GHO by Steven Valeri | Devcon Bogotá

foreign [Music] Valeri I am a smart contract Dev at the Ave companies I've been there for about a year and a half have worked on um some things like our cross-chain governance Bridge our V3 deployment and most recently I have been spending time working on our stablecoin project go um and I'm really excited to tell you guys all about that um but before I get into go I kind of want to take a step back and walk through the current stablecoin landscape and in doing that I think that will give some helpful context as to you know what is go and how it fits into that broader ecosystem um and I don't know if who else was here for the previous talk but it was a great talk about Rye which is a stable coin and I think it perfectly kind of highlights why understanding the landscape is important because what the heck is a stable coin there's so many things that fall under this definition that it creates confusion it creates risk um and you know just saying that you're working with a stable coin isn't sufficient to understand what the heck type of asset you're working with so let's try to answer some basic questions around stable coins and I think we'll pretty quickly identify uh why it's so challenging to understand what people are talking about so what is a stable coin um I think at the broadest level you could say a stable coin is an asset that attempts to maintain a stable price I think very commonly we're seeing Peg stable coins so they're pegged to some other assets value most commonly I think and most dominant in the market is US dollar Peg stable coins but we're also starting to see stable coins that are pegged to other FX uh tokens um and there's also tokens that just aren't pegged so again Rye is an example it's a stable coin but it's not pegged to a specific price so it's a token that aims to have less volatility but I think generally at this point if someone were to say yeah I traded into a bunch of stables you would probably assume that they're talking about a US dollar pegged Staples uh how does a stable coin work we answered one question of what is a stable coin and I think here at a second question it's pretty obvious that there's not really a straightforward answer it depends it's totally different depending on the type of asset that you're working with um and you know this creates some challenges and presents risks right if you just assume that the token that you're using is in fact stable um and without understanding how the underlying stability mechanism works or other risks that are present in that asset you know you may be taking on far more risk in your portfolio or whatever you're trying to do than you're intending um so yeah again just these things are so different you can't compare apples and oranges um you know to the you know users here who know it die and usdcr if you were to ask them you know are these the same people would be like no very different um and I thought this analogy played very well and I've just realized that I'm going to in fact be comparing stable coins throughout this presentation so maybe not the best analogy um so let's take a look at the current landscape um as you can see here the one-to-one backed centralized stable coins are totally dominant uh you can see tether usdc busd um are in the tens of billions in terms of market cap um just kind of totally Far and Away dominant um next in line is die so dye is a decentralized over collateralized cryptocurrency backed stablecoin um and that's really the the next leader in the pack and definitely the leader in the pack in terms of this type of asset um you know there are other types there are other Assets in this category um like MIM magic internet money uh and then go uh aves uh Native stablecoin which were um developing will fit into this category as well um also here there's other stable coins that have uh much smaller market caps but are using new stability mechanisms things like fracks things like Rye which we'll talk about as well um and these things are just so different um that you know even having them in the same category presents challenges and talking about them and comparing them um you know and trying to use them for the same purpose um so one other thing I'd like to call out here and I think that's probably the biggest example of why this stuff is important is an asset that's not included here which is uh UST so the stable coin associated with the terror project it was approximately 18 billion dollars worth of value at its top market cap that has essentially disappeared right and that is comprised of users and people it not really double clicking into what is this stable coin how does it work what are the risks how does it compare to other stable coins um so I you know I think that's kind of the ultimate example of why we're even having this conversation around you know well what really is a stable coin we talked about those top three um they're one type of stable coin which is a centralized one-to-one backed stable coin uh examples are usdc usdt busdt-d true USD in this case they are generally Assets in which you trust a centralized institution to custody in the case of a US dollar Peg stablecoin one US dollar per each stablecoin that they Mint or issue there's caveats around this though right you're trusting them to uh maybe hold about one uh dollars worth of Assets in their reserve for each thing that they meant uh and you're you're also in some cases trusting them to hold about one dollars worth of US dollar equivalents um so again you know per each of these institutions um and their processes and how they work you know kind of double clicking into what this asset's actually backed by is it one to one what are they doing are they using treasuries um is important um so here we can highlight some of the risks of working with an asset like this um you know obviously it being centralized is to some extent counter to the general decentralized ethos of blockchain environments um and in having this trusted entity we take on risk right we're trusting this entity to be managing their reserves appropriately right like they aren't just investing all of that reserves into risky assets um so that's very important to mitigate this some companies are using audit firms so center with circle they hire Grant Thornton top five accounting firm in the world to publish uh reports to give users confidence that they have reserves of US dollars US dollar equivalents that are equal to or more than the amount of value they've issued on chains um another risk you're taking with this trusted entity is just generally um you know how do they function as a business you could think of things like I.T security right who has access within their systems to make transfers for their reserves this is something you know kind of basic but very important um and then I.T security specific to web 3 who has access and how do they manage their wallets that can make really important transactions uh or freeze users oh one other point on the um Reserve ecosystem and getting confidence that these reserves are backed true USD instead of