DappCon 2023: Forkable stable coins - Alexander Hermann

Transcript

um welcome everyone to my presentation over here I'm super excited to talk about foral stable coins because forkable chains are quiet to talk these days like there's for example run who describes in his end Vision that he wants to have a forkable chain there is Alex G who says we can use forking in order to recover from severe smart contract issues and yeah if we have in the soon future some forkable change there of course the question how do we actually put stable coins on them and that's what I wanted to describe over here with this presentation hope you enjoy it I will take you through the following agenda

first the definition then I want to motivate it a little bit more and then last but not least we will look into the designs how actually one can build such a thing so let's start with the definition what is a forkable stable coin I hope you all know what a stable coin is it's a coin that maintains it value and now a forkable one is the coin that is able to survive Forks of the underlying blockchain so Fork is if we have at the beginning only one chain and then it kind of splits into two chains with separate states and they continue to live and now the forkable stable coin after this definition that I will use over here in this talk is that it should

preserve the total face value during the for so the market cap should not change and also it should be usable on both Forks or both branches of the fork and thereby eally it should really not influence the fork Chas rule of the users and be neutral so a small question is usdc a forkable stable coin I see some people not agreeing definitely not of course usdc if they would after a fork um redeem their USD dollars for usdc on one chain the total face value would be the same but of course they would make all their users

prefer the one chain where the dollars are redeemable but not the other one and we want to look into designs where yeah also the second criteria is fulfilled so let's motivate them a little bit first the question do we need forkable stable coins for ethereum well I think forkable stable coins only make sense on chains that have controversial Forks um in the past maybe theum had some with ethereum classic but now really the intention is that we should no longer have them like V League even wrote a blog post about why we should not overload under other consensus why

we should not risk controversial Forks but still I want to mention that kind of all the protocol upgrades that we do for etherum that they actually are introducing forks and potentially they could become um controversial but we really really hope not we really want to kind of keep the credible neutrality for ethereum and yeah we hope we will never need them for ethereum but I'm still super super excited for folable stable coins because there's so much talk about special folable l1s and l2s and this all starts I would say in 2015 when we wrote a blog post about subjec ocracy he kind of coined this

term it was the governance by forking he said basically that we can do our best governance if we do the governance by kind of forking things and then we just stick to the chain that we actually um which has the properties that we actually want and he kind of described that as the ultim governance tool for blockchains he said it's really nice because it's non- cursive nobody's forced to pick a certain choice and also it's very secure because it can withstand 51% the tax and then people really said yes let's lose this great property um let's build with that for example orles there's for example Justin Drake one of

the eum researchers who said let's enshrine oracles or east or Price feeds into the chain um Edmund Edgar wrote really nice um blog posts about it how we can use it and the idea is always the same we have either a forkable chain or a forkable token and then if there are discrepancies about what could should be the actual information the real information that the Oracle is delivering and we simply split these things and one of the branches would have one worldview and the other Branch would have the other world viw and with that one can really nicely build um the best oracles the most secures but then there is also this recent talk um for example from dun he

describes in his end Vision that he wants to prevent governance attacks and Technical failures with introducing a new chain that's how he calls it he writes there the most important reason for why new chain is needed is that we need to allow the ecosystem to use hard Forks to gracefully recover from the most severe forms of governance attacks and Technical failures like Forks um they would allow that to some certain degree and yeah it's really nice that people are thinking about it and Alex G also made a proposal that one can even Fork L1 in order to recover from Smart contract hex of course there was quite some back flash as I described before we

don't want to Fork um ethereum but I think we will definitely want to Fork other chains and so with that I want to quickly sum up my motivation it's that with forkable um chains we can enable certain use cases for example the most secure oracles and adjudication platforms recovering from Smart contract issues and yeah if we have forkable chains then how do we actually build forkable stable coins on them because we want to um have it usable and that's why I now want to look into the designs for it yes so the design has the same design goals as I mentioned before so it should

preserve the total face value of the issued stable token during the forks and of course also in general and it should be usable on both forks and thereby not significantly influen the forch rules of the users and of course the design space is huge so I want to make some assumptions um I think a reasonable assumption is that the stable coins are collateralized um by forkable collateral so for so collateral that is natively deployed on these chains for example the native token or also it could be some Dow or utility tokens that are natively deployed over there and also one has to

make some assumptions about the Oracle so as with normal stable coins when need kind of oracles that report the normal prices of these forkable collateral and additionally we want that we can also after a fork after kind of blockchain has split the oracles can tell about both collateral prices not just the one on chain but also on the other chain and why I make this assumption um it will become clear in a second so overall with this assumption we would kind of propose a stable token that should work quite similar to Ry or die so that means the tokens are issued via create the creation of cdps with

some collateral token I call it over your call and then it would work very roughly like that that if we have before the chain Forks we have some collateral token let's say it has roughly a value of $1,000 then after the fork these $11,000 probably distributes to these tokens on the natural native tokens on these forks and let's assume simply that split is 30 to 70% now how should in such a scenario the stable coin behave I called it over here fi for folable d or right on before the fork actually it would have exactly this stable value of

