 Before we, let me start my video. Before we start, we know we, hi, go ahead. We are live streaming, so just so you know. Yeah, yeah, I saw that notice. Meeting is now streaming live on YouTube. So before we start, we normally do a couple of things. One is, of course, the capital markets SIG has two requirements. One is you have to obey the antitrust policy of the Linux foundation. The other is to follow the foundation's guidelines on being nice to everybody, meaning you can disagree with people, but you should not be disagreeable. So somebody had a hand up, Murthy, is that by design or by accident? I just raise my hand. I just wanted to introduce myself because this is the first time I was able to join any of these meetings because of some time constraints. So I think by that time, the live streaming got started, so I lowered my hand. Okay, no problem. So we'll just go straight into the presentation, all right, which is the best thing to do in these circumstances. So I'm going to start sharing my screen. It's very strange that I cannot share. Looks like I cannot share the screen or it's not allowing me the full rights to share screen, but let me see. Oh, she has made me a post again, so maybe that's the problem. Anyway, share screen. Are you sharing a screen, Murthy, or no? No, we've been nothing. I'm just on mute. I'm not sharing anything. Okay, very strange that I cannot. Can you see anything? Yeah, perfect. Well, it's coming up. Hey, it's coming up. I think it might be a network thing. No, I don't think so. Yeah, so you can see the first presentation page, Hyperledge Capital Market Stable Coins, right? Yes, we can. Thank you. So the agenda is very simple. We have the concept of the stable coins followed by stablecoin taxonomy, then what we call custodial stable coins, then the automated algorithmic autonomous stable coins. I don't know what to call some of them because automated can cover both crypto back stable coins and others. And then the Terra Luna episode and its relationship to Black Wednesday. And then we talk about the systemic risk in DeFi, specifically in stable coins, and how we can adopt certain methods to lower the risk. So the concept is very simple. A stable coin, of course, is a marketing term. According to me, sometimes it's not stable nor is it a coin. And the value of a stable coin is thanks to a price index. A price index can be anything. It can be a price of fiat currency, the price of oysters in Alaska, I don't know. Whatever the price index is, there has to be a way to discover the price index and to keep the stable coin linked, pegged. There has to be a mechanism. So why do we need stable coins? Because the three qualities of money, which is a store of value, medium of exchange and unit of account or numeral, is essential for any kind of operations with money. The existence of stable coins, according to me, points to the fact that cryptocurrencies are lacking one or more of these qualities. So stable coin is a way to bring the qualities of money into the on-chain world. So the main quality is the store of main property, store of value, which underpins both the other two. That means you can peg a stable coin to, let's say, some currency that is highly volatile, a fiat currency that's highly volatile or a cryptocurrency that is highly volatile, then the stable coin does not become stable at all. I mean, because it'll fluctuate with the peg. Even if the peg, it is possible to maintain the peg. And the price index must be stable. That's what we just talked about. And stable is a relative term because even the US even USD is changing in value due to inflation. The purchasing power is changing, but we are used to that. The peg mechanism or the power mechanism is difficult to hold. In fact, there are lots of literature on it because stable coins is not the first place where we have this particular effect. The whole of money market is based on the maintenance of pegs. The whole of bank deposits is based on the power conversion of one asset to another, meaning like your bank deposits to, let's say, cash or to some other bank deposit. That's what enables this mechanism. We can see that this mechanism is not a new mechanism. It has been around for many, many years. But of course, stable coin concept comes with the on-chain, with the creation of blockchains and the way for fiat to go back and forth. Now, if you see the broad market for cryptocurrencies, you can see the third name on this list is a stable coin. But we have to see why it's stable, why it's not stable. USDT and then USDC, both of those together currently have a market of more than Ethereum. And if you add up all the stable coins, probably have more than Bitcoin the value. And this is taken from this morning's coin market cap. So 24 hours, well, it's at 6am. I don't know what has happened since then. But a 7-day fall of Bitcoin is 32%. Ethereum is 41 and so on. But stable coins, as you can see, are pretty steady. But Tether sort of breaks the buck. And why is