This Lesser Known Type of Stablecoin Is Better Than USDC & USDT - Michael Svoboda

The good point is either what is better or worse is the people now have the option to opt out of the threat part and be able to shift the risk when you're applying that to stable coins to onchain businesses to generating revenue cash flows this entire idea here.

How do you see this evolution continuing to play out for stable coin companies? Is the same level of yield and rewards available to us as we're exploring some of these sovereign onchain stable coins or welcome back to another episode of Stabled Up, our premier weekly show covering the ins and outs of digital dollars, stable coins, and the future of decentralized finance.

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All righty guys, welcome back to Stabled Up episode number 20 powered by our friends at FRA with FRXUSD, FRANET and more of their awesome products. This is our weekly premier stablecoin focused show for investors interested in NEO finance, in the rise of stable coins, and in DeFi.

We've got liquidity CEO Michael Savvada. He is a friend of the show, a longtime friend in DeFi since probably 2019. We were all on liquidity back then. They have been very resilient and strong with LUSD now bold and their CDP mechanism which has been around for some time. Michael, welcome to the show, man. Good to have you.

Thank you, Andy and Robbie. Nice to be back.

Absolutely, man. Since 2019, things have changed a lot. Stable coins in particular have really I mean, just taken the entire market and brought it with it. I'm just curious as far as like maybe the top just tell us a little bit about you know what it was like back in 2019 and you know give us a bit of the chronology like tell us a little bit about the story about ultimately how we got you know from 2019 to stable coins in 2026.

Yeah, I mean Maker was really the pioneer, you know, to pioneer a stable coin on chain and then Robert who founded liquidity saw maker was fascinated and just said, "Hey, we I think I can do a stable coin without governance without interest rates and with higher loan to value." So he created that.

That was the version one, the LUSD back back in the days had five billion in TVL. And then all started then we said all kinds of experiments also algorithmic stable coins every everything went crazy and now I think we we see again the the consolidation of first kind of we saw them really this adoption. I mean stable coins being the DeFi killer use case and I think now we're entering stage a bit of consolidation and consolidation I think in two parts in in in the consolidation of the model.

So you know I think I watch your show and you have so much content on stable coins but actually mostly we talk about these regulated threadfire stable coins you know the genius act kind ones and I think they will become a commodity will be interesting how they differentiate and there will be a lot I'm not saying that there will be only two but I think everybody will gravitate toward that model and I think something you haven't talked much about and hope we can deep dive today a bit is the other models it's like talking about the car with combustion engine And we haven't talked about the car with with the electric engine having stable coins that are not linked to the banking system.

So like the original die and maker and they are a really tiny fraction but I think they provide really unique benefits and will also survive in in a very decentralized way. So that's my point. I think we will gravitate to the these two models fully regulated commodity and this purely decentralized and I think in between there you have the trust me trust me bro zone you're adding trust you know you're adding a multisc you're adding a yield source you're making that a hedge fund you're adding risk and risk and risk and hopefully you get more yield but there in between it it gets just more difficult you know because then with regulation what are you doing here?

So actually you probably should be rather regulated and that's to close the arc. I think until now we have seen the full range and I think in the middle it will clear up and we'll see these two models.

Okay. So we're going to see this bifurcation of these two models on on one hand I think everyone because you're right we've talked about it a lot on this show this genius compliant fully reserved regulated model. You know you can think the circles and eventually the tethers will probably get genius compliant. FRXUSD at FRA is also in that regulated bunch.

On the other side, you know, I I think if we think back before there was a Genius Act, it was D and it was it was, you know, the decentralized stable coins that, you know, we were very accustomed to. But if you look even if you look at Maker, you know, they've gone from D to more focused on SUSD, right, with Sky.

Give us you know the bull thesis you know cuz combustion to digital or electric feels like you know an upgrade. What is the benefit of an unregulated but fully decentralized onchain stable coin?

Yeah. So it's a sovereign or a freedom stable coin. I mean that's what blockchains are about. If you look at what are these Genius Act compliant stable coins, they are run by humans, backed by Treasury, controlled by nation states. And that's why they need to be regulated. Hey, there are humans in there. Okay, they make mistakes. They are fraudulent. So, let's regulate.

The other category, the sovereign stable coins that are only linked to crypto, so no ties to Trefy or run by code, backed by cry crypto, and controlled by its users. And what kind of value proposition does this give to you?

