S14 E16: Philipp Hoenisch on 10101 Synthetic Stablecoins on Bitcoin

Philipp Hoenisch is a developer and trader who decided to create 10101 (Ten Ten One): a synthetic stablecoin system that’s built on top of the Lightning network. Interestingly, this system doesn’t even have a central issuer or a middleman that needs to be trusted: anyone can use their own bitcoin to mint their own BTC-backed stablecoins and the only point of failure might be the oracle that keeps track of the price.

According to Philipp Hoenisch, 10101’s synthetic stablecoins are not entirely trustless. But they are trust-minimized and resistant to arbitrary government regulations and censorship. Unlike something like Tether (USDT) or USDC, there is no central issuer, there is no KYC for redeeming, there is no bank, the fees are lower, and there is no custody of funds.

In an era when such projects tend to get threatened by regulators and governments, it’s useful to have alternatives which require a lesser degree of trust.

Philipp also explained that 10101 represents the binary representation of 21 million bitcoins, symbolizing their core value of creating self-custodial solutions with no counterparty risk. Their journey began with building derivatives on Bitcoin, but they soon realized the potential of creating a synthetic stablecoin without a token issuer. This synthetic stablecoin represents the value of a stablecoin in US dollar terms, but it is not an actual token that is sent around.

10101: Achieving Stability in a Volatile Market with USDP

The stability of this synthetic stablecoin is achieved through a short position against the Bitcoin-USD exchange rate. Users lock up Bitcoin in a contract, and if the price of Bitcoin increases, they lose parts of their Bitcoin but remain stable in US dollar terms. The stability is maintained without the need for a trusted third party or stablecoin issuer.

An oracle is used to ensure the contract is executed at the defined terms. The oracle attests to the Bitcoin price at regular intervals, and its trustworthiness can be verified as it is open source.

Trust in Decentralized Finance

My conversation with Philipp Hoenisch delved into the concept of trust in decentralized finance (DeFi) and how it applies to Bitcoin and stablecoins. Philipp acknowledged that while nothing is completely trustless, Bitcoin is designed to minimize trust and offers a good level of trust for those who don’t want to rely on third parties like Tether. However, he noted that stability is not guaranteed in Bitcoin, as the value of holdings can be affected by exchange rate fluctuations.

Addressing Liquidity and 10101’s Potential of Stablecoins

We also discussed the issue of liquidity, with Philipp acknowledging that it is a significant challenge that needs to be addressed. He explained that 10101 initially started as a side project focused on trading, leveraging the liquidity of Bitcoin and its derivatives. The stablecoin aspect emerged later, targeting users who want stability in USD terms while transacting on Bitcoin and Lightning. Philipp sees potential in this approach for third-world countries where people want censorship resistance but also want to mitigate exchange rate risks.

The Impact of Taproot Assets on the Bitcoin Ecosystem

Our conversation revolved around the use of Taproot Assets and their impact on the Bitcoin ecosystem. Taproot Assets allow for the issuance of tokens on the Bitcoin network, but raise questions about trust in the token issuer. The advantage of using Taproot Assets is that they provide a decentralized alternative to traditional token issuers like Tether. However, there is a risk involved if the token issuer disappears, as the tokens may become worthless.

The Role of HODLing in Bitcoin’s Security

We also touched on the concept of HODLing and its impact on Bitcoin’s security. I argued that HODLing, or holding onto bitcoin without using it for transactions, can be problematic as it relies on others who do transact to pay the miners. As the block subsidy decreases over time, there will be a need for more transactions to sustain the network’s security. However, Philipp countered by stating that HODLing is not a significant issue as eventually, HODLers will need to use their Bitcoin for spending or other purposes.

The Potential of 10101 Stablecoins from a Trader’s Perspective

Philipp discussed the potential traction that 10101 can gain from a trader’s perspective. He mentioned that trading is a common use case and highlighted BitMEX as an example. BitMEX initially started as a Bitcoin-only exchange, settling trades in Bitcoin. While they now offer other coins, Bitcoin settled futures and options remain the largest part of their exchange. However, Philipp Hoenisch pointed out that traders have to accept counterparty risk, which is becoming a growing concern. He believes that there is a demand for a more counterparty risk-free trading solution, and 10101 could be that solution.

The Vulnerabilities of Exchanges and the Need for Decentralized Solutions

Our conversation then shifted to the topic of exchanges and their vulnerabilities. Philipp mentioned the unfortunate incidents of Mt. Gox and FTX, emphasizing that similar situations may happen again, whether intentionally, by mistake, or due to regulatory actions. He believes that decentralized and trustless solutions will become more desirable as attacks on exchanges increase.

The Future of 10101 and the Integration of Taproot Assets and DLCs

When asked about the possibility of regulation for 10101, Philipp explained that there is some centralization involved in the form of an oracle that coordinates activity due to technical limitations. However, he hopes to decentralize the system in the future or have others run their own coordinators.

