Epicenter - Learn about Crypto, Blockchain, Ethereum, Bitcoin and Distributed Technologies - Ariah Klages-Mundt & Lewis Gudgeon: Gyroscope – The All-Weather Stablecoin

Episode Date: October 27, 2021

Gyroscope is an "all-weather stablecoin" that is backed by a reserve portfolio that tries to diversify across many risk factors. By maintaining a reserve of many decorrelated assets, it makes Gyro Dollars more resilient, similar to how it is hard to move a spinning gyroscope. In a market where there's an explosion of new stablecoins, Gyroscope attempts to find a niche by providing a very stable and resilient option. We were joined by co-founders Lewis Gudgeon and Ariah Klages-Mundt to chat about how Gyroscope works and their strategy to try to make it a standard throughout DeFi.Topics covered in this episode:Their backgrounds and how they got into cryptoAn overview of the Gyroscope StablecoinThe collateral being usedThe mechanism used for stabilizing reservesUse cases of the GyrodollarSAMMs and PAMMsLeverage loansGovernance within the protocolThe goals of the current testnetHow to get involvedEpisode links: GyroscopeDiscordGyroscope blogTwitterLewis on TwitterAriah on TwitterSponsors: Chorus One: Chorus One runs validators on cutting edge Proof of Stake networks such as Cosmos, Solana, Celo, Polkadot and Oasis. - https://epicenter.rocks/chorusoneParaSwap: ParaSwap aggregates all major DEXs and makes sure you beat the market price at every single swap and with the lowest slippage - paraswap.io/epicenterThis episode is hosted by Sunny Aggarwal. Show notes and listening options: epicenter.tv/415

Welcome to Epicenter, the podcast where we interview crypto founders, builders, and thought leaders. I'm Sonia Agarral, and today we're speaking with Lewis Gersian and Aria Klogis Munt, who are the co-founders of Girocope, a new stable coin project. Before we talk to Lewis and Aria about Gyroscope, though, we'd like to tell you about our sponsors this week. The first, proof of stake is transforming crypto and you can be a part of it. You can start participating in networks and contribute to network security. and earn rewards by staking with Chorus One. Corse 1 is your staking provider securing billions of assets for over 10,000 customers on 25 networks including Solana, Cosmos, and Ethereum.

Interested in running your own branded nodes, the managed white label node as a service offering leverages Corrace 1's highly available and proven infrastructure. Corse 1 also just helped launch the LIDO for Solana, Solana's liquid staking solution that allows you to stake and participate in, defy at the same time. Head over now to course. Dot 1 to start your staking journey.

Also, Paraswap just came out with a huge update that's even faster and more liquid. It's cheaper than Uniswap and comes out with a new gas token that can cut your gas fees by up to 50%. Paraswap is now multi-chain and has expanded to Polygon and Binance Smart Chain and they recently just launched an avalanche as well. So you can start trading at pariswop.io slash epicenter. Cool. All right. Welcome guys to the show.

glad to have you on. My friend Leland has spoken, you know, he talks a lot about you guys and he was like, you got you got to get these guys on the show. They're like amazing and I'm like, okay, let's do it. So I'm excited to have you guys on finally. Oh, thanks. Yeah, thanks. Thanks. It's a real pleasure to be here. And yeah, thanks also to Lee and thanks for introducing us. Before we, you know, dive into gyroscope, why don't you, you know, tell me a little bit about how how you guys got involved with crypto? Is this sort of your first project? Or do you have like, you know, what were you doing before?

Yeah, sure. Well, so myself, the journey started on one fairly decisive day in October 2014, I think it was, when Vitalik was doing his sort of Ethereum Roadshow. And he came to Cambridge University and he sort of gave this talk to, what was a relatively sort of under attended event, I would say, at the time. It's just incredible looking back. And he talked about smart contracts and all of these concepts that we now know very well and understand.

And I was very intrigued, but just sort of didn't, just sort of couldn't really wrap my head around what he was proposing at the time. But that was really the sort of start of my interest. And since then, I sort of, learned a lot. I went on to do a master's in economics. While I was doing that, I sort of continued to really sort of research the space and focused on many projects as they developed. I did a master's in economics and worked briefly in the city as an economist, but my interest in crypto was still very, very strong. And I sort of knew that once I caught the bug, I couldn't really

go back. So I got to a point where I saw there was this PhD position advertised at Imperial College London. This was in 2018 or so and I started started this PhD. So my PhD has been focused entirely on defy. So when I started it, it was really in the deep depths of a bear market. really quite a, it felt like quite a kind of contrarian bet going into it, I suppose, at the time. And published a number of papers on this area, on risks in decentralized finance. And then at some point met Araya and we, yeah, have embarked on this stable point journey. Nice. Araya, how about you?

Yeah, my background is in math. and after undergrad I did a bit of work in financial software for for a couple years and decided to go into a PhD program after that because I was working on some side projects around sort of like modeling complex financial systems and decided that that was kind of the more interesting area compared to the work that I was doing and then went to Cornell and kind of partway through the PhD around like two, 2017, this is when Maker was coming out, got very interested in these more complicated sort of defy-like things being built, but before it was really called defy, and sort of merged half of my research into that area. And so several stable corn papers and defy papers have come out of that since then. And this project emerged from a paper that Lewis and I were working on summer 2020, and then we sort of jump started this project at the IC3 boot camp following that paper. Oh, nice.