First, I think there are three dimensions. First of all, you're not being exposed to threat risk, counterparty risk, collateral risk, custody risk, operational risk, legal risk, jurisdictional risk, you name it. So, you have now really a stable coin where you can diversify your portfolio with a totally another risk profile, also an uncorrelated yield because it's not coming from treasuries. So that's the first part, not being exposed to threat risk.

Um, then the second part is you get more control as a user. So you as a user can instantly mint and redeem with a lot of stable coins. You need to be KYC, you need to be a business, you're in a queue, yada the other. You have strong property rights as a users. The stable coin can't be frozen. There is no blacklist. That's kind of guaranteed. and the ma mandate in our case because I think liquid and ball is really that's why I said on on the edge how much we can today decentralize a stable coin of course we could even do more in the future like Vitalic has outlined but that's in the future so we have also a immutable mandate so you get very strong guarantees that the mandate isn't changed or that today we make a carry trade strategy and then we form stable coins so you get more control and the last one is better transparency everything is on chain 247 verifiability, you have the predictability and peace of mind because you as a user don't have more information control than me as a CEO of the company that developed it.

So to sum it up, you have really a stable coin that you know that acts in the best interest of the user.

Yeah, Michael, I think you raised a great point with regards to the three characteristics here. I think Vitalik just answered to a friend CodeED with regards to his tweet about there's no reason to use DeFi unless you have longs on cryptocurrencies and want to access financial services while preserving self-custody. Quite a reductionary take. And then he said in before my USDC yield that's not DeFi. And Vitalic wrote back and he said look would algorithmic stable coins follow under this in my in my opinion no algorithmic stable coins are genuinely DeFi.

He says the easy mode answer is if we had a good ETHbacked algorithmic stable coin that even if 99% of liquidity is backed by CDP holders who hold negative ALGO dollars and separately positive dollars elsewhere, the fact that you have the ability to punt the counterparty risks on the dollars to a market maker is still a big feature. The hard mode answer is even if an algorithmic stable coin is backed by RWAS if it is over collateralized and diversified to the extent that it would still be collateralized if any singlearted way failed i.e. if a max share of any individual backing asset is less than the overcolateralization ratio so it's you know properly balanced then that's still a meaningful improvement to the risk properties experienced by a holder.

He goes on to say that basically putting USDC into a gadgets do not qualify under either of my categories. And then you had Stanie respond put ESGO into a is the right fit and you know people start to show their bags in there and stuff.

But talk to us about kind of this like like what is your initial reaction to this from Vitalic and Codes USDC yield not being DeFi and this suggestion of kind of RWA collateralized algorithmic stables or general ETHback algorithmic stable coins. I know this kind of flows into your bold product that that you have probably trying to answer this question. What is your reaction to to Vitalik's take here?

I mean, in general, I think my point is it's great that we have the options. You know, I also really like Genius Act stable coins. A PayPal dollar is such a great product because it's much better than your bank deposit. It gives you much stronger guarantee. But what these traditional stable coins add which are actually a government market money fund is DeFi also leverages them, gives them new rails. They have now digital rails. So they are more accessible and you have the modular modularity which is also great you know and you can also add then RWAS you can add transparency so the the whole blockchain layer can add more stuff to it and I think on the end where liquidity is I think we are taking to the full extreme as far as we can go to create an Ethereum dollar which I think Ethereum is is a freedom technology so kind of how much how can we give as much freedom as possible to stable coin holders um I that's then liquidity and bold and I think the good point is either arguing what is better or worse is the people now have the option to opt out of the threat fight and be able to shift the risk.

So I think that's really the advantage and rather than pick picking on each other we should just make sure we have these two options and honestly the the the Ethereum dollars I mean there are other projects like curve and and and others that it's just a two small fraction of the market rather we should really make sure these options are there when we need it because again you know kind of is a sovereign dollar but that's not a company coming and delivering that to you. So it's also a bit freedom always comes with responsibility and also for the risks you know I'm not saying they are risk-f free they have technical risk they have oracle risk so that's why you also need users that that use it but I think the cool part is and I think that that was initially why I get in touch with you I think it was really cool to see blue chip that rates the stable coins so bold was the only one rated a or a minus but the only one with our counterpart risk playing in the threadfire angle.

