Episode 16
Raft: The case for LSD-backed stablecoins

Our guest today is Richard, Head of Product at Raft. Raft is a governance-minimized protocol that allows users to mint a novel stablecoin, R, backed by liquid staked ETH as collateral.

In this conversation, we explore the current state of the stablecoin landscape, what differentiates R from other stablecoins, the potential use cases for R, and how the protocol maintains peg stability.


Hey everyone, welcome back to Degen Responsibly. I'm your host David. I lead research here at Exponential. Degen Responsibly is a forum where we invite protocol builders to talk about their innovations, what makes their protocols unique, and how they manage and mitigate risk. Today we're excited to have on Raft Finance to talk about all things stablecoins and their innovative stablecoin. Hey Richard, excited to have you on DR to talk about your protocol and what you guys are building at Raft. Before we jump into the details of Raft and your stablecoin, we typically ask our guests how they first got started in crypto and what led your journey to Raft. Yeah sure, so I was saying before, I think there's a bit of an audio issue, but so my name is Richard, based in London and I spent sort of a good part of 10 years in banking in a derivative space looking at interest rate swaps and credit derivative swaps. And then sort of within banking, you know, I saw the financial crisis and I was actually on the tail end of that. And, you know, I kind of appreciated the transparency and the need for transparency in the financial system, given that you had so much of this like, you know, pent up derivatives speculation in the background that sort of like regulators or anybody had, nobody had like sort of any privy to. So I had appreciation of, you know, economics and banking transparency. And when I sort of discovered sort of crypto in 2017, it just spoke to me more and I was sort of going down the rabbit hole of like Bitcoin and Ethereum, et cetera. And yeah, that's sort of what got me sort of blue pilled, I guess, is perhaps the right one. Or red, I never remember which one. And then, yeah, so it's been since 2017, it spoke to me about sort of the decentralization of the new financial rails, peer to peer sort of markets, et cetera. And it was only around 2021, I started contributing to DAOs, like EIDL Finance, starting to get to know and understand the mechanics of operating a DAO and governance and all that kind of stuff. And then, yeah, I joined the Tempest team who built Raft in January last year. And just to help them with the whole vision of like building a better financial world, making, growing, and the adoption of DeFi just appealed to me. And I think, you know, it's been a great team. There's 21 of us that are, you know, heads down and sort of banging the drum and trying to build some cool stuff in the space. Nice. Yeah, I think we're all pretty similar backgrounds in TradFi and getting that, being red-pilled or blue-pilled into crypto, seeing the whole decentralized ecosystem emerging. Yeah, so I think before we jump in into Raft specifically, just wanted to get your thoughts on where you see the current state of the stablecoin landscape and what are some of the main challenges and opportunities that you see for stablecoins in general? Yeah, sure. So I guess stablecoins is sort of commonly known as like the product market fit or the product that, you know, cryptos help solve, right? You know, I think we've seen a huge amount of adoption with fiat-backed stablecoins like USDT and USDC. And then you have, you know, crypto-backed stablecoins like DAI, which has also seen good success. But still, the fiat-backed stablecoins, you know, still sort of overshadow crypto-backed stablecoins. And there's a couple of reasons why. I think mainly it's like the sort of capital efficiency. So, you know, you could put one dollar of fiat and it's backed by one dollar of USDC or USDT as far as we know, and that's reported. But that's the thing. It's reported and it's, you know, we are then again to like a trusted system with, you know, lack of transparency as much as they try to, you know, provide reports. It's still a little bit of, there could be some jiggery-pokery there. And so, you know, the stablecoin peaked around $180 billion. It's down to like $125 billion and it's sort of stabilizing. But I think, you know, with the stuff that happened with Silicon Valley Bank and USDC de-pegging, I think there was a, those are moments of appreciation of like, of a decentralized stablecoin. And I think, you know, that's one of the sort of, almost the zeitgeists that occur to give people a bit of a wake-up pill. I think the challenges that crypto-backed stablecoins have is perhaps, you know, capital efficiency versus fiat-backed. So on one side, you get a dollar for every dollar on a fiat-backed, but on a crypto-backed, you know, currency like R, you know, it's one to, you know, 1.2. So you have to put $1.2 to get $1 of R as a minimum, you know, and that's sort of a very sort of a slightly, slightly on the edge of high risk there. So there's a capital efficiency difference, which I think drives the appeal of having a fiat-backed stablecoin. But then I think, you know, it's that premium of having the ability to sleep at night, knowing that you're not at the peril of any centralized bank going down or any centralized entity going down, which is like what you kind of pay in that capital efficiency. We've seen sort of, you know, funky stuff happen with algorithmic stablecoins, which have, you know, come and gone. And I think, you know, of course, there's this still problem of capital efficiency and algorithmic stablecoins seem to be the way to solve that, but