Episode 15
Angle V2: Building more resilient stablecoins

Our guest today is Pablo, Co-founder of Angle. Angle is an over-collateralized, decentralized and capital-efficient stablecoin protocol. It offers full convertibility between stable assets and collateral at oracle value.

In this conversation, we explore the current state of the Euro stablecoin market, the new features implemented in its V2 upgrade (Transmuter), and how Transmuter can better handle black swan events.


Hey everyone, I'm your host, David. I lead research at Exponential and I'm a fellow DeFi degen. Exponential DeFi is a platform where we want to bring more rationality into the space and make it more accessible to all types of investors. And as a responsibility, we invite protocol builders to talk about their innovations, what makes their protocols unique, as well as how they manage and mitigate risk. Today we have Angle as our featured guest. And from the team, we have Pablo speak about the protocol's new v2 upgrade, Transmuter. Before jumping in, I just want to give our guests a little background on how you got started in crypto and DeFi and what led you to start Angle. So I used to, I mean, I came in DeFi during my studies. I'm not the kind of person that has a lot of out of the scope projects. You know, I had the luck to be, to study at Frankfurt University and that's where I took some crypto classes. And at this point, you know, it was late 2020. I got lucky enough to play kind of early with DeFi projects. And there I realized that there was a real potential to improve over what was done in traditional finance and do it in a more efficient way in DeFi. And I also realized that there was a big opportunity risk, like exchange risk for people who were based in Europe, because most of the DeFi was centered around the dollar. And at this point, you know, the dollar was decreasing with respect to the euro. So I was earning a yield in DeFi, but basically losing because the dollar was decreasing. And so I thought, okay, DeFi is great, but it needs more tooling, it needs more primitives. And so this is what led us to start building and ideating around the idea of making a euro stablecoin and more generally of making stablecoin spec to almost anything so that people can enjoy DeFi without having to care about, oh, this is not my home currency I'm going to lose. And that's how we got started on this. Awesome. You know, before diving into more of the core protocol, could you just give kind of a macro background on where the state of the euro stablecoin market is currently and where Engel sits within that? Sure. So the euro stablecoin market is still a super small market. Like total market cap, it's less than 100 million. It used to be bigger at the peak of the bull market, but the market is really, really, really small. Engel has 30 million TVL. It is not the largest euro stablecoin, but it is the stablecoin that's making the most of the volume of euro stablecoin trade. So if you have ever traded with a euro stablecoin on-chain, there is an 80% chance that you dealt with a EG euro, Engel euro stablecoin. So we kind of take pride in this. But you know, our goal is not only to grow Engel within the euro stablecoin market, but to grow the euro stablecoin market as a whole, because there is an underserved opportunity here. And many people are using USD stablecoins from Europe because they still don't know about euro stablecoins and they still know that we're building reliable and resilient alternatives to what can be done in dollars. So I'm not so... the market is small, well, like even like a thousand X smaller than the US USD stablecoin market, but I believe that this is something that should rectify in the future. Yeah, for sure. Just given the size of international countries, there should be a stronger demand for these alternative stablecoin like EG euro. You know, last time we had you on, being responsible, it's been a while and there's not a lot of changes to protocol. Most notably, your recent transmitter upgrade. You talk about sort of the motivations and goals behind this upgrade and where are some of the main differences versus the prior version. So the month of March was the tough one for all stablecoin protocols, I guess. Like Engel got impacted in the Euler hack. And before that, there was the USDCNIPEG and so the USDCNIPEG was really a big learning for us. It showed us that there was no stablecoin protocol or even no stablecoin system that was ready to deal with the failure of one of its underlying banks in the case of centralized stablecoins or to the failure of one of its underlying stablecoins when it comes to decentralized stablecoin protocols. So it led us to think, OK, we are here to revolutionize the world's financial ecosystem, but none of us has an infrastructure that is ready to support this. And so this got us to work on a system that is designed to be as resilient, as robust and that is able to withstand any black swan event like the USDC depeg or anything like that super, super efficiently. And the system, the transmitter system we want to push, you