The Stablecoins Competition Started When the New Players Arrived

Interview with Equilibrium CEO Alex Melikhov

Tether’s daily trading volume has surpassed Bitcoin’s, and the stablecoin market share has tripled in just one year due to a huge influx of new players. We discussed the booming stablecoin market’s current state of affairs with one of the newcomers, Alex Melikhov, Alex is the CEO of Equilibrium, the first decentralized stablecoin project on the EOS blockchain. We touched the topics of competing against dominant players, the tug of war between centralized and decentralized stablecoins, and how self-governance could turn stablecoins into the next killer app for crypto markets.

Marko: Hello, Alex! The stablecoin market share seems to be expanding significantly. Tether’s 24-hour trading volume recently exceeded Bitcoin’s. Some crypto market experts label stablecoins an antidote to volatility, some point out their fundamental flaws and regulatory issues, but there’s no denying that they’re gaining popularity. Their share of the crypto market has increased to almost 3% today from 1% in 2018. You represent an emergent stablecoin project shaping this new market, so we were especially interested in your vision of the current market situation. So let’s establish some background for the conversation: according to recent market research by Diar, the market cap of USD-pegged stablecoins hit an all-time high, exceeding $4 billion. With the lion’s share of that volume taken by Tether (with over $2 billion of TUSD in circulation), do you think something is preventing decentralized crypto-backed stablecoins from having the same success?

Alex: Stablecoins are mainly used in trading, so the uptick in stablecoin trading volume directly correlates with the behavior of the crypto market. Hedging risks and entering short positions are both valid use cases that require stablecoins, so there’s your explanation.

Speaking of emerging stablecoin solutions that are gaining traction (Equilibrium’s EOSDT included), it’s important to understand that the decision-making process for large centralized exchanges is slow and complex. They already have Tether as their main stablecoin option, and in the absence of demand from their users, they see no reason to list alternatives.

At the end of the day, it's their customers who decide which stablecoin meets their requirements and suits their needs. The key success factor is to offer these customers the options that large players don’t have. For example, developing new multi-collateral options would serve more markets and enable more use-cases. Bear in mind that the EOS platform itself is still growing, and it will see higher volumes both in trading and DApp usage. Since September 2018, there have been 20–50 new DApps deployed on the mainnet every month. We have to be more flexible than Tether, go where it can’t go, design innovative use cases on different blockchains, and be the first to reach different markets. That’s at least part of the solution. In fact, projects like Equilibrium (and other new players) have already pushed the competition further than was ever possible before on a market dominated by Tether.

Regarding additional use cases: according to the same report by Diar, despite growing trading volumes and market cap, stablecoins have so far found little usage outside of sitting on centralized exchanges. Do you agree with this statement? If so, why?

As previously mentioned, there’s nothing wrong with stablecoins being traded on centralized exchanges. They’re there to ensure that traders can cut their losses or hedge their risks at any moment. You could almost say that traders are the pioneers of stablecoins. They test the waters of stablecoin solutions, paving the way for more stablecoin use cases.

If you check Dappradar or study one of the reports on the DApp industry, you will observe noticeable growth of key indicators. Compared to the previous quarter, the EOS DApp ecosystem has seen more than 160,000 new users and more than 100 new DApps. DApps on the EOS chain, for now, are predominantly exchanges, wallets, games, and gambling services. But there is untapped potential here for decentralized finance. Dozens of applications are deployed on the mainnet every month, making the DApp ecosystem more diverse. Not only could many of them benefit from adopting a stablecoin, but many of them can’t even function properly without one (collateralized loan services come to mind, for example).

I see your point: the adoption of stablecoins can enhance existing financial services or even power new ones. But bearing in mind the current state of affairs and the abundance of stablecoins on the market, how do you position your own solution?

It is true that there are established names in this space, and some can be intimidating to compete with. But the intensity of competition only confirms that stablecoins are important to the market at large as an emergent class of crypto assets.

Speaking of giants like Tether and other centralized fiat-backed solutions, we are very different. Our ideas align more closely with those represented by the EOS platform. By the way, EOS happens to lack a reliable and transparent crypto-backed stablecoin solution so far. That’s a gap that we hope to fill by introducing EOSDT as a decentralized stablecoin native to the EOS blockchain. We adopt community governance principles that we believe are a great fit for the EOS community. EOSDT provides liquidity and stability without compromising decentralization.

Let me stop you for a moment here — you’re claiming that Equilibrium is decentralized, but isn’t your team in control of the platform’s smart contract code and can modify it at any time?

The initial release of the platform is, of course, the fruit of our labor, and we took care to properly set all the key technical and economic parameters. But after the transition to a decentralized governance model (which we’ll approach gradually), the eos.setcode permission to deploy new code will be delegated to the governance contract. It will be up to the community to decide what goes and what doesn’t.

Is your community really in charge? What key aspects are they responsible for?