I love those IC3 boot camps. I think I went to the one in 2017, and that was like, you know, I think I've just met a lot of people who have been like, you know, close friends in the space from those. Is that where you guys met as well? Or do you guys, how do you guys like get, start work, you know, decide meet and then decide to like start working together on this project? We met the previous summer. 2019, I was spending some time in London where my advisor is sometimes based. And we met at a PhD meetup here, I think. And Louis, you mentioned you were doing like economics, like you're, you know, practicing economists. Was it like monetary economics or was it like, you know, something

else? So my sort of main area in economics, that time was like econometrics and microeconomics. So, yeah, really kind of concerned with, like, you know, finding like causal impacts and trying to sort of understand exactly how sort of certain types of economic systems work. In my work as an economist, it was, yeah, one of like the main areas of focus was on sort of, yeah, like litigation type work and also had a lot of exposure to regulators, financial regulators. Yeah, it was that sort of thing. Do you think any of it really carries over to what you're doing now? So I think, I mean, there are two parts to that. So, of course, the formal training in economics, well, I mean, I should probably say, so actually right back in the very beginning of this journey for me,

I did a degree in philosophy, politics, and economics. And it was during a time of, you know, just after the financial crisis and went into this in this, I attended many talks and there are many lectures where everyone was giving these talks about the sort of misbehavior of banks. And this is, of course, something that has really been at the center of Bitcoin itself, where one of the first block headers, there's this statement about the chancellor declaring bail out of the banks or something like this. But, yeah, so there are two parts. So my sort of main background in economics, of course, has carried over immensely, like, you know, currency models and this sort of thing is like really red and butter of degree courses and master's courses and economics. And then on the sort of professional side, the focus on, like, engagement with regulators has also really shaped how I see, like, this industry and sort of the role that we should be.

be playing in this industry as well. For whatever reason, I've engaged with a number of regulators in different areas, not just financial services, actually. And I think that one of the sort of main things that I quite passionately believe is that, you know, regulation isn't something necessarily to be feared. And in fact, it's something that for, like, well-functioning markets actually helps enable these markets, it really can play a very important role. And of course, the challenge is to make sure that it's playing the right role and that, you know, it's sort of an industry that,

you know, you can grow together. Like industry and regulation, these are things that they co-evolve. And that's one of the main beliefs I took away from my professional, professional experiences and a columnist. Nice. And so then how did this sort of lead you guys to build a stable coin. Like, why, you know, there's so many different interesting things going on in DFI from, like, Dexas to lending to pure Ponzi's. But, like, why stablecoin? Why did that, why was that the thing you guys decided to, like, okay, this is what we want

to go in and fix? Well, actually, a stable coin is kind of like something that pops out of what we have in mind building, but there's like a number of other things that go along, along the way as well. Basically, we see a need for robust infrastructure for just like connecting various things in various different DFI

protocols, sort of making composability but with risk control sort of like an idea as well. And one of those things is a stable coin. Another thing is sort of what we consider like a robust deck structure. Something where if there are sort of issues

with certain pairs that you can still sort of route through the decks to do swaps that you might want to make without the problem of like a central hub asset or something. I see, interesting. I guess we have to dive into how that works. So yeah, so why don't why don't we just, I guess, start off with like this, the brief summary of like what the gyroscope protocol is and then we can like kind of dive in from there. Sure. So the gyroscope stable. Coin is an autonomous stable coin. It's one that we can sort of primarily think of as comprising of two components.

So when you say autonomous, what does autonomous mean? So it runs like by itself without necessitating like constant sort of human intervention. That's not that. And just to add to that, I suppose, otherwise it will be ambiguous. So not to say there's no role for governance, but just that it's not a sort of, you know, second by second or block by block process. So yeah, so the stable coin you can think of it is comprising of sort of two main elements. So the first element is a reserve that is fundamentally as diversified as possible. So we try to diversify all risks that we can think of in defy. So if you can think of the risk and think of some way to diversify away that risk,

we will attempt to do that in the reserve. So it's constructed so that it contains multiple assets that if there are certain types of failure mode. So the first, of course, is like price risk or other stable coins going through depegging events or crashes or this sort of thing. This is one type of risk. But of course, there's also regulatory risk is another major. one, particularly in the stable coin space, governance risk, plenty of risk factors. And so what we try to do with the reserve is separate assets into different compartments so that these risks are diversified to the greatest extent that we can.

So that's really the first thing, this reserve. The second thing is that we have a sort of innovative approach towards constructing primary and secondary markets. And perhaps, yeah, Aria maybe wants to go through this one. Yeah, sure. So here, it's first worth highlighting what is like a primary market, what is a secondary market? Because sometimes the naming can make it a little counterintuitive.

But this is coming from like ETS and traditional finance. So basically the primary market is if you're minting or redeeming a stable coin, or in the case of ETFs, if you're minting or redeeming a share for the underlying assets in the ETF. And then secondary markets means that you're trading shares or trading stable coins that have already been minted and trading it with someone else. And so actually, like, kind of the problem in the naming here that gets confusing is that the primary activity, as in like most trading activity usually happens on secondary markets, not primary markets. And so that can be a little confusing. But basically, what we have in mind is bringing this sort of structure into the

defy space with this stable coin and basically designing the structure of this primary market in kind of the right way that helps like reinforce liquidity in this stable coin, but doesn't take charge of like where most trading activity is supposed to happen. It's just sort of like supporting the secondary markets. And the secondary markets are are then sort of like taking the information from the primary markets, and in particular, like, you have pricing balance coming from the primary market then, and then you can construct these secondary markets as AMMs that concentrate liquidity within specific ranges. Cool.

