Bankless - SotN#28: Uncollateralized Stablecoins w/ Dan Elitzer (ESD, BasisCash, backed by Faith & Yield!)

Episode Date: January 6, 2021

🚀 SUBSCRIBE TO NEWSLETTER: http://bankless.substack.com/ ✊ STARTING GUIDE BANKLESS: https://bit.ly/37Q17uI❤️ JOIN PRIVATE DISCORD: https://bit.ly/2UVI10O🎙️ SUBSCRIBE TO PODCAST: http://podcast.banklesshq.com/ 👕 BUY BANKLESS TEE: https://merch.banklesshq.com/ -----GO BANKLESS WITH THESE SPONSOR TOOLS:  ⭐️ AAVE - BORROW OR LEND YOUR ASSETShttps://bankless.cc/aave 🚀 GEMINI - MOST TRUSTED EXCHANGE AND ONRAMPhttps://bankless.cc/go-gemini 💳 MONOLITH - GET THE HOLY GRAIL OF BANKLESS VISA CARDS https://bankless.cc/monolith 📈 KWENTA | DEVIRATIVES TRADING WITH INFINITE LIQUIDITYhttps://bankless.cc/kwenta------ State of the Nation #28 Algorithmic Stablecoins, with Dan Elitzer Dan Elitzer recently co-founded Nascent (nascent.xyz), a venture capital company that is deep into the weeds in some of the most experimental projects in the Ethereum ecosystem.  In the 2nd half of 2020, some of the coolest experimental projects have been Algorithmic, Uncollateralized Stablecoins.  These are stablecoins without dollars in a bank, or without crypto in a vault. They are completely backed by financial incentives.... and faith in those incentives.  In this episode of State of the Nation, we begin by defining the 'Stablecoin Trilemma' (https://imgur.com/a/Uj0HBL3), and discuss some of the history of stablecoins.  Then we turn to the current design philosophy behind algorithmic stablecoins, how they work, what makes them stable, and who gets the upside? We largely discuss Empty Set Dollar (ESD, https://www.emptyset.finance/), but also discuss Basis Cash, and Ampleforth.  Tune in, to hear about this exciting emerging corner of the DeFi ecosystem! ------ Don't stop at the video! Subscribe to the Bankless newsletter programhttp://bankless.substack.com/ Visit the official Bankless website for resourceshttp://banklesshq.com/ Follow Bankless on Twitterhttps://twitter.com/BanklessHQ Follow Ryan on Twitterhttps://twitter.com/ryansadams Follow David on Twitterhttps://twitter.com/TrustlessState ----- Not financial or tax advice. This channel is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. This video is not tax advice. Talk to your accountant. Do your own research. Disclosure. From time-to-time we may add links in this channel to products we use. We may receive commission if you make a purchase through one of these links. We'll always disclose when this is the case

Hey guys, David here. Before we get into the podcast with Dan, I just want to apologize. The audio on this episode isn't so great. We had some unfortunate internet issues today while we, I've done my best to clean up the audio and make it sound okay. And there was nothing lost in the audio. Everything that was said is audible. It's just not the best audio quality. So sorry for that, but it was still an absfire episode with Dan. Dan is an absin. He's got me really excited about the sector of algorithmic stable. There's a top. ton of good information podcast. I hope. Welcome everyone to State of the Nation.

This is a weekly podcast and video cast that David and myself do where we talk about what's happening. We relate it to the big picture stuff and we drop some insights in action items. Today's topic is all about uncollateralized algorithmic stable coins. What the heck these things are. David and I both wanted to know. So we brought on our friend Dan Ellitzer to tell us all about it. We will get to. to that shortly. David, it's good to be back from the holidays, man. We're coming back and crypto is roaring, my friend. How are you doing? I'm doing really good, Ryan. 2021 has already shaped up to be a banger year for crypto, and we are just four days into it. So much has happened

in the last few weeks, and I'm pretty sure that trend is only going to continue into 2021. We are seeing so much innovation happening, especially in the realm of algorithmic, uncollateralized stable coins. That is a brand new field that we are exploring today here on the state of the nation with Dan. I have a ton of question to ask about how these systems are built, how they're designed, how they are maintained, and how they maintain PEG, how they maintain security. So it really should be a really interesting conversation. And I'm excited to see what happened in the world of uncollateralized table coin 2021. Yeah, I have probably just as many questions as most of the folks listening and watching today. So it'll be good to talk about them. As usual, guys, if you're watching this on

YouTube live. You can ask questions as we record this of Dan or ourselves. We'll try to get to those questions as we can. We've also got some new stuff going on in the nation, David, as usual. So we just released another episode with Vitalik where we talk about three of his articles, basically, are actually two articles. And then we talk about the launch of ETH2.0. Fantastic episode. That came out Monday. Make sure you catch this. I take it a habit of listening to every single Vitalic episode, I can, oftentimes listening to it multiple times. They're just so deep and interesting. David, any takeaways from that one? Every time we talk to Vitalik, I just learned so, so much. And I often listen to the podcast back, even though I was there when we recorded it, I listened again,

because Vitalik is just so incredibly precise beat that he often packs so much punch into a single sentence that I don't really always grasp it time around. And so listening to it a second time or sometimes even a third time has always been really, really, really helpful for being precise in my speech is something I definitely aspire to and it's a skill that Vitalik has mastered extremely well, both in speaking and in writing. I'm quite impressed by it overall. And the episode that we recorded with him, it goes through his Why Proof of Stake article, which came out in November, really, really timely, especially for people that are staking their ether on the beacon chain or intend to stake into the future, or just have questions as to how Ethereum can

came to be where it is today and signed principles and design ethos behind a theory behind stake. Vitalik does a great job laying down the arguments for proof of stake, the thesis and theories, ethos behind stake, why it was chosen, why it was corporate. And then we also get into his other article, concave and convex disposition, which kind of actually does a really good job helping me formulate my theories as to why this space is so tribal. And Vitalik categorized or offers an explanation as like, people are tribal because of these different dispositions and how they think. And he characterizes them as convex cave. Understanding how kind of like the cards have fallen in crypto space through that lens also been. Absolutely. We also

just released a new weekly NFT newsletters. So if you're subscribed to bank lists, you can also subscribe to this. A bunch of tokens. So digitally scarce. Art items, virtual worlds, this sort of thing, all in sort of the metaverse. We think that's going to be a investing theme, crypto theme, a defy theme for 2021. I want to keep you up to speed. We'll include a link in the show notes and subscribe to that as well. Lastly, we've got Chris Dixon, who is the manager of the Endorowitz Crypto Fund. He's coming on the past. Let me see. Tomorrow, right, David? So we're lining that up. That will be released the following Monday. So catch that next week. Of course, you get it early to our bankless subscriber, premium member. But I'm really excited about that episode with Chris. David, any

Any thoughts as we go into that episode next week? Yeah, Chris to me is somebody that gets it. He had to talk about the different price cycles, the hype cycles of crypto, which we know that that's how these things happen. And so I think I'm focused on asking Chris, okay, we are clearly moving into a new cycle. How is this cycle the same? But also more importantly, how is it different? Like, why will this fourth cycle of crypto be different? What will be the news that come out? Is this just going to be another bubble or are we actually going to be able to sustain some of the growth. Is this bubble going to be mapped marked by speculation? The other ones, or is there something, are we able to build foundation time stand on to make sure that speculation turn real products?

