Ariah Klages-Mundt & Lewis Gudgeon: Gyroscope – The All-Weather Stablecoin #415

Transcript

welcome to epicenter the podcast where we interview crypto founders builders and thought leaders i'm sunny agaral and today we're speaking with louis gergen and arya claudius munt who are the co-founders of gyroscope a new stablecoin project before we talk to louis and aria about gyroscope though we'd like to tell you about our sponsors this week the first proof of stake is transforming crypto and you can be a part of it you can start participating in networks and contribute to network security and earn rewards by staking with course one course one is your staking provider securing billions of assets for over 10 000 customers on 25 networks including solana cosmos and ethereum interested in running your own branded

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uh glad to have you on my friend leland uh has spoken you know he talks a lot about you guys and he's you know he was like you got you you gotta get these guys on the show they're like amazing and i'm like okay let's do it so excited to have you guys on finally oh thanks yeah thanks uh thanks honey it's a real pleasure to to be here and yeah thanks also to leaders for introducing us before we you know dive into gyroscope um why don't you you know tell me a little bit about how you guys got involved with crypto is this sort of your first project or do you have like you know what were you doing before yeah sure well so myself um

the uh journey started on one fairly uh decisive day in october 2014 i think it was uh when uh vitalik was doing his sort of ethereum roadshow um and he came to cambridge university uh and he sort of gave this talk to uh what was a relatively uh sort of under attended event i would say uh at the time i was just incredible looking back um and he talked it talked about uh smart contracts and all of these concepts that we now know very well and understand and i was very intrigued but just sort of didn't uh just sort of couldn't really you know wrap my head around what he was what he

was proposing at the time but that was really the sort of start of my interest um and and since then i sort of learned a lot i i went on to do a masters in economics while i was doing that i sort of continued to really sort of research the space and focused on many projects as they as they developed i did a masters in economics and uh worked uh briefly in the city as an economist but my interest in crypto was still very very strong uh and i sort of knew that once i caught the caught the bug i couldn't really go back

um so i i got to a point where i uh saw there was this phd position advertised at imperial college london this was in 2018 or so i started started this phd so my phd has been focused entirely on on d5 so when i started it it was really in the deep depths of a bear market uh really quite a it felt like quite a kind of contrarian bet going into it i suppose at the time um and i had published published a number of uh papers in on this area on risks in decentralized finance

uh and then at some point uh met araya and we yeah have uh embarked on this stable point journey nice right how about you yeah my background is is in math uh and after undergrad i did a bit of work in financial software for for a couple years and decided to to go into a phd program after that because i was working on some some side projects around sort of like modeling complex financial systems and decided that that was kind of the more interesting area compared to the work that i was doing and uh then went went to cornell and kind of part way through the the the phd um

uh around like 2017 this is when when maker was coming out i got very interested in these more complicated sort of uh defy like things being built but before i was really called defy and sort of merged half of my uh half of my research into into that area and so several stable coin papers and d5 papers have come out of that since then and this project uh emerged from a paper that lewis and i were working on summer 2020 uh and then we sort of jump started this project at the ic3 boot camp following that paper oh nice i love those ic3 boot camps i think i went to the one in uh 2017 and that was like you know i think i've just met a lot of people who have

been like you know close friends in the space from those is that where you guys met as well or what do you got how do you guys like get start work you know decide meet and then decide to like start working together on this project we met the previous uh summer so 2019 i was spending some time in in london where my advisor is sometimes based and uh we we met at a phd meet up here i think and louis you mentioned you were doing like economics uh like you're you know practicing economists was it like monetary economics or was it like you know something else so my sort of main uh area in economics uh that time was like um econometrics

and micro econometrics uh so yeah really kind of concerned with like you know finding like causal impacts um and trying to sort of understand exactly how sort of uh certain types of economic systems work in my work as an economist it was um yeah one of like the main areas of focus was on uh sort of uh like litigation type work and also had a lot of exposure to uh regulators financial regulators yeah it's that sort of thing do you think any of it really carries over to what you're doing now so i i think i mean there are two parts to that so

of course the formal training in economics um well i mean i should probably say so actually right back in the very beginning of this this journey for me uh i did a degree in philosophy politics and economics and it was during a time of uh you know i just after the financial crisis and went into this in this you know i attended many talks and there are many lectures where everyone was uh giving these talks about the sort of um misbehavior of banks and this is of course something that uh has really been at the center of bitcoin itself um where yeah i'm one of the where one of the first uh block headers there's this uh statement about uh the

chancellor declaring bailout of the banks or something like this um but yeah so there are two parts so my sort of main uh background in economics of course uh has carried over um immensely like you know currency models and this sort of thing is like really bread and butter of um degree courses and master's courses in economics um and then on the sort of professional side the focus on um like engagement with regulators uh has also really shaped how i see um like this industry and sort of the role that we should be playing in this industry as well um through for whatever reason i've um engaged with all you know a number of

