Ameen Soleimani: RAI – A Low Volatility Trust-Minimized Stablecoin #460

Transcript

welcome to episode of the show which talks about the Technologies projects and people driving decentralization and the blockchain revolution I'm Brian Crane and I'm here with Frederica Ernst today we're going to speak with Amin solimani he's been on the podcast before today we're going to talk and he's the co-founder of reflex lab we're going to talk about reflexive today and the stable coin right that reflexor creates so just before we do that briefly work from a sponsors so stake wallet is your new favorite multi-chain Mobile Wallet that puts the power of web 3 at your fingertips in just three tabs you can stake and manage your assets in over 22 built-in protocols including all the

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thousands of users on this next Generation wallet by downloading it today on iOS or Android and go to stake wallet dot Phi State spell like the meat and one more thing so with episode we are looking to hire a community manager so if you want to you know to help us grow the audience and you know produce better content so if you're passionate about crypto and creating content we want to hear from you um you can find a link for applying in the for the position in the show notes and yeah if you know somebody else you think might be a good fit just share it

with them and would love to hear from you and with that mean thanks so much for coming on it's great having you yeah it's great to be here so I was I was listening to this long three-hour discussion uh the other just today I think I finished it today about tornado cash and you know all those things and I heard you in there to sort of you know speaking a little bit the the voice of you know pure uh crypto decentralization you know I think there's a lot of other voices in there as well um I guess that sort of ties maybe a bit into reflex or two but I don't know maybe we can have like a brief background from

you like you know who are you how did you get into crypto and then sort of how did that end up with you working on reflexor so I got into crypto uh like many people buying mushrooms on the Silk Road a decade ago uh I lost all my money in Mount gox sometime after that uh I've learned solidity joint consensus works on ethereum Smart contract stuff built some advertising stuff some micropayment stuff payment Channels State channels uh eventually started spank chain was trying to bring the crypto blockchain ethereum micro payments Tech to porn um and adult sites and then later started reflexor uh which makes the

stable coin Rye a fork of uh maker does die uh so that it would stay sort of eth maximalist also help start Dao's started molokda back in the day um made Medicare cartel ventures in the Lao of code base uh and so helped build some of the early early Dows really generally excited about furthering tools for people to maintain sovereignty have access to financial services be able to store money transact privately securely I don't know how this made me the poster child of decentralization in that last three hour conversation uh that we had it was a Twitter spaces hosted by Joe Gunther and

her I think company like espressosis is like a privacy thing so there are some representatives from that on it uh Zuko was there there's a bunch of people uh Zuko is obviously much you know he's an actual cryptographer he's a veteran of the space I think I was just the angriest and loudest person on the call because tornado is kind of personal for me uh helping with Malik Dao we gave tornado their first grant uh I knew the people doing it you know I like them I'm not happy that one of them is sitting in a jail cell right now uh it's not great so I was very angry I was just expressing that um

on the call uh I think obviously this stuff has far-reaching implications uh a lot of the conversation has moved not only from privacy to also the implications of like censorship and uh stable coins having censorable collateral and stuff like that and so you know I've I've been able to contribute in multiple places in the discourse cyber coins having sensible collateral um that sounds like maker um the other poster child of decentralization in the space which kind of which is an image that has kind of fractured over the tornado um Fallout a little bit

um I really want to talk about this at length but before that I think we kind of need to cover our bases here and kind of understand how Rye works and how it's different from maker so maybe I think most listeners will be familiar with how Maker Works and right Builds on a lot of ideas from maker so more specifically the first version of makeup what is now called Psy um so can you talk maybe a little bit going from there and what you know talking about the point where you chose um to go on a different path than maker yeah so I was a big maker fan dye fan all through 2018 19 uh smoking couldn't

get bank accounts uh and so die was a really great resource for us to be able to not lose all of our money in each uh during the bear Market back then I liked it as like cypherpunk money it was like you know only backed by eth there's not a lot of governance uh it just kind of works um uh the motivation to Fork came uh later in 20 I think 20 when they started adding other forms of collateral they went multi-collateral so they they started loading up on usdc uh and they started uh doing a lot more governance and so I wanted to see what the sort of pure

uh decentralized sort of stable coin could work like and so we forked off of a multi-collateral dye and we made Rye Rye has only a single form of collateral just raw eth that it accepts and you deposit the Ethan in Fairly the similar way to Mint Rye the same way you might mint die the key difference between rye and die is that in order to maintain stability without having centralized collateral like usdc which allows people to short die against usdc easily and keep die at the peg uh die a rye allows the system to have negative interest rates now that's not like a negative

interest rate where you lose money it doesn't turn your hundred dollars into 99 the way it works is that it changes the actual Peg price so in all of the other stablecoin systems they have a peg price of one dollar Rye says well actually we're gonna make it less than a dollar and this is a way to incentivize people to sell it and so it does so gradually over time and it expresses the the rate at which it will do so that's called the Redemption rate which is shorthand for the rate of change of the Redemption price which itself is like the peg I I feel like maybe before we get into like the exact mechanics of Rye maybe it would be worth to speak a little bit

because you because you said you know there was like two points right basically that you know bothered you one was there was it became multi-collateral right and today I think it's something like 70 percent is you know like usdc right in uh in maker and the other thing was like the governance can you talk a little bit maybe like why did you think those were big issues and you know a little bit like sort of the division uh that you saw for Rye uh you know sort of like opposing maker yeah so the the two issues right the the multi-collateral and the governance

