f(x) Protocol: Decentralized Yield-Bearing Stablecoin & 0-Liquidation Perp - Cyrille Brière. Ep. 616

Transcript

FX offers two products. The first one is a leverage product. It delivers leverage on ETH and BTC. Without funding costs, without borrowing costs, users just pay a onetime opening and closing fee and that's it. And in most cases, they won't have to pay any fundings. And the difference with regular CDP is that we abstract the looping. So we give overexposure to the collateral and we have this very innovative liquidation mechanism that prevents any hard liquidation. Rex protocol is an evolved CDP. Whenever people are longing the collateral, it involves selling the stable coin for more collateral.

Different peke keeping mechanisms. The first one is that stability pool on FOX. The stability pool is a Y strategy that takes both FXUSD and USDC as base assets. Each time FXUXUSD is traded below one, the USDC from the Y strategy will buy FXUSD in the market to put it closer to peg. And each time it's traded above one, it's sold back for USDC and goes back to the stability pool. >> Hey guys, I want to tell you about Nosis, a collective of builders creating real tools for real people on the open internet. Nosis has been around since 2015. In fact, it started as one of Ethereum's very first projects. And today, it's grown into a whole ecosystem designed to make open finance actually work for everyday people. At the center

of it all is Nosis Chain. It's a lowcost, highly decentralized layer 1 that's compatible with Ethereum and secured by over 300,000 validators. So whether you're building a DAP, experimenting with DeFi, or working on autonomous agents, Nosis Chain gives you a solid neutral foundation to build on. But Nosis is more than just infrastructure. It's also tools that people can actually use. Like Circles, for example, lets anyone issue their own digital currency through networks of trust, not banks. And then there's Metri. It's their smart contract wallet that makes it easy to access circles, manage group currencies, and even spend anywhere Visa is accepted thanks to their integration with Nosis Pay. All this is governed by Nosis Dow where

anyone can propose, vote, and help guide the network. And if you want to get involved, running a validator is super easy. All you need is one GNO and some basic hardware. To learn more and start building on the open internet, head to Nosis.io. Nosis, building the open internet one block at a time. Welcome to Epicenter, the show which talks about technologies, projects, and startups driving decentralization and the global blockchain revolution. I'm Sebastian Kuchio, and today I'm here with Seril, who is a core contributor at FX Protocol. Uh FX is a really interesting um yield bearing stable coin that also utilizes a purpose market. Uh there's an interesting stability mechanism there

that we'll get into. And also right now I think it's like pro probably one of the best yielding um stable coins on the market um with their stability pool yielding somewhere around like 12 13%. Uh so that's that's really sort of uh compelling and interesting and I wanted to talk to S today about uh about FX and understanding the core mechanism um you know and also you know how how they fit in the broader stable coin landscape. So uh hey nice nice to see you today. Thanks for joining. Hey. Hey. Thanks, Sebastian, for having me. It's a real pleasure to be here today.

>> Actually, so you're actually based in France. I see you got the Ethereum France uh t-shirt. Um, what's your like what's your background? Uh, how did you get interested in DeFi? like a, you know, had you worked in any of the big Fred protocols or uh Yeah, >> I I I started DeFi because I got wrecked with the crypto markets and I figured I wanted to make yield that and that getting yield on stable coins would be some somehow more predictable uh income than just betting on on the market uh volatility. So, and I had the uh I I had a bit of uh um as uh funds on my on my company actually and I went to the bank and I asked for yield

opportunities to the bank and as a professional in France they would offer me 15% uh APR with a six-month lockup and I figured it's >> 15% or 15%. >> No, no, 15 with a >> not 1%. >> Yeah. Yeah. So I figured it was um a theft and I I should find something else and I heard about DeFi at that point and and actually what I didn't hear about DeFi, I heard about Celsius that was offering something like 8% and Nexo as well and I started uh putting Euro there at the at that time and I figured okay how do these guys actually make yields

and this is how I heard about DeFi and it was right after the DeFi summer and I bumped into a French community called Defi France. It's pretty close to maybe lobster dao but for French people and it's a group of defi passionate people uh talking mostly about defi and with uh zero it's mostly doing about building stuff and there's a lot of builders actually in the group and I started by reading everything every single message in that group for months and I learned a lot of stuff starting practicing D5 as well and getting involved uh into D5 fronts by uh sharing what I learned learned from the community and organizing meetups uh in Tulus and I've organized almost a meetup

a month for the past three years. I just stopped before this summer >> and this is how I I got to meet with people that came to the meetup to talk about the their projects and stuff like that and how I got people to reach out to me to get my uh opinion on different stuff. And regarding F ofX, um I did a meet up about F ofX in September 23. So right after the first iteration launch, I've been following Aladdin Dao, which is the the DAO behind F ofX and and as well as Concentrator and Clever Protocols. I've been following the DA since the beginning.

