Unqualified Opinions: Edan Yago on CementDAO and Stablecoin Potential
Unqualified Opinions host Ryan Selkis sits down with CementDAO founder Edan Yago to talk about the immense potential of stablecoins.
All right everyone, welcome back. I'm Two Bit Idiot Ryan Selkis here to talk today about all things stablecoins with Edan Yago, who's the founder of CementDAO. Really excited for this conversation. I think there's quite a bit of potential for Stablecoins in general. They bring a ton of liquidity to the crypto markets. Historically, they've driven quite a bit of growth, regardless of what you think of Tether, it was probably one of those profound innovations and and most important innovations for crypto markets, particularly given some of the regulatory uncertainty over the last few years.
Now we've got a wide variety of options beyond just USDT and Tether. Edan, would love to dig in to why exactly you're trying to create, basically, a stablecoin-of-stablecoins and and why it's so important to create better interoperability between these assets. Before we dig in, why don't you quickly introduce yourself? Obviously, you and I have known each other for years, you've been around the block in crypto. Tell us a little bit more about your background, how you got to work on CementDAO, and why your role on a stablecoin infrastructure these days.
Thanks very much Ryan. Great to have another chance to check with you. Like you say, I've been in crypto for a while. My background is in neuroscience and I, up until 2011 I was involved in entrepreneurship on the biotech side. I was involved with two biotech companies. In 2011 because the work I was doing was working with neural networks and trying to use machine learning to identify better ways of identifying different diseases using machine naming diagnostics, I was reading a lot of network papers, papers in the networking space and so randomly I came across the Satoshi white paper and I was hooked immediately.
But even before I fully digested the white paper I was sending out emails to all of my friends, which were promptly ignored, that they have to get into bitcoin. This is going to be the biggest thing that our generation has ever seen.
And it's a bit unusual. Most people I think make a face, their story is, I came across the white paper, I ignored it or I dismissed it initially and then I slowly got into it. That wasn't my experience at all. And I think the reason is I was primed for cryptocurrencies from a young age.
I come from a family of refugees who only survived through their wits and through fact that they managed to stash away some hard currency or jewels. I grew up in South Africa. My family were very politically active there and where the part that government declared some of them to be terrorists. And so I ended up between the ages of 9 and 11 smuggling gold out of South Africa to get money to my family.
So, many, many years later when I came across Bitcoin, to me the utility was obvious. And ever since I've been involved in trying to get cryptocurrencies into the hands of as many people as possible. I'm fascinated by one thing in particular, which is the payment side of cryptocurrency because I think that that's the way that we get people to have mainstream uses to get cryptocurrencies. And so I've been involved in a number of projects over the years around that.
And that's what's ultimately brought me to stablecoins. I feel like stablecoins are the most likely way that the majority of people are going to interact with cryptocurrencies and blockchain. It's the most likely way that people are going to have access to uncensorable money. And it's most likely because people want something which is familiar and which is easy to understand. For mainstream adoption, you need to massively reduce the barriers to entry and the frictions around being able to use something. And there's nothing less frictionful than just doing what you've always done, using dollars using euros, using yen.
Can you walk through the history of stablecoins and the different economic models? It's one thing to say that you're going to create a decentralized dollar reserved or kind of fixed price cryptocurrency. It's quite another to pull that off because if it is dollar reserved or some fiat currency reserved, then that means that you have those reserves on hand somewhere. Right? And so it's touching the legacy financial system in some way.
If you're trying to do it algorithmically or strictly via code, you introduce, you know, black swan risks, if you get any of your security assumptions off. If you're thinking about creating a synthetic basket or thinking about a senior in shares model where you're offloading risk on one set of users that are going to absorb that risk and be half of the other users in order to make a return that presents probably a third type of stablecoin project and a way of thinking about the trade offs between decentralization, security, and making sure that these systems function.
So where does CementDAO sit and can you kind of walk through what you view works and what doesn't and what some of the trade offs are that some of these different projects are making, yours included?
Yeah. So, how to create something which is dollar denominated or euro denominated or denominated in any way to something which is off chain is a very difficult problem. And like you say this, whatever method you choose, you're going to be generating some degree of risk, risk of releasing the pig, a risk of centralization, risk of regulatory involvement, which removes the uncensorable aspect of what you're trying to do or all of the above.
And so when you're using a token, which isn't the native token of a chain, you're dealing in a world of compromises, you're dealing in a world of imperfect. And then the question becomes, "All right, so how do you manage those risks, and beyond the risks, how do you manage the fragmentation that comes with a world where you can have multiple different tokens, which are all being created, and all being issued, trying to represent the same thing?"