I think we're definitely seeing that with Bitcoin. Bitcoin is no longer who will only speculate. Some actually Dave Kat rather number up. The dollars being distorted. And so that's definitely a huge theme that I think talked Chris about. But he also is very much a into the world of technology behind Bitcoin. And his line is that I am not a blockchain, not Bitcoin person, but I think he does see a lot of value in blockchain technology, quote unquote, as well as all these other technology. Social token, social token, defy, you know, the whole gamut, right? He thinks that blockchain and software can really extend the whole rest of the world. And I have that as well. I think, you know, if you can do something in the legacy world better using crypto, I think that. Yeah, very cool.

All right. Before we get into the main event, the main topic with Dan, I've got to ask you the question. We always start with David. This is the first time I'm asking you this in the year 2021. What is the state of the nation right now, David? The state of the nation this week is validated. We are validated as a nation. Obviously, when crypto prices go up, when the market goes up, when the market agrees, you feel validation about investing. It's very nice to feel that, right?

Like, imagine if we had like the bankless podcast and it's like talking about all going on, like uniswa, balancer, defy, staking. Yet all of the assets stayed the same price for years on end. That would be unvalidating. That would be very bad. But instead, the opposite is happening. Like assets are going up in price. People are getting into the ecosystem.

People are starting to see the value in defy, see the value in big value staking. And really just start to incorporate that into their mental model. See both negative, but also positive regulation come out that helps protect. And saw that with the comptroller news yesterday. And then also, I think what else is being validated is, I know you believe this as well, Ryan. And I definitely accept the design space for options. for just building anything theory. The optionality of stuff is being explored aggressive.

And that's what we're seeing with algorithmic stable conversations that we're going to have. But the point is, like, if you can build something, going to build. And we are seeing the constraints around building stuff being moved. And that feels very valid. I've always been a exponent of things being built. I think that new layer of is uncollateral. And that just the fact these are working or so far, you know, so far is valid. I've been really excited.

Yeah, I totally agree, man. And I totally resonate with that word validated. I would even say, you know, use the word. word like vindicated to describe it. I felt like there are really three components of a thesis that we've been talking about for the last two years. One is, of course, Bitcoin. And that got validated in 2019 and 2020. The second is defy. And that totally found product market fit in late 2019 and early 20, you'd breakout successes like Uniswap. And of course, you know, DeFi Summer and the birth of these defy capital assets. So, you know, checkmark there. Another thesis validated. But the third piece

has always been this well, ETH will accrue value as a native defy reserve as part of the Ethereum economy and a store of value in the same way Bitcoin is. And it's finally, we're finally starting to see that happen, David. It's like ETH has woken up. So validated on all three of those points. That's how I'm feeling right now, too. That's a good, that's a good word for the state of the All right, guys, we are about to bring Dan Ellison on to talk all about algorithmic stable coins. But first, we're going to take a moment to talk about some of these fantasticers that make... AVE is a borrowing and lending protocol on Ethereum and just recently released Avey version, which has a ton of cool new features that makes using Avey even more power.

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right into it. So, want to welcome Dan Ellitzer, who has been on the show a few times before. In fact, he was our first guest before DFI Summer. He is now starting a fund of his own called Nacent that we'll look about soon. And he's here a bit about what's going on with uncollateralized stable coins. We'll define that in a minute. Dan, good to have you on State of the Nation. How are you doing, sir? How's it going, Dan? Good to see you, man. Good to see us too. All right. Yeah, so this is a fun topic. Thanks for having me on. It's always always a pleasure to chat with you guys. And really explore what I think is a very exciting space. The last time we had you on was right for this whole event that we called DFI Summer. So I'm wondering what's going to happen this time. If we have Dan on, is there going to be some kind of explosion in unclateralized stable points right after this conversation? I'm not sure what to expect.

I don't think we're front running the explosion. I think the explosion already has happened is happening. So, you know, there's that. Very cool. Well, you're going to have to help us catch up then a little bit. And but before we begin, I'd love to actually hear because you recently made a transition to Nason, which is, as I understand, kind of your own fund or something that you've co-founded. Can you tell us a bit about that? Yeah.

Yeah. So, you know, I spent five years at IDEO and I helped start up IDEO co-lab ventures there. Did a lot of early stage investing in DFI and in crypto more generally. And then a few months ago, kind of beginning of September, left IDEO and started this new fund, nascent, with my partner, Josh Felker. We were focused largely on DFI, but really we think of this more broadly as an open financial system. And we do both early stage venture, but we also are able to be more participatory.

We have the advantage of utilizing proprietary capital. And so we don't have to spend time raising funds or managing LPs. We're able just to focus all of our energy, all of our time in understanding the ecosystem, in supporting our portfolio companies, and really understanding how things play together, because we don't want to just be investors. I think a lot of funds are structured where they're either doing a lot of trading or they're really doing early stage venture, and that's about it. And so there are a few funds that I think are doing a fantastic job, framework,

Parify, a few others who really do both. And so we're really trying to be in bold where we use. all these defy protocols. I was a personal user and really that's up to my understanding of the ecosystem a lot. But we're now looking at this six, seven figure positions and movements. And so that really gives me a different lens through which I'm evaluating all these protocols and thinking about where are the gaps in the ecosystem, what's useful, slightly better in these situations. And I really think it lets us bring another layer of helpfulness to the companies and protocols. Super cool. We've been preaching investors as users from the very beginning. So really cool to start a

capital pool around that, Dan, that's very exciting. Dan, it's very appropriate that your fund is called NACE because that's exactly how I would bribe these algorithmic, uncollateralized table coins. It seems to be a very emergent field that is very, very, just in the last, you know, a couple quarters. And it's very experimental as well. And so I think it's perfect for somebody like you that tends to see things before they come because they are deepied. And then also, are willing to get their hands dirty and get into the protocol, be active part. So let's talk about the ethos and theory behind an uncollateralized stable. Ryan, if you want to bring up the stable coin trilemma, so we can get our ground.

There's this famous stable coin trilemma where there's three different designs of stable. We have fiat collateralized like tether or U.S.E. And that, to spin up a fiat collateralized stable, you'll put fiat into a bank account, you issue a token on a blockchain, and then you claim that if the token is redeeming fiat. That's pretty trivial. And that's the fastest stable coins that have gotten out, right? That's the biggest market cap. Then we have crypto collateralized, which is a little bit harder, but still more or less the same print. Right. Where instead of having a fiat and a bank, we have crypto smart contract. There's a little bit more technicality there. We need to over collateralize because of the volatility of

these outs. And there's there's oracles and there's a little bit more complication. But generally, a very solvable problem that I think has solved. So I die come around December 15. Dyes old now. it's pretty battle tested. And the benefit of die is that it, unlike a Fiat collateralized, stable coin, is nation-state regulate resistant, right? It kind of exists independently of physical landscape of the world. It just exists on Ethereum. It doesn't have any real world.

But then there's non-collateralize, which don't have any collateral behind them as in our very, very new. And, you know, we almost had BASIS back to a team as a project that really pioneered this. But BASIS didn't work out. Maybe, Dan, you can maybe illustrate for the list. listeners, why are under collateralized or non-collateralized stable coin so difficult to spin up? Because would you say that these are the most difficult of the three of the three categories? These might be the most easy to spin up and the hardest to make work. So, you know, this, that diagram you showed, I think credit goes to Hasib Koreshi from Dragonfly.

