DeFi’s Next Frontier: Institutional Capital Meets DeFi | monetsupply | S9 E1

Transcript

crypto is now sort of pivoting towards being accepted by governance by by regulators. Um there's, you know, big institutions, you know, Black Rockck, uh Janice Henderson, a whole laundry list of them that are excited to start getting on chain. Um so I think the confluence of of all those factors like you know the infrastructure is ready and the users are now kind of coming here in scale is um it's a really exciting time for DeFi. Hey everyone, quick shout out to today's sponsor, Namata. Namata is currently entering phase three of their mainet rollout, so make sure you check it out by following the link in today's show notes. We'll talk more about Namata later today. But for now, let's get

started. Quick shout out to Permissionless 4 coming this summer to New York June 24th through June 26th. We'll have speakers from all across the industry, including Hayden Adams, Kyle Sami, Guy Young, and more. Get your tickets today by following the link in today's show notes and make sure to use code Bell10 to save 10% on your purchase. See you there. Hey everyone, quick disclaimer before we get into today's episode. Nothing said on Bell Curve is a recommendation to buy or sell securities or tokens. This podcast is forformational purposes only and the views expressed by anyone on the show are solely our opinions, not financial advice. Our guests and I may hold positions in the companies, funds, or projects discussed. All right, everyone. Welcome back to another episode of Bell Curve.

This is a special episode because we are bringing back seasons here at Bell Curve, uh, which I'm very excited about. And, uh, this is the episode where we're kicking off the season and I'm introducing my co-host who I'm very excited to be doing this with, Mr. Monae Supply. Monae, welcome, man. Yeah, thank you for having me on. Excited. Should be uh, this should be an excellent season. Um, very excellent. I think at some point we should uh maybe wear those sauna caps um if an episode ever calls for it. Whenever it's getting too too hot and spicy with the guests that that might be a time for the sauna hat. We'll bring the sauna caps on. Um so guys, I'm just going to give a for those of you who haven't followed this is the so this is

actually the ninth bell curve season. Um and we're going to be focused all about uh DeFi uh this season. But for for folks who haven't um gone back and listened, just a recap quick recap of the format. So, this is going to be a nine episode arc. Um, so this is the kickoff episode where Monet and I are going to be detailing what are the big themes and ideas that we want to be digging into this season. So, uh, this episode will give you as a listener kind of an idea of what you can expect over the course of the season. Um, so there's going to be a kickoff episode, seven interview based episodes, and then we're going to do a wrap-up at the end of the season for just lessons learned and takeaways and uh, stuff that came up throughout the course of the season. But

that's a rough idea of the format. Um each interview is going to be Monae and I will kick it off. We're going to do an interview with one or two guests and then we'll do a 20-minute recap of each episode as well. So, uh without any further ado, um I want to introduce the first theme of this season of of DeFi. Uh well, actually maybe just um even before we get into that, Monet, I'm curious. You know, you've been in DeFi in the weeds for a very long time. Um probably on more forums than you would uh you know, like to admit um but getting in the weeds with a lot of Dows. And I'm cur like this feels like a really interesting moment in time for DeFi and a little bit of an inflection point. So the kind of narrative out there is the institutions are finally

coming. Um but I'm curious like what what is it about this moment in time that makes DeFi uh very exciting for you or like what gets you kind of out of bed in the morning? Yeah. No, I think it is a really exciting time for DeFi. Um a few different kind of reasons that are driving this. I think for one like we've been as a space we've been investing in infrastructure for years and years. Um maybe even you could say overinvesting and not enough sort of focus on apps but it feels like the infrastructure chains L2s bridges oracles it's reaching a point of maturity where um we actually have enough block space we have enough scale to start doing useful things. Um, so that's exciting. Like I think even a

couple years ago when L2s had just launched like it was still kind of very much training wheels phase and now um now we have all this infrastructure and it's really up to app builders like people in DeFi to start using it uh putting it to good use. Um, I also think that, you know, kind of the DeFi technology, we've, uh, gone through a lot of sort of like testing phases, uh, DeFi summer 2021. Um, you know, we were just kind of like throwing stuff at the wall and seeing what stuck. But, uh, we've gone through some pretty brutal bare markets. The stuff that has survived has kind of proven that it's it's lindy. Um, you know, sort of the the primitives that we're we're working on make sense. Um so yeah I think we we

have like a lot of um a lot of proven sort of building blocks to work with. Um and then like you said you know the institutions they they are actually here. Um you know crypto is now sort of pivoting towards being accepted by governance by by regulators. Um there's you know big institutions you know Black Rockck uh Janice Henderson a whole laundry list of them that are excited to start getting on chain. Um so I think the confluence of of all those factors like you know the infrastructure is ready and the users are now kind of coming here in scale is um it's a really exciting time for DeFi. I completely agree. I I would also add to that as

well. I think some long-standing debates in DeFi are potentially on the cusp of starting to get answered. And you know what this makes me think of is, you know, back in kind of the 2019 or 2020 time frame, you know, Maker kind of had this big decision to make Maker now Sky of do we go down the path of real world assets or do we not? And the challenge back then was, hey, we basically exist as a way for people to get some amount of leverage on their Ethereum that on their ETH. There's only so large that that market can really grow and we need to keep this um die relatively stable.

So, how do we do that? And there's this kind of big fork in the road of do we go down the RWA path or do we not? And we're starting to finally get answers to some of those long-standing design decisions. And yeah, I think that one of the big questions that at least I have going into this season is now that institutions are actually here and these aren't just proof of concepts that are being run out of Bank of America's innovation budget that they kind of stick the 25-year-old blockchain guy who just really loves it in um it's how is how how are the introductions of these institutions actually going to change the space and overall the design of protocols is definitely something that I'm really interested in and maybe Maybe with that we can introduce the the first

theme of the season which is fragmentation and then reaggregation in general and I'll kind of you know level set in terms of what we mean by that and I would love then for you to dig into it but you know I think that when you're looking at the current iteration of protocols in DeFi be that dexes or borrow lend protocols or what have you there's kind of this very common design uh choice and philosophy around uh maybe you would even call it like a modular design, but this could be anything from Lido V3, which is kind of bring your own validator and a vault architecture to Morphos's vault architecture to even something like Uni V4, right? Where you have a bunch of different um AMM hooks that there's a front end and kind of a

settlement layer underneath. But the idea is instead of these kind of monolithic you know immutable protocols kind of like unis swap v1 was just like instead of amm pools you actually have a much more modular design and architecture and I think a big part of that for me is the introduction of this new customer which is the institution but you know let me let me kick it over to you like when you kind of look at this new architecture that a bunch of D5 protocols are trying what is the driving force here and then how like what are the implications of that for for DeFi in general?

Yeah. Well, I think I think like sort of the history of DeFi, it started as a bunch of protocols that were uh for lack of a better term like kind of one sizefits-all. Um like unis swap v1 for instance, you pair everything with ETH and everyone is just supplying to the same curve uh the same you know x * y equals k invariant curve. Um same with compound and lending like you had one market it had a certain set of assets that were approved and each you know each asset had a certain parameters for it. Um I think that was a necessary step for DeFi because um liquidity was like so thin. There were so few users, so so little amount of of actual capital in these protocols that

if you were um you know kind of having each person choose their own adventure with parameters or with like the type of pool they were using, you would never reach a critical mask where uh these protocols became just kind of minimally usable having enough liquidity to to really get anything done. So that makes sense how that was kind of the first iteration of DeFi. you know these big lending markets like uh you know compound or earlier versions of a where everyone was in the same market kind of playing by one set of rules um now defi has actually reached you know a pretty decent scale of liquidity um you know there's tens of billions in some of these protocols um and more than that

you know uh we used to have just kind of one client base all just kind of early adopters defens um who had a high risk tolerance. They didn't care about, you know, compliance concerns, uh, AML, anything like that. Um, they were just happy to like kind of use the chain as it came. Um, and, you know, the the concerns of the new crop of users, uh, you know, whether that's institutions, whether that's fintexs who are kind of using DeFi as a backend, um, they have a lot of, you know, kind of more individual concerns and and needs out of these protocols. Um so taking the example of like a lending protocol um many users are happy to kind of sit in

