The Makings of a DeFi Credit Boom | Tushar Jain

Transcript

the average users and the average borrower dollar really wants to have fixed rates I don't see any reason why that would be different in defy if we want D5 to go mainstream I think you know we have to go meet users where their preferences are and they have clearly expressed their preferences here in traditional Capital markets [Music] welcome to another episode of bell curve you know who are we talking to today too sharp baby James oh what is up with that accent never do that again but we are talking this is the best intro to charge ever got right there all right you you go you take this uh he's gonna listen to be

like I'm never doing an interview with these guys again um yeah all right there actually is a method so too short Jane uh obviously he's a managing partner multi-coin uh he's we called him on for two reasons so in episode one we talked to Michael and Vance about you know the death of C5 which is a little bit of a you know marketing gimmicky kind of name but basically all of this the recent implosion of C5 leverage taking way down it's gonna push activity on the margin out into D5 so that creates an opportunity to char actually outlined what one of those opportunities were so uh in October of last year he read a really great piece called exploring the opportunity for defy interest rate markets and what he basically was talking about was the need for exactly what our thesis is fixed rate borrowing right

um which he quoted from a paper that uh notional wrote Teddy's actually coming on the Pod as well in 2018 there was 15.3 trillion dollars of debt outstanding in the U.S uh corporate debt Market 80 of that was in fixed rates he also outlined that the way that you do that is through this market for interest rate frauds which we talked a lot about in the pilot but that's basically an interest rate swap is a swap of different cash flows in the future so you swap you know I've got interest rate X you've got interest rate y we agree to swap cash flows it's a way to hedge but it's also a way to lock in fixed rate borrowing so he kind of outlined what the opportunity for that was in D5 and what some of the different models that people were trying so he actually got

into like in the weeds right of how it actually might work but we also he also he's in the process of building out this really interesting thesis about what catalyzes bull markets right so he says it's a it's an innovation in token distribution right so in 2017 and icos it was because back then it was all about proof of work type coins you didn't actually need to go out and and create all of these different get all these different people to verify your network you could sold pre-pre-mined tokens right that was a big innovation in terms of Distributing tokens boom led to the big boom in icos then you actually had launch pads like in 2019 there was a finance launch pad when you could just launch directly in a compliant way onto binance so you have a bunch of liquidity there that caused a

little mini bubble then more prominently your D5 summer in 2020 which was yield farming and then you had nfts but basically the idea is all of these things I think to us right they look like some form of equity financing which are these protocols they're giving away tokens which is kind of ownership right in the protocol the right to vote their governance tokens in general and that kicks off these these bull markets but in traditional markets you know you know I've talked about actually what what usually ends up kicking things off is a bubble in debt you know most recently that was cdos in in 2008 for the great financial crisis you can go all the way back right I mean like Michael Milken in the the late 80s uh you know slinging junk bonds around you basically create an asset class for that in the United

States so you so basically mapping these two concepts together the unlock that gets created by fixed rate borrowing and this idea of equity financing Innovation Equity financing kicking off bull markets you know we wanted to get his impression of do you think that there's ever going to be a debt-based bull market something you know a debt-based catalyst that kicks off a bull market in crypto and so that's what we got his opinion on I added no value to this intro I think you said no you did not my friend I added arguably negative value all right buddy well we can we can wrap it there let's get into the interview with two shot boom let's get into it all right everyone welcome back to another episode of bell curve uh today we're joined by uh managing partner at

multi-coin Tushar Jane Tushar welcome to the show hello uh it's great to be here thanks for having me yeah man we're really excited about it um we've got two really big topics that we want to cover with you today they're going to seem different when I outline them here but we're gonna make him connect at the end of the episode so we're going to talk about defy native interest rate markets which you wrote a great piece on back in October of 2021 the previous year and this really interesting new thesis that you have on distribution distribution mechanisms around tokens and how that leads to our tends to catalyze uh different bull markets in crypto uh but I want to start with kind of the high level uh on the interest rate Market side of things so you wrote this great piece again back in October of 2020 2021

of this past year uh talking about this big opportunity that you saw for a market for interest rate swaps so can you just give us the overview of like why did you write this paper and what do you find interesting about the market for interest rate swaps in crypto yeah absolutely so I I like looking for Primitives uh you know things that can be composed to build bigger products with more features and such and when it comes to defy there is nothing more primitive than an interest rate swap in my opinion uh so much of modern Finance is just about uh borrowing at fixed rates versus floating rates and the Arbitrage between them and you know the fixed income

market and interest rate derivatives are by far the most liquid derivative out there interest rate swaps are like at least as of the time that I wrote this post in October six and a half trillion dollars trillion with a t of daily traded volume and it was over 80 percent of the world's total derivatives volume like these are staggering staggering numbers these are the you know some of the deepest most liquid markets out there and then I looked at defy in um it's Incarnation right now and it's almost all variable rate Lending um like I would say I would go so far as say it's like 90 98 99 or higher percent uh is variable rate and that introduces

risk for borrowers now if I'm a borrower I may not want to take out a loan that is a floating rate loan just like you know people may not want to take out like floating rate mortgages because then when rates go up like your debt service payment your interest payment goes up and you may not be able to afford it and then you get liquidated that sounds terrible um right so I think that there's a lot of people who don't want to borrow at floating rates especially mainstream users I think uh are more partial to fixed rates if you look at what you know the traditional economy looks like and so that's where I saw an opportunity and the very nice thing here

