Guy Young: Ethena - USDe Synthetic Dollar via Delta-Neutral Staked Ethereum Hedging. Ep. 518

Transcript

welcome to epicenter the show which talks about the Technologies projects and people driving decentralization and the blockchain revolution I'm Felix and today I'm speaking with gyang who's the founder and CEO of ethena labs ethena is building eusd a delta neutral stable coin backed by state ether we're we're GNA dive into what that all means um but yeah first of all welcome guy so glad to have you on yeah thanks awesome yeah so generally we start more about your personal journey to crypto you know epicenter is mostly about kind of how how did people get into the space what were their Vision or why are they trying

to work on future of decentralized Finance so yeah when we start there how do you like learn about crypto and and get into the space and what did you do before yeah sure so before crypto I was working at a a hedge fund in the US um they focused primarily on Financial services so we're investing into everything from Banks to insurance company special Finance um and that was across the capital structure as well um I had a friend who was a defy founder back in 2019 uh he introduced me to uh to ethereum and to defy back then and it was just something that was immediately interesting to me and I was uh investing into it on on the side of my my day job uh all the way through until when ler collapsed and uh it was when Luna went

down Arthur came out with his his sort of thought piece around how we might think about a more um secure and scalable crypto of St coin and uh that's how we sort of landed with with the idea of Thea yeah that's that's a really like interesting post there and like sort of Origins with with Arthur's POS and also like he's uh like a founding adviser jth and in in the post if you look through it in the ad it actually says right if I find a team that does this like let's let's do it so PR cool that uh you guys found each other there I guess um would be curious to to hear actually how how that went down did you like reach out to him you started building it and then later when

it had like some shape you were like Hey Arthur it's happening or yeah that's exactly right I thought um we wanted to flesh out the idea a bit so he actually had a bit of a a game plan an architecture behind the whole thing and um you know a business plan that actually made sense that he could get behind rather than just sort of putting our hands up so uh we put that together had this sort of design and everything ready to go and then had a connection into to aat who uh the guy who's running his family office Maelstrom um had a few calls with them and then got introduced to to Arthur directly there awesome yeah that's pretty cool so also like I guess for our listeners although I think many people know Arthur is right it's like a bid Max founder and

like a sort of person that's very famed in the crypto space around like macroeconomics and like trading in general and he wrote this post called actually I don't know on crust I think it's it starts about skiing and kind of draw parallels to you know the crypto space I think in general arst is a pretty great writer so recommend like reading some of his blog post and it goes into this idea of the Naka dollar which is essentially like sort of a new type of stable coin that he was thinking about that is based around uh derivatives and sort of hedging um out the price risk of cryptocurrencies but we'll get into that I think wanted to start because I guess stable coins like huge topic you also already mentioned

Luna there right in general stable coin seem to be one of the kind of use cases of crypto that has gotten the most traction um so yeah I wanted to kind of get your view of like the history of of stable coins in the in the space you know what what did you find interesting and what was lacking um like going from like die and and these sort of like more centrally backed stable coins can you like just kind of talk through a bit how you were thinking about stable coins before you started like if now yeah sure so the history of stable coins go goes all the way back to to tether and it was originally called real coin back in 2014 um and then they launched

officially as tether on bitfinex back in in January 2015 uh so that really the key Innovation there was uh a lot of the crypto businesses that existed were really struggling with banking relationships and being able to to offboard into interfere and really the only Innovation that they had there was if tther could get the right banking rails set up uh you only really needed them to be able to do that as as sort of an offer to to the real world and then everyone else within the crypto ecosystem could rely on on tether's transactional money within the space and so that was really the first use case which was just a trading pair um on exchanges and it's obviously evolved um pretty significantly from from then onwards after that I think actually the origins of Athena was probably the next

example of how a stable coin like asset sort of surfaced and so it was actually on bitm where um everything was BTC denominated so every single uh instrument that in order to margin uh the derivative required Bitcoin as the collateral assd and so if you wanted to get into a flat position you'd take out a short inverse Perpetual against that BTC collateral and that would in effect create a synthetic doll position out of those two things and adding off um and really that's that's kind of the origin of the Athena story which is what we're trying to do is uh tokenize and Export that as an actual product rather than just a trade that was sitting on bitmax since those days of bitmax I think you saw a few different uh Evolutions going away from the centralized model of

stable coin so you saw make a DA and originally was called Sai with single collateral being e and then moved moved to die which allowed different collateral types to come in there at a very basic level what was happening is you're putting up collateral on one side and then you're able to borrow the stable coin into existence on the other really the key moment though for for make it out was in the March 2020 crash where uh the system basic became insolvent with what happened uh with the price crash eath and in order to actually Remedy that situation they needed to on board usdc as a collateral asset there and so I think really that changed the course of history for for madal where they sort of made the decision that they were going to take on centralized assets and that fundamentally sort of changed uh the

