What to Know When Selecting a Stablecoin
Stablecoins — cryptos leveraged 1-to-1 to a fiat currency — are essential to the crypto economy. Particularly regarding yield farming and liquidity mining: Their price is essentially free from market fluctuations, meaning your principal is kept safe as you continue earning passive income.
But what separates one dollar-leveraged stablecoin from another? As an investor, what parameters should you consider before choosing a stablecoin?
To answer these questions, Weiss Crypto Sunday Special host Chris Coney turns to Joshua Scigala, cofounder of Vaultoro, a Bitcoin (BTC, Tech/Adoption Grade “A-”) and physical gold trading platform established in 2015.
To learn the answers for yourself, you can watch our latest Sunday Special, or continue reading for the full transcript ...
Chris Coney:
Okay. Hi there, guys, and welcome to this week's edition of the Weiss Crypto Sunday Special with me your host, Chris Coney. The topic for today, is the Crypto Stablecoin Minefield, and with me today to discuss this topic is old friend of mine: Joshua Scigala. Josh, welcome to the Sunday Special, mate.
Joshua Scigala:
Hey Chris, it's wonderful to be back. It's been far too long, and this crypto space moves at a strange, compressed time, so it's even longer than it has been.
Chris:
Absolutely, sir. Absolutely. I know you. Perhaps the Weiss audience needs to know roughly what you represent and who you are. Give us a quick 30 seconds on that if you would.
Joshua:
All right. Basically, I discovered Bitcoin back in late 2010, when the white paper came across my table, because 10 years before that, I was actually looking for that solution for a swap site that I'd built, where people could swap clothes instead of buying and selling, like a nice alternative economy and the thing is, I realized that swapping was really crappy, right?
You have a beautiful jacket and I want it; I want it. I'm like, "Hey, have a look at all my things," and you look through my stuff and you're like, "I don't like any of it," and then the deal falls through, which is unfortunate because there's a whole marketplace and I was looking for a credit, back then I was calling a credit. I didn't know it, but then I was like, "I don't want to be the central bank, because then I'm just creating money out of thin air, and I could print as much as I want, and it defeats the whole purpose."
I found what the cipher punks were talking about, trying to solve this thing and they just couldn't solve that double spend problem and I thought it was an unsolvable problem. The double spend for those that don't know, I'm sure your listeners do, but it means if I send Chris an MP3, he doesn't know that I haven't made a copy and I send it to all my friends, triple, quadruple spend.
What Bitcoin represented, was the first rare digital asset, that when I send that to Chris, he knows I just don't have it anymore. I forgot, I thought, "Well, it's an unsolvable problem," but I kept my ear to the train track, so to speak and then that's why that white paper came across my table pretty early on and since then I was like, "Wow Satoshi, he solved the problem, let's go. This is rare digital asset."
Then swap style. I put the little thing in there, back in the day that you could buy some alpaca socks and put in a Bitcoin address. Also, it was a female only orientated swap site, where they could swap clothes and everyone was like, "What is this thing?" No one got it. But anyway, it was a fun story.
Chris:
Sure, sure. Absolutely. I've called this episode, what do we call it? The Crypto Stablecoin Minefield, which I haven't actually addressed this topic before. Stablecoins are an essential part of crypto right now and especially with all the yield farming stuff and liquidity mining, stablecoins are the darling of that, if you don't want price risk, but you want stability. But it is a bit of a minefield. We've gone from one U.S. dollar to multiple versions of the U.S. dollar. There are a dozen dollar stablecoins, let alone any other national currencies, right? You've developed some expertise and a project in this area, but before we get to that, let's look at why the stablecoin thing is a minefield. Question for you is, what's the general difference between a centralized and a decentralized stablecoin? Is there a difference and what is it?
Joshua:
There's a massive difference. A centralized stablecoin, the simplest version and the real version that you want, is for a company to say, "Okay, I have $1 and I'll put it in my bank account and I'll give you one ERC 20 token, that if you bring that to me, I will give you $1," and there's always one-to-one and I've got a transparency protocol that says, "I've got a million of these tokens and I've got $1 million sitting in the bank."
Chris:
Full reserve, right?
Joshua:
Full reserve. That means full reserve and actually you can take this back to what gold used to be. Everyone used to walk around heavy, pockets full of silver. Gold was more for the elite, for the royalty, but silver was the people's money and they used to carry around this heavy stuff, until they went to the vaulting facilities and they would drop off the silver and the vaulting facilities would give them receipts and then give them receipts, "Hey, you've got 10 grams of silver here," and after a while they went, "Hey, on the way to the market, let's not stop and get the real silver. Let's just ask the market store, hey, do you want to accept my receipt?"
Because then you can go to the vaulting facility and pick up my silver and this is where paper money was born. It's effectively the same thing. It's a tether between a paper and a gram of silver, but what really quickly happened, was the vaulting facilities went, "Not everybody's going to come back at once and get their silver, so how about we just start writing receipts out of thin air and asking for interest for that?" Hey Chris, you want to borrow some silver? Sure thing, here you go. That's X percent interest and they got so wealthy with this scam.