like a big sort of consolidated protocol that has a bunch of different assets listed and you know same parameters uh across the whole protocol. But then um you know if you look at something like uh Coinbase um they had a very specific use case that they wanted for a lending protocol. They just wanted to have people be able to supply Bitcoin collateral and borrow USDC. Um they didn't want any of the other complexity or other sort of like risk factors that you'd have in a uh traditional DeFi lending market. Um so for them uh kind of a more a more sort of individualized approach made a lot of sense. Um, so yeah, they they actually on base they've um launched this sort of DeFi mullet

product where uh users can use the Coinbase app and deposit into DeFi and uh you know do this this Bitcoin collateralized loan position without any of the other um sort of constraints or baggage that you might have with a traditional lending market. Um so yeah like the you know the the sort of fragmentation or the individualization of these protocols is actually a benefit for a lot of these new users. Um that being said, you know, it it also presents challenges because um you need like another another layer to make the UX uh acceptable like uh so that individuals, you know, regular users don't need to be continually monitoring their positions, you know, moving funds

from X, X to Y, etc. Yeah. And I just want to emphasize that I want to get into some of the the challenges or the drawbacks to this model, but it seems pretty ubiquitous. And I I think that the way that at least I think about that is that point about introducing new customer personas here. And I think that in the early days of DeFi summer, if you look at the early iterations of something like Uniswap, even if you were to look at something like Lido as an example, we didn't necessarily spell it out like this, but these were products that were built for retail for the most part. Like if you think about who was using Steath in the beginning, I mean it was people that were trying to get, you know, liquidity on whatever they'd staked into the the beacon chain, right?

And that was mostly retail at that point. You didn't have uh big macro hedge funds for the most part that were concerned with something like that. Although you do have whales, which are a little bit of an interesting mix in between. You might have started off as retail and then kind of gotten into the institutional bucket. But I think actually I want to pull up here as an example as well. uh you know this is a this is an excerpt from Hu's goose 2. So this is the set of strategic objectives that Hu writes for Lido and you know I think he described it perfectly. So this um boy we'll be hearing a little bit from Hosu during this this season but the the way that he describes this as a shift to a product line uh for the staking ecosystem and if you think about

steith originally as one product it was mostly a retail focused product but the challenge is if you have this new customer set which is an institutional customer set they'll have their own needs which is namely they can't necessarily interact with a validator that they haven't KYCed and so if you want institutions using ste you need to allow for that and that has informed this more modularized vault architecture which you can think of we'll get into it during the season as a bring your own validator approach u which the original version of lido with the staking module didn't necessarily support and you're seeing that across a lot of different uh different types of protocols in DeFi and I think at least to my mind the driving

force here is the in introduction uh of the institutional customer really for the first time and you can bucket you know Coinbase as a fintech or maybe other you know challenger banks or the Robin Hoods of the world that may or may not you know expand into crypto hopefully they will but I would put it all as that one that one bucket kind of the introduction of this new customer. This episode is brought to you by Namata. Namata is the shielded asset hub rewarding you for protecting the multi-chain. Shield your data across any asset and any chain and get shielding rewards for helping strengthen data protection for everyone. To learn more, follow the link in the description below. Today's episode is brought to you by Ledger, the global leader in digital asset security. Celebrating 10 years of innovation, Ledger is trusted by 7

million users, secures 20% of the world's digital assets, and remains the most secure hardware wallet for your crypto and login. Follow the link in this episode's show notes to grab your ledger today. What are in your mind, we're starting to get, what are some of the drawbacks here? So maybe we could look at as an example use case something like Morpho versus A. Um I think one of the one of the nice things about a which has historically had maybe less of a modular design and architecture is kind of have these nice network effects and liquidity network effects there. So talk to us because the idea of this this what we're introducing here is fragmentation right which is had you know there definitely drawbacks to that. So what are what are the the challenges to this model? Yeah, there's there's huge challenges. Uh, you know, Morpho has

generated a lot of excitement. Um, but when you look at the size and the scale and how many users each of these lending protocols have, um, A has kind of a more consolidated model and it's still, uh, way ahead in terms of usage, in terms of liquidity, um, because it's just so simple. like you bring an asset that you want to use as collateral. You borrow one of the other assets in the market, you don't need to worry about the liquidity being set up in a pair-wise way between those two assets. It's just, you know, kind of all to all liquidity. Um, and I think that applies, you know, not only to lending, but um stuff like uh unis swap for instance. Um, in a way it was simpler back in kind of the unis

swap v1 or v2 paradigm where everyone was supplying assets to the same uh the same curve you know so to speak that you supply into the pool and you don't need to think about um what range you're choosing for liquidity or what pool fee um fee tier that you're choosing. You just pick two assets that you want to provide liquidity for and you're set. So the complexity for users for these kind of more modular um approaches to protocols is much more much more challenging particularly for um you know retail users who are managing everything themselves. um you know if I want to provide liquidity on Morpho, if I were to just provide it to these individual

pools, um you know, whenever the demand changed from most people using Bitcoin to borrow to more people using Ste for instance, um I would have to like log on and then move my money over to whatever is paying most. Um if I were supplying directly to the pools, um same with with Uniswap, you know, if your liquidity is out of range, suddenly you have work to do as a retail user. huge pain in the butt. Um so it's it's really challenging for UX uh you know for people who are supplying assets liquidity providers but also uh for users you know what pool do I borrow from uh how do I get my trade routed to the right pool that has the most liquidity um you know it it creates a need for all these additional

abstraction layers at a higher level. Um now that being said I think a lot of these protocols um they're aware of this and they are you know actively building these solutions um as part of the protocol where they have fragmentation at like a base layer but then they're envisioning and and building out these sort of higher layers of abstraction that help to kind of reagregate everything. Um so I think that's that's the critical link is how do you kind of reaggregate this fragmented liquidity uh when you make a modular protocol. Yeah, and I I want to just double underline that point on complexity and yeah, this was a huge discussion when uh UniV3 launched around being able to provide

concentrated liquidity, right? And this just introduced far more complexity for the LPs and this was exactly the question, right? Does this make sense for retail? Uniswap didn't come out and necessarily say this at the time, but I think the answer now is pretty clear that, you know, maybe this idea of retail being able to passively market make and generate fees is nice and everyone ideologically buys into that, but maybe the the benefits of that aren't really worth the trade-offs, right? Which is a much degraded experience for um users of the protocol. And I think there's kind of a gradual acceptance there that if you are, you know, these DeFi protocols are going to require sophisticated financial actors to make good products most of the time.

Um, and Monet, I'm curious, you know, when you think about one of the other um maybe things to think about is how risk and counterparty like especially counterparty risk uh changes um in this environment and this idea of it kind of moving up the stack. So, you know, when you think about these more modular designs, can you just talk a little bit about how like counterparty risk changes from your perspective? Yeah. Yeah. So, um I think Morpho is kind of a good example of this that's out now where um people get very excited about it because the base layer of the Morpho protocol, the pools, um they're completely permissionless. They're not upgradable. anyone can make any you know pool for any asset pair of collateral

and borrow asset. Um so it's it's kind of like uh really adhering to like the DeFi sort of principles the the goals that we have in DeFi which is like a really governance minifized uh protocol. Um, but that being said, the UX, if you just are, you know, uh, Joemo and you're supplying $1,000 to these various pools, if you have to move them each time that like there's a change in relative interest rates, that's a terrible UX. So the vast majority of people they're supplying the morpho via uh vaults which is basically like a it's a riskmanaged um sort of like risk curation asset management type of product where um you

have a vault manager um you're giving them uh access to your funds and then and then that vault manager is deciding which pools kind of meet the risk criteria and that are safe to supply into and then also optimizing between them to get the best you know riskadjusted turn. Um, so you have the benefit where you're not exposed to governance risk at the base, the protocol layer, but then you do have a bit of um a bit of sort of like governance counterparty risk uh at that next higher abstraction layer in the stack.