actual profile of of die as an asset going forward and now you sort of look at it and it's more than 50% uh centralized I assets whether it's rwas or or usdc sitting in there and then we obviously get to lunar I think um everyone's pretty aware of of what went on then happy to sort of jump into what we think went right and wrong there but I think it was a it's a pretty uh well well spoken story at this at the moment right yeah totally I think very interesting to hear that I guess on bitmax there was already like this product there but I guess it was only on the exchange right it didn't let make its way into onchain or Defi and that sort of what you your after since that also has like evolved a lot so it it goes back quite far which I guess most

people maybe don't know I think you are also of mentioning in some of your rals the stable coin tremma can you like sort of expand on what's what's like the tradeoffs that that stable coins generally make and then how ethena fits in that yeah well I think um Trias are used quite a bit within pitch Dex in crypto I think to make up problems and pretend that we're solving them to to get a capital raise but I think actually the tra as it relates to to stable coins is actually a very real one so basic idea here is you've got uh decentralization scalability and stability and you only can really out two of those those three components um we personally think that it's a pretty

unhelpful sort of definition of the world where if you're focusing on these words which are just very broad like decentralization and scalability it's quite unhelpful to actually say are you actually attaining those qualities that you're actually after and so for us we we we're trying to think a bit more deeply about what are the more narrow qualities of each of those three pieces that we actually want to try and retain within uh within our product and uh what we arrived at is within this decentralization piece what is actually the piece that you're you're trying to solve for here and that is actually having censorship resistance so for us that meant you don't want bonds or or real world assets sitting within sbbs or banking structures in the real world which uh a regulator or some entity can come in and shut down uh in the space of

a day and so for us that was really the piece that we were trying to unlock and it's something that was echoed in in the sentiment of Arthur's piece which is you're not actually trying to create a purely decentralized stable coin because I don't actually think that they exist in in reality what you're trying to do is create a stable coin which is independent of the feat system and that's actually the quality that you're going for so for us uh yeah like I said it's a more narrow definition that we're going for I don't think we've solved anything when it comes to the the tri that's uh sort of presented um as it is but we we are um more narrowly defining what it is that we're we're trying to um achieve and in doing so I hope that we're just presenting something that's honest uh to our users in terms of the

type of tradeoffs that we're making let's get into this in I think another one that's very common like fear or like concern in the stable coin space especially around tether is sort of this transparency angle is that like kind of related to the censorship resistance since for you or how how do you think about that since I guess in tether's case right many think is the backing actually there there's not enough Audits and yeah is that something you were addressing as well yeah 100% so I think uh we felt like we weren't leveraging the openness and transparency of defi within our product we' be doing our users a massive disservice with the way that we put it together so uh it does look slightly different here because we

are leveraging um centralized liquidity to put on the hedges and we can jump into the reasons for that um um later on uh but what you do have are wallets where you can see where the collateral is actually sitting and then the corresponding Hedges that um uh offset that that collateral you can obviously just have a read from the exchange apis to display that so really what we're trying to do is Elevate the level of transparency here well beyond anything that you see uh even from like a usdc where you're often waiting a month to get um uh watered down order audit reports come back and here you can you can see a real real time dashboard of every single scent of collat and and hedge that sort of corresponds to that um and we think that um you know showing that to our users and being fully

transparent about it uh is is the way that we we really want to uh present the product to our users right yeah let's let's definitely get a bit more into this I think maybe we take it back a bit around you know this actual principle of how the stable coin is created so I guess in ethia is called eusd um and it mostly relies on this principle that you already said that you have the the long asset the core asset and uh short position against can you explain that maybe in a few sentences again for our our listeners that maybe are not so familiar with like um Financial product yeah for sure and and maybe just before we jump into that

uh I know we've mentioned like stable coins a few times on this I think it's a word that we as a team have been thinking a bit more deeply around in terms of how we're marketing these type of products to people without outside the space so I just want to be clear before we jump into the mechanics that um really the risks around this product look very different to having um a no normal stable coin with bonds basically sitting in a bank account in the real world and so I think we're we're just thinking about uh repositioning the way that we uh describe the product as something that is closer to that synthetic dollar concept that I described earlier on and uh yeah really what goes into like the the synthetic dollar idea is you have uh in Arthur's case his idea was long BTC on one side

and then short the invis per pedal on the other and the basic idea there is that for every percentage change in the underlying collateral those two positions are essentially netting off uh so that you always have $ar um of collateral that's uh uh that's inting there one key change that we made to to Arthur's post was was thinking about swapping out Bitcoin for stake ethereum uh there's a bunch of different reasons why we thought that that made sense uh the main one being that you now have a positive carrier to being long St ethereum so you get uh paid some yield that's you know range between 3 and a half to 6% um this year and what that does is not only enable you to create what we think are really interesting yield products around um around the synthetic dollar but then also it gives