But again, you know, that makes it great that we say we have two options. Uh both can be safe depending on what you would like to trust rather humans and regulation or rather code and they they provide you now options.

So, so you personally believe that Ethereum and LST backstables are the more resilient path long term then?

Yeah, I think they are more res resilient. I think the the traditional stable coins probably will always bigger, but but I think to having a stable coin that is sovereign that people can use and nobody can take away that you have control over and that provides an alternative to for example genius act stable coin is interesting as you know you know the financial system is also a weapon I mean you you can sanction a journalist because he has an unpopular opinion and I think that's the ethos of Ethereum that's why we have this great technology and if you want to use it to the fullest extent I think then we are in a world of liquidity and bold and if you say the technology is also great to be used as rails and to modularly piece together but this still means these are totally traditional products that are just kind of have a digital pointer if you see it in your ebanking this government market fund or on the blockchain actually isn't that much of a different product so that's what I want to highlight just to say that's why I that electric car and combustion engine it's another thing but at the beginning you didn't have kind of all these power stations everywhere to power your electric car so there were some downsides but I think it's also important to highlight the optionality the different risk profile the encore related yield and you know besides the rating that you can say it's equal for example bold performed really well it had six to 8% since you could earn since May last year because of the liquidations recently lost 30 day 8 to 15%.

So also the safety risk profile kind of you you have these options and I think that that's yeah I think that's really an important message because probably not a lot of people are aware that not every stable coin not every dollar is created equal.

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And you know, with with the risk profile, the you know, the the other side of that coin is going to be the the the reward profile, right? Which I I think is just as as important to talk about because we're we're seeing this new sort of design space for these yield coins. Now, you know, obviously in DeFi, we've had yield for a long time, but I I think people were a little bit tired of, you know, where the yield came from emissions. You know, fees kind of dried up when activity was down. And then also, as some of these things scaled, the fees actually dried up, provided less yield.

You know, the the traditional uh you know, Fed and money market rates have something to do with this as well. And so what we're seeing now is this cohort of teams that are going into kind of exogenous yield sources like the USDAs of the world, the daylights are going into AI. They're providing credit. They're taking that credit. They're giving the interest, you know, and taking it back to shareholders in in terms of their token holders of this of this yield coin. same thing where you know we're we're seeing companies go into other industries uh have real business models and then take fees from those industries and bring them in so that we don't need to subsidize yield with token emissions and and inflation and so when when we're looking at the risk profile I think you explained it extremely well as we think about the reward profile of you know the the two groups of stable coins that you mentioned are we are are we available is is the same level of yield and rewards available to us as we're exploring some of these you know sovereign onchain uh stable coins or you know if we keep something that's stable and onchain are we foregoing all of these exogenous sources of yield

Good question why do they need to be exogenous if we have our sovereign stable coins why can't we have our own defy rate so I can explain you how how bold works and where the fees are coming from

Sure. So as a as a borrower, you can deposit your collateral ETH and mint the stable coin and you pay a borrowing fee. So there you have the borrower and who's the creditor? Okay, you could say the protocol, the protocol just mints the stable coin, but actually then the stable coin holder who buys the stable coin is the creditor. So what you created is a market. What liquidity creates is this market and actually it's peer-to-peer finance. And the only I think reasonable thing that needs to happen is the borrower should pay the stable coin holder because he gives him the credit or holds the stable coin until he wants to pay it back directly to him.

So what liquidity does it funnels 100% of the revenue to the stable coin holders and connects this market and this is a very sustainable predictable yield. If liquidity would be big enough probably the reference rate would appear because liquidity is also the feature that the borrower sets its own users own rate and the he of course needs to set the rate in a way that people would like to hold the stable coin so kind of then this rate gets adjusted but what I wanted to say there you have this totally organic sustainable yield and you're creating a very efficient market for borrowing and and and stable coin yield I just connecting the people and I think that's what Ethereum is great for.

I I really love this peerto peer finance solution and again you know that's why I think not being regulated is not something bad because they are directly interacting with each other so kind of who do you want to regulate? Shouldn't users be able to kind of do their finances like we have done for hundreds of years before banks emerged?

