🚨LIVE From The Tower: Biggest DeFi Exploit of the Year: What Happened? Blueprint & Hadick join in

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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 Nest. See you on the show. Ladies and gentlemen, happy 420, baby. Happy 420 to all the celebrators in the world out there today. Hope you guys enjoy your nice stoniness. Robbie is unfortunately still under the weather following his wisdom teeth removal. Let's give some love to Rob. I know that we miss him here today on the show. We, you know, we we really want to get Rob in the show. Hold me back soon. Ladies and gentlemen, what a weekend.

My god. Okay, Saturday. I'm on the couch. Turns into a 48 hours of monitoring the situation. We're going to talk all about it, guys. Welcome to Tokenization Tower, The Nest, broadcasting live from the Empire State Building. Beautiful sunny day today. Uh shoutout to Plume, our lovely friends here at The Nest powering the Tokenization Tower, powering The Nest, powering on-chain infrastructure for the future of asset management. Guys, let's get into today's topics. I want to get through this quick because I really, really want to talk about what the hell happened this weekend.

All right. So, we're live from Tokenization Tower. Again, Rob is unfortunately not going to able to make it. Market and weather live from New York. Blueprint Blueprint Finance's co-founder is going to join the show. Obviously, a DeFi protocol, a long-time standing builder in DeFi. You can assume what what we're going to talk about. Dragonfly's GP joins the show, Rob Hadick, long-standing investor, long-standing participant in the markets. You can probably allude to what we're we're going to talk about. Today's topics are powered by Trezor, trezor.io, using code rollup10 to get your Trezor now, one of the best self-custody wallets on the market.

Ladies and gentlemen, happy Monday. Happy 420. Uh it was not a good weekend for DeFi. Let's move on into the weather and the markets. Before we do, let me tell you about our friends at Frax, frax.finance, open, stable, borderless, building the infrastructure for the future of digital money. These guys are safe marked safe from the infamous uh exploit this weekend. Fortunately for Frax, uh not the same for the rest of the DeFi ecosystem. Guys, it is a little chilly today in New York. Uh I think it's uh yeah, 46. Uh feels like 42. It was a It was a puffer day this morning. I I know last week we were saying that the trench coat weather is gone. Fortunately, it is back. Uh I might have to wear the trench coat

tomorrow. Today, I did not choose to. Today's weather is powered by Relay, relay.link, some of the best cross-chain swaps in the industry. Guys, also marked safe from the exploit over the weekend. Uh shoutout to Relay, uh doing some amazing work in the cross-chain swap ecosystem. Let's get into the markets, guys. Uh yeah. So, actually not that bad. Considering what happened this weekend, this is not that bad. I mean, this could be a lot worse.

I think it's signs of the marginal buyers and the marginal price changers, if you will, of the market are no longer, you know, small wallets on-chain or those who are frozen. It is ins- institutions. Tom Lee came out and bought a ton more ETH today. I think Saylor announced a $2.5 billion purchase of Bitcoin. A lot more talks now about Saylor getting too big. Don't blame them. Uh I think he is quite quite a big buyer, quite a big owner of Bitcoin now. Bitcoin sitting at 75 3, Solana 20 or sorry, Ethereum 2300.

A lot of liquidations on-chain around 1800. We do not want to see Ethereum fall here um for the sake of these frozen markets on Aave and for the rest of the ecosystem and for all the looping that is currently in a negative APY, we do not want to see Ethereum fall here. Solana at 85, Chainlink hovering on that same $9 mark and Near also hanging around that $1.35 mark that it's been for quite some time. Um apparently, the the straight was closed again or the war was restarted. I don't know. I don't think people are really taking what Trump's saying as much at face value anymore. Um I think they're starting to kind of think a little bit differently about what they

hear and what their take is from Trump's kind of nonsensical back and forth about this Iran situation. So, on the macro side, oil had a bounce over the weekend. Apparently again, there was some kind of reopening of the straight. Um re- or sorry, re- closing, reopening, more kind of strikes. Um but I think that the the max fear is behind us. You know, I think the war max fear, the macro max fear is likely behind us. Uh what I don't think is behind us is what we're about to talk about, which is what's happened this weekend in in DeFi. Um if you've seen any any of my tweets, um I was covering this pretty much from the moment it started all weekend, uh being a couch warrior, monitoring the situation and yeah, it was not great. Um so, we're going to talk about that now.

Today's Markets Prices is powered by Zama, the best confidential encryption computing layer on chain for private transactions, private tokens on Ethereum. Let's give them some love. These guys are pushing forward empowering our digital markets prices. All right, it's time to get to the news. It's time to get to the news and boy oh boy, unfortunately was it not a calm weekend in DeFi. Before we do, let me tell you about Near, our premier AI partner, ladies and gentlemen, the blockchain for AI and AI native applications and autonomous agents. Start developing today at near.org. Use near.com for any of your cross-chain needs or near.ai to learn more about Open Claw and Iron Claw, their iteration of a private secure Open

Claw. All right, guys. Where do we Where do we begin? I am I have a bunch of tweets here that we're just going to recycle through. And I guess just at a high level what's came to be known now is there is a one-of-one LayerZero decentralized verifier network, also known as DVN, that had an internal compromise by some sort of North Korean DPRK nation-state sponsored group.

Uh, they were able to uh basically sign a transaction under a one-of-one LayerZero managed and controlled DVN that KelpDAO had effectively given all power of their um let's call it decision-making to LayerZero in this context. Uh, then the exploiter was able to take that rseth that they were able to mint out of kind of thin air and deposit into Aave and create a situation of bad debt. They were able to borrow a ton of eth, wrapped eth, leaving a lot of the wrapped eth holders on Aave now in serious trouble. Aave's markets are frozen.

And the rates are going crazy. And so what you can see here is the cost to borrow USDC on Aave is at a level unseen since the sUSD APR was 15% during the very speculative days of the basis trade in the bull market in the end of 24. And so you see this very um sharp rise in the cost of borrowing. And so what this is doing right now is you can imagine a lot of these um a lot of these people on Aave are doing these aggressive looping trades, right? Where you put in the like for example, with rseth, this restaked

eth that's powered by KelpDAO, they're putting in this asset, borrowing normal eth against it, re- re-entering that original collateral asset, the rseth, borrowing more eth and doing this like, you know, eight or 10 times. You get a nice yield, the collateral asset and the debt asset are the same um and the rates are such that you can basically create this loop that juices your your uh yield on eth. And so what's happening now though is that the the stablecoin pools are getting affected.

And so basically the APY of of USDC on Aave is now the highest it's ever been. This is very, very problematic for stablecoin loopers, right? So if you're a stablecoin looper right now, I mean, the borrow APY is absolutely skyrocketing, but your um lending APY is still around I think it's somewhere between like the 3-4% range, maybe got a little bit higher, but not much. And so you're operating at like a like a negative a significantly negative APY and then by looping it, you're basically leveraging up, so you're amplifying the negative returns and a

lot of these funds, if not all of them, are locked. So Aave loopers are in a really, really, really, really bad scenario right now and it hurts to even say it. Like it really just hurts me down to my bones to see that the most trusted lending market in the world is dealing with this on chain right now and there's a lot of different opinions as to who's at fault here. Let's get over to the next post because I think this is a good segue into the conversation about who's at fault.

So KelpDAO is actually planning to put out a memo that basically says that they're not at fault. And so LayerZero puts out this post, right? After this happened, this was about 8-10 hours ago. They effectively blamed KelpDAO for using a one-of-one DVN. And in this post they wrote they explained how their internal system was compromised, but they ended up blaming effectively blaming KelpDAO for not listening to them and heeding their

advice to become a one or to not be a one-of-one what people on Twitter are calling a mono sig. Right? And so KelpDAO apparently has leaked a internal draft of their upcoming public response saying that it relied on LayerZero's documentation, default configurations and team guidance when setting up this bridge. So you've got finger-pointing from the two protocols that were directly involved in this, which is not what you want to see as a user. And then you've got Aave coming out and saying that the rseth on mainnet is completely fine and that basically

what you could infer that they're suggesting is that the L2 users of Aave might be in big trouble. And that they might want to maybe encourage KelpDAO to save mainnet users rather than L2 users. And so what you have here is you've got three levels of fault. And I think there's a tweet from Fiscontis that explains this well, but I just wanted to present this to you. So this is happening. So KelpDAO is getting ready to come out and say that they are not at fault and that they're getting ready to blame LayerZero for being at fault. So let's get to what Aave said first.

So this is what Aave said first. This was before this LayerZero post came out and before this announcement from CoinDesk came out. They're basically saying that the rseth on Ethereum mainnet is fully backed and that rseth remains frozen across Aave V3 and V4 and exposure to the incident is capped. Uh, but weth markets also are effectively frozen across all of Ethereum, Arbitrum base, Mantle. You can kind of think of like the entire Aave protocol is more or less bricked right now. Like it's more or less bricked.

And so users are not able to pull out their wrapped eth. And now when I say users are not able to pull out their wrapped eth, I mean some of the safest, low-risk DeFi users who had simple wrapped eth deposited into Aave, eth into Aave just to get a couple extra points of yield are not able to pull their funds out. That that that's a problem. That's that's a big problem and the longer that these protocols remain frozen, the more worrisome I be I become and the less the less trust these users are going to have in this system longer term.

And so those are kind of like the three angles happening. Now let's kind of get into like who's at fault here and what actually happened from this chronological order based on the actual event itself and then the public comes. So Way Dai came out and uh he put out a post kind of TLDRing what LayerZero's um announcement was. He goes LayerZero, KelpDAO, please don't use one-of-one DVN. KelpDAO, no, can we please just use one-of-one DVN and you operate this single DVN for us? Fine, if you insist, we will do it.

LayerZero gets hacked. Hacker minted rseth for free, took $200 million of eth out of Aave. LayerZero, we told KelpDAO not to use the one-of-one setup, they didn't listen to us. But LayerZero operated the the one-of-one DVN node. Also, how did Aave allow a one-of-one DVN asset into their protocol? So when I kind of think about the layers of like fault and risk here, very number one, number one is if you're running a protocol that is managing $1.5 billion of TVL that is an externally managed one-of-one

signer, you are just completely you've completely lost the plot of what we're trying to do here. Completely lost the plot. That is just unacceptable, irresponsible negligence for users' funds and risk. LayerZero running a one-of-one node for a protocol that is insisting that you do it for them and then not having proper security practices to prevent a a exploit of this um of this nature, also completely completely irresponsible.

