Pablo Veyrat : An over-collateralized and capital efficient decentralized stablecoin design

Transcript

hi everyone thanks for joining today you know it's 1 15 p.m you may want to take a nap but today i'll be talking about stable coins and angles so angle is a protocol i've been developing and i'm currently developing with some friends of mine it's built to be over collateralized and capital efficient decentralized tablecloth protocol so the the root of the project um was the need to build a euro stable coin what's important to understand today and defy is that there is no widespread and liquid euro stable coins there are several reasons for that the first one is the difficulty to build a centralized eurostable coin so

you have no or almost no ether equivalence in euro so the two reasons for that is first that there are negative interest rates in the eurozone meaning if you are a centralized company trying to build a stable coin protocol well because of the negative interest rates you can't keep as much reserves as the fiat money you have so every year let's say you have 100 in the bank at the end of the year you end up with 99.9 if you don't do anything uh with these reserves because of the negative interest rates meaning uh you are getting under-collateralized and there are also uh some regulatory reasons that prevented the emergence of eurostable coins

so the the reason why we wanted to build a euro stable coin was that um in defy when you are like us based in europe you are subject to the volatility of the usd with respect to the euro so in 2020 uh to in order to be profitable on stable usd you would have needed to make a 30 a 13 apy on your stable usd which is okay which seemed fine in 2020 but not sure it's going to say like that every year so for people in europe and for people using not dollar as their home currencies having euro stable coins or stable coin pack to their home currencies is something which is definitely needed and that's why we decided to tackle the problem

the question now is how do you build a euro stable coin so as i told the centralized way is really complex in euros so it was not the best way to proceed um so one way to do things and there are also several protocols that do that is to copy maker and just change the oracle we could have done that but for several reasons we did not the first reason is that maker wants to launch a euro dies so not the best the best thing to do to try to copy them and also when we started to really dig in makers protocol well we we realized that there were some flaws in the protocol um which made which made us think well

this couldn't hold for eurostable coins the main flow i think of uh maker's protocol is that it's not capital efficient to get one die unless you use usdc as collateral but to get one die you need at least 1.5 eth as collateral or like depending on the collateral you use you need to lock up more collateral that's the first thing the second thing is that with maker you don't have uh unless you use usdcs collateral you never have direct arbitrage opportunities whenever the price of the stable coins deviate from peg and when the price of die deviated from pegs so before the implementation of usda's collateral well the an active governance was needed uh to be able to plan the stability fee

to incentivize or disincentivize people from issuing die so because of this first capital inefficiency enough this inability to sustain the peg if you don't have usdc as the collateral we thought okay maybe this is not the best way we also wanted to have a protocol which could be generalizable and i think that's kind of a problem with many defined protocols today is that everything is built around dollar and what's important like synthetics does is uh the ability to have a protocol that could be used to issue eurostable coins korean one stable coins um but you could imagine a stable coin spec to other other assets it doesn't need to be a forex currency you could have a stable tesla share like

a terra dose or you can even have a stable temperature in paris you could really pack stable coins to anything you want so we wanted to build a protocol that could be fully stable and to have this fully uh default stability what you need is to have some sort of direct convertibility between stable coin and karate meaning you give the one of collateral you get one of stablecoin and conversely you get one of stablecoin you get one of collateral because like this convertibility it's what creates this is what creates the arbitrage opportunities whenever price develops from pig we could have gone also uh into undercollateralized designs uh which are also capital efficient uh

we decided not to do so um because we haven't seen many projects working really well there are some which start to work well so now frags is at peg feizat peg and congrats to them for for doing so we're just trying to explore another another vertical um but we wanted to have something which is over collateralized to to keep the robustness in front of bank runs and in order not to have to prevent exits in case of liquidity crisis so how do we build a stable kind protocol that is capital efficient but over-collateralized so our protocol has several features that enable us to achieve this and i'm going to go over these features one by one