If you want to call it a scam, whatever, but it got crazy that they had these massive estates, these huge castles. People would walk past and go, that's got to be a banker or a vaulting, because no king or queen could afford something like this and of course it got so crazy, when the poor people then had French revolution, they start cutting off heads and the bank is like, "Whoa, stop now, stop cutting. Can you stop cutting off their heads? I'll tell you what, you let us continue doing this and we'll give you a cut and that's where interest got born, right?"
Now you're saying, "Hey, we'll give you a cut. You credit us. That’ll allow us to be in fractional reserve and we'll give you some of that cut as interest," and they're like, "Oh, okay. Yeah, cool. Then we can also be as rich as you guys." Of course, then, you get fractional reserve. Now, when Tether (USDT), when USD Coin (USDC) or Binance Coin (BNB), all these centralized stablecoins, we're effectively going full circle. We're going into a decentralized world and then back to the same spot as we were before, where we're birthing a new version of the old crap. It's, meet your new boss, same as the old.
Chris:
That's cool. Yeah, because those banks that have the dollars in reserve nowadays, or banks, not all banks, the likes of Circle and Bitfinex and Binance, they are the custodians of old and the stablecoins are the receipts for your deposits and you are saying and I think even Bitfinex with Tether have admitted this openly, that the USDT Tether is not in full reserve. It's backed by a dollar’s worth of dollar denominated assets, whether that’s debt or actual dollars or something else, right? It’s a dollar’s worth, but the thing is the U.S. dollar in the bank is already fractional reserve. It's a fractional reserve of a fractional reserve. Is that not true?
Joshua:
That's right.
Chris:
Right. Let's get down to it though. Fine. Is that a problem though? What's the danger with that, if any?
Joshua:
Yeah, there are multiple dangers of this, right? For instance, Tether's an interesting case. They were apparently one-to-one and as Bitcoin hit the bottom of, I think it was 2018, something like that. They went and put heavily into Bitcoin, which was an extremely risky move. They didn't tell anyone, because everyone would be up in arms, but it was an amazing move, because now they're way over collateralized. They're very lucky, but they could just as easily have screwed that up and taken down the entire economy, that's going along with it. You've got Bitcoin, which is speculating on this side. You've got the company holding this money, speculating on this side, what could go wrong? And this is one attack vector, but the second one is, let's say USDC is more regulated. They have to be one-to-one.
They can't do any fraction reserve. They're checked and balanced, but what would happen if like Europe, America goes into negative interest rates, then the whole business model breaks, because the business model of these stablecoins is, "Well, we sell at a dollar, but we buy back at 99 cents," or stuff like that. It's these tiny fractions spreads and doing a lot of them. That all breaks down when they store billions of dollars in reserve and they have to pay an interest rate on that. This is why we don't have a Euro stablecoin. Why don't we have a Euro stablecoin? Because of this. This is one attack vector and the other attack vector for these centralized stablecoins is CBDCs, which are these central bank stable coins.
And they will come along eventually and what a CBDC basically is, is that they will cut out the middlemen. They will cut out all of the retail banks and allow you and I to become customers of the central bank and you will then have your CBDC, they'll issue it and whatever else, but if history tells us anything, central banks and governments don't like competition in the currency space. When that happens, these centralized stablecoins will either be bought up and amalgamated in or they'll be made illegal, which is probably more of the case.
Chris:
Mm-hmm. Make a point about point number two there. The negative interest rates thing, that was actually one of my first thoughts when even the talk of negative interest rates started to come in. My mind immediately went to stablecoins and what was I holding back then? I think it was probably Tether or USDC and in my mind's eye, I saw the link and I'm like, "What happens to my stablecoins in my Ethereum (ETH, Tech/Adoption Grade, “A”) wallet, if this is being eaten by the rats, basically?"
Joshua:
Exactly.
Chris:
Whatever the rate is. It doesn't matter what it is. The reserve would immediately start shrinking, because circle the dollars they have on with a 'real bank', would start evaporating or being taxed and what are they going to do? Start applying a negative interest rate to my stablecoins? If that's not in the code, they can't do that, can they?
Joshua:
No, they can't do it. It's a bearer-based asset.
Chris:
Right. I'll throw this in there. One thing I do know about some centralized stablecoins, I'll use the USDC as a specific example. I think one of the ways they managed to get regulatory approval on that, is that the smart contract that issues the USDC, it does have the ability to freeze the USDC in a given Ethereum address and that's the only way they fell on the right side of anti-money laundering and know your customer regulations. Unlikely, but if the UK government, U.S. government suspected me of money laundering, they could forcibly freeze all of my USDC, if they knew that was my Ethereum address, but the feature is there and using their terms and conditions, it's one of the terms of using the USDC. I'll throw that in there as number four, if you like, it's a bearer asset, but it's got a back door.
Joshua
Extremely scary and anybody that's cheering on these central-bank issued stablecoins, they're like that on steroids, because we're already using digital currencies. The banks have been digital since the 90s and the 80s, some would say, really primarily and for us to realize that what we are doing is handing over ultimate control to currency, programmable control. The difference between the digital currencies that we've had and the currencies that are now with cryptography and these cryptocurrencies, is they're programmable. You can just either freeze them or you can skim some automatically off or if you don't like a certain person's political views, then you could just totally defund them instantly and this goes, not only for individuals, but corporations.