So what we're doing with CementDAO is we're tackling those two problems. Right now, we are seeing a huge number of different types of assets being tokenized in various different blockchains, right? So the most obvious is the US dollar and all of the big stablecoins, and all of the biggest stablecoins are using the dollar. In addition to that, there's euro, there's other currencies. And in addition to them, there's gold and silver and petroleum and even less commoditized things like IBM shares or the shares of different companies, public or not, and even derivatives.
And so for each of these different things, you have multiple different issuers and each of these different issuances have their own risks. So with CementDAO what we're building is a platform which is designed to work across chains, allow all of these different representations to be standardized.
In other words, you have multiple different issuers, but they're all interoperable for one for the other. So if we have DX Exchange, and eToroX exchange, and a broker in India, and a broker in Hong Kong, and a broker in the United States for various regulatory reasons or preventative reasons, they're all issuing tokenized versions of Tesla shares.
You actually don't want there to be six, seven, twenty different tokens of Tesla shares, which all trade against each other and fluctuates and it's not clear which one is the business share. What you want is you want there to one layer, which is the Tesla share. And so what CementDAO does is it provides a protocol which combines these different issuances, allows there to be decentralization by having multiple different issuers, but at the same time makes them fungible for each of these different tokens. And also protects the holders, or allows the holder to be protected from the risk of one of the holders growing, defaulting effectively on the issuance that they've created. So-
But doesn't that suggest though that you're always going to have some slippage in value? Right? So if you're basically creating an interoperable exchange of stablecoins and there's any miss pricing from the underlying stablecoins that are components of this index, then the user is essentially paying something akin to an interchange fee that they would use in traditional payment technologies. Right?
Because there was a 50 basis points spread between two CementDAO components, you guys might be able to make that market and allow for interoperability, but it's not necessarily saving fees relative to legacy system.
Is that even a goal at this point? Or do you just view stablecoins as something that people are going to use? And so a fee that's in the 25 to, you know, 100 basis point range is going to be something that people accept in the near to medium term?
Right. So that's an excellent question and I think you're right to put your finger on the word interchange. And I think an analogy here is worthwhile because you know, while what we're doing in crypto is extremely innovative, it's not like similar the things haven't happened before.
So it was a new network technology that was invented, which led to tokenization of money. And that new network technology was invented in the 1950s or achieved from before, but started coming up here in the '40s and '50s and it was called the telephone. And as different stores and banks started to get hooked up to the telephones, somebody came up with this idea of tokenizing money and creating stablecoins.
The way they tokenized it was in the form of plastic or metal cards, which they called bank cards or credit cards. And so you had Wells Fargo cards and Wells Fargo currency that was attached to those cards and Bank of America cards. And the Bank of America is stablecoin that was attached to those cards.
And if you were a user and you are a customer of Wells Fargo, you could get the Wells Fargo credit card and you could spend the Wells Fargo tokenized currency, but only at merchants that accepted the Wells Fargo currency. This was a miss, and in fact everyone became dissatisfied with it over the course of the next 10 years until what they created was the world's first interchange in the way that I think you're describing it, which eventually got into its own company and became Visa.
And what that allowed is if you had a Wells Fargo card, you could go spend it at any merchant and that merchant didn't need to be a customer of Wells Fargo. They could be a customer of any one of the different banks. Today we have a similar situation, right?
Every one of the major exchanges are now issuing their own stablecoin. Their customers can get…into this tokenized…through their exchange. And if you're a customer of Coinbase, you can get USDC. But if you want to spend that or trade it on a different exchange, then that exchange either has to list that token and so they're listing more and more tokens, or you need to do the work yourself of swamping it for whatever the native stablecoin of that exchange is.
And so what CementDAO first and foremost does is it provides that type of interchange. It allows USDC to be sent to an address which wants your USDC and to be in the very act of being transacted as an atomic transaction be converted to USDC, and neither of the participants even need to know that this happened. They're just transacting orders.
And so there is an interchange fee that needs to be assist for that because there are differences in the prices. Now what's cool about differences in the prices is these differences in the prices exist even today with the banks. So the reason Visa, among other things, has an interchange fees because actually there's risk associated with Bank of America dollars or Wells Fargo dollars. They're not fungible at the level of the bank. So when Wells Fargo look at Bank of America dollars, they don't think of them as fungible for their own, so they assess a fee for taking on the risk of having to handle the credit of another bank.
But to the consumer, this is invisible. What crypto does and what I love about crypto is it makes it explicit. So right now, and that's it, not that you appear at to be a decentralized system.
So what our system does is basically allow people to transact dollar value. Anywhere that dollar value is accepted, or euro value, Indian…then there is a small fee associated with that.