um so at the time it didn't seem like multi-collateral and like the usdc inflow was gonna be that bad uh right now it's really bad uh right now there's like 20 crypto collateral and like 80 you know usdc and usdc derivatives so it's not entirely unfair to call die like a usdc condom uh you know I I do that I thought it was a safe way to use usdc you know like friends don't use let friends use usdc unprotected um we'll we'll come back to whether or not that's that's still the case but uh the the sensor ability of the collateral is an issue because if for example the usdc has to freeze the die contractor

all of the die contract then everybody holding die has to you know is kind of stuck uh they they need they don't have a way of getting their money back um and the people who have ethernet system are also kind of stuck because they don't have a way of like paying back their debt so it's not great for the system the governance stuff is also something that we wanted to improve on a lot of the governance comes from having multiple forms of collateral needing to manage the different kinds of collateral and how you you know assign risk to each one what's a stability fee Etc but another thing that you do with the governance is you like vote to set interest rates so whenever die is not stable a bunch of people get together in

a meeting and they say we will raise the stability fee to something higher for example if the die is below Peg you know so they did this before die went below Peg to like 95 cents and then they raised the civility fee to like 20 and then die repacked so the thing that ride does that's cool is it automates this process and zooming out to like the vision of this thing the vision of this thing is like we want International cooperation on a reserve currency uh this has not been my goal for that long it's actually been a stated goal of the center Bankers of the earth who have thought about this for a long time the way that they make progress on this is they write papers

in ethereum we can do more than writing papers we can test things and so Rai is a demonstration of a system that has a transparent rules-based engine to stabilize itself that isn't necessarily dependent on a group of people to go and figure it out maybe let me let me let me Loop in here so um make a in its original design also if I require correctly head um um had a Target rate feedback mechanism and they ended up not implementing this um in uh and and it basically ended up introducing this governance uh based

parameter do you know why that happened uh yes so basically it was a political thing and it seemed at the time that the dollar Peg was more palatable uh and would get more adoption than letting it float it was like it was a little too weird uh I don't know if people remember at the time like I was sending twenty dollars of e 20th was 20 as like pizza money uh the existence of something like die was a a great uh Innovation because it was the first stable coin ever that ethereum people could use to even transact like using a not volatile asset but yeah the the original design had the

trfm target rate feedback mechanism that was Nikolai the technical co-founder's plan was not to Peg it uh it it it seemed he lost the political battle and that the pragmatists were more interested in having a dollar Peg because that would help growth uh and so maker never really had to deal with this problem of trying to force people to not hold die uh or sell their die if the you know uh if the price of die was above the pack and usdc was also introduced later right it wasn't one of the early collaterals introduced a couple of years ago when prices fell precipitously um it looked like the entire system

might collapse at some point and that's when they introduced the usdc collateral right yeah so it was right around black Thursday I think March 12 2020 uh East crashed a lot I think 50 in 24 hours and die spiked up and in order to deal with the excessed item in they added the tag stability module which allows you to Mint uh die against usdc and so that was how they were able to lower the price of die by adding the usdc now I've made memes where I have like maker uh introducing the usdc as like a trojan horse for ethereum right uh and it's like the caption is like where did it

all go wrong and it's like that day uh is when it all went wrong it didn't seem like it was going to go all wrong from there uh and you know but like it didn't seem obvious that we were going to end up at like 80 usdc and die uh from that point but for me it was enough to want to try something different and to try and see how far we could get with Rye let's have um let's continue this uh discussion after the technicalities Brian if you don't object because basically in the maker in the maker Forum um there's also discussion currently going on that was started last week by roon um about whether you know to kind of make die also free-float so basically this is kind of I think there's a larger

discussion to have to be had here there's a couple yeah absolutely um so um let's kind of before we kind of look at the exact feedback mechanisms um kind of May I give you my idea of how Rye works and you can correct me because it's it's it's a very counterintuitive and um a little weird mechanism to be honest so basically if if it goes off pack and the pack is arbitrarily chosen so it's not one US dollar but you started it Pi dollars to kind of to to kind of uh make everyone understand that this is super arbitrary um and then basically the the mechanism

that is behind it kind of tries to push back um the market price to the Redemption uh price at any point in time no matter where the uh Redemption price currently is and the way that it does it is it doesn't move the Redemption price closer to the market price it moves it further away which is a little bit counterintuitive can you talk about that yeah so the market price so so the the things happen in like the sequence right it could be like uh the price of eth goes down you know uh the price of uh people buy Rye to cover their their debts right now the price of Rise higher

uh and so well the price of Rye being higher you need to get people to sell the Rye uh or you need to get more people to Mint right uh and sell it the way the protocol does that is it moves the peg price down away from the market price as you said so if the market price starts out at you know let's say three dollars and the uh and it's at equilibrium at three dollars and it goes up by you know let's say five percent or something that's like three dollars and I don't know uh one percent three cents of fifteen cents uh well that's a lot uh and so that's gonna set a negative rate and so what's gonna happen next is that the peg that started at three dollars is

actually gonna start dropping 299 298 uh at a specified rate and so this is going to create the incentive for people holding Rye to realize that they should sell it because in the future uh not only is the price going to go lower but if the price goes lower and they don't sell it then the price is going to go lower faster so it's kind of an exponential function that you're throwing in front of this thing uh and it's basically like you know we'll keep growing until it resolves the question on this so so the price is at 315 and now this Redemption now it's already different right from this pack right so the peg was at with three and