He wrote that piece that really, really influenced my thinking on stable coins and on the design space here. I think that was from 2017 or 2018. And, you know, Dye has been this kind of decentralized beacon that we've all been able to rally around space and very big. And I think we often, those of us who really focus on decentralization and transparency and openness have not loved the fact that Tether has been such a massive force in this ecosystem. And so I do think things like USDC step in the right direction. But this on or under collateralize, you know, point on the triangle has been under explored. And I think there have been a lot of very valid critiques of basis back in the day. You know, there were some really good kind of preemptive takedown posts talking about problems with this model.

And my sense of the time was like, yeah, I was I was very much also kind of Bitcoin maximalist land at that time. And like, you know, none of this stuff is going to work. But my impression now of the space is that there's a very good chance. that that that is just very hard. And that getting to these under-collateralized, really, coins is nearly impossible. Maybe it is impossible. One of the things, though, that I think is not quite right is when we look at the initial proposal on basis that never launched, but there's over $100 million in capital to support

this. And the vast, vast majority of that ended up getting returned to investors. And they didn't spend it to, you know, credit to them, unlike a lot of teams that raised lot in the 2017 timeframe. They actually said, nope, we're not going to do this. We're going to shut it down and give all the money back to investors. So kudos to them for making that decision. But the plan was never to use that to buy big houses and lambos, or to hire a massive team. It was to literally this kind of backstop fund. So it was not necessarily collateralized per se, but it was to provide this deterrent from trying to break the peg in these ways because they're

saying there's this massive $100 million fund that is sitting here ready to be deployed to support the peg, should that be necessary. And I think that that's where we're seeing some of these things move with empty set dollar, planning to move that direction with V2. You know, Frax has another kind of partially collateral. I was thinking, honestly, Yam, which I was involved with originally, was something that kind of came from the same idea where it took the kind of rebasing mechanism that we're seeing from Ampleforth and said, said, well, what if we start putting some capital behind it to dampen the downside? So there's a lot of design space here and we'll go for all these different things. But what is really exciting here is the ability to create potentially, right, something that can be long-term stable and decentralized and be much more capital efficient than something like die.

Yeah, yeah, yeah. So can we talk about that, Dan, so that is let's zone in on like why non-collarized, right? It's part of that dilemma. So we have Fiat collateralized. We've talked about that lots on bank lists, right? It's not bankless, basically. It's sort of a product of the existing banking infrastructure. And then we have this thing called die, right?

And that's grown to its credit over a billion dollars, lots of collateral in there. And but the problem with it, some of the critics will say it's not very capital efficient, right? It's very difficult to kind of grow the supply of die versus something like Fiat collateralized. So could you zone in for us on what? the value of a non-collateralized stable coin would be. Is it those two things? It's both bankless, decentralized, and also highly kitchen. Yeah. And so one of the one of the changes with Maker and, again, I'm a huge fan of Die, but one of the challenges with it is that we've seen there's this massive demand for USD pegged stablecoins. And Die can only grow to the extent that there are

folks who have capital that they want to take leverage on. And so that inherently means that you can't grow the supply of dye faster than there is demand to borrow against other assets that are supported through that cap. And so that just inherently caps it. And so by having something where it need to be fully or in the case of dive really over collateralized, that allows the supply of the stable coin to match the demand for stable coins. And I don't think that that's early a, it's not a huge problem, that things like UST and USCC are kind of 100%, well, in the case of USDT, who knows, but like in theory, 100% collateralized with dollars and a bank account.

The problem is that they're in a bank account rather than on chain. And as soon as you go on chain, you can't really have it just like perfectly a percent collateralized. You need some other mechanism. to bring stability because if that peg and that collateralization is fully important, then you're not giving yourself any leeway. And so you need some kind of algorithmic system to help provide stability and supplement the collization for the collateralization to potentially supplement that kind of an algorithmic factor.

So they kind of work in tandem. And once we need algorithmic forces, not just reliance on the ability to, seize and liquidate collateral, well, why leave it a percent? Why not lean a little bit more heavily on those algorithmic components and say that the collateral is almost secondary to that? I think what people struggle with, and this is also foundational, is the question of what actually backed a uncollateralized stable coin, right? So it's very clear with tether. We think we know what backs tether. Some dollars in a bank account, I hope, fingers crossed, right? We know what backs die, you can see that on chain, right?

It's completely open. We can see all of its collateral at any one time. But what in the world backs the value of a stable coin that has no collateral backing it? Yeah. Well, what backs the US dollar, right? It's faith. Ultimately, it's faith. And so the goal here

is with these stable coins for them to work is people need to believe in the mechanisms and they need to be given very good reason to believe in the mechanisms that it will stay very close to $1. And there's a lot of reasons to believe it won't, right? And we've got a lot of evidence for these things diverging pretty significantly from a dollar, both the up and downside. And so that's

not great, right? But what I will say is a few of these things have actually stayed a lot closer to that shelling point around $1 than I would have expected a couple years ago. And so that, to me, is a great starting place, but it needs to get better. And if it can't get better, these things are not going to work. So I think there's a lot of design space to think about how to make that. And one of the things that, you know, when I first ample, you know, it was called something else originally and they had a white paper for it a couple of years ago. I thought this is the stupidest thing I've ever seen.

And it launched. I thought this is the stupidest thing I've ever seen. And then people started piling into it. I was like, whoa, okay. So clearly they're a very powerful. these reflexive mechanisms that are going to drive up the market cap. The problem is it can also go down. But, okay, well, then if you got this powerful mechanism for driving up the market cap,

actually expanding this again, the supply up there, that's really useful for bootstrapping. So could you modify the mechanisms once you get above a certain point to dampen the reflexivity on both the upside and downside? And that question was what originally led to the idea of Yam was, okay, if on the way up, you're building up a collateral base that effectively pulls a floor up with you, then, you know, maybe that's a way of the rampant. And now that didn't, that didn't play out. So we, there were some, some problems with Yam, some bugs. And we saw, you know, what can happen or it doesn't. And then the community there, Yam is actually, I'm very excited by what's been

happening with Yam since. I think Brock and Trent and the rest of the team over there have done an incredible job. But the decentralized community around it decided this is not a stable coin. And They actually just recently removed the rebasing that was inspired by Ample entirely. And now it's really this kind of community Dow saying we've got this treasury, how we manage it, how we build more things. Very cool, but very different. But the idea, the original seat of the idea there was thinking along these lines, how do we take these powerful financial incentives to strap the system, but also have

them in a way where they can be modified in a way. So up to some level, then make it harder for it to drop down. They can grow at a more reasonable, staying pace to serve the needs people have that they come looking to a stable coin. So, Dan, I want to talk about the, continue the conversation about the design space or under collateralized stable. Because there seems to be a lot of overlap and you've touched on it just a little bit now. To say that they are uncollateralized, I think is not completely act. Collateral is just in a diff right with collateralized stable coin, the cash bank with a crypto collateralized stable coin. the collateral is contract with an uncollateralized stable collateral, as you alluded to,

is the faith that when there is time, when the time comes for there to be buying pressure, there will be buying. And I guess it's collateralization. Faith. Hmm, you're getting some resistance. I feel like I would push back against that a little bit because I think there's, the mechanism there is faith. I think calling a collateral is a bit of a stretch in terms of what people realistically think of as collateral. These things, absolutely, to be very clear, they can 100% death spiral and go to, well, nothing in crypto ever goes to zero, zero, right? People will trade, you know, penny stocks until the end of time.