And when I first read about F ofX, I just loved the design. So I figured I should uh make a meetup about it and shared it on the community. And this is how I I started to contribute to the project. >> Cool. I think like doing meetups is such uh an underrated um kind of low lift thing that you can do early in your crypto journey. I organized a few meetups uh back in the day lil in the in the north of France. Um and like yeah I know like you know Brian my co-founder here at Epicenter like also organized like quite a few meetings in Berlin. And it's such a great way to like meet people who you know you don't necessarily see online, right? Like but like they come out of

the woodwork for the meetups, right? And they they they um it it built it's like great great way to build connection. Um >> yeah, exactly. It's >> one of of these few ecosystems left in which you can uh easily access to people that makes uh that make the ecos the ecosystem and as and you and you can just uh give to the community and and it will just bring so many opportunities you know just by being genuinely uh sharing stuff uh it just just meet people and and it brings opportunity.

>> Yeah. Yeah. I guess what I'm trying to say is like even you know even like 15 years into crypto there's still opportunity for people to like have to know it's like uh >> u like I encourage anybody to do that um and like what what's the relationship like what is Aladdin Dow and the relationship there and you know who someone was already working on FX before you started contributing to it and >> yeah yeah it's a good question Aladdin Dao is the DAO that builds F ofX protocol so it's the same team basically and Aladdin started as an investor ment dow uh something like four years ago uh and but it quickly created it first protocol to just to to get what was missing to them uh in the D5 landscape.

So they they they launched I wasn't there I wasn't contributing there at that point but I was a user actually they launched concentrator um I believe in 2021 maybe or 22 and and then clever so concentrator in a in a nutshell is a um um an auto compounder protocol so it autoco compounds your yields but instead of compounding into the underlying it lets you compound into another yieldbearing asset such as Steve for instance or or since since uh Adinainda has been very close with the curve ecosystem in the first days uh you you can uh compound your CRV for instance

instead of compounding stable coins so it's kind of it's a protocol that lets you um uh DCA with your D5 farming basically and uh that so that's the first protocol it's still around with over 100 million TVL. And um the second is Clever that lets you um leverage your uh uh CVX uh farming basically with without liquidation. And so the first two protocols are very deep into the curve and convex ecosystem while the third one which is FOX solves the the the problem of decentralized stable coins basically.

And what I've lo what I've loved about about the design is that it brings a real decentralized alternative uh into the stable coin landscape and it was uh the the origin on f of f ofx is actually the USDC peg in March 23 because alladin da with the existing two protocols had a treasury mostly made of USDC and they just figured it's such a nonsense to build defy in in in in on the decentralized infrastructure and to rely on on centralized stable coins and to depend on on troty events such as the SVB failure. And this is how uh the idea

of FX uh was raised in the first place and and it evolved to what it is today. And today we managed to to bootstrap FXUSD to uh over 100 million uh market cap as well while having no VC funding while doing things 100% organically. >> Yeah. No, I I agree that like the the it's it's it feels like such a huge failure on the part of the ecosystem sometimes. But I think like the fact that centralized stable coins have dominance over the stable coin market um feels like a pretty big failure on the part of you know proponents of

decentralized tech and it's really unfortunate that you know uh protocols like D and other decentralized stable coins haven't picked up more um more adoption than than they have. I mean like there's sizable adoption right but it's like it's nowhere near where USDC and Tether are at. Um I mean there's like a lot of regulatory risk there and also you know DPAG risk and these sorts of um off-chain risks. Um what what is like the kind of core value that you think of core tenants that a decentralized stable coin protocol should embody like you know if you had to kind of put characteristics on what's like an ideal decentralized stable coin protocol uh looks like what would those be? Yeah, I think uh for a decentralized

stable coin to work, people need to to to trust it to be reliable. So it needs to have a good peg obviously and and to be liquid enough uh so that you can come and and buy it and sell it in size and it it needs to be collateralized so that the peg actually stays. So it's not just liquidity, but it's actually a good peg by design and good backing and uh and it also needs to to be scalable. It it all goes back to uh the stable control. It needs to be in my opinion mostly on chain because so that you can abstract trust uh from it and just trust the code instead of trusting entities and and

people and um yeah that's that's and and and it also brings uh censorship resistance with by by being onchain. So that's all these different um key components I guess that makes a good uh decentralized stable coin. In my opinion, the beauty of Ethereum is and and decentralization is that it abstracts trust and abstracting trust from finance reduce the risk, right? And it's just like people just forget about this and and and and just like the the trile is used to to to trust and to have someone to sue if anything goes wrong and why we can just avoid trusting people using Ethereum. And in my opinion

makes a lot of sense to to embrace that technology and to to bring and and this is actually what we do with FOX. managed to deliver higher risk with lower higher sorry that's higher uh rewards with lower lower risks uh because there's no trust involved and and in my opinion that's a a paradigm change that will come at some point with when they most of the new guys will be cryptonative and understand that that uh value proposition.