Um, it's, you know, it's challenging to to think which is which is necessarily like better. there might not be like a a firm answer of what's better or worse because um you know when you're sitting across from a protocol like with a big decentralized Dow like let's take a look at like a or maker um you have all this risk of of the governance that they have on the base layer of the protocol but then the DAO itself is got fairly distributed governance power um it's you know reputable they've been around for a long time they're kind of lindy um when you're looking at uh sort of like governance at the higher layer of the stack, you kind of have new entrance. Uh people who have been around for maybe a

year or less, they've got less of a track record might just be run by a single company uh rather than like a distributed set of of participants. So um you're kind of in a way when you move the government governance higher up the stack you're kind of fragmenting uh fragmenting the governance layer a little bit as well which um you know it's it's got challenges uh like but then if one of these vault managers has a huge problem or rugs everyone else in a different vault that's on that same underlying protocol is still safe. So uh it's it's a lot of trade-offs. Also in practice, isn't there a huge overlap in between the protocol teams and the dominant vault managers? Like I'm

thinking of BA Labs obviously shout out uh but also steakhouse and gauntlet right and uh between BA labs and stakehouse that was a lot of the risk management that was happening at maker in the early days and even you know up through the present was managed by those groups. Gauntlet obviously very famously there's been a little bit of falling out then between them and a right but they were doing a lot of the risk management and curation for a in the early days so it's almost like you took the parts of the DAO you almost unbundled uh sort of parts of the risk management part of the DAO and moved it into these vault curators and in practice it's a lot of the same people right that are that are managing risk yeah no it definitely is um you know I think it it makes sense

because the the competency required for being a you know a vault curator uh for a lending market is quite similar to to the competency you need to be a consultant or like sort of like the service provider for a DAO style of of management. Um, so it does make sense, but yeah, it's kind of taking that same function and externalizing it out of the base protocol, but it's still for the most part it still has to exist um somewhere else for the vast majority of users who yeah, you know, are not qualified to be doing the risk management or it's just too much too much work for them to be doing and it makes more sense to like give that to somebody else. Yeah. Well, you know, I'm curious and you know, part of the what

the this protocol design necessitates is this sort of cottage industry of risk curators in general. And you know, I know we've talked a little bit offline. I know BA Labs does this. Um, maybe that'll be a good business. Maybe it'll be a little bit commoditized. Uh, but it is still interesting that now you have these, you know, because historically, if you kind of think about the makeup of the early team of AV, it's a lot of developers and engineers, right? Not super obvious, right? that you have a bunch of very uh you know like kind of risk managers in that in that setup as well. I'm sure they ended up onboarding those people but now it feels like you've got um you know groups that just do the risk management part and don't necessarily need to u mess around as much with the dev stuff which feels like

a good separation from my perspective. One other thing that I'm very curious about with this design is how BD changes and the the more modular design architecture of something like Morpho to me feels like it's more of a BDriven model versus a retail marketing driven model. And I think the days in general of crypto Twitter being super important are getting it's getting less and less influential. And yeah, if you are a team like Morpho and you want to land a big account, right, like Coinbase, um, that can leaprog you, you know, billions of dollars worth of TVL. And so to me, it kind of changes the entire BD structure and setup of a lot of these protocols

and it kind of makes it a little bit more exciting because all these protocols, everyone from even L1's and L2s to D5 protocols are really one or two big apps or integrations away from potentially leaprogging their competitors. So I think it makes the entire space much more dynamic. But anyway, this is a this is a huge theme that we're going to be exploring for this season. And you know to introduce the kind of the second idea that I think it's worth poking at is this idea of vertical integration. Um and so maybe to lay the groundwork and historically how vertical integration has been thought of especially in the Ethereum ecosystem is I feel like it's a little bit a little bit of a no no uh word right where we had this philosophy that Dows were supposed to be this flat structure where governance was minimized and there was

this strong preference towards um maybe because of the decentralization ethos that we we wanted these things flat and horizontal right and we could kind of have these nice DeFi Legos where you know a was the borrow lend protocol and uh maker was the you know stable coin issuer and these could just interact and when you fast forward to today there's been quite a bit of vertical integration kind of on two fronts where a now has go uh maker or sky now has spark and we're kind of seeing each of these OG protocols offer uh competing lines of business and so it's harder to even look at these and say this is why they're so different um but also I think there's another uh area of vertical integration

around especially uh dexes where you started to see someone like unis swap start at the protocol layer but then move both up and down the stack and I would also say for Jupiter there's there's a there's an analog here as well but you know it's everything from getting the kind of the RFP offchain layer of unis swap x to the wallet layer so they've got their front end and unis swap now they actually have a chain and uh a dex like kind of the protocol and liquidity layer as well and so they're is controlling more and more of how um the user interacts with ultimately the brand. And I'm curious to get your perspective here. You know, what do you make of this trend of vertical integration? Does it make sense, you know, uniformly or there some protocols

that it makes sense more or less for? And then, you know, was is the original Ethereum ethos here right? Like does this fly in the face of decentralization or how we've historically thought of DeFi protocol governance at some level? Yeah. No, it's it's been really interesting to see. I think um people have kind of been uh anticipating that the kind of like kumbaya era of DeFi was going to be you know basically on its way out at some point and I think we're there's still a lot of uh protocols working together but uh it is you know sort of on the way out in a way.

Um the money Lego idea was super interesting and I think that's part of like why I got into DeFi is like just the idea that you can build on anyone else's protocol. But um what we've what I've seen is that um it kind of was like an idealistic mindset where you're looking at all these protocols as just like super simple widgets like basically like unis swap v1 type thing where there's no governance required. There's no like sort of active management uh or like soliciting users uh you know growing your user base required. Um and for a lot of these types of protocols um that's just not really how they they work in practice. they're they're protocols, but they're also businesses

in a sense. Um, so yeah, the idea that like you're going to be okay uh sort of funneling your users to some other protocol that is also a business that you have no control over um is quite challenging. Um I think you know there's a few drivers that I've seen for vertical integration but I think like uh some of these leading protocols like a is a great example they're kind of reaching a point of saturation for their existing PAM like they they already own 65% of like the the D5 borrow market. So it's completely natural that they they would want to expand into adjacent stuff like stable coins makes perfect sense.

There's a lot of synergy with lending markets. Um so yeah I think there's people have started to saturate uh saturate their their existing market and then uh beyond that you know like a lot of the value uh just in general in business is like kind of owning the user and and having like a solid user experience from front to back. And um if you look at something like unis swap where they are trying to like kind of own the entire entire like transaction flow um they can ensure if they do that they can ensure that the user is having a coherent journey all the way through um and I think that you know that adds a lot of value and it kind of has a potential where they can have like a a

stickier kind of deeper relationship with their users. Yeah, I completely I think there are two uh maybe to try to summarize some of what you said there, there are two different reasons to do or a couple of different reasons to do this. One is a UX uh thing and then one is an economics thing. And I think in the early days especially uh I've heard Hayden talk about this from Uniswap you know describing that you know if you're a product driven company right you want to make sure you've got high user retention that your users having a great experience and said something like 80% of the complaints um around people interacting with unis swap didn't actually have anything to do with unis swap it had to do with MetaMask right so if you want to give your customers a great exper no no shade to MetaMask but

right that was that was his perspective so moving up the stack and controlling more of how your users actually interact with unis swap the underlying protocol is you can you have the ability to give your customers a better experience then there's also a there's also a like especially in the unis swap world I know that team is really really focused on eliminating me leakage right so something else um that presents not a great user experience but also kind of leaks value away from unis swap is leaking me to the L1 and that can be anything from 12 second block time so you have stuff like uh loss versus rebalancing lever um on your AMM pools um is definitely very real. Even just the cost of gas back when the cost of gas on Ethal one