So, okay, let's maybe start then with Treasury first, or, like, the, you know, reserves. So, so, okay, I guess, like, to start off with, what kind of collateral do you guys accept currently? So, you know, the goal is to maximize the, or minimize the correlation, risk. So what is the current collateral that's being used? Yeah, so primarily stable coins, but not exclusively. So yeah, you said sort of the goal is to minimize correlation risk. That is true in one sense, but it's not like the, it's not an explicit objective. Because it's not just about minimizing sort of, you know, correlation in returns or prices or something like that.

We do want to control for other risk factors. Yeah, it's kind of more about tail risk. Right. Correlation in tail risks. You mentioned like regulatory and governance. What about like oracles? Like do you think, how do you, you know, I feel like within the defy space, one of the biggest things is like this like heavy reliance on very few sets of oracles, especially like often chain link. It's like, how do you sort of like deal with this when like and like, like, and like, like, nudge the protocols that you're integrating with towards like more decorrelated Oracle risks. So I think there are a number of things. I mean, you know, this, the risks posed by oracles, and we're well aware of and we've seen many sort of bugs have occurred due to

problems when over-reliance on single oracles. I think that, you know, in the first instance, we will go with things that are tried and tested for the Oracle approach because also with a system like ours, it's relatively complex in terms of code base. So there will be this bootstrapping phase where we have to roll things out and make sure that we sort of don't try to do too much innovation all at once. But actually we have put quite a bit of thought into ways to control this Oracle. risk. Yeah, and in particular, trying to find ways to sort of bound the behavior of oracles and see if we can set sort of parameters around what we would consider reasonable input feeds. But this is certainly on our sort of list of things to do here. And so you mentioned the stable coin. So do you have a list? Do you know which stable coins particularly

you accept right now? Or you plan to at launch? right so it's not live right now of course and we don't we haven't come out with the specific portfolio that it'll start with I think the space can evolve significantly and even just like a couple months here before before the actual launch and so we also want like some flexibility there but we kind of see like at a high level the portfolio is just sort of split between the various different risks. And one of the top risks, risk distinctions, is between custodial assets and non-custodial assets, with the custodial assets having a lot of counterparty risks and regulatory risks more so than the non-custodial ones, but then the non-custodial ones having sort of more

or more or more governance risks, or at least on-chain governance risks, a little bit different from centralized governance risks, as well as just like the pricing, mechanism risks, kind of like what we were seeing in Maker back on Black Thursday, what we're seeing in like the crash of all these Algo Stablecoins recently. And so at a very high level, you would think of the portfolio as like first separating between these custodial and non-custodial risks and then segregating the risks to the extent possible. Like the simplest way to visualize kind of like a hierarchical ordering of risks.

It may not be exactly that, but that's easy to visualize. Do you guys have a mechanism then also to like target a specific ratio of like assets in the in the reserves? So like, you know, we can go ahead and say that like, hey, okay, you know, let's say it accepts USDC, USDT and die as, you know, the three things. And we accept all three, but then what happens if our trip, if our reserves just end up becoming 99% USDC? Because that's just all people want to deposit. So do you have like some mechanism of like making sure incentivizing, balancing these out? Yeah.

So the idea is that their desired portfolio weights. And these weights do change over time naturally, but just as the price of those assets change. So you can think of it like how cap weighting might change the weights in an ETF. It happens in a passive way as those assets are repriced. And then at some point in the future, governance might come in and say, well, actually, we think the new desired portfolio weights are slightly different. And then there's like a rebalancing event to that. But then, right. So how the primary markets work, essentially, is there's these desired portfolio weights coming from how it was initially set up to segregate risks. And there's some ability to go outside of that, but not too much. And eventually you pay for going too far outside of that. And so basically if you get to the point where you're getting too far from those weights, then it'll be more efficient to, instead of just coming in, say it's overweighted a little bit in USDA, instead of coming into mint more gyrodollars with USC, it's probably going to be more

efficient to come in and mint with dye instead. And maybe you start with USC, but you swap to die somewhere else and it's more efficient to do that routing. Got it. Okay. So great. That makes sense. That's like, you know, so I guess in, you know, from your blog post, you talk about like the three layers of defense in like menacing stability.

So the first one is just these like reserves, right? And like in a world where we're over collateralized or at collateral, you know, great, the world's easy. You know, we just, if you want to get out, you just swap it for one dollar of the other thing. Obviously, the fun part of stable coins is how to design for the other world where we're going into a risky. scenario. So, and so I guess this is where the primary, the Pams and the Sams come into, come into play. So, okay, so would it be fair to say that the primary, so if I'm getting this right, the primary automated market maker is sort of, you know, what would be fair to call it? It's more like a bonding curve that allows you to mint and burn a new gyro dollars or like

collateral tokens that you deposit. And then the secondary market maker, the secondary, the secondary very automated market maker is like something, something like uniswap or something where the gyrodollars are trading on what we traditionally think of as an AMM. Yeah, I think you could say that. Basically, it's a bonding curve with a specific shape that we've encoded. And the shape sort of changes depending on the health of the system, kind of the important thing. The idea there is that it's a sustainable curve always, didn't into account the health of the

system. And then there are two curves, actually, one for redemption, one for mint. Oh, okay. So it kind of creates a spread in the primary market. And this spread, if the secondary market is behaving smartly, will take that spread into account and deciding how to price things. And is the secondary market kept in line with the primary market by the protocol itself, or does it sort of just depend on external arbitrages to like common arbitrage to secondary market into a So basically, if the secondary market is ever trading outside of the bounds from the primary market, then right, there's an arbitrage opportunity and somebody will be running a keeper that brings it back in line is the idea.