Completely irresponsible. And then finally, having a curator model from the DAO to not look at the risk of a one of one DVN asset from a from the from the bridge module, basically meaning that they they didn't look at the collateral that they were listing and this just got listed onto V3 enabled E-mode as of January. To allow this into the protocol is just a it's obviously an oversight, but it's a grave mistake. So, you've got like three layers of fault here. Let's roll it through into Fishtank taste because he

actually really kind of lays it out from a more like top-down perspective, which I really appreciated. So, here's kind of how he's thinking about this and I I'm I'm in agreement for a lot of it. So, layer zero multi-sig architecture enabled one of one multi-sigs, even though this is obviously a dumb idea. Maybe giving users all this freedom isn't the best primitive. Agreed. One of one multi-sig architecture should never exist for any sort of protocol managing size of users' funds.

Then, Kelp DAO took this liberty to use a one of one multi-sig, which by the way guys, I was shocked to see the amount of teams that froze their OFTs and they were one of ones, two of twos, or two of threes, or in some cases three of threes. Absurd. Absurd. Absurd amount. And I think there was probably upwards of 50 50 teams here that had a one of one implementation for their protocol across multiple chains.

One of one. One signer. And a lot of these is just layer zero themselves. Now, layer zero, to give them credit, has came out and is like basically saying that this design is never going to happen again in the future and that they were going to re-enforce this across all of their implementations of DVNs, which I think is very important. But, needless to say, there was probably 50 tweets this weekend from teams pausing their bridges, their OFT bridges, and many of them were one of ones or two of twos. And and they a lot of them were managed by layer zero. Like a lot of these actual one of ones were just managed in-house either

by the team or they were a a two of two, one was managed by layer zero, one was managed by the team. Getting back to this tweet. So, Kelp DAO took this idea that they were going to put all the security into layer zero's hands. They're going to use a one of one multi-sig. It's not even a multi-sig at this point. It's just a it's just an EOA. And this was ridiculous. This is this was just insane. Then, Aave took Kelp DAO's rETH as collateral across a few L2s. Less obvious that this is a dumb idea because you had to do extreme due diligence to figure out that um this was a one of one asset.

And they allowed this this asset as collateral across a few L2s. And you know what's insane is the chain and this is what Fishtank taste is saying here. The chain that caused all of this was UniChain. It was UniChain. And so, Fishtank taste is saying that this whole problem is downstream of modular L2 infrastructure requiring bridges to work and hold assets. Being that bridges are a single point of failure. And I've seen a lot of takes on this that if you don't have a proof system for your bridge in 2026, you're making a grave mistake.

But, here's kind of like the like the key takeaways that I also found to be quite quite on point. Don't give your users freedom to do something dumb. In this case, layer zero should have never allowed any of their customers or clients to ever have a one of one DVN set up that's required um to be used by them internally. That that that that's makes no sense. Multi-sigs are insecure. Multi-sigs with one of one signatures are extremely so. A single point of failure. Again, something that I think this industry has learned time and time again that single points of failure are simply unacceptable.

DeFi protocols need to reject assets assets secured by one of one multi-sigs or multi-sigs in general or isolate them to limit contagion. In this case, Aave. Additional safeguards such as circuit breakers or similar would help a lot. And I and I thought this was pretty interesting because you start you start to get people saying that well, like meaning around like, oh, why doesn't why don't we have So, so, so this is why they have T+1 settlement, right? This is why they have circuit breakers and limits. And then then you had like the Agora team come out and say that they have like these $10 million on their stablecoin bridge. You had Athena come out and Guy talk about kind of how he thinks about this.

And you know what? It's an interesting thought because you know, a lot of the reason that DeFi exists is to get this kind of 24/7 always-on liquid markets, but it's while it's a massive feature, it can also be seen as a bug. And so, I think I think part of what's going to come of this is going to be more rate limits and security monitoring for large-size transactions and effectively like blockages or like security council-based rate limiting of transferring massive assets at scale.

And then finally, the modular L1 L2 design leads to complexity and increased attack increased attack surface. And yeah, I mean, it's hard to disagree with this. The the bridge design has caused endless exploits and endless pain for users. And I I just can't believe that we had so many one of one, two of two, or even three of three multi-sigs managing bridges at scale across all of your favorite chains and protocols and we didn't learn that you need I mean, you you need a lot more signers than just two or three.

You need a lot more. Let's move on to 0xngmi and then we have our first guest here, Nick, who we're going to talk more about this with. Um just some quick things here from him. Uh North Korea figured out which RPC providers layer zero was using. They compromised two of the providers to make them return fake data. Again, I don't think layer zero was using that many RPCs. At best, I think it could have been been three. It may have just been two. Um it may have been four. And then whoever it was DDoS'd other providers to shut them down forcing layer zero to use the bad or the poisoned RPCs.

And and that's what happened. And $292 million the biggest exploit in all of DeFi happened over the weekend. And that's where we are today. And that's where we And that's where we sit. Um and the markets are still frozen on Aave. And it's it's there's no telling when they will be unfrozen. And we're waiting for a statement from Kelp DAO. And ultimately, Kelp DAO has the final say here in how they're going to choose to distribute these losses. And so, there's really there's really like what from what I understand, two paths.

Socialize it across everyone or pretty much give it to people that were on the L2s. But, they have not came out with any sort of statement. And it doesn't look like it doesn't look like the statement that they're going to come out with is going to have any sort of like any sort of actual real substance towards that issue as much as it is just deflecting blame from layer zero's pointed accusations toward Kelp DAO. And so, you kind of have one of the worst of all scenarios here where you're seeing real-time legal protection in PvP on the timeline, but these teams don't seem to really be trying to figure out behind the scenes as as much as you'd like.

And you're just seeing sentiment across DeFi just evaporate. And it's just not it's just not the situation that you want to see at all. So, guys, we have Nick Roberts Huntley here from Blueprint Finance. Uh he leads the development of concrete institutional grade yield borrowing product um and Glow. Uh so, he has quite a bit of experience in DeFi. Uh and what what better day to have a conversation about the risks and about what's happening. So, we're going to bring him up. I'm going to get him set up back here. We'll be right back and we'll be back on the news, back on the topic of the day of the week as we as we watch this event progress and

shape up real time. Be right back. >> All right, guys. Welcome back to the

tokenization tower. I'm here with Nick Roberts Huntley. Nick, welcome to the show. >> Thanks, man. Thanks for having me. Uh quite the day for you to be on the show, is it not? >> Yeah, I would say before we arrived today, had not planned for the weekend to happen as it did, of course. But, uh yeah, it'll be an interesting conversation, I'm sure. Yeah, man. So, you are the founder of Concrete, uh former surgeon as well, um working on the institutional side of DeFi. Something that that I think is obviously a pressing conversation for us to have today. We'd love to just hear how you went from being a surgeon into crypto, into DeFi, kind of like what that path looked like, and then tons to talk about Yeah, sure. I mean, definitely a certainly different path to I think you find most founders in the space Yeah.

having gone through. Uh loved my time in the hospital. It was super privileged to have that work. I think fell in love with medicine and surgery more broadly, predominantly focused on the complex system design and problem-solving. Uh got into kind of solving quantitative problems around computational drug discovery, and kind of fell into the rabbit hole of economics, policy. Was lucky to study that uh at a graduate level, and then ended up moving to the Bay Area now close to 10 years ago. Uh worked on some interesting software, data, quantitative challenges with some large institutions and groups uh up in Menlo Park before being fortunate to transfer over into the world of finance, spent some time at Point72, um and ultimately post-Point72 started Blueprint, which operates Concrete and and Glow.

And just a quick primer on Concrete and Glow, what exactly are are these products? One is an institutional kind of lend-borrow yield product, that's Concrete. Glow is more of a kind of a separate offering on Solana. Maybe you could just kind of uh Yeah. Yeah. Yeah, of course. Very similar kind of value propositions, just built for the slightly different ecosystems. One, Concrete being EVM, and then, of course, Glow being Solana-focused. Um similar premises. So, vault infrastructure, strategies and execution execution in terms of getting people sustainable rates of return, uh and then focused on kind of how do we optimize money market control, and utilize debt predominantly.

So, big focus on working with kind of blue-chip asset issuers, um you know, large money markets, but also just trying to think about what is a sustainable rate of return without taking on too much risk. And obviously, you know, day-to-day like we had over the weekend, uh risk is obviously an operative word. So, you know, heavy on making sure that we try and reduce the edges of what can go wrong in DeFi for our clients and our partners. Yes, as you mentioned, heavy institutional focus, working with, you know, custodians, uh financial institutions, and and large investment firms. Yeah. Awesome. Well, there's a ongoing sentiment right now that is DeFi simply just far too risky for the yield that you get. And this kind of happens in higher interest rate environments. What

you get is usually a bit of a compression in the crypto market itself uh in terms of lower prices, a bit of of like a bear market kind of sentiment down. Rates on chain typically are inversely correlated to the actual central bank interest rates just because low rates in central bank drive more speculative activity, which is a net positive to crypto. This drives more borrowing on chain, which spikes up the borrow rates, gives people higher stablecoin yield even though that the central bank interest rates are quite low. And so, you get this you get this periods of time where on chain yields are far better.

