10 Highlights From “Stablecoins Are Killing It” Ep. #15 — Focused On Dai Stability & The History of Money
Episode #15 featured Ganesh Viswanath-Natraj, Assistant Professor of Finance at Warwick Business School. Ganesh discussed his research on Dai’s stability mechanism and how it can better maintain it’s $1 peg.
Our second guest was Alex Lipton, who gave gave a super interesting overview of the history of money and how to put stablecoins and CBDCs in to context. Alex is Co-Founder & CTO at Sila, which provides a simple, secure, & regulatory compliant API to make money programmable. Alex is also a Professor at the Hebrew University of Jerusalem, and a Fellow at MIT.
You can watch the entire episode below:
Or you can read our 10 highlights below (five from Ganesh & five from Alex):
#1 During Periods Of High Volatility, Dai’s Leverage Ratio is Lower Than Average, Indicating That The Stability Tools Are Working
As the stability tools can influence the leverage ratio, and thus the supply of Dai, the graph above highlights that the tools are working.
#2 DeFi Driven Demand Has Caused Dai To Trade Above The $1 Peg For Most Of 2020, With A Peak of $1.12 Caused By “Black Thursday”
The demand for Dai, driven by DeFi in 2020, has caused Dai to trade above it’s $1 peg for most of year. The price of DAI peaked on March 12th, when the entire crypto market, including BTC & ETH, plunged by 50%+, causing over 1,200 Maker vaults to be liquidated, rocketing up the demand for Dai. Vault owners struggled with high gas prices and transactional delays when attempting to add more collateral or return Dai to their Vaults within the Protocol’s one-hour window. Prices spiked as high as $1.12
This MAkerDAO post gives a detailed account of the events of Black Thursday and how the MakerDAO responded to limit the impact on Dai of future market crashes.
#3 In 2019, Significant Stability Fee Increases Had The Expected Result Of Increasing The Price OF Dai
Per the graph below, Ganesh’s regression analysis indicated that a 1% increase in the stability rate reduces Dai borrowing and increases Dai’s price by 20–60 basis points.
One problem is the fact that Dai’s stability rate is currently bounded at zero.
#4 Increasing The Amount Of Lower Volatility Collateral, Can Raise The Leverage Ratio, Increasing The Supply Of Dai, Which Should Lower Price
The introduction of multi-collateral Dai, with low volatility collateral options like USDC and TUSD, should decrease the price of Dai over time.
#5 Enforcing A Hard Peg Via Smart Contracts Would Cause Dai To Trade Closer To USDC And It’s $1 Peg
If MakerDAO enabled holders of USDC to buy Dai at one-to-one ratio, the upward pressure on the Dai peg could be transferred to USDC. While this could cause Dai to trade close to USDC, Ganesh pointed out that that Dai’s market cap is large enough, relative to USDC, that pegging Dai to USDC could potentially cause USDC to trade above peg.
Alex Lipton started speaking 19 minutes in to the call.
#6 In The 14th Century, Nicholas Oresme Made A Detailed Case Of The Immorality Of Government’s Monopoly Over Money
Oresme was a brilliant 14th century scientist: physicist, mathematician, philosopher, and economist. Oresme’s treatise on money, De Moneta, provides a detailed account of the function of money. Oresme was the first theorist to shows the sheer immorality of government monopoly over money and the social effects of debasement. Oresme made a detailed case that money belongs to the community. Alex pointed out that the signaling of money’s value by coinage is a feature that digital currencies needs to emulate.
#6 When New Currencies Are Issued, Old Currency Must Be Demonetized
While Copernicus is best known for proving that the earth rotates around the sun, his treatise on money were also profound. Alex pointed out that #3 above is what’s still not well understood by Libra and others.
#7 Money Has Always Been Unstable, And Systems Become Obsolete
Alex highlighted how the currency debasement in the U.S. happened even faster then it did than in ancient Rome.
Alex also pointed out that the fact that the U.S. is still sending checks to people highlights how obsolete the current U.S. payment systems is.
While there is not yet an open access protocol for money or identity, Alex believes that such a system, if regulatory compliant, can solve many of the this problems inherent in the system today.
#8 Central Bank Digital Currencies (CBDCs) Are More Efficient Than Cash, And Increase Monetary Options
For instance, Alex highlighted how negative interest rates below 3% or 4% will lead people to horde cash. In a CBDC world, cash can be abolished, allowing central banks to drive negative interest rates lower without causing the hoarding of cash.
Alex believes that central banks shouldn’t foster direct relationships with consumers because it would crowd out commercial banks.
#9 Banks & Bank Consortiums Are Well Positioned To Deploy Their Own Stablecoins
Alex sees this alternative as a “professional” solution that sits between CBDCs and the current crop of “people” lead stablecoins.
#10 Alex Is A Huge Believer In Asset Backed Coins
Alex has highlighted his project, Tradecoin, which is pegged to the value of a basket of custodianed commodities, as a good solution for a transactional currency.
Alex pointed that other baskets, like a basket of currencies, as Libra is working on, can also provide good solutions for transactional currencies.
The last 17 minutes of the show included lots of good Q&A.
Join us next week, on September 24th, for “Stablecoins Are Killing It” #16, featuring Matthieu Saint Olive, a member of ConsenSys’ strategic business development team. Matthieu is leading ConsenSys’ efforts on CBDCs, stablecoins and payment projects, globally. Click here to register for the call.
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