R.I.P. 'Decentralized' Stablecoins

July 21st, 2014 - March 13th, 2023

After the depeg of Circle’s USDC over this past weekend, every ‘decentralized’ stablecoin depegged due to a single bank failure. All of their funerals were held the same day of this tragic event, in USDC wrapped coffins.

Is decentralized finance really decentralized finance if a few banks could destroy it all? Three questions:

-Why did virtually every major ‘decentralized’ stablecoin have a major (10% or more) depeg from the U.S dollar due to a single bank failure?

-How did we end up with a majority of the decentralized stablecoins becoming USDC wrappers (majority USDC backing)?

-How could there possibly be no harborage from the Jim Cramer approved clown show highly regulated and transparent banking institutions that you should totally trust ™, in DECENTRALIZED finance?

While obituaries can be melancholic, this one is not- imagine for a second a truly decentralized, unstoppable US dollar pegged over-collateralized capital efficient stablecoin built for a multichain world was coming into existence #soon?

Well dear reader, you’re in luck, as the Nobel CT Prize winning “Death of..” series continues in today’s newest installment- the death of ‘decentralized’ stablecoins. As with tradition, we must first take you back to where it all began- the very beginning of the ‘decentralized’ stablecoin..

a note from el jefe: please take note of the sarcastic quotations surrounding the word decentralized- true decentralized stablecoins are FAR from dead ;)

The Father of DeFi’s Decentralized Stablecoin

In early 2014, the utter fucking mess coolest, most daring, innovative, and -every superlative ever insert here- blockchain technology was released by someone who I personally attribute the creation of Decentralized Finance to- none other than Dan Larimer (you may know him as the founder of the “Ethereum Killer” EOS). But I’m not talking about that failed blockchain- the blockchain in question was BitShares*.*

The birth of BitShares brought us BitUSD- the first decentralized stablecoin!

But it didn’t end there, BitShares was like a clown car of a never ending stream of forex pairs- BitEUR, BitCNY, BitJPY, etc, called “SmartCoins” that all totally held their pegs and didn’t amount to glorified meme coins that yours truly definitely did not trade to feel like the super cool Forex trader bros on YouTube infomercials.

So, how did BitUSD work? BitUSD was not backed by cash reserves like Tether (supposed cash reserves amirite?), but instead was backed by BitShares native token, BTS (not the k-pop group, calm the hell down).

To create $1.00 in bitUSD, you needed to provide $2.00 in BTS as collateral, thus bitUSD was the first CDP or Collateralized Debt Position (fancy word for loan) “over-collateralized” stablecoin, with what amounted to a 200% Collateral Ratio (or a 50% Loan To Value Ratio, or LTV).

You could redeem the underlying BTS collateral by supplying back the bitUSD, or- if the collateral factor dropped to 150%, a rudimentary liquidation mechanism would occur whereby a “margin call” mechanism was employed to buy out the BTS associated with a bitUSD CDP and liquidate it- (reiterating for the last time, this was in TWENTY FOURTEEN).

This is all well and good, but how did bitUSD actually keep its price pegged to the US dollar? Well, uh..Dan forgot that part..

AN ACTUAL QUOTE from the BitShares Whitepaper: “So far we have shown how the price of BitUSD is highly correlated to actual USD; however, we have not provided any rational means for actually establishing the price.”

Essentially, the price of BitUSD was derived based on BitUSD’s weighting against BTS on Bitshares built-in DEX. There were no direct mechanisms enforcing the $1.00 price peg of bitUSD. Dan felt BitUSD should trade at a dollar well, because. And this worked, sort of..

If you want to truly understand how insane the beginnings of DeFi were, read the BitShares whitepaper here .

But who cares! While literally no SmartCoins stayed on peg, bitUSD basically held it’s dollar peg besides maybe uh..

But come on! In 2014 with bitUSD on the BitShares blockchain, you could Forex trade, purchase bitGOLD and other real world synthetic assets all on an early DEX, lend to earn a yield, borrow against any of these SmartCoins, go long or short on any of these assets, everything you could imagine in DeFi today, except, nothing really worked..

This all must sound pretty cool, and it was! But dear reader, by now you must be asking yourself, “I’ve never heard of BitShares, so this thing must have blown up,” and if you’re thinking that, you would actually be wrong.

No Boom?!

Nope, besides there being no oracles with actual price feeds, low trading volume on the BitShares Exchange which allowed for easy manipulation, and the peg stability mechanism amounting to “well, it’s supposed to be worth a dollar, why wouldn’t it be?” there was a more critical issue-

It may sound perfectly logical to think, “bitUSD was backed 200% by BTS, so at least there couldn’t be a death spiral” but what was BTS? A highly illiquid and volatile asset.

