Ethena Labs: Enabling the Internet Bond | Guy & Conor

Transcript

one of the largest deficiencies we see within usdc and usdt is that they sort of externalize all the risk of the product onto users and then internalize all of the yield to themselves which we think is a pretty crazy construct as a product but um it is is pretty like indicative of how strong the the actual demand for stable coins is right like you're actually telling people you take all the risk we're going to keep all the return and there's still 130 billion dollars of demand for product like that what's up everyone welcome back to another episode of Xerox research this show is made possible thanks to our fantastic sponsor the atom accelerator if you're a developer looking for the home in the industry the economic zone welcomes you today is August 7th and as always we have a great interview lined

up with guy and Connor two members of the fdn team and Athena is a protocol looking to build a truly decentralized and scalable stable coin on ethereum I did want to take a second to give a little self-shill to our conference we are hosting in Austin Texas in September if you use code 0x30 you can get a 30 discount on those tickets so be sure to do that hit us up on Twitter and then we can go grab a beer down in Austin it's September 11th through 13th it's one of the best uh conferences of the year so we highly recommend you come but before we get in the interview we are joined by Ren and Matt to discuss the latest Market happenings Matt why don't I hand it over to you to start it off today I'm putting centralized exchanges for trading Perpetual Futures in the hot

seat this is because of the amount of innovation that's currently happening in the decentralized and on chain In Perpetual Futures landscape if we look last week GMX launched V2 of their product it looks to address a lot of the problems they had in V1 such as a lack of ability to attract LPS this is because a to be a liquidity provider on GMX and just for some background uh you know GMX liquidity providers are the the counterparty for every trade so anyone can go trade there and you're trading against these LPS who go and put assets in there anyways if you're being a liquidity provider and V1 of gmx's product you are taking directional exposure to every asset so this was things like Bitcoin eth link unit Swap uscc and in a basket that was a composition that may not have been what

everyone really wanted you know maybe I don't want the GMX governance token holders telling me what amounts of these assets I have to hold so in V2 they address this with isolated liquidity pools where you only have to provide liquidity against you know whatever asset you want so I can go and provide liquidity only against you know maybe Bitcoin or maybe eat or whatever I want to hold so this is one very very cool Factor here and then the second thing that I think is most interesting oh another thing is because of these isolated liquidity pools eventually we might even see permissionless asset listing so in V1 there's very few assets listed because you needed this liquidity in order to facilitate trading in V2 as long as someone's willing to take the other side of the trade and provide liquidity that asset can probably be

listed so GMX will probably be listing far longer tail assets in the near future and maybe even permissionless asset listing the second one is there was in in V1 a lot of people said that it was a benefit that the liquidity providers were taking on the risk or whatever you want to call it of Trader p l so if Traders were going to lose a lot of money in aggregate GMX LPS were going to win if Traders won then they lost um you know some people reckon this and lightly sorry some people liken this to being the casino with Camp you know Traders being the the casino although for a while this worked really well because Traders were losing a ton of money since January 1st of this year Traders have actually just been wrecking glp providers so in V2 there's a way better function for balancing open

interest meaning for making sure that there's an equal amount long and short so that instead of a risk of you know Trader p l more so liquidity providers are just pocketing those fees more like a vig with a sports book or something like that which I think is a you know amazing model when compared to the likes of uh the way V1 worked Additionally you know synthetics is heating up with ccip launched recently it's going to go across chain so soon we'll see synthetics purpose V2 not just on optimism there should be a huge benefit given that Quentin polynomial which are the two biggest exchanges for trading synthetics purposely two are actually ending their incentive programs at the end of this month so this is like a little bit of low-key Alpha but if you trade on those exchanges for the past few weeks you've been able to get more

money in op and token rewards than the fees you were paying so this will end at the end of the month and you know whether or not any of those users and volume that they've received is sticky or not what has yet to be seen but anyway ccip should be a huge benefit for them what's going to happen to this ecosystem of uh applications that have kind of Taken GOP and made it a core piece of their product like now there's a couple like yield aggregators that have really like built a product around this and are they just like shoot out of luck at this point some of them yes and some of them know so V2 actually allows an even better mechanism for partnering with you know products that want to build in the GMX ecosystem but that being said you know a lot of the builders who've spent time

building these like delta neutral vaults on top of GMX or whatever are kind of out of luck so while in the long term it'll probably benefit people that are looking to build on top of GMX a lot of the builders who've been there recently might might have put some effort into into verticals that aren't going to be too beneficial in the long term I got another question for you and sorry to put you on the spot but I guess if let's say someone goes and lists Pepe tomorrow and that's like an asset that people can trade against if p l goes so negative that the protocol is left holding bad debt um what happens in that scenario yeah so actually they don't have like there's no road map or tweets or anything that say that they're going to support permissionless asset listing

rather like I bothered the team a little bit to get that information that that is something that's planned in the future so we'll definitely have to see how you know first these longer till assets go and then I'm sure uh yeah I think that really the question there is like how much trust you have in gmx's liquidation mechanism um and the protocol realistically may not be even liable for those debts so I don't know I think it has yet to be seen I guess my take care or just initial knee-jerk reaction was that liquidity in D5 is fairly fragmented already like just having the whole glp like versus all of the other options out there at least in the current environment is kind of like

a big ass and nowadays here increasing the complexity on the user you know sure like the original V1 basket had like being head uni in it but now as a user you start to think oh do I want to choose between like BTC traded piano or like epnl or like any other token and I think that fragmentation makes it even harder um or even like just looking at it from like a super like simple perspective right you look at glp as a whole it's a nice number because you say like glp as a whole has a total like X dollars of liquidity but now like you Silo it to sort of marketing BTC has like 10 of that liquidity Eve has like 15 of that

equity and it just from like a numbers perspective doesn't look as nice um I don't know whether V1 will still be available when V2 goes live it if it is I think it'll be very interesting to see sort of the Dynamics between providing liquidity between V1 and V2 and how much really migrates to V2 and whether that's like something people actually want at the end of the day and going back to your point about trader piano um it being like well be positive this year I think on aggregate you can expect people to get liquidated they'll DJ and Gamble and Louise but that's on aggregate over a long term right um I think the case against Europe has

always been what if everyone is wrong and um cop gets aside everyone is long as a food market and GOP gets completely wrecked I think that's definitely true like at one point everyone was like super duper rich in the blue Market but it's basically where they're fresh enough whether the glp holders can last long enough to get to the bear market and then everybody gets liquidated liquidated then they'll make back um but yeah I just think it's an interesting approach of sort of tackling all of the problems that GOP slash GMX had in V1 Matt does this change who the fastest horse in the perps race is you know between dydx GMX cuenta you know level vertex we're seeing aggregators like mux

come online like who's your favorite here who's the winner yeah honestly I don't think this like you know really changes the uh the the top spot rather gives GMX a Fighting Chance again um if you look at like volume and fees market share GMX was I want to say like around 20 or 25 we could probably pull up a chart um 20 or 25 about a year ago you know August September last year and now it's probably down to for volume probably under five percent under 10 so they've really been getting hammered by some of these newer products a lot of that's airdrop hunting and you know things maybe incentives things that aren't sticky but at the same time they have been getting out innovated by new entrants to the market um anyway so this gives GMX a flying

chance to to return to that like King spot at the end of the day I think if dydx V4 manages to actually succeed have a user experience that really abstracts away you're in the cosmos makes you feel like you're just using an app no matter what wallet you're connecting with no matter what asset you're starting with I think the dydx team is really strong has proven that in the past and still maintains the the dominant share for both metrics that I just mentioned as well yeah I hate to say but I do think that gmx's days are limited potentially I know they just reduced fees pretty drastically but I was looking at for every ten thousand dollars of volume traded how much revenue does dydx bring in versus GMX and for GMX it was like 21 bucks and for dydx it was like two so I

