SotN#28: Uncollateralized Stablecoins w/ Dan Elitzer (ESD, BasisCash, backed by Faith & Yield!)

🚀 SUBSCRIBE TO NEWSLETTER: http://bankless.substack.com/ ✊ STARTING GUIDE BANKLESS: https://bit.ly/37Q17uI ❤️ JOIN PRIVATE DISCORD: https://bit.ly/2UVI10O 🎙️ SUBSCRIBE TO PODCAST: http://podcast.banklesshq.com/ 👕 BUY BANKLESS TEE: https://merch.banklesshq.com/ ----- GO BANKLESS WITH THESE SPONSOR TOOLS: ⭐️ AAVE - BORROW OR LEND YOUR ASSETS https://bankless.cc/aave 🚀 GEMINI - MOST TRUSTED EXCHANGE AND ONRAMP https://bankless.cc/go-gemini 💳 MONOLITH - GET THE HOLY GRAIL OF BANKLESS VISA CARDS https://bankless.cc/monolith 📈 KWENTA | DEVIRATIVES TRADING WITH INFINITE LIQUIDITYhttps://bankless.cc/kwenta ------ State of the Nation #28 Algorithmic Stablecoins, with Dan Elitzer Dan Elitzer recently co-founded Nascent (nascent.xyz), a venture capital company that is deep into the weeds in some of the most experimental projects in the Ethereum ecosystem. In the 2nd half of 2020, some of the coolest experimental projects have been Algorithmic, Uncollateralized Stablecoins. These are stablecoins without dollars in a bank, or without crypto in a vault. They are completely backed by financial incentives.... and faith in those incentives. In this episode of State of the Nation, we begin by defining the 'Stablecoin Trilemma' (https://imgur.com/a/Uj0HBL3), and discuss some of the history of stablecoins. Then we turn to the current design philosophy behind algorithmic stablecoins, how they work, what makes them stable, and who gets the upside? We largely discuss Empty Set Dollar (ESD, https://www.emptyset.finance/), but also discuss Basis Cash, and Ampleforth. Tune in, to hear about this exciting emerging corner of the DeFi ecosystem! ------ Don't stop at the video! Subscribe to the Bankless newsletter program http://bankless.substack.com/ Visit the official Bankless website for resources http://banklesshq.com/ Follow Bankless on Twitter https://twitter.com/BanklessHQ Follow Ryan on Twitter https://twitter.com/ryansadams Follow David on Twitter https://twitter.com/TrustlessState ----- Not financial or tax advice. This channel is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. This video is not tax advice. Talk to your accountant. Do your own research. Disclosure. From time-to-time we may add links in this channel to products we use. We may receive commission if you make a purchase through one of these links. We'll always disclose when this is the case

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:08David Hoffman?

  Aave is a borrowing and lending protocol on Ethereum. And just recently released Aave version 2, which has a ton of cool new features that makes using Aave even more powerful. With Aave, you can leverage the full power of DeFi money Legos, yield and composability all in one application. On Aave, there are a ton of assets that you can deposit in order to gain yield. And all of those same assets can also be borrowed from the protocol if you have deposited collateral. Here you can see me getting a 200 USDC loan against my portfolio of a number of different DeFi tokens and ETH. I'll choose a variable interest rate because it's a lower rate than the stable interest rate option. But I could choose the stable interest rate option if I wanted to lock that interest rate in permanently.

• 0:53David Hoffman?

  One of Aave's V2 features is the ability to swap collateral without having to withdraw your assets. Trade them on Uniswap and then deposit them back into Aave. Aave does all of this for you, all in one seamless transaction. So you don't have to repay loans in order to change the collateral you have backing them. Check out the power of Aave at Aave.com. That's A-A-V-E dot com. Gemini is the world's most trusted cryptocurrency exchange. I've been a customer of Gemini since I first got back into crypto back in 2017. And it has been my main exchange of choice to make my crypto buys and sells. Gemini is available in all 50 states and over 50 countries worldwide. And on Gemini, there are markets for over 30 various crypto assets,

• 1:37David Hoffman?

  including many of the hot DeFi tokens like Wi-Fi, Aave, Uni. And also, they are one of the few exchanges that has liquid DAI markets. Having both the option of logging into the Gemini.com website or instead opening the Gemini mobile app has allowed me to be able to access any and all exchange and on or off-ramp services that I've needed to on a moment's notice. With instant deposits and fast withdrawals, I'm able to make my money do the things I want it to when I want it to. You can buy crypto safely and securely on Gemini with the peace of mind. Of knowing that your investments are insured and protected with industry leading cybersecurity. You can open up a free account in under three minutes at Gemini.com/goBankless.

• 2:21David Hoffman?

  And if you trade more than a hundred dollars within the first 30 days after signup, you'll be gifted a free $15 bonus. Check them out, Gemini.com/goBankless.

• 2:33David Hoffman?

  I'm doing really good, Ryan. 2021 has already shaped up to be a banger year for crypto, and we are just four days into it. So much has happened in the last few weeks, and I'm pretty sure that trend is only going to continue into 2021. We are seeing so much innovation happening, especially in the realm of algorithmic, uncollateralized stablecoins. That is a brand new field that we are exploring today here on the State of the Nation with Dan. I have a ton of questions to ask about how these systems are built, how they're designed, how they are maintained, and how they maintain the peg, how they maintain security. So it really should be a really interesting conversation, and I'm excited to see what happens in this world of uncollateralized stablecoins in 2021.

• 3:18Ryan Sean Adams?

  Yeah, I have probably just as many questions as most of the folks listening and watching today. So it'll be, it'll be good to talk about them. As usual, guys, if you're watching this on YouTube live, you can ask questions as we record this of Dan or ourselves. We'll try to get to those questions as we can. We've also got some new stuff going on in the nation, David, as usual. So we just released another episode with Vitalik, where we talk about three of his articles, basically, or actually two articles. And then we talk about the, the, the launch of Eve 2.0. Fantastic episode. That came out Monday. Make sure you catch this. I take it a habit of listening to every single Vitalik episode I can.

• 4:02Ryan Sean Adams?

  Oftentimes, listening to it multiple times because they're just so deep and interesting. David, any takeaways from that one?

• 4:07David Hoffman?

  Every time we talk to Vitalik, I just learn so, so much. And I often listen to the podcast back, even though I was there when we recorded it. I listen to it again because Vitalik is just so incredibly precise in his. Speech that he often packs so much punch into a single sentence that I don't really always grasp it the first time around. And so listening to it a second time, or sometimes even a third time, has always been really, really, uh, really, really helpful for, for me. Being precise in my speech is something I definitely aspire to, and it's a skill that Vitalik has, uh, not, that Vitalik has mastered extremely well, both in speaking and in writing. I'm quite impressed by it overall.

• 4:48David Hoffman?

  And the episode that we recorded with him, it goes through his why proof of stake article, uh, which is, uh, came out in November. Really, really timely, especially for people that are staking their ether on the beacon chain or intend to stake into the future. Or just have questions as to how Ethereum came to be where it is today and the design principles and the design ethos behind Ethereum and behind proof of stake. Vitalik does a great job laying down the arguments for proof of stake, the thesis and theories and ethos behind proof of stake, why it was chosen, why it was incorporated into Ethereum. And then we also get into his, uh, his other article, concave and convex dispositions, which kind of actually does a really good job helping me formulate my, uh, theories as to why

• 5:30David Hoffman?

  this space is so tribal and Vitalik categorizes, uh, or offers an explanation as like people are tribal because of these different dispositions and how they think. And he characterizes them as convex or concave disposition. So understanding how kind of like the cards have fallen in the crypto space, uh, through that lens has also been really helpful for me.

• 5:50Ryan Sean Adams?

  Absolutely. We also just released a new weekly NFT newsletter. So if you're subscribed to Bankless, you can also subscribe to this.

• 6:01Ryan Sean Adams?

  Token, so, uh, digitally scarce, uh, art, uh, items, uh, virtual worlds, this sort of thing, all in sort of the metaverse. We think that's going to be a huge investing theme and crypto theme and DeFi theme for 2021. Want to keep you up to speed. We'll include a link in the Shinets where you can subscribe to that as well. Lastly, we've got Chris Dixon, who is the, uh, the manager of the Andrew and Horowitz Crypto Fund. He's coming on asked, let me see, tomorrow, right, David? So we're lining that up. Um, that will be released the following Monday. So catch that next week. Of course, you get it early. You're a Bankless, uh, subscriber, premium member, but I'm really excited about that episode with Chris.

• 6:46Ryan Sean Adams?

  David, any, any thoughts as we go into that episode next week?

• 6:49David Hoffman?

