🟢 LIVE From The Nest: Arbitrum freezes 30K ETH, Odysseas, Sky Founder & Coinbase CSO Join

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Heat. [music] [music] Heat. [music] >> [music] >> 2. [music] [music]

We'll see you around the timeline. Feels [music] good to be back. >> I think The Rollup [music] is one of the most premier media brands in crypto and Andy and Robbie are great experts [music] at everything they talk about and it's my favorite podcast. >> Adding into my library potentially multi-chain deployments. >> We are at Connect Day [music] one here. [music] >> [music] [music]

>> Heat. Heat. [music] Heat. [music] [music] Heat. [music] [music] >> [music] [music] [music]

>> JP Morgan, Black Rock, DTCC, Fidelity, the entire thing was just institutions. It's just it's next level. This industry is going to the next level. And guys, I I don't know what else to say. I'm bullish. >> HE SAID IT. HE FINALLY SAID IT. So bullish. >> It is bullish. I'm bullish. We're bullish. [music] Heat.

[music] [music] Heat. [music] Heat. [music] Heat. Corola [music] is headed to the top. If

we're not already at the top, we're going to the top. >> Roll up is my favorite. >> People from all walks of life, all over the world, all over this industry [music] come together for the roll up. [music] [music] >> [music] [music] [music]

>> Zoom out. The institutions aren't coming. They're simply here. It's the golden age of crypto, guys. Get right. Let's go. [music] >> Welcome to the next. See you on the show. >> Welcome back to the tokenization tower. You're watching the rollup. We are here live in the nest broadcasting live from the financial capital of the world. Today's April 21st and we are live guys. I am on reream right now. I will see what you guys have to say in a second.

We are live. Shout out to Plume, the mass bringing onchain asset management infrastructure to the masses. They just put out a tweet today saying that they have scanned 40 million transactions in their sequencer, meaning that they are keeping track of who's using the chain. Today, Arbitum, actually last night, Arbitum put out a post announcing that they have froze 30,000 ETH tokens of the 106,000 that were hacked. Today, we've got Odicius of Philax Systems, a local security expert down there in Brooklyn somewhere. And we got Run, the founder of Sky, and Philip, the chief security

officer of Coinbase. guys. Um, gonna be a show today. Kind of following off yesterday's show. A little bit different today though. Um, not so focused on what's happened over the last kind of uh, 72 96 hours. A bit more kind of broad. You know, I've we talked a lot yesterday about what happened this weekend, why it happened. Now we're going to get into, you know, more of like what's to come. You know, we have Sky Run on. He's going to talk to us a lot about what they're looking at. Spark Lend has had a massive jump in terms of total deposits on their lending market and then obviously Odicus and uh Philip are going to talk more on the security

side. So let's get into today's topics. I kind of just went over it all already but today we do have uh our lovely friends here Philax stabled up brought to you by Fracks with Sky co-founder as mentioned Coinbase Cso also joins the show. We are live from the tower. Markets and weather coming up next. First, let me tell you about FRA, our local in-house stable coin partner building the infrastructure for the future of digital money, open, stable, and borderless. Guys, visit frack. Finance today. All right, guys. It is a cool cool 48° here in New York City. Uh, beautiful day outside. Actually, I did wear the trench coat again. So, Robbie,

if you're listening to this, I know you're still recovering from the wisdom tree or wisdom teeth uh surgery. Um, it is still officially trench coat weather, especially in the mornings. Crisp and clean, classic cool spring day out here in New York. The Knicks lost by one last night. Don't know how that happened. I was watching the game. They were up by 10, 11, 12 points. Came out very, very weak in the fourth quarter. Um, I imagine just down here I can actually see Penn Station uh was probably pretty hectic last night after the game. Let's get into the markets. Today's weather is powered by Relay relay.link.

All right, guys. Uh, it's green. Um, it's green. It looks good. It looks stronger than previous um days. Today we had Kevin Walsh, the new Fed chair, come out and kind of say that kind of some, I guess you could say, hawkish things. I don't know, it wasn't too bad. But yeah, I mean, look, this is holding on. Um, Hyperl is struggling. Um, we'll see kind of how that pans out. I think this whole security thing is getting getting everyone all riled up based on the onchain kind of security preferences and what they're seeing out there. So I wouldn't be surprised if some of these you know DeFi names kind of struggle a

bit. A is struggling a bit $10 billion lost uh in terms of TVL. Um Sky is not Sky doing well. Skye's up a percent today. Uh but yeah, if you if you look at that bottom ticker, kind of a mix of red and green, mostly a bit of red today. The big names here almost seem like they're just staying where they've been. Chain link near, etc. So that's the markets today powered by Zama, our local in-house privacy solution, encrypted assets onchain on Ethereum, confidential transactions as well.

Equities getting a bit of a pullback here. haven't been paying too much attention there um since the kind of big breakout and of course the the ups and downs of Trump are never going to end it seems. So all right guys, let's get into the news. Before we do, let me tell you about Near, our in-house local AI partner, the blockchain designed for AI native applications and autonomous agents start developing at near.org, near.com or near.ai. All right. So, Apple has named John Turnis as the new CEO, replacing Tim Cook, who will transition to executive chairman. 15

years for Tim Cook. Did an absolutely amazing job. The only push back that I've been seeing on Twitter is um the AI development on Apple's side as of late. uh that has not been competitive apparently compared to Gemini and Google. So Turnis is a 25-year veteran here. He will become the CEO as of September 1st, which is pretty pretty big for them. Um and yeah, I expect a lot of focus on AR, VR, nextgen product developments, and just different different new AI developments. So shout out to Apple, shout out to Tim Cook. What a run um

amazing run doubling down on hardware. Probably going to double down on Apple intelligence and Siri. I know all of us Apple users are probably wondering, you know, when that's going to improve. I think that's probably going to be part of the focus. So, all right guys, let's move on into uh what came out last night. Something that I think ruffled a lot of feathers in the community for good and for bad. So the Arbitrum Security Council came out and said that they are taking emergency action to freeze the 30,766 ETH being held in the address on Arbitrum 1 about $71 million. So this is really interesting that the hacker actually

kept this on arbitum and what as soon as the hacker went and saw that arbitum froze it, they started immediately pushing the assets on mainnet ETH through Thor chain, Umbra, and a couple other solutions to get it over to Bitcoin. Um the arguments here are basically around whether or not this is decentralized or not. And obviously this isn't this isn't an immutable action in the sense that this isn't a blockchain that is meant to be similar to a Bitcoin or Ethereum.

This is a stage one rollup. Uh the security council is is is a feature in this regard, but this is the first time I've ever seen a layer two like this get so deeply involved. And so what happened was there was a 9 of12 security council that chose to effectively freeze these funds. Um and this is a massive win for all the parties involved. Uh anybody who's worried about layer zero or a getting a loan, this is a massive massive win. This is undoubtedly the right thing to do in this situation. If you have the power to stop the DPRK and North Korean hackers and you don't

exercise that power, I think that is wrong. This is not this is definitely still like not DeFi. It's not decentralized. This is like multi-IG interaction from the security council. But that's fine. It's the it's the state of a stage one L2. This is why a lot of these chains have opted to stay in stage one rather than moving to stage two because once you do get to stage two, the ability to change things really goes out of the window. And look, man, I think Arbentro did the right did the right thing here. I think they undoubtedly did the right thing here.

I'm curious what Odicius has to say about it, what some of the other folks coming on today have to say about it. But I think they did the right thing here. And I think it's it's it's going to go down as extremely helpful to the entire process of getting the rest of the funds back. They only need to get 70,000 ETH back now, which means that A's loan amounts um that they're going out and trying to to source have came down. Layer Zero and Kelp's liability has came down. Obviously, the rest of the funds are gone. Unfortunately, those are being transferred over to Bitcoin.

Uh they those will not be frozen on mainet Ethereum. They will not be frozen on Bitcoin. Uh but I think in this regard, Arbentro did the right thing. I tweeted that the comments in that tweet weren't were like a mix of supportive and not. Um anyone who says otherwise is just playing devil's advocate. I don't agree. The only thing proven by this is that layer 2s are Trojan horse enforcement mechanisms that allow the tyrannical state influence. Stop a bad guy today. Sub subjugate the innocent tomorrow.

Okay, totally agree. The best Bitcoin advertisement from a shitcoin clown show. Okay, best move to be honest. Ethereum should hard fork to claw back the stolen funds. Don't know about that. Um so I mean look there's a lot of people that agree with this being a net positive for the space um and for arbitum and then people that are also pushing back on it. I expect that that's you know somewhat normal in these circumstances. So yeah I mean guys like Arbitrum Arbitum had a tough choice here. um they they were forced to induce a new question which is how much control

is too much control in these decentralized systems and they came out and answered what they think to be the correct answer. And so look man I think again if you have the power to stop a bad actor doing an illegal activity on chain it is your duty and responsibility to do so. And I think Arbitrum recognized that and they acted on that. And that's all I have to say about this. So big win for all of DeFi and for all the people who are trying to uh save these protocols and secure these funds. All right, let's move on into the next topic here. Uh getting off of this hack and all this news, [snorts]

looks like Anthropic secures a massive compute deal with Amazon. uh looking to secure five gigawatts of compute for training and deploying claude. I mean this compute war is just absolutely accelerating. It will continue to accelerate. I mean I expect um Amazon added also a $5 billion investment in this deal with potential to up to$20 billion. So yeah there is there is a lot here in terms of the compute race happening. It will continue to happen I expect and yeah I mean big big congrats to Amazon congrats to Anthropic as well.