was high, right? That was a real that was a real actual challenge for Uniswap. And if you think about um first of all, that presents just not great UX in general of your fees, your customers having to wait x amount of time or getting priced worse. But also, if you think about the fee, let's say users are willing to pay $100 for a swap fee, which they're not, but at one point they were comfortable paying that. Um, if $95 of that is going towards gas, then there's so much less of the pie for unis swap to grab. And so, it makes a lot of sense for them to want to eliminate those gas fees that they're paying to the L1. So, that's kind of everything at the settlement layer to they're kind of moving down the stack and up the stack at the same time. But I think that

moving up the stack today is probably seen as being slightly more valuable here. And I think that people are starting to rediscover some of the work that like Ben kind of classical business wisdom and guys like Ben Thompson at Strate have detailed with his idea of uh aggregation theory. But just having that relationship with the user is incredibly incredibly valuable. And yeah, I think you're starting to see more D5 protocols try to move up the stack and actually own that relationship. Yeah. Yeah. No, I think it it dovetales a bit with kind of the the like modular approach to building a protocol too. Um like if you're relying on uh somebody else below you in the stack um basically you're

you're depending on them to not screw something up. Um, and there's been plenty of cases uh in the past, you know, 5 years where something almost went wrong with one protocol, another like maker, like compound, whatever the case is, and everyone above them was, you know, uh, basically just hoping that they weren't screwed. Um, so yeah, I think, you know, it's it's for economics, but it's also like a matter of, uh, like risk mitigation and kind of just like trying to ensure that you survive. um completely. Um so yeah, it's going to be very interesting to see how um all that ends up balancing out. I think the DEX uh space is probably where you see this the most. But one other area that I

would highlight as well is companies trying to figure out where their core competencies are and then leveraging that across other business lines. And you know, one thing actually that shout out to Adrian from Stakehouse who originally pointed this out to me is that, you know, running a stable coin is not wildly dissimilar from uh the core competency required for uh running a liquid staking derivative or liquid staking token. It's basically the same thing if you look at it from a balance sheet standpoint. So, you know, if you look at over in Salana, what GTO is doing, I think is fascinating where you have these complimentary lines of business that leverage the same kind of internal core competency. um but you use it to benefit um your other products, right? Like real synergies. So for GETO,

they started off with MEV um where uh they obviously had direct relationships with validators, but they had a good understanding of how to extract uh value from transaction ordering. Then they parlayed that into an LST, right? where obviously if you could redirect something like Geto tips into the LST yield or even just allow you know by extracting MEB more efficiently you have higher yields that's quite good for um you know your LST and that dominance there and then a reststaking protocol to decentralize some of that infrastructure it's all it all just kind of fits together very nicely um and you see that more in um maybe other protocols than Ethereum necessarily but that kind of leads into this next subject that I

think we want to explore which is um DeFi outside of Ethereum. And one thing that I would be curious before we get into some of the differences about Ethereum based DeFi versus DeFi that you see on other protocols is you still for all of the uh flak that Ethereum gets today. You still see that DeFi is extremely dominant on Ethereum um versus other protocols. So, I've even been pretty surprised in Salana land, right, for it should be a massive boon to DeFi that you have lower transaction fees, but you still just haven't seen nearly the same amount of adoption on Salana versus something like ETH. Um, and even, you know, the Black Rocks of the world and the banks like they're kind of launching on L2s, right? And they're

really leaning into the Ethereum, uh, you know, into the Ethereum space. So I guess just an a question to you to begin. Why do you think DeFi has continued to be as dominant as it has been on Ethereum? And has it surprised you to see it not take off quite as strongly on other chains, especially as Salana? Yeah, I I mean I think it has been a little bit surprising to me um as far as like one of the key drivers of of DeFi still being so dominant on Ethereum and not so much on these newer like sort of faster more more high throughput chains. Um, Ethereum has been lagging on a lot of key, you know, fronts like speed, um, throughput, uh,

transaction costs, but I think in a way like the most important thing for a lot of DeFi protocols is just like uptime and reliability and lendiness. Um, for something like a stable coin or a lending market, if you have downtime, um, that can stink you completely. Like, you know, if the price crashes in an hour or something when the market is down and you can't liquidate someone, um, you're cooked. Um, Salana's had no downtime recently, so they're actually I think things are looking up for them quite a bit. Their reliability has gotten much much better. Um, but it's still within, you know, recent memory that they had downtime for, you know, periods of hours up to like even a day.

And luckily, the prices of assets didn't shift too much during those times. So, uh, it ended up being fine. But, um, I think ETH L1 is still kind of the Lindy chain like it it doesn't go down. Um, so a lot of the key parts of the DeFi stack, something like a which has, you know, huge TVL, um, Sky, uh, these other like core lending markets, um, that's what they value most. So, and also that's what the users value most. The users who are bringing big money to these protocols, um, they know that their money is safest when it's on the lendiest infrastructure. So, I think that's part of it.

Um there's also some quirks like uh the way that ETH um you know ETH staking is it's like friendly for uh home stakers in a way cuz like you can um you know you can basically uh stake with a like a toaster basically or like a Raspberry Pi what have you. Um they don't have delegation. So if you're like me and you don't want to run staking infrastructure, your only option is to use a liquid staking service basically. And um that's a huge tailwind for DeFi. It's driven like a ton of TVL to all the lending markets. There's this whole like ETH liquid staked looping trade which has been driving like just a ton of TVL and revenue to all these Dows

and uh DeFi protocols. And that was just kind of like forced on Ethereum because the you know there's no delegation feature in protocol. Um but it ended up being a huge huge boon to DeFi where Salana like it's just too easy to to do like delegated stake and then the epochs are like two three days. So the liquidity benefit of of an LST isn't really even that significant. Um so I think even today like what's what's the liquid staking penetration rate on Salana? Like 10% something like that. That's much lower than Ethereum. Yeah, quite small. And you know, I think that's uh that's definitely been a headwind for them, I think. Yeah. I I think also one of the things that Ethereum again still has going for it is

is just the amount of liquidity in users um that it has versus other chains even something like Salana right so I think again if one of the themes of this season is the introduction of the institutional customer I do think Ethereum is getting knocked at the current moment for its roll-up roadmap and maybe it didn't get the path dependence thing 100% right but I do think some but I do think that these institutions are going to want their own environ ments they're going to want their own L2 like things, right? So I think Salana maybe not prioritizing in its road map at all the ability to do that. You know, there are drawbacks to that. There are definite bounds to it, right? You have less fragmentation 100%.

But there are drawbacks to that. And I do think this is one of those instances. I'm not sure Ethereum really thought like this. I think this is kind of one of those things where they might have gotten a little bit lucky here. But one thing that I think it's it's important to get the words right. Um, I think the uptime part of what you described is super important for attracting institutions. I also frankly just think the amount of time that Ethereum has been around versus Salana is really important like that track record and consistency element is really important. Um, but also it has way more users and liquidity even than Salana and then there's a massive paro kind of fall off after that. So the reason I think it's important to say I'm not actually 100% sure that the institutions care about what we all hope they would care about

which is the, you know, the credible neutrality and being the most decentralized and, you know, you can run a Raspberry Pi. I really don't think they care very much about that. But I do think that they like the idea that it's been around for a long time. The uptime record has been really good. There's a strong track record and it's got users and liquidity. They view it as a as a new business line, right? An opportunity. So I think that's something that Ethereum has done super well. sales going forward. Yeah, I think there's there's like an interesting aspect too where um taking Salana as an example, but I think other kind of new high throughput chains um they have this benefit too where because they're sort of network fees are much lower and and they have a lot uh more throughput. Um there's like more sort of monetary

velocity within these D5 protocols. They can get more done like more transaction volume with less TVL which is in a way super exciting. like it's more capital efficient. Um generally there's just you know they can do more with less which is great. Um but then from the perspective of an institution at least for these kind of like early joiners like someone like Black Rockck and Securiz doing Biddle um their incentive to come join DeFi you know I think they're trying to get their foot in the door early and they're trying to be known as uh you know innovators in the space but the short-term incentive is just that there's a bunch of idle capital that they can sell into on Ethereum and that's partly because the capital

efficiency and like sort of the velocity of money on Ethereum and DeFi is much lower. But then it's it's giving them more of an incentive at least in the short term um to participate because you know I think Bid has already got a couple billion um in in TVL on Ethereum because there was all these stable coins sitting around doing nothing. Um and it's just like it's like sitting ducks for them. It's you know they just it's like free money. So I it's it's weird like Ethereum is kind of benefiting from um the capital inefficiency. It's like such an opportunity for these institutions to come in and and sort of pedal their wares.