Is $1.00 in ETH worth the same as $1.00 in DogeElonSafeMars, or maybe FTT? Collateral assets aren’t created equally. The quality of the collateral asset is almost as important as the collateral ratio (as well as debt ceilings, liquidation systems, oracle quality, and many other factors).

Thus, all that needed to happen for bitUSD to lose its $1.00 peg was for BTS to sharply fall 50% or more quickly, and a liquidator wouldn’t liquidate the underlying BTS because it would no longer be profitable to do so.

But, probably to your surprise, there was no boom..more of a faint whimper.

BitUSD actually kept a somewhat respectable peg to the US dollar as seen above. But, BitShares as a network was literally unusable. There simply wasn’t enough value in the system for anything bad to happen. Is anyone going to spend time robbing a convenience store when they only have pocket lint in the cash register? Probably not.

With BitShares and BitUSD fading into obscurity and Dan heading to ‘kill Ethereum’ with EOS (also didn’t go so well), what would be the next chapter of decentralized stablecoins?

SAI HAI to DAI

R.I.P Nikolai Mushegian, a true innovator

**
**Speedrunning through history to the next major stablecoin brings us to 2017’s “Single Collateral” DAI (or ‘SAI’), made by none other than the legendary MakerDAO and its leader, Rune. DAI was named after the originator of cryptocurrency, WeiDai (among other things). Rune ironically was a well known community member of BitShares, and actually originally Maker was meant to be deployed on BitShares! (the more you know).

DAI’s technical advances in comparison to bitUSD is like comparing a Campbell’s soup-can affixed with a string to an iPhone 14 Max. But let’s begin with the similarities:

SAI was over-collateralized at 150%, slightly lower than BitUSD which firstly offers higher capital efficiency (less dormant liquidity). SAI was backed by Ether, and Ether only, thus SAI- Single Collateral DAI- just like BitUSD was only backed by BTS.

SAI was also a CDP based stablecoin like bitUSD, but much more intricate. If a borrower accrued too much debt from Maker’s interest rates, an off-chain liquidator bot could purchase a portion of the users collateral for a profit, a much smoother and efficient system then BitShare’s “Margin Call” mechanism.

That’s where SAI and bitUSD’s few similarities end. SAI was deployed on the much more sophisticated Ethereum blockchain. Maker employed Oracle price feeds to ensure accurate values of Ether being used as collateral, interest rates to exert control over the supply of SAI like a true central bank, a way for users to always be able to redeem Ether with SAI, and lastly- an actual mechanism to enforce SAI’s price equivalence to the US dollar via arbitrage:

If the price of SAI was over $1.00, users could create new SAI at a discounted rate, and if SAI was under $1.00, users would purchase SAI to repay debt at a discounted amount.

Even though Ether fell 80% over the course of SAI’s first year, SAI adhered to its $1.00 US dollar price peg. wow mom, over collateralization with good liquidation systems works!

A Power Struggle

With the ultra successful actually decentralized SAI (Single Collateral DAI) stablecoin having almost $100m in liquidity, of course a power struggle had to begin, and begin it did in 2019.

Rune’s perspective had shifted- he believed the decentralization purism path was stunting DAI’s potential, and that Maker needed to integrate itself into the traditional finance system to truly spread its wings. Maker lost its CTO, Zandy, over this pivot. Zandy left Maker with a public memoir “Zandy’s Story,” dated April 3rd, 2019.

You’d never know if this was written in 2019 or 2023, Zandy certainly knew what was about to happen before it did:

With Zandy gone, Rune prevailed, hell bent on a warpath to world domination with SAI via melding the world of tradfi’s clown show highly sophisticated and heavily regulated financial system with DeFi’s trustless medium of exchange- SAI.

Rune offered the MakerDAO contributors two options- the red or blue pill:

Those who chose Red Pill were supposed to work on the initiatives focused on delivering government compliance and integrating Maker into the existing financial system.

Those who chose the Blue Pill would build Multi-Collateral DAI’s core contracts and then get BTFO’d from Maker (fired).

The core contributors unfortunately weren’t in the Matrix, and Rune wasn’t as convincing as Morpheus, and thus a number of the contributors chose to create the “Purple Pill” faction to dethrone Rune and take control of the now $200m USD that Maker controlled, and continue on the path of SAI being true decentralized money.

The Poison Apple

By 2020, Multi-Collateral DAI was born, supporting more collateral assets than just ETH to mint DAI. BAT or Basic Attention Token was the second asset ever allowed to collateralize DAI. The legendary Maker PSM or “Peg Stability Module,” which allowed DAI to be easily swapped with low slippage and fees to other assets through MIP29 was born.