it puts trading at 315 and now it's decreased to 298 I mean why um why do I believe that the price in the future is going to go down uh because the peg price is lowered um well if it doesn't it's going to keep going down faster so like you might stare at uh you know negative I don't know something like 30 rate if you have a five percent difference uh and the sort of what it's tuned it's like one to six one to seven

in terms of like one percent uh error will drive a six or seven percent uh you know rate and so like let's say you're staring at a negative 30 rate well you know that as soon as the price goes back to three or you know whatever the new Redemption price is that the rate's gonna go away but so long as it doesn't that rate's going to keep growing and the price is just going to keep dropping and uh this is a good deal if you have minted rye and you're shorting Rye uh because for me as somebody who's shorting Rye my debt is shrinking which is sort of the same thing as making money uh as a rye holder uh you know maybe I have the expectation that the market price won't catch up to the Redemption price but if it does uh

then I stand to lose a lot of money uh and the way the system's designed is that the rates just keep getting stronger if it doesn't so it's it's sort of like you know don't fight the FED we have our own version which is the money God always wins uh you can hold the price you know high or low if you want for a while but the end result is just going to be that the net change in the Redemption price uh you know the peg is going to move even further against you when you try to hold the market price I still don't fully understand how the Redemption price being lowered forces the market price to get lower so it creates an expectation that the price of lie will be Rye would be lower

in the future but why because the rate is negative and so you either well you either expect that the market price will catch up to the ramsham price or you don't right uh if you don't you will just be educated uh because the market price will eventually catch up to the Redemption price because the money got always wins uh because at some point the rates are so strong that somebody's going to take it right let's say you ignore the rates let's say you're you hold all the the Rye let's say you're the one who bought up ride of three one five right five percent above the peg right now you get to sit there and wait as the the Redemption price gets lower and lower and so at first it was you

know a five percent error then if Rye goes down the Redemption price goes down another you know 15 cents now it's a 10 error and so now that rate that was 30 is now something like double that you know something like sixty percent uh and that process only takes like with the current Pro like controller tuning only like a month or two uh to fully offset a gap in the market price by the same Gap in the Redemption price so you're staring at the rates doubling in something like you know uh a month or two and if the initial rates didn't work maybe the the stronger rates will right and that process doesn't stop uh until the market returns

to equilibrium so you can take the trade you just might not like how it goes you know it's uh in other words uh if you're trying to manipulate the price of Rye it should be expensive for you if you are trying to cause the Redemption price to go up or down you have to do something that the market actually punishes you to do and so everyone else who is aligned with stabilizing rye back to its Redemption price tends to make money and you would lose money because at some point in the future if you know right the market price does eventually go back to you know 285 or whatever the final uh Redemption price is like you

just lost that whole Delta as a rye holder so yeah I believe that I have no problems believing that I think that works it's kind of like a gyroscope that kind of writes itself right so basically it wobbles more and then it wobbles less so I think I think I buy that part the thing that I don't fully understand I mean um is I mean you have oracles built in right so basically clearly the the the protocol cares about the price ratio of eth to the US dollar um so how so basically cares about that ratio albeit not the value itself so in

as how much um does this mean that uh that the US dollar is is still influences the system right so basically it's not pegged to the US dollar but it is somehow correlated right yeah this is a thing we've also learned is that rye referencing the dollar still makes it a dollar denominated asset you know it has the ability to float away from the dollar go up 10 20 50 you know or down uh the equivalent um but it still is subject to the esoteric dollar swings in the market right if the Dollar by itself one day became stronger or weaker uh that would

you know somewhat reflect in the uh Rye uh trajectory right it won't uh it won't show up in the market price probably as quickly but uh it'll you know if if the dollar is strengthening right might weaken against the dollar if the dollar is weakening Ryan might strengthen against the dollar okay so basically if you look at the um the decline of the right price from 3.14 dollars to currently 2.90 or so um that would that would reflect um a um a strengthening of the dollar and the weakening of the East price right you have to be really careful to explain

Ryan macroeconomic uh terms because Rye is so small that the incentives for Rye holders are typically vastly greater than any sort of macroeconomic incentives for example the greatest price change in Rye happened in the first three weeks uh and it was sort of we effectively sponsored an attack on our own system by offering flx incentives to ride uh LPS without requiring any sort of minting requirement which now most of our uh liquidity incentives require is that you also meant the Rye that you're lping what we inadvertently did in the first three weeks was uh basically pump

millions of dollars into uh holding you know for people to hold Rye uh by offering incentives for the LPS and so people minted some rice some people initially did and then the rest of them went and they bought Rye off the market to LP it and then somebody else comes along buys that rye off the market to LP it uh and they all you know uh pumped up the price of Rye I think like 10 12 13 above the peg so it started at 3.14 it was like 3.3 you know uh at some points and then uh it took us three weeks to figure out how to fix that and then once we fixed the incentive uh the the you know it's a requirement it went back to Flat uh the

flat uh was around three dollars at that time so um much of the you know about five percent of of uh the the Rye Redemption price uh uh the ride Redemption price lowered by about five percent in those three weeks because the rates were like negative 70. uh the controller was also a little bit stronger and we to be absolutely clear like we thought that people were being irrational in in doing that but it turns out because some of those people you know flx opened it whatever a thousand when it did uh they were sort of being rational in that they were able to like play their Ponzi game and like exit the LP for some of them before you know the the price of Rye