is that what something like interest rate swaps you can compose floating rate and fixed rate markets together so you can enable efficient Arbitrage between those markets and you can have the liquidity of one market help you know kick start the other Market because you're able to to have this very efficient construction so that's what I found very interesting very interesting about this market and that's why I wrote that post we also made an investment in a protocol called strips which we announced in that post that is building interest rate swaps yeah um so I want to just start for those who might not be familiar with this Market because you're right it's a huge market and actually when I read those

statistics in your in your report I just had to go look it up it's like it's really this big of a market it's and it's an enormous market so can you just walk us through it like at a high level what an interest rate swap is and how this super large super liquid Market transforms variable interest rates in tradfite into more fixed income rates like what is the actual mechanism look like uh so there's a variety of mechanisms um that can be used and what we tried to do is understand the design trade-offs of each of the constructions um that's that's usually our like Mo when it comes to analyzing a new complex large Market uh you know usually I don't

think there are like there's a right answer for a design of something like this there are trade-offs along the Pareto Frontier and it is helpful to know you know where is that Pareto Frontier so there there's a few constructions for fixed rate lending or or interest rate derivative markets I think the simplest one is zero coupon bonds this is very intuitive and easy to grasp I borrow money I have to pay you back I borrow X dollars I have to pay you back y dollars at you know Z date uh and that's it um and that can be a liquid tradable aspect for you like a bond and you can

go and sell it someone else and I would have to pay them back this is an interesting primitive just because it is very simple uh it supports both fixed rate lending and borrowing so both sides can have fixed rates which is which is helpful It's relatively safe because everything is over collateralized and very interestingly this allows you to build a yield curve on top of the protocol because you can see the yields at which the various bonds are trading with various maturities and having a yield curve is like one of the most important kind of analytical Tools in financial markets so

um that's what's powerful about this construction the the downside though is that it fragments liquidity across these different expiries um you need an oracle for the collateral um or debt ratio and this introduces some risk um and it's Capital inefficient for speculators or market makers it is very simple and efficient for organic market participants who want to be there like you know the lenders and the borrowers but if you want to increase the liquidity of a market you have to you know make it easy and efficient for market makers as well who are showing up you know just to do the

the math and collect Arbitrage profits and zero coupon bonds don't do the best job at that there's a bit more Capital inefficiency there no I think that that's a that's a helpful I mean really what I what I just wanted to make clear to the audience right is that like just a swap is just it's a swap of future cash flows right so if there's company a and Company B they agreed to say at a certain point in the future you can swap uh different different cash flows and the way that that works right transforming a variable interest rate that like the kind you might get from ethereum right which there's a there's a variable stake right there there are variable rates that get produced on compound and Ave is you might say hey I don't want to take any of that variable risk so you can

basically do something like an option right and say I actually want to sell in a future date the option to collect this amount basically uh and that's good for whoever sells that right they're kind of taking a speculative bet that interest rates aren't going to spike and then you as a borrower get to lock in a fixed rate um and you kind of mentioned why that there was a preference uh for borrowers to borrow at a fixed rate I think Jason and I have as operators of company have a pretty good intuitive understanding of what that is but like walk us through why you think the the market for fixed rate lending might even be bigger than than variable rate lending right because compound and Ave have been great but I think there's some limited upside there because all you get is this variable yield that if you're a company you can't

borrow at two percent knowing that it might Spike to 20 the next day right so like walk us through like more concretely like how does this expand the market just for Lending products in crypto in general yeah I mean I think we can look at traditional financial markets as a signpost here I I generally think that we in defy are speed running the lessons of traditional financial markets yeah you know basically everything that took traditional financial markets 150 years to evolve like we're doing it in five uh yeah which is pretty incredible and so when you look at traditional financial markets like um in 2018 there was about 15.3 trillion dollars of debt outstanding in U.S

corporate debt and Mortgage Debt not counting Sovereign treasuries and 88 of that debt was in fixed interest rate terms so like the market has spoken very loudly uh that you know the average people the average users and the average uh borrower dollar really wants uh to have fixed rates I don't see any reason why that would be different in defy if we want D5 to go mainstream I think you know we have to go meet users where their preferences are and they have clearly expressed their preferences here in traditional Capital markets how does this teacher how does this work in traditional Capital markets right it's I don't think you ever have a borrower who goes into a bank and it's like I want to do a swap

give me a swap they go in and they say oh I want to do I want to fix I want a fixed rate loan right so then the bank says okay we'll give you that fixed rate loan they take that and they basically give that to what the interest rate swaps desk and the and the desk trades trades the loans out like how does how does this act what are the mechanisms of how this works in traditional Capital markets right now yeah that that's fairly accurate um basically you have the the banks managing two things here you have the managing credit risk and rate risk right uh you don't want to be you know a long-term lender at one percent interest rates before the FED goes and raises interest rates a

whole bunch right like that if you just do the math on how much that bond is worth after uh rates have been raised like you as a lender are losing money on a mark to Market basis um so Banks typically very strictly monitor what their interest rate exposure is um to understand what would happen to the marked market value of the loans on their books as interest rates change and frequently uh you know they will go to like an interest rate swaps desk basically a group of Traders within the bank that will hedge out some of that risk for the bank by saying like uh you know I have too much floating rate risk