regulators in different areas um not just financial services actually and i think that one of the sort of main things that uh i quite passionately believe is that um you know regulation isn't something um necessarily to be feared uh and in fact it's something that for like well-functioning markets actually helps enable these markets it really can play a very important role and of course the challenge is to make sure that it's playing the right role and that you know it's uh sort of a an industry that you know you can grow together like industry and regulation these are things that they co-evolve and that that's one of the main beliefs i

took away from my professional professional experience as an economist nice and so then how did this uh sort of lead you guys to build a stable coin like why you know there's so many different interesting things going on in d5 from like dexes to lending to pure ponzi's uh but like why why stablecoin why why did that why was that the thing you guys decided to like okay this is what we want to go in and fix well actually uh a stable coin is kind of like something that pops out of what we have in mind building but there's like a number of other things that uh that go along along the way as well basically we see like

a need for robust infrastructure for just like connecting various things in uh various different d5 protocols sort of making composability but with a risk control sort of like idea as well and one of those things is a stable coin another thing is uh sort of what we consider like a robust deck structure um something where if there are sort of issues with uh certain uh certain certain pairs that you can still sort of route through the through the decks to do swaps that you might have it might want to make without the the problem of like a central hub asset or something i see interesting um i guess we have to dive into how that works um so

yeah so why don't why don't we just i guess start off with like this how do you the brief summary of like what the gyroscope protocol is and then we can like kind of dive in from there uh sure so so the gyroscope stablecoin is um an autonomous stablecoin uh it's one that we can sort of primarily think of as comprising of two two components so when you say autonomous what does autonomous mean so it it runs like by itself without like necessitating um a constant sort of human intervention

um that's not that's so yeah and just to add to that i suppose otherwise it will be ambiguous so not to say there's no role for governance but just that it's not a sort of you know second by second or block by block process um so yeah but so the stable coin you can think of it is comprising of um sort of two main elements so um the first element is a reserve that is fundamentally as diversified as possible so we try to diversify all risks that we that we can think of in d5 so if you if you can think of the risk and think of some way to diversify away that risk we will

attempt to do that in the reserve so it's constructed so that uh it has contains multiple assets that uh if there are certain types of failure mode so the first of course is like uh price risk or other stable coins going through um de-pegging events or crashes or this sort of thing this is one type of risk but of course there's also regulatory risk is another major one particularly in the stablecoin space uh governance risk um plenty of risk factors and so what we uh try to do with the reserve is uh separate assets into different compartments uh

so so that these risks are diversified to the greatest extent that we can so that's really that's really the first thing this this reserve the the second thing is that we have a sort of innovative approach towards constructing primary and secondary markets and perhaps yeah aria maybe wants to go through this one yeah sure um so here uh first we're worth highlighting what is like a primary market what is a secondary market because sometimes the naming can make it a little uh counterintuitive but this is coming from like like etfs and traditional finance so basically the primary market is uh if you're minting or redeeming a a

stable coin or in the case of etfs if you're minting or redeeming a share for the underlying assets in the in the etf um and then secondary markets means that you're you're trading shares or trading stable coins that have already been minted and trading into with someone else um and so actually like like kind of the the problem in the naming here that gets confusing is that the primary activity as in like most trading activity usually happens on secondary markets not primary markets and so that can be a little confusing um but basically what we have in mind is uh bringing this sort of structure into the uh the d5 space with with this stable coin and basically

designing the the this the structure of this primary market in kind of the right way that uh that helps like uh reinforce liquidity in the stable coin um but doesn't like take charge of like where most trading activity is supposed to happen it's just sort of like supporting the secondary markets and the secondary markets are are then sort of like taking the information from the the primary markets and in particular like you have pricing balance coming from the primary market then and then you can construct these secondary markets as amms that concentrate liquidity within specific ranges um cool so okay let's let's maybe start then with treasury first or like the um the you know reserves so i guess like to start off with what kind of collateral

do you guys accept currently so you know the the goal is to maximize the or minimize the correlation risk so what what is the current collateral that's being used yeah so um primarily stable coins but not exclusively so yeah you said sort of uh the goal is to minimize correlation risk that is true in uh in one sense but it's not like the it's not an explicit objective um because the it's not just about minimizing sort of uh you know correlation in returns or or prices

or something like that we do want to control for other risk factors yeah it's kind of more about terrorists right correlation in tail risks you mentioned a couple of different ones like oracle regulatory what about sorry you mentioned like regulatory and governance what about like oracle's like do you think how how do you you know i feel like within the device space one of the biggest things is like this like heavy reliance on very few sets of oracles especially like often chain link it's like you know i i how do you sort of how do you sort of like deal with this when like and like nudge the protocols that you're integrating with towards like uh more decorated oracle risks so i think there are a number of things

i mean you know this the risks posed by oracles and we're well aware of and we've seen many sort of bugs have occurred due to problems when over reliance on single oracles um i think that you know in the first instance um we will go with things that are tried and tested for the oracle approach because also with a system like ours it's relatively complex in terms of code base so we there will be this bootstrapping phase where we have to roll roll things out and you know make sure that we sort of don't try to do take too much innovation all at once um but but actually we

