Blockchain trilemma cracked: what about the stablecoin's?

Transcript

Good afternoon, everyone. I'm Cyril. I'm contributor to Aladdin DAO, which is the DAO behind three protocols, including FX protocol. And today's keynote is named the blockchain trilemma cracked, what about stablecoins? So, Vitalik recently published a tweet earlier this year saying that Ethereum blockchain trilemma. So, now let's look at the stablecoins trilemma. If you're not yet familiar with the stablecoins trilemma, so this is the idea that a good stablecoin should find a good balance between decentralization, scalability,

and peg. So, let's dive a little a little deeper into these three different notions. Decentralization is the idea that you get a stablecoin which is um resilient and censorship resistant. Scalability means that it can scale with demand, or at least scale enough, and this is what we'll talk about today as well. And stability is making sure that your stablecoin is always, if it's a dollar stablecoin, is always worth a dollar. And so far there's been lots of different experiments, but most of the stablecoins designs, so the market stablecoin market is around like $316 billion now, making ATHs after ATHs.

But 99% and it's even more, but at least 99% of all these stablecoins design made a compromise on decentralization to give very good scalability and peg. As a matter of fact, most of the current stablecoins are either backed by T-bills or other stablecoins backed by T-bills. So, most of the Circle stablecoins, we even see stablecoins which are actually vaults, not necessarily stablecoins, and I believe words matter. So, most of them are depending on on T-bills and made a compromise of on decentralization. And the reason is very simple. It's way easier to get scalable and stable

stablecoins when they're backed by by the most liquid assets in the world. But did we really create Ethereum, which is the only infrastructure in the world that allows trustless finance, to just replicate try to try to find on chain? >> [snorts] >> I think it's a shame. And it's important to find better alternatives. So, this is the purpose of FX protocol. FX was born of the USDC depeg that happened in March '23, I believe, after the Silicon Valley Bank collapsed.

As DAO, we were highly exposed to USDC because USDC still is today the most liquid stablecoin on chain. And we figured it is shame to rely instantly have a stablecoin that goes from $1 to 84 cents because of whatever bank somewhere in the US just collapsed. So, let's find a better solution. And at this point, the experiments were not necessarily reliable enough. There could be very decentralized stablecoins, but the peg was not reliable enough, and scalability was an issue as well. So, we first released in in August '23 f ETH, which is probably the most Ethereum aligned stablecoin because it's not pegged to a dollar. Instead, it keeps 10% of ETH volatility.

But we soon realized that people were not ready yet to not be pegged to fiat currency. But maybe at some point we'll get there, I hope. So, f ETH is still around, so there's f ETH that keeps 10% of ETH volatility volatility, and the counterpart gets extra volatility in a leverage token. We then released in May '24 FXUSD in the first design, which is the evolution and gets pegged to the dollar because we realized that's what people wanted. Then we iterated to V2, which is the current design, in January '25, and released their yield-bearing version in April '25, which is FXSAVE, and delivers some organic and

sustainable yield. And more recently we released FXMINT, which I will be describing today. So, FX protocol is audited by 16 times by one of some of the best auditing firms around, Trail of Bits, OpenZeppelin, and CertiK. And if we've been building DeFi protocols without incident for the past 5 years now, it's because every single line of code is audited before going into production. It sounds natural, but it's often not the case, unfortunately.

So, let me tell you about FXUSD. So, I told you earlier about the stablecoin trilemma. Let's look at FXUSD's design design. So, FXUSD is 100% on chain. It's only backed by on-chain collaterals, which are Lido stETH and wBTC. It's overcollateralized, so it's not an algorithmic stablecoin. It's an overcollateralized stablecoin with good capital efficiency thanks to the design I'll explain in a minute. And to make it reliable on the peg side, so the stability side, we integrated the whole peg-keeping mechanism into the protocol instead of only relying on external parties.

As I told you, so there's already 16 audited mints, and you can stake FXUSD to earn 100% organic and sustainable yield into the FXSAVE strategy. So, how can you get FXUSD? So, most of the liquidity is on Curve, but it can be on different pools. So, the best way to get FXUSD is going to be to buy it. So, you can go on Llamaswap to get the best rates, and as you can see, you can swap decent amounts. You can even go way higher while having a very good very good peg price execution. Or you can mint it using FXMINT. So, FXMINT is lets you basically never sell your ETH and BTC again because you can simply borrow

FXUSD against your ETH and BTC paying just a one-time fee. If you were borrowing on Aave, for instance, you would have recurring costs. So, right now it can be 5%, next month it could be 10, 15, 20, whatever. It's not something you control. It's directed by by the market. On FX, you just pay a flat one-time fee when you borrow, and which is 0.5%, and 0.2% when you repay, if you ever repay, because potentially you may never repay. And you don't have to worry about hard liquidation because we have a very what we call liquidation protection, which is a very progressive liquidation mechanism that prevents any hard liquidation. I'll get into the details a bit later on that.