  Yeah, Chris to me is somebody that gets it. He had to talk about the different price cycles, the hype cycles of crypto, which we know that these two, that's how these things happen. And so I think I'm focused on asking Chris, okay, we are clearly moving into a new cycle. How is this cycle the same, but also more importantly, how is it different? Like, why will this fourth cycle of crypto be different? What will be the new things that come out of it? Is, are there, is this just going to be another bubble? Or are we actually going to be able to sustain some of the growth? Is this bubble going to be marked by speculation like all the other ones? Or is there something, are we able to build foundations this time that we can stand on? To make sure that speculation turns into, you know, real products, real use cases.

• 7:33David Hoffman?

  I think we're definitely seeing that with Bitcoin. Bitcoin is no longer a tool that is only used to speculate. Some people actually do use it to save their cash rather than just a number go up because the dollar is being distorted. And so that's definitely a huge theme that I think we're going to talk to Chris about. But he also is very much a into the world of the technology behind Bitcoin. And he, his line is that I am not a blockchain, not Bitcoin person. But I think he does see a lot of value in blockchain technology, quote unquote, as well as all these other technologies, you know, social tokens, social tokens, DeFi, you know, the whole gamut, right? And he thinks that blockchain and software can really extend into the whole rest of the world. And I have that belief as well.

• 8:18David Hoffman?

  I think that, you know, if you can do something in the, in the legacy world, you can do it something better using crypto, using crypto economics, using blockchain. I think that conversation is going to be really valuable.

• 8:28Ryan Sean Adams?

  Yeah, very cool. All right, before we get into the main event, the main topic with Dan, I've got to ask you the question. We always start, David, this is the first time I'm asking you this in the year 2021. What is the state of the nation right now, David?

• 8:43David Hoffman?

  The state of the nation this week is validated. We are validated as a nation. Obviously, when crypto prices go up, when the market goes up, when the market agrees with you, you feel validation about your investments and it's very nice to feel that, right? Like, imagine if we had like the Bankless Podcasts and we were just like talking about all these things going on, like Uniswap, Balancer, you know, DeFi, staking, yet all of the assets stayed the same price for years on end. That would be unvalidating. That would be very bad. But instead, the opposite is happening. Like, assets are going up in price, people are getting into the ecosystem. People are starting to see the value in DeFi, see the value in Bitcoin, see the value in staking,

• 9:26David Hoffman?

  and really just start to incorporate that into their mental models. We see both negative but also positive regulation come out that helps protect this industry. We saw that with the OCC Comptroller news yesterday. And then, and then also, I think what else is being validated is, I know you believe this as well, Ryan, and I definitely believe this, is that the design space for options for just building anything on Ethereum, just the optionality of building stuff, is being explored aggressively. And that's what we're seeing with algorithmic stablecoins, which is the conversation of that we're going to have today. But the point is, like, if you can build something on Ethereum, it's going to be built. And we are seeing the constraints around building stuff being removed,

• 10:10David Hoffman?

  and we are seeing things being built more and more and more. And that feels very validating to me. I've always been a believer of the exponential growth of things being built on Ethereum. I think that new layer of exponential growth is in the world of uncollateralized stablecoins. And that, just the fact that these are working, or so far, you know, so far working, is validating. I believe that to be true, and I'm really excited to get into this conversation with Dan shortly here.

• 10:35Ryan Sean Adams?

  Yeah, I totally agree, man. And I totally resonate with that word validated. I would even say, you know, use the word like vindicated to describe it. I felt like there are really three, three components of a thesis that we've been talking about for, for the last two years. One is of course Bitcoin. And that got validated in 2019 and in 2020. The, the second is DeFi and that totally found product market fit in late 2019 and early 2020 breakout successes like Uniswap and of course, you know, DeFi summer and the, the birth of these DeFi capital assets. So, you know, check mark there, another thesis validated. But the third piece has always been this, well, ETH will accrue value as a

• 11:19Ryan Sean Adams?

  native DeFi reserve as part of the Ethereum economy and a store of value in the same way Bitcoin is. And it's finally, we're finally starting to see that happen, David. It's like ETH has, has woken up. So validated it on all three of those points. That's how I'm feeling right now too. That's a good, that's a good word for the state of the nation. All right, David, we should get right into it. So want to welcome Dan Elitzer, who has been on the show a few times before. In fact, he was our first guest before DeFi summer. He is now starting a fund of his own called Nacent that we'll get about soon. And he is here to a bit about what's going on with uncollateralized stablecoins. We'll define that in a minute. Dan,

• 12:03Ryan Sean Adams?

  good to have you on State of the Nation. How are you doing, sir?

• 12:07Speaker 02

  I, I'm doing well. Thanks for having me, guys. I'm not on video yet, so I don't know if, if, uh, bring me on.

• 12:18Ryan Sean Adams?

  Yeah, we're just looking at Dan's profile shot right now and we're about to livestream. There is. How's it going, Dan? Good to see you, man.

• 12:28Speaker 02

  Good to see us too.

• 12:30Ryan Sean Adams?

  All right.

• 12:31Speaker 02

  Yeah, so it's this is a this is a fun topic. Thanks for having me on. It's always always a pleasure to chat with you guys and really explore what I think is a very exciting space.

• 12:39Ryan Sean Adams?

  Last time we had you on was right before this whole event that we call DeFi Summer. So I'm wondering what's going to happen this time. If we have Dan on, is there going to be some kind of explosion in uncollateralized stablecoins right after this conversation? I'm not sure what to expect.

• 12:56Speaker 02

  Well, I don't think we're front running the explosion. I think the explosion already has happened, is happening. So, you know, there's that.

• 13:02Ryan Sean Adams?

  Very cool. Well, you're gonna have to do help us catch up then a little bit. And but before we begin, I'd love to actually hear, because you recently made a transition to nascent, which is, as I understand, kind of your own fund or something that you've co-founded? Can you tell us a bit about that?

• 13:18Speaker 02

  Yeah. Yeah, so I, you know, I spent five years at IDEO and helped start up IDEO CoLab Ventures there, did a lot of early-stage investing in DeFi and in crypto more generally. And then a few months ago, kind of beginning of September, left IDEO and started this new fund, nascent with my partner, Josh Felker. We were focused largely on DeFi, but really, we think of this more broadly as an open financial system. And we do both early-stage venture, but we also are able to be more participatory. We have the advantage of utilizing proprietary capital. And so we don't have to spend time raising funds or managing LPs.

• 14:00Speaker 02

  We're able just to focus all of our energy, all of our time in understanding the ecosystem, in supporting our portfolio companies, and really understanding how things play together. Because we don't want to just be investors. I think a lot of funds are structured where they're either doing a lot of trading or they're really doing early-stage venture and that's about it. And so there are a few funds that I think are doing a fantastic job. Framework, Parify, a few others who really do both. And so we're really trying to be in bold where we use all these DeFi calls. I was a personal user and really that's upped my understanding of the ecosystem a lot.

• 14:40Speaker 02

  But we're now looking at this six, seven-figure positions and movements. And so that really gives me a different lens through which I'm evaluating all these protocols and thinking about where are the gaps in the ecosystem, what's useful, what's slightly better in these situations. And I really think it lets us bring another layer of helpfulness to the companies and protocols that we work with.

• 15:06Ryan Sean Adams?

  Super cool. We've been preaching Esther's as users from the very beginning. So really cool to start a capital pool around that, Dan. That's very exciting.

• 15:15David Hoffman?

  Dan, it's very appropriate that your fund is called nascent because that's exactly what, how I would describe these algorithmic, uncollateralized, stable coins. It seems to be a very emergent field that is very, very recent, just in the last, you know, maybe couple of quarters or so. And it's very experimental as well. And so I think it's perfect for, for somebody like you that tends to see things before they come because they are deep in the weeds and then also are willing to get their hands dirty and get into the protocol, be active participants. So let's talk about the ethos and theory behind an uncollateralized stablecoin. And Ryan, if you want to bring up the stablecoin trilemma document, just so we can get our

• 15:56David Hoffman?

  listeners grounded, there's this famous stablecoin trilemma where there's three different designs of stablecoins. We have fiat collateralized like Tether or USDC. And that, to spin up a fiat collateralized stablecoin is just trivially easy, right? You just put fiat into a bank account, you issue a token on a blockchain, and then you claim that if the token, the token is redeemable for the fiat. And that's, that's pretty trivial. And that's the fastest, the fastest stablecoins that have gotten out the door, right? That's the biggest market cap. Then we have crypto collateralized, which is a little bit harder, but still more or less the same principles, right? Where instead of having a fiat in a bank, we have crypto in a smart contract. There's a little bit more technicality there.

• 16:37David Hoffman?

  We need to over-collateralize these things because of the volatility of these assets. And there's, there's oracles and there's a little bit more complication, but generally a very solvable problem that I think has been solved. We saw DAI come around in December of 2017. DAI is like three years old now. It's been pretty decently battle tested. And the benefit of DAI is that unlike a fiat collateralized stablecoin, it's nation-state regulation resistant, right? Like it kind of exists independently of the physical landscape of the world. It just exists on Ethereum. It doesn't have any real world dependencies, more or less. But then there's non-collateralized stablecoins, which don't have any collateral behind them, as the name would suggest,

• 17:21David Hoffman?

  and are very, very new. And, you know, we almost had Basis back in 2018 as one of the project that really pioneered this. But Basis didn't work out too well. Maybe, Dan, you can maybe illustrate for the listeners. Why are under-collateralized or non-collateralized stablecoins so difficult to spin up? Because would you say that these are the most difficult of the three categories?