that? We'll examine that in detail later. And USDC has gone up above $1, which is also dangerous because it's breaking the peg in the opposite direction. Not a good thing when your whole premise is that you're pegged to the US dollar and you'll maintain that peg. Now, stable coins, you can see that the first two are definitely collateralized assets held off-chain. I don't know too much about USD, but DAI is hybrid with the algorithmic component and a crypto component baked into one coin. And so on and so forth. I mean, they are all different in slightly different ways. And this is, of course, the chart that everybody strikes fear into people because it's the market cap of Tether Classic, or I don't know whether it's called Tether Classic or just USD. But basically, the market cap falling to almost zero. And the price, of course, is going from $1 to almost zero. So this is a kind of a simplification of a lot of mechanisms. We can say that the peg can be to a fiat or a commodity. In most cases, it's to something stable. Fiat is meant to be relatively stable. It depends on the fiat, of course. Commodity is also fairly stable. So the peg is to something stable. And the mechanism can be none in the case of fully collateralized or even undercollateralized reserves held off-chain. The other mechanism is using an automated way of maintaining the reserves. In the automated way, there are two main categories. One is, of course, the dual token model, where there's nothing else pegging it other than a stable coin and a volatile coin. But there is another one that's trying to link it to overcollateralized cryptocurrencies, like using some mechanisms, which is the examples can be Rai or something else. And the reserve is usually a peg that is less than or equal to the, I mean, reserve can be directly to the peg, which means if I have US dollars, some stable coin back to US dollars, I have exactly the amount I've issued as in the peg or a liquid asset that is fully convertible to the peg without moving the market. These are all caveats, right? If the amount of liquid assets you have is huge or held in something like, let's say corporate bonds, that sale of that asset can move the market depending on how big the stable coin is and how large the component, the liquid component is. So in most of these mechanisms, the market works as advertised or close approximation of how it works. But the way the market works can be destructive to the peg of the stable coin, the value of the reserve and so on. The on-chain assets in the case of Rai or something else can be over collateralized cryptocurrencies. Or there can be none, when I say none, what I mean is that it is another coin that is linked to the stable coin, which absorbs the volatility of the coin, which was the case of course with Terra, right? So it's pegged to a fiat US dollar, the mechanism is automated and the reserve is none, but it really is the wall coin. So the algorithmic stable coins have been known to, sorry, I have to get up to close the window because there's somebody moving the lawn outside. The value of the reserve assets is what controls the peg or holds the peg. And the debt spiral of algorithmic stable coins have been talked about for a long time, although we haven't observed such a spectacular collapse as that of Terra, right? The main way in which the debt spiral happens is due to a run on the reserve ultimately, which lowers the price of the peg beyond a point of sustainability. So that is the value of reserve assets diminished rapidly due to a run on the asset. Oh, I think I have just copied the same thing back. But there was another slide that I had prepared, which is also from the same source that shows the quality of the reserve is what controls the, what prevents the stable coin from going into a debt spiral. So in this case, we are just talking about this senior age stable coins, where the price of the backing asset, which is basically the price of the ball coin is controlled by the algorithm. And there are two steps. One is if the price of the stable coin exceeds $1, the system auctions off the new Terra and uses that revenue to to burn Luna until the price returns to the target. So basically, it is by increasing the supply of US, USD, I mean, Terra, which will then depress the price in theory when the supply exceeds demand or supply exceeds the current supply, then the price pressure is down. And if the price of Terra drops below one US dollar, the system buys back and burns Terra, issuing new Luna to fund the burn until the price returns to the target. So it is by increasing the supply or decreasing the supply of Terra using the ball coin, as it's said here. This diagram has been taken from Vitalik Buterin's blog, but it essentially talks about the automated stable coins as being problematic, but he defends the whole concept of it by talking about coins like dye and rye, which are partially backed by cryptocurrencies. But even in that case, you've seen that the price of crypto currencies