So, right? But it could effectively go to zero for any of these things. And so I think that's a very important thing to look at is right now is these things are highly speculative. I think there's a lot of interesting design space to be explored around making them a little bit less speculative. One of the things, though, that I think we shouldn't lose side of it is speculation isn't necessarily bad. I think people need to know what they're getting into, but I think that it can be a very powerful mechanism to get things up to a level where they can be

broadly useful. Okay, so let's define why stable core uncollateralized stable. And I think that will kind of ground us behind like where. To me, the reason why uncollateralized stable get really, really dangerous is because they can get out in front of their, right? And this goes back to the issue of who can mint new stable, right? With the collateralized method, it's the protocol, a Dow Bank of it. But with an uncollateralized table protocol can also issue freely as anyone can, just like the federal can freely mint new coins. That's not where the restriction. The problem is the protocol cannot revoke. And that's where their needs come strategy. So there's different strategies for how each different algorithmic stable revokes or takes

away supply, away if there is a price that is under. So maybe you can kind of go into the different strategy tools that under collateralized cap coins have available to them to incentivize the removal of supply of these uncollateralized table when the time comes that things are below it. Yeah. Okay. So in all the cases of these different kind of algorithmic and under under collateralized coins, there's the same mechanism is above a dollar, print more.

And that creates selling pressure, push it down. Easy. Not hard. The problem is like you said. on the downside, how do you get it back up? So the original kind of senior share model that BASIS was planning to do and never launched, there is the, you know, the USD-pegged staple coin, and then there's a share, base shares or whatever, and then the holders of those base shares will receive the inflation, right? So they hold essentially shares in the system. They get new dollars

printed to them, and then they can sell those to bring the peg back down, but that's why you hold the share. When it's below the peg, the idea would be that you would have these bonds and people could burn their kind of cash tokens for bonds that when the price returns above a dollar, they can then redeem those and get the full dollar. So that's the basic mechanism there. With empty set up, or so before we get them to the dollar, there was one though that kind of came next. Let's kind of go almost to the chronological order as we're seeing the evolution here. So the idea behind ample forth, right, was everybody gets it, right? If you hold ample and we need more ample to bring the price down, everybody gets more ample. And then how do you then get the price back up? Well,

below a dollar, everybody loses AMP. And so that's, you don't opt into that. It just happens across the board. And while I'm very impressed by the kind of insight in psychology around the creation of this what's called rebasing mechanism there, I think psychologically it's hard and technically it becomes impossible. I don't think Ample is ultimately going to work as a stable coin, even if the mechanisms around this, the kind of the economics of it, did work on a technical level, it doesn't behave like a standard ERC20 token, right? The fact that the balance can change without the user doing anything, it just breaks everything. And so they've had to create their own whole like kind of elastic finance, they're calling an ecosystem around it. And when you break

defy composability in that way, it creates all sorts of problems. And I think it just makes it really hard, even if you somehow achieve more or less stability, it's going to be really hard to take advantage of that composability that is such a strength in this ecosystem. So getting to your point there, Dan, right? So like you say with Ampleforth, the risk is borne by all ample holders. All ample holders have it. Okay. And they all contract to kind of get the price back up to a dollar. And that has led to a lot of big swings. But these new designs, these different designs, they have kind of different classes of risk take.

Yeah. So that's, in that initial senior share model with BASIS, that was the different classes, right? So you have the stable coin holders, then you have the kind of shareholders. And that has been then ported forward now with BASISC cash has more or less implemented that that same design. And that is nice, right? You avoid the need to do anything. If you want to hold just that kind of stable coin piece.

It may not be stable, but at least the amount of individual tokens you hold doesn't change unless you opt into buying. Now, what MTCSET dollar did that I think is very interesting, full disclosure, we have a meaningful position in MTSA dollar. But one of the insights there was saying, well, what if we just package these together in a single token? So the way that you receive inflation is actually depositing your ESD, your MTSA SOTA into the Dow.

and staking it, and by staking it, you can earn a share of the inflation or by providing liquidity into the ESD, USDC liquidity pool. That's another way that you can earn part of the inflation. And there's some of the criticism for that is that, well, how are you ever going to have something stable that's inherently speculative in nature? And the flip side, what got me excited about this saying, wow, let's recognize the fact that early on, people really just want to speculate us. And so to be useful as a stable coin, you need to be integrated across the ecosystem. You need to have, be on different lending protocols. You need to be in different AMMs. And so if you want to have the liquidity, have the integrations, let's have it be on

the spec coin, which, oh, by the way, over time, if the mechanisms work, should become less speculative, more stable. And then you've already got these integrations across the ecosystem. I think the challenge with things like basis cash is people are really just interested in kind of the number go up piece and nobody's really wanting to use the stable coin as a stable coin and integrate that. It's really just there. They're kind of leaning into the farming aspect. And I think that's hard. And one of the things that pointed out, there are a lot of games to be played, a lot of money

games to be played around this, around all of these different designs. And a lot of teams are leaning into that. And what I got excited about empty set dollar for was the ethos where, unlike the other communities that I've been a part of, this one really is focused on let's tamp down the growth. Let's grow at a slower, more reason to pace, right? The first fork that I saw of empty set dollar was dynamic set dollar. That just was a straight fork off. They tweaked a few variables for it.

And I love the experimentation, you know, good on them. But like, man, they like took all the breaks off and kind of, went full degen and kind of like lean into going like super degen. Like, okay, great, you can do that. But I think there's a really important element here around community and around ethos and belief that this is something where, yeah, you can absolutely step on the gas. We're playing with very, very powerful tools here. But if you want this to be long term sustainable and successful, you need to move slowly

and intentionally. And there's certain things you can't control, you know, apes are going to ape and you can't stop that. But what you can do is you can try to put dampening things into place to make sure that to the extent possible growth is more or less in stride with interest and adoption of the of the product. So at the beginning of this conversation, you talked about how like, you were, you are more accepting of speculation and aping, right? Like that's, you think that's an important part of projects, right? And I totally agree. Like if there was no speculation around Bitcoin, we wouldn't big, right? And something like Bitcoin speculation is inherently. Like there's almost no

such thing as bad speculation. And that's where algorithmic uncollateralized stable coin are very different from other protocols that see where rampant uncontrollable speculation will actually end right. Because as you were as you were alluding to, if you only have a gas pedal and you don't have a brake pedal, now that's great for Bitcoin, number go up. If you don't have a brake pedal on an uncollateralized stable coin and you only have a gas pedal, you will. Because at some point, the whole design ethos around this, that there will be a devaluation of asset below the pet. And that's when you need the break. Don't have the brakes at that point. You're in trouble. And so I do think that, you know, another project that I think is worth, there's a couple other

projects worth mentioning. So one is fracks. And they've started off as something that was, you know, essentially fully collateralized to partial collateralization over time. I think that that makes a lot of sense as something to to play around with as a design space to explore. I think there are some elements of how it's being created and how it's being used that make me a little less comfortable. But I think overall, the idea of starting more collateralized and moving to less collateral is a very reasonable place to start. I think often they positioned as like they were the first. Yeah, they got it into market. But a lot of people have been kicking around these ideas, as I mentioned, you know, with the games, initially thinking along similar paths.

Another one that I think we're talking about is Rye and from Reflexer, which they've got an early version, I think, launched and people complain with it. And it's not pegged to the dollar, right? It's entirely kind of self-referential with the stability mechanism they're using. I don't want to get into it too much because it's very complex. To be honest, I'm not going to do the best representation of it, but the idea of having something that is entirely algorithmically governed and done so in a way, human involvement around governance and just tries to essentially dampen volatility significantly. I think it's super interesting. And I've seen a number of these projects, ESD included, that have talked about at some point

potentially transitioning away from pegging to the dollar and doing something that is more crypto-native because I think as anybody who's spent time in the space, you know, the dollar itself may be a reference point today. But, you know, I think we're all kind of like looking out for at what point are we no longer longer can consider the dollar itself to be stable. And we're going to want a clean way to transition to something else that is really inherently more crypto. And so I think we're going to see more projects I would expect taking a similar approach where they're thinking about how do we get something that is volatility dampened and may peg to something other than the dollar over time.

