Stablecoins | But actually (re-uploaded)

Summary

This video script delves into the world of stablecoins, debunking misconceptions and explaining their importance in the crypto market. It clarifies what stablecoins are, their significance for everyday transactions and in the DeFi space, and the different types based on stability, method, and collateral. The script critiques traditional media's portrayal, highlights the functions of money stablecoins serve, and discusses the real reasons behind their creation, often tied to investor leverage rather than just fulfilling the three functions of money.

Takeaways

• 😀 A stablecoin is a crypto asset designed to maintain a stable buying power relative to other assets in the market, rather than being pegged to a specific value.
• 🔑 The primary purpose of stablecoins is to fulfill the three functions of money: storage of value, unit of account, and medium of exchange, with low volatility.
• 📈 Traditional media often misrepresents stablecoins as cryptocurrencies pegged to another currency or commodity, but the concept is more nuanced and includes their relative stability.
• 📊 The categorization of stablecoins can be based on relative stability, stability method, and collateral type, rather than just being fiat, crypto, or commodity collateralized.
• 💡 Pegged stablecoins are tied to another asset, like the US dollar, while floating stablecoins maintain their buying power over time without being pegged to any asset.
• 🤔 The stability method of a stablecoin involves mechanisms like minting and burning, which can be governed by a centralized body or algorithmically determined.
• 🏦 Governed stablecoins involve human intervention for minting and burning, whereas algorithmic stablecoins rely on autonomous code with no human meddling.
• 💼 Collateral types for stablecoins are divided into exogenous (from outside the protocol) and endogenous (from inside the protocol), affecting their stability and risk profile.
• 💡 MakerDAO's DAI is an example of a pegged, algorithmic, and exogenously collateralized stablecoin, which uses over-collateralization to maintain its peg.
• 💸 The real reason behind the creation of stablecoins often lies in the opportunity for investors to gain leverage or maximize exposure to certain crypto assets.
• 🌐 The future of stablecoins is closely tied to the development of DeFi (Decentralized Finance), as they are considered a fundamental building block for financial applications on blockchain.

Q & A

What is the primary purpose of a stable coin according to the video?

The primary purpose of a stable coin is to provide a nonvolatile crypto asset whose buying power fluctuates very little relative to the rest of the market, allowing it to maintain a stable value over time.

Why do we need stable coins in the context of web 3.0?

We need stable coins in web 3.0 to fulfill the three functions of money: storage of value, unit of account, and medium of exchange, in a decentralized and low volatility manner.

What is the difference between a pegged stable coin and a floating stable coin?

A pegged stable coin is tied to another asset, like the US dollar, to maintain its stability. A floating stable coin, on the other hand, maintains its buying power over time without being pegged to any other asset, often using algorithms to adjust its value.

How does the MakerDAO system, which uses the DAI stable coin, work?

The MakerDAO system allows users to deposit crypto collateral, such as ETH, into a smart contract. The contract mints DAI based on the value of the collateral. Users are charged a stability fee and can repay DAI to get their collateral back. The system is designed to always have more collateral than minted DAI to maintain stability.

What is the role of the governance in the context of governed stable coins?

In governed stable coins, a centralized body or governing organization is responsible for minting and burning the stable coins. This body ensures the stability of the coin by controlling the supply and often requires collateral backing.

How do algorithmic stable coins maintain their stability without human intervention?

Algorithmic stable coins maintain their stability through a set of autonomous code or algorithms that dictate the minting and burning of tokens. These mechanisms can include supply and demand adjustments, seigniorage shares, or other financial instruments encoded in the protocol.

What is the significance of collateral type in the stability of a stable coin?

The collateral type determines the source and nature of the backing for a stable coin. Exogenous collateral comes from outside the protocol and is typically more stable, while endogenous collateral originates from within the protocol and can be more volatile.

Why might an investor choose to mint a stable coin?

An investor might choose to mint a stable coin to gain leverage or maximize exposure to a particular crypto asset. By minting a stable coin and selling it, they can acquire more of the desired asset, effectively increasing their investment.

What is the role of fees in the minting process of stable coins?

Fees associated with minting stable coins serve multiple purposes, including providing revenue for the protocol's maintenance, offering incentives for the stability of the coin, and funding improvements to the system.

How does the video script differentiate between traditional media's view of stable coins and its own perspective?

The script challenges traditional media's view of stable coins as simply cryptocurrencies pegged to another asset. It emphasizes the importance of understanding stable coins as assets with stable buying power and introduces the concepts of pegged and floating stable coins, as well as the mechanisms and collateral types that contribute to their stability.