is under pressure right now. So Vitalik's argument would not hold. Well, basically, what he says is that there would be automatic sell, you know, like liquidation of the overcollateralized asset as the asset price starts to fall. The whole point is, unless there is a buyer and the buyer is supposed to be incentivized to buy the vault and then redeem the rye, let's say, at the USD at the right price, but it can happen that you don't have enough buyers in the market, which is always the case when there's a crisis that stops the coins from being stable. So the attack on Luna, that our complex happened, was actually foretold by somebody in October, in November 2021. And he, when he put it out on Twitter, he was attacked by the guys who controlled the, I mean, by, I think, the main guy, Kwan, I think his name is Kwan, who attacked him and denigrated him instead of listening to what he said and trying to fix the problem. So the Black Wednesday attack is, I mean, it's not even an attack. The market behaving the way it should. So in this case, the pound sterling, which was in the European exchange maintenance mechanism, was supposed to be in a narrow band with the Deutsche Mark at that time, 1992. So I think Soros, among others, sold GBP and bought Deutsche Mark. So when there's tremendous selling pressure like that, the government is supposed to step in to buy the pound at the correct rate to keep the rate above the 6% ban. But even the Bank of England could not do it because they had to use foreign exchange reserves to do that, not their selfish currency, which is GBP. So as long as you have a peg like this, that means your GBP and Deutsche Mark are linked together. But at the same time, GBP had different characteristics than Deutsche Mark. That means there was a higher rate of inflation or some other problems with the pound cost that peg not to hold because the fundamentals, the underlying fundamentals do not correspond with the exchange rate mechanism, ERM. This is the basic cost of the failure, not that Soros came along and did what he did, but because they pegged it in the wrong way, to the Deutsche Mark. Which had different characteristics. This attack was then taken to break the peg of terror. I'm not going to go into the details of this, but this attack was published on November 21st, 2021, about six months before the actual collapse. And of course, you need a lot of capital to do this or need access to a lot of capital to profit from the way in which this, from breaking the peg. But in the end, this is true only if the future circulating supply of Luna, which is the wall coin, is not infinity. But the above process leads to infinite Luna being minted. So that's point number nine, which is the culmination of those six steps. Then keep on iterating on this process 10,000 times or so, then the peg would break. So the hyperinflation of the wall coin that backs the back terror is what caused the peg to break. Now, it doesn't stop there. I mean, that's the whole point. I think at that point it was 17 billion or 18 billion, which is not the largest stable coin, but still pretty, pretty large. So the emergent effect of this is not just the ones that I've noted here. Obviously, stable coins are a interoperability rail with the fiat world because if you can convert the fiat to a stable coin, which is what constitutes the majority of stable coins, not, we are not talking about dye and rye and all that, because that is based purely on cryptocurrencies, which is, I mean, which of course you can interoperate with by converting fiat into cryptocurrency and then depositing those in the vault and getting rye or dye out of it. But it is a two-step process. Whenever you have this kind of a process, then you have, let's say vulnerabilities in the assumptions that you made because some of the assumptions will not hold all the time. The other is that the value is, you know, I mean, we spoke about all these particular things. So when we say interoperability implies contagion, what we mean is on both sides, right? In terms of how the stable coin is participating in the crypto world itself, meaning you are depositing there a tera or a 30% interest and the value of tera falls to $0.007, which is not even a cent. Then you have real problems. You can get 20% on the 0.7 cents, but that is nothing. You're supposed to be getting 20% on a dollar. So on the crypto side, it has that vulnerability. On the fiat side, luckily, US dollar is extremely stable, I mean to a certain extent, meaning you cannot execute an attack like that was on the GVP because USD is not pegged to anything, not even to gold or anything else. And the Federal Bank can issue dollars at will, even though it's tied to the economic performance of the United States. So in that sense, anything that is backed by the full... So if you go back to, let's say, the pegging mechanism, if your reserve is US dollar, I mean, if you're pegged to the fiat, let's say US dollar, because most of the bulk of stable coins