Building the Financial System You Want to See w/ Dion Chu (Term Finance)

Transcript

[Music] thank you welcome back to the strangewater podcast I'm your host Rex also known as ham Salomon or Salomon crypto thank you so much for joining me for our second episode as previously discussed I am a Die Hard believer in ethereum I have my own personal Journey that transformed me into a Believer but that's a story for another time here's what I'll say it's incredibly specific to my life experiences the deeper I get involved with this community the more I realize that everyone's journey is incredibly specific to their life experiences

I mean I guess you don't find yourself outside of the Global Financial system without a good story today's conversation is with someone with a particularly good story not only because of the person it has made him into today but because it gives him the tools and the knowledge needed to create the financial Primitives that Define needs in order to become stable and scalable here's all the background context you need fixed income is an incredibly important asset class far larger than the equity or the stock market and uh fixed income basically does not exist on chain and so without further Ado let me introduce you to Dion Chu the founder of

term Finance for a fascinating conversation of the future of bonds on chain one final note please don't take Financial advice from this or any podcast ethereum and decentralized finance will change the world but you can easily lose all your money on the journey there and with that once again thank you so much for joining us and uh I hope you enjoy the podcast today we have a very a conversation that I'm very excited about with Dion Chu the founder of term Finance so Dion thank you so much for joining us super excited to talk yeah thanks for having me I'm super happy and excited to be part of

your podcast well thank you thank you so I think kind of before we we go to gigabrain and start talking about like this like super Dynamic like changing world that like we're in and we're helping build like I love to get like a deeper understanding of your background um sure so it started my career I had hedge fund in New York d-shaw was there for you know a year and a half but was interested in public policy so decided to join the Federal Reserve Board of Governors in D.C um and was there from 2007 to 2009 sort of bracketing the financial crisis 2007 to 2009 is probably the most interesting time on this planet to be at the Fed so we will definitely be circling back to

that what we're like the biggest takeaways that you um you know found or learn when you're working at like this the fed and these like super institutional businesses yeah for sure I mean I think one key thing is starting my career in 2006. you know the entire you know two-thirds of my career has been centered and focused on financial instability right start a career into one of the largest financial crises um in modern history um you know even while I was at D Shaw there was the first signs um you know of trouble brewing and there were some of these they call it the

kerfuffle where you had some Quant funds you know entering into statistical Arbitrage strategies that led to some you know short-term you know liquidation crunch in the market and then by the time I got to the fed you know things started to pick up Full Steam and so you know really early on the importance of you know Financial stability uh paying attention to liquidity you know it's kind of like etched into my mind and I think that's something that is starting to rare its head again but um but yeah I think my whole career has been about okay how do we create

Financial systems that are stable and robust um and also always being cognizant that you know it's a very thin line between stability and crisis so you know I think that's a really important part of sort of my career path um let's talk about crypto so uh just tell us about the story about how you went from like managing macro stability to like the most unstable like but most like energetic um place that Finance is right now yeah so you know kind of stepping back my intro to crypto crypto story is I got into Bitcoin in 2012.

so it was actually a good friend of mine from law school you know he was CS major undergrad so had been mining Bitcoin sort of in his closet um it was like my 30th birthday showed up you know he's breaking popping Magnums of champagne I'm like yo it's cool you don't have to do all this and he's like oh it's all good it's Bitcoin money and that's the first time Bitcoin hit a thousand so that was like a big deal at the time um yes anyway obviously not long thereafter it went back down ultimately again as low as thinking the 200s but he had said like look just buy some every month it's like coffee money

either works out or whatever you don't lose too much so you know I took the advice and bought into Bitcoin uh it was for a very long time very much a Bitcoin Maxi so I didn't touch anything else you know missed or avoided the Ico boom depending on how you look at it um it's a kind of like off my radar for for some time and then yeah this was around you know around the pandemic interest rates were really low right essentially zero and a friend from my own friend of mine visited from out of town you know he was deep in the crypto space

started you know talking about different altcoins started looking on to Bringing tokens on chain which is something I hadn't done before right Bitcoin was just something you held and didn't do anything with so that was interesting like bridging or taking tokens off exchange onto the blockchain discovering this entire world or ecosystem where you can swap tokens you can borrow and lend you do yield farming and the yields at the time were quite High we were talking about double digit yields even among some of the safer protocols so just kind of comparing those yields to what was available in track live which is essentially zero you know was you know something worth

