Inside M0: The Decentralized Bank of DeFi | Luca Prosperi

Transcript

but in my opinion the really real end game of this is is for Defi and crypto to become the back end of fch if you look at finac today finac is a very Sleek front end but in the back end of it there are old Banks and you should do it in the most fair and transparent way and we think that M the m0o construct the way we have designed it can redistribute the economics in a way fairer way compared to current centralized systems where pretty much St sure keeps 90% of the buy we teed up with the Wormhole Foundation stewards of the Wormhole protocal the leading interoperability platform powering Crossing transfers for 200 plus multi-chain teams K unique

Wormhole NFD just for zerox listeners today pair is an Innovative pair trading exchange built on top of Simo users can trade trending narratives with one click from Blue Chip narratives such as long BTC short e right through the whiff versus B the Hat stays on Sim's intense Centric architecture enables deep liquidity source offchain and Broad onchain and combined with pair has democratized access to complex trading strategies typically reserved for institutional Traders marinade is a staking protocol on salana and the only steak food that delivers Auto rebalancing M Rewards and automatic downside protection with new protected staking rewards optimize your soul steak with marinade by hitting the link below

Avalanche is a smart contract platform that has a novel consensus protocol subnet infrastructure and the hyper SDK toolkit which allows web free developers to easily launch custom powerful blockchain solution you can start building today by checking out the link below before we get into today's episode just a quick disclaimer the views expressed on this podcast by em myself or any guests are their personal views and do not represent the views of any Associated organization nothing in this episode should be construed or relied upon as Financial technical tax legal or other advice all right let's jump into the episode welcome back to another episode of ZX research today we have a great episode lined up of Luca the CEO and co-founder of mzero which offers a new crypto dollar product called M today is Thursday April 19th but this episode

will likely go live the first week of May as a reminder be sure to use code0x research at app. blockworks research.com for 10% off your annual subscription on to the interview with LCA thank you so much for coming on LCA thank you guys for having me um before we get started and dive into it could you explain what m zero is and how it works yeah I'll try to do it in a couple of sentences but I think in the long run we hope m0o for m0 to become the true the Central Bank of defi what what do I mean with that I think what we hope for m0 is to be a set of rules uh smart contract enforced that would allow anyone to bring eligible

collateral and meant a fully fible crypto dollar we don't really like the term stable coin this has many implications it stops fractionalizing liquidity has the ability to bypass a lot of the financial infrastructure overlay that is used in today's stable coin but not really needed and hopefully can create a true Global dollar-based um Financial ecosystem interesting um could you describe the process for minting and redeeming um like the life cycle of a transaction yeah absolutely I obviously there are many layers and layers of complexity but

in its simplest form a mentor who is a smart contract permissioned to access a minting engine provides a proof of Reserve that a certain eligible collateral exists somewhere this proof of Reserve needs to be validated by at least a third party or or a validation smart contract and following that proof of reserve the minting engine gives the ability to the minor to Mint a subset of that value in M form let's make an example a more bit more practical there is an approved minor that can strictly

prove and then you know we can get to that in a second but can strictly prove that there are let's say $100 million worth of us treasury bills in a in a compliant container and the protocol will allow that Minter to Mint less than $100 million call it 995 Million worth of M that this fully fible it is not doesn't have the face of the Minter and can be distributed in the open market freely without any blacklisting functionality or any way for governance or protocol or or a regulator to actually um confiscate that dollar and

on the way back when the Minter wants to close this transaction he can purchase or access the mamp floating in the open market bring it back to the protocol burn it let's say through the protocol and access the collateral back gotcha that's a helpful explanation I did have one curious question on some of the numbers you mentioned so you mentioned in your example $100 million of coll and he'll be able to Mint $95 million of coll is there always going to be a sort of uh quote unquote like loan to value or like you're only able to Adit less than 100% of your collateral or would you be able to Mint like one to

one the dollar value of your collateral um I think there's going to be another question after that uh and we're going we're we will get in the Nuance of how money is created but I'll park that in for for the moment I the first the first part of your of the answer is I don't know because what we are creating is actually a decentralized governance system where governance has the ability to parameterize the protocol the way governance is fit now in my opinion it should never be the case I think that a floating M should always be a sub like a subset with a loan to value less than