declined and the you know the flx that they were able to get was more than that so long story short we're learning to be more careful about how the incentives can warp the perceptions of how the system is working to most people who are using it they sort of know this uh but to somebody who's on the outside you could very easily look at it and be like ah it's the dollar Yeah so basically you kind of you screw Ed it up with your own incentives but in a way the market does this for you all the time right so basically if you actually have to rely on fairly sensitive Market feedback kind of are

the actualities that you can price in um kind of have an effect on you anyway so for instance currently um if if you hold eth they are fairly lucrative things you can do with it at zero risk so basically kind of stake it for instance and that gives you like a guaranteed even if you liquid mistake gives you like a guaranteed like four or five percent um so basically if you have anything less if you stand to make anything less than that does your mechanism still work or is it kind of screwed by that so I don't think any of these things screw the mechanism to be totally clear Rye works with a negative 20 rate forever right works with a plus 20 rate

forever Rye works with you know zero percent rate forever like okay fat but uh that's a different question um because you know you could uh it attractive to who is is a good question right so like for people who have eth and who have the opportunity to you know get liquid staking returns of whatever four or five percent as he said uh they would possibly need you know more incentive to Mint Rye uh and so the existence of steak teeth in the ecosystem and the fact that rye does not

accept steak to eat this collateral creates an opportunity cost for anybody depositing eth into the Rye system and so that makes it so that they might want to get paid more to do so and so they might prefer a negative rate in this sense rise very like Farm to Table uh in terms of its stability like you know exactly where your yield is coming from like your yield is coming from the Rye holders who are paying you to Mint a you know Rye against your eth uh if the rate is higher that means the eth depositors are demanding more or if the rate is more negative right uh and if the rate is positive that means the you know eth uh depositing Rye mentors are actually paying to mintry

so it balances the supply and demand for the asset itself yeah I understand I mean I understand that basically it doesn't make or destroy money I totally get this it's a conservative system in that in that sense but basically on the flip side it means currently you have to pay like 14 and a half percent to actually hold right which seems unattractive to me so who who are the people who actually hold right yeah uh it's a good question and Rise market cap has obviously shrunk a lot uh having it you know only backed by youth means that uh when eth goes down your economic bandwidth is also reduced and you know the market cap sort of shrinks

uh necessarily um there's about 15 ish million Rye outstanding uh the people holding it are typically either lping it or Dows that want to be holding it uh DX Dao was until recently one of the largest holders but the negative rates you know uh cause them to sell and so um you know it's it's not going to be like Rye isn't going to be friendliest towards the largest group of people it's going to be friendliest for the people who care the most about decentralization right so it's if you if usdc works for you if you're not worried about you know blacklisting or having your collateral

blacklisted then like you know usdc or die could work for you if you care a lot about you know uh the collateral type and you also want to to know like have some degree of predictability in the trajectory then Rye might be for you so we mentioned or Federica mentioned I think you both mentioned state if I guess accepting sticky fast collateral would undermine a bit right this sort of trustlessness nature no because you you're gonna have like some dependency on how lighter down and stuff but of course at the same time it will make it like much more attractive to like mintry

is like how do you think about that is this something that like if you're like definitely not or maybe at some point we used to think about that now we don't think about that uh we already Froze all of the collaterals so Rye can only ever be backed by youth uh we actually can't change that anymore um I think it steath is good collateral uh it might not be good for what we're trying to do with Rye which is just try to minimize the surface area for attacks and like having staked eth as a collateral type makes it you know you somewhat have to be dependent on Lido's governance like working well and them

not screwing anything up or having any sort of like attacks or hacks or existential you know threats um whereas when you only use eth as collateral you have the you know as long as ethereum's working seemingly it'll be okay so less dependency of course it could drive more growth um personally I think that a better opportunity is to just make more Rye like things uh I don't think that rye will be the last Rye like thing I think for Rye to work uh there will be more Rye like things and by Rye like things I just mean stable coins that aren't necessarily pegged to the dollar stable coins that have mechanisms that

stabilize themselves whether their controller works exactly like rise or not is sort of a optimization problem you know you deal with later once you've already decided to not have a peg that's already you know the first step so I think there could be more Rye like systems we might even help launch them uh or contribute to launching them um on other you know even on layer twos that have like steak teeth and more forms of collateral um it was it was pretty expensive to have lots of forms of collateral on ethereum last summer too because the gas was so high and you need to spend gas for all the price feeds and things yeah so one thing I'm curious about about you know with regards to the right price

right so ride price started at 3.14 now it's 2.92 uh or something like that he like in the long run like what would I mean could it go to one dollar or five dollars or like in in what would determine that like if let's say if I was like someone is like I want to hold you know some Assets in you know like a crypto stable coin and you know I I would like to have it there for like five years and you know not have to worry about it and maybe maybe if the dollar like I don't know hyperinflates at some point

probably not gonna happen next five years but at some point I guess uh you know I would like not that to happen with you know I would like to be protected from that it's it's right a solution for this I would say it depends uh stability is really in the eye of the beholder uh if you think that like in five years the dollar is still a dollar then like You're Gonna Want dollar stable coins it's Rye is weird for me because people are like I don't get it I don't understand it's like long-term price trajectory you know and I'm like I perfectly understand it's long-term uh you know price trajectory I just don't