$1 and then according to the design I'm proposing over here we would rebase this file to 30 cents and 70 cents kind of exactly with the ratio so that the ratio over here is exactly the ra same ratio as over here and with this rebasing we have some really really nice properties so of course the face value of D stays $1 because oops because if you add these two together you still have $1 and then users they can later on use both for of course one there is their

dollar a little bit more wors but they basically have both choices they can either sell these ones and then interact with this chain or the other way they can sell these ones and then interact with this chain and basically always have their their $1 so it's really not pushing them particular into one chain I think that's really nice because then you don't have to use thec um situation and it has some even nicer properties um if we are assuming that during the fork the value stays roughly the same um so basically the $1,000 only splits between these two chains then also the CDP piece that with which the Sable tokens are created they also then are still liquid because basically on

this chain for example everything is refactored by a factor of 0.3 so we have the the Sable token are less worse and the collateral and so yeah it's it's still liquid and the cdps are well covered I think that's that's a really nice property and that of course holds for both and it continues with these nice properties another really nice property is that if you put these um stable tokens and the collateral tokens if you have them in some amm then during the rebasing basically the ratio of these prices it does not change because they're rebased exactly to the same value and then you do not even have much

me in the amm no big repricing because the price between these uh is actually the same so yeah these are all the nice properties this is already the very basic design and I just want to mention where I would think these kind of things are best deployed um and I think if one builds a forkable L2 then these price Oracle assumptions one can basically get for free because after a fork on the l2s one can still Port the native tokens to L1 and then trade them against over there and then via the native Bridges one can simply see these prices and communicate them down and then one has all the

Assumption of the Oracle um basically gotten for free and one can build really nice decentralized orles with it and then also if one would kind of build a heracle Curt system with forking as the final Appeal on these l2s then one can cover a lot of use cases for example the Oracle use case that was mentioned before adjudication and also the smart contract uh um issue or hack recovery and while this is actually one of the projects we are these days working on we want to build a forkable L2 right now we only a small team of Edmund Edgar um zil and myself but yeah if you're interested in anything of that

kind of all the fuing mechanisms how one can secure things with that or if you're interested in actually building uh FOC stable coin please please talk to us we are super interested in this topic and yeah that's it already thanks a lot um for listening and yeah if you have any questions I'm more than happy to answer them excellent thank you for sharing do we have some questions I see one right here in the front I wanted to ask you for maybe you can wait for the mic like U um examples where this would be needed like let's assume uh we have uh usdc and

I want to Fork it into the local currency local tender in another country um uh taking into consideration the exchange rate does is that an example um if not what is like another example like let's say uh there's a lot of forking like for what happened for um Central Central Bank um uh uh the Central Bank um the central currency uh a lot of people have forked from that in order to kind of develop that because that's not sort of yet a mature code so what are the kind of scenarios where this thing would be applicable so I want to describe one

more time it's not really not about the forking of the software like as you do it on GitHub and so on but we really want to Fork the native assets so if you have um um these Fork these tokens on the blockchain after the fork you basically get two tokens that kind of represent the same assets so for example when ethereum was forking in the past for example the ethereum classic Fork you had um previously only ethereum and then you had suddenly etherum Classic on one fork and other which we know called the normal ethereum on the other one we called it kind of normal ethereum because it had the yeah more adaption and yeah it had in more dominant um

developments and yeah this is for example one of the um examples we had in the past and you were asking about usdc and usdc is is really not easily be forkable because real world assets you cannot easily Fork because if I have a car I cannot suddenly make two out of them as I could with eum I had eum and then suddenly I also got eum and eum classic so it's not really applicable everywhere but for all these forkable assets you get all these nice properties about Central Bank digital currency is this like uh is your research related to or relevant to that a lot of fing is happening like on the MIT Central Bank digital currency that there's a lot of

forking going on in order to advance uh the quality of that uh uh digital currency I mean I'm I'm trying to figure out like if exactly what is like the where your research is going and what are the like the most applicable areas for for your research yes so basically we are thinking right now about building a for L2 and on the you can have all kind of folable assets but also nonfocal assets and that you bridge into the system so you can work there as well with them and the other examples that that I mentioned