All right let's move on. I think this next this next topic is just I mean this is the most classic crypto thing. Bitcoin is a sovereign settlement asset for 20% of of global oil and today maritime security firms are warning of scammers exploiting the chaos. So apparently there was a group of people who scammed a ship settling their transactions in either Tether or Bitcoin and then that ship proceeded to get fired at after they had already paid the amount to or you know the toll to get through.

So, I mean, come on. I mean, this is just I mean, come on. Let Let's watch this video here. >> Iran were talking about people can pay their toll fees on the street of hummus in uh in Bitcoin. >> Yeah. I mean, I I >> Isn't that quite positive for Bitcoin? >> I I thought that for me was like massive news. Um >> but just from a signaling standpoint, >> Yeah. Yeah. just like I I wrote in in my newsletter this week um like it's like a real sort of shifting of the Overton window, right? It's that moment of >> because again it's kind of the reason it's the reason they're looking at whether it ends up being used or not.

It's the reason they're they're choosing that as like kind of really the only neutral asset out there. >> Not even gold, right? >> Not even gold cuz gold gold still for settlement needs needs a third party for custody. So you need to trust someone. But then also with gold you haven't got like in terms of actually as a payment um mechanism bitcoin settles within within minutes. Um so >> it was I I I I think that's quite a big moment. Um and and to think to to think that that could be potentially facilitating 20% of the you know bitcoin is the currency potentially to facilitate 20% of the world's oil trade is huge. Now again whe whether who knows how that's going to play out.

>> I mean I mean I think a lot of this is going to probably end up settling in Bitcoin perhaps. I think the news that I saw about this uh kind of like scamming thing happened was actually in Tether. So the the uh Tether uh transaction was actually the one that was um misrepresented and then sent to this wrong person and then that they got attacked. Look, I think it's it's great for Bitcoin if it's being used as a kind of this neutral asset that was always kind of part of the appeal and of the pitch.

Yet to be seen what this means more longer term though. Um but yeah, interesting nonetheless. All right, let's move on here from the straight of Hormuz and from our lovely Bitcoin bulls into um I believe we have some quantum computing news. Quantum computing won't break Starknet unlike most ecosystems we've been building with that threat in mind since day one. Let's go ahead and watch this video.

I think um I think the these guys are pretty, you know, they're going pretty hard on the Starks being quantum resistant rather than snarks angle, >> which then brings us to cryptography. One of the main things that one of the main classes of mazes that the quantum computer can break are things related to a branch of cryptography. And now I just we won't go into details but in cryptography there are two huge branches. There are branches and problems which a quantum computer can break. And these are things usually related to a discrete logarithm or factoring. And that's one kind of cryptography. And if we have tomorrow a large scale quantum computer, all of

that cryptography just goes to the garbage can. It cannot be used. Okay. And then there's this other branch of cryptography that usually involves things like hashes like Shatu um and also some kinds of uh encryption systems like AES. And that part is not affected by a quantum computer. So quantum computer doesn't break all of cryp cryptography, but it does break a very big branch of cryptography, including things uh like ECDSA, which is a piece of cryptography that's used to sign Bitcoin transactions. So now we uh let's summarize what we said so far. If a quantum computer, which does not exist yet today, but if there was a

large-scale computer, a quantum computer tomorrow, it could break a large class of cryptographic systems, including the signature scheme that is currently used to sign Bitcoin transactions. Okay? And there's this other class of problems or cryptography that by the way includes things like ZK Starks which is what Starkware has you know invented and productized and uses uh to secure its network. >> Yeah. >> And a bunch of other things like Shatu and you know the proof of work used in Bitcoin. All of those things are not susceptible to quantum computers. So even if a large scale quantum computer emerges tomorrow those kinds of cryptographic primitives are safe.

things like ZK Starks, SHAT 2, uh, AES, they stay safe. Yep. Yeah. So, I think again when we had Murd on, he was talking about this transition from Snarks to Starks eventually and that how these Stark proofs rely on hash functions, not elliptic curve cryptography. Effectively, Stark has been working on this problem for so long and yeah, I mean just makes sense for them. It they this is like a very very strong marketing angle for them. Uh quantum resistant blockchains will rise in popularity as quantum fears increase.

Um [snorts] and now it's becoming a competitive differentiator for blockchains. The question is like can they actually export their technology to other blockchains and help them as well specifically larger blockchains. Um that is an answer to a question that I would be really really curious to see from Starkness side because I think that's something that the the the entire industry is going to want and need. And so yeah. All right guys, we're going to get into this exploit a bit deeper with Adius. He's coming up the founder of Philax Systems. Um, he should be our kind of local in-house security representative today. Um, yeah, I mean, he's going to probably explain to us

what happened over the last several I mean, it's really been a a series of 96 hours now or so. And so, yeah, I mean, we're gonna learn about kind of how he thinks this happened, what he thinks happened, and more. So, looking forward to this one. Let's bring him up uh and get this show started here uh with Adius, a friend uh first time on the show. All righty, man. Welcome to the show. Good to see you, man. >> Good to see you, man. Thank you for having me.

>> Yeah, of course, man. What a weekend, right? Or what a what a 96 hours. >> Yeah, right. I mean, the last past two weeks or three weeks has been insane. Started with a drift hug, >> now this, right? >> Yeah, man. And I mean what we saw I was I was asleep when Arbers put out their announcement of freezing the funds. Uh that's obviously a big contribution to the efforts here. I'd like to just start from like the highest level. Man, like I'm I'm I'm curious if you have any particular insights into really why you think this happened or how you think this happened from the security lens.

Just just kind of walk us through more of a high level and then we can get into some of the nuance here. >> Yeah. So it's it was a very sophisticated attack right they um Bante which is a you know very famous developer the community and security researcher had a very nice analysis where basically the attackers were able to infiltrate inside the trust boundary inside the systems of layer zero and basically replace uh the RPC nodes that are used as a source of truth for messaging with malicious binaries with a malicious version that were used to create these fake messages, right? It's it's a very sophisticated attack >> and layer zero was basically saying that

it was a RPC that was compromised, but it are you're pretty certain it was more of the internal system. >> Yeah, exactly. They are running the RPCs, right? So, it seems that they were able to infiltrate their systems um and replace the RPC nodes they run, right? They don't uh it appears at least from the communication they were not using an external RPC provider but they were running their own RPC nodes. >> Yeah. Yeah. But the the kind of question that people are asking and that I'm you know also curious about is if that oneofone DVN was taken down right internally why were the other I don't know 40 to 50 DVNs not taken down

>> that was the most EV um the you know probably they calculated right and they say okay we have access to the system what is the best attack we can carry out right what's the most money we can extract And they calculated that well if we uh we go through this route through this restaking token and then we can use a to you know take the loan right uh the calculate that was the most profitable attack because the more you know tokens or the more uh tokens they attacked right this would raise the probability that the alerting systems they have they could they would see something >> but it's interesting that I think if they really want it. They could spoof probably tens of

right and create havoc like 2008 havoc in DeFi >> and they didn't. >> Yeah. Because they don't care about, you know, they prefer to not kill the cow but just extract as much milk for as long as possible. >> Yeah. So, are we certain this is DPRK? You think? >> I mean, it's too early. Um but this the level of sophistication tracks with uh a state actor was a very sophisticated attack because not only they uh replace the RPCs but they also um you know dosed the honest RPCs to make sure that these were not able to

offer honest answers and also they um they they the they manipulated the observability stack and they removed logs afterwards such that it takes more time to identify the root root cause very sophisticated attack. They had >> root level access probably. >> Yeah. So at FileX you guys do a lot of work on kind of preventing exploits before they happen or helping after you know I guess like this is a silly question perhaps but like how preventable was this from you know in hindsight how preventable was something like this?

So you know an obvious first uh way to prevent this is to have multiple sources checking for these uh bridge messages right because all the bridge hacks that have happened effectively there is a very basic rule that breaks right you have a dep you have a withdrawal on one side without um the deposit on the other side right so if you have an external system uh that uses completely different stack and completely different technology to track this very basic accounting then uh this could have been prevented and all bridge attacks actually. Um the second thing uh and you know this is where secret breakers become very

interesting is that you can limit the spread of the contagion right uh because now we're having bankrun on a >> yeah I mean I had um Rob from Dragonfly on and asked him about rate limits yesterday. I think you you saw one of the clips there and you know he he basically said that in in traditional systems they've been using these for you know forever as a way to help retail as a way to prevent uh you know massive large scale liquidations exploits etc.

And so I is part of your vision for where DeFi is headed is is it more akin to traditional systems? Like what what would rate limits actually look like in these systems? >> Yeah, I think it's interesting because in traditional finance, we use this rate limiting for financial types of events, right? A stock drops 5% in, you know, five minutes, you you know, you pause the market and then you reactivate it. you don't really have securities issues because you have long sentiment, right?

Worst case scenario is it's expensive, but you have a couple of meetings, you go back and you modify the ledger. Um, in crypto, a hack is a physics event, right? It happened. Um, and you know why these are institutions are coming on chain is because they have instant sentiment because it's more capital efficient. But this efficiency is also what's causing all so much pain now and why security needs to be top of mind is because you have instant sentiment. You can't drop into a meeting and and fix it. Um so I think uh yeah circuit breaker is going to be a vital piece uh of the security infrastructure such that

you basically say if there is an abnormal outflow outflow or inflow of funds you know stop it and then ask questions later or maybe you allow certain parties to do that like maybe market makers who who are trusted to perform a lot of you know movement but if an unknown address does it then you don't allow And is that something that you guys are working on on the file side is kind of implementing these types of rate limits and circuit breakers into DeFi? Like is that at a smart contract level? Is it at the account level, protocol level? How how would that actually look?

