A Birds Eye View of Stablecoins Today - PaperImperium - Flywheel #64

Samuel McCulloch
Samuel McCulloch
Aug 9, 2023

4 Things We Learned This Week From PaperImperium

In this week’s episode, we had on PaperImperium, who took us deep into MakerDAO governance. We covered Spark Protocol, Sub-DAOs, Rune’s Endgame, and more. Through the interview, we did learn a couple of things and we wanted to share the top four things we learned with you.

Fraxlend has the Highest Seniority

After the hand-wringing over the almost-liquidation of Curve Founder Michael Egorov in the wake of the CRV LP exploit PaperImperium says it became clear that out of Aave, Compound, and Abracadabra, Fraxlend has the “highest seniority” when it comes to liquidation and debt. This is due to the speed at which Fraxlend can raise interest rates if lenders exit and raise utilization. It is faster than anywhere else in DeFi.

“He who liquidates first, liquidates best.” - 0xWenMoon

Paper thinks that Fraxlend is “more conservative” and this “makes it more appealing to lenders and operators.” He brought up Sifu, who is one of the big Fraxlend lenders and said he “saw Fraxlend was effectively higher in the seniority ladder.”

He also didn’t “agree with what [Abracadabra is] doing [with] the punitive rates.” Abra had originally tried to raise the base interest rate to 200%, but adjusted after negative feedback. Paper thinks “they're trying to fill in the hole, as opposed to digging it deeper.”

The 8% EDSR is an Expensive Experiment

We recorded this episode last week before the EDSR had gone live and already Paper thought that it was going to fall flat. Well, it only took 48 hours for Rune to see that the 8% interest rate was too high and was being farmed by massive ETH/stETH whales who were borrowing DAI from Aave at 3.19% and capturing the spread. Rune said in his post that “In hindsight not exactly a surprise this would happen at a massive scale.”

Paper told us that “I think the prediction is just that some fund that has a bunch of idle ETH is just gonna plug it into a vault, borrow DAI [at] 3.5% or something, and then put that right in.” Well, that exactly happened and it was a “predictable outcome.”

He’s Ambivalent about Spark Protocol

It’s too early to tell if Spark can “squeeze some more growth” out of Maker. Right now it’s just an Aave fork that “doesn't have a competitive advantage other than the fact that Maker just yeets a bunch of money into it.”

Additionally, he thinks “the Spark folks have had to do it with one arm behind their back as well. Because governance has imposed arbitrary limitations” on what they can list. He brought up that WBTC was too centralized for Spark.

The Future is Multichain

Paper said that “Whether that's Layer 2s or sidechains, or Alt L-1s, it’s important to be multi chain and be everywhere.” He noted that using Maker and DAI used to be cheap. Then gas spiked due to demand and many people in developing nations were priced out of Ethereum. Now when you go to Optimism or Arbitrum, you get to experience what it was like to be on Ethereum during 2020 at the beginning of DeFi Summer.

On these L2s you can “take 20 bucks and mess with stuff. You spend an hour doing all kinds of crazy contortions with protocols and you're like, ‘I spent $3, I did 120 transactions and spent $3.’ Um, that's powerful stuff.”

Unfortunately, Paper “doesn’t know how to get Maker back onboard to pursue a multi-chain strategy.”



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