By The Fedz Team

Before the advent of fractional reserve banking in the early 18th century, the financial world operated on a full reserve banking system. Banks held all the depositors' funds, ensuring that every currency unit was backed by an equivalent amount of physical reserves, often gold or silver(1). This fully collateralized system instilled trust and stability, as depositors knew their funds were secure and available on demand.

The transition to fractional reserve banking marked a significant turning point. Banks could lend more money than they possessed by holding only a fraction of reserve deposits, effectively creating new money(2). This change fueled economic growth and global prosperity by expanding credit availability, enabling businesses to invest and consumers to spend. However, it also introduced new risks, including financial instability and the dreaded bank runs(3).

In the decentralized finance (DeFi) landscape, the ethos of over-collateralization remains strong. The crypto community, rooted in principles of transparency, decentralization, and a distrust of traditional banking, has shown natural resistance to lending, leverage, and especially under-collateralized mechanisms(4,5). This skepticism is understandable; under-collateralization without proper safeguards can lead to systemic risks and financial crises.

Early adopters of Bitcoin and other cryptocurrencies often viewed these technologies as financial tools and a philosophical and ethical alternative to the existing banking system6. Rooted in ideals of financial sovereignty, censorship resistance, and complete asset ownership, many early Bitcoiners harbored a deep mistrust of traditional financial institutions, mainly due to practices like fractional reserve banking and under-collateralized lending that can lead to economic instability(7).

This cultural and ethical aversion has fostered a reluctance to embrace under-collateralized models within the crypto community. The emphasis on self-sovereignty and total control over one's assets makes concepts like lending and leverage appear antithetical to the foundational principles of cryptocurrencies. For many, replicating elements of the traditional banking system within the crypto space undermines the very reasons for adopting decentralized currencies in the first place.

The preference for over-collateralization in DeFi protocols aims to ensure stability and security. By requiring borrowers to provide assets worth more than the loan, these platforms mitigate the risk of default(8). However, this model limits the potential for growth and inclusion, as it restricts access to capital for those who cannot provide substantial collateral(9).

The collapse of the Terra-Luna ecosystem in 2022 was a stark warning about the perils of improperly managed under-collateralized systems(10,11). Terra's algorithmic stablecoin, UST, was designed to maintain its peg to the US dollar through a mint-and-burn mechanism with its sister token, LUNA12. However, this model relied heavily on the quantitative theory of money, focusing on the supply side without adequately addressing demand stability or the prevention of bank runs(13,14).

When confidence in UST faltered, a mass sell-off ensued, leading to a death spiral in which both UST and LUNA plummeted in value(15). A critical flaw was the lack of robust mechanisms to prevent a bank run scenario. This event resulted in significant financial losses and eroded trust in exploring innovative, under-collateralized solutions within the crypto space(16).

Bank runs represent one of the most significant threats to financial systems. They occur when many customers withdraw their deposits simultaneously due to fears of the bank's insolvency(17). This phenomenon can quickly escalate, causing solvent institutions to collapse under the sudden liquidity strain.

Economists Douglas Diamond and Philip Dybvig's foundational work, which earned them the Nobel Prize in Economic Sciences in 2022, provides a deep understanding of bank runs and how to prevent them(18,19). The Diamond-Dybvig model illustrates how banks transform short-term deposits into long-term investments, making them inherently susceptible to runs(20). Their research emphasizes the need for deposit insurance and lender-of-last-resort facilities to maintain depositor confidence and prevent panic withdrawals(21).

Over the past 40 years, extensive research has built upon this model, exploring various strategies to enhance financial stability. These include regulatory frameworks, capital requirements, and liquidity provisions to fortify institutions against sudden shocks(22).

In light of these challenges and historical aversions to under-collateralized systems, The Fedz emerges as a pioneering solution that seeks to bridge the financial gap in DeFi by leveraging decades of bank-run mitigation research. Recognizing the necessity for more efficient capital utilization and inclusivity, The Fedz introduces FUSD, an under-collateralized stablecoin designed to bring the benefits of fractional reserve principles to the crypto world while ensuring stability and trust.

