4 years ago at Devcon, I presented the possibility of deleveraging spirals happening in stablecoins.

5 months later, one happened in Dai. This was the first major test of Dai and triggered Dai’s evolution to incorporate exchangeability with USDC and RWA backing.

🧵👇

https://twitter.com/aklamun/status/1181520472501936129

What is a deleveraging spiral?

It's a short squeeze effect that can occur when many agents who have taken leverage need to deleverage their position at the same time (e.g., in an ETH price crash). In the original form of DAI, deleveraging required repurchasing DAI on the market.

7 of the largest 10 stablecoins depegged as a massive bank run effect rippled across crypto

What happened and what are the lessons for the space: 🧵👇 2/ The trigger was a bank run on SVB and subsequent closing of the bank amidst illiquidity and insolvency worries

As a depositor, *if* the bank is insolvent (you don't know) *and* you don't rush for the exits, then you may be holding the bag for everyone who exits ahead of you

Preempting DAI's USDC problems is why we spent the last year building a more resilient "PSM 2.0".

The primary market (P-AMM) we built for @GyroStable is designed from first principles to autonomously govern risk control and stablecoin monetary policy.

🧵👇

https://twitter.com/bantg/status/1557742913924186117

Gyroscope’s "PSM 2.0" increases resilience in several ways

1⃣ Diversified PSM reserves 🪺
2⃣ Programmatic risk control 🤖
3⃣ Coordinated PSM strategies 🌐
4⃣ Contingency pricing ⚠️

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 👇

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.

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

https://twitter.com/SBF_Alameda/status/1334247283081138178

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

This is where our Stablecoins 2.0 paper can help to bridge the gap btw traditional finance and crypto
arxiv.org/abs/2006.12388

Where risks are similar, similar regulation makes sense. This applies particularly well to custodial stablecoins

https://twitter.com/rohangrey/status/1334258771204325378

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

#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