it's not that easy. And I don't think it'll ever be, because there's a lot of still, a lot of trust, and there's a gap there that can be created. So yeah, I think that's kind of where we are, you know, and I think with Raft and R, which we can touch on more, it's just, you know, there's now a shift from native ETH or sort of idle ETH into productive ETH, which you could call liquid staking tokens that we can talk about more, which is where Raft is positioned. Yeah, yeah, all these stablecoins have to sort of optimize for two sides of the stablecoin trilemma. And yeah, with Raft, you guys are crypto backed, so more on the decentralization and stability sides. But yeah, what would you say makes Raft different from other stablecoin protocols? I think you guys took a lot of innovations from, or just ideas from liquidity and applied it to Raft with some unique spins. So yeah, could you talk a little bit about that and your R stablecoin? Yeah, sure. So I guess the thesis is there is, or the thesis was and still is, is like, you know, liquid staking tokens are going to be a preferred asset for people to hold it. And in the future, right now, we're, you know, you have about 20% of ETH that is staked. And then again, there's a small amount portion of that, that's liquid staking tokens as well. But that's been growing. And, and ever since, you know, the merge even before, and, and then the Chappella upgrade as well, which enabled withdrawals. And so I think this, this is a kind of world where we're seeing, you know, it makes sense to hold staked ETH more and more, or something that gives you yield in the background. So today, staked ETH can give you around 4%, you know, just by just by doing nothing, right, just holding it in your wallet. And that's it. And then there's an opportunity cost there of holding ETH. And so Raft allows users to use their liquid staking tokens, like staked ETH or Rocketpool ETH, to borrow R. And R is a USD peg stablecoin that sort of they can use in many different places. And all the while keeping their staking rewards accumulating in the background, while it's held within Raft. As you, as you kind of mentioned, you know, taken some, some sort of inspiration from existing protocols out there. But with an improvement that I think is where the market's heading. You know, to borrow R, it's a one time borrowing fee, it's pretty low at 0.5% at the moment. And then there's 120% collateralization ratio as a minimum. And that goes to the whole point of capital efficiency, which is still relatively quite low. Also, with Raft, we have the ability to have leverage. And I think, you know, that's something that we can dive into. But we launched something a couple of weeks ago called One Step Leverage, which allows users to get leveraged yields, or leveraged staked ETH, leveraged staked yields on their staked ETH. And so I could dive into more than that. But like, you know, for example, if a user wants to have two, two and a half percent, you know, leverage, rather than getting, you know, 5% or 4% stake at 10%, which I think is, you know, another another tool to allow people to express their views in the market. Yeah, that's super interesting. You know, with these staked ETH, there's a lot of these protocols trying to get that leverage yield on it, like with I think one of them is Index Co-op has a leveraged product for staked ETH. You guys are building one or have one. Yeah, what I guess what are some of the benefits of your leverage mechanism relative to some of the other protocols in the market? Yeah, so I haven't used all the, you know, all the various products out there. I've used, I've used Raft. I think, you know, the one thing that we focus on in Raft, and what we try to make clear is that it's more capital efficient, like it's, it's cheaper for rather than in today's or yesterday's age, where you needed to loop your or fold your transactions on chain. To get that leverage exposure, you can do it in a couple of clicks with Raft. And so in yesterday's world, you needed to deposit your staked ETH, borrow R, swap R in for staked ETH on a DEX, then go and deposit that staked ETH to borrow more R. And rather than doing that, you can just have a, you know, select your leverage, your desired leverage, and then, you know, a couple clicks, and it's done. So yeah, I mean, of course, with that, there is sort of a higher, slightly higher risk, you have a bit of a liquidation risk there. But I think, you know, for intensive purposes, if, again, it's there, it's a tool for others to use. And I think we've been seeing good traction so far, if they have a view on the market, and they want to have a, take a position, and they, you know, OSL is the thing they can use. Gotcha. Yeah, so simplifying the user experience, instead of having to manually fold it, you offer this one click leverage mechanism, which is really cool. In terms of the business model, you mentioned the borrow fee earlier, but are there any other fees that the protocol accrues? And where is this being, what are these funds being used for? Yeah, so as you mentioned, the borrowing fee goes to the protocol. At the moment, it's not being used for now. But in the future, it'd be sort of down to the governance to determine where that's used and utilized. There's also a flash mint fee that, you know, is, again, sent to the treasury, and that's from the one step leverage feature. And then at the same time, yeah, I think those are the two main sort of ways the protocol makes money. And also, to say that, you know, liquidation, liquidations are also permissionless. So anybody can liquidate. And within liquidation, there's also a reward for the liquidator. And so, you know, there could be a world where the