100% as you mentioned of the eligible collateral that has been posted in a in the ecosystem which is by the way the way Financial financial markets work today um you know when when you have one for one collateralized Fiat back stable coins that Fiat which is actually the money generation has been produced in an under collateralized fashion by a bank so the leverage the LTV that you mentioned is actually with a depositary bank and it would be like someone who actually purchases m in the open market would deposit in another smart contract one for one and produces another stable coin um so that leverage that lack of Leverage or or one for one

collateralization is um is already existing somewhere else in the financial system these days gotcha I appreciate that explanation and another thing I wanted to ask is from my understanding MERS are going to be a permissioned entity at launch so how are minors going to be selected at launch and perhaps what are some of the consideration you guys sort of thought about When selecting these initial batch of minors yeah um as you can imagine we thought extensively about this uh and um when we designed the protocol we wanted to design a protocol that was as modular and future proof as possible

so yes governance can Whit list which wallet addresses can be permissioned as Minter but in abstract fashion this this white Leist can be infinite right can be completely open by governance in the future but we don't think that that should be the case today and why we are strong Believers first of all that money is a B2B Toc product there are centralized parties that bring collateral in large scale uh they post collateral in large scale they manage it in large scale and they distribute it in large scale and these institutions are also better equipped also from a regulatory perspective to do

that and and then this but this doesn't mean that the distribution of the of the stable coin should actually be controlled by the minters after they mint so the reason why the reason why we we think that minters should be permissioned is that today in the world we have today it is very difficult to uh Patrol the quality the Regulatory Compliance and the ability to manage collateral of you know an arbitrary number of people so I think that's we are we are beli in a B2B Toc model but that shouldn't be

the future in the the future forever necessarily I think when more and more and more controls will happen on chain in a composable and fully transparent way we think that the pool of potential minters could definitely expand gotcha that makes sense just falling of then sticking on the point of mters right so for example like a stable coin like Circle and tether there is like one centralized entity and they are like the centralized mentor and Redeemer of their respective stable coins given that M will have multiple mentors permissions through this governance system what are some of the key risks that users should be aware from mentors because you know like with circle it's very easy that you're trusting that like

one entity whether like however trustworthy you think they are but now with M it seems like there's sort of like multiple sets of trust assumptions because you have multiple mentors yes and I I actually think that things are a bit more complicated that the than that even by Design because to trust so as as when m is free to float in in in the outside word as as we mentioned before M cannot really be confiscated by anyone it's not that like like in the case of circle someone can push a button and Blacklist a wallet address and pretty much confiscate the balance of that wallet

address that means that the only the only um aspect that a user should consider from a risk perspective is whether there is accessible backing of that stable coin in a safe place and I and I think the way we have we are ensuring this is not only by decentralizing and diversifying the risk coming from the minters which are the issuers and the redeemers but also creating other classes of actors collateral storage collateral storage venues validation venues Etc so we are trying to create a network of um not

always uh of independent actors or classes of actors that actually kind of controlling each other uh in a way that it that doesn't exist today so we think that the best way to diversify the risk and increase the transparency of a model with one issuer that has one balance sheet that is always kind of opaque because it's quarterly attestations or and has two three custodians or Bank custodian Bank Banks Etc is actually to open the the set of minters to create this comp competition but include also a set of collateral storages that are independent from the minors and a set of validators

that are independent for the first two so I think that that is also the reason why to your point run before we wanted to limit somehow the number of parties that could come and perform those actions so that in order to trust the backing of the stable coin you need to ensure that the parties that are playing those roles are trustworthy and obviously you don't want to do this oversight for thousands of parties but for 5 10 15 20 parties and ultimately the the uh the full back of everything is social governance and governance oversight and

that's why we also spent significant amount of time designing governance mechanisms and thinking who should actually be the governor of this system um yeah the governance I've went through your um white paper quite heavily and that you I think this is the first time that I've seen like a stable coin Focus so much much on governance uh I think it might be the only example of a stable coin focusing this much on governance um but before that could you kind of um dive into the validator set a little bit more uh are they basically an oracle set that comes to consensus and verifies the offing collateral or is there other nuances in there I think first of all like we will

definitely talk a lot about governance and there are reasons why we're spending so much time on governance also link to our past in the ecosystem but the validator set yeah definitely I think the validator set should be seen as um in two aspects first of all Yes uh we are aiming at having a consensus validation for the on on live proof of collateral and just to make this more real what we are expecting is that we will have daily onchain attestation of the reserves provided by Third parties for anyone to review the backing of coin um we we are hoping to have we actually have abstracted the the role of

validator because we are hoping to have more and more research from our Labs company and others on how we can actually do very robust consensus validation but also those validators have a second second lag which is way more traditional where those validators are actually auditing the real um the real structures where the collateral is stored so to make an example if you want to be a mentor An approved Mentor in the system and we will provide guidance I mean this is very boring stuff but it's very important we will provide guidance to governance as a minor you should bring your independent collateral storage which is typically a regulated

entity that works in the securitization Market this is not the first time we have an asset manager that uses an independent storage the the securitization Market has been working with this for decades and also you need to make sure that this collateral storage this SPV operator has a third party independent validator that ultimately has has the contractual ability to look look into the Securities account and cosign what in what exists in in uh in the structures so what we're trying to do is making collusion and opacity more and more more expensive for the parties so if you want to have if you want to Mint an over like