I will sell you the income that I will get from these loans in exchange for a fixed coupon payment that you pay me uh that that's the the simplest instantiation of it though these contracts frequently get extremely sophisticated and complex uh with tremendous amounts of Leverage in them right now um you know to your point just about fixed income markets fixed rate markets being much larger than variable in crypto right now across many of the D5 protocols like your makers your compounds your obvious there's about 10 billion dollars worth of outstanding loans um if we use that 80 analog from tradfi they were saying maybe even today right if the ability to borrow in a fixed rate existed you could expect that market to

be somewhere on the magnitude of like four times larger um what you what you also need there though is like you need kind of product Market fit for these credit products and what we haven't really seen actually is like who's going to step in and like who wants to borrow at the fixed rate you actually outline two different groups I think that might provide some of that demand for borrow so you kind of talked about like neobanks and institutions and then you actually talked about Dows which I thought was extremely interesting as well um I want to start with like maybe the Neo Bank institutional side of things like what does demand look like from that customer segment how would they like Leverage um the existence of like you know fixed rate credit products um and kind of you know proliferate there yeah I think Neo banks are more on the

supply side of this Market um I think that fixed rates are interesting because then if you are a neobank you can offer fixed rights to your depositors uh right and you're not taking the risk of you know offering a fixed rate but earning a floating rate you're able to properly hedge it out um which I think is uh really preferable for a lot of these entities right they they don't want to take that risk right no one wants to really take that type of uh mismatch um I think the your Market size characterization sounds right uh I think that there's a very significant

um Market that is not being met yet for D5 lending and I have two theories for why that is one is our conversation that we're having today about fixed rate markets but the second is the nature of collateral in defy lending versus in traditional Finance the fact that all lending and D5 is over collateralized is hugely restrictive on the market for Lending however without the ability to have legal recourse to go after a delinquent borrower it is very scary to lend you know an under collateralized

defy uh Pro protocol like that that's just asking for trouble right like you're putting those pennies down in front of a steamroller or you're picking up pennies in front of a steamroller and then you have like a giant three arrows type event and it like you know can wipe out all of the earnings that you've had you know in the past 10 years or something crazy um because you know they weren't collateralized and you don't have any recourse uh so if that's the case that's actually pretty bearish for defy in in my mind uh because I I don't see a plausible path for under collateralized lending on defy without legal recourse

scaling to you know the billions of dollars of scale without tremendous tremendous risk yeah I I think under collateralized Landing is like the big that's one of the big white whales that has because again I don't know those statistics off the top of my head but the amount of lending that's collateralized in Trad Phi right is much much smaller right like an order of magnitude smaller than under collateralized lending which also just makes sense usually people go uh to get a loan because they need Capital not because usually if you basically over collateralize uh lending is like you're trying to leverage your existing Capital um so it's just a very different very different thing um I I wanted to talk about dowels here for a second uh yeah yeah at least I think

that that is maybe the one place where under collateralized lending and defy can work because you're lending to a Smart contract you're not lending to a person or an entity you're lending to a contract and that contract is the shelling point for the community it's not easy to change it right if you have a very large Dow uh you know let's say with 10 million contributors in it uh and then you go take out a loan for you know let's say 100 million dollars um on the future cash flows of that Dow whatever the Dow does uh it is hard for you to then say get all 10 million people to switch to a new contract and avoid having to pay your debt uh of course the borrower could

still default like if the Dow you know stops earning cash flow or something for whatever reason like that is possible but you can't easily willingly default you can't like game the system and so that's why I think uh you know protocol to Dao lending is probably the the most interesting spot for growth in D5 credit markets I I tend to agree with you and I would actually plus one that with um like what do you think about this idea like if a lot of the way that these dials have grown right they've they've done things like yield farming which is basically bootstrapping right through something that looks like related to equity financing right given Equity like instruments in the form of tokens out to

their Community pull growth forward from the future um that's great that's really works super well but I think what people are kind of starting to realize eyes in the spare Market is that you bring on a lot of mercenary type liquidity it's a very expensive way of acquiring new customers and because it's Equity financing right So eventually it makes sense to me that dials will pursue some form of debt financing right they'll start to add debt to their financing mix as opposed to just 100 equity and even if you think about something like Ave will have been around you know maybe by the time the next Bull cycle kicks off for like five to seven years like depending on when that is like that's typically around the time where companies are mature enough have steady enough cash flows to pursue some form of debt financing in there so there's also just

the sense of like eventually people come in they'll start managing treasuries in a much more traditional way and they'll start pursuing Finance in a much more traditional way I think it makes a lot more sense for Dows to go through like a defy native credit product than like going to a big bank or lender I don't know your thoughts are there yeah I would agree um I think if you have a protocol that is earning cash flows uh that that can be quite attractive uh lending Marketplace is a little bit weird here that's kind of like a bank going to The Lending markets which is a very complex subset of the credit markets um that that's less about uh yeah that's more about like Capital markets than than

um other like credit type things uh so I'm really excited to look at Dows that are providing some good or service outside of borrowland that earn cash flows you know like let's say um Sushi swap would be an interesting example because like they are in five bits of all trading volume so if they wanted to borrow money because like I think that that would be interesting uh right unit swap doesn't really earn anything so I I don't think that that works so it's actually quite limited um right there's only very few protocols out there that earn real cash flows that

are not borrowed land marketplaces two-star roll I mean we're all kind of nodding our head here saying agree like we need fixing uh fixed interest rate loans and D5 this whole you know Dows will start borrowing uh debt instead of just capitalizing their business businesses with Equity why hasn't this happened yet though what's what's been the missing link so far in D5 uh that's a good question I think there's a number of things that have made this hard one is uh honestly liquidity mining distorted the market very significantly over the past two years uh in in some cases people were getting paid to borrow right they would earn more on their liquidity mining rewards from being a