And then the opposite happens, where central bank yields are quite high and the risk-free rate is quite high. That thus the desire to borrow on chain goes goes down because, well, people aren't you know, going along on crypto, basically. And that's kind of where where we sit right now. And so, this was kind of stemming and this was growing, and then obviously, bang, this weekend just kind of put a put a nail into that wall. And so, let's just start with this kind of concept broadly. Like, how do you think about the risk to reward of systems broadly? And, you know, as it pertains to DeFi, what is it that what are we missing here? Like, is this risk to reward just just wrong? Yeah, it's it's Look, it's a great question. What

we're really talking about is how productive can we make these assets against the risk of carrying that for some duration. Um what is the cost of working capital against those, which is obviously what generates kind of flows and borrow-lend on the money markets, which is the predominant activity or base of liquidity within DeFi. Um Look, candidly speaking, we've had this extraordinary explosion of just the sheer number of tokens that are available, which creates a lot of fragmented pools of liquidity. Certain mechanism designs, as we've seen over the weekend, particularly through Aave's kind of pooled function, mean that certain assets are considered nearly like-for-like in terms of their {quote} debt-worthiness. They go through rigorous risk assessments through third parties, etc. But, as we start to continuously create these extra layers

of networks, money markets, assets, LRTs, LSTs, you know, raw tokens, wrapped tokens, whatever it might be, that creates just an incremental amount of extra underwriting and consideration that we need to take on. Um and then, of course, you have the underlying infrastructure, which is the way in which these funds are transferred, moved, accounted for, uh verified. And so, you build this kind of layer cake uh of dependencies across the stack, both in the underlying backing, the asset issuers, the infrastructure that controls it, and candidly, like the third-party under you know, underwriting of those assets as their utility as either, you know, collateral and/or working capital within the assets. The interesting thing that I've noticed over the last couple of years, say since

2021, kind of the golden era of DeFi when everyone was having a lot of fun, um there was a large push back then to talk about utility of these tokens. Like, what could these tokens necessarily enable you to do on chain or in the real world? A lot of that has kind of faded by the wayside. Uh a lot of the utility-focused discussion has headed directly back into the use of stablecoins, and we're looking at the non-stable assets as effectively ways to accrue long value. Um and last year we saw massive appreciation in token price. People really started to say, "Hey, if I can generate a couple points on that non-stable asset, it is now a productive tool for me in terms of generating cash flow." just because the token price had appreciated. Now, obviously, at token prices where they

are, that rate of productivity, even through good kind of asset allocation and risk control, isn't that exciting. And that gets us back to the kind of risk-reward debate, which is raging on right now, and rightly so, given the weekend. Um but, it's where we cut our teeth and where we spend our days. It's something we spend, you know, morning, noon, and night thinking about and trying to make sure that our clients are protected. Yeah. I'm curious how you think about this looping trade that's been ongoing for the last couple years. I mean, it's been like the primary driver of on chain yields for larger amounts of capital, right? You could you know, put two assets of similar or, you know, usually a wrapped version and then a non-wrapped version. You deposit this wrapped version, whether it be a

wrapped staked ETH, gives you a bit of extra yield. Then you borrow this ETH, re-reallocate into the wrapped version, and just kind of loop, loop, loop. You You can also do that for stablecoins. You can also do that for USDE, for USDC. And so, it's been a very, very big part of like the DeFi TVL just in general has been looping. And now a lot of these looped assets are stuck on Aave today. Uh a lot of the wrapped ETH depositors and stablecoin depositors are stuck. Was this always bound to happen in your opinion? Like, was the looping trade doomed to start just due to some collateral part um not being as safe as perhaps folks thought? Like, what is your honest and

just kind of broader view of looping as a construct? Uh where do you think we go from here? Since we launched um in December 2024, um we've been very staunch and very kind of stale on the fact that we don't operate loops. No. We have not uh engaged in any meaningful kind of looping strategy at all. Uh and I'll tell you a little bit as to why we think that. Um You're right. It drives TVL um reportedly very much higher. Generally speaking, most accounting mechanisms on chain don't necessarily allow for you to disintermediate between what is looped volume versus what is principal. Um The other thing is if you look at the yield kind of curves or the yields that are available to you on a looping trade, very rarely do they

actually net out to what you expect them to. They're normally subsidized by token emissions, points, grants, some kind of reward system for which that protocol or that asset issue is incentivized to give you. Now, you're basically getting paid for risk, which is the trade between risk and reward. Our stance has largely been that while those rates may appear very attractive, the probability of actuating those to your balance sheet is not that interesting, particularly for our clientele. And we like to say like like there's some sort of sweet spot. You can go and loop for maybe what we saw last year of 20, 25, 30% or you know, wonderful numbers to see. But I can tell you coming from a traditional finance background, if 20 to 25% was so easy to get from my sofa at home, then a lot more people

would be retiring early. You know, then you move down to the other end of the curve, looking at money market funds, maybe a spreading between 3 and 5% at its peak a couple years ago. Um, that's interesting, but you know, very very sure and safe and that's why people spend time in centralized banks. We try and get kind of the Goldilocks approach. Like how do we get you a meaningful rate of return above that of a money market without taking on what we would consider, you know, edge risk or consider you know, execution risk that we don't feel confident returning capital to our partners.

And I think for us in the way in which we approach our business has been loops are a great way to boost rates, but depending on them is um maybe a misguided approach. And so, looping as a construct, do you believe that it'll accelerate from here or wind down from here? No pun intended, right? >> was going to say winding down. Um, I hope that we see less of it in the sizes that we did. Um, there's a lot of design space in solving for how you would control upon that, particularly within money markets. Um, it's hard to put a lid on it. Um, there will always be actors who are incentivized to encourage that because of the metrics that it provides to a

company, to an asset, to a network, to a protocol. And I don't blame anybody for pursuing that. Um, challenge is that as soon as you introduce more and more leverage to the system, you're effectively cranking up the sensitivity dial to price action. Um, and so when you see shocks in liquidity or price, and there is an awful amount of leverage introduced into the system predominantly through looping, getting out of those positions becomes very very hard and your yield typically craters. And that's what we're seeing right now is that the APY on the borrow side for stable coins and for ETH has skyrocketed on Aave across all chains pretty much.

And so, any of these people that are in these looping strategies are unfortunately stuck. And I mean, I've seen different different markets from Fluid to Spark Lend, I I believe Aave will like looking at like 10 to 14 days before liquidations on these positions. And that's happened like just just like that. Again, I think it points to the fragility of those looping trades. If the going's good, fantastic. Continue to print money, everybody's happy. Um, unfortunately, as we've seen, you know, the snap of a finger, we've basically unwound pretty much all of the available yield. We have no clarity on how people can get out of that trade. Markets are frozen.

There's no flow. We're basically kind of paralyzed for the time being until we can see some resolution looking forward and some hopefully some positive updates from the the counterparties in this But don't you think that unlocking the markets is is better than just leaving them frozen? Like I I'm missing something here, but like I I I assume if you unlock these markets, there's going to be liquidations that are going to happen for sure and a lot of redemptions and a lot of basically like capital flight. But but from a user perspective, I to me it just seems like every day that this is, you know, going on, even for last two days, like the trust deterioration just like accelerates very quickly.

I think trust is an important piece here. Um, you know, as participants within DeFi, everybody kind of wants and expects this permissionless and immutable um, kind of framework in which we can engage 24/7, get access to money markets, get access to capital, distribute to whomever or however we want to at any point in time. And that's the the goal of decentralized finance in creating freedom to move assets wherever, whenever. Of course, as I mentioned in that layer cake model, there has to be some inherent assumptions and trust based on the tools and the systems that we use. So, there is always trust in which we engage with those systems.

I think there's a good intellectual debate to be had about like is it right or wrong to freeze and unfreeze markets at the discretion of a small an individual and or an own counterparty or a consortium. That's why we ended up with, you know, DAOs as they were. That's maybe a a longer breathier discussion to be had. Um, I think what a lot of the market will not be seeing right now. And candidly, I am not necessarily privy to it and so can't comment with any accuracy to it. But there are parties at work furiously right now to seeing if there is a way to repatriate this loss. What is the risk reward for a certain number of counterparties to find a way to fill

this hole? What duration would it take for that to be earned back? What incentive mechanisms, what economic levers can counterparties pull? That's what's happening, right? It has to be. There is no world in which a major crisis happens and there is obviously close to $300 that has effectively been, you know, spoiled here within the ecosystem, that there are not people actively working team to team, counterparty to counterparty, book to book, trying to find a way to repatriate this loss to continue to get DeFi back up and running. At what point do you effectively cut your losses and say there is no way to repatriate this and we have to socialize them? It's a great discussion and we're probably approaching some sort of time at which that needs to be solved for.

The final leg of the stool is how are those losses going to be socialized? Obviously between ETH mainnet and the the L2s that are currently exposed. And there is quite a delta in terms of what L2 holders or users would face comparatively to if it was distributed across Unfortunately, it's unfortunately like the decision for the socialization has very catastrophic effects on particular L2s, Mantle, Base, um, and I think it might be Arbitrum is is the third one. Yes.

Yeah. Those three, if if if if the choice from Kelp is to socialize to the L2s and effectively save Ethereum mainnet users, those three chains will be left with a with a big problem. Yes. Yeah. Like a like a potentially unsolvable problem at up to tune of like 70 million all the way to 130 million, I think in the biggest case. It's a tough one. Um, DeFi for the longest time has been a lot of PvP.

And because of that peer versus peer or player versus player approach, ultimately, nobody wants to give money away. Um, this is a unadulterated capitalist market where people are looking for upside and looking to protect the downside. Um, I think if you are s- speaking plainly, if you are a holder of an ETH loan right now, you want these losses socialized across L2s. Yeah. And the same can be true for the other parties. Yeah. It makes pure sense.

Everybody is trying to protect their position. It's challenging, of course, because you now have to get into the underwriting and understanding of like who is potentially at fault, who would be the responsible party in order to repatriate some of these losses, absorb some of the losses, reduce the hit that the market takes. Is there a way for us to get everybody to take a tiny haircut versus a more select number of individuals taking a heavy heavy loss? I don't know. We'll find out in the next, you know, few days. Um, as always, just to be clear, during events like this, there are counterparties out there making extraordinary returns on this volatility. Um, there's always two sides to the trade. Um,

this is a terrible situation for a lot of people. Um, but of course, this is a free and open market. And people who are connected, organized, have the right infrastructure, have the right knowledge base, and the right resources are currently making money on this trade. We'll see how long it plays out for. Yeah. You know, there is this idea of low risk DeFi that was kind of consistently talked about over the past couple months, at least 6 months to 12 months. Kind of this idea of rather than building this kind of casino on chain, we just build a resilient system for low risk, you know, low yield, really solid DeFi. Aave was kind of like the main the main backbone of that, if you will. Um, I'm just curious from what like what you

think the ramifications are from the institutional side, from the kind of trajectory that DeFi has been on as far as adoption goes. The last year has been massive. Um, you know, I think we're getting to a point where a lot of these tokenized assets are trying to come on chain, trying to be collateralized, trying to you know, being used in different DEXes. Like we're starting to kind of see this this next wave of types of different assets coming on chain. Uh, you know, I'm just curious like from your conversations, from your work, from your uh, you know, interacting with folks that are trying to design systems such that they don't, you know, face these types of exploits, what do you think the ramifications of something like what happened this weekend are on that

progress, on that kind of like snowball that's been rolling? And like what do you anticipate to change from the trajectory of DeFi? Yeah, of course. Um anytime you see major event within any market, typically you find kind of belts get tighter and pockets become a little bit more sewn up. You look at the global macro right now given the volatility and the events going on in the Middle East, we've obviously seen flows constrained. Um we've seen people looking to be more present, you know, focus on capital preservation waiting for the right opportunity to re-enter.