an under collateralized or a bad Rec collateralized stable coin you need to as a mentor you need to corrupt an SPV operator which is also a regulated entity and it's also going going against the law you need to make sure that they do the same with a separate auditor validator and then you need to make sure that governance is either very lazy or very unqualified or actually corrupt itself so we are really trying to make more and more honorous and more difficult with parallel checks and balances the corruption of the system one more question that I had like regarding the mechanics is currently from what I've seen the only eligible

collateral is 30 to 90day US Government bills is there so from what I understand you guys are eventually planning on making this all decentralized so the governance would decide on what collateral can be added but how do you see this evolve and like is there a framework that you have when you're thinking about Al yeah um I obviously have my own opinions I I think the foundation of the mzero foundation will have its own opinions and governance will have its own opinions as well but let's start from me we there is a very simple reason why we decided to start from the simplest possible type of collateral

first of all because it's very simple there is de facto zero credit risk where you're thinking US dollar terms if you're actually backing a credit by the bills because yes the the US Treasury might default but if the the US Treasury default the dollar itself is worthless it's the most liquid and largest uh asset Market in the world is the easiest to underwrite and uh and is the easiest to start by passing what banks do because ultimately this is this might be not really not immediate for everyone but what we're what we are trying to do with m zero is bypassing an unnecessary Commercial Banking layer in the production of money now how can this

will this collateral pool evolve yeah yeah we think so and that's also why we didn't call the token the stable coin token produced by m0 USD whatever but we called it m because we think that m is a unit of money today is backed entirely by treasuries because it's easy because the market is huge but in the future might be backed by other Assets Now if you ask me what do you think should be those assets and also like the last point is it's also very profitable because now those those treasuries are yielding four five% so it's actually there is a huge tailwind and I mean we're are not the first ones we might have been the first ones to actually to to to talk about it I've been discussing about it at length but other other

products have worked on this on a for like less complicated but faster to Market Solutions so this is not a new New Concept but in the future in my opinion we should think about the evolution of the eligibility criteria in the same way we would think central banks to evolve their eligibility criteria for their own reserves I think C central banks have been including some commercial paper in their reserves central banks might include Bitcoin in their Reserves they include gold in their reserves so I think that the reserve policy will probably evolve and become more sophisticated but I really hope that this will not become actually a discount window for bad credit or IL

liquid credit to come and ask for cheap financing and we have seen this in crypto we have seen when crypto has opened the windows of liquidity so-called tacki credit or Revenue based financing which is very difficult to underwrite for good reasons pitching itself to be a good collateral for stable coins I've seen it myself a maker I spent a lot of time in the maker ecosystem and people might know me at maker so I hope that is not that is not the direction and we actually have created the mzero foundation and will provide Financial Resources to M the mzo foundation because we really want the mzero foundation to become a think tank that publishes research of about how Global

money should be backed yeah um one more thing on this topic is that I was reading through I think it's your latest research it's about money um and how it developed and one of the things that you mentioned is I don't want to butcher it is that you basically you don't think that crypto and endogenous collateral mechanisms are going to prove to be popular I think like I agree with you but I I kind of wanted to understand like how you you think m is going to fit into the landscape of crypto because in my mind it feels like there's like very decentralized ones um in the sense that

they're backed by E and then there are like more centralized entities um how do you see M fitting into all of this I so first of all I I think that endogenously collateral sorry like Crypton native collateralized stable coins um might or might not scale but definitely they will not be able to scale today uh they are too pro pro too procyclical and actually this goes against the concept of money in the first place and we have seen it with maker again for example in the bare Market maker became the facto a rapper of

usds um now where do we think M would would sit I think first point where do we think M would sit today and where it would sit in the future I think today there is a huge space to provide a better and um more transparent version of dollar packed stable coin I I think that this Market is absolutely dominated by one party that does one thing very very well which is liquidity to settle retail trades which is tether it might not necessarily be the best to do other things and if you even talk to large whales in crypto

or large market makers in crypto they will most probably tell you that they trade with tther but they store their money with US Banks now I think that there is a huge space now to provide a better alternative but this is the typical cold start problem right uh you need to start you need to provide liquidity we have very very strong Partners from an equity perspective and a market making perspective some we can make public some not yet but soon so I think we are in a very strong position to tackle that also this Market is 150 to billion dollar even from a Crypton native perspective will probably become $1 trillion so there is huge potential for credible alternatives to