On the fateful day of March 16th, 2020, Maker onboarded its third collateral for Multi-Collateral DAI- Circle’s USDC.

This was an extremely important event in DeFi, as centralization’s Trojan Horse was wheeled with glee through DeFi’s top decentralized censorship resistant stablecoins fortress gates.

However at first, it actually was done in a very sharp way via isolation- USDC was given a cap of how much of it could back DAI, about 10% at the time which was the equivalent of $20m USD.

However, with the bite of the poison apple, DAI’s USDC backing quickly ballooned over time to being the majority backing of DAI.

RWA’s and other centralized stablecoins were kept isolated to some level, but USDC has since created 57% of all DAI in circulation, and currently makes up 40% of its backing.

This event started a ripple effect of attracting more and more ‘decentralized’ stablecoins to also take a bite of the poisoned apple of centralization- namely of the Circle variety- to gain meaningful adoption through the euphoric times of the 2021 bull run.

The allure of the mountains of capital Circle and other centralized entities had on offer was too great, making it easy to forget the very reason cryptocurrency was created- the 2008 Financial Crisis and the constant collapse of banking institutions due to endless greed and the reckless abandon employed to satiate this greed.

Here we are, 15 years later, in the same damn place..

Just to put in perspective the last several months in crypto:

Silicon Valley Bank: $1.8b in losses

Silvergate Bank: $1b in losses

FTX: $8b in losses

Celcius: $5b in losses

Three Arrows Capital: $3.5b in losses

Genesis (Digital Currency Group): $3.4b in losses

Total: $22,700,000,000

While the Lehman Brothers collapse of 2008 was over $600b, we can either keep deluding ourselves into believing centralized entities ‘are too big to fail,’ and that USDC wrappers are decentralized because they are governed in a decentralized fashion, even though Circle (or the government) could press one button and obliterate them from existence.

OR

We can accept that no centralized entity is too big to fail, and the need for trustless censorship resistant money pegged to the US dollar- what SAI used to be, is one of the single most basic needs in true decentralized finance. How could you even begin to think a decentralized finance system could exist without a dollar denominated decentralized currency?

Wakeup Call

After the abhorrent arrest of Alexey Pertsev (creator of Tornado Cash) in August of 2022, Rune (seemingly) realized the severity of the situation DeFi was in, even saying we should seriously consider depegging a multi-billion dollar stablecoin (DAI) from the dollar.

Centralized entities now had a DAI kill switch for the supposed ‘decentralized’ stablecoin, and could flip the switch any time they wanted- along with most of ‘decentralized’ finance like a bug.

Shortly thereafter, Rune posted the now (in)famous Maker Endgame Proposal .

This radical shift would take the steps to jumpstart Maker’s chemotherapy of it’s centralized cancer- accumulating ETH into the Maker PSM, to inevitably yolo all of the remaining USDC into ETH, to become a censorship resistant..free floating non-stablecoin (wut).

Maker also posted an emergency proposal after the collapse of Silvergate Bank, Silicon Valley Bank, and the Circle USDC depeg to begin stamping out centralized assets from Maker’s PSM, as DAI was depegging.

But unfortunately, the cancer in my opinion is terminal.

Adding even deeper issues to Maker DAI:

-Circular Financing: Backing DAI..with DAI (DAIUSDC">DAI/USDC LP - $375m)

-Moar Centralization: $300m Gemini USD (GUSD) backing DAI.

-Custodial Risk: $1.6b of the Maker PSM’s USDC lent to Coinbase Prime.

-Even Moar Centralization: Abusing Maker’s upgradeable automation contracts to seize user’s funds (Wormhole Hacker’s $202m) from a DAI vault for a British Court.

note on the wormhole hacker reverse exploit**:** While the Wormhole Hacker’s money was stolen and absolutely should have been returned to the rightful owners, true decentralized trustless protocols do not get to decide that. Think of the implications? Courts can tell protocols to seize user’s money now? That’s DeFi?

DAI, in my humble opinion, is now so poisoned by centralized assets (and governance theatrics), it is no longer the censorship resistant decentralized stablecoin it once was, especially comparing it to its days as single collateral DAI.

note 2: I will openly state I have modeled Tapioca and myself after Maker and Rune in many many different ways. His doomer mentality on traditional finance, his openness to discuss radical ideas with the community at large, his perspectives on decentralization, etc, shaped my opinions. I by no means dislike Maker or Rune, and would not be here without them.

But, before we begin on what will emerge in the large empty place of our dearly departed, there is the blighted scroll we must pull deep from the annals of the history of decentralized stablecoins, written by the ‘master’ of the stablecoin, Rick.