for example run from make a DA he wants to kind of put his own da onto its own chain that's later on forkable um that's another example or from metalabs he thinks about kind of recovering um on either l1's or l2s um from Smart contract is security issues and yeah these are some of the examples but yeah I I'm happy to later on talk because I don't know how central banks are using that so I'm happy to learn there yeah there's a lot ofing that happen MIT Central Bank digital currency research code a lot there over 200 Forks that

happened there yeah so the question is how is your research relevant to something like that okay cool let's talk do we have any other questions got one middle right over there oh uh hello so I wanted to understand the amm process so if you are forking the chain and you have collaterals on one side and the other okay you made the assumption that the collaterals are forkable but how do you actually pull uh the tokens from one side of the fork with the other one uh I didn't understand that part

okay so when I was saying when I was talking about the amm I was assuming that we have a normal amm like Unis swap um on the Chain before and then if a chain splits you suddenly have an amm on the new on each of the new chains and in the amm of each of forks are then the native um assets for example here the collateral token or in the E ethereum Class classic split you would have the ethereum classic and it would still be traded in the AM against the stable coin and if it would the stable coin if it would be us DC then immediately the price would completely be change because

um for example on ethereum classic there is no usdc that is redeemable but with these kind of of token constructs you can actually then still have the stable token of both and the nice part that I mentioned is that the price is actually not changing because the stable toen is kind of rebased by some ratio that is exactly the same ratio as the um collateral token that it was traded against so the actual price ratio of these two assets is not changing and then the amm does not have to be heavily repriced or anything hope it makes sense if not feel free to catch me up later we've got one more a few rows back

perhaps more of a legal question regarding the uh treatment under the pending M regulations regarding asset reference tokens and the significant um uh designation that may be determined uh depending upon scale as I understand it to see that forking and potentially the multiplicity of of asset reference tokens um um forking so as to go under the radar so to speak of significance I'm wondering if you could speak to that sorry have to repeat one more time uh assets the asset reference token treatment under the MAA and sort of the significant designation as it as it scales and potentially forking could allow for bifurcated or trifurcated or infinitely forced um iterations of of

the same original originating um uh asset reference token is that hopefully I'm on track it's not too familiar with um the legal aspect it's non technical more legal yeah yes unfortunately I'm I'm not too familiar to to kind of answer that I think right now it's also still everything in the I would say heavily research idea and people are kind of implementing it and thinking about implementing it and yeah but I see already you're talking already to Z she's probably the right person to talk to you um about this aspect or you can also hand it over the microphone to her if you want and she would probably be able to answer

well if that's all for questions let's thank our oh we've got one more over here and we've still got some time yeah thank you very much uh what about the liquidity pools that's uh on the same network that's the original Network and there is some uh liquidity pool with usdt with other stable coins and also liquidity pools uh on the bridges between multiple Networks and where the collateral is not not all the collaterals are are on the same network that's forked with maybe with other uh yeah other places so how this for c will will work because people will just dump the uh the token replaced with

usdt for example on the original uh chain after the fork which is which is the original code let's say of the of the fork and how how this would would work then thank you yes good good question really nice so um how I imagine it to work out if you have a kind of stable um blockchain and then these F tokens if they are kind of bridged to another EOS system to another chain and so on then the bridge would after the fork not kind of redeem this F exactly for only one of them but basically for both of them but if you have these five for example on another chain on in an

liquidity pool they still continue trading over there for $1 because people know that later on you can go to this bridge and redeem it for this and this one and kind of because they sum up to $1 it's yeah there's no Arbitrage to make and so if you have them in a curve pool in on another bridge and so on it's really nice because it also don't has to resell to reprise anything and then if these ecosystems are getting more mature over time then there are new bridges that would kind of Bridge to one five this fored from the branch this F into the ecosystem and put it into a new pool um and then over there of course it

would be traded at yeah the discounted um value do we still have time yeah sure thank you and what's about the liquidity pools with usdt and usdc at the same original network uh what happens with with with those how how should the the token react thank you yes um there exactly in these kind of cases if you have a pool trading F against the USD then you would have to have um repricing over here but these usdt and these other stable coins they anyways not nicely compatible with

forking because likely they are only redeemed on one chain for for doar but not for the other one so you would probably want to have them anyways um you don't want to put them at the beginning into the same amm pool if you want to do it then probably want to do it bridged on another chain so that everything is well obstructed away all right that's it for questions here I'm sure you can find the speaker around afterwards let's thank him again thank you all for the good questions [Applause]