have put quite a bit of thought into ways to control this oracle risk um yeah in in particular trying to find ways to sort of bound the behavior of oracles and see if we can set sort of um parameters around what we would consider reasonable input feeds um but i this is certainly on our sort of list of things to to do here and so uh so you mentioned the stable coin so do you have a list do you know like which stable coins particularly you accept right now or you plan to at uh when launch right so it's not live right now of course uh and we don't we haven't come

out with the specific uh portfolio that will come that it'll start with um i think uh the space can evolve significantly and even just like a couple months here a bit for before the actual launch and so we do also want like some flexibility there but we kind of see like at a high level uh the the portfolio is just sort of split between uh the various different risks and one of the top one of the top risks risk distinctions is between custodial assets and non-custodial assets with the custodial assets having a lot of counterparty risks and regulatory risks more so than the the non-custodial ones but then the non-custodial ones having uh sort of

more oracle risks more governance risks uh or at least on chain governance risks a little bit different from uh from from centralized governance risks uh as well as just like the pricing mechanism risks kind of like what we were seeing in uh in maker back on black thursday what we're seeing in like uh the crash of all these algo stable coins recently um and so at a very high level you would think of the portfolio as like first separating between these custodial non-custodial risks and then segregating the uh the risks to the extent possible like uh the simplest way to visualize kind of like a hierarchical ordering of risks it may not be exactly that um but that's

easy to visualize do you guys have a mechanism then also to like uh target a specific ratio of like assets in the in the reserves so like you know you we can go ahead and say that like hey okay you know let's say it accepts usdc usdt and die as you know the three things and we accept all three but then what happens if our tr if our reserves just end up becoming 99 usdc that because that's all people want to deposit so you do you have like some mechanism of like making sure incentivizing balancing these out yeah so the idea is that their desired portfolio weights um and these weights

do change over time naturally but just as the price of those assets change um so you could think of it like like how cap weighting uh might change the weights in an etf it happens in a passive way as those assets are repriced and then at some point in the future governance might come in and say well actually we think the new desired portfolio weights are slightly different and then there's like a rebalancing event to that but then right so how the primary markets work essentially is there's these desired uh portfolio weights coming from what was initial how it was initially set up to segregate risks and there's some ability to go outside of that but uh but

not too much and eventually you pay for for going too far outside of that and so basically if you get to the point where uh where you're getting too far from those weights then it'll be more efficient to instead of just coming in this is overweighted a little bit in usdc instead of coming into mint mara gyro dollars with usdc it's probably going to be more efficient to come in and mint with uh with dye instead but and you maybe you start with usdc but you swap to die somewhere else and it's more efficient to to do that routing got it okay so great that makes sense that's like you know so i guess in you know from your blog post you talk about like the three layers of defense uh in like continuous stability so the first one is

just these like reserves right and like in a world where we're over collateralized or at collateral you know great the world's easy you know we just if you want to if you want to get out you just swap it for one dollar the other thing obviously the fun part of stable coins is how to design for the other world where we're going into a risky scenario so uh and so i guess this is where the primary the pams and the sams uh come into come into play so okay so would it be fair to say that the primary so if i if i'm getting this right the primary automated market maker is sort of you know what if you fail to call it it's more like a bonding curve that allows you to mint and burn uh new gyro dollars for like uh

collateral tokens that you deposit and then the secondary market maker the secondary automated market maker is like something something like uh uniswap or something where the gyrodollars are uh trading on what we traditionally think of as an amm yeah i think you could uh you could say that basically uh it's a bonding curve with the specific shape that we've encoded and this shape sort of changes depending on the health of the system is kind of the important thing the the idea there is that it's a sustainable curve always taking into account the health of the system and then there are two curves actually one for redemption one from into oh okay

so there's it kind of creates a spread uh in the primary market and this spread if the secondary market is behaving smartly will take that spread into account in deciding how to price things and is the uh secondary market uh kept in line with the primary market by the protocol itself or does it really sort of just depend on uh external arbitragers to like comment arbitrage the secondary market into alignment so basically if uh if the secondary market is ever trading outside of the uh with the bounds from the primary market then right there's an arbitrage opportunity and somebody will uh be running a keeper that uh that brings it back in line is the idea okay

so but the protocol itself is not actually ever like you know it's not like fey or something where the protocol itself is market making on the secondary market well faye is an interesting case here where their secondary market and primary market is kind of like one a bit confused into one right and so we are just making it explicit what should be the primary market structure how should that influence the secondary market and then it's a much cleaner and much more fundamental driven approach for how to build it is our idea got it okay what's the benefit of do do you not like end up losing value to like arbitrage instead of letting the

protocol do the market making on the secondary market like why not why did you choose not to do something similar to faye how would you compare like the pros and cons of the two models so basically the primary market is market making but in its own amm basically actually i think how it will work out if you're coming to uh to the stablecoin market as a as a user looking to buy some uh some gyro dollars you will go to so we're first implementing this on balancer you'll go to the balancer exchange the balancer exchange has a smart order routing mechanism both this pam and the sam will be built into uh into the balancer v2 uh system

