Another flawed design for a stablecoin has failed and I’d like to explain why. This one is essentially the next iteration of basis/esd/esdv2/nubits so really this isn’t too surprising 🙃
It's not pure basis, which hopefully everyone can now agree doesn't work! They have something that is ~ a reserve. In that respect, essentially like Nubits with different parameters (larger reserve but still too small). Reminder of how that worked out 👇
At the root of Malt’s failure lies a misguided aim of "capital efficiency" as trying to create the most stablecoins for the least underlying value. This places us in the middle of this spectrum for algo stablecoins, which is still very prone to failure!
One common mistake is to conflate this misguided notion of “capital efficiency” with scalability. Actually, scalability is different and should just mean that the stablecoin can sustainably meet excess demand, e.g., by expanding the supply. 100% reserved systems can do that also.
Worth also drawing a parallel with frax (which is better reserved in USDC fwiw). Conceptually, Frax is two separable parts: (1) ~$0.85 of deployed USDC, (2) remaining amount of an endogenous collateral/seigniorage shares stablecoin essentially like UST.
The second part could break, and you're left with $0.85 in USDC. Though if USDC breaks, then probably both parts break by extension. Malt is a mix of basis (w/ coupons) and a reserve, and the reserve could be depleted and anyone left gets 0. More like Nubits.
To read on, we’ve discussed this in more detail previously 👇…

And even more details in our Stablecoins 2.0 paper
fwiw a good addition in malt: coupons (although flawed) have automatic redemption. (Potentially) resolves the problem where the miner of a block with a weak demand resurgence can be the sole coupon redeemer and earn riskfree MEV by buying coupons at a discount in that block.

• • •

Missing some Tweet in this thread? You can try to force a refresh

Keep Current with Ariah Klages-Mundt

Ariah Klages-Mundt Profile picture

Stay in touch and get notified when new unrolls are available from this author!

Read all threads

This Thread may be Removed Anytime!


Twitter may remove this content at anytime! Save it as PDF for later use!

Try unrolling a thread yourself!

how to unroll video
  1. Follow @ThreadReaderApp to mention us!

  2. From a Twitter thread mention us with a keyword "unroll"
@threadreaderapp unroll

Practice here first or read more on our help page!

More from @aklamun

23 May
The Terra UST stablecoin could collapse in a bank run effect. UST is backed by an endogenous collateral Luna. Current Luna marketcap has fallen to arguably < outstanding UST. We are now in a dangerous spiral: as users panic out of UST, this reinforces the Luna crash further.
The Terra design is based on endogenous collateral, or seigniorage shares: the value of Luna derives in a ~self-fulfilling way from the anticipated usage of UST. While this brought benefits on the upside, it is now materializing in dangerous spirals on the downside.
Is the system underwater? It's hard to say precisely. On paper, Luna FDNV is still ~2x the 2b UST supply, but measures of circulating marketcap are only ~0.8x. Even the optimistic 2x number would be very unhealthy though given the spiral effect on endogenous collateral.
Read 5 tweets
5 Dec 20
Finally caught up on crypto twitter 😅 A few thoughts on this AMM debate:

1) The math itself seems plausible based on volatility harvesting results (though I haven't checked the details). The interpretation is a little optimistic though imo. 1/7
2) Kelly criterion (max E[log V]) makes sense in context of an entire portfolio and effectively heavily penalizes possibilities of portfolio wipeouts. But when only modeling a component of a portfolio, it makes less sense. 2/7
To illustrate, a Kelly optimal portfolio could very well be: keep x% in safe assets w/ the rest spread over very risky bets. You wouldn't want to Kelly maximize each of the very risky bets. In effect, the safe x% removes the heavily penalized wipeout possibilities itself. 3/7
Read 7 tweets
3 Dec 20
This is where our Stablecoins 2.0 paper can help to bridge the gap btw traditional finance and crypto

Where risks are similar, similar regulation makes sense. This applies particularly well to custodial stablecoins
For non-custodial stablecoins, it's more complex. Where they rely on central governors, they may have fiduciary risks. But where non-custodial stablecoins aim to align incentives of agents decentrally and remove custodial and fiduciary points, then the risks are very different
Non-custodial risks are more like blockchain and market manipulations, which are issues outside of any given stablecoin. Makes more sense to pursue such manipulators for attacks, hacks, frauds as opposed to the smart contract coder (unless they're the same!)
Read 5 tweets
3 Jul 20
#CropRotation: Since the new governance change, the most profitable $COMP farming is now to borrow and re-deposit #Dai. With multiple layers of borrow-redeposit, you can get >40% yield still. The $BAT positions have massively unwound (w/o incident!) and replaced by Dai
As with $BAT before, this leads to concerns about deleveraging effects. Demand for Dai is high with price close to $1.02 and Dai interest rates are already low. Dai issuance is struggling to keep up with COMP farming demand in this otherwise 'normal' time
This increases concerns about future Dai liquidity. An outside shock now would make a worse deleveraging spiral, as we've previously explored here (and as happened on #BlackThursday)…
Read 7 tweets

Did Thread Reader help you today?

Support us! We are indie developers!

This site is made by just two indie developers on a laptop doing marketing, support and development! Read more about the story.

Become a Premium Member ($3/month or $30/year) and get exclusive features!

Become Premium

Too expensive? Make a small donation by buying us coffee ($5) or help with server cost ($10)

Donate via Paypal Become our Patreon

Thank you for your support!

Follow Us on Twitter!