>> Yeah. So with the EVM, you know, you have a very constrained environment naturally. So there's not a lot of things you can do. So our approach is basically doing that at the network level. So implementing technology that runs at the network level either the sequencer or the block builder and surfaces this extra functionality to protocols uh like a to leverage uh to protect themselves and so at the network level you're able to actually have like for example there's some products that do like KYC and AML scanning at the sequencer level for L2s.

>> Yeah. >> Right. Like that's something that I've heard about and seen it. Like Agora has I think $10 million rate limit on some of their stable coin uh side of things. They came out and said that guy from Athena came out and said that that they've got these kind of preemptive measures already. It it kind of just seems like a failure on the part of of the teams involved to have this not already implemented. Yeah, it's it it gets complicated because on the token level, if you just have a token, maybe you can do a very basic uh circuit breaker, but when you have a complicated protocol like a lending protocol or a DEX, um you need extra functionality to make the circuit

breaker not trick all the time >> because it's natural in these environments to have you need something smarter, right? You need to have more um logic that decides when to circuit break or not. And this is where we come in. >> Okay. And so this is like if X like it's a very conditional kind of operation like okay so like if this capital amount is deposited or if this amount is withdrawn or if this event hap it's it's like a very if then conditional logic basically for these real limits.

>> Exactly. But uh custom to every protocol, right? So we make it easy for the protocol to express conditions that are not possible on the EVM. Um, yeah. And that's how you you end up in a system and I think that's important that's credibly neutral. It's aligned with the with the clarity act because if you have KYC IML then um it's not really decentralized and then probably you will be regulated as you should. Well, that's what Arbitrum found themselves in when they made this announcement was, okay, look, you know, the argument is if you have the power to stop this and you don't, then you're, you know, effectively complicit.

Um, and if you do stop it, then you raise the immediate question of like, all right, well, this was never a decentralized system anyways. And then people are like, well, it's a stage one rollup. It's supposed to be able to do these things. That's the whole point of being a stage one rollup. So there's kind of two sides to this. Where do you where do you think the the proper answer is here? I is is arbitum freezing the funds a sufficient enough kind of way for them to step in and stop what's happened on on their chain without kind of losing users trust? Did users even care anyways? Like what's your what's your reaction to to arbitum freezing these funds?

[sighs] >> It's a very complicated question. Um I think if you if you can do it you should do it. Um but at the same time this is going to circle back right because with the clarity act specifically there were a number of rollups and they were making the point that you know we are mature blockchain systems we are digital commodities we're decentralized because we have the forced inclusion forced exit. um when they try to make this argument again in the future, >> uh the incident today will be used >> to tell them you're actually not as as decentralized as you're saying.

>> Yeah. And I mean they didn't really I don't really think they had a choice. >> No. No. When you have so much you have everyday's people money at stake, >> um you you know it's not ethical to say um you know this is this is life, right? But ideally we create systems and I think you know there was a similar discussion about circle with drift right >> I think it's you can make an argument that circle should freeze funds only if the space has done everything they could on security and we're just talking about extremely edge cases that are impossible to prevent but the reality is we're not so I think it's too early to you know

perform this type of surgeries with uh butcher knife as a preventative measure. I think we should first you know invest more in security tooling like circuit breakers u create more preventative measures and then um have that as a a result of because you can't have circle policing the the DFA space right that's the security model >> yeah I mean they got a lot of they got a lot of push back for not stepping in there on drift >> yeah and I think personally that's my personal opinion I'm going to get a lot of hate hate mail for this. But I think they made the right choice >> because once they stop saying well court

orders then further down the line and maybe not that much further um law enforcement agencies can ask them for other types of freezing. Right. >> Right. At least with arbitum you have a credible decentralized you know security council multiple parties involved and also it's a very complicated technically thing to do right so asking them to do it they have arguments in favor of saying well guys we just performed open heart surgery >> we can't just do it whenever >> yeah I just pulled up Steven's tweet uh the co-founder offchain labs and he says um the sequencer has absolutely no power to move funds and was not the one who

acted here. It was made entirely by the Arbitum Security Council, a group of 12 individuals elected by the DAO, which requires a 9 of12 vote for them to agree. And for many, the ultimate goal is to get rid of the Security Council entirely, but this is complicated. Um, >> yeah, >> it is very complicated. >> Yeah. I mean, they must have been in the war room talking about the political, legal, regulatory, financial, like the combination of all those factors. They they all kind of step on each other's toes in different ways.

>> Like the most obvious >> Yeah. >> There's no good decision, right? There's no there was no good option. There was only bad options and just identifying the least bad one. >> Yeah. So, where do we go from here for for the rest of these funds? I think a is trying to work on getting some loans. Um, I think obviously Kelp, DAO, and layer zero are kind of pushing back on each other in in the public landscape. Kind of like how do you how do you anticipate this resolves? Users are still frozen on a across multiple chains. There's a couple L2s specifically that are going to be on the hook. Um, Mantle put out a statement this morning. How do you how do you anticipate this kind of resolves?

And I you know I'm curious if you have any thoughts on how long you may think a's markets will be frozen. >> Um I'm guessing that everybody's trying to find a lender of you know last resort to give them the money to recoup the some of the funds. uh you know a is having a bank run and everything is frozen and and it just shows how how much of a systemic risk we have right because in a even if you were the most safe deposit uh the most safe position you're frozen in them right um I expect it to be weeks especially seeing how most you know both teams are pointing fingers at one

another um you know you you definitely have lawyers involved so all the communication we're seeing are airtight from a legal perspective. Um I think it's going to be ugly. >> Yeah. Yeah. So just from the Philax perspective about some of the work that you guys have done um I know that you guys have done some exploit prevent uh prevention on Lineia and some other chains. maybe you could just explain some of these stories um kind of like how you guys stepped in and what that process actually looks like for other chains other protocols and yeah just would love to hear some of those

anecdotes. Yeah. So we are integrated with Lineia. Um this was the first network, a great team. Uh they're taking security very seriously. Um and basically there we had um it was an immutable contract where um because of a misconfiguration of a front end uh users were allowing an immutable contract with their funds which means uh a drainer started taking notice of that and then the drainer would just call uh the immutable contract and just take the money from the f from the users right so we work with zero x um and we added an assertion an envir variant on that contract even though it wasn't Zerx uh vulnerability, right? They they went

above and beyond to protect user funds even from an external integration. And now whenever transaction from the drainer tries to hit the network uh to drain a user um it stopped right the the software just sees the transaction runs the policy sees the policy is uh implicated and then it doesn't allow it right and 0x was the only party that could add this policy so the system is very um decentralized right only the protocol itself can add policies to itself uh and we stopped hundreds of transactions, the the drainer is really not taking the signal. [laughter] >> Yeah. And so they keep trying to put

these like malicious transactions through and then you guys are able just to block them at the >> sequencer level. Yes. >> At the sequencer level. >> It's not even us. We just provide the software. The software runs within the trust boundary of the linear sequencer and we just coordinated [clears throat] with uh Zerx to add the right policy. Um, it's completely out of our control. Even if we wanted, we wouldn't be able to stop anything. >> Yeah. Wow. So, you think it's going to be weeks of the frozen funds? >> I mean, unless someone jumps in, maybe we see Tether doing another leveraged buyout. Um, yeah, like it seems the parties don't

want to work it out, right? They just shifting blame. there is um because there's a lot of legal um liability right like even if after a hack you know that the the people I I don't think know that even after you have a hack >> and even if you survive it as a protocol as a team you are bound for life the moment the protocol succeeds again even if they manage to succeed you you can they should right that's what they're fighting for it's not just covering the money but it's all the possible future litigation they will receive the moment they get any kind of revenue.

>> Yeah. >> What I mean I think all the loan part from a is b is going to be based on paying them paying that loan back on future revenue kind of what happened to by bit. >> Yes. >> I I I think it was less so on like the I mean you raised a good point. It's more on on the legal side. I was just thinking purely financial. It's a loan that's going to be paid back over time ba, you know, based on a revenues basically. >> Yeah. Um but a is probably off the hook from a litigation point of point of perspective, right? Because they're just running the market. The real question is who will who will take the blame? Either cable or layer zero >> and then when they do that all the

future litigation they can receive, right? Maybe they succeed, they're doing great, and two years they're hit hit with a a group lawsuit. >> Yeah. >> Right. That that's why you see, for example, uh whenever there is a hack, if they can't recoup the money, usually the legal vehicle, the the development company, uh is disbanded. >> Yeah. And that's probably more something that Kelp and Layer Zero are actively thinking about then and that's why you see that the like the way that their comms are structured.

