RAI: The First Stablecoin - Bert Kellerman

Good. Hi, I'm Bert from Reflexer Labs. And I know the title is a little provocative, just a little, but I hope to convince you that Ry is the first real stablecoin. Okay, when you think of stable currencies, you might think of these centralized assets linked to the dollar. Basically, they are off-chain US dollar certificates.

So, having them implies that there must be third-party trust involved. You have to believe that there is an off-chain dollar somewhere that corresponds to your digital representation. Because they represent US dollars, they are also motivated to follow anti-money laundering guidelines. That's why online digital representations basically have blacklists. These are the USDC and USDT blacklists.

You can see the trend there. While I was preparing this, the number kept going up. I had to keep updating the graph. Those are centralized stablecoins. They could also consider these could also consider these : they are decentralized stablecoins pegged to the dollar.

These are stablecoins represented, at least in part, by cryptographic collateral. And then there are decentralized, unpegged stablecoins , and that's Ry. Rye is a fork of the MakerDAO codebase. Everyone knows Dai, with 10 billion Dai in circulation. And this is one of the problems of decentralized stablecoins that Rye was created to solve: the imbalance between supply and demand.

And what that means is that the market price of a stablecoin is not traded at the coin's redemption value . Why does this happen? All stablecoins backed by collateral exist as a debt to someone who has minted them against their collateral. So if there is an excess of supply or demand, the market price will deviate. It is more common in collider collisions.

If a currency is backed by collateral and that collateral falls, those who have debt in that currency do not want to be liquidated, so they buy back their currency. And you get these scenarios here. Why is this bad? Okay, if you don't want to be liquidated and you have debt in one of these currencies, by paying off your debt, you get one dollar of credit in the system. But if the market has deviated as in this case, you have to pay extra just to repay your debt.

You might have to buy the currency at $1.15 on the market just to get one dollar of credit in the system. So, is it stable in these situations, in these time periods? Given this behavior of stablecoins backed by collateral, I think it's fair to say that it's not stable. Well, and that's how Rye was born.

Well, here 's a bit of MakerDAO history: the single-guarantee Dai was launched in 2017 and was backed only by Ether. There was a technical specification intended for Maker called the " technical specification intended for Maker called the " Purple Paper," and it dealt with how to deal with the imbalance between supply and demand. In the end, the Purple Book was not implemented and in 2019 the Multi-Guarantee Dai was launched . The reason it wasn't implemented was the Dai's market adjustment ( implemented was the Dai's market adjustment ( PMF), as the Maker team really wanted one Dai to always equal one dollar. That's what it all boils down to.

So, at Rai we noticed that and said, "You know what we noticed that and said, "You know what ?" We believe the Purple Book should have been implemented. We believe that solving the problem of supply and demand imbalance is more important than always maintaining the value of a dollar. So Rai is backed solely by Ether. We consider Ether to be layer one money.

That's why we want a stable currency that only represents our layer one money. Minimal governance. This is a fundamental value of the team and the protocol. Has anyone read Ray Dalio's book this year on the history of reserve currencies? Anyone?

OK. My conclusion from that book is that all reserve currencies have failed throughout history because of humans. Humans end up being motivated by external factors and do not make the right decisions for the system. We recognize that. We recognize the fallibility of humans and we do not want to have governance.

We will not be having governance meetings. We are not going to vote on parameters. We're not going to have any of that. In time, Rai will be yours. It will not be ours.

It will be for the community. That is one of our core values. Algorithmic rates are the way in which stability is achieved. I'll explain that in more detail. And due to algorithmic rates, we ended up with a floating refund value.

It is different from most stablecoins pegged to the dollar. Good. How is Rai created? It is created like any other collateral-backed stablecoin collateral-backed stablecoin . The user locks Ether in a "safe" of Reflexer.

And with that Ether as collateral, you can mint Rai as a loan. With a very small annual rate . Right now it's 0.5%. Once you mint Rai, you can do whatever you want.

This usually involves selling it on the market and going long with another crypto, farming, or leveraging long with ETH. It depends on you. Those are the coiners. And then there are the people who just want to buy and sell stablecoins. So move in and out of stables as your market outlook changes.

Okay. Okay, so market outlook changes. Okay. Okay, so how does Rye stabilize? First, some definitions.

The redemption price is the face value of Rye. It is the backing, the amount of ether that backs each Rye. It is applied through a process called global settlement that we inherited from Maker. If the system were to go through this, one Rye would be exchangeable for that amount of ether. And then the market price.

Let's define it. We're not going to act as if it doesn't exist. We're not going to wait for it to simply trade at the correct value. We will define it because we are going to influence him with the god of money. That's Reflexer's pet, the god of money.

The god of money is an autonomous smart contract controller that makes decisions to stabilize. Its sole purpose is to drive the market price up to the redemption price. Okay. Brief summary of feedback control. It is a type of feedback control.

It's the controller. It's a loop. You have a controller. The controller does something in a system and the system produces an output that is measured. The input to this feedback control is a target value.

We have an actual value that comes from the system and the controller analyzes the error, the difference between the target and the actual value, and then the controller provides an input to the system. In physical systems, this could be opening a valve to control a fluid, controlling voltage, temperature, various things. Filling a glass of water in the sink is feedback control. Okay? Your hand on the key is the controller.

