Qidao - The Truth About Stablecoin Repegs and the Factors that Influence Them

so stable coin reegs uh so today we're going to talk about a subject that doesn't get a lot of light like people talk a lot about how to Peg stable coins people talk about the pegs but nobody talks about like what happens when you know hits a fan like how do we come back uh so this is kind of like the broad terminology for people that might not understand like pegging you know this is where everything's fine you know you're a peg you're worth a dollar like everything's fine uh dpeg you're no longer worth like whatever you're supposed to be uh worth and then repe this is what we're going to talk about today how do you come back to Peg when you know people might not trust you when you might have bad debt uh maybe your model doesn't work like how do you come back from that uh and you know obviously ad my we we have suffered this so uh know a lot about it so dpex happen uh a lot of people that make stable coins especially now like they come out and they say you know our stable coin is the best you know like yes a good model uh we're very confident about it um but you know they're eventually going to deeg because the the reality is that every single major stable coin has deped at some point uh you know usdc die go M you know even ours uh everybody deegs um but uh not everybody comes back right so Tera is a good example platypus usdr um and that's very important to know because uh a lot of people you know try to buy the bottom they try to like Arbitrage uh I know a lot of friends that were trying to buy the USD uh token when it was going down because they thought it was going to come back up uh they just get wrecked uh so today we're going to talk about you know why some of them come back and why not all of them come back but first of all you have to understand why stable coins deeg because if you don't understand the problem you're not going to understand the solution uh and so the two main areas that we're going to focus on is one bad debt you know either get hacked uh there are bad loans stuff like that and the other one is your system doesn't work there are economic misalignments uh I'm going to start with the second one because it's like much easier right because uh one is like adjusting parameters or adjusting models the other one is like you know you have to like burn millions of dollars uh so economic misalignments uh the recent example that you know we can see about economic misalignments is the change of Market premiums so during the bare Market the highest yield in crypto was t- bills because there was no usage right and so you would be fine getting away uh giving people 5% on stable coins and people would love it uh but in January like people started borrowing more there was more leverage demand and as a result like I could go to a or compound and get like 10 to 12% uh and so what happened was uh all these projects that were giving yield or or getting yield from charging suddenly didn't have enough money to pay for these like increased Market premiums uh so D for example uh they have like the DSR and they uh push a lot of the interest that they make onto the stakers and then obviously liquid they have a fixed uh uh rate of 05% which is not great right when people are getting 10% and you're charging only 0.5% uh so that's that was the issue that arose uh and it's the same in like the real world so a lot of people were staking their USD uh in t- bills and uh then the the FED decided to start increasing rates so if you were caught with those staked uh American dollars from before uh you're kind of screwed because now they're worth less uh people don't value your 2% when they can get 5% so here's the outcome so what happened was uh D was only giving 5% uh usdc on a was giving 10% so people just started like selling their their Dive by dming it on the PSM uh and then LUSD something similar like people didn't want to hold LUSD right because you know you can only give so much to LUSD holders if you're only charging 0.5% uh so naturally people started redeeming uh so the solution uh you have to see like a lot of these people were going to repe uh to dpeg like LUSD didn't hard dpeg D didn't like actually depe but they were heading in that direction so if um D didn't do anything the whole PSM would have been like completely collapsed people would have redeemed all of the usdc and eventually uh they would have started going under a dollar so they had to act quickly to like bring people back into the PSM and so what they did is that they increased the rates right so if people want 10% that's fine we're going to start charging 10% and we're going to start giving 10% and it worked perfectly like people started coming back up uh obviously the the chart starts to go down after ethena launched so I don't know it worked for a little bit and then for for liquid uh like their whole thing is like immutability right so they couldn't change the rates and as a result people just kept redeeming and you can see like people selling people redeeming uh the rate started fluctuating a little bit uh so that's that other one that's uh Market premiums the the harder one is bad debt so let's say you have a stable coin and you have bad debt how do you come back so here are some examples of like people having bad debt us obviously uh was 100% bad debt why because there was not enough collateral covering the the stable coin uh my obviously we were the largest stable coin on Phantom the main Bridge got hacked kind of screwed uh uh Oiler kind of uh screwed a lot of people right CU when they got hacked they had bad dead thankfully they got the money back uh but uh yeah not everybody was as lucky so uh what is bad