DAO operates its own liquidation operation, if that's something that they decided to do. Curious a little bit about the liquidation mechanism. I know you guys decided not to implement the stability pool idea from liquidity. What was some sort of thought process behind that? Yeah, I think just having an internal stability pool, it seems a bit internally circular, like self referencing, you know, and then there's not really much benefit in terms of, you know, it kind of constrains where the liquidations can be made, as opposed to having it more open in the market. With our, and the flash, the ability to flash mint, it means that any liquidator could tap into a liquidation, like a liquidity venue or an AMM, and, you know, participate in a liquidation. I think that's more of a more decentralized way and robust way of doing it without having to, you know, have like a whole bunch of incentives and emissions and in some sorts of stability pool. So that's the sort of like, that's where we landed on that. And I think it's probably a time to tell, but I think it'd be a good decision that's been made. And what do you see as sort of your main growth drivers? And what challenges are you seeing as you try to increase adoption of R in the market? I saw you guys have partnered with Aura Balancer for your stablecoin pools. Just also curious, what was the decision to go to Aura versus, say, like the Curve Combex? Yeah, sure. So, I mean, we had an existing relationship with Balancer and Aura, and we love what the guys are doing over there. So it has seemed like a natural place. They're very supportive in sort of getting Raft and getting R enabled. So that was one of the things. Also, they're a pretty good shop, right? They've been getting quite a lot of traction in their gauges and the liquidity that's been ticking up. So there's a good set of synergies there. In terms of the growth drivers and challenges, I think, as I mentioned, the sort of liquid stake and derivatives space is growing. Of course, at the moment, it's dominated by staked ETH taking a large share of the market. And that's kind of why we decided to deploy with staked ETH first. But I think as time goes on, that would get more and more competitive, and the pie would look a bit more distributed. And we would look to support those liquid staking tokens as and when they become more mature. And for that, they need two Oracle feeds, for example, as a minimum, for us to be able to integrate them. And then the liquidity and activity needs to be right as well. And I think also this LSD fire, I feel like, provides almost a utility use case for LSDs. So it's all well and good holding LSDs, getting your passive 5% in the background. But some may opt or want to do more in certain environments. And if your liquid staking token is not supported by something like Raft, then they could seem unfavorable to another liquid staking token. So you could have this sort of like LSD fire, or LSD kind of wars type, you know, model, or, you know, there will be like a more of a an appeal for new players on the market to partner with, you know, protocols or DAOs like Raft. So I think that's kind of where perhaps the market will, you know, trend to. I think there's always been a need for sustainable yield within crypto. And I think we have it now. So it's just the case of, you know, doing smart things around that yield. whether people want to fix the yield, take speculative positions on the yield, on both sides, the fixed and the float, or, you know, hedge the price movement or the price delta of staked ETH and just get the yield at a sacrifice or a premium or letting go of some of that yield. So there's a few things that, you know, smart things that people will come up with. And I think the one other thing I would say is, like, right now, the crypto yields are competing with real world asset yields, or T-bills or whatever you want to call it, right? The yields in the traditional finance space. So at the moment, you know, that's highly competitive. I guess the risk that people perceive risk that people might take in crypto should be reward, should have higher rewards. And so therefore, the base sort of yield of crypto needs to sort of be a lot higher than what it is now to make it appealing to come over to crypto. But as we're in sort of a high rate environment today, as those yields sort of maybe they'll maybe they've peaked, maybe they've not, but as those yields start to come down, there'll be a shift in terms of where the yield is, and more of an interest in something like staked ETH and LSD. So I think that's sort of like some potential growth drivers that we might see in the coming, you know, 6 to 12 months. Yeah, it's interesting that you say, you see maybe more of the yields coming down and more interest keeps accruing towards the LSD space, given the base rate that ETH pays for stakers. And you mentioned earlier how, you know, right now, Raft only accepts Steeth and Rocketpool ETH. What's sort of the process for adding new collateral options to Raft? Is that currently a team decision? And are there plans to have that decentralized to the community? Yeah, that's right. So at the moment, I mean, we've put a discussion out there a few weeks back to the community, asking them what sort of collateral types they would like to see on Raft. And you know, we make an informed decision on that, plus the market, you know, like, where is their demand? What can help Raft grow in terms of adoption, liquidity, etc? And so at the moment, yeah, that's kind of discretionary with the team. But, you know, in the future, that would be a governance and a DAO decision to take, which, you know, we're excited to see come to fruition. Yeah. And I know you