having an auditor has introduced an or a solution with chain link called proof of reserves in which they have oracles that report the status of all of their accounts so by doing that the system can never mint uh more than you know the reserves that they have so that's another interesting solution and you know attempt to give users confidence that these assets are in fact backed and redeemable um another risk here in trusting this institution and entity is that uh these these stable coins often have the ability to freeze uh and address or it could also be a pool and in doing that you know you could potentially lose access to your funds at the discretion of these institutions of course there are times when this makes sense right in the most recent BNB hack tether was quite early to freezing the hackers funds but you know you're dependent on this institution making the appropriate decisions in the future which you might be hesitant to do so the next type uh decentralized over collateralized crypto-backed stable coins um the most obvious example of this is dye there's also magic internet money um each of these tokens gets minted that's minted is backed by crypto collateral this can be you know ethereum with Bitcoin um other one-to-one stable coins um and when they in order to Mint them you need to deposit your collateral to a Smart contract so this is a clear difference from the previous example this smart contract is on chain you can clearly see and have confidence that the smart contract holds enough assets to collateralize the stable coin which has been minted um you also have confidence around the rules in which the system works the it's controlled by a smart contract um which uh uh is open source software right you can see the code you know how the reserves will be handled so you know you have confidence around um how that will work um in addition to the smart contract in some cases you have certain parameters within the system that can be configurable or it could in fact be an immutable smart contract so once the system's deployed there's no configurations to change I think more commonly most of these systems have a few configuration variables at least um and these are often set by Dows which is a decentralized set of token holders hopefully incentivized to maintain the stable coins Peg and this encourages and and helps uh de-risk the fact that and and not be dependent on one single entity uh for the stability of the system that being said these also have a lot of risks um just because you move away from some of those centralized concerns um there's still risks with this different type of asset um so first of all there's the stability mechanism how does this token maintain its Peg so some common ways in which this is done uh is an oracle within the system that's responsible for telling the system how much this stable coin is worth gets pegged to one dollar and that's regardless of whether the market price is you know above one dollar less than one dollar and by doing that it creates Arbitrage opportunities in which uh which helps stabilize the um token and if we have time later we'll talk through some examples of that um additionally interest rates can be used so you can help manage the supply of the asset based on interest rates with high interest rates people will be paying back their positions which will decrease the supply impacting the price same with low interest rates if you have low interest rates more people will be interested in taking out positions increasing the supply again impacting price another risk here is the collateral that's being used for this decentralized cryptocurrency backed stable coin the stability of the token and you know its collateral is dependent on the value of its collateral so if a in some cases those all the risks of the collateral come through and are present within the stable coin so for example we said we've de-risked these types of coins by removing the centralized entity and how the system is controlled but that being said while there's collateral um that backs a decentralized stable coin um which is a one-to-one centralized stable coin um you know you're still exposed to those risks of how that centralized entity is managing um their stable coin Additionally you generally don't want volatile assets you would like assets that are relatively stable in order to minimize the amount of liquidations that are required and reduce the possibility of having under collateralized positions within the system I think that gets to flash crashes um again around the price of your stable coin when you have an over collateralized stable coin you need the collateral to be worth more than um your the amount that you have minted uh over time generally if assets if the price of assets decreases uh that are your collateral that's okay there's liquidation processes in place in which someone can come they'll pay off your debt and they get your collateral and the collateral is worth more than your debt so they make out a little bit of extra money really where a risk comes into play is if the price of your asset crashes the collateral asset crashes so quickly that Liquidators do not have time to perform those Liquidations in that case you result in under collateralized positions which likely result in a deepeg of your coin um again we talked about you know there's different aspects of these protocols that are configurable so making sure that a it's configured appropriately and the per the person or the entity or Dao who is configuring them is knowledgeable in the space and is making informed decisions is important and then finally there's smart contract risk right there's always a risk that there's going to be a bug in the code you can do as much as you can to try to eliminate and mitigate this risk from responsible development practices internally internal reviews external audits which I think we see throughout the space yeah so you know you can do as much as you can to try to reduce the risk of smart contract bugs but at the end of the day they'll exist in the space so briefly other types of stable coins I think we already can see there's a huge difference between one to one backed centralized stable coins decentralized over collateralized stable coins and now a couple of others that I hesitate to even try to name what type they are because they're so different and function you know very interestingly so one is fracks frax is a stable coin that is partially backed by collateral and then also partially maintains its stability through algorithmically obviously that's quite different than a Dye or usdc or you could look at Rye which is a stable coin that is not pegged to any specific asset uh and its stability mechanism Works through understanding the reduction rate so how often are people taking out positions how often are people repaying their positions and based on the rate under which that is occurring the price of the asset will slowly vary one way or the other um and you know this isn't to give you you know a full understanding of what these systems are and how they work but it's to say these are