looking into so that's sort of you know kick-started my rediscovery of the crypto space yeah that's all I mean 2012 Miner that's um wow I'm impressed and I'm impressed not only that you found it that early but that you weren't scared away and all of the downturns um so first of all like so excited that um you're here and that you found ethereum and now we're like um are ready to build on it but I guess if once you hear your story The the path to term Finance is like pretty straightforward and pretty clear right because it sounds like you entered this space like specifically like looking for yields that were higher than what you

could find um in the real world and then immediately found them and then probably immediately realized that like they could be gone tomorrow yeah I think these are absolutely that's a huge part of it you know I think another part of the story is and as part of that journey into rediscovering crypto we started advising for various projects so some of our work both on the nft side and on the D5 side and one of those roles I served as a dow treasury manager um you know they're significant operating capital that needed to be managed you know in a safe and conservative manner and when trying to kind of perform the

duties of that role one thing that jumped out at me almost immediately was a lack of fixed income product D5 right so as a former Bond Trader fixed income that's what I know very well it's one of the largest financial markets in the world and you know actually can we dig into that a little bit I think like for for people that came to this space from Trad fire traditional business like it makes sense why fixed income is so important but like do you have any thoughts on like number one why it's so important to like building strong financial systems and two like why and up until today like we really don't see it existing at scale yeah I mean I think it's not exactly accurate to say that it doesn't exist

um it was actually quite large in C5 so Galax digital and Genesis they had major OTC lending books that were on a fixed rate basis if you look back at Q2 last year I think Genesis originated over 40 billion in a single quarter a Galaxy digital you know similar similar origination size so it is a massive Market it was just happening off chain on chain it was also there were also some early attempts some projects are still around um but the mechanisms weren't particularly scalable and given how efficient the C5 Market

was there wasn't really much of a need to necessarily have in D5 you know I think recent events have made the you know need for doing an D5 a lot stronger it's a little much stronger case for now because people are starting to realize a counterparty risk is something that you know the blockchain was originally designed for and hadn't really been used now people are you know suffering from the consequences of relying on third-party custodians so you know there should be some Tailwind now towards trying to move that market you know onto the blockchain yeah no that makes a lot of sense and I

you know I uh now that you say it it's like how could I have missed this but like obviously you know Genesis and like the centralized lenders um like were like such an enormous business that they might have been like the whole market for a while and um you're totally right that like that it's not even that the opportunity is there is the opportunity has been proven out the only question is how do we like take that activity off chain and put it on chain and so with that um that I guess now finally my question for you is uh Dion would you give us the elevator pitch for term Finance yeah I think the I think to really understand from Finance we first have to see how the existing

um D5 protocols address it um all of the existing protocols in the fixed rate barn and lending space rely on amm mechanisms and these amms require that LPS deposit idle capital that sits in the pool essentially waiting for bars to show up and perform a transaction in between it generates no Revenue so the average real return to LPS is about half a percent a year this is not including liquidity incidents just the real return then on the barn side the way they typically work is a bar is asked to deposit collateral into a smart contract

but rather than getting loan proceeds from that transaction all they get are erc20 tokens that the bar is then required to take the additional step of selling into the amm in order to realize their loan proceeds so it's a two-step process and in that second step you know they incur significant slippage through the decks we unpack that a little basically the receipt token when you deposit a collateral what you do is you mint both you know you have your asset your collateral receipt that's your asset and they also mentioned a liability but

because you hold both the asset and liability it kind of just zeros out if you want to actually turn that liability into you know usable funds then what you can do as a borrower sell that liability into the pool and then retrieve your stable coin liquidity got it so what you're saying is that no matter what that includes like an additional cost on the borrower via slippage because like you have this like extra trading or amm stuff in there like no matter what that's right the only way you're going to turn that

you know token into the loan proceeds is by going through the amm got it okay all right and that's that is yeah super clear on why that's a problem it definitely for the borrower and possibly for the lender or at the end of the day the slippage is always like two sides of a coin right somebody's losing and somebody's gaining and so does this uh model end up benefiting the protocol not really so from the protocols perspective the way it works is because they funnel all loan origination through their amm the total amount of loans they can androgenate or accommodate at any point

