Build your own stablecoin—the hard and the easy way by Nour Haridy

Transcript

Hi guys, my name is Nor um uh founder of Inverse Finance. We are a an onchain DAO that governs uh DoA stable coin. And in this talk, I'm going to guide you through how to create your own stable coin. We're going to go through three things. How to make a stable coin. some of the biggest lessons learned from stablecoin protocols, some of the biggest players and the mistakes they've done and what we work on. So, Dola stable coin.

Okay, first a quick intro uh about me and us inverse. Uh I helped build Dola stablecoin which at its peak reached about 100 million in TVL. We've been here for over almost five years at this point doing the exact same thing, focusing on the exact same thing. Stable coins lending in particular. Uh also uh I founded inverse DAO in 2020 um which governs Dola and also governs our fixed rate lending protocol firm which is the only way you can borrow for a fixed rate for any duration. So like 100 years if you will.

NDBR is also a product of us of ours which allows you to tokenize interest speculate on it fix your interest rate for future loans. We're going to talk about all that in this presentation. All right. So before we talk about how to build a stable coin, we're going to talk about what it is, right? um for a token to be stable, we needed to be absolutely, you know, um priced at $1. So this is a screenshot from Coinbase, right, for D and the mid-market price of D is almost always at $1. The bids and the asks are always meeting there. So we

need to control the market and this the word control I think is the key word here. The whole purpose of a stable protocol is about control. We need to be stronger that the entire market buyers and sellers. We force all of them to buy and sell at $1, right? Another way to look at it is relatively speaking. So this is the absolute price. This is the relative demand and supply. Relative supplies of stable coins to each other can be looked at in pools where they are paired together. So in this screenshot from curve, this is the curve three pool. The very first pool on curve where you have USDT, USDC and D. You can looking at them at the ratios of their supplies that are paired

together. You can see which ones are relatively um I would say less than a dollar or relatively dept that implies that USDT is what is it higher or lower than a dollar? Anybody knows higher than a dollar, right? The supply of USDT is lower than the rest, which means the rest um there's more supply than demand for each of these stable coins compared to USD. So USD is relatively stronger than the rest currently when this screenshot was taken at least. So we know even if a stable coin is not I mean they're all at

a dollar here but we can tell before they're dagging before they become less than a dollar before there's a problem we in the stable industry can tell you can see people on Twitter telling oh wow something's going badly but still like you could see us at a dollar and don't know what's going on or you can see for example others at a dollar and you don't know what's going on well this is what's going on one of them could have sometimes US itself was like 90% of the three pool uh uh supply and that was terrible. That means it was very close to maybe catastrophic you know deeping or we call it or just dropping under a dollar.

Anyway, so this is how we usually measure the performance of a stable coin. Absolutely. And relatively speaking. Okay, let's go. So again, this is all about control. You have to be if you're a control freak like me, you'll love working on this stuff. We have to be always not only controlling through code but even through information sometimes and we have to deter the market including shorts and longs to not fight us. You know when they say don't fight the fed this is the Federal Reserve right this is kind of similar to that we have to make sure that people no one fights the protocol. So how do you decide the price of any asset? Um as an issuer or really

as anyone I mean you individually as a person you could do what we do if you had the power to control either supply or demand of any asset. So think of you want to fix the price of gold. If you had the ability to create an infinite amount of gold, you can set a price ceiling on gold. Um and if you basically control the entire supply of gold, you could set its price. If you could if you could set the the entire amount of demand of gold, you can set its price. So it's the power of demand or supply. If you're able to change what any of the two whenever the other changes, then you can change the other which you control to set price because price is a function of supply and demand. So unfortunately we cannot

control demand. We can only control we can only reward it. We can try to nudge it. We can try to push it in a direction. But we cannot create infinite demand. What we can control and this is the trick that stable coin provide uh uh protocols use is supply. What we do when what I'm talking what I'm talking about here are mostly decentralized stablecoin protocols. We don't we don't just control supply. We own all of it.

