Demystifying Stablecoins: Cryptography meets monetary policy

Transcript

we can hear you so yes we can hear you the next one is going to be a video conference demystifying stable coins cryptography meets monetary policy please you can

start thank you No

yes we do can you hear us as well okay thank you hello yeah can you hear me you know yes

we can we can hear you now can you hear us yeah yeah sure no no I'm good okay my queen I love you sorry for delay yeah yes sorry for the delay please can you can you start I your breaking off sorry can you hear us yeah yeah now I do oh no

that's fine okay it's okay yeah everything's set up okay Casey nice screen as well all right so I start that's fine yes okay sure all right yeah so hi everyone I'm Nessa and it's my pleasure to be removed to their side that I cannot attend a conference because of the corner virus and I'm here today we're mostly to talk about stable coins price level cryptocurrency that we hear a lot about them today so a bit about myself I'm doing my PhD at the Concordia University in Canada I understand fusion of suffrage are declared and I've also worked as an

intern in Quebec government where I worked on implementing and designing decentralized exchange and my current research is on financial technologies in tech plus acknowledges of course all right so my today's talk is going to be about recent paper that is soon to be published in the communications of the ACM journal and the title is domestic violence federal court it's about seven point and it's the systemization of knowledge meaning that we start the research gap in the space and they started performing a thorough and systematic study unstable point topic and we provided our results and in fight inside the paper and hopefully the users

and the community members will be able to understand what the stable coin is by reading our paper but before jumping in so the paper result I want to take a little bit of time and talk about whether several parts at least all apparel so today we serve the largest cryptocurrency at the most trader one in the whole work that is meant to be one-to-one backed by us daughter and this lever coin can be used by traders and they want to liquidate your assets and they don't have to convert them back to us other they can't they take they still chance let's say you have some business quite at the exchange that you want to liquidate it you can convert it back to the US dollar but that has a lot

of fraction because first of all it takes a while at two months or even more for that money to actually arrive to your bank account and when it does that's the moment that you have to answer the pin track for other education agencies about where did you get this amount of money from so that's a lot of issue that you can avoid using tether and other type of wire to decrease in terms of usability but a teller was subject to a lot of controversies and it's speculation it was born and I want to talk about a few of them here so in 2016 the Phoenix which was a Hong kong-based crypto Exchange enable trading creditors stable and USB TI on s platform and

since they won both disconnects and tether were accused of being the same company although both of them they constantly denied effect and they claim that there's a completely separate first however in 2017 the leak of the final stage we found that this car was one company and there were a lot of overlap between the executed members of this company and this type of later confirmed by both Heather and this connect another fact is in 2019 BitFenix was accused of using cutter funds in order to cover up this 850 million loss and at that time tethered market cap was around three

billion dollars and if this is true it means that around one third of Chatham was not actually backed by anything and they didn't have enough reserve another issue we tether is Bitcoin and Heather have been showing a lot of tests and correlated behavior and it's incest their links and there was a study on this issue that came out in 2019 from some researchers of us and the papers called is be quite ready untether in which authors try a bleached and link between the feather behavior the price change each other and bitcoin and they were able to conclude that tether is spoken I just think issues not because of the

market in man but just because they want to change the price of other inflating cryptocurrencies which require and if this is true that could be the reason why point here 20 K in December 2017 however pitch X with an accepted fact and it provides better response saying that they never use each other to change the price of any other cryptocurrency and they always have to they're back 100% by reserve and also just be sure to others because of the market demand and the last issue I want to talk about about feather is a lack of transparency that it's in a lot that up to this point so far we haven't seen any official

audits being performed on feathers account saying that they have this much amount of reserve in their account all right so I talked about all these speculations and controversies about feather not because I wanted to say that I'm for or against ik but also just I wanted to raise this awareness that how much more research and regulations we need in the state and that was the reason they actually performed this study and from now on I want to talk about the result of a paper and what we did so I start with a comparison chart that I brought from the paper so in here we compare three main fiat currencies