The core motivation behind The Fedz is to address the limitations of over-collateralized models in DeFi, which restrict access to capital. By embracing under-collateralization, The Fedz aims to:

• Enhance Capital Efficiency: Allow issuers to engage in financial activities without the prohibitive requirement of excessive collateral.

• Advance DeFi Evolution: Integrate proven financial stability mechanisms into the decentralized ecosystem, propelling DeFi into its next maturity phase.

The Fedz is a DeFi stability mechanism that brings established bank-run mitigation principles into cryptocurrencies. By introducing FUSD, The Fedz provides an under-collateralized stablecoin that maintains its stability by applying insights from decades of economic research and banking practices.

Key aspects of The Fedz include:

• Integration of Bank-Run Mitigation Research: The Fedz leverages the foundational work of economists like Diamond and Dybvig, implementing principles such as maintaining depositor confidence and ensuring liquidity availability to prevent panic withdrawals.

• Application of Traditional Financial Safeguards in DeFi: By adopting mechanisms analogous to deposit insurance and lender-of-last-resort facilities, The Fedz enhances the resilience of its under-collateralized stablecoin.

• Commitment to Transparency and Decentralization: The Fedz operates with full transparency on-chain, governed by a decentralized community that aligns the platform's evolution with its users' interests.

The Fedz presents a vision for the future of DeFi - one where the efficiency and inclusivity of under-collateralized systems are realized without sacrificing stability. Through the thoughtful application of bank-run mitigation principles, The Fedz aims to close the financial gap and lead the way in redefining decentralized finance.

The Fedz represents a significant step toward closing the 300-year financial gap since the shift to fractional reserve banking. Thoughtfully integrating time-tested financial stability mechanisms into a DeFi framework addresses the core challenges that have hindered the adoption of under-collateralized models in crypto.

FUSD, as an under-collateralized stablecoin with bank-run mitigation, exemplifies this innovation. It opens up new possibilities for growth and inclusion within the DeFi ecosystem. By mitigating the risks of bank runs and financial instability, The Fedz paves the way for more accessible lending and borrowing opportunities, fueling economic activity and prosperity akin to the boom experienced during the rise of fractional reserve banking(23).

The journey toward making DeFi great again involves learning from the past and thoughtfully applying those lessons to new technologies. The Fedz stands at the forefront of this movement, offering a solution that marries the strengths of traditional financial safeguards with the transformative potential of decentralized finance.

By introducing FUSD to address the fundamental issues of under-collateralization and bank-run prevention, the Fedz is poised to lead the DeFi space into a new era of stability and growth. It invites the crypto community to embrace innovation over hesitation, forging a path that closes the historical financial gap and sets a new standard for what decentralized finance can achieve.

Join us in shaping the future of finance—secure, inclusive, and truly decentralized.

Note: For more detailed information about The Fedz, FUSD, and their architecture, please refer to official communications or documentation from The Fedz team at TheFedz.org and The Fedz GitBook.

1. Rothbard, M. N. (2008). The Mystery of Banking. Ludwig von Mises Institute.

2. Gorton, G. (2010). Slapped by the Invisible Hand: The Panic of 2007. Oxford University Press.

3. Kindleberger, C. P., & Aliber, R. Z. (2011). Manias, Panics, and Crashes: A History of Financial Crises. Palgrave Macmillan.

4. Antonopoulos, A. M. (2017). The Internet of Money. Merkle Bloom LLC.

5. Buterin, V. (2013). Ethereum Whitepaper. Retrieved from https://ethereum.org/en/whitepaper/

6. Nakamoto, S. (2008). Bitcoin: A Peer-to-Peer Electronic Cash System. Retrieved from https://bitcoin.org/bitcoin.pdf

7. Antonopoulos, A. M. (2014). Mastering Bitcoin: Unlocking Digital Cryptocurrencies. O'Reilly Media.

8. Aave Protocol. (2022). Aave Documentation. Retrieved from

By The Fedz Team

Before the advent of fractional reserve banking in the early 18th century, the financial world operated on a full reserve banking system. Banks held all the depositors' funds, ensuring that every currency unit was backed by an equivalent amount of physical reserves, often gold or silver(1). This fully collateralized system instilled trust and stability, as depositors knew their funds were secure and available on demand.