>> Yeah, I certainly hope so. I mean that like but there's there's a you know centralized stable coins you know have a lot of uh have a lot of tailwinds. So um uh you know and they have I think like for for that to happen I mean you know it could happen it could happen that like decentralized stable coins take over but there would have to be some catastrophic event that like really erod the trust in like tether or USDC um to the point where you know decentralized stable coins can kind of like come in and start taking that I I don't know that I think that you know decentralized stable coins can like slowly start creeping up and and and building up um issuance to to really surpass uh in a meaningful way, you

know, the the main state centralized ones. >> I don't think I don't think they will take over uh because they the centralized one will probably always be more convenient and and scalable. That's that's a fact. But I also believe that centralized stable coin will all eventually disappoint at some point. and and at that point people will need a reliable alternative to use. And why would you use a more risky uh stable coin? So a more trusted stable coin with low risks while you can most of the time use a decentralized one with higher uh uh higher yields. you know, uh the idea is just to to to offer a reliable

alternative and this is what what we're doing and and looks like people understand it since the protocol has grown pretty well lately. >> Yeah, that makes sense. Um I think I think also maybe there's still like some lingering fear about decentralized stable coins, right? like where with um with US um so that might also contribute a little bit I think I think also just generally like they're they're harder to understand right than like a centralized stable coin like centralized stable coin people know like hey there's an institution behind this there's all these banks um there's like you know KPG audits that say the money's there uh I

you know I get that cuz that's like the model that most people um are familiar with with a decentralized stable coin like you you have to listen to hourong podcasts like this to like understand what the going on. And u again it goes back to that trust paradigm of of of the old world in a in a way. But yeah, definitely there's a PTSD of of uh USD and in lots of people I meet and and when the first question they ask about FXUSD is is it an algorithmic stable coin because they heard about this? >> It's dangerous and uh yeah no it's fully collateralized with exogenous collaterals uh decentralized stable coin.

>> Cool. Yeah. Well, let's maybe get into a little bit of how it works. And like the first time we chatted, uh, you described it as sort of an evolution on the CDP model, uh, that Maker um, introduced to the world, I guess, back in like 2016. So, uh, maybe using that as a, you know, if that's helpful, using that as a comparison because I think a lot of people have that model um, and understand that model. Yeah. H, you know, how does it work and what are the different components? >> Yeah. for for people used to the CDP model, it's the easiest way to understand how FX works. Uh it's it's indeed an evolved uh CDP design in the way that uh so FX offers two two

products. The first one is a leverage product. So it it it delivers leverage on EH and BTC or BTC you can you can choose uh directional leverage with uh without funding cost without borrowing costs. users just pay a one-time opening and closing fee and that's it and in most cases they won't have to pay any fundings. it can happen in very uh rare occasions but um so it brings predict predictability in the cost and the difference with regular CDP is that we abstract the looping so we give overexposure to the collateral uh just just like if you would use a CDP with looping protocol such as defi saver or

contango or stuff like that to get directional leverage we abstract it we we include it into the the the product. So that's called X positions for the longs, S positions for the shorts. You get directional le leverage up to 7x predictable cost, just a onetime fee. And we have this very innovative liquidation mechanism that prevents any hard liquidation. So you don't you don't get the half or 100 or the the entire position wiped out with a with if the market goes on the opposite side. uh and you you get this very u progressive liquidation that keeps you uh as much exposure as possible and reduce uh the

the risks. So on the leverage side in a way it's a zero stress leverage. It's just a zen uh per if if you want uh using the CDP model uh in in the back end. >> Okay. So maybe we stop it there and and kind of go over those different parts yet. Um so right so comparing to the CDP model CDP you borrow against collateral but leverage isn't included in the protocol typically people get that leverage by going through some external protocol like defy saver or maybe instadap and they're they're do they're kind of exporting the looping functionality to that protocol and then bringing the collateral back

>> I know of the >> yeah it's a huge pain in the ass like I've done this it's just really painful and kind of scary to do so like and then you bring the collateral go back and then like you you know you're doing this loop and you may like get some leverage from that. Um uh uh f ofx uh has this built in so you can do up to 7x 7x leverage and then um the the other part that you mentioned is that there's a gradual liquidation mechanism which means that your collateral isn't um liquidated in sort of a single transaction. It's more um >> it's very progressive. is progressive, right? So, and I guess I'd never thought of this, but like

what makes that possible and why is it that typically lending protocols don't have a progressive? >> It's a very good question. >> Liquidation mechanism. >> Yeah, thank you for asking this. the why the other CDP don't do this is is because most of >> or just lending protocols basically like you know why wouldn't a kind of have this you know progressive lending mechanism >> can't do this because they handle each leverage positions individually so to make the liquidation profitable it needs to be large enough so that the the keeper the liquidator will actually be profitable to uh by handling the liquidation and the the main difference with f ofx is is that All the leverage positions are handled together uh based

on the the on on price ticks basically. So we aggregate every positions at risks to together to process the the liquidations meaning the liquid liquidations are profitable even if the individual liquidation is very small. Um, so to to illustrate the the design, if you're familiar with the LTV uh concept, each time your leverage position crosses 88% LTV, the protocol puts it back at 88% LTV, no matter the amount it represents, the dollar amount, the dollar value of the liquidation, so that your position never reaches 95% hard liquidation LTV. If that process ever fails and your position reaches 95%