So, the idea is that it's a set and forget it borrowing positions because you don't have to worry too much about liquidations, and you don't have to worry about raising borrowing costs that could be very very expensive over time. So, if you're familiar with the CDP design, when you hear one-time fee, you may think, okay, but how can this stablecoin be pegged? Because if you borrow it for a very very cheap price, because you may have understood that FXMINT is the cheapest and safest way to borrow against your ETH and BTC.

You may borrow it for a very cheap and sell it to farm whatever the new fancy farm is. So, as I told you, we integrated the peg-keeping at core of the protocol. So, the first mechanism for keeping FXUSD's peg is the natural demand for it. So, when people mint it, it potentially brings selling pressure. When people redeem it to get their collateral back, it brings buying pressure. But it's obvious obviously not enough. So, then we have a very strong uh pool on Curve, which has a very efficient liquidity for stablecoins. And then there's what we call the stability pool, which is the main yield strategy on FX protocol.

In the stability pool, you can stake either FXUSD or USDC, and you earn most of the protocol revenues. This is why I said it's organic and sustainable yield because that strategy is incentivized with revenue generated by the protocol rather than by token emissions, as you would see in most DeFi protocols. And whenever FXUSD is traded below one, to be precise, whenever it's traded below 0.997, the USDC from that strategy will buy FXUSD at the market to put it closer to one.

Whenever it's traded above one, they're sold back for FX for USDC. And this is how we manage, by having both that Curve pool and the stability pool, to have a very reliable peg and in a very dynamic way. That means you don't have to, in some stablecoin design, you may have to wait for a couple of days for the peg to come back. Here it's instant, basically. And we'll see this in in a bit. But it may not be enough because at some point there may not be enough USDC to support the peg. So, whenever the ratio of USDC is into the stability pool goes too low, that's actually 5% right now, we can apply a temporary borrowing

costs to the leverage positions. So, this is the only situation you may have to pay a borrowing cost. That borrowing cost is the borrowing cost of USDC on Aave, and it's applied to the whole collateral. And it's directed to the stability pool. So, it basically instantly create a double-digit APR to the stability pool, thus attracting new USDC deposits, and reaching the threshold of 5% again. So, this is why it's very temporary. But in some situations of very high leverage demand, it may not be enough.

So, this is what we then the the protocol triggers what I call the depeg mode. It means that the EMA 42 minutes of FXUSD on Curve goes below certain threshold. And in that point, you cannot mint FXUSD anymore to make sure there's no more selling pressure on it. And in that situation, we apply a second layer of funding cost, which is which five or to be to be precise like five times I believe the average borrowing cost of USDC. And in that situation there's two incentives to to close your position. First, it's very expensive to hold because you get very expensive borrowing cost.

And you may be able to buy FXUSD at a cheap price on the market, thus repaying your debt position with a premium. But it never happened so far. So, the first steps I described were always enough to keep FXUSD speak, but it it's here just in case. And the worst-case scenario, if it's still not enough, you can always buy FXUSD at the market as a at a discounted price because in that situation it would be underpeg and give it back to the protocol as this is what we call the redemption and you get the collateral, $1 of collateral minus a 0.5% redeeming fee.

So, in the very worst-case scenario, FXUSD's peg would be 0.995. >> [snorts] >> And all this is completely automated. This is just protocol design. It doesn't rely on any human execution or intervention. And as a matter of fact, if you look at all the previous intense markets liquidation events, such as October 10th, I don't know if it's Yeah, you can read from here. You can see that how we we looked at the Curve pool and we looked at how FXUSD behaved during the market crashes.

So, on 10/10 there was 20 billion liquidated in 24 hours. I'm pretty sure you all remember that. Um because we probably owe the current market conditions and atmosphere to to that very event. And FXUSD was 0.999. Even on other events, you can you can see 2 billion liquidated in on November 21st, a perfect one. I encourage you to take a look at other stablecoins behavior when this happened. For instance, take a look at ETHUSD's price on Binance on 10/10.

And you see it's centralized. It relies on market makers that I paid I don't I paid to make sure the peg is tight. And it didn't behave that good. So, I told you earlier that you not only pay a one-time fee, but you also benefit from liquidation protection when you mint FXUSD against your ETH or BTC. This is what we call the liquidation break. So, the idea of the liquidation break is to prevent any hard liquidation. If you borrow on Aave, for instance, I don't know how familiar you are with the the term of LTV, but you always have to secure your debt with collateral. This is what we call over-collateralized debt.