understand the intermediate Market uh things that might have to happen to to move it around like I can perfectly predict what the Rye Redemption price will do from the market activity right if you want to make Rye a dollar that's easy simply hold it above the peg for a couple years and it'll get there you know it'll devalue itself 30 40 every year we had this funny conversation on Twitter I was like should we rebase ride to a dollar right vitalik thinks so a couple other people chimed in and they they think so Eric Wall was mad at us he was calling Rye autistic money and we're like yeah well you know what we are autistic and we can stay autistic longer than you can stay [ __ ] so uh you know what's the argument for not

rebasing right to a dollar why didn't we start it at a dollar in the first place right and the the point is that rye is not mean reverting he doesn't actually care about what it's like initial starting point is so uh what might happen if Rye started at a dollar is that it could like Drop to 95 cents and then people would buy it because they think that that would make it it's supposed to go back to a dollar it's a dollar stable coin and like that's not how it works in fact by buying Rye you know uh at 90 like if the Redemption price is 95 cents like you might make it go down faster so Rye is designed uh once again to to to like be predictable in terms of how it responds to the market

um and so if over five years you think you know like the market is just like always above the the Rye Market's always uh above the peg then the Redemption price always going to go down uh and it's gonna you know slowly devalue in the flip side of that let's say we get to the hyperinflation scenario people like to talk about this uh the thing that I would expect to happen is that rye would roughly be uh in equilibrium with the rates in the ecosystem to borrow against ether so I would be surprised in the hyperinflation scenario where we expect like the dollar to drop you know 50 75

whatever percent over the course of a year maybe more if the rates to borrow die were at like 10 20 you know the stability fee wasn't like 10 20 because in theorem it should depeg right uh they should have to raise the stability fee to keep die from depegging and likewise you know everywhere else in the ecosystem we should see like pretty high uh borrow rates against ether for dollar denominated assets so I would expect ride to roughly be in equilibrium with those dollar denominated uh the the debt rates the debt interest rates so is that going to completely offset hyperinflation I don't think so uh would it somewhat offset hyperinflation

seems possible maybe even likely okay but like you know you said sort of like okay you know Rai reflects the this the market of Ryan the trading and but like let's say in the in the example I made like okay I just want to have some sort of decentralized crypto you know stable coin like I have no idea of like are people gonna be is it going to be above the pack below the pack like like zero clue right no interest in it either right maybe I just want to hold this thing so then that team that seems to I mean because if you actually look at the price chart since rise existed it looks pretty good right it looks pretty stable right it's basically been like

okay 3.1 2.9 doesn't matter right like that's close enough like over an extended time but of course if you then say like oh maybe it goes to a dollar or like you know then that that's like a very different matters so I'm like wondering a little bit about that of like how well it like serves because in the end people still want that kind of predictability with a stable coin right they want to know that it's gonna be worth even maybe it's relative to the dollar Let's ignore the hyperinflation scenario but they want to know that kind of okay a year from now it's worth a similar amount I think that's like the fundamental goal of like all currencies ever right is

that like you want them to be stable relative to like your purchasing power or like the stuff that you buy regularly you know your toilet paper and cheeseburger is that's like why we set up this Consumer Price Index to try and track it and like that's what our inflation metric comes from um like the the short answer is that like if you only want to check on rye every five years it's probably not set up right for that for you right now um it more it because of the response time of the controller being on the order of like a few months uh you kind of have to pay attention to it with a little bit more frequency than that um there are other controller setups

that you could do that change the rate much more slowly that could be more friendly for people to only check in every couple years uh for example um the cool thing about Rye is that in the meantime it tells you exactly what it's going to do so like on it's not like the FED it doesn't Bluff you know when the Rye has a certain rate it does what it says right so if you can pay attention to it you know it's it's fairly easy to follow the instructions and do what it tells you to in the sense that when the rates are positive it's saying hello if you hold Rye you know you'll probably make some money and help like hello if the rates are negative like if you sell rye and wait and then

buy it back later like you also might make some money you know the protocol makes very clear to add it's not Financial advice to tag to all of the protocol statements but uh you get the idea so so I mean maybe let's talk about the things that are still governed right so basically there's the flx token that you touched upon briefly earlier um and you just said that you made it firmly um single collateral so basically no other forms of collateral can ever be introduced for this form of Rye so what does f at X currently actually govern yeah flx governs a couple things it governs the controller parameters the oracles um and like a couple other sort of

there's just infrastructure pieces like the gas Oracle for the Pinger Bots you know to to make sure that the price feeds are updated um we like to we have this meme called ungovernance right and the idea is that we just want to progressively remove governance over aspects of the protocol uh we want to do this to make it harder for people to mess with it including ourselves um we also just want to have fewer meetings fewer moving Parts uh fewer opportunities for you know human corruption so we want to take uh we want to automate the controller as much as possible so far you know we don't update the rates

directly we only update the parameters that automatically update the rates and so we're able to have the controller discussions you know more more slowly like we've run this thing in production for a year and a half uh we ran it in the P only formed for a year then we added the integral controller uh about six months ago we just you know published our results of that experiment we're trying to figure out what to do next so we're still in the process of figuring out how to design the controller so that we can not mess with it for a really long time and we're learning what what that means to us uh because the ultimate goal is to remove control

um read the price oracles the system depends on chain link which is not quite decentralized uh and we are adding backup oracles that rely on on-chain t-wops that we could quick switch to easily through the governance so we have the sort of like Oracle white list uh and then you could switch between the oracles quickly but adding something to the white list takes a long time yeah but the the goal of all of our meetings is to have fewer meetings so we discuss the things that we want to remove control over and then we progressively remove control and as how much is the flx token like the mkr token so basically the mkr token kind of acts as a lender of Last Resort

