Thread by @Ishanb22

The Next Generation of Stablecoins: Solving The Free Float Dilemma

Any “stablecoin” pegged to $1 is NOT stable

Your stablecoins (like $USDC and $USDT) are INFLATING in price AND supply, anon.

But the next generation of stablecoins can solve for this: 🧵👇

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Stablecoins pegged to a fiat currency (like USD) are only as stable as the asset its pegged to, which at the moment… is not very stable

A great house built on shitty foundation is still unstable

The next generation of stablecoins are helping solve this issue...

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Stablecoins NOT pegged to $1

Instead of tying the asset to 1 USD (manipulatable and unstable) - stablecoins can get their "stability" through a variety of mechanisms:

Indexes, seignorage, interest rates, game theory etc

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Here are some of my favorite projects that are building the next generation of stablecoins:

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1. $FPI @fraxfinance

FPI is a stablecoin pegged to the Consumer Price Index (CPI).

FPI uses the unadjusted 12 month inflation rate reported by the Fed and uses a chainlink oracle that commits this data on chain immediately after its release.

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THIS IS A MASSIVE UNLOCK

$FPI is basically an index of consumer goods

Instead of measuring value against a “stable” USD...

We can measure value against an indexed basket of goods (like CPI for $FPI)

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This is the first step towards pricing objects against indices of all kinds.

Imagine a stablecoin pegged to the S&P that could fight inflation

Imagine paying rent denominated in FPI in order to counteract inflation

This is the first step into a new paradigm!

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2. $RAI @reflexerfinance

$RAI is a @MakerDAO / $DAI fork but was made to be as decentralized as possible using ONLY ETH as collateral with a free-floating peg

The peg began at $3.14 (currently hovers between $2.85 and $3.00)

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$RAI is debt-based and algorithmic - minted by leveraging against $ETH.

$RAI uses a “Money God” PID controller algorithm which uses a proportional term (P), an integral term (I) and a derivative term (D) to maintain price stability

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As a free-float currency, RAI fluctuates based on factors such as the re-demption price of RAI vs the market price of RAI

RAI uses a series of economic tools (IE positive/negative interest rates) in order to incentivize or de-centivize users from minting $RAI.

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The RAI price is more based on supply/demand for the asset (while being hampered by demand for ETH leverage - the only way to create RAI) than other fiat stablecoins which are based on the price or value of fiat dollars

The problem: $RAI is not very scalable

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3. $OHM @OlympusDAO: THE Decentral Bank

While OHM began as a way to raise protocol owned liquidity, what they’ve done with that liquidity has been interesting

$OHM is a community-owned, decentralized, and censorship resistant reserve currency backed by crypto reserves

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OHM works similar to central banks

Olympus uses the treasury of crypto assets to back all OHM tokens

The protocol then uses a mint/burn function when OHM is above/below backing in order to stabilize the price of $OHM.

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This allows $OHM to maintain a relatively stable floating value

$OHM is then able to:

- Preserve purchasing power
- Acquire deep liquidity
- Become a stable unit of account
- With a relatively low risk (due to the diversity of backing)

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OHM attempts to solve the stablecoin peg issue by creating a reserve currency system (similar to Frax) with a more open peg value to counteract the lack of stability of the US Dollar

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4. $DAI

While $DAI is currently hard pegged to $1, $DAI was actually originally designed to be a free-floating currency

But after Black Thursday when the DAI peg went up to $1.10, MakerDAO introduced the peg stability module (PSM) to keep DAI hard pegged to $1

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Recently, MakerDAO co-founder @RuneKek has been proposing to go back to a free floating DAI and even submitted a Maker governance proposal for it.

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@RuneKek The thesis is to accumulate as much ETH as possible over the next 3 years in order to eliminate "seizable" assets from MakerDAO’s backing making it more uncensorable with less attack surface

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https://twitter.com/1358927095255232515/status/1564946096555802625

While $DAI is still currently hard pegged, the realization that a hard peg is not worth the exposure to censorship is the key unlock here.

Censorship resistance > Peg Stability (For Rune's vision of Maker)

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5. $BEAN @BeanstalkFarms

$BEAN uses credit instead of collateral to create a decentralized, liquid, asset, which is relatively stable

Beanstalk uses financial incentives in order to encourage participation in peg maintenance

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$BEAN uses depositors, lenders and arbitrageurs and aligns each participants incentives in order to maxmize peg stability

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bean.money/blog/introduci…

While $BEAN attempts to peg to $1 USD, it is NOT hard-pegged. It can move above/below peg for extended times based on the supply/demand of the depositors, lenders, arbers etc

A reasonable debt level and consistent credit history attracts creditors and helps $BEAN scale

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Current iterations of fiat stablecoins are not solving for many of the issues with currencies we see. De-valuation, closed door monetary policies, supply/price inflation etc.

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The solve for these issues are currencies not tied a specific price or asset but rather what the market believes they are worth

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These are fascinating economic experiments and will unlock the true value of “money” as a medium of value transfer.

If our dollars aren’t doing their job - we now have the unique ability to opt out and use dollars more suited to our individual personal values.

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That's a wrap!

If you're picking up the stables im putting down:

1. Follow me @Ishanb22 for more of these
2. RT the tweet below to share this thread!

https://twitter.com/1270993847036805121/status/1572333037664473090