Sam MacPherson, Phoenix Labs: Solving Liquidity Fragmentation with Decentralized Stablecoins

all right thank you so much next up we have Sam mcferson of Phoenix Labs uh he will be talking about solving liquidity fragmentation with decentralized stable coins hello hello all right so this talk is solving liquidity fragmentation with decentralized stable coins go uh so I'm Sam mcferson um I've been a maker core Dev uh previously and now focused on spark thank you um so first let's go over uh stablecoin 101 a little bit just for some context so there's two broad categories of stable coins the term is a little overloaded so I kind of want to unpack them a little bit so there's two broad C categories and then in those two categories there's two subcategories within each of them so in the first category is Fe fatback so these break down into two categories first we have onshore these use the US banking system these are high highly regulated and full Reserve stable coins examples of this are usdc and PayPal USD we then have offshore using the euro dollar system res uh regulation reserve requirements may vary here so these are things like tether FD USD and Mountain USD then uh so the the second broad category is decentralized their onchain stable coins and again these break down into two categories in my mind um we have fractional Reserve or Peg stable coins this is essentially the onchain banking system and they Peg to a higher form of money so examples of this USD usds previously die um Athena usde fra go Etc um and then you have the other uh C subcategory of this which is free float so do not have uh pegs to higher form of money uh this is LUSD and uh Ry so shout out to Seb Ventures who's been popularizing this since 2021 as one of the chefs at Steakhouse he's been talking about the hierarchy of money and he actually did a presentation I recommend you watch at uh Brussels at the stable Summit so you can kind of think of the mental model about how the onchain stable coin system works like this so in the hierarchy of money you have the Federal Reserve at the top that issu choose the currency you have the US banking system that sits below that and then it splits out where you have uh Euro dollars and tether connects in through that way but on the full Reserve uh US banking side you have usdc which connects directly into the US banking system and then usds you should think of it as sitting uh Below usdc on the hierarchy of money and the main difference is that while usdc is running a full Reserve usds runs a fractional Reserve so it's narrow banking versus Broad base banking um so one of the ways to look at uh decentralized stable coins by market cap usds is has as one of the first movers is fairly dominant in this space um containing about like 60% of the market cap today um there are other players like uh Athena frax and go that are um you know doing quite well but usds still remains quite dominant with 5.5 billion uh in total deposits another measure to look at stable coins by broadly is permissionless yield generation and it's important to look at permissionless yield generation I understand that usdc does offer yield but it's behind like kyc and I think the important part here is to look at the permissionless yield generation this is what we've really seen gain traction and defi so if you look at this from this perspective you have usdt offering nothing usdc offering nothing and then you have like products like Mountain USD which are full Reserve but offer as much almost as much as possible as they can but they're limited by the treasury bill rate whereas a fractional Reserve broad-based stable coin like usds can overperform when the defi rates are doing well or even just investing in things beyond the uh treasury bills so zooming in a little bit on the the savings product savings usds which is the killer product of usds um we've seen total deposits of 2.1 billion um usds targets a cash reserve of uh 25% um to ensure that there is ample Peg liquidity for people to enter and exit whenever they want so as of today the cash reserves uh sit at 1.3 billion usdc and in fact usdc usds is the largest onchain holder of usdc on ethereum Main net um other than exchanges uh and the yield it offers is 6.5% so I mean yield is great um but where does the yield come from right so the yield breaks down broadly into these categories um the base yield is provided by t- bills um and this is the rate that every stable coin should be providing by default in my view this is the risk-free rate so really the users should just be receiving this um the other uh main categories are uh defi lending so this is the more classic maker core now called Sky core vaults um spark L A this is usually just eth and Bitcoin crypto native lending um and then more recently with the onboarding of Athena we've been able to tap into the uh revenues generated by centralized exchanges with pers products and this has been rapidly growing it's a smaller portion but it's rapidly growing um and but the other piece of a stable coin is uh what is the insurance policy so there are three levels of insurance at the sky protocol there is the Surplus buffer which is cash on hand to cover any uh bad debt that occurs there is is 120 million