just don't understand how you know volume will actually stay on GMX with fees being so high in comparison to dydx so I definitely agree and Echo your points there Matt yeah I guess just to be a contrarian to myself um GMX does have an impressive ability to attract these retail users and have them stay there I'm not sure what it is necessarily you know first mover Advantage being on arbitrum uh meme culture literally could be meme culture but they have a they've been very impressive with having users stick and and enjoy their product which is something that I don't know if I could say for a single other D5 application maybe you can swap so impressive Iran who you got in the uh hop seater

cool drone this week it wouldn't be a week of zero X without us talking about coinbases some form or the other so we have coinbase in the Cool Zone this week um last Thursday aftermarket closed they announced their earnings it was pretty pretty positive All Things Considered especially given the market climate of crypto as a whole in Q2 so the revenue came in at 708 million deaths versus analyst estimates of 629 million so a roughly like 10 plus percent beat um after those results came out the stock went up 10 post Market but then retraced that entire move I think the market was kind of confused about

how the value coinbase or what to think of coinbase um but yeah if you consider that the Q2 2022 Revenue was 808 million and consider everything that's happened between Q2 2022 and Q through 2023 including Luna 2ac FTX is pretty impressive that the revenue has basically only decreased 12.5 said year and year of course there's other like sort of factors that push back against this increasing revenue for example declining interest income given lower usdc market cap uscc market cap has continuously been on the decline versus UCT which has posted record profit profits the market cap is still continuing to increase but I think

there's a few points that stand out the first is that coinbase has a fairly sticky retail user base perhaps is the only option or only convenient option for a lot of users in a lot of countries or within the United States too and transaction revenue from that fund is still fairly strong the retail takeaway basically like trading fees used to be around 1.5 percentage points at the end of 2022 but someone in coinbase basically went hey I think we can charge more we and so actually the consumer or the retail or take rate is 2.2 percent which like I guess the UN me like just trading on like perfect access where your face of

fees of like five bibs 10 bips 20 bits 2.2 percentage finances to be quite Frank that's insane but there's still a decent amount of retail users that are still paying for that and of course Talk of the tunnel space that's going to fully launch on August 9th um and L2 was probably the word that I heard the most often in the earnings car Brian option just kept on saying l2l to L2 arbitrum optimism based polygon that was really sort of the narrative for half of the earnings call and he mentioned that base will be monetized through sequencer fees and coinbase can one of these sequencers as others can over time um probably just one more fun thing

about the earnings call was that coinbase had relatively strong subscription Services revenue and one component of that was beef staking and basically Byron said that the outperformance in that was driven by higher Mev boost rewards and I think most of us to start that was pretty cool to hear like in the chat fight and in this earnings call yeah that's that's a really great synopsis there and and on your point about you know like I think you said an average uh transaction fee for trades on the platform was 2.2 percent um that does seem ridiculous right but if you think about it like the on-ramp kind of has that privilege and of course if you're actually actively trading

using just like the coinbase front end okay yeah that's probably a bit nuts but if you're converting you know dollars from your paycheck into crypto you kind of don't really have a choice and once you get into the ecosystem right you have better Alternatives but where you can execute your swaps but you know for a dollar to crypto transactions I mean you really got one option if you're a us-based resident and that's uh that's really coinbase and I'm doing it too it's like if I'm on or off ramping like I'm going to coinbase of course I'm going to support that company they're fighting a good fight for us like I I think they might just kind of realize that they're the best destination for any us-based customer there really is no second best okay but we're not paying 2.2 percent right like that's only on the I haven't

used coinbase in a while but at least back in the day you know the way it worked was if you use the coinbase.com front end where you just like easily put a credit card in and buy you pay the two three percent fee whatever actually absurd number it is but then you go to the the order Book Exchange and and your fees go down to like 50 bips or 60 bips still ridiculously high when compared to most other on and off ramps but reasonable at least in my head um so anyways yeah if you're a user don't don't pay two to three percent when you're using coinbase go figure out how to use an order book and save yourself that money it's not that hard so that was an interesting point about the L2 is that how I actually am criminally underexposed to ltus and like

I think that it's clearly a forming narrative so like what's the best way to get exposure if if you guys have an opinion there if you want specific exposure to base their probably isn't a good way to do it I'm not sure if buying coinbase stock has exploded basis the best option you have definitely don't go out and buy that Meme token ball that's not how you get exposure to base as a whole I think probably your best bet for getting exposure to base specifically as an L2 would be to buy tokens of projects that are specifically launching on base but with a strong existing brand outside of Base so the best example of this is probably

velodrome optimism's largest decks by a pretty decent Market to make a good amount of fees but they're launching are basically another version of that on coin base called Aerodrome with its own token right that's probably the best way to do it in my opinion like sure you can buy like existing dabs that exist on other protocols but like I'm not going to go by for example unisop or some other like big Landing borrowing protocol that's gonna Deploy on base just as my exposure I think it has to be a token specific for that depth on base yeah and of course none of this is financial advice but it is kind of interesting because you also noted when that uh sequencer revenue is like that's how the profit generated by the

sequencer is how coinbase is going to like uh essentially realize profits from base and already in the first couple of days since launch it's generated 1.1 million dollars uh with you know fee L2 fee Revenue less L1 uh call data costs so it's already you know I think we're like what a week and a half into launch and a quick million bucks in coinbase Revenue so you know again not Financial advice but coinbase itself is gonna you know I grew a meaningful amount of value from uh base L2 yeah one thing to add on to the aerodrome comment Wren is I guess they're giving 25 of their protocol fee Revenue to um public goods funding so I'm just kind of

wondering if that's going to be like a normal Trend like are a lot of projects from optimism gonna use the same Tech stack go to base kind of be like a bit more public goods oriented just because the nature of bass I don't really know but I have a trouble time like seeing like okay like do I want to own Arrow or do I want to own you know Velo like I just don't know it's like if a quarter of all revenues going to public goods funding I just don't really know how that shapes out in terms of token performance but yeah like Dan said not Financial advice at all another interesting uh cool thrown this week is Paypal actually didn't think we'd see them back in the news but they've been off and on with crypto for a while most recently announcing pyusd which is an on

platform stable coin so it's funny it's like a couple months ago we were talking about protocol specific stable coins uh with the launch of like ave's go and curves CRV USC well now now we're getting company company specific stable coins with the launch of PayPal's pyusd and so they announced that customers will be able to purchase send convert and fund purchases with this new stablecoin in the coming weeks which is pretty big news because PayPal itself has about 400 million active users and this announcement comes just a few months after PayPal enabled crypto purchases for its venmo users and I think the probably my personal biggest takeaway with this announcement is they are launching this thing on ethereum and

so again like we're seeing this increasing Narrative of things that are hap like we used to get I don't know felt like in the bull market you'd get this like crazy big announcement of a you know a real company partnering with like some random ass blockchain project that like you knew was a scam if you spend time in this space and it was like great just like another meaningless partnership but now with the sap news and now this PayPal integration and this is kind of what you'd imagine adoption actually looks like and it's all happening on ethereum um so that's a pretty interesting takeaway from me personally now the stable coin itself kind of got a lot of heat it's actually issued by paxos so to create the contract they forked the uh usdp uh one of paxo stable coins

contract and they're like randomly catching heat on Twitter because this is like a very old version of solidity but again it's forked from an old staple coin so of course that's going to be the case so I was like this weird thing people were hating on um and then it also got a lot of hate for being like a centralized stable coin because it has a freeze functionality that is not surprising at all if a private company or like a public company uh is launching a stable coin like they are already a centralized company you're going to have to trust to use this thing it's like no different than usdc and usdt having a blacklist function so just don't use the stablecoin if you don't want to hold us like a centralized form of money like it I I don't know why this was getting so much heat I thought this