Corporations will bend down and bend the knee. The only thing that gives me hope about this, is the decentralized stablecoins. But there is one more attack vector with these centralized stablecoins. They can also be used in the black markets, like silk road. There's nothing stopping them and if you have a smaller stablecoin, maybe a startup that's trying to run these centralized things. It doesn't even need to be smaller. The state could just say right... Or the bank. You have multiple attack vectors. Actually, let's talk about the attack vectors, in terms of what to look out for. There are three things here with centralized stablecoins. There's the code. The code of the wallets and the contracts and things like that, the smart contracts that are running these things, they have to be watertight.
You need to trust them. You need to trust the company like USDC or Tether, as the company that they're speculating in the right mechanisms to stay above reserve and then you have to trust the bank, that's actually holding the money, that they're not going to fall into a massive financial crisis and disappear and then that drags down the whole mirror economy in the crypto space and then there's the state that money's located in, the bank where the bank is located, because the government could say, "Hey, there was a large transaction in a dark market. You know what? Freeze the whole thing," and they're just like, "Okay, we're sick of this, cut the whole thing and issue our own CBDC."
There's the bank, who could collapse and there's the code. There are multiple things. Now, if we look at a decentralized stablecoin and I know we'll go back and cover the whole thing, but if we look at a decentralized stablecoin, there's one attack vector and that is the code, which is still a large attack vector, because code, we've seen some smart contracts being hacked for millions and millions of dollars. That's also a very important thing to look at.
Chris:
What do you mean? I know what you mean, by decentralized stable coin, but what do you mean? Decentralized in what way?
Joshua:
Okay, I think it important to go back and see how some of these decentralized stablecoins work or algorithmic stablecoins, as they're called. The first real decentralized stablecoin and what really kicked off the DeFi moniker or the decentralized finance name, is Maker DAO (MKR, Tech/Adoption Grade “B”). You could arguably say Bitcoin kicked off DeFi. Of course, I would say yes for sure, but the actual what we know of DeFi, was Maker and what Maker DAO did, was say, "Hey, we've got a smart contract," and for those that — I'm sure your listeners know — but I'll just bring it back for any new listeners that are coming in. The only difference between a smart contract and a computer program, is that a computer program — if I run it on my laptop — I can't trust that with money programs. I can't send some Bitcoin in and expect the output to be correct, because somebody could have put a virus on that machine, or a hacker could be in there.
I don't know what's going on there. You don't want to trust one machine. All the differences between a computer program and a smart contract, is it's running on thousands of machines and they're all computing and if 51% have the exact same output, the network considers that as truth, because it would be very improbable that a hacker would compromise every single computer. Yeah. Yeah. In fact, I calculated I think about one and a half to two years ago, that this is just a Bitcoin network. The hash rate is so high now. The security of this network, the amount of people calculating stuff on this network, is so high that if Google pointed every single bit of hardware that they have, including every employee's phone at the network, it wouldn't even add 1% of hash power. It's astronomical.
Really, Ethereum is not as high as that, but it's still high enough and yeah, that's the difference between a smart contract and computer program and what Maker DAO did was say, "Hey, instead of selling your Ethereum, because Ethereum is very volatile, right? Let's allow you to send it into a smart contract and the smart contract, you are the only one that has a private key to that. You can unlock it, you can withdraw from it and you can lock it." And when you can lock it, you send some Ethereum in, you lock that Ethereum in there and you generate a stablecoin called DAI, D-A-I. You can call it U.S. …
Chris:
By the Ethereum, right? It's backed by the Ethereum, right?
Joshua:
It's backed by Ethereum. If you put $1,000 worth of Ethereum in, you can take out let's say 50% of that value maximum, as a U.S. dollar pegged stablecoin and to get that Ethereum out, you just have to send that amount of Bitcoin that you borrowed from yourself, back into the contract and that unlocks it and then you can withdraw your Ethereum.
Chris:
That amount of dollars. I think you just said Bitcoin. You mean...
Joshua:
Sorry, sorry.
Chris:
The DAI. Yeah. The DAI is the dollar stablecoin. If you destroy that or burn it, send it back to the smart contract, it'll then give you your collateral back.
Joshua:
Exactly. Exactly. My apologies. Yeah. This is a beautiful mechanism and for those that question further and go, "But how do you peg the DAI to the dollar?" Because it's just a token, it's just a bit of paper. How does this piece ... It's just a piece of paper. What is that?
Actually, what you do is you say, okay, you've borrowed some money from yourself and now there's an autonomous organization of thousands of people holding what's called a governance token. And I'm sure your viewers might know, most of them — what a governance token is but it's basically another coin that allows you to vote on certain aspects of the protocol and the people would say, "Okay, if DAI drops below $1 in terms of its value, if it goes down to 80 cents, then what you want to do, is lift interest rates."
Everyone that's borrowed money from themselves, what they'll do is they lift some interest rates, and everyone will be like, "Ooh, that's a little bit much for me. I've borrowed all this money for myself. That interest rate is a bit heavy. I might pay off my loan because it could go even higher." They go into the secondary markets, buy up all this money, all this DAI. What does that do? That creates demand. Demand lifts prices — supply/demand — and you might reach up to a dollar again and you might overshoot. Maybe it goes to a $1.10, in which case they drop the interest rate and people go, "Wow, the interest rate's good. Let's borrow." They borrow some more off themselves, and they dump it into the market. Too much supply drops the price again.