>> Yeah. Because you have it for life. >> Yeah. >> Like even if you succeed, you find the money, you make people whole. Uh you're open for litigation for life. >> Yeah. Wow, man. [laughter] Well, Adis man, um I'm sure you're busy. I know that there's a lot of security conversations going on between different people who believe different things. So, thank you for joining us. Uh quite a quite a sombering 96 hours here in DeFi. We'll continue to monitor this as as basically the this evolves. I mean, we're seeing now each day different parties come out. I anticipate that a lot of like the major major

announcements and major moves have been made. Now we're really just waiting for how the socialization of these losses are going to come out. >> And we still don't know the vert how layer zero has not yet shared how the attackers got access to their systems internally. That's a very important piece of information we don't know yet. >> Yeah. Well, to be continued. Adis, thanks for joining man. >> Thank you so much for having me. >> Best of luck. All righty, [cheering] man. >> Wow, guys. I mean, goodness, goodness, goodness, goodness. DeFi is in a very, very interesting place as we kind of navigate this situation. I mean, it has been it has been a very very very

hectic last couple of days. Um, for those who are sitting in a waiting for their funds, I mean it is it is very very tough. It is a very very tough situation to be in. Ladies and gentlemen, we've got Run Christensen, the co-founder of Sky. He's going to join us to talk uh USDS Sky Moore. We're going to take a super quick break, get Rune in, and we'll be right back, guys. This should be a good one. We're going to talk about what's going on with Spark, what's going on with Sky, his take on DeFi, on DeFi, and more. We'll be right back, guys.

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We get We get deep. We get deep. >> [music] >> Welcome back to another episode of Stabled Up, our premier weekly show covering the ins and outs of digital dollars, stable coins, and the future of decentralized finance. >> Show is made possible by FRA and FRA is powering the financial engine of the internet, powering FRXUSD and genius compliant stable coins. This is the stable coin super cycle made possible by FRA. Now enjoy Stabled Up, our weekly stable coin show.

All righty guys, welcome to Stabled Up episode number 28, our premier weekly stablecoin oriented show powered by our friends at Fracks and their FRXUSD product. We've got Rune Christensen here, co-founder of Sky. Run, what a 96 hours in DeFi, man. >> Yeah, it's uh another day in DeFi, I guess. >> Yeah, indeed. Indeed. Um, where do we start here? Well, run, I mean, I would just love to just get a bit of your perspective. Uh, we'll start on kind of this exploit, what happened, transition this convo into just kind of more broadly stable coins, USDS sky. Starting on this exploit here, I mean, initial reactions, thoughts. Um so much has

happened from arbitrum uh earlier today with Kelpa's statement layer layer zero statement a statement kind of finding out what actually happened run I mean from your perspective um what went wrong what happened here and um just any immediate reflections and lessons here >> yeah I mean I think first of all it's pretty uh it feels pretty uh shocking right that it happened so close to the drift incident which was I don't know feels like that was like two weeks ago or something almost you know that that was very recent as well and uh I mean my understanding was that this was a pretty deep attack into the the

the you know the off-chain infrastructure of layer zero combined with basically uh suboptimal configurations on the smart contract side for both uh kelp and then a which which led a lot of these uh assets basically then get sort of cashed out. Um, but ultimately like I mean it was just it's still like it's it's still quite surprising to actually see this kind of attack where North Korea like literally got onto like sort of very deep into the systems of a to my understanding like quite security focused uh organization like layer zero and I mean a lot of the sort of fear

that's that I'm sort of you know that I've been sensing recently is this like fear around AI powered uh hacking basically and and attacks on DeFi. And I I I think I remember from one of the statements that there were literally there literally was this mention of like that there were you know this could have been somehow AI accelerated which of course I mean yeah I mean it's you can't really tell I guess necessarily and and on the other hand every export always like it always happens because there's some kind of mistake made like you can't have you know AI systems can't just like literally like hack something that is like built fully correctly just through magic. So it's not like everybody should be really scared and like expect you

know anything to blow up any moment but definitely like I think across the whole industry I mean already following the the drift hack to some extent everyone is just realizing like North Korea is watching you know they are running you know 100 agents scanning your protocol right now you know 24/7 they're looking for every single possible vulnerability and everybody must just be prioritizing security even greater than they were before, right? That should have been priority number one already, but now it needs to be sort of an even bigger part of what you're doing is just basically everybody should be just keeping all of the money safe looking for every single uh attack vector and and uh basically fix it before the the agents find it.

And I think Run, one of the other kind of preemptive points that you made was around this idea of the political post exploit dynamic between protocols and voices in the space kind of almost operating without a I mean really without a plan, without a kind of emergency plan. And you know, you kind of wrote about how you think this is something that Sky should really work on and think about and anybody should think about. You know, I I'm curious kind of what you think about how how a protocol is or a you know, community here, right, of the of the shareholders of the token holders of the participants of any given

ecosystem should think preemptively about designing a post potential post exploit u command system or you know a line of fire as far as like you know XYZ is to happen. How do you think about this? What is your kind of ideal uh end outcome for for for a company like Sky or others who you know maybe face with something like this in the future or perhaps not. But of course always being careful is better than um you know not being >> Yeah. Yeah, I mean I just I think that I mean I think a lot of people have been mentioning this, right? That in many ways the damage done to the DeFi industry from the uncertainty around this might actually been greater than

the loss of the hack itself just because you've had like several days of this like completely unprecedented sort of liquidity seizing up. And it's kind it's as if it's like the great financial crisis and uh the mortgage back securities just turn out to be worthless and so on. But the reality is this is actually I mean sadly for DeFi this is not a like this is a it's a big hack sure but it's not like it's you know a similarly sized hack happened like a couple of weeks ago right so the real problem here is actually just that there's a lot of you know it it brought a lot of systems into uh sort of states uh they were not prepared to be in where suddenly there's this like uncertainty around what is

this you know like sort of shreddingerous collateral like you don't really know if it's worth anything and then you can't run liquidations and you can't sort of you don't know if is it going to be a bailout or not and all of these things like all of the uncertainties just just results in everybody sort of being more conservative and basically not taking action and that can just be incredibly bad for interconnected financial systems because they're all about liquidity. Once you remove the liquidity, it's just like it becomes very very damaging and harmful. And you have like users like loopers that uh can be sort of really, you know, that sort of depend on the ability to to to jump in and out of positions and just like a lot of damage being caused by uh the uncertainty

rather than the the uh the incident itself, right? It's like the classic like um you know we have to fear fear itself, right? that that actually the this is itself a very harmful thing. Uh but I think there's great news like I mean I think the the fact that the arbitum assets were frozen and there's some indication that like even mantle which is a completely uh you know external project is like stepping up to actually help and try to backs stop this. I think that's going to like you know these kinds of of of uh of movements is something that at least if I was a uh like an affected DeFi user I would feel you know that would be something that would sort of be

comforting in the sense that I would expect that this type of stuff is what's going to lead up to some kind of I mean some kind of resolution uh happening because the momentum and like the goodwill shown is going to make it a lot easier for everybody to come to the table and figure out how to basically resolve this instead of what I think there was some fear of in the early days which was some kind of like total PVP uh lawsuits everywhere everything is frozen for months right which would just be so bad for everybody so I'm very happy to see that there is this collab like that that there is this like um likely collaborative uh solution and hopefully uh things can get sort of uh fixed and and recovered before it gets completely out of hand

with the damage from the liquidity issues and the fear here. >> Yeah. Um the staked USDS APR or APY to supply on Sky hit upwards of 25% in the past 24-ish hours due to large people withdrawing. I is this a is this a a general broad riskoff sentiment thing? you know, maybe you could just explain the the dynamic behind this kind of yield ratio and and and how the sky asset is involved here. Um because I think there's generally just this kind of riskoff sentiment happening as you're as you're you know explaining here the

fear being more problematic than the actual event itself. Uh you know clearly this is a very high yield opportunity for uh USDS holders. What's happening here? Well, okay. So, maybe I should just first explain SDUSDS and sort of the the broader landscape of Sky um products. And I mean, so Sky of course is it's primarily known as a decentralized stable coin protocol, right? With USDs, that's the largest yield generating stable coin, the third largest stable coin in the world. But actually Sky has like a lot of financial primitives, a lot of building blocks uh for different financial use cases and you know famously the Sky agents that are just enabling really a lot of stuff to happen

within Sky. Uh even though it's like one ecosystem, it's it's you know it has the ability to sort of do a lot of different things all at once. And then one of the things that this that also really uh enables basically the the ability for Sky to to um to basically be very flexible and very complex in in the types of things that are possible is uh risk tranching. So basically uh you have sort of multiple different types of uh financial products that that sit at different layers of what's called a capital stack. So basically, you know, like if you want to take like basically I mean I guess what people are used to in in crypto and DeFi is usually like well here's the safe project so I can

put my money there and it's like low yield and low risk and here's the super risky project and then if I put my money there it's like high yield and high risk. or the sky. There's actually like you know you can hold SUSDS that is like you know absolutely optimized for risk adjusted return right it's like the definitely the most uh proven best lindy uh like stable coin uh product with a really really reasonable uh rate of return right right now it's at 3.75% which is actually 10 points above sofur which is you know a lot of people dunking on D5 to not for not being able to beat TR Right. But >> USS does in fact still uh beat Trafi and is very much highly risk optimized.

Right. But with Sky, you can also use a product like STUS, which is a sort of, you know, it's a higher risk token that is still uh that still has this link to the US dollar. And you can actually go even more, you know, higher risk and and buy something like SPK, right, which is then a, you know, a completely volatile governance token of of one of the Sky agents. But so SUSDS uh because it's a risk token and it's explicitly like marketed as risk capital uh you know it's like um it's for it's for advanced users right because it has higher risk.