So every dye that you own in your own wallet is sits on maker DAO's balance sheet. Maker Dow the issuer of D. They consider it a property of maker. It's also the same for Dola. We consider every DOA the DAO's property. We allocate it. We lend it to borrowers and then borrowers will give it to other people maybe. But we have the power to force these p these borrowers to give us back our dolas. Right. We we're the Asian of Dola. So we can so the key word here is recallability. We own the entire supply of the stable coin and therefore we we we own we can control the supply. We can increase the supply by lending more or

we can decrease the supply by asking for our loans back uh by raising interest rates for example. Um so yeah so control of supply is the key here. So, let's talk about a classical collateralized debt position stable coin, which in this case refers to something like D, like Dola, maybe MIM, if you guys are aware of it. Um, they're all really work kind of the same. Liquidity. Let's look at how they work. So, the idea is there are two things that happen uh in two different scenarios. One scenario is when the price of the stable coin rises above a dollar and the other is the opposite

when it goes under. So what happens when it goes above? When let's say a stable coin is at $1, say three five cents borrowers and then incentivize new borrowers maybe or existing borrowers are incentivized to go to the protocol and borrow new stable coins and sell them at higher than a dollar. Hopefully when it goes down in the future they're going to be able to buy it back for less. So that's kind of they're shorting the stable coin. So that's kind of a classical idea of a CDP. At least that's the idea. So there's an incentive to borrow when it goes over a dollar and then holders are are incentivized to sell it. If you hold a stable coin, it goes to a $15 that's a great time to sell and make an easy 5%. And in this case, the protocol will

also lower interest rate. Uh so us make like like inverse the protocol the issuer of dola or maker issuer of d would lower the interest rate to incentivize shorts or borrowers to borrow more. So lowering the cost of capital or borrowing and then to incentivize to disincentivize longs. So we would uh not want to give as much yield as before so that people would stop holding it. We need them to sell because there's clearly too much demand. The opposite is true when it goes under a dollar. under a dollar. Borrowers then buy it at the cheaper price.

Existing borrowers buy it at a cheaper price than they've sold it at in the past. So if it's like 95%. Well, now I can repay my loan at a 5% discount. So that's good. Holders also buy it, you know, for a discount. If a stable coin is at 95 cents, well, maybe you can buy at 95 cents and it goes back to a dollar. Then that's a nice arbitrage. These are usually called stable coin arbitrageers. And then here's the interesting part. Interest rate is is raised by the protocol in those situations. And we we're going to go through examples of that uh very very soon. Now um to deter shorts and this is the point where it gets really um interesting. We want to

tell shorts who are borrowers if you borrow now while the stable coin is under a dollar you're betting against the price of the stable coin. you're gonna pay and you're gonna pay a lot. I'm gonna keep keep raising raising rates. And the idea is that we have the power as a protocol to raise rates to infinity. And usually just this piece of information alone is enough deterrence. So you can't find us. If you want to short, you can short. We're going to charge you 10 20 50 100%. And that did happen in many cases. So and also an incentive for longs because we can pay longs we can pay holders. So for examples in the the case of DI through SDI uh a rate to incentivize them to buy. Okay, pretty

clear so far. Um so what you're doing here is you have a two-sided market. You can think of it think look think of it that way. You have holders of your stable coin who are also your lenders. You can think of this as a lending protocol. this whole setup who are also your suppliers. If you think of it as as a business, these are people who are supplying your product. They're not your customers, at least in our eyes, because we pay them. They don't pay us. So, they're actually a cost. And they're also the longs of the stable coin. They bet on the stable coin going up. Oops. And then you have the opposite. You have mentors of the stable coin who are actually borrowers and they are customers. They pay. They're the people who who this whole business is

built on. And I don't think a lot of stable coin projects forget that. These are our paying customers and we serve them. We don't say serve holders. And that might be a surprise. Actually, the holders serve us in a way because we pay them. So, we are their customers. Anyways mentors borrowers they're also shorts. They bet against the stable coin. They would benefit from it going down in price because then they could repay their loans at a at a discount. So you as a stablecoin protocol your job is to grow and maintain both sides always equally and if one of them goes out of balance your stable coin price goes you know over a dollar under a dollar both are terrible situations we'll talk about going to talk about that you also have to make a profit or

at least break even in the process by some by having some kind of a margin between the borrowers and the lenders and then you have to face new competition every new week equipped with more and more VC money more token rewards you know your competitors are always probably losing money as well. So you're forced to lose money. So uh yeah, good luck with that. All right, let's talk about this. All sounds, you know, simple I guess just to an extent in theory. Let's talk about failure modes because it's not so simple otherwise you wouldn't have so many stones blowing up in every single way every year.