What are some of the risks associated with endogenously collateralized stable coins?

Endogenously collateralized stable coins carry the risk of rapid scaling and potential instability. If the underlying collateral's value is tied to the stable coin itself, a loss of confidence or a de-pegging event can lead to a rapid collapse in value, as seen with the Terra/Luna system.

Outlines

00:00

📚 Introduction to Stablecoins

The script begins by addressing the misleading information about stablecoins and aims to clarify misconceptions. It introduces the concept of stablecoins as nonvolatile crypto assets whose buying power remains stable relative to the market. The video promises to cover the basics of stablecoins, their importance, categories, properties, and the real reasons behind their creation. The target audience includes both technical and non-technical individuals, and the script emphasizes the need to understand the nuanced nature of stablecoins beyond the common definition of being pegged to another currency or commodity.

05:01

🪙 Understanding the Concept of Buying Power

This paragraph delves into the concept of buying power, using the example of apples to illustrate the difference between stable and unstable assets. It challenges the traditional definition of stablecoins found through a Google search, arguing that a stablecoin should maintain its purchasing power over time rather than just being pegged to another asset. The script discusses the importance of money in fulfilling the three functions of value storage, unit of account, and medium of exchange, and how stablecoins serve these functions in the context of web 3.0 and decentralized finance.

10:02

🔑 Categories of Stablecoins

The script introduces different categories of stablecoins, moving beyond the traditional media's classification of Fiat, crypto, commodity, and algorithmic stablecoins. It proposes a new categorization based on relative stability, stability method, and collateral type. The paragraph explains the concept of relative stability, contrasting anchored (pegged) stablecoins with floating stablecoins. It also briefly touches on the mechanisms that maintain stability, such as minting and burning coins, and the spectrum from governed to algorithmic stability methods.

15:02

🔄 Stability Mechanisms and Collateral Types

This paragraph expands on the stability methods of stablecoins, distinguishing between governed and algorithmic approaches. It describes how these methods involve minting and burning coins to maintain stability. The script also introduces the concept of collateral, explaining the difference between exogenous (outside the protocol) and endogenous (inside the protocol) collateral. It uses the example of a bank and gold to illustrate the transition from exogenous to endogenous collateral and the implications for stablecoin stability.

20:03

💡 The Role of Endogenous Collateral in Stablecoin Design

The script discusses the advantages and risks associated with endogenously collateralized stablecoins, which can scale quickly but may be more prone to failure if the underlying collateral's value declines. It contrasts these with exogenously collateralized stablecoins, which are typically over-collateralized and considered safer but may not scale as efficiently. The paragraph also references a paper by Robert Sams that influenced the design of many endogenous stablecoins.

25:04

🤔 The Incentive Behind Minting Stablecoins

The final paragraph shifts the focus to the incentives behind minting stablecoins. It questions why individuals would pay fees to mint stablecoins and suggests that the primary motivation is to gain leverage or maximize exposure to other crypto assets. The script implies that while stablecoins are essential for the functions of money, their minting is driven more by investment strategies and the desire to amplify one's position in the crypto market.

Keywords

💡Stable Coin

A stable coin is a type of cryptocurrency designed to minimize price volatility by pegging its value to a stable asset, such as the US dollar or gold. In the video, stable coins are discussed as an essential part of the cryptocurrency ecosystem, particularly for their utility in providing stability in a volatile market. The script mentions that stable coins are 'a crypto asset whose buying power fluctuates very little, relative to the rest of the market'.

💡Buying Power

Buying power refers to the amount of goods or services one can purchase with a certain amount of money. In the context of the video, it is used to describe the stability of a currency's value over time. The script explains that a stable coin maintains 'buying power' by ensuring that its value does not fluctuate significantly, unlike more volatile assets like Bitcoin.

💡Pegged

To be 'pegged' means that the value of one thing is fixed in relation to another. In the video, it is used to describe how some stable coins maintain their value by being pegged to another asset, such as the US dollar. The script mentions that pegged stable coins 'are stable coins that are pegged or anchored to another asset like the US dollar'.

💡Collateral

Collateral is an asset or store of value that is pledged as security for a debt or to ensure the performance of an obligation. In the video, collateral is discussed as the backing for stable coins, providing them with their value. The script explains that stable coins can be 'exogenously collateralized' or 'endogenously collateralized', depending on whether the collateral comes from outside or inside the protocol.