emerge but in my opinion the really real end game of this is is for Defi and crypto to become the back end of finac if you look at finac today finac is a very sleek front end but in the back end of it there are old Banks you have like fancy new Banks most of the times they have old partner Banks and correspondent Banks and it's very complicated it's very costly we think that crypto should become the rail of choice of f tax so if you are providing a financial product through a front end in in emerging markets for example you can do this on usdc Rails you can do on on

this on mzero Rails and I think in order to do that you should try to be the best possible dollar rail because the business of those finx is not actually to trade but is actually to provide a product for their business for their clients and you should do it in the most fair and transparent way and we think that M the m0o construct the way we have designed it can redistribute the economics in a way Fair way compared to current centralized systems where pretty much the issuer keeps 90% of buy so I think that there is there is definitely space for a better and more transparent and better distributed stable coin layer today there will definitely be the need

when larger institutional pools of money come in in the next one to five years and in the next 20 I think we should definitely bypass the banking the Commercial Banking rail I think banks will just become utilities and for this we need we need better middlewares and that's what that's what we're aiming we are aiming to build for gotcha that's a fantastic explanation so it seems like M and m0o is sort of aiming to be this sort of neutral base layer where anyone can come in provide this eligible collateral and Men their own stable coin while obviously capturing sort of like the inherent yield that a lot of the collateral that back stable coin has one interesting point that I saw on your

blog was that a few mentors May potentially use M as a distribution channel for their own product and for example wrap the M token in their own for example wrapper into like another uh crypto dollar or like another crypto contract do you think that's going to be very likely with either like in the long term with like the M mins where they want to sort of like own their own sort of like crypto dollar or do you think most of them are just gonna buy into like M and sort of tap into like the existing M liquidity rather than like fragmenting it through like their own wrapper and why so we are agnostic to that that's why we have designed the product like

this but we are anticipating it and one of the reasons why we called m m is because we thought that M could be raw material for something else um even even if this happens actually liquidity still is less fragmented because there is a uniqueness of money that is guaranteed at the backand which is a bit like the discount window of central bank's work today you know every every money is kind of different in the different banks where you store the money there is a different credit risk but everyone can go back to the discount window and and use it I I think this will happen because I think one one thing that there is one thing that we think the m0o construct is can be very good at which

is guaranteeing an evolving and distributed collateral pool for the quality and the stability of the coin there might be other ways there are there might be other things where other overlayer Protocols are better for example P stability or leverage or distribution within certain layers so we think that partnering with other protocols that build on top should definitely be a winner and we will definitely uh incentivize it that makes sense and then obviously value of crel is relatively important for crypto protocols these days it seems like the retail Market is slightly more aware of

sort of like value Cur Dynamics and sort of the token utility there and at least for um there are two types of protocol fees the first is a m rate and the second is a penalty rate would you mind diving into both of those a little and sort of like talking about the potential value of crew there yes um the north star of this is trying to avoid as much as possible any risk of under collateralization so actually incentivizing minors to keep a healthy level of over collateralization uh for m so that's why we have included a Min rate and a

penalty rate but how does this work so if you are minting them by providing collateral you are actually paying the protocol a fee that is proportional to the amount of M that you have minted for the finance uh people the Trad F people listening it is like a repo you provide you post some collateral that has a yield you have you get financed by a liquid form of Deb that has a cost why would you do it because the yield of the asset is actually typically higher than the cost of the

liabilities you can buy more asset to this liability so you're actually Levering up in a healthy way this is how the wholesale Market works so this MTO rate is absorbed by the protocol and redistributed partially to earners and the rest at disposal of token holders without any Dow without any decentralized treasury but simply can be swept by token holders now if the um if the collateralization ratio part temporarily exceeds certain thresholds or if the validation and the proof of collateral isn't done properly the minor keeps acre a penalty rate which is an

incentive for the Minter to behave before it is actually expelled by the network so that this this incentivizes uh riskier riskier Behavior ultimate governance is the ultimate decisionmaker can push out orderly a Minter but I think the idea here is to to incentivize healthy collateralization and also the Minter rate is captured by the protocol in the same fashion so it's very simple the Minter the m0o Minter engine is a centralized fac facility for healthy financing and absorbs uh fees in order to provide from from those that uses this facility and this fee is

distributed among the stakeholders of the network in a way that maybe we can discuss later guys if you're interested R is the leading interoperability platform for multi-chain Bridges and applications with over 1 billion messages sent and 40 billion in value transferred wormo leads the industry in Cross chain message volume and total value transferred if you're a builder wormo has an ex extensive sued of tools and infrastructure to securely build multichain applications you can use worold to power D5 nfts governance and so much more and Wormhole supports over 30 blockchains and six different run times came your unique Wormhole NFD just for zerx research listeners today for out of form proof that you've listened to today's episode to receive a p app and you'll get an email over the coming