in time is capped at 50 of the tvl in their pools right that's the component of the pools that are actually stable coins so the idea is you can't take out more than what is already in the pool though in reality given the way the constant product function works for the pricing on the decks the amount of liquidity available at sort of the market rate is far lower than that 50 number so in practice if you go in and try to take out two or three million as a borrower from a pool the interest rate is going to go from say four to six or seven percent got it and in this case the interest

rate is really just like a virtual thing that we're using to think about it wherein it's actually manifesting is in that slippage when you dump your liability token exactly you're selling it at you know 94 cents on a dollar instead of 96 cents an adult got it okay super clear super clear um and then all this works together in a vicious cycle right because the slippage is so high there's low utilization low utilization means low transaction fees for LPS causing LPS to withdraw Capital because they're not earning a sufficient rate of return which in turn makes the slippage problem you know even worse so you kind of have like this negative

flywheel effect where it's very hard to like reach a Tipping Point all right so that that's the problem with uh fixed rate lending as it exists today yeah it's just not scalable it's very capital and efficient both for the lbs and for the bars my insight from being a former Bond Trader was look we need to separate the matching and issuance of these loans the loan origination from the secondary market trading so the primary or secondary markets taxes were designed for trading volume on the margin of tokens already issued they're not meant for doing icos um

so you know I think by separating those two functions we can get a more efficient outcome uh and so what you're saying you're saying in Ico as akin to loan originate an Ico is akin to loan origination which is not appropriate for Dex all right if you want to match large volumes of bars and lenders you know Dax isn't the best way to do that got it okay yeah that follows yeah so you know thinking back to my days is a Government Bond Trader must have participated in hundreds of U.S government Bond auctions every G7 country to this day still issues Bonds in the first instance through an auction process [Music]

so you know what we decided to build was an on-chain auction that allows us to match bars and lenders and use the auction mechanism to determine the fixed rate that comes out of the process okay so an auction method uh sorry an auction dynamic in loans I'm I'm guessing what that means is that um like people who borrowers um put their requested capital and the amount that they're willing to pay their interest rate out into the the marketplace the lenders do the same thing they say this is the amount of capital I have that willing to lend and this is the interest rate I'm willing to

lend it and then term Finance is a like a clearing protocol that matches up um like these these loan requests with these like potential loans is that right yeah that's right so basic idea is you know the auction will typically be open for a period of 12 to 24 hours and bars and lenders will be able to come in and submit tenders so Biz and offers to borrow or lend as a lender you can specify how much your you'd like to lend and what the minimum interest rate you would require in order to do so bars would specify how much you're

looking to borrow and specify what is the maximum interest rate they're going to pay up to in order to receive the loan and at the end of the auction the smart contracts will determine a market clearing rate where any bar willing to pay at or above that rate would receive a loan and any lender willing to lend at or below that rate would make a loan and in both cases they would transact at the market claimery so at the conclusion of the auction the bars will receive their loan proceeds directly from the protocol and lenders will receive erc20 tokens we call them term repo tokens

that are essentially receipts receipt tokens that the lender will be able to use to redeem for principal plus interest at maturity and these tokens will be normalized to redeem one for one for the underlying loan token so that you know in secondary markets they might trade like discount notes at some fraction of par conversion to par as you get closer to the maturity date and the idea is that at steady state we will have tokens for every week every month going out to one year so that when you open up massari or wherever you go for your crypto data the first thing you'll see is the term find

and seals curve and this would form the basis of a sort of a D5 Benchmark yield curve for the D5 ecosystem I think another unique feature of the way our our spark contracts are set up is that unlike compound anave where they have one single large co-mingle pool lateral assets our collateral assets are segregated by maturity so you know each token different maturity each loan would have its own separate pool so that you don't kind of put all your eggs in one basket and the idea is that you know if there is a secondary market for these tokens

they would trade you know at a discount to par and converge to one as it gets closer to the maturity date um and theoretically there should be buyers because it's you know fully collateralized over collateralized in fact by you know Blue Chip collateral tokens so that's super interesting what you're essentially saying is that like term Finance is kind of back dooring into like I don't know if you're gonna take offense of this but like minting synthetic uh tokens against like whatever collateral you accept yeah you can call them like claims or you know discount notes um it's very similar to it's very similar to like a principal