We'll continue to see that here. Um I think, you know, talking to the team internally over the weekend, this looks a little bit like a couple years ago there was a period of extended um hacks, breaches, losses, um bad actors kind of drifting out. It sometimes feels like a little bit of escape gas um before a market regime change. Um I think what Guy succeeded in building at Athena um came out of a period post that kind of frequent hack behavior. Um and I think that was an interesting mechanism by which we had seen everybody had moved all on chain all the time and uh ironically obviously Arbitrum's in the crosshairs of potentially a loss here, but a wonderful ecosystem that we all enjoyed playing in from a DeFi

perspective during the bull run of 2021 and 2022. Um everybody was pro com- fully decentralized finance, governance tokens were the rage, everybody wanted to participate and it was like real deep cut bare metal stuff. After a period of time when that flow dried up and there was just less retail capital participating and it had consolidated around a few actors due to the fact that PvP is a very straightforward game, the best people typically win over a long period of time. Um people needed more trust, people wanted to find a better venue and that was when the cash and carry trade really played out between centralized exchanges and and on chain holdings. Um perhaps we're headed into that next new era where we'll find a slightly more, you know, a different looking, but perhaps a

comparable outcome. You know, we run trades using centralized exchanges as well as on chain venues and maybe that hybrid model needs to come back to get the right balance of trust and execution with the cost benefits of being on chain. Yeah. So let me take this to the furthest point of the logical extreme here then. Um something like Canton is like, you know what, we're just going to black box this thing, it's going to be a permission chain, we're going to make this uh very different than traditional blockchains in terms of we have this global synchronizer, we have kind of these super validators. Effectively, what what we're doing is we are built we're building our own version of what we think that this ecosystem should look like and we're going to do it in this manner. It's going to be private, it's going to be in- institutional first.

In in order to get a wallet, you know, you have to be on a waitlist, you have to you have to get invited, it's not just uh permissionless. Like where do we like Ethereum DeFi is like maybe here and Canton is maybe here, like is maybe we're going somewhere in the middle in the future, like kind of if we take it to the logical extreme, we get all the way back to TradFi compared to like where, you know, where we are. Where do you Where do you anticipate the biggest for example, um folks were suggesting uh rate limits on bridges, right? So let's say there's a $10 million every hour is the max that you can bridge out or in a minting uh uh a minting process for a token, again,

$5 million every 10 minutes or whatever it is or even doing something like um rate limiting by like a a a region or you start to think about like, okay, we're just building T+1 settlement again or like, oh, we're putting capital controls on what we promised that was going to be this 24/7 open permissionless market. So like, you know, using this kind of spectrum in in mind, how do you envision these types of new newer primitives to DeFi but always having existed in TradFi coming to the market? Like do you expect capital controls? Do you expect rate limits?

Like how do you think about uh a more secure and resilient on chain market? I think there's two possible ways of describing here. One is like candidly just the technical components. Like what can be built and deployed on chain and can it function? The answer is predominantly yes, there's wonderful builders and engineers and great teams across DeFi and crypto more broadly and I think you brought up Canton and I think what you and all the team have built there is incredible. Um and to use that as a kind of an example here, they built something that they knew there was a willing and wanting participant who had, you know, inherently upside to using that process.

And that was predominantly large, entrenched traditional financial organizations. They built a system that spoke to a market and a participant that was there and would be readily able to benefit from it in terms of what the services and the technology they offered and they met them where they were. Um I think on the other side of it, we have a slightly more distributed view on like what gets built in DeFi. Um we went through that period of just building anything and saying, well, build it and they will come. Yeah. Um I would take the counter to that. Um I think the people that will come to use those bare primitives have been and they've a lot of them have made their money and a lot of them are not that active and then a lot of them sitting on significant pots of capital are not

going to take the risk that they inherently did in the earlier days of DeFi because they want to protect their pot of capital and they took their risk early on and they're not going to continue to take it anymore. Yeah. Um what we really care about and kind of where we position ourselves as a company is there are a lot of wonderful standards and well battle tested core components across DeFi. And how do you actually layer those into a cogent, defensible kind of infrastructure stack for people to remove the complexity because it's obvious is that there isn't a huge amount of traditional retail participation in DeFi right now. Mhm.

You know, there was an influx of retail activity around the kind of mem- memetic theme and meme coin race through kind of late 2023, 24, 25 um as it kind of really crescendoed. What we have seen then is as that has drained away, there hasn't been a new resurgence of on chain activity from traditional retail. Um So in order to get what I think is the next wave of participants, you have to get them to a point where they're willing to trust the system that you built. It has to look and feel like something they're familiar with. Yeah.

Um to the point about what can Canton has achieved. And then on the other side of it, I think ease of use. You know, people talk about UX and reporting and accounting and all these things, they really matter. Uh so for us it's a case of take wonderful things that have been built by really smart and talented engineers, compile them in an elegant fashion that gets people the right risk reward for being a participant within the ecosystem. >> Yeah. And so just a a bit more concretely here, yes, we will see kind of more of these like rate limits and these types of practices on chain or not so much? You're going to put me on the spot. Um I think >> curious like like how you think that evolves. Yeah.

I think we will we should and we would we should want for people to put more controls that are net net protective Yeah. But in a weird way, you know, I used to study policy and these are enforced regulatory frameworks. Yeah. Um but decided by whom? Is there the great DeFi council who determines which protocol could control what flows go where and of what asset? Of course not. We don't necessarily have great regulatory clarity. And so now we're distributing regulatory controls on asset flows and money markets into candidly either a distributed network of individuals in a DAO and all the operators of a protocol who have, you

know, sole discretion on what happens here. Yeah. That's going to be a really fast learning curve because those things can be shipped quickly and we will find out very quickly from the market whether they are well received. Um there are obvious upsides um in terms of mitigating downside if there are rate limit controls on these systems to make sure that, you know, truly anom- anomalous flows don't necessarily occur. Um but now we're going to start saying, well, hang on, well, should we just make the flows only um maxed out or capped during the weekends or out of hours? And what time zone do we use? And where do participants need to come from? And, you know, what should be the the history of the wallet that engages within a particular protocol? Yeah. We end up creating a lot of complexity here and

I'm not against it. I'm not against putting in stronger, more, you know, defensible and rigid capital controls around participants, particularly when moving size around. Uh protects retail. That's why we have regulations around laws and registration of large financial financial institutions and investment partners to make sure that they don't bully retail um and they operate to a certain high standard. Is that what DeFi was about? Maybe not. Is it where we going? It might be. Yeah. Yeah. So an ironic um anecdote or kind of thought experiment that's been going around is, well, don't use DeFi and Ethereum, just buy STRC, Sailor Stretch Product.

>> Mhm. Just buy a stretch product, get your 11% you're basically you're basically getting yield from a similar thesis, directionally to similar, different in terms of how it's actually operated, but you've got a guy who's going out there and he's going to he's going to buy a bunch of Bitcoin and you need Bitcoin to, you know, remain somewhat elevated here and at least not dump a lot for a long period of time and you're going to get your, you know, now twice a month yield payouts in terms of your dividend and you're going to get 11% a year and you're basically just betting that Bitcoin doesn't go to zero or doesn't go down a lot.

It Is there is is stretch just like a better yield product than Ethereum DeFi now? Like like what's your what's your kind of holistic view on the comparison of something like stretch versus like a um like a yield product on Ethereum or kind of on chain? Look, fundamentally, they are completely different products. Yeah. So, when we talk about yield, yes, 11% is greater than a lot of people are offering right now in DeFi. So, if you're just looking for unadulterated rate of return, maybe that's the right thing for you. Um if you think about the other costs and considerations that you need to take in participating with effectively a registered product, um there are considerations around tax. Um

there are considerations around, you know, effectively how do you manage that position after you register it? Um the that feels more familiar, um for sure. And are you basically comfortable with taking that bet both on the counterparty? Right, there is still counterparty risk here in the organization that you're trusting to perform over a long duration of time. Uh and then of course you're underwriting to your point the performance of Bitcoin perhaps given its current structure. That can also change and you have no influence over it. Um so, how that product and how that solution is managed for you might change and you won't have anything you can say about it. Um Now, the other side of it is that why why could DeFi be better I think is the question that you're really asking. Why

is DeFi a better choice than sitting in a stretch product? Well, one I think if you believe in DeFi, you're interested in having a say over your financial future. So, you actually buy into the doctrine of being a participant within a decentralized financial network of which you have underwritten and you have taken the ownership and responsibility of investing in that environment and you are happy with what the up and downside might be and you are fully aware of those risks. Inherently in that decision you should hopefully be able to underwrite whether the institutions or the organizations that are moving your funds, offering you a product, or securing your assets have done their job well. Um when a series of bad events occur like

it has this weekend, that trust can be really fractured. Um does that change the doctrine of why a decentralized financial system should exist? No. Um we just need to be better at underwriting and managing those risks. The next question then is, okay, so on a first principles basis, if you believe in the decentralized financial system, you should probably still participate because you believe in that and you're not just there for upside, you're there for autonomy. Yeah. Now we're talking about rates of return. DeFi rates are not that impressive right now.

Um people producing rates of return need to either diversify and think about novel ways to create that without inherently taking on too substantive a volume of risk. Um and they also need to understand exactly what the hell people are looking for. Um is it a case of utility-focused asset return? Is it about yield products diversification long-term upside in terms of farming rewards? You know, we went through the whole airdrop period for a while where everybody was just farming, farming, farming, farming and then just dumping tokens as soon as they came out and teams were kind of finding a way to finagle some some money and success through that. Yeah.

There will be a new narrative that emerges. It will be a core spark that will lead to greater rates of return and more grease coming into the system. Personally, I think we'll probably head back to a bit more of a hybridized system, um where we will get more participation with the centralized exchanges meeting DeFi. Um we will find inefficiencies and opportunities to arbitrage the performance of those two systems, um while maintaining the fluidity of DeFi and and and managing it. There's a lot of money in DeFi still. I know Arbitrum obviously sadly had a a big withdrawal over the weekend, but there's still a lot of money going around.

There's still a lot of yield. Um and there are some great people in the space. Um you know, we'd like to count ourselves among that crew of people, but um there's there's a lot of upside and a lot of worth in being a participant within DeFi and we're grateful to all our customers, of course, uh participants, but I I think any balanced portfolio should have exposure to traditional financial traditional financial instrumentation, digital assets more broadly, and I think it's, you know, fiscally responsible in the modern era with the dawn of micro payments, stablecoin uh growth, even micro payments and agentic payment frameworks coming together across AI, people should be curious and people should be participating within this ecosystem. Yeah. Definitely. Yeah, I

mean it it's it's a sign it's a sign of maturity that the the Ethereum ecosystem has had a the biggest exploit of the year, the asset itself hasn't really moved much, nor has Bitcoin. It really just kind of it's showing you that the marginal buyers or the marginal sellers are not on chain anymore that actually dictate the price. They're very much so large ETF buyers, that buyers. Saylor and Tom Lee both came out this morning and said I think Saylor announced a $2.5 billion purchase, Tom Lee and maybe another couple hundred million or something.