borrower than they were paying an interest uh and that's just massively massively distortive it makes the data like far less useful it changes people's incentives um and now luckily thankfully we are seeing poorly defined liquidity mining protocols like on their way out and D5 teams are much more sophisticated about how they're thinking about rewarding uh Market activity I I think that is a fundamentally important thing that we need you know we need more rational incentives in the market and I think that that will help Drive people to express their true preferences whereas right now it's mostly like

there's a lot of hot money that is just there to like earn the liquidity mining Rewards I also think Dao's as a real business entity concept is like a brand new thing it's only like a year old I I honestly can't name that many that like earn actual cash flows so like that that just hasn't happened yet I expect that it will happen I'm quite bullish on the future of of this but you know it's early and it's hard for lenders to underwrite you know the cash flows of like Hive mapper as a Dao or helium as a Dao or something you know in this very early stage like it's just you know those cash flows are either quite small or non-existent just because like these

things have been around for a year maybe two uh they're just not that old yeah if this starts happening and this actually starts ramping up like debt inside of uh defy uh like doubted doubt debts will if you look at Capital if you look at Trad fire right now you have these bonding curves right so like governments and companies raise funds by issuing bonds at these like fixed interest rates for set periods let's call it like a two-year or five year or a 10-year bond longer lockup equals higher interest rates and vice versa forms the curve that doesn't there are no fixed maturities in defy so if this starts happening do we are we going to start seeing these yield Curves in D5 um like where you can get a set rate for locking up eth for for five years let's call it yes I think so and you have

an approximation of this with D5 derivatives protocols with dated Futures you can imply an interest rate with dated Futures uh you can also do this on centralized exchanges like FTX as well right and you can construct the the curve there I think what we will see is composability will lead to those curves uh you know uh coming together from like arbitragers will Arbitrage those two uh in order to capture that relatively risk-free or very low risk profit um so we already kind of have yield

curves I think they could be much much better and the markets could be much larger but when you think about it like right now the demand for borrowing in Defy is all about speculation really it's about oh I own a bunch of eth and I don't want to sell it and I need dollars to pay for you know my house or whatever um or oh I own a bunch of soul I don't want to sell it let me borrow some dollars and actually I want to go lever long right that Maps very very well to derivatives uh right and and actually one theory that I have is that it's possible that borrow land has not gotten bigger in defy

because or in crypto broadly because derivatives are such a big component of this Market that's uh that's also why I think options may not have taken off as as much as they have in traditional Finance you know talk to so many options teams trying to build defy options on on C5 all you have is like terabit really at a at any sort of uh very meaningful scale and you know people keep looking for it to take off and you know my thought is if you're comparing to us Equity markets I think options volumes are really high because that is the best way for retail to get leverage like they can't there's no perps there's no if you're a retail like try trading on the

CME and trading Futures like you're not going to be allowed uh right they they don't let you trade that stuff uh so it's possible that that perps are the construction that eats all of this market share for speculative borrowing um and so that that might be something that's very different about crypto Capital markets from traditional Capital markets how does that impact the creation of these interest rate swap markets right because my understanding like if you go back to Jason's Chad fi example right like let's say you go to get a 30-year fixed mortgage you go to your bank they say okay that's totally fine and then they basically they've got like a whole back end network of people that will take what is essentially a levered bet on interest rates to be the uh to lock in the fixed portion of your

yield um I feel like do we still need that kind of thing for crypto and if so like is the perp involved in that if the perp is what's keeping us from having like deep uh like liquid options kind of native markets you see what I mean like how does the the impact of the perp uh the Perpetual contract like impact the creation of the interest rate spot markets uh that's an interesting question if you think about it from first principles actually like a perp is kind of like borrowing at a floating rate because the funding rate changes every hour right and then dated Futures are like borrowing at a fixed rate because you know the price you paid at time t uh you know you paid price Y for the future spot is worth X so you can calculate the rate and that's not going to change

because it you entered it at that point and you're not paying funding uh so we have this already with derivatives uh I think having that for over collateralized loans like they're fundamentally very very similar things right like if I'm putting my Ethan to Ave to borrow usdc to buy more eth versus I'm putting my eth into FTX or Perpetual protocol or mango and going love or long like those are kind of the same thing um so I I generally am pretty bullish on derivatives markets for this for this

stuff I think that there is going to be a market for interest rate derivatives that will likely trade on the derivatives markets whether that's mango or perp or whatever right like I I think that they will have interest rates markets as like one of their markets so you can go and speculate on interest rates if you want I think that that will make the markets more liquid and more efficient because right now it's it's just hard to go short rates right like if I see that interest rates are really high right like it's hard to go short how do I say how do I express a view that uh you know I think rates for lenders are going to go down over the next six months in D5 like you can't really do that today

um so I think that D5 derivatives will probably be the way that this was created I want to return to a point that we're making kind of about you made this point about yield Farm or yield farming distorting markets and signals that people were able to take from markets um this is going to seem this is kind of I want to move on to like the second part of what we wanted to chat about which was this uh you made this really interesting point that whenever we see a new innovation in terms of how tokens are distributed that tends to catalyze a bull run and that has a lot to do with um the cycles that we see in crypto and you've got a lot of great historical examples in there uh so can you kind of just walk us through that theory of yours like when what what do you mean

when you say like Innovations and how tokens are distributed and what have they kind of looked like in the past yeah absolutely I'm happy to walk through it I want to caveat up front though this is possibly a correlation not causation thing so uh you know I I can't say for certain that this is causal but the correlation is very very strong if you look at the Historical bull markets in crypto 2013 bull market kicked off by the proliferation of proof of work uh mining coins you know people Bitcoin at that time was like you know four years old people were like oh yeah this this actually works this like makes sense and so they started making more coins and that got everyone really