right so does flx have a similar mechanism yeah flx has that mechanism built into uh if you know Rye becomes under collateralized then uh in the same way that I would uh they both basically become algo Staples uh backed by printing their governance token uh until their reserves are met but hopefully neither one goes under collateralized uh you know too much that that's a big problem and there aren't people to step into uh you know help bounce the books so is is there is there also a revenue side to effort it's the same as maker it

does a buyback and burn of the tokens with the Surplus once it exceeds a certain threshold in the Surplus treasury of the system uh make sure that it has enough money to pay for Bots uh and and everything the protocol makes money from stability fee and liquidations and how is the stability fee set because in in maker that's uh that's some sort of community I think you know that does this yeah we just set it to I think two percent uh I think it's it might be locked in Forever uh the goal is to not change it uh we don't actually want to change the stability fee the stability fee is

supposed to reflect the risk of the collateral uh maker sort of uses it as a monetary policy tool uh I don't think that makes a lot of sense I think you know the Redemption prices well obviously I think the third Redemption price is better to use for that and having two knobs Is Not Great uh to to do that so you just fix one of the knobs uh the stability fee and then play with the other one yeah but I mean Mecca did the exact Converse right they also only have one one knob because they fixed the Redemption price to one dollar so basically it's kind of like yeah so it's maybe we should talk about that to me it's exactly equivalent in terms of basically how much control you have over the system hmm why did roon propose

that they don't Peg die to a dollar anymore in the Forum last week interesting question I mean yes that doesn't mean that's a really good question I mean why don't you answer your own well maybe for people who haven't read their posts maybe uh maybe uh can either of you give some context about like you know what was written in the post and yeah sure uh so basically This Tornado cash usdc sanction uh so so when tornado cash was sanctioned usdc also went and froze all the usdc and those contracts that made a little bit of a wake-up call for everybody else who has usdc in their contract uh that could potentially be censored or you know Frozen

um and and dye has I think the most it's like six billion usdc's or something like that right so uh roon looks at this and is like huh we need some way of reducing our exposure to usdc uh and he looks at the knobs and he concludes that the most effective knob that we have to use is to actually reduce the Redemption price over time slowly now they could of course they don't need to use our sort of Target rate feedback mechanism they could just manually set like a negative half percent rate to start with or one percent rate to start with right and that could apply to you know all the die and then what that makes it is that it's

a less attractive uh you know for you to Mint potentially against usdc um or uh and so um yeah it's one of their tools to to reduce the die demand and to reduce the usdc driven dye demand uh and so in the aftermath of this it's been pretty funny because Nikolai has been there uh in the forums and the in the Discord and I've been there and it's like really funny because Rye which was sort of uh [ __ ] on or you know uh thought to be this like stupid thing that no one should care about is like

the whole research plan for their future right uh like had we not done right like everyone would be sitting there twiddling their thumbs uh thinking oh negative rates like what do we do uh no one's done it before it sounds scary I don't know right but because we've done negative rates even in you know the simplified uh Pi model uh that we we did it it's like at least there's an example uh that you can point to and you know look and and and see something that for the most part Works to stabilize uh and use that as a direction and this sort of reflects the like three phases everyone goes through when they when they encounter Rye they start out and they're like man right this thing is weird uh I don't know how

it works I don't want it I like the dollars and then they learn a little bit more and they're like oh I get it uh it stabilizes itself using the tag like that that kind of makes sense but it's also like kind of small and weird and I don't know if I I want it and then they learn a little bit more and they're like I finally understand why the system is designed like this and I don't understand why everything isn't designed like this uh and that reality seems to be coming true with die uh die you know they bit The Poisoned Apple of usdc and now 80 of it is usdc-backed and they have to decide what to what to do about it um it's almost a civil war because all the people who have jobs that depend on

the usdc and the rwa stuff like are gonna try to keep the system that way uh and so I don't know how this is gonna unfold but it's uh I'm I'm definitely on team decentralist which is about uh trying to reclaim monetary sovereignty for diet uh have die be what did you know maker holders and die people want it to be and not have it always necessarily be a dollar if uh being a dollar adds too much risk yeah I agree do you think people should have been alarmed earlier by the fact that so much of dye is actually backed by usdc uh do you think we should never

have gotten to this point where it's like 80 percent that's hard to say I think maker made the pragmatic decisions based on the information they had at the time I think it would have been very hard for them to decide to not use the usdc and die for the last couple years I think that uh given the fact that we've gone and done this research uh you know and and sort of proved that you can have negative rates without destroying your whole system uh you know rented and prod for almost two years I think they're in a much better place to try and make this decision now and and to be clear this the thing is going to unroll over like several years roon is sort of only talking about it

now to get people prepared for it uh and we are excited about this because it means more people will learn about Rye learn about the trfm learn about unpeg you know stable coins or controlled pegs stable coins uh and we can sort of migrate intellectually away from the barren Wasteland of uh dollar stablecoin dominance forever maybe if we zoom out a little bit um so if you look at the demand um for um for die or for dollar denominated disabled coins in general so when people are crypto long there's always Iman right so basically but this kind of

flips when people are crypto short right so they don't want to use crypto um for collateral so basically in in times like these where people generally tend to be crypto short um do do you think it's a it's a bigger uh bigger problem to kind of to find people to Mint die or to hold die um I don't know I mean when when crypto goes down most of the stable coins that use debt leverage to back them will go down as well um it seems prudent to be able to impose negative rates uh because more people

