Conversation

Replying to

9) Stablecoins are basically the simplest product in CeFi. You take an ERC20 token, and you take dollars in a bank account, and you map them 1:1, with creations and redemptions. There's basically nothing tricky about them (other than holding the bank account!). How about DeFi?

SBF

@SBF_FTX

Jul 21, 2020

10) In DeFi, stablecoins are a total fucking mess. The problem, really, is that a stablecoin is a dollar, and dollars are not on the blockchain; they're centralized in bank accounts. So if you only have the blockchain, you can't redeem for $1. But then what makes it stable?

SBF

@SBF_FTX

Jul 21, 2020

11) All over DeFi you see complicated attempts to solve this. Curve and mStable are entire DEXes built around stablecoin:stablecoin swaps. OTOH you can trade USDC:TUSD 1:1, no fees, infinite size using ftx.com/wallet, or you can do it yourself if you have banking.

ftx.com

FTX

Cryptocurrency Derivatives Exchange

SBF

@SBF_FTX

Jul 21, 2020

12) But those require banks, and if you don't allow centralized elements then you're left with, basically, atomic swaps of TUSD for USDC--which depend on some outside mechanism to keep them in line and provide liquidity.

SBF

@SBF_FTX

Jul 21, 2020

13) But it gets worse--if you really hate centralization, you might not like the fact that your stablecoin's value relies on a bank account. What if it gets frozen, or the creation/redemption facility shuts down? What is worth $1 but doesn't rely on banking?

SBF

@SBF_FTX

Jul 21, 2020

14) There's a really fundamental tension here! So we end up with stuff like $DAI. And DAI is a total mess. It's not backed by dollars. That means you can't redeem it for a dollar bill. But in fact, you usually can't redeem it at all! What makes it "worth" $1?

SBF

@SBF_FTX

Jul 21, 2020

15) In fact you can't create it either, really--you can just borrow it. So it's peg is really soft. And it's backed by a leveraged position, so if markets move the stablecoin's holdings might get liquidated. So to recap: no creations, no redemptions, but yes liquidations.

Replying to

and

Uh it is "created" through the act of borrowing. This is also how actual USD is created...both by US gov and banks...

Replying to

But with DAI you have to overcollateralize the borrow--so it costs like $1.50 to "create", or else you have to lock up $1.50 per DAI, and then eventually buy the DAI back to get your collateral back.

Replying to

and

Most lenders require over collateralization. The number 1 asset used to collateralize USD loans(and the banking sysyem) is real estate. e.g. conventional mortgage requires 20% equity which would be a minimum 125% collateral ratio. A mortgage creates USD exactly like borrowing Dai

SBF

@SBF_FTX

Replying to

@b_d_thompson

Yeah agreed, except that USD is what things are pegged to, not DAI, and DAI is only loosely tied to USD.

11:45 AM · Jul 21, 2020Twitter Web App

Replying to

and

Yes, agreed, the soft peg is a significant difference.