so that you can understand how we can keep this capital efficiency while having the robustness of our collateralized protocols so the way angle works it's very much like uni swap you give you give the protocol one eth or an accepted collateral we look at oracle value and we swap you we issue the stable coins based on the oracle price and conversely at any time with your stable coins you can redeem collateral based on the oracle value of your stable coins so if one if is worth 2000 euro you give the protocol one is we issue 2 000 tokens and with your 2000 tokens if the price of one ease is one thousand euro then we need to give you two eth to be able to trade you at oracle value

the question is how do we find this other heath on the market to be always able to to keep enough reserves regardless of the volatility of the collateral so i'm just going to make a small parenthesis here um when you think about it uh stablecoin protocols decentralized protocols i'm not talking like about protocols or companies like circle usdc or t3 usdt a decentralized protocol uh to make stable coins it's all about taking volatile crypto collateral to issue uh to issue a stable asset so it's about taking something that is volatile making it stable but you need to remove the volatility at some point to be able to guarantee this stability so

what we do at engel to ensure the protocol against the volatility of the to make sure that regardless of the price variations of eth or of the collateral we accept we are able to sustain the convertibility and the redunability between stablecoins and collateral we issue what we call perpetual features so it's leveraging contracts we uh we sell to people who who are going to come to the protocol and and say look you have one if in reserves that was used by someone to issue stable coins so someone giving me one eth and getting 2 000 tokens in exchange you have this one if i bring you a small amount of collateral or the amount of collateral i want so it

can be one eth and i accept to cover the volatility of this if you have in reserves so now how how does it work um if the price of if uh doubles uh just for the example well this person we call it the aging agents in our protocol uh they they they are entitled uh well she is entitled this person is entitled to get the capital gain she would have made if she had owned the heath so now if the price of heath doubles from two thousand heroes to four thousand euro this person which came in and said look i'm going to cover the volatility of this heath she has the right to the capital gain she would have made if she had owned the if she covers so the capital gain is four thousand minus two thousand it's two thousand euros and at current

oracle price uh two thousand euros it's point five east so this person she brought one e through the protocol or whatever she wanted and she gets the right to what she brought plus the capital gain and conversely if the price of if decreases well this person she has she has to pay using the collateral she brought for the capital loss for the capital loss of the if she covered so if the price of east is divided by two the capital loss is a thousand euro which at current oracle price is one eighth so we would take one ease from this person to be able to sustain the convertibility so it's a bit technical uh i did not get it default the first time uh but after working on it i i can tell you it works um the the so as it stands and as i'm

describing the protocol now anger is like a marketplace between stability and volatility it's a marketplace between people who want stability and people who want volatility and get the volatility of the collateral that was brought by people wanting stability the thing is and so we are not the first one with this idea so variable uh i see some people worked on this project before in the room uh they had this idea to make a stable coin by matching stability to volatility the the thing that we do and that makes us a bit different i think is that we accept the fact that at all times uh our offer in volatility is not going to be fully covered um by uh by what we call aging agents

for instance when someone comes in the protocol and give us one ease to get stable coins we're not waiting for someone else to come and to say look i'm going to cover the volatility of this we directly swap the person and hope that someone will come to to cover the volatility of this heath so in order to be able to do so we need to have some sort of buffer for the moment where there is an imbalance between the offer and the demand of volatility and our innovation is that we rely on a third type of agent we call them standard liquidity providers they are just people giving money to the and in exchange receiving uh they receive an interesting yield from the protocols reserves and so these people they are the buffer

for the moments where the protocol the protocols collateral is not fully covered so how do we incentivize these people to come well first we take some small transaction fees to our users wanting stability that's the first thing and also the the second thing is that our protocol owns reserves um so let's say that at a moment in time there is a hundred and fifty of collateral in the um 50 coming from so the third type of agent standard liquidity providers well there is nothing preventing us from getting guild on these reserves so we can uh for instance this 150 we can lend it to compound or ave or build whatever strategy you want on this