💡Algorithmic

Algorithmic refers to something determined or maintained by an algorithm, often without human intervention. In the video, algorithmic stable coins are those that use autonomous algorithms to manage their supply and maintain their value. The script notes that 'an algorithmic stable coin is a stable coin whose stability is maintained by a permissionless algorithm, with no human intervention'.

💡Governed

Governed stable coins are those that are controlled or managed by a centralized authority or governing body. In the video, governed stable coins are contrasted with algorithmic ones, with the former involving human oversight in minting and burning processes. The script mentions that 'a govern stable coin have some human interaction that mint and and burns the coins'.

💡DeFi (Decentralized Finance)

DeFi refers to decentralized financial systems built on blockchain technology, which operate without traditional financial intermediaries like banks. In the video, DeFi is highlighted as an area where stable coins play a crucial role, particularly in providing a stable currency for various financial activities. The script suggests that for 'web 3 we need a crypto version of this', referring to the need for stable currencies in DeFi.

💡Leverage

Leverage in investing refers to using borrowed money or other financial instruments to increase the potential return of an investment. In the video, leverage is mentioned as a reason why investors might mint stable coins, allowing them to increase their exposure to certain assets. The script discusses that 'most stable coin platforms have this as one of the biggest reasons to Mint their stable coin: to multiply exposure or to maximize your position on some crypto asset'.

💡MakerDAO

MakerDAO is a decentralized organization that governs the DAI stable coin, using a collateralized debt position system. In the video, MakerDAO is highlighted as an influential stable coin project that has contributed significantly to the DeFi space. The script explains that 'the way it works is you deposit eth or some other crypto collateral into the smart contract that has this DAI algorithm code'.

💡Curve Finance

Curve Finance is a decentralized exchange platform that focuses on stable coin trading and is designed to provide low slippage and high efficiency. In the video, Curve Finance is mentioned as an important protocol for stable coins, hinting at its role in facilitating stable coin transactions. The script suggests that 'curve.Finance being one of the most important protocols for stable coins is a really interesting story'.

Highlights

Stable coins are nonvolatile crypto assets designed to maintain a stable buying power relative to the market.

Traditional media's definition of stable coins as cryptocurrencies pegged to another currency or financial instrument is disputed, with the emphasis on stability of buying power instead.

The importance of stable coins lies in fulfilling the three functions of money: storage of value, unit of account, and medium of exchange, especially in the context of web 3.

Stable coins are categorized by relative stability, stability method, and collateral type, challenging the traditional categorization of fiat, crypto, commodity, and algorithmic.

Pegged stable coins are anchored to another asset, whereas floating stable coins maintain their buying power over time without being tied to any asset.

Governed stable coins involve a centralized body controlling minting and burning, while algorithmic stable coins rely on autonomous algorithms for the same purpose.

Collateral types for stable coins are either exogenous, originating outside the protocol, or endogenous, originating within the protocol.

Endogenously collateralized stable coins can scale quickly but may pose risks due to their self-referential nature, as seen in the US and Luna collapse.

Exogenously collateralized stable coins are typically over-collateralized, providing more stability but limiting scalability.

The MakerDAO and Dai stable coin system is highlighted as a significant influence in the DeFi space, utilizing a collateralized debt position model.

The Ry stable coin by Reflexor Labs is presented as an example of a floating stable coin using clever algorithms to maintain stability without pegging to another asset.

Stable coins serve the functions of money, but the primary reason for their minting may be to enable leveraged bets and maximize exposure to other crypto assets.

Curve Finance's role in stable coins and the concept of stable coin exchanges are discussed as important for trading and utility in DeFi.

The video emphasizes the importance of understanding the incentives behind minting stable coins and the potential risks associated with different types of collateral.

The future of stable coins in DeFi is anticipated to be innovative, with new projects like Aave and Curve launching their own stable coins.

Developers interested in building stable coins are encouraged to explore minimal stable coin contract examples provided in the DeFi Minimal repo.