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utilization the way we have um divided this in order to tackle the problem is in thinking about supply and demand so who is actually producing money and who is using money and for for producers to be attracted by the trade there needs to be significant demand for money to be distributed into and we are trying to work at at at both sides on both sides at the same time because obviously you cannot have a lot of demand if there is no Supply demand will get frustrated and vice versa and at the same time we're trying to work on the liquidity of uh of

the stable coin itself because obviously liquidity is at least in the short term the characteristics number one for a stable coin I would say that solvent is very important but unfortunately you you realize when when that solvency is important when when it when it's too late typically so we are working on the on the on these three legs at the same time on demand what we are doing we have been starting to work on demand from the very beginning of this protocol because we have been designing um and the protocol in a way that is more as friendly as possible with the protocols that use it so for example the fact that M doesn't have a blacklisting functionality in a native shape for us

was very very important we know that blacklisting hasn't been used much we think that AML and source of funds should should definitely be done in the ecosystem but we do not think that it the best way to do it is to provide one agency a Witcher to actually bring down a whole ecosystem so the fact that there is no blacklisting functionality natively in Act M facilitates the use of M as a settlement um asset in many other ways for example on side chains on rollups and you don't really want your rollup to be switched off by one one agency that doesn't like your rollups so I think one the the blacklisting functionality was an

example the solvency is another example the ability to direct earn yield in a more targeted way was also an example um more pragmatic on this point we have considered the ability for the protocol to redistribute part of the yield that is captured by the protocol itself that ultimately indirectly comes from the asset so you know it's a bit like when people think about ill bearing stable coins there are different ways of doing it now the reason why we actually asked governance also to Whit list which wallet addresses can be earners is not

only for Regulatory Compliance but it's also because we think that it's easier not to have a modular approach I make you an an example let's say that there is a an asset backed eeld bearing stable coin product out there that just automatically gives yield to the stable coin holders now this product can be very complex to manage from a regulatory perspective when it goes around the world can be very difficult to be created liquidity against and sometimes this this cost doesn't really have a benefit because I would argue that in crypto people do not really care much about the two three 4% yield when re for retails because people retailers use this to trade uh and they have a way way

higher risk appetite in the construct we have designed let's say that a large exchange has been permissioned Le on theform on the protocol when a permission wallet address of this exchange this exchange will keep earning but as soon as this the asset leaves the exchange wallet address and goes into the user wallet address this functionality stops that means it is way easier from modular perspective to for to be digested by distribution Vues instead of like fully monolithical stable coins this is another example so we have been spending

a lot of time in designing this in the most neutral and way in order to allow um use cases to build on but I mean we could have many we could have many examples the other side is distribution we we see that a lot of the large Distributors are doing the heavy lifting for stable coins uh because they're actually providing liquidity for stable coin pairs but they are not benefit benefiting for most of the economics and and we are we are convinced that our distribution venues will start more and more to get interested in having their own stable coins you know binance has done it in the past PayPal has agreed on

a um on a partnership with paxus but we have many others and market makers have been starting to move in the space so I think we think this will functionalize liquidity significantly so we think that we created this platform to be the most credibly neutral technology for Distributors to build stable Zone we hope that large distribution venues will all have stable coins that are powered by the MZ ecosystem and they will capture most of the economics right the MZ protocol will not be predatory on the economics the mzero protocol as a set of Standards was just wants to be very large gotcha no I really think that's interesting how you can think about sort

of like distribution and the demand and Supply Dynamics one question I did want to ask was Black List fight I feel like you mentioned that a lot of times that M does not have a Black List functionality however in most cases so far at least for centralized stable coins like usdc and us usdt I feel like I've only seen Blacklist utilized in sort of like a positive manner after a exploit or a hack so I wanted to ask sure I I can understand like how you don't want like a sort of like centralized like perhaps like censorship Vector to the stable coin but why not have that be controlled by for example governance instead of like a centralized

entity so on um on your first point I agree I mentioned also before that the blacklisting functionality hasn't been used much in the past and I also think that the birth of this functionality is actually more accidental than people think um but we just think this not good design I think that we should build compliance protocols and Frameworks on top of core minting engines of stable coins and not within I think it's all a matter of modularity where you actually put certain functionalities in um I think this is the beauty of Defi and crypto in general so for us design is important because we are such a young space and

still Niche we don't really know how these functionalities will be used in the future uh especially more and more if we believe that this is going to be the basis of for Global Financial Services ultimately will become also a political weapon to have certain functionalities embedded within the financial system uh I think we have we have we have had similar examples in Telecom with like 5G servers and Etc I think is a good analogy on um on um I think on the governance aspect is because we really believe that governance should stay away as much as possible from managing core value for the protocol I think we we cannot really get away with from governance because I