So, like the like the buying is just going to continue. Um it's more of the it's more of this like losing of the sentiment of like what are we what are we doing on chain? How is it like like, you know, the there's a tweet that came out that was like I mean, it was a it was a troll from Eric Wall, but it was you know, people are going to get mad at me, but why is DeFi necessary? Mhm. You know, and it's just like that kind of sentiment is where we're currently at. Yeah. Um You'd like, you know, having been through a couple of cycles now, you'd like to think that we're headed towards the bottom of whatever sentiment is going on. It's it's it's not a pretty picture out there. Certainly.

Every you know, we talk about market cycles for a reason. Yeah. Things go up, things go down. Um how you time it and how you manage your risk is the most important thing that's going to lead to your financial prosperity. Yeah. Um I think that a lot of what we see on X, on whichever social feed that you're you're following, it's to draw attention. Yeah. That whole system is to get your eyes on it. Of course. >> There's obviously some wonderful writers, bloggers, uh threaders, et cetera, who give really, really fantastic information. It's hard sometimes to sift through the noise that's out there. Um and of course it's sometimes quite fun to to read the trolls in the comments and and at least take it with a pinch of salt but

we need to have a little kind of ecosystem discussion about how well we're managing risks and are we keeping ourselves to operational standards for sure. Yeah. Nick, appreciate you spending some time with us today, man. Hell of a a hell of a weekend. I'm not sure this was the planned topic at hand, but it it doesn't feel like there's much more important to talk about, so I appreciate you. Thank you very much, man. Appreciate your time. Thank All right, guys, we'll be right back with our next [cheering] guest. Thanks for joining in. Crazy weekend. Uh you can feel like the somber in the air, but we're trying to stay optimistic, trying to stay bullish. Markets don't seem to care. We'll we'll be right back, guys.

Yeah yeah. >> Title. Alrighty.

Um yeah. So, back on KelpDAO, guys. That was Nick Huntley. If you guys are watching in Restream uh or on YouTube or on X, I'm checking the chat. I'll check it out right now. Think Aton's going to get active in the chat. There's Rob. Rob's in the building. We're going to get him up. Basically, yeah, man. I mean, this was just a very very very hectic hack. Um I see you guys concrete roadmap, CD 5 not real, the biggest CD 5. Let's go, Mr. Canton. Roadmap. Yep, good to see you guys in here. Um yeah, I mean, guys uh this has been insane. We're We're going to get Rob from Dragonfly on to further discuss what is happening here

and just to kind of get some insight into his perspective on this KelpDAO incident. But, this is the statement from LayerZero, and I think there's a couple things to highlight here that I think are a little bit I don't know a a little bit a little bit iffy. First one is there's zero contagion to any other cross-chain assets or applications. If you give them the benefit of doubt here, I think what they really mean is that um none of the other OFTs or OAPs have been affected. That being said, 50 50 protocols paused their bridges, um and we're we're very clearly seeing contagion in Aave.

Like we're it's it could be Aave, Mantle, Athena. It could be an entire suite. Um Okay so next thing is we've got this kind of highly sophisticated act was the poisoning of the downstream RPC infrastructure. Again, um yeah, I mean, on this, from what I understand is that you're supposed to have at least like three to four to five RPCs that you're using to access a lot of these uh different basically to access the chain. And from what I understand, it sounds like they it basically sounds like this whole issue was a a matter of lack of lack of nodes on the signing and lack of of redundant

RPCs on the RPC side to access the chain. Um and so here's the part that I think people got a little bit upset about. And And I don't blame them. Industry's best practice and LayerZero's express recommendation to all integrators is to configure a multi-DVN setup with diversity and redundancy. This means no single DVN should represent a unilateral point of trust or failure. And so I think everybody solely and strongly agrees with this take, but I think the part that is upsetting is that the is the part that they that Kelp and LayerZero weren't able to put two and two together that that this was happening, and that LayerZero had all of these other one-of-one implementations

here. Like I think that's like it it's easy to write this now, right? But, it's when it's actually you know, before something happens, it's that's when these things should be addressed. And so, I think I think this is the part where people felt a little bit I don't know. They felt a little bit like LayerZero was kind of just unfortunately passing the blame. And so, I think that that's kind of like where where they got that that pushback from, and it's not ideal. It's not ideal at all for them or for the ecosystem to have to deal with that.

Um and so, just to be like very clear here, we're still yet to have a resolution here from either uh KelpDAO. I don't believe they've came out with their statement yet, unless I'm missing. Uh let me look at KelpDAO. Unless I'm missing a tweet, um no, there is not been any updates from KelpDAO yet, guys, which means that we're basically still operating at the same standalone point that we were prior. Uh which is essentially that we are still yet to really understand how they're going to socialize these losses.

And I think that's kind of like the big thing that a lot of us are are waiting for. Cuz we've got Rob Hadick from Dragonfly GP after their big raise. Um I really want to talk about something else other than this, but I think we have to talk about what's happened for at least a bit. Um because it is just it is affecting everybody across whether they're, you know, a small protocol, big protocol, small holder, big holder, whether it's sentiment, whether it's fear, whether it's actual frozen assets, um it needs to be talked about. So, I'm going to get Rob in. We're going to get him all set up, and we're going to get started. So, we'll be right back, and we're going to keep talking about this, because I think it's very very important. Guys, if you're in Restream, I see you on YouTube and on and on X. Um

I will be answering your questions in the chat and can ask them as well. So, just let me know, and we'll be right back with Rob. Alrighty, guys, we are live in the

tokenization tower with Rob. Rob, welcome to the nest. I hope you enjoy the view. Great view. Not bad. >> I've lived in New York for 15 years and never been to the Empire State Building. Really? >> Not once. Ever? First time. Wow. Well, welcome. This is This is a non-New Yorker here coming to the realization that I've got it it was You know what? A lot of this choice to come up here was part product, part show, part like growing the business, and also part just lore. I can just tell my kids like for some part of life I was going to the Empire State Building each day. It's great. No, I mean, this is amazing view. So, I'm glad I came up here. Well, it's good to have you, man.

Um as I kind of told you prior to starting, the unfortunate reality here is that the topic of the day is certainly this uh largest exploit in DeFi 2026. Um Rob >> Yeah, there has as of late. Yeah. Where were you when the when this exploit went down on Saturday? Where was I on Saturday? Uh I might have been watching the Cavs playoff basketball when it happened. You know, I'm a big Cleveland Cavaliers fan, okay? So, you know, game one, they had to go and take it to the Raptors, so like, you know, beat them down bad, so it's good, great, so go Cavs. Um but no, I mean, it's like the weekend was it was tough, right? So, you know, we've got a lot of DeFi in the

in the portfolio. Nobody directly affected, everybody's fine, but, you know, you don't don't like to see this. Like you don't want to have something like this happen to the whole ecosystem. It's obviously, you know, all hands on deck to make sure everybody is okay, and so, um you know, it was a long weekend for I think everybody in the space. Yeah, it was. And it was And it's just kind of like a bit disheartening, but really just now we're thinking about the contagion and like how this spreads and who's affected and yeah, it's looking it's looking like there's a lot of potential affected parties here. Um, you know, this composability of D 5, right, is a beautiful thing. It's an amazing way to create very unique products that are just not available elsewhere, but

when you come in, it also adds this kind of like layered risk, right? And we're seeing that play out real time. And you know, like the thing that's kind of, you know, upset me is just the the the the PVP on the comm side. Yeah. I I just don't like to see like the lawyer-drafted memos. No one like it just doesn't seem like anyone's wanting to help each other. It's just like everyone's covering their own ass. Yeah, it's pretty clear that, you know, the statement that LayerZero put out was heavily drafted by lawyers. Like that's I think that's very clear. Uh, I think you said this before, but I don't think we've seen a Kelp statement yet. No. Uh, there, you know, there was like a leaked CoinDesk article where they said they saw all the draft of the memo. I am sure that has a bunch of uh, legalese in it

as well. I think there's I mean, there's a there's a real liability here, right? And so, I think that's obviously what people are worried about. Uh, it makes complete sense from their perspective. They're shareholders, you know, potentially their token holders that like they would end up doing this. Uh, and you know, wanting to make sure that they were legally buttoned up. I don't think anybody looks particularly good in the situation right now. Like there's very obvious issues around the one-to-one DVN setup, uh, that, you know, while the LayerZero team has been, you know, very adamant that hey, they told Kelp that they shouldn't have had the one-to-one. Um, you know, it seems like, you know, something like 40% of people operating on LayerZero right now have a a one-to-one setup. Like, you know,

documentation at least at some point has, you know, suggested that that is fine. I think it's also we haven't quite gotten the full story from them around how the hack happened. It seemed like it seems like from like reading between the lines, maybe there was, you know, a infiltration inside the team or, you know, inside their their their security setup. That's unclear. That might be speculation. So, you know, don't um, don't take that for for my word. But so, there's there's that piece and then, you know, obviously from the Kelp side, like they also deserve to like they should have been more security conscious, right? Like there's you know, we've seen even if 40% of the DVNs are one-of-one, 60% of people and, you know, and if what

they're saying is true, which is that the LayerZero documentation said, "Hey, like this is what you should be doing." There's still 60% of people who decided that they looked at the documentation and that is not what we should be doing. Like we should be more security conscious. We should be more on top of it. Um, there's a lot of people who have put in their own like throttling mechanism as well on the lending side. And so, there's a lot of teams that were much more on top of it than they were. And so, there's, you know, neither of them look good. They're both pointing the fingers at each other. And then, you know, there's the the obvious situation, which, you know, we can talk about, you know, what type of assets should be able to have a 93% LTV, Right. but um, you take all of it and you look around

and you say, there needs to be more thoughtfulness around the real risk of what some of these wrapped assets, um, you know, present. And there needs to be more of thoughtfulness around, you know, what cross-chain what it means to be, you know, having an unbacked token on, you know, when you're doing a cross-chain bridge, right? And like how we should think about what that risk looks like and, you know, across the L2 ecosystem versus mainnet. And so, there's going to be a lot of conversation around this, you know, I think across all of D 5 for, you know, weeks if not months. Yeah. I I'm sure you recall 2024-ish, we were in this era of like restaking being the primitive that was extremely exciting for Ethereum itself, but also

highly controversial, right? And it there was this kind of like this poses a systemic risk to Ethereum, the protocol, not necessarily the D 5 layer, but like the protocol. But a lot of folks were pretty adamant that the restaking wrapped tokens were also a threat. And I think now we're kind of seeing that systemic threat happen. You know, I I'm just curious like how much how much of this do we think is is like the the this isn't a restaking problem. No, it's it's not. I think that's a red herring. Right. But think about like the dynamic of that era of like the points farming and the wrappers and the race

and the the way that that that Eigen and Carrick and Symbiotic were all kind of going at each other in this whole kind of dynamic. Like it it it kind of created this very frenzy-like environment that was very fast-paced and and perhaps some of the lack of critical security thinking here from Kelp derived from that environment of like just ship and go because we're, you know, we're fighting EtherFi and Renzo and all these other teams and, you know, restaking is the hottest thing and we're going to go go get a big token launch. It is a red herring, right? But I think that era caused a lot of like just FOMO and it yeah.