And what we think is going to happen is that over time people are going to start to think if of Stablecoins, not as a particular brand but as their brand that they're all aspiring to be, just a dollar, the euro, or the yen, or the gold, and that transaction fee, that interchange, will just become part of the general fee of transacting in the same way that you pay in small amounts of gas when you transact in…stablecoin and the actual fees associated are very, very low. Our system is designed just to maintain the amount of fee that is required in order to bet ends up with different structuration in the risks.
Walk me through the implementation of something like CementDAO. Merchants on one hand accepts a USDT. Some of the international exchanges have Tether pretty strongly integrated into their systems. If you were to support USDT then at the merchant level where previously they're just using USDC, where you want to support USDC as someone tried to actually send funds to an international exchange, where does CementDAO fit into that? Who Do you need to onboard in order for that market to be matched successfully?
Right. So I'll give you two examples of the way we're being onboard. So first example I'll gave you is exchangers which are still at the very heart of our…industry, right? Because most of the transactions have to do with trading or speculation and so the exchanges, they have a problem, they are listing more and more stablecoins and it's becoming less and less manageable because each new stablecoin that they add is something that they need to maintain. It reduces the user experience by increasing this complexity and making users have to figure out which stablecoin they're going to use. The worst thing it does is it fragments their order books. So instead of having nice deep order books of USD to…or USD to BTC, they now have different types of USD packs to BDC and USDC to BDC and USCT to BDC.
And so the BTC order book becomes shallower, the liquidity becomes lessened and the spreads become wider. And so a number of exchanges are working with us now to basically reintegrate the stablecoins under one ticker, which would be the dollar ticker or the euro ticker. And some really pioneering work was actually done by two Asian exchanges who attempted to do this themselves without sort of a broad protocol.
One was Huobi and the other one was Gate. And the reason I think it started in nature is because so much activity in stablecoins is being done out of Asia. And so for example, what Huobi did is they created the sticker HUSD and you could send a whole bunch of different stablecoins to the exchange, but what you would actually see appearing under your user is your balance in HUSD, not in USDC or normal packs. And so they basically graded the dollar on their exchange. And so exchanges are doing the same thing. Our protocol, the Cement protocol is helping them do that.
Another example, it's a merchant, right? So-
So Huobi and Gate are two of the first customers or partners?
No, no. Huobi and Gate have then created this system for themselves. Huobi have since had a lot of issues with it. It's very, very difficult to manage a vertical like this if it's not a protocol.
So basically they were managing it as a book and they took on all of that risk themselves and there was no way for them to balance inflows and outflows, which is why interchange comes in.
It's a shared resource, a commons between different merchants and exchanges and people for using the stablecoins. And so what they're doing now is they're launching their own stablecoin, which is likely to be part of a CementDAO mix. And so in that case, with an exchange...
The exchange basically just integrates with our smart contract and now they can start serving up the positive addresses through their users, which allow any user to send any one of the stablecoins that are in the Cement system through that address and we can also convert into whatever that exchange wants or into a universal ticker, which people make seriously, but they've sent, you can put whatever they want. Same thing happens with the merchant.
But so who is the most important person or party to buy into the system as you work on these integrations? Is it the stablecoin issuer or is it the end user that needs to do the work that will Huobi and Gate had tried to do themselves by managing their own book?
Yeah. So the most important sort of type of user of the system is the receiver. The type of user who says, "Look, I want to be able to receive a whole bunch of different stablecoins and consolidate them and manage it."
And so that would be exchanges. That would be merchants or payments companies and right now, a lot of…has been talking to exchanges and through dex who are using stablecoins, especially in the DVI space.
Got it. So let's walk through how this is going to be decentralized because you guys are doing the lion's share of the work right now. The name of the project is CementDAO. So I imagine that the goal is to disintermediate yourselves from some of this decision making.
So first of all, where are you in the life cycle of this project? So what's the roadmap and kind of roll out plan for the one…and beyond as as you work towards actually creating a basket of stablecoins versus maybe an incremental approach and taking one at a time.
So our system is currently live on…and has also been launched on the test net of Rootstock. Part of the goal there is to basically allow you to perform these types of transactions on any chain. And so we started with…and Rootstock.
We're in the process now of talking to and helping the first few partners integrate into the system. Now the reason it's called a DAO is because ultimately we aren't going to make any decisions. So if the system is going to launch de-centralized, when it launches on main net, and there's a token which is going to be used to help de-centralize the system, it's a governance token. We'll call it the bull's token.