Chris:
And this is what you mean by the algorithmic stablecoin, right?
Joshua:
Yeah. Yeah, and this isn't pure algorithm. It's actual people voting.
Chris:
It's a proper market, yeah.
Joshua:
It's a proper market and when they first had launched the white paper maker, I was like, "This will never work. I don't see how inflation can work that quickly." I thought that inflation would take maybe six months to really show itself, but if you mix inflation with the expectation that it should be pegged, then you get also a mix that arbitrage people in there, that look for arbitrage opportunities where "Hey, DAI's trading over a dollar. Let's buy some over here and send it over here, to ..." If you mix those three up, it works remarkably well.
Chris:
Mm-hmm, absolutely. That is cool. I've used DAI myself, actually. That strips away almost all the, I guess, unnecessary human or organizational elements. It actually simplifies it, because you've listed all these various components, tech vectors and entities that are involved in the centralized stablecoins … like the bank that has the money, the issue of the stablecoin and all this stuff, smart contracts ...
Whereas this is just decentralized, because it's all smart-contract code. Well, it's actually one smart contract, the MakerDAO smart contract in this case, that has the rules, which are whatever the collateral ratio is, whatever the interest rate is, all the Ethereum and whose deposits are they; who's got the right to redeem them; and how much DAI is in circulation? That's what the MakerDAO smart contract does, and then the MKR token is the governance token, isn't it?
There are two tokens in that ecosystem, the MKR token, where people vote on the monetary policy and all that malarky, and then the DAI stablecoin, right? I think the theory with holding MKR, is not only do you get the voting power, but the theory is that if the MKR holders are wise in their monetary policy decisions, that should raise the value of the MKR token and hand them a gain, right? There's an incentive, unlike central banks who get paid regardless of their performance.
Joshua:
Absolutely, absolutely. They just leave when they want to retire, generally, but it's extraordinary because it doesn't just show transparency, where everybody can look into these smart contracts and how much collateral's locked up and how much DAI is out there … but it moves the whole psychology of finance to being in an overcollateralized state.
Rather than fractional reserve, which means you've undercollateralized by however much we think, we're actually overcollateralized in a transparent and provable method with rare numbers. The gold standard was very similar. It was a bit different, but you wanted to have the collateral sitting there and it was 1-to-1 for a receipt, but now we can have a provable, overcollateralized economy and this does an amazing thing.
Seventy-eight percent of Americans — and I think this number is fairly general globally I can imagine — are living paycheck to paycheck. That means they get their paycheck in, [and] by the time they get the next paycheck, they've used all that up and there's no more liquidity. They never have a chance to save at all. They never get a chance to save. What this mechanism does is [it] allows people to buy some rare assets and borrow from themselves, to have the liquidity they need to spend. Of course, you have to be overcollateralized. It's not a panacea, but you can buy some assets, borrow from yourselves to buy food and rent and everything else, and you develop debt. Now, if you are in a hyperinflation or in an inflationary environment, as we're globally seeing right now, as they're printing trillions and trillions of new currency … we're in a definite inflationary cycle, which is extremely hard to turn. It's bigger than the Titanic.
The Titanic couldn't move, right? It's on a course and it's just heading … and this is the same with inflation from a state level. Once you've printed trillions, it's extraordinarily hard to slow that down, and so what you want to do in an inflationary environment —how the wealthy have always stayed wealthy through inflation — is by borrowing more at fixed interest rates, hopefully, generally.
Chris:
Yes, because you would inflate away the debt basically, right?
Joshua:
They inflate away the debt. These people who are living paycheck to paycheck in an inflationary environment, what you'd want to do is buy rare assets, borrow from yourself, and then allow the inflation to effectively pay off that debt. Where, when you first borrowed it, it was a whole car worth of [a] loan that you borrowed from yourself and hey, in 10 years, a carton of milk is the same value as that. This is generally how people, except the wealthy, have done that with property and houses and forestry and things that have real value. And that's how you determine that.
Chris:
That piece, you mentioned there about the fully collateralized financial system, my mind went to the mortgage market at that point. And if we think about the current financial system, they are the ones who are the benefactors, because whenever they lend money, say to buy a house, it's always overcollateralized, right? You used to be able to get 100%–125% mortgages before the 2008 financial crisis, I remember.
And that actually created a massive speculative bubble, but nowadays you might be lucky to put a 15% deposit down and get 85% loan-to-value. In any case, the banks are always making sure that the money they'll lend you is at least overcollateralized by 15% in that case, or if they want a 60% loan-to-value, they've got to almost double the collateral and, of course, it’s your house.
The incentive to keep up the payments is pretty high, because if you don't, they take the house and then they can either liquidate it or sell it at the market value and potentially even make a profit on it. That's fine, but that's a different set of rules to what we get. When we borrow, it's that way around. when they're lending the money. When we want to lend the money, we get fractions of a percent interest. What on earth is that?