can see it in a way as a price stability module 2.0 for Maker. Maker during the USDC depeg, many people did the trade like USDC to die and then die to GUSD and all their safe reserves got emptied. And now if they had been using the transmitter system, none of it would have happened and they would have been able to properly segregate their exposures, the exposures to the assets that they have in reserves in a pretty efficient way. So yeah, like our transmitter system is an iteration of our price stability module systems like the ones like the one we had with Agile, but also like the ones that were in place for Maker with internal and automated circuit breakers. I could go more into details of it. Yeah, the point on transmitter being able to withstand these black swan events is super interesting. I want to dive into that more specifically. Could we just walk through an example of, you know, let's say AG Euro and one of the underlying Euro stablecoins gets or depegs in that scenario, how would that process run through in transmitter? So like the first thing to take into account is that if one of the assets in your reserves depeg, it's still a bad situation. There is no protocol that can completely eliminate and get rid of the fact that it's bad. You know, if you have a hundred of stablecoins at a hundred reserves, if something happens and your reserves are now worth like 98, well, it's not good. But once this happens, the responsibility of stablecoin protocols is to ensure that not all the reserves are converted into the weakest asset. Usually, you know, I don't know if you follow this 3CRV pull on Curve, usually when there is a stablecoin depeg like USDT or USDC, most of the 3CRV reserves are converted into like the weakest asset. Like last week, there was some FUD on USDT and like 80% of the 3CRV pull was USDT. With the transmitter, what happens is that once an asset depegs, the exposures kind of remain frozen. Like if you have a USDC and USDT backing an Angel USD stablecoin or like EURC and EURT backing AG Euro, if EURC depegs, well, people will not be able to profitably do the trade where they mint AG Euro with EURC and then dump their AG Euro with EURT. Because minting, it happens like if one asset depeg, like you're always minting at the record value. So if EURC is worth 0.8, you bring one EURC, you get 0.8 AG Euro. But burning happens at the worst record value than all of the assets we have in the system. So if you are burning for EURT, but the transmitter sees that in the reserves, it has EURC that has depegged, then you will be burning at the EURC price. Which means that you will not be able to arb the whole system and make it converge to a situation where only its weak assets are in the reserve. So this is one of the main innovations of the system. The other thing is that you can always redeem 1 AG Euro with the transmitter with the third value of what is in the reserve. So if the third value of the reserve is like 0.98, because for every AG Euro situation, there is 0.98 in reserves, then you can redeem 0.98 for each AG Euro in circulation. And this at any time. And this is kind of like a fairness property, it guarantees that, okay, there cannot be any bankruptcy because in all cases, I can redeem the third value of the reserves without affecting the state of the reserves by itself. The bankruptcy situation is like bankruptcy arise when people are all burning, like when it's a first-arrival-first-served situation. In the transmitter system, you don't have this, there is no sequentiality in place and everyone is treated fairly and equally in all circumstances, including the case of the depeg. So it may be a lot, I'm happy to dive more into some of the points. But basically, in case of a depeg, it's still bad for the protocol, but transmitter provides guarantees and incentives for people to bet on the stablecoin returning to its price. And it provides strong, strong guarantees on the fact that exposures will not change towards only the weakest asset in the reserves. Gotcha. Yeah, it's a lot to unpack. I'll try to recap what you said. Basically, during a depeg, the users who burn for the underlying assets, they're penalized across the board for the weakest asset. Is that correct? Yes. Yes. Okay. And then if you redeem for a proportional amount, you're also getting sort of a weighted average of the underlying assets based off of the depeg asset. Exactly. Now you got it. And there is a small penalty factor that can happen during redemptions. So if a collateral ratio is 98%, because there is the start of a depeg, the protocol can apply a penalty factor, meaning that, oh, you should be getting 98 cents for every EUR, but we will be giving you 97 cents. So if you want to exit, you can still exit, but you will exit in a way that is going to re-collateralize the protocol and leaving other H0 holders better off. So this is like a small incentive. If you can bet on the stablecoin, on the assets in the reserve returning back to PEG by just holding H0, and you will even potentially earn money if other people want to dump their H0 because