DeFi-ing Institutions by Danny Ryan - DeFi Today Devconnect ARG

Transcript

And I guess without further ado, I'd love to introduce Danny Ryan from Ethereal from our first speaker. Okay, so I gave a talk on Monday. I talked a lot about how institutions demand decentralization. Um I'm just going to do a quick recap of that. I talked for like 20 25 minutes if you want to check that out. I talked more in depth on it. Um and actually the only the only answer is Ethereum. So the institutions demand Ethereum. Quick recap. Institutional lens uh is often counterparty risk. Who can screw me over? Um Ethereum on the infrastructure layer by and large reduces that to zero. Uh Ethereum has 100% uptime. They [ __ ] love that. Uh cryptoeconomic security is a scarce

resource. You cannot just create it out of thin air. Uh, thus Ethereum is one of the only programmable environments, if not the only one that can handle trillion dollar security. Mature app layer, I clicked neck for some reason. Uh, mature app layer, there's tools, there's languages, there's security practices. It's, you know, there there's a lot of depth to the entry point. Um, and even if somebody else is building it for them, uh, they can actually begin to trust something that's been around for 10 years. Uh, privacy is table stakes.

We spent quite literally billions of dollars on applied ZK and applied cryptographic constructions. We have to uh represent the privacy that markets expect. Thus, we need these tools. Massive network effects and liquidity, although tiny compared to institutional markets, but getting there. and the modular infrastructure L2s uh and being able to plug into the internet of value and inherit all of these other properties but be able to construct their own environments very speaks to institutions. Um so decentralization they actually love when you communicate properly and frame it up uh so that they

can parse it through their traditional lens. Again gave a talk on this we went in depth on Monday. Check it out if you're interested. Okay, so institutions, it depends on how you count, depends on who counts, depends on what you count, but institutions manage something like a hundred trillion plus dollars in investable assets. a report from 2024 said 120 and this is out of something like $200 trillion in investable assets. Uh so when I'm thinking about Ethereum making an impact

I'm thinking about the infrastructure that we've been working on for a decade making impact on the world and as Tomas says if we're going to onboard the global economy which I believe there are many ways that Ethereum can make an impact. There's many ways to frame it, but this is a I think a very important frame. Like if if we if we own the board of the global economy onto Ethereum, we've made a made an impact. Um then we have to figure out how to bring institutional capital markets, institutional capital onto Ethereum. And that, you know, maybe that looks like capital flowing out of institutions on a chain, but it also probably looks like institutional capital moving on chain

and being supported in a different way. So, we're going to do this. Again, this is a crazy number. Like, I it's hard for me to wrap my head around this number. Um, it's reported in many different places, so I believe it, but it's a crazy number. And quite frankly, we have a lot of work to do. Um, this is south of 40 billion. It's really cool. The the the shape of the graph is very exciting, although it kind of plateaus right there. But the shape of the graph is uh very exciting, but we have a lot of work to do if we're going to onboard the global economy. And a lot of that work needs to be figuring out how to bring institutions on.

So I was asked to speak about institutional DeFi, which is funny. When I was asked that, it was actually the first time that I I thought to myself, is it am I working on DeFi? I'm trying to bring institutions onto Ethereum, institutional DeFi. So this creating this talk was me kind of exploring um whether what I've been working on and what we're working on the institutional space is DeFi. But regardless, this is an opportunity to rewire the world. Capital markets are in in need of an upgrade. Um, if you look at some of the things that you're more familiar with like equities, they're pretty efficient.

Uh, they maybe settle in a day. It feels instant to you. Uh, you can you can have access generally to what you need when you want. uh the markets work, but when you the further that you get from consumerf facing markets, uh the more kind of crazy and archaic these markets are, um so I'm talking about like credit markets and land banking and fixed income and a number of things. And these this is a picture I took on Wall Street last week. Um just joking the uh this is somebody faxing. They are most markets are like just north of that although they do fax each other stuff. Um it's

crazy. There are um tons of manual checks. There are tons of intermediaries. And if you look at how these markets have been architected over the past hundred years, you can kind of begin to piece together why they are why how they are and how why they are very difficult to upgrade and why many of them had an upgrade in 93 and haven't upgra upgrade since or had an upgrade in 2000 and haven't had an upgrade since. They're very complex problems. There's middlemen throughout.