Okay. So, but the protocol itself is not actually ever like, you know, it's not like Faye or something where the protocol itself is market making on the secondary market. Well, Faye is an interesting case here. where their secondary market and primary market is kind of like one. A bit confused into one. Right. And so we are just making it explicit. What should be the primary market structure?

How should that influence the secondary market? And then it's a much cleaner and much more fundamentals-driven approach for how to build it is our idea. Got it. Okay. What's the benefit of do you not like end up losing value to like arbitrage instead of letting the protocol do the market making on the secondary market? Like, why not, why did you choose not to do something similar to Fay? And how would you compare, like, the pros and cons of the two models?

So basically, the primary market is market making, but in its own AMM. Basically, actually, I think how it will work out, if you're coming to, to the stable coin market as a, as a user, looking to buy some, some gyro dollars, you will go to, So we're first implementing this on balancer. You'll go to the balancer exchange. The balancer exchange has a smart order routing mechanism. Both this PAM and this SAM will be built into the balancer V2 system. And actually, if this smart order routing algorithm will take into account like how much you're trying to swap

and the resulting gas fees estimate. And it'll route your order in the most efficient place. usually that should be the secondary market. If it's a little bit out of alignment, you may actually be going straight through the primary market. And if for some reason your order is too small, maybe the gas fees on the primary market are a little bit higher than on the secondary markets, maybe you still go through the secondary market.

And then there's a rebalancing opportunity from an arbitrageeure. Got it. Okay. So, okay, so then let's talk about what is the exact mechanism of how this like helps maintain stability when the reserves go under collateralized. So let's say the value of the reserves, USDT declares tomorrow, psych guys. We actually had no reserves the entire time and the value just goes to zero. And now let's say your value of your stable, the reserves goes to like 80% of what the

outstanding gyrodollars are. What is the mechanism here? What happens next? I think one thing to immediately say here is that in this situation, this is already very extreme, given our design. So at the point that it's possible to be at a collateralization ratio of 80% or so, this means that like the first kind of defensive line, which is this diversified reserve, it means that this has already been, well, breached, I guess, to continue with the analogy. Well, what is sort of the maximum that you'd be willing to let,

something like USDT become in your reserves. As a proportion. Yeah. I mean, yeah, it's too early to, it's too early to say at the moment. But we, but this reserve itself is intended to also be, um, yield accruing. So it's not, it's not just that we can only go, you know, we have like the kind of, say, straight value of the capital and any, any drops will harm us. we've got this like additional buffer as well built into the reserve.

Um, when we first started talking about this, it was, uh, we were using this term like rainy day fund. Uh, so having some capital in, in case of a rainy day. So this, so yeah, so just to say that in, in the situation that you're describing, we're, we're already, um, in, uh, hopefully what is a sort of quite, you know, part of the tail of risk for us. But then, sure. So, let's say we are in the situation where um just really quick where does the yield come from so you are you taking the collateral that's put in and then you know throwing it into urine or something yeah so so um we will be simulating what uh like safe levels to do with different parts of the the capital the most important thing that we will not compromise on is like uh uh putting the reserve in any sort of

dangerous or vulnerable position. So this is a feature that, again, we expect to be rolling out very slowly and possibly not in the very first version. But yeah, so it will be through integration with other protocols where it's possible to be any yield. And yeah,

and, you know, with balance of battle rewards, this sort of thing. The idea is basically that like the portfolio is supposed to segregate theirs risks, but some assets have very similar risks. can deploy those assets together in certain pools to earn a yield without bringing in much more risks to the portfolio. And so the aim of the portfolio is sort of like good risk-adjusted sort of like deployment of assets. Cool. Okay, so then let's go back to the, all right, we're at

80%. It is the doomsday scenario. What now? What do? Yeah, so yeah, I just wanted to highlight the extent to which we hope this is unusual given the design, but then given we're in this situation, what we fundamentally do is enable agents to coordinate on the possibility of the stable coin returning to peg. So we leave open in design the possibility of this sort of equilibrium of the peg, like re-pegging occurring. And one of the one of the mechanisms that we use here is baked into the primary market AMM itself. So this is where we will essentially, in times of heavy outflows from the protocol, the redemption rates will be made less favorable. So we'll start to sort of in some sense impose penalties, penalties on redemption. But we will never stop redemption. I think

that's also kind of an important point to make. So in the worst, worst case, it will always be possible to redeem it the sort of just the net asset value of the reserve. But we, we will, we're trying to sort of, you know, engender these like dynamics in the market that means that we only would get down to this point very, very slowly. And in doing so, enable agents to kind of coordinate around this belief that the currency will return to the peg. Yeah, so I can fill in more there if you want. I'd kind of mentioned before that this primary market bonding curve,

shape, basically, is dynamic with the health of the system. And the idea there is that if you do have sort of large shocks to the reserve, like the setting we're describing here, you want to open up the possibility that a peg can be maintained because there's enough like natural economic usage, economic demand for this as a as a currency. And be able to support that up to a point. But then after that point, there's kind of like a circuit breaker effect. And the redemption price kind of decays down to the always sustainable level, basically. And this is to basically deter bankruns and deter speculative attacks and just ensure that the system actually survives and has a chance to recover. And,

supposing it's like it that gives it time and then all the other mechanisms can basically help the system recover is the idea got it cool i guess this kind of goes into another like thing which is like you know this like natural demand where you know i feel like in stable coins you can come up with whatever algorithmic trickery you want and but at the end of the day like stable coins to work really need to have like real organic demand and like usage and adoption, right? So, I don't know. In my opinion, I feel like so far, I've only seen two non-custodial, stable coins that have actually like managed to like seem to have gotten like legitimate organic demand. That's probably like die and like Tara. So what would be like your plan to like,