Joshua:
Yeah. Well, I gave a talk at a large family office event in Zurich, and one of the questions was, "Yeah, but how can this DeFi space give you 20% annual percentage yield (APY) on stuff? It just sounds like a scam," and it definitely sounds like a scam. Twenty percent, are you crazy? That's nuts. Everyone celebrates 2% in the old-school financial world, but why that is, is because block chains have allowed for the removal of inefficiencies along the way. In traditional finance, you put your money in a bank, the bank gives it to a broker, the broker gives it to someone else, someone else shuffles some paper around, takes a cut, gives it to someone else.
It goes maybe 10 people down, until that gets to the trader and the trader speculates on it, makes the money or market makes, between the foreign exchange (forex) markets, takes the profit out and then all the way up, until you get your measly 0.1%. Now in DeFi, you just basically cut out all of that, put your money in an automated market maker, who basically adds liquidity, and people buy and sell between the two … and you make the whole lot without worrying about any middlemen. And this is a phenomenal move forward. This is why DeFi is taking off and is a black hole, why Coinbase dared to offer 4% interest and the U.S. Securities and Exchange Commission (SEC) went, "How are you doing that?" And it's like, "Well, we're just allowing people to put their money in DeFi." And it’s changing everything. But yeah, the stablecoin side of stuff is super, super important, because we as a community need to move away from these centralized stablecoins.
It's very important, because when they collapse, they're going to take a massive chunk of our economy, the mirror economy, the economy in the metaverse, as they like to call it rather than cyberspace. Somehow it's changed since Facebook, but this economy that we've all built up in this anarchic mechanism called the internet is at an existential threat from these centralized stablecoins moving across. And this is why we've really focused on what MKR did and trying to develop a next generation version of MKR, because we've all seen these gas fees that are crazy on Ethereum. And we want to continue developing on Ethereum, because the vast majority of developers are there, but we just want to build the next-gen version, which includes some of the old-school world of gold, as well as the new-school world of crypto.
Chris:
Yeah, right. Let's go into that then. Before we just go into that, you were talking about that talk you did at the family office conference and people are like, "How can you do 20% APY, sounds like a scam, blah, blah." Well, it only sounds like a scam, because your expectations are set at 0.1%, right? It's 40 times more than whatever it is, but I would say another answer to that is that when a new DeFi protocol launches, they have to bootstrap the liquidity somehow. The high interest rates are the incentive for liquidity to run that way and, of course, supply and demand, as soon as the liquidity gets to a certain threshold, it starts coming down and eventually, just like Bitcoin's volatility, it'll all settle down. It's just because … here's the answer: DeFi's in a hyper-growth phase and hyper-growth markets have the fattest margins. That's basically the explanation. That's Business 101 at the end of the day, right?
Joshua:
No look, you've hit the nail on head, and it's similar to when Bitcoin is in crypto. People look at gold and say, ‘Why would you want gold? It doesn't move. Bitcoin's parabolic and gold sits there. Gold isn't an investment to get you to the moon. It's there to store value. It's there to store value. It's already found its price. It's had a 5,000-year price discovery met phase.
Bitcoin has had a 10-, 11-, 12-year price discovery phase and it's still trying to find: What is this new technology worth? Where are we in this? Oh, wow. China has just banned it! Oh, it’s collapsing!” And then I always look at bullion as a very important part of a distribution of someone's portfolio. Look the internet, as much as we love it and we think it'll never go away, I never thought the President of the United States would ever get banned on Twitter either, right?
As much as you love or hate the guy, it doesn't matter. The fact that that's a possibility sort of flicks people … or that one day, all of a sudden, I think it was a quarter of the internet went down, because the Amazon backbone went down for a second or the Google captchas went down for a little bit, and all of a sudden, hospitals couldn't log in. It was pandemonium, right?
The internet, as much as we all love it, and it was built to outlast nuclear Holocausts and build around the damage, it still isn't perfect and it's a very young technology. That's why, hey, it's a block of gold. It's valuable around the world for the last 5,000 years. It's decentralized in its issuance. There's something there, don't let go and don't just ignore the value of some of the wise-ness from our elders.
Chris:
Fair point. Fair point. There is an argument where people say, "Well, Bitcoin's a better store of value, because it goes up and appreciates faster." Well, I understand what they're saying, but through a bull market and a bear market in Bitcoin, well, gold is more stable. You could say that it's less volatile. If you want a store of value that isn't volatile, then that's still gold's arena, if you like.
Joshua:
Yeah. Yeah. If you look at certain assets, you could compare gold and say it's very volatile. But if you compare gold to other commodities, against corn, pork bellies, other commodities, it's fairly stable really and that's always something to think about.
Chris:
Sure. Going back to what you were saying, you said we are trying to improve on the MakerDAO model. What do you mean? Who is we?
Joshua:
There are a bunch of us, a bunch of Bitcoin OGs and crypto OGs, someone who helped in the original block one before they went AWOL, but it's a bunch of people who saw a problem and thought, "Wow, MKR have done a great job, but there are certain problems with it." For instance, there's one stablecoin output. Why is there just one? I don't want to just have everything pegged to the U.S. dollar. All that does is give it more... why isn't there a Euro stablecoin? Ah, because of the negative interest fees on these centralized coins. Let's build a protocol that allows anybody to mint any stable asset pegged to any other asset, that's relatively...