Middlemen have a vested interest for them not to upgrade. it's a coordination problem for them to get them to upgrade. But nonetheless, these markets once we move past the surface consumer markets are kind of crazy. So when I think about institutional markets and think about institutional adoption, I think the goal is to leverage all of DeFi. The goal is to take the magic of Ethereum that we've been working on for a decade and all the crazy [ __ ] that yall are working on. Again, I'm not a DeFi guy, so I look at it and like I'm not also not very risk on. ETH is that's my risk on. Um, but crazy stuff in DeFi, magical stuff in DeFi. Like we're

literally like building the new the building blocks of the future of finance and that's the goal. But the reality is that the basics of Ethereum are profound for these markets. And the things that we often think that we get for free are like massive step-wise upgrades, like 20-year upgrades even. I mean, just mindblowing. For example, Ethereum's fast for for real. I mean, when you're talking about markets that take 10 days to settle, 10 days, and that's like the average. Sometimes it's 30.

We're good. We're fast as hell. Global access, I mean, even institutions trying to do things global is very, very difficult, very timeconuming, jumps through tons of hoops and has and and is costly, but not only from time, but money. This one I love, atomic trading, atomic swaps. Um, there's some markets we looked at, especially in the credit markets, you and I decide to trade. So trading and settlement is different which again in in in Ethereum on a blockchain you're like we traded it's settled it's done you know these are I don't know why we're talking about two different things but trading and settlement are different you and I decide to trade then it settles and like different people

might be involved in this process and I might chuck it to the back office and they do settlement but nonetheless trading and settlement are different and the things that we trade I might give you cash, you give me some credit instrument. Those actions aren't necessarily related to each other. Like the 10 days pass and the the credit comes to me and it's settled. That has no dependency on whether I sent you the money. They're totally unrelated. And in fact, there's a probably a penalty if I don't send you the money. But I might just hold the money for a while cuz I don't know. I make 4% on it. I'll give it to you

eventually. It's it's crazy. And like these markets are like structurally broken because of some of these things in my opinion. And people have vested interest in gaming those things. It's kind of difficult to upgrade. But once you actually like the people that have built and work in these markets, they've never even thought that like capital flow and asset flow could be conditioned upon each other. Like one of the people that built the settlement software for a number of credit industries, I had to be in dialogue with him for like four months before he was like, "Oh my god,

wait, I get it. Atomic settlement. we're going to change the world. I was like, yeah, like you just write like two lines of solidity, maybe one, and it's done. Um, programmable cash, this is huge. The fact that we are we have stable coins, especially in the US, the Genius Act, uh, is now in motion. Um, we do have a very key building block to make these markets more efficient. um you know it's not just that it's easy to send the money but the fact that it's programmable the fact that I can condition again like the atomic settlement atomic swaps but the fact that I can condition uh actions upon cash is huge and huge in upgrading these markets um and even there's some cool

technology where yes they might want to send a wire for a while but we can even wire that use a bridging technology to have it touch chain and and then maybe land on chain to the person that wants it or even just touch the chain and then hop back out in another address that sends a wire. And this kind of stuff allows all capital all cash flows the flow of cash uh to now have a computer embedded in it. And again, this last one, it's it's silly that I have to write it, but like the enforcement of rules, right? Like I might trade a credit instrument with you and one of the reasons it takes a long time to settle is that there's someone

literally doing manual checks. They're literally checking a white list. Are you allowed to hold this instrument? I don't know. Let me go see. Are you allowed to Are we allowed to subdivide it lower than a million dollars? You took a $750,000 chunk of it. Uh let me go do a manual check. It's It's crazy. like it's it's crazy town. Um, and a lot of this boils down to giving like the structural upgrade for Wall Street is it's programmable and there's a single source of truth. And I often say in these rooms, you get single source of truth as a service. Like that is what Ethereum provides.

And in doing so and the fact that it is neutral, neutral, credibly neutral, decentralized or something, no one controls it. They begin to uh open up to the idea that they could use it as a single source of truth. Right now, each bank is their own single source of truth. Each financial institution is their own single source of truth. And there's tons of manual work rec on reconciliation. So my system is it seeing the same as your system? When did it happen? Does this system that I run and this other part of the financial institution that I'm involved with their back office, how do we reconcile between there? There's no for a lot of these markets single source

of truth. And because of that, we're stuck 20 years ago. Okay. I have a little bit of a bone to pick on tokenization. Um, tokenization is great. It's not a product. It's not the product. It's not the thing we're selling. It's not the thing that Yes, it's it's a buzzword. Yes, it's the right word to say to open up a dialogue in the particular room that you want to be in, but it's not it's not a product. It's not how we're going to onboard the global economy.