The transition to fractional reserve banking marked a significant turning point. Banks could lend more money than they possessed by holding only a fraction of reserve deposits, effectively creating new money(2). This change fueled economic growth and global prosperity by expanding credit availability, enabling businesses to invest and consumers to spend. However, it also introduced new risks, including financial instability and the dreaded bank runs(3).

In the decentralized finance (DeFi) landscape, the ethos of over-collateralization remains strong. The crypto community, rooted in principles of transparency, decentralization, and a distrust of traditional banking, has shown natural resistance to lending, leverage, and especially under-collateralized mechanisms(4,5). This skepticism is understandable; under-collateralization without proper safeguards can lead to systemic risks and financial crises.

Early adopters of Bitcoin and other cryptocurrencies often viewed these technologies as financial tools and a philosophical and ethical alternative to the existing banking system6. Rooted in ideals of financial sovereignty, censorship resistance, and complete asset ownership, many early Bitcoiners harbored a deep mistrust of traditional financial institutions, mainly due to practices like fractional reserve banking and under-collateralized lending that can lead to economic instability(7).

This cultural and ethical aversion has fostered a reluctance to embrace under-collateralized models within the crypto community. The emphasis on self-sovereignty and total control over one's assets makes concepts like lending and leverage appear antithetical to the foundational principles of cryptocurrencies. For many, replicating elements of the traditional banking system within the crypto space undermines the very reasons for adopting decentralized currencies in the first place.

The preference for over-collateralization in DeFi protocols aims to ensure stability and security. By requiring borrowers to provide assets worth more than the loan, these platforms mitigate the risk of default(8). However, this model limits the potential for growth and inclusion, as it restricts access to capital for those who cannot provide substantial collateral(9).

The collapse of the Terra-Luna ecosystem in 2022 was a stark warning about the perils of improperly managed under-collateralized systems(10,11). Terra's algorithmic stablecoin, UST, was designed to maintain its peg to the US dollar through a mint-and-burn mechanism with its sister token, LUNA12. However, this model relied heavily on the quantitative theory of money, focusing on the supply side without adequately addressing demand stability or the prevention of bank runs(13,14).

When confidence in UST faltered, a mass sell-off ensued, leading to a death spiral in which both UST and LUNA plummeted in value(15). A critical flaw was the lack of robust mechanisms to prevent a bank run scenario. This event resulted in significant financial losses and eroded trust in exploring innovative, under-collateralized solutions within the crypto space(16).

Bank runs represent one of the most significant threats to financial systems. They occur when many customers withdraw their deposits simultaneously due to fears of the bank's insolvency(17). This phenomenon can quickly escalate, causing solvent institutions to collapse under the sudden liquidity strain.

Economists Douglas Diamond and Philip Dybvig's foundational work, which earned them the Nobel Prize in Economic Sciences in 2022, provides a deep understanding of bank runs and how to prevent them(18,19). The Diamond-Dybvig model illustrates how banks transform short-term deposits into long-term investments, making them inherently susceptible to runs(20). Their research emphasizes the need for deposit insurance and lender-of-last-resort facilities to maintain depositor confidence and prevent panic withdrawals(21).

Over the past 40 years, extensive research has built upon this model, exploring various strategies to enhance financial stability. These include regulatory frameworks, capital requirements, and liquidity provisions to fortify institutions against sudden shocks(22).

In light of these challenges and historical aversions to under-collateralized systems, The Fedz emerges as a pioneering solution that seeks to bridge the financial gap in DeFi by leveraging decades of bank-run mitigation research. Recognizing the necessity for more efficient capital utilization and inclusivity, The Fedz introduces FUSD, an under-collateralized stablecoin designed to bring the benefits of fractional reserve principles to the crypto world while ensuring stability and trust.