Yeah. I Listen, I like I think like putting any of this at the feet of restaking specifically, I think it's like pretty obviously wrong. Like any sort of wrapped asset that's going like, you know, across like the, you know, roll-up ecosystem, like very clearly this could have happened to. And and so, I I um, you know, I don't see that as a specific issue. Now, I think there's well, like what you just talked about is really like a a startup problem, right? And it's the fact that we have a bunch of technology startups that are not operating like they are financial services businesses, right? And so, there's this, you know, old adage of like move fast, like break things, right? But that is a a software conversation. And people are think that

a lot of founders and entrepreneurs think they are building software when they are building finance companies, right? And so, there's not a enough thoughtfulness and enough just what I would say responsibility taken for software and for projects and for businesses that are at the end of the day securing and frankly, in many ways, operating or, you know, managing hundreds of millions of dollars, right? So, there's a reason that the bar in, you know, call it traditional fintech or financial services is much higher for how you when you and how you roll out new software, right? There's a reason that that is very high. And it's because of the fact that when you lose money, it is obviously a much bigger issue than

if you're like, whatever, B2B software platform that doesn't work as the way it should be, right? And so, I um, you know, I I kind of tweeted this over the weekend, but, you know, there are some founders who seriously understood the responsibility they were taking when they took in tens or hundreds of millions of dollars into their protocols. And there are many, many founders in our space who have not, right? And I think there is a lack of seriousness and a lack of responsibility across a lot of the ecosystem. Now, this isn't meant to denigrate D 5 as a whole. It's not meant to denigrate um, all of the well-meaning and well-acting founders that are out there. But the problem is is this is a a space where, you know, a lot of the

uh, the way people have underwritten rolling out these, you know, BD partnerships or underwritten rolling out these, um, uh, new integrations has been around, to your point, like how much yield, how many rewards, like how many like what do I think is like interesting from um, you know, can get this net new depositor. And there has been not enough thoughtfulness around, you know, what it means to be, you know, set have the right security setup and to have the the right opsec. And I'll make even a um, kind of a a separate point, which I think there's also been a lot of conversation on the timeline about AI and mythos and like, you know, how the in terms of how they think through their

security setups. Yeah. Yeah, and I think that was very evident in what happened while in the in the actual announcement from LayerZero, it was a bit kind of vague and broad as to what happened. Sources very, you know, very deep in this matter have have anonymously kind of passed several tips over that it it it was indeed an internal compromise of a key of a of a certain internal process that allowed this to happen. Yep. And then, not only that, if you think about the way that and look, I'm not here to to point fingers and to blame LayerZero or Kelp or just an objective look at how these DVNs have been talked about.

Decentralized Verifier Networks. To to kind of come out and say that they're this kind of like this decentralized immutable tech and then underneath is a one-of-one in-house signer. That also feels like a little bit misleading and a little bit wrong as well, not just from a security perspective, but from the way that these products are talked about. So, I think there's also a regime change in the way that marketing a certain products like nuanced decentralization is going to occur and there is probably going to be a lot more pushback and acceptance of pushback from people who are going to say, "Look, no, like you're this is not decentralized. Like let's look under the hood."

Yeah, and I think listen, decentralization is part of the story. Uh, there's you know, and there is like layers of what decentralization actually means. And and and I I don't put it at like the feet of like, "Oh, we just need to be, you know, entirely decentralized." Uh, cuz there are obviously teams that are much more centralized that are doing, you know, uh, taking this more serious as well. I I do the one thing that I would say to what you said though, which is um, I don't know who looked at that statement, but when you come out and you make the point multiple times, the protocol worked as intended and then but the protocol working as intended meant that you lost $300 million.

Like maybe that's not the statement that you should be putting in there because maybe that it worked as the software intended, but clearly there should have been some change to the software so that didn't happen, right? And so I I um that to me felt uh just like the wrong tone and defensive in a way that was um probably not appropriate for the situation. Yeah. Let's talk about the risk curation side. I mean, I've been hearing quite a bit in the just at desks and through rumblings through uh having conversations with institutional asset managers, whether they be curators, uh funds, family offices, etc. People or people from that world, right, are coming and they want to provide better

risk management services on chain. And so when it comes to something like Aave allowing rUSD to be listed and to not have identified through Chaos Labs, uh through BGD, or just through themselves that this was a one-of-one DVN asset, like how how do we grow from here, right? Like rather than being like this is bad, we all messed up. Like like what is the necessary steps here to implement stronger risk management practices going forward? Is it just a you need to bring in smarter people, bigger money, smart like like what is the how do we do better risk management on chain? I Listen, it's not like we need smarter people. Like, you know, the Chaos Labs team and the Gauntlet teams, like these

are incredibly smart people, right? Like, you know, these are some of the smartest people I've ever met in my life and most of the people who work at these places are smarter than I am, right? And so it's not that is not the the problem. I do think there is a probably an incentive problem in the space, which is that the often times, I mean, it depends on if we're talking about Morpho versus Aave and, you know, um and this has kind of been the point that's been made about um you know, how curation works. But some of these curators, obviously, they get uh potentially compensated by percentage of AUM, right? And if you get a percentage of of AUM, but then also you're, you know, call it tasked with making sure that risk management is appropriate, well, there is a push pull there because like

obviously if you are the result if if a hack results because of you, like, you know, you might lose all of your AUM, but you're obviously trying to always push for more AUM. This is the problem incentive problem that exists in traditional finance as well, right, which is, you know, we're seeing on the private credit side where, you know, people have an incentive to try to increase their AUM, but does that mean that they're out on the risk curve, right? And is being too far out on the risk curve, you know, where does that break, right? And so there's there's that, right? And then there's just like broadly there's also there everyone else involved is also, I think, incentivized by just, you know, having more AUM, right?

That and and and again, I'm going to make the point. This is not a crypto specific incentive issue. This is a broadly like a finance incentive issue, which is just that, you know, there is everyone who's gets paid more having more AUM. Having more AUM typically means having more yield or, you know, more and a higher APR. And so getting more exotic products being further on the risk curve allow you to have, you know, call it that higher APR. And in crypto relative to traditional finance, most of the capital is probably less sophisticated in terms of actually pricing that risk, right? And because also the, you know, treasury rates have been so low and like the on-chain like, you know, call it, you know, basic like USDC markets, USDT markets,

um they return on that has been so low. There's been this, you know, I think real just hunger for like, you know, better um more yield. And so that's I think what's driving a lot of these decisions. I don't think we solve that by and like I don't think there's a crypto specific way to solve that. There's just a you sometimes just have to learn the lesson the hard way, right? When you look at traditional finance, like how did we learn the lessons around to think, you know, tranching mortgage-backed securities, right? Like we we went through the this really bad thing and then there was regulation on the other side.

In crypto, there is no regulation that stops us from doing that. And so we have to self-police. Well, how do we self-police? That's a hard problem, right? And there that requires a lot of coordination. Probably it requires some sort of, call it like, independent body that we try to have people, you know, call it opt into that reviews maybe lending and um markets that, you know, call it, you know, it goes through a first review from the risk manager or the curator themselves, then it goes through independent review of some sort of, you know, uh whether it's like a Moody's type rating agency or or or something like that.

This is something that people have been thinking about in the space for a while. You know, again, it's all about incentives. And maybe we've reached a point where after what has happened uh the last, you know, call it you know, few months, that people will want to opt into something like that. I don't know if we have. Yeah. One of the lessons that I've heard many investors come on the show and say is that investing is path-dependent, right? You get you get these certain outcomes based on, you know, circumstances and events that are almost out of your control or entirely out of your control.

This This is a a very good example of a of how the future of DeFi going forward is path-dependent on something like what's been happening for the last couple months. And there's luck involved in that, right? Like a a a lot of the Sky guys and the Spark guys are like, you know, kind of kind of out there like not cheering, but, you know, saying like, "Look, we avoided this and we did this with our markets and this is safe and this is safe." And then then you've got other folks who are obviously having to deal with these losses. In terms of this kind of path dependency, like is there is there a a way to anticipate what the maybe incumbents of DeFi will look like as a result of this event in the future or perhaps like how you would think

about um this path dependency of exploits or unfortunate events as it pertains to like the longer term uh investing outlook in the in the space? Um as investor, how would how would this kind of change your your views? So I don't know if it actually changes my views uh at all. Okay. But that might be because like, you know, I already had maybe different views than than the market. I think the reality is is that I I'm not sure that I have seen the general feeling around DeFi be this bad since FTX. Probably or maybe Luna was

worse because, you know, that was much um more DeFi contained. It's very clear that there are a lot of people. I mean, you listen to every podcast in space right now, people are saying, "Oh, like what is the risk reward of being on chain like at all appropriate anymore?" You know, they're seeing tweets about this from some of the, you know, largest like, you know, DeFi traders, etc. And I I think there's this mentality is going to continue going forward. Now, I also think, you know, I go talk to the all of the large, you know, investment managers and the banks and, you know, uh everybody getting, you know, call it in the traditional finance side who's looking to get involved in the space, and all of them see

how much or how interesting of things that they can build if they're doing it on chain. Now, what's not going to happen is that like there's never going to be an Apollo pool that is using collateral from restaked ETH. Like that's just not going to happen, right? And so in some sense like it it matters less to them about some of the stuff that's happening cuz they're going to have segregated pools for their assets and it's going to only be paired against pristine collateral like a USDC or USDT or something like that. And so, you know, their perspective is like, "Well, I can actually build better product on chain. I can build a more modular product on chain. I can serve my customers better. I can go more global."