was very strange like why would PayPal go launch like this decentralized form of money that you know some of these Protocols are trying to make that's just not going to be the person to do that that's not gonna be the entity that does that obviously that's still like a goal we want to work towards building but yeah not sure why we thought PayPal would launch that uh to me what matters here is the transparencies like this thing's on chain everyone can go to look at the contract everyone can go see the transactions and kind of know like what's going on in the back end with this pyusd when you're using it on platform now I imagine that PayPal itself won't like every time a user purchases a you know a good on using PayPal I I don't imagine to see that as an ethereum transaction I think

they're going to do a lot of the bookkeeping in their own internal system and then kind of like true up transactions when need be on chain and eventually if the users want to off-board pyusd from the platform to an external wallet then they'd have the ability to do so and like that of course would be a transaction um so yeah it's gonna be really interesting like I'm excited about the launch and then there's like this whole other wave of things that it's gonna be really really interesting to watch happen like how do they drive liquidity for this token because that's so imperative to keeping a token pegged like are they going to launch an Amo or a PSM like we see with all these on-chain protocols and they're stable coins like there's a whole world that they'd have to unpack if they really did enable external transfers which they

said they're going to do so I'm gonna watch it's gonna be an exciting one to watch this one unfold crypto Twitter really loves to get upset about the stupidest things like I totally agree with your take but it's honestly for me this the smart con the people that were you know on the smart contracts that they were using because they're older to yeah you totally every time we launch something new we should 100 innovate and do something that's not battle tested that's a terrible take I think um you know using battle tested older older smart contracts is actually totally fine for something like this and and that you know pushing for innovation in in that type of space actually it sometimes isn't even a good idea but yeah just crazy to see all the hate I think one of the main takeaways for me

is that this increases or in some sense increases the retention of sort of dollars within crypto I think like a lot of people would be fine receiving say their wage or their pay in crypto and like uscc or UCT but it's what comes after that that's really a pain in the ass you know you have to off-ramp it you can't really pay for anything any crypto today and there are sort of like interim Solutions being built for example noses pay with the car that they've launched in Europe which I think will be available to American users soon but this gives you a lot more reason to sort of use stable coins on a day-to-day basis right for example with PayPal they have the PayPal debit card you can pay

your bills for example your Spotify your net face or whatever subscription they have direct deposits they have savings where you can deposit your like assets and receive a 4.3 apy and I don't know how much like this PayPal USD is going to be integrated with all of these services or products that PayPal has but if it is integrated even to like some extent I do think that's like a pretty big move from PayPal side just because it makes stable coins have much more value from like an everyday consumer perspective the first thing I thought about not gonna lie was I don't know if you guys remember that headline a while back saying like any transfer is over 600

will be reported by venmo to that or sorry to buy PayPal to the IRS that that kind of just like sits in the back of my head and I'm like wondering man I should probably go read those terms of service because to me that feels more like a a doc scheme than anything else to me not gonna lie because I don't really know the main use case for PayPal I get it for cross-border payments and I get it for maybe like switching money around between International accounts for PayPal as a business but I don't even know if that's legal either using like their stable coin per se so I don't know I'm interested to see how this one pans out for sure but not entirely optimistic connect your ethereum dressing at five dollars free

yeah yeah exactly experiments though I'm excited for the experiments like we need people testing this and like I I haven't actually done this and it literally just hit me right now but I'm fairly certain that saps um they're like cross-border payments thing was on Superior test net and I'd love to go find that contract and like mess around and see like how much value has been shoved through that thing obviously it's test night so it's not real money but I'm curious if like any clients were like fired up to use this thing or not so uh that's another thing that I need to put on the to-do list definitely let us know what you find but on the kind of similar same vein is uh the coinbase L2 talk I've got arbitrum on the cool Throne they announced bold

last week which stands for bounded liquidity delay and it's basically a dispute protocol and it represents in my opinion one of the most Progressive attempts at a large ethyl too actually trying to decentralize to date today how arbitrum works is it's basically a permission set of validators who can submit challenges if they detect an invalid State transition but bold is going to make it so that anyone can participate in the dispute process and uh make sure that the chain is actually operating as it should be in an honest manner um so it's it's super cool cool any chain can use it it's like super modular so any orbital chain or maybe Nova or Arboretum one and then they're also

going to let the Dow vote whether they want to actually implement the protocol it hasn't gone live on testnet yet so um definitely keep an eye out on that but it has been audited by a trail of bits uh and honestly just in general it's a really good step forward for for ethyl too so you guys got an extra cool Throne this week I go a step further I'd say arbitrum's the only L2 like what is an L2 you know you're trying to rely on ethereum security okay with a permission set of people who can submit fraud proofs is it really now too like not really but it's it's the closest thing we have today it's better than uh you know a multi-sig controlling the bridge like some other optimistic roll-up counterparts or every L2 today has a lot of points of centralization and this was

really the last thing that arbitrary actually the second last thing that Arboretum really has to figure out before it's like truly fully decentralized Layer Two on top of ethereum the last one being the security Council which is like nine members who can veto any governance proposals or push anything through a 9 of 12 multi-sig sorry um but yeah like this is a huge step and just for reference like the reason it's so hard is because if you let anyone submit fraud proofs right then I'm gonna go if I'm a malicious actor I'm gonna go submit that every single transaction is is malicious and I'm gonna halt the network so it's like a denial of service attack on arbitrum or any other L2 so finding a solution this is like a huge step forward and it's been something that the optimistic role team has been thinking about for years now so this is

the first real good attempt at it and very very exciting yeah they did say in the blog post too that there's an upper bound of seven days for this process so like you said like this denial of service attacks can't happen in their their scheme as at least they believe believe so so that's that's super interesting and then on top of that um there's another point I was gonna make but I'm blanking on it right now so I don't know Ren Dan do you have anything to say about this I think it's interesting that you're leaving this up to the Dow to vote I I doubt this will happen but I think one super interesting scenario would be for whatever reason the Dow votes against uh this sort of like protocol upgrade I think that would be like a

super whack so now totally plausible I'm not sure why anyone will vote against it but totally possible but maybe they think there's like some technical risk or like no one really understands it and just guys just thought um but no I I agree with 44.7 meant that this is a big step in sort of like decentralizing the protocol we can l3s that are built on top of uh arbitrum can they do they have any sort of cross like cross native interop between the two l3s is that or is that not possible yeah so l3s is like kind of a misnomer but whatever it just means that it it uses arbitrim's inbox meaning it uses the same sequencer and settles with you know transactions back to L1 so all

arbitrum orbit chains the l3s and Arbor Tremor are synchronously composable duh wait so the l3s also post directly on the L1 the l3s don't post to the L2 correct with with optimistic Roll-Ups l3s are a bit of a you know nl3 and an optimistic world looks very different than an L3 and ZK roll up interesting okay today I learned technically you could say like that off train Labs would probably give me just give me some for that and say like yes it does settle here but by settle here it means that the transactions go into the same inbox contract on in Arbitrage yeah that was a good question though Dan and at the point that I had forgotten a little bit earlier was just that there could be an infinite number of malicious

validators uh you know disputing your valid uh fraud proof essentially and as long as there's just one honest validator then it's gonna work like the chain will go back to its correct state so that I just thought that was a pretty cool takeaway as well but Dan you want to take it home and tell the folks about the atom accelerator a little bit I do indeed I do indeed so as always like to give a little shout out to our wonderful sponsor the atom accelerator who is looking to improve the quality of builder in the atom economic zone we want to bring more attention more effort and ultimately more funding into building within this uh kind of uh subdivision within the cosmos ecosystem that's really focused on you know improving the atoms Adam as money and

you know really just driving home with the atom economic zone can do you know we've seen a lot of success in ethereum D5 we kind of want to replicate some of that um over in the cosmos ecosystem so I was just talking about Native cross-chain interoperability which you know the cosmos atom economic zone has this with IBC it also has interchange security and things like stride and Duality I've leveraged this to kind of help push forward the Innovation that's going on over here we'll soon have native usdc coming to the ecosystem with the launch of noble and so again if you're looking to build within this ecosystem check out the atom economic zone we'll put a link in the description and they are giving funding on a rolling monthly basis ranging from ten thousand to one million