The Basis for Rick Morty in Decentralized Stablecoins

The first thing you’re probably saying is, “wait, Rick?”. Dear reader, sit tight.

Before the ‘master’ of the stablecoin went by his real name, he was Rick- clearly showing his sharp intellect- borrowing a pseudonym from the popular ‘Rick Morty’ cartoon’s protagonists, along with an engineer from his company, being ‘Morty’.

So what did ‘Rick’ ‘Morty’ build? Basis Cash, kind of- they really didn’t actually ‘build’ anything. Basis Cash actually existed long before Rick purported himself to be the ‘master’ of the stablecoin, and its roots were based in Basecoin / Basis. Basecoin was an unbacked algorithmic stablecoin that utilized a now common seigniorage model. Essentially, when Basecoin was below its peg, Base Bonds would be auctioned off to repeg it, and when Basecoin is above peg, it would issue shares.

Let’s step back for a minute- what’s an algorithmic stablecoin? Instead of backing a stablecoin directly, an algorithmic stablecoin relies on mathematical formulas and incentive mechanisms to hold price equivalence with the US dollar - aka, a sure fire way to lose a lot of people a lot of money.

The three main algorithmic ‘stablecoin’ models employed have been Rebases, Seigniorage, and the third and most recent, Fractionally Backed- a mix of collateralization and seigniorage.

Rebase- the stablecoin mints and burns its supply to keep its peg to the US dollar, an example of this was Ampleforth. Generally, rebase stables aren’t seen any more.

Seigniorage- These stablecoins generally have a multi-token economy to exist. The stable itself, and a second non-fixed price token to utilize to keep the stable well, stable. Generally incentives are employed to get market participants to buy or sell the secondary asset to keep the stablecoin on peg.

Fractionally Backed- Part Seigniorage, Part Collateralization, an example of this is Frax. With that being said, Frax has for some time been moving it’s collateralization ratio to 100%, although completely backed by USDC, Frax now has formally made clear it will become an over-collateralized stablecoin with FIP-188 .

Anyway, Basecoin was never deployed, as its founder, Nader Al-Naji, stated regulatory constraints existed that forced Basecoin to shut its doors. Nader however felt there would be no regulatory concern cloning the Bitcoin blockchain, slapping an ultra cringe name of ‘BitClout’ on it, selling CLOUT tokens to VCs for $0.80, to turn around and sell them to retail investors for $180- getting the Vacuous Clowns and himself a quick 5000% gain. How in Nader’s mind Basecoin’s mechanisms were more illegal than him and a group of “tier one” veecees scamming retail investors for gigantic profits this el jefe will never know.

However, getting back on track with our master of stablecoins, ‘Rick’ didn’t care about Nader’s legal concerns, or more importantly the technologies sustainability, and issued a proclamation in his Telegram group, only comparable to the Sermon on the Mound, in the Summer of 2020:

“Yo degens, does anyone remember what Basis was? It was an early ‘DeFi’ algorithmic stablecoin with high ambitions, but was shut down due to SEC-related risks. Today we’re bringing Basis back from the grave.”

With this proclamation, ‘Rick’ began his quest of losing sixty fucking billion dollars and all trust in decentralized stablecoins building many no backing, no worries! seigniorage based algorithmic stablecoins, one in specific we all know of (don’t worry we’ll get there).

The Basis for Basis Cash

Basis Cash launched in the Summer of 2020, with Rick Morty deploying Basis Cash (Stablecoin), Basis Bond, and Basis Share.

A quick history lesson that will prove valuable in explaining algorithmic stablecoins like Basis and currency itself- The U.S Treasury is the arm of the US Government that can print U.S dollars, that also issues Treasury Bonds Bills. Therefore, algorithmic stablecoins like Basis Cash aren’t innovative at all but simply modeled after the actual fiat system that totally works perfectly.

Basis Cash = U.S Dollar, Basis Bond = Treasury Bond, Basis Share = Treasury Bill.

One note to add that adds even deeper issues to this model, is the U.S Government’s full faith and credit is certainly equal to ‘Rick and Morty’ amirite?

Basis Cash was an exercise of bad ideas and ponzi schemes, and ultimately captured $30m before falling to $0.30 by January 2021. But Rick Morty kept themselves busy, the pair launched Empty Set Dollar (ESD), which hit $22m in market capitalization before falling to a penny within months, Dynamic Set Dollar (DSD) which was an instant failure, seeing a pattern?

But why did Basis Cash fail? Basis Cash was the highest performing of the trifecta, reaching $170m in market cap, and surprisingly, there wasn’t actually a catastrophic failure, it just never held a dollar peg.