Dan, there's so much there that we will pack. I also want to ask about where oracles come into this and also Europe, whether this is like a winner take all market. We're going to take a moment to talk about some of these sponsors and stay tuned. We'll be right back. Pentics is Ethereum's decentralized derivatives liquidity protocol. What does that mean? Synthetics is a platform for creating and trading synthetic assets, which are assets that are priced via an Oracle rather than bids or ass. Traders can use the Quenta exchange, which hosts and trades all of the synthetic assets created by synthetic. Traders on Quinta can trade synthetic tokens like SBC oil or S-D-Fi. Because Quinta is powered by synthetics, traders experience

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Dan, where we kind of left off, we're talking about some of the projects here. I want to get into empty set dollar in a minute. But something that keeps going on the back of my mind is sort of set context for everyone. You mentioned the term money games that we're playing with these things. And David and I have talked about on bank lists like playing is very much a money game. Ether is very much a money game. Any unclosed monetary asset is a money game. I would even use the term Ponzi game for these things, right?

It's kind of like a pyramid scheme where there's benefit to being first. and you receive the upside of that. Like putting on your Bitcoin Maximilist hat for a minute, right? You said you used to wear one. Put it on for a second. So a Bitcoin or maybe a really strong Ethereum might say, Dan, what you're trying to do is impossible. You're going to invent all of these like Ponzi games without any upside or benefit to the world.

Some early people get rich, right? But like the only way to get uncollateralization and some level of stability, some level of stability is to become highly liquid. reserve global asset. That's what I think some bitcoins might say. What's your response to that? Did you used to think that? And now your mind has changed. I think that there certainly are elements here where you can see that, right? Where early people do very well if this works. I think that's good incentive for getting it going. The idea is that this can't be a Ponzi scheme. Right. And I think one of the great things about what Ethereum has done is because it's all transparent is all in chain.

What do you essentially steal funds from others? Everyone can exactly what's happening. People can choose to play the game or choose not to up to that goal here if these things are going to work. It's a place where to go down. It's like can't go up at an insane pace forever. And so I think the important thing is as these things, if any of them are successful to approach close to maturity, the loatheets of the game being played has to move. from being a growth to about petability.

And so even things, one of the reasons why Tether and USTC are able to keep such a tight peg is because it's really easy to arb that back to the dollar. If, you know, Tether is trading at 101, somebody who's got, you know, the ability to is just going to wipe funds in and just arb that difference down immediately. And that's one of the problems with Die. why dye has had trouble being as tight of a peg is there's not this like instant arb ability for professionals to come in and arb it back to a dollar. And so for any of these algorithmic undercollateralized, uncollateralized stable coins

work long term, the loss of the game needs to move from how do we get it a little bit above the dollar so that like we all print more money for ourselves. And it has to be, okay, how do we get the incentive to above, push it down, it's below, push it up, but keep it very tightly around. the dollar. And a big piece of that for something like MTCSeller is around faith that it will, that people see it go through these cycles and see the cycles get less volatile and shorter and that there's more faiths. People are willing to help push it back up rather than saying we need to get like a 50% discount or whatever in order to take on the risk that it might

never come back up. Maybe we're comfortable with a 20% discount, a 10% discount, a 5% discount, a 1% discount. You need to get that range that people are willing to play around. tighter and tighter at time. And how do you do that? Is it the algorithm, the precision of the algorithm itself, or is the mechanics of the protocol, or is it the liquidity and like underlying faith of the backers? How does it happen?

In my view, it's a multiple thing. One is there needs to be, the mechanisms need to be, and I will say very, very clearly, I don't think M.T dollar has 100% the right mechanisms today. There are certainly challenges with the kind of coupon bond-like system around this where they are highly risky. I don't think price well. I don't think the redemption process works pretty well enough. It's gotten it back to the peg three or four times already. But everybody who's active in the community looks at this and says we need to do some fixes here. And

Scott Lewis and Will Price and some others are working on a proposal for a kind of an overhaul of that coupon system. It is more like a bond, some with a zero bond. I think that's a very worthy thing to research and it may end up being something. The SD will transition to if the community wants to do that. But there's also been fixes to the coupon system to improve it. Each cycle, it's getting better and better. And that's a piece. The other piece is just the fake piece, right?

The longer than it's around, the more times that it goes below and the returns, it goes above and then returns, the more faith people have that it will do so in the future. It's, you know, the Lindy effect around this, right? The more times that we see, the longer it survives, the more times it does the thing that everyone says it's supposed to do, the more people believe it will continue to in the future. But it's that combination of faith and actual kind of like technical economic mechanisms together that will hopefully enable it to more stable over time. So there's an article I wrote a while ago in the bankless newsletter that talked about

Ethereum as a protocol is designed to work in the most adversarial condition of, right? The protocol is designed work, like full stop. And the more that people have faith in that protocol working, the more monetary premium, that's the claim that I'm. And I think that is very similarly true for uncollateralized table. Where you can make the system work. And once the system proves that it is working, then you get this premium of the fact that people know that it works. Then you get this benefit of extra liquidity because of the faith. Leave that event.

People are more willing to buy sooner when the value of the token drops just a little bit below it. Because people know that, you know, it's going from 90 cents. back to a dollar, people are willing to take just 2% of that R, rather than like they see it at 85. It takes a lot more faith to buy something at 5 cents to get it all the way up, back up to a dollar than it does to 98. The only way that you get that benefit of a premium is if you prove out over its call is going operate under the worst possible. Is that is that about right? I think that's a very fair statement, right? It's the same reason that we're kind of seeing similar things play out with like Bitcoin and Ethereum today. We're like it's, even though the

price has gone up, you know, hundreds of percent in the last year, it's in some ways less risky for people to buy it now because it has all this kind of existence proof and more people have piled in. And it's easier to buy it a higher price, which is ridiculous, right? Because rewarded so much more for buying a lower price, but there is this risk reward tradeoff. And it is a factor in these stable coins. So Dan, let's maybe look at your example of empty set or ESD of not chart from protective and look at performance. So I've got coin gecko here just showing me a chart of the price of empty set dollar

to be called the NSD, right, which is this unilateral coin, one of them we've been talking about. And this is over the last 90 days. And over the last 90 days, we can see some fluctuations. So at the start of it starts out about a dollar in one cent. And then that's at the beginning of October. And then sometime in late October, it stays steady. We get a spike. And all of a sudden, it's $2.29.

And now in later in October, we get a spike down and it's 50 cents. And then we get some flatline. You can see this chart. Anyway, there's some ups and down. It seems like there's a range of it. It tends to gravitate around a dollar, but it ranges up over $2 and sometimes down to 50 cents. So it's fluctuating around stability. What can you say about this chart?

Is this the protocol at work? How is this stable coin doing so far? Yeah, I think it's doing all right. You know, I'd say anything that went from literally zero, six, like didn't exist six months ago to something that is, you know, now at, you know, a 400-mill market cap or so, right? That's, it's grown a lot. But that it's done on the basis of somewhat range-bound, right? And I would say the goal here is to get it into the die-like range or better, you know,

if you can stay within, you know, 5% or so the peg is where you ultimately want to be, hopefully even tighter to like 1%. But right now, for something to early, so speculative, I think that this is reasonable performance. And some of the mechanisms are being tweaked to hopefully allow it to not skew as much on the upside, right? One of the elements of the V2 proposal is to have a price, whether it's $1.3, $0.10, something like that, where anybody can always mint as much as they want to. at that price to effectively create a ceiling on the price.