and uh actually if this smart order routing algorithm will take into account like how much you're trying to swap and the the resulting gas fees estimate and if it's it'll route your your order in the most efficient place usually that should be the secondary market if it's a little bit out of alignment you may actually be going straight through the primary market and if for some reason your order is too small they're like maybe the gas fees on the primary market are a little bit higher than on the secondary markets maybe you still go through the secondary market and then there's a rebalancing opportunity from from an arbitrager got it okay um so okay so then let's talk about how what is the exact mechanism of how this

like helps maintain stability when the reserves go uh under collateralized so let's say the value of um the reserves you know usdt declares tomorrow psych guys we actually had no reserves the entire time and the value just goes to zero and now let's say your value of your stable the reserves goes to like 80 of what the outstanding gyro dollars are what is the mechanism here what happens next i think one thing to immediately say here is that in this situation this is already very extreme given our design so we would like

at the point that it's possible to be a collateralization ratio of 80 or so this means that like the first kind of defensive line which is this diversified reserve it means that this is um already been uh yeah well breached i guess to continue with the analogy well what kind what is sort of the maximum that you'd be willing to let something like usdt become in your reserves as as a proportion yeah uh i mean yeah it's too early to it's too early to say at the moment but we but this reserve itself is intended to also be um guild uh accruing so it's not it's not just that we can only go you know we

have like the kind of say straight value of the capital and any any drops will harm us we've got this like additional buffer as well built into the reserve um when we first started talking about this it was uh we were using this term like rainy day fund so having some capital in in case of a rainy day so this so yeah so just to say that in in the situation that you're describing we're already um in hopefully what is a sort of quite you know part of the tale of risk for us but then sure so let's say we are in the situation where um just really quick where does the yield come from so you are you taking

the collateral that's put in and then you know throwing it into urine or something yeah so so um we will be simulating what uh like safe levels to do with different parts of the capital um the most important thing that we will not compromise on is like putting the reserve in any sort of uh dangerous or vulnerable position so this is a feature that again we expect to be rolling out very slowly and possibly not in the very first version um but yeah so it will be um through integration with with other protocols where it's possible to to be any guild and yeah

and you know with balance of battle awards this sort of thing the idea is basically that like the the portfolio is supposed to uh segregate various risks but some assets have very similar risks and you can deploy those assets together in certain pools to earn a yield without bringing in much more risks to the portfolio and so the the aim of the portfolio is uh sort of like good risk-adjusted sort of like deployment of assets cool okay so then let's go back to the all right we're at 80 it is the doomsday scenario what now what do yeah so yeah i just wanted to highlight the extent to which we hope

this is unusual given the design but then given we're in this situation um what what we fundamentally do is enable agents to like coordinate on the possibility of the stablecoin um returning to peg so we leave open in design the uh possibility of the this sort of equilibrium of of the peg like re-pegging occurring um and one of the one of the mechanisms that we um use here is um baked into the the primary market am itself so this is uh where we will essentially in times of uh heavy uh outflows from the protocol

the uh redemption rates will be uh yep made made less favorable uh so we'll start to uh sort of in some sense um impose penalties penalties on redemption but but we would not we'll never stop redemption i think that's also kind of an important point to make so um and in the worst worst case it will always be possible to redeem it the sort of just the net asset value of the of the reserve um but we uh we will we're trying to sort of and you know engender these like dynamics in the market that means that it we only would get down to this point very very slowly uh and in doing so and enable uh

agents to kind of coordinate on around this belief that the the currency will return to to the peg yeah so i can fill in my there if if you want but i had kind of mentioned before that the this this primary market uh bonding curve shape basically uh is dynamic with the with the health of the system and the idea there is that if you do have sort of large shocks to the reserve like the setting we're describing here uh you want to open up the possibility that uh that a peg can be maintained because there's enough like natural economic usage economic demand for this as a as a currency uh and be able to support that up to a point

but then after that point there's kind of like a circuit breaker effect and you'd uh the redemption price kind of decays down to the the always sustainable level basically and this is to basically deter bank around senator speculative attacks and just make ensure that the system actually survives and has a chance to recover and supposing it's uh like it that gives it time and then all the other mechanisms can basically help the system recover is the idea got it cool i guess this kind of goes into another like thing which is like you know this like natural demand where you know i feel like in stable coins you can come up with whatever

algorithmic trickery you want and but at the end of the day like stable coins to work really need to have like real organic demand and like usage and adoption right um so and i don't know in my opinion i feel like so far i've only seen two non-custodial uh stable coins that have actually like managed to like seem to have gotten like legitimate organic demand that's probably like die and like tara um so what would be like your plan to like how do you guys plan to like get you know drive legitimate demand for for this stable coin for a gyro dollar so that when you get into a scenario there is this like expectation and like

reason and demand for it to go back to one dollar yeah that's uh i think that's really answering that question i think that really brings up by many many different topics i mean firstly you know firstly if you if you have the option of having an asset that is you know as low risk as you can go in d5 um that already seems to be offering improvement over existing uh non-custodial stable coins where the risk is concentrated um so i think this you know i i think this already is uh itself just a massive improvement having a reserve backstable coin uh like this

