DAPPCON 2024: Are RWAs The Answer To The DeFi Boom-Bust Cycle? - Niklas Kunkel

Transcript

okay uh so quick background on me um my name is Nicholas uh was part of the founding team of makerd and uh kind of taking a look back uh to 2016 2017 right when when dii was was still in its infancy right um we it it all started very small right so uh at first it's like well there's going to be this uh kind of parallel Financial system and we're going to need to be able to exchange value and crypto is volatile right and so we're going to need some stable means of exchange right and so okay stable coin is kind of

primitive number one to uh creating a def ecosystem right um but but in trying to do so uh there was enormous amount of other things that had to be built out first right so um oh well we will need a means to kind of exchange these Assets in a decentralized way so um we created the first decks on ethereum actually I I don't think many people know that maker actually created the first deck on ethereum uh before ether Delta before any of this stuff and then you get to kind of the next step and it's like oh well like in order to have this stable coin that's that's backed by ethereum

right you need to know what is the price of ethereum right so okay you're going to need an oracle so we maker made the first oracles on on ethereum and then right it's like well you know I wish I could like debu my code without just deploying my contract on chain seeing an out of gas error and still having no idea why why my function failed right so okay so I make the first like solidity debugger um and so fast forward a few years right we've we've kind of released D and um it's uh exclusively backed by ethereum right the most decentralized collateral and we run into the first problem and what is the first problem

well um there is only so much onchain activity there is only so many people actually using eth on chain there are so so many people willing to take risk in Defi and actually utilize their eth instead of having it just safely sit in a wallet and so we hit kind of this level of like 80 million uh Sai which was the name for single collateral die and it looks like we've just topped out right there there's no growth left and uh it's like well this kind of sucks how do we fix this and so the solution was oh well clearly we just need a stable coin 2.0

right we need a multic collateral die we need to expand what die is backed by by more than just eth right it should be backed by uh other uh altcoins right it should be backed by things like uh Bitcoin it should be backed by Stocks by bonds by Commodities right um and this way right it wasn't just a way to uh open a means for growth right but it was also a way to diversify the collateral portfolio uh to uh help stabilize right and drisk uh the uh Peg breaking for for the die stable coin but okay so you've released multic

collateral die and what happens right you start onboarding a bunch of altcoins right and uh you quickly find that uh you run into problem number two uh compared to you know outside of eth or something like rap BTC uh there's really not that much total addressable Market if you start combining all of the uh altcoins that can be safely uh utilized as as backing for a stable coin right so uh the growth opportunities were were quite slim um and so you're back at problem number one right like is this it is this the biggest that this thing can grow

right and all the while you're going through these cycles and uh what what are these Cycles well the Cycles are when you get uh some kind of euphoria right and number goes up and it uh just kind of has this positive feedback loop right so um maker kind of benefited um from this at times right the number goes up people want to uh get Leverage so they lock up their eth they borrow against their eth they buy more eth right and uh maker gets to set really high interest rates uh because people are just that bullish on number go up and and that's the positive side of the equation um but uh actually

like defi has this problem right in that it's hyper reflexive so actually uh what happens when number goes up you know uh stops and number goes down starts well when number goes down starts uh nobody wants to have long exposure on on eth or or crypto in general um and nobody wants to have um uh especially nobody wants to have leveraged exposure and if they do they don't want to pay very high interest rates right so uh you get into uh this this kind of depression right and so at first glance right it's just like oh big deal right uh Revenue goes up Revenue goes down down who

cares um but uh I I I kind of want to like give you kind of the second order thinking here which is that organizations right like all of the defi institutions like a like Makow like curve like Unis swap right um they're all part of this hyper reflexive cycle and so when um excuse me uh so when time are good you're making you know hundreds of millions of Revenue right uh great you do a bunch of hiring right you're uh starting to expand your product Suite right and then when times are bad you have to lay everybody off right you have

to do cost cutting um the future is uncertain right uh regulatory fears right um and and this is uh this is not a very enviable position right and so this is what I kind of call the D5 boom bust uh cycle and so I want to talk a little bit about um how maker has kind of uh has been trying to solve this right and so the the way that uh maker kind of tackled this was to say okay well all of crypto is hyper correlated and if you stick with crypto right uh you're always going to be subject to this roller coaster ride of uh of uh

acceleration and dampening however if you start using using real world assets right uh which is a non-correlated asset class right you can diversify that Revenue stream and start to smooth out that curve and so uh in I I would say late uh 2022 maker started aggressively uh reallocating into real world Assets in particular T bills were quite attractive right uh due to very favorable monetary policy that was happening uh around the world and so uh here's a graph of kind of maker crypto Revenue um you can see on the bottom it totals 155 million uh across all the different onchain uh

collateral types um I think today actually that number is at 200 million um and then here is Makers R World asset Revenue uh so these come from uh treasury bills these come from uh lending for uh us mortgages uh these come uh from I think a variety of things I think there was even a uh uh a way of extending credit to uh the contractors that were building like Tesla collision repair facilities in uh some uh credit tenant like loss sweeps uh swaps um and and this number is also today around 100 million right and so

