Building DeFi Yield Curves & Unlocking New Real-World Use-Cases

Transcript

[Music] so our next speaker has a background in trade fi uh also has uh worked with trading and investment banking with big names such as Goldman Sachs Morgan Stanley and roko capital in London uh I would like to ask to come on the stage George give a round of applause thank you thank [Applause] you great um so is everyone bullish etherum I hope so yeah so my name is George um thanks a lot for having me

really excited to be here um I'm going to be talking about building defi y curves and unlocking new real world use cases um so let's get going um so what is the term structure protocol um term structure is a custodial fixed income protocol that uh basically aims to establish interest rate Curves in defi by having fixed rate fixed term borrowing and lending um the way it's doing that is by having a customized ZK rollup uh for fast scalable and secure transactions uh We've also been in contact with the arbitrum formulation to to to deploy there as well by the end of the year uh and the whole vision is to basically provide defi tools and infrastructure

that can unlock real world real life use cases um from RW to cheap remittances and um to to mortgages um where is the market right now uh well basically almost 50% of uh bored and land volume is being repaid or redeemed after less than 30 days so there's not much activity happening beyond that there's nothing happening one month two months Etc there's no concept there's no such thing as a as an interest rate curve um as a yield curve um so what is an interest rate curve Cur what is a y curve I'll go into that in just a minute but uh before that I just uh want to go into some financial markets history um so Bank notes and

modern money was invented in the 17th century the first Futures Contract uh it's really interesting it it it was traded in Japan in the 18th century uh and it was a rice Futures Contract so basically farmers were trying to ensure their future crop and basically hedge their price rate and that's how Futures were invented they had a real life use case and uh that's that's how they they got going um then significant growth of Futures contracts happened later in 1848 uh with the grain Futures that that was introduced by the Chicago Board of Trade um so that is on the on the future side and then the other important um product that we all heard of um

government bonds uh when were these first issued uh 17th Cent Century in Netherlands and the UK um they kind of happened around the same time so I've put in both uh and then the first issuance of US government bonds happened later in 1790s so obviously US government bonds the most important bond market and arguably the most important kind of uh Financial contract traded um so the kind of point I'm trying to make here is that uh when it comes to Futures contracts uh these were tied to Commodities and Were Meant to hedge Farmers price R so they had real life use cases they they were not created such that speculators can play a different type of Casino they they were embedded in real life needs and

similarly um government bonds played a significant role um throughout history in funding War unfortunately and then funding reconstructions and making societal progress so again they had a real life use case that in itself had a real life use case that's how it was invented not for you know speculation um now back to what the yield curve is so basically if uh you have the time to maturity on the x-axis and the interest rate on the y- axis uh you should get this nice upward sloping concave looking curve if the market is well behaved and what this is meant to tell you is that the longer the time to maturity the more uncertainty you have if you're having

more uncertainty you need to be compensated with a higher interest rate so for example if I'm lending $100 to my friend for a week uh it's a different risk proposition as opposed to lending $100 to a real estate developer in New York for two years obviously the uncertainty is much higher and I won't be necessarily be able to chase that real estate developer to get my money back versus my friend uh and so that's that's kind of what what a yield curve is or an interest rate term structure um is that's that's you know the terms are interchangeable um let me just try to go to the next slide yeah perfect so um use cases of fixed income again most of these use cases

were embedded in real life needs um for example Capital preservation and income generation you have some spare cash you go to the bank you make a deposit that's meant to preserve your Capital ideally pay you pay you an interest rate that is going to beat INF inflation and so it's it's going to preserve your Capital um we use fixed income to Value simple and complex Financial products we use it as a benchmark for pricing and risk management so um again if you look at us treasuries and they're yielding 5% you can use that as a benchmark when assessing other investment opportunities so similar to the real estate example I was giving if if treasuries are yielding 5% and you have an investment opportunity to yield to u to lend to a