excited drew a bunch of attention and kicked off a bull market then 2017 was icos people were like oh we don't need to just do proof of work coins like that it's pretty environmentally wasteful and like we we don't need this uh component like what if we just pre-mined the tokens and sold them and ethereum really kicked this off um at scale with their very large uh premine and sale which was a new capital formation method for crypto at the time uh and extraordinarily successful um kicked off 2017 bull market um then I think you know in 2020 we saw well before 2020 2019 we saw the emergence of ieos which which kicked off

like a mini bull market not not that different from icos uh other than you know Regulatory Compliance uh which is a good thing uh but it wasn't necessarily different enough or new enough to like really kick off a bull market it was kind of a muted bull market if you're if you recall you know Bitcoin going from like 3K to 12 and then drawing back down um it did not take out its past all-time highs uh neither did ether or any other the other assets and then in 2020 we saw the Advent of liquidity mining first with I think compound uh announcer liquidity learning program in June of 2020 if I recall correctly uh and that was a new 20 distribution mechanism new

method of capital formation that got a lot of people really excited everyone started doing it drove the 2020 bull market then I think 2021 was really driven by nfts um I think you know like the second half of 2021 that was driven by consumers actually showing up and saying I want to buy this digital item and that was a new token distribution mechanism because it was different people getting to distribute the tokens now it was creators and influencers and artists Distributing these tokens not just like you know Finance nerds like me or you know like uh a bunch of crypto nerds like in the 2017 icos and that was a new method but

it is not clear that this is entirely causal it's possible that like there is related causality here in that these new mechanisms attract attention and the attention is actually what kicks off the bull market because uh you know I think we live in an attention economy like that that is a scarce resource of our time so I I want to be mindful of that so sorry I can't help but think I like the theory but I can't help but think that um these token distribution mechanisms are really just uh Evolutions that are trying to stay ahead of like users Game Theory right and then like once the prominent Game Theory anticipates the the distribution mechanism the signal that you're trying to create and isolate actually becomes

noise right so if you think about um who did airdrops first like uniswap I think did did uh or like retro like if you use retroactive airdrops as an example at one point in time they uh they worked really well but now that users know that they're coming uh it becomes increasingly difficult to isolate who's like the loyal unit swap user or the the loyal protocol user and then who's just aping in from like a hundred different addresses who are just trying to collect a bag so I feel like uh uh it's just interesting to see that the none of these things last very long they all there's I feel I I agree with you that all these token distribution mechanisms kick off these bull markets I like that theory but it's interesting to note that they all only last for like

let's call it six to twelve months yeah there's a half-life on this stuff it's it's almost like you know you have the meta of the game and then the The Meta has to change once everyone knows the meta uh if everyone knows the meta then like it's not gonna work anymore um so yeah I agree with you this stuff has a short half-life I think it's a good uh I mean what I would also say maybe just to like slightly tweak Jason what you said is like or maybe put a more positive spin it's just like the it's it's the mechanism gets refined right it gets refined and then retried in a way that hopefully creates more value right like maybe uh like yield farming in its current iteration is a pretty expensive

pretty blunt tool that but it still worked for some protocols right like it could clearly created a lot of hype I think compound right was the first one that really kicked this off and look there's still a blue chip project in the space right so maybe the next iteration of this is like instead of just hey here's some uh basically free tokens just for showing up and dumping your liquidity we want you to do more specific tasks right and then those will start to look more like kpis at a company instead of just like hey do work get Equity type thing um not that some of these things are Equity but I think it's just refining basically over a period of time well and it's just one more and more when it when it works really well for one company more companies go do it space gets

competitive and and then people have to move on no no different than d2c companies adverting on Instagram working super well everyone goes and goes to do it rates for ads on Instagram go up you have to go find a new thing so yeah yeah and I know tusharra you've got a theory about what the next mechanism is going to be uh this is a great again a great post that you wrote on uh proof of physical work so can you just talk to us a little bit about what is proof physical work and I know you funded uh like helium which you think is an example of this so just kind of walk us through what that what that is and what that might look like in the future yeah absolutely the theory here is actually very simple um the theory is you can pay people in

tokens to do stuff and that stuff could be useful all right we've been paying a lot of people with tokens to do useless stuff right that doesn't create any value like me battling my axes like doesn't really create any value for anyone um but we could pay people with tokens to do useful stuff like build a telecom Network put a bunch of you know hot spots all around the world to provide very inexpensive connectivity uh you can do things like reward people with tokens to build a global mapping network uh you can do things like reward people with tokens to build a distributed energy grid right like several of these ideas are are quite compelling and what they have in common is that they create this

Capital asset that is created by the sum of those individual actions me signing up for some distributed energy thing or putting a hot spot up in my window or putting a dash a hive map or dash cam in my car it doesn't really accomplish much I'm just a person right but if we can get like a hundred thousand people do it or a million people to do it that whole is worth more than the sum of its parts and that is really the the core of what I find interesting about proof of physical work is it's it's basically like proof of useful work um and people doing something useful that creates a capital asset and it's a new form of capital formation which I think is extraordinarily compelling it's

just it's funny I mean that sounds so um similar to me almost and just in terms of how again Equity is used at companies like Equity is kind of the great incentive aligner within an organization it's like you've got your kpis and your kpis and your kpis but really what we want to do is create Equity value here so the thing that we own goes up together so it's just it's funny to hear you describe like useful work and then you get this thing and that's like the the big incentive aligner but I kind of feel like that's just what it is on a global scale right yeah exactly it is similar to to traditional business formation but the difference here is there are different trust properties which allow the system to scale much much much larger uh you know if you think about it there's

