Upcoming CGP: Increase target level of stable holdings in the reserve

Governance
14

There are certain risks inherent in any start up.

Being under collateralized for a moment or two is a “so what” moment in my mind. IMO the only reason it seems important to anyone today is a matter of marketing. The competition and Nay-sayers are driving that narrative.

Fiat isn’t over collateralized, it never has been, it does though have incredible utility.

The wild card here is trust that the system will work when I need it to buy my groceries.

For example, if CELO went “all in” and did “whatever it took” to fix the on/off ramp issue once and for all, it would create more trust than any other crypto currency simply because people like my wife could move money out when she needed it with a few clicks.

Fix that utility issue and the status of the CELO reserve on hour by hour basis will matter very little to the user.

The feds might require more backing, but if CELO fixed the on/off ramp issue I’d bet the influx of fiat would fix that and that CELO’s value would pump in concert.

2 Likes
15

Yeah, I think the key questions are:

  1. Is it ok if it’s for more than a moment? (It’s definitely possible there is undercollateralisation for weeks, months, who knows)
  2. How do we know it’s ok for a moment?

And btw, I’m open to you being right. It’s just there’s a chance you aren’t right, and I think adding a small percentage of stables (20%) is worth any associated downsides to hedge against you being wrong.

16

Yes, a distinct possibility that I’m wrong is always there. :wink:

My hope is that we can find and fix the real problems rather than take an aspirin to mask the symptoms.

1 Like
17

We followed the discussion and want to give some input:
Tldr: Timing markets rarely works, BTC should be a decent collateral long term

Since the proposal aims to reduce BTC for another stablecoin we quickly look at BTC and its behavior in the last cycle. From its peak end of 2017 till November 2018 BTC fell ~80%. This was after a so called “blow off top” in December 2017 where BTC went down ~50% within 1 week.

Currently BTC trades ~44% down from its top back in November 2021. Therefore even if we see a draw down as bad as in 2017-18 more than half already happened. We would rather argue that the drawdown won’t be as bad due to eg. no “blow off top”, more demand via TradFi.
Overall we see the proposal to adjust the reserve here as “timing the market” in order to front run a real crash. But even in the scenario of a real crash BTC will be the asset that drops the least compared to ETH and CELO.
Looking at current numbers the reserve could drop ~78% before cUSD gets undercollateralized. Furthermore we think that a draw down of ~78% in CELO / a long lasting bear market itself will result in less adoption of the eco system and therefore demand for cUSD.

Commenting on the last few points discussed in this thread:
According to the metrics used UST is constantly undercollateralized and it’s no problem so far. Like stated the main point depends on the trust people have in the stablecoin itself. The far bigger problem in the reserve is CELO since if really everyone would try to get out of cUSD at the same time and then swap the CELO to USD they will get a haircut anyway.

All of this is of course a lot of speculation but we don’t think this is the best time to reduce the least volatile asset (out of the 3 volatile ones) in the reserve into another stable coin.

2 Likes
18

Been chewing on this today and one other thing that stands out to me in favor of keeping BTC and ETH rather than adding DAI, is the question of liquidity.

To me it seems that BTC and ETH are arguably going to be the most liquid assets if things go really sour.

I would even hazard a guess that that is part of why Terra is loading up on BTC.

1 Like
19

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.

Rationale
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.

2 Likes
20

So what happens if crypto falls 80+ % before those natural assets are in place? Also, these natural assets which are less volatile… which ones are you thinking of specifically? I would like to see a chart so see how volatile they are exactly.

1 Like
21

What do you reckon outsiders think of Celo betting the savings of vulnerable people in developing countries on the value of bitcoin and other massively volatile crypto assets?

1 Like
22

Trust is an important thing John but the risks are endemic across everything that is crypto backed, including stable coins.

IMO if BTC and ETH drop 80% then all the ‘stable’ coins are going to probably de-peg and be taken down as collateral damage. They almost exclusively derive value from each other rather than from the real world.

Like it or not everything crypto is hanging on BTC’s reputation in the world.

IMO until each of the various projects in crypto find a way to derive value from real world interactions and assets we face the crypto crash reality.

Sooner or later crypto has to leave their backyard and venture out into the wild.

23

There is a meaningful chance that the reserve would become undercollateralised. That does not necessarily mean cStables would de-peg, but one would have to assume de-pegging risk would increase.

Finding a low volatility (relative to fiat) natural asset that is tokenizable and with comparable liquidity to assets currently in the reserve is not an easy feat. I have the same questions myself and am setting up some time to speak with members of the climate collective.

I don’t think outsiders understand how Celo’s reserve works. I would expect people associate some risk with cStables - because it’s crypto, but I doubt that retail users understand the collateralisation of the reserve.

There is a sort of mis-match in risk-profiles, because most Celo holders hold Celo as a risk asset. That there may be a small probability of cStables de-pegging (and taking down CELO with it) is perhaps not as much an issue to expected value calculations for CELO as to expected value calculations of someone holding cStables as savings.