LTV, at that point the whole position is liquidated. So, but in most cases, it shouldn't happen because uh yeah, it it works. >> So, you're kind of socializing the liquid the liquidation mechanism. Is that a way to look at it? >> Yeah, it's a good way of of saying it. Yeah, it's socialized. >> Okay. Interesting. And and no other D5 protocol does this like a lending protocol? >> Yeah. Uh recently Fluid uh came up uh with a similar approach. They have this whole base liquidity layer, but it's way it's a way bigger machine, you know, because it's a it's a whole lending

protocol and DEX and and so on. We it's on the FX side is way simpler. It's just two collaterals and and a CDP, you know. Um but they have a a similar approach in a way. The main difference on their side is I believe that the the liquidation penalty uh can fluctuate uh while on f ofx it's it's fixed 2.5 uh on fluid I believe it goes from 1% to 8%. So maybe just to put this another way, say we compare with a like a each position is can be liquidated has to be liquidated individually to protect the underlying collateral. Here the underlying collateral is kind of pulled to

represent all of the positions and you know that that collateral is going to secure your position as much as it's going to secure someone else's. And the different positions may have different sort of collateral ratios relative to the overall collateral which which is where you get this kind of socialization mechanism. So someone else's collateral is kind of like backing your position, right? >> Uh not not not exactly. Your position is actually like your your position collateral ratio is is um uh monitored, you know. So there's no you're you're not uh actually each long position has its own

collateral but it's all pulled together and and all the all the the the leverage positions are monitored together. So um and instead of of liquidating each position individually you look at what's at risk on each position considering the current price and you liquidate everything al together. Is that is that easier way? >> Yeah, I think I think that makes more sense. Okay. And what kind of complications does this thing does this because there's always trade-offs, right? So like what what's the sort of trade-off of this approach >> regarding other lending lending liquidation design or or even CDP? I

think it's just uh it's just better because it enables a higher LTV. This is how we we managed to deliver up 7x while on a for instance you would get like 5x stops on on E4 or BTC. It's it gives us like by liquidating way more progressively it it it's um it's kind of it's more secure in a way, >> right? But is it are there like unintended trade-offs like um for example like the the fee you know the fees you can charge are lower or like uh um you know liquidations liquid like liquidators are less efficient like

there must be some some trade-off right on the liquidation side no I don't think I don't uh I don't think I can't think of of any trade-off here it's it's actually a more efficient uh way of of doing things. Um, no, I don't think of any trade-off on that on that side. Actually, the the cost of liquid of the liquidations is like the liquidation penalty, which is a keeper bounty, it's actually the same, it's way lower than on on other money markets, for instance. Uh, if you compare with a when you get liquidated on a I believe it's it's at least 5% penalty or maybe 10. and and the the liquidation LTV on on E is or

Steve is something like 80% while it's 88 on F ofX and um and when you get liquidated you can get up to 50% of your position instantly repaid. Uh that's a hit you know uh on FX it can be as small as just.1% of your position wiped out. If the price just touches it and and goes up again, you don't don't get wiped uh more and the penalty is just 2.5%. regarding other our money market. It's it's way more secure and efficient and it it brings like a relief in terms of uh how you uh

see liquidations to compare with a a regular centralized per uh it's still since it's onchain it's the the liquidation of the TV even if it's a part progressive liquidation is still lower than on on centralized per because like liquidations are processed with a 90 99.5% percent of TV on on Binance for instance, but it's a it's just a different approach, you know, it's >> and so with this approach, you have near capital 100% capital efficiency like borrow to lending is nearly 100%. No, it's it's still overcolateralized, but it it's since since it's more efficient, we it's um we we can have a a lower

collateral overall collateral ratio than on other CDPs. So, it's more capital efficient than than previous CDPs. It's still obviously less uh scalable than a centralized stable coin obviously because it's over collateralized, but uh still it brings a a better compromise than anything before. Okay, I'm I'm looking at their website. It says that $4 billion well almost $5 billion have been liquidated last month on other per solutions and FX has zero liquidations.

>> Yeah, because uh uh like the hard liquidations only happened once. it was in the first days of the the current iteration of the protocol and there wasn't uh enough keepers processing the the the the liquidation break so that the some position reaches reached reached 95% LTV and got liquidated but since that event it was on on February the second or something like that there was a massive liquidation event on the market and since uh that date there there was no hard liquidations on FOX.

Some got uh pro partially um reduced in a way, but there was no hard liquidations. And the main the main uh point of of this design is that the leverage uh users keep as much exposure as possible to recover with the market. If the market ever recovers, if they made a bad trade, it won't it won't save them, you know. If the market just crashes and goes to zero, they will go to zero, you know. that way more progressively than on any other onchain leverage solution. >> And another thing you mentioned is that um that there's no funding rate for the leverage trades. You just have this onetime fee.

