Hi folks, and many thanks for the comprehensive input: @markbarendt , @VirtualHive , @0xLeo , @Tobi .
In short, @roman and I have decided not to proceed with submitting a CGP on this topic. Instead, I will shortly post with a proposal on reserve decentralisation.
While I remain concerned about undercollateralisation of the reserve in the case of a crypto crash, two reasons emerged to stop pursuing the addition of stables to the reserve in favour of focusing instead on reserve decentralisation and adding natural capital to the reserve, as well as other Mento 2.0 efforts.
1. Regulatory Risks
At present, the Celo Reserve is managed by a multi-sig of trustees. If USDC or DAI is to become regulated (e.g. as a security or eMoney), it is possible that this treatment could flow through to crypto that is backed (or backed-in-part) by USDC/DAI. This is speculation at this stage. We do not yet know fully how USDC or DAI or cStables will be treated from a regulatory standpoint in different jurisdictions. Increasing the exposure of the reserve to these assets may increase risks of multi-sigs/trustees (or cStables backed by these currencies) of falling into regulated territory where compliance would be difficult.
Obviously, this point emphasises the importance of further decentralising the Celo Reserve.
2. Rationale for one stable backed by another
Why would make sense to have one stable-coin backed by another? Why not just use the first (e.g. replicate USDC natively on Celo OR bridge it from Ethereum (which is already possible)?
The answer, under this proposal, is that the backing is only temporary - to protect the reserve in a crypto downmarket - and to be phased out as natural capital is to be phased in.
Still, adding USDC and DAI would be a detour from Celo’s mission points of decentralisation and of natural backed assets and I think this concern comes to the fore from the community both in a real sense and in the sense of “what will outsiders think if we add USDC or more DAI”.
Where from here #1: Decentralising the Reserve
Ideally, we keep Celo in a lane of regulatory compliance where the protocol and cStables are afforded differentiated treatment as decentralised items. Decentralisation of reserve management helps with this. I will post shortly with a proposal on that matter.
Where from here #2: Getting natural backed capital into the reserve"
This is critical for the Celo mission. Further, hopefully natural capital assets are less volatile (relative to fiat) than BTC or ETH, and so this would improve reserve collateral quality. This will be a challenge but I’m hopeful the Climate Collective CGP will make good progress.
Where from here #3: Fundamentally, how do we safely collateralise fiat denominated cStables with volatile assets?"
This requires continued thought (including ideas in Mento 2.0), but might include:
a. Having a black-start procedure (i.e. some guidelines around what would happen if the reserve does become undercollateralised).
b. Potentially having a deposit guarantee scheme up to some amount (e.g. each phone-verified wallet) is guaranteed by the reserve up to a certain value.
c. Limiting minting of stables if the reserve collateralisation ratio goes below a certain limit.