Mento Labs CTO Bogdan Dumitru shared valuable insights on various aspects of stablecoin mechanisms and governance at the unStable Summit during Devconnect Istanbul in November 2023. Below are highlights from his contributions to the panel discussion.

Which components of stablecoin mechanisms are most critical to remain decentralized?

The question of centralization in stablecoin mechanisms usually appears around collateral management, because you want to diversify your collateral outside of crypto assets and that requires you to interact with TradFi and brings some centralization. But a non-negotiable for me personally, is the censorship resistance side of it. I'm not a fan of adding blacklists to smart contracts. I'd rather explore solutions like associative sets and privacy pools to disincentify bad actors or limit them, but maintain a censorship-resistant stable token.

What may be some trade-offs between a dual token model where you separate utility and governance benefits, and a single token model where those two things are conflated? Why might you go for a single token model?

I feel like if you have a separate model, you're trying to price the governance tokens just in terms of governance, which in times of instability can cause your system to be more vulnerable to attacks. If you have them both, then your utility sets a lower bound to how that token can be priced, which can enhance security.

The users of the stable token will always be underrepresented in governance in many of these systems. They will typically be represented by intermediaries like wallets or other players that act as node aggregators between them and the stable token platform. However, the end-users themselves will always be somewhat underrepresented.

How do you manage the tension between censorship resistance and compliance?

Maker is doing a lot of things right by having a sub-DAO structure where you have isolated pockets of centralization in your infrastructure, it's the way to go. You're always going to have to interact with these elements when you’re diversifying collateral with RWAs. There are decentralized versions of these financial instruments coming, but they tend to always have a sketch to them, either it's a form of lending market that then gives you the yield of the T-bill, but then you're exposing yourself to liquidity issues. If you want to really have that risk profile, you need to be centralized to some extent, so you're always going to have to play this game.

I also want to add that we call USDC a fiat-backed stable token, but it's actually a credit-backed stable token. In reality, we saw that when the bank crisis happened and then USDC had a 10% haircut for a bit and then came back. I think it's interesting to build things more composable on top of these different risk profiles. Like in the Mento Platform, we have USDC in the Mento Reserve, we have DAI in the Reserve, we have Bitcoin, and we have Ether. We're looking at more real-world assets like treasury bills, bonds, carbon credits and also real estate, and we're trying to build a more diversified risk profile.

Transparency in and of itself is nice, but it doesn't really tell the story. We have a lot of data on-chain, but who’s looking at it? I think there's something to be said about having a counterparty that has skin in the game with you, that is incentivized to keep you accountable, like asking the right questions, highlighting the right information, but also it's not on the same side of the table as you are. I think that's something that we see in the space a bit, but we need more of that.

You talked about people having skin in the game who are invested in actually bringing transparency. Who are some of these stakeholders? What are some examples?

Let's say you have DAI as a stable token, and then you have a money market like Compound or Aave built on top of it. I think Aave and Compound, for example, are incentivized to make sure that DAI is being maintained how it should be. And you get these symbiotic relationships between players that are incentivized to keep each other in check.

Have you observed any effective cross-chain governance mechanisms for stablecoin protocols? If so, what has made those governance systems effective?

Angle protocol is a good example of this. They have their buy and sell module on Ethereum and the CDP module as well, but they deploy the CDP module to other chains to simplify things. Governance cross-chain becomes a bit of a technical nightmare when you want people to understand what's happening. Even as a developer, I have to really struggle to understand Curve's governance proposals sometimes. I guess for the more average end-user, that just won’t happen.

Aside from bridging, what are other frictions that limit governance participation?

We still lack good UIs for governance, especially for more complex mechanisms. While Tally encompasses all-in-one token voting, it's still mostly snapshot and multi-sigs for anything outside of that, which isn’t great. I also really like the bicameral model of OP governance, the idea of having a token room and citizenship room, and actually trying to implement one person, one vote. I would like to see more innovation in that space.

Watch the full panel discussion: Panel 7 - Overcoming Challenges in Stablecoin Governance