US New York real estate developer at uh 8% maybe that's good or maybe that's bad if it's lower than us treasuries that's definitely bad cuz the risk is much higher for that rather than the US government which is never going to default so whenever we we look at things this whenever we look at these financing needs and and things like that we need to look at it from a from a risk management perspective um again we use fixed income for duration and asset liability management for Pension funds Insurance funds that that are meant to you know preserve value and and and pay pensioners money and things like that we use it for funding and liquidity management we use it to hedge interest trade risk future payables future receivables uh and lastly uh we use it

also to Arbitrage against other interest rate instruments we use it for leverage for risk taking but these are obviously more uh Financial related use cases as opposed to real life use cases which were the the the first ones um so yeah that's that's you know short conclusion here fixed income has many real life use cases and needs besides Financial speculation um when it comes to where the market is right now um if you look at the top 10 defi um lending protocols uh so the tvl is around 12 billion uh give or take depending on when how how bullish people are feeling that week um and then if you compare that to fixed income that's over 100 trillion and then

to us interest rate derivatives that's that's over 600 trillion so there's a huge gap for for defi to to to catch up with over over the next uh next few years um when it comes comes to product gaps I think here it the the the story is really really interesting um we have money markets uh with fa we've compound we've jumped all the way the complexity curve to having options and structur products uh projects and protocols and teams that are building this uh we're doing tokenized real world assets but I think the main problem in defi is that we have forgotten about the the solid foundation the backbone of how you can build all these things and so the idea

is to kind of build Bond markets and going from Bond markets to create an interest rate swap curve a yield curve that I was mentioning that being able to price forwards and future contracts and having a discount curve that basically allows you to uh price any sort of future cash flow discounted to the present and by doing that you're actually able to price options correctly and structure products and other things so uh real really big issue here that that we've jumped all the way to uh the complexity curve without solving the the fundamentals um when it comes to some gaps and solutions so uh again if you look at defi you have floating interest rates API that varies by block so you

know this block is going to be 5% the next one is going to be maybe 5.2% there's no sort of certainty and the idea is to get to fixed interest rates to API that varies by tener so you know you're getting 4% for a month you're getting 5% for 3 months you're getting 7% for for 6 months um uh similar L you have this peer Topol amm pricing model that was meant to kind of bootstrap liquidity and there's a there's a mathematical function that that you don't know necessarily what's what's happening there so you have very little transparency you have very little efficiency and the idea is to go to peer-to-peer to a market driven order book where you have bids and offers that determine market prices not a whale that for example withdraws liquidity from a pool imbalances the pool and then the

the kind of the prices depack significantly whereas if it's a market driven order book and people p put in you know bids and offers that that actually actually means that stuff has transacted there and that is the real and correct price and I think all these things basically make D5 very hard to scale and the idea is to you know improve on that scalability and and build uh multiple products um how we plan to do this it's by having three types of markets so primary Market secondary Market and repo markets um repo markets are happening later down the line so I won't be talking about those but the there's many different use

cases that you can use these markets for you can use them for payment investment pricing hedging uh liquidity management issuing debt asset allocation and obviously arbitraging for opportunities taking some leverage um this is just a kind of a chart with with the primary and secondary repo markets so I'm going to go into the primary markets first um so what are primary Market markets well basically here um you can choose for example the token to borrow is usdc you can choose between some maturity days these maturity dates are going to be standardized such that it can concentrate liquidity so that such that liquidity is not fragmented in like so many different places so you're going to be able to to go for a month and two months and three months and six months

to start you can choose the collateral in this case it was rep if and uh and the amount you want to borrow and uh so basically you're going to do that um you're going to put going to be able to borrow and lend at a fixed rate and for a fixed amount of time you know you're going to get 5% for the next month it's all going to be certain and the way people are going to get matched is VI an auction auction process with with the ZK rollup um so the workflow is very simple lender places an order to lend at x% borrower to to borrow at y% they get matched and then the lender receives an erc20 fixed income bond likee token and so then the question becomes what can you do with this bond-like token well in

traditional Finance when a US Treasury is issued and there's an asset manager that buys it in primary markets he can go on and trade that treasury in secondary markets why would you need that well for example let's say that you were a lender you've lent for 2 months at 5% and in two weeks time uh people are really demanding to borrow for 6 months and the the borrow rate for six months which was driven by market demand is at 15% and you're like wow I this is such a better opportunity than than what I have so what you can do is you can go into the market with your token and send it sell it um get back your capital and then go on and lend for 6 months at 15% which is very similar to what uh to what

what has been happening in traditional markets for the last 100 years or so um so that's secondary markets you can place limit orders or Market orders to trade fixed income tokens um and uh as I was mentioning the the workflow is very simple um and uh that's that's kind of primary and secondary markets they're you know synergistic together and they they replicate the the thread fine model that that has worked in creating liquidity for um the last 100 years or so um as I was mentioning the use cases are many um and the market participants are many as well so you're going to have you can have Bitcoin miners that want to