The bull's token is used to allow the community to choose which they which stablecoins are allowed in the system, what allocations they receive to decide on any differential pricing or fees that need to be changed with regards to them and most importantly to remove from the system tokens which are no longer appropriate or potentially risky.
And so what we're doing is we're working with those partners who are integrating with the system now and we're going to be looking to allow their communities to have both token and to participate in the governance process. I think one of the coolest things that we're doing in terms of the governance process is there's a lot of DAOs out there. It's an extremely interesting space. I think one of the most interesting things that is happening in the blockchain space is this idea of creating communities that can govern themselves in a nonhierarchical way.
But what we're doing is we're working to try and build a system which is extremely robust against various types of attacks and which is going to be able to make extremely good decisions because you need to be able to make very good decisions about which tokens you're allowing to this type of system.
And so our system is not built on simple staking or voting. It has... The system is driven by futarchy, which is a new something that we and a few other projects or working on and I think is going to be introduced over the course of the next year into a number of DAOs. And the idea is that you allow prediction markets to become decision markets.
In other words, prediction markets can predict the best outcome for a DAO. And if you construct the system where the prediction market sits at it's core, whatever the prediction market predicts is going to be the best outcome the system will automatically choose. So it becomes a very market driven process where people can participate in predicting which stablecoins are going to be the the most stable for example. And whichever ones they predict are the most stable, the system will automatically adopt. So there's actually no human being doing the adoption. It's the system itself, the smart contract itself.
And when do you anticipate this is going to go live on main net?
So I don't want to give out a date. We are basically ready. The thing is we want to make sure that when we launch it, it launches decentralized. And so a lot of the work that we're doing now is trying to make sure that we can disenfranchise ourselves and have other partners and parties involved in the project from day one. And when that's ready then we'll launch.
Can you walk through the process or kind of the different stakeholders in the system and how they're rewarded? So basically the maintainers or primary governors of the system are going to be absorbing the risk associated with any instability in the underlying components? Is that right? And essentially earning the rewards and fees that would come from the deposits that are components of the CementDAO currency?
How many of those stake holders do you need around the table to get comfortable with launching on the one hand, and then how big is that pool of funding? Because if you are a stablecoin issuer, there are a number of things that you can do to entice people to use your stablecoin and actually deposit funds with you because you know that you're going to be able to...
You could offer a discount for instance because you know that you're going to be able to reinvest the underlying and generate some type of yield on it even though the interest rates are obscenely low right now. But with you guys, that's kind of abstracted away, it seems to a certain extent because you're a stablecoin, a basket of stablecoins. So the issuers are still the ones that are collecting the underlying dollar or euro or again, collateral now.
Yes. So there's a number of questions there. I'll try and answer them. So first of all, right now most of the stablecoins, and certainly the most popular ones are backed by reserves of the same currency in a bank account somewhere. And so one of the nice things about our system is it allows multiple different-
Or at least we think so because there's no audits of any of the issuers just yet.
Yes. They're backed by a claim on. So, actually look, a number of the issues have been providing audits, but I don't think that really matters, right? The crux of the matter is that there's a central party which is responsible for guaranteeing that, issuing, creating, and also managing those tokens. And so one of the nice things about our system is it allows you to have multiple different issuers like this within the system which creates this basket, as you called, we call it the mix.
And users can also hold abstract…So they can take a centralized token deposit into the system and get out a abstracted USD token, which is more de-centralized. Now how do you deal with the risk because a user who's holding a token like that, it's one of the underlying tokens now loses value because it collapses because their accounts are seized by the New York district attorney.
How do you deal with it? So the way we deal with that is twofold. First, there's the ability to be a risk holder in the system. We actually have tokens, which we call the risk token, and you can deposit stable points into the system and get back risk tokens. These risk tokens earn a yield, but in return you take on the risk from someone else, right? Somebody who doesn't want to hold any risks, that one of the issuers might collapse or might lose value.
Usually they don't go down to zero, they lose a haircut, 10%, 20% so they'd end up with 80 cents on the dollar that they put in. That's the potential risks that they're taking.
If that fails, then the Bose token holders who are kind of like the last resort in the system in the same way that Maker and the Maker DAO system can create new Maker Tokens and use them to recapitalize the system. In our system if the risk token doesn't absorb enough of the risks, then the Bose token holders are diluted in order to recapitalize the system.
Now you asked about who are the different stakeholders. So the stakeholders who are involved in governance are the Bose token holders and then Bose token holders can be involved in governance in two ways.
The first is they can stake with curation agents and the curation agents, their goal is to white list which stablecoins are allowed into the system. If they do a good job, they get rewarded by the system. So they're sort of the first line of defense, but they actually, even if a token gets white listed, it's actually not in the system because the next step is the futarchy system or the prediction markers and there what the system is actually doing is it's using the fact that Bose can be used for proxy of the value of the system because all of the fees that are collected by the system are used to buy and burdened Bose.