how do you guys plan to like get drive legitimate demand for for the? stable coin for a gyro dollar so that when you get into a scenario there is this like expectation and like reason and demand for it to go back to one dollar yeah that's uh i think there's really answering that question i think that really brings up by many many different topics i mean firstly you know firstly if you if you have the option of having an asset that is um you know as low risk as you can go in defy um that already seems to be offering improvement over existing non-custodial stable coins where the risk is concentrated. So I think this, you know, I think this already is itself just a massive improvement

having a reserve back stable coin like this where the reserve is specifically diversified to the greatest extent that you can do so. But then we have a number of sort of core ideas that we intend to go with, which will enable us to bootstrap usage. But before sort of talking about it, I think it is to sort of jump the gun a bit, because something that's very important to us is, you know, for a stable coin, legitimacy in the stable coin is like a super important facet of it. And this is something that's like, say, fundamental value of this project is to ensure, that we achieve rapid decentralization from, you know, from the beginning. And we, we already have a very active community on Discord and elsewhere that we, you know,

it's like helping us to formulate the sort of ideas that we want to be going with and, you know, shaping a stable coin fundamentally as a kind of, you know, public good for defy and for the for the defy community. I'm saying that because I think that's a real caveat to the fact that the, you know, where we do have these ideas to bootstrap economic usage, which is the most important type of usage that will, you know, help boost demand for us, or one of the most important, this is all very much subject to community input and so on.

But so with that caveat out the way, one of the ideas that we are interested in at the moment is the possibility of a sort of UBI type program where the some you know amount of tokens could be distributed to like community members and on some frequency in the future to be determined and referring here to stablecoin as opposed to any other token but the idea being that yeah we can somehow try to encourage like a kind of organic growth in how the stable coin is used. And in particular in, you know, places where it really is of, you know, fundamental value to different market players to be able to use and have access to a stable

currency. So, you know, in unstable economies and places where inflation rates are very high and, you know, it's difficult to get access to a stable currency. These are really, for us, this is like, you know, the level of values, this is like kind of very important area that we would hope to be encouraging demand. Another important area here is kind of more the almost B2B area of basically demand from Dow treasuries for stable-ish assets to keep the treasury in. One thing I guess would be, let's say I'm a, user that has a lot of USDC and I am sufficiently confident in USDC is like stability. Like swapping my USDC for gyro dollars and then the protocol is like, you know, taking those USDC and putting them in like urine or whatever and keeping the yield as like part of the reserves.

Like, how do you drive demand for, like, people to actually do this, like, give up the return that they could be getting on the USDC and instead use it to, like, contribute to this public good, which is, like, growing the reserves? Yeah. So this is where I think it makes sense to talk about, like, a distinction of use cases. Most crypto use cases today are fairly speculative in nature as opposed to, like you're saying, these, like, real economic adoptions. cases. And realistically, those speculative cases, although kind of like, if that's the only thing happening, it's a little bit self-reinforcing, of course. At some point, you have to have actual economic adoption of something for the whole chain of things to make sense. But realistically today, like the first adopters and first use cases are going to be in speculative sort of

uses. And then once you've, our aim is basically like make the first speculative sort of uses. make the system sort of like more liquid and more able to function and provide like a various services that people would want and then kind of like once that's established as a baseline like try to bootstrap economic usage on top of that and so the first the first use case that we're sort of building out of the gate is this uh this idea of a i mean you can kind of compare it to like a money market fund replacement i mean it's quite different in structure from a market, but it's the same sort of aims. Like basically you want a fairly stable asset with the aims of getting some good risk-adjusted returns. And the idea here is that you would

mint the first gyro dollars because you are going to provide liquidity across these different SAMs, these secondary market AMMs that we've set up. And these secondary market AMMs are basically forming a network within the balancer vault and connecting trades, making more trades more efficiently possible within balancer. And so basically, if you're a user of balancer, and this is all set up, you're going to come to balancer, you're going to use their smart order routing algorithm, you're going to be routed than the most efficient path, and probably without even knowing it, you're going to be going through two of these SAMs or something.

And basically, the idea here is that compare this with, compare this with, like curve and like their three pool, for instance, or other pools, or even like these three pools now in Balancer. The problem is if you're providing liquidity to this three pool, you're composing all of the risks of all of the assets in that, and all of the places those assets are being deployed. So for instance, well, in the three pool, you're certainly taking on USDT, USDC, and die, all of their risks. If anything breaks, the whole pool basically goes to to zero. In some of the other pools, you also layer in compound and AVE on top of that. This means that, like, it's not actually like a great money market fund strategy because you're

actually getting, like, fairly bad risk exposure. But we've set up, we're setting up this network of SAMs in a way where if you sort of provide liquidity across, like, a number of these different SAMs, your risk exposure is actually quite contained. Kind of the same idea as like this all-weather reserve that, uh, that we're building. So yeah, I guess the difference here is that, you know, in Curve, they are allowing people to trade against the pool. Is there any way to, so using this like network of SAMs is sort of, you're saying that this is a way of replicating that functionality that Curve provides? Yeah, exactly. And you can also make sense.