are going to want to hold the stable coins than people are going to want to take on debt you have a very basic supply and demand equation there and so you have to balance it by having some sort of subsidy and incentive for the people who are minting and some sort of costs on the people who are holding and so negative rates are the way you do that um so yeah I think it makes sense I don't know what the like to zoom out again right like I don't think the end game forever is dollar denominated assets uh I think that in time crypto will probably make its own price indexes uh in time crypto will probably you know use some other

standards besides uh you know basket of Fiat currencies or something um for now we use the USD reference for Rye because it's easy it's liquid you know it's um relatively it's you know still today the most stable thing uh that we can use as a reference there are some plans uh not anything in motion right now but things that we could potentially use to move off of the dollar if we wanted in you know over the course of 10 years or something if we wanted to switch to you know some other reference asset what kind of reference as it would that be I mean I mean basically some sort of basket but how would that be constructed

and don't you need governance for that again uh yes and that's why we haven't done it um the like I don't really like that that problem because it's messy and it deals with a lot of factors that are constantly in flux like you know I when I said earlier stability is in the either holder Brian you were like I want to hold something for five years and then come back and it's like fine well you want it to be fine relative to the stuff that you want to buy in five years uh so if you could give me an itemized list right now of everything that you want to buy in five years you know like that's that's the kind of thing where it's like yeah things change you know uh we don't know exactly what the future will look like we don't know what

consumption will look like uh and so there's sort of you know the the idea of this reference basket index thing cons you know CPI whatever will sort of always have to be a govern process but yeah I mean I think on a high level right I think with the tornado cash you know this tornado cash sanctions you know I guess you can sort of interpret this in different ways you know maybe to some extent it's about like I don't know North Korea and preventing they get some money and stuff like that but I think on another level it's also just the government really not liking this crypto thing right and really not liking losing

control right and basically saying like Okay we're gonna try to like crack down on this and I think if you see something like maker and I mean uscc is like such an obvious uh Avenue right so I think if that becomes something that's like I mean in the end right like if you're gonna have some stable coin that's supposed to be you know widely used by people and that's supposed to be actually like neutral and you know you can use it anonymously you don't have to do kyc you can use it across the world it just doesn't want it that you just cannot have uscc in there this is not

gonna fly right like it has to be actually decentralized yeah I believe that um I want to see more decentralized stable coins uh more things that move away from usdc dominance usdc is clutter I mean that's why actually you know people uh um criticizing Tara a lot and of course that turned out to be correct in retrospective but I always found that the the criticism of oh it's not that decentralized you know compared to make remain like no sense at all yeah there's points of centralization wherever you look um you know the maker has oracles that are kind of centralized maker has the

usdc collateral right Tara had uh I mean the lfg fund was a multi-sig That was supposed to be backing it they didn't have any sort of like on-chain algorithmic backing they just decided when to back it and so there's all sorts of like information asymmetries like hey if you're close to them and you know that they're out of money you should short the [ __ ] out of UST immediately right like uh that's the kind of thing that you know we try to avoid and decentralize systems um so yeah I think I think the better criticism of Tara was the one where vitalik blogged about it and also mentioned rye as an example because he talked about how if your stable coin

can't unwind in a like down market like you were saying you know if youth crashes everything's going down like if your stable coin like can't unwind it's basically a Ponzi scheme right you're gonna have some people sitting there at the end of it like hello I would like my money I would you know I want to exit uh and if they can't exit then you you know didn't design your system to be very friendly to those people to exit which you know systems that typically leave some people hanging or called ponzis do you think there is a future for you know algorithmic stable coins that are not backed or is this uh do you think it you're playing with fire right like you you can get shorted to zero you know even if you're 80 backed

or 90 backed right the the window of opportunity is smaller but uh the risk is always present right even things like maker and Rye could in theory become algo Staples if some Black Swan event hits and they become you know under capitalized uh you know under collateralized then there's less money backing them than they're having debt uh so they need to recruit people who believe in them and if there aren't any then you know some people are gonna get a haircut that's how the systems were designed so to try to make the haircut process you know transparent Fair equal right uh it's not like you lose everything uh it's like you might lose whatever uh you know went wrong whatever

degree of under collateralization you are is sort of shared by everybody if it's five percent for example ten percent but that's a huge difference right I mean basically having like an orderly shutdown even if it means everyone gets like a 10 haircut um that's completely different to the the situation where the first first person to cash out gets their entire money back and you know the the the the 20th person doesn't so I mean this is yeah so I think this kind of Yeah so basically I'm totally with the ordered shutdown process we really uh we fought a losing battle uh those of us who care to try and not throw the algo stable term out with the bathwater uh you know

the because people are like I'll go stable's a bad word now right and it's like I used to call Rye a kind of algo stable it's I'll you know has an algorithm that stabilizes it uh but now I can't uh now we have to you know make sure that like all we can do is try to explain that the bad thing wasn't actually the algo it was the under collateralized part like Luna didn't hold the Luna like that you used to Mint UST in a reserve somewhere it wasn't a CDP they lit it on fire you know they so there was no reserves the the reserves was backed by the you know future printing against the Luna token