Transcripts

when you research stable coins today you

get a lot of misleading information and

that's what we're here to clarify today

in this video we're going to teach you

everything you need to know about stable

coins but actually what are stable coins

why we care categories and properties

designs of top stable coins and then the

real reason behind what they do what

stable coins really do this video is for

both everybody Technical and

non-technical and we're going to correct

a lot of the misleading information out

there there's going to be a lot of

information here for people less

familiar with def so as always don't be

discouraged if something doesn't make

sense the first time you hear it buckle

up buck up Dum D we're in for a volatile

ride about stability a stable coin is a

nonvolatile crypto asset that's it

fleshed out we could rephrase it to a

stable coin is a crypto asset whose

buying power fluctuates very little

relative to the rest of the market and

this is the first place where we

disagree with traditional media if you

Google what is a stable coin you'll see

something like this response everywhere

stable coins are cryptocurrencies the

value of which is pegged or tied to that

of another currency commodity or

financial instrument and to that I

disagree I think that's an easy initial

way to understand them but not the whole

story a stable coin is a crypto asset

whose buying power stays relatively

stable a good example of buying power

would be an Apple Market if you went to

a market to buy apples with Bitcoin 6

months ago the number of apples you

could buy would be drastically different

than the number of apples you could buy

today that's an example of buying power

changing and not being very stable

however someone buying apples with

dollars would probably be able to buy

the same amount of apples 6 months ago

to now that's an example of buying power

staying relatively the same since we

could buy the same amount of apples

today than 6 months ago a dollar would

be considered a more stable asset

whereas Bitcoin would be much less

stable this is what we mean by buying

power an asset whose price fluctuates

rapidly all the time is a poor example

of stable buying power oh it went to

zero this for example would not be a

stable asset now a stable crypto asset

is just a stable asset that's a

cryptocurrency most cryptocurrencies by

Nature aren't stable but we will give

examples of stable coins so summary here

a stable coin is a crypto asset whose

buying power stays relatively the same

and if that's all you take from this

video Perfect great let's keep going now

why do we care about stable coins

because money is

important but not like I Love Money type

of important in everyday Society we need

some type of low volatility AK a stable

currency to fulfill the three functions

of money and for web 3 we need a crypto

version of this the three functions of

money are storage of value unit of

account and medium of exchange storage

of value is a way for us to keep the

value and wealth we've generated putting

dollars in your bank account or buying

stocks cryptocurrencies is a good

example of storing your value apples

would make for a poor storage value

since they would rot over time and lose

their value unit of account is a way to

measure how valuable something is when

you go shopping you see prices being

listed in terms of dollars this is an

example of the dollar being used as a

unit of account pricing something in

Bitcoin would be a poor unit of account

since the prices would change all the

time medium of exchange is an agreed

upon method to transact with each other

buying groceries with dollars is a good

example of using dollars as a medium of

exchange buying groceries with car tires

would make for a poor medium of Exchange

since car tires are hard to transact

with in order for our everyday lives to

be efficient we need money to do all

these three things and like I said in

web 3 we need a web 3 money we need to

be able to know the value of stuff in

web 3 be able to pay for things without

prices going crazy and we need to be

able to store our wealth in web 3 in a

decentralized world we need a

decentralized money assets like ethereum

work great as a storage of value and

medium of exchange but fall a little bit

on their unit of account due to their

buying power of volatility how over

maybe in the future as ethereum because

more adopted it'll become stable and we

won't even need stable coins but right

now it's a little too volatile and yet

I'll still tell you it's ultrasound

money since I do think it's an amazing

store of value but that's a conversation

for another time bankets don't kill me

I'd love your content also if you're

here be sure to like And subscribe

because we're just cooking the fire up

and we are about to pop off anyways okay

so now we know what a stable coin is why

we care let's talk about the different

categories of stable coins and here is

the second place I strongly disagree

with traditional media

if you search for types of stable coins

you'll get something that pulls them

into categories like this Fiat

collateralized crypto collateralized

commodity collateralized and then

algorithmic now this isn't too bad of a

categorization it does make it easier

for new people to understand but I think

it paints a in acccurate picture so

let's categorize stable coins but

actually the categorizations that I like

are relative stability stability method

and collateral type so what are these

Cate or izations let's start with

relative stability when we talk about

stability something is stable only

relative to something else the most

popular type of stable coins is pegging

or anchored stable coins and these are

stable coins that are pegged or anchored

to another asset like the US dollar

tether D and usdc are all examples of US

dollar pegged stable coins they Follow

The Narrative of one of these coins

equals $11 and that's how they stay

stable it's stable because they track