So first failure mode I mean this is a classical one right supply is higher than demand so your stable coin price goes down. So in this case go by a was consistently under a price I think up down to 96 cents at some point as soon as it launched and it was a huge uh kind of effort to bring it back up. they had like this hold uh this whole like committee and effort and marketing effort etc. But the problem here is that when a launch stable coin they didn't consider the fact that they needed a demand side incentivization. You need to remember holders are not a charity. So

while a were doing a letting people borrow their stable coin they were not giving any incentive for holders of go. There was no reason to buy Go. There were all the reasons to borrow and sell Go, but who's going to buy it? You need to pay someone to buy it. It's not for free. I'm going to talk about that actually a little in a few slides. So, you have to think of if you're increasing supply, you also need to increase demand. If supply increases but but demand stays constant, this is what happens, right? That well, that's what happens. Okay.

Now, the opposite. Demand is higher than supply. Well, that should be good, right? I mean, it's good to have demand, but what about too much demand? In the case of D when it was just launched, their stable coin was consistently at what, like one up to $15, which sounds good if you're a die holder, but that's the end of it. Who's going to buy D now at 5 cents uh at premium? No one's going to buy it because they know it could go down to a dollar. So, it's just really there's nowhere for D to go at that point. Uh and anybody buying D when it's at a premium is going to lose money. So they had to find uh a way to fix that. But why did that happen? The the problem here many people never understood back then was

that leverage is not infinite. Um meaning if your stable coin's demand is people buying it and then the supply is people borrowing it. These two are not always equal. Sometimes you have more people want to buy your stable coin. That's what happened with dye. Everybody wanted to have a have some die because it was decentralized stable coin was the only one back then censorship proof etc decentralized all that but then not many people wanted to borrow it using ETH whatever so they found that that problem and fixed it in not the best ways but honestly there were not many options they use USC as a way to mint it etc but it is a big problem actually largely unsolved and this is why a lot of the RWA people are bas basing their whole

premise over this problem there's no other solution that we know of so far open problem yay okay So, what's next? Counterparty risk. I mean, this is kind of an obvious one. You see, you see here, they've um had a pretty I mean, everybody almost forgot about this. Maybe some people in this room never heard of this. Have you guys, who here never heard of USC price going under a dollar? You've all heard of it. You've all seen it. Okay, good. Well, um basically what happened here is that Silicon Valley Bank went broke. And the reason it went back up here is because the Fed intervened. So, thank you US government and Federal Reserve. This whole space owes you everything. Um I

guess um um if you base your stable coin over a dependency, you have to make sure it doesn't fail. And I guess people were thinking, well, US banks are not going to fail. Well, they did. And but I guess maybe they were right because the Fed didn't let it, you know, fail entirely. So maybe we could all use the Fed as a dependency. But the idea is in general is you don't want to oh you want to minimize your dependency risk in general. Banking is one oracles is another another stable coin maybe a custodian if one thing fails the whole thing just can be completely gone you know that's almost what was going to

happen with you see if the fed didn't didn't intervene. All right now this is a fun one. Can anybody tell me what's going on here? So above we have the LUSD supply so liquidity and below we have the federal funds rate of the US Federal Reserve. Anybody has any idea why there's some kind of correlation?

So all right so basically LUSD when it was launched it the first version of uh LUSD had 0% interest rate and the idea was that as a borrower you don't pay any interest and as a as a holder you also don't get any interest basically and it was fine because of cool right like free loans yay but the problem here was that this whole time liquidity was doing so well the interest rates on the federal funds rate were zero basically. So I mean they were technically the at the market price what liquidity team didn't realize was that this is just an interest a zero interest rate phenomenon. Then the Fed kept

raising rates and then suddenly because liquidity could not have any way to change their interest rate of their protocol to charge borrowers more or to give lenders more. Suddenly they became below the market rate and suddenly everybody left liquidity. Everybody flocked to some other you know US bank or some other stable coin that would give them a higher rate a higher than zero anything higher than zero work liquidity basically died over time because why you know why earn 0% when you can or four four and a half on US bank or on die or anything I mean every other stable coin did but this but this one couldn't because immutable there was no way to upgrade it so when you're when you're thinking about your stable coin think about this chart but maybe you

