Designing Resilient Stablecoins: Best Security and Stability Practices

Transcript

Okay, good afternoon everyone. I think I'm the last one before lunch, so I'll try to be concise and quick and hopefully give you some useful information. Uh, so the name of my talk is designing resilient stable coins with M0 and best security and stability practices. As most of you know, we are right now in very hot stable coin cycle. Somebody some people even call it stable coin super cycle because no matter if market is up or down the total supply of stable coins is raising and um as a lot of you saw during the market crash in October flash crash that certain stable coins

have uh add a systematic risk to DeFi systems. That's why I would like to walk you through a little bit of stable coin history just very briefly and then describe how we solve this issues with M0. So a few words about M0. M0 is stable coin platform for builders. We issue white labeled custom stable coins on on top of M0 protocol which is the mutable protocol that exists on EVM and now SVM. So a few few notes where we are now. So we are now at 300 billion of stable coins and uh obviously a lot of active addresses holders. Ethereum still

dominates the space. Salana wants to grow Ethereum and L2s and I'm very happy to tell you that I see our M unit of account token on this chart as well. And we are moving up. So where are we where are we going? The expectation that all of this will grow 10 times meaning that first of all big stable coins will grow 10 times like approximately and also the number of stable coins will grow and the question is how to make all the ecosystem of stable coins resilient and secure through bearer and bull right when the bull is happen it's very easy but when the bar is happening liquidity is being

sucked out of defy venues and that's when all the big crashes happen a few I would say quite well-known trilmas first of all as most of us are engineers here there's a cap theorem right we have consistency availability and partition tolerance like vitalic favorite one is blockchain trillemma it's scalability security decentralization we can always debate EVM versus SVM like bring up this trillemma stable coin also have its own trilmma and it worked very nice I would say until Ephina because Ephina is a tricky beast and not

everyone know how to place it on this on this triangular but basically stable coin trma we have decentralization pe stability and capital efficiency. So speaking about what kind of stable coins we see in the space through through history and history of stable coins is roughly 10 years. The oldest one was launched 2014 bit USD and it didn't make it but we we saw a lot of new and new stables being launched. So first of all between decentralization and pack stability we see a lot of onchain first stables. This is where maker dow lives. This is L USD with liquidity. This is also stable coins

which are issued by curve or other go which they try to enhance. So these stable coins are based on volatile volatile collateral meaning that they need to be overcolateralized. More interesting set of stable coins which also unfortunately crash the most is algorithmic. They are very interesting as a mind puzzle but unfortunately not very resilient. So what what they do they try to achieve decentralization capital efficiency but unfortunately pack stability doesn't hold and the most boring one is pack stability and capital efficiency that's where all the biggest one leave it's USDC USDT packs of

stables and more and more of them being issued usually collateral is relatively boring and stable it's T bills fiat um repurchase uh reverse rep purchase agreements and others. Here I just added a few history lessons and um like one example of history lesson is was a crash of iron from Titan. Uh if anyone remembers that during D5 summer and uh I added this phrase, we never thought it would happen but it just did.

We experienced the world's first large scale cryptobank run. So what happened here is stable coin was based on governance token which was issued by the same same protocol. This is one of antiatterns of stable coins designs like everyone knows probably about Terra Luna USD crash. It was very stable stable coin for 99% of the time but then then it ceased to exist and crashed very significantly. Ephina is interesting. It survived already already two major events. one it was by bit hack and ifina proved that the reserves are kept in custody and as secure and also recent events in October

which happened uh ifina depacked but aa I would say a saved a saved this uh the market and limit number of liquidation by hard coding oracle price to one the opposite thing happened with stream finance where it was also hard the price oracle was also hardcoded to one but unfortunately it led to not very nice situation where nobody nobody can liquidate the positions so like lessons from all of this first of all what to do and what not to do so to do it's relying what not to do first of all it's relying on arbitrage

as a source of stability is not really a good choice so if white paper describes stable coin as if price goes above one and somebody sells it or if price go below one and you need to buy it, it's not really a good choice for of stable coin design. Diversifying collateral is not necessarily good. So to build really stable, really valid stable coin, you should put ideally 100% of your collateral in the most secure asset. Next antipattern is when stable coin relies on a token bond governance governance token which issued by the