including euro Canadian dollar and British pound with Bitcoin from 2016 to 2019 as you can see here Bitcoin has been fluctuating a lot while others 3p appearances have been showing relatively stable behavior and in order to amplifies and how huge this one but it is look at the breasted here so here is one breaks that happened in 2016 and then British Pound significantly lost its value and this change was huge of course but when you compare it with bitcoins frustration it's a very little flow in our chart so that's that shows that the volatility that we're talking

in crystal space is nowhere near the one that we have in fiat currencies all right but you may ask yourself why do we even need stability in crypto that goes back to the traditional definition of money in finance so for something to be able to access money first it has to be used as a medium of exchange meaning that you should be able to buy and sell goods and services using what what you called money so bitcoin is a good medium of exchange because things are being bought on all the Bitcoin another property is it should be used as a unit of account you have to be able to price goods and services using what you call money but bitcoin is not a unit of account because

all those things are being financed rogen bitcoin they're still being priced in u.s. dollars and at the end simply we want money to be stable and the whole goal behind all of these they behind projects and proposals was to bring the stability property to something that is already a medium of exchange so that maybe if we have this package later in the future we can use it as a unit of account and then it would have stable money which is also a crypto forensics all right great but that was the motivation behind all those favicon proposals that came into existence in 2018 we've seen a lot of them but when we started this study in 2018 be found a knowledge gap in the space so we we know

that understanding how several coins work should be easy but it turned out it's not not because all those white papers and the resources the online resources and all those web pages they were obfuscated with a lot of jargon and terminology that may be really hard for us to understand simply what are they were crime so if I just wanted to know more about favor coins and how they work they would go online if she would go in life would search for a stable home but she would get overrun with a lot of different charges and terminologies like seniority a collateralized via currency so there was ever a lot of jargon I would say that would overwhelm you when you want

to try to understand in a super word water save a coin and that is where I would say our contribution is taken into account so what we did for this paper is the creator disabled which is a taxonomy of stable coin so what we did is with 25 major stable current projects of Rococo and decided them one by one thoroughly and we were able to create a classification of favor coins what are the different ways you can create several coin and I'll go through each category in the rest of my talk and hopefully at the end of the day we will be able to take any several current projects you want and you'll be able to

map it to the exact same categories one at the table alright so they were quite proposal brought me they fall into two main categories but I want any chocolate chip one and by the way these are the templates we chose and we hope it's going to be descriptive because we think they realize oh so the backbone this coins in this category they try to match the stability of the second effort let's say you will see and they cannot exist without their target others so back point they didn't fall into the very back or they are either reversing back and within the bug or they are in directed by five cent time on each and hopefully no longer

this time so the coins in the developing bag category it's the exact same idea of Liberty Reserve or equals like a tradition of digital money by doing the only difference that now the transactions are decentralized so for each cyber point that they issue they hold one equivalent access and some physical definition let's say a bank account and the coin in here is the volatility or stability of this effort and of course this bank account or whatever that physical location they're storing the asset needs to be periodically auditor and this group they don't offer any redemption for their underlying asset another X category is

the ones that are directly back and redeemable so it's the exact same idea with a difference that as they offer redemption for their underlying asset and the last group of the back category are the ones that are indirect effect and they're the most interesting to me at least because they offer decentralization in everything so it's not only the transaction but also the issuance and redemptions that are being done on a blockchain but because there's no notion of US dollar and some deductions let's say it's early on what they do is they put some like native cryptocurrency Angus they're younger thicker and they try to indirectly back their coins with that using the exchange rate between the US dollar and the earth

so a distance a little a little bit complicated so we spend a little bit more time on it so the specific idea of indirect feedback one is just like take it as a black box they take a thirty wallet card coin they ether the black box or something of that and it creates two points one of them is extremely volatile when you compare this research and the other one is completely stable so let's take an example to see how all right Oh thank so let's get an editor to create a stable coin and that is in direct feedback on an SEM self change so what she does is she goes on a coin and

either and USB is only one dollar is only one and the over collateralization ratio is 1.5 1.5 the first one is the same Accord itself and which is 1 Y is equal to 1 Easter at this point and the other one is with it whatever is remaining more contract which is fine cause either so at experience never coin and she chose it to fall and intercept but we know that exercise can change so it can go up in the future so imagine that one-acre across the to USC now so now let's amount of ether in the smart contracts to give you the exact and amount of equivalent of one USB but