there's only like three entities in the US that employ more than a million people right I think it's like the post office the military and Walmart or something like that right like that there's a limit to how big these corporations can get in terms of coordinating people but there's a million hot spots on healing them already you know like they but there can be 10 million very easily because there's a structured coordination with some trust minimized properties to it so I think this is like the Next Generation evolution of this type of capital formation because it reduces friction it is global from day one uh it had some of these very nice trust minimized properties and I think

that it just is much more inclusive and gives more people access to participate than traditional rails so you think then the next I just want to make sure I understand you think the next bull market will get either either get kicked off with this or or will be a big theme in the next bull market this like infrastructure networks that are driven by thousands then hundreds of thousands then eventually millions of people doing some sort of physical work like with Hive mapper taking videos or with helium setting up their hot spots or with file coin you know sharing sharing or are we sharing sharing file storage that's what you think that's that's the big one of the big themes and narratives of the next uh or use cases of the next bull market I think so I I would expand that

slightly to also include useful digital work uh right the work doesn't need to be entirely physical um you can have useful digital work like for example we invested in a company called Delphia which is a data Dao the idea is basically a user can go sign up and connect their Amazon account for their Amazon data their JPMorgan account for you know their financial data their Google account for their search data and so on and so forth and Delphia collects all that information joins the tables together and then uses that to train machine learning models that can predict asset prices because they can do something like say like oh Jason you're such an

influencer every time you talk about a product like turns out all your friends buy it right and that company goes and beats earnings and that's me and like as well right because like the useful work here like the capital asset that you are creating is this large database of data sets that could not have been created otherwise right like you can buy some alternative data but you can't join the tables together easily uh right you're buying it anonymized if you could join them together that'd be that'd be quite a failure of anonymization um right and some of the state is just not even available for sale like you know LinkedIn doesn't sell some of this

data but knowing who is moving from what company to another company could be extraordinarily predictive but you just can't get this data right now right so yeah I think it's it's more like proof of useful work than just physical work I've actually been pretty skeptical about the Solana phone I will admit to char um I know you guys are big big factors of Solana but I just something just clicked which is you take a a lot of this is verifying physical work and if you take a phone a crypto native phone that where I mean your phone has more data on you than anything out there right now and a lot of that data can be going back into verifying these these uh these proof of physical work networks I

just I don't know if I'm sure you guys are light years ahead of me on that but it that just clicked for me yeah absolutely that that's entirely right I do want to comment on the Solana phone uh briefly um when when they told me first about the idea I was like you're crazy like what you're gonna go compete against apple with Google and build a phone like like guys like let's pull over the bus here and have a conversation right yeah but then I I started talking to them and and just like thinking from first principles like what were they trying to accomplish and I think the core of what they're trying to do is say Key Management should not be an application Level thing it should be at the operating system level the fact that I have a Chrome

extension that you know you that I use to sign transactions is just like it inherently unsafe because the key is being stored in a user accessible part of the computer um that the same thing is true on mobile right like if you've used metamask on mobile like it's it's a pretty atrocious experience and intrinsically insecure because the key is being stored somewhere that the user or you know the file system can access it and so like the really key innovation in my mind about Saga and salon and mobile stack is creating the norm that an application throws a an unsigned message to the operating system and it's the operating

system's job to figure out how to sign it now specifically with the Solana system like they're going to have a secure Enclave so the private key will live in that secure Enclave the private King is never exposed to the outside world you're able to pass a message in sign that message and then pass the message out and then broadcast it uh which is basically the same security that you have with a ledger wallet or a treasure wallet yeah like a or any other Hardware wallet which is the gold standard and I think we need to solve key manage management before we can get mainstream users on right like my mom's never going to write down 12 words it's just not not going to happen or if she does she's going to write him on a plain piece of paper and like you know leave it on the dresser or

something right like people people mainstream users are not going to do this easily right so I think uh building that into the operating system that everyone already uses is extremely compelling I I would consider the Solana mobile phone successful if it influences the current mobile phone manufacturers to do this it doesn't need to sell a ton of units or takeover or like Dethrone apple or anything it just needs to get them to like make signing crypto transactions a first-class citizen I I completely I was gonna say actually the reason why what you were describing before proof of physical work sounded cool to me I find it very cool when like crypto actually translates and starts

influencing things in the real world similar to what the internet did right like a really small example of that on the Internet is when uh menus at restaurants they started printing in a way or like when you know restaurant would create something that was like really instagramable you know so you had uh so you had like in the internet World influencing the real world and that like maybe started to happen in crypto a little bit with just Asics and miners in general but like this would be kind of the whole next evolution of that honestly with the phone so I'm rooting for it as well um but I wanna I know we're drawing low on time here and I want to try to connect these like two distinct conversations that we're having and get your opinion kind of on our thesis here which is if you look at a

lot of these Innovations in distribution that you're talking about these are really about getting tokens in the hand of people and that looks something like to me similar to some form of equity financing right you are especially like with icos what they're doing is they're bootstrapping growth by selling you know future it wasn't really that clear but something like ownership in the network right so that looks to me like kind of a form of equity financing so there are examples in tradify of these like Equity financing bubbles that happen right all the way from the.com Bubble it has an equity financing driven bubble to like the south sea bubble like all the way back uh all the way back when but also what happens in tradify is debt driven bubbles that's a big thing too right and you have recent examples again in like 2008 cdos that kind of caused this huge

like uh glut for debt around the housing market and that resulted in this big boom and then bust uh but again back in the 80s too with Mike Milken the creation of like a whole new asset class around junk bonds so debt also drives these Bubbles as well so I guess you know my question to you and maybe knitting together these two themes is do you ever see like debt being a big part in the in the um catalystation of a new bull market um and if so do you think that the ability to borrow at a fixed rate will unlock or create um kind of that Rush that is a very interesting question uh and yeah it's it's a yeah that's that's a fascinating thought process to combine those two things uh