Manually taking chunks of assets and bringing them on chain. And hopefully there now there's now there's distribution. Now that more people have access to it, you but no, we need to structurally think about upgrading markets, not about tokenizing the markets. I think it's kind of like in object object-oriented programming when that came out, it's like very cool, very awesome, but like we don't like someone probably did and I think they were off base, but like you don't walk in a room and you go, I got objects, dude. Like we're gonna we're gonna we're going to do it. We do have tokenization. It's a tool. What we really want to do, I think, if we're going to onboard the global economy is begin to encode markets on Ethereum.

And when we begin to have a single source of truth and encode all of the rules of the market, how do the assets move? What are the rules upon moving them? If you hold the asset, what does that mean in terms of capital flows, in terms of distributions, in terms of in terms of voting rights, in terms of everything? As you begin to encode markets on Ethereum, they become 10 times simpler. At least at least middlemen fall out. You're like, why why does this like entire subset of the industry exist? It doesn't need to exist. Like that's a line of code. And I think that if we're going to onboard capital markets and onboard institutional capital, we need to be encoding. We need to be thinking about

how does the market work end to end. Who are the players? What are the rules in the market? What are the rules of the assets? What are the exceptions? Where do you need manual processing? That much as opposed to that much. Um, and as you write the solidity or whatever language is appropriate, some of this needs to be in privacy, you begin to be able to structurally upgrade an entire market. And I think the goal here is not to tokenize these hundred trillion dollars assets, but it's to rewire all of capital markets to utilize Ethereum, to utilize solidity, to utilize L2s.

And when we start thinking about repo markets, treasury markets, credit markets, land banking, title, mortgages. We're not we don't want to just bring the mortgages on chain. We want to bring the title on chain and use the title as collateral for the mortgage and have the rules of who can interact with title and how what happens when there's leans against title and we need to think from from first principles on how to rewire all these capital markets and that is that is how we're going to upgrade the world. That's how we're going to onboard the global economy.

I said this at the outset privacy is table stakes. um you cannot begin to have these conversations without being able to meet as good as if not better privacy than it exists in in typical markets. And again, that means maybe in a credit market you and I trade, we see the assets going to move, we see the capital's going to move. Great. Maybe some related bank sees that the asset moves but doesn't know the price that was paid. And then the rest of the world can't see it. And if we're going to rewire these capital markets, you can't just say chuck it on chain, you know, chuck it in solidity, everyone can see everything. Um, that's a non-starter. And so when we're thinking

about rewiring capital flows and capital markets, um, applied cryptography and for now ZK is critical. Um, and it's it's very exciting. This is we've seen um really in the past year pretty much from every angle of the Ethereum ecosystem, privacy is being elevated as as very important. And I think that's because we're moving one, we have the tools now, so let's do it. And we're also moving past vapid use cases. We're moving past chasing memecoins and we're we're really trying to on board the world. We're really trying to get people to use it as their basic payment platform. We're really trying to bring a hundred

trillion dollars of institutional capital on chain. We're really trying to get to the point where people are willing to put their life savings on this thing. And really when when you begin to look at the real world and the real use cases, we have to have privacy. So I alluded to this before um a lot of RWAs so far on Ethereum are, you know, they're funds. They're like, "We'll take a bunch of assets that are not on chain. We'll bundle them up. We'll make some product specific to put on chain." Um, what we really need to be looking at is is far more asset level. And when we're looking at rewiring capital markets from the baseline, um, that's that's how we're thinking about it. Um, but really what

we get here is instead of having a fund, a product somebody can buy, you instead can have, I don't know, the credit instrument itself. The credit instrument can be traded. It can have its interest payments. It can have a number of things. And then if we want to create the fund that's on chain and maybe is distributed to retail, great. Bundle it up, toss it into a fund, create a like that that's that's magic uh to institutions to be able to do that in a very dynamic way. Another interesting example is like let's bring mortgages on chain. We can program how mortgages work on chain and that's good. But if you can actually go a step lower, you can bring

title on chain and you can originate the mortgage on chain. You can do it as a collateral. Anytime you can go a little bit earlier in this process, we're going to have better DeFi building blocks for classic instruments. And then what does it mean? People talk about native tokenization. What does that mean? And really in my perspective like native is always going to be it's a spectrum of like I don't know native and highly artificial I don't know the right word is there but it's really the more that the law default respects the chain is truth and some of that is the more that the rules are encoded in the asset itself so that you don't have to call upon the law in most cases the more that the various

actors that might interact with that asset in a classic setting can do So onchain, I don't think we're going to get to a place where like code is law and if you like lose the deed to your house, it's done. Um, but you can encode the rules into the asset itself and what what does happen, who can step in, who can fix it. And and again, the more that the law respects the chain of truth, the more that it's native, the more that it's native, the more that we've actually encoded the rules of reality into chain, which is which is certainly the the goal.