The best way to summarize Rick Morty adventures is from this quote:

“While DeFi degens are busy trapping retail in zero sum games like @emptysetsquad @dsdproject and @BasisCash , recall the only real stabilizing force in algo stablecoins is growing adoption and usage”

Who was this quote by? Rick of Rick Morty, aka the guy who made ESD, DSD, and BAC.

Well that doesn’t make sense? Why would Rick call his own projects “zero sum games?”.

Because Rick wasn’t known by Rick anymore, he was now known by Do Kwon. Do Kwon was about to provide context to the phrase “failing upwards”. Having three failed stablecoins under his belt proved to sharpen his experience to make his fourth disaster his biggest yet.

That wasn’t the most ironic or interesting part of that statement, however. “The only stabilizing force in algo stablecoins is growing adoption and usage”. What does this mean? Do realized for an algo to keep peg, people needed to keep buying into the algorithmic stablecoin’s ecosystem to keep it stable. Hmm, what’s that called again? A Ponzi Scheme?

Rick realized the most important missing ingredient to his “no collateral, no worries” style of stablecoin with ESD, DSD, and Basis was there was no incentive for users to buy in and continue to buy in to keep them stable. So fail upwards we go!

Kwon I Blow Up DeFi?

Yes, yes you can- Enter Terra.

In 2019, Do Kwon and Terraform Labs, incorporated in Singapore, completed a seed round with LUNA tokens at 18 cents to create a Cosmos blockchain with every “top VC” (an oxymoron) in existence virtually participating.

Shortly thereafter in 2020, UST was publicly announced as a ‘decentralized’ ‘stablecoin’ on the Terra blockchain. There was a second critical piece to the story however, which was an engineer at Terraform Labs created Anchor Protocol, a money market on Terra to earn high consistent* *yields on UST, paid in UST. The Terraform Labs developers told Do they’d set Anchor’s yields for UST at 3.6%. A week before the launch of Anchor, Do told them, “3? Nah, let’s do 20%”.

UST, otherwise known as TerraUST, was a ‘decentralized’ ‘stablecoin’. Many anons mistakenly believe UST was backed by LUNA- it was not.

UST was backed by nothing, it was a pure seigniorage algorithmic unbacked ‘stablecoin’.

We’ve gone over the seigniorage model already, but to explain one more time: You could create 1 UST by burning $1 of LUNA, and vice versa.

If UST went above peg, you could convert $1 of LUNA into 1 UST which would be worth more than $1, and sell it for a profit.

If UST was below peg, you could always burn 1 UST for $1 of LUNA. (this is the important part)

In theory, this model probably may seem logical to some degree. But remember, “the only stabilizing force in algo stables is growing adoption and usage”.

Why would anyone take on the risk of holding or using UST versus USDC or DAI in the first place?

Well here’s the $60 billion dollar answer to that question, remember that Anchor Protocol? That was Terra’s Central Bank. Remember that 20% guaranteed yield part?

Essentially, you could deposit UST onto Anchor, and earn a consistent and stable 20% APY. That means for every UST you put into Anchor, in one year, you will get $1.20- guaranteed. How is this possible when real banks can barely offer a 1% yield? Well, we’ll get back to this. But through this ponzi-rific yield- Do had his “stabilizing force”- attract people to adopt and use UST with ludicrously high yields!

Also to foreshadow, Do Kwon tweeted In 2021 that a Black Wednesday George Soros style attack to destroy UST was “retarded”.

For context, what exactly is a “Black Wednesday Soros Attack”?

Black Wednesday

To explain this as efficiently as possible, Britain had joined the European Exchange Rate Mechanism in 1990. The ERM would essentially peg members' currencies against the European Currency Unit, which amounted to a basket of the members' currencies. This ECU would ensure all member currencies would trade in a ‘band’ against one another, minimizing fluctuations of European currencies trading rates, to ease into eventual adoption of one shared European currency. However, when members placed their currencies into a ‘band’ against one another, they were artificially changing the values of their currencies to create ease of exchange, and therefore could place them on fragile footing.

The Deutsche Mark (DM) was growing strongly in a unified Germany, so most of the ERM’s members tied their monetary decisions to Germany’s central bank. There was one problem with this, Germany’s economy was booming while Britain was feeling the woes of inflation in a stagnating economy.

Britain upon entrance to the ERM set their exchange rate at 2.95 DM’s being equivalent to 1 British Pound, vastly over valuing the Pound. Inflation continued to spiral out of control in Britain, which forced them to raise interest rates to 10%- further increasing the strain on their stagnating economy.

A billionaire by the name of George Soros, seeing that Britain entered the ERM at too high of an exchange rate against the DM, decided to enter into a $10b short through a 20:1 margin position on the Pound. Central Bankers thought Soros was over-levered like an adderall addicted Web3 VC, but Soros knew this was a house of cards that he could easily topple over and rake in endless amounts of cash doing so.