you a really interesting margin of safety because uh these Hedges often do pay you to be short so over the last three years you get paid roughly 7% uh to be short the E contract but that's not always the case and sometimes it is negative so for periods during 2022 when the whole Space was blowing up and and centralized entities were getting liquidated you did you did see that sort of briefly dip into into negative funding territory and so having that that stake e uh return on one side obviously helps for you to be able to cover that risk as well and just create a more secure product right so this funding rate just to to go into this a bit more right if you're like shorting or using Perpetual you have to pay this funding rate to the

other side essentially right and you get PA usually you get paid for putting on the short so it's uh you can sort of think about it as uh there's a natural long demand for leverage within the system and crypto is a long biased Market where most people who are in the space uh think it's going up and so they're willing to pay for that leverage speed longer than one XA net worth and so in our case we're taking the opposite side of that position with a short and they're getting paid uh for for that but essentially the what's underlying to what if it's like um negative or positive defunding rate is essentially like a market Dynamic of like supply and demand for short Longs right yeah exactly right yeah okay and uh you mentioned already

so they that mostly it's like long biased I guess we we'll maybe get into a bit more like how how this could turn out in the future and things but I guess one other question that I had around you know that you already said you're switching out ether uh Bitcoin for ether but is there also a potential to you know have multiple as collateral in in the Etha system like also Bitcoin maybe or even like other proof of stake assets yeah absolutely um for us it's it's really just a question of sequencing so um bitcoin's obviously got the deepest derivative Market sitting behind it but there obviously got that issue of of not having as much interesting yield for you to be able to create a product and so the way that we thought about this is in order to

bootstrap something from zero and you know fund an insurance fund that can sit behind the whole thing and ultimately actually just drive demand for it we know the people within crypto respond to yields and that's how you can sort of address that coldstar problem in the beginning uh by interesting people people with with something that has a bit more yield but as we sort of grow in scale and you start to tap out the potential of D to Market and stake ethereum uh you can obviously generalize that to to look at Bitcoin and then also other proof of stake assets like salana the issue here is that on one hand bitcoin's more scalable uh due to the size of the derivative Market that exists around it uh but you don't have the yield but then on the other hand you've got something like salana which

yes it's got a proof of stake yield that's attached to it but the dtive market is like a 20th of the size of ethereum so really it is a question of sequencing for us but um who knows where where these markets grow over the next three to five years uh but we are we ar sort of restricting ourselves to to State ethereum and they right yeah makes sense makes all sense I think what's also interesting I guess is this insurance one you just mentioned or like syncing fund I think it's called in Arthur's post so like that's basically for these periods where the funding rate goes negative um can you like expand a bit how does it exist in eth how are you building this what like sort of I guess portion of the yield is diverted to that

how how do you how you thinking about the system to do that yeah you can you can think about the the sources and uses for the Insurance Fund uh in in basic two ways so the first is just raising Capital so when we're raising Capital uh at the equity for the eth Labs business or uh within um the if we eventually have a token and do treasury sales through there you'll have an ability to to basically raise uh dollar Capital uh in exchange for uh for the equity or tokens and I think that that's just a pretty clean and easy way to get um to get an initial Insurance Fund set up uh the other interesting piece about this is uh to the extent that you're generating uh yields on the product that are above market so um roughly this year this

product has been running at around 12% un LED and that's with uh crypto rates being um pretty close to the low of their Cycles versus like the real rates in the real world at 5% what's interesting there I think is um yes initially you want to pay out most of that yield I think to to users in order to to sort of bootstop liquidity and Supply in the beginning but there does come a point where that interest rate differential to to rate in the real world I'm not convinced that you need to pay out the full amount to to keep sort of users in the product and so there might be an equilibrium where you know rates in the real world are at 5 4 3 and this products at 10 12 15 that obviously gives you some scope there to be able to capture some of that yield to

the insurance F going forward I think the interesting piece about that is obviously uh as I mentioned funding is is typically skewed positive where you get 7% over the last three years and if you just look at the distribution of sort of the days of positive funding versus negative when you include the state de yields you get 89% of the days you're getting paid and you can add cash to that Insurance Fund and only 11% what you're going to be drawing from it so really it is in your fa that you're going to be accumulating cash into the Insurance Fund through the life of the product and we think it's quite interesting because you're capturing you know some value within uh the token within the product um and actually helping to create a more safe and secure product going forward by by capitalizing that Insurance

Fund right right that makes sense and and then I guess if it turns negative the Insurance Fund would like sort of subsidize that to get the yield back for a while is that sort of the mechanic that it would yeah what it's solving for is zero in that in that case so uh we don't want to be in a position like with what you saw with anchor and Luna where I think actually creating that inflexible um uh endogenous interest rate there I think was one of the biggest mistakes that they made because you really need um external Market forces I think to be calibrating the supply of the whole system and whenever you're stepping in and trying to pay more yield uh than it's naturally producing I think it's just a bit of a slippery slope where it eventually leads