token that you see on you know some of the strip protocols um that are going to be backed by the collateral pool that sits behind it before we continued let's just real briefly for people who are following along at home would you mind describing like what how these strip protocols work yeah so with the standard strip protocol I think element is one of the you know larger our leading protocols in that space what they do is they'll take an interest bearing asset which in D5 currently are primarily floating rate assets that come out of you know Ave or compound so ausdc or cusdc

and what they'll do is split it into a principal component and an interest rate component so you know you know after a three month period you'll get your initial investment back if you can put it into one of those plugin rate protocols but you'll also earn some interest which remains undetermined right you won't know until until the end of that period so with these strip protocols what they're able to do is take that a die or see that c die and split it into a principal component in an interest rate component so in this way it allows people to trade them separately

a buyer who wants fixed rate can buy the principal typically will sell at some discount because there is a cost to um you know that time value money you're not actually able to access that usdc until the end of that until the maturity date and then the variable component will you know nobody knows exactly what it will be but the market can you know express its views by trading that token around yeah yeah and so just like to put a fine point on it like the way that these protocols work is they'll take a variable rate asset or you know variable rate token and they'll just create two tokens one that says you get back your original investment in X months right and that's

the principal token and then you have the yield token that says whatever your principal generated all of the yield will go into the yield token and so like the cool part about that is that's how you transform a variable rate product into a a smaller variable or a product and then a fixed rate product right because this principal token is saying like I will give you one of your principal in X months that's the same that's fixed rate yield right and so um what Dion is saying is that when you um what did you call them the term repo tokens are are analogous to these uh principal tokens because

um when you have a term repo token you at the end of the time lock period you know that the pr the total amount of the proceeds which are known up front that's the way fix work Frisk fixed rate lending works is like if you know the principal amount you know the interest rate amount then you can know how much is supposed to be there at the end of the time at the end of the loan yeah I know for sure I mean if you see you know we call it term repo tokens because the model is largely based on um repurchase agreements and tradify repurchase agreements have been around for a very long time they are typically collateralized by

high grade Securities like U.S treasuries or mortgage-backed securities repos are the way that the Federal Reserve implements monetary policy that's how they control the money supply by taking money in or putting money out into the system so it's a massive Market and on U.S treasuries because you know they are relatively stable and backed by the full faith and credit of the US government the over collateralization Ridge you can borrow 99 cents on the dollar against the U.S treasury um so you know normal markets U.S

treasuries are not very exciting instruments they do not move very much but the way you know the macro hedge funds and the large Banks trade it is on a heavily levered basis right so it's not uncommon to see hedge funds and Banks trade Bonds on like 40x Leverage so that small you know movement becomes quite magnified when you're trading with that you know that kind of um the kind of Leverage in your books and and yeah I mean that's what repo barring collateralized borrowing is primarily meant for right allows people to trade large volumes without having to

tie up a lot of balance sheet or capital and the more stable they asset the more you're able to lever it up so as you're saying if you're going to be using stable coins or you know fixed rate tokens as collateral that are over collateralized then you know you can really get some decent decent leverage on that without very significant risk um you know one example would be say you want to use a die or C die as collateral against the term loan you know you won't need to put up 125 percent over collateralization you might need only one percent um or maybe it could be one to one

because you feel confident that compound or not they are steady protocols and that would allow you to kind of Leverage that up um quite significantly if that's what you wanted to do I guess like it would make sense to really uh talk specifically about the secondary market for the term repo token so would you mind like talking me through how that's going to work yeah you know so that's not something that's in our roadmap to do ourselves but it's something that you know certainly would be interesting to see and you know how I think it would work out um you know I think there are a few different ways I mean to start remember my you know first MD on the

trading desktop is there are no bad bonds only bad prices so you know there's going to be some price if you are holding a term repo token and you need to get out you know there's going to be some price that somebody is going to be willing to pay to have you know ability to redeem at a fixed state in the future um so you know great to see this happen organically let people negotiate between themselves I think you know the way we see secondary Market liquidity there is no Magic Bullet right it's going to happen the way it already happens it could be on centralized Exchange it could be through RFQ platforms where people can submit for quotes to

