Hey All,
Has there ever been any thought about Polkadot issuing its own stablecoin and leveraging interest to help fund DAO operations. Not saying Polkadot would do directly but could own interest in a venture that is owned by the DAO, if legally possible to do, and interest paid to DAO. Would boost funding, shift sells from DOT to stablecoins, and I’m sure Polkadot holders would opt to leverage since it would indirectly benefit DOT holders.
Mission creep, like the idea to buy & stake ETH.
I think $DOT is already our stable coin on the Polkadot Network, like $KSM is the stablecoin on Kusama Network.
Polkadot is not a stablecoin but rather a utility token (one with many utilities). I am referring to stablecoin in terms of fiat backed. It is also not scope creep. It is defacto standard to innovate at every point in the entire tech stack and/or financial process. Literally every bank and tech company do this. Polkadot has also been doing. Think about (blockspace for rollups, storage with new storage chain, smart contracts soon, payments, bridging, being able to hold multiple assets such as a sovereign wealth fund, and soon services on JAM). The next logical step is for Polkadot to issue stablecoins in fiat terms and to benefit from the interest of the bills.
It is highly likely that the new US administration (and not just the new administration but folks on the opposing side as well that are new to congress) will pass friendly crypto legislation over the next four years. The new administration is very pro crypto and they have taken the house, senate, and presidency. They also already have the supreme court. If stablecoin legislation passes, it will likely allow tech actors and online stores to issue their own stablecoins (i.e., X, Amazon, etc.). Polkadot should get ahead of this now.
The implementation of the stablecoin in terms of programming, which probably not popular to say, should be something similar to Cardano’s USDM, which is native and comes along with all the associated benefits of being truly native in how it is programmed.
A large stablecoin issuance by Polkadot could fund the Treasury by itself, and therefore, Polkadot would not have sell pressure on its DOT token.
Obviously, this all assumes a regulatory path forward.
We mentioned a similar approach in a Polkadot strategy report from last year.
Below is an excerpt from it:
Vigorously promote decentralized stablecoins similar to MakerDAO and distribute rewards in the form of these over-collateralized stablecoins. In this way, the funds from the treasury won’t lead to selling pressure, and if the proposer is further bullish on Polkadot and is willing to use the acquired stablecoins to buy DOT, it will, in turn, create buying power.
This is an excerpt from a more recent article, which proposes more specific measures:
We propose promoting the development and maintenance of a non-profit MakerDAO fork application on Polkadot by the Technical Fellowship. Any proposal funds requested from the treasury will require DOT to be over-collateralized in this application and generate stablecoins, which will ultimately be used to pay the proposal recipients.
This application will operate as a public good infrastructure continuously. Implementing this application will not only address the treasury sell pressure but also lock up a significant amount of DOT.
The stablecoins generated will be used to pay treasury expenses and can be widely utilized in other DeFi projects such as lending protocols and DEXs, increasing interactions and TVL in these projects. This could become a key step in activating Polkadot’s DeFi ecosystem.
Furthermore, these stablecoins could be integrated with the newly launched Polkadot Pay, which is widely used in more commercial scenarios. Moreover, these stablecoins can accrue interest, incentivizing users to hold or generate more stablecoins. This provides additional yield-generating assets for the Polkadot ecosystem and, in turn, indirectly locks up more DOT. As the demand for commercial applications using stablecoins or user needs increases, the value of DOT can also be further enhanced.
Nice. I like this. But what I am also proposing is that Polkadot pursue whether it can issue stablecoins (through an intermediary) that are actually backed by the underlying bill/bonds in full. This would be the equivalent to a USDC or USDT; however, I would suggest researching the native capability of how Cardano does with USDM. This way the Polkadot DAO is receiving the interest of the bills themselves. So not only are they not selling DOT but they are also generating other sources of funding. Obviously, alot of legal hurdles to jump through, but would be worth pursuing. For example, if Polkadot had users with $1B equivalent in TVL in Polkadot stablecoins, that would be $40M in treasury funding assuming a 4% interest rate. If you are a Polkadot user that holds DOT, why would you not use the Polkadot stablecoin that is funding your DAO’s treasury?
I think in the years to come alot of businesses will be issuing their own stablecoins and I see no reason why Crypto ecosystems will not follow suit.
Blockquote
I would suggest researching the native capability of how Cardano does with USDM. This way the Polkadot DAO is receiving the interest of the bills themselves.
Not sure if this would be an improvement compared to using DOT to finance treasury operations. If you use all DOTs in the treasury as the underlying assets to issue stablecoins, you will likely need to overcollateralize the underlying DOTs. When you make payouts in stablecoins, you need to increase your DOT collaterals. Where will these additional DOT collaterals come from? Probably inflation. So issuing DOT backed stablecoins doesn’t really solve anything.
If you are considering issue stablecoins backed by assets like bills/bonds, that would be essentially asking w3f to enter into an entirely new business to compete with existing stablecoins. Not sure if this is a direction the foundation is wiling to take or if it is good for the ecosystem in general.
That’s a good comment.