to breakages in system um so at some other point and so really what the Insurance Fund is doing there is when it would be negative you're just getting it to zero so that you know users on losing principle in the stable coin um and then naturally what's going to happen is when you're getting paid 0% to hold the stable coin we expect that some users would would step out of the product and in the process of doing so we'd have to lift the shorts on the exchanges which causes funding to to mean r again back about zero so just to be totally clear on this one um the funding rate is not Something That We're scared of it really is like core to the whole design here which is we want users to be responding to positive and negative interest rates and when it does get too low that means

the supply of the stable coin is too high um relative to to D NX in the rest of the market and it needs to shrink and we're not going to stand in the way of that right I I read this like tweet where you answered basically like some concerns of like Dent SP in there and I I found it very interesting that essentially the St coin can can adjust by like just people withdrawing and then you're closing out the shs like you just said but there's also the the just like General mechanics are not as many people might think I think in the that are like scarred from from Luna that it would be like totally collapsing uh at once or it's very very hard to do that can you can you explain maybe why the like a daging wouldn't be like you know from $1

to Zero versus instead maybe going like more gradually losing value in in in this sort of case yeah for sure so I think the the the key difference here is that you've actually got the collateral sitting behind the stable coin so Luna was obviously backed by basically just the faith that the Luna token had some sort of value and then Market Maker's ability to stand in and save the system a bit like a central backwood uh in the real world and uh the key difference here is yes even if you do have some of these issues and there were other risks outside of the negative funding but we can just focus on this one uh even if it does go negative um if you look at sort of uh the bottom 25 centile of funding IE like the the worst quarter of where

funding gets to it's typically around sort of the um negative 5% range uh if you think about that on an annualized basis if you bringing that down to a daily uh attrition that you're to within the stable coin it's literally one basis point per day right so it's it's like uh not even comparable to a swap on curve or a little bit of slippage that you'd be paying like anywhere within this entire system that's how much you're losing every day if this thing is at like the bottom quartile of the funding and so really the risk are very different here where if something is going wrong it's a very slow gradual attrition of the principle of the stable coin rather than something that sort of collapses to zero in the space of a day like s ler right totally okay I think that's that's very interesting I think maybe we

can get a bit into like technically how it works I think the the interesting piece in EA's case is I guess it has like this sort of interaction between CI and defi so like there's there's elements on chain and there is like interaction with centralized um parties can you yeah you know just explain how that works um and why you need that maybe yeah for sure so this was something that Arthur was pretty insistent on on his pace which is uh the demand for this type of product we think is is here right now and it's it's a product that sort of uh the need is immediate and Urgent and we don't really have uh the time to be able to wait for

Perpetual dexes on chain to to grow to a size that we'll be able to accommodate for it so centralized liquidity rough numbers is between 25 to 30 times larger than what you see on chain and part of the issue is that even onchain dexes they're not a single single unified source of liquidity so you have synthetics sitting on optimism you got GMX and arbitr you dydx doing their app chain on Cosmos these are all disparate areas and pools of liquidity which you can't even sort of aggregate into one place to try and um build this product and so for us it was really um accepting the fact that you needed centralized liquidity in order to get this to scale to achieve the goals that we have as a team um and deliver a product that we think is is useful for millions of people rather than thousands and given

that fact that you need to to make those trade-offs we ask ourselves the question of can you do that in a trust minimized way while you still retain the core pieces of decentralization that we care about and so just going back to that original point that making around the trma for us it was really uh asking a more narrow question of what is it that you actually care about when you uh have your assets on an exchange and what is it that you're trying to protect yourself from and for us it's it's really just you don't want your asset sitting on a centralized server if you have FTX 2.0 happen again where you want to be able to hold your assets and make sure that centralized exchange is not going to basically withhold you being able to to take them out and so we've seen really interesting unlocks when it

comes to uh custodian uh uh setups that have been put in place since FDX where you have an ability now to to hold your assets outside of the exchange but then still use them as the margining instrument for the derivative on the other side and so what what that unlocks is our ability to be able to a provide the transparency that I was describing earlier so you can actually you know see those wallets and be able to read into them as a user on the other side and we'll be providing that in dashboards on the app and then B it gives it reduces that counterparty risk the exchanges obviously enormously by being able to to disaggregate the assets from from sitting on that service can you explain a bit more how how that works like these off exchange custody accounts who are actually the holders

like what's technically happening there yeah so it's brand names that you'd be um familiar with guys like copper fire blocks with big G Anchorage coming out with with their products in q1 next year uh but essentially what all that's happening is uh you have usually and this is obviously different between different custodians but you have a Kea that's split using MP PC into usually three different Keys uh there's usually uh one uh pair that's sort of sitting with the custodian uh one with the CH of third party and then one with the client on the other side and uh the reason that the exchange can allow you to have your assets in there without actually sitting on uh the centralized servers that they know that we on the other side or user on the other side does not have