same protocol. Obviously it's not very resilient inheriting risk of other stables looping leveraging that. That's what we saw with stream finance. It usually leads to crashes and disasters. manual liquidity operation, not being able to react fast enough when liquidity is getting out of the market because the first thing people want to do, they switch to more to the bigger stables like USDC and USDT and obviously fragile oracle design. It's all relying on very relying on DAX venues and price from these venues with low liquidity or hard coding to one and it depends on situation which one is

better. So what to do? It's high quality. Ideally, it's very boring. High quality collateral which provides risk-free rate meaning that it can be tokenized treasury bills can be offchain collateral which is periodically attested that it's still where it should be. Ideally algorith algorithms in stable coins are used for yield acral not pack not pack stability. So no algorithmic like coins made no algorithmic coins made it really I guess except ample forth which is not even stable coin automatic liquidity management and clear expectation. If your stable coin is

based on treasury bills treasury markets are closed over the weekend. So, as a stable coin builder, you should be able to manage your venues over the weekend and understand what to do if there's some political news coming on Friday like it happened last time. And obviously, transparent oracles uh instead of hard coding liquidity values to one for stable coins just because it's stable coin uh it's good to provide nav net asset value oracles for the community.

Okay. Now I would like to speak a little bit about M0. So what we were able to build. So what is M0? M0 is an immutable protocol which is living on Ethereum and Salana. on Salana it's mutable because everything is mutable on Salana and we launched roughly one and a half year ago thanks to probably some of the auditors who also in this room and uh help us to secure them because we launched with immutable protocol and immutable governance and it was a very tricky task. Um so what is M0 and how we manage collateral? First of all, M0 is not only a manage same protocol, but it's also a

network of actors. We have mentors who mint our unit of account M. We have governance who manages the protocol and can set only limited set of parameters. So our governance cannot execute um I would say random proposals. It's just limited basically to configuring the protocol in the right way. We have earners in the system which receive yield that mentors are paying for minting M and we have like I would say optional actors for now also it's SPV operators which can manage offchain collateral now more and more collateral luckily moving onchain we're working with for example superstate tokenized treasuries so SPV operators role

becoming obsolete the next one is the protocol itself. So, Mora protocol contains two parts. It's an M token immutable uh special I would say rebasing token because it's rebasing for only actors which were added by governance. We have earners in the system and they receive yield. So, their balances are increasing making making it rebasing and everyone else for them it's a simple token.

Balances don't change. So and we have a mentor gateway which is the main venue for our mentors that can create prop updates coll. So they have to periodically update collateral or we will panalize them propose um and mint m and our governance which set up certain set of parameters which is like mint delay rates mray rate or earn rate um rate models. The only two actually the only two upgradable contracts in the system are rate models and we have a very interesting earner rate model which allow us to give exact amount of yield to our earners which will be stable coins on the other side.

[snorts] Okay. So a few interesting points about our system and this is I was the best I would say this is all the best part which allow us to scale to almost 1 billion of stables and launch also MetaMask USD and other big stable coins is automatic uh automatic yield acrruel and um being able to manage how much yield we charge for mters interest and how much yield we give to our earners. ers which become a nonstable coins and also we allow we allow to give earners more yield if not all total supply of M is earning. So basically if you have some

passive users of M we allow earners to receive more yield then we charge M interest in our MR rate and all of this is safe automatic and formally verified year ago. Next one. Okay, that's just I wanted to mention a few interesting things we did. So one is earner rate model which balances the earner rate and we continuously compound the interest from interest and continuously compound rate rate for earners and all of this is balanced by the rate model. It's like very very convenient in borrow and lending markets but I think on level of stable coins it was not done until us. And also one more

interesting thing is pad uh oil oiler series calculation which we did just for this protocol. Okay. Okay. So what what it allows us to build now when we have this core protocol we can build a set of extensions on top of it and this ext we call them extensions they stable coins which basically the earners in the in the system which I described a little bit earlier and add the custom features for them. So that's how we launch our biggest stable coins. So we launch USDA, usual M, Metam Mask, USD, Noble dollar, we launch on Hyper AVM, we launch USDHL, cast dollar, defense, and many more

coming. All of them are built on top of immutable credibly neutral neutral protocol, but they have an additional features built in and uh the the contract of uh stable coin itself is upgradable. So like how the contract is built we have this obviously it's C20 on EVM on salon it's token token 2022 and this this contract this contract includes M we allow we allow interoperability between any of our tokens. So what happens behind the scenes is we allow to wrap into into our tables using M and unwrap back to M and this way we can

achieve interoperability between any of those extensions. So to give you example we have this M we call it wrapped M. So if you want to exchange between wrapped M and for example MetaMask USD or usual USDI what we do we unwrap one token into M and then wrap it into another one. I mean I know it sounds funny but what it allow us to do is have no exchange rate. So it's always one to one and also we don't need to set up any liquidity venues anymore because all of these tokens are interoperable and as soon as we have one big token which has already liquidity venues any new token can launch and reuse liquidity from these venues.

