying on intermediaries to get the goods to the user in our case it would be the stable tokens and direct distribution of course would be a system where the user does not have to rely on intermediaries to get the goods and if you look at the the stable tokens that are out there I just listed uh a few um and you will see that the most successful ones are externally distributed and I and and I yeah I mean let's talk about why it is the case I mean I guess you can imagine why or it's at least my thesis um let's first look at the the user experience um with directly distributed in particular so directly distributed stable coins have no real ties into Fiat economy I mean no one is connecting them with fear you can play around with them on chain but it is very difficult to to get them back to the reference price which they are trying to refer to um then stable coins are really unstable across chains I mean basically you take something which is supposed to be one and there's another one or even if you take the native token on Two Chains like you bring it to another chain oops it's not worth one anymore I just lost something why should this happen with the general asset it doesn't bother you so much I guess there's some Market risk to it but with the stable token I think the user experience it's really weird why should I use something from my stable I mean um then there's a transparency issue um most users are not aware of this but um I believe that the oracles are insufficient to deal with uncertainty and ownership because this refers in particular to tokens that are backed by real words as so if you look at usdc it's in a way a real world asset but I think the Oracle infrastructure is not up to the standard that it should be to give transparency to the user I mean yes you can go to the circle website and yes you can probably download a report by Deloitte or PWC but I think we can do better than that um and then there's another point and this is also one of the principles of blockchain I mean we want engagement of the user but we have no infrastructure and no tools to allow the user to take on these Services because someone has to do them like I know they are not like like people despise this kind of services Market making yeah it's something shady and but someone has to do it and usually for all the other services we say yes we want to empower the community to take them on but with these kind of services I mean they're really crucial we are not we don't care I mean we don't provide an infrastructure that an experienced user easily can be a market maker or a ram provider we just think he has someone will take it on and what will happen in the end is there will be a traditional company picking up the job or getting paid by a foundation to do with the job so I think what we are creating is really unefficient the market unefficient stable coins and um and what happens in the end and this is why people are using usdt and usdc convenience drums over consideration it's easy to use them they are the most Market efficient they could even be better but they are the most Market efficient and this is the way people are using them um so so we have these Services they are crucial and they're really like systemically important to our stable coin or to even the financial system that we're imagining and we have two solutions to this I mean either this is the idealist blockchain solution yeah we will just build a decentralized mechanism for everything that needs to be done but the problem is a Dax doesn't substitute a centralized exchange it can't because a centralized exchange is a Fiat price Market maker it won't work and it's for a lot of other services the same and then we see the other solution of people light-heartedly just handing these important services to traditional intermediaries or removing the intermediaries and I think this is what we are doing we are removing the intermediaries from mentor our stable coins we are removing them from flux and so on and what we are left is is a broken stable coin Market so um I think what do we need um there are probably more things but these are the things that I was thinking about and it's nothing and I want to point this out that I think one project on its own can stem it's something that we as a stablecoin community or infrastructure build a community have to do together it is first I believe we have to create supply chain tooling because I mean we have been talking about a direct distribution model if we want to have a direct distribution model we need tools to allow people to go to their app and convert Fiat to stable directly yes you can do this right now you can go to binance you can put your money there then you can transfer it to binance chain you can transfer it to another token Bridge it over to the I mean come on this is not how it should be I mean this is ridiculous and so we need a good UI that it's like seamless like if like we should have sdks that allow users to directly swap from Fear to the stable that they want to go through enter the keys connect The Ledger enter your apis but then you can just shoot and you have your status and then we have to think broader about what stable coins are actually like they are I think a protocol it's like they are a valuable protocol so like let's say you have two chains you have ethereum and you have cello if you if there's a stable on cello and there's another stable on ethereum what is the promise of these tables it is there's a reference value and our token is worse somewhere around this reference and for the user it is just a way to transfer value from one chain to another and be sure that he is not using two to Market risk it is it shouldn't be the problem of the user to deal with the losses it is our task of a stable coin protocol if we are promising we are creating a stable then we have to deal with how do we transfer the stable from cusd to usdc and it should be one to one in the wallet of the user and this is what I mean with the value transfer protocol I mean we are transferring value from one chain to another we can do this through Bitcoin and others but there's always Market risk so I think a standard for Value transfer would this is what the stable actually is like I I want to transfer value from one place to another and do this in a standardized way then yeah transparency I think we need more General oracles um that are again also standardized they have to be able to deal with uncertainty for example cases like binance has a different price than coinbase right now the Oracle either stops reporting or the Oracle is reporting an average price both it's wrong in my opinion what the Oracle should report is a price and a certainty score which tells the user you know what I can calculate the price right now but to be honest it's very uncertain that this price is true which would