[FIAT] - A basket of stablecoins that carry the same risk profile

1. Who is the interested party for this collateral application?
Michael Dunworth, on the team at Wyre.

2. Provide a brief high-level overview of the project, with a focus on the applying collateral token
Collateral: FIAT
Collateralized USDC, GUSD, PAX, BUSD Bundled together as one asset.

  • More efficient feedback loop for risk teams.
  • Reduce idiosyncratic risk from one entity.
  • Perfect time given that we’re about to head into a heavily volatile market (thus end traders/holders want savings/security, and not leverage).
  • No slippage on redemption would result in additional opportunities & awareness for MakerDAO.

3. Provide a brief history of the project
Posting for awareness & show support due to the current market conditions/community discussion.

4. Link the whitepaper, documentation portals, and source code for the system(s) that interact with the proposed collateral, and all relevant Ethereum addresses. If the system is complex, schematic(s) are especially appreciated.

  1. Link any available audits of the project. Both procedural and smart contract focused audits.
    https://www.etherscan.io
  2. Link to any active communities relating to your project.
    https://twitter.com/Gemini
    https://twitter.com/Coinbase
    https://twitter.com/PaxosStandard
    https://twitter.com/Binance

7. How is the applying collateral type currently used?

PAX - Institutional/Digitized Assets
USDC - Institutional/DeFi
GUSD - Institutional/Merchant
BUSD - Institutional/Exchanges

8. Does one organization bear legal responsibility for the collateral? What jurisdiction does that organization reside in?

All counterparty’s are deliberately chosen for their jurisdiction, and path for recourse. USA, Licensed Money Services Businesses.

Our aim is to ensure security at all times above everything else. As an agnostic platform, we curate any counter-party’s for rate optimization, so long as there’s a clear path for either:

  • Regulatory recourse - Centralized licensed entities that satisfy all current obligations with state & federal regulators. E.g FinCEN Registration, NMLS, SOC1/SOC2 Audits.

The below is not applicable for this collateral

  • Cryptographic Recourse - Distributed (often labeled “Decentralized”) teams operating open-source protocols, where digital assets are secured transparently on-chain with verifiable cryptographic rules. Primary consideration always being “Duration Of Immutability”.

*Additional factors such as Insurance coverage, Team Control, Asset Types, Participants are considered but secondary in cryptographic recourse given irreversible transactions.

9. Where does exchange for the asset occur?

Functionally it’d be a contract on-chain. Implementation could look many different ways. CHAI (vending machine) or AragonUI (Auto-OTC desk)

For demonstration purposes, you can see it here on Aragon.
https://mainnet.aragon.org/?#/wyre/0xef687d87afbecc2efeffe93523af827edfbafac0/


That’s a demo btw, :blush: Can formalize if people take this application seriously.

(Out if scope for this doc) Additionally, we can extend it to be a DSR like opportunity.

E.g If assets are stored in custody, and the custodian is offering interest, then that becomes more DSR growth opportunities from the CeFi world, or similar. Stronger DSR means stronger motivations to generate DAI.
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10. (Determined by Legal Domain Team) Has your project obtained any legal opinions or memoranda regarding the regulatory standing of the token or an explanation of the same from the perspective of any jurisdiction? If so, those materials should be provided for community review.

https://www.fincen.gov/msb-registrant-search
Search Legal Name for:

  • “Wyre, Inc.” & “Wyre Payments Inc”
  • “Gemini Trust”
  • “Coinbase”
  • “PAXOS”

11. (Determined by Legal Domain Team) Describe whether there are any regulatory registrations for the token and provide related documentation (including an explanation of any past or existing interactions with any regulatory authorities, regardless of jurisdiction), if applicable.

  • The entities are licensed and regulated, but the asset itself (GUSD, USDC, etc) are not (afaik).

12. (Optional) List any possible oracle data sources for the proposed Collateral type.
Wyre, Coinbase, Gemini, PAX, Binance.

13. (Optional) List any parties interested in taking part in liquidations for the proposed Collateral type.

We would already intend on doing all of this if needed and can do it automatically. If it’s better for the community for us not too, then we don’t have to of course!

Hope this helps move things forward :slight_smile:

Thank you!

Kind regards,

Michael.
There’s a deeper dive external doc available if this is of interest

Summary

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5 Likes

Are all the components equal weighted?

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They’d be weighted based on what is supplied by users.

E.g:
20 PAX
20 USDC
50 GUSD
10 BUSD

This can be reweighted for sure, but feels like it is unnecessary admin. Increases trading, introduces more questions such as reweighting frequency.

Thanks!

2 Likes

Very interesting MIP. Definitely something worth pursuing.

Quick question on the “E-money” side of things. All the proposed assets (being CeFi, im not saying CeFi is bad) have resemblance of “e-money”, will this affect Dai’s legality and acceptance in various jurisdictions?

Perhaps MKR legal can chime in.

The Foundation’s legal team does not, and ethically cannot, “chime in” with regard to the community’s questions. If the community has specific legal questions or issues re: collateral on-boarding (or anything else for that matter), you all should hire your own counsel.

This doesn’t make sense to me. How can you price FIAT if the component proportions can vary? Or is the price fixed to 1.0?

They’d be weighted based on what is supplied by users.

E.g:
20 PAX
20 USDC
50 GUSD
10 BUSD

This can be reweighted for sure, but feels like it is unnecessary admin. Increases trading, introduces more questions such as reweighting frequency.