So basically, let's go into what a SAM is, I guess. A SAM is basically a specialized pool where you're trading gyrodollars against another asset. So one SAM would be like gyrodollars USDC. Another Sam would be gyrodollars die. Another SAM going to like BUSD maybe. And you can even have a SAM that goes to ETH, which is a little bit harder in Curve. Now they have their tri-pool. But basically it's the SAMs are working because there's this primary.

market structure. As long as there's a primary market for this other repaired asset, you can do basically the same sort of ideas in constructing the strategy of this pool. And then you would basically be, the idea is that you would compose these trades in these different SAMs. So say you're starting with USDC and you want it to swap to be USD, maybe there's a pool where you could directly do that. Likely, it also includes like a bunch of other. risky assets in it. If you're doing it through the gyroscope, sort of like a robust decks idea, you would compose two SAMs. You would compose a swap to Jarrodollars and then compose a swap in the other SAM from Jarodollars back to the USD. And this has the benefit

that if you actually have like some real market turbulence and one of these other assets actually breaks, this deck still functions, whereas the curve pool is gone. And so we just started if I recall, like the SAMs exist on the primary market maker exists like as a bonding curve, but the SAMs exist on external AMMs like Balancer or Uniswap and stuff. They'll both be integrated into balancer v2. It's just that the PAM, the PAM is something where if you're a liquidity provider like an individual, you can't provide liquidity to the PAM. That's only the protocol itself. Right. And so it's a, it's going to be a balancer pool where, well, not anyone can provide liquidity. It's for the protocol itself. But it's built into balancer so that you can like easily compose trades and easily route through the right pools. And then if you're an individual liquidity provider, you would be considering these different sam pools. I see. And the protocol is not the one market making in those sam pools. No. So basically the protocol provides these preys.

pricing bounds through the PAM. These pricing bounds influence how the SAMs should be shaped. And either you're coming into balance or to do a trade and you're being routed to the most efficient venue. And if it's a large enough swap, it might be the PAM if the SAM is kind of out of alignment. But it's usually the SAM. But if you're too small of a trade, maybe you still go through the Sams and then there's an arbitrage opportunity for a keeper to come along later. Why do you believe that these SAMs will become, like, highly liquid? Like, so, you know, if you, if your goal is to make this be this, like, common liquid, like, you know, the one of the most popular liquidity routers, are there incentives for people to add liquidity to these samples? Well, the precise form of incentives is certainly sort of TBD.

The long-term idea is that, as with any sort of, like, LP position, like, to be sustainable long-term, there should... There should be sort of like organic trading demand to use these pools. And so that's the aim, basically, is to make these profitable, like, LP positions that that people actually want to use because it's providing a useful service. In this case, like immediately connecting new trade possibilities and balancer. Eventually, also, like, hopefully there's organic demand for usage of gyro dollars itself. And natural demand is to use the SAMs just because they allow you to use job. gyro dollars and move from assets into gyro dollars or out of gyro dollars,

why it's going to be liquid at start comes down to sort of how we've designed the system and the reserve also. So basically that's why it makes sense to start with a reserve that is like mostly other stable coins. Maybe there's some some other assets in the reserve at the beginning to the extent that it makes sense. But because like the system is just starting out, it's a lot more sensitive to price risks. And so if we start with a system that's basically, unless something really bad happens really soon, is going to be guaranteed, basically, like 100% reserved

or slightly more as it earns yield, then the pricing bounds from the PAM are going to be quite tight, and you don't actually even have to have that much liquidity in these SAMs to have good liquidity, have good trades possible. You guys also talked about a couple other forms of, like, stabilization that you're looking into, like leverage loans and stuff. Can you talk a little bit about that? Yeah, sure.

So I think the best comparison here is to draw comparison with Maker. And Maker on Black Thursday encountered this de-leveraging spiral, the short-squeeze sort of effect on dye that brought the dye price up to over $1.10. and this had the effect on sort of vaults, the people getting leverage in Maker by minting dye, that in a crisis where they actually have to de-leverage, sort of, they have to buy back dye on the market at this, they're a very large premium, and actually they ended up losing more money in this de-leveraging process than they thought they would have, because it's supposed to be a dollar, a dollar asset.

But instead, there's a short-squeeze effect on dye, and all of a sudden, to de-leverage the same amount, there's a like 12% premium. And Maker since then, this has been one of the big motivations for like the PSM and Maker, has introduced this PSM that basically ties the die price to one USDC. And this is basically their form of like introducing a primary market, I would say. And their primary market is just adopting USC's primary market, where now, if you're in this sort of crisis and you're a vault, you can come in with a, if you have dollars, you go to circle, you get new USDC, you bring it in, swap it to die and de-leverage your position, and you don't have to worry about these de-leveraging spirals, but now you're importing

USC risk in a very large extent into Maker itself. And that's kind of motivated like gyroscope actually, because this mechanism that we're building is basically like if you were to try to do something like the PSM, which is like, again, making this primary market structure in as decentralized as like a risk-adjusted way as possible, that's our idea for gyroscope, basically. And so gyroscope is kind of like making a better PSM, which means we can also integrate with something like Maker to make a leveraged loans backing for part of the supply. And so the idea would then be that part of the general dollar supply would be backed by by leveraged loans just like Maker. Part of it would be backed by this primary market mechanism,

this PSM replacement, so to say. And then you have basically similar sort of like security to Maker, but maybe like a little bit better because you have this sort of stronger, more robust primary market mechanism. And then there was also like a proposal I saw of like considering like getting Maker to use GyroDollars as like part of their PSM. Is that sort of orthogonal to this or is or are these like related in some way? It's the same idea. It's basically like if we can work together with Maker to just make one thing like that

would be ideal. Okay. Got it. And is that like, you know, is that in progress or like what's, the status on that? I don't think that there was much like immediate interest just because

