Designing Autonomous Markets for Stablecoin Monetary Policy | Devcon Bogotá

Summary

The video discusses designing a redemption curve for a cryptocurrency stablecoin to maintain its peg to the US dollar. It analyzes previous stablecoin designs and issues caused by discontinuous crashes. The proposed solution is an autonomous reserve-backed design with a smooth redemption curve that responds dynamically to market conditions. This aims to prevent speculation, enable long-term survivability, and provide transparency. Theimplementation uses a piecewise linear approach for tractability. Overall, carefully designing redemption curves can lead to more robust stablecoin systems.

Takeaways

• 😀 The talk discusses designing a stablecoin system and its redemption mechanism during times of crisis
• 💡 A key component is the Redemption Curve that determines payouts during redemptions
• 📈 The goal is to keep the redemption price stable for as long as sustainably possible
• 🔧 The system should be easy to use, with no incentives to game the mechanism
• 🎯 Key design criteria include continuity, long term survivability, and maintaining the peg
• 📉 Case studies of stablecoin designs crashing show the need for robust mechanisms
• 💰 Diversifying reserves and coordinating vaults can improve stability
• ⚖️ Governance can configure parameters, with the system reacting autonomously
• 🔀 The implementation makes the redemption curve dynamic based on market conditions
• 👍 Properties like path efficiency help the system recapitalize itself over time

Q & A

What is the goal of designing a redemption curve for a stablecoin?

The goal is to get good properties and robustness for the stablecoin system. It allows you to configure parameters like minimum collateralization ratio to prevent the system from crashing.

What are some examples of assets that could be used in the reserve of a stablecoin system?

The reserve assets could be things like USD Coin (USDC), equity shares, bonds, or a portfolio of other cryptocurrency assets. The gyroscope stablecoin uses a reserve of liquid assets.

How did the original design of the Fei stablecoin lead to problems with its peg?

Fei originally had direct incentives, which meant the more the overall system was depegged, the worse redemption price you would get. This created a very steep redemption curve that did not support the $1 peg for very long before crashing.

What was the main flaw in the design of the Iron and Titan stablecoins?

Iron and Titan had endogenous collateral, meaning the assets backing the stablecoin were tied into the project itself. This led to negative feedback spirals and abrupt crashes when redemption exhausted the market's willingness to buy the endogenous assets.

What are some desired properties for a stablecoin redemption curve?

Desired properties include: collateralization stays above a minimum level to enable recovery, redemption price stays above a minimum to support the peg, continuity to prevent speculation, ease of use without incentives to game the system, slow reserve exhaustion, and ability to regain the peg.

How does the presented stablecoin system make its redemption curve dynamic?

It observes the current collateralization ratio and redemption pressure at each point in time. Using those inputs, it reconstructs what the initial 'anchor' collateralization would have been if markets had not moved. It then applies the redemption curve model based on that anchor state.

What are some advantages of having an automated redemption curve policy?

Advantages include: no need for governance intervention during crisis events, full transparency for market participants to understand system behavior, and prevention of speculative attacks due to predictable policy.

How does the system provide incentives for recapitalization and survival over long term?

As outflows decrease over time, there is upward pressure on the peg and collateralization from earning yield on reserve assets. This allows the system to improve its state and regain trust after a depegging event.

Why use a piecewise linear curve instead of a smooth curve for the redemption policy?

A piecewise linear curve leads to easy numerical integration and solves for redemption amounts using simple quadratic equations. Smoother curves pose challenges for on-chain computation and implementation.

Why do we see a resurgence of stablecoins with pegs today versus free-floating cryptocurrencies?

Pegs to trusted currencies like the US dollar make it easier for people to adopt a new cryptocurrency economy. An autonomous peg system also allows more general types of monetary policy in the future if desired.