reflect the market reality much more um and we need to create relations between in the terms of real world assets and the token meaning we have one directional um one directional oracles so proof of Reserve is going one way it's proving to the user that we uh the the assets are existing but we also need the other way around we need if someone is trying to sell an asset that is used to collateralize a stable this should only be a possible if the corresponding token is burned so we need to find a framework where the the real world assets the states of the real world assets and the on-chain assets are much more linked in a more inextricable way and then when we come to engagement we need tooling that allows users to become service providers so if we don't want traditional finance companies to pick up all these crucial roles we need to provide the tools that someone in our community whose experience can pick this up easily yes there are licenses and I agree someone has to like go for them but I think if we if we take the hurdle of like the technical hurdle people will step up and maybe buy licenses and to another point if we are talking about engagement I mean these days a lot of these crucial services are just like solved by loose incentivation like arbitrages yeah you can take the Arbitrage and probably someone will I can tell you cases in the last three years of cusd where people actually didn't because there were better incentives so I think if you have these crucial Services you need commitment you need actors that have to perform these services in this regard of better initiative better incentives or not so I think we we have to embed these services in a way that we are dealing with the consensus mechanism we have to set up like an in a committed incentivation scheme that we that we're already using for consensus so just to summarize all of this I think we need standards and this is something that only we as a like industry can do together for collateral oracles intermediaries and for value um and I want to touch on the last thing that I think is really important and it then it closes the loop to the how the talk started with centralized intermediaries I think we need to think about something that I would call like a decentralized intermediary um it is like a hybrid state of an intermediary it's already existing in a way if you want for oracles but um of course like to include these Services you have to go a step further so for me a decentralized intermediary is like it's a hybrid entity that is kind of Bridging the interface between real world and and on-chain of course and what it has to do it has to lock all the all the transaction that is doing just think about a broker that is um uh acting on behalf of a client all the transactions that he's doing at the centralized exchange they have to be logged and he has to download them on chain and then we have a verification step all these events are checked and cross-checked against market prices against the order book this can all happen on chain um that also allows some sort of like programmability because like we are all about I want to make these things programmable yes I think we can even make this this intermediaries programmable I mean we can embed them in smart contracts and then someone can interact with these intermediaries potentially after kyc through smart contracts um and then the the fifth requirement I think is to um yeah to allow Community to to govern the services of um decentralized intermediary in the sense that if we notice that the broker is misbehaving charging too much failing and getting a lot of unverified transactions we remove him and we maybe we slash him and uh if this works for some time we will end up with a system of intermediaries that have behaved trustworthy in the past and I think the benefit for the user is massive because then he has this kind of web of intermediaries that the protocol has selected and that that he can trust and then I think there is a phase two um and this now relates to what I talked about linking the state on chain and off chain I think this is much more work and it's much more complicated because it also involves creating a legal framework that would allow us to do but just imagine your are a real world token tokenizer and instead of creating an SPV somewhere in Hong Kong or Singapore putting your assets there and then just launching a token you would have to set up a trust and distrust has 10 trustees and these trustees don't belong to your company and similar to a multi-sick a transaction of the funds that are in the trust can only happen if 5 out of 10 trustees agree plus they can only happen if after checking on chain it is clear that the funds are not used as collateral for tokens that are existing on chain so you're creating a hook between the assets of chain and what is stored as a informational chain and just to to finish here's an example of how a broker could look like and I can show you later like I have been experimenting with some friends we created a company that actually is doing exactly this so how would touch a flow look like so a consumer would send for example ethereum to a Smart contract we have validators that are observing this um request the smart contract is sending the request and the ethereum to the broker or OTC desk the broker is sending the information about the kyc that he potentially has to do with the consumer to the very to the validators the broker is also sending the information of the transaction to the blockchain the validators are getting a performing a data request to the blockchain to get the information about the transaction they make a data request to the centralized Exchange there they can get order book data to check for example whether at the time of the transaction the order book was actually in a state that the price that the broker is claiming is truthful and then the broker is performing the transaction and sending out the um Bitcoin to the consumer and what we are ending up with is a cross chain swap through a centralized exchange that is not fully decentralized of course yes I mean all the blue parts are not but I think it feels much better and is much safer much more controllable much more transparent than what we are dealing with right now yeah um so here is just the list of like a short list of the requirements that I think we need to fulfill to allow a decentralized intermediary yeah transparency logging all the states verification all the states have to be verified it has to be programmable it has to be controlled so that the community can switch off intermediaries it has to be committed intermediaries have to be rewarded but also penalized and then the last and most complicated step we have to yeah link off chain states with Unchained States in both directions yeah I think that's it that's it thank you