the price of another asset that we think

is stable and most of these stable coins

have some type of mechanism to make them

almost interchangeable with their pegged

asset for example usdc says that for

every usdc token printed or minted there

is a dollar or a bunch of assets that

equal a dollar in some bank account

somewhere so the way it keeps its value

is that at any time you should be able

to swap your usdc for the dollar or at

least hypothetically so something like d

on the other hand uses a permissionless

over collateralization to maintain its

Peg but we'll get to understanding that

a little later however a stable coin

doesn't have to be pegged to another

asset it can be floating remember to be

considered a stable coin its buying

power just has to stay relatively the

same over time so a floating stable coin

is floating because its buying power

stays the same and it's not tied down to

any other asset with this mechanism you

could hypothetically have a stable coin

that's even more stable than an anchored

or Peg stable coin let's look at an

example let's say I can buy 10 apples

for $10 today but in 5 years I can only

buy five apples with $10 so it would

cost me $20 to buy 10 apples this isn't

an unheard of phenomenon to happen and

it's commonly just referred to as

inflation now let's introduce a stable

coin whose buying power floats up and

down with the market for now let's just

pretend it does so magically and let's

call it applecoin today you can buy 10

apples with 10 Apple coins and in 10

years you can also buy 10 apples with 10

Apple coins which one of these assets

would you say is more stable yes the

Apple coin's buying power stayed the

same over the 5year period so we'd say

it's a more stable asset even though

it's not pegged to something like a

dollar and Yes stable coins like this do

exist and they use a lot of clever

algorithms to do this one such example

is the Ry stable coin by reflexor Labs

how Rye works might be its own video but

we've left some links in the description

for you if you want to learn more about

how it works because this concept can be

a little hard to grasp to further

explain it let's go through another

analogy let's look at the anchor and the

buoy in this image which of these do you

think is more stable the anchor or the

buoy well it depends on what you're

comparing them to compared to sea level

the buoy is more stable since it'll

always be at sea level as the water

level rises and Falls the distance

between the anchor and the sea level is

constantly changing the buoy is an examp

example of a floating stable coin now if

we compare these two to the ocean floor

though the anchor is more stable of the

two since it'll always be right on the

ocean floor this is analogous to a

pegged SL anchored stable coin now if

we're going to be really serious with

this analogy then the question might be

well what happens when a storm comes or

what happens when the water's crazy or

the Tide's crazy or something and to

that I'd say you're right and a stable

coin needs to take extra precautions to

take these into account and maybe get

the average sea level over the course of

time and most most popular floating

stable coins have some mechanism to

account for turbulence like that summary

Peg stable coins are tied to that of

another asset while floating stable

coins use different mechanisms to keep

the same buying power over time number

two stability method the stability

method is this mechanism that keeps the

coin stable if it's a peg stable coin

what is the pegging mechanism if it's a

floating stable coin well what is the

floating mechanism and it typically

revolves around minting and burning the

stable coins in very specific ways and

usually refers to who who or what is

doing the minting and burning these are

on a spectrum of governed to algorithmic

in a governed stable coin there is a

governing body or a centralized body

that is minting and burning the stable

coins you can imagine the maximumly

governed and least algorithmic coin

would be a single person/ entity minting

new stable coins promising that the

coins are not volatile but it could also

be an organization like a government or

even a dow choosing to Mint and burn new

coins these govern coins are typically

considered centralized since there's a

singular body that is controlling the

minting and burning you can make them

more decentralized by introducing a dow

and that kind of makes them more

algorithmic but we'll get more into that

later coins like usdc usdt and TUSD are

examples of governed stable coins on the

other hand an algorithmic stable coin is

a stable coin whose stability is

maintained by a permissionless algorithm

with no human intervention and this is

the third place where I disagree with

traditional media a coin like I would

consider much more algorithmic than

govern because uses a permissionless

algorithm to Mint and burn tokens

whereas traditional media might say an

algorithmic stable coin is always under

collateralized or follow seniorage

shares or something like that but an

algorithmic stable coin is just when a

set of autonomous code or algorithm

dictates the minting and burning there

are zero meddling humans would have been

mine if it hadn't been to those meddling

kids examples of algorithmic stable

coins are going to be die frack

Ry and yes the $40 billion disaster us

yes we're going to talk a little bit

more about classic us and Luna now a

token can have algorithmic and govern

properties in the same way that it can

be somewhere in the middle of being

floating and pegged D for example does

have an autonomous set of code that

dictates the minting and burning but it

does also have a dow where they can vote

on different interest rates and what can

be collateral types and different things

like that so technically it is a hybrid

system it has some governance mechanisms

and also some algorithmic ones usdc

would fall purely in the governed

category because it's controlled by a

centralized body us and Luna would fall