Now, once we bring markets on chain, then we have a chance to evolve the markets. And this is when we get to do all the magic things that we're that we're good at. We can expand to global access. We can have distributed capital formation, dynamic structured products. I talked about that. That's like the click of the button and like bundle up, I don't know, a CLO or an ETF or something like that's that's literally magic to institutions. Um, incentivize distributed behaviors. You know, maybe uh people can get a a chunk of asset under management fees if they create micro funds that people are are into and buying and and increase uh distribution. And really just all of DeFi, and this isn't going to happen all

at once. All of this stuff is has red tape. It's regulated. There's compliance stuff. Uh but we can iteratively get there and it is actually positive some institutional capital. I mean one of the like dominant lenses of success is asset center management. They want more asset center management and thus they want to figure out how to be legal but in this new landscape. And that often means instead of putting these like large boxes of compliance around entire chunks of infrastructure or entire entire chunks of markets, they are very keen and interested to to get it as tight as possible to the components that need to be uh compliant

and regulatory regulated. Okay. But is this DeFi? Like if we upgrade a capital market and we program it on chain and it kind of just looks like it does but maybe with fewer middlemen, maybe with better efficiencies, like is this is this DeFi? Did we make DeFi? Is this good? So it's a spectrum and the Ethereum network ETH is number one. It has the fewer fewest amount of assumptions on uh its operation on the rules that govern it on on how it it it the risks that it has in the system.

So the DeFi spectrum ETH it's going to be I tell me if I'm wrong Casper but I think it is by definition always will be the the most trustless asset on on Ethereum. Then we got other stuff. We got D. Maybe in the middle, maybe a little bit further because I think it uses USC as collateral, but like pretty trustless. I think that's DeFi. USDC. I think it's DeFi. I can send it. They don't have to like they don't even check who I am. It's pretty cool. It does rely on a lot of trust assumptions on like is the capital actually there? We're trusting the legal frameworks on like auditing that capital. I think there's a freeze function on it. So, but it's DeFi crypto crypto punks. I think those are

still a thing. Um, they're actually pretty trustless. I actually I looked this up. Um, you can you can generate the image entirely from the the stuff on chain. Um, so it does have a little bit more trust assumptions because it's a smart contract and that's that's another layer. These guys are a little bit less trustless than crypto crypto punks because they reference an IPFS hash that has the image. So you're now layering in IPFS. But again, this is all DeFi. I don't think that we we would debate. And what we're looking at when we're thinking about Trad orders of magnitude like it's it's a crazy crazy space there. It's not absolutely not DeFi today.

But as we begin to encode the rules of the market, we're going to move it orders of magnitude closer. And in doing so, we're going to reduce the amount of middlemen. We're going to create better products. We're going to create better access. And maybe it maybe it won't be DeFi, but it definitely be better. This is definitely a better thing. Like I'm not going to be a purist here. like we can with Ethereum massively improve capital markets, massively improve access to them, massively improve the efficiency and hopefully we can edge them onto the actual DeFi spectrum as we cut out middlemen, as we program these

markets, as we bring the title on chain and originate the mortgage on chain and maybe have a distributed capital formation on chain. I think we can inch most of the world into DeFi. And it's not going to be ETH. It's not going to be crypto punks, but I think we can get it there. My last message is we need to compel the world's assets on chain. This is a silly I you know, increasing decentralization, increasing control.

What we need to do is we need to on this top axis of increasing decentralization, we need to make it such that increasing decentralization actually increases value. It increases efficiencies. It makes things simpler. Like we need to encode markets such that that's true. We need to create really [ __ ] good products. So that's true. And if we can map essentially decentralization to all of the qualities that institutions are looking for, which we can, I think we have the tools now today to do so, then we're going to keep moving traditions are going to have to increasingly become

DeFi companies or they're just going to be replaced by the people that do. Thanks, Thank you, Denny. You filled up the room after all. So, we're very excited for that. >> Um, we have a lot of questions. So, I have five minutes. >> I I can I can answer some questions. >> So, the first question is, do D5 protocols need to be on mainet to attract institutions or can they be on L2s like Bass?

Uh yeah, this is a complex thing that will continue to evolve. Um I do believe that certain highv value interactions, certain highv value, sorry, I'm going to use the word tokenization is going to happen on L1, but that doesn't mean that you know institutional certain institutional actions certain institutional capital balances might happen on L1, but certain of their activities are going to happen on L2s. Whether those are uh some L2s like Bass or L2s that they create, I think that time will tell. Um and I still do believe that a lot of uh retail's interaction with institutional capital will be on Altus.