>> Yeah, that's correct. What's unique? What's unique about this approach? What does it enable? >> Um it's been it has been done before uh by liquidity for instance with LUSD. It was similar in a way. uh people would just pay a onetime opening fee. But the the main difference here is that CDP like LUSD could couldn't uh scale because uh they had massive peg issues like the the LUSD peg what is is not reliable enough to actually hold LUSD because you end up buying it at 1 1.05 and selling it at at 0.99. So, it's not reliable enough. And we fixed this by still having this uh uh just fixed uh

onetime opening fee and closing fee. But we only add a small funding if the stable coin is ever deped. And that funding is and just like most of the fees generated by the protocol are distributed to a stability pool that acts as a peg keeper to attract more USDC earning that uh that uh organic yield and helping with supporting FXUSD spec. So we have this organic peg keeping mechanisms that that just work and that lets FXUSD scale pretty well uh since we launched early this year.

>> Yeah, let's let's talk about the that stability mechanism, the stability pool and then there's there's also I think like I guess FXA is >> um >> yeah correct. >> Yeah. So, so, so like what's really impressive here I think is the yields um which range between like 10 and 20%. Now, you know those those approach terror level uh anchor level yields but u yeah why why why is this sustainable? How how is this sustainable?

>> It's it's a good question. Yes indeed FX save which is the main yield strategy on the FX protocol has since we launched it uh has been one of the best yield stable yield in DeFi. If you look at the dashboard created by inverse finance called stable yields.info info you can compare all the main yield bearing stable strategies around such as FX obviously S dollar USR uh SCRVUSD SUSD and stuff like that and and most of them and if you look at this on different time frames you see that FX has been above all the time and like the next one is like four points below uh FXA and and that's that's a a huge

success for us. We're very very proud of of this and and most and the main thing is that most of this youth is 100% organic and doesn't imply any human um active management. It's 100% smart contracts onchain. There's yeah nothing to trust uh else than the the code you know um and so to understand what uh how it works uh maybe I can break down the different the the peeping of FXUSD. So if you understand that FX protocol is an evolved CDP whenever people are longing the collateral it involves selling the stable coin right because in the back end the stable coin is sold for more

collateral. So it brings selling pressure and this is this is why for instance LUSD ended up uh under PEG or or or the the people getting leverage on liquidity ended up being redeemed uh because LUSD was massively sold and we solved it with different peeping mechanisms. The first one is that stability pool on FX. The stability pool is a yield strategy that takes both FXUSD the decentralized stable coin and USDC as base assets and it acts as a pe keeping uh mechanism.

Each time FXUSD is traded below one on on the main liquidity pool which is on curve against USDC. Each time FXUSD is traded below one, the USDC from the year strategy will buy FXUSD on the market to put it closer to peg. And each time it's traded above one, it's sold back for USDC and goes back to the stability pool. So that strategy keeps FXUSD spec. And to attract capital, the incentives uh comes from all the or the the the fees generated by the protocol. At the moment, the protocol generates close to 1 million uh dollar a month and most of it is distributed to the stability pool or the uh governance token lockers.

>> Okay. So just just to stop there for a second. So so the protocol does rely on on USDC at least in the stability mechanism to find its price. Yeah. It's not backed by USDC at any point. But like USDC is the like if you want to if you want any asset onchain to be pegged to USD, it's pegged to USDC or USDT. And actually onchain USDC is the most liquid. So this is why USDC currently is the most uh liquid DeFi stable coin around, >> right?

>> So if you is is is it is it is it safe to say then that like this mechanism it wouldn't be possible without an onchain stable coin that has a really high uh peg stability. >> The the other option would be companies that could handle their redemption with real dollars for instance. But yeah, um since we don't want to rely on I guess the biggest company that does this currently is is Circle and and and Tether, but the most liquid onchain is is circle with USDC.

>> So, okay, >> that's currently the obvious choice. At some point, if we scale FXUSD enough, we may not need it anymore and people will build liquidity with FXUSD because they want to be paired with FXUSD. But when you build a stable coin, if you want it to be liquid and at peg, you need to build liquidity with currently the the the most obvious choice is USDC, >> right? And and so if there was a USDC DEG, you know, highly unlikely, but like it's happened before, right? What >> it happened before and it actually triggered the creation of FOX. um if the the stability pool uh cannot accept USDC like the USDC peg is monitored and when

if ever DPEGs the stability won't accept more any more USDC so it's exposed but protected from USDC DPEG so you get exposure to both assets FXUSD and USDC but it's protected from any USDC DPEG so the main risk here in that strategy for any LP is the FX XUSD spec and this is why there's different layers of uh peg keeping. The first one is the stability pool itself. Um and and and so the the yield comes from the protocol economic activities. So people taking leverage, they pay this onetime fee I told you about. Uh they can have in some uh in some situation a funding and I'll I go