And when your collateral's value goes too low, your collateral could be sold to repay your debt. This is what we call liquidation. On Aave, when you reach this certain threshold of FD LTV, which is 80%, 50% of your debt is repaid with a 10% penalty. So, you end up selling at the market your precious BTCs and ETH at the worst price with a discount, which is very painful. >> [snorts] >> On FX, we prevent this by actually just putting you back at a safe level.

So, we just deleverage you a little bit. We just repay what's needed to protect the protocol. It lets us achieve way higher capital efficiency because instead of happening at 80% LTV as it would be on Aave, it happens at 88% LTV. And we just put your position back at 88% LTV so that you never reach the hard liquidation LTV of 95%. And the the reason we're able to do that is because your position is not an individual position in terms of liquidity. It's all aggregated. So, when there is maybe $1 to liquidate on your position, there might be a hundred or a thousand on other positions and the

liquidators can process the liquidation profitably. So, to illustrate the mechanism, you can see the price of ETH unfortunately decreasing in blue, reaching that liquidation threshold line in yellow. And you see you can see that the value of a position that the liquidation price, the actual liquidation price in red, also follows the the price so that you never reach it and your position can recover with the price of ETH. That means basically that you keeps you keep as much exposure to the market as possible while protecting the protocol and the stablecoin's integrity.

So, basically we found and we found a new balance, a new equilibrium of the stablecoin trilemma. In terms of decentralization, everything is on-chain. You can verify everything 100% of the time. There's no human execution. There's human intervention. The peg, as you've seen, is very tight. So, you may wonder, how about the scalability? Can we onboard trillions in 1 second? Of course not. But do we want to onboard trillions in 1 second? No. We just want our stable to be a reliable alternative to centralized ones that can be seized in your pocket anytime as we've seen last week. USDC froze assets randomly and some people just got their USDC frozen. It disappeared just

like that. They can't do it. On FX, it's not possible. No one can do it. So, the idea is to have an alternative that can scale enough with with demand while you can also remember that each each FXUSD which is bought is demand for the collateral. So, that means the more people use FXUSD, the more demand there is for your precious ETH and BTC. So, what's next? So far, over the past year there was no hard liquidation on FXUSD, so it's battle-tested. It works even with very high liquidity events as you've seen.

We managed to reach 450 million TVL organically because we built without any VC backing. We're only community-funded. There's no team allocation on the token. Our purpose is to build something sustainable and that a real alternative that would last for years and decades. And the idea now is to push the value proposition of liquidation protection even further. So, we're about to release FX100, the first perp decks that gives traders the time to be right.

The idea of FX100 is that you will be able to trade up to 100x leverage with complete liquidation protection. No more scam weeks. And we will not sleep edge because it's going to be a synth perp. So, that means there's will be no extractive market makers. So, the idea is as with FX protocol to is to build something user-centric that protects the users, that gives a new equilibrium. So, as I told you, we have found a new equilibrium for on-chain trading, leverage, and stablecoins. The idea is to do something similar with perp dexes and to make sure that users get the best experience without being extracted. And

as we build the same way, most of the value will be redistributed to the users. That's it. Thank you very much for listening. If you want to learn more, feel free to scan this QR code and follow the socials. And make sure you don't miss the upcoming testnet on FX100 if you want to be the first to be protected from liquidations. Is there any Thank you very much. Do you have any questions for the speaker? Thank you for your presentation.

How can you maybe resume the difference with for example Liquidity protocol regarding the stablecoin? Yeah, thank you. Thank you for asking. So, there's two version of Liquidity. In a way, they're similar to is with V1 of Liquidity that lets you borrow against ETH with a one-time fee, except the redemption mechanism is not the most efficient and that led to a very very poor capital efficiency in high rates environments. So, people would end up selling LUSD massively, creating depegs, and then people would redeem LUSD, redeeming the collaterals of people borrowing. So, people ended up with a 600 800% LTV, which is very capital inefficient.

And on FX, it's it's very different because we never had any redemption basically because of all these steps of peg keeping that happened before. So, our stability pool is here to make sure that the stablecoin stays at peg rather than liquidating and liquidations, if they happen, are handled by external keepers. So yeah. Besides that, so the stablecoin you can rely on its peg more than on Liquidity. You can also borrow against BTC, which is not possible on on Liquidity.

And when you stake your stablecoin into the stability pool, you don't have any market exposure risk cuz on Liquidity, you could end up the stability pool on Liquidity is made to process liquidations. So, you may end up buying ETH in turn in case of liquidations. While on FX protocol, you're always exposed to a dollar, which is way more convenient because it's not the same profile. When you want to farm on with stables, you just want to stake those two stables. You don't necessarily want to get ETH exposure. I guess that's pretty much it.

My pleasure. Thank you very much.