you have this uh very nice like uh Revenue distribution right uh here uh where you can see like in blue right of all of the crypto backed revenue and in yellow right all of the uh real world asset uh backed Revenue right and so you say okay like problem solved right like we've solved the the boom bus cycle like uh pack it up boys and everyone just start doing this um well not quite so the really big problem here is that robot assets are not crypto native uh um so what do I mean by that well uh when you have something like eth

right it's entirely encompassed on chain right it can be encumbered on chain right you can view all of the uh related data on chain um it's completely custody you know on chain um with robot assets this is a it's the complete opposite right and so uh the challenge here is how do you make real world assets uh crypto native right or how do you emulate these crypto native properties such that they become easier and safer uh to integrate across Defi and so uh while there are certainly

more I think there's kind of four main categories here of metadata that is uh important to uh either either utilize or at least you know be aware of if you're not utilizing it you know what risks you are exposed to when integrating Rob World assets so um those are custody uh liquidity yield and counterparty risk and so uh I I kind of want to go into into each of these uh a little bit so let's start with custody right um when you have a roed asset on chain typically this is not the actual asset that that uh you have right it's a

representation of the asset in the real world and so that asset needs to be custodi somewhere right and so uh you're going to need some metadata stream uh showing from the custody provider right that okay these assets are actually in custody and so this onchain representation right is uh can actually be treated as this asset right because the underlying assets actually exist right and uh right there are you know this is a non-trivial problem right because uh okay uh let's say that there is a corporation just uh holding these things or there is some SPV well okay um

who are you trusting to get this data from and to bring this data on chain right uh to then you know completely trust that that that data is correct right um now liquidity right um with crypto native assets right when say uh the price goes down right you can liquidate them on chain and there is liquidity available on chain uh either via dexus or via an army of uh Market maker Bots or or me Bots uh that will you know happily scoop up uh you know vast quantities of of collateral at a discount with RW you

don't have this right um now you either you know with certain robot assets right uh they may just be very liquid in general and there may not actually be liquid markets for this stuff right or you know in the case of t- bills right it's one of the most liquid markets in the world but it's the liquidity is not on chain right so you cannot do uh onchain liquidations and so there there's a whole mechanism right uh Witch of signaling of back and forth to the real world of of how to liquidate this kind of stuff and as a defi protocol right you need to be aware of this because you don't have those same guarantees furthermore you have all kinds of counterparty risk right um when

you have uh you know Assets in uh in some kind of SPV right or even in some kind of bank right what happens if uh you know either through um corporate greed uh or um maliciousness or let's say through regulatory action right uh these stics get Frozen well all of a sudden you have this onchain token that you thought was backed by the underlying asset and now it's not actually there anymore right or you know um you did uh some kind of sale through some kind of broker and like you know this shouldn't happen but the broker just rugged you right or you have some kind of FTX or

Alam situ sitation right so uh you know that could take you know go into bankruptcy proceedings that could take years to unwind right uh so when you're integrating in rwa right you need to consider like this failure scenario that this can happen right and that there will be a you know multi-year process right and to give you an idea right the the FTX uh situation still hasn't resolved right that's still in bankruptcy proceedings uh Mount GX still hasn't resolved that still in bankruptcy proceedings right and how many years has that been um and last is yield right and so this is um this one is a little more interesting right and so um I

think um I I think you can make defi protocols much more smart with their kind of capital allocation strategies right and you kind of see the um the beginnings of this right with Dow is kind of doing treasury management right like oh let me uh diversify my treasury or we see a yield opportunity here let's put some Capital over here right but this is all done in a manual way right and so the the automation uh side of this is extremely important and uh what you can kind of do here right is okay well if the protocol is aware through like an

oracle that the yield is high here and low in this RW opportunity here the protocol can automatically write reallocate capital from you know bucket a to bucket B right uh let's say the protocol wants to have uh certain geographic distribution of risk of where assets are custody right it can say oh we have too much exposure in the US let's move some capital from this us exposure rwa Bucket over here to this one in Singapore or this one in London or this one in Dubai right and so kind of wrapping up here um I think that the the opportunity here is extremely large right to not just expand Revenue but really

smoothing it out um but there is all kinds of infrastructure that we need to build and it's primarily going to be powered by by oracles and so um oracles are going to be getting much more advanced and much more U utilized really as an interoperability layer uh between traditional finance and and decentralized finance so uh that's it for me today uh want to thank you all for coming um quick shout out uh I'm the founder of Chronicle uh Chronicle is an oracle protocol um we currently are the second largest or Oracle protocol by value

secured securing just under1 billion in tvl um if that's interesting to you or if you need oracles please uh please come talk to me or please follow us on on our socials thank you thank you so much uh we might have time for one question um right yeah okay just one just one second sorry um what Ledges and protocols you currently integrated with um in terms of which chains yeah which chains and which apps uh pretty much all

of the chains uh in terms of apps it's uh I would say predominantly the largest ones are uh spark protocol maker Dow uh Moro and uh a few other ones that that we haven't announced yet okay thank you um I think we are on time right um thank you so much Nicholas [Applause]