I would say it's possible that we have had a debt fueled uh bubble in crypto already uh I don't think it was in defy I think it was in C5 it was things like Celsius and Genesis and Babel uh you know lending under collateralized to groups like three arrows uh and really like these things all share something in common which is someone borrows money or raises money prices go up they use that money to like you know buy assets and then that encourages more people to lend money or to you know invest in the equity like layer and that runs you know like a reflexive cycle

um so yes I I do think that there is a real chance that fixed rate lending or uh Dow to Dow lending is the next big New Capital source especially within defy and it could trigger a bull market I I think that that that's a valid thesis awesome all right Tushar you've been super generous with your time I guess any closing questions Jason or Tushar anything else that you wanted to uh you guys by the way the blog I'll give you guys a plug here the blog on multi-coin site is like a gold mine of great information it's like I want to plug some of the work that you produce but any just closing thoughts I guess on anything that we've talked

about or might want to still talk about uh yeah I would just say you know we like sharing our thoughts podcasts blog posts Twitter Etc uh one of the main reasons why we like sharing our thoughts is we learn from the audience often they come back and they tell us what we're wrong about um or you know what we missed uh so I want to encourage the audience you know if you think I'm wrong about something like I would love to hear that I I do not mind being wrong in public at all that's actually my favorite way to learn Tushar I have something that we haven't talked about yet I want to wrap this up sorry Mike I know you wanted to wrap this but uh stable coins just all these protocols curve Ave they're launching their own Stables right now yeah just I

know it's not really about the two top related to the two topics Mike wanted to talk about but I got to get your take on that oh yeah I I I have a an interesting take on that I think or hopefully it's differentiated I think that these things are directly competitive and they're going to converge Ave and maker are the same protocol actually uh they're they're doing the same thing uh so is curve actually how they make a curve all do the same thing which is if you think about it from the jobs to be done perspective right the jobs to be done here are I have some assets and I want to earn yield on it or I want to borrow yeah those are it like those are the two jobs yeah right maker is I want to

borrow Ave is I want to earn yield or I want to borrow curve is I want to get some yield right and so I think you can have economies of scale by combining them all that's why I think uh Ave launching their own stable coin is fantastic I think you know that this is a really interesting move and I would not be surprised in the future to see Ave launch a stable swap protocol as well where the assets that you have deposited into the Ave borrow n protocol could also be used for stable swap for some incremental yield for you and by having those assets available for both like you will earn more yield there's economies of scale to combining this stuff together so my expectation is over the long run like we will see stable

swap borrow land and uh stable coins kind of converge into one protocol yeah it feels like in C5 we saw all of these you had like London our platforms then you had like the wallets and then you had the exchanges and then over a couple of years they all kind of converged into these like crypto native Banks defy you're seeing everything converge into whether you start as like a lender or like an amm or a stable coin everyone eventually Builds an amm a London borrow platform and a stable coin and I've heard Sam from frax called that the the Holy Trinity of defy which uh is obviously a nice sexy name on it but um it but it does feel like that's starting to play out now so yeah we'll see absolutely all right guys uh to try I actually I love what you said about liking to be

wrong in public that is the entire theme of the show as well Jason and I are confined to the middle of the bell curve tell us why we're wrong why you agree or don't agree with this thesis um so I thought that was just really well said uh Tushar honestly it's been a fascinating conversation thanks so much for coming on uh we'll have to do it again soon awesome thank you for having me that was a lot of fun man Tushar um well first of all he just schooled us uh we are so proud of this this Creation with the bell curve and he completely schooled us on on the actual bell curve meme destroy that right after we were finished recording he was like I love that Meme whenever I find myself in the middle of the bell curve I always go to the left it's easier to always go to the

left baby yeah never go to the right of the bell curve yeah if two Char is saying you go to the left I feel better about myself what's left to the left left on the right just take your just don't basically don't allocate to crypto is left to the left yeah seriously just hang up I agree so what'd you think of the episode I thought it was really good I mean I thought it was really good it was kind of an ambitious episode because we went in and tried to unite these two very different thoughts I'm not gonna lie I was a little worried he was gonna be like that he's really stupid but I'm glad we ended the on a high note uh he had a lot of I had a lot of takeaways um from what he was saying uh first of all I didn't understand the importance

of uh the Perpetual contract and how I mean I know that that's widely used in crypto in general but I hadn't actually thought uh about that it's its own kind of variable funding rate mechanism um and how that might actually impact the development of decentralized options so I thought that was I thought that was a pretty big takeaway uh for me honestly yeah that's a good point I mean perps what the funding rate is reset every I think it's every hour or so um yeah that was a good point I mean he seems to agree with the fact that Dao uh doubted out credit growth will drive will be just a massive driver in uh of capital in the next bull market which which you and me have talked a lot about that's I mean we've got a full episode dedicated to that later in the season

and I thought that was I also thought that was a big surprise because I didn't think I didn't think that he would come right out and say or be as bullish on that um as you and I were on that topic I always viewed within this thesis kind of like that was one of the because the big question is like where's the borrow going to come from right who wants to issue the debt in the first place um in a defy native way so Dows are like one answer to that but he was really bullish on that as a use case uh which I thought was super cool I I mean I think he literally said Dow Credit growth is the most interesting thing in D5 right now so there was something that he said that I didn't understand at the beginning about Neo Banks being the

