Goddamn Forking Stablecoins

Stablecoins have vastly more power over chains that people recognize. So much so that in the case of a fork it is likely the stablecoin issuer who will decide which fork is the ‘accepted’ fork. The full extent of this effect on cryptocurrency governance is poorly explored.

The foundation of cryptocurrency governance is the ability to fork the network. To take the open source code, modify it in whatever way you feel is important to your goal, and try to start your own network. However, because forks potentially fracture the community and weaken the network effects they are often most impactful when there is an intractable difference between groups in the community, like the blocksize debate for Bitcoin.

Because stablecoins have a central issuer, it will be up to those central issuers to determine which set of assets they intend to continue supporting. They cannot initially support both chains because then they would have way too many liabilities. They must choose one chain and set of coins that they will assign value to and will continue to redeem. The coins on the other chain should not maintain their value. Then every exchange that wants to offer that stablecoin will also need to make sure to support the chain that the stablecoin issuer chose. The exchange does not necessarily need to give the ticker to the chain that the stablecoin issuer chooses, but since they must maintain the infrastructure for that chain, they are likely to continue offering it for trading. Often in other forks we have eventually see liquidity dry up for the ‘loser’ in the fork, and in this case the stablecoin issuer helps ensure that liquidity is maintained for their chosen chain.

This has significant knock on effects for the DeFi community. Consider for example any protocol like MakerDAO or Frax that uses a centralized stablecoin as part of their collateral. They must treat the chain selected by the stablecoin issuer as the ‘real’ chain, because their protocols are dependent on the value of that coin. Therefore they must follow that value to ensure that continue to function.

Then any protocol that is dependent on a protocol that is dependent on a stablecoin (whew) like Alchemix also must follow the stablecoin issuer in order for their protocol to continue functioning well. These layers of dependence on stablecoins mean that a significant portion of the value on these chains is obligated to follow the decision of the stablecoin issuer.

To clarify: Tether went ahead and released their own version, blacklisting these tokens, then distributed it to exchanges and service providers, kicking our reference client out of consensus by a huge economic majority. We then adopted, so both clients were back in line.

— dexx ⚡️ (@dexx7y) October 2, 2018

There is actually an already existing example of a hard fork caused by a stablecoin. In November 2017 Tether was hacked. In response to being hacked Tether issued a brand new version of the Omni client (archive) to the exchanges who used Tether. This new version was a hard-fork that changed consensus, with the goals of making sure that the hacked Tethers could no longer be moved. The reference client for the Omni network was kicked out of consensus because Tether controlled such a meaningful portion of the economic activity on the layer.

The more economic activity that depends directly or indirectly on stablecoins the more influence that stablecoins have over the governance, and right now there is significant economic activity that depends on stablecoins.

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