almost purely in algorithmic the dirt

roads Blog has some amazing takes on

these pieces and a wonderful

visualization of we in a spectrum of

coins that are more algorithmic or

govern they use Dum as the opposite of

algorithmic instead of govern which

probably isn't wrong most classically

categorized Fiat collateralized stable

coin almost all fall into the Govern or

dumb section since they are dealing with

fiat currency and you need a centralized

entity to onboard that Fiat to the

blockchain you'll also notice on this

chart they have anchored versus

reflexive on the x-axis that's referring

to how the collateral type affects the

stable coin and collateral type is what

we're going to cover next so the summary

here though is algorithmic stable coins

use some sort of autonomous

permissionless code to Mint and burn

tokens whereas a govern stable coin have

some human interaction that mint and and

burns the coins and keeps them stable

now before we go into our final category

let's look at this chart again we could

replace the word anchored with exogenous

and reflexive with endogenous and we'd

have a chart that shows collateral type

versus stability mechanism which brings

us to number three collateral type now

when we say collateral we mean the stuff

backing our stable coins and giving it

value for example usdc has the dollar as

its collateral and it's the dollar that

gives the usdc token its value because

hypothetically can swap one usdc for $1

Dy is collateralized by many assets for

example you could deposit eth and get

minted die in return and US was in a

roundabout way collateralized by Luna

exogenous collateral is collateral that

originates from outside the protocol and

endogenous collateral originates from

inside the protocol so one of the easier

ways to Define what type of collateral

protocol is using is to ask this

question if the stable coin fails

does the underlying collateral also fail

if yes it's endogenous if no it's

exogenous if usdc fails the protocol

does the underlying collateral the

dollar fail no so the protocol has

exogenous collateral if the usdc stable

coin fails the dollar is going to keep

being the dollar if die the stable coin

fails does the underlying collateral eth

also fail no so the die system is

exogenous the value of eth isn't

dependent dependent on the value of D if

us fails does the underlying collateral

Luna Tera fail yes absolutely and this

is exactly what happened that caused the

system to lose $40 billion in what

seemed like a day exogenous collateral

originates from the outside the protocol

endogenous collateral originates from

inside the protocol two other good tests

that you can ask are was the collateral

created with the sole purpose of being

collateral or does the protocol own the

issuance of the underlying coll Al if

the answer is yes to either one of those

then it's endogenous collateral now the

traditional media usually says that

algorithmic stable coins are to blame

but I think what they're really

referring to is endogenously

collateralized table coins it makes

sense that they can be scary and

potentially dangerous because their

value kind of comes from nothing

exogenously collateralized stable coins

are typically over collateralized

meaning there's more value of collateral

than there is of the stable coins here

we have another image from dirt roads

comparing different stable coins the

exogenous versus endogenous collateral

of the protocols and how much they have

maker d/ diey has almost all exogenous

collateral frax which is another stable

coin we haven't really spoken about too

much has a mix of exogenous and

endogenous collateral and the old teral

Luna and US system had mainly endogenous

collateral which is how the system was

able to crumble so quickly so yeah

endogenously collateralized stable coins

don't have a great track record so why

would you want to make one well the

answer is scale and often times people

also say Capital efficiency with

exogenously collateralized stable coins

the only way you can mint more stable

coins is by onboarding more collateral

you can only have a stable coin market

cap that is high or as high as that is

the value of all your collateral so if

you want to have $68 billion in stable

coins that that means you need to have

$68 billion worth of collateral and

that's a lot of money that you would

need to on board to your system if you

have an endogenous ly collateralized

stable coin you can have 0 worth of

collateral meaning it's much easier to

become massive faster now I agree with

the dirt roads publication when they say

that exogenously collateralized stable

coins can't scale and I've talked more

about that in the blog associated with

this video so if you're interested be

sure to check that out after the rest of

this video but watch the rest of this

video cuz we're just getting started in

the blog we also talk more about

seniorage shares and shelling coin logic

which if you're interested in that stuff

definitely check it out most of these

endogenous coins can be traced back to a

paper written by a man named Robert Sams

where he talks about how to build an

endogenously collateralized stable coin

using a senior shares model which again

I'm not going to go into but I wanted to

mention it because it's probably one of

the most influential papers when it

comes to these endogenously

collateralized stable coins endogenously

collateralized stable coins that's a lot

of words now there's more information on

the endogenous collateral debate in the

blog but let's do a thought experiment

that I do think is compelling for

endogenous collateral Li stable coins

indogen collateralized stable coins

imagine you have a currency and it's

collateralized 100% by gold and you run

a bank and it's open 24/7 to allow

people to exchange your generic coin for

gold in your vaults people love the

convenience of our stable coin instead

of having to Lug around their gold so

they treat our stable coin as if it was