Thanks!

Are you proposing that users can deposit 1 of any compatible fiat stablecoin and in return receive 1 FIAT? So FIAT could be backed by any percentage of eligible stablecoins?

If so, you’ve made a token that is only as strong as its weakest link. As soon as one of the stablecoins explodes, FIAT will be flooded with the worthless stablecoin and FIAT will also go to zero.

An alternative model would be to have an equal weight of as many stablecoins that is viable. This way FIAT would only depreciate by 1/N% if one of the stablecoins goes under. This could result in FIAT based CDPs being liquidated at a non-zero price

2 Likes

I see what you mean, but I think you’re missing some parts of the approach (could be wrong btw, but just how I read it)…

An alternative model would be to have an equal weight of as many stablecoins that is viable. This way FIAT would only depreciate by 1/N% if one of the stablecoins goes under.

The number (count) of stablecoin’s doesn’t decrease risk. It changes it. E.g.

$500M Market Cap - Basket 1: TUSD, kUSD, nUSD, ppUSD, oUSD, reUSD
$500M Market Cap - Basket 2: TUSD, PAX

Basket 1 is not safer than basket 2. Same market cap, more diversification in the basket, but you don’t recognize any of those stablecoins other than TUSD because they don’t exist.

Are you proposing that users can deposit 1 of any compatible fiat stablecoin and in return receive 1 FIAT? So FIAT could be backed by any percentage of eligible stablecoins?

  • Ultimately they’re carrying the same risk profile, risk profile is always used to optimize predictability. For example… The risk team at MakerDAO exists to provide insight and data that helps educate them on issuing guidance for how much risk should be taken when adjusting the stability fee, introducing new collateral types, etc… All of this helps keep things predictable. If things are predictable, they’re planned for, and if things are planned for, then they’re not surprising black swan events :blush:

If so, you’ve made a token that is only as strong as its weakest link.

  • This is why you make every link just as strong as each other. It’s removes the chance for it to become a multi-variant testing scenario. Where you’re turning all the different levers and never able to pinpoint which one is weighted correctly, and which one isn’t. You do this by defining them by their risk of not being able to made whole on your token.
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Isn’t the entire point of a token like this to decrease custodial risk? Yes, they all carry the same risk profiles individually, but the collective risk should be less than the individual risks due to diversification.

If you don’t have some sort of equal weight process, you may as well just hold any one of the individual stable coins instead of this more complicated construct.

$500M Market Cap - Basket 1: TUSD, kUSD, nUSD, ppUSD, oUSD, reUSD
$500M Market Cap - Basket 2: TUSD, PAX

Basket 1 is not safer than basket 2. Same market cap, more diversification in the basket, but you don’t recognize any of those stablecoins other than TUSD because they don’t exist.

I don’t understand the point being made here. Having 6 stablecoin tokens equally weighted (assuming they are real tokens) should have less custodial risk than having 2 equally weighted stablecoin tokens, especially if all 6 stablecoins operate under different regulatory jurisdictions.

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I want to second this

I guess we are just trying to say that more is not necessarily better, but i think using an extreme example (like using made up coins) is kind of missing the point.

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Interesting decision to not have any weights. One thing though is that you could have weight caps instead, you still have some flexibility, and a bit less tail risk from one stablecoin rapidly losing value.

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Yeah, it’s a rabbit hole and I see how it’s interpreted from your side. I’ll try to explain a little better… I’m pretty bad with words.

  • Say you hold USDC and I hold GUSD, what motivates you to hold one over the other? Is one safer? Or is one more liquid, and thus more efficiently priced, propping up it’s utility value by default?

If you were always guaranteed 1:1 redemption, would you worry which asset you held?
If you would worry, what concern would you have?

You mentioned custodial risk, which I think is saying that if Gemini goes broke, or USDC goes under for some reason then you’re left with a bag of unbacked digital tokens. Is that fair to say?

I think the concern is that if GUSD suddenly becomes worthless I can use my GUSD to mint FIAT and then redeem that FIAT for some other collateral type until there is nothing left but GUSD.

2 Likes

Yep, but unpacking that a little more… What would make GUSD become worthless?

Yes, I am sort of combining the risk of blacklisting, regulatory risk around crypto in specific jurisdictions, the risk of a specific firm going broke or lending out more usd backed tokens than they actually have usd for, etc. Many of the risks that cryptocurrencies are designed to subvert.

My understanding is that a token like FIAT would exist to diversify these risks in a way that approximately approaches a decentralized asset, therefore reducing total custodial risk while retaining a hard usd backed asset. If that is not your idea of the purpose of this pooling of assets, I would like to know what you feel is the value proposition here.

If you read the initial post, it touched on this, and happy to elaborate more as this stuff is so finicky (*spelling?) and I only know it from having to learn grinding it out :dizzy_face:

Mike, can you please clarify your proposal. Either it’s:

  1. A basket of stablecoins with a fixed weighting to reduce custodial risk
  2. A wrapper around stablecoins where users are free to mint FIAT by depositing any valid stablecoin.

1 provides us with a way to recover from a single stablecoin blowing up. 2 may improve UX and liquidity in some areas of DeFi but is extremely risky because it is only as strong as its weakest link. Proposing 2 as collateral for MakerDAO is really really silly

3 Likes

How is this proposal different from using a token like y tokens from https://y.curve.fi? They represent a basket of stable coins with variable weights, which seems to work pretty well right now.

1 Like