and selling it uh and so as soon as the Luna demand went to zero the UST demand went to zero and the whole thing went to zero so that's not great uh having collateral in your system is very helpful for protecting against systems like that we want the regulators and the public to know the difference and so far that's you know meant retreating off of the algo stable Hill and onto the over collateralized Hill so hopefully you guys can help with that narrative yeah no I mean I I think obviously Tara went horribly wrong in USD went horribly wrong and it was like tragic how you know lots of people lost lots of money uh it's just that if you look at the I mean maker right

well make her struggle to scale more I struggled more with scaling than UST and the only way they actually got to scaling is by adding this like centralized you know basically USD coin to it right so is in you know I mean you said yourself right like probably they made they had no choice but to make that decision you know it would have been hard to make you know to just have eth and you know with Rye you know we're seeing okay it's very small right so like we really haven't seen anything get to any kind of scale right that's actually collateralized uh you know with actual crypto assets

so I think that whole scaling issue is like it feels like a big big challenge to Me Maybe I mean maybe this would be super interesting to get your take on to me in large part this feels like mainly an oracle issue because basically if you had good price feeds for all kinds of assets you could use them as cholesterol um and I mean this is this is the reason why we don't see more real world assets as collateral because there's no good price feeds for them so basically if somehow be magically you know I could you know wave my wand and kind of have a good price feed for all kinds of things I feel like most of these problems would

go away uh I'll answer both questions so um on the one hand Brian you're correct uh no well-designed decentralized stablecoin has scaled today right we could say rise while design hasn't scaled you could say maker is well designed until it's scaled using usdc you could say you know usdc scale or usdt scale or UST scale Terra but it wasn't poorly it was poorly designed and then you know 50 billion dollars in Flames so uh I think the answer is it's still a work in progress uh and Frederick to your question of uh what if we had lots of price feeds you know maker was designed to you know include

real world assets um part of the challenge there is also liquidation right if I say I have a house and the housing market crashes I use my house as collateral for a loan somehow you have to carry out some sort of on-chain liquidation process auction somehow you have to get the dye you know back into the system so there's there's complications there and the hard part's always the paperwork uh with with any of these like real world interfaces so my solution is going to sound really silly my solution is youth hit 75 000.

uh and then decentralized stable coins can scale uh right it's like maybe maybe like we're still in the experiment running phase uh of the decentralized table coin part uh maybe it's a good thing that they're you know 700 million dollars uh maybe like if Rye was billions of dollars I would actually be freaking out right now um you know like any any uh weaknesses of the system would be like uh much more apparent and risky so I think it's important that we I don't know figure this stuff out but like also realize that it's still pretty

early uh and as the collateral base grows uh and we have even stronger native assets than it seems overwhelmingly likely that the stable coins will grow uh proportionally too I mean usually we ask what's what's on the roadmap for the project it looks like that like you know together with your meetings you kind of reduce your roadmap choices so maybe I I'll ask this the other way around do you do you guys plan to uh to offer um an out of the box white label solution for people to make their own versions of Rye with whatever collateral they want because I think this is

something that lots of projects might actually use right lots of dowels for instance who have their own governance token and so on it's not a plan to make the like fully white label you know out of the box thing it's actually a little harder than you know it seems and also rallying people around assets uh is like you know it might it might not make sense for like you know everybody to have every project to have their own stable point maybe it does I'm not sure um I think our plan right now is to work with like groups that have the dev capacity to be able to Fork the system and manage it themselves and then we provide support and maybe you know get some tokens out of it or have some sort

of you know partnership agreement or something but um yeah uh it's it's a little bit too hard to go like full white label in like three years maybe it won't be um something I've I've always said is that like the cost of deploying a sophisticated smart contract platform you know drops by a factor of 10 every year so what that looked like was like 2018 it was like 10 of you know rocket science level solidity devs had to like make maker Dow from scratch over 18 months you know then like a small group of like four people in 2020 could do it right and then like you know in a couple years from now it'll be like one guy just like deploys everything right so that's where we're going

um I I think uh the tools that Dows have reported wanting are things to like automatically manage vaults like for example you know if you want to leave something for five years uh and come back like maybe you don't want to hold raw Rye itself you want to hold the like Vault that automatically arbitrages right uh given the market conditions you know and makes you money in the meantime so people want things like that like uh urine urine style tokenized vaults it's a little bit tricky because we have to manage you know like debt and liquidation stuff so working on that also working on we we did just roll out our like governance platform I know we

we call it ungovernance but it uses the compound Bravo and it works like all the other governances the ungovernance is just the the meme to make sure that you know we we try to not uh do too much governance things um and then the last thing is that we are still researching and iterating on the controller with the goal of coming up with some sort of controller that we can lock in for a really long time without needing to change it um that won't of course happen without running it in prod for a while uh maybe you know a couple years with whatever we think is close to final but we are talking about that encourage people to join our Discord uh and uh jump into the research Channel just publish some stuff

about the controller how it's working how it could be updated yeah we're just trying to remove things make it harder to change um hopefully uh also make it so that if one day the US decides that I can no longer touch it because I'm a US citizen there's other people who can still touch it and make it run uh and they don't live in the U.S cool well thanks so much I mean that was a that was a perfect like wrap-off in summary at the end and thanks so much for coming on that was really great I'm glad you're working on this uh and I'm excited to see you know we're right goes and where the idea of you know better better decentralized stable

assets uh how that evolves in general so thanks so much for joining us yeah thanks for having me thanks for giving me the opportunity to talk to you guys about it cool and thanks so much for listening for once again tuning in if you want to support the show make sure to leave a snatch into its review or if remember the job post we have too so if that's you then get in touch and we look forward to being back next week