And the idea is that the US DC or ETH or whatever would be spent to mint would then be in a reserve where if the price falls below, you know, a certain threshold, 97 cents, 90 cents, whatever it is, that that reserve would then be used to buy back ESD and potentially burn it, potentially hold it, who knows, but that you can actually create

this kind of secondary stability mechanism and create these boundary conditions around it that can tighten over time. And so I think that is a very promising direction. I'm very encouraging and encouraged by the discussions around that mechanism and effort to start moving towards implementing. So I'm putting my in the shoes. Let's say I'm an ESD hole wanting to use this for utility purposes as a stable coin, right? That's ultimately what we want to use stable coins for.

So I'm looking at this chart and I see, okay, I've got $100 of ESD. And I hold that. And next week, maybe that could be $2. But I know if I wait seven to 15 days or so, it's going to restore back to $100. Maybe the following week it goes down to $50. Or if I wait a little bit longer, it's going to ratchet back to $100. Is that kind of the user experience or am I misunderstanding this? No.

So one of the things that you're missing here is this is not like ample where it goes up and then it contracts down on like the full amount, right? So the idea is that on the upside, right, was going up and was above the peg. People who had staked their ESD in the Dow or were providing liquidity in the in the Nuspot pool, they were receiving more ESD. And so they had more units of ESD. Now, when it drops below the peg, let's say that, you know, you had 100 ESP and, the market cap, you now, you know, are going to have roughly double the amounts. You'll have 200 ESD. Now, if the peg goes down to, you know, drop to low, down to 50 cents, yeah, then you've got

100. But assuming it's above 50 cents, you're still, you have more dollar value and more coins than you initially had. And so one of the things that I think is really important psychologically for maintaining the peg here is it doesn't have, in my view, the same crazy downward reflexive. as something like Ampleforth because when it's below the peg, you've got the double pain of both

watching the value of your holdings go down and also the number of units is contracting too. And so that's just like creates this gut-wrenching thing. We saw it with Yam before the rebase was removed. I think anybody who's held ample has like been through that and seen that as well.

And so I think that this just psychologically does a lot better, right? If you're looking at this from an investment standpoint, Really, market cap is the thing that matters much, much, much more so than price. But when you want this to actually be a stable coin and when people are looking at holding it, the fact that it doesn't take supply away from you on the downside unless you opt in to buy a potentially get more upside from getting that discount, you know, that opt-in elements

for returning it back up to the peg, I think is very important. So you're saying, Dan, that I've got, if I hold a C&N, the utility stable coin user, I don't have downside, right? It can't drop below a dollar. No, no, no, no, to be very clear, no, yes. You absolutely do have downside. The price can certainly drop below a dollar. If you have 100 units or 200 units, you will never have fewer units than you did. The price can still go down, right? Right? Yeah. Well, you can have more on the upstairs above a dollar. You could end up with more if you're staking them. But you'll never end up with, you'll never, yeah, you will never, you will never, without taking action, you will never end up with fewer units.

And so I think that is an important piece. Again, there's no floor. This could go to zero. But, or, you know, or it's like, you know, Bitcoin. If it goes to like, you know, one cent, I'd buy all 21 million Bitcoin, whatever. So same principle here. It's never going to go to zero. But it can approach very, very close to zero.

So not saying there is a hard floor or something on this anyway. What I'm saying is that when it goes up and more is printed, those who receive that printing, you know, now have those, have that inflation. They have those additional units in their wallet. And if they lose interest, lose faith, and decide to sell, they absolutely can drive the price down lower. But if people want to hold it because they believe this is going to be useful, it starts becoming more stable. They start using it as a stable coin. Great. That's the goal, right? The goal is to get this to be something that is widely used where, you know, my, you know, ideal future state is that ESD becomes boring.

People should not be excited about it. They should not be looking at charts about it any more so than like, you know, we get excited when like a bunch of USDC or SD is like on chain. It's like, oh, wow, that's clearly stable coin demand is up. Nobody really cares. Hopefully ESD could at some point become like that where the majority of people using it just pays zero attention because it is staying so close to peg. And there are professionals who are arbing it in.

both directions and maintaining that peg money off it. Like, great. I'm not against people making money. I think that there always needs to be some kind of profit motive around this to maintain the peg, but hopefully that profit motive shifts from, I want to just hold a lot of this and Citi number to up to I'm going to make profit by actively participating in the peg restoration process. Okay. Oh, no, you go ahead, David. I was going to turn the conversation to Oracle's, but I think I talk about market. Yeah, yeah. So I guess that's the perspective of maybe someone who's holding ESD, but what does it look like from the perspective of someone who's taking the speculative risk in the itself, right? So this is a different chart, different than price. This is market cap of

empty set dollars, which it looks like this is, you know, basically total price multiplied by the supply, right? Yeah. And what I'll say is again, this is not a beginning. Ginner 101 made him to play. I think that's one of the reasons why Basis Cash has seen a lot more forks. It's like a lot more in that whole

yield farming vein. And with like the forked yam UI and people kind of understanding how to play this as a yield farming thing. One of the things that throws off this chart is the fact that

some of the units get removed from circulation. They get burned for coupons. And so that also then reduces the market cap further. So it's not exact. It gets, you know, ballpark right direction. But as you can see here, right, it peaked around 600-bill market cap and it's currently around 400-mill. And so, yeah, that is a pretty significant decline. And it could drop a lot more. It could go up a lot more. You know, it's anyone's guess on this. I think that, you know,

to the extent that people do want to speculate, this is not one that people are going to try to make it easy for you to ape into this. do your homework, do your research, understand it, and then make an educated decision on whether to participate or not to participate. I think that's what I try to emphasize to people. So for those of you at home, this is an advanced money game. Don't just like yolo into this. Don't epe into it. That's what we're saying. None of this is financial advice. But I want to be clear on what, like basically the speculators, how well they've done with this. So this looks like 90 days ago. This is just done 100x in terms of. price appreciation. So we had four million market cap around that 90 days ago and now we're up to

400-ish cap. Is that right? Yeah, that's that's right. And so there's, yeah, that's been tremendous returns. And there's no reason this couldn't fall back to to five million if something breaks. Right. Absolutely. It could fall below five million. Who knows, right? But I think that's, that's one of the things that's been appealing has been the fact that it has has grown very quickly. you know, it was sitting up high on the coin gecko, like yield farming yield list. And so, you know, that brought a lot of more attention into it and people joining joining in. But honestly, look, my preference is that this thing I'm talking about you guys, because I want people to understand these things, understand the differences, understand the risk.

But my preference is that this grow at rate that it's grown. And that none of these things grow at astronomical rates, I think hopefully they will grow a little more in line. with the interest. And I think, you know, up into the range of kind of like a mid-tier market cap coin here. And so I think that that's kind of, you know, an okay place to be. I do want to see it grow obviously over time. But, you know, if this, you know, next week or double the market cap, that would make me very, because I think it's very unlikely that there is double the traction, double the real interest in this a week from. I think, you know, going, going, this project is worth zero or with $5 million. This is, you know, worth $500 million. In some ways, that to me is more reasonable.