through this in a in a second. uh and and most of the leverage positions are are backed by yield generating assets such as wrapst and that yield also goes to the stability pool. So if but if it's not enough so actually whenever uh FXUSD is uh traded below one it's actually below 0.998 the stability pool buys um FXUSD the market but if there's not enough USDC into the stability pool so whenever the ratio of USDC goes uh below 5% we may not have enough USDC to support the peg. So in that very situation all the leverage positions get

a small funding cost applied to their position. It's temporary and it it's here to support the peg and that funding cost is the RV boring cost of USDC and that goes to the stability pool to attract more USDC deposits that will support the PEG and and then cut the funding because at as soon as the distribution of USDC goes above 5% again then the funding is is off. But if it's not enough, there's, you know, different layers. You always have to, you know, anticipate what could go wrong. If it's not enough and FXUSD starts to depect for too long, it means when the EMA 42 minutes of FXUSD on curve um goes below N98, so it's pretty small DPEG, but long

enough to be uh noticeable. Uh we trigger what I call the DPEG mode. And in in that situation people can no longer open any long positions. So it prevents any further selling pressure on FXUSD. And at that point uh a second um layer of funding is applied to the leverage positions uh which is way higher. It's it's five or 10 times the USDC borrowing costs. uh I don't believe it happened yet um because the previous layers of keeping were uh have always been enough but in that situation it brings a very high incentive for leveragers to to to for either leveragers to repay uh to

close their loans because they can buy FXUSD cheaper and close with a bigger profit and they can avoid these high fundings. If they keep their longs open then it brings a very like like massive yield to the stability pool thus attracting USDC that will uh cut uh rep FXUSD quickly and cut the funings and there is a one uh last layer of peg keeping mechanism which is the redemption when FXUSD is in in DPEG mode um people can can buy it and redeem it against the collateral minus.5 5% redeeming fee. So that sets the worst case scenario PEG at 0.995 basically.

>> One question here like you know I'm looking at the stable yields dashboard which is great by the way. Um, and you know, the the yield, the 30-day average is um almost six points above the second position, but only has well has less than half the um the TBL. And if you look at Athena, Athena has 5.7 billion in TBL with also about the same, you know, 30 average. there's about 100 million in TVL as we're recording this on on September 3rd. Um you know with yields with yields so attractive and a mechanism that uh appears to be sustainable and sort of

safe um why in your view why why isn't there more TVL on FX? >> Uh there's probably different reasons for that. Um first thing is that we are doing things 100% organically. there is no VC backing so there's no so we don't get a we we we had to make all our connections ourselves you know just by uh reaching out to people and meeting people into events and stuff like that and and the overall protocol TVL is uh uh over 400 million now and it's been built 100% organically so it takes and I guess it takes time to uh build as you as you said it previously it takes time

to build trust towards the decentral centralized stable coin. So for people to actually understand that uh the team wantpool that it's actually secure and that there's a uh the liquidation mechanism works and the the pay keeping mechanism works and so on and that the yield will also be um sustainable, the stable coin will be liquid enough so that people can come and exit in size and stuff like that. It it it takes time to to build that and we've we've done that and we we keep doing it and reaching out to to getting in touch with more and more people. But I I guess it takes longer when you're doing this just

organically and without any um massively back token TGE event uh to come and stuff like that, you know, because the token has been liquid from scratch with fixed emissions over the next 50 years. And uh yeah, there's it's probably less speculative uh in a way than uh other VC back projects. And then obviously Ephina is not uh exactly a D5 product. It's uh it's highly centralized and reliesed on uncentralized um fundings. Uh which makes it obviously more scalable. Uh and if if we were having 5 billion right

now, the yield wouldn't be uh that high. But it's what we observed uh over the past few months and and scaling the protocol to over 400 million is that uh it actually scales by growing progressively. uh the more TVL there is into the stability pool, the more leverage activity we observe on the leverage side and the more fees we uh collect and and when when when you look at the uh collected fees over each month, you could it's pretty clear that there's a pattern of of u of stabilizing these fees and having them way more steady over time and growing steadily.

Um I don't know if I if I exactly answered your questions. I I went to all different topics but um I guess doing things not VCs and 100% onchain it's it's the probably harder to to to to scale a protocol that way but in my opinion and our mission with FX and Adendow is to build stuff that will last for uh decades if not centuries and um so yeah we're here for the long term. Do you think that like with you know the track record now that um you've built you know this TVL

um uh and and a you know a peg that has held and kind of demonstrated that this works. Do you think that it would be useful to now go and like raise money to accelerate growth to accelerate um you know fundraising into the protocol marketing etc. Is that something you considered? >> We don't consider raising money from VCs because it's but people are free to buy the token on on the market. uh and it's if people do it actually helps because uh there's other strategies which are incentivized with the the token. Uh but we're but it it definitely helps on one side is that when we talk to new funds