One one other question that I have as well is what you know how sticky is some of this path dependent stuff going to be? Um so you know you mentioned what like the penetration of liquid staking in Ethereum versus Salana. One big change there is just yeah you don't have delegated proof of stake in Ethereum. You also had the merge which Salana was a proof ofstake chain from day one. Um, Ethereum used to be proof of work. Then there was this long transition. There was beacon chain, multiple chains running in conjunction. And if you stake, you didn't really know how long you would have before you could unstake.

And so that was a huge boon to the rise of LIDO. And you know, as you mentioned, this idea of looping. And so I'm I'm curious how long some of these path dependency effects are they are they permanent or maybe slightly less permanent. And then also what does the change in fees especially on like mainchain mean for market structure? And one example that I would give you is you know pe uh there were very early in Ethereum's uh in the Ethereum days there were kind of these ideas of like um you know oneinch aggregators right and the idea is hey I've seen this uh play or this movie before um there's going to be the kind of liquidity and protocol layer that unis swap has but there'll be an aggregator on top of that and that didn't really work um whereas it has worked in Salana then I think the idea

is just that fees in Ethereum are so high that yeah no one's going to pay uh you know $40 for an extra hop if 90% of the liquidity exists in unis swap anyway, right? So, I'm interested to see how, you know, different different transaction fees on different chains lead to different market structures as well. Yeah. No, I I I completely agree. I think Ethereum's in a bit of a weird time right now because gas is just so depressed. It's like one way to do anything. So yeah, um even complex DeFi transactions on L1 right now are like a dollar, $2, which is great if you're if you're using it, but um I think you know I I don't really anticipate it'll stay that way in the long run. uh even with a lot of L1

scaling on Ethereum and and users kind of using L2s more often um it feels like Ethereum is always going to be considerably more expensive than something like Salana or you know another uh new high throughput chain. So um yeah like something like uh Phoenix you know onchain order book I don't think will ever work on Ethereum L1. Um instead you have all these sort of interesting workarounds like um you know a lot of like interesting intentbased architecture where more of the logic is happening offchain and you just kind of have settlements like the matching happening uh onchain but um you know on Salana like there's a lot less resource

constraints so um stuff like you know onchain per uh like drift or something um a lot of these defend protocols calls um which they're not really DeFi, but I think um you know there's there's a future where they'll kind of be able to finance some of these deepen activities on chain. Um I think that's at least for now that's kind of like uh that's that's Salana's uh market. I don't think Ethereum L1 is is really going to be able to compete there. So, um, it feels like Ethereum is still kind of leading in innovation in DeFi in a lot of respects, but there's certain niches that I think other chains are going to be like out competing uh on

Ethereum for for quite some time. Namata is the shielded asset hub rewarding you to protect the multi-chain. Built to give you full control over sharing your personal information, Namata brings data protection to existing assets, applications, and networks. Namata ends the era of transparency by default, enabling shielded transfers and shielded cross-chain actions to protect your data even when interacting with transparent chains. Namata also introduces a novel shielding rewards system. By holding your assets in the shielded set, you help strengthen Namata's data protection guarantees and collect NAM rewards in return. To learn more about Namata, follow the link in the description below. Ledger is the global leader in digital asset security, trusted by 7 million users and securing 20% of the

world's digital assets. In recent years, Ledger has built a comprehensive ecosystem of products and services, making digital ownership more secure and accessible for everyone. Ledger's newest devices, Ledger Stacks and Ledger Flex, introduced the world's first secure touchcreens, making it easier and safer to manage your assets. Alongside Ledger Stacks and Ledger Flex, they have also launched the Ledger Security Key app, offering a safer alternative to traditional password management. Follow the link in today's show notes to get started with Ledger today. Actually, I want to return to that point that you were making about um Bidd and Black Rockck and introduce this next big theme as well, which is, you know, this is going to be no surprise here, but I think it's got to take up a good amount

of air time during the season, which is real world assets and especially stable coins. And you know, this is something that people have been talking about for a long time. Uh the stablecoin market cap chart is one of the few charts in crypto which is up only, which is part of the reason I think people like to talk about it, but part of the reason it's exciting outside of just the fact that empirically there's quite a bit of demand for it is you can start to see it slot into the macro picture of something like the United States, right? So a bit of context that we haven't necessarily talked about is yeah you have the largest uh you know capital market in the world opening up and saying we want to be the uh crypto capital of the world and you also have the treasury secretary

Scott Besson describing stable coins as a key pillar of how he plans on managing the United States debt which is unbelievable right that's kind of wildest dream stuff if you just rewind the clock back three years ago to where we were in 2022 and so I think there's a lot of tale macro tailwinds for the adoption of things like stable coins, but also uh real world assets more broadly in the form of something like treasuries and more recently um around private credit. Um and so one thing that I'm you know curious uh to get your take on here is you know how do you see the adoption of stable coins going? And I'd love to you know we'll bring on some some experts this season but I would

love to pick that apart. Um, and I'm also curious, you know, if we see the US adopt stable coins to the degree that they say they're going to. I assume there's going to be a wave of new issuers. And I'm curious how you see the market share of the incumbents playing out. Is Tether going to maintain its, you know, 60% uh market share that it currently has. Do you see that bleeding out? And how how does how do you see all that changing with the introduction of, you know, a bunch of new stable coins moving on chain? Yeah. No, it's a super super exciting uh like time because yeah, for once like the government is is supportive of uh stable coins and RWA and just kind of this general path of development.

Um people have been uh sort of anticipating that yield bearing stable coins are the next big thing. They've been sort of saying this for quite some time and it hasn't panned out yet. It's still uh basically a duopoly between uh Tether and Circle uh USDT USDC and it's tough to like to say what what will happen there. Um but I almost I'm guessing that Tether is going to maintain a lot more of its market share because um its user base is concentrated mainly in emerging markets um overseas and uh you know the difference between 0% yield on US dollars and 4% yield you

know from like sort of a yield bearing stable coin that's a proxy for treasury bills um is a big deal for maybe like a domestic US user Um, but for someone whose, you know, national currency is going down 20% a year because of inflation, it's not as big of a deal. Um, and they just want, you know, broad acceptance. Um, trust. Um, I think they like the the idea that Tether is kind of an offshore operator, so it's a little bit less under the US's thumb. Um, so I could be wrong here, but I I actually see Tether maintaining like a good deal of their existing uh market cap and market share. Um, and I think for the onshore um sort of space, I actually see