>> Thank you. Um and then we have another question about the enforcing mortgages. So someone asks, how do you enforce mortgages in the real world if the whole thing is on chain? Like are you unable to pay payments? who would liquidate your house uh in practice. >> Um yeah, and I I think the way that we think about any market and bringing them on chain is what are the rules today? Who can liquidate you? You know, and and I think that there are very clear answers to that and you can encode those rules on chain. That doesn't mean that that's how mortgages look in 10 years.

But as we move mortgages on chain and we move title on chain and we encode the rules that exist today, those rules then have a chance to evolve. They then have a chance to to grow and change in this new ecosystem. So maybe yeah, maybe some bbot will liquidate your mortgage uh in 10 years, but I think right now it'll probably be the bank. >> Okay. Uh thank you. And I guess um a follow-up question from the audience on that would be how important is the single truth of uh single source of truth as a service that you introduced for registered assets like RWAS?

>> For which assets? for registered assets or non-bearer assets for like real world assets. >> Um massive structural upgrade like the again some of these are some of these ROAS a lot of the RAS we're looking at are just like some productized representation of a a large component of a market. Um but again if we begin to program the rules of a market and all the people that interact with it there are a lot of complexities because no one has a single source of truth with equities there's actually like there is a single source of truth for most of it in the US it's a regulated monopoly the DTCC DTCC and

because of that that market's actually like not ripe for dis ripe for dis disruption it will be disrupted Equities will eventually evolve and grow and onchain and have more native representation, but like they do have a single source of truth and that's one why one of the reason why the equities markets are efficient compared to a lot of these markets. But as we move towards bank loans, credit instruments, all sorts of stuff. The single source of truth is a huge just like fundamental upgrade for that market. >> Okay. Um, and as you have had more experience with institutions now, I'm curious if you had any experience with digital asset treasuries and whether they're an opportunity or a threat for Ethereum, >> just treasuries in general. General

>> digital asset asset treasuries. So, they're dat's running out, but >> you have some extra time. >> Yeah, some of them like DATs are interesting. Dats, some will, I'm sure, blow up spectacularly. Maybe they're doing that right now. Um, leverage is fun to watch. Uh, but my my my positive case there is that we have, I don't know, three, four, five different um, ETHbased publicly traded companies that are competing and they become the future of demonstrating how to be an asset manager in this new reality, in this new decentralized reality. and they're going

to have uh they're going to have earnings earning reports and they're going to have you know the different strategies that they're pushing on chain to to again like the leverage game is a game that's going to be played but I think ultimately the the long long-term equilibrium of these companies they're going to be playing DeFi and they're going to be demonstrating as public publicly traded companies how to do this in in in this new world. So they can go in all sorts of different directions but I I'm hoping that's what we see out of them. >> That makes sense. So they're kind of on your DeFi spectrum, I guess. >> Yeah. Yeah. I mean, and they more than I think most asset managers in Wall Street right now, they're primed to to move much more natively into DeFi soon.

>> Okay, we have a lot of questions from the audience, so I'll I'll just answer a few more. I guess I'll pose a few more. We'll have some extra time. Uh so there someone asks will moving institutions onto Ethereum rules necessarily make it easier for banks existing users to switch uh to banks and if so is that something that they fear? >> Um yeah so I spend my time in the trenches of like highly esoteric uh institutional markets and some of the stuff that we're working on deeply is like upgrading markets that are consumers don't even really play in. And one of the goals then is to like figure out how to inch them towards having more access to consumers. Um so by and large that doesn't necessarily have people leave banks. I was talking

to Bartik before and the consumer story in relation to decentralization and relation to um you know Ethereum and L1's consumers there will be a massive spectrum between consumers doing their own thing and self-custodying and and being involved in this stuff and maybe they do that for a portion of their capital but a lot of capital is going to continue to be professionally managed. People care about security. They care about other people's professionalism in relation to their assets. Not everyone is like super degen and like willing to take all this risk they want just like tried and true paths and as the world does upgrade onto Ethereum rails hopefully these custodians you know we have to trust them less but there's still going to be uh room for

you know professional people in finance to help consumers >> okay um and I guess we're we're rounding up here uh but still people are curious is there a timeline or a road map for Etherealize and any elf out you can spill there. >> Uh we're looking at some really exciting markets. Upgrading markets is as much as a uh technical problem as it is a coordination problem. Um trying to figure out how to align the incentives of very powerful and strange entities. Um we're making progress.

We're making progress. Uh we're also building some really exciting privacy stuff underneath the hood to help power the markets. um which is really some fun stuff and hopefully Zach and I can share more about that in the new year. >> Okay, awesome. Thank you so much and please give a big round of applause for Danny. >> Thank you.