are pegged to US dollar, you know, maybe even 90% or more of the stable coins are pegged to US dollar. And if the reserve is in the peg, that means the reserve is in US dollars, not in any other instrument. But then it matters who's got the US dollar also, because if suppose it's deposited in a bank, you can have problems if the bank cannot satisfy that commitment. So currently, there have been some people who suggest that the true stable coin, which is pegged to the dollar, can only be a narrow bank, which means the currency is inside the Federal Reserve account. And you can only issue what you have in the Federal Reserve account. You cannot issue anything more than what is held in your Fed account, which is the concept of a narrow bank. That means the bank is not issuing money or creating money, but it is fully backed by its reserves. Obviously, today's banks, commercial banks, do not follow that because otherwise we wouldn't have money supply being generated by banks, but by the Federal Reserve only. And in this case, you know, that's one of the suggestions that has come up due to this by an economist from BIS named Manmohan Singh and our own, you know, crypto world person, Ketlin Long, who started a bank in, I think it's in Wisconsin, or some state, which has a very, you know, it's a small state, which has very generous loss. I think, Reb, when you're talking about Ketlin Long of Castoria Bank. Yes. I mean, I think she's, her bank is called Avant. I don't remember the exact name. Yeah, let me rename, reburn Castoria Bank recently. Oh, yeah. Because the proposal is, of course, to do 100% reserve, in which case, of course, the only way to make money for the person who's issuing it would be to take a fee on the issuance, 0.5% in the case of USD, for example, is 0.5%. The other is the second point is the liquid assets, so-called liquid assets. First of all, how do you know what the liquid assets are? There is a monthly sort of report by auditors on USDC. But a month is a long time. You could, you know, the reserves could have changed in value during that time. And what is liquid assets? I mean, the safest is, of course, supposed to be US pressurized, short-dated pressurized, and other assets. Obviously, that would bring in some yield, but if the amounts are huge, like, you know, $50 billion of USDC, then the operator circle will make money on the yield from those liquid assets, quote-unquote liquid assets. So the periodicity of this reporting is crucial. That means we don't know what happened between the 15th of May and the 15th of June today. We don't know whether there's backing or not. The biggest stablecoin being USDT, we don't even know whether they have 100% liquid assets. In fact, in the previous slide, I changed it so that it's less than or equal to 100%. In USDT, we know for sure that it's less than or equal to 100%. Second thing we know about the assets is, one, the liquid assets that they have contain the so-called liquid assets have corporate bonds about $30 billion worth of $20 or $30 billion. Okay. When it started, it was $20 or $30 billion. I don't know what it is now. When it started meeting just before May 12th, before the whole thing went down. And of course, the on-chain asset thing, which is the ether or other cryptocurrencies, it's over-collateralized. So there is, of course, a question of capital efficiency, credit and all those normal things that are in the regular markets. You can do certain crazy things by borrowing raw or die and then buying more ETH and depositing more ETH. But if you have done those things just before the crash, then your vault probably would have been liquidated and purchased by somebody. But what if there are no buyers in the market? That's always a problem, right? Whenever there's a crisis, buyers disappear, sellers flock to the market and that's when the prices go battling down. It's basically a crisis of confidence. So now back to where we stopped is somewhere around here. Interoperability implies contagion. So the contagion spreads in both directions, which is not very evident from most of the analysis. One direction is of course the crypto prices of the crypto assets. Second is contagion into regular assets. If there is a reduction run on USDT, then there would be a lot of selling pressure on corporate bonds. What does that mean? Does it mean that the price of those corporate bonds will hold? They will probably go down if there's selling pressure, which means that it is immediately means that USDT will not be able to sustain a peg. I mean not in any normal sense of the word, but suppose there are lots and lots of redumpions that will only hasten the selling pressure of corporate bonds. So in this case, the contagion extends in both directions, which means that the contagion can bring systemic risk not just to one system, which we assume are separate systems like the crypto currency system is separate from the regular real world asset system. But in this case, these effects, like I just