where the the reserve is specifically diversified to the greatest extent that you can do so but then we have a number of sort of core ideas that we intend to go with which will enable us to bootstrap usage um but before sort of talking about it i think it is to sort of jump the gun a bit because something that's very important to us is you know for a stable coin legitimacy and the stable coin is like a super important facet of it and this is something that's like say a fundamental value of this

project is to ensure that we achieve rapid decentralization um from you know from the beginning and we um we already have a very active community on discord and elsewhere um that we you know it's like helping uh us to formulate the sort of ideas uh that we want to be going with and um you know shaping shaping a stable coin fundamentally as a kind of you know a public good um for for d5 and for the for the d5 community i'm saying that uh because that i think that's a real caveat to the the the fact that the you know we where

we do have these uh ideas to bootstrap economic usage which is the most important type of usage that will you know help boost boost demand for us or one of the most important this is all very much subject to community input and so on um but so with with that uh caveat out the way one of the ideas that we are interested in the moment is um possibility of a sort of ubi type program where the uh some you know amount of tokens um could be distributed to uh like community members and on some frequency in the future to be determined uh and referring here to stable coin as

opposed to uh any any other token um but the idea being that yeah we can somehow try to encourage like a kind of organic growth in in how the stable coin is used um and in particular in you know places where it really is of you know fundamental value to to different market players to be able to use and have access to stable currency so you know in unstable economies and places where inflation rates are very high and yeah it's difficult to get access to to a stable currency this these are really yeah for us um this is like you know the level of values this is like the kind of very

important area that we would hope to be encouraging demand another important area here is uh kind of more the almost b2b area of basically demand from dow treasuries for stablish assets to uh to keep the treasury one thing i guess that would be um let's say i'm a user that has a lot of usdc and i am sufficiently confident in uh usdc is like um stability by swapping my usdc for gyro dollars

and then the protocol is like you know taking those usdc and putting them in like urine or whatever and keeping the yield as like part of the reserves like how do you drive them how are you going to drive demand for like people to actually do this like give up the return that they could be getting on the usdc and instead use it to like contribute to this public good which is like growing the reserves yeah so uh this is where i think it makes sense to talk about like a distinction of use cases um most crypto use cases today are fairly speculative in nature as opposed to like you're saying these like real economic

adoption cases uh and realistically those speculative cases although kind of like if that's the only thing happening it's a little bit self-reinforcing of course at some point you have to have actual economic adoption of something for the whole chain of things to make sense um but realistically today like the the first adopters and first use cases are going to be in speculative sort of uh uses and then once you've our aim is basically like make the first speculative sort of uses uh make the system sort of like more liquid and more able to function and provide like a various uh various services that people would want and then kind of like once that's

established as a baseline like try to bootstrap economic usage on top of that and so the first uh the first used case they were sort of building out of the gate is this uh this idea of a i mean you can kind of compare it to like a a money market fund replacement uh i mean it's quite different in structure from a money market but it's the same sort of aims like basically you want a fairly stable uh asset uh with uh with with the aims of getting some good risk adjusted returns and the idea here is that this you would mint the first gyro dollars because you are going to provide liquidity across these different sams these secondary market amms that we've set up and these

secondary market amms are basically uh forming a network within the balancer vault and connecting trades making more trades like more efficiently possible within balancer and so basically if you if you're a user bouncer and this is all set up you're going to come to balancer you're going to use their smart order routing algorithm you're going to be routed than the most efficient path and probably without even knowing it you're going to be going through two of these sams or something um and basically the idea here is that compare this with uh compare this with like uh with like curve and like their three pool for instance uh or other pools or even like these these three pools now in in

balancer the problem is if you're providing liquidity to this this three pool you're composing all of the risks of all of the assets in that and all of the places those assets are being deployed so for instance well in the three pool you're certainly taking on usdt usdc and die all of their risks if anything breaks the whole pool basically goes to zero uh in some of the other pools you also layer in compound and ave on top of that and this means that like it's not actually like a great money market fun strategy because you're actually getting like fairly bad risk exposure but we've set up we're setting up this uh this network of sams in a way where if you uh sort of provide liquidity

across like a number of these different sams uh your risk exposure is actually quite contained kind of the same ideas like this this all-weather reserve that uh that we're building so yeah i guess the difference here is that you know in curve they are allowing people to trade against the pool is there any way to so using this like network of sams is sort of you're saying that this is a way of replicating that functionality that curve provides yeah exactly uh and you can also make sense so basically let's let's go into what a sam is i guess a sam is basically a specialized pool where you're trading gyro dollars against

another asset so one sam would be like gyro dollars usdc another sound would be jarrah dollars die uh another sam uh going to like bust maybe and you can even have a sam that goes to eth which is a little bit harder in curve now they have their their tripole but basically it's the sams are working because there's this primary market structure as long as there's a primary market for this uh this other paired asset you can do basically the same sort of ideas and constructing the uh the strategy of this pool and then you would uh basically be the idea is that you would compose these trades and these different sams so