there's like so far in the future. I guess we'll see kind of like when things get rolled out and what the interest is at that point. Got it. Okay. We're generally all... It's an idea that I'm quite excited about. Yeah. Yeah. And we're also like as a general point of principle, very excited about integrations with other protocols and, you know, believe very

strongly in like cooperation in this space. And yeah, I personally feel, you know, Maker was one of the, like, key projects back in 2017 or so that really peaked my interest in this area. We would, we would love to, love to integrate with them. I think, yeah, back when they sort of devised the CDP mechanics and their naming scheme, all of these things, I mean, it was, you know, this was some real ingenuity. And, yeah, we're big fans. So I guess let's talk about a little bit about your governance. So you guys also have been doing a lot of work on like, you know, making your governance protocol for driver dollars really, you know,

resilient in a lot of ways. So tell us a little bit about, you know, I guess the two big key words that, you know, are bolding in the dock are like conditional cash flows and optimistic approvals. You want to like tell us a little bit about these? Yeah, so we've done a fair amount of research now on sort of like the issues about decentralized governance. In particular, when you have sort of like pseudo-anonymous people and you, the goal is like not to have the, not to rely on the backing of like a legal system to work out something if there's a problem. And several things that come out of this basically is that, there actually are issues that are very parallel to some things in corporate finance.

It's just kind of like amplified because you don't have the protections of the legal system guaranteed or guaranteed to some extent, which is some probability. And these two issues are sort of along the lines of sort of short-term decision-making. So things that are maybe good for protocol revenues that can go to governor's short-term, but kind of at the expense of the long-term health of the system. And then also basically like governance attacks or rug pulls on the system that might be attempted by a governance community. And that's kind of influenced us to design these two mechanisms that you mentioned. Kind of the biggest one, what I consider the most interesting and innovative one really, is this optimistic approval mechanism. And what it means is that you have, on a structural level at least, you have some party that is as delegated to be able to make decisions. And you have another party that's this guardian role in the system.

And it has this optional veto right that it can exercise if it doesn't agree with the decisions made by this designated party. And this can kind of fill in two important places. in a Defi protocol, and not just gyroscope, actually. Like, it can be applied in Defi more generally. One of them is streamlining governance, which we've seen as like a very important issue these days because of basically a voter apathy and just too many things to vote on, too many things to decide.

Basically, you can use this optimistic approval mechanism to delegate to a specific group of, like a subgroup of governors, and these governors can make, make decisions and post these decisions. And basically then there's a time lock period during which the whole governance community can come in and say, well, actually, maybe I don't like this decision. And if enough of us feel that strongly about it, then we can exercise this optional veto to stop it from actually being implemented.

And in that way, like usually this veto rights, like you'd expect if you made the right decision about who's who's delegated, that it's rarely exercised, but it's really only exercised if there's, like, very bad decisions being made. And this is why it can also be applied, like, to prevent rug pulls, actually, because you can, you can make the, the guardians of this actually be the real users of the system, like the stable coin holders, for instance. And so now, let's suppose that the governance has proposed a change that would effectuate a rugpole. Now there's a time lock period and as long as there's some gyrodollar holders like paying attention to this and then raising the alarm that, hey, this is a rug pull, then the idea is that there's

this opportunity during this time lock for enough gyrodoller holders to come together, exercise this veto right and block the rugpole action from actually happening. And this just changes the dynamics of this governance game theory, basically, where now you're, if you're a governor and you're thinking about doing a rugpole, you should be kind of skeptical that's actually going to pass. There's like a significant probability is going to be caught. There's this optional veto that's going to happen. And actually, you're just going to hurt the value of your position because now everyone's like,

oh, maybe I don't want to use the system because look what the governors just try to do. and so I'm going to exit and use a different system. I think that all makes sense. I guess it's similar to like sort of the role that guardians play in a lot of the governance protocols, but it's like the idea of like, hey, we can give this guardian power to like the token holders of the stable coin holders, I guess. What about, I think the part that I was actually more interested on was the conditional payment, because I thought that was really cool where, so let me see if I understand this correctly. So what happens is that like there's like some.

cash flows where, first of all, where are the cash flows coming from? Those are coming from the yield strategies. Yeah. So basically, yeah, there's a number of places that cash flows could come from in the future. It really depends on like what the, how the community decides to evolve the system, of course. But just to point out a few, like there are some tasks to governance. One of them is sort of like the slow update of the reserve portfolio design as the DeFi space. evolves. And at some point, they may be compensated for that by some of the excess yield from

that portfolio. Other things are on like sort of designing the right, designing and implementing kind of the right, the right SAMs structures and interaction with the PAM. And at some point, you could have a, I guess, a fee switch, kind of like in UNISWOP, where part of the fee revenue from the SAMS might go back into the system kind of by default, but maybe could also be used to incentivize governors in the right direction. And that's kind of like where these cash flows could be coming from hypothetically at some point. And the idea then behind the conditional cash flows is really that these these cash flows that are coming into the system, where should they go? And we're saying by default, they should go to be an extra buffer to the reserve port.