It's not just a stable coin that is designed to to you know protect you uh above everything else. With SDUsds it's also about being able to offer a higher rate of return. Uh and one of the things that one of the consequences of this is that uh it can have its liquidity it's its onetoone uh liquidity with USDS frozen when there's a lot of withdrawals and that did happen for about I think for maybe for 24 hours maybe a little bit longer uh right as the big uh crisis and the initial shock occurred.

Sorry but actually uh the liquidity returned actually quite rapidly. >> Yeah. So, and this is also a very good uh sort of story about you know and and I think this should be very encouraging to everybody in DeFi that because uh Sky is sort of the the protocol that has really optimized for security right we've always been focused on security always focused on risk management this has always been on messaging right has always been how we sort of built and conducted uh ourselves in the ecosystem uh and as we as as the products were marketed from from uh yeah from the Sky Frontier Foundation from all the Sky agents as they market their individual

products right and that really paid off in this crisis because you got a sort of like partially like a flight to quality right where so SUSDs is something like I mean it wasn't affected by this at all but people just risk off they're scared and then they're like yeah >> at first they pull out the money but quite rapidly uh they basically put it back in because um you know they got to have assets somewhere and if they're not ready to completely leave leave uh the onchain world then what sky has to offer is sort of at this point very right it has a lot of lindy effect it's quite uh trusted >> yeah no I mean for sure and I think you know we've seen a kind of transition of capital or a shifting of capital into

one of the uh stars as well being spark I think has got a ton of deposits and you also mentioned and you got some push back for this post about U Sparks SPUSDT being one of the few USDT yield products that uh actually stayed fully liquid during the market stress. Maybe you could just explain why that happened and um you know what what the dynamics of that SPUSDT uh stable coin yield product in Spark is and why wasn't affected.

>> Yeah. So well so similar to what we just talked about with ST USDS which is like a one of these like it's a >> a D5 yield product uh you know I mean the basically there's the the the two bread and butter primary types of D5 products that exist are USDC vaults and USDT vaults right so basically where you can put your USDT you put your USDC and get a a return on it and typically USDT uh products tend to have an easier your time like they tend to more easily run into liquidity issues. Uh why exactly that's the case, I'm actually not 100% sure. One of the reasons might be because of the Sky PSM because Sky has like gigantic amounts of USDC liquidity

and this might generally help uh kind of deal with users moving in and out of of uh getting a yield on the USDC specifically. But because there's no um USDT PSM in Sky uh although actually there is an ongoing effort to increase USDT liquidity actually in Sky but but currently there's not nearly as much USDT liquidity in Sky as there is in USDC and I think this might be one of the contributing factors to USDT generally in crisis events like this. uh it can it's it's often much more easy for the USDT pools to dry up and the USDT to get stuck. Uh and this like happened across the board. Uh I think in

all of DeFi actually, you know, there might actually have been, you know, I can't actually be 100%. I didn't literally verify this myself, right? But from all the major pools I looked at, the only one I I saw that that never uh seized up even once uh was the SPUSDT uh spark pool. And I actually heard from some of the contributors that Spark was like actively managing this and actually losing money just trying to maintain that liquidity uh in this like sort of throughout the the event right as there was like a sort of a run on the bank across the the the whole uh ecosystem.

And in my opinion that was like a really clever move. So even though it cost them some money to to subsidize this uh it will I think it will have really really uh bought them a lot of goodwill. Uh and that's because I think if you I mean so somebody like me I mean I'm I'm in DeFi 24/7 right? So I all the time DeFi finance, you know, asset liability management, like I'm pretty it's not a surprise to me that your USDT can get s stuck in a D5 pool. That sort of seems like this is this is some of the most basic stuff that's like yeah, that's one of the risks you accept, right? But for a lot of normal people who who try this kind of stuff, I mean, if if it's crypto is already scary, right? It's already

hard to understand. And then your money is suddenly stuck and you can't get it out, that's really going to like affect you emotionally. And I think uh you know like the price of of not giving your user that shock where they maybe have a day where they think maybe they will lose their savings or something like the value of that is is is really priceless in a in an emerging market like DeFi and crypto right where it's all about like establishing that that brand and that sort of market presence. And I think the fact that the the Spark guys they they actually made this decision and they sort of really doubled down on investing during this crisis in order to build uh their brand and and build build trust

with their users for the long term. I think that that must have really paid off. And I also want to highlight how it's quite, you know, unique and sort of very Yeah, it's like very unique to to um to Sky specifically, right? That as a sort of as a Sky agent, right? They're like a sub component of of Sky basically, right? They exist inside the sort of broader Sky uh ecosystem running on Sky protocol rails and everything, but they still had enough flexibility to build a system that let them do this. Like I wasn't actually I wasn't even aware that they could they could even do this. So I was like surprised like how do you even pull it off and they were like oh this is you know we use these primitives and then this way we were able to to do it right and I think

that's that's really cool right that you can have this uh you know the overarching like standardized risk management security and processes of Sky and then they were able to basically put it together into into some very useful features that really paid off uh in this moment of crisis. >> Yeah. Yeah. Yeah, and I think it's it kind of goes to explain some of the risk management choices holistically within, you know, the Sky ecosystem and obviously been prioritizing ETH, staked ETH, a lot of RWAs to backed USDS and just kind of very, you know, uh, more like what people would call pristine collateral over more exotic collateral.

you know, I'm curious how your general view of collateral backing has changed as a result of this RS ETH uh kind of uh exploit here. Obviously, you know, we've even seen Athena come out as of late and say that their sole basis trade backing for USD is not what their future is going to look like. They're, you know, the they're looking at other RWA collateral, the basis trade on commodities, etc. uh you know I'm just curious following this this event has your view on DeFi native versus kind of more RWA or TRDFI if you will collateral um has that view shifted changed is it staying the same kind of generally how

is your viewpoint on the way DeFi should be thinking about collateral and the types of collateral uh you know changed or has it been just further reinforced? >> Yeah. So I mean so Sky is at this point it's uh I guess a more it's more than 11 years old right it's the oldest D5 protocol it has maintained stable coin products without ever suffering any kind of loss or major instability for almost nine years and uh so end to end the protocol has had no security incidents of any kind for more than six years and this is all because the whole time what

Sky has fundamentally always obsessed over is security, risk management, you know, what's going to happen to the collateral, right? I mean, that's what has kept me up every single night for the last 10 years, right? Is just thinking about what what if something happens to the collateral, right? And uh I mean and so what the kind of I mean the kind of things that have been happening in DeFi lately uh despite it being very shocking and You know, even to me it definitely makes me feel uncomfortable to see sort of big hits being being taken sort of left and right like this. Like none of what's the types of things that are being exploited and the kind of things that are going wrong right now is not actually at all the kind of stuff that I'm scared of in

the sense that it's all preventable. like you know this recent RS ETH situation uh you know doesn't at all teach us anything new in Sky because that's that's been very clear to us for for many many years right that you you shouldn't uh you know you shouldn't do that kind of stuff right you need to have a lot more clarity about the security setups of these types of assets and even just generally uh the degree to which you can I mean use these like highly complex assets like reststaking and so on. It's not really uh something that that is allowed um very much or at all in in Sky because it's just not like it and it really

comes down to like the uh the risk adjusted return. It's just not worth the trade-off or the risk to to use these kind of assets generally. But in order to understand that you need to have very advanced like risk management uh frameworks and capabilities and and monitoring systems and so on. And uh I think about 6 months ago actually in Sky we we got we we managed to kind of uh really increase our risk management capabilities and risk assessment capabilities and we actually from that realized that even though we had been obsessing about risk for so long and we had been building everything to be low as low risk as possible uh there was still like we actually realized we were definitely

overweight on on the level of risk the protocol was carrying. So actually for the about the last six months like Sky has been consistently in this like deleveraging risk off uh just like simplifying the exposures reducing um uh you know like yeah like just reducing sort of the bulk of like concentration into some of the more I mean I would say some of the more sort of interesting assets right that originally was the kind of stuff that I mean it still is the kind of stuff that makes Sky really unique uh like it you know for instance it's backed by by CLO ETFs Yeah, >> which are quite interesting assets. But >> uh about 6 months ago it was determined that that it had gone a little bit too

far and and that was the kind of stuff that that then has been had the exposure quite decreased. Um and yeah, like I mean the the crazy technical stuff like yeah resticking and bridges and that kind of stuff. I mean that's something uh Sky has had a very low tolerance to that for for for quite a long time uh already. Uh I think honestly in the end uh the really big takeaway for me from this actually to the earlier point about like uh understanding the fallout of everything in advance is really like there's got to be you know there's always got to be like a clear protocol like a clear rule set for what happens if a bridge gets compromised like that's got to be you

know and I mean I think by default I think the simple answer probably should be you got to make it really clear to the users that choose to use a bridge that they are taking on additional risk that applies to them only. And on the contrary, like the mainet users, Ethereum mainet users that are consciously, right, they're choosing Ethereum mainet because they want to be safe. They they need that reassurance that you're not going to get contagion from other users that choose to to use a bridge, right? And uh but I mean this is of course this is kind of one of the major things that are being really examined >> in Sky now as a consequence of everything that happened. So you guys just pushed a native deployment of USDS and S USDS onto Avalanche using this

kind of Skylink technology. It's already live on Salana. So you guys are obviously pushing a multi-chain strategy forward as well. How do you how do you avoid the give the kind of native issuance problem when it comes to Ethereum being kind of the home and you've got these other chains but there are other security practices, models, validator sets, sequencers. How do you ensure that the representations of USDS and SUSDS across the broader multi-chain or uh you know crosschain ecosystem also remain resilient. What does that look like for the users on other chains of Sky assets?