saying you say you're starting with uh with usdc and you wanted to swap to uh to be usd uh maybe there's a pool where you could directly do that uh likely it also includes like a bunch of other risky assets in it uh if you're doing it through uh through the gyroscope sort of like a robust decks idea you would compose two sams you would compose a swap to general dollars and then compose a swap uh in the other sam from zero dollars back to the usd um and this has the benefit that if you actually have like some real market turbulence and one of these other assets actually breaks this this deck still functions whereas the curve uh pool is

is gone and sorry just so if i recall like the sams exist on the primary market maker exists like as a bonding curve but the sams exist on external amms like balancer or uniswap and stuff they'll both be integrated into balancer v2 uh it's just that the pam the pam is something where if you're a liquidity provider like an individual you can't provide liquidity to the pam that's only the the protocol itself and so it's a it would it's going to be a balancer pool where uh well not anyone can provide liquidity it's for the protocol itself but it's built into into balancer so you can like easily compose trades and easily route through the

right pools and then if you're an individual liquidity provider you would be considering these these different samples i see uh so and the protocol is not the one market making in those samples no so basically the the protocol provides these pricing bounds through the pam these pricing bounds influence the how the sams should be shaped and um either you're coming into balance or to do a trade and you're being routed to the most efficient venue and if it's a large enough swap it might be the pam if the sam is kind of out of alignment but it's usually the sam but if you're too small of a trade maybe

you still go through the sams and then there's an arbitrage opportunity for a keeper to come along later why do you believe that these sams will become like highly liquid like so you know if you if your goal is to make this be this like common liquid like you know the one of the most popular liquidity routers um are there incentives for people to add liquidity to these samples well the precise form of uh incentives is certainly sort of tbd the long-term idea is that uh as with any sort of like lp position like to be sustainable long term there should there should be sort of like organic trading demand uh to use these pools and

so that's that's the aim basically is to make these profitable like lp positions that people actually want to use because it's providing a useful service in this case like immediately uh connecting new new trade possibilities and balancer eventually also like uh hopefully there's there's organic demand for usage of gyro dollars itself and natural demand just to use the sams just because they allow you to to use gyro dollars and move from assets into gyro dollars or out of gyro dollars why it's going to be liquid at start comes down to uh sort of how we've designed the system and the reserve also so basically that's why like it makes sense to start with a reserve that is like

mostly other stable coins maybe there's some some other assets in the reserve at the beginning to the the extent that it makes sense but because like the system is just starting out it's a lot more sensitive to to price risks and so if we start with a with a system that's basically unless something really bad happens really soon is going to be guaranteed basically like 100 reserved or slightly more as it earns yield then the pricing bounds from the pam are going to be quite tight and you don't actually even have to have that much liquidity in these sams to have to have good liquidity have good trades possible i see okay you know i guess uh you guys also talked

about a couple other forms of like stability stabilization that you're looking into like leveraged loans and stuff um can you talk a little bit about that yeah sure so i think the best comparison here is to draw a comparison with with maker and maker on on black thursday encountered this uh this deleveraging spiral the short squeeze sort of effect on dye that uh brought the dye price up to uh over a dollar ten and this had the effect on sort of vaults the the people getting leverage in maker by minting dye um that in a crisis where they actually have to deleverage uh sort of but they

have to buy back die on the market at this very large premium and actually they ended up losing more money in this deleveraging process than they thought they would have because it's supposed to be a dollar a dollar asset but instead there's a short squeeze effect on on die and all of a sudden to deleverage the same amount there's a like 12 percent premium and maker since then this has been one of the big motivations for like the psm in maker uh has introduced this psm that basically ties the diet price to one usdc and this is basically uh their form of like introducing a primary market i would say and their

primary market is just adopting usdc's primary market where now if you're in this sort of crisis and you're you're a vault you can come in with uh if you have dollars you go to us you go to circle you get new usdc you bring it in so happen to die and deleverage your position and you don't have to worry about these deleveraging spirals but now if you're importing usdc risk in a very large extent into into maker itself and that's kind of motivated like gyroscope actually because this mechanism that we're building is basically like uh if you were to try to do something like the psm which is like again making this this primary market structure in a as decentralized as like a risk-adjusted way as possible

that's that's our idea for gyroscope basically and so gyroscope is kind of like making a better psm um which means we can also integrate with with something like maker to make a leveraged loans uh backing for part of the supply and so the idea would then be that part of the jar dollar supply would be backed by uh by leveraged loans just just like maker part of it would be backed by the this primary market mechanism this psm replacement so to say um and then you have um basically similar sort of like security uh to maker but maybe like a little bit better because you have this sort of stronger more robust uh

primary market mechanism and then there was also like a proposal i saw of like uh considering like getting maker to use gyro dollars as like part of their psm is that sort of orthogonal to this or is are these like related in some way it's the same idea it's basically like if we can work together with maker to just uh make one thing like that would be ideal okay got it and is that like you know is that in progress or like what's the status on that uh i don't think that uh there's much like immediate interest just because it's like so far in the future i guess we'll see kind of like when things get rolled