portfolio. And then if the system stays healthy, like far into the future from when these cash flows actually came in, that means that like the governors were doing, it's an indication at least that the governors are doing a good job. And then at that point in the future, conditional on the system remaining in this healthy state, then some of the cash flows like should be unlocked to incentivize governance. And so it's really about like expectations of future cash flows, conditional, on the system remaining healthy, which then sets up this incentive dynamic that, hey, we actually have to be very serious about the system, designing it as best as possible, so that it actually remains healthy. So, and so it would go to the current governors or the governors at the time when it was, so what I'm imagining is there's like some sort of like, let's say a six-month delay on like payouts, and it's like, okay, we look at the protocol, six-month. months from now and then we decide, okay, it actually, you know, the governor is from six months ago

actually did a good job and then we pay them out, you know, now. Is that what it's like? Or is it, or do we treat, or do we treat like the governance token holders, which I guess we haven't even got into the governance token, but like, do we treat those token holders as relatively stable over time? So the precise form of this can vary. And this is something that hasn't been sort of built yet. This is going to be one of the. the next pieces that comes out. But to some degree, it also, like, it doesn't matter to some degree. Like, basically, if markets are efficient, which it may not be the case right now in

crypto, of course, but let's suppose they are, then if you are sort of like selling out of your governance token position at some point, the buyer of that should take into your account sort of the probability that the payouts would actually happen from these conditional cash flows. And so you should get a fair price if it's a fair market. But that's really a long-term idea, of course, that these systems are actually like efficient markets. So you guys have this sort of like live incentivized test net going on right now. What is the, how does it work?

And I saw that there's different phases and it's sort of a little bit gamified. what's the goal of this? Is this to sort of get people familiar with the UX of the protocol, or is it to test out certain economic assumptions? Or what's ultimately the end goal of this? TestNet? So I think there are a few goals, really. The first is, again, about growing an active community of users from the beginning. but yeah it's also been um so perhaps i should just yeah maybe give a bit of detail about about what the

game actually is so um it's uh sort of very at least visually it's based on um on a flight simulator uh but unfortunately there is little flying that you can actually do this i think the sort of the i think if you attempted to build a flight simulator on solidity i'm not sure what would I'm not sure what would happen, but I don't suggest trying. So there is no flying, but the idea is that you go through these like two and a half levels we have at the moment where you can sort of learn about the core mechanics of the protocol and get some familiarity with, you know, how the minting and redeeming operations work in the primary market and these sorts of things. And so by going through that, we hope that one of the first things is that people are able to learn about what we're building and like learn the language that we think like fits this best.

And it's also for us an interesting experiment in seeing, you know, seeing what feedback we get and seeing what sort of resonates with the community. And also there are a few mechanisms in this very early test net version that we, wanted to get sort of tested a bit in a live environment to see how, see how they work and see, see if there are sort of edge cases that emerge through time that we haven't thought of up front. So it's, it's been sort of a way for all, you know, both sides in this to, to learn in the beginning. And yeah, but it's, it's been, it's been quite, it's been quite a fun, a fun ride as well with this game. So, yeah.

You think you've found like interesting economic insights, even though that these are using like valueless test net tokens? So I, from the the test net itself, I would say this is a question that's like to be, the full answer to that is to be revealed later because what we've mainly done so far is tested like the most basic mechanics in the system. But there are more sort of sophisticated elements that we're interested in, in, testing out and seeing what what insights we we can can get from from that. But we've we've certainly, yeah, we've certainly taken many other,

very big insights in like how to manage like sudden influxes of users. We had a occurrence where we suddenly had just, yeah, an absolutely insane amount of traffic, I think, six weeks ago or something like this. And this was a really, really, experience. We have, so one of the things that we had to deal with, it's a bit, a bit of a detailed remark, I suppose, but like the, some of the forcets for Coven were a bit shaky. And so we built our own forcid mechanisms.

And we had this massive influx of people wanting to try this. And we had to, like, do some sort of on the fly debugging of what was going on with our force it and really scale this quickly. So we've, yeah, we've certainly, we've certainly learned quite a bit from the process of having this in a test net environment. One of the other main aims of the test net is really to provide a setting where we can like help walk users through how the, how the system works. And so this whole idea that I was explaining before about like, what's a Pam, what's a Sam and like what do they do and how do you use them? They're kind of opaque concepts until you actually walk through it and use them.

And you can actually do that on the test net. And I think that's helped a lot in terms of the community, understanding how these mechanisms work, at least on a high level. Nice. So what's the best way for people to start getting involved? Like, I guess step one is getting involved with this test net. You guys mentioned there's a new phase that's coming out the day that we're recording this right now. Yeah.

Yeah, that's right. So we would say regarding our sort of third level, definitely, yeah, on the day of recording, it's, we'll be making announcements about that. We, in terms of getting involved more broadly, yeah, certainly the TestNet, also Discord is like the primary place. We're all on there all the time responding to questions and that sort of thing. So that's, if you want to get in touch with us, that's definitely the best way to immediately get involved with the project. And then, yeah, for more resources, I mean, we have have a blog and the docs are also fairly comprehensive. So that's, yeah, those are, those are quite good resources. I think there's also, we've, there's a good amount of content on, on YouTube. If anyone also enjoys video for the video format. Sweet. Awesome. Any last words or anything you want to share with people before we sign off? I know, I don't think so. It's really been a massive pleasure to be on this podcast. So, yeah, thanks very much indeed for having us, Sunny.

Awesome. Thank you guys for coming on. Yeah. Thank you. Thank you for joining us on this week's episode. We release new episodes every week. You can find and subscribe to the show on iTunes, Spotify, YouTube, SoundCloud, or wherever you listen to podcasts. And if you have a Google Home or Alexa device, you can tell it to listen to the latest episode of the Epicenter podcast. Go to epicenter.tv slash subscribe for a full list of places where you can watch and listen. And while you're there, be sure to sign up for the newsletter, so you get new episodes in your inbox as they're released. If you want to interact with us, guests, or other podcast listeners, you can follow us on Twitter. And please leave us a review on iTunes.

It helps people find the show, and we're always happy to read them. So thanks so much, and we look forward to being back next week.