unilateral ability to be able to pull out those assets um at any point so so long as the rules of that wallet are are being um adhere to uh I.E you have enough margin in there for the position that you have in that exchange they have comfort that the custodian uh is obviously undertaking their job correctly and have the S to correct checks and balances that sit around it so I know it in sounds like strange within crypto this type of setup but it's actually kind of how the real world Works where you don't have uh like assets sitting on the place that you're actually trading uh those those functions are kind of different in the real world and and uh you know purposefully separated and I think this is just the Natural Evolution where I think a lot of the times in crypto we

kind of have to learn the lessons uh uh ourselves and in a painful way to kind of see that some of the pieces of traditional Market Tru actually make a bit of sense and for me actually having custody of your assets outside of an exchange is uh it makes a lot of sense and I hope that the industry sort of moves toward that over the next to 24 months yeah it's definitely a really like interesting Direction probably also useful for other use cases or things that's outside of ethena use case specifically so just to clarify that the trust third party here would be then like something Etha Labs um does and the actual user so these shorts are also something that does doesn't really

involve the user but more like EA having um accounts on these different centralized exchanges and kind of placing the the hedging sort of um trades on on the exchanges correct yeah so um the user is actually basically sending their assets to this custodian um so the user does not hold the keys to their assets anymore and that's a key trust assumption that's sort of built into to the design here so really what ath is doing is providing a front end where a user is depositing assets it's being sent to one of these institutional gr custodians where we no longer have control and title over those assets and uh you know it's it's a bit like a user base just sending their assets to a f blocks or or a coinbase

where they no longer um are holding basically the keys to those assets but it's programmatic in the way that they can uh come in and out where if they um choose to redeem uh we don't have an ability to sort of stop them from doing that right okay and the again on on the trade and how like if if you have to take these short positions how are you like basically bringing back this information to the to the people holding the coin or or like you know what kind of Trades were made is this also like something yeah you're exposing somehow or like trans how can you make this like sort of trust minimized I guess yeah so the way it's actually working on chain is um it

was probably worthwhile me actually just stepping through the user workflow but you arrive at the front end and you put in an EIP 712 signature request so that's you basically requesting or signaling an intent that you want this collateral to be hedged uh our offchain servers are basically reading those messages coming through Reading exchange apis to to understand where can we actually efficiently have ex lateral on the other side and then we're providing a quote back to the user which says you can hedge this at 99.99 D1 to accept and if it is within sort of that um the range that the user was expecting when they signed that request uh then we can actually execute and the key piece here is that we cannot issue the USD to the user on the other side until we have confirmation that the

Hedge is actually being executed so really the sequencing here is user comes in requests a hedge if it's in line with what they're expecting and we can execute we execute and then issue the USD on the other side to the user so and and why does the user do that he wants the the the USD e to like USD to like earn the heeld on it or what's their yeah that's correct um I have sort of um uh there is two different types of users within the system there's like uh what we can call retail users who are just wanted to swap in from dollars to Dollars and so the the front end that we're providing there is basically just um a front end that rots people into liquidity pools on chain so you're all

right with usdc USD whatever stable coin and all you're doing is actually swapping it in a curve pull into our stable coin uh but then in order to achieve what I've just described there we need to abstract away all of the complexity that I've just described to you um previously and the sort of mechanism that that that allows for that is we have market makers who are doing the mint and redeem Arbitrage against that curve pool so you can think of the flow as a a user comes in with $100,000 to swap into USD that slightly imbalances the price of USD versus usdt in the curveball and when that becomes imbalanced a market maker now has an Arbitrage opportunity to pick up that asset and come to our mint and redeem contract and add new assets into our system and it's actually the market

makers who are doing that request for qu that I was just uh describing where um they're performing the Arbitrage and keeping things in line with the dollar over there so uh really that complicated system that I was trying to describe there that's only really to how a market maker is interacting with us and uh retail flow basically just looks like a a Unis transaction that that just hits an amm on the side right makes sense and then maybe I guess in in terms of like RIS we we talked a bit about the funding rate um but now you're like interacting with all these centralized exchanges and like sort of other players can you expand what sort of additional risks exist there and and how they might impact like uh St coin

holders yeah for sure um so yeah as you said I think we we' covered the negative funding one a bit uh the other one was just around credit risk to the exchanges right um we thought we made a pretty thoughtful decision in terms of how we disaggregated the the assets from The Exchange and and tried to help alleviate some of that concern but it doesn't take the risk down to zero the risk that's still exists there is you still have the derivative instrument sitting on the exchange and so if you just play through scenario of an exchange going down on the other side let's say you've spread the portfolio um there's five exchanges you've spread it uh you know 20% across each exchange and one of them goes down let's assume that on the day that that happens eth is probably going to be

falling you know 10 20% on that day um so you're going to have the Hedge that is massively in profit on that day where you might have lost the p&l to that hedge that corresponds to the collateral that's still sitting outside of there so you still retain some of the credit risk um on the Hedge side of the whole thing but you have an ability to basically move that down to um to basically daily settlements of the p&l so you can just you can keep that risk to just one day of p&l that you'd have on that exchange uh and so really what you'd be losing there is 20% of 20% um in terms of the whole portfolio and so yes we haven't sort of reduced that risk entirely to zero but like with an entire exchange going down we think we we've sort of