guys described the protocol as governance minimized. So just to have an understanding, what other sort of parameters would governance be able to change or upgrade? Yes. Besides, yeah. Yeah. So governance minimized is to say, you know, there's the core part of the contracts are immutable, they are unchangeable. And it's only sort of the various parameters that, you know, governance can change. And those would be, for example, the borrowing spread, which feeds into the borrowing fee. And that can be between sort of 0% to 1%. So there's a hard cap there to where that can go. And that's just to ensure that there can't be any crazy abuse to that parameter. There's no need for it to go higher than that. Another one is the redemption spread. So that, again, there's a range there between 0.25 and 100%, 100% meaning there shouldn't be any redemptions at all, because it just wouldn't be feasible. And then you have a liquidation reward rate, redistribution reward weight, and flash mint rate. So again, they're both, all those have sort of hard caps. And so, you know, there's reasonable ground to play on. And again, you know, some of these stuff is put in place to avoid any governance attacks or there to be some skepticism that, you know, there could be an abuse of parameter changes. Because ultimately, what we want to do is create a completely decentralized, stable coin, which people can sleep at night, knowing that it's not, you know, it's going to be safe and it's going to be, you know, all there tomorrow. And so that's why we wanted governance to have just a limited amount of scope in terms of what it can control and change. Moving on to the RSK Bitcoin itself. How do you maintain the peg to the dollar? Yeah, what sort of mechanisms do you have to maintain that stability? Yeah, sure. So I guess the main two things is redemption. So redemption is something that's been used in the crypto space before. So basically what that means is that, you know, anybody can redeem R if it's trading below. So it could be profitable if it's trading below a certain amount. So, for example, if the fee for redemption, say, for example, is 1.5%, that means that if R is trading below 0.985, then there's, you know, you have to consider gas as well. Then there's an incentive somebody to buy R in the market. So swap it for, you know, Dai or what have you, and then redeem it on the raft protocol for $1. So you can redeem your R or your collateral at the value of $1. So then there could be an incentive for people to reduce the amount of supply of R and creating that more of a balance and restoring the peg. So there's one sort of smart mechanism, which I think is quite nice and elegant. The other thing is like a sort of almost like an invisible hard cap, but because of the collateralization ratio is 120%, if R is trading over $1.20, which is quite a big deviation, but theoretically and practically, actually, people can deposit state ETH, generate R or borrow R and sell in the market for more, you know, and get that difference because they'll buy it for $1 and sell it for $1.20, basically. So those are two sort of like core mechanisms. And then you've got something, we have like a, we'll have a liquidity committee that will, you know, try to create balances or keep, monitor the pools and ensure that there's the right balance that's made so that there's a sort of equilibrium of like $1. So those are the kind of main mechanisms that we have in place. And are there any mechanisms in case a user's vault falls below the 100% collateral ratio? Yeah, so I guess, so two things, right? So if one, if the collateralization ratio goes below 120%, then they should be liquidated by anybody who is able to spin up and trigger the contract and call the event and liquidate. And there's a liquidation reward for them and they get paid. In the event that that doesn't happen, in the unlikely event that doesn't happen, there's something called redistributions that we have, where if a position falls below 100%, that could be redistributed across the pool. So it's more of a last line of defense because it's, you know, we'll create it such that liquidations will be profitable. And so there'll be an incentive there for this not to happen. But if it did happen, basically, there'll be, anybody can redistribute, you can call the redistribution function. And that means that all the sort of debt and collateral will be distributed across all the positions or all the open positions within Raft, almost like socializing the kind of bad debt. But again, this is sort of a last line of defense, which I think is a very, very sort of doomsday scenario kind of thing. Yeah. And then when people redeem their R, are they choosing the underlying collateral that they receive? Or is it, do you get like proportion of R-eth and S-eth? No. Yeah. So users can choose between the collateral that they prefer. Okay. As long as there's liquidity in there. Yeah. Are you adding, are you introducing any controls to new collateral as you add them in terms of limits on supply or borrow? Caps? Yeah. So for example, we have some caps on R-eth. So we have like a 20,000 R-eth total collateral cap, and then a max cap of 1000 R-eth per position. Whereas for state-eth, there's no cap. And then, you know, depending on the, Chainlink have like a price deviation that they have. So then there's like a threshold there. And depending on that, that would sort of drive the borrowing fee or the redemption fee. And so there are some differences and we've got it listed in our docs of like, you know, sort of head-to-head state-eth versus R-eth. But yeah, there are some caps and, you know, that's just primarily to keep everything safe, right? We don't want it to be too much