Not any asset, it depends on what the DAO decides, but the MVP will start with Euros, S Euro, Standard Euro … and then slowly go through standard yen, standard shekel, standard ruble, standard USD, standard AUD, standard Great British pound and we'll go through them. But then why stop there? We can also do commodities. We can also peg to indices. We can also peg to listed stocks, so people can start issuing themselves stocks that are pegged to Tesla or whatever they want, from their collateral.
Chris:
What's the collateral going to be?
Joshua:
The collateral, this is another difference … I've run an exchange since 2015. It was the very first Bitcoin exchange that traded between Bitcoin and physical gold, and I know you were an amazing affiliate there with us. And it's a really interesting model, because why we went with gold was after the Mt. Gox collapse, I decided, "Well, I don't want an exchange that deals with Fiat, because a lot of the people holding Fiat on Mt. Gox also lost their money." Why? It was still there. Well, because when you hold fiat, it's on the books of the exchange.
Chris:
And it belongs to them effectively.
Joshua:
Yeah, it belongs to them. Now the liquidators [are] sitting there eating everyone's lunch.
Chris:
Yeah, sure. With big fees.
Joshua:
Yeah and they're still eating all that. The idea of Vaultoro when we launched was, "Hey, let's do it on gold, because gold can be allocated to the person." That means if Vaultoro goes broke or is just bad at business, then it doesn't matter. The gold that people buy is in their name, it's allocated to their name, it's their property. It's also insured to however much gold they've got.
If they've got millions of dollars’ worth of gold, it doesn't matter. They can go and collect it and they can fully ensure it. They can fully audit it. It's very different than a bank, and over the years I thought, "Why can't we collateralize this properly?" And since 2015, I've been to many gold conferences as well and crypto conferences and a lot of gold companies came up to me and said, "Josh, we've been trading on the same spot for years in the gold industry, this crypto thing, it's eating our lunch. Help us tokenize the gold." And I said, "Don't do it. Every single time. Don't tokenize the gold. I'll tell you why. Because you'll become a scam … and I'll tell you why. Because you have vaulting fees, you have vaulting costs, you have insurance fees, auditing fees, men with guns, all the stuff, storing the security ... you've got a whole lot of costs.” This is called demurrage in the old financial world. That's the cost of holding value. That's anything in real life. If you're dealing with property, you've got to paint the property. You've got all this demurrage. Any token that says that they tokenize real-world assets, I don't believe them. Because let's say there's a company that says a gram of gold equals one ERC20 [wrapped ETH]. And the problem is, if someone loses that private key or they die, then the voting facility has to pay for that gold forever, because they don't know who this belongs to … and what do they do? They just suddenly say no more. They're paying it forever, and they turn into a Ponzi scheme, where they need new clients to pay for the gold, for the storage fees, for people who have lost their keys or died or passed … and people lose a lot of keys.
I've heard a statistic of: There's 5,000 Bitcoin lost every day. or something crazy.
Chris:
I believe that, to be honest. Sounds plausible to me.
Joshua:
Yeah, this is a real big problem and how we deal with that though now, is we say, "OK, let's use gold, because there's $10 trillion worth of gold. $5 trillion of that is in private hands. $5 trillion is a roundabout in central banks and stuff around the world, different countries.” And by the way, we throw these numbers around … $5 trillion … and they're like, "Oh, $5 trillion." The word trillion, the number trillion is an extraordinary number.
Chris:
It used to be. It's now normalized.
Joshua:
It's normalized, right? If you count to a million seconds, you'll be there for 11 days. You'd be like, "one, two…" OK, 11 days later, you'll reach a million. If you were to count to a billion seconds, what do you reckon?
Chris:
A week?
Joshua:
You'll be there for 32 years.
Chris:
- That's a big leap.
Joshua:
Right? It's a huge leap, and if you were to count to a trillion seconds, you would be there for 32,000 years.
Chris:
- It's an order of magnitude more.
Joshua:
And most people can't wrap their heads around these numbers.
Chris:
Just did. That's kind of cool.
Joshua:
What's that?
Chris:
That helps.
Joshua:
That helps, right? Yeah. I mean, it's from 11 days, 32 years, 32,000 years. It's exponential, and $5 trillion is sitting there, and why not put that into DeFi? So, what we're building with the standard, also part of it, is almost like a SEPA network of vaulting facilities that will be able to connect and tokenize. Now, how do we get around this demurrage problem that we mentioned? Well, what we do is, we don't allow people to actually ever get the tokenized gold onto their phone, where they could lose their private keys. What happens is, it gets tokenized up into a smart contract, and the user has the keys to either unlock or burn and then back to the vaulting facility, these coins, but in the meantime, the smart contract pays the vaulting facility, monthly every on time —
Chris:
Because the smart contract's effectively got custody, and you have the right to redemption, and it can't refuse, because it's a smart contract.
Joshua:
That's right, and if you lose your private key or you pass away unfortunately, it doesn't matter because the smart contract will continue paying until it undercollateralizes and liquidates.
Chris:
And then actually, then you don't own any gold anymore. So, not a problem. So it almost, likes, liquidates the gold; like, melts it.