This put Britain in a game of chicken with Soros, they could either let the Pound continue to devalue and Soros to print money on his short, or find a way to squeeze Soros out of his short. Thus, Britain instituted a buyback on Pounds. Tuesday, September 15th 1992 began, and a run on the British central bank began. May have seemed bad, but in retrospect, Tuesday was nothing compared to Wednesday.

Wednesday, September 16th 1992 was the date of “Black Wednesday”. The Bank of England was buying back $2 billion in British Pounds an hour, before they finally called it quits being left with no other options but to officially leave the ERM- depegging the Pound completely from the DM. This further massively devalued the Pound, which allowed Soros to pay his loan back on his margin position and have $1b USD in profit left over, collapsing the British economy almost single handedly.

Thus, the British Pound’s artificial peg to the Deutsche Mark, buyback, and a bank run caused Black Wednesday- let’s keep that in mind while returning to Do Kwon-

Black Saturday

Shortly after @FreddieReynolds on Twitter outlined a Black Wednesday style attack to bring down Terra and UST, Do Kwon raised $1b from Three Arrows Capital and co (seeing a pattern with these clowns?) to create a “Luna Foundation Guard” of BTC to use to buy back LUNA/UST to protect the UST peg.

Unfortunately for Do Kwon, if you recall Black Wednesday- like Britain, Do Kwon was implementing a buy-back, while his central bank, Anchor, like Britain, was deep in the red. Now who would play Soros Quantum Fund? Certainly not SBF and Alameda Research! I didn’t say that, you did.

There was now fourteen billion dollars of UST deposited into Anchor, which would cost over a billion dollars annually to maintain. More on how this wasn’t spotted as laughably unsustainable later.

Do Kwon not being able to see the flames surrounding him through his endless greed, bet GCR millions of dollars nothing bad would happen to Terra. He then infamously proclaimed DAI would DIE by his hand..(what a clever guy, huh? you’d totally give this dude a billion dollars too, right?) with a Curve 4Pool of FRAX/USTUSDT">T/USDT/USDC to starve off Curve’s 3Pool (DAI/USDC/USDT).

With mounting yields owed to Anchor Protocol depositors being pushed to critical mass via Abracadabra’s Degenbox (Bentobox) strategy offering 10X leverage on UST, which offered near 100% yields on a stablecoin* *(UST), piling on another near $3b of deposit mass fetching unsustainable laughably high leveraged yields from Anchor. This Degenbox strategy was the single most profitable yield strategy ever invented, all based on Terra’s absurd ponzi scheme.

Things reached critical mass, Anchor had a total yield reserve of $65.5M UST to sustain the 20% APY being paid to the depositors with billions of dollars in UST lent on Anchor.

So how did no one see that Anchor was hemorrhaging money? @FatManTerra discovered renowned clowns ‘tier-one’ VCs TFL Hashed were manipulating Anchor’s borrowed capital to make it appear that things weren’t on fire- that there was actual organic borrowing that made the 20% APY sustainable on UST.

This account was borrowing $450m in UST earning no yield, thus forgoing $29m in yield and paying out $44m in interest on the loan. There were many more ‘whale’ accounts like this, just to make it appear that Anchor could sustain its 20% guaranteed APY on UST with fake loan interest.

Trying to fill an endless pit turned out to be an impossible task, 0xHamz, a Terra community member, plotted that at the rate of decline of the Anchor yield reserve as of Jan. 2022, there would only be 80 days until Anchor’s yield reserves were fully depleted. This yield reserve was supposed to build when Anchor was operating at a surplus (earning more capital than it needed to pay out), but because essentially all of the Terra liquidity and performance was fake, it was all smoke mirrors.

With the flames starting to tickle Do’s face, Terraform Labs Anchor realized they would need to spend $1.8M per day to continue paying depositors their 20% guaranteed yield.

Of course, Do Kwon realized that Anchor couldn’t sustain this yield, and therefore decided to lower the yield to a more reasonable 4% from 20%? Right? Right?! Nope, he said haters gonna hate, everything is perfectly fine. A few flames in the kitchen are never a big concern, even if they’re burning off your eyebrows..

Do, Do You Like Prison?

An attacker who was certainly not SBF OTC accumulated $1b in UST, and borrowed $3b in BTC to create a gigantic BTC short position.

Remember- Luna Foundation Guard (LFG) was accumulating BTC to protect the UST peg.