Uh I mean so definitely uh something that uh that has been like a core tenant of like the the Sky like Sky approach to to multi- chain for quite a while is that it must be built I guess you can say in-house. >> Yeah. Like there used to be a time where you know there's where you'd have other projects do bridges and you'd have these like I mean you also have you have the example of like USDC right where sometimes you go on on uh on like multi-chain uh blockchains and they will have like multiple different versions of USDC because you have kind like different bridges doing different versions and that's something that I believe I mean I think later uh it you know

I found out or I believe it's like it can be quite risky right you really don't want your product and sort of users that that you know like I mean let's say users that want to use USDS and then somebody conveniently bridges USDs somewhere and then it's available and then you get this organic adoption that sounds good in theory but in practice that can actually be a huge mess and very dangerous because once you have that adoption going it could be difficult to actually then transition it uh and if you can't easily upgrade the bridge uh it could be a huge problem if the bridge turns out to not be very secure.

>> Yeah. So actually Skylink was this uh this innovation that was basically designed to ensure that you only do USDS bridges and you only do multi-chain USDS uh when it's built following the Skylink standard which ensures that it can be upgraded by Sky governance and there's not going to be like external multisc or external parties that that are involved in the I mean potentially the management of this or the decision about how should it be upgraded or what to do in how to set the the safety limits and so on, right? That should all be uh something set by Sky core governance.

Uh and yeah, I mean that that part of the the strategy I think was totally correct. I think now again what what probably needs to be re-examined by Sky and everyone else is like just how you know just how strict should these limits be and they should possibly be stricter than uh people were expecting up until this point, right? Because you really want to avoid again this kind of situation where a loss occurs and it's big enough like an event happens and the the the the security incident is big enough that it creates this concern and fear of contagion and things start to like to

seize up and that's just a very bad thing. You really got to enjoy like got to avoid that at all costs. >> Yeah. Yeah. 100%. Um, we're kind of getting into a more of a forwardlooking environment here and conversation. Interestingly enough, the new Fed chair Walsh came out today and had a, you know, bit a bit of a speech about his policies and his views. And ultimately, I think it's it's decently certain that we're going to get at least one, two, if not three rate cuts this year. Probably just 25 bips. Um a lot of the stable coin products and and use cases for yield are directly derived from treasury bills and T bills from you know

shortdated assets in um you know these ve you know very very safe very liquid uh opportunities on chain and so as you mentioned earlier in an earlier point there's this rhetoric right now that DeFi um is less yield than this the risk-free rate uh with a lot more risk. A and I've kind of got this like inverse thesis here where as the macro Fed rates decline more speculative activity picks up onchain driving the de demand to borrow stable coins driving the the yield to lenders up and the opposite happens in environments kind of like now with you know somewhat elevated rates

and lower rates on chain. Now, obviously you guys have a special kind of situation here, but that is what begs the question, you know, in an in a in a lower rate environment coming up, even if it's just 50 bip 75 bips by the end of the year, you know, you can kind of see that the administration is pushing this forward that the Fed wants this. Obviously, Trump is, you know, screaming about it. I'm just curious like how much of your strategy changed from a collateral perspective, from a yield perspective, from an expansion perspective when you have a lower rate environment versus a higher rate environment. Um what you expect from users, what kind of uh you know anticipatory measures you may be taking

as a protocol or maybe none at all and it doesn't really matter. Just curious how you think about the broader macro Fed interest rates as it pertains to the value prop of something like SUSDS on chain. Yeah, Sky has been engineered carefully to be able to handle whatever macro environment uh it it finds itself in. Uh and I think actually I mean to some extent as rates go lower uh increasingly uh credit spreads get more important. Um, so basically it's, you know, it's no longer enough to just be able to sort of like deliver the

yield. It's like you got to be more you got to be able to handle more complexity and then source the yield from from basically through different avenues. And this is through this you can you can uh you can basically offer um like you can capture credit spreads, right? But the thing is, I mean, even when rates are high, you still want to capture credit spreads and offer the best possible risk, just return, right? And I think like I mean, I think this idea of like uh you know, DeFi uh gives you like lower rates and way higher risk, >> that applies whether rates generally are low or they're high. Like it's just as annoying to take tons of risk and then get, you know, 4% when the risk-free rate is 5% as it is to to do the same

thing and then take tons of risk and get 2% when the risk rate is 3%. Right? In either case, you're underperforming and taking extra risk. uh and the I would say the opportunity for DeFi is to on one hand really really really deal with the risk uh first of all and I mean I think in Sky case uh the ecosystem has really done almost uh everything it it possibly could right because I mean it's maintained uh a clear track record for many many years at this point even as as um like even as other projects have been uh dealt with like dealing with issues is just not really something that has been happening to Sky uh in the same way. And that's of course

I mean that really matters a lot but then on top of that there's also this whole I mean just the transparency and like the effort that goes into actually explaining the risk understanding the risk right because it's not just like through luck that that Sky didn't uh have security incidents right and and or and or or risk uh events it's because it's like very carefully engineered very carefully designed and um all of the thinking that goes into that design is made as public and open and transparent as possible because this is essential for the you know like sophisticated users right institutions and crypto whales that that use Sky and and hold their assets in SUSDS uh they really need to be able to do

their due diligence and actually you know access public information uh in things like our risk dashboards or our uh governance uh rule sets so they can sort of directly actually look at like sort of look at how the sausages just made on their own rather than listening to some salesman telling them it's all good right? >> Yeah. >> Um and uh yeah, uh that's just going to be continuously improved over time. And what's interesting is like it sounds like well, you know, we're just, you know, Sky just focusing more and more on security, managing risk better and better. Like it sounds really boring, right? like it's just like a bunch of

going in circles and making everything more safe and more secure. But the thing about in particular decentralized systems in in DeFi, right? And and I guess I guess maybe you can think more broadly decentralized systems, there's this really interesting characteristic that security and risk management is what enables scale. So without I mean so so basically like when we when we think about like when I'm thinking about like how we're going to grow Sky to get really huge and massive and like a huge business and make tons of money and tons of profits and so on like the key to that is through security and risk management and that's because if you do tons of security like if you have extremely solid extremely scalable

security and risk management processes you can open up for more complexity. So actually like in theory Sky could like do 10 times what it's doing right now. Like it it the protocol absolutely has the capacity to onboard like 10 times as much collateral and uh you know like go into like do this sort of very diversify like into all sorts of high risk or not necessarily high risk but like all these like exotic super innovative things out there. Um but the problem is uh like at that point it gets impossible to track end to end what's happening everywhere all at once, right?

>> And and that's the kind of that's the key to this like you you shouldn't be uh you know you shouldn't be scaling so fast you can't track and explain exactly what's going on in every single corner. Uh and this is really like I mean with Sky the the the the kind of the the model that Sky is going with for scaling is modularity right so you have multiple Sky agents right you have Spark focusing a lot of DeFi you have Growth focusing on RWA right you have um OPEX ke like other agents that are all focusing on different areas and they all have their own autonomy to go and and do things right so with that approach you could really just like open the floodgates and let's be like go do whatever you want. And they would dig

up, you know, a thousand opportunities within a very short amount of time. Um, but that's exactly the opposite of what we want, right? It has to be that everything they do, it must be sort of possible to essentially like I guess you could say mathematically prove >> that this is within the risk tolerances. This is within the existing approved risk categories. It's following the the capital ratios. It's like following best practice. And ultimately I mean the goal is really to be able to at all times prove that Sky is following best practice that is equivalent to or better than what you see in uh modern banking.

Right? So all the risk management frameworks are sort of fundamentally uh based on and and and kind of building on top of uh the Barcel uh banking risk management framework. run. Um, one of your points was particularly interesting about kind of managing all of the, you know, disparit risk parameters that are present in a given DeFi protocol. One of the things that uh Rob Haddock said yesterday on the show is that this is just another clear example that the ex that the design of pulled lending is really likely going to slowly kind of consolidate into uh much more of this isolated model as the Fidelities and the