Joshua:
Yeah. Melts it back. Exactly. So there's this vast amount of value, just sitting there not working, but imagine if you can then borrow against the gold that you've stored or these people have stored there, you can actually put it to work, create jobs and do all this stuff, rather than just gathering dust in a vaulting facility, and so this is one thing: We are allowing e-wrapped Bitcoin and gold bullion to start with and then silver to be collateralized, and we're networking a lot of voting.
Now, a lot of voting facilities are coming to us and saying, "Hey, this standard protocol sounds really good," and the word, the standard, comes from the gold standard, because effectively we don't need a government to create a gold standard. We can back a smart contract and overcollateralize by yourself, without asking any permission, and have a fiat-pegged stablecoin backed by gold and Bitcoin and Ethereum if you wish. So this is what we're doing, but there are some key problems with the MakerDAO that we're also solving, and in fact, this isn't just the MakerDAO, this is every single DAO has this problem and I like to call it voter apathy.
Chris:
Yes, absolutely agree.
Joshua:
No one rocks up to vote. They all hold these DAO tokens, and they expect —
Chris:
[inaudible] … who's smart or make good decisions.
Joshua:
Right. Right. So, one of the principles I've really loved and thought about a lot is the idea of futarchy, which is a governance through prediction markets.
And how does this work? Well, a prediction market is basically a bet. So, I predict that horse No. 7 will win the race, over horse No. 8, because I've researched. So, what happens when a crowd of people do this? The odds that come out — and there's a lot of academic work behind this — that the odds of prediction markets are the best mechanisms that humans have of determining the future.
Chris:
Wisdom of the crowds, right? The odds end up being the relationship between people betting one way vs. betting the other way, and it becomes .85, which is the relationship between the two sides, right?
Joshua:
That's right, and if the whole crowd is wrong and you're an expert and you're like, "This crowd is wrong, I'm going to bet quite largely on what I believe is the right answer," and then the future tells the truth.
Of course, once you get to the time and you get all that money, it's ... What we're working on is, because there's going to be a lot of different outputs, so we need people to rock up and determine the stability fee. Exactly what I was talking before. If something drops below the pegged price, you want to lift the interest rates to peg this.
Chris:
Create the incentive to increase or decrease the stablecoin’s value.
Joshua:
That's right. You need this in there. So what we want to do is build lots of prediction markets, which will probably be futures markets where people will say, "Okay, I'm going to pretend that this is now set at X interest of stability fee and the second choice is Y," and a whole bunch of people bet and hey, this one's one out, that'll be the truth, and there's still some stuff to work out there and we're talking ...
Chris:
Okay. That's interesting. That's how you're making a prediction market into a governance system and that's how you solve the apathy problem.
Joshua:
That's right, because there's always a bunch of people that want to gamble.
Chris:
Totally. I wouldn't even want to say it, but yep.
Joshua:
I don't want to say the word “gamble,” it's a terrible word, but there's always ...
Chris:
[inaudible] … a stake or whatever, it's something to gain.
Joshua:
A stake. People that are looking and thinking, you know what, for this peg in the next six hours to be closer to zero, I believe that this is the right answer and then they'll bet on that. If they're right, they'll win. If they're wrong, then they'll lose a part of that.
And so, this is the mechanism we think will solve the ability for voter apathy, but also large-scale decision making. You can call them decision markets or prediction markets, but this is really, really interesting. And I've had a chat […] with people like Robin Hanson, who actually invented the idea of prediction markets. He's a fantastic mathematician and all-out great guy. If you can ever get him on the show, I would highly recommend him. He's a wonderful person.
But there's one last thing that we're doing with the standard, that we believe we will become the standard when it comes to stable assets, stable crypto assets, that can't be shut down by despotic states is that no one wants to spend $50 to send $2, right? Zero. No one, in terms of gas fees. So, one of the most important parts of this whole debate is scaling Ethereum properly.
Now in 2017, we all thought, "Ah, EOS (EOS, Tech/Adoption Grade “C”) is the Ethereum killer; NEO (NEO, Tech Adoption Grade “C”), the Ethereum killer." Everything was the Ethereum killer, yet here we are still Ethereum, still high gas fees. Now, why are there high gas fees? Because everyone's using it.
Chris:
That's where all the economic value is.
Joshua:
That's where the value is, and that's where the developers are and there's a lot of “We're the Ethereum killers” again, but I believe and I talk with a lot of the great core, the talent in Ethereum … and really, I've got to say, it's where it is.
That's why there are only a couple of markets. There's wax. Sure. That's not Ethereum, but a lot of the non-fungible tokens (NFTs) on OpenSea. I think that that's where the future is, but it has to be better. It has to scale, and one of the best scaling solutions that I've seen and, well, the community CTO that it really agrees with is StarkWear that comes out of Israel. They're building zero- knowledge validity proofs on Ethereum. They don't have their own coins. It's working with Ethereum on Layer-2. The smart contract on Layer-1 can talk to a Layer-2 contract. Really, it's beautiful. There's no seven-day settlement layer, like there is with —
Chris:
I was going to say, this is a competitor to stuff I've talked about on the show before, like Optimism and Arbitrary and stuff like that?