hedge the Bitcoins that they Mine by doing futures or forwards you can have rwa investors that want to borrow lend using their assets as collateral you can have fund managers and threat five people structure products investors options Traders people that want to make arbitrages or arbitrageur um stable coin issures there's many many different interactions between primary secondary markets and the products that are going to be uh to be on on the platform um here I want to talk a little bit about stable coins um so what they're meant to do is they're meant to be a pricing unit a medium of trust a medium of exchange a medium of of value and and and reserve and I think there are um a few problems right now um one of them the fact that

we don't have risk management we don't have yield curves we cannot discount future cash flows to the present and that leads to some kind of negative consequences so you have less liquidity less people hold stable coins less transaction volume and in general just a lack of use cases and product varieties and so the idea is to fix that and you know create liquidity and scalability be able to price derivatives and synthetic products via having the discount Factor curve and the four curve and the and the term futures um you're going to be able to um discount future cash flows to the present make Futures make make future payments discounted to the present and

things like that um and for example here um one of the one of the very important use cases liability management so if you're a stable coin issuer um you can use the protocol for optimizing your capital structure say for example you want to issue more debt you can use it for refinancing so you can replace your existing debt with new debt at faval terms so for example maybe you've issued debt at 10% and now the market is much more is has rallied so now that you can potentially reissue at 4% so you can buy buy back the debt that you issued at 10% and ref Finance at cheaper level uh you can restructure your debt so extending the maturity or reducing the maturity of your debt profile usually people tend to extend the maturity profile like if it

get gets to a month or two people try to extend it to a year or so and in general you can uh you can use derivatives such an such as interest rate swaps to hedge risk um another Super interesting um use case for me it's this interest rate Corridor system so let's say for example you're a again a stable coin issuer and you think that uh for your stable coin to be well behaved you think that the yield on your stable coin the borrowing and lending rate should be anywhere between 4 and 8% so if it goes beyond 8% you think that's too much if it goes lower than 4% you think that's too little and so what you can do is you can kind of preserve that in that that this this interval by having a corridor so if

the interest rate goes down significantly you can borrow more of your unstable coin in primary markets by borrowing more there's a higher demand for borrowing and therefore there needs to be a higher interest rate for that and that's how you push it higher and equally um if you know the yield curve the yield has gone beyond 8% you can buy your own stable coin fixed income token in secondary markets by buying it the price increases and therefore the yield decreases and so you're going to have this interest rate Corridor um another interesting one is basically if you're an importer or an exporter for supply chain payments uh actually I'm not going to go much into this because I think the example is a bit more complicated and I'm more excited about the the the corridor one um and uh in general you're going to be

able to um you're going to be able to price forward you're going to be able to discover to discover forwards in this case for example you're going to be able to to know what should be the fre month rep Bitcoin forward which you don't necessarily know right now um and lastly um tokenized rwa so using fixed income securities using equities using real estate using credit you can verify and tokenize it you get to the rwa tokens and you can use these rwa tokens as collateral for fixed rate borrowing uh on term structure the risk is going to be segregated um that's definitely going to be a high use case for this

um yeah so I think uh the the point I'm trying to make is that uh you're going to be able to combine call options put options Perpetual Futures options in general to to create all these different synthetic structures structure products floating rate structures floating rate notes and the the the space for for composability is really really high um you can have some trading strategies as well you can have some carry TAA strategies you can borrow at a low yield and lend it at and lend tokens at high yield you can buy fixed income tokens that are yielding high and when those prices increase and the yields decrease you can sell them at those lower yields and therefore higher prices you can

borrow low low lower yielding tokens and lend them on centralized exchanges Farm points rewards and things like that you can obviously borrow to increase your leverage if if that's what something that you're passionate about on you know Bitcoin ethereum alss mem coins as well should have put it there um and you can borrow to Arbitrage against uh ter Futures and other dislocations that that you see in defi um and I think all of these things uh provide a lot of thread benefits and thread related benefits it provides further legitimacy to the industry from a threat by threat F perspective um it enhances the compliance the Regulatory Compliance by having transparent

benchmarks so you're going to see okay uh this is a benchmark for three months boring and landing on ethereum it's going to be this percent and for usdc it's going to be y% and for usdt it's going to be this um this is going to open up the space to different ways of benchmarking investment performance correctly uh you can use it for other things that I was mentioning in the beginning so portfolio construction investment diversification um funding and liquidity management asset liability management duration matching and hedging any sort of interest rate risk and tailoring any sort of interest rate risk for risk- taking views um so I think all of these things um are going to provide a lot of