gets killed on 150 but this yield on 150 we are just distributing it to the liquidity providers which brought 50 in the protocol so there is a super interesting multiplier effect in this and we can propose them leveraged returns leverage yields and higher yields than what they would get if they were directly going to compound or going to have it and that's the incentive for them to come to angle so just to sum it up engel is a protocol with stability uh you can get stable coins at oracle value with no sleep page any time you want and you can always slap swap distable coins for collateral for the collateral type you want without uh without having to pay big

transaction fees and with no slippage on the price you pay to get the stable coins that's the first feature then the second feature we offer perpetual features contract so leveraging contracts um and the leverage will refer is a way more straightforward leverage than what you get uh by using i don't know maker or compound or ave where you have to deposit borrow swap and then you get leverage in our case in just one transaction you get you get leverage with the multiple you want and you can cash out any time getting your capital gains or having lost a little with the capital losses with the variation of the second thing third thing we offer classical

um liquidity uh liquidity mining uh with as i explained uh we we can offer more interesting yield uh than what you get by going to compound or by using yearn or by using ave whatever staking or farming protocol you have that's the first thing and one point i did not insist on is that you can see our protocol as an automated market maker with no slippage on the price uh you can come to the protocol give us one each we give you 2 000 euros but once you have stable coins you can redeem the collateral type of your choice so you can use your 2000 euros to to redeem a rap bitcoin and so you can see

our protocol as the medium of exchange between uh ease and rap bitcoin in this case but it can work for any collateral type we have and so these are the main features of we tried we started by wanting to build a eurostable coin and then we we arrived in a point where we have lots of defy core components to make a stable coin stable um and so the the point where we are uh in the project uh so we are going to get uh audited uh from next week uh and we hope to launch in um in october after the end uh the end of the audit uh we will start with a just a eurostable coin so all the cool things i told you about

leverage about leverage it's not going to be super useful in the beginning because we will play it safe uh it's so hard to build and algorithmic double coins and still we will start with the euro stable coin backed by usdc and die and then on the roadmap we want to accept potentially any collateral type so it can be eth it can be rabbit coin we'll push for more decentralization in the collateral types to accept and so rare bitcoin is not decentralized but uh you get the idea um and um on the roadmap as i said the the idea is not to make a eurostable coin so the euro is first because it's an untapped opportunity and because there is a real need for

euro pegged stable coins in the market but we really to go also in the usd uh because that's where liquidity is and that's where well people that's the the currency people like to play currently in defy but we also want to go with a korean one uh gbp uh uh swiss franc uh and all that currencies and we really count on our community to propose uh new collateral types and to propose um like a new new stable coins we should implement and the last thing is that our stable coins are all independent from one another it's not like synthetics if one stable coin fails in our case the system is not at risk as

the collateral pulls for each stablecoin are completely independent uh and that's something we really wanted to to have uh to make sure uh that if we experiment with a stable temperature in paris if this doesn't work well that's not going to harm the whole protocol and that's what we care about experimenting about stable coins it's an active research area and we welcome any new idea to improve the protocol and yeah to to make uh to make a building block of decentralized finance thank you so i was wondering if some of you have questions

but if you're doing your pack not exactly it's uh the central bank when you are a big company having money in your bank uh the the bank charges you small fees so it's like a point one percent uh for the uh money you have in the bank currently in the eurozone okay okay sorry oh sorry because the term was just weird because that's a fee it's but it's fine so how are you solving the the inflation thing i mean you're still packed to the euro which yes loses value so yeah you are paid to the euro and so if the euro inflates the your stable coin inflates too well yeah but

