The $330B Stablecoin Blind Spot: Systemic Risk Nobody Is Measuring - TokenBrice

Transcript

Uh, yeah, we're going to be talking about stablecoins today about uh most importantly the censorship problem. We're going to touch on themes like uh freedom to transact and remember a bit what is it that we're doing here because we're not building some funny-looking farms for institutional actors or uh all the things that are not mattering. Initially, we had a bit of a project in crypto and I like to uh remember not forget about it and try to have other people remembering. So um elephant and is is even more of a mammoth because it's been here for for a while, no, since DeFi exist.

Uh but you have the number on screen, it's pretty pretty straightforward and it's a generous assumption, but in the current state of play, 99.93% of the stablecoins can be censored, frozen destroyed. Uh essentially, if you use the stablecoins and if um a government or a large-scale um private actor wants you to not use them, they will find a way to make it happen. The levers are here. Um So, yeah, it's it's a bit key to our space, right? And the first reflex people will have is, "Hey, yes, but you have it ETH and Bitcoin and those are not censorable. So, people can use that if they're worried about the censorship, blah blah blah."

Which is a nice story to put the kids uh to bed at night, but uh it doesn't hold, you know, because people in the real world, they don't transact in Bitcoin, they don't transact in ETH. We've established that half a decade ago already. They transact in stablecoin. If you're paying wages, if you're buying a product, uh any kind of actual economic utility-tied transaction happens in a stablecoin. And again, you go back to this figure of uh most of the stablecoins not being able to resist this censorship. Um so, to be a bit more precise, ooh, can you see the screen well? I hope so.

It's okay. Uh bit more precise is essentially you have um So on on Faros we talk about 240 stable coin. This gives you the distribution of the um censorship capabilities. Um so essentially uh 133 are a direct yes, meaning the contract of these stable coins include a blacklist or freeze or destroy feature and through action by the um emitting entity, the Circle, the the Tether and so on. They can blacklist, freeze, and censor you. Uh you have a bit of a a middle belly, the yellow and orange, which are those DeFi stable coins, uh but they of course uh in Faros they

are essentially what we we created a category for them we call CeFi dependent, which we find more uh informative, because essentially um you have two two issues, okay? The yellow is more or less your thing is clean, but I can't trust you because your contract can be changed. So you don't have a blacklist or a freeze feature now, but it's totally possible that I wake up tomorrow and now you have one. Uh the orange is a bit different. It's uh typically for instance a First Dai situation, which is you did a good job, your infrastructure is beautiful, it's amazing, decentralized, you have a DAO, they vote, we like it,

but what goes in your stable coin, the collateral, is mostly made of censorable assets, and therefore I don't care that you don't have freeze function. You can be just censored through upstream. So that's this upstream orange category. And you're left with 15 to 16, depending of how generous you count, stable coins that are explicit no. They cannot be frozen or blacklisted. So uh yeah, I was one ahead. This is pretty much a detail and you have the figure by category, but you really need to realize the scale, all right? So, roughly 330 billion stablecoin, that's the market.

300 billion and 306 billion explicit yes, issuer can freeze. Then another 16 billion possible. So, again, contract can be changed, it can happen. Then another 20-ish billion upstream. Die type situation, it can happen just going through the collateral. And you're left with 200 million explicit no. Um That's kind of where it comes from. So, the problem is an explicit no takes all of those three conditions together, right?

So, first one is quite obvious, but an explicit no takes that there is no freeze, blacklist, or cease function in in the contract of the stablecoin. But it also takes immutable code because else we go back in the possible problem, right? Maybe you don't have a freeze function today, but I wake up tomorrow there is an update and now there is a freeze function. And the third point is to address this upstream situation. Not only you need to have no freeze function and an immutable code, but you also need to have an infrastructure that does not depend on collateral that can be censored.

So, I don't know, it might seem a bit of a pre discussion so far, right? Why why does this dude care so much about his stablecoins not being censorable? Uh I would say it's quite the opposite actually. If you have even a a minimal amount of curiosity for the world and you're watching what's happening everywhere right now, you would understand that I'm talking about something like utterly fundamental. Like, you know, like I don't care what's happening in the political temperature of your country, that is is significant. This is.

Because if you look at again recent examples like, you know, the the the truckers protest in Canada a few years back where they censored the bank account cuz the guys were carrying a political project that the government did not approve of. They didn't ban the movement. They didn't make being a trucker illegal. They just cut the funding because they have access to the whole financial infrastructure and those guys were dependent on it. So again, to put it another way, freedom of association, cute, useless. Freedom of religion cute useless.