boxed up that risk um reasonably well um for for yeah what we just described there and then um I think one other piece just to mention here as well is uh there is like a liquidity element to this as well so you're obviously tapping into uh Perpetual markets that um you obviously need to be liquid as people come in and out of the product uh this is something that you can just think about conceptually very similar to slipage of people coming into Unis transaction when you want to come in and out there's obviously a cost to doing so it's the same way that there's a cost to to open and close a hedge uh P markets are you know considerably the than spot markets and so this this is like low single digit type basis point uh of impact but if like everyone wants out at

the exact same time and you have thin liquidity at that moment um there might be you know higher sivage for people to get in and out but uh really it's a cost of liquidity and it's something that we can't uh try and disguise in any way I think we just need to be clear with our users that it does exist both on the way in and the way out right and and I guess yeah just in to clarify if there is like the scenario that why exchange kind of can't honor the short or like whatever happens to the funds on this exchange um this impact is kind of socialized across all the sein orders and not like by the specific user that did the trade right like it's it's kind of

yeah that's correct yeah yeah Okay cool so yeah really it's a lot about um working with the exchanges that are like trustworthy also and and managing how much goes where is there like some sort of yeah like are you just using like the best rates or like how are you managing what liquidity goes where in terms of the exchanges is it also like kind of risk adjusted in in some way uh based on your judgment of the exchanges or something like that you know I don't know what what one could use but have you thought about that yeah so in the beginning I think you can do a bit more soing for the best return uh because you're small and sort of not um you know impacting the funding rates and

the liquidity on single venues but I think in an end State really this whole thing is going to be determined by you know Global risk parameters that sit around how much of each exchange you're you're willing to to be a part of and so in the end it's just going to look like the market share of the entire Market if that makes sense so if we significantly diverge from that market share I think that there's something going wrong in terms of our risk controls um and so yeah you can do a bit of solving for for yield in the beginning but then uh beond that point when you get too big you kind of lose the ability to do that um and then just in terms of the exchanges itself yeah we we are only working with exchanges that we as a team feel comfortable uh there is sort of uh

different allting systems and stuff that are attached to the custodial Services we use as well uh where they're obviously flagging for any any type of activity that looks slightly suspicious or on train wet movement that type of stuff um and so we do lean on on some of the third party infrastructure providers there as well um who who can help with that I I would just Circle back to the same point though which is if an exchange is going down you have sort of isolated to just one day of hedged uh risk not even collateral and so that number on on the you know example we're giving if it's in exchange between 10 10 to 20% of the entire portfolio only a single day and there's a 10 to 20% n in eth price it's only somewhere between you know 5 to 1% of the total portfolio

that you'd be losing so again it's not something that sort of takes the whole thing to zero and a five to 1% is is a type of risk that you can actually cover with insurance fun as well yeah thanks for clarifying that I guess the other this is like specific to the exchanges but I mean custodian there could I guess there is a little bit of a risk maybe with these MPC wallets that would be the only way how collateral could be lost in case there is like something wrong with this MPC setup on in some ways right yeah that's correct I I would also just say that the cadians that we're using um have not actually lost dollar to date so we compare that to 7 billion lost in defi in the last three years north of 15 billion in CI uh if you just like

empirically look at the data and say where has it been safer to leave your assets in a smart contract or with the custodians that we're working with uh the data says uh it is the custodian so yes it's not um it's not perfect in terms of reducing risk to zero which I think is impossible to do with any of these things it's really just looking at um uh how risky is it relative to things and affected data gives us a bit of conf around that right yeah I do I do like that approach a lot to like actually look at the state and the current numbers I think also like in terms of the open interest and and the choice you have made there and like the analysis so I'm also recommending we we'll probably put it in the show notes like some of the kind of data that you have around

that which which I also found very interesting to see just like also the differences between open interest and centralized exchanges versus like the dexes so I guess yeah maybe also like a question around that do you think because right now I guess it's like 20x centralized exchanges do you do you think at some point like more and more will move to decentralized like sort of Perpetual protocols um and you know what is needed for that or like kind of why why are people choosing centralized exchanges still over de is it's still like user experience type of questions or um yeah liquidity type questions that if at some point they flip that would change or you know is there anything else there yeah sure so um we are we are

working with synthetics so we put out a bit of a post where we described um uh how we're think about integrating with them so uh that is absolutely the intention that we sort of start where the quid exists today and then uh walk back to decentralization after that and uh I am bullish on the onchain growth of derivatives I think it was something that a lot of investors and a lot of people were quite excited about last cycle but actually I think the infrastructure wasn't really there uh to enable to to to grow to the size that people were expecting and so now really like derives and being able to run um offchain aluts it it really does take um uh not even an L2 can really handle it like if you speak to dydx and their decisions to go and build on an a trade

