Treasury Tuesday Treasury Tuesday: Stablecoin Panel - November 22, 2022

View the agenda for this event.

Stablecoin Panel

• Panelist Exa256 is the founder and CTO of Exponent, a treasury risk management service for DAOs.
• Panelist Josh Fraser is the co-founder of Origin Dollar, a fully collateralized yield-bearing stablecoin that allows users to generate farming returns effortlessly.
• On the importance of stablecoins: Stablecoins could be considered Ethereum’s “killer dApp.” They offer reduced volatility compared to most crypto assets, which improves the user experience for payments and debt positions. [3:15]
• More value is transferred over Tether than BTC, highlighting the demand for stable value exchange. [4:05]
• Individuals outside the US are able to use stablecoins to combat inflation of their local currency. Stablecoins lower the barrier to foreign currency exchange. [5:15]
• Ideally, a stablecoin should be backed by non-correlated assets in order to reduce volatility and reflexivity. [5:40]
• The various features of stablecoins include: quality of the collateral; whether coins are endogenous or exogenous (backed by internal assets vs. external assets); collateralization ratio (what percentage of the supply is backed by “hard” assets); and the redemption mechanism (e.g., whether the stablecoin can be redeemed for fiat/USD, or for on-chain assets). [6:48]
• There are different trust models for the various stablecoin offerings, including considerations such as counterparty risk and smart contract risk. Decentralized stables such as DAI depend on smart contracts and DAO policy, while centralized stables like USDC and Tether depend on regulated entities that are generally more opaque in their operations. [9:50]
• The level of decentralization plays a factor in the risk of funds being frozen. USDC and USDT are regularly frozen by Circle and Tether, which may be a negative for decentralization advocates but preferred by TradFi entities such as hedge funds. [10:30]
• Other factors to consider when comparing stablecoins: available yield opportunities, collateralization ratios, and whether the asset is partially or fully backed (including the quality/volatility of the backing assets). [11:19]
• The available liquidity plays a major role in the stability and usefulness of a stablecoin. Deep liquidity allows swaps with minimal slippage. [12:46]
• Capital efficiency is very important to the scalability of a stablecoin. The ability to mint 1:1 with USD is an advantage that centralized stablecoins have. However, there are trade-offs with the centralized approach, especially regarding transparency. The events of the past few weeks surrounding FTX and other opaque entities have illustrated the risks of trusting centralized parties. [21:00]
• There are questions about whether “decentralized” stablecoins are really decentralized. DAI is in an interesting spot, as its dependence on USDC brings the negatives of both decentralization and centralization.
• Preferences for particular features vary by user. Desire to redeem for fiat may be more important for some, while low on-chain slippage may be more important for others. [23:10]
• In order to reduce risk, Origin monitors circulating supply, redemptions, liquidity, and the borrow rate on Aave and Compound – especially the ratio of the borrow rate between Tether and USDC. The Origin team is working on defining a set of rules to help further encode these monitoring efforts. [29:45]
• Monitoring the collateralizing assets is also important. However, liquidity can matter more than backing. For example, UST’s deep liquidity allowed it to remain stable for a time despite its backing assets losing value. The peg broke once liquidity became shallow. [40:00]
• DAO treasuries must base their strategy on the trade-offs between custody, ability to react, and diversification. Keep in mind that becoming more decentralized in treasury ownership slows down reaction time, especially with multi-sigs. [44:00]
• In a hypothetical USDC blow-up scenario, token prices would be decimated, but crypto would survive and return to its decentralized fundamentals. [53:19]
• Moving forward, we will likely see less leverage and more focus on decentralization in the industry.
• Assets such as RAI and OHM are interesting, as they are backed by volatile assets but stabilized with volatility-dampening mechanisms.
• Moving away from fiat-backed/denominated stablecoins will likely require that goods and services be denominated in non-fiat assets. [1:05:00]
  

Rook Treasury Update

• The Treasury Charter has been ratified.
• KIP draft: Replenish Discretionary Investment Limit Funds.
• Deployment of Additional ETH for Yield Generation. The ETH yield generation experiment has been successful, so there is a desire to increase the limit to 80%.
• Expand Funding and Strategies of Testing Wallet.

KIPs in Development

• Emergency Rebalancing KIP
• Approved Stablecoin Framework
• Treasury Management Framework

The Q3 Quarterly Report has been published!