think that certain things especially today require social consensus and monitoring actually spent some time after my maker days researching and writing about governance systems in a hyper complex situations that are not actually minimiza in algorithmic decision making so I think we need governance that's a short version but I think governance should really not have nuclear buttons as well because it's very risky so we we think that this shouldn't be in the hands of governance in in the way the way actually governance in mzero works is a preemptive let's say pessimistic governance so if you're not adding value

to the ecosystem governance pushes you out but pushes you into an orderly wind down it doesn't capture your value I don't think anyone would would like that but also we are not against again um creating additional functionalities for financial products or products in general we just think this should be layers layer after layer at the periphery of the core protocol so we are um we hope we think that going back to your wrapping and building on top point we think that there will be um other other use cases for M that need to be compliant or need need require additional functionalities people will

build on top but without breaking the the core liquidity and fungibility of of the M token we really hope we really think that M should be raw material core material for other for other use cases and also when it comes to when it comes to the ability to divert funds from a from a risk management perspective this is very important but this should be in the right place if I were a D5 protocol whether a perex and amm are lending borrowing protocol what would be your like two sentence pitch for my protocol to integrate MV I I would

say three things I would say first of all that what we have created is the most neutral Tech platform with the long the Highest Potential longevity as a product the second one is that it will give the ability to distribute yield better and the third one is that we think that the team of professionals and investors and partners we have put together is the highest quality possible in crypto and we think that this is very very important to create network I think we started m0

by raising a seid round which at the time in the middle of FTX was one of the largest seid rounds of of that period we raised $22.5 million with panta leading the round but also great investors like parafi like standard like hack like Road like air3 participating the reason why we chose those those guys is because we had very deep connections with them with most of them during during our maker days these guys love Stables they understand Stables they use Stables now m0o has around 50 people working including some of the early builders in the maker

ecosystem the former Hado product for pretty much forever in of usdc at Circle uh people coming from the compound experience or from tread five I think this team is um is incredibly high quality and and we are working very hard to expand this family even further bringing the the highest quality strategic Partners In the Mix as well so we think that network is crucial in crypto we want to build the team that has the highest Firepower to build Network effects for a stable coin and I think you know stable coins or money in

general is the ultimate Network product you need you need ability to do Network in order to have value you can have the best product in isolation but without the ability to create a network around it there is no value so I think that that is that these would be the three things plus a fourth so technology number one ability to be fair in distributing yield number two ability to create network number three and then the fourth one is M will not blow up your protocol and I think if you are building a protocol and the stable coin is something you absolutely need in your construct but you don't wor really don't not want to carry someone else's

risk and will not blow you up and I think this is quite important through the cycle for things that are thinking longer term yeah that last point is I think that would do it for a lot of people I think especially if as the cycle maybe we'll see I don't want to get too deep into that but governance wise you guys have as I mentioned before you have probably like the deepest um governance framework that I've seen for a stable coin could you kind of run us through the two token governing system um and why you decided to go with that yes absolutely and this is a bit

this is the child of Greg one of the three co-founders of mzero so I hope Greg if you're listening I hope I'm not doing too bad of a job the reason we spent a lot of time in on governance is that we have felt on our skin the problems of starting a protocol that become successful with a bad governance construct and many many many projects they start and they say yeah we will fix governance later and then you never fix it is a bit like giving giving the power to to a very powerful General in a Military Coupe and the general will give it back to the people and then surprise surprise he decides it's better if he runs the the country

himself so we shouldn't get the generals there in the first place um we we have worked extensively in the defi ecosystem and have have noticed on our skin a few problems the first one is that is lack of participation even decentralized um distributed uh governance systems have very few people participating because most people are actually buying governance tokens because they want to trade them or they want to stake them so the the merge of the economic utility and the and the control utility of a token is creating a lot of problems um I have seen this on my skin uh I I

was on the maker ecosystem and I was actually advocating for more checks and balances in the ecosystem might be a might have been a good battle or not a good one it doesn't matter but that vote was the most participated vote in defi history I think uh I don't remember how many hundreds of millions of of uh worth of tokens of MK tokens participated pretty much every large Institutional Investor voted on one side but the the total float of of tokens participating in that vote was probably 20% 25% and this had never been done before ring