in Cosmos they weren't even happy with the way uh that um nl2 or even Sana could could cope with the capacity that they needed and so uh I do think we should have got there now and the cycle in terms of infrastructure to allow uh those things to grow really does become a question of liquidity and and it is quite difficult I think to unseat these big pools of liquidity on Texas where ultimately market makers and big Traders um have shown that they're comfortable to trade and it does take quite a big step for them to move onto new chains um and application sitting within defy yeah that's that's super interesting I think yeah will be interesting to see how it plays out in in the next cycle and after that if like actually liquidity kind of moves more on chain and I guess also how you're design

then adapts because I guess for now you are are you supporting any Texas I I I think synthetics right um you already announced but it's essentially like again like a pragmatic sort of thing where you're like thinking about the sequencing of how to roll things out yeah that's exactly right so I think also from an engineering perspective it's um a lot easier to integrate with CFI um it's sort of one type of mod and you can just plug in different exchanges and then actually picking different chains different um Deep by applications to get into just takes quite a bit more engineering lift on the our side um but we are really excited about what we see with a bunch of the different dexes on chain just sort of takes time A for them

to grow to a size um where they're more comparable to Sexes but then B also for us to just do the Integrations on ourside um I do think it's pretty interesting though if you start to think about the different ways that Athena can plug into different defi applications it's not just Perpetual dexes so if you think about the core product itself where you're capturing uh a yield and tokenizing it within product where you've got sensorship resistant collateral with an embedded Crypton native yield uh coming from the two sources that we described earlier what's really interesting there is that you're actually importing a new source of yield on train for defi where at the moment all of defi is basically just running on stake e right and there's no way of extracting any more return or bringing any more yield to to defi your ability

to import uh that that 7% return that I described from shorting PS from CI into defy then unlocks a whole sort of new suite of things that you can start doing when you compose with that acid into different applications so just one example I could give you here is if you look at make a DAT or a FRX if they're filling their entire balance sheet and the backing for their own stable coins uh with RW ways what happens when rates start to go from 5 to 4 to three and this product is sort of sitting there at 12 does it become quite interesting to think about you know diversifying away from Pure centralized assets into something that's a bit more perative as a as what we're calling it an internet Bond um and so yeah it's it's really Beyond just trading on dexes but it's

actually we hope delivering a really interesting Bond like asset for the rest of defi right yeah that that's super interesting I think you also yeah I guess maybe maybe let's go a bit into that as well right like now it's very based on um perpetuals but there is also I think some ideas around like fixed rate and you know like kind of using f futures or or options maybe to to also can you explain how that would work and what would what it would unlock for or this sort of concept of the internet Bond or or for E I guess at large or in the space yeah for sure so you can you can think of the Hedge that we described down where your long spot St de from one side and then short to

per those are both variable rates of of uh return so the per is is resetting every eight hours and the interest rate is changing uh you do have traditional features contracts within crypto as well they're quite a bit less liquid so roughly the the size of the market is 10 a tenth of of the size of the perss market but what you can do there is actually head to the collateral out for a pretty defined maturity date so you can say uh I want to look out from now until June of next year and lock in what that um that the the how much you're going to get paid for that hedge on the other side and so what you're able to construct there is actually fix return dollar denominated instruments where you putting down the state e collateral and saying I know I'm going to get paid 4%

and then all of that conversation that we just disced cribed around negative funding and all those other elements it completely drops out of the equation because you know You' locked in that collateral as a dollar format with the return and so again thinking about that asset if you look at some of the treasuries with n defi uh that's a pretty interesting proposition right where you can go to these treasuries which are sitting on hundreds of millions of dollars of either usdc or eth and say do you want to buy into something that has you know a fixed rate of return of whatever it is uh 6 8% over the next 6 months and you can actually take that yield and use it for sort of working capital and paying employees within the down and stuff like that so uh that's we think a really interesting

asset to be bringing to Defi and the concept of like fixed rate is really started to to you can really unlock it when you're using an asset of the size of state dth and then also the features market across the entire uh sex space uh so yeah that's one piece there and then one other um item that you sort of called out there which I can just jump into a bit more detail is thinking about this idea of rep repay financing so if you have uh the assets that we're describing there with with the returns that we described are all obviously on an UNL basis um but to the extent that you have an interest rate differential between that asset and your ability to borrow dollars in the rest of defi at a different ratees so you know if a uh is 3 to 4% to borrow usdc or USD if you can

put up this asset and start to lever it up uh by borrowing usdc against our USD asset with a yield and you're getting paid 12 on the asset side and borrowing at 30 or4 that post leverage return starts to become really interesting when you start to Loop it up to five or 10 10 times over so um again it's a bit of sort of financial engineering that I think is unlocked uh by having an interesting base layer of yield that we're obviously importing from CI into def right if you were to do that does it I guess it would impact maybe like more people do it it might push down the yield of e USD also like to like goose closer to the borrowing rise of these