• 17:46Speaker 02

  These might be the most easy to spin up and the hardest to make work. So that diagram you showed, I think credit goes to Haseeb Khoreshi from Dragonfly. He wrote that piece that really influenced my thinking on stablecoins and on the design space here. I think that was from 2017 or 2018. And, you know, DAI has been this kind of decentralized beacon that we've all been able to rally around in the space. And I think we often, those of us who really focus on decentralization and transparency and openness, have not loved the fact that Tether has been such a massive force in this ecosystem.

• 18:30Speaker 02

  And so I do think things like USDC step in the right direction. But this on or under-collateralized, you know, point on the triangle has been underexplored. And I think there have been a lot of very valid critiques of Basis back in the day. You know, there were some really good preemptive takedown posts talking about problems with this model. And my sense at the time was like, yeah, I was very much also in Bitcoin maximalist land at that time. And like, you know, none of this stuff is going to work. But my impression now of the space is that There's a very good chance that that is just very hard.

• 19:16Speaker 02

  It often and that getting to these under collateralized really coins is is nearly impossible. Maybe it is impossible. One of the things, though, that I think is not quite right is when we look at the initial proposal on basis that never launched, but they used over $100 million in capital to support this. And the vast, vast majority of that ended up getting returned to investors and they didn't spend it. So, you know, credit to them, unlike a lot of teams that raised a lot in the 2017 timeframe. They actually said, nope, we're not going to do this. We're going to shut it down and give all the money back to investors. So kudos to them for making that decision. But the plan was never to use that to buy big houses and Lambos.

• 20:01Speaker 02

  The or to hire a massive team. It was to literally this kind of backstop fund. So it was not necessarily collateralized per se, but it was to provide this deterrent from trying to break the peg in these ways because they're saying there's this massive $100 million fund that is sitting here, ready to be deployed to support the peg, should that be necessary. And I think that that's where we're seeing some of these things move. We have empty set dollar planning to move in that direction with V2. You know, Frax has another kind of partially collateralized thing. Honestly, Yam, which I was involved with originally, was something that kind of came from the same idea

• 20:46Speaker 02

  where it took the the kind of rebasing mechanism that we're seeing from Apple forth and said, well, what if we start putting some capital behind it to dampen the the downsides? So so there's a lot of design space here and we'll go through all these different things. But what what is really exciting here is the ability to create potentially, right? Something that can be long term, stable and decentralized and be much more capital efficient than something like DAI.

• 21:18Ryan Sean Adams?

  Yeah, yeah, yeah. So can we talk about that, Dan? So that is, let's zone in on like, why non-collateralized, right? It's part of that dilemma. So we have fiat collateralized. We've talked about that lots on Bankless, right? It's not Bankless, basically. It's sort of a product of the existing banking infrastructure. And then we have this thing called DAI, right? And that's grown to its credit over a billion dollars, lots of collateral in there. And but the problem with it, some of the critics will say, it's not very capital efficient, right? It's very difficult to kind of grow the supply of DAI versus something like fiat collateralized. So is, could you zone in for us on what the

• 21:58Ryan Sean Adams?

  the value of a non-collateralized stablecoin would be? Is it those two things? It's both Bankless, decentralized, and also highly

• 22:11Speaker 02

  Yeah. And so one of the one of the challenges with Maker, and again, I'm a huge fan of DAI, but one of the challenges with it is that we've seen there's this massive demand for USD-pegged stablecoins. And DAI can only grow to the extent that there are folks who have capital that they want to take leverage on. And so that inherently means that you can't grow the supply of DAI faster than there is demand to borrow against other assets that are supported through that capital pool. And so that just inherently caps it. And so by having something where it need to be

• 22:55Speaker 02

  fully, or in the case of DAI, really over-collateralized, that allows the supply of the stablecoin to match the demand for stablecoins. And I don't think that that's really a not a huge problem, that things like USDT and USDC are kind of 100%. Well, USDT, who knows? But like, in theory, 100% collateralized with dollars in a bank account. The problem is that they're in a bank account rather than on-chain. And as soon as you go on-chain, you can't really have it just like perfectly 100% collateralized. You need some other mechanisms to bring stability. Because

• 23:37Speaker 02

  if that peg and that collateralization is fully important, then you're not giving yourself any

• 23:46Speaker 02

  And so you need some kind of algorithmic system to help provide stability and supplements the for the collateralization to potentially supplement that kind of algorithmic factor. So they kind of work in tandem. And we need algorithmic forces, not just reliance on the ability to seize and liquidate collateral. Well, why leave it at a percent? Why not lean a little bit more heavily on those algorithmic components? And say that the collateral is almost secondary to that.

• 24:27Ryan Sean Adams?

  I think what people struggle with, and this is also foundational, is the question of what actually backs? A, you know, uncollateralized stablecoin, right? So it's very clear with tether. We know what we think we know what backs tether. Some dollars in a bank account, I hope, fingers crossed, right? We know what backs that you could see that on chain, right? It's completely open. We could see all of its collateral any one time. But what in the world backs the value of a stablecoin that has no collateral backing it?

• 24:59Speaker 02

  Yeah, I think, uh, well, what backs the US dollar, right? It's faith. Ultimately, it's faith. And so the the goal here is with these stablecoins for them to work is people need to believe in the mechanisms. And they need to be given very good reason to believe in the mechanisms that it will stay very close to $1. And there, there's a lot of reasons to believe it won't, right? And we've, we've got a lot of evidence for these things diverging pretty significantly from a dollar, almost the up and downside. And so that's not great, right? But what I will say is,

• 25:39Speaker 02

  A few of these things have actually stayed a lot closer to that shelling point around $1 than I would have expected a couple of years ago. And so that to me is a great starting place, but it needs to get better. And if it can't get better, these things are not going to work.

• 26:00David Hoffman?

  Okay.

• 26:00Speaker 02

  So I think there's a lot of design space to think about how to make that work. And one of the things that, you know, when I first amped up, you know, I read, it was called something else originally. And they had a white paper for it a couple of years ago. I thought this is the stupidest thing I've ever seen. And it launched, I thought this is the stupidest thing I've ever seen. And then people started piling into it, using it. I was like, whoa, okay. So clearly there are very powerful, you know, these reflexive mechanisms that are going to drive up the market cap. The problem is it can also go down.

• 26:37Speaker 02

  But okay, well, then this powerful mechanism for driving up the market cap, actually expanding this again, this fly up there. That's really useful for bootstrapping. So could you modify the mechanisms once you get above a certain point to dampen the reflexivity on both the upside and downside? And that question was what originally led to the idea of YAM was, okay, if on the way up, you're building up a collateral base that effectively pulls a floor up with you, then, you know, maybe that's a way that you can dampen it. And now that didn't, that didn't play out.

• 27:18Speaker 02

  So we, there were some, some problems with YAM, some bugs. And we saw, you know, what can happen where it doesn't work. And then the community there, YAM is actually, I'm very excited by what's been happening with YAM since. I think Brock and Trent and the rest of the team over there have done an incredible job. But the decentralized community around it decided this is not a stablecoin. And they actually just recently removed the rebasing that was inspired by Ample entirely. And, and now it's really this kind of. Community Dow saying we've got this treasury, how we manage it, how we build more things. Very cool, but very different. But the idea, the original seed of the idea there was thinking along these lines.

• 28:00Speaker 02

  How do we take these powerful financial incentives to bootstrap the system? But also have them in a way where they can be modified in a way. So up to some level, then make it harder for it to drop down. They can grow at a more reasonable, sustained pace to serve the needs that people have, that they come looking to a stablecoin for.

• 28:27David Hoffman?

  So Dan, I want to talk about the, continue the conversation about the design space for under collateralized stablecoins, because there seems to be a lot of overlap. And you've touched on it just a little bit now. To say that they are uncollateralized, I think is not completely accurate. The collateral is just in a different place, right? With a collateralized stablecoin, the cash is in a bank. With a crypto collateralized stablecoin, the collateral is in a smart contract. And with an uncollateralized stablecoin, the collateral is, as you alluded to, is the faith that when there is time, when the time comes for there to be buying pressure, there will be buying pressure. And I guess it's collateralization via faith.

• 29:11Speaker 02

  I feel like I would push back against that a little bit because I think there's, the mechanism there is faith. I think calling a collateral is a bit of a stretch in terms of what people realistically think of as collateral. These things, absolutely, to be very clear, they can 100% death spiral and go to, well, nothing in crypto ever goes to zero zero, right? People will trade penny stocks till the end of time. So right, like, but it could effectively go to zero for any of these things. And so I think that's a very important thing to look at is right now is these things are are highly speculative. I think there's a lot of interest in design space to be explored around making them a little bit less speculative.