real life benefits and use cases so stable coin growth into both um present and future payments um that that growth in stable coins in in in general I think is going to push for cheaper remittances which is obviously a very big topic for uh for uh not just Latin America but in general emerging emerging market economies um you're going to going to get to healthy and predictable borrowing and Lending Solutions so people are going to know okay I can lend ethereum for three months at this rate I don't have to check in every single day on a what is what is the rate what has happened and try to aage out what was my rate over the last three months um you're going to get to real world asset

organization and financing as I was mentioning earlier um that is only going to open the space to mortgages and uh the the kind of last point I uh I wanted to to mention here is that speculation in itself is is definitely you know Casino like but I think also speculation in itself brings liquidity and mind share which in turn creates a lot of other composability and other different use cases when when people try to to to look at the space correctly and and for the long term and I think uh in general speculation will lead to real life applications and I think that is where defi is right now people people are using it to speculate on a bunch of

things but once we build the right tools and the right things we're also going to be uh able to build uh more real life use cases um in terms of where I see this going in terms of security with scalability we're going to get to a non-custodial wallet with ZK capabilities in terms of efficiency we're going to get to a peer-to-peer plus ZK order book and in terms of costs uh think a customiz e is what would make sense for for trading activities and defi activities and uh in terms of where the future lies um we start with ZK interest rate product we go to um building a defi

layer 2 in ZK and the whole ZK defi ecosystem uh similarly we start with simple Bond markets and fixed income instruments we get to money markets derivatives and structure products and that's how we build a lot of use cases for stable coins and real world assets um and uh I think that's that's all I had to say um thanks a lot for uh for the [Applause] time do we have any questions hey uh thank you for the presentation uh before we get to oura I

think we could probably tokenize a few things like um uh gas futures or block space and how far do you think we are until we can get there yeah good question um I think there have been attempts in the past to um to try to hedge for for for gas risk and I think that's that's some definitely something that uh we are definitely not working on that at the moment but I think that's something that that would be that would be really interesting I think probably as you scale up and all these different scalability solutions come up I think guest in itself is going to be less and less of a problem but definitely I think both both of those use cases are very much uh uh uh blockchain related and

very very important and I do feel that the The Narrative for rwa is is extremely extremely strong but equally it's very hard to get there without having the the right fundamentals which we don't have right now yeah thanks for that presentation that's really interesting I have this question so uh the uh yield curve in traditional Finance usually implies the risk free rate and I was wondering how are you going to access the risk free rate and uh if uh there is any way how users could uh possibly uh get rid of the premium that you have to pay for the

canalization process yeah it's it's a great question and I think it's a very fundamental question question which is what is the risk free rate like if you look in traditional Finance the risk free rate is in if you if you look at Dollar denominated instrument it is the US Treasury curve and then anything that is on top of that is a risk premum as you said and equally if you for example I was a Trader I was trading Euro and Sterling products in Sterling it's the UK Government Bond Market in Europe it's the German Government Bond Market that's kind of the the uh the risk-free rate now I think the question we uh in crypto is is a very philosophical one in my opinion I think ethereum in itself

should be the risk-free rate so how how you think about that you can think about it in different ways is is ethereum if ethereum is yielding 3% can you compare in staking can you compare that 3% with us treasuries that is basically a different asset class not really so going back to the ethereum ecosystem I think the staking rate in itself is probably going to be the risk-free rate beyond that I think you're going to have borrowing and lending on ethereum that is going to to to to be trading at a premium to the staking rate which the staking rate in itself should be the lowest risk uh activity that you do on the ethereum blockchain

obviously we say that ethereum staking rate is the risk-free rate because we obviously all envision that etherum is never going to get hacked and things like that otherwise there's no such concept of risk free rate on ethereum if if if we have any sort of uh technological risks and then from there you can you need to think about other things such as for example usdt which is the most important stable coin that we have should the usdt rate trade above the ethereum rate probably um but how how high should it trade um probably at a premium probably also at a premium to us treasuries right because if us treasuries are yielding 5%

that is a risk-free US denominated product whereas usdt has the dpeg risk has the hacking risk and things like that so uh I think we're going to get to this stage where for many different users in the ecosystem people are going to have very different views about what is the risk-free rate and equally for Bitcoin is rep Bitcoin a good indicator of a risk free rate when you have to wrap it probably maybe for for others it's not but I think the fundamentals is that ethereum in itself will need to will will become the risf free rate and that was going to be the staking rate on which we're going to build other things that are going to have risk premum I

think that's where we're going to get at some point thanks that's all that's all the time we have for questions thank you George thank you [Applause]