dollars so again this is like this is the color to the builders if you're looking for a great if you have a great idea that you're just looking to get kick started be sure to check out the link in the description so we are joined by two members of the Athena team Connor and guy I want you guys to uh intro yourselves and maybe tell the audience a little bit about the protocol Athena my name is Connor I'm leading research at Athena and before then I had a traditional Finance background working for a pension fund for about four years so about as far away as you can get from crypto and then about two years ago made the decision you had to get into crypto um professionally so I joined clayco who are a market data provider and I sat in the research team there and so I spent

nearly two years there talking about kind of Market liquidity um from like an asset and exchange level as well but with also kind of two main focuses on stable coins and derivatives so it was already kind of aligned in my interest with Athena um and as well kind of spent my time writing about the need for a stable coin like a teener building in the space so yeah when I heard kind of what a Tina was doing I was immediately on board um and yeah let guy take it from there oh yeah so my name is guy started my career in in traditional Finance as well so uh initially that was an investment banking work in London and then moved to a U.S uh private Equity slash hedge fund in the US uh we focus primarily on financial services so we're looking at

everything from buying Banks to insurance companies fintechs and then distressed debt situations as well um I sort of got into crypto I had a friend who's a D5 founder back in 2019 um you know straight into into D5 back then and uh was was sort of doing that on the side of my day job um until midwell 322 when Luna collapsed and it was uh just after Luna had sort of gone down Arthur Hayes came out with one of his four pieces around how we might think about a crypto native dollar that that could produce live outside of the banking system and actually scale and uh yeah read his base in uh quit my job like three days later to start building out what we're doing with Athena that's awesome I'd love to hear it so can you kind of explain why you

think a decentralized stablecoin is so important and maybe if you could touch on that Arthur Hayes piece a bit and explain maybe some of the inspiration you took but also how the actual implementation Athena is going after is going to be different yeah sure so I might just start on the well I think it's important I think um what is crypto trying to do it's trying to create sort of a parallel Financial system that sits outside of the existing one but um the most important Financial instrument in crypto is just typical and then it's completely Tethered to the existing system so I think most of what we're trying to do in D5 is a bit of a joke if if basically the most important asset is is completely centralized so I think we've we've sort of seen in the last year as well um just how important it is to actually

just have something that we can be self-sufficient with um whether that's SBB at the beginning of the year or what you saw with paxos um and finance sort of getting shut down I think it's becoming more and more evident that we actually need sort of a solution that exists within crypto and we can sort of depend on um yeah Arthur's basic idea was um and it's there's been previous iterations that have have attempted a similar thing it's basically long a crypto asset on one side and then short to Perpetual on the other and those two things coming together creates a synthetic dollar position out of those two positions netting off uh Arthur's core idea was around Bitcoin just around uh the size and scalability of that market and he was pretty insistent on this not trying to be purely decentralized so you sort of have

to accept the fact that centralized liquidity is needed to actually scale this to a size that's actually meaningful for both ourselves and then actually uh users who who want to come to the product and so yeah we took the idea two small adjustments around swapping out Bitcoin for stake teeth initially um Bitcoin is sort of something that is possible further down the road and then the other piece was just around how we think about creating interesting connective tissue between D5 and C5 web we we agreed that you need centralized liquidity togethers to work but we thought that there were pieces of defy that we wanted to retain and that was sort of transparency and making sure that the collateral was sitting off of centralized exchange servers and so we think we find it pretty interesting middle ground between keeping assets off

an exchange so you reduce the kind of party risk to exchanges and then still be you know able to access their liquidity so what's the perk of of kind of finding this uh I don't necessarily want to call it a hybrid solution because I think it does keep a lot of the core ethos of defy it's just kind of like giving the the takeoff there the trade-off is you know you are leveraging some of the liquidity on Central exchanger so I guess like the question comes you know why is it is this like help promote scalability yeah exactly um so I think maybe just background in terms of how I philosophically think about the space I'm I think a bit more pragmatic than than other Founders so maybe in the space I think you sometimes see people who either are trying to produce products that are that are

scalable and useful for like millions of people or you sometimes get idealists who are just super focused on like broad definitions of decentralization which are only really interesting to 100 to a thousand people um I definitely fall in sort of the the camp of the former which is I'm more focused on producing a product that's actually useful for people and then walking back towards decentralization and so I think for us as a team we sort of ask ourselves the question of um what is it actually within decentralization that you care about when you're not trading on an exchange and for us it's just looking back to FTX which is you just don't want your assets sitting on FTX when that sort of situation um unfolds and being able to disaggregate custody from Trading and

execution is actually a step change improvement from from what we had and this is sort of how traditional Market structures work in the real world which is those those sort of three functions being jammed together is at like a complete abnormality within within crypto versus normal markets and I think it's our view that um that's going to change over the next 12 months and we just want to be part of that are any existing stable coin designs that you think like did something really interesting of course outside of the the One You're Building but I'm curious to see like you know did you like Leverage The ideas that have been you know tested and tried or like how do you think about the existing landscape and maybe some interesting things that are currently exist one that we were kind of aligned with I guess was uxd and so they also

adopted like a delta neutral approach on Solana to centralized markets the the issue with them was that they couldn't really scale so they could scale on a collateral side of things so essentially like delta neutral strategy had in your collateral one-to-one allows you to kind of adopt a near 100 collateral ratio and so they were scalable from that side of things but the fact that they relied kind of solely on decentralized perpetuous on Solana they couldn't really scale to the size that was needed and so from that that side of things we thought there was a definite Improvement that was needed um and hence the kind of C5 connectivity that we're making um also like liquidity is interesting um but then you've kind of got a lot of stable coins popping up now and I think

generally it's like a comment on D5 in the last few months that there's been a lot of stable coins um and protocols kind of using stake deuterium and like forking old D5 protocols and using State deuterium on top of things Probably sounds ironic coming from a protocol that's doing something similar but that's not our main kind of our main value add um so yeah there's been a kind of I guess a lack of innovation in the space right now um and yeah a lot of those stable coins they're needed from a like a decentralized standpoint it is good to have a decentralized like a fully decentralized alternative but the problem is they just can't rescale um we kind of know that by now we've seen plenty of examples of stable coins that that need like 150 160 collateralization because they take on

obviously just fully decentralized collateral in ethereum and Bitcoin and what we're doing is obviously taking on fully decentralized collateral but we're obviously making trade-offs and trying to get that C5 connectivity to access that kind of liquidity so that you can kind of you can scale it into the size the size you want to actually reach like 100 million users rather than let's say a thousand kind of D5 whales so I think it'd be helpful if you guys just kind of walked us through the process of like if I'm a user and I want to make ten thousand dollars of usde where am I going what collateral do I provide what's actually happening underneath the hood and when I want to redeem it what does that process look like as well yes also um we try and Abstract away a lot of the complication that sort of

sits in the back end for the users so what we're basically doing is providing a pretty simple front end that looks quite similar to when you derive at something that looks like unisop so you'd be coming with either dollars eth or Steve and uh you can deposit any of those assets and we're going to have like the system at the back which sort of aligns our collateral to put on the hedges that we need in the background so if you're actually just coming with dollars you can sort of swap directly into into usde or if you're coming with Steve uh or if we're basically taking that collateral um we have an off-chain server that's basically reading the contract that receives uh the collateral coming through from the user it's running a pretty simple computation to say where is funding most efficient across the market to deploy that collateral and so

that's reading exchange apis which are external and outside of D5 and then also D5 platforms as well it's uh basically making assessment that can you take that entire collateral and deploy it on one venue or do you need to split that up between different is to make execution as efficient as possible and then it's basically saying we need to send this collateral to X exchange you're then going to distribute that to an off exchange custody solution so that that's where the collaterals actually held that will be with custodians that you'll be familiar with um guys are copper Fidelity um all of the big names there are five blocks uh and the key piece there is of the collateral is actually sitting um