(just to note: it is disputed as to who or what put this attack to motion, and this is based on my interpretation of the facts, it was absolutely not Adderall addicted levered up morons in an “Imperial Chinese Harem” in the Bahamas who did this, I swear)

First, the attacker waited precisely for the migration of UST from Curve 3Pool to the DAI killing 4Pool so that it’d have low enough UST liquidity to enable him to easily drain it, with its remaining $350m in UST. Remember that Do proclaimed DAI would die by his hand with 4Pool? Do Kwon in actuality had prepared himself (and UST) to fall on his own sword with 4Pool. You can’t make this shit up, I swear.

Second, he began dumping UST on Binance after UST began its terminal descent into a depeg ($0.97). LFG then began selling BTC to buy back UST and fix the depeg. Remember, our attacker was shorting BTC, so by LFG protecting their peg by selling BTC, they’re causing the attacker to profit in BOTH directions (LUNA/UST down = profit, BTC down = profit), what made this trade pretty brilliant ngl.

With the Curve 3Pool now drained, the attacker began slamming Binance with the rest of his UST holdings to cause it to depeg worse, which in turn caused a bank run.

Binance then suspended trading of UST, and the UST peg was nuked, LFG ended up selling all of their BTC to try to restore the peg, and the attacker profited gigantically off the BTC sell off, being estimated to have raked in $850m in profit.

Without buy pressure on LUNA, the profitability of arbitraging the UST depeg, and LUNA now undergoing hyperinflation due to its seigniorage model with UST- remember, you could burn 1 UST for a $1 in LUNA always. If UST = $0.01, you still get $1 in LUNA.

Inevitably, $60 billion US dollars was lost on a horrendous ponzi scheme that any respectable business person would have laughed at. It’s not like this happened several more times directly after, either, or anything (Celcius, 3AC, FTX, etc).

The TerraUST Conclusion

While UST nuked consumer confidence in ‘decentralized’ stablecoins, it taught an important lesson. Algorithmic stablecoins simply will never work over a long time frame.

There is no way for trustless decentralized money to keep a peg to the US dollar, unless there is more money in, than out. What that means is, for every $1 in Decentralized USD, there needs to be more than $1 backing it. While fiat money is now unbacked, even fiat started with full backing in precious metals within the last century.

Governments, whether you love them or hate them, have exponentially more trust than 0xGenius building the BBQUSD algo stable- non-over collateralized stables almost inherently require trust to work. Whether that be by finding willing participants to purchase a secondary non-fixed price token, clever incentive structures, etc. Over-collateralized stables, while less capital efficient, need no trust, as all participants are aware there is verifiably more on-chain money backing each decentralized dollar than what is issued.

But, that also does not mean we must settle for USDC wrappers, or ‘decentralized’ stablecoins that utilize USDC (or USDT, USDP, BUSD, etc) as their main (and sometimes only) backing. We also do not need to settle for SAI style decentralized stablecoins like LUSD that strictly only support one collateral like ETH. We also mustn't give up all of our capital efficiency (liquidity productivity) with low maximum Collateral Ratios. Lastly, we shouldn’t need to rely on mercenary capital providers through incentive mechanisms such as veCRV and CVX to ensure the liquidity of an over collateralized decentralized stablecoin remains deep enough.

There’s a better way to do it all, balancing the “decentralized stablecoin trilemma” of price stability, censorship resistance, and capital efficiency.

Enter the Omnichain Dollar

The term decentralization has become a parody of itself- nothing more than an ideological gimmick to lure uninformed people into crypto. We at Pearl Labs reject this prospect, and believe it is time to return to truly trustless and decentralized money as cemented in the anarchist roots that started crypto and DeFi from the 2008 Financial Crisis. The events of November 8th, 2022 March 11th, 2023 have proved this is the only path forward for DeFi to survive as intended. There must be a line drawn in the sand, and the only way to ensure true DeFi not only survives, but flourishes, is for there to be decentralized dollar denominated money on-chain once again.

With that said, TapiocaDAO presents anons worldwide, USDO- the Omnichain Dollar, built around a DAO governed decentralized central bank, Tapioca.

The five tenets that shape USDO:

Composability: We now live in a multichain world. There are 179 chains listed on DeFiLlama, and Ethereum currently only holds 60% of total TVL. From data of just Tapioca’s community, most members are utilizing at least 3 chains regularly.  We cannot issue stables on one chain, and store credits (that are often hacked) on another (USDC on Ethereum vs USDC.e on Avalanche for example).

Thus, USDO was built for a multichain world, being able to be minted burned from chain to chain (teleported) with no bridges or intermediaries that are found with most major interoperability solutions outside of LayerZero. Competitors such as Axelar use an intermediary consensus chain, Wormhole, Multichain and Nomad were all previously hacked and use intermediaries, lesser known cross-chain solutions like Synapse Abacus/Hyperlane use an intermediary and an unknown external validator set respectively.