20% of tokens for a vote So currently large large holders of governance systems control typically two three four 5% and it's enough to outvote everyone so there is a problem there in actually um apparent decentralization versus effective control the second one uh was was the difference in uh was the difference in the time Horizon and intentions of the holders of those tokens there are some some that are very active and are very engaged others that are just sitting for economic acral Etc and the third one was the distribution of those tokens I I do not necessarily believe in

very complex flat Democratic systems where everyone is actually arguing about very complex things it becomes a very difficult political game and that was what has driven Us in the design and the design has a few very basic concepts the first one is splits the voting ability and the economic ability of the tokens so the mzero system the two token Governor as we call it has a voting token that is called the power token and a utility Guardian token is called a zero token the voting token requires participants to actively

participate in governance if they do not participate in governance they will be heavily diluted them very quickly the zero token is less pun punishing on the dilution but doesn't give holders controlling Powers apart from emergency High Quorum votes where the economic stakeholders they want to reset the system because they think the system is actually going in a very bad Direction so the reason why we're doing this is to really split these two cohorts there are there might be Traders and stakers that are really interested in one token but not in active participation and it

ensure that voting has a very active and always evolving always evolving cohort um we think this is not I mean and again this is not new we we have SE we have a lot in the in in the capitalist system we have many people that are interested in the upside of a company B but they do not really want to participate or they do not have the ability to to participate in governance so we think this was very important and the last point is how we we decided to distribute The Tokens The Tokens haven't been distributed yet but we will be way more targeted in a the initial distribution of the tokens because this is a path

dependent equilibrium if you have the a wrong distribution at the very beginning it might actually impact the evolution of the system itself um and you know we spent a lot of time on governance because as you mentioned we think that good money ultimately comes from governance you know the US is the most trusted Sy Financial system in the world it's not only because it has an army but because it has good governance and if the governance of the US gets very bad and the the central bank and the treasury start getting colluded Etc the value of the US dollar would go down so in order to in order to ensure a healthy and long um life cycle for the

mzero power money we really wanted to spend a lot of time in governance that costed us a lot of time and lot a lot of money and many investors asked us why but we are long-term thinkers and we hope that others will build on the same you know we will we will open source our our governance system we hope that will build on the same concept ideas or modules that we in pure crypto Spirit we we are sharing with with the rest of with the rest of the industry I wanted to follow up there and continue to ask some questions about governance first of all I think block research spends a lot of time in like various Styles in different governance systems and there's clearly a big difference between just participation

and sort of active slash good participation participation is just sort of voting on like random snapshot votes without much of an opinion whereas active and good participation is for example hosting weekly data cause actively having discussions in the governance Forum before the post even makes it to the snapshot how do you think about sort of incentivizing like those two different types of participations because ideally you also want sort of like the active discussion instead of just you know like sure like having a large percentage of the token Supply vote on uh votes is good but at the end of the day like you still want sort of like an informed vote rather than just like someone chucking their vote out so how do you think about

that yeah I I would say like you know the difference is like participation farming participation LED farming and and real real participation in protocols you know and I myself I spent a lot of time on in Dows and researched Dows from maker but also Lio and nouns that to me was one of the most f inting governance tests at least at the very beginning Etc I think how we differentiate it we cannot have a perfect differentiation I think we can reduce the in first of all we can reduce the incentive of um parasitic participation and the two token governor

also goes in that direction I think voting has some level of uh liability and um onchain while onchain the protocol rewards participation through token distribution that is permissionless we think that really for institutional type of players the real game is not on in that open class but in another one so I think we wanted to reduce the incentive to farm through participation I think is also again I think that it's always in uh it's always a nuance it's also the way you actually think about emissions and token

distribution in order to avoid predatory participation to farm tokens and move on we are really long-term thinkers we think we will pay for this long-term thinking in the in the short term especially in a bull market but you know we have white shoulders so we can sit and wait but also so the how aggressive you think about parameterization is going to be very important but then I think from a foundation perspective and MZ is not only a protocol a foundation is actually uh like a Labs company that is in a very Lively manner creating apis and software to connect to the protocol we never we never talk about that but I

think we're spending a lot of time and we have a lot of engineers in that site but let's let's park that for a second I know that crypto people are more interested in in system design rather than software but we want we will do a lot of work from the mzero foundation to keep this com this debate Lively we will do a lot of work by publishing by researching by engaging in conversations we really want the mzero foundation to become the reference thing tank for stable Co research in crypto period And if this come this will come through grants will this will come through suggestion to Governors this will come through additional projects but I think

this will be there is no secret Source I think this will be most of the work from a from an ecosystem perspective at the foundation because it's um nourishing high quality and fostering high quality participation is an ongoing effort is not something that you create a great system to do that and then it goes on its own so I think we we will live and see but we have we started by designing a system that we hope would have improved ver the existing flows of crypto gamified governance or financialized governance systems but this is just the beginning the rest is humans as usual yeah um the idea of the think tank uh the MZ