outside of the exchange when the collateral hits our wallet an API call is sent to the exchange to say we need to hedge this exact amount of notional um uh right now and when we receive the API callback from the next round to say that that hedge has actually been executed we can we can issue USD to the user on the other side and so the key piece there is that we can only issue that stablecoin once we have confirmation that the the Delta has actually been hedged because we as a protocol can't take on the sort of naked tail risk that Heath price moves and you haven't actually hedged yourself in in that period so I think from from the user perspective it'll look quite some uh simple and similar to what people have seen which is arrive with dollars or all stagedies collateral in the

background that's the mechanism that that's taken place what does the timing of that look like so if I go to the front end and make a deposit the transaction has to occur uh on chain and then the off chain server needs to read the transaction and X execute some computation or some logic to fill the Hedge and then once the Hedge is filled uh it kind of needs to like Ping it back to the smart contract in some way so like what's the what's the feedback time look like yeah so the actual uh request that you're putting in as a user at the front end is more of a signature request uh bit similar to when you're going to one of the aggregators like a Xerox or matchup that type of thing you're you're signaling an intent that you want that hedge to be to be

executed and then you've got to remember that everything that's sort of occurring on a C5 level is like microseconds rather than seconds um and so before the next block is actually confirmed within ethereum we already know as it has been executed and can we issue the USD on the other side and so it's not going to be any slower than what you'd sort of see on train with with other particles because all of the opportunity infrastructure which is operated at 100x the speed of Everything Will Change okay so that makes a ton of sense and when we think about the actual hedge itself like how do you think about the the venues that you're using is it just kind of like if you have liquidity where interest whether that Beyond chain or whether that be off chain um or do you have like some sort of risk

tolerance for which venues you are interested in using yeah we obviously need basic risk controls around this whole thing I think uh two simple examples I could give you is uh let's say funding on whatever exchange pick your exchange private is better than the market we can't have 90 of the portfolio so don't buy a bit if they represent 10 to 15 of the market there needs to be basic controls around a what is your contribution to to that exchange relative to market share across um across the space and then also what is your percentage of open interest on that exchange itself so there are basic caps around how big can we be on a single venue because then you start to really influence um sort of funding rates and look what you do in that venue and then

sort of Global risk parameters around does the portfolio that you have um within Athena accurately uh sort of represent the market share across from our campus okay okay and that's super interesting and then um so I'm curious like I guess the obvious question then is uh when funding rates go negative for an extended period of time I know you guys have done some extensive research on like what this has looked like over the last three years um and kind of how that would impact the the asset itself but when funding rate is negative for an extended period of time like how does that impact uh the protocol yeah sure so um do you want me to run through the pieces why we're not

concerned about that or just literally the uh sort of the downside and what actually plays out in reality uh do the the latter part and then like why you're not concerned about that being being a factor so um yeah so you can basically just think about it is we have a liability to The Exchange that we need to pay out that funding every eight hours the source of those funds is going to be the principle of the state coin so if we can't take the yield from stake teeth to cover that and we don't have a sufficient size Insurance Fund to pay out that cash you need to start actually using the principle of the stable coin itself to pay out the funding on the other side I would characterize this risk very differently to some of the collapses that you sort of seen in the past where

this is a very slow attrition of the principles Through Time rather than something that collapses to zero in in a short period of time um I think the other piece just to highlight around this risk is that it would be quite strange I think for that to persist Through Time because a user can see that there is a negative yield that's attached to the instrument um and that's going to be pretty obvious to people um on the app itself and so for people to continue holding something that has a negative yield and that you know is going to experience a slow attrition through time is quite a strange sort of user Behavior where we would expect people to actually step out of the product uh when funding does go negative I think the interesting piece about that

is that when users start to step out of that product you'd lift the short on the exchanges and that in the process of doing so actually starts to lift funding rights across the market because uh you reduce sort of short short interest across the market so we like the funding rate is is is a risk resulting and there are um a bunch of different risks with all kinds of stable kinds um but I think the one here is actually uh it's part of the mechanism design and we actually do quite like it which is you have an exogenous interest rate which um acts as sort of like an anti-reflexive mechanism where if suppliers Contracting too quickly and you're lifting shorts as a response that's actually going to mean without the funding rate above zero and people are attracted back into the product and

on the other side of that is when it's going too quickly you're going to be pulling down funding rates across the market the product is less attractive for people to come in and so naturally sort of the the growth in the stable coin slows down so where some designs in the past were super reflexive on the way up and down I think this is actually going to exhibit characteristics which are which are in contrast to that it's admin two cents there for building rates like kind of the key there is like that they're mean reverting and we kind of did a lot of research there over the last few weeks on the actual kind of like the distribution of funding rates and so there's a bunch of different things that kind of help like keep wanting right positive and there's Baseline positive Baseline funding on

some of the biggest exchanges so buy an answer by bit have like positive Baseline funding of 0.01 um and that's like 50 of open interest you're looking at there between finance and buy this um and then you've also just got like yeah a lot of kind of market dynamics crypto tends to be kind of long biased anyway there's a lack there's kind of a supply demand imbalance we've got the demand side is there definitely we know kind of how DJ and crypto people are and they want to be they want to go long crypto and but there's no real supply side definitely in the derivatives Market anyway a lot of Institutions aren't at the stage yes where they're willing to kind of lend that Capital to counter that demand side um so naturally kind of falling rates have sat positive and we've seen that so

like funding rates are being reverting but they also kind of are skewed to the the long side as well so that like kind of the longest streak of days we've seen like positive funding rates has been 99 days and that was set like this year um and the longest negative streak of funding rates we've seen daily has been 13 days so there's a lot of kind of points to be reassured about there with following rates that they've shown up until now um obviously still very early days they've only been around for about three years but um there's no a lot of kind of reassurance that they are one main reverting and also at the moment execute positive and is the idea on the other side of that in order to spark demand for usde going to be returning some of that yield to the stablecon holders and

if so is it like a seed token model where like the amount that's climbable like the underlying pool grows so like the amount you can you know redeem usde for will gradually increase over time yeah that's correct it'll look a bit like a bolt um and that's obviously only eligible to to some users outside of like certain jurisdictions there is sort of a bit of sensitivity around that pace but um yeah the idea is that uh one of the largest efficiencies we see within usdc and UCT is that they sort of externalize all the risk of the product onto users and then internalize all of the yield to themselves which we think is a pretty crazy construct as a product but um is is pretty like indicative of how strong the the actual demand for

stable coins is right like you're actually telling people you take all the risk we're going to keep all the return and there's still 130 billion dollars of demand for a product like that so we think the opportunity is quite interesting where you can actually start to share some of that with with users on the other side um I think the other piece just to get to your question around the distribution and how we're thinking about holders actually getting um uh coming into the product is uh I generally think people underrate um the idea of distribution for stable coins quite a bit um we tend to sort of solve interesting academic problems within D5 but then forget about how is this actually ending up in the hands of users on the other side I think one thing that looks quite unique about us is um we obviously have

quite a few centralized exchanges as investors and then also as platforms that we're going to be integrating and trading on it's worthwhile just remembering where we could potentially be a really large and interesting fee opportunity for these exchanges because every dollar of notional that we're creating on the stablecoin requires a dollar of derivatives being traded on their exchange so those numbers get pretty big when you start extrapolating out stable coin supplies like into the billions and so to the extent that you can actually incentivize exchanges on the other side to say you're actually going to see fees not only in the generation of this product but actually potentially as part of the yield that's being generated um that's a really interesting sort of carrot to then incentivize Exchange to distribute your product on the other

side so my perspective on this is rather than us going to find 10 million 100 million users ourselves why not actually create a product that's compelling for yes some people on chain but actually just make a compelling product for five exchanges which have 100 million users on the other side and let them distribute to those users uh for you with the right sort of incentives to sit around that so I think that is a slightly different piece of this approach and again is why we see sort of our connections to centralized exchanges is quite important for for the product yeah I know that that makes a ton of sense and when you noted the piece about you know usdc or Circle and tether for example uh kind of internalizing all the revenue generation that the collateral