Revolutes and these larger firms come on chain. Do you agree that the future of onchain lending is very isolated? It's very single collateral asset, single debt asset, very clear as far as what you're getting into from that perspective. Like I'm just curious like what what you think about how onchain lending is going to evolve because I think spark you know maybe is not exactly in this direction. Morpho probably closer but you know maybe that's not the right take. like just generally curious is this another example of hey onchain lending is moving towards isolated curated risk design rather than the poolled model how do you think about this transition yeah I mean it's I guess it's an

interesting topic and it's kind of frying my brain a little bit in the sense that a lot when you talk about finance it's like often you use a lot of different words for more or less like one or two or three maybe like basic concepts right so I guess the question is do consider uh like stable coin, do you think like of banking of of deposits, do you think of that as lending your money like when you put your money in the bank, is that lending to the bank? And depending on how you sort of want to answer that semantic question, right? Then uh I mean if you if you if you basically define lending as you know I'm like I have something I consider my sort of my

currency my my risk-free asset and then I'm going out and I'm deliberately taking some additional risk with it then I think it's absolutely true like in that case and whenever you're sort of thinking and you're like I'm going to go and take some risk. >> Yeah. >> You know like nobody should ever be like oh I'm going to take some risk. I don't know what the hell I'm doing, but let's take some risk, right? Like that's a horrible way to to do stuff, right? But what's interesting is as a type of I mean financial activity which is essentially like savings or uh stable coins, right? So stability that's that's specifically the type of product that is designed to be here. You don't have to think super carefully, right? And really like analyze everything into it. I mean, you should be able to if you want to,

right? This is everything we strive for in in Skype, right? But the the point with with Sky is exactly that. It's this massive diversified pool. Everybody goes in the same Well, it's okay, let me take it back. It's not a it's not a pool. It's a it's it's it's a token, right? Everybody goes in the same token and the token then like deploys through the um I mean through the sky agents they through the co vaults the all the rwas right that are backed by large regulated you know the large global institutions and like this this massive diversified portfolio and ultimately uh I think the point is really that like I mean that's a massive responsibility right like if you if you if you ultimately regulate

such a large portfolio which what Sky does it's just you know it's like a very serious very uh significant task to at all times monitor it monitor that right like measure the risk left and right like and it's once you get big enough also you get this issue that like it's no longer all about um well I guess I mean actually this is like a you know the recent incident is a perfect case of it right that one thing is like insolveny uh like literally losing money and like whoops the money's gone type stuff. But increasingly as you get bigger and as it gets more like uh sort of liquidity focused and and currency like this issue of just purely like liquidity

and fear and like I want my money and I want to feel safe and so on like that itself becomes a huge risk vector which is something that you know gets yeah it gets just gets more and more complicated the more you you dive into it. But um I mean from my perspective if you think of like if you like if you say lending and you define that as like you sort of define that as like risk sort of risky uh very deliberate lending then yes that's absolutely going in individual collateral individual collateral direction. If you think of like DeFi as a whole and sort of this concept of like holding your assets in DeFi and and getting a good return on your assets in DeFi uh it it can't really be done like it has to be diversified. it has to be

this uh sort of uh large scale managed governed stuff and I think what will happen is it will consolidate. I mean this has always been the the case right that there's been like a few very large players in DeFi. Uh and I also think that um actually I mean it will be a lot easier actually for for the large players to distinguish themselves and and kind of benefit from focusing on security and risk management. Uh I mean I I really do feel like that has that is is the you know the market has been changing a lot and that sentiment has been been a lot in the forefront actually like the big moment was exactly like in the fall like

around uh 1010 actually was like that's commonly known as like that's the moment when the vibe really really changed and suddenly uh as a project you had to really you know I mean not only did you have to focus on security that's one thing like sort of focus on being like this is how I'm keeping everything's safe. This is how I'm keeping stable. But what's so amazing actually from that is that it started giving you like an advantage like it started, you know, the market finally gave you positive feedback when you did the right thing which was yeah >> care about security, care about uh stability and uh I mean I feel like that's it's been sort of a frustrating thing for Sky because it's the project that has always been so massively obsessed with security and stability and

and safety. Uh but you know sort of crypto cycle after crypto cycle we sort of getting clowned on every time there's a bull market then everyone is like oh they're so like boring and lame right and then everything crashes and suddenly people want to talk to us again. Uh but like I think I think finally we're past that now and and there is this like fundamental understanding that the lowrisk stuff the riskadjusted returns I mean that's actually when you know um that is when there is a massive opportunity that's and to my earlier point right that's how you get massive scale right that's how you get economies of scale that's going to give you profits right that's going to give you the stuff that the market is now looking for so I really think >> you know I don't think DeFi is over at

all from this I think it's going to evolve it's going to get way stronger and way better. And I mean overall it's a terrible situation and I hope it gets resolved really soon, right? But I also really hope that the whole industry and everyone who sort of survives and comes out on the other end, right? And and and are able to reconstitute themselves, right? That they uh really seize this opportunity to to to have stability, safety, security be the the cornerstone of like their growth and their business case. >> I agree. I I I think DeFi is going to be fine. I appreciate the thorough answer on the on the lending model side of things. I mean it's it's going to be rapidly evolving the entire space. I mean our bridge from freezing those

funds was was a big win and I think the situation hopefully is resolved sooner sooner than later. So appreciate you spending some time with us today man. Um looking forward to seeing Sky hit that 20 billion mark this year. Best of luck man. >> Thanks a lot. Glad to be here. Thanks for all righty guys. That's tabled up episode number 28. We're going to take a super quick break, get Philip, the COO of Coinbase into the show. Our last guest of the day. We'll be right back. [music] [music] [music]

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Philip Martin, the chief security officer at Coinbase. Um, notably been in conversation with Anthropic about Mythos. Apparently, as of late, a US Army veteran, a smoked meat enjoyer. Phil, how are you, man? >> Doing well. How are you >> doing? well as well. Uh what a what a crazy couple of days for DeFi. >> Uh it's been absolutely wild. Absolutely wild. And I think >> you know the reality is we're going to see more of this going forward. Um I think is a very interesting overlap of some of the new frontier AI models uh and their ability to to be really impressively good at cyber security. And the fact of the matter that that you know for for DeFi, we're really running code in the open, right? um makes it

much more susceptible to that kind of attack than you know just trying to point a model at an API endpoint. >> Yeah. So I had um Dragonfly GP on yesterday, Rob Haddock, and he said a lot of people misrepresent the amount of AI involved in these exploits. He said it's basically a lot of just internal infrastructure malpractice from a security perspective. Do you agree with that? >> Broadly, yes. Um I think uh but I think we will see the amount of AI involved in these things increase um uh in my view increase pretty substantially as time goes on.

>> And do you think that the prevalence of a exploits for that are AI related are more you know more possible onchain or this more of this kind of like traditional security DNS domain hijacking fishing? How do you how do you think about the the surface area for for these types of things in terms of the different uh attack vectors? >> Yeah. So for AI specifically, right, um context management is really important.

Um right, the ability for uh you to provide that model with as much information, at least as much relevant information as you can is going to help it do do a lot better, right? So that's why in general I believe AI actually favors the defender over the attacker. I think that's turned a little bit on its head for things like smart contracts, right, where um the the context is actually pretty evenly shared between the attacker and the defender because it's all on chain, right? Um and it allows a defender or or an attacker to move very very quickly, much much more so than in traditional sort of the assumptions we we might make traditionally, right? Right. And so I think that'll be uh uniquely um uniquely harmful for uh D5 protocols.

Um also I think we will see the the pace of cyber attacks increase generally, right? Um because AI enables uh both bad guys and good guys, right, to do more and do it faster. Um, and so, uh, being able to, you know, maybe the initial entry vector, right, is is some sort of infrastructure thing, but then being able to leverage AI agents to to move laterally, move internally, that's going to make the pace of an incident a lot faster than it is today.

>> Interesting. You put out or you contributed to a a report around quantum as of late. Um it was a very well done piece and wanted to talk more about that. I mean we've had quite a few different conversations. One of the uh maybe overly optimistic takes that I've been sharing that is probably even you know one could say silly is that Qday is not actually coming that that that this day is just not coming. >> Um why am I so absurdly wrong on that? >> You know what? You're not necessarily.

Um this is a really interesting area where very smart well-informed people um at the forefront of this field have wildly divergent opinions um on when and in some cases even if Qday is coming. Now I I think >> we can look at and sort of extrapolate from the pace of research and from some of the break breakthroughs that we're seeing and I think it's becoming harder and harder to say that Qday is never coming. Um and even even some of the most um you know sort of dedicated advocates um are having a harder and harder time uh justifying their position. Um but the reality is right we're still doing basic research. This

is not an engineering problem. This is not a we know the answer we just have to scale it right. We're still doing fundamental research into how quantum computers operate at scale. Um, and there is no clear technique or winner that's going to take us from here to a cryptographically relevant quantum computer. Right? So there there I think there's there is still room for doubt. My overall position on this, however, is it doesn't actually matter. The timeline doesn't matter. Um the if question doesn't actually matter because the risk here is actually a trust risk for cryptocurrencies, right? And so doing nothing at all um having no plan for a postquantum future um you know maybe Qday comes maybe it doesn't um but

that's causing harm right now to the trust in the ecosystem. >> Yeah I agree with that. I mean it's been a big headwind for the Bitcoin I think for Bitcoin institutional adoption as of late. I think this is a question that is like it's like a very easy question to ask from that from an allocator perspective like oh well how how are you going to solve this right because a lot of these guys think you know far longer term than perhaps the average current uh you know user or speculator in the in the market and it's a very easy like 2035 is around the corner you know what happens then right and and that's something that they want to avoid now one of the things that I haven't particularly heard or been educated too much about on has been around why post

quantum postquantum uh computing and cryptography needs to be um at both the execution layer and the consensus layer of blockchains. Uh this is you know this was part of this report. Maybe you could just help us unpack what that means. We're pretty technical here but not understanding exactly why you you need it on the on the consensus side and on the execution side. >> Yeah. Um, so the the execution side I think is is is fairly obvious. You guys had um have had a couple guests on, right? I think I think you had Alex Prudin on relatively recently um who is I think one incredibly uh smart and thoughtful about this space. Um but like that's straightforward, right? You use

private keys um to sign uh your transactions uh to the extent that those that the corresponding public key is is made public in that transaction. that that's what gives the um the quantum computer something to bite into, right? Uh and lets it uh in theory assuming you know big enough performant enough factor that uh that that public key so that we can get back to the private key so they can you know sign messages. Um I think what we also need to um pay attention to however and and it's actually not just the cons consensus like we have to we have to pay attention to the entire ecosystem and infrastructure like you we

were talking earlier about like hey do these do these are these really AI assisted assisted hacks or are they like just basic infrastructure stuff right a quantum computer that can that can break public key cryptography and weaken um although not entirely break uh uh you know hashbased systems is isn't just about you know uh um doing a uh a spin related transaction um it's also about the entire infrastructure layer um right so suddenly now I can inject messages in uh an SSL secured uh uh communications path between two systems right I can start to spoof um information in there I

can start to do things like I mean we just saw with um uh with the recent uh uh DAO hack, right? Um that was an RPC um issue, >> right? Um so imagine if I could suddenly if I could get in the middle of a communication like that and start to tamper with it without having to break into the endpoints on other side, >> right? Um, so there's there's a bunch of surface area that's exposed from a quantum computer here that's more than just my private key for for for crypto is going to get is going to get broken up.