Joshua:
Yep, yep. Yep. All Arbitrary and Polygon (MATIC), they all use these Optimistic roles. Polygon's trying to do everything and it's still interesting, but it has an extra coin. What happens is you add more and more complexity? The normie — sorry, I hate that term — but the normal person comes along and goes, "Well, I need to then get another token, but I have Ethereum, what's ... Huh?" I see Polygon as a really nice stopgap for scaling, but I don't see it as a proper solution. Really what we want to do, is really make sure that we're grandma-friendly to the point where anybody can use this thing. Anybody can save in not just rare physical assets, but also rare digital assets, like Bitcoin and Ethereum and other cryptos, but also be able to send money for less than a cent.
I come from the very Maximus Bitcoin side of things. For many, many years, all my friends are these very Maximus friends, but the fact to the matter is … running Vaultoro for so long and I'm sure you use a lot of freelancers as well, Chris, and what I've noticed, I'm not sure if this is your experience, but a lot of freelancers have been asking for stablecoins from me over the ... It's been a slow shift toward stablecoins and I ask them, “Why do you want stablecoin, rather than Bitcoin or Ethereum?” They say, “Well, it's very easy to account for. When the taxes come, I've asked for this much and I've got this much and then when I've got that much, I can decide, okay, I'm going to buy some Ethereum or buy some Bitcoin.”
Chris:
Totally not the other way around.
Joshua:
Not the other way around […] Yeah, that's right. Yeah, and I think stablecoins really have a future and are important in the ecosystem, but it's about removing these centralized authorities that will take us back to the past, rather than bringing us to the future of empowering people … rather than reducing people to, again, being sucked into these fractional reserve mechanisms, of these centralized stablecoins.
Chris:
Absolutely. I think the name's quite clever because you've called it the standard. You've dropped the notion of calling it the Bitcoin standard or the gold standard or the Ethereum standard … it’s an amalgamation of all that rolled into one, right?
Joshua:
Yeah.
Chris:
Whatever standard you want to be on, you can be on.
Joshua:
Yeah, absolutely and the logo here, we've got an S, we've got a T and it's also some hands holding a bar of gold. We've got a beautiful designer, actually. I'm very happy, but yeah, it's really for me, Bitcoin has never been this ... I'm not a person for fast cars. I don't need much, to be honest. I can be relaxed sitting at the beach, just surfing for the rest of my life, but what I do want is … when the time comes and I'm lying on my deathbed, I do want to look back at my life and think, I made a change in this world.
I did something, and that's really why I feel that the projects that I choose … and you are the same, Chris, when you say, “I want to educate people,” is that when we look back, we are like, "Wow, we've really made a difference in this world," and I hope that I can inspire other people to also go that way, a little bit away from this materialism. Of course, it's great to have some money or enough to pay your rent and not have any worries. I'm not saying, “Don't do that.” The more, the better. We are living in an abundant world, but to have the goal of actually making a difference, even if it's in your own personal life, is important, and I believe that the standard really is one of those times in my life, where I've chosen a really great team and a great project.
Chris:
You think that's really worthwhile putting your time into, I think that's all we can ask for. There's nothing worse than putting your precious time into something that doesn't really matter, which is subjective, but matter to you anyway … it matters to me. We have the same mission, which is making a difference to as many people as possible, and we see the finance and money being pretty universal. If we can fix money, we can fix a lot of other stuff.
Joshua:
Absolutely. Absolutely and I see this world as ... Generally, governments have spent a lot of time de-risking, especially in the Western world, de-risking people's lives for them, and this is why we've seen so many people jump into Bitcoin and crypto and being scammed straightaway, because they just don't understand what a scam looks like anymore.
Chris:
Very true. Yeah.
Joshua:
They're like, "Oh, this person, if I send them one, they send me two back. Yeah."
Chris:
“Is that how it works?” They don't know better.
Joshua:
They don't know anymore, because this obsession with de-risking for us and regulating risk out of our lives, is really not a good move. And this is where I think the real proper move is, jobs like yours and projects like yours Chris, that actually educate people in this space. Education is the true regulation. It's the way that you allow people to understand what they're doing. Especially as we move toward a technocracy, where stuff gets a little bit more complex and there's a lot of attack vectors and a lot of fraud and a lot of bots that pretend to be humans, a lot of confusion. Podcasts like yours, I think, are absolutely extraordinary and important. And what I love to see as well, is that you haven't succumbed to pod-tigue or pod-fatigue or whatever you want to call it.
Chris:
Absolutely. Well Josh, that was amazing. Thank you very much for coming on to the Weiss Crypto Sunday Special. I shall now be doing a deeper dive into the standard.io. Thanks very much for bringing me up to speed on that.
Joshua:
No worries. If anyone wants to keep up, join the ... we're just developing. We haven't really been doing any marketing. We are doing a private distribution on the Dec. 15. Check out the website. You can follow us on Twitter @thestandard. Also, our discord is starting to really ... we do a lot of little airdrops of Bitcoin and Ethereum on there, for people chatting, and it's a really fun community, that's starting to develop there. It's still very young. If you want to find a proper ... we don't have a dog on the coin, but it is a very serious infrastructure project, and if anyone's looking for a serious infrastructure project to help out in the early stages at the foundational level, definitely come join us at the standard.io.
Chris:
All right. Sounds good. I'll speak to soon, Josh, but thanks for now, for being on the Weiss Crypto Sunday Special.
Joshua:
Thanks, Chris.
Chris:
Take care, mate.