• 29:54Speaker 02

  One of the things, though, that I think We shouldn't lose sight of it is speculation isn't necessarily bad. I think people need to know what they're getting into. But I think that it can be a very powerful mechanism to get things up to a level where they can be broadly useful.

• 30:12David Hoffman?

  Okay, so, so let's, let's talk about, let's define the why stablecoin, uncollateralized stablecoins are so dangerous. And I think that will kind of ground us behind like where the buying pressure comes in at. To me, the, the reason why uncollateralized stablecoins can get really, really dangerous is because they can get out in front of their skis. Right. And this goes back to the issue of who can, who can mint new stablecoins. Right. With the collateralized method, it's the protocol, if it's Maker Dow or if it's the bank, if it's Circle. But with an uncollateralized stablecoin, the protocol can also issue freely, as anyone can, just like the Federal Reserve can freely mint new coins. That's not where the restriction comes. The problem is the protocol cannot revoke supply.

• 30:56David Hoffman?

  And that's where there needs to become some, some strategies. And so there's different strategies for how each different algorithmic stablecoin revokes or takes away supply away from the market. If there is a, a price that is under $1. So maybe you can kind of go into the different strategies, the tools that these under collateralized coins have available to them to incentivize the removal of supply of these uncollateralized stablecoins when the time comes that these things are below a dollar.

• 31:27Speaker 02

  Yeah. Okay. So in, in all the cases of these, these different kind of algorithmic and uncollateralized coins, there's the same mechanism is above a dollar, print more. And that creates selling pressure, push it down.

• 31:42David Hoffman?

  Easy.

• 31:44Speaker 02

  Not hard. The problem is, like you said, on the downside, how do you get it back up? So the original kind of senior share model that Basis was, was planning to do and never launched. There is the, you know, the, the USD pegged stablecoin and then there's a share. Like base shares or whatever. And then the holders of those. Base shares will receive the inflation, right? So they hold essentially shares in the system. They get new dollars printed to them and then they can sell those to bring the peg back down. But that's why you hold the share. When it's below the peg, the idea would be that you would have these bonds and people could burn their

• 32:26Speaker 02

  kind of cash tokens for bonds that when the price returns above a dollar, they can then redeem those and get the full dollar. So that's, that's the, the basic mechanism there. With empty set dollar, or sorry, before we get them to start. There, there was one though, that kind of came next. Let's, let's kind of go with the chronological order as we're seeing the evolution here. So the idea behind ample fourth, right, was everybody gets it, right? If you hold ample and we need more ample to bring the price down, everybody gets more ample. And then how do you then get the price back up? Well, below a dollar, everybody loses ample.

• 33:11Speaker 02

  And so that's, you don't opt into that. It just happens across the board. And while I'm very impressed by the kind of insight and psychology around the creation of this, what's called rebasing mechanism there. I think psychologically it's hard and technically it becomes impossible. Like I, I don't think ample is ultimately going to work as a stablecoin. Even if the mechanisms around this, the kind of the economics of it did work on a technical level. It doesn't behave like a standard ERC 20 token, right? The fact that the balance can changing without the user doing anything. It just breaks everything.

• 33:56Speaker 02

  And so they've had to create their own whole, like kind of elastic finance. They're calling it ecosystem around it. And when you break DeFi composability in that way, it, it creates all sorts of problems. And I think it just makes it really hard, even if you somehow achieve more or less stability. It's going to be really hard to take advantage of that composability that is such a strength in this ecosystem.

• 34:18Ryan Sean Adams?

  So getting to your point there, Dan, right? So like you say, ample fourth, the risk is borne by all ample holders.

• 34:25Speaker 02

  All ample holders have it.

• 34:26Ryan Sean Adams?

  Okay.

• 34:27Speaker 02

  And, you know, they all contract to kind of get the price back up to a dollar, and that has led to a lot of big swings.

• 34:34Ryan Sean Adams?

  But these new designs, these different designs, they have kind of different classes of risk.

• 34:39Speaker 02

  Yeah. So, so that's in that initial senior share model with basis, that was the different classes, right? You have the stablecoin holders, then you have the, the kind of shareholders. And that has been then ported forward now with, with basis cash has more or less implemented that, that same design. And that is nice, right? You avoid the need to do anything. If you want to hold just that, that kind of stablecoin piece. It may not be stable, but at least the amount of, of individual tokens you hold doesn't change unless you opt into buying a bond.

• 35:17Speaker 02

  Now, what empty set dollar did that I think is very interesting, and you know, full disclosure, we have a meaningful position in decent in empty set dollar. But one of the, the insights there was saying, well, what if we just package these together in a, in a single token? So that the way that you receive inflation is actually depositing your E S D, your empty set dollar into the Dow. And staking it, and by staking it, you can earn a share of the, of the inflation. Or by providing liquidity into the E S D, U S D C liquidity pool, that's another way that you can earn part of the inflation. And there, there's some of the criticisms for that is that, well, how are you ever going to have something stable that's inherently speculative in nature?

• 36:03Speaker 02

  And the flip side, what, what got me excited about this thing, wow, you know, let's recognize the fact that early on. People really just want to speculate with this. And so to be useful as a stablecoin, you need to be integrated. Across the ecosystem, you need to have beyond different lending protocols, you need to be in different A M Ms. And so if you want to have liquidity, have the integrations. Let's have it be on the spec coin, which, oh, by the way, over time, if the mechanisms work, should become less speculative, more stable, and then you've already got these integrations across the ecosystem. I think the challenge with things like basis cash

• 36:47Speaker 02

  is people are really just interested in kind of the number go up piece and nobody's really wanting to use the the stablecoin piece as a stablecoin and integrate that. It's really just there. They're kind of leaning into the farming aspect. And I think that's hard. And one of the things that, you know, pointed out, there are a lot of games to be played, a lot of money games to be played around this, around all of these different designs. And a lot of teams are leaning into that. And what I got excited about empty set dollar for was the ethos where unlike the other communities that I've been a part

• 37:26Speaker 02

  of, this one really is focused on, let's tamp down the growth. Let's, let's grow at a slower, more reasoned pace, right? The, the first fork that I saw of empty set dollar was, you know, dynamic set dollar, that just was a straight fork off. They tweaked a few variables, but it was really just a fork. And I love the experimentation, you know, good on them. But like, man, they like, took all the brakes off and kind of went full degen and kind of like lean into going like super degen. Okay, great, you can do that. But I, I think there's a really important element here around community and around ethos and belief that this is something where, yeah, you can absolutely step on the gas.

• 38:09Speaker 02

  We're, we're, we're playing with very, very powerful tools here. But if you want this to be long-term sustainable and successful, you need to move slowly and intentionally. And there's, there's certain things you can't control, you know, apes are going to ape and, and you can't stop that. But what you can do is you can try to put dampening things into place to make sure that, to the extent possible, growth.

• 38:39Speaker 02

  Is more or less in stride with interest and adoption of the of the protocol.

• 38:44David Hoffman?

  So at the beginning of this conversation, you talked about how like you were you are more accepting of speculation and aping, right? Like that's you think that's an important part of projects, right? And I totally agree. Like if there was no speculation around Bitcoin, we wouldn't have Bitcoin, right? And something like Bitcoin, speculation is inherently good. Like, there's almost no such thing as bad speculation on Bitcoin. And that's where algorithmic uncollateralized stablecoins are very different from the other protocols that we've seen, where rampant uncontrollable speculation will actually end the protocol, right? Because as you were as you were alluding to, if you only have a gas pedal and you don't

• 39:28David Hoffman?

  have a brake pedal, you know, that's great for Bitcoin, number go up. If you don't have a brake pedal on an uncollateralized stablecoin and you only have a gas pedal, you will crash. Because at some point, the whole the whole design ethos around this thing is that there will be a devaluation of the asset below the peg. And that's when you need the brakes. And if you don't have the brakes at that point, you're in trouble.

• 39:52Speaker 02

  And so I do think that, you know, another project that I think is is worth, there's a couple of other projects worth mentioning here. So one is Frax, and they've started off as something that was, you know, essentially fully collateralized to partial collateralization over time. I think that that makes a lot of sense as something to to play around with as a design space to explore. I think there are some elements of how it's being created and how it's being used that make me a little less comfortable. But I think overall, the idea of starting more collateralized and moving to less collateral is a very reasonable place to start. I think, you know, often they position as like they were the first,

• 40:36Speaker 02

  and yeah, they got it into market. But a lot of people have been kicking around these ideas, as I mentioned, you know, with the initially thinking along similar paths. Another one that I think we're talking about is RAI, then from Reflexor, which they've got an early version, I think, launched and people complain with it. And it's not pegged to the dollar, right? It's entirely kind of self referential with the stability mechanism they're using. I don't want to get into it too much because it's very complex. And to be honest, I'm not going to do the best representation of it. But the idea of having something that is entirely algorithmically governed

• 41:19Speaker 02

  and done so in a way that mises human involvement around governance and just tries to essentially dampen volatility significantly, I think is super interesting. And I've seen a number of these projects, ESD included, that have talked about at some point potentially transitioning away from pegging to the dollar and doing something that is more crypto native. Because I think as anybody who's spent time in this space, you know, the dollar itself may be a reference point today. But, you know, I think we're all kind of like looking out for at what point are we no longer going to consider the dollar itself to be stable? And we're going to want a clean way to transition to something else that is really inherently more crypto native.

