Making Stablecoins More Stable: Incorporating Custody Assets and Building a Buffer Market Mechanism

特邀专栏作者

2020-04-13 09:00 (UTC+8)

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A seemingly paradox arises in decentralized stablecoins: while our goal is to make them non-custodial assets, these assets can only be fully stabilized by adding uncorrelated assets, which are currently is centralized/custodial.

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Editor's Note: This article comes fromCrypto Valley Live (ID: cryptovalley), Author: Ariah Klages-Mundt, translation: Ziming, reprinted with authorization by Odaily.

Crypto Valley Live (ID: cryptovalley)

background

Abstract: A seemingly paradoxical problem arises in decentralized stablecoins: while we aim to make them non-custodial assets, these assets can only be fully stabilized by adding uncorrelated assets that Both are currently centralized/custodial (e.g. Maker recently included USDC as collateral). In fact, synthetic assets and cross-chain assets also face the same problem. We design an alternative market-based mechanism to enhance stability in crises while remaining non-custodial. This creates a buffer that separates those willing to swap stablecoins for custody-like assets in a crisis (in exchange for continued yield for option buyers) from those who need full decentralization."black thursday"background"stable currency"March 12, 2020, in what is known as

black thursday

High volatility of assets and breakdown of collateral liquidation process. Some collateral liquidations took place at near-zero prices as network congestion drastically reduced market liquidity. As a result, the system suffered from a collateral shortage, which led to an emergency response and had to replenish capital by selling new equity tokens.

Stability Results

Dai is in high demand during this time. It became a riskier and more volatile asset, but it traded at a steep premium and with lending rates in the median double digits. Leveraged speculators must repurchase Dai in order to deleverage, thereby depleting Dai’s liquidity and driving up the price of Dai, thereby increasing the cost of future deleveraging (we discuss further causes of market illiquidity in later chapters reason). These speculators are beginning to realize that in this case, they face a concrete risk that a dollar of debt reduction may pay a huge premium. Ultimately, a new exogenous stable asset had to be introduced—the U.S. dollar-backed custodial stablecoin USDC as a new type of collateral to stabilize the system.

In addition to the panic caused by COVID-19, bitUSD, BTC, Steem Dollars, NuBits, etc. are also facing the same risks as Dai, and these currencies have experienced "depegging" events in 2018.

secondary title

Stability Results

We formally describe "stable regions" and "unstable regions" of stablecoins. In the stable zone, stablecoins perform very well: with high probability, the stablecoin price is around the target price with minimal volatility. Outside of these areas, stablecoins are volatile, with significantly higher price volatility, and may be comparable to the volatility of the collateral asset ETH.

We describe how this instability is triggered by large swings in collateral asset prices, a collapse in ETH expectations, and deleveraging in crises that lead to liquidity problems (potentially leading to a deflationary spiral of deleveraging). In order to de-leverage CDP/vaults, speculators need to repurchase stablecoins to repay debts. Intuitively, if a speculator wants to deleverage a lot without a counterparty (either a marginal speculator who wants to increase leverage to issue a new stablecoin, or a stablecoin holder who wants to sell a stablecoin ), then speculators will eventually race to drive up the price of stablecoins. Essentially, speculators need to pay a premium to deleverage in this situation, as we saw on Black Thursday.

These triggering processes reflect a reality of working in a digital currency environment - or are these processes likely to occur in the long run. Therefore, we cannot deny their factual existence, nor can we expect them to change; we must adjust our designs to take them into our consideration. We can focus on expanding the breadth of the stable region. How large this area is depends on the precise market structure. Under ideal (unrealistic) settings, stablecoins are stable over a large area. Importantly, however, even idealized setups can worsen in the event of market expectations collapsing, as speculators will think they are entering unprofitable, high-risk positions, and thus will not issue more stablecoins. currency."The results of our analysis can be applied to data-driven risk tools for stablecoins. For example, our analysis results can be used to estimate the probability of peg deviation and infer when the boundary of the stable zone will be crossed. However, we note an obvious problem: the specific numerical results can be highly model-specific and very sensitive to the market structure and the distribution of the underlying assets. Our main contribution lies in the theoretical understanding of these systems, and how crises can be suppressed."secondary title

One Solution: Include Managed Assets

The reality of deleveraging brings fundamental trade-offs to decentralized design, bringing stablecoins closer to"Perfect"One way to stabilize is to increase the adaptability (elasticity) of demand to supply.

Medium- and long-term resilience depends on the existence of stablecoins with good non-correlated alternative collateral assets. Since all non-custodial stablecoins are likely to face similar deleveraging risks, greater resilience relies on custodial stablecoins or greater convertibility with fiat currencies. Yet the treatment of short-run elasticity can still be tricky (even if the demand side is inherently elastic in the long run). A significant portion of the stablecoin supply is locked in other applications, such as lending protocols and lotteries. These applications promise (in a sense) value security in over-collateralized assets, but do not guarantee liquidity when exiting the market. Additionally, Ethereum transactions cannot be executed in parallel; during periods of volatility, transactions may be delayed due to congestion, causing timely transactions (especially transfers/transfers involving centralized exchanges) to fail. This occurs even when these markets are in principle liquid."Another brings stablecoins closer"The way to stabilize is to increase the supply of borrowed speculators (who are willing to leverage to issue more stablecoins). Since the number of speculators with positive expectations on ETH (especially in a prolonged bear market) is limited, this relies on having another uncorrelated collateral asset. And since all decentralized assets are very correlated, this again relies heavily on the inclusion of custodial collateral assets, such as USDC, which Maker recently joined. Of course, it is important to note that custody assets also face their own risks, which may not be irrelevant in all extreme crises. This includes counterparty risk, bank run risk, asset seizure risk, the impact of negative interest rates, etc. In reality, however, there are some possibilities for substantial risk diversification.