Equilibrium is building a decentralized autonomous community inspired by EOS blockchain governance. The voting process of Equilibrium’s governance lets the community determine and modify the framework’s key parameters, that directly affect risk management and business logic. This process is essential for the system’s stable functioning and it will eventually be fully delegated to the community. Any governance token holder will be able to generate a proposal of one of the two types: general proposal, indicating the general desire to change one of the platform’s models or mechanisms, and parameter change proposal — that changes a critical system parameter, such as the liquidation penalty, for instance. The former type of proposal, if the community votes in favour of it, is executed automatically.

That concept sounds good, but it’s not entirely new. Doesn’t it resemble the Bitshares and MakerDAO model? Are you trying to simply replicate these solutions on the EOS blockchain, or is there more to what you’re doing?

This comparison isn’t entirely wrong, in the sense that EOSDT, Bitshares, and DAI are decentralized collateral-backed stablecoins. There are intricate high-level differences between our solutions, of course. But our platform benefits by virtue of being built on the EOS blockchain. Consider zero transaction fees, faster transaction processing, high performance, and reduced latency. This means our system is highly scalable while being more responsive to external price changes. We achieve financial and technical differences because of partial collateral superfluidity — portions of Equilibrium collateral can be used for block producer voting or resource exchange staking. We also have a built-in ability to leverage any DPoS architecture and provide a true cross-chain solution with DPoS consensus blockchains that could be instrumental in our platform’s future expansion. Finally, we definitely took a step further by building enhanced decentralized governance capabilities, thanks to built-in EOS governance features.

It looks great on paper, but the market will judge stablecoins from practical criteria like accessibility, liquidity, and (most importantly) price peg stability. What measures do you employ to protect EOSDT’s 1:1 USD peg?

The main threat to price stability is undercollateralized positions, so we enforce strict over-collateralization requirements — our collateralization ratio currently stands over 300%. The platform additionally incentivizes its users to margin call and liquidate such positions in a timely manner. This reduces the supply of EOSDT and pushes the price up.

A liquidation penalty also applies to undercollateralized positions. This lets third-party participants buy the collateral from such positions at a discount, ensuring timely management of liquidated debt and collateral.

The stability mechanisms mentioned above are hard-coded into Equilibrium’s smart contracts. Provided that the community will be able to fine-tune all the key parameters, this set of measures should be robust enough to ensure price stability.

If the decentralized governance will determine the platform’s key parameters, can it also jeopardize EOSDT’s price stability? Are there any issues related to community governance as opposed to centralized leadership? Which model is better?

Both models have their advantages and disadvantages. Centralized leadership might be better in the short-term, but it doesn’t always serve community interests, and those interests do not necessarily align with those of the management. It’s fair to say that centralized management can be less error-prone in the short term if the project is managed by an expert team. But in the long run (especially in the blockchain industry), that actually makes decentralized governance a real thing — there are no guarantees. But look at it this way: who better knows the fair mechanisms of market regulation, the actual rates and fees, and the most useful tools for the unpredictable crypto market than its own players and participants?

As far as the Equilibrium framework is concerned, we’ve conducted thorough research of the market and established fairly conservative initial system parameters to be on the safe side. The transition to decentralized governance will be a process, it won’t happen overnight. Lastly, we won’t hang our community out to dry — our analytical team is working on a risk management framework and other tools to help sustain the system’s growth in the long term.

That’s interesting, but it’s quite a lot to take in! How does this reflect on regular users? Could the service be too tricky for them to master? Can anyone generate EOSDT without knowing all the underlying principles of the Equilibrium framework?

Absolutely. Generating EOSDT isn’t rocket science. Anyone can generate EOSDT against their collateral by using our self-service gateway to create a collateralized position. You lock up EOS, receive EOSDT, and that’s all there is to it — you’re free to use it for trading, transfers, DApps, whatever you want. When (and if) you’re done, you can get your collateral back by returning the stablecoins to our liquidator contract (including any accrued fees), and close the position.

It appears that collateral security is extremely important for stablecoin solutions. How do companies go about solving this problem?

While fiat-backed stablecoins rely on in-house or licensed third-party custodial services like banks, crypto-backed stablecoins leave fiat money out of the equation. It’s an advantage! This lets users effectively remain in control of their own funds, while all the transactions and lockups are handled by fully audited, transparent smart contracts. The Equilibrium framework is a great example of this approach:

EOS collateral is stored by a smart contract, neither we nor any third party has access to it. There are only two ways your EOS can be handled from there. It either goes back to your wallet after you have successfully closed your position by returning the generated EOSDT, or if the collateralization of your position falls below the critical threshold, your position is liquidated and you lose only the collateral necessary to cover the cost of your EOSDT, plus a 20% penalty. The rest is returned to you.

Maintaining collateralization above the critical level is something every individual position owner has to do on his or her own, but the platform will send timely notifications about the position status, so you will know whether it’s close to being margin called or not.

It seems like a solid concept, and I’m looking forward to seeing how it fares in practice. Have you identified any particular challenges in the foreseeable future?

One thing that we could call a challenge is helping the EOS DApp landscape change for the better. Due to the lack of high-quality DeFi applications, many view it as a platform for low-quality crypto games and shady gambling services. But we believe that the situation will improve soon. Just look at the Voice social network announced at B1 in June — there’s got to be more where that came from. There are many talented developers out there, and many use cases are going to require stablecoins.