The system is the tap, the cup, the water. Your eyes watch as the water rises as it approaches the target. And that 's feedback. And as you see it approaching, you control it with your hands. It reduces the speed of the water.

Okay. The god of money is a type of feedback control called a PI controller. All you need to know is that it considers two types of error. Observe the current error and then observe the historical error. Just like when a central bank meets to determine rates, they look at what's happening in the economy now and what has happened in the last eight weeks.

It is the most common type of controller implemented in industrial control. It's good for noisy systems. And there is even research showing that modern monetary policy resembles this type of control. PI is a subset of control P. So, we believe we're going in the right direction.

Good. I think this...Oh, yes. This is a video, a simulation of what a PI controller looks like. So, let's use the example of a heating system in your car.

Hey, you're going to turn the dial to the red setting. The system is the blue value red setting. The system is the blue value . He'll adapt. Uh, green is the air.

You can ignore the green. Then air. You can ignore the green. Then you get into your car. It's 30 degrees outside and you want it to be 70 inside.

So you turn up the dial and the system starts to respond. Probably by sending voltage to a heating coil or something in the car. Don't know. Hey, you want it to be hotter. Then, you turn up the dial.

The system responds. You want it to be colder. The system responds and attempts to converge The system responds and attempts to converge . And if you can't decide, the system will still try to converge, even if it doesn't fully succeed. It's called marginal stability.

Good. So how do we use feedback control principles to make a stablecoin trade at its redemption value? Good. Our desired market price is the face value of Rye. It is the redemption value.

That's what we want the market to reflect we want the market to reflect . And the real market price is where it's being negotiated. So we have a smart contract that observes the difference and sets a rate for Rye, and that will appreciate or depreciate Rye and influence the market to converge. So, uh market to converge. So, uh , our previous example with the other stablecoins and the high market price, if we have that with Rye high market price, if we have that with Rye , um, in this situation, we have the market way above it.

Therefore, the controller needs to create sales demand. And how does it do that? Oops, a bit late. Much delayed. Therefore, the redemption value decreases.

Good. To influence people to sell. If you have Rye, it's depreciating. You're going to sell it. If you're an issuer, your future debt is getting cheaper, so it makes sense to me.

And when you issue sense to me. And when you issue , you generally sell. So, everyone is incentivized to sell. And the god of money will do that until there is convergence. And the opposite for the opposite scenario.

The market is trading below that. We need to create purchase demand. and all participants are incentivized to buy. Okay, so how's everything going? This is our V3 Rye fund for the last eight months or so.

There was a lot of volatility at the beginning when it launched, but I wanted to include that RAI redemption price in red and the market, the spot market, is in black. Um, so you can see that we started around 302 in this period and ended at 3025. Um, after our initial volatility after our initial volatility , the total deviation, the percentage deviation after August, was plus or minus 1%. Then they can see that the controller opposes the market to induce convergence. So after August, this period in which the market is below the redemption price is positive.

Uh, finally here we had our pool of Curve; Our Curve pool went online. So we had a lot of demand for RAI and the market went up, the redemption value went down and eventually that will converge. So it is free-floating, but at any given time the amount of Ether backing each RAI is equal to the redemption price in red. Good. So why is RAI the first stablecoin?

Good. It guarantees the stability of the market price with respect to the redemption value. Good. This is important. You're not stuck for long periods of time paying a premium on your debt in order to pay it off.

And the important thing is that it can do this and be backed solely by Ether. Okay, I forgot to mention something when we had the three graphs of the deviations. Um, almost all other stablecoins deal with that. Let's go back because this is important. Good.

How do most stablecoins prevent or deal with this ? They put other stablecoins into their system as collateral. That's the common way to deal with this. Normally, it's USDC. Perhaps it is a decentralized currency that is ultimately backed by USDC.

So they avoid this through a centralized guarantee, and that's the one thing we did n't want to do. Because we focus on minimal governance and on ETH only supporting RAI. Good. So again, we can force market convergence to redemption and maintain the purity of the collateral only in ETH, and the cherry on top is that it's completely autonomous with a smart contract controller. Okay, governance minimization.

This is our timeline. We are downplaying it. We are freezing parameters. The first phase is in April. We don't want to be in control.

The second phase is in August. That's happening. Um, what will remain without governance at that point are the PI parameters and the oracles. PI parameters because we are still fine-tuning and want to make sure we have the best parameters. We have just activated the historical error.

Um, I mentioned that the PI controller has two types of errors. We are about to enable the historical error soon. So we want to adjust it to ensure it provides the right balance. Oh, and then the oracles. Oracles are third parties.

So we don't want a long-term dependency. We do n't want a third party to be able to overturn the system by shutting down an oracle. So those uhs will remain. OK. And last year has been quite uh busy with integrations.

We've had around 40 integrations. We have several DAOs that maintain Riser as a reserve currency. We are on several lending platforms, some L2 and exchanges. It's been quite eventful. Okay, to finish up, all of these on the left are coins linked to the dollar.

They are always equivalent to 1 dollar dollar. They are always equivalent to 1 dollar . That is the value of redemption. But uh, a Rye is a Rye. Thank you.