Yeah, I I I hear you on that. But like the answer to to to why people would want just a basic RWA backed stable coin like a USDC or USDT is just trust. It's just this is US treasuries. You're holding this dollar. Um you know it's backed one to one. There can be like people have such PTSD of pegs of stable coin pegs. You know what I mean?

Yeah. And I understand it and you know I'm not not saying anything against these Genius Act compliant stable coins. Like for example, the Paxos setup is great. It's amazing that you can access this treasury yield in such a safe way. As I said, it's better than every bank and you should be able to do and maybe also other products, but these are traditional financial products. So all these things need in place because all these uh mistakes will be made. That's why I said it's still the trust me bro area. Traditional products if they brought on chain in the normal way, that's great. You get direct access to it. And for people that like to have that exit, I think that's cool.

And I'm not saying people should shift, you know, for for whom are these sovereign stable coins. And I think there there are three people. People that are really self-serving individual that say, "Hey, I want to have control over my dollars. I don't want to be dependent." you have lowrisk DeFi yield seeker in our case because you don't have a lot of risk that other protocols with integration with bridges and so have say okay I'm in defi I want a good risk adjusted yield and then you have the last point maybe treasuries that want to do risk diversification so I don't say shift everything but maybe say hey as a hedge I have all these um same stable coins with the same risk profile having five 10% in another risk risk profile with an uncorrelated yield with other properties and other rights and maybe a direct if backing could be appealing to more cryptonative users.

So yeah, again I'm not saying that your mom should hold that. I think that's kind of the traditional products are better, but for these more sophisticated user, I think it could be an interesting play to have this option.

Yeah. Yeah. I I have one one quick followup on, you know, where this and and lowrisk yield. So I think like you said 8 to 15% in the high volatility you know 6 to 8% is extremely good when we're talking about riskadjusted yields a as we're thinking about you know what is possible in this in this space I I I can't help but think that one limitation here is that you know if we're lending to some of these you know these other sources like and and we're looking to drive some interest and yield from those sources one limitation is the collateral universe right because I I think a lot of like traditional businesses be it crypto businesses or fintexs or traditional you know industries are looking more at you know they're they're being lent credit and and a lot of times it's just based on their cap table right and their existing balance sheet maybe it's against their future cash flows and so a as you're thinking about you know someone wants to get credit maybe they're not interested in uh having exposure to ETH as their form of collateral you know, maybe they they have their their other assets or their own equity, you know, h how much of a limitation do you think this could be to, you know, the sovereign ETHback stable coin uh complex?

You raise a good point. I mean, these sovereign stable coins that are fully backed with crypto, they don't grow as easily and in such a scale as the treasury backed. But I think that's also not the goal to out compete. I think it's really the goal to have these options. And of course you can also introduce like private credit stuff. I mean these things are all done or hopefully well understood but need to be managed well there. Sometimes I have my questions Mark because now you have just kind of some people doing traditional business where you just need to understand the risk and manage that properly. I think that's a bit difficult but if it's managed well yeah then it's great because again if you bring it on chain you have the access you have the composibility of these assets which I think is a great feature but the other thing not to underestimate I mean I I outlined the the value prop for the users you know fire risk more control transparency but also for us on in the ecosystem we need to be aware that every time we hold such an endogenous yield source we are funneling our assets into the thread banking to just get the deal.

You know, the bull case would be for example sovereign stable coins and stuff that is backed by crypto. Yeah, if you just move 5% of the stable coin supply into these sovereign stable coins with crypto collateral, we will move 15 billion in in collateral on chain. Again, that that would be the move for our bags.

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Yeah. Um guys, kind of shifting gears off the types of stable coins, which I think that we've pretty much solidly established on stabled up this year and last year. These two different types, Michael, I think you you know, you explain it quite well. Um we've also just seen a really big boom in stable coin B2B payments. So thinking about things from from the state of of quarter 1 2026 and stable coins in January stable coin transaction volume according to Artemis actually surpassed 10 trillion dollars. USDC processed over 8 trillion, Tether around two trillion or one and a half two um and then kind of like the rest around there. Just kind of filling in that last couple percent guys that's massive. That's 10 trillion dollars of stablecoin transactions in a single month.

What do we think is the reason for this stable coin transaction volume? Are we seeing just a rise in neo banks in this neo finance category? Are we seeing more and more payments from B2B perspective? Michael, what is driving stable coin transaction volume to reach over 10 trillion in January? And what do you expect to be the key drivers of stablecoin transaction volumes throughout the rest of the year?