All of these are downstream of another freedom, the freedom to transact. If you don't have this one, well, you are so easy to play. You are like toys for your government if you don't have this one. Because you know, well, I don't know. The ecological guys are getting a bit heated up, no, and they're doing all these protests and blah blah blah and now we don't like this so much. We want to keep polluting. Well, what are they going to do? They're going to make it illegal to fund you, you know, because you're a terrorist organization or I don't know what they're going to cut the access to you. And then they don't even have to ban the project that you're carrying. They just cut the funding.

To put it another way, in the world that we live in where money governs and decide everything, whether we like it or not, it's a logical conclusion to understand that the freedom to transact is then the mother of all freedom. And you know, I'm not necessarily happy saying that. I would love a world where we're more balanced and we look at things through another lens and money is not dominating everything. But I'm also a pragmatist. So that's why this topic is is um extremely important for me. Um those are just some numbers in case you want to have an idea of the actual amount of uh censorship happening.

Uh so about 4.7 billion is the total, but you can see the trend, right? Most bullish chart of all crypto right there. Except we we we don't really like to see that going up. Um and the situation needs to be uh factored with what's happening more broadly in the stablecoin market, right? Cuz right now I'm talking about entities that can censor you, but you may be thinking, "Okay, you also told us there was 240 stablecoins. So, is that so much of a problem because maybe Circle doesn't like me and censor me, but I will use Tether. And if Tether does the same, I will use whatever Sona, and then I can hop through providers."

Um no, as simple as that. Because again, you have this. 80% of the market is two stablecoins right? Uh you can see on the chart below. Uh I don't know if you see well, but the the little gray part you have on top is all the others. So, the 240 stablecoins and all the everything that is below the gray is essentially USDC, USDT, and IUSDs. So, you have a very concentrated market over a few centralized actors that essentially become the gatekeeper in in that new system.

Um another point potentially of little hope is that you do have diversification of the uh providers of stablecoins and of the currencies that peg to. So, you're seeing more and more stablecoin in uh in Asia, in in South America, and so on. And of course, they respond to different regulatory bodies, to different uh regulations. So, potentially it creates some um let's say arbitrage opportunity for the holders of stablecoins to resist the censorship.

But uh it's still not sufficient. So, um yeah, this is what I I do. This is what I worry about. I want the whole world to use stablecoin and to do DeFi, but I don't want them to you do DeFi in uh you know, a a Googleized version that they will have on their phone where everything is trusted and essentially they're at the mercy of the government. Uh am as far as you might have understood more aligned with the early punk vibes that crypto is the best tool we ever created to resist governmental operation. And now we are at a critical time where essentially, you know, we had the shift we had in the '90s with the internet.

The '90s internet was true to its original principles and vision. And then the 2010 internet became the Facebook Amazon Google Megaslop factory that we all know of. With the trade-off that came on population control, financial control, freedom of salts, and essentially the whole techno-capitalist modern apparatus. So now how do we prevent that from happening in crypto? We need to defend that freedom to transact enforced by immutable decentralized stablecoins. It's as simple as that.

So I try to do my part in two ways. I showed you some data from Faros. It's a stablecoin analytics platform giving you tons of insight on the whole market. And I'm also contributing to a project called Polaris building a decentralized stablecoin that can scale and cover essentially all fiat currencies. Um so for Faros I don't know. Yeah, I'm a bit short on time. So I'll go a bit quickly. Let me show you actually, if you have a minute, that could be fun. Um it's a bit more interactive than you usual.

So Faros has tons of things and lately I got even to the point that I decided to bring them to life. So what you will find here is a kind of world visualization, right? Where every stablecoin is a ship. Every harbor is a chain. The zone in the water are like stress signal on the stablecoin. So you will find this corner right there is kind of like the the corner. So those that have stressful situations on their peg are are hanging over there. And yeah, it allows you to navigate the Faro's data in a in a bit more um playful way.