• 42:04Speaker 02

  And so I think we're going to see more projects, I would expect, taking a similar approach where they're thinking about how do we get something that is volatility dampened? And may peg to something other than the dollar over time.

• 42:18David Hoffman?

  Dan, there's so much there that we want to unpack. I also want to ask about where oracles come into this and also your opinions as to whether this is like a winner take all market or winner take most market. We're going to take a moment to talk about some of these sponsors and then we're going to get into some of the deeper conversations behind uncollateralized stablecoins. So stay tuned and we'll be right back. Synthetix is Ethereum's decentralized derivatives liquidity protocol. What does that mean? Synthetix is a platform for creating and trading synthetic assets, which are assets that are priced via an oracle rather than bids or asks. Traders can use the Quanta exchange, which hosts and trades all of the synthetic assets created by synthetix.

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• 45:07Ryan Sean Adams?

  All right, guys, we are back with Dan Elitzer and State of the Nation. We are talking about uncollateralized stablecoins. Dan, where we kind of left off, we were talking about some of the projects here. I want to get into Empty Set Dollar in a minute. But something that keeps going on the back of my mind is sort of set context for everyone. You mentioned the term money games that we're playing with these things. And David and I have talked about in Bankless, like, coin is very much a money game. Ether is very much a money game. Any uncollateralized monetary asset is a money game. I would even use the term Ponzi game for these things, right? It's kind of like a pyramid scheme where there's benefit to being first, and you receive the upside of that.

• 45:52Ryan Sean Adams?

  Like, putting on your Bitcoin maximalist hat for a minute, right? You said you used to wear one. Put it on for a second. So a Bitcoiner, or maybe a really strong Ethereum, might say, "Dan, what you're trying to do is impossible. You're going to invent all of these Ponzi games without any upside or benefit to the world. Some early people get rich, right? But the only way to get uncollateralization and some level of stability, some level of stability, is to become highly liquid, a reserve global asset." That's what I think some Bitcoiners might say. What's your response to that? Or did you used to think that, and now your mind has changed?

• 46:32Speaker 02

  I think that there certainly are elements here where, you know, that, you can see that, right? Where early people do very well if this works. I think that's good incentive for getting it going. The idea is that this can't be a Ponzi scheme, right? And I think one of the great things about what Ethereum has done is because it's all transparent, it's all on-chain, nobody can essentially steal funds from others. Everyone can see exactly what's happening. People can choose to play the game or choose not to, up to them. Here, if these things are going to work.

• 47:12Speaker 02

  To a place where you go down, basically can't go up at an insane pace forever. And so I think the important thing is, as these things, if any of them are successful to approach closer maturity, the locus of the game being played has to move from being a growth to about liability. And so even things, one of the reasons why Tether and USDC are able to keep such a tight peg is because it's really easy to arb that back to the dollar, right?

• 47:51Speaker 02

  If, if, you know, Tether is trading at 101, somebody who's got, you know, the ability to just go wide funds in

• 48:00Speaker 02

  and just arb that difference down immediately. And that's the thing that the, that's one of the problems with DAI, why DAI has had trouble being as tight of a peg, is there's not this like instant arb ability for professionals to come in and arb it back to a dollar. And so for any of these algorithmic, under collateralized, uncollateralized stablecoins work long-term, the locus of the game needs to move from, how do we get it a little bit above the dollar? So that like we all print more money for ourselves and it has to be, okay, how do we get the incentive to oh, push it down when it's below, push it up, but keep it very tightly around the dollar?

• 48:44Speaker 02

  And a, a big piece of that for something like MTX is around faith that it will, that people see it go through these cycles and see the cycles get less volatile and shorter. And that there's more faith, people are willing to help push it back up rather than saying, we need to get like a 50% discount or whatever in order to take on the risk that it might never come back up. Maybe we're comfortable with a 20% discount, a 10% discount, a 5% discount, a 1% discount. You need to get that range that people are willing to play around tighter and tighter over time.

• 49:21Ryan Sean Adams?

  And how do you do that? Is it the algorithm, the precision of the algorithm itself, or is it the mechanics of the protocol? Or is it the liquidity and like underlying faith of the backers? What, how does that happen?

• 49:33Speaker 02

  In my view, it's multiple things. One is, there needs to be, the mechanisms need to be really strong. And I will say very, very clearly, I don't think Mt. Dollar has 100% the right mechanisms today. There are certainly challenges with the kind of coupon bond-like system around this, where they are highly risky. I don't think the price well, I don't think the redemption process works particularly. It worked well enough, it's gotten it back to the peg three or four times already. But everybody who's active in the community looks at this and says, "We need to do some fixes here." And Scott Lewis and Will Price and some others

• 50:16Speaker 02

  are working on a proposal for a kind of overhaul of that coupon system. It is more like a bond, some with a zero bond. I think that's a very worthy thing to research, and it may end up being something E S D will transition to if the community wants to do that. But there's also been fixes to the coupon system to improve it. Each cycle, it's getting better and better. And that's a piece. The other piece is just the faith piece, right? The longer that it rounds, the more times that it goes below and then returns, it goes above and then returns, the more faith people have that it will do so in the future. It's, you know, the Lindy effect around this, right?

• 50:59Speaker 02

  The more times that we, the longer it survives, the more times it does the thing that everyone says it's supposed to do, the more people believe it will continue to in the future. But it's that combination of faith and actual like technical economic mechanisms together that will hopefully enable it to be more stable over time.

• 51:18David Hoffman?

  So there's an article I wrote a while ago in the Bankless newsletter that talked about Ethereum as a protocol is designed to work in the most adversarial conditions ever, right? The protocol is designed to work, like full stop. And the more that people have faith in that protocol working, the more monetary premium accrues to Ether. That's the claim that I made. And I think that is very similarly true. For uncollateralized stablecoins where you can make the system work. And once the system proves that it is working, then you get this premium of this benefit of the fact that people know that it works. Then you get this benefit of extra liquidity because of the faith that people believe that it will work.

• 52:02David Hoffman?

  Then people are more willing to buy sooner when the value of the token drops just a little bit below a dollar. Because people know that it's going from 98 cents back to a dollar. People are willing to take just 2% of that arb rather than like they see it at 85 cents. It takes a lot more faith to buy something at 85 cents to get it all the way up back up to a dollar than it does to 98 cents. But the only way that you get that benefit of a premium is if you prove out over time that the protocol is going to operate under the worst possible conditions. Is that about right?

• 52:39Speaker 02

  I think that's a very fair statement, right? It's the same reason that we're kind of seeing similar things play out with like Bitcoin and Ethereum today. We're like, even though the price has gone up, you know, hundreds of percent in the last year. It's in some ways less risky for people to buy it now because it has all this kind of existence proof. And more people piled in and it's easier to buy at a higher price, which is ridiculous, right? Because you're rewarded so much more for buying at a lower price. But there is this risk reward trade off and it is a factor in these stablecoins as well.

• 53:15Ryan Sean Adams?

  So Dan, let's maybe look at your example of empty set or ESD of not target perspective and look at performance. So I've got CoinGecko here just showing me a chart of the price of empty set dollar token called ESD, right? Which is this uncollateralized coin, one of them we've been talking about. And this is over the last 90 days and for the last 90 days, we could see some fluctuations. So at the start, it starts at about a dollar and one cent. And then that's at the beginning of October and then sometime in late October, it stays steady.

• 53:53Ryan Sean Adams?

  We get a spike and all of a sudden it's $2.29 and now in later in October, we get a spike down and it's 50 cents. And then we get some flat line. You can see this chart. Anyway, there's some ups and downs. It seems like there's a range of it. It it it tends to gravitate around a dollar, but it ranges up over $2 and sometimes down to 50 cents. So it's fluctuating around stability. What can you say about this chart? Is this the protocol at work? How how is this stablecoin doing so far?

• 54:27Speaker 02

  Yeah, I I think it's it's doing all right. You know, I'd I'd say anything that went from literally zero six, like didn't exist six months ago to something that is, you know, now at, you know, a 400 mil market cap or so, right? That that's it's it's grown a lot. But that it's done on the basis of somewhat range bound, right? And I would say the goal here is to get it into the the dial like range or better. You know, if you can stay within, you know, 5% or so, the peg is where you ultimately want to be, hopefully even tighter to like 1%. But right now, it's early, so so speculative.