assets are making is is a great point but we know what that ultimately ends up becoming is a is a phenomenal business those those two entities are raking in cash so from looking at the protocol for more like a business lens you know how is the protocol going to generate revenue is there like a take rate on some of the yield being generated yeah so I think you can um very simple numbers here like stake detailed somewhere between four to six percent the basis in the Futures Market if you include the bear Market of 22 over the last three years is somewhere between five to seven and a half percent so when you add those two numbers together it's actually uh pretty interesting unleaded yield which gives you a lot of room for maneuver to think about how you distribute that yield um my view here is is

um maybe slightly nuanced in terms of how you think about that distribution to users where really what you're competing with um to some extent you're competing with like risk-free rates in the real world but there's clearly a lot of trap Capital within crypto that hasn't gone out to fetch those yield and is still sort of sitting there in usdc and usdt really like the harder rate that you're trying to clear uh is either zero with those products or like a very um uh what is quite a small wheel now and defy uh roughly three to four percent uh in terms of what you can get on dollars in some of those blue chip uh defy product uh protocols and so if you're actually earning somewhere between 8 to 12 on the asset side for this product in normal conditions and the rest of the markets are three or four

um I'm not convinced that you need to pay out the full 12 to users to still attract them into the product and that gives you a pretty large scope to um to capture some of that to the Insurance Fund within the protocol so the idea here is that whatever's being captured by the protocol from that yield is going to capitalize Insurance Fund to sort of make it a more safe and secure product going forward and gives gives us the optionality to start thinking about other products like do you want to add Bitcoin do you want to add Heath without Steve and all those sort of uh ways that you can think about um scaling the product even more okay very very interesting there and I want to quickly jump back to scalability um so you mentioned that uh you know they kind of has this like

self-correcting mechanism where if the funding rate does go negative you'd expect users to kind of exit the product and that ultimately takes some of the open interest off of the purpose market and reduce it or increases in this case uh the funding rate so with that being said that to me it sounds like the scalability of the product is Tethered to the amount of liquidity available on the perv side of the market like would you because I imagine you know if it does rapidly increase in um in total Supply then you'd eventually like find this equilibrium point where you know there's like based on the total maybe it's like maxing out the total amount of liquidity on the perps market um and it's you know the users are kind of like keeping it balanced there as funding rate goes negative is there like a way to imagine what that size is or is

that just like you know kind of like an impossible question um we can give like rough numbers for the marketers as it exist today um and then there's sort of views about how that might sort of evolve going forward in time um I think one thing that we might just point towards is is something that we saw at the back end of 22. I don't know if you guys remember the East proof of work Arbitrage trade that went on there where uh Traders were long spot Heath on one side and then shorter Futures on the other to collect the risk query um sort of uh proof of work air drop on the other side conceptually that's very similar to what we're doing here right which is your long stake teeth on one side and then you're using the same derivative instrument um on the other side and um what we

actually saw from the data in that period was that open interest on exchanges went from 8 billion to 16 and then back to eight in the space of two weeks and that was all in a pretty orderly way which to us was actually a pretty strong signal that if there is a demand to expand the derivative market for a specific use case which in that case was quite similar to what we're doing um the market can sort of handle those flows in a reasonably orderly way that's not to say that I don't think some of those yield dynamics that I was describing earlier don't change three times so I think natural compression of State teeth yields um through time is expected like full Market aside uh depending on what sort of happens with activity on chain and then naturally as this product goes

through time I think it's reasonable to assume that that basis within the features Market does get compressed as well going forward um but that's going to be a natural outcome of us doing our job successfully on the other side so I do think there are limitations absolutely if you're thinking about just staked collateral right now with derivative Market as it exists today um but there are obviously different avenues that you can start using other collateral like Bitcoin going forward and there's no there's no sort of mathematical reason that the derivative marker can't be a multiple of spot markets going forward which is actually what you see in traditional markets um across a bunch of different instruments so um at the moment perhaps as a percentage of each market cap sub 10 so somewhere between five to eight

depending on when you look that has like a lot of room to grow to support this product going forward um and it's pretty natural I think as more institutions come into the space that tends to be the product that actually um tend towards no you mentioned at the beginning of the chat that USD Steve as in light as Steve and then eth will be you know eligible to be deposited on the front end so do you mean like usdc and usdt or do you mean U.S dollars on the centralized exchange side and then also like the raw ethic it's deposited does that ultimately get staked by you guys like is the whole entire product ultimately converted to State eth and then hedged accordingly uh kind of yeah so if you're coming with dollars actually what's functionally

happening is you're just going to be hitting a carpool or a amm on the side and in the process of that curve pool becoming imbalanced market makers are going to perform the Arbitrage against the mint and medium contract um of the protocol um and so it's not actually users who are coming in with dollars to swap into Steve um or even the other side it's actually them swapping into dollars in an amm and then the market maker sort of closing that Loop uh which sort of kicks kick starts that whole mechanism that I described earlier um if we are receiving it yes we will be Distributing them to different state these providers that could include Lido it could include more like Enterprise grade staking Solutions like Louisville um or even exchange native steak products so as you know finances are

pretty big um steak product coinbase does uh um okx as well and there's pretty sort of interesting rebate opportunities that you can get for the users on the other side there which is if you're taking an ease and depositing into those those staked products you can actually try to get a bit of a kick back to the users on the other side um so yeah uh functionally that is what's happening and uh link to your question around how does that interact with exchange contents going forward this is clearly quite an interesting product to be sitting behind one of those earned Pages um on an exchange front end where they sort of abstract away their complexity for users to basically just deposit into this product on the back end to um again as we sort of said distribute our product but actually just get a yield for their users on the other side

okay that's super interesting because my next question was going to be are you at all worried about Steve and Lido dominance because that's obviously a Hot Topic amongst the ethereum community and you guys are like gonna be very reliant on the health of the ethereum network itself so I guess I was going to say are you going to try and reduce your alliance on steath over time and expand the market share more even like amongst like other staking providers but would your answer just be that like yes if Steve dominance got super high eth raw youth deposits and US dollar deposits you just you know sprinkle into other providers is that kind of like the answer to that question yeah I think Conor does have some views in this I might just pass on to him as well but um you just got to remember that we have a

lot of platform dependence on what other people require rather than us sort of um driving that decision so um if we just simplify that question into what's more important of liquidity and decentralization uh you won't be surprised to know that um exchangers care more about the liquidity base in terms of using that as collateral and we just need to think about our users which is how do things go wrong on our side that's with liquidity it's I think a far lower probability that sort of decentralization is something that actually um is is a core reason why what we're doing fails that's not to say it's not important I think there's a lot of really intelligent and um important discussions going on around that topic it's just not something that we should be leading because it's not the biggest

risk I think to what we're doing the biggest risk to what we're doing is making sure that collateral is liquid and we can put on the positions for our users in the right way so I don't mean to sort of deflect away from that question I just think um we have different um things that we're focusing on versus other LST providers who are more focused on decentralization piece I'm more focused on making sure that things are liquid and and allows to sort of provide the best product that we can for our users yeah yeah my point on that was like kind of on the same page guy covered it there pretty well but um like it's just like kind of personal thing but I'm not sure yet how much kind of risk management you're doing or reduction of Risk by taking on other forms of of state ethereum and so

lighter dominance isn't something that really concerns me right now like it's kind of dominant for a reason and that's because it's got like the best validator said it but it's been battle tested it's got like obviously very good Market traction and it has enough to pay a good validator set whereas these smaller kind of um liquid staking tokens right now haven't haven't got that kind of Market traction yet you're nearly it's not like you're diversifying by taking 10 Steed to 10 rocker pulley to 10 whatever else I think you're actually potentially adding more Risk by kind of diversifying away a lot of a lot of uh the state deuterium allocation so as I said it's kind of not something we're concerned about right now it's probably more of a question for the the ethereum ecosystem as a whole um and it's probably it's probably far