these people would be paying a small penalty. Ah, okay. Yeah, that's super cool. So yeah, in the case of USDC, people who just held would have been re-collateralized by the users who rushed to exit. Yeah, in the case of USDC, if everyone had the transmitter, almost all stablecoin protocols would have been frozen. Those who would have wanted to panic sell, like people who would have wanted to panic sell their DAI, for instance, they would have been able to get back some USDC, some JUSD, but at a value which was inferior to the fair value of the reserves of a maker price stability with you. And by doing this, they would have re-collateralized all DAI holders, or like leftover DAI holders. Gotcha. Yeah. Yeah. Makes sense. Cool. Cool. So I get all this stuff on the protection for Blocks.one events, but are there any other innovations that are also introduced from Transmeter? So yes, there are other inventions. The main one is that the system is kind of automated. Like governance can set in the system target exposures for each asset. You can be like, okay, I want 30% EURT, 40% EURT and like 30% of, I don't know, EURE in my reserves. And so people can mint, burn for any of the assets, but the fees at which you mint and the fees at which you burn are dynamic. And these fees kind of incentivize you, incentivize stakeholders of the protocol to make the reserves of the system converge towards the targeted ratios. So it's kind of an improvement over systems like Maker, where whenever they want to switch the reserves and like, okay, we no longer want USDC and we want GUSD or now we want to invest our GUSD into a Paxos dollar, they have to manually do the trade. Here in our case, the system can be completely governance-free and passive and just have its reserves automatically rebalanced just based on the fees that are set by governance. Okay, that's super cool. So it's always constantly rebalancing based off of a target weight. And then how is this target weight set? Is that by governance? Yes. So the system could be made completely immutable and governance-free. Like you could launch it with target parameters and never change them again. But we were thinking about doing an ETH stablecoin that is backed by several liquid staking derivatives tokens and kind of do it in this ethos, like immutable, have parameters that can hardly change if they are not impossible to change. For AGRO, and this still needs to pass through an ongoing governance approval, but for AGRO, what we want to push for is a system where governance will have the choice on the targets and where governance will be able to choose its desired allocation. And okay, gotcha. And so are there any, I guess, mechanisms to prevent any, like, I guess, governance attacks where you add a bad asset as a collateral or you adversely change the target weights or fees? So no, there are no such mechanisms because, you know, when you are adding a collateral, you are adding it as an ERC20 and it's hard for an automated smart contract to check whether this ERC20 is a legit Euro-denominated asset or whatever legit asset it could be. So... So a corrupt governance could still take advantage of the system. But our idea is the transmitter system, since redemption is always permissionless, it's always active, and there is nothing that can prevent you from redeeming, the transmitter system should only work with governance systems that implement proper time blocks. So if you have a 24-hour time block before any governance approval, and if you see something that is going to rug the protocol, well, you will always be able to redeem your A0 or whatever other stablecoin relies on transmitter system implementation, and you will always be able to redeem in tweaks with no time or volume weighting limitation. Okay, that makes sense. And is the design of transmitter that each of these, whether it's a EUROS stablecoin or a LiquidState ETH stablecoin, each of these, I'm assuming would be isolated to the specific collateral background? Yeah. Each stablecoin system needs to be isolated, like a stablecoin. That's my take. If you're making different protocols, the trust assumptions you have when interacting with one stablecoin shouldn't be the trust assumption you have when you're dealing with a protocol that is doing multiple stablecoins. So one thing is the transmitter system is compatible with AGL smart contracts, but it could work with any other smart contract system, like Maker could use it as a price stability module, Aave could use it for the Ghost stablecoin. That's the first thing. And yeah, if you are making different stablecoins that rely on different transmitter implementations, these must be isolated as well. True. Okay. Cool. Yeah, if Maker had adopted transmitter, then you would have seen all the users flee from the non-USDC stablecoins, right? What about the idle plateral assets and transmitter? Are you? Yeah. No, that's an excellent question. The transmitter supports, even though we don't have any plan in the short term to enforce this or to push for enforcing this, the transmitter supports investing a portion