and stuff like that and uh it's way easier now that the the the the stable coin is more liquid and and the protocol is bigger than in the in the beginning. Um so it helps to to raise u in a way stable TVL for the stability pool because the more TVL there is in the stability pool the more volume we can process on the leverage side because it it keeps and so yeah it helps on uh and we and we've definitely seen the difference for instance we were discussing it with Paul another team member that uh uh went to ETHC with me this year as well as last year and we've seen a major difference between the traditions in how people were interacting with us like when when

we were talking to people and other builders last year they we felt like they were things oh that's interesting let's see how it goes you know and now it was mostly wow guys congrats on congrats on the growth and it definitely it's way easier to to build uh partnerships when people already heard about the protocol and and start trusting So, I wanted to switch gears a little bit. U you you guys published an article a couple of days ago on your Twitter. It's Ethereum security model and strategic importance of decentralized stable coins. Um yeah, give give me a gist of like what you're arguing for in this article and um you know how how you're thinking

about you know Ethereum security long term. >> Yeah. So yeah, the idea the idea of the article this was was to to point out that the the value secured by Ethereum uh and in in centralized asset mostly which is which are real world assets and USDT and USDC and stuff like that is going so high that at some point these guys and and today it's tether tomorrow it could be another entity has a major weight into any into the the the protocol security for instance if there is any uh hot fork uh tomorrow for a new update for instance and that that major

centralized entity doesn't want to support it what's going to happen you know and by supporting all these centralized entities we make that possible we make it's may may not it may not be a technical issue because obviously it's it's very hard to compromise uh the proof of stake. Uh but it could be a political issue at some point and and an an economic issue and and the idea is not to say as I told you earlier that we should replace centralized stable coins with decentralized but the idea is is that we want to make sure that there's always an an alternative that you can use in most cases and just use centralized uh

solutions when it's absolutely needed. And I like to compare some decentralization with privacy, for instance. Uh it's not it's not white or black, you know. It's not it's not binary. You don't you you cannot be totally private and and anonymous on internet. It's it's a it's a scope, you know. And I know people decentraliz decentralization is a scope is some kind of a meme, but it's actually true. Uh you do your best. You just do your best. And if you can can use private product in most cases like let's say in for um search uh engines you can use duck do go most of the time and if you don't find the answer then you'll go on Google and

it's actually better than using Google all the time and giving them all your uh private data and it's I think it's pretty much the same thing if if you can uh achieve what you want to achieve with your stables using a decentralized one uh there's no point in using a centralized one. So if you can get better yields while staying decentralized, you should just do it. And whenever you want to uh off-ramp because today on on off-ramp goes through centralized solutions, then you can go with the centralized solution for that very moment. But in yeah, that's I guess that's the main idea of what we wanted the the message we wanted to pass with that uh article.

I mean, and I think it makes sense to kind of promote the use of decentralized stable coins, but like yeah, was as we were saying earlier in the conversation, it's like uh you know, at this point, USDC and Tether are so ingrained. It's like it it almost feels like um a little bit of like Ethereum's Achilles heel that you know we've built uh like the ecosystem has built all this amazing decentralized infrastructure only to recreate um kind of similar systems that exist in Tradfi and yeah the the uh it's not it's not clear like what what the solution is there to kind of mitigate for this as a as a space. Um >> yeah, it's I think it's a shame

especially when there there are actual actual reliable alternatives. It's always a compromise between uh um uh decentralization and conveniency. You know, if it's convenient, if it's not convenient, you won't do it. It's just like ecology as well is is is very similar. People won't recycle. If it's a pain to recycle, if they can just do it very easily, they will do it. and and um as it's and and now that I believe we we brought um a design that is uh convenient, reliable uh secure and and and with attract attractive yields then why are you using uh anything else you

know? >> Yeah. One one other thing I wanted to talk about is kind of where FX sits within the broader um per landscape. Um so you you guys are competing with Gearbox, GMX and Hyperlquid and Dydx. Um and it's a it's a market that's very dynamic and it's changing all the time. It's like two years ago Dydx was you know leading that market. um had a lot of traction and now that's sort of lost prominence. Now everyone's kind of focused on hyperlquid. Um and I I think it is there is a big part

of that that is driven by incentives that's also like driven by capital and you know like hyperlid has a lot of money. Um how do you guys succeed in that space and you know maintain relevance long term uh when we know that like really well capitalized projects like DYDX you know have lost prominence in in in such a such a short period and who knows maybe like maybe hybrid liquid in two years from now is like totally irrelevant and something new came along and is much more interesting. >> Yeah maybe we don't know. Yeah, I think uh we mostly uh do our own uh path in that market in that very competitive market as you stated by we have our own blue ocean. I don't know if you heard about that book,

but it's like we have our niche market in a way because we're not exactly a perp we're not exactly a CDP. We're kind of in between delivering zero stress leverage and for many people getting a leverage position just is a headache. You know, they don't sleep well and they are very nervous and they get liquidated. We've seen that James win guy getting liquidated all the time. I mean, if that guy had been longing or or trading on F ofX, he would still be rich, you know, and and we we bring a solution to these guys, basically.