USDC having a lot more competition. Um, because a lot more of their business is probably going to be from FinTechs who, you know, basically they need the economics of the sort of like the float uh the T bill yield to run their business. It'll be a lot of um onore users who like, you know, I'm not going to hold a lot of USDC on chain because I can just take it and put it in Treasury Direct uh and earn some yield. Um so really interesting time, but I I think that the the onshore stable coin market um is going to be a lot more competitive and you're already seeing um I think Paxos has this USDG stable coin that's like signing up a bunch of consortium members. um a lot of different you know

activity like that where big uh big institutions in in payments and fintech and traditional finance are getting in the game. Uh and I think USDC is probably going to be uh their first their first target to like vampire attack. Yeah, I I think the the division of rest of world and you know maybe you can view tether as eating the uh Euro dollar market um which this isn't a macro podcast but it's kind of this market for offshore dollars which is actually much more opaque actually larger than the market for onshore dollars domestic dollars and uh you know largely unregulated so I think that's very interesting for tether the other thing too I think that both USDC and USDT have in common is that they

innovated on distribution and Tether. This is probably something that you can't replicate, but the need at the time was you had all these offshore exchanges. People wanted to trade in dollar pairs, but they couldn't actually hold dollars. So, they wound up with Tether. Um, and Tether was able to become a key trading pair um across assets like BTC and ETH. So, that's a really difficult thing to replicate and a persistent source of demand. Over in more US regulated land, you had the center consortium in between Coinbase and Circle where, you know, the distribution engine for USDC was Coinbase for the most part. Um, and USDC is still the dominant trading pair for stable coins in DeFi. Uh, the challenge

for USDC is now Coinbase understands its leverage and from my understanding has basically eaten up the entire revshare u that circle had there. So, I agree. I think there's going to be some pressure under USDC here. Um, and I also think that probably new issuers will also need to find a way to innovate on demand. And I could see that coming from historically what it's looked like in crypto like an exchange like Robin Hood or something like that. Um, or a a player who's dominant in payments and they can just replace a lot of their existing payment flows with stable coin rails. the I actually see that as being really powerful in the endgame, but it's so disruptive to their business model, right? Like they they'd have to eat into

a lot of their own fees and, you know, kind of cannibalize their existing business, which is maybe why you haven't seen PayPal be as successful in the stable coin game as everyone predicted, right? If I were if I were the CEO of of PayPal, I'd be like, "Yeah, what am I going to do? Eat 98% of my own revenue here? That would be uh not great for my shareholders." So, I don't know. I I agree. I think Tether is in a really good spot here for the most part. Yeah. I I I think PayPal is an interesting uh test case, too, because um you know, you could see in the future it'll be kind of a more core part of their payments business, but um so far it's kind of just been them like dipping their toes into DeFi, trying to get listed on various lending protocols. uh they have

some incentives uh you know being paid out in various places and um you know it's it's actually quite difficult to break into DeFi protocols with some of these these new stable coins or other products if you're not like differentiated. Um and I I would say you know PYUSD versus USDC they're both redeemable sort of onshore stables. So if you're a user, um why are you going to use PYUSD when you know there's already a lot of liquidity pairs indexes and there's already a huge liquidity pool in a part of like sort of the sky PSM. Um there's all these integrations.

So like there's it's it's a much tougher cell to like be the first one to say, "Oh, I'm going to use this different stable coin even though it's basically offering the same exact value prop." Um, and it's it's, you know, difficult to see what what is going to help tip that for like the big DeFi use cases. Um, but what I what I think, you know, could have a little more success is when you have a net new product, like something that is actually differentiated. Um, I think some of these T-Bill products, uh, like Bidd, you know, they're paying out yield and it's also just purely like a a T- bill fund, which in some respects has a bit less risk than than stable coins.

Uh, that's seen a lot of traction and as we get kind of more esoteric, uh, like credit products like you were mentioning, uh, private credit on chain, um, it'll be able to deliver, you know, higher yield than T bills, um, a different sort of risk return profile. Um, I'm not sure if that's going to like see immediate traction in DeFi DGEN land, but for some of these protocols with a lot of excess capital, um, you know, Sky and all the subdows over there, um, some other lending markets and such, like I think it could be of of major interest. What do you think the value proposition is for private credit issuing on uh, crypto rails? I've asked so Apollo just launched a uh I forget

the name of their fund but it's a you know it's their distress credit fund and I looked recently it's got something like five million in TVL or something and I'm just curious what is the what is the rationale here and you know oftentimes when this I have no insider information here at all but generally when you see stuff that doesn't make sense they're being incentivized to do that so uh someone from the you know Salana Foundation or Kraken correct me here if I'm wrong but I think that they launched on uh this this on Salana and also on Inc. uh the Kraken 2. So sometimes these things are incentivized, but yeah, I'm I'm curious because Apollo I would I'm sure has no difficulty with distribution whatsoever of their private credit vehicles, right? So I'm I'm just curious what the the benefit is here on

the issuer side. Yeah. Well, with with distress debt, I mean, that's I'm just laughing because like crypto has like our fair share of distress debt without any extra help every few years. Yeah. every few years we have a bunch of people go bankrupt and yada yada. So, it's it's funny from that perspective, but um yeah, it's tough. I mean, I would say in a way it's probably their way of just dipping their toes in like they're figuring out how it works. They're figuring out what's kind of like the transaction pipeline and all the steps to make a tokenized product. Um, I think you know more than likely the the products that succeed, they're going to go from simpler to more complicated gradually and kind of in a

step-wise fashion. So like the first real successful RWA products are tokenized T bills because they're basically almost like a stable coin with yield. Um, they have like very minimal duration risk. They have no credit risk. um any idiot can like look at them and know like what they're getting versus something like distress debt. It's quite complicated. Um you kind of need to be a specialist to know whether you're investing into something that's that's actually like a good bet or whether it's just somebody shoving all of kind of like the the dog turds uh into a product and selling it to you.

Um, so yeah, it's, you know, I think I would envision that that Apollo product is probably more of them testing, but um, I could definitely see, you know, maybe you don't go directly into the deep end of the pool of private credit, but you go from T bills to like uh, corporate bond ETFs and then you go to high yield corporate bond ETFs, which are still like public market assets. Um and then once you kind of have a developed market uh for those sort of things uh and protocols are a little more familiar with how to how to use them or onchain users um then you can start getting into um you know more more challenging like private assets. Um the flip side of that though is that um

private assets in a way they actually benefit a lot more from being onchain because their liquidity situation is quite poor now versus you know public public debt is you know tradable. It's in ETFs. Um so I see why people want private credit to work on chain because uh it's like such a step change in the the liquidity and the user experience for people who are holding and trading this stuff. The uh flip side of you know public credit uh being maybe more suitable for DeFi and onchain investors and protocols is that um private credit benefits more from tokenization because um it's got a lot of friction for trading and for transferring. Um so it

it makes sense that people are more excited from like the trapy space in private credit onchain because tokenization would be such a you know a level up for for that asset class. Yeah, you know, that really resonates and it it does feel like there's the opportunity for a barbell here where you have uh the most liquid uh you know, types of real world like US dollars and treasuries and that type of thing which there's just an enormous amount of demand for that type of collateral on chain, but then also it makes sense for the most illquid uh private assets. Um and there's actually one of the um maybe the more cynical approach to this would be I'm sure there there are articles that you can see in the Wall Street Journal at this particular moment in time uh where PE funds are basically lobbying to be able to include private

assets in 401ks and that's called stuffing right they have uh they've lost their they're looking for more buyers for their for their assets to keep valuations where they currently are and so there is an incentive right for more illquid uh forms of but also it's just on a more kind of first principles basis yeah Okay. The friction around issuance of especially private assets like LP shares or real estate or whatever it is um is much higher. So it makes sense for that to be on chain large. So one other aspect is like uh sort of the people who are onchain now they kind of have like a degenerate like super high risk tolerance. So in a way like maybe maybe it's a good fit to like have distressed debt. Uh because I think

people in DeFi, they don't get out of bed for like a 5 percent yield. You know, it doesn't really excite anyone. Um but if you can have like a 12% yield on something that's very risky, um you know, we we do that all the time. That's that's like our yield farming. This episode is sponsored by Catria. Catria is the first zero knowledge rollup to enhance the capabilities of Bitcoin block space, enabling Bitcoin applications and unlocking Bitcoin's full potential as a programmable financial platform. With Catria, developers can now tap into Bitcoin's liquidity to build scalable payment systems, privacy solutions, and more.

Citria is currently in its test net phase and is approaching its mainet launch. To learn more about Citria, follow the link in today's show notes. Okay, maybe that introduces kind of this final um idea that we want to unpack this this season, which is this idea of financialization and um the professionalization of historically retail focused activities like yield farming. Um, and I'm kind of combining a couple of different um, ideas into one into one theme here, but you know, I'm curious because the idea of securization and the increasing financialization of the economy at large um, it feels like a big mega trend in finance over the course of especially the last 20 years. You know,

this was particularly salient during the 2008 um, housing bubble, right? and uh you know great recession that followed and people were very confused and no one really understood this idea of you know collateralized debt obligations and um you know CDS and all of this stuff but yeah it feels like that trend has the potential to be supercharged even in crypto and I'm sure folks who might be participating in the DeFi ecosystem today start to see parts of DeFi uh look more like that than than less I think.