totally different types of assets that we're talking about in the same category of stable coins and you know now if you go to think about stable coins or work with a stable coin you should say what is the stability mechanism how does this actually work is it Peg does it not pegged it's more to you know kind of promote that thinking of what what are the risks of this coin and is it actually going to maintain its stability cool um so now I get to talk a little bit about go which falls into that category of decentralized over collateralized crypto-backed stable coins and it will fit natively into the Ave Market so one thing we recognize that Ave looking at our existing liquidity pool uh protocol was that there's a lot of functionality in our General market that would be required for this type of stable coin you know things like depositing collateral things like liquidation processes these things exist within the Ave protocol and also are exactly what you need to facilitate a decentralized stable coin so I think that's something that's really nice even on the development side is that go fits into the existing Ave market so a lot of the processes and you know ways that you will interact with it should be very familiar to interacting with go it's really a new custom asset that's getting added to the market um so you know while there are differences in the implementation and we'll go through those you know in some detail um at a high level when you go to interact with Ave and borrow go uh it's pretty much the same as borrowing another asset you deposit your collateral you borrow go uh you hold it for some amount of time it accrues interest and eventually you pay it back so that's pretty much the same process as any other asset um that being said when it gets added the way that this asset is configured has differences and the differences are what help it maintain its stability um so so let's walk through those [Music] um the first is that this asset isn't supplied to the market so if you think about borrowing some other asset you know if you deposit with and borrow wrapped Bitcoin somebody else has to have deposited that wrap Bitcoin in order for you to later borrow it um in terms of go that's not required when you deposit your wrap teeth and borrow go nobody has to have deposited it instead the protocol reaches out to the go uh contract and mints that go on demand um same goes for when you repay that go is actually burned rather than going back to the suppliers the Oracle price is fixed to one dollar so of course other assets the Oracle reports the actual market price so that the protocol knows you know how much value is this asset how much can you borrow against it you know maintaining that over collateralization in this case go is pegged to oneusd despite what the market price is so this helps maintain stability it creates Arbitrage opportunities say the price is above one dollar in the market when the protocol thinks it's just one dollar you can mint a bunch of go uh you know that is debt at the cost of a dollar you can sell it at the market say for a dollar and five cents that increases Supply which should reduce the price and then eventually you can buy back that go at one dollar pay back your dollar debt and you know five cents on the dollar is arbitrage stability mechanism and difference in how this asset works is in its interest rates uh normal assets uh the interest rates are based on the utilization of a pool so you know if you have a hundred uh tokens supplied and 10 of them borrowed the interest rate will be relatively low if you have a hundred tokens supplied and 90 assets borrowed the interest rate will be quite high in this case there are no suppliers so interest rates work differently to start interest rates will be set by governance and again this serves as a stability mechanism you can increase Supply by reducing interest rates and the inverse holds true as well another difference to highlight is that interest that accrues on positions will be repaid to the Ave governance so rather than having to pay suppliers because there are no suppliers that interest can be redirected some other differentiating factors for this token uh is that discounts are available to users who stake Ave in the safety module so you know if governance has set the interest rate to three percent by staking Ave you can get some discount on that interest there's also a multi-collateral positions so you have the flexibility to [Music] um use different assets as collateral within the same position this is different than dive where you have a single Vault you have one collateral type so this introduces a little bit more flexibility for some use cases that might make sense where you know if you need to re-up your collateral you don't necessarily need to swap between assets to fund that position and then thirdly you can earn interest on these positions so by supplying your collateral to the Ave protocol um other users will be borrowing it and you'll earn interest on that which effectively reduces the interest that you're paying uh on your borrowed positions we highlighted in a lot of the earlier part of this talk was around risks right so let's talk through what are the risks here and how are they mitigated in the Ave market so collateral Asset Risk um the Ave protocol has a pretty strong history of being relatively conservative and effective in managing the assets that are used for collateral and you know setting the configurations around those so making sure you have safe uh over collateralization ratios Etc similar goes to the flash crash risk this risk exists but we've seen that the Ave protocol is a relatively resilient Market that has gone through pretty turbulent uh times already again protocol configurations pretty similar to Collateral Asset Risk where you know we work with the Dow the Dow works with gauntlet um and it was relatively conservative um there's the smart contract risks and stability mechanisms I think we've covered those enough so when go uh soon TM there's a few dependencies in governance right now including deploying the V3 Market whether we'll be upgrading the V2 Market in place or deploying a new market for V3 so there's some dependencies around that which will uh as soon as those are done we'll move we'll look to move forward with go and goes future um you know we're hopeful that uh we can move go to l2s I think we think there's a really large opportunity there with lower fees um to you know have this as a token that's used widely both by crypto native users and um you know more of the general population another interesting functionality is that we have facilitators so um go Ave is the first facilitator of go which means that they have permission to Mint um more go and in the future Ave government I'm getting the times up folks to talk fast uh Ave governance can add additional facilitators which will have the ability to uh mint go uh if they are approved so obviously there's a lot that goes into that a lot of reviewing I think that will probably be more long-term but something cool to look forward to that's it thank you guys