standing market makers what could happen you know in a definitive way through a DEX I think one complication with fixed rate tokens is that they have a life cycle right they mature at some point and disappear in the existing Dex ecosystem doesn't really contemplate anything but Evergreen tokens but you know there are a lot of interesting developments coming out in the space balance or managed pools is a super interesting product it's a pool that allows the deployer to change the composition of tokens that live within that pool

so it would be great to see in the future and balance or manage pool where say you had a one-week token a two-week token a three-week token and a four-week token and ideas as the one week token rolls off and matures it could be replaced with the newly optioned four-week token what's particularly interesting about that kind of a solution is that specifically as it applies to fixed rates every token in that pool is interest bearing it was not dead Capital as typically the case with Dex pools so it's almost like a money market instrument that also happens to generate

transaction fees on top so it's kind of like you know yield plus product it's super cool um and I think would also be really appealing to you know passive investors you just don't want to have to deal with you know options rebalancing their portfolio because that's one of the key frictions of you know fixed rate Securities fixed rate products fixed rate tokens in general you know there's a lot of those rebalancing involved um and by having that done by a manager you can kind of simplify that process to something that you know D there's more D5 negative D5 users like to just set it and forget it

I mean it occurs to me that like whether you guys ultimately like end up deciding to do this with your own treasury or somebody else decides to do this like there is obviously there for well-capitalized people who believe in like term Finance like it makes so much sense to provide liquidity for people that exit out of these fixed um these like short-term positions because like at the end of the day you know exactly how much you're gonna get when it like comes out and like if people want to exit they are going to sell it to you at a discount like that's just how it works you know yeah no for sure I think that's what's great is you know you have all these people that are great at what they do you know we don't need to do everything you know we can focus on our strength and then people

who are good at managing pools people who are good at creating exchanges they can handle that we had a lot of asset managers in the space yeah are you familiar with um Iraqis Finance their um there's like the spin-off of gelato Finance no I've never heard of them so so gelato is essentially just a smart contract automating company and um yeah and they are like holding like like so much of Maker's liquidity and die and like they realize that um that like the automation around uni V3 was such a compelling product that it makes sense to spin it out as like a whole new Dao or project or whatever and they're calling it Iraqis um like Dune um anyway well yeah I

should look into that yeah it's very very cool from uh um actually you would just love it from a like a treasury manager's perspective because it like makes uni V3 accessible but um I was just listening to them on the they were on the flywheel podcast um this week I think and the way they talked about what they're building was very cool because what they essentially said is everything that is on chain it's just basically smart contract Frameworks for managing liquidity for univ3 and anyone can use those and there's no fees and everything is totally free but like in order to use those you have to actually like program in solidity and be on chain and like do stuff there's no

front end and then so now they're going and building these front ends that like you know in the same like kind of Oasis maker model like actually provide access to these primitive tools and they can charge fees at that level but still create this like very credibly neutral um infrastructure and so I I just heard that this week um and I thought that was like a really cool exciting way to think about building on chain but um I don't know if I was worth bringing up because it seems to like really resonate with the way that we're talking about like you know it's kind of organic and you know decentralized in that way where different parties will come in and take off different parts of the you know whole chain and well yeah and I

just you know as I've been part of the space for like a year or two now right not that long but um so many like protocols or groups or people are trying to do like Bonds on chain right Bonds on chain bonds like I've I've heard this so often and I've seen like really prestigious VCS give so much money to like kids who have no idea what they're talking about and like one of the reasons I think term is so compelling is like yes like you're going to be able to build like this business on top of it but like I just want someone who actually understands how like bonds and fixed income actually works and is supposed to work and then like allows that to exist on chain and like your point exactly

about um how the way fixed income works today with the the decks and then you have to sell your liability into the decks and this is like the perfect Insight that um that I just I think is like lacking because like we have so many people that just haven't had real experience in the space so um yeah I don't wanna you know you know you flatter me I don't wanna I hope we're doing the right thing we're trying our best here but yeah well I appreciate that vote of confidence no man that's that's like the beautiful part about ethereum right is that everyone can try their best and like do their thing and like look man like I think I like I hope it's gonna work out for your sake and our sake and like the