But uh Faro's is also a very serious dashboard you can just use to uh get a comprehensive overview of the state of the stable market including uh to the topic of today uh these questions of censorability and blacklisting. So, the tracking extremely uh detailed tracking of uh wanted freezing freezing event that happens on stablecoin uh on about 30 stablecoins right now. And uh yeah, this total figure. Up. But uh let me use my uh few minutes that I have left to tell you maybe more about the uh the alternative, right? So, the problem Faro's measures the problem, but

how do we solve this concretely? Uh remember that the current state is about $200 worth of stablecoins against the 333 billion base that are uh explicitly um resistant to censorship. So, uh you have a question of essentially uh establishing a stablecoin model that can uh explore a path completely different from what has been done before because the before is essentially uh maximally centralized and scaled or decentralized and censorship resistant but niche. Um so, this is the uh effort we've been taking on at uh Polaris since 2 years now uh to come up with a new model to build and scale decentralized stablecoin. It's uh much bigger than a

stablecoin project itself actually. Uh we had to think about um the collateral itself and how to turn ETH into a yield-bearing asset but without relying and creating a dependency on staking. So, there is a bonding curve involved with this uh base collateral. There is a CDP model to emit coin that is generalizable to cover all the currencies and USD. And we had to give it some thoughts too about governance which is not governance because the core is immutable, but there is still some levers that can be adjusted to adapt the protocol to changing situations.

Um So yeah, the vision is to essentially establish a new dual infrastructure on the east, right? First, the yield layer with this Polaris east P east. Um competitive to staking with a completely different risk model because now you have a a bonding curve backed asset meaning um massive liquidity at scale that scale with the size of the assets itself. So you've heard a few talks today about those problems of pricing of the oracle on on the liquid stake tokens and things like that.

The liquidity on the stake token is a real question and is not as good as we like to think it is. Especially if you start comparing it to the size of those tokens, the size they have reached. There is also questions about the staking on Ethereum long term, right? Does it make sense that we're spending so much on staking? Does it make sense that 35% of the east in existence are staked? Do we need so much? All of those discussions are happening, but essentially the staking landscape is going to evolve. That's quite apparent now and probably evolve towards compressed yield and towards less um insane ponzinomics on top of the the stake tokens, right? The the restaking

and all those funny games we played for a few year were all cute, but they don't deliver tangible economic value. They still haven't really found product market fit. So maybe it's time we actually mature the space into an asset that is a bit more of institutional grade in a way. Uh so, so that's for the the ease part. On the stable coin themselves, it's it's similar. There are questions of, you know, we talked about the decentralized core, immutable code, providing maximum guarantees to the user. That's cute, that's technical, but it also needs to actually do its job as a stable coin, meaning keep its peg, be able to scale, and offer competitive terms for users,

both on the borrow side and on the earn side. Um So, yeah, the best way, if you're curious about this, is simply to try out the testnet. We just launched it 2 days ago. So, you'll find it on the website. I'll put it at the end, protusfinance.io. Um Yeah, I'm trying to keep some time for the questions. Um I know some of the things I might I said might have been a bit frontal. That's my way of doing thing. I don't like to beat around the bush, you know, we uh If we're honest about it, you know, I've been doing DeFi 7 years.

So, I don't care. Like, I really don't care. You can't fire me. You know, I'm made. Um I don't have anyone to please. I'm doing what I believe in. And in the stage we are in, I'm not far from considering the whole industry from a massive waste. Simply because, you know, what we've built is interesting, it's innovative, but again, it's poisoned at the very core because of this. Right? If you don't have a kind of visceral reaction when I literally just told you 0.06% of what's happening in DeFi is upholding to what we tried to build in the first place.

The rest is essentially traditional finance cos playing as DeFi. For me, that makes me mad. That makes me wants to break things, you know? But, I try to channel this into something a bit more constructive. Okay, maybe the problem is we didn't do good enough on those decentralized stablecoins. Maybe there are other questions at play. And that's why I'm I'm I'm doing what I do. But, I think it's really like, you know, it's not a question we can keep sleeping on because the more we sleep on it, the more brutal the slap back to reality is going to be. And I'm not sure the space can survive the slap back to reality if it happens, you know, in a in a ma- major way, you know? What if at some point

a state-level actor that is not North Korea trying to pull little hacks and make some pocket money, but a state-level actor actually try to destroy DeFi, not make money out of DeFi, but destroy DeFi. Current DeFi doesn't resist that. We need to be aware of it. It doesn't for a second. You know, probably it's a it's a few hours event to explode the whole DeFi. If you're the United States of America and that is your project. So, let's make the the the game a bit harder, shall we, right? Because uh I'm not here to to give them candies and and and gifts like that, you know? I don't think this

industry should be uh so vulnerable and exposed. Um so, yeah. Pharos Watch to get a sense of what's happening on the stablecoin, who is censorable, who is not, risk analysis, tons of things. Polaris to get a glimpse of what can be done with those decentralized stablecoins, how do we actually scale them while keeping them uh censorship resistant and true to the original DeFi ethos. Um yeah, we have 5 minutes for questions if you have some. You You have a microphone?