mentioned with the corporate bonds, these effects can cross the so-called system boundaries and it can infect the whole financial system. And that's why people are calling for regulation of these, not because they say, okay, you know what the cryptocurrency world is in trouble. So, you know, let them be in trouble. We don't care. But that's not the point. I mean, there are two arguments against it. One is, of course, that it can cross system boundaries and cause problems in other systems like the regular assets. The second is protection of investors. We can see from the behavior of investors during the crypto crisis that a lot of them are not as sophisticated because many of them would have had stop-loss or some other kind of way in which you could protect your asset. Like suppose you could say that if the asset falls by 5% immediately sell it. But if you did that, then, you know, you normally crypto assets do fall by 5%. Maybe there is some way in which to determine that percentage that's dynamic. So these are some of the ways in which investors normally protect themselves in regular markets. And that has not been the case in crypto markets from observation. So there's a lack of sophistication, even though people claim high degree of sophistication when the market is fallen by 50%. And none of these activities seem to be happening across the board. Then we have, you know, an indication of the sophistication of the participants, which of course is the so-called job of the SEC or some of the regulatory agencies to control this. The other thing is this also puts paid to the notion that for some reason there's been an attack on CBDCs by mainly the private currency folks, the Cato Institute guys, Waller, Governor Waller. So, you know, a lot of them feel that stable coins, the presence of stable coins implies that we don't need a CBDC. But looks like the events of the last few weeks have shown that CBDC is definitely not subject to a death spiral attack or death spiral effect. So many people, including I spoke with several people who are very heavily into crypto who are completely against CBDCs. But it does provide a way to have a fiat rail without an intermediary into the system, into the on-chain systems. People say, oh, CBDCs are not really decentralized. But, you know, most of the stable coins are very centralized. USDT and USDCR, definitely they can ban you, they can stop your withdrawals, they can do all kinds of things. In fact, they have done those things. So, just to pay lip service to decentralization is not enough. We need a way to measure decentralization. Anyway, so this is Vitalik's approach taken to a to a stress test model. That means whenever we examine a particular stable coin or even any DeFi protocol, can there be an orderly shutdown? That is 100% withdrawal, a complete run. Price of the peg moves 20% up or down. What happens in the design of a particular stable coin? These are the stress tests that are probably needed. Vitalik had talked about it as a thought experiment. But this is a common practice in the regular asset market that you're supposed to be doing these stress tests and not such extremes like 100% withdrawal, but definitely stress test to test whether the algorithm can withstand such algorithm or any process around it can withstand this kind of run on the bank or the move of reserve asset or even the peg by 20% or up or down. Yeah, yeah, Celsius top withdrawals, sorted finance. So, we're not even going to talk about those things because the number of such things are coming taken fast. This is what Sandy just said that Celsius stop withdrawals. I think it stopped withdrawals yesterday or day before. I don't even know. My head doesn't stop spinning from all this stuff. So, we need more methodology to be brought to bear and maybe backed by regulation. Everybody thinks regulation is a bad word, but on the one hand, so it is like steering between the Silla and Caribbean. You have to be able to steer between the two extremes somewhere in the middle. And in order to do that, you've got to have some common sense approaches and transparency. So, this is this is my presentation which I put together probably in about two, three hours today. Of course, I had the background material and I am also trying to get some of this stablecoin material into the interoperability working group in the digital currency global initiative by ITU. So, anybody can participate in that and give me feedback. Now I open it for questions about eight minutes before time. So, please, if you have any questions, I'd be glad to answer you or otherwise we can talk about a couple of other things dealing with capital markets. Any questions or was it too much information? It was great. Thank you, Vivian. Any other questions from anyone else? Really helpful Vivian to walk through the details of what happened with the graphs and everything. Thank you for putting that together. Thank you. But the main aim for us, go ahead. I guess I just have a point, less than a