Um, and so, you know, I'm curious just what your thoughts are about increasing financialization of crypto. Um, and you know, in addition to that, I'm wondering about uh kind of like novel and interesting way of importing uh tradfi yields and bringing them on chain. So, maybe we could talk a little bit about uh some of the energy related securities that we're talking about. We'll hopefully speak to one of the founders of a deepen very interesting Deepen project um over the course of this this season. Um and then finally I also think that uh what the folks at Total Club are doing around uh professionalizing um TVL um and kind of bundling and acting as a as a syndicate for investor interest by you know moving uh TVL into

different DeFi protocols and professionalizing some of the negotiations and the yields uh that's happening there is also really interesting trend. So would love to just get your take on you know some of the financialization uh that goes on in in DeFi. Is this is you know crypto like a breeding ground for even more financialization? Does it make it easier to do? Is it better the pros and cons? How do you see all of that? And then we can get on to that triple club and TVL stuff. Yeah. Yeah. Um you know I think crypto is uh like sort of the killer use case of crypto is tokenization which is you know naturally it's it's financializing a lot of a lot of new things. So it's um I think crypto has like a really a lot

of strength in uh in sort of the like product structuring. You know if you want to securize something and kind of split it into components that's something that crypto is actually very good at. Uh smart contracts are like a supernatural fit for that. And I think they can do it more efficiently more reliably than you know just giving a bunch of assets to an investment bank and having them chop it up and sell it. Um so just from a functional level I think there's there's a lot of uh kind of meat on the bone there for crypto to to take. Um it's also reaching you know that point of maturity kind of like how protocols are becoming more modular because they have different user segments that have different needs and wants. Um I think that's kind of like

the main driver behind a lot of like the securization and trenching that you see in Tradfi. like some people want only AAA rated like super safe assets. Um and then a lot of other people are happy to take you know a lower rating a bit more risk to get a higher yield. Um and you can take you know a bunch of home loans like a mortgage back security naturally like the the sort of whole pool of home loans is not going to be as safe as as some of these users want and it's not going to be as high yield as others want. So you can just structure it to give people what they want and serve more diverse user groups. Um and DeFi, you know, we're having kind of greater diversity of of uh user profiles. So um

it's a big opportunity for us to to start digging into structuring uh you know stuff like I think Pendle is like you know kind of a simple example of this where some people just want to fix yield some people want to be a degenerate gambler and bet that the points are going to be worth a lot. Um and that's become a huge market in DeFi. Um, so yeah, I think I think there's a lot of a lot of tailwinds uh to tokenization um and and just generally kind of like structuring stuff on chain. Yeah, I agree with that as well. And I think you know there's I've sensed a little bit of an allergic reaction to some of this in crypto and I think that's because the ethos of crypto

largely is born out of Bitcoin, right? Um and Bitcoin was a counterreaction to some of the shortfalls of the existing financial system where there are bailouts but also you know people saw too much risk um in the way that the existing financial system was constructed. And when we kind of dug into why did 2008 happen which was obviously the led to the genesis block of bitcoin um people were upset at the amount of risk that bankers were allowed to take and uh you know those losses ended up getting socialized and you know bitcoin is like the antithesis of that right it is uh very robust and solid and um anti fragile the trade-off of that is that it's highly inefficient right and a lot of the early designs of defi and even still to this day are you have

mostly overcolateralized lending which is not capital efficient at all. And there are huge there's always a little bit of a tradeback. I think this is one of those laws of physics that you can't fully um get around, which is there's a trade-off in between robustness and efficiency. Um and so I think we're going to start to see the the pendulum swing in DeFi more towards efficiency than robustness over the course of the next um decade or so. And my hope would be that the better tech of uh you know building on blockchain rails um will increase transparency and hope uh help remove some of that risk. But I would guess that we see more you know trunching and financialization than than less for sure. A lot more

financialization uh probably a good dose of moral hazard uh and people you know taking risks that they shouldn't be. Um but that being said yeah I completely agree. I think the fundamentals are very strong like you can have atomic settlement which reduces a lot of like settlement risks that you have when everything has to be you know settled through some third party investment bank or something like this. You have more transparency. Um, so I think, you know, it's maybe even part of why uh the regulatory picture is is improving for for crypto and DeFi is because um there's actually a really strong story to be told here of why DeFi infrastructure is really suitable for for you know prime time and it can

actually make the financial system safer. Yeah. One thing I've wondered and maybe it goes beyond the remmit for this season, but moral hazard comes from the backs stop of the taxpayer, right? That's what it is. It's uh privatizing gains and socializing losses. And in crypto, you don't really have the ability to do that. And that leads for to some very poor UX. You know, people often say it doesn't make any sense for us to have 10 different stable coins. But in reality, we have we what we mechanically have is about 50,000 different stable coin issuers in the United States. It's every single bank is its own stable coin issuer, right? That those are not dollars aren't technically fungeable banktobank. However, you have

such a strong guarantee between the FDIC and the Fed that it's actually fine. Everyone just accept, okay, you can call JPMUSD the same as BOA USD and because we all know that it's backed up, that'll be fine. But you don't really have that option in crypto. So, I'm just curious how far you can really It's almost like trying to trade off some of like a a gain in transparency and tech for this kind of social backs stop that we've all engineered around the financial system. And I'm curious how much the technology improvement can mirror some of the benefits of the social contract that we have in society. Um, open question.

Yeah, it's I think um well it's like uncomfortable to admit this but I I feel you know as somebody who works in risk a lot like I do feel there's aspects of kind of moral hazard that um come into DeFi in a way like you know back in 0708 like if it was rip rated AAA even if it was like the top trench of a a subprime mortgage back security if it has a AAA rating you just treat it as if it's risk-f free. Um, in DeFi, I think we have some of these sort of like sacred cow type things like Lido. Like we we know Lido is not going to get hacked. If it did get hacked, it would kind of like basically put us back to the stone age.

So there's in a way it's like everyone feels okay taking a lot of risk exposure to Lido. It's very reliable. It's a super Lindy protocol. So they've earned it in a way. But um I think in the back of people's minds, they're also thinking, well, everyone else is taking this risk. So like um there's no career risk for doing this. Like maybe it gets bailed out. Um you know, there's similar stuff with like USDC or Tether. Like you know, who's going to who's going to get fired for having exposure to USDC or uh L2s people used Vitalik wrote that famous post, don't overload Ethereum's consensus. And I think everyone at the time thought, "Okay, I get what you're saying, but let's be real. If there was some catastrophic hack on optimism and,

you know, 100,000 ETH were lost." Yeah, that would be tough to not roll that back, right? When you're trying to push everyone to maybe less so today, actually, now that Ethereum L1 might feel a little bit more competitive with L2s. That's a really interesting concept. Actually, that would be an interesting debate to revisit because at the time I think everyone just assumed of course Ethereum would roll back, but now maybe less obvious actually. Yeah, I guess that's part of I'm not like an expert in this, but I think that's like part of the whole like native rollup uh push. I guess it's like if if the rollups if it's part of the protocol then if there's a bug of course you know if there's a bug in L1 Ethereum of course you know you fix it because it's inside the protocol. Yeah. Um, so yeah,