And I will continue to do that on, you know, Morpho or Aave or, you know, Upshift or Midas or like one of these things right? But I will only do that and like very tightly controlled, more segregated markets. But that was already what they were thinking about doing. Like that is not net new. The the broader stuff that's happening around, you know, some of this like more exotic collateral, that is a very crypto native specific thing. And I I do broadly believe that that market is going to be much tougher from here on out. You know, we we invested in Athena in um I guess it was like July or or or maybe June of '23,

right? And at that time, you know, everybody looked at us and was like, "Man, this is crazy." Because like, you know, Luna just happened and like isn't this the same thing?" You know, we were like, "No, it's very different. Like there's a from a risk perspective, like this is why it's different. This is why we we wanted to invest in it." And then Athena basically kicked off this new market, right? So obviously like, you know, you mentioned Sky and what they've been doing, but this new market of, you know, um having, you know, different types of of collateral for different types of, you know, ways to get yield on chain, Athena basically reinvigorated that and that's basically the they were the beginners of what we've seen of the last few years in my mind. And um people saw their success and then they like further and further down the risk

curve. They went, you know, call it um they were less focused or more focused on growth and less focused on security. And that part of the market, these people are taking as much risk as possible to grow as quickly as possible, move as quickly as possible. I think we're going to have just a a repellent from a lot of those people. >> Okay, that's a very very interesting point because I just had Shu Yao from Maker ETH in here, asked her about, you know, she they built Mega Ethan in a way it was just single sequencer, juiced the hell out of it. You know, forget all this decentralized sequencing crap, just go in, make the the most performant possible, you know, L2.

>> [snorts] >> Hyperliquid has been dominating, 16 nodes in Tokyo. Nobody cares. Hyperliquid's winning it. In fact, and people are tweeting at me like, "Oh man, you're virtue signaling now, but you've been speaking about Hyperliquid for the last 3 months, man. You got to, you know, get your facts straight, right?" And so, there has been this like, you know, no decentralization doesn't really matter. You know, speed, performance, product does. And like the like the market is like seemingly kind of accepted that. But you're saying that's going to get a big pushback in the crypto-native space specifically. >> so that's not what I'm saying, cuz I actually I actually think people still will not care about decentralization, right? And cuz I actually like decentralization is a form to a form factor, a way to be more secure, but um it not necessarily needed to be more

secure um in so much as like the way that crypto-natives talk about right? >> Okay. It's meaning that like, you know, you can have a you know, whatever, like a a 15 of a 16 multi-sig, right? And be a centralized company, right? Like, you know, so it is it is it is not necessarily that you were going to and and I definitely don't think we'll actually have a um a kind of a revolt or repellent away from, you know, the people who are centralized if people think that they are taking their jobs more seriously. Right. What I do think we will see a and and I I guess what I my point was more specifically around um like the lending lend borrow money markets and collateral because there's been a a push to use

more and more wrapped tokens, more and more kind of like further out on the risk curve, like, you know, call it, you know, we're calling these stablecoins or or or wrapped tokens that have, you know, something that's less and less stable underneath them, right? To to proliferate that in DeFi. And I think that part of the market is going to get re-rated uh because of the risk. People are going to be less open to taking that type of risk. Um uh listen, for you know, there's a lot of tweets about Hyperliquid. I you know, I'm I'm I you know, having known Jeff for a little bit and you know, I I think like they will do hopefully as good a job as possible on the security side and it's been on their minds um a lot. And so >> Yeah.

But I don't think um I still don't think people will I I consumers just do not care about decentralization. >> Yeah. Yeah. On that, so is is it fair to say that the vault isolated lending model is going to reign superior over time to the pooled model? That that there's obviously pros and cons of both and we don't even need to make this a Morpho Ave thing cuz Ave is already kind of thinking about this with V4, but you know, in in instances like this, in this kind of heightened risk environment, right? I remember in 2020, Ave had like five assets. ETH, wrapped Bitcoin, Chainlink, USDC, and USDT. That was the only five.

Yep. On V1 and V2. Every time. And then, as you say, it kind of, you know, grew and now grew out of proportion. Do you think that the isolated model, even though that has its cons, is going to be the kind of leading growing model for the institutional adoption, for larger allocators cuz they want that control? Or kind of how do you envision this market Yeah, I mean, institutions like that that's the only way they're going to operate. 100%. Just the vaults. Yeah, that's the way they're going to operate. That's the way they've been operating today. This type of stuff only makes someone operate like that, you know, more more more cleanly.

Um it it obviously does have you know, drawbacks, right? Relative to like how we think about capital efficiency and um and and being able to make, you know, call it, you know, full like more most wholesome returns. Um and you know, broad composability, right? But there you're never going to convince a Fidelity or an Apollo or even like a Revolut who, you know, they might just you know, maybe Revolut just wants to have a Bitcoin product like Coinbase has on Morpho, right? But you know, Revolut's going to want their product to be segregated cuz it's going to there one, there's regulatory reasons for that, but there's an accounting reasons for that, but there's also just risk reasons for that as well, right? Um and so I I I think if if your perspective is

the same as mine, which is that call it this next phase of growth is very institutional, then and when I say institutional, that also means call it, you know, distribution channels through fintechs and through, you know, banks and things like that to consumers, so like B2B2C, then um that is the only way that that proliferates. Yeah. Interesting. And then, you know, we had this rise of these, you know, quote unquote stablecoins, yield coins, you could say. Um also different types of wrappers and different types of like uh collateral backings. Uh Athena actually notably just came out and expanded their collateral backing uh as a result of kind of the basis trade changing, you know, more RWA backing, more kind of

interesting commodity-based uh trading strategies, etc. You know, curious like when people are thinking about riskier for these wrapped, you know, Ethereum assets, they'll probably start to naturally start to think about the risk of USDE and of other stablecoins, USDS, and all these kind of yield coins. And now that the the stablecoin markets are being affected in Ave where a lot of these looping strategies were being ran, I'm curious kind of how you think the market reacts to these, you know, not stablecoins, but yield coins, not these genius-compatible things, but these actual like yield-generating stablecoins, if you will. Is there going to be pushback there? Is there going to be more acceptance? Is there going to be an opinion or is it just going to kind of be the same thing? No, I think it's like

the teams that have proven that they take this seriously and have proven that they like understand how to manage risk, like they will continue to be the assets that people, you know, that people flock to, right? It's going to be harder for what I would say like a net new startup to win I I think the trust of people today unless they go about way uh things in a in a certain way, but you know, for something like an an Athena or Sky, right? You know, the the Athena guys and and and Guy and his team, you know, they were ahead of the curve pretty much every step of the way in terms of how they thought about security, right? And so, they've done, you know, when it came to, you know, even like 1010 with USDE when they had the, you know, isolatedly um

USDE depeg on on Binance, you know, they were specifically telling Binance to um that they needed to have direct mint redeem uh enabled and that they needed the to um when they thought about how they were thinking about their uh oracle setup that, you know, it couldn't just be to their own order book, that it needed to be, you know, much more broadly. And and and had Binance gone and done those things, we wouldn't have had the depeg on Binance, right? >> Yeah. And so, when we think it through, you know, how that team has operated, they've operated with a level of professionalism that has put, you know, these other teams over the last few weeks to shame, to be honest, right? And so, it's important to understand the risk that you're taking in these products, whether

it's, you know, Athena or Sky or, you know, any of the other numbers of of challengers out there, and to understand what underlies, you know, that risk, but it's also important not to reflexively, you know, kind of I I would say like, you know, try to act like, you know, this is like a an issue because it's, you know, is non-standard, it's like non-US dollar risk, right? And so, you know, from a if you are going to enter into a position that says, "Okay, well, like I understand that this is the basis trade. I understand that the basis trade can turn negative. I understand that there this thing is, you know, call it, you know, has a tripartite agreement, so none of it is um you know, actually on uh is is posted to the you know, exchange

itself, but that there's this, you know, 2-hour period where I could lose that P&L if, you know, things went um if things went awry." Like when you understand that risk and that risk is very clearly laid out for you, then uh you know, these products they they're just financial products, right? And they serve an important part of a, you know, big financial ecosystem that's building around, you know, DeFi and and crypto. Um but it's just about understanding what those risks are. And some teams have been better than others about being very clear about what they're doing. Some teams have been better than others about being very clear about what their oracle setups look like, but what their custody setups look like, how they think through managing in you know, times of dis- of stress. Um and those battle-tested

teams, I think will actually be better coming out of, you know, everything that's happened in the last few weeks. >> Yeah. Yeah, I would anticipate a consolidation of capital as well, right? You know, once these once these funds on Ave become unfrozen, I anticipate also kind of a changing of capital structure and in terms of people allocating there or elsewhere, but generally like, you know, seeing more of the cream the cream of the cream kind of be become more enshrined, become more of an incumbent. >> Yeah. I I wonder what you think about this the trust deterioration as a result of the frozen funds for the last 48-ish hours, right? Like I'm kind of for one a bit shocked that that that the main ETH

market and a lot of the stablecoin markets are still bricked on Ave. Um I think as every day goes on, like the the the trust, you know, it it it goes down a lot. And the users are the ones that are suffering from the PVP coms and lack of cooperation here. At the end of the day, Kelp DAO has to make a choice here. I believe is kind of what the sentiment and and what the common consensus is. I'm just curious how how you think about the trust as it pertains to the frozenness of these funds? And then this is going to kind of take us into a conversation about rate limits, about T+1 settlement, about these funny things that TradFi has that we've kind of avoided, but now are seemingly coming back into the

conversation as like a way to kind of backstop and to prevent what's happened to happen again. Yeah, I I I I maybe take a little bit of a different view here, which is that everyone is working tirelessly behind the the scenes of like figuring out how to get the best possible solution for depositors. Right? And so the this is taking a long time, but if you allow a run on the bank, uh it is literally it's it's net bad because it's literally just bad for the markets, it's bad for um whoever the last person out is, right? And it's not it it usually doesn't allow for us to, you know, get to some sort of agreement that is maybe probably the most EV positive thing for

everybody. Right? And so there's I I I think a general understanding of that is okay. Uh I'm probably going to get like blown up on Twitter about this because like everybody's, you know, wants to get their uh their money out, but I I think like that's fine. And there, you know, I I can tell you I can't tell you exactly what, but I can tell you that, you know, we've been part of conversations where I've been or people have hit us up about things that they're trying to do to try to figure out what's what's what's best going forward. And so people it's not as if there is no work happening, right? Now, >> um that maybe goes against like the general ethos of of a lot of people think about when they think about DeFi, but the reality is the space is getting more

institutional. Like we talked about it earlier, everybody's clearly lawyered up. There's everyone's trying to figure out how to, you know, formulate a response. Um and I, you know, what ends up happening in terms of like, you know, who takes what losses when and how and how much um is still very much uh up in the air, but I, you know, I think it will be whatever it ends up being, it will be better than if we had allowed, you know, the markets just to have a run on the bank, Yeah. um So I guess that's point number one. What what was your second question? Then the thought was around, okay, you know, this could have been prevented if this mint function on RS ETH had a $10 million per