It's like, I think there's a lot of potential behind the idea, but going from like, you know, 500 million to a billion or $5 billion or whatever, like that would scare that everything. Yeah, I don't want to see it grow overnight in that. They talk about, you know, the investment like staircase up, elevator down. But this is elevator up and elevator down. Very much. Right. Right. Right. Yeah. In a basement. Yeah, I think hopefully, but that's what we've seen, though, interestingly, right, is that we have not seen the straight elevator down.

And we have seen a bit of an elevator up. I don't like how much of an elevator up. I wish it were a staircase moving more towards, like, I don't know, like a conveyor belt type situation where it like just becomes a lot smoother and more muted in both directions. And we'll see if the community can navigate it in such a way that that is what happens. Maybe to finish off this conversation as to why the dynamic are like that. When Ryan showed the market cap, it shows something like $5 million to $600 million down $400. Unlike other crypto assets that are like Bitcoin or Ether, whatever, there was no one that actually just purchased an asset and held to experience that exposure, right?

The only way that you had that upside from $5 million to $600, $400,000,000, is if you were taking actions every step of the way to bear the risk every time the MTCET dollar dropped below. $1. And I don't actually think it's possible for someone to even actually have direct one-to-one to the market cap of set dollar. Is that right? Ish? You know, if you're, if you're staked in the Dow, you're going to get your share of rewards upside. But as we've seen for a lot of the early holders, if they're not participating in the coupons and taking on that risk or participating in the LP and taking, taking on, like essentially putting up additional capital, they're getting diluted out. So like the empty set squad, the kind of founding team that hit first advanced the first epic and received the first 100 EST as a reward, their ownership percentage has dropped significantly over time. Because they've just been holding a stable coin.

Because they've just been staking it, right? And so like they had tremendous growth, right? I think, you know, I think they're, my understanding is somewhere around like 10% or so of the supply. But like that's come down for 20% or initially 100%. But that comes down because all they're doing has been just staking. And so I think that is very. healthy that, you know, people who are just long-term holders get some growth, but they're being diluted out if they're not taking on additional risk, taking additional action. I think that's

very healthy. And that's not something that you necessarily see through the basis of Ash like model, right, where if you have fixed supply of those share tokens and you have the same ownership, you're always going to have that same ownership. And so I think that that, that to me doesn't feel like the system that we necessarily want for something like this, I think the idea that gradually over time, you know, we improve the decentralization of ownership and it becomes flatter ownership, I think is one of the major positive factors for MTCET dollar, because if this does become kind of the digital internet dollar, then hopefully it is very widely dispersed. Dan, would you say the price or the supply apprease of MDTet dollar?

Because that largely comes from people purchase ES so that when the time comes for them, stake by bonds and burn it bond, that they have tools to be able to do it. Because you can't get senior, you can't get the up. You don't have it. You have to purchase ESD so that you can be prepared. Burn it comes time senior. And that increases price of the token. Their plot.

Well, actually, let me put some nuance on that. So the way that you can receive, yeah, the senior is to hold ESD into stake in or to LP. So yes, that requires, if you don't have any, you need to buy something to be able to do that. The problem is people do that over the peg and it drives the price up and it's not good to have that reflexive upside. So hopefully it gets sold back down very quickly. The ideal thing from a system's perspective is that people buy in below the peg, so to discount to a dollar, which has the dual effect of giving them the ability to capture some senior age above

the dollar, but also pushes it closer and almost makes that more of a self-fulfilling prophecy. And so that's the goal. And then the other piece is this coupon system where you can burn. And there's currently, I think it's like about a 54% premium. So if you, you know, burn, I think a dollar or one ASD, you get like one, you get like 2.1 coupons-ish right now, which can be redeemed for ASD in the future. But they will expire potentially in 30 days if you aren't able to redeem. And so you're taking on risk, but that's a way that you can get a lot more reward as well. And so the coupon incentives, hopefully not that existing ESD holders, then just burn for the coupons and hope the price goes back up.

The idea is that there should be now, kind of like, if you burn your ESD for coupons and do nothing else and the price is going back up, you're just going to lose all your SD. You go to zero. Like, sucks to be, sucks to be you. So the idea is the incentive is then, okay, you can do that. Then if somebody else doesn't push the price back up, you better step into the market and buy some more ESD to get it back up to ensure that you can. redeem those coupons and you don't get zero. Or as a new entrance, you come in, you buy ESTMR where it's currently trading below a dollar, burn that to get like a kind of a premium premium from the coupons. And, you know, that becomes kind of a reinforcement mechanism to drive the price back.

So these things play. There's different kind of risk return profiles for taking different activities. But again, like I said, this is not like a basic beginner thing. I do not recommend and people who are interested in this to play the coupon game, unless they're very, very aware of what the tradeoffs are associated with that. And there is that reliance, though, on net new buying to push it back up to a dollar. If there is not any net new buying and there is net selling, it does not return to the peg. It needs to be net buying to peg. And so that's one of the reasons why I think it's very important that this not grow too quickly because if there is not interest, it's enough buying pressure when it comes below, it's just never going to get back back. So just everyone needs

to be very aware of that think about the different dynamics as they participate in the system. So the fantastic thing about collateralized table that there's no depend. Die depends. They're back uncollateralized. Don't have. But both Vecorough, both have OREC. Are there any differences between uncollateralized stable Oracle or Oracle that die or large? So one of the things that I loved about the design for ESD is the way the Oracle is done. Is it, uses an eight-hour time-weighted average price pulled from the uniswap, ESD, USDC. Wow. And so that is a really hard Oracle to manipulate.

And it works because you don't need instant Oracle price for liquidation for something like MakerDAO, right? Like the fact that it's weighted over eight hours is fine. We want to be robust to manipulation more than accurate in an exact block or an exact instant. But this is a risk, in my view, is that. it is reliance on USDC, ESD UNISWAT pool, where the center foundation, in theory, could freeze all the USC in that pool and therefore it's censored. And so I think the likelihood of that is relatively low, but certainly with some of the, you know, actions we've seen from some government agencies recently, like, I think it is not a zero risk thing. And so one of the things that

has been discussed in the ESD community is, well, could we take advantage of the UNSD keeps it very head and actually incentivize ESD-Eath pool, which would be incredibly censorship resistance, and then combine the T-WOP off the ESD-Eth pool with the USDA-C pool, which is a very deep liquid pool. And if the Center Foundation wanted to, like, the Center Foundation is like not going to nuke the U-D in the ETH-USDC, right? If they do that, like, they're done. They're done so, right? Like, USTC is done if they're going to, if they're going to nuke the ETHUSTC, you know, and so that would give ESD a level of protection where it's like you can't nuke our pool without nuking everything.

And how are you going to nuke the ETH pool? Like, you can't. Like, that is about a censorship resistant as it gets. So I think something like that. But then you lose the advantage. A, you've got now trading from USDC and ESD, you've got double the transaction fees. You also are incentivizing an LP pool that is not, in theory, a stable to stable. pool. There is more impermanent loss involved in L-being for the ESD pool. So I don't know if

that switch is going to happen, but I think the fact that you can make this more censorship resistance, going to using ETH as that really censorship-resistant asset in the pair, like it's so cool that is possible. And that's what gives me real hope for these assets is not that we want to reference, you know, something that is censorable like USC. But it's the fact you can actually find a way to reference it where it's useful, but not be dependent on it in a way where you need it to be there for your system. Just one observation. It sounds like that your work is actually a much smaller problem for M-D crypto-collateral.