down our yeah our initial kind of uh our risk preferences right now let's say yeah no I I see where you're coming from on that point as a builder you know you got to focus on what's best for your users so that makes a ton of spent so your perspective makes a ton of sense there um I do have one question as it relates to Steve so if that's the collateral asset being used then your long spot stake teeth but shorting the perp of eth itself and is there like a I guess like if Steve were to D Peg which of course with withdrawals live that's not the most likely scenario State youth holders also have the ability to force exit validators so there's like a lot of good place guards in there but in the event that some you know crazy situation did happen where there's a material d-peg

and staked eth wouldn't that like create a gap in between because you do have a bit of a mismatch there right like is is not the same exact acid on the perp in the spot side and so how do you guys think about the risks involved there yeah so there there is absolutely a basis risk there that you're pointing out I think um you sort of got to one of my responses there before I did which was um I think post Chapel of that risk is is slightly less pronounced than it was uh when we sort of Saw um it wasn't it's not really a deep egg but like the the dislocation and pricing uh down to whatever was like low 90s when three hours was blowing up um I don't think we see things as deep as that going forward but um that's not

to rule out um a small uh sort of dislocation in that price one piece I'll just point out around what we're doing is um we don't really use any leverage on the shorts so um if we're running a highly levered strategy over there and the Oracle price was was reference to to stake teeth's actual price um that would sort of run up run the risk of us obviously getting liquidated on that account for for our users so uh part of what like our philosophy around this is just try a kid was sort of simple and safe and secure to just make this thing stable for users rather than uh push push through the boundary in terms of returns and introducing level data so that's one piece and then the other one is just more of a question of sort of timing um where if every single user wanted all

of their money out at the exact same time that would force you to crystallize that loss um on withdrawal because you'd have to take that collateral and give it back to the user which doesn't represent the dollar that they thought they put in uh if this is something that's a temporary sort of issue over a day you lose 50 of your tvl but you've still got half of it sort of sitting there and it can sort of like recover in that period of time and um and the basis can sort of close uh that's sort of fine because you haven't crystallized the lawsuit of God through it that obviously exists with normal stable coins I'll just point out where uh a lot of the risks that you saw with bonds blowing up in the in the real world in the last sort of year was a

question of are you actually redeeming now to crystallize that loss on the mark to market value of those of those bonds so really it's actually exactly the same um sort of risk there it's just a question of how are you managing that duration risk which is does everyone want their money out at the exact same time that you have that dislocation in pricing um so I'm not going to Discount the risk but I think um pressure pillow this product probably wasn't possible and I think that was sort of a huge uh Tailwind for us to be able to do this so will it be one to one or are you guys thinking about adding like a five ten percent buffer just in case of like Doomsday scenarios occurring or like allowing even more time to potentially de-risk and wind down a portion of the stable and then also have you guys

thought about maybe putting caps in place in relation to the size of the Insurance Fund just for like ultimate safety yeah I think uh so that's the perhaps of the the insurance one so like the effective collateralization of the system will be more than one because you've got that pool of uh dollars basically sitting behind the stove coin uh the purpose of that is uh for the negative funding risk that we described but then also to add um it can sort of be a bidder as well of Last Resort because I think one interesting characteristic of this stable coin is that you can prove in real time that the whole thing is solvent because you have the collateral there where you can sort of uh read and show users and you've got the derivative positions which again you can read and show users so it's sort of like a

real-time um uh value that you can actually make an assessment of is this thing solvent and to the extent that like the market value of the stable coin is trading off of where you know the solvency of the stablecoin exists so if you can prove that there's a dollar that's sitting behind it and it's trading at 95 cents on curve is there an interesting sort of solution without Insurance Fund is also a better of of uh the open market usde and then you basically socialize those gains between uh token holders on the other side so we know that people are going to panic at some point in time going forward and you can't sort of control the free market price uh moving in panic but I think there's an interesting sort of um role that Insurance Fund can play in also providing basically a bid to

socialize those gains with with token holders afterwards and you can only do that when you can prove that the system has actually collateralized at one and that is programmatic yeah that's a super interesting idea because I was going to ask you know what do you expect the volatility of the stable to be um you know granted like if you really wanted to be prime stablecoin for D5 usage you want that Peg ideally to be as strong as possible so I was curious as a follow-up question of that like were you planning on a PSM of sorts but it kind of sounds like that Insurance Fund might be used for Peg stability yeah I think I mean in proper dislocations I don't think we want to be interfering with sort of normal Market um uh normal market gyrations around the price so uh I think you've just got to

let the free market do its thing most of the time but I think if there's a very obvious and defined level that you can uh you can Define relative to the solvency of the server coin where that can be a sort of video of Last Resort um I do think that's an interesting use of that Capital which actually benefits all the token holders as well going forward um so yeah and yeah we're working pretty closely with um the way that they're meant to redeem contract as well works is pretty similar to uh to usdc where uh it's usually um known counterparties to us so you can do the actual momentum redeem so unfortunately that's not going to be totally permission as wear them into redeem is done by any User it's sort of done by primarily market makers who who carry out that function which is similar

to usdc but when it's sort of out in the wild in the same way that you can hold the SDC without kyc and without permission within defy um that's sort of how most users are going to access to USD and so yeah the um we're gonna have sort of Malcolm X around this protocol in a pretty involved way and they're also going to play a role uh to some degree in in that possibility do you need any like protection to the upside here right because if we look at die in its history there was uh you know its moment it was a black Thursday where borrowers were rapidly trying to repurchase die on the open market to repay their loans as ethereum the price of eth was crashing and of course there's like a liquidation risk there right like uh when you're in these over-cloud stable coins it's

because you're risking liquidation at the end of the day which doesn't really seem like it'd be a case here but I'm curious to get your take like is there ever a situation where you know people that have minted eosd and maybe swapped it into like eth or some other thing like rapidly want to close their position and um you know reclaim their staked from the protocol like that would create a you know a surge in demand that could potentially increase the price of the stable coin so like yeah I guess you know like we've seen go from Ave recently launched that launched with no stability mechanism so no PSM or Amos and that thing's been trading around 98 cents basically since launch and you know they're working towards getting a PSM live but that's really kind of seen we've seen this trend where like you

sort of need an Amo or a PSM model to kind of kick start there so do you have any like risks with you know even deep eggs to the upside yeah I think the the feedback's the upside are interesting um because it's I think it's more of a question of why does that not close down um when it does Deepak upwards um and it's traditionally something that you see as you pointed out with CDP type designs where I think that's sort of Arbitrage Loop of defining the the stable point to be one within the landing protocol and then expecting people to sort of repay debt when it's below there or add collateral it's just a bit sort of clunky versus something that's super efficient where Malcolm X are plugged in with apis and you know it's all done in a completely algorithmic way to to keep our peg in

line um I think one question that you had around the market crash piece which I think is is quite interesting here is that as you pointed out with with dye when we when we had um that marker crash people sort of buying to repay debt and that pushes the price up um what's functioning happening to us on the other side is that in a market crash you sometimes see dislocations in in per pricing versus spot and so sometimes you see the perps actually trade whatever 10 15 20 out of line versus spot uh that would be actually a pretty concerning risk I think gives the design of this had us long on those exchanges on on Long perhaps but actually because always the positioning is to the short side when things are melting down it actually tends to sort of work in your favor

um where the whole Market dislocates it breaks down and you're actually positioned on the short side you thought that you were Hedge for 100 emotional and it turns out that the purpose price at uh 110 on the other side and so you can actually collect sort of that that extra p l if the market breaks in your way um so I'm yeah I'm not sort of saying that's part of the design here which is uh we're trying to pick up like strange p l um opportunities through the way um I do think it's interesting though that on those Market dislocations it's likely that you are positioned in the right way um where things are breaking down it's most likely it sort of works in your favor is there a plan for on the user interface to just have a very clear insight into like where the backing is