in Sky usds uniswap V2 pool this is protocol in liquidity that's sitting there ready to absorb losses but beyond that uh Sky token holders need to be prepared to Mint any uh Sky to take care of any losses beyond that so if we look at the um at the top chart you have the exposure so this is the market cap of the stable coin broken down by what collateral is backing it and at the bottom you have annualized Revenue so the uh structure of D at the beginning was very quite simple it started just crypto collateralized lending which is the blue you then see the onboarding of the PSM and usdc with the green but it did not yield any Revenue um well also because the rates were zero so it wouldn't be able to anyways um and then you see this coming in of this uh orange which is the treasury bill backing so as you can see uh it took over most of the stable coin uh Supply naturally because why would you accept zero yield you want treasury bill yield so um this uh and this created a lot of uh new revenue for the protocol at the bottom you can see the orange supplying a lot of Revenue and then even more recently the stable coins themselves are now uh offering uh Revenue um on the supply as well as you can see the green is now starting to generate Revenue at the bottom and you can see although uh ignoring this big spike in March uh 2024 due to a interest rate jacking uh revenues are actually at a steady state all-time high these days now let's let's talk about the sky balance sheet in more detail um but first let's talk about the spe Peg stability module just so everybody's on the same page about this the PSM is is a mechanism where you can swap usdc to usds one: one at huge sizes so as I mentioned uh sky has 1.

3 billion in um usdc that it owns that allows people to enter and exit at huge size so 200 million is not even an unreasonable number about how you can enter and exit at free will the protocol will make sure that this this order of magnitude of liquidity is available and people can uh depend on that now if we look at the balance sheet from this it's mostly correct but it's somewhat of an oversimplification you have on the liability side yield bearing liabilities um which is ssds um some of it is not in the non-yielding version of the stable coin which is fine but we'll just assume it all is in the yield bearing version for Simplicity you then have the on the asset side you have uh 25% in as the reserve asset which is usdc and then you have the remainder that's an outstanding loans this is T bills sparland a Moro Athena Etc and really it can be all number of a whole number of uh defi protocols so here's some of the problems this only exists on ethereum Main net and so if like you're on base and you want to scalable yield there's limited options like there's definitely ways to get yield on your stable coins but it's like not at the size of like hundreds of millions that doesn't exist right now so users who want to lend and get yield on 100 million this is kind if you go into like a lending Market or something at this size you'll just crush the rates and for borrowers let's say they want to use a and borrow uh usdc there may not be enough liquidity if the user wants to do this and so the rates again May Spike so if we look at usdc by Chain uh it's really been growing quite rapidly um base has just been like exploding with the amount of stable coins available and users um so this has been like a huge uh growth Trend recently uh is clicker worked better okay so now I'm going to talk about the spark liquidity layer as the solution to these problems okay so the observation is that because we have so much usdc in the PSM we can uh have the protocol move that to base and then move over U printed usds as well and then have a PSM there so that users are able to swap say 50 million usdc into the yield bearings at 6.5% yield 50 million of SDS they're then able to start earning this 6.5% yield right away without crushing the rates and they have these sort of guarantees and similarly the PSM is there such that they can swap back on base without having to touch ethereum main net but there's a little bit of a problem with this is that as users are swapping USD usdc to ssds the protocol is having more users that it has to pay out a yield but it's gaining more of an inventory of usdc that is not paying a yield and so what the spark liquidity layer will do is it automatically notices this and it will move access usdc inventory into the overall yield generation strategy of the sky protocol and so and this is mostly on ethereum mainnet and then when users are wanting to exit it provides liquidity back to the chain just in time and so really you can kind of think of it like this where usdc is already dominant in uh cross chain liquidity um it is it is basically the US dollar for defi right now and you can think of usds as the cross chain yield on top of usdc that will be available on all chains in the same way so users no longer need to think about which chain to go to which protocol you can just dump it into SDS and get this uh relatively safe yield cross chain and then uh isol isolated instances of stable coins lending exchanges can then tap into this um on each of the chains now here's a little bit