>> I want to ask technically when Tether freezes funds, what happens on the blockchain? You cannot move the funds or what happens? Thank you. >> Yeah, that's a that's a good question. Um The answer is a total mess because I I'm doing this blacklist tracker on Faros. So I'm literally monitoring those contracts and those events. It depends a lot compared to the providers. They all have different processes. But you have like three main actions they can do. What we call the freeze is simply the owner of the assets cannot move them.

As simple as that. There is destroy which for some stable coins will happen after they freeze you. For some it's immediate which is as the name would suggest the assets are actually destroyed. Um and then there could be unblacklist or unfreeze when they are freeing the assets that were frozen. But yeah, the situations are really like different. You we keep seeing new ways to censor. So if you followed the RSIC's Arbitrum situation, you've seen what the Arbitrum Security Council has done which is something else. It's not freezing.

It's not destroy. It's not blacklist, right? They posted a transaction on behalf of the owner's wallet to send the funds somewhere. So you could call this a force send cuz the owner did not sign that. But essentially, you know, different ways, same result. You're not fully in control of your assets. Someone else, an entity, can operate them, destroy them, seize them from you. >> Um what did you learn from Maker Dows kind of journey?

>> Do you have an hour? Or two. Uh, a lot, a lot. So, I was extremely Maker was one of the project that you know, I'm I'm DeFi early class. So, my my staple thing where Maker Uniswap, Banco. There wasn't much to do, but they were pretty exciting. Maker especially, I I love this concept of like you know in the early vibe you have to be honest, the project felt like we were building our own central bank, but crypto version proper fair and transparent, you know?

It really felt like the logical extension of you know, Bitcoin tried to do what it's it's trying to do, but it's not very useful to transact or to do finance, then Ethereum come along, then we have DeFi, and then we have the central bank of DeFi that emerge in a way. Um, so the early days were very exciting. Uh, the infrastructure of the protocol itself is is very elegant. But essentially the choice that were made by governance over the years made the protocol quite uninteresting to my eyes in the present day. Um, so you know, it was a bit of a case of uh a progressive degradation of the collateral.

Which is a pattern now you see more and more on the stable coins, right? If you were for engineers talk just half an hour ago, he was telling you about how Asna started as a basis trade backed coin and then evolved into something else, and most people didn't realize. Um, so I think that's something bit similar with Maker, you know, there was the addition of the USDC PSM, more and more real world asset. Um, then the transition to um USDS. Which is interesting by the way because Dai in our blacklist categorization is an upstream blacklist stable stablecoin.

I Meaning there is USDC, there is also centralized asset in reserve. This way you can censor die. USDS became worse so the next version of die cuz now USDS is a possible, right? And it's the most explicit case of possible ever recorded on Pharos. Cuz essentially there is a function in the contract. It's already there. It's not active now. It takes one governance vote to activate it. That will define the address that can then trigger the function and up Stengar, you're blacklisted from USDS. Stop, you're blacklisted.

This is just, you know, a flip to switch to enable that blacklisting. So um Yeah. Lots of hopes initially and then delusion. Um story of Maker is still interesting to to to read but uh this is not where you will find what we're looking for here. What did they do what they did? Uh Growth, scale, uh they they took the easy pass. You have to understand that the models that I described for stablecoin is not the quickest pass to growth.

Um It's a kind of a situation of short-term incentive versus long-term, right? If you want the most growth short-term, then your playbook is clear. You take some real-world assets, you do all those things, you centralize. That's how you get your growth. And look at the recent trajectory on the big stablecoin, this is what they did. What I'm thinking deeply is so that if you want long-term TVL retention, this is not how you will get it. You will get it by building it slowly but surely over time by offering something that um the others cannot match and replicate this easily. So, that's kind of, you know, that's a startup mentality, right?

People are copying what works but they don't understand that doing that is has zero defensibility, right? Because then the next guy is going to copy what work and so on. This is actually building a decentralized stablecoin. People are going to have a hard time stealing your stealing your sender. The only way they can do it is by competing on the same vertical. Uh but from from what we see now, there is literally no team capable or willing. Uh again, we're talking 16 stablecoins that match these conditions of ours.

Those 16s are pretty much all of them are fork of Liquity is a V1 or V2. So essentially you have one team in the whole history of DeFi that was pick the words, right? Is it competent, quite obviously, stablecoin is still alive after 5 years. Willing. And and that did it. The other teams, I don't know, maybe they don't have the skills, maybe their focus is somewhere else. Maybe they they have another vision for the space. But yeah.

I think that's that's uh how we get the current situation. Do we have time for more? >> I think we're waiting for the next speaker, so I think yeah, one more. >> Okay.