the collateralization like what's the plan for transparency on that front yeah I mean this is like absolutely cool to our approach I think we look back on the last few years and I think um a lot of the reason for the blow-ups that you saw in the last few years was actually just um uh an arrogance from a lot of Founders who didn't want to sort of engage with reasonable questioning and uh reasonable Inquisition into into how things were actually working um and so yeah part of what we're going to be producing is extremely detailed dashboards which have uh real-time information around uh the solvency of the whole stablecoin that's going to be broken down by custodian by exchange exposure uh everything that you can sort of like Trace down uh to to literally uh the single dollar

um I think it's part of what we think is actually interesting about this versus usdt or ustt where you're sort of waiting for for bank statements to come through from Banks or auditor reports every quarter or whatever it is again part of like what we found interesting about DFI is having that real-time view of what's actually going on under the hood and if we weren't leveraging that I think we'd be doing our users a bit of a disservice super interesting I love that focus and honestly really just like your world view of like how you view what an interesting world uh for D5 looks like in kind of being just an open transparent Financial system so good to hear it on that front as well but earlier in the call you mentioned the ability to add Bitcoin so to me it makes sense that steak teeth is a collateral

because it has that natural yield whereas Bitcoin does not so how would the trade-offs kind of work for adding Bitcoin as collateral yeah I can take that it would just I guess have like worse unit economics like so at that point when you do take Bitcoin on its collateral you're presumably going to be in the size of like a billion or multiple billions um and you've got to make that decision aside sheet okay do we want to scale this product as I said reach way more users um and if we do that's like a decision we're making and we like this product can essentially still function without the state deuterium yield and so again if you look at like the numbers with funding rates uh Bitcoin basically mirrors ethereum funding rates in that uh the number of days where Bitcoin funding rates have been positive has

been 75 versus 25 negative so as I said the kind of Economics of this are still viable with just uh Bitcoin Pence kind of authorizes post um it's just obviously at worst unit economics you don't have that extra little bill for that state ethereum gives us um so if you add on the the five percent yields that steak ethereum has you get like that those percentage of like negative days essentially dwindles down to like 11 percent so it's just a different kind of setup in terms of your exposure to funding rights and potentially more of a drain on the Insurance Fund but as I said that could be like a trade-off we're willing to make eventually to to scale the product even further and kind of achieve the achieve the goals we're after yeah I think I think just to add to

um Connor's comments and Echo everything you said but um I think in the beginning you were going to like ask the question of what is actually a fundable business that you can sort of grow in the beginning if you take the idea of Bitcoin to to try and get funded it look doesn't look that interesting right you sort of saying can you take naked risks that this thing uh it doesn't blow up over the next few years and hopefully there's sort of a token that's attached to it that people buy into um I think that's a much harder sell than what could actually look like a really interesting sort of Revenue generating um protocol um which is if this thing is in this low sort of single-digit billions at some of the the yields that I was describing back of the envelope matters producing like more Revenue than every application

that exists within defy now I think you can sort of look across to tethers profits and just see like what is actually the potential there in terms of them producing more than even BlackRock um the reason I'm sort of saying that is um I think it gives you interesting optionality to start with State dates first because uh it's a really interesting business and it's a fundable business and it allows you to accrue cash into that Insurance Fund and then also raise capital for the entry into one going forward and then at some point you've got enough in that Insurance Fund where you can then say do I want this to be a really interesting business or do I want this to be a protocol which can um like truly scale beyond the sort of like 10 billion in size and I think uh you sort of need to start with with the

solid economics in the beginning to afford yourself the the optionality to do that later yeah I absolutely love the way you're thinking about this I I've been pondering the idea of an LST backstable for a while and was like man I hope whoever does it puts a strong emphasis on the Insurance Fund so that way 10 years down the line after that compounds for a while you have a lot more flexibility in your design decisions to maybe try other things to scale the stable itself but I did want to ask you guys what your L2 strategy is obviously a part of the core ethereum roadmap is moving users to L2 so therefore you want usde to be there is that going to be relying on people you know bridging it there somehow or you guys looking to Mint it natively over there like have you guys thought at all about the LT

strategy yeah I think um uh we have an over-reliance on stagney's um collateral sitting on ether one I think if you actually look at what's the migration of stake teeth and dollars to L2 I think it's been slightly underwhelming actually um in in the last sort of 18 months my view on that is that whales are actually just pretty comfortable and then we also have the the curb needs come out um this week so if we put that to the side but like they were pretty comfortable in those pools um up until last week and that's kind of where you saw billions of dollars of liquidity sitting and they didn't seem uh to be able to take on that risk to go to an L2 and so for us as I sort of said earlier it's it's really about being close to where is the liquidity for

dollars and and stacked Heath in the beginning and uh that's sort of evil one um there are interesting um new l2s that are popping up which have a deeper Focus around State ethos and acid going forward um there are interesting discussions that we're having now um I do think that they're also uh products coming out from some of the messaging and bridging protocols which allow you to access these sort of omnichine deployments of your your stable coin across train um in a relatively secure way in our view um and so yeah the initial focus is etel one because of the liquidity that's sitting there I think there are interesting developments on certain LTS who are focused on stake details and acid

um and uh it's something that I think we'll explore once we've really nailed the opportunity on each other one sounds like a layer zero oft if you ask me but hey um I guess I gotta you know you gotta ask the question like where are we in development guys are we on test net yet uh and when can we expect a main net launch yeah so we're running with like team prop Capital at the moment um trading with cloners money and uh haven't lost any of that so um okay okay um there's like we're running those numbers now for the for the next uh six weeks and uh we have sort of investors who are in in the seed round who are going to put this way and and just sort of like slowly growing the TBR before we open that up to the public the

idea is in in uh six weeks time we've got test net forms um on the Twitter which you can sort of sign up to to be involved there and we're just going to do a very slow secure um and controlled rollout of the product uh in six weeks time for people to engage that's awesome and uh you know I'm curious to get your like launch strategy uh you know again we've seen go launch they launched very closely with balancer frax has been very attached to the hip with a curve in the amm ecosystem over there what is your plan to kind of Garner on-chain liquidity and create true depth for the stable coin yeah I think um obviously the news events this week like uh slightly put that up up in the air but um I'll maybe I'll just describe our general approach

to these type of things which is we're generally quite agnostic to um providers and we don't really like to um sort of nail down our own success on a single platform going forward so whether that's an exchange whether it's a liquid staking token whatever it is like I think diversity and sort of actually working with everyone towards the same goals is generally how we we sort of think about things so we didn't have a like strong tie up in the same way that you sort of described a few of these other projects um so I think uh there isn't a defined strategy with a single provider we sort of want to work with others and I I think the other comment around that is that um we have slightly less of a focus around actually incentivizing liquidity sitting um on-chain with just token incentives I

just generally think it's um it's not something that's like fully sustainable through time we're quite focused on actually just making sure that that exogenous yield that we're bringing into our product actually just stands on its own two feet which is we think quite interesting because you're basically leveraging a return from stick D's and then the return from the Futures Market which all sit out outside of um like the core piece of defy and that sort of self-referential yield that you'll be like often see within that and we just really want to lean into the fact that we think we have a really interesting uh set um uh sustainable source of yield that we can actually bring on chain uh which doesn't need as much of those incentives um within those pools so yeah that's the general sort of comment awesome well

this has been an absolutely fantastic conversation I'm super excited to see where Athena goes and I'm definitely going to sign up for that wait list for uh the uh test net and I'll be sure to link that in the share notes but Connor um guy do you guys want to share people where they can find you learn more about Athena and get involved at Connor Ryder on Twitter for me and I think the Tina Twitter is at Athena underscore labs and we also have a Discord and a telegram you can find all that in our Twitter and I'm uh the laptop addict tag you can say over there actually appreciate it cheers [Music]