I think it's it's a very tricky question. You know, already understanding what happened in 24 and 25 because you only see part of it. I think until now stable coins were mo mostly used in the background, you know, to move money between exchanges, market maker really an and bit OTC stuff if you see how much is settled still on Tron. So kind of sometimes I feel we just think we are the main users just moving this money in and out of Coinbase or so. And I think that's that's not the case yet. It it has driven a lot of volume. What what I expect because now a lot of players has have the infrastructure in place. For a long time, these players didn't have the infrastructure to receive stable coins and send it. So I think we we'll see a lot more of these use cases.

And I really like you know when I think of the future I think we have Tether, they're incumbents. We have USDC. They have also a great position. But we already see they need to give away a bit of their yield to Coinbase. And then I think you talked also to bridge and stripe. I really like the model. That's what I say. Stable coins are a commodity and then they give away the yield. So I think and and it's really difficult to say what kind of business model will be possible if people can get the yield and it's about distribution. We see it with hyperlquid that gives some of the distribution back and then you have these players that have huge distribution bases. But then the question is how will they form it? Maybe you know we will see a comeback of the consortia chains just like we saw base had had just because with its customers such a base big base but everybody doing its chain it's different. So the next thing would be that big players with big distribution could go together. So I think it's really hard but I think it's going to be who can make use of this treasury yield as long as it it stays quite high because it's funneled through through from a player like bridge that just takes a cut which makes sense and now I can build a business model on top of it if I get the aum and and so on and that and that's I think it's it's really tough to say I have no clue and I expect a lot of innovation and a lot of failure.

Yeah. and and what's to say about these stable coin chains, you know, as as we think through ARC and Plasma and Tempo, you know, h how do we think that the economics if we're flowing more stable coin transactions through those chains and there's collateral there, do you think that because stable coins are such a significant part of the DeFi ecosystem at this point, do you think that might pull stable coins off of like some DeFi venues and pull it onto places where more stable coins volume could take place.

Yeah, I think so. It's maybe something we underestimate. We just think, oh, it will happen on DeFi and it will happen on Ethereum. Why it's happening there? Because they have the customer base there. You know, a lot of people with wallets. But if you roll out wallets to 400 million users, two billion users that you have as a user base, it doesn't play a role anymore. And as I said, these are threat stable coins. You burn it here, you mint it over there, and they are gone, you know. And with these other chains, the stablecoin chains, they have some interesting features, but at the end, I'm more a product guy, you know. I think you need to have the problem and you need to have the distribution. And distri it's really a distribution game for for stable coins. And I think who can best position itself and and have really a strong use case will just attract the volume and and he can dictate on which chain it will be because the chains with these traditional stable coins are really easily exchangeable. You know, as I said, I burn there, I mint there, whoops, stable coins are gone because anyway they are somewhere in a bank. They are not on the chain.

And you know, I think some people are looking at at that and they're thinking it's a feature. They're thinking, "Oh, well, if I can, you know, uh, if you know, I'm Iran or Venezuela or like, you know, one of these like sanctioned countries, look at what Tether's doing. It seems like every other week now they're, you know, they're, uh, they're freezing, you know, a half billion dollars of Turkish LRA, you know, in in Tether, right? And I what you know, your answer to that is just optionality, right? There's there's there's"

Yes. Sometimes you have to pay a price also like freedom of speech you know privacy another man's bug and if you say you can't avoid that this will be misused but at the end I think it's it's more important that we have these fundamental rights and of course you should go after illicit funds and and criminal funds and and whatn not and you should have law enforcement and you should be able to get them but you shouldn't restrict the 99% of the others of their fundamental rights.

And Michael, as a founder of a of a stablecoin product and just as a founder in general, when you see this like big shiny ball like this massive total addressable market out there, stable coins as a whole, regulated stable coins, how do you like what is your mental process to think to yourself, I want I'm going to stick to my roots. I'm going to remain true to like the the spirit of this project and despite what might be a bigger TAM, I'm going to continue to build the project that we set out to build originally.