Basically what the prediction market is doing on an ongoing basis is it saying, "All right, let's say we introduce change into the system." They would create one of two scenarios, right? This change is accepted or the change is not accepted. Which of these two scenarios is predicted to have the highest price of the dollar, right? The dollar stablecoin, to the book. In other words, which one will create the higher price for the Bose and whichever change or maybe the status quo is expected to create the higher price for the Bose is automatically what the system adopts so that the primary way in which you can actively participate in the governance is by…in these markets with the Bose tokens.
Got it. Interesting. Well, the one thing that always comes to mind with the stablecoin markets is just how much money the issuers can actually make. Right? So it seems like there's a ton of default risk, there's seizure risk, there's regulatory risk, when you think about things like Tether. There are usability risks when you think about some of the more heavily regulated digital dollars, right? The USBC and Gemini dollar come to mind. Paxos as well.
And then on top of that, interest rates are low. And then to top it all off, you're talking about creating a system that bridges all of these together.
It just doesn't seem like the market is that large or that liquid just yet. And there's much more downside than upside when it comes to earning fees. What do you think some of the catalysts are that would make this basket base approach to managing stablecoins more economically interesting for people that wanted to get involved in CementDAO as a curator for instance?
Because it seems like right now if you're going to look to provide similar services, you can make a hell of a lot more money if you are providing staking as a service, or you're participating in any of the active governance, or curation of some of these systems that have much larger yields embedded in their programmatic inflation of the underlying asset.
And those aren't stable assets, but it doesn't matter if you're the curator, you can see quite a bit of cash flow from that. What has to change for this to become more compelling? You know, market wide and internationally?
Right. So I think that there's actually... Even now stablecoins are extremely compelling for a number of reasons. The amount of money that you can end up making from a stablecoin is very, very substantial. So the different stablecoins and different ways of generating yield for their communities or their owners. If you are Tether, you're sitting on $4 billion, which is you know, just passively sitting and account generating some yield for you. Probably around 2.5%.
2.5% of $4 billion is actually quite a lot of money given that you're actually not involved in doing that much. And there are also strategic benefits, right? So all of the other exchanges that use USDC are effectively banked by their competitor Coinbase. So Coinbase becomes the bank to a whole set of exchanges which effectively introduces them into their ecosystem.
That's sort of like on the issuance side. In terms of the extra activity that is happening in stablecoins, the most traded coin on any given days, sometimes Bitcoin and sometimes it's Tether, in terms of the volume of trade that is happening.
And the stablecoin space is the fastest growing space right now in the cryptocurrency space. So projects, for example, like Maker, you know there the MKR token, which is not DAO, is worth depending on the days somewhere, you are know it has a market cap of between a half a billion and $700 million. And I think the reason for that is that people believe that stablecoins are going to be one of, if not the biggest part in terms of the trade payment and store value activity that the vast majority of users have.
Certainly the excitement around…tends to show that. And then if you look at DeFi, DeFi is totally driven by stablecoins. So compound Maker, dYdX, they all have most activity and the most interest earned on these various stablecoins.
So I suspect that both from the ability to drive yield through the risk tokens and the even small interchange fees that will be driven by a large number of transactions in the stablecoin space, Cement will actually end up being a very interesting focus of activity.
And there'll be a large number of parties who are there either for strategic reasons and want to participate either for strategic reasons or simply because they're interested in DeFi, they're interested in finding new and interesting ways of driving yield. Especially in a way which is predictable, which you can sort of do a discount cashflow analysis, which is usually not possible to do with most staking tokens.
So it's a new way of being able to participate in crypto and especially to be able to take a view on stablecoins. All Right? There's no way you can invest in the USDC. There's no way you can invest in the USDC. But by being involved in the Cement system, you can effectively take a view on the entire stablecoin space as a whole.
Well, time will tell, but certainly be on the lookout for the main net launch and some of the other key milestones on the roadmap. Edan, this is, I'd say a boring but important part of market infrastructure for crypto.
Maybe not in your project, but stablecoins in general. The prices don't go up and down. At least hopefully they don't.
But certainly there's still quite a bit of work to do to connect all the plumbing, even for this boring type of assets. So appreciate you shedding a little bit more light on it and taking the time today.
We'll do it again soon.
Thank you for tolerating the more boring side of crypto, Ryan.
You know what? I said boring but important. So important. All right everybody, until next time, thank you for joining. We'll see you again real soon. Peace.