debt so generally uh speaking bad debt is when there is way more of the stable coin than there's collateral uh so like let's say like uh a bunch of like loans you know their collateral goes to zero so there's no point in liquidating them uh and now they like excess stable coins uh but why why is that a problem the problem is if everybody redeems everybody liquidates if everybody exits the system eventually you have no collateral at all and you have a couple of stable coins and so for people that like are holding your stable coin they begin to get very worried because they think they're going to be the last man standing right when everything gets 3 deed um uh they're going to be worth like they're going to be holding a stable gun that's worth nothing uh and so the first solution if you have bad debt is to clear the bad debt right so uh Doan tried to do this right he knew he had a bad stable coin and he knew people were going to start selling it but he didn't have the collateral so what he did he did he founded the Luna Foundation of uh what's it called lfg and he was trying to buy uh Bitcoin with USD to collateralize it so then eventually there would be more collateral than debt and and people would be able to redeem it uh and so look you know deploy more Capital steady Lads uh this is all meant to tell people don't worry you're not going to be the last man standing uh and hopefully that like repex the stable coin and it worked for a while like people believed it uh and so you know this idea of clearing bad debt was quite successful for a time uh but because they didn't clear fully the bad debt eventually you know the scups couldn't um uh continue people eventually left uh so here's a successful example of uh of a reeg so as I said before my uh we were the largest stable coin in Phantom and and then the main bridge on Phantom was hacked meaning all of the collateral that's backing our stable coin uh was suddenly worth 0 and that's really bad for for a stable coin uh and uh we had around $1.4 million uh of bad debt on polygon now why was uh Phantom connected to polygon because my was uh completely fungible and so the may you Meed on Phantom was the same M you were're holding on on polygon and so um if the people that Meed it on Phantom then transferred it to polygon then suddenly that's a problem for polygon holders because that's excess M on polygon not excess mice on Phantom uh so going back to the example of like bad dead is the excess of of the stable coin uh we didn't want to scops people like we didn't want to tell people like uh everything's going to be fine just buy our stable coin maybe do some K like rounds to you know tell people that everything's going to be fine so they prop it up we just decided to burn a lot of the treasury and actually fix the problem uh we didn't tell anybody you know you should come in you should try to like Arbitrage it we focus solely on increasing revenue and like this year we've already 3x it and using that Revenue we were able to uh buy back uh all these bad debt and you know go back to a dollar very painful as you can see we we dep a while ago and so it was like a long and very painful Journey but eventually we were able to do it because we cleared the the bad Deb uh transmitters an interesting example uh because um if you can um socialize the bad debt then you don't really need to clear it so the problem with the bad debt obviously is like there's the last man standing like somebody's going to have a stable coin that's worth zero dollars at one point uh but if you're able to get ahead of that and say okay let's split up the loss like if we have 5% B debt uh everybody loses 5% then you're never going to have a last man problem like last man standing problem and that's kind of what transmitter does so if one of their Reserve assets uh deps a little bit then the Redemption rate of all of the collaterals is adjusted to be that I think that's pretty ingenious because um if you're doing a PSM style thing like transmitter there's no liquidations right if they goes down you're screwed uh so this is a good way of protecting all users from from from that Deb and then there's finally DOA so DOA hasn't cleared the bad debt but they're at Peg and actually they're doing really well they're making a lot of money uh Bas Vel Drome they're done pretty well um so how did they do it so they did a mix of like repaying a little bit you can see they're 43% of the way there uh and then a lot of marketing so this page for example is part of their transparency dashboard where they take people people you know we're we're getting back like there's things that are being done to uh make sure that you're not the last man standing uh and so uh this points to the the you know the idea that it's all about uh portraying confidence to the markets right like if you're not going to uh be screwed in the end then people are going to want to hold your stable coin and maybe make some money on the on the repe so uh conclusion adaptability wins uh as we can see here there's a lot of stable coins that uh deeg but the ones that were able to succeed were the ones that were reacting to their uh their problems so my we uh bought back the bad debt DOA they have this whole like plan to buy back the bad debt uh die they change their parameters right to fix their economic problem uh and then liquid we didn't mention it here but you know liquid had their issue right and they started like you know being redeemed on now they have the V2 which directly addresses the problem that they had before which was that um um you know the interest rates change like even if you don't want to change the world changes and so uh yeah you have to remain adaptable uh thank you guys [Applause]