• 55:10Speaker 02

  I think that this is reasonable performance and some of the mechanisms are being tweaked to hopefully allow it to not skew as much on the upside, right? One of the elements of the V2 proposal is to have a price, whether it's $1.03, $1.10, something like that, where anybody can always mint as much as they want at that price to effectively create a ceiling on the price. And the idea is that the the USDC or ETH or whatever would be spent to mint would then be in a reserve where if the price falls below, you know, a certain threshold,

• 55:52Speaker 02

  97 cents, 90 cents, whatever it is, that that reserve would then be used to buy back the ESD and potentially burn it. Hold it, who knows, but that you can actually create this kind of secondary stability mechanism and create these these boundary conditions around it that can tighten over time. And so I think that is a very promising direction. I'm I'm very encouraging and encouraged by the discussions around that mechanism and effort to start moving towards implementing it.

• 56:32Ryan Sean Adams?

  So I'm putting my my in the shoes of, let's say, I'm an E S D hole, wanting to use this for utility purposes as a stablecoin, right? That's ultimately what we want to use stablecoins for, right? So I'm looking at the chart, this chart, and I see, okay, I've got, you know, a hundred dollars worth of E S D, you know, and I hold that. And, you know, next week, maybe that that could be dollars. But I know if I wait seven to 15 days or so, it's going to restore back to a hundred dollars. Maybe the following week it goes down to fifty dollars. Or if I wait a little bit longer, it's going to ratchet back to a hundred. Is that kind of the user experience or am I misunderstanding this?

• 57:11Speaker 02

  No, so so one of the things that you're missing is this is not like Ample, where it goes up and then it contracts down on like the the format, right? So the idea is that on the upside, right, when it was going up and was above the peg, people who had staked their E S D in the Dow or were providing liquidity in the in the Uniswap pool, they were receiving more E S D. And so they had more units of E S D. Now, when it drops below the peg, let's say that, you know, you had a hundred E S D

• 57:47Speaker 02

  and the market cap, you now, you know, are going to have roughly double the amount, so you'll have 200 E S D. Now, If the peg goes down to, you know, drops to low down to 50 cents, yeah, then you've got 100. But assuming it's above 50 cents, you're still, you have more dollar value and more coins than you initially had. And so one of the things that I think is really important psychologically for maintaining the peg here is it doesn't have, in my view, the same crazy downward reflexivity as something like Ample4th.

• 58:25Speaker 02

  Because Ample4th, when it's below the peg, you've got the double pain of both watching the value of your holdings go down and also the number of units is contracting too. And so that's just like creates this gut wrenching thing. We saw it with, with YAM before the rebased was removed. I think, you know, anybody who's held ample has like been through that and seen that as well. And, and so I think that this just psychologically does a lot better, right? From, if you're looking at this from an investment standpoint, really market cap is, is the thing that matters much, much, much more so than price. But when you want this to actually be a stablecoin and when people are looking at holding it,

• 59:09Speaker 02

  the fact that it doesn't take supply away from you on the downside unless you opt in to buy

• 59:19Speaker 02

  potentially get more upside from getting that discount.

• 59:24Speaker 02

  You know, that, that, that opt in element for returning it back up to the peg, I think is very important.

• 59:31Ryan Sean Adams?

  So you're saying, Dan, that I've got, if I wholly see and I'm just a utility stablecoin user, I don't have downside. Right? It, it can't drop below a dollar?

• 59:42Speaker 02

  No, no, no, no. To be very clear. No, yes, you, you absolutely do have downside. The, the price can certainly drop below a dollar. If you have 100 units or 200 units, you will never have fewer units than, than you did. The price can still go down, right? Right? Yeah. Well, you can have more on the upside as above a dollar, you could end up with more if you're staking them.

• 1:00:02Ryan Sean Adams?

  Right.

• 1:00:03Speaker 02

  But you'll never end up with, you'll never, yeah, you'll never, you will never, without taking action, you will never end up with fewer. Units. And so I think that is an important piece. Again, there's no floor. This could go to zero. But or, you know, or it's like, you know, Bitcoin, if it goes to like, you know, one cent, I buy all 21 million Bitcoins, right? Like, whatever. So same principle here. It's never, it's never going to go to zero. But it can approach very, very close to zero. So not saying there is a hard floor or something on this in any way. What I'm saying is that when it goes up and more is printed, those who receive that printing,

• 1:00:45Speaker 02

  you know, now have those, have that inflation. They have those additional units in their wallet. And if they lose interest, lose faith and decide to sell, they absolutely can drive the price down lower. But if people want to hold it, they believe this is going to be useful. It starts becoming more stable. They start using it as a stablecoin. Great. That's the goal, right? The goal is to get this to be something that is widely used where, you know, my, you know, ideal future state SD is that ESD becomes boring. People should not be excited about it. They should not be looking at charts about it anymore. So than like,

• 1:01:25Speaker 02

  you know, we get excited when like a bunch of new U S D C or S T T is like on chains like, oh, wow, that's clearly stablecoin demand is up. Nobody really cares. Hopefully, ESD could at some point become like that, where the majority of people using it just pays zero attention because it is staying so close to peg. And there are professionals who are arbing it in both directions and maintaining that peg. Making money off it like, great. Like there's, I'm not against people making money. I think that there should, there always needs to be some kind of profit motive around this to maintain the peg. But hopefully that profit motive shifts from,

• 1:02:05Speaker 02

  I want to just hold a lot of this and see the number go up to, I'm going to make profit by actively participating in the peg restoration process. So, yeah, go ahead, Ron.

• 1:02:17Ryan Sean Adams?

  Oh, no, you go ahead, David.

• 1:02:18Speaker 02

  I was gonna turn the conversation to Oracles, but I think you want to talk about market cap first?

• 1:02:23Ryan Sean Adams?

  Yeah, yeah. So I guess that's the perspective of maybe someone who's holding EST. But what does it look like from the perspective of someone who's taking the speculative risk in the itself, right? So this is a different chart, different than price. This is market cap of empty set dollars, which it looks like this is,

• 1:02:45Ryan Sean Adams?

  you know, basically total price multiplied by the supply, right?

• 1:02:50Speaker 02

  Yeah. And what I'll say is, again, this is not a beginner 101 into play. And I think that's one of the reasons why basis cash has seen a lot more forks. Is it's like a lot more in that whole yield farming vein and with like the forked YAM UI and people kind of understanding how to play this as a farming thing. One of the things that throws off this chart is the fact that some of the units get removed from circulation. They get burned for coupons. And so that also then reduces the market cap further. So it's not, it's not exact. It gets, you know, ballpark right direction.

• 1:03:33Speaker 02

  But as you can see here, right, it peaked around 600 mil market cap. And it's currently around 400 mil. And so, yeah, that is a pretty significant decline. And it could drop a lot more, it could go up a lot more. You know, it's anyone's guess on this. I think that, you know, to the extent that people do want to speculate, this is not one that people are going to try to make it easy for you to ape into this. Like, do your homework, do your research, understand it, and then make an educated decision on whether to participate or not to participate. I think that's, that's what I try to, try to emphasize to people.

• 1:04:15Ryan Sean Adams?

  So for those of you at home, this is an advanced money game. Don't just like YOLO into this. Don't ape into it. That's what we're saying. None of this is financial advice, but I want to be clear on what, like basically the speculators, how well they've done with this. So this looks like 90 days ago. This has just done 100x in terms of price appreciation. So we had 4 million market cap around that 90 days ago. And now we're up to 400-ish market cap. Is that right?

• 1:04:45Speaker 02

  Yeah, that's that's right. And so there's yeah, that's that's been tremendous.

• 1:04:49Ryan Sean Adams?

  And there's no, there's no reason this couldn't fall back to to five million if something breaks.

• 1:04:56Speaker 02

  Right, absolutely. It could fall fall below five million, who knows, right? But I think that's, that's one of the things that's been appealing has been the fact that it has has grown very quickly. You know, it was sitting up high on the CoinGecko like yield farming yield list. And so,

• 1:05:16Speaker 02

  you know, that that brought a lot of more attention into it and people kind of joining, joining in. But honestly, my my preference is that this thing I'm talking about you guys, because I want people to understand these things, understand the differences, understand the, but my preference is that this grow at the rate that it's grown and that none of these things grow at astronomical rates. I think hopefully they will grow a little more in line with the interest, right? And I think, you know, up into the range of kind of like a mid-tier market cap coin here. And so I think that that's, that's kind of, you know, a, an okay place to be.

• 1:05:59Speaker 02

  I do want to see it grow, obviously, over time. But, you know, if this, you know, next week were double the market cap, that would make me very uncomfortable. Because I think it's very unlikely that there is double the traction, double the the real interest in this a week from now. I think, you know, going, going, this project is worth zero or five million dollars. This is, you know, worth 500 million. In some ways, that, to me, is more reasonable. It's like, I think there's a lot of potential behind the idea, but going from like, you know, 500 million to a billion or five billion or whatever, like, that would scare them.