It’s fascinating that only 15 years after bitcoin was born out of frustration with fiat money system, people just can’t help themselves and want to replicate weaknesses of fiat in crypto projects that were supposed to prevent Wall Street-style machinations…
I think folks are taking these suggestions to extremes. The point would not be to use all of the DOT Treasury to create stablecoins. Like any practical real world situation, it would be a mix and match. Not saying that this is a business, but very few businesses have all equity or all debt. Or even all of the same equity or all of the same debt (if you are familiar with corporate finance). They have a balanced mix between the two and numerous options within each of the two. You dont want to ONLY use DOT to finance operations because not only is there sell pressure but the sell pressure is predictable and therefore can be front run. You combine this with a bear market at the same time and you have a death spiral.
One way the Treasury has combatted this is selling DOT at other intervals for stablecoins and accepting stablecoin payments. All that is being said here is that in order to have resilience in a system, you need diversification (and diversification that is negatively correlated). DOT is option one. Selling DOT for stablecoins (ideally in a bull market) is option two (this is literally already being done which is why the push back on this is kind of funny). Option three is using the DOT to create decentralized stablecoins (im sure the DAO will do this with Hydration Hollar anyway at some point tbh). Option four is using the second option; however, the Polkadot DAO sets up legal entities to benefit from the interest of the bond issuance. Ripple and XRP are already doing this. Watch how successful they become. This also doesn’t have to be the W3F. It could be an entirely new legal entity.
In summary, I don’t think anyone is saying collateralize the whole DOT Treasury. In order to have resilience, you need optionality. In a perfect world, you would use DOT to finance operations, create decentralized stablecoins off a PORTION of the DOT, and obtain interest from issued stablecoins. Being able to leverage all three provides resilience in BOTH bull and bear markets. Bookmark this because I bet every significant chain will end up doing this over the next several years. Ripple is just ahead of the game right now on this front.
BTW, Polkadot (along with Ripple/XRP) have already shown they are trying to extract value at every point in every layer, so this is in my mind is a foregone conclusion (just when). It just comes down to when everyone figures it out, or how long it takes to implement from a legally compliant standpoint. Examples below:
There’s a proposal in Kusama about stables issuance that might be of your interest:
Extending it to Polkadot Asset Hub seems an option.
Just wanted to highlight this, because “why” is more important than “how”: it has never occurred to me that Polkadot is supposed to financially innovate with its funds.
I imagined it’s supported to act as a wise guardian of funds that it collects and distributes to various projects/teams: nothing is supposed to appear or disappear in this process.
Now you may say “staking to keep up with inflation out there is guarding the DAO”, but that would be tautological (Polkadot causes Polkadot inflation, so more “financial innovation” is required to fix a problem that’s not supposed to exist or be serious enough to require attention in the first place).
I’d expect the DAO to be extremely conservative with its assets because of its key role and importance within the Polkadot ecosystem, but others see a pile of cash/tokens/assets and want to play with it.
No one proposes burning all excess funds starting with the day it becomes clear enough is collected, or printing even less, but a bunch of people has ideas how to do “financial innovation” with other people’s funds.
Ethereum actually already does this; however, it is done through indirect means that are not apparent to most. Further, it is one of the reasons that Ethereum has achieved the valuation it has (which also determines crypto economic security). Coinbase has significant interest in Ethereum doing well. A large portion of coinbase ventures is invested in ethereum products, they make a significant amount from ethereum staking, and the majority of the USDC sits in Ethereum. Coinbase pushes USDC because they (and their business partner circle) obviously collect interest from the USDC stablecoin treasuries behind the scenes. This interest funds their business which they in turn re-allocate a portion of to Ethereum.
Polkadot needs something similar. The difference is what is being proposed for consideration is more transparent. The real reason the base chain is likely not going to use its own coin is because Coinbase is trying to fend off other L2 rent seekers that could make the Ethereum chain economically vulnerable over time. And remember Coinbase has significant capital invested into the Ethereum ecosystem.
The main chain needs to extract value at each level to the extent it doesn’t compete with applications. If you don’t, then a VC could extract for short term value even though detrimental for the long term, or an adversary could attack. If you look at ethereum, it is getting vampired at the execution levels with L2s and at the data availability levels. You could even argue it is partially getting vampired at the settlement layers when you talk about superchains and agglayers.
If other stablecoins dominate your ecosystem and your ecosystem does not control those stablecoins, then you could lose control of your ecosystem to a third party.
I know that observation. IMO that would be a design problem (if it was never considered or thought important when L1 chains were designed) and should be fixed at that level.
So everyone (all L1 chains) is in a situation where they need to compete with VCs.
That sounds completely nuts (not your comment but the situation, if the conclusion is correct)!
It seems nothing can be done but financializing and levering-up whatever assets there are - exactly how Wall Street “solved” it (before it went down and took all “nominators” and “stakers” with them).
What happened to all those tokenomics models? Were all L1’s white-, lite-papers and other papers wrong?
Since this seems to be affecting all L1s, I suggest there’s a different, more difficult problem to solve rather than add additional layers of algos and magic on top of the existing ones that don’t seem to work correctly, or were not designed to cope with the direction in which tech and apps are going.