know maybe it was the LUSD guys who didn't think about this stuff, you know, a lot. Maybe they were new and all, but not really. It wasn't just LUSD. I guess the FRA guys didn't consider that either because they didn't have any way to incentivize holders because why? I mean, why incentivize anyone when everybody's willing to deposit for free? Because money was free. But as soon as money was no longer free, everything went down. But it's not just Fra, it's also me. Never consider it. All right. So maybe it's just the newer projects, the smaller ones, you

know. Not really. People always talked about D having organic demand. D never had organic demand, you know. It was just the the normal rate of 0% that everybody was earning on D because money was free. And then once money was no longer free again people expected some other alternative uh to uh people expected other opportunity opportunities that could earn them 4% 4 and a half% then they left die and looked for something else but then die later on reacted and they they increased the S die rate so and that's when demand started coming back right so it's interesting here even I was hit by this problem. The law the

largest and the oldest decentralized stable coin and even USC. You know, you could see a little bit of a slope here until the Silicon Valley bank collapsed. That's when everything went downhill. But even before then, a little bit. And people think USC is a great business. You know, they're not paying anything. They're paying 0%. They're not. If you've seen the latest Circle IPO filings, they're they're talking about how much distribution costs they're having. They're paying people through Coinbase wallet, through Coinbase products in general. They're doing some deals with other projects to incentivize. So, they look like they're not paying anything. They are. They're actually losing money and they're having big problems evaluating their their

company uh when doing the IPO because of how much money they're losing. So, even Circle is losing. I mean, everybody's losing in this business basically. All right. So when you're designing a stable coin, the lesson here is to consider all interest rate environments and organic demand is a zero interest rate phenomenon. It does not really exist if there's an opportunity cost to that organic demand. No one wants to hold something for free which they could earn something on alternatively. And maybe RWAs are the opposite actually. Maybe RWAS are great now because of the high interest phenomenon because you can earn four or five percent uh on on a T- bill, but what what happens when you start when it goes down to zero? RWA isn't going to be

around. Maybe it's the current also temporary phenomenon. Anyway, all right, let's talk about Dola. We don't have much time. Enough talk about other projects. So, let's talk about Dola's design choices. Here we go. Do is our stable coin. It is a cryptocal only stable coin. No rwas and transparent onchain governance. It's been around for five years been governed from the very start by onchain holders. No company no etc. You know the entire history of hundreds of proposals is available. You can look at it on chain. Our main differentiator is fixed rate loans. We give fixed rate loans for any duration. And you can have a loan

with a fixed uh interest rate for 100 years and we tokenize also our interest rate. So we're going to talk about that right now very quickly. Uh but the idea is unlike other projects that we've talked about maybe here some of them uh we don't decide our interest rate. We don't have a fixed like a specific interest. We decide or we set as a protocol we have a market driven mechanism so that it adapts to different you know environments. So how does that work? It works through dollar borrowing right and that is the form of tokenized interest. We tokenized a right to borrow. So we got rid of interest rates and then we replace it with a utility token that represents the right to borrow borrow. And then we issue an equal amount of those tokens than the lending

capacity that we have. Um the cost to buy that token uh for a borrower is equivalent to interest rate. So for example, if you're borrowing a dollar for a year and you pay 5 cents for this token, this is equivalent to paying 5% APR as a borrow rate. All right? And we also have a supply rate. We give this tokens to lenders as well. So this is also known as as SOLA, but we're not going to talk about that now. We're going to talk about DBR. One VBR as a borrower allows you to borrow one dollar per year. Okay?