stability of our ecosystem's sake but like kind of the beauty of ethereum is like you guys are gonna try it and like it's gonna work or it's gonna not and like the only question is like are you gonna be able to like take the punches on the face and like continue building or not you know and not like is anyone gonna come in here and tell you you're not allowed to do it and like I mean that's what I love about this space yeah oh for sure everybody gets to try and experiment um try to create something cool yeah cool um I am gonna start to wrap this up right here but thank you so much for um like talking us through term and explaining to us like the protocol and like how I I really do think that you guys are going to change

um like how fixed rate lending works on chain but um before I let you walk away I just we're in the middle of a banking crisis and I have someone who is at the FED during the banking crisis like I gotta ask man do you have any perspective or any hot takes about like what is going on with the economy or the banking system or like whatever we're seeing today yeah I know it's really interesting because it's in a lot of ways it's very similar it's the financial crisis of 2008 2009 um but it's also different you know they say history never repeats itself but it certainly rhymes

um you know what's similar between the two I'd say or two things I think one thing is the market getting lulled into assuming what happened in the past will always continue into the future with you know the great financial crisis centered around mortgage bonds you know it's based on the faulty assumption that housing prices always go up with the more recent crisis I think the Assumption there was that Government Bond prices always go up but if you look back over the past 40 years since Volker

interest rates have gone down from you know 18 percent to essentially zero essentially monotonically for the first time now we're seeing a pretty big regime shift where our race are starting to go back up and bonds government bonds have taken pretty significant losses you know in the banks they are allowed to Mark U.S treasuries as held to maturity assets so they can mark them to par when in reality government long bonds a 30-year you know at the trough was down 50 percent

so I'm thinking this is a government security government treasury bond down 50 saying is that they're allowed to Market as down zero percent but in actuality if they were to sell it they would have gotten 50 cents would take uh you know 40 to 50 loss yeah wow which is unbelievable for something you think are pretty sleepy boring instrument yeah um the problem here is that Banks take deposits deposits are short-term liabilities right as a depositor I'm allowed to take out my money whenever I need it and ideas that they'll be able to make good on that but the only way Banks can make money is by taking these short-term deposits paying a low interest rate on it and try to attempt to lend that capital

you know longer term at a higher interest rate we call this the carry trade this idea was back when interest rates were zero they took in a lot of deposits they paid zero interest or very little interest and they went out and bought long-term treasuries that were yielding you know three four percent uh you know I don't think they expected that race would rise so quickly and that they'll be looking at you know 50 Mark to Market losses but you know as rates started to rise you know with the FED raising interest rates people started you know pulling out deposits you know invest in them in Money Market

funds yielding three four five percent now and at some point you know they have to think about maybe we need to sell these these bonds that we have seen on the books and when they go to sell that they're selling it at you know 50 haircut to where they're marking it and you know as it became clear this was happening you know it's only logical for depositors to you know rush to the exits right what is the upside if you stay in the bank nothing but the downside could be that you lose everything so when you're kind of in that kind of equilibrium it's not logical to keep your money there

so there's a lot of news articles where people were kind of blaming the VCS but you know it's just Game Theory in that situation get your money out there's no upside it's not they don't get you a special star for yeah staying in the bank yeah so you know this kind of a clear crunch is kind of common across all Financial crises you know you do need to do this maturity extension to kind of profit from the carry trade it's how the economy is able to leverage itself but it's also inherently very unstable and that's why the Federal Reserve was

created initially right it was meant to be a lender of Last Resort you know when a liquidity crunch create its head the FED would step in to provide some short-term liquidity to try to shift that equilibrium back to a stable one where you know depositors aren't kind of all running from the thing I think you know very interestingly the um I think one thing they learned from the first financial crisis was a need to act very quickly you know during that time they let bear Stearns fail I think for moral hazard reasons they

didn't want to create the impression that they're going to bail out everybody who runs into trouble But ultimately that led to you know what they call Contagion right everybody just considered who is the next what's the next shoe to drop ultimately they had to come in to you know kind of turn the tide and this time around they acted much more quickly because I think they recognize and learn from the previous crisis that if you don't act quickly it's just going to continue to snowball and ultimately they're going to be in the same place and the solution here is pretty interesting right basically they forced everybody to will force in a sense that they impose