question, is kind of the differences between fiat-backed stablecoins, crypto-backed stablecoins and the algorithmic stablecoins. And if you wanted to kind of address the differences and maybe how an actual collateral that isn't moved around by either algorithms or smart contracts automatically, like how they can differ from what happened within the Terra Luna saga? Yeah. In fact, Vitalik examines that in this two thought experiments. But he wrote it on May 25th. I wonder what he would say now. Okay. So, there are two things. One is fiat-backed stablecoin. But when you say fiat-backed, what is the reserves held in? And who's holding the reserves? And how are they managing the reserves? How transparent are they? All these matter in the end. Just saying fiat-backed is not enough. The other is the two types of stablecoins, I mean, of automated stablecoins. One is the two coin example with Terra, with the wall coin and the stablecoin complex, which has shown to be problematic because basically the automated methods were used to issue infinite amount of wall coin, which brought down the stablecoin in itself. The other one is the one backed by cryptocurrencies, like Ether, which is normally overcollateralized. It means, let's say, Rai is two-third of the value of Ethereum at any point. You can withdraw Rai at that rate. But if the price of Ethereum changes, then either you are over-collateralized. If the price of Ethereum goes up, Rai is meant to be 3.14 USD, right? I mean, so the peg is not one-to-one, but 3.14. And if the price collapses, then of course, your vault is your store or whatever you want to call it is immediately liquidated, but there has to be buyers for you to and obviously the buyers are incentivized to buy your vault. Oh, sorry. Yes, go ahead. Sure. So I did peruse the white paper by Vitalik near the ending of the paper. He indicates that some testing or some type of restriction might need to be done for stablecoins. So when I'm reading that, I'm thinking to myself, can I imply that he is recommending some type of regulatory or restrictive measure? And if he is, is that a self-imposed regulatory measure? The reason I'm asking is because now we're seeing talk of sort of Taraluna 2.0, 3.0 and so forth, I guess the core question is, as stablecoins continue, what will change and how would those changes be implemented? Thank you. Well, I mean, every industry does not want regulation because obviously, regulation can be like a hammer that smashes everything without discrimination. And that, you know, it can be, but it can also be, you know, prudential regulation and regulation always happens after the fact, after the fact of collapse. I was in the mortgage industry and they did not have counterparty risk. And now counterparty risk is a definite thing because two days of exposure where your settlement is T plus 2, you could be out because if you had done two trades that balance each other out, one of the trade goes through, the other one cannot go through because the counterparty is no longer there or in bankruptcy, then you have a problem. So all of this stuff, there was no counterparty risk measure before 2008, but it happened. So as to self-regulation, it never works because people say, oh, I'm going to regulate myself, but then they forget after a while or whatever, and the exuberance, the irrational exuberance continues. So, you know, there has to be a via media again between over-regulation and between, you know, and total chaos or no regulation at all where some people benefit from other people's money. So what are you going to do with other people's money, OPM? Right. That is the question always. Anyway, I hope I answered that question, but I'm not very sure. You did. Thank you so much. I appreciate it, Vivian. I think Vitalik has come to the point, but what he's saying is very simple, right? He's saying if you do these two thought experiments, he calls them thought experiments, but they are essentially stressed as, can there be an orderly shutdown? If the price moves on the peg, in fact, he says by 20% up, then what happens? Anyway, I think we have reached the end of the hour, but if anybody else has any questions, please let me know. And I'm sorry if, you know, I'm not as well prepared as I should have been because it was all spun out of my mind in a few hours. Thank you. So I'm going to stop the share. Nico, do you have something to say? Yeah, I think folks are starting to arrive for the Firefly Community call. I think we're on the same Zoom like here. Okay, I'm going to give you the host, right? Shall I? That'd be great. Maybe stop the live stream. Stop the live stream. That is up to Karen, who's already left, I think. So if I close this now, I hope I don't kill. I tell you what, if you have the ability to end the Zoom call, I have a host key that I can start it up again. Okay, I think I'm going to end the host call because I cannot see how I can pass on the host to you. Okay. It doesn't seem to allow me to do that. All right.