>> So the the idea is that in the kind of gossiping of data amongst nodes that there could be a interference from a quantum computer not just necessarily on the transaction signing or the execution of that transaction. There's there's and not just that, right? There's a there's a ton of surface area. If if you can if you can say, hey, I can now um with with a performant enough quantum computer, I can real time, right, break SSL. >> Yeah. >> That opens up a lot of surface area for mischief.

>> Okay. Do you do you think that there's any credence to these um current quantum resistant chains? Like it it seems to me that nothing's quantum resistant onchain today. But for some reason this Google paper, this Google paper came out and elicited Algarand a couple other chains and projects like even Justin Sun came out and said, you know, Tron's got these NIST signatures coming on chain and it's happening. How how how much credence do you give to the idea of these NIST signatures being adopted today? Also something like Stark uh Starknet Starkware has came out that their their Starks this is their notable improvement to the ZK technology of of snarks is

quantum resistant. They don't use ellipt elliptic curve cryptography. Just how much credence do you give to the current state of you know we have postquantum in our you know XYZ stack? >> Yeah. So, I don't think um any major cryptocurrency today has a uh anything more than a test net stood up that is quantum um resistant that last time I checked. It may have changed, right? But I don't believe there's anything more than a test net. Uh, also um so the the the NIST standard you're talking about um in particular the one I think will be implemented by most blockchain because it's called Falcon um is is really one of the more efficient signature schemes

for postquantum but it's still something like 10 times larger from a signature perspective than a traditional ECC signature which is very very compact. um that h that that is going to cause um throughput issues on blockchains as this stuff is is adopted and all the other signatures are even worse from a size perspective, right? Which is why I think Falcon will probably be the winner for most blockchains because it's the it's the least bad of the current known implementations. >> Um and so there's there's actually quite a bit of I think engineering left to do to figure out what this is going to look like on chain and what the impact to throughput. um are going to be um and uh you know how we want to think about the

issue of uh these algorithms are actually quite new right um we look at uh you know all the various sort of uh uh NIST you know sort of bust algorithms um we don't necessarily know that there's going that there isn't a classical computing vulnerability >> in these [clears throat] algorithms right >> um cryptography is one of those unique spaces is where smart people who spend you know careers in the space uh make mistakes quite frequently because it is so complicated both from a theory perspective and from an implementation perspective right and so I worry that rushing to bring uh the sort of quantum resistant algorithm to chain um is

actually premature right now because we don't yet fully understand the threat model uh or the potential vulnerability space for these algorithms Yeah, man. Kind of shifting into something that's relevant in terms of the rushing and the timing, but not, you know, necessarily quantum here. I I did see some news that that Coinbase was, you know, speaking with Anthropic about potential Mythos, you know, AGI hacking and these things. Are are you are you worried about Claude Mythos as a serious attack vector for a largecale financial services company like Coinbase?

>> I'm worried about these sort of bleeding edge models uh in not necessarily today because I think they're very tightly controlled. What I'm worried about is a year, two years down the line when we start to get um the efficiency of these things up and we start to get sort of openweight models that have, you know, sort of onpar performance. >> Um you know, today these are these are enormous models, right? Um very impractical to run outside of an organization like like Anthropic or OpenAI or any of the big AI labs. Um but we're going to see improvements both in efficiency um as well as um but really

across the board, right? Efficiency. We're going to see better sort of model model streaming. Um we've already seen some interesting interesting research around sort of running models um not fully in memory but from from from flash, right? So the efficiency picture is going to get better and these models are going to be able to be run, you know, without having to spend $10 million on hardware. Maybe you're only spending $100,000 on hardware, right? And for uh an attacker group that's going to be very very tempting, right? Um and so so I'm like today I don't think you know Mythos is going to take over the world as it escapes a sandbox and you know breaks everything, right?

That's not that's not a real fear. But in a couple of years, um, I could see being in a in a much more worrying state, which is why I think it's so good that, you know, Anthropic and others are being very careful with how this model is being released. Um, you know, they want to, uh, make sure that defenders have enough of a head start to to patch things. Um, and we've seen some of the bugs it's found, right? It found a 27y old bug in OpenBSD, right? one of the most audited code bases in the entire world. Um it's like very very impressive stuff.

>> Yeah. Yeah. So on the defenders front, you made an interesting point earlier about that. Wouldn't it just be sufficient for the defenders to get as you say a bit of a head start using something like this and then providing that as a ample, you know, defense to the potential bad actors or is it just not that simple? you know, I don't I don't think it's going to be that simple. Um because, you know, you're never going to find all the bugs the first time, right? When when you use an AI model like this as as a defender, um you're running these things hundreds, thousands of times um across your various pieces of of code and services

and infrastructure. Um and you get, you know, new and different results as you as you run it again, as you tweak its approach. Um, so it's not a simple like, oh, I ran it and I found all the bad things and we're everything's good and wonderful now, right? Um, and so there it's always going to be a bit of an arms race, I think, as both the models improve, as the ways of using them improve. So it's not going to be as simple as just, oh, the good guys get it before the bad guys. Um, because the bad guys will get it eventually, and they're going to run it in in new and different ways that maybe the defenders didn't think about.

>> Yeah. And so from like a from a large scale company like Coinbase, what is the what does the preparation process look like? like like what is this what is the security hardening for the team for the you know anything from a a password to a uh security key to a serer to a email account to a browser to a webcam call like like what is the like scope and length of security harding processes look like you know to prepare yeah for for this advanced intelligence >> so I mean so we already use AI extensively internally in how we do, you know, application security and security

hardening and and and really in every piece of how we do security today. Um, and so when we think about, you know, a new model like like like Mythos or um, you know, OpenAI's uh, 54 cyber or whatever else comes next. Um, it's really about learning the nuances of how those models need to be prompted, how they manage context, like how how we need to tweak our approach as we swap a new model in. This is even true of moving from like cloud 4.6 to 4.7. >> Yeah.

>> Right. Is is the the big difference is what do we need to do to give this model the the instructions and the context and the way that that it sort of best consumes it. >> Yeah. Um and then it's about making sure that we have the right sandboxes in place, right? So like as we do, let's say AI assisted pentesting or red teaming, um we we we're always very very careful and think very very hard about the environment we're doing that in. Not because oh AI is going to escape and do something crazy, but but because hey, in the process, AI might choose to exploit a vulnerability to do a PC, right? which is which is fine and normal and and and part of any good pin testing process,

>> but AI doesn't necessarily realize that oh that exploit is going to result in deleting data, >> for example, uh or that exploit, right, is going to result in or or or a DOS of some sort, right? And so we want to think long and hard about the environments we're setting up so that so that the models get as close as possible to a live instance without it really without the potential for that model going a little bit off the rails and doing something it shouldn't do. >> Yep. Phil man, I know you're uh I know you're probably slammed right now. It's been a busy it's been a busy week in DeFi. Um there's a lot of there's a lot of people running around trying to make what's happened right. And then in addition to that obviously the ever the ever increasing amount of intelligence

you know happening. I think this this way to think about this from the defender and attacker perspective is is quite interesting. And I think that you know you'll you'll think that this model is going to be the one that you have to solve and then a year or two later it's going to be a whole another level of a model that you have to solve and that you have to you know prepare for. the internet is in for a very interesting, you know, decade or so a as we as we scale this intelligence. >> I I I fully believe that to be true and I think you're exactly right. Right. So I I my my 10 year anniversary at Coinbase was last last week.

>> Thanks. Uh, and you know, I I have never seen an industry evolve so quickly um and take so many left turns that you you know, you didn't see common a year a year prior uh than than than this one, right? So, it's it's it's always a fun place to be. >> Well, Phil, thanks for joining us, man. Have a great rest of your week and day. Congrats on the 10 years and appreciate you keeping us safe, man. >> Yeah, anytime. >> All right, buddy. We'll see you soon. All right. >> Bye. >> All right, Phil. All righty guys, that is that is uh the Claude mythos uh you know future of how these industries are going to protect themselves, how crypto is going to

protect itself. That is also our show for today guys. It is Tuesday, April 21st and I battle Rhino is getting suspicious about the coins. Oh goodness. Oh goodness. Ladies and gentlemen, we will see you guys tomorrow. bright and early here from the nest. Stay safe out there. Stay sound. I hope D5 figures all of these little nooks and crannies out sooner than later. Tomorrow, we'll hop off the uh security exploit conversation. I think these last two days have been very they've been sombering, they've been real, and they've been very important to have a discussion about. I think after these types of events, the industry takes this stuff very seriously for, you

know, four, six, eight weeks and then we kind of continue on. I I hope this time this event things are taken very seriously. We'll see you guys here tomorrow, Wednesday, April 22nd, from the nest, from the tokenization tower. Thanks for rocking with us. [music] >> [music]