Building on Bitcoin vs Ethereum

Philipp and I also discussed the risks and challenges of building on Bitcoin compared to Ethereum. I argued that building on Bitcoin is more difficult and time-consuming, but also less risky due to its decentralized and robust infrastructure. Philipp added that building with Ethereum’s JavaScript Solidity contract is easier – but not necessarily secure. We both agreed that the challenge lies in gaining traction and getting people to use the platform.

The Role of 10101 in the Trading World

I asked Philipp if 10101 was built for personal use, to which he responded that it was primarily built for traders. He explained that the goal of 10101 is to eliminate counterparty risk in trading and support the decentralized peer-to-peer movement for small traders.

Comparing the Synthetic USD Stablecoin (USDP) by 10101 with Other Stablecoins (USDT, USDC)

We then delved into a comparison between 10101’s synthetic USD stablecoin (USDP) and other stablecoins like Tether and USDC. Philipp highlighted the advantages of USDP, such as the self-custodial nature and the low fees. We also discussed the role of KYC (Know Your Customer) requirements in different stablecoin systems.

The Power of Community Engagement

Our conversation concluded with a heartwarming interaction with a listener who has been actively participating in the chat. This Brazilian developer expressed his love for 10101 and his willingness to contribute to its adoption. It was a testament to the power of community engagement and how the Bitcoin Takeover podcast makes a significant impact in the space.

In conclusion, our conversation with Philipp Hoenisch was a deep dive into the world of stablecoins, the potential of the Lightning Network, and the future of decentralized finance. It was a testament to the innovative spirit of the Bitcoin community and the potential of projects like 10101 to revolutionize the way we transact and trade.

Listen to Philipp Hoenisch on Spotify, Apple Podcasts & YouTube!

The creation of 10101 (Ten Ten One) [00:00:22]
Philipp explains the concept and purpose behind 10101, a project focused on building derivative stablecoins on Bitcoin.

The development of a synthetic stablecoin [00:03:28]
Philipp discusses the concept of a synthetic stablecoin, which represents the value of a stablecoin without being an actual token.

The role of the oracle in the synthetic stablecoin [00:06:13]
Philipp explains the function of the oracle in the synthetic stablecoin, which ensures the execution of the contract at defined terms.

The trust level and risk in Bitcoin [00:12:00]
Discussion about the trust level and risk involved in using Bitcoin and stablecoins, and how it depends on individual preferences.

Generating synthetic BTC tokens [00:13:47]
Exploring the possibility of creating synthetic BTC tokens based on different price curves, and the need for an oracle and counterparty.

Liquidity challenge and target users [00:15:14]
Addressing the liquidity challenge of the project and discussing the target users, including those in third-world countries who want stability in USD terms while transacting on Bitcoin.

Taproot Assets and their advantages [00:24:39]
Discussion on Taproot Assets and their advantages for creating tokens on Bitcoin, including the question of trust in the token issuer.

Competing protocols for stablecoins on Bitcoin [00:25:55]
Exploration of different protocols, such as RGB and Taproot Assets, and their potential to create superior projects for stablecoins on Bitcoin.

Bitcoin’s cultural issue and rejection of alternative tokens [00:28:45]
Analysis of Bitcoin’s cultural issue and resistance to welcoming other tokens, as well as the potential use and adoption of Taproot Assets compared to Liquid.

Bitcoin as a Common Use Case [00:36:29]
Discussion on the traction of Bitcoin trading and the counterparty risk involved.

Regulatory Challenges and Decentralization [00:39:35]
Exploring the potential regulation of 10101 and the possibility of decentralization.

Synthetic Stablecoin and Risk Management [00:44:19]
Explanation of the pegging mechanism and risk management strategies for the 10101 stablecoin.

The bull market plan [00:48:43]
Discussion about buying a Supra, institutions having weak hands, and dumping on them during a bull market.

Attending conferences and networking [00:50:24]
Conversation about attending BTCPrague and Baltic HoneyBadger conferences, giving technical talks, and the value of networking at conferences.

Using stablecoins on Lightning Network [00:54:17]
Exploration of using stablecoins for payments, orange peeling, and onboarding people to Bitcoin and Lightning Network.

Building on Bitcoin is Hard [01:00:35]
Discussion on the technical challenges and time-consuming nature of building on the Bitcoin blockchain compared to Ethereum.

Introducing 10101 [01:02:27]
Philipp talks about the motivation behind creating 10101 and the goal of eliminating counterparty risk for traders on exchanges.

Comparing Stablecoins [01:04:01]
Comparison between different stablecoin projects, including USDT, USDC, Brink, and 10101’s USDP, in terms of trust, custody, fees, and KYC requirements.

Why Bitcoin Takeover podcast matters [01:12:41]
Vlad talks about his role and the purpose of the podcast, which is to connect people and promote interesting Bitcoin projects.

Philipp’s Support for the Project [01:12:52]
Vlad expresses his enthusiasm for the project and mentions a Brazilian coder who says he can help with development.

Thanking Philipp and Wishing Him Luck [01:13:50]
Vlad thanks Philipp for his support and wishes him luck with the project.

Vlad Costea

I'm here for the freedom, censorship-resistance, and unconfiscatability. What about you?

So, what do you think?

Follow Me