gold because they know that at any time

they can exchange it at the bank this is

an example of our generic coin being

exogenously collateralized by gold

pegged to its price and governed by us

by Me by our entity since we own the

issuance and burning of the coin you

come to our bank we'll issue this coin

or we'll burn it once you redeem your

gold and since you can always exchange

our coin for gold our coin keeps its

value now let's say the bank is only

open 5 days a week does our coin lose

its value now that you can't always

exchange it for gold well probably not

the market probably won't even care now

let's say you need to close the bank for

a week for renovations does our coin

lose its value now well let's say we

close the bank for a month or a year or

a decade forever if we get to the point

where you could never actually exchange

our coin for gold or the underlying

collateral again maybe do people just

use the coin as its currency backed by

nothing in a way now it's moved from

being exogenous to now being endogenous

since it's down backed by well itself

this is why dirt roads has reflexive on

their chart one of our coins is no

longer equal to some amount of gold it

now equals one of

itself okay I know there's a lot here

and there's even more in the blog so if

some of this confused you don't be

discouraged you can always come back

there's a ton of supporting documents

and blogs and links that I personally

watch to learn a lot of this as well so

be sure to use that if you get confused

but now let's look at some of the top

stable coins what their properties are

and then we're going to get to some

really interesting stuff we're not going

to go too deep into the architectures of

these stable coins we are going to go

over die a little bit more though

because the die/ maker di system is a

pretty standard model for what a stable

coin could look like and it was one of

the most influential stable coins ever

created so there's that and it's

important that we go through these so we

can understand what's currently out

there and why they're currently out

there and then we can

reveal why they're really out there why

they're so many stable coins what are

the incentives for people to Mint them

and it may just blow your mind so let's

start with Dy as we've mentioned before

D is a pegged algorithmic and

exogenously collateralized stable coin

it's one of the most influential D5

projects ever created and was a huge

factor in supercharging the defi space

roughly the way it works is you deposit

eth or some other crypto collateral into

the smart contract that has this die

algorithm code and based off the current

collateral to US dollar or eth to US

dollar price

it'll mint you some amount of dye you

can only mint less dye than the total

value of collateral or eat that you have

this way the system always has more

collateral than they'd have minted dye

additionally every year or so you'll get

charged something called a stability fee

usually around like 2% and now you're

free to do whatever you want with your D

if you want to get your eth back you

have to give your die back to the smart

contract which will then burn your die

it'll use the current price of e to

figure out how much money it should give

back to you it's because of this

stability fee and collateralized eth

that people often refer to this system

as a collateralized debt position since

we technically owe D back to the

protocol at some point so yes all the

die that's in existence somebody minted

from the maker protocol and needs to pay

it back at some point if you can't pay

your stability fees or the price of e

tanks and now the value of our

collateral is less than the value of the

die that we minted people can liquidate

us which means they can take our

collateral protocol always needs to have

more collateral than meant to die so

this is sort of your punishment for not

keeping the collateral up and a way to

save the system from becoming under

collateralized and then there's also a

maker token that's used to vote for

stuff now the reason I give this

overview is I want your brain to be

asking the question hey uh I get charged

to Mint a stable coin all the die in the

world somebody's being charged to have

it out there someone could take my

collateral if I don't monitor the

balance and most importantly why would I

spend money to Mint this stable coin why

would I be the one to do that great

question that is the fundamental

question and we'll get to that usdc usdc

is a classic pegged governed exogenously

collateralized stable coin it's backed

by real world dollars in a bank account

not much else to say here USD and Luna

the classic old us and Luna we know it

collapsed but we can learn from what

happened to hopefully prevent it in the

future us was a stable coin pegged to

the dollar algorithmic and endogenous

and it imploded on itself using what we

know about stable coins can you guess

why well since the system was endogenous

once Us lost its Peg Luna became less

attractive to hold since people weren't

holding Luna the price fell and it made

it harder to keep the peg of us which

made Luna's price fall which makes us

harder to hold its Peg which makes you

see the pattern people still want to try

using these endogenously collateralized

stable coins because they do scale so

quickly so protocols like fra have come

a long way to do some type of hybrid

between endogenous and exogenously

collateralized stable coin Rye Ry is one

of the few floating stable coins where

it's not pegged to any other asset it's

focused on minimal governance being

floating and using only ethereum as a

type of collateral with a nearly purely

algorithmic stability mechanism in a way

one could argue that because their

collateral is only eth the price of Rye

will always be somewhat pegged to the

the price of eth but that might be a

longer argument due to these it's

floating algorithmic and exogenously

collateralized now they use some really

cool supply and demand mechanisms to