Hey, it's really the passion that brought me in into Ethereum, being able to create this technology, put it into users hand, being able to roll it out worldwide. You know, it's not so easy for USDC. You say just think because you you you print it on Ethereum, it's rolled out. No, it's regulated in the US in in the EU. So where is it regulated? Where can you redeem? It gets more complicated and complicated. So this simplicity to be able to give this power to users, that's really what drove me into the space, what keeps me in the space.

And yeah, that's why the other things they would be interesting if I say, okay, let's make the fintech play. And of course, it makes sense and could be interesting, too. But you know that really brought me out of the corporate world where so so we had the internet that I missed that a bit with my age and now we have blockchains that fundamentally take out the intermediary like the intermediary like internet took out the intermediary for media and communication we can do that for financial intermediary that's what brought me in that's what liquidity is doing and that's why I'm so passionate about it and saying hey uh let's preserve that and and let's make users aware that this product exists not forcing it on anybody but just realizing that that's maybe something different and for some people it it has advantages or for some people that don't trust certain systems or don't have the privilege to live in in certain systems these can be valuable tools and that's really having this you know I don't know about your job but having this this higher goal this this higher northstar is really an additional bonus I wouldn't say that I wouldn't do the other job but it's just kind of it it gives you really this energy to stand up in the morning and say, "Hey, how cool is that that we can build such technology?"

Yeah. Yeah. Important.

Yeah. Michael, when you're thinking about this kind of evolution with the Genius Act, uh, you know, being passed and soon implemented as well as the market structure bill, as well as just the general cleansing of a lot of the the, you know, typical bull market mania stuff that we get each cycle in crypto into a more, you know, you could say more of a slower, more of a mature, sophisticated phase, almost a coming of age of the industry. These two things are happening simultaneously, right? like the the regulation kind of causing the coming of age in in its own way.

When you're applying that to stable coins, to onchain businesses, to generating revenue, cash flows, this entire idea here, how do you see this evolution continuing to play out for stable coin companies? How are you thinking about um how regulation as well as this coming of of age and maturity of forcing onchain businesses to be the thing that that the market wants? uh how do you see this kind of convergence continuing to play out this year? What are some kind of thoughts that that that you have from your perspective?

I mean what I like from the US that they make the regulation better than than the EU, you know, which is prohibitive, which honestly also made the the stable coins less less secure. You know, they need to hold more bank deposits. So I'm you also need to be aware regulation is not always to protect the customer. also the the the clarity act you know it's about how do you distribute the the the interest what's here in in the customer interest it's in the bank interest but it's fine you know half of it it's kind of regulation to clar clarify things but just to outline hey this is also a mode and here it's also kind of protecting the incumbents so this is will happen but I think it's it's good I think it's good that we have these um super sound stable coins we can use that we have the clarity that we als also see now these players coming in.

So we'll see that more and more that kind of the traditional stuff is allowed onchain and taking advantage of it and I think it will take a long time and we we we underestimate how long it will take because it's not just tokenizing something and then everything will be easier and you have a business case. These things live all still in the old system. So once we have clarity and we can bring these things natively if the blockchain is like the the primary ledger and not the banking system then we will will see a lot of advantages. So I see that coming it will take longer. I think it makes a lot of sense. It will clear up this gray area we have I think which is in the benefit of all but the fear I have is um exactly that you know the things like electric cars the people say no no no that's dangerous and we should disallow it or oh they are self-driving. you know, we are a self-driving credit facility that people say that's very dangerous and kind of restrict this peer-to-peer finance area and just because you want to regulate everything and I think that's my biggest fear that people don't understand it just see it as a danger or um or afraid of it and that we lose the niche we have and the freedom we have in DeFi.

But that's not only the regulatory kind of issue or fault. I think we also as a industry need to have higher standards you know from like a self-disclosure practice and just say hey we're doing that in our best interest and we we're a good example and this technology in that way should have its merits and people should be able to build and use it freely outside of a regulated parimeter parimeter or just in a different regulation like product regulation. Okay. You look is that product safe? Is the security good? But not do we need an intermediary to regulate if there is no intermediate.

Yeah. Yeah man. I mean I think I think this entire new era of crypto like what's happening is we're testing the bounds of the censorship resistance, the libertarianism, the immutability properties, all of these while converging deeply with the legacy finance world. And there's some line that is being walked right now where there's adoption in institutional interest allocation into the market while also not foregoing what we've kind of came here to build. And I think that line tends to swing in both directions uh as