concentration risk. Or there's like, you know, insufficient liquidity, or there's a sort of, we start getting into high sort of price impacts or slippage in terms of, you know, if there's a scenario where we need to liquidate. Yeah, for sure. It makes sense. And then, you know, I wanted to talk a little bit about what the use cases are currently for R. You know, I think some of the ones we mentioned are, you know, are leveraging on your state-eth yield. There's some, there's some or pools out there where you can earn yield. I guess, what else would you say are some of the opportunities to use R in DeFi today? Yeah, sure. So I guess, you know, R should be like sort of a store of value, right? So one of the important things about the stablecoin is just being able to, you know, remove volatility or have a place of stability in a volatile, you know, environment. So first and foremost is to keep it stable, which I think is the biggest thing. Then as you, like with money, as I like to consider R being, there's like three things you can do with it. You can save it, which is almost just delayed sort of use. You can invest it and you can spend it. And invest in, there's, you know, I guess what you've kind of pointed out, you can use it within DeFi at the moment or to, you know, get more yield from the pools there. And we'll be seeking more opportunities for people to be able to invest it and get more yield in different areas. Be that, you know, as a collateral type for, you know, some T-bills, for example, or another DeFi protocol with, you know, appealing yields. And then the other thing is to spend it. So we're, you know, we're working on trying to make that as easy as possible and talking to like various on-ramps and off-ramps to make it easy to be able to spend R. You know, I like to think of like there being a world where you can spend R and then in the background your collateralization ratio is improving because your stake yields are, you know, all accruing year on year, day on day. And, you know, you're happy to spend a bit of R for a coffee or something like that. And so, yeah, those are the three sort of like areas or two areas that we're sort of like focusing on at the moment, just trying to improve the distribution of R and where you can use it. Yeah. And what do you see as the, I guess, the biggest obstacle to getting broader adoption on R? Is it adding more collateral options, more yield opportunities or something else? Because I know I like I'm seeing there's a lot more of this LSD-Fi trend with stablecoins. You have like Libra, Prisma, Finance. I think Liquidity is also moving into StakeDeath as a collateral option. So a lot of competition in this space. What would you say is the path for Raft to become the top player? Yeah. I mean, it's a constantly evolving and innovative space. So the path changes. I think, you know, I think that the main thing is distribution, right? So one is Lindy. So like the Lindy effect, like how long you can, you know, the longer you last, the higher the trust goes. And we want to make sure that Raft is, you know, one of the most trusted protocols out there or stablecoin and ours, you know, trusted stablecoin out there. And then it goes down to distribution. I think, you know, like where can people use R more so than others or easier than others? Maybe that is another chain, expanding to another chain where, you know, on that chain, it makes more sense to be able to spend because it's, you know, it's fractions of a cent to transact versus, you know, dollars to transact on Ethereum mainnet. So I think, you know, it's about seeking those opportunities and making those partnerships in order to sustain the growth and the demand of your stablecoin. And yeah, that's probably what I would say. Yeah. So I guess what's next on the roadmap for Raft? I know you just briefly talked about cross-chain expansion. Is that something you guys are looking towards? And any new collateral options that you guys are looking to add as well? Yes. There's a couple of sort of areas that we're exploring. One is sort of chain expansion. You know, which chain does it make sense to go on? Where is the demand? Where is the liquid staking tokens that exist? Is the liquidity deep enough to make it make sense commercially? And then at the same time, we're also thinking about V2 features. You know, what could that look like? You know, perhaps if we were to like rehash it again or perhaps get in feedback from the community, what would we like to see in there? So those are two key things on the horizon. And then in terms of collateral types, you know, it goes down to sort of the community as well as, you know, the state of the liquid staking token environment, right? Like who's getting traction? Do they have at least two oracles to support them? Right now we're integrated with Chainlink and Teller. So, you know, that's almost like a requisite for liquid staking tokens. You know, and then also is the community supportive of that as well? So, yeah, there's a few vectors that we're going down and I think it's going to be exciting next few months just to see which one pops up in the announcements first. Awesome. Well, I'm really excited for all the new developments for Raft. I think you guys are definitely focused on the right things with decentralization and sort of the risk parameters you guys have built around the R stablecoin. Yeah, I think now it's time to open up the call to questions from the community if there are any. All right. It looks like there are no other questions. Well, Richard had a really good time talking to you about Raft and R. Yeah, no, it's been great. Thank you for the invitation. Yeah. All right. Thanks, everyone. Have a good day. Cool. Ciao.