Yeah and I think that's it. So a few points what we made what we made with this system. First of all, we use very simple, very reliable collateral. It's T bills. We have an risk-free rate which then we algorithmically streaming streaming to our earners and built very different models of token extensions, AM extensions which is tables. On top of that, uh in addition, we're using nav oracles in we even using nav proxy oracles which are a little bit more advanced. It's like when we check the nav value of collateral in our system and if it's above one we always we we always return one. So we basically

capping it up. If it's below one which never happens that's when we return real value. So it allows our partners to scale and not necessarily hardcode just uh price of one in D5. So I think that's all for me. Thank you for attention and happy to answer any questions. [applause] >> Thank you Antonyina. Any questions from the audience? We have someone over here.

>> Yeah. Hi. Uh so uh back to the trilma in the case of M. Uh is it over collateralized? Uh yes, it's a little bit overcolateralized. Not much. We allowed to mint up to 97%. No was 97 then 98 now we went 99. So it's still a little bit overcolateralized but we're using very stable collateral like T bills which is also yielding the the rates fat funds rate. So yeah we're over collateralized but we also can increase capital efficiency but even setting it up to one right. to 100%.

>> We have a question in the back. >> Yeah. So, first I just want to make sure I heard correctly the M extension tokens. Did you say those were upgradable? >> Yes. Yes, those are upgradeable. >> Yeah. Then my question is how is the upgradability of those controlled? And are you concerned about say some upgrade that allows say unbacked menting that could wreck all the extensions and such? That's a good point especially since they're interoperable right so any upgrade technically can um can break the system but that's uh the beauty of things which I tried to explain with this raping unraining I probably need slide for that it's like every extension can screw up the only up to the portion of M which they have in it and we also

control this process by special contracts we have we call them swap M swap facilities so what happens on M swap facility we allowed to put like basically swap between this token using this unwrapping process. So if our extension builder, our partner upgrade contract to something malicious, first of all, yeah, they they still have M inside and they can do anything they want with it. But at this point, what we will do and now not us, but our governance, first of all, they take them out of earner list. So they don't receive yield anymore. And we also this way we als they also won't be able to access uh swap facility. So basically they will be limit they will be isolated

from all other extensions. >> Any more questions? I have a question actually. I'm uh really curious because I think stable coins are very hot right now. I'm sure you have a lot of inbound and like partners that want to potentially do a stable coin. Any interesting observations with regards to like what are their like requirements or their priorities? And also do you see a trend there? Do you see like a movement towards a specific direction? >> Yes, an interesting trend. So, we built this um I mentioned extensions. We built extension frameworks on EVM for EVM and Salana. And before Genius Act, unfortunately, we all even know we

engineers, we all affected by policies and regulations. So before genius act we see a lot of interest in different models of yield splitting inside M extensions because like the most simple model for us is to acrew all yield on M and give it back to to the builder. But also there are models where we give it back to holders of the token or we like the partner can set up certain earners now inside this extension and give yield to them. after genius act, everyone just wants to do yield to one and then use walts to add additional I don't know rewards, points, uh I some fun stuff.

[snorts] So this is one thing also what we see obviously extension builders care a lot about compliance uh freeze pause which we don't have in which yeah like which was not built in the mutable core protocol but now we we're building it on top and we're partnering with I would say quite interesting projects like predicate to handle this for us and uh to monitor like compliance checks and be able to call it also like crossbridge and things right So what we allowed to do now in addition to the swap facility we allowed to bridge any extension into any extension.

So we have also bridging infrastructure which uh facilitates such such operations. >> Clear? Okay. Thank you. >> I think it's lunch time. So let's uh give another round of applause to Antonyina. >> [applause]