• 1:06:41Speaker 02

  Yeah, I don't want to see it grow overnight in that way.

• 1:06:46Ryan Sean Adams?

  They talk about, you know, the investment like staircase up elevator down, but this is elevator up and elevator down.

• 1:06:52Speaker 02

  Right, right.

• 1:06:53Ryan Sean Adams?

  Bottom basement.

• 1:06:55Speaker 02

  Yeah, I think hopefully, but that's what we've seen though, interestingly, right, is that we have not seen the the straight elevator down. And and we have seen a bit of an elevator up. I don't like how much of an elevator up. I wish I wish it were a staircase moving more towards like, I don't know, like a conveyor belt. Type situation where it like just becomes a lot smoother and more more muted in both directions.

• 1:07:21Speaker 02

  And we'll see if if the community can navigate it in such a way that that is what happens.

• 1:07:27David Hoffman?

  Maybe to finish off this conversation as to why the dynamics are like that. When Ryan showed the market cap, it showed something like 5 million to 600 million down to 400 million. Unlike other crypto assets that are like Bitcoin or Ether or whatever. There was no one that actually just purchased an asset and held it and then experienced that exposure, right? The only way that you had that upside from 5 million to 600 million down to 4 million is if you were taking actions every step of the way to bear the risk every single time. Empty set dollar dropped below $1. And I don't actually think it's possible for someone to even actually have direct one to one exposure to the market cap of empty set dollar. Is that right?

• 1:08:12Speaker 02

  Ish. You know, if you're if you're staked in the Dow, you're going to get your share of rewards upside. But as we've seen for a lot of the early holders, if they're not participating in the coupons and taking on that risk or participating in the LP and taking taking on like essentially putting up additional capital, they're getting diluted out. So like the the empty set squad, the kind of founding team that.

• 1:08:37Speaker 02

  Hit them first, advanced the first epoch and received the first hundred EST as a reward. Their ownership percentage has dropped significantly over time.

• 1:08:47David Hoffman?

  Because they've just been holding a stablecoin.

• 1:08:48Speaker 02

  Because they've just been staking it, right? And so like that, they had tremendous growth, right? I think, you know, I think they're, my understanding is somewhere around like 10% or so of the supply. But like, that's, that's come down from like over 20% or initially 100%. But that comes down because all they're doing has been just staking it. And so I think that is very healthy that, you know, people who are just long-term holders get some growth, but they're getting diluted out if they're not taking on additional risk, taking additional action. I think that's very healthy. And that's not something that you necessarily see through the basis hash like Puddle, right? Where if you have a fixed supply of those share tokens and you have the same ownership,

• 1:09:33Speaker 02

  you're always going to have that same ownership. And so I, I think that that, that to me doesn't feel like the, the system that we necessarily want for something like this. I think the idea that gradually over time, you know, we, we

• 1:09:50Speaker 02

  improve the decentralization of ownership and it becomes flatter ownership, I think is one of the major positive factors for empty set dollar. Because if this does become kind of the, the digital internet dollar, then hopefully it is very widely dispersed.

• 1:10:09David Hoffman?

  Dan, would you say the, the price or the supply appreciation of, that's a funny phrase, supply appreciation of the, of the, of empty set dollar? Does that, that largely comes from people purchasing ESD? So that when the time comes for them to stake it or to buy bonds and burn it to get the bond, that they have the tools to be able to do it because you can't get the seniorage. You can't get the upside if you don't have ESD. So you have to purchase ESD so that you can be prepared to burn it when it comes time to get the seniorage. And that actually increases the price of the token and therefore the supply of ESD. Is that right?

• 1:10:48Speaker 02

  Well, actually, let me, let me put some nuance on that. So the, the way that you can receive, yeah, the senior is to hold ASD and to stake it or to LP with it. So yes, that, that requires, if you don't have any, you need to buy some to be able to do that. The problem is people do that over the peg and it drives the price up and it, it's not good to have that reflexive upside. So hopefully it gets sold back down very quickly. The, the ideal thing from a systems perspective is that people buy in below the peg, so at a discount to a dollar, which has the dual effect of giving them the ability to capture some seniority when it goes above a

• 1:11:30Speaker 02

  dollar, but also pushes it closer and almost makes that more of a self fulfilling prophecy. And so that's the goal. And then the, the other piece is this coupon system where you can burn and this currently, I think it's like a about a 54% premium. So if you, you know, burn like a dollar or one ASD, you get like one, you get like was 2.1 coupons ish, right? Which can be redeemed for ASD in the future, but they will expire potentially in 30 days if you aren't able to redeem them. And so you're taking on risk, but that's a way that you can get a lot more reward as well.

• 1:12:11Speaker 02

  And so the coupon incentives, hopefully not that existing EST holders than just burn for the coupons and hope the price goes back up. The idea is that there should be now kind of like, if you burn your EST for coupons and do nothing else and the price is going back up, you're just going to lose all your EST and that you go to zero. Like sucks to be, sucks to be you. So the idea is the incentive is then, okay, well, you can do that. And if somebody else doesn't push the price back up, you better step into the market and buy some more EST to get it back up to ensure that you can redeem those coupons and you don't get zeroed. Or as a new entrance, you come in, you buy EST off the market where it's currently trading below a dollar, burn that to get like

• 1:12:55Speaker 02

  kind of premium, premium from the coupons. And, you know, that, that becomes a kind of a reinforcement mechanism to drive the price back up. So these things play.

• 1:13:09Speaker 02

  There's different risk return profiles for taking different activities. But again, like I said, this is not like a basic beginner thing. I do not recommend people who are interested in this to play the coupon game unless they're very, very aware of what the the trade offs are associated with that. And there is that reliance, though, on net new buying to push it back up to a dollar. If there is not any net new buying and there is net selling, it does not return to the peg. Needs to be net buying to return to the peg. And so that's one of the reasons why I think it's

• 1:13:49Speaker 02

  very important that this not grow too quickly, because if there is not interest, enough buying pressure when it drops below, it's just never going to get back up. So just everyone needs to be very aware of that. Think about the different dynamics as they participate in the system.

• 1:14:06David Hoffman?

  So the fantastic thing about uncollateralized stablecoins is that there's no dependencies on other assets, right? Like it doesn't, DAI depends on Ether and USDC and other things that back it. Uncollateralized stablecoins don't have that vector. But both vector, but both DAI and both uncollateralized stablecoins have Oracles. Are there any differences between an uncollateralized stablecoins Oracle and an Oracle that supports DAI? Or are they largely the same, the same set of problems?

• 1:14:34Speaker 02

  So one of the things that I loved about the design for EST is the way the Oracle is done is it uses an eight hour time weighted average price pulled from the Uniswap EST USDC pool.

• 1:14:48David Hoffman?

  Wow.

• 1:14:48Speaker 02

  And so that is a really hard Oracle to manipulate. And it works because you don't need instant Oracle price for liquidation for something like MakerDAO, right? Like the fact that it's waited over eight hours is fine. We want it to be robust to manipulation more than Accurate in an exact like block or an exact instance. And but this is a risk in my view is that it is reliant on USDC, EST, Uniswap pool, where the Center Foundation in theory could freeze all the USDC in that pool, and therefore it's censored. And so I think the likelihood of that is relatively low.

• 1:15:29Speaker 02

  But certainly with some of the, you know, actions we've seen from some government agencies recently, like, I think it is not a zero risk thing. And so one of the things that has been discussed in the EST community is, well, could we take advantage of the USDC keeps a very heck? And actually incentivize EST ETH pool, which would be incredibly censorship resistant, and combine the T WAP off the EST ETH pool with the USDC pool, which is a very liquid pool.

• 1:16:10Speaker 02

  And if the Center Foundation wanted to, like, the Center Foundation is like not going to nuke the in the ETH-USDC pool, right? If they do that, like, they're done, they're done so, right? Like, USDC is done if they're gonna, if they're gonna nuke the ETH-USDC Uniswap pool. And so that would give EST a level of protection where it's like you can't nuke our pool without nuking everything. And how are you going to nuke the EST ETH pool? Like, you can't, like, that, that is about as censorship resistant as it gets. So I think something like that. But then you lose the advantage, A, you've got now, you know, trading from USDC and EST, you've got double the transaction fees.

• 1:16:52Speaker 02

  You also are incentivizing LP pool that is not, in theory, a stable to stable pool. There is more impermanent loss involved in LPing for the EST ETH pool. So I don't know if that switch is going to happen. But I think the fact that you can make this more censorship resistant, by using ETH as that really censorship resistant asset in the pair.

• 1:17:17Speaker 02

  Like, it's so cool that is possible, and that's what gives me real hope for these assets is not that we want to reference, you know, something that is censorable like USDC, but it's the fact you can actually find a way to reference it where it's useful, but not be dependent on it in a way where you need it to be there for your system to function.