Trustless: Some stablecoins like MIM for example require trust based on being minted from a 5/10 multisig with manual intervention required to fill its markets (cauldrons). USDC USDT obviously require trust in that its off-chain liquidity is truly backing what’s issued on chain. Algo stables require some mechanism in which the stablecoin and its token economy have enough buy pressure to remain stable, which inherently relates to trust in the system. Some decentralized stablecoins contain upgradeable contracts which could modify critical systems.

USDO is trustlessly minted on demand when users supply collateral, and Tapioca’s contracts are fully immutable. There is no trust assumption in USDO’s ability to hold a peg, as there’s more on-chain high quality collateral backing USDO than what’s issued. There is also no trust in USDO’s central bank issuer, Tapioca, again being immutable code.

Stability: Not only is USDO over-collateralized at a minimum of 110%, but its liquidity is made up of Tapioca’s POL. With users redeeming oTAP call options, this creates POL, which is then supplied to USDO’s LP pairs cross chain (via Arrakis Vaults). This ensures the liquidity depth of USDO constantly grows without chance of a run on the bank and without needing to rely on external systems like Curve’s veCRV bribes to ensure sufficient liquidity is present and that the peg is held.

High LTV’s can seem dangerous, but liquidations are fast and efficient being settled off chain. USDO’s collateral backing is also not lent out (rehypothecated) as with DAI and some other smaller stablecoins which creates massive risk- especially when levering rehypothecated collateral, essentially making the stable no longer over collateralized. Lastly, Tapioca features “Collateral Debt Ratios” (CDR’s) in ‘Big Bang’ loans that mint USDO, which enables Tapioca’s Big Bang markets to accurately control collateral asset backing weightings and price in risk, as well as to control supply expansion and contraction.

Capital Efficiency: As USDO can be minted at a 90% LTV with ETH, wstETH, and 80% + LTV ratios with other assets in isolated CDP’s (loans), this ensures the dormant liquidity requirement is as small as possible. Other stablecoins such as LUSD suffer from needing large stability pools to cover liquidations- over 80% of all minted LUSD at the peak was deposited into the stability pool. This causes liquidity issues on secondary markets, and secondarily causes LUSD to trade above peg constantly (needing to pay a premium is just as bad as a depeg to the downside).

Censorship Resistance: USDO is only minted with network gas tokens such as ETH, AVAX, FTM, MATIC, and Liquid Staking Derivatives such as RETH, stMATIC, sAVAX, etc. USDO has no USDC or any centralized stable backing. USDO will also feature pairs against ETH to ensure even if USDC were to be obliterated, users could continue trading USDO as if nothing ever happened.

Of course, these are all important USP’s of USDO, but why would someone want to use USDO? Enter the Singularity.

Singularity is Tapioca’s Omnichain isolated Lending Borrowing Engine based on Kashi that allows users to achieve high real yields on attractive yield bearing assets such as GMX’s GLP, Stargate ETH USDC, Curve TriCrypto, among many others. As Aave and Compound (and their 9001 forks) have a shared pool of collateral, they cannot offer these riskier assets, or offer their users access to efficient leverage.

This allows users to attain leverage on the assets they want, while USDO holders get paid to lend them the liquidity- this is a second benefit of Singularity. With Aave or Compound, the interest rate minimum and maximum is manually set, whereas Singularity’s rates are set via utilization rates and have no min or max-

more demand = more real yield

This is a sustainable method to bootstrap adoption of USDO, offering attractive yields like Anchor, but sustainably without incentives or cash reserves, or like Abracadabra without creating undue risk on the USDO peg itself to support the high yields riskier assets can create with leverage making up any of USDO’s actual collateral backing.

Conclusion

USDO has been designed as the stablecoin to fill the large hole DAI has left for a decentralized immutable and trustless dollar as a base layer asset of DeFi. But also to importantly offer the highest capital efficiency possible for a CDP based over collateralized stablecoin without sacrificing sustainability and stability, and lastly to empower DeFi users on every chain to be able to traverse with their money once again- no more getting stopped at the toll on the unsecure bridges.

Your el jefe and 0xRektora believe we have designed the perfect decentralized stablecoin to scale to new heights without taking a bite of the poisonous apple of centralization- immutable code after all is law, and the unstoppable Omnichain Dollar will be coming from the Tapioca banking system to a swap near all anons, #soon

Pearl Club Member #0, twMatt, signing off.

Join the omnichain revolution @ tapioca.xyz

[last note: so anons can actually mint the Mirror NFT of this masterpiece instead of a bunch of bots grabbing all of them, there will be a price set on them. Pearl Labs will match all funds raised $1 for $1 and donate all of it to ProtocolGuild ]