of the collateral reserves in other protocols. Like let's say you have EURC and EURC supported on Aave, the transmitter could invest the EURC on Aave. And it also comes with guarantees, like if Aave gets hacked during the redemption, like the transmitter will not try to give you EURC only, it will try to give you EURC and a EURC being the token you receive when lending on Aave. So investing on other protocols doesn't break the trust assumptions you have when dealing with transmitter redemption. So it's a scalable way for the protocol to make the best of its reserves. That's one thing. The other thing is the transmitter system works with EUR stablecoins, but it can work with any EUR delimited asset. So rather than accepting EURC, we could straight out accept as a collateral, a EURC, or we could accept, I don't know, we could accept tokenized EUR securities within the system. This would be a way for the protocol to earn on its reserves without having to do strategies because the protocol from scratch accepts the underlying token of the strategies as a collateral. I don't know if that makes sense, but yeah, a transmitter is built, and because you cannot be a scalable stablecoin protocol if you don't do so, a transmitter is built to earn money on its reserves. Okay. Gotcha. Yeah, so in the case of where you're investing in Aave, during a redemption, you're sending the user the underlying EUR and the Aave EUR, so yeah, during a redemption for the, say the underlying collateral is invested in Aave, but during a redemption, the user would receive the Aave EUR and the underlying EUR asset that's backing the stablecoin. Yeah, so let's say we have EURC and 80% of the EURC is invested on Aave, then when you redeem for the EUR, the part that corresponds to EURC would be already 20% EURC and 80% Aave EUR. Because if Aave gets hacked, you are still like, and if the protocol doesn't have a way to estimate that Aave gets hacked, well, you are still under the fair value of the reserves. You know, you're only getting a proportion of the balances of the protocol. And what you get during a redemption is, apart from the fee side, it's really independent from the collateral ratio of the protocol. It doesn't depend on any record. You're just getting a fair value of what's in the reserves. Gotcha. Gotcha. Okay. And then in terms of your price oracle, what oracle are you using and how are you preventing any oracle manipulations? So we are kind of oracle agnostic. Usually we use chainlink oracles, but the global criterion, and this is something which must be handled at the governance level, is that the oracles that are used must be non-manipulable. It's easier said than done. We have quite some experience building robust oracles, like for instance, in angle-boring module, we have built oracles to price, safely price a curve, a convex and spanked out LLP token. So we know how to do this, but we could work with Uniswap TWAPs, even though these are more manipulable with proof-of-stake. We could work with Redstone oracles, we could work with Pyth oracle, we're super agnostic, but it's more on a case-by-case basis that we need to make sure that our oracles cannot be manipulated. Cool. So, I guess, is Transmeta live yet or it's still being tested? Yes, still it's being audited, audited started today. We are going to push a proposal slightly early next week about the key launch parameters for the transmitter and what we exactly want to push for, and then from this, we will just be adjusting. Awesome. Okay. You know, why don't we move on from here a little bit to sort of the yield opportunities that exist within Engel currently. Are you able to talk about some of the areas that users can earn yield currently? Yeah. They're in Agero? Yes. So, where you can earn the most yield on Agero is by providing liquidity across different exchanges. Like on Eliswap, on Chronos, on Arbitrum, we kind of have this yield dashboard on Engel app where we are showing all Agero-related yield opportunities. So most likely, by providing liquidity in different pools, you can earn on Agero. We are working and we should release it as part of the release of our transmitter system. We are working on a savings contract for Agero that will basically pay Agero holders with a portion of the revenue that's paid by the protocol on its reserves, and also by people like borrowing Agero through the borrowing module. And it will be a single-sided yield opportunity. It won't be like the kind of day-gen yield that pays you 10% or 20% or this kind of thing. But our goal is to provide on-chain to Agero holders the opportunity to earn the market's risk-free yield. So it's really part of our short-term plans. And it's not even plans. We are going to do it and it's the direction we are headed. So yeah, there are interesting yield opportunities on Eliswap. Most of them are relying on a new system we have developed that we call Merkle. And for the rest, just stay tuned for our savings contract when it's released. Cool. The single-sided staking on Agero sounds pretty interesting. That kind of reminds me of the DAI