that's not good right the idea is to build a stable coins that replicate what's in real life markets so if the asset you are begging to is inflating then you are subject to this inflation and it's really to bring traditional finance i mean the idea with the project and there are also other projects which try to get rid of that like uh reflexolabs and rye which completely gets rid of uh home of like currencies inflation in our case we really replicate what's happening in uh in the forex and trying to put it on chain got it i mean the the reason why i'm asking this is because i mean i've been working on like in the past couple of years on one stablecoin project didn't go really well because of reasons uh but we were toying with the idea of

what could you peg a coin to which is actually you know stable or even rises in value over time and we figured that the only thing that actually behaves in that way is the value of the global economy because whenever we have a recession the global economy still grows by an average of like 0.3 a year and you could in theory take gdps and purchase power parities as like key economic indicators for starters from the leading countries and then from all the countries and create an indicator which is actually an accurate representation of like global economic value and that is stable because one country 10 countries can fail and implode and it's still going to stay the same so that's an interesting point you have

and the remark i want to make is that your stable coin is only stable to the oracle value you choose so if you choose an oracle that is a euro corrected of inflation then your your stable coin is spec to euro collected to inflation and so it's it's really easy you just have to change the oracle and you can peg your stable coins to whatever you want yeah i mean in in this case you would be making like a completely new monetary indicator which basically aggregates a lot of other economic ones and we wouldn't be able to use a chain link and unicef v3 or record students yeah well man changing the world thanks sort of a hypothetical question if you pegged your stablecoin to an

ever-appreciating value what parts of the model would start to break down because i assume counterparties wouldn't want to leverage against an appreciating asset so um the the problem of the stable coins of the underlying asset increasing in price is similar to the problem of the collateral price decreasing so this are this is really the same um the same problem uh and in our case um when people want to get leverage they get leveraged on the variation of the collateral with respect to the stable coin so if you have a stable coin as collateral and if the other stable coin you are pegging to increases in value uh well this person they lose these people they lose money because it is as if the price of collateral was decreasing with respect to the stable coin

so if you found that what not enough people wanted perpetual futures it might be worth making a stable coin that depreciates in value and if there is two people you may want it to appreciate in value yes yes hi um maybe that's a curveball but um i don't know there is upcoming regulation in europe against stable coins how do you plan to navigate the that landscape uh not well uh we uh so we are fully we are decentralized um so i'm presenting the project i'm just a core contributor of it it's going to be i hope a full community behind it

and given the decentralized nature of the project we hope that we will pass under the radar uh and the idea is not to be um is not to be uh outlaws and to work with terrorists and that's a completely side thing but my vision about decentralized finance is that there is it's going to be split into in the future there's going to be one decentralized finance that is as today with um like permissionless anyone can interact and there is going to be a compliant version of it where people have like kyc oracles telling them if the address is uh is compliant or not and the idea is still to be compliant in the end and to to show that we are willing to talk

but first we need to make our proofs and show that the protocol can work that would be a first grade step no more questions maybe the very last one so i it really clicked for me when you said that standard liquidity providers are earning leveraged yields because they're getting yield on the whole portfolio i'm curious how the risk profile of being a standard liquidity provider changes as a demand for longs goes down like i'm assuming in a bear market there's very little demand for law that's that's a that's a great question um so i did not mention it uh kind of on purpose but uh standard liquidity providers they face a small slip page

when they exit so let's say that the protocol is only collateralized at 110 percent um well we may have the parameter saying look if you are a standard liquidity provider wishing to exit you may not you may only be able to get 90 of your claim and so this is this is the risk this is the risk for them but before arriving to this we have many other safety safety modules we can activate uh to boost demand for long and you're right to mention it the big big problem for the protocol i mean not the big problem the main risk is a decrease in demand for long uh in bear market uh but we have lots of tools we can activate to boost this demand first then we have the standard liquidity providers and we we can activate extra incentives

and make our model look more like a seniority model where we distribute governance tokens to boost to boost the yield but we don't want to use that too much in the first place thank you so much and i'll be here around if you want to ask some questions [Applause] you