The core motivation behind The Fedz is to address the limitations of over-collateralized models in DeFi, which restrict access to capital. By embracing under-collateralization, The Fedz aims to:

• Enhance Capital Efficiency: Allow issuers to engage in financial activities without the prohibitive requirement of excessive collateral.

• Advance DeFi Evolution: Integrate proven financial stability mechanisms into the decentralized ecosystem, propelling DeFi into its next maturity phase.

The Fedz is a DeFi stability mechanism that brings established bank-run mitigation principles into cryptocurrencies. By introducing FUSD, The Fedz provides an under-collateralized stablecoin that maintains its stability by applying insights from decades of economic research and banking practices.

Key aspects of The Fedz include:

• Integration of Bank-Run Mitigation Research: The Fedz leverages the foundational work of economists like Diamond and Dybvig, implementing principles such as maintaining depositor confidence and ensuring liquidity availability to prevent panic withdrawals.

• Application of Traditional Financial Safeguards in DeFi: By adopting mechanisms analogous to deposit insurance and lender-of-last-resort facilities, The Fedz enhances the resilience of its under-collateralized stablecoin.

• Commitment to Transparency and Decentralization: The Fedz operates with full transparency on-chain, governed by a decentralized community that aligns the platform's evolution with its users' interests.

The Fedz presents a vision for the future of DeFi - one where the efficiency and inclusivity of under-collateralized systems are realized without sacrificing stability. Through the thoughtful application of bank-run mitigation principles, The Fedz aims to close the financial gap and lead the way in redefining decentralized finance.

The Fedz represents a significant step toward closing the 300-year financial gap since the shift to fractional reserve banking. Thoughtfully integrating time-tested financial stability mechanisms into a DeFi framework addresses the core challenges that have hindered the adoption of under-collateralized models in crypto.

FUSD, as an under-collateralized stablecoin with bank-run mitigation, exemplifies this innovation. It opens up new possibilities for growth and inclusion within the DeFi ecosystem. By mitigating the risks of bank runs and financial instability, The Fedz paves the way for more accessible lending and borrowing opportunities, fueling economic activity and prosperity akin to the boom experienced during the rise of fractional reserve banking(23).

The journey toward making DeFi great again involves learning from the past and thoughtfully applying those lessons to new technologies. The Fedz stands at the forefront of this movement, offering a solution that marries the strengths of traditional financial safeguards with the transformative potential of decentralized finance.

By introducing FUSD to address the fundamental issues of under-collateralization and bank-run prevention, the Fedz is poised to lead the DeFi space into a new era of stability and growth. It invites the crypto community to embrace innovation over hesitation, forging a path that closes the historical financial gap and sets a new standard for what decentralized finance can achieve.

Join us in shaping the future of finance—secure, inclusive, and truly decentralized.

Note: For more detailed information about The Fedz, FUSD, and their architecture, please refer to official communications or documentation from The Fedz team at TheFedz.org and The Fedz GitBook.

1. Rothbard, M. N. (2008). The Mystery of Banking. Ludwig von Mises Institute.

2. Gorton, G. (2010). Slapped by the Invisible Hand: The Panic of 2007. Oxford University Press.

3. Kindleberger, C. P., & Aliber, R. Z. (2011). Manias, Panics, and Crashes: A History of Financial Crises. Palgrave Macmillan.

4. Antonopoulos, A. M. (2017). The Internet of Money. Merkle Bloom LLC.

5. Buterin, V. (2013). Ethereum Whitepaper. Retrieved from https://ethereum.org/en/whitepaper/

6. Nakamoto, S. (2008). Bitcoin: A Peer-to-Peer Electronic Cash System. Retrieved from https://bitcoin.org/bitcoin.pdf

7. Antonopoulos, A. M. (2014). Mastering Bitcoin: Unlocking Digital Cryptocurrencies. O'Reilly Media.

8. Aave Protocol. (2022). Aave Documentation. Retrieved from