That is a cynical take [and maybe it’s wrong, because as @VirtualHive states, if the cStables depeg it’s the CELO price that gets hit first, and then CELO owners are left holding a reserve of BTC+ETH, and they [not cStable holders] can control where that goes). In reality, I think there are many (incl. big) Celo holders that care a lot about community and cStable holders. My sense is that:
i) Many are busy and not active on the details of this forum and CGPs.
ii) Many feel (and I welcome the dissenting views) something like either a) regulatory or marketing risks outweigh risks to cStable holders, or b) adding stables would actually reduce rather than increase the stability of the reserve (which I don’t see evidence for) or c) some combination.

I don’t believe this is correct. DAI and USDC have withstood sharp market corrections, including Bitcoin and Ethereum dropping 80% from their all time historical highs. What is particularly dangerous for cStables is that it doesn’t even have to be a sudden price crash. BTC/ETH could slowly drop in value by 80% over three months… DAI would be fine because it’s liquidation mechanisms will have no issues at those time scales (in fact, they seem to work quite well even in crashes) and there is no reason to believe USDC could be in trouble then either in a slow crypto price drop. Further, per @VirtualHive 's comment, if BTC and ETH tank, it’s highly likely that CELO tanks much faster. So, in a BTC crash, you probably have a much bigger CELO crash, and CELO is half of the reserve, so the non-linearity of CELO (vs BTC/ETH) in a crash goes against the reserve.

All of this said, my sense across the community is that there isn’t strong support for this interim step.

2 Likes
24

Well doesn’t make much sense to take their views into account in this matter, then?

1 Like
25

Do you really want to have that conversation John?

26

I agree that fiat-backed stablecoins (e.g. USDC) should be added to the reserve given the volatility of BTC/ETH and high correlation amongst reserve assets that make up the majority of the reserve (CELO + BTC + ETH = 94.5% of reserve).

DAI, which is held by the reserve already, is backed by 50%+ USDC already (for reasons above), thus the reserve indirectly already holds fiat-backed stablecoins. Overall, increasing the stablecoin percentage from 5% to 20% reduces the overall risk exposure of the reserve’s collateralization stability.

3 Likes
27

Safety of a currency is achieved through liquidity. However, currency has an interesting property as it is money. There will only be one that dominates.

In the wider economy, USD is money, accounting for >70% of global trades. In crypto, Tether is money.

The obvious problem is then, how do you attract exchanges and other institutions to offer your decentralised stablecoin rather than Tether to their customers?

The solution is two-part:

  1. Back your stablecoin with enough collateral, that is negatively correlated to cryptoto, to guarentee a high floor to the peg (this CGP is key)
  2. Offer a credit-risk free yield on your stablecoin that comes from block rewards, creating something akin to a demand deposit at a central bank

In this way, exchanges, who hold vast reserves of stablecoins, will be incentivised to hold your stablecoin instead as they can use the yield to attract customers.

This is what Cambridge Cryptographic has been pushing forward with Proof-of-Deposit for Celo and cStables.

2 Likes
28

With regard to point 1 Ying I agree and would like to suggest the the arbitrary numbers thrown out so far, like 30% don’t make sense.

Instead I’d like to suggest that matching the cStables 1:1 against liquid fixed assets like DAI, USD, Fiat, … on an ongoing basis would be a more logical choice, whatever that percentage may be.

I also want to suggest that we not let fud rush us. I’d suggest that we should work that direction over maybe a full year.

Gotta run I’ll address point 2 later today.

29

Also with regard to number one, there’s probably an optimal ratio between the c-stables and the cello native asset, the native asset shouldn’t be allowed to get below that optimal ratio.

30

With regard to your second point Ying, First I’d like to know if you have come up with an option that addresses the social concern that I brought up regarding Muslims specifically.

If we don’t address that concern we run the risk of excluding a quarter of the worlds population from participation in Celo’s stable coins.

31
32

Your point on religious implications of PoD will be investigated, but let’s not discuss in this thread.

In regards to the 30%, you’ll have to refer to the CGP and ask the proposers for their justification. I do agree that we should aim to back cStables at least 1:1, and this seems like a stopgap that achieves this (so long as cStables demand doesn’t dramatically rise in near term).

2 Likes
33

Hi all, for visibility: @Markus and I submitted a CGP on chain that is heavily based on the original proposal by @Pinotio.com and myself from 3 weeks ago and the subsequent discussion in this forum thread. Please take a look and prepare to vote how you see fit: Celo Governance by Staking Fund

The tradeoffs in such decisions are incredibly tough, especially in the details, and I want to thank you all for the thoughtful and knowledgeable input - makes me super proud to be part of this group. Let’s keep fostering a community in which we discuss these tradeoffs critically to make sure we take actions that are in the best interest of the users of Mento stable assets.

4 Likes