• 1:17:40Ryan Sean Adams?

  So just one observation.

• 1:17:42David Hoffman?

  Oracle problem is actually a much smaller problem for empty set dollar or algorithmic stablecoins than it is for crypto collateralized stablecoins. It sounds like that's a much easier problem to solve with much more solutions at hand.

• 1:17:56Speaker 02

  Yes, if implemented in the right way, right? Because you can use the AM-based oracles. We've seen a lot of people use MM oracles in dumb ways that have led to hacks. But I, I, I think it's really hard to guess like an eight-hour T WAP on something that has millions of dollars, often 10 millions of dollars in liquidity. But that is something that's going to create oracle problems.

• 1:18:19Ryan Sean Adams?

  One observation, it's kind of been a recurring theme, definitely in bankless, as we've been exploring all of this is, you know, people ask the question of, well, why is this the first time we've seen empty set dollar? Like, why didn't we get it two years ago or three years ago? It's really interesting what you said there. I mean, a lot of this has only been possible with the money protocols that we have now, right? So first of all, we had to have this thing called Ethereum, of course. And then we had to have this thing, this money like called Uniswap. Uniswap had to build up enough liquidity and V2 had to ship. So we get this time weighted like average. So we can have an oracle and now we see the birth of algorithmic stablecoins.

• 1:19:00Ryan Sean Adams?

  Like it's this, this like tech tree almost that had to be built for us to get to this place, right? It's like, why didn't we have this three years ago? It wouldn't, it wasn't possible three years ago. We didn't have the, we didn't have the technology.

• 1:19:15Speaker 02

  Absolutely. And so I think, you know, one of the hardest things I think about being in this space as a builder and as an investor is understanding timing and the dependencies around all these things, right? There's so much stuff where, you know, look back at stuff 2017 and like say, that was stuff was so ridiculous. And yes, most of it was, but there are some things that failed in 2017 or, you know, on Bitcoin failed in 2015, 2013, whatever, that it wasn't because the idea was bad. It's because the timing was wrong. The necessary ecosystem components weren't there yet and we're not or we're not mature enough yet.

• 1:19:56Speaker 02

  It's the same way with the internet, right? That, you know, the big examples of like the dot com boom found was like pets.com and Webvan. And then a couple decades later, we've got, we've got, you know, chewy.com and Instacart. It's like the, the, the concepts were not wrong. It was just the timing was completely off. The all the other things that needed to happen in the, in the ecosystem in the world had not happened yet. And so I'm super excited to look back at ideas and it's, it's hard for me because I can be like, okay, I saw that didn't work, saw that didn't work. Right. And constantly I remember, okay, well, it didn't work, then why? And is that reason

• 1:20:41Speaker 02

  that didn't work still valid? Or have the ecosystem grown and changed in such a way that maybe it's valid now, or maybe it can work now, or maybe it'll work a year from now, or two or three years from now. I'm not sure. And the timing, right, is really hard. It is so energizing to work with teams that are willing to try these crazy things and are building what, you know, this, this is the, the new global financial infrastructure that we are privileged to be part of. Witnessing and helping to bring into reality. And I do think that there is something in this

• 1:21:21Speaker 02

  space and maybe it's empty set dollar. Maybe it's it's one of these other things that exists. Maybe it's one of the things that have yet to launch and we're actively looking at other things that are doing different approaches in this because something here I believe is likely to work. Maybe it's not this cycle. Maybe it's in a future cycle, but I think the promise is so great and the potential is there that I want to try these experiments because there is massive, massive benefit to the entire ecosystem if it can be done and done right.

• 1:21:59David Hoffman?

  Dan, well, I can think of no better person to be at the helm of the ship steering the the direction of algorithmic uncollateralized stablecoins. So thank you for for providing that service to the ecosystem. It's it's the start of 2021 and this seems to be a very promising year for the growth of uncollateralized stablecoins. Maybe you could give us some of your predictions, your goals, your aspirations for the ecosystem around uncollateralized stablecoins for this year.

• 1:22:26Speaker 02

  Yeah, so I'm hopeful that I think there was an earlier question around like, is this a winner take all market? Like, no, the same way that like, you know, collateralized centralized stablecoins is not a winner take all market. I think there can be multiple ones that gain significant market share. So I hope that we expect that we will see some of these at least briefly cross the billion dollar kind of circulation or billion dollar market cap around some of these things. I think potentially a lot higher. I think we will see some absolutely implode and go to near zero. What I do think we will start to see is we'll start to see more integrations where the it does become viable to use a

• 1:23:10Speaker 02

  flat curve like AMM for some of these things because they show that they can stay close enough to a dollar over a long enough period of time that it makes sense to have that flattened AMM curve. I think that we'll start to see some of them in cream. ESD got added to cream recently, so it can be borrowed and lent there. Hate to see stuff like that, that's advancing. I'm actually very interested to see how some of these things will start to work across different layer two solutions or potentially other chains too. But I'm more interested in the layer two solutions. And I think there's a difference. Challenge set with moving algo stable coins into layer two solutions versus something like

• 1:23:55Speaker 02

  USDC, which you can start, you know, minting them directly in the L2. So I think we'll see some experiments around that. You know, I think we're going to see more experimentation around games to essentially incentivize people to maintain the peg tightly. Less around growth and more around tight pegs. And there's another project that I've been working with called Faye that is experimenting with this idea of protocol owns liquidity. And actually having a lot of essentially LPs directly by the protocol itself.

• 1:24:41Speaker 02

  Mines and burn right tightly around that dollar. It's an approach that I haven't seen anyone else do something similar to that. So I'm excited to see that get live. I think for all of these things, right? There's this interesting dichotomy between what works in theory and what works in practice. And someone recently stated somewhere on Twitter, right? Like it's the stuff that works in practice, but not in theory. That's the most interesting. I think Bitcoin is like that Ethereum is like that. And so there may be some things like that in this algorithmic stablecoin space that could be really exciting. Outside of algo stablecoins, something that I'm really excited about, like I said, L2 adoption. I'm very bullish on

• 1:25:28Speaker 02

  a big fan of the investor in optimism and think the optimistic roll up approach is great. I think some of the advances on ZK rollups have also been very and excited to see some of those getting more usage too. And something that's really, I think, going to come to the fore and is still below the radar for a lot of people is what used to be referred to as minor extracted value. And now there's an attempt to translate it and call it maximum extractable value. So it can be done by validators of all sorts, not just, you know, proof of work miners.

• 1:26:08Speaker 02

  And I think people are not generally aware of how much these games are being played right now in the mempool and how much value essentially being lost to users in the DeFi ecosystem versus, you know, essentially these arbitragers who are taking advantage of their peer technology in both mining and in mempool monitoring. And so we're going to see that get more democratized this year. People are going to recognize it as a problem. It's going to be talked about, I think, you know, in similar ways to in permanent loss is talked about where if you're active in the ecosystem, you at least need to be aware of the risks and costs and dangers with it.

• 1:26:51Speaker 02

  And then more and more teams will be trying to build protocols that are MEV resistant at the very least. So I'm excited to see that play out as a new trend. And again, I, you know, always keep coming back to it. That's kind of like super fluid collateral thesis, just maximizing capital efficiency. I think Andre is doing some really, I think, Sir has some really cool stuff that they're going to be doing in their V2 that moves in this direction. Ave has been doing some fantastic stuff, including uniswap key shares as part of the kind of lending and borrowing system as well. Just more and more capital efficiency is, I think, going to, going to allow this whole

• 1:27:35Speaker 02

  space to keep moving forward and the.

• 1:27:40Speaker 02

  I think leverage is in some ways a scary word, but really letting the ecosystem grow a lot more, make it a lot more useful because you'll have much deeper liquidity. But trying to trade, you know, borrow, lend, do options to various derivatives, all of this collateral is going to kind of come together and come out of a handful of pools that are going to be super, super efficient. And we're, it's taking a little bit longer than I thought, but I think 2021 is going to be the year where everything is super fluid by DeFi.

• 1:28:12David Hoffman?

  That and then also paired with a bunch of new money and new users coming into the ecosystem. 2021 is set up to be a bang up year for crypto, probably our biggest ever. Dan, thanks for coming on State of the Nation and helping us learn more about uncollateralized stablecoins. I've already learned a ton. So, so thank you for your time and appreciate you coming on and giving us your thoughts.

• 1:28:35Speaker 02

  Always a pleasure, guys. Thanks for having me.

• 1:28:38Ryan Sean Adams?

  All right, guys. Risks and disclaimers. Of course, I have to say this, ETH is risky, so is crypto, so is DeFi, so are uncollateralized stablecoins. Guys, we're on the frontier, but this is the frontier of the frontier. So be careful with these money games. We're headed west. It's not for everyone, but thanks for joining on another episode of Bankless State of the Nation.