spencernoon.eth πŸ•› Profile picture
May 12 β€’ 19 tweets β€’ 5 min read
Read this 🧡 to go from 0 to 100 on stablecoin designs and risk πŸ‘‡
First, what are stablecoins?

A stablecoin is a crypto asset whose price is "pegged" to the reference price of a reserve asset. The most popular reserve asset for stablecoins is one US dollar.
Stablecoins have a combined marketcap of more than $170B. A look at the market prices of the top 10 stablecoins on CoinGecko and we can see that not all of them are functioning properly. Why is that the case?
To understand why, we need to understand how stablecoins work. The best framework I've seen was published by @aklamunl and a team of DeFi researchers in 2020 (link below). I am going to break down the major concepts here so you don't have to read it.

There are two major classes of stablecoins:

Custodial: entrusted by off-chain collateral assets like fiat dollars that sit in a bank. Requires trust in third party.

Non-custodial (aka decentralized): fully on-chain and backed by smart contracts & economics. No trusted parties.
In custodial stablecoins, custodians hold a combination of assets (currencies, bonds, commodities, etc.) off-chain, allowing issuers (possibly the same entity) to offer digital tokens of an reserve asset. The top 2 custodial stablecoins today are USDT and USDC.
There are 3 types of custodial stablecoins.

#1 Reserve Fund: 100% reserve ratio. Each stablecoin is backed by a unit of the reserve asset held by the custodian.

#2 Fractional Reserve Fund: The stablecoin is backed by a mix of both reserve assets and other capital assets.
And finally, #3 Central Bank Digital Currency (CBDC): A digital form of central bank money that is widely available to the general public. CBDCs are in their nascency as today only 9 countries/territories have launched them, many of them small.
Custodial stablecoins have three major risks:

- Counterparty Risk (fraud, theft, govt seizure, etc.)
- Censorship Risk (operations blocked by regulators, etc.)
- Economic Risk (off-chain assets go down in value)

Each can result in the stablecoin value going to zero.
Next, non-custodial stablecoins aim to operate without the societal institutions that custodial stablecoins rely on. They achieve this by creating an economic structure on blockchains enforced via smart contracts.

Tldr: economic strcuture + rational actors = price stablity
There are 3 types of non-custodial or decentralized stablecoins.

#1 Exogenous collateral: the stablecoin is backed by assets that has uses outside of the stablecoin system. The most prominent stablecoin in this category is DAI, which is backed by a # of crypto assets like ETH.
#2 Endogenous collateral: An asset created with the purpose of being collateral for the stablecoin. Examples include Synthetix, whose token SNX collateralizes its sUSD stablecoin.
#3: Implicit collateral (aka algorithmic): Stablecoins without explicit collateral that instead use market mechanisms to adjust supply to stabilize price.

UST is the most prominent algostable. Highly recommend reading this thread on its mechanics + blowup:
Non-custodial stablecoins have 5 major risks:

- Collateral (value < issuance)
- Data Feed (system can't price itself)
- Governance (parameter failure)
- Base Layer (chain fails)
- Smart Contract (hack leads to insolvency)

Each can result in the stablecoin value going to zero.
Algo stables like UST are especially susceptible to collateral risk because they are not explicitly backed by collateral. When there is a crisis in confidence, such as the overall crypto markets going down, it can can lead to a bank run or "death spiral".
This is when an algostable's fractional liquid reserve is depleted by redemptions, causing its system to default and remaining liquid assets needing to be sold at a discount. This in turn depletes the system's overall equity, resulting in a spiral that is hard to overcome.
Algorithmic stablecoins are a brand new type of asset, and while most attempts to date have failed, not all of them have. It remains to be seen whether they are viable long-term at scale, however, many people in the crypto industry are optimistic.
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And please follow @aklamun who I accidentally typo’d earlier in this thread!

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More from @spencernoon

May 1
Increasingly confident we're getting NFTFi Summer as the right mix of financial primitives are on the brink of being ready for degens. My rough/quick/conservative math pegs the marketcap of NFTs to be ~$20B, of which only ~$200M of that (1%) is locked in DeFi. This will 10x easy.
The key piece of infrastructure that will soon be unlocked is lending, which will allow NFT collectors to go levered long on their existing NFTs. And b/c the category is so wide open, protocols will be forced to be highly competitive with their yields to attract capital.
We saw this happen during DeFi Summer in 2020, when protocols like Compound and Aave were in fierce competition and the β€œreplacement rate” yields for major stables were greater than 20%. Meaning if another protocol wanted to attract liquidity, it had to be well clear of that.
Read 7 tweets
Apr 13
1/Thrilled to announce that @Derekmw23 is forgoing his senior year to become our newest investment partner at Variant Fund, where he'll be focusing on #DeFi alongside myself and @gham1lt0n.

Read below for the inside story on how this happened πŸ‘‡
2/As with many jobs in web3, Derek's journey to @variantfund began with him making the opp happen himself. Last year he DM'd me cold, explaining his interest in our internship role. At the time I didn't think much of it and encouraged him to apply 😬 Image
3/Derek then went above and beyond to demonstrate his expertise in on-chain fundamentals. He covered @MagicEden, @QuickswapDEX, @HopProtocol, @BoredApeYC, @TokenReactor, @oncyber_io, and @Uniswap for my newsletter @OurNetwork__ in a matter of weeks. Insane. The result = HIRED πŸ”₯
Read 5 tweets
Apr 1
1/Some thoughts on #Eth2 and @LidoFinance. As the merge draws near, the total amount of $ETH staked on Eth2 has passed 10M ($34.4B). @visavishesh points out in the latest @OurNetwork__ that the majority of new deposits are happening via Lido. To me this signals a new class...
2/...of participants has entered this market: investors, and not just any investorsβ€”marginal buyers of $ETH. Until recently most depositors were seemingly techies, ETH heads, and large long-term holders (e.g. Consensys) who rolled their own staking solutions. This is new money.
3/Average deposit size on Lido is up over the past two months too, which signals that we may be seeing institutional hedge funds and large #DeFi whales gearing up for the merge trade.
Read 7 tweets
Apr 1
1/If you're long-term bullish on L1s w/ low fees (ie. all except $ETH) then you are implicitly betting on them sustaining some type of premium over time, monetary or otherwise. Simply put: You're betting on multiple L1s becoming moneyβ€”or a brand new investment framework emerging.
2/It is going to take a long time for the market to settle on a widely accepted investment framework for L1s. But when the dust settles, I have strong conviction that the average L1 is not going to be priced as highly on a relative basis to the winner as it is today.
3/There is one L1 that doesn't require investors inventing new frameworks to justify its value, because it produces cold, hard cash flows. That is ofc $ETH, which generated $7.3B in transaction fee revenue in the last year. Everything else doesn't come close.
Read 4 tweets
Mar 23
1/ Earlier this year @OurNetwork__ contributors and @DuneAnalytics created OurNetwork Learn: Web3’s first learn-to-earn data cohort program, hosted by @andrewhong5297 🧡
2/ The program spent 30 days teaching a cohort of 30 students how to analyze data in Web3 and communicate their work publicly.
3/ Last week, we released all 19 episodes from the cohort on Youtube for everyone and anyone to learn.
Read 24 tweets

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