Yes, if they're implemented in the right way, right? Because you can use the AM-based oracles. We've seen a lot of people use AMM oracles in dumb ways that have led to hacks. But I think it's really hard to make it's like an eight-hour T-WOP on something that has millions of dollars off in 10 millions of dollars in liquidity, that that is something that's going to create Oracle problem. One observation, it's kind of been a recurring theme, definitely in bank lists as we've been exploring all of this, is people ask the question of, well, why is this the first

time we've seen empty set dollar? Like, why didn't it two years ago or three years ago? It's really interesting what you said there. I mean, a lot of this has only been possible with the money protocols that we have now, right? So first of all, we had to have this thing called Ethereum, of course. And then we had to have this thing, this money. called Uniswap. Uniswap had to build up enough liquidity and V2 had to ship so we get this time weighted like average so we can have an Oracle and now we see the birth of algorithmic stable

coins. Like it's this, this like tech tree almost that had to be built for us to get to this place. Right. It's like, why didn't we have this three years ago? It wouldn't, it wasn't possible three years ago. We didn't have the we didn't have the technology. Absolutely. And so I think, you know, one of the, the hardest things I think about being in this space as a builder and as an investor is understanding timing and the dependencies around all these things, right? There's so much stuff where, you know, look back at stuff 2017 and like, say, stuff was so ridiculous. And yes, most of it was.

But there are some things that failed in 2017 or, you know, on Bitcoin failed in 2015, or whatever that it wasn't because the idea was bad. It's because the timing was wrong. the necessary ecosystem components weren't there yet and we're not, or we're not mature enough yet. It's the same way with the internet, right? That, you know, the big examples of like the dot com boom found was like pats.com and webvan. And then a couple decades later, we've got, we've got, you know, chewy.com and Instacart.

It's like the concepts were not wrong. It was just the timing was completely off the, all the other things that needed to happen in the, in the ecosystem in the world had not happened yet. And so I'm super excited to look back at ideas. And it's hard for me because I can be like, okay, I saw that, didn't work, saw that, didn't work, didn't work. Right. And constantly, I'm going to remember, okay, well, it didn't work then why?

And is that reason that didn't work still valid? Or have the ecosystem grown and changed in such a way that maybe it's valid now, or maybe it can work now, or maybe it'll work a year from now, or two or three years from now. I'm not sure. And the timing right is really hard. it is so energizing to work with teams that are willing to try these crazy things and are building what, you know, this is the new global financial infrastructure that we are privileged to be part of witnessing and helping to bring into reality. And I do think that there is something in this

space. And maybe it's empty step dollar. Maybe it's one of these other things that exist. Maybe it's one of the things that have yet to launch and we're actively looking at other things that are doing different approaches in this because something here, I believe, is likely to work. Maybe it's not this cycle. Maybe it's in a future cycle. But I think the promise is so great and the potential is there that I want to try these experiments because there is massive, massive benefit to the entire ecosystem if it can be done and done right. Dan, well, I can think of no better person to be at the helm of the ship steering the direction of algorithmic uncollateralized stable. So thank you for providing that service to the ecosystem. It's the start of 2021. And this seems to be a very

promising year for the growth of uncollateralized stable coins. Maybe you could give us some of your predictions, your goals, your aspirations for the ecosystem around uncollateralized stable coins for this year. Yeah. So I'm hopeful that I think there was an earlier question around like, is this a winner take all market? Like no, the same way that like, you know, collateralized, centralized stable coins is not a winner take. all market. I think there can be multiple ones that gain significant market share. So I hope that we expect that we will see some of these, at least briefly, cross the billion dollar kind of circulation or billion dollar market cap around some of these things. I think potentially

a lot higher. I think we will see some absolutely implode and go to near zero. What I do think we will start to see is we'll start to see more integrations where it does become viable to use a flat curve-like AMM for some of these things because they show that they can stay close enough to a dollar over a long enough period of time that it makes sense to have that flattened AMM curve. I think that we'll start to see some of them. Cream ESD got added to cream recently so it can be borrowed and lent there to see stuff like that that's advancing. I'm actually very interested to see how some of these things will start to work across different layer two solutions or potentially other chains too. But I'm more interested in the layer two solutions. And I think there's a different challenge set

with moving Algo stable coins into layer two solutions versus something like USDC, which can just start minting them directly in the L2. So I think we'll see some experiments around that. You know, I think we're going to see more experimentation around games. to essentially incentivize people to maintain the peg tight, lesser on growth and more around tight pegs. And there's another project that I've been working with called Faye that is experimenting with this idea of protocol-owned liquidity and actually having a lot of essentially LPs

directly by the protocol itself. I mean, it's in burning right tightly around that dollar. It's an approach that I haven't seen anyone else do something similar to that. So I'm excited to see that get live. I think for all of these things, right, there's this interesting dichotomy between what works in theory and what works in practice. And someone recently stated somewhere on Twitter, like, it's the stuff that works in practice, but not in theory. That's the most interesting. And I think, you know, Bitcoin is like that.

Ethereum is like that. And so there may be some things like that in this algorithmic stable coin space that could be really exciting. Outside of Algo Stablecoin, something that I'm really excited about, like I said, L2 adoption. I'm very bullish on. Big fan of the optimist investor in optimism and think the optimistic roll-up approach is great. I think some of the advances on ZK roll-ups have also been very impressive and excited to see some of those getting more usage to. And something that's really, I think, going to come to the fore and is still below the radar for a lot of people is what used to be referred to as minor extracted value. and now there's an attempt to translate it and call it a maximum extractable value.

So it can be done by validators of all sorts, not just proof of work miners. And I think people are not generally aware of how much these games are being played right now in the mempool and how much value essentially being lost to users in the defy ecosystem versus, you know, essentially these arbitrageters who are taking advantage of their computer. technology in both mining and in mempool monitoring. And so we're going to see that get more democratized this year. People are going to recognize it as a problem. It's going to be talked but I think, you know, in similar ways to impermanent loss is talked about where if you're active in the ecosystem, you at least need to be aware of the risks and costs and dangers with it.

And then more and more teams will be trying to build protocols that are MV resistance at the very least. So I'm excited to see that play out. as a new trend. And again, I, you know, always keep coming back to it. This kind of like super fluid collateral thesis, just maximizing capital efficiency. I think Andre is doing some really, uh, sir has some really cool stuff that they're going to be doing in their V2 that moves in this direction. Avey's been doing some fantastic stuff, including unisible key shares as part of the kind of lending and borrowing system as well. Uh, just more and more capital efficiency is, I think, going to allow this whole space to keep moving forward. And I think leverage is in some ways

that's a good word, but really let the ecosystem grow a lot more, but make a lot more useful because you'll have much deeper liquidity. But trying to trade, you know, borrow, lens, do options, do various derivatives. All of this collateral is going to kind of come together and come out of a handful of pools that are going to be super, super efficient. And it's taking a little bit long than I thought, but I think 2021 is going to be the year where everything is super fluid by D. That and then also paired with a bunch of new money into 2020. It's set up to be a bang-up year for crypto, probably our biggest ever. Dan, thanks for coming on in the state of the nation and helping us learn more about

uncollateralized stable coins. I've already learned a ton. So thank you for your time and appreciate you coming on and giving us your thoughts. Always pleasure, guys. Thanks for having me. All right, guys. Risks and disclaimers. Of course, I have to say this.

Eat is risky. So is crypto. So is D5. So are uncollateralized stable coins. Guys, we're on the frontier, but this is the frontier of the frontier. So be careful with these money games. We're headed west. It's not for everyone. But thanks for joining on another episode of Bankless The Nation.