at this point if all comes along and he wants to redeem his coins he can do so easy and he can get the equivalent of 1 USD which is 25 either and Alex get whatever is remaining in the contract is one either getting more and but eager price can go down as well imagine that one ether equals to 75 cents now we need more ether to back our server for it so if all comes along he redeems his crime he can see with image or the coin service but that would be 1.3 ether and Alex gets the rest which is point to eater so you can see that the position that additive language the collateral is

extremely volatile and in a very terrible case as the ether when you go can go extremely down and we don't have enough ether in a smart contract to back out of a point bit and this is when the stability can break so imagine that one ether is equal to 50 cents so we have only 1.5 internet smart contract which is 75 cents so if all comes along each an operating point for $1 and that is when the stability is broken some of the flavor crime colors proposals that relying and dismiss of what they do is to crave understand happening considering some liquidity threshold and

there are some people in the federal doctrine that the classes in my 34 contract so whenever they see the differentiate between the US dollar and be fair is close to the liquidity threshold a liquid a different contract and then Addison bhakti as whatever they have to at that point of time and doing so they can present us at electrification happening and another broad category of set of coin is the intervention one these coins are like the best categories they're not backed by anything and they're just independent currencies as they allow for intervention either human or algorithmic supposed to increase or decrease the value of this never quite

but when they were starting this group we found that there are quite a few designed distribution it has to be taken into account when designing this point that those design decisions would be when to intervene and most of the projects is the exchange rates the Chompy experiences such as US dollar and what kind of net intervention and some of them they manipulate the supply of this type of mind how to supply is being manipulated is it directly or indirectly and the last moments who are the participants and etc and these needs need to be taken into account they're really important so the intervention one day funding tube money supply adjustment

or as a transfer so the Canada coins in money supply adjustment is just simply and diversely increase or decrease in supply of the saber point it's either algorithmic or based on some humans installation so whenever the value of silver coin goes above $1 they have to hand the supply so the new type of coins are being issues directly into decision and they're given either to the minors or the holders of the silver coins and on the other hand whenever the price of never point it no one dollar they withdraw money from the market by removing these miners or the another group of intervention ones are the asset transfer visit which is expect

and ideology which is increasing or decreasing the supply of cemre coins however they don't do it directly so they do it in an integrated way and I'm going to explain it to you very simple so that you would understand so imagine s there's a system that is reliable easy mechanism and have a stable coin that is supposed to be traded and expect one dollar so what happens in the future because of some reason this little coins price goes above $1 the decision now wants to expand the supply of labour coins so that it would come back to $1 again so what it does is is create some new single coin and it gives it to some

people that are waiting in some conditions they lie and those people may get their money they get the sever point they will go back to the market they try to spend their coins and that would hopefully bring back the Democrats price $1 now you may ask yourself that how would these people spend in these positions in life so that will go back to when the price of silver coins is below $1 what happens here this one has to be from the same apart from circulation what it does is it creates this positions in line and it auctions it up to to the highest bidder so they both find holders they have this motivation to come along he is using the silver coin and the payment would be win

from circulation and that would bring back their price of silver coins to $1.00 again and the incentive for those people to participate in the auction is they are using this type of understanding the flip of a coin and I should less than a dollar and they're getting back end of the process over a dollar and it's been a benefit and that would be their incentive participate in the option all right so hopefully now you would understand how different classifications of Seviper work and maybe now you can go through the paper and there are a lot of features as how each client cracks on

evaluation or over valuation and you can you'll be able to link any level point project or proposal you speak based on the specification and at the end of the paper we have some very interesting discussions clients discussion points that I couldn't go through because of the time but some of them are there like evaluation of political mechanisms that we compare different methods of ability based on the core ideas and trust assumption and because really interesting resources you can go through the paper for more detail and we also explore the potential of the SRM gas in a context of cybercrime and they expanded using some charts and the

questions also are interested and that concludes my talk again sorry that I couldn't be there and you can reach me through Twitter and you can also access our paper is online on therm they must be fine leymah coin and also we have a chart and everything on the table thank you you questions you I wish

you