out and what the interest is at that point got it okay yeah we're generally all it's an idea that i'm quite excited about yeah yeah and we're also like as a general point of principle very uh excited about integrations with other protocols and you know believe uh very strongly in in like cooperation in this space and uh yeah i um personally feel you know maker was one of the like key uh projects back in 2017 or so that really uh piqued my interest in in this area and we would would love to love to integrate with them i think yeah back back when they sort of devised the cdp mechanics and uh and uh their naming naming scheme uh all of these things i i mean it was you know

this was some some real ingenuity and uh yeah big fans so i guess uh let's talk about a little bit about uh your governance you guys also have been doing a lot of work on like you know making your governance protocol for driver dollars really um you know uh resilient in a lot of ways so um tell us a little bit about you know i guess the two big keywords that you know are bolding in the dock are like conditional cash flows and optimistic approvals um you want to tell us a little bit about about these yeah so we've done a fair amount of research now on sort of like the the issues about uh

decentralized governance in particular when you have sort of like pseudo-anonymous uh people and you the goal is like not to have the not to rely on the backing of like a legal system to work out something if there's a problem um and one several things that come out of this basically is that they're actually issues that are very parallel to some things in corporate finance it's just kind of like amplified because you don't have the protections of the legal system guaranteed uh or guaranteed to some extent which is some probability and these two issues are sort of along the terms of along the lines of sort of short-term decision making so things that are maybe good for

protocol revenues that can go to governors short term but kind of at the expense of the the long-term health of the system and then also basically like governance attacks or rug pulls on on the system that that might be attempted by by by a governance uh uh community and that's kind of influenced us to uh to design these these two mechanisms that you mentioned kind of the the biggest one the most uh what i consider the the most interesting and innovative one really is uh is this optimistic approval mechanism and what it means is that you have uh on a structural level at least um you have

some party that is as delegated to be able to make make decisions uh and you have another party that's uh that's a this guardian role in the system and it has this optional veto right that it can exercise if it doesn't agree with the decisions made by this this designated party and this can kind of fill in two important places in in a d5 protocol and not just gyroscope actually like it can be applied in in d5 more generally one of them is streamlining governance which we've seen is like a very important issue these days because of basically a voter apathy and just too many things to vote on too many things to decide basically you can use this optimistic

approval mechanism to delegate to a specific group of like a subgroup of governors and these governors can make make decisions and post these decisions and it and basically then there's a time lock period uh during which uh the whole governance community can come in and say well actually uh maybe i don't like this uh this decision and if enough of uh if enough of us feel that strongly about it then we can exercise this optional veto to stop it from actually uh being implemented and in that way like usually this uh this veto right so like you'd expect if you made the right decision about who's who's delegated uh that it's rarely exercised but it's

really only exercised if there's like very bad decisions being made and this is why it can also be applied like to to prevent rug pulls actually because you can you can make the the the guardians of this actually be the the real users of the system like the stable coin holders for instance and so now uh let's suppose that the governance has proposed uh a change that would would effectuate like a rug poll now there's a time lock period and as long as there's some gyrodollar holders like paying attention to this uh and then raising the alarm that hey this is a rug pull um

then the idea is that uh there's this opportunity during this time lock for enough gyro dollar holders to come together exercise this veto ride and block the uh the rug pull action from actually happening and this just changes the uh the dynamics of this uh this governance uh game theory basically um where now you you if you're a governor and you're thinking about doing a rug poll you should be kind of skeptical there's actually going to pass that there's like a significant probability it's going to be caught there's this optional veto that's going to happen and actually you're just going to hurt your the value of your position because now everyone's like oh maybe i don't want to use the system because uh look what the governor's just trying to do and so i'm going to exit

and use a different system i think that'll make sense uh it's i guess it's like similar to like sort of the role that guardians play in a lot of like governance protocols but it's like the idea of like hey we can give this guardian power to like the token holders of the stable coin holders i guess um what about i think the part that i was actually more interested on was the conditional payments because i thought that was really cool where so let me see if i understand this correctly so what happens is that like there's like some cash flows where first of all where are the cash flows coming from those are coming from the yield strategies yep so basically there yeah there's a number of places that cash flows could come from uh in the future it

really depends on like what the how the community decides to evolve this system of course um but just to point out a few like there are some some tasks to governance one of them is sort of like the slow update of the the reserve portfolio design as as the defy space evolves and at some point they may be compensated for that uh by uh some of the excess yield from from that portfolio other things are on like sort of designing the right designing and implementing kind of the right to the right sam structures and interaction with the pam and at some point you could have a i guess a fee switch kind of like like in uniswap where part of the the fee revenue from from the sams might might might go back into the system kind

of by uh by default but maybe could also be used to incentivize governors in the right direction and that's kind of like where these cash flows could be coming from hypothetically at some point and the idea then behind the conditional cash flows is really that these these cash flows that are coming into the system where should they go and we're saying by default they should go to to be an extra buffer to the reserve portfolio and then if the system stays healthy like uh far into the future uh from when these cash flows actually came in that means that like the governors were doing uh it's an indication at least that the governors are doing a good job