>> I don't know. I don't know who that is, but I feel his pain. >> Yeah, it's a it's a guy on on X that shares his trades and people just observe. And there was another one, a fund. I don't remember the name. And these guys just keep getting liquidated or hyperlquid and and I've seen there's even a a meme saying hyper liquidated. That's a good one because uh the other thing is that on all these u semientralized solutions there is more risk and and on the hyperlquid side there's a a massive trust me bro stuff on the on the oracle side and we've seen it recently. people got liquidated for no reasons on I don't

recall what's what ticker h it it it cannot happen on f ofx everything is 100% onchain there's no there's no >> there's to play devil's advocate here like like you know there there is kind of an oracle and that oracle is the US is like the treasury bonds that are like backing the USDC um that are backing the USDC uh peg, right? Uh because that that's a mechanism that's in that enables the stability pool to function. So I I think I like sure there's there's no oracle and there's maybe no centralized oracle

but there is a reliance on some centralized thing that >> yeah of of of course f ofx relies on chain link uh uh as an oracle just like all defi and obviously we we were talking about um ter being a democ sword for defi earlier and and is another obviously but yeah as yeah there is a reliance on on chaining on on on f ofx and um and on USDC spec yes and no not not exactly because as I told you like for instance the stability

pool and fxa which is built on top of the stability pool is protected from from any USDC >> okay maybe not vulnerable but like it relies on on the price on that price feed if you will like that that's kind of the the equivalent of a price feed. Um >> but we believe that so far chain is the most secure and reliable oracle provider and if chain fails on the e or ptc oracle I guess uh f ofx is going to be the list of your problems.

>> Yeah. Yeah. Yeah. Yeah. It be it'd be great to have just like a simulation where that happens just to see like, you know, how how we just all get rugged >> like a DeFi dystopian story. >> Yeah. Yeah. Just just like build the simulation where you know the the the the the chain link oracle price for Ether BTC just goes off haywire and then what happens? >> Well, I I don't have because I'm not the technical guy in the team. I I don't recall the exact Oracle design but if I recall correctly there's different safeguards um in the oracle design uh on on f ofx looking to the future like ethereum

aspires to secure hundreds of billions trillions in in rwas like stable coins are becoming a large part of the kind of crypto narrative institutions are hopping on the stable coin and sort of train. Um there I think we all kind of anticipate a proliferation of stable coins with many branded stable coins like PayPal is just like one of many I think that will come. Um what are the opportunities here? I think for us as an ecosystem and where does FFX fit in there?

>> Yeah, it's a again very good question. it it we actually already see opportunities and I think I will also answer in a different way one of your previous questions regarding how uh we can compete and why the TVL is lower than Etheas for instance uh these products since they are not uh hardcore DeFi in a way that they're CDI stuff they are already institution ready you know they can talk to institutions and they can build they can sign contracts actual legal contracts not smart contracts with these guys and so that these uh inst institutions can deploy capital I know for instance usual scaled

like crazy by onboarding capital that was had no idea about crypto in the first place that's that's crazy they managed to scale to two two billion if I recall correctly with people from all around the world that had never done any transaction you know and and and as a defi protocol is is way harder because these institutions don't want to hear about this and and uh hopefully there's solutions now and there's new protocols um filling that gap between um OGDI in a way and and and and institutions and we're currently working on a product with different partners

such such as Lagon Finance 9Summit Nexus Mutual FPC custody solutions to build a tailored product for institutions so that institutions could harness the FX FX safe yield in a very safe way. And uh you're actually the first person I I talk about it publicly. Um and the idea is to call this FX safe because it could it would be the FX safe without the DeFi risks all created and and and uh institution ready. So that's uh a way to embrace the ar arrival of institutional money and the other way is all these new stable coins you mentioned I don't

really see them as competitors because most of them are very attracted uh with um organic yields and some of them are already harnessing them. Many of these new yield bearing stable coins are made of other yieldbearing stable coins on on harnessing onchain or offchain yields and they actually use FX save or or stability pool in the back end. So they contribute to uh to our growth in a way. Uh so there's it's not just centralized solution versus decentralized solutions.

there is a synergy between uh the the two words and it's actually good because in the first places I could I could see it in like the good guys and the bad guys way but it's actually we can build synergies and and and these guys can help us bring uh build the alternative to what they're doing. >> Well, that's a great note to end on. Si, thanks so much for spending the time on Epicenter today and um yeah, looking forward to seeing uh looking forward to seeing FX go up and to the right.

>> Yeah. Yeah. Thank you very much for having me. If you enjoyed that episode, feel free to to join the Aladdin Discord. It's a very open community. We all started by popping up uh on on the Discord and asking questions and sharing ideas about the design. So, it's always a pleasure to to meet new people and and discuss things, discuss DeFi between passionate people. Great. Thanks, David. Cheers. >> Thank you very much. Bye.