of an update so this is like a the balance sheet on base is kind of what it looks like and I'm adding another piece here which is the idle usds Supply on the asset side of the balance sheet which also matches matches on the liability side so this is uh idle usds Supply and it's important there's no cash drag here which I'll get into um in the next part and there's also yield bearing opportunities on base as well um so this could be through a Moro you know etc etc and then we have the PSM also available so users can treat it pretty much like usdc ah okay so this is the interesting part so now that we have um this what I'm looking more at like usdc as a chain wide Reserve so on Bas we have this one place where the PSM where we pile usdc into the protocol can then premit um or just in time credit Amo whatever you want to call this can then premin this into every lending Market at once this number is fairly arbitrary because these assets um have no cash drag so you can just mint 40 million into a 40 million into Morpho 40 million into compound and then you have the chain ride Reserve which is maybe not the same as so there's 120 million in outstanding these are not uh borrowed yet so that it's like it's very um artificial number in a way but the chain wide Reserve is what's actually providing the hard Peg on these assets and it may be smaller than the actual outstanding uh assets that are being issued on each of these lending markets and so this is a nice way to balance out so that users whenever they want to borrow they can just use whatever protocol they want and then this fills in the uh back end to ensure that there's liquidity and balance and all these kinds of things and so what what you end up looking like uh is more like this so you have the US banking system which is the peg for usdc and then you have usdc which looks like money or like an onchain M1 now you have usds which is more like credit or an onchain M2 and in the hierarchy of money credit is a can serve a much bigger uh audience than the than the higher up more like M1 it's the same with the cach you think the M1 Supply is much much smaller than the M2 Supply and so the M2 Supply can serve a much much uh wider uh space but the interesting thing is I mean you can do this for any type of stable coin it could be a stable coin on eth so you can have eth as the core asset and then you have Lio um as an example of a full Reserve stable stable coin um that is wrapping the eth and um and then but you can also have a more credit- likee system this doesn't exist yet but somebody could totally do this where it's serving a wider audience and it can pre-int uh tokens into protocols such that they can be available to users just in time when they want to borrow such that you solve The Lending side of the two ided equation of of lending Market lending markets sorry and so yeah a little bit more detail about the spark liquidity layer how this works under the hood is we have within the same chain um the spark liquidity layer will do automated rebalancing between each of the uh lending markets so when a user borrows um say they borrow an a the spark liquidity layer on the next block will rebalance the usdc in that market and it could be usdc or us yes they're fairly interchangeable um such that uh the rates on a will be balanced across all of Defi and then users really no longer need to worry about which protocol they're using on which chain um they can just go ahead and use their favorite protocol and then similarly like cross chain rebalancing the system will move um using Circle cctp for example or uh Skylink which is the usds version of that and really that's only bounded by uh ethereum finality um and that's currently 20 minutes but I think that should improve in time with single slot finality and things like that and really this will homogenize the uh the rates across all of defi again such that users get this like really killer ux where they can use the interface and the protocol that they prefer they want to borrow usdc and they get the same rate um I mean depending on what the collateral is but uh they get roughly the same rate um across every single protocol this clicker is not good okay so this is all very exciting um we're uh rolling this out very soon um so here's the road map for the near future um so the support for the savings usds on base where you can swap from USD or usdc into ssds at large size um that's going live uh in like a week actually it's it's very soon um and then looking at uh we're going to hit the ground running in the first half of uh 2025 uh phase two we're going to be expanding to more chains launching the allocation system into extend uh external lending protocols is a Moro etc etc um we'll have uh rwa active management this is the tokenized treasury bill competition where we'll be on boarding you know we're investing 1 billion Nick mentioned this 1 billion into uh tokenized treasury bill products and that will be on boarded into this system as well and we'll and then fast token bridging and then phase three and Beyond we'll be looking at like yield optim optimization uh safety mechanisms asset failure detection Etc and then eventually we'll be adding uh tether support as well thank you [Applause]