regulations requiring Banks to hold U.S treasury securities and allowed them to Market at par so what they've done is they've stepped in and said okay well you can give me those securities that are trading 50 cents on the dollar and will lend you a hundred cents on the dollar against it uh in the process of doing this they've you know essentially created a lot of money out of thin air um I think the idea is that you know they would do this for one year after a year most likely they're going to have to extend it because I don't see where else

you know the banks are going to get the money for that so quick question I mean is like if you put the inflation question aside which like we don't have time to go down that rabbit hole but like if you just snap back the race to zero does this problem go away oh absolutely yeah as they snap the race back to zero all those bonds trading 50 cents on the dollar go back to par um but you have the inflation problem right right yeah yeah I mean this is again I don't want this is a rabbit Trail for a different time but like I really believe that like the inflation problem is that like for the first time in our like modern history we gave money to people that

would spend it and not just to rich people who would like continue to hoard it and so like the stimulus checks like all the stuff that went around covid like that is the stuff that is like reflected in inflation and not like so anyway I don't know I I I have like a soapbox on this and like it's hilarious that I would even try to get in on top of it in front of somebody who knows so much more about the system than me but again um uh something for a different time and I just it is like really fascinating for me to hear you say like that at the end of the day like what we're seeing here just is like what happens at all um financial crisis right which is

that you essentially all financial crisis boiled down to this duration mismatch between the um where your assets were invested and like when your liabilities are due and especially relevant like when your liabilities can be due at the whims of like people that um short-term you know yeah yeah just short term I guess Dynamics yeah and like one is one shock you kind of put that equilibrium no man the Silicon Valley Bank thing is like super interesting because it's like look like I I think like the most mid-curve take you can have is like well why wasn't Silicon Valley Bank like hedging the interest rate

um you know against like why wouldn't they hedging the interest rate going up and it's like the entire economy can't hedge interest rates like there has to be someone taking the other side of the trade and so if it wasn't Silicon Valley Bank like well I mean it's also you know if they hedge an interest rate then they're not earning any money right earning a spread on their deposits was by lending it long or you earn a premium if you say I don't Blended lawn don't own a premium and they're going to say well how am I going to stay in business yeah and so I just it's like pretty incredible to like it's so easy to call like backseat driver on Silicon Valley Bank and just be like how irresponsible look at all this stuff but like I mean

really what it boiled down to is that I mean I I was I'm not part of these groups like I don't know if Peter or teal like really reached out to all of his like friends and told him to get them out but like it seems like Silicon Valley Bank like kind of did the right thing and then like all their depositors got spooked and that that just resulted in the destruction of a bank but like who did anything wrong yeah I mean I guess the only thing you could say is that you know not every Bank is you know in the same position so you know maybe they took a little more risk than they needed to um you know really hard to know unless you actually get to see the details of

their book and compare it to other bands like there are some there's certainly some systematic forces that are government policies that kind of encourage this Behavior well and I think that is like kind of the purpose wait perfect way to tie us off because like the one thing that we can do differently is like only work with like Banks or financial institutions or protocols in which like we can see all their books and like that really wasn't possible before but like that is like the future that we're trying to build with ethereum and like that I think is like maybe like a way out of this like endless cycle um you know if if uh we can like figure it out before

this country bans it first yeah for sure man I think what's what I love about being able to build and Defy is that you know I can try to create a protocol that implements policies that I think are financially stable and robust and so you know to that point um kind of touched upon this earlier but all of the loans on term are non-callable loans meaning that there isn't a duration mismatch the lenders are locked in for Lending for the same term that the bars are are negotiating for and you know that you know there are some downsides it means that lenders have to

sell their repo tokens if they need liquidity but that ensures robustness of the system and you know avoids these Bank Run flights of liquidity situations uh you know cause so much trouble yeah wow okay that that is our send-off like come work in ethereum found your own protocol because like you are able to implement like the policies that like make a more stable and a more like a better world so man Dion thank you so much this is such an honor and such a pleasure and like such an opportunity to learn about like what term Finance is and like how to recreate like the financial system we have today but in a

way that's just better like and whether that's like more transparent or less susceptible to herd mentality or you know like whatever you learned in like your real world experience dealing with these crisis like you're fixing it on chain and like that's what I love about this space and these conversations and uh just want to say thank you man thank you so much thanks for having me Rex it was a pleasure thank you