savings rate. Yeah, no, it's really inspired. There's nothing new about it. It's really like the DAI savings rate. For us, it's the direction in which the American protocol should go. So yeah. Okay. And then you mentioned that those fees come from the EIDL assets and the redeem fees. But where does that differ from the yield you get from staking in gold? Okay. Sorry? So for the single-sided staking, where does that yield differ from the VE in gold? So it would be kind of similar, except that here, Agero holders will earn a Euro yield that paid and denominated in Agero. And it's a risk-free yield. It's not you put your Agero in the contract and this Agero invested in other strategies. Here, the Agero are staying idle in the contract. So there is no extra trust assumption for having these Ageros. You could see it as a way to, as a means, like instead of sending all the protocol revenue to VE.ANGLE, the savings contract will guarantee Agero holders, like it will take a share of what is sent to VE.ANGLE holders to Agero holders. Because this is by rewarding Agero holders that in the end, you can grow Agero to tell the supply that you can grow TVL and grow the Angle market price and hence in the longer run revenue for VE.ANGLE holders. So it's kind of an investment that you are using to pay protocol stakeholders. Okay. I see. So it's just a portion of the VE.ANGLE. It gets refunneled to 80 Euro. Cool. I guess, what is the, I guess, what's your future vision for Angle? Where do you see it transitioning now with the, with the transmitter upgrade coming out? Yeah, I think the savings contract is really crucial in its part and parcel of our vision to build a financial, like infrastructure for financial applications on the, on blockchain. We want to, our goal is to mitigate through Agero the opportunity cost you get when interacting with DeFi with respect to the opportunity cost of, with respect to just interacting with that with Stratified. Our savings contract is here to bridge and to limit this opportunity cost. And once we have this, our goal, we believe that the way we are going to grow stable coin demand and marginally to grow demand for DeFi products is by really leveraging what differentiates us as a protocol. And what differentiates DeFi from Stratified. The essence of what we're doing in DeFi is not so different from what we're doing, from what can be done in Stratified. You know, the product, the underlying actions you are doing are kind of the same. The difference is the technological stack. And this stack enables us to do things in a more transparent, in a more trustless, in a faster way than what you could have ever hoped for. So our take is that we want to double down on like what makes us different. We are going to double down on risk monitoring dashboard. We are going to double down on smart contract security. Our goal is really to build trust while having, of course, products that are worth it. But if with the savings contract and with the transmitter infrastructure, I believe that we're going to get close to an infrastructure that is really, really comparable that what you can get in other Stratified infrastructure. And from there, you know, it's really going to be about doubling down on, you know, being better in terms of transparency, trustlessness and this kind of stuff. Of course, we have other ideas of products that we want to build, other DeFi products and to play the DeFi game. But down the road, I believe that, you know, by doing not so many edge improvements, that we will eventually get to a place where 8.0 and decentralized debit card protocols are met. Yeah, for sure, I love the way that you guys are transitioning and focusing on risk and improving the flexibility modules. But do you still see that the vision is driving the Euro stablecoin market? I know you also mentioned the potential for transmitter applications and like LSD5. Is that something you're envisioning? Yes, we are envisioning this. I still believe that the stablecoin market is kind of underserved. The Euro stablecoin market is still underserved. We're not married to it, but we don't feel that we have done everything that we should do to actually substantially grow on this. So we have some stuff to finish on the Euro market and then have the bandwidth to focus on other limits. Awesome. I think that covered most of the topics I had in mind. Do you think there's anything we missed on transmitter or english? I wanted to thank you for inviting us and for having us here and thank the audience for listening to all my technical explanations on the transmitter. I'm genuinely looking forward to collaborating once the transmitter is live, once our infrastructure is live, to collaborating with people like you guys to provide transparent risk assessments for everyone on the protocol, because this is how we are going to build trust and to drive more utilization in what we believe are going to be the most resident products out there in this space. Yeah, for sure. Really excited to see transmitter go live and have future partnerships between Exponential and Angle.