10 minutes or $100 million per hour even, right? Or if Aave had a uh a limit on the amount that you could pull out or deposit at at at a given time. Could be every hour, every block even, something, right? Just something to make it harder than just like a you know, a false sweep of a button and boom and then all of a sudden you you deposit 300 mil, you pull out 200 and then you're gone, right? It's it's there's also this kind of like meme going around. Mert tweeted it like, "Oh, so this is why TradFi has all those middlemen, right?" And then people are like, "No, buddy, that they're the they're the cause of the problem." But talk to us about kind of how you envision rate limits or more kind of concrete on-chain security practices to

prevent large-scale exploits. Obviously, you can't prevent everything, but how would how do you envision the space evolving from that perspective as far as like maybe learning a bit of something from traditional world or at least implementing more guardrails up upon the true ultimate open liquidity dark forest that exists today? Yeah, yeah, so I sort of I responded to Mert's tweet cuz the if you look at the last like five or six years of DeFi, the people in DeFi learning about what happened in TradFi and like learning the same mistakes Yeah. uh is like probably the like the most undefeated thing that has happened over the last five or six years because you have a bunch of like, you know, like interested technologists who like haven't worked in in a lot of them have not worked in in finance and

are like, "Oh, how would I build this thing if I was on first principles?" And then they're like, "Oh, like this is how you manage risk." Like that's a lot of what's happened. Um and unfortunately, it's happened with a lot of other people's money, right? And I the I guess getting back to the what we talked about earlier with some of the more serious teams like people like Aave, they'd already done that. They already had limits, Right? Agoric had that as well. Yeah, Agoric had that as well, right? I think I'm sure there's a bunch of others who have done it, right? Because there's absolutely no need and it makes absolutely no sense for someone to be like, "Yeah, I got a, you know, full port 300 million right now." Like that makes no sense, right? Like and that would never happen in any market.

There is no institutional real investor who would be like, "Oh, yeah, this has to happen this way." Right? There would never it's a little bit annoying, but it would never get real pushback from anybody who's thoughtful about it. And so I think [clears throat] the reality is is that you don't necessarily need, you know, a bunch of middlemen like like like Mert talked about or maybe you need, you know, more, but you do need, you know, um like fully being able to allow people to do whatever they want at any time they want is like clearly not like the best solution, right? So doing things like putting rate limits in there like I think it's going to be standard from here on out, right?

>> Yeah. Um I I don't know why anyone would not have had that and I don't know why it wouldn't have been the standard on um for a lot of these markets. And this is not a new conversation, right? Like a lot of the teams were building this themselves already. Uh and so like if they were building it themselves, obviously there was already conversation happening about it at, you know, Aave and Morpho and, you know, um etc. Uh and so I I do expect that you know, with how much damage has been done over the last, you know, few weeks and over the last few years, I do expect that we're going to have more fullsome conversations around putting in some of these more TradFi-like,

you know, checks and balances going forward. And you know what? If it really bothers you that you can't put $50 million into uh you know, a single borrowing market and, you know, in one single transaction, then like, you know what? Who cares? I I honestly like I I could care less. Yeah. Yeah. But so there's a spectrum here, right? There is like where we are now on on-chain DeFi and then there's like T+2 settlement and like KYC and everything that comes with that, the lack of composability, the wires, the ACH, the bank accounts, right? Like somewhere somewhere in the middle here is like,

you know, the Tempos and like the Cantons and like the like the corporate blockchains, if if you will. And then like somewhere in here is probably where we're going to end up getting closer to for the more like open public chains. Yeah so I mean even traditional markets are going away from T+2, right? And so like there's a uh I I think it's very clear that, you know something And we talked about this a lot in payments, so this is kind of a specific point cuz I think it's actually been it's been more talked about in payments recently than it was stablecoins. Uh you know, atomic settlement is not something that actually that a lot of people want, right? And so like we talk a lot about like atomic settlement being like this like, you know, big unlock.

Uh the reality is is like that is actually how most payments happen. And while people want faster settlement than we have right now, atomic settlement is probably not it. Um and so like, you know, what is the middle ground to your point? I think we're all still figuring that out to be honest, right? And there's risk, there's like credit, there's, you know, how do you think about uh you know, how much risk is too much risk? There's KYC and there's like all of these things that go into, okay, well, you know, why should we potentially throttle a transaction or have, you know, some sort of settlement time in period in uh baked into the transaction.

I expect that these markets are going to just continue to bifurcate, which is that you have the institutional markets and, you know, we talked about it, okay, we're going to have siloed out, you know, segregated, you know, asset management, you know, specific, you know, institutional markets. You're going to have the same thing is going to happen on the payment side where, you know, your maybe atomic settlement happens in the system, but you KYC at the, you know, at the entry points, right? But there's going to be these markets where you have permissionless DeFi over here and you have, you know, the smart contracts and the protocols that people can interact with. And then you're going to have a lot of the institutional side of the market over here. And there's going to be, you know, a lot less of that.

There's going to be a lot more of that, you know, call it, you know, throttling and that KYC. I I I expect that So it depends a little bit on the regulatory environment. Where I think most of the industry is trying to get to, if if you think about not just what's on Twitter, but like, you know, what's happening in DC, most of the industry is trying to get to well, let's, you know, KYC people at the end points and let's let the protocols, you know, do the thing that they are supposed to be doing to the best of their ability. And maybe there's segregated markets, so the protocol you can take full control and full use of the technology and you're KYC'd at the end points, but everything you do in these like walled gardens is able to to, you know, be

the way that, you know, you would intend the software to to to be. Um and I think that is probably where we are going, but it is going to be a segregated market from everything that happens on re-staked ETH across, you know, all of the L2s. Uh and that is, you know, I think for a lot of people not the world that they wanted to see when they came into the space. And I think for a lot of people it's not doesn't ideologically fit with the things that they believe. And they, you know, still continue to believe that you know, crypto is meant to be like cypherpunk permissionless money. And and there is a part of that market that will continue to exist. I just think if I if I look 10 years in the future and I think about like the market cap and the

economic activity that's happening on-chain, I think the part over here, the institutional part, will just dwarf everything that's over here. Yeah. Last thing from my side on, you know, kind of on on this point, on the more kind of retail DeFi on-chain finance that a lot of us, you know, who are listening and a lot of people have been around for a while have kind of come to grow and love. You know, there's often this inverse relationship with central bank rates to DeFi rates because borrowing activity of stablecoins is very high when interest rates in the macro are low driving more speculative activity. You borrow you borrow a lot of stablecoins, you you get long. The the rate goes up, all of a sudden DeFi

is amazing because the risk-free rate is, you know, 2%, 1 and 1/2, 2.25, but the DeFi rate is 4 and 1/2, 5 and 5 because, you know, people are willing to pay that. And then obviously what's been happening as of as of late is the opposite is the risk-free rate is 3.5, 3.75, the DeFi rate is 2.5. It's terrible, right? But this, you know, this too shall pass and and this will change. I I think probably quicker than people think. With that being said, what what do you see as catalysts to kind of reverse the sentiment, to reverse the sentiment around the entire DeFi complex and generally the way people think about this asset class?

Uh this bear market has not been that bad from a price perspective for the majors. For the other tokens, it's been a bit rough. It's been almost like a cold front, at least from my perspective. It hasn't gone on long enough. We'll see how long it does last. But the sentiment is really, really bad and the perception I think has suffered once again. Not to the same level of FTX or anything, but internally. What are some catalysts that are going to drive a turnaround here for the market for DeFi? Yeah, but people I think this is like not super obvious if you don't if you don't think about it really closely, but the last maybe 15 months have been 16 months have been probably the single most value destructive months of crypto history.

And it's for retail specifically. And this includes FTX, this includes Luna. Because when you look at what happened, you know, you had the Trump meme coin and then you had Milania, and you had everything that came after after that and all the drawdowns. You had the Terra of tantrum. And then you had what happened on October 10th. And you look at this and you just you look around to, you know, the retail users of DeFi and now all the hacks that we've had recently. And it it's hard to see a world where probably 90% of the retail users have lost significant amount of money over the last that period of time. And at at a time when risk assets more broadly, you know, we're back at all-time highs in

the equity markets. Inside. And so I I think that, you know, along with what you just said about rates has made it really hard for people to see the risk reward of just being in DeFi and just being in crypto as worth it unless they're people who have already made their wealth on chain. And I think there's probably a lot to be said about tax situations that are going on there and, you know, how people are are are thinking through them you know, the the future of their, you know, wealth. Um And so, you know, what do you need to get those people excited about this space again?

I I hate to say this like this, but you probably just need better price action, right? Because like the reality is is when people figure out that they can make money, they come back into the space. And then if we can get more controlled price action on, you know, the way up and like less volatility, it means less institutional interest from a trader perspective, but it probably does mean more um long-term oriented retail capital can come into the space. I think there's another point that you made there, which is, okay, well, like the majors hasn't been that bad, but the altcoins have been. I do think we're about to see and we've been seeing a lot more dispersion and there's just a lot less correlation, right? It used to be the case where, you know, I'm sure you remember '21 where like,

you know, you were you know, it went from a major to whatever to whatever the meta was at the time and every AMM went up and then every lending protocol went up and then every gaming protocol went up and then like, you know, it didn't matter if you were in the biggest piece of that ever existed. Like, you know, it went up with these other things that that went well. Um and uh that's just that that era is gone, right? There there you it needs it's going to be harder to invest in this space. It's going to be harder to trade this space. And you're going to have to have it's no longer going to be about finding beta, which is basically what everybody had before, and it's going to a lot more be about finding alpha in the future.

Rob, thanks for joining, man. I appreciate Thanks for having me. >> Tough week for DeFi, tough weekend. Um but we will we will get through this as we always have. Yes absolutely. >> uh ladies and gentlemen, that's the show for today. Uh I see you guys on YouTube. Toss a like, throw a subscribe. Thank you for joining today. We'll be back tomorrow. A hell of a weekend. You can hear it in my voice. There's a bit of somberness, there's a bit of bit of reality checking uh for anyone who was affected. Wishing you guys the best. Hoping Kelp DAO can come out with a better statement than what they're currently planning, which is just to shoot down Layer Zero and have more kind of legal uh mishmash, but we'll we we will see, ladies and gentlemen. Rob, you will will be back on

the show, I think, Wednesday. So, it should just be me tomorrow. See you guys then and uh stay safe out there. Hey. >> [music]