I mean the idea of like enshrinement for like uh some of these some of these risks I mean there was discussion of like sort of nationalizing LITO. It I don't think it really got anywhere a few years ago but like the idea of enshrining an LST. Um I think I think moral hazard like it crops up everywhere in finance and uh I think I think DeFi space has actually done very well um so far but it's it's something that we'll you know have to grapple with. Oh, you know, one thing that we forgot to discuss, by the way, in the area of vertical integration, you just reminded me of it. Um, is we'll try to zoom through a couple of these last ideas because I know we're running low on time here, but uh, one other thing that I think is really interesting and worth

exploring is kind of this idea of, you know, people you did used to talk about enshrining Lido. Well, recently you've had L1 ecosystems like Barochain launched with essentially native apps, right? like Honey and um uh you know like enshrined uh borrow lending apps, right? And so where does that line and that reminds me of first party apps like when Apple launched its iPhone, right? There weren't enough thirdparty apps at that point yet so it had to make its own first party apps. So yeah, that's kind of an interesting idea to explore I think throughout the course of the season. And um you know one one other question that I have for you that I would love to get at is actually I was listening to a podcast today with Joe Weisenthal who's a quite a good I think representation of the zeitgeist of how

the average sort of finance and relatively intelligent for person might think about crypto and he actually asked this question hey if uh I really believe in stable coins stable coins are mostly on Ethereum why is that not translated into Ethereum price appreciation ETH price appreciation and that is something that I would like to get at this reason as well is what does the adoption of RWA's stable coins, how does that impact the native ecosystem, but also the price of the L1 token? Uh because on one hand, I think intuitively, and this is where I think I am going into the season, more stable coins should equal good for the EOS ecosystem, right? Like that just feels intuitively like, okay, if a bunch of stables end up settling down here, that should be valuable. On the other

hand, I could also see, you know, this is how we've talked about ETH historically in the past that is this a form of money and you denominate NFTts in it and it was a major pair, right, for uh um you know, pair trades. But now, uh actually stable coins are kind of competing with that, right? And actually you could just hold stable coins on Ethereum and you don't need to hold ETH anymore. And most people hold dollars, they don't hold ETH in the world. So what do you think going into this season does how does the impact of stable coins and RWAS you know on a within an ecosystem impact the price of the L1 token?

Yeah, I still well I have heavy eth bags so I want to believe more stables more RWAs are good. Um, I think, you know, you can look at a L1 token kind of like a government and like if there's more economic activity inside of inside of like the national economic zone. Yeah. Eventually that'll flow through to the government sort of having more value acrruel, I guess. I don't know how you'd say it. So, uh I still think it's good, but um but yeah, I mean it's it's going to be a bit of a challenge to like see once you have L2s with like gas abstraction, uh like you can pay gas in USDC. Um what is what is going to be the reason to hold ETH? Is it just going to

be, you know, DCF? Is it just going to be based on fees? Um or is it still going to retain some of this moneyiness aspect? Um, so yeah, I think it's, you know, it's a big open question and as particularly as you get more RWA backed stable coins and like it's less of the classic like over collateralized ETH borrowing, um, it'll be a bit of a headwind I think for for ETH to have value acrruel because it's losing a bit of this traditional like everyone needs to hold it for gas, everyone needs to hold it as like a trading pair pair currency. Um, so what what's going to fill fill that place?

Yeah, I think that's a big question. I for me the way that I can uh I try to square this circle is that if investors look at the fees that are being generated from transferring stable coins uh or the uh you know the marginal activity that a bunch of stable coins create, if that flows back in the form of fees paid to ETH holders, then I think it will be good for ETH. I think if it just directly competes as a store of value for ETH, I think that will be bad for ETH. Um, so I think that if I was unilaterally in charge of ETH, the protocol, I would be very focused on trying to figure out how I can translate the fee activity that gets generated

from RWA type assets, uh, into, you know, going back to ETH holders because I think if you don't figure that out, that's not good. Yeah. I mean I I would just put in like one little point is that uh there's a lot of people trying to make Bitcoin DeFi and Bitcoin L2s happen. Like is this bearish for Bitcoin? They suddenly have RWAS on Bitcoin competing with uh BTC. I would say probably not. It'd probably be very bullish. But uh it's an interesting question that they might be kind of encountering this same same uh challenge. Probably same answer for ETH, right? Short-term challenging and longer term. I think the same exact answer for ETH actually um is kind of how I view it. It does complicate the Bitcoin

story. That's the beauty of Bitcoin actually. It's that man, it has such a simple story. Um and for me, I actually read this uh one of the most influential business books I've ever read was a building a story brand. It's about 50 pages. Everyone should read it. And it just it's it's ve it has a lot of very salient examples of what it takes to build a brand. It has to be really simple. And this is my this has always been my beef with ETH is that if you can't describe it in one sentence that is a problem you know I know that people some people push back but that's not a problem but Bitcoin is just digital gold very simple but okay last thing is um and I'll just speed through this here and then we can conclude because I know we've already gone for a decent amount over time but

uh yeah I think that you know one of the persistent uh something that crypto innovated on is this idea of yield farming which is essentially distributing the native token to new customers to bootstrap demand and solve the cold start problem. And over time that was very, you know, pretty unsophisticated in the beginning and now it's gotten far more sophisticated. And you've actually got the introduction of protocols like Total Club, uh, who act on behalf of investors. They're kind of a syndicate type model where they gather up a bunch of different pools of assets and then they use combin like collective bargaining power to bargain with protocols, right? Right. And the idea is on the investor side of things, okay, someone's going to negotiate with a bunch of more leverage because they have more assets behind them, so they can get a higher yield. And actually on the

protocol side of things, they get something too because you can lock in a certain duration or period of time. So it's kind of this um this form of and over time as well, you should be able to get a better sense of what the true cost of capital for protocol is. So that's been completely unquantified up until this point. So there are benefits I think from both sides and it'll be interesting to kind of get at the um you know the professionalization of this new form of uh kind of capital raising slash but but it's interesting for users to know because I'm not really sure you know when people see TVL moving into a protocol that they understand where that's coming from or how those user behaviors have changed over time. So that'll be yeah it's uh it's super

interesting. I think like bar chain is another great example of this. they they had this like uh boy co thing which uh was like a pre-eposit scheme that's now put just billions of of dollars of TVL into their ecosystem. It's like bear chain's extremely highly liquid. Um so I think it'll be really interesting to see how this works out for new protocols. U it's a completely different playbook than you know starting at a low FTV and just releasing your token and hoping that it kind of has like this flywheel um to uh to pump it up. Um, so yeah, I'm pretty excited to see how these these uh these experiments are going to play out. Um, yeah, that being said, like uh some protocols are doing it just to uh

kind of buy metrics. So, uh it's it's challenging to like know like are you just optimizing for vanity metrics or do you actually uh need this to help fix the cold start problem? Yeah. And this is a this is a debate that happens around es especially uh different metrics um and the data providers especially love to get uh in arguments on Twitter about stuff like this because and you know people infire argue about metrics all the time right and there are these sort of vicious fights about it but okay so you see a billion dollars of TVL moving into a protocol does it matter how it got there I think the answer is probably yes right like I

think it it makes a difference whether whether that's purely organic TVL um or whether it's incentivized in some way. However, you could also make the argument and people will um okay, organic has historically meant mercenary retail airdrop farmers. Do is that actually better? I I actually I'm not sure. I think you could make the argument and it actually be worth it to pay um a couple extra basis points if you can lock in some amount of duration. Um, and is it really organic if this is just like is it more organic for a Twitter user airdrop thread or to be getting that reward and putting their capital in versus you know family office in Dubai who turtle club is negotiating on their behalf to me like that's where I think there's some amount of validity

here but people screaming that one is far better than the other I think is is probably off base. Um I don't actually agree for the most part. So, you know, it's just interesting to understand the mechanism of how it happens and then everyone individually can make their own value judgment about um how impactful all of this stuff is. But I think just shining a light a little bit on how this stuff is working in practice today will be valuable for people. Um and yeah, we'll hopefully have the Total Club guys on here. I connected with them. They're they're super interesting. So anyway, man, I am I'm really looking forward to this season. I feel like DeFi is having a moment. uh you know we're about eight years into this experiment and it feels like a lot of the thorny problems that we're wrestling with in the beginning

are if not solved uh on the cusp of being solved and yeah there's basically just you know no point in time I'd rather be doing this with and no one no one that I'd rather be doing it with as well. So this will be a lot of fun and um yeah guys uh hope everyone is also as excited about this as we are. So yeah, looking forward to it. Should be should be a great season. Should be a blast. All right, guys. Tune in next week for our first episode. Take care.