supply side of of this debt demand banks are basically like distribution right so like someone else creates the product products uh like a financial product like that like let's say it's a 30-year fixed mortgage and then Banks and the brokerages that are a part of the banks are the the distribution mechanism for those things so actually Matt Levine was the one who first made me understand this like a while ago but if you think about uh brokerages as like an investment store and you the investor you're like I want to earn money and The Brokerage is like here here are all these different Financial products for you to either earn money or buy a house or do whatever it is so that's why a Neo bank would be they'd be like the distributor uh in a sense they'd be distribution mechanism for the financial product which is fixed borrow lend does

that make sense yeah um I actually in in he mentioned Sushi swap um so I actually want to quote from this from the blog post that to char Brook saw that was really good um this is what he actually said and a specific example we predict that many dials such as Dao's that manage risk in large D5 protocols and nft platforms will pursue debt financing imagine a world in which the sushi swap Dow can borrow funds from a variable rate lending protocol and in code logic that says we will redirect 10 of our revenues from our staked X Sushi to repay the loan this would expose the sushi swapped out to interest rate risk from the variable rate protocol and they could use IR swaps to hedge it I think the cool thing in there and this is something that you couldn't necessarily

do like it's very common right in Trad five to do borrowing against future cash flows but what you can't do right it's kind of a promise of hey if you have those cash flows the hope is that that will go to pay the debt right but what you can actually do with something like sushi where there's you know it's written in the the code what their take rate basically you can direct funds that comes from their take rate into repaying this loan so actually it removes a whole layer of risk when you're underwriting a loan right which should allow you to offer lower interest rates and then that's more Capital efficient at the end of the day which is pretty cool it is cool it is cool could yeah yeah it is cool it's very cool I mean uh I do I do know I mean yeah I mean it

lower rates will be what propels I think D5 London borrow in in into the into the mainstream I think um if there's like if there's no overhead the make the maker team obviously talks about this all the time same with Ave and compound if there's just much less overhead um to offer these rates they can can they can continually offer lower and lower rates uh than what traditional Capital markets and and tradfy offers yeah yeah but I agree I think that Sushi things really interesting yeah here's the other thing that I loved his conclusion at the end was like I think we've already seen the Deadpool but I actually it's funny I didn't even think of this when we were coming up with the thesis but yeah basically what he's driven you know a lot of this this last

cycle was all this uncollateralized borrowing that was going on like but largely in the form of 3ac right but uh yeah I guess like that actually was an enormous amount of a demand that all of us I hadn't thought about that either we we've been in a debt bubble this was the debt bubble it's already happening yeah yeah it's a that the season's over the season's over baby yeah that's a really interesting point that he had as well um I don't know I I liked his and I liked his whole thesis about um about uh you know new distribution mechanisms kicking off bull markets I thought it was a good I haven't heard him give that caveat before you know like oh this could be correlation instead of causation I totally agree but I also think

I don't know it seems pretty compelling to me I'd be I'd be pretty interesting as if if his proof of physical work uh use case ended up playing out because helium's great it's a great company so yeah and hive mapper yeah so anything else from the app no I think uh just for for folks who are going to be tuning in so next week's episode we're going to be getting uh even more into the Weeds on a fixed rate protocols because we kind of talked a little bit with Tushar at a high level of what fixed rate lending unlocks but next we're going to be getting really into the weeds with it um and talking about what some of the mechanisms are that works and then some of the additional Structured Products that gets laddered on to fixed rate lending right so just give everyone like

a super concrete understanding of like how what like why the increase like fixed rate expands the market compared to variable like you can think of a 30-year fixed mortgage as like The Golden Child example of how markets can be grown from variable to fix because like how many people would borrow to uh you know fund their house basically if your interest rate was super variable actually we can see what happens when people get in trouble with that right that's what basically caused the mortgage crisis um but uh the ability to take out a mortgage to fixed rate is a huge huge unlock and that's is actually a consumer product not just like a so I think what we're going to talk next week about is like what some of those additional Structured Products that might be that leverage the ability to

borrow that a fixed rate like what are some of those specific unlocks I think which is going to be cool one thing I want to learn uh one thing I want to get out of the next episode is just talking about Libor like a lot of interest rates in traditional markets are set around Libor um what is like what is the Libor equivalent in D5 unless you already have an answer for that yeah I mean Utah I just think we need a we need some contact or some concept of the risk-free rate right you were talking about that branding curve which I thought was a really good explanation but we need like all valuation happens relative to something else that's why we have our risk-free rate which is basically the 10-year treasury in the world and like everything else goes off of the yield curve of the risk curve as opposed to

the rate that you can earn on a 10-year so we just don't really have that in crypto there's a theory of what that might be but that's I agree that's what we need to find out um oh and then the last thing which is just the one thing I flagged to people following along for why this thesis might be wrong I actually have and nothing is really disconfirmed at this point that I think this there's a good chance that this is right I think the biggest thing that you and I need to be teasing out around is timing because like this fixed rate lending is definitely going to happen in D5 it's definitely going to be a big unlock but I think the thing that I'm the least sure about at the current moment is when this is going to happen as is it going

to be this full cycle the next Bull cycle after that so we should you know give some thought into these next couple interviews about trying to parse out how far along fixed rate lending really is and is it likely to be like a this cycle thing or next cycle yeah good good flag good flag all right partner it's been fun shall we cheers [Music]