So for example, if you buy one DBRR for five cents and you borrow $1 for a year, that's equivalent to pay to paying 5% APR. And but it also works in this the way that you can borrow $2 for six months. You can borrow $1 for six months by burning by using one uh 0.5 DBR. So the DBRR is basically being burned over time during that duration depending on how much you're borrowing and the rate of burn depends on the amount that you're borrowing. All right. So, use cases here. That means let's say you want to have a loan for 10 years of let's say a,000 dollars. You can buy 10,000 DVRs and they will last

for 10 years. You can even do it for 100 years. And that means whatever happens to the interest rate environment in the you know in the in DeFi or in the world really your loans are fixed. And a lot of whales and Dows have used that actually to their benefit recently have saved millions on on costs of borrowing using DBR in the recent months. Um fixed rate for future loans. You can buy DBR or not use them. I think that's one of the more interesting use cases. Um you can use them later. So you know you might want to have a loan in the future. We're in low interest rate environment which we might be coming to soon when rates are being reduced by the Fed. So buying DBR 2 3 cents and then using them when the when the rates

are higher would be a really good uh savings tool but also you could just sell it and it's a way to speculate. You could just sell the DVRs at a profit you know buy it in two some people did that bought them at 5 cents and sold them what here is like went up to 25 cents so like 5x betting on interest rates of D5. All right. So, let's talk about DBR is issuance policy because basically we need to have um we need to make sure that this system could also be used well to regulate the DOA supply, right?

Because we talked about other CB stable coins like D, their models were all about adjusting interest rates as a deterrence or incentive. So, we need to make sure DBR also does that um for Dola because the so let's see how that works. So when dollar is over a dollar in price, the issuance rate of DBR is increased. So more DBRs are given away or basically sold. Oops. So DBR becomes cheaper to sell because there's more of it and then people take more loans which increases the supply and to make the increase in demand. So pretty simple.

What about what happens when it goes under a dollar? The issuance rate of VBR is decreased or paused causing a supply crisis. DBR then becomes more expensive. Borrowers then start repaying to sell the remaining DBRs that they have they have not yet used. So maybe they've had a loan for a year. Then at 6 months in they've used half of their DBRs. So now they can sell the other half because it's gone up in price making a profit technically making it maybe a negative interest rate on that loan which is really cool. So not not only fixing the rate up to a six-month end in but also making money

after supply also falls because people start you know repaying their loans which means demand. So it works um it really works. It's been actually working around for over a year and maybe a year and a half now. And you can see in this chart you can see it in action actually. Actually that's more than that's basically two years. Wow. just realized um you can see in uh in the green the issuance rate of DBR and it's done through auctions it's done through like basically a supply rate giving DBRs to holders of Dola and you can see in orange the burn rate and the burn rate is people borrowers who are consuming DBR every second uh this is the annualized rate uh so like people

for example at the peak they were burning over maybe 60 million DB RS per year a rate of that anyways assurance rate is also the same you can see I'm going up and down and then the the blue line is the price of DBR and you can see that the price just moves in correlation with the with the ratio between this those two um so for example you can see in the middle here right the price went down because the issuance had increased significantly so in In a way we don't as a DAO inverse does not decide the price directly set the price of loans or DBR but it does have control over the issuance of it the

supply side of it which allows it to push it down or up when the lending capacity has increased or decreased to incentivize more borrows or less borrows or to incentivize more people to basically when dollar is going over a dollar under a dollar this is the main lever that we pull as DAO So okay what's next um for inverse and for dola so we are working now it's just like we have you know fixed rate loans for 100 years which is only possible really by the way on inverse I'm not talking about defy but in the world or in trfy even there's no way you could get a loan with a fixure for that long

we're working on the opposite now we're also working on multi-year fixed income so you know on pendal you can get a year-long long fixed rate uh interest you know like you get like 10% and it stays fixed for example we're going to offer something similar but for multiple years two two years three years hopefully at some point will be five or more of fixed income I think it will be it will be definitely no I think it will be the first in DeFi but the bigger project we're working on is stable coin as a service so all of the lessons we've learned through the years since 2020 and all the you know things even that we learned and

we went through through this in this talk. We want to make all we know this is extremely difficult for for new entrance and we our goal is to make it easier. We want to commoditize stable coins. We want to dem democratize them. We want to allow anybody to make their own and to enter that space and experiment and innovate. And so a new project we're working on, very ambitious project called Monolith, uh is going to allow anybody to create their own stable coin in one minute permissionlessly um on uh basically a DAP. Uh you can use any collateral. We're going to we're going to announce more about that, but that's basically what's next for us.

We're going to move away a little bit from being a stable coin operator to a stable coin infrastructure provider. And um thank you. Yeah, feel feel free to reach out.