keep the price stable and nonvolatile

but it's not really important how it

works for the purpose of this video so

once again I'm going to leave some links

in the description if you want to learn

more about Rye the video on screen right

now I think is particularly good at

explaining exactly how it works and

explaining why it's such a good stable

coin for normal average people to have

so now that we've gone over some stable

coins we've gone over the categories why

we care what is a stable coin let's talk

about what they really do we can start

by asking the question okay which one of

these is the best stable coin and to

that I need to ask the best stable coin

for who centralized govern coins

obviously have the issue of centrality

which sort of defeats the purpose of

being in web3 so maybe we want some

flavors of algorithmic stable coins

maybe that's probably what we want for

web 3 but these algorithmic coins might

feel untested to non- crypto people and

the fees associated with them might be a

little bit scary for me personally like

I said I really love the idea of Ry the

idea is to have stable buying power as

opposed to being pegged to some other

asset and its algorithmic nature as

opposed to being centralized so it's a

decentralized stable coin that's what we

want but every coin has their trade-offs

and I'd argue there is definitely no

best coin right now the stable coin

that's best for the average person might

matter much less it's the stable coin

that's best for Rich whales might be

what's more important here yes the

stable coins the whales like might be

what's more important now for most

algorithmic stable coins you'll see this

some sort of fee associated with minting

the coins protocols do make money off of

the stablecoin systems which I think is

good sometimes they need money for

maintenance incentives for the stability

of the coin or money for improvements so

I do think these fees are good and we

need stable coins for the three

functions of money storage of value of

account and medium of exchange but are

you going to be the one to pay these

fees to Mint them and keep them in

circulation someone has to pay to Mint

these coins and often keep paying the

market cap for some of these stable

coins is in the billions if there is a

1% fee on these and the market cap is 1

billion we're talking about $10 million

are average people going to collectively

pay $10 million a year to keep these in

circulation no so average people aren't

printing these for the three functions

of money well then who is minting these

so let's play a little thought

experiment let's say I have eth as an

investment and I've bought up all the

eth I've sold my house I've sold

everything I own and I've used

everything I have to buy ethereum but I

want more what can I do I can put my eth

into one of these stablecoin protocols

get the minted stable coin and then sell

the stable coin for more eth you might

have heard Concepts like Leverage

investing or margin trading and this is

essentially the web 3 equivalent it's

kind of funny why are stable coins good

well because we need those three

functions of money but why are stable

coins minted well because investors want

to make leveraged bets in fact most

stable coin platforms have this as one

of the biggest reasons to Mint their

stable coin to multiply exposure or to

maximize your position on some crypto

asset now for sophisticated investors

this isn't new information at all this

is like investing 101 however it does

feel weird that we need stable coins for

the three functions money but that's not

why they're minted so even though I said

I really like Ry as a stable coin for

the people a reason D might be higher

market cap is that investors like The

Leverage opportunity much more than they

like the leverage opportunity that Ry

offers it could be something else but

that might be a big reason how much

stable coins are minted are based off of

how much investors think they can use

that stable coin to get more exposure to

assets that they really want so I know

we've gone over a lot here and the

rabbit hole really doesn't end there

curve. Finance being one of the most

important protocols for stable coins is

a really interesting story as well my

friend Garrett who teaches about

technology and finance has a fantastic

example as to why a stable coin exchange

might be so important you might wonder

how a stable coin exchange ever got off

the ground is there really any demand

out there to trade $1 for $1 then I

think back to my university days one

weekend my laundry pile grew so

disgusting I was desperate to use the

washing machine immediately but the

laundry machine took quarters and I only

had dollar bills quarters were in such

short supply around the dorm room that I

was willing to pay more than $1 for four

quarters in this urgent moment I had

specific utility in mind and that

changed my personal equation for this

and a and curve both looking to launch

their own stable coins soon is going to

be really interesting as well so we'll

just have to see how these unfold I do

think though that we are going to get

better better and better at creating

these stable coins because we do need

them they are important and for you

developers watching who want to build

one of these we have some minimal stable

coin contract examples in our def

minimal repo Link in the description so

if you're looking to tackle this problem

definitely be sure to get started there

I'm really excited for the future of

Defi and for the future of stable coins

as I think they are a wildly important

primitive for Defi and I know that this

was a long video but I hope you all

learned something and I hope this gives

you a better idea a of what stable coins

really are and how they're created if

you learned something leave a comment in

the comment section if you didn't learn

something leave a comment in the comment

section or if I got something wrong

leave a comment there thank you all for

watching and I'll see you next time