and then uh at that point in the future condition on the system remaining in this healthy state then some of the cash flows like should be should be unlocked to incentivize governance and so it's really about like expectations of future cash flows uh conditional on the system remaining healthy which then sets up this incentive dynamic that hey we actually have to be very serious about the system designing it as best as possible so that it actually remains healthy so and and so it would go to the um the current governors or the governors at the time when it was so so uh what i'm imagining is there's like some sort of like let's say um a six-month delay on like payouts and it's like okay we

look at the protocol six months from now and then we decide okay it actually you know the governors from six months ago actually did a good job and then we paid them out uh you know now is that what it's like or is that is it or do we treat do we or do we treat like these governance token holders which i guess we haven't even gotten into the government token but like do we treat those token holders as relatively stable over time so the precise form of this can vary and this is something that hasn't been uh sort of built yet this is going to be one of the next pieces that that comes out but to some degree it also like it doesn't matter to some degree like basically if uh if markets are efficient which may not be the case right now in

crypto of course but let's let's suppose they are then uh if you are sort of like selling out of your governance token uh position at some point uh the buyer of that should take into account sort of the probability that uh that the payouts would actually happen from these conditional cash flows and so you should get a fair price if it's a fair market um but that's really a long-term idea of course that these systems are actually like efficient markets so you guys have this sort of like um live incentivized test net going on right now um what

is the how does it work and you know i saw that there's different phases and it's sort of a little bit gamified um what what's the goal of this is this to sort of get people familiar with the ux of the protocol or is it to you know test out certain economic assumptions or um what's what's ultimately the end goal of this test night so i think there are a few goals really the first is again about uh growing an active community of users from from the beginning um but yeah it's also been um so perhaps i should just yeah maybe give a bit of detail about about what the

game actually is so um it's uh sort of very at least visually it's based on um on a flight simulator uh but unfortunately there is little flying that you can actually do this i think the sort of the yeah i think if you attempted to build the flight simulator on solidity i'm not sure what would i'm not sure what would happen but i don't suggest trying um so there is no flying but the idea is that um you go through these like uh two and uh two and a half levels we have at the moment where you can sort of learn about the core mechanics of the protocol and get some familiarity with um the you know how the like the minting

and redeeming operations work in the primary market and these these sorts of things um and so by going through that we hope that one of the first things is that people are able to uh learn about what we're building and like learn the language that we we think like fits this best and it's also for us uh an interesting experiment in uh seeing you know seeing what feedback we get and seeing what sort of resonates uh resonates with the community and also uh there are a few mechanisms uh in the this very early test net version that um we wanted to get sort of tested a bit in a uh in a live environment uh to see how see how they work and see

um see if there are sort of edge cases that emerge through time that we haven't thought of up front so it's it's been sort of a uh way for all you know both sides in this to to learn in the beginning and yeah but uh it's been it's been quite it's been quite a fun uh fun ride as well uh with this game um so yeah do you think you've found like interesting economic insights even though that these are using like value-less test net tokens so i from the the test net itself um i would say this is a question that's like to be to the full answer to that is to be revealed later because what we've

mainly done so far is um tested like the most basic mechanics in the system but there are more sort of sophisticated elements that we're interested in in testing out and seeing what what insights we we can can get from from that um but we've we've certainly uh yeah we've certainly taken many other uh very uh you know big insights in like how to manage like sudden influxes of users we had uh a current where we suddenly had uh just yeah absolutely insane amount of traffic i think six weeks ago or something like this and this uh this was a really real experience um

we we have so one of the things that we had to deal with it's a bit um a bit of a detailed remark i suppose but like the some of the faucets uh for coven were a bit uh a bit shaky and so we built our own faucet mechanisms and uh we had this massive influx of people wanting to try this and we had to like do some sort of on-the-fly uh debugging of what was going on with our faucet and uh really yeah man scale this quickly um so we've uh yeah we've certainly we've certainly learned quite a bit from the process of having this in a testnet environment one of the other main aims of the uh the

test net is really to provide a setting where we can like help walk users through how the how the system works and so this whole idea that i was explaining before about like what's a pam what's a sam and like what do they do and how do you use them uh they're kind of opaque concepts until you actually like walk through it and use them and you can actually do that on the test net and uh i think that's helped a lot in terms of the community understanding how these mechanisms work at least on a high level nice so what's the best way for people to start getting involved like i guess step one is getting involved with this test net uh you guys mentioned there's a new phase that's coming out the day that we're recording this right now

yep yeah that's that's right so um we would say regarding our sort of third level uh definitely uh yeah on the day of recording it's uh we'll be making announcements about that um we in terms of getting involved more broadly um yeah certainly the test net also the discord is like the primary place we're all on there um all the time responding to questions and that sort of thing so that's if you want to get in touch with us that's definitely the best way to immediately get involved with the project um and then yeah for more more resources i mean we yeah we have have a blog and the the docs are also fairly comprehensive so that's uh yeah those are those are quite good resources

uh i think there's also there's we've uh there's a good amount of content um on on youtube but yeah if anyone also enjoys video for the video format sweet awesome um any last words or anything you want to share with people uh before we sign off i know i i don't think so it's really been a massive pleasure to uh be on this podcast so yeah thanks very much indeed for having us sonny awesome thank you guys for coming on yeah thank you