money markets elsewhere that's exactly right and there's like a big conceptual question around what we're doing and what is sort of the equilibrium interest rate of this entire thing right because right now you're getting paid too much to put on uh this uh long spot and short per position um eventually it has to sort of come down to some equilibrium level what does that equilibrium level look like uh it's probably where borrow dollar costs in the rest of the market um start to converge with that number so you can borrow dollars at three or four like put away the complication of everything else with all of the cerial risk all of the credit risk all that type of stuff and there was just a very clean way to borrow dollars and put it into what we're doing those two interest rates

should sort of like come together but really the outcome of those two things coming together what needs to happen is the supply of our stable coin needs to go through the roof right um and so really that that repo thing that I described there is just a really clean mechanism within defi uh to allow people to basically Force that interest rate differential to conver right yeah I think I think that's a very interesting like case for like the supply growing actually and when there is like so much demand let's say like scenario that you you it does succeed and there's like a huge supply now it does impact the the funding rate do you would yeah I guess that's also like

equilibrium where one is not clear where would that lie then if if there's like just much more short demand from your end um through such a product right yeah and um I just want to be clear on it which is um if we do reach a theoretical equilibrium and this like we know in crypto things never like actually land on their theoretical like equilibrium so always just like a mess between here and there but really if you are getting to that stage that is just an outcome of us doing our job correctly right which is we've produced a Crypton native stable coin that is um large and it sort of reached the the size that the market can actually handle and so really it's it's not something that I'm like awake and worrying about if you sort of get to that size it's actually something

of yeah you've sort of succeeded in what you set out to do um and if you do get to the stage where it's zero will start push down the funding as I said it's part of the design where if that is starting to happen it means that the supply needs to shrink and we need to get to a new equilibrium of of Supply after that so um it's it's something the things I stress about are have I put the appropriate measures in place to cover for the taale events the Insurance Fund is at you know appropriately size relative to the whole thing I'm not like awake worrying about if this thing caps out at three four five or 10 it's going to cap out where it caps out and that's just sort of like the market dynamics determining where where that is all we we need to do is put in the

infrastructure for us to Gap from from zero to that point and then make sure that we're covering the the tail RIS appropriately to create a product that's a safe as as possible for our users so um I think it's interesting to discuss these theoretical outcomes I don't think we have a land them because it is crypto and then I would also just comment it's not something that um I'm spending a lot of time thinking about I just need to think about sort of the TA risk right yeah that that makes a lot of sense I think why I guess it's interesting to discuss is that if we think about yeah I guess stable coins like really being used in the actual economy and other things then you wanted to be like quite a big Supply I guess that's where generally the scalability or like the lack of in maybe like things like

die come to mind or or people are like maybe thinking about and that's was probably like the promise of of Luna for for a second there that it's like very scalable and I guess you know you can't have free lunch and uh that definitely showed so um yeah I think that's a very yeah uh pragmatic like sort of approach and makes sense right first look out for the that it actually works on on the smaller scales too um I do think yeah it's also interesting that I guess just to know that there's like obviously it's kind of obvious that there's like long demand for crypto uh bias and maybe that in the future will also change but I guess you know also Etha will evolve and who knows what what else what other

assets you will will put uh be able to collateralize in the future or Al like other Pro of stake assets or who knows what what this will turn into do you have any thoughts about that like you know could you do like a similar mechanism with like non- crypto assets or is that like not not on the table for now something like that yeah you've got like uh you obviously got features that exist on acties in the real world um they don't have perss in the same way that we see do in crypto there perss are very much crypto um specific phenomenon um but what you could do and this is just conceptually speaking it's not something that I put like a ton of thought into is uh if there is a positive carry or like a contango within

um the equities Market as it relates to a single equity um and someone sort of allows you to collateralize that with an Apple stock or whatever yeah really uh the whole concept here is you just got one asset as a spot thing on one side and then a derivative on the other side that offsets it so so long as there's sort of contango within uh the derivative instrument on the other side and you're getting paid put in that position uh you can do that um I think uh you're thinking further ahead than than I ever have with with this thing I think we're just pretty focused on on getting something that uh sort of works and is useful for the c space uh to start with awesome yeah I think um yeah maybe we we went a bit like very far there I I thank

you so much for for coming on and like explaining you know how how it works and bringing like uh all the piece together I I hope this was a useful episode for our listeners um yeah and maybe yeah as a final sort of question like where where can people learn more about Athena how what's the road map like things like that yeah sure so the the website's Athena uh the the Twitter is Athena Labs I'm on uh lepto CTIC uncore which is a bit cryptic so hopefully we can throw it in the show notes um and then yeah in terms of the road map uh launching uh basically in a couple of weeks uh slow sort of roll out of the product to

internal um parties where we're just going to be doing some testing with internal capital and then the idea is that we slowly start to roll it out uh the month after that to to the public to be able to come in and uh test the product so yeah excited to get it out and uh hope that everyone um likes the product as much as we do awesome yeah very excited to see how the user experience goes and how the launch goes and like yeah congrats and yeah thanks for coming on and see you soon we see M thanks for the time