Labs F tank you mentioned that um you want to see F tanks participate in governance could you kind of expand on that a little bit and because it ties into what rents set as well you want both active members um but I think think tank from what I understand is like a very very active member to the point that it's more so focused on thought pieces and research um is that what you're envisioning just third parties coming in and discussing um stable coin research and design as part of the governance process as well yeah we we we will incentivize this also probably through a grand Pro

program but we would hope universities some of the rating agencies that are spending significant time here to publish and research uh I mean I I'm an example of crypto a Crypton group that I really respect because I saw the guys flourishing from day one is like steakhous uh I mean the guys from from they spun off from maker Dow and are doing a lot of the financial work for some of the very best protoc protocols I have a lot of respect for those guys but we we would love to see this product researching and analyzing very specific aspects like collateral eligibility criteria or certain parameterization characteristics Etc now how do we incentivize those groups I think it's

going to be a combination that will keep evolving um exposure if the mzero protocol will be a very strong protocol I think it's going to be good for them uh grants we want to we want to fund our project is well very well funded hopefully it's going to be even better funded and uh we want to use this for high impact initiatives and delegation we we know that large Financial investors do not really want to be fully fully engaged in governance because for them there is significant liability in doing doing so they just want to protect the governance of certain protocols because they want to

protect their investment but we think that those those same token all ERS might sell or delegate token power to more informed parties and also the protocol we mentioned before that the protocol has a as an automated dck auction system where tokens that should belong to participants that do not participate are auctioned off automatically by the protocol we think that groups that want to actively part participate in governance will invest certain resources to actually capture part of the voting voting power I think it's going to be a

combination uh but we also think that certain parties that want to connect to the protocol to do stuff like certain validators certain minor certain Distributors they might want to they might want to buy a seat at around the table because they want to protect their own network and I I really I really hope that we will have a combination of independent research houses other think tanks University type of researchers and strategics uh market makers or distribution venues that want to participate because they want to protect an infrastructure that they benefit they benefit benefit from and uh not necessarily Governors that want to buy

Limelight or actually they want to capture economic benefit necessarily that are emission by the protocol interesting so I think one kind of last question that I have for you is I understand that m zero is a base layer and that it's going to be decentralized but what do you hope slink it looks it should look like over the next like in the next let's say five years what would you in your ideal scenario have hope that mzero has achieved I think in five years mzero should should should have hundred billion do of value and I think it should

be um supported by a set of independent and independently flourishing Minter validators and collateral managers and I think that in the future while m0 as a network will remain because as a notified network will remain the base layer will evolve a lot lot and I mentioned before the fact that the MZ Labs company which is a tech company is working a lot to create tools for institutional parties to come and connect and do stuff with the protocol I hope that by doing that we will allow very large institutions to come and play

in crypto because we think sometimes that crypto doesn't care about certain characteristics but I think we are really not thinking big enough it doesn't carry in the current scale I think the current scale of D is probably one 1/8 of JP Morgan's balance sheet if we want this system this space to go to like 50x 100x it will care care and our ambition is to bring to help bringing this ecosystem from a defi perspective because we're defy nerds but the ecosystem as a whole ready to really absorb the financial Market of the future and um and this this is what what

we are hoping for what I'm hoping for personally is that as a builder I am currently CEO of the company of the labs company I hope that my governance weight for the m0 protocol will be immaterial in five years time and uh I hope that better and smarter and more technical technologically savy parties would have acquired the labs company and grew the LA the the labs company into really a Powerhouse of software as a service for Finch backand and that I will just exist in the ecosystem to keep researching and helping other teams to

do what I think crypto can do I'm personally not here for the quick Buck good a noble cost um is there anything else that you would like to mention to our listeners um specifically maybe the apis and the software that you guys are building I think uh from um from API and software perspective not much I think we would like to unveil progressively what we have been doing uh we focused on the mzero foundation with our website and starting to focus on Research uh soon we will focus on what another corner of the company is doing but what I would like to to to tell

people is very simply if there are listeners among you guys that are long-term thinkers and want to build for projects that are really very ambitious and they have the best of the best investors Builders and engineers in the space building you should call us because we are looking for people like uh like you and uh and you know a lot of people that I had the I have the pleasure to work with at mzero met me through my research because I was just I was recovering from a very very hard disease in uh in uh isolation and I started

writing research about Defi and that changed my life and I and I and I think it's very important to have other people that think and research and publish and communicate through channels high quality content because he might not Farm Twitter likes but reaches the right people out there so if there are if there are people like this in marketing communication building design business development engineering you should call me because our team is growing perfect I think that's it for today thanks a lot guys we have teamed up with the woro foundation stewards of the wormo protocol the leading interoperability platform powering

Crossing transfers for over 200 plus multi-chain dabs Wormhole isn't just a bridge it's the leading interoperability platform for multi-chain applications so go and claim your unique wormo nfts just for zerox research listeners today hit the link in the description to fill out a form and to prove that you've listened to today's episode and receive a PO app you get an email over the coming weeks to claim your limited edition nft [Music]