Mento: Onchain FX Markets - Decentralising World Currencies - Markus Franke. Ep. 617

Transcript

So what we've done differently in our markets is actually oracle driven markets where we query a range of different oracles so that we can actually for our markets that instead of AMM we call FPMM fixed price market makers we can query a wide range of oracles about the FX rate and then allow users to swap directly at this FX rate. these fixed price market makers on mentor is what we in the end call distribution pools. So you can easily access then these 15 currencies. What we also need to supply then the stable coins in these fpms are what we call expansion pools markets where these uh

stable coins are minted into existence. In today's setup of mentor we have a single reserve over collateralizing all the stable coins that are outstanding. the reserve is fully on chain so that everyone can verify that this reserve exists and against this reserve you then can mint stable coins into existence. But in a future version of Mento Mento V3 we also offer CDPs where users then actually can borrow local currency into existence.

>> Welcome to Epicenter the show which talks about the technologies, projects and people driving decentralization in the blockchain revolution. I'm Fedria Ants and today I'm speaking with Marcus Franker who is the CEO of Mento Labs, an onchain FX and stables issuance protocol that started originally on top of Cello. Before I talk with Marcus, um, let me tell you about our sponsors this week. >> Hey guys, I want to tell you about Nosis, a collective of builders creating real tools for real people on the open internet. Nosis has been around since 2015. In fact, it started as one of Ethereum's very first projects. And today it's grown to a whole ecosystem designed to make open finance actually work for everyday people. At the center

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anyone can propose, vote, and help guide the network. And if you want to get involved, running a validator is super easy. All you need is one GNO and some basic hardware. To learn more and start building on the open internet, head to nosis.io. Nosis, building the open internet one block at a time. >> Marcus, it's a pleasure to have you on. >> Federica, thank you so much. Great great to see you. Thank you for having me. >> Marcus, you actually have a pretty eclectic background. Um we we often see these founders who kind of start something kind of like while while they're still at school or university and then kind of like but but you actually you have had an entire first life. Tell us about that.

>> Uh that is true. I'm I'm already a bit older already have like first wrinkles uh around my eyes that is also maybe due to this industry. Um so yes I'm I'm coming from an economics background. Did a PhD in economics. um worked in research for some time as a posttock researcher um at the university in Munich in Hong Kong in in New York um and then worked in the traditional finance industry trafi as I would say today um worked for different investment banks Maril Lynch and JP Morgan and then also worked as a portfolio manager for Alian's global investors inside the Alian asset management group um and there I worked um on managing

pension fund portfolios, um different asset classes, everything from currencies to to equity to bonds. Um often worked more on the risk and research side of things and then around 8 years ago joined web 3 ecosystem went down the rabbit hole. Um back then I actually was managing a part of a pension fund from uh bank for international settlements. They told me, "Oh no, you're also going to this industry. Do not touch these assets. This is evil." Um, in between back then and now, they ch changed their stance a bit on Web 3. Um, but they're still relatively skeptic on on on what we are doing. Um and then actually started in

the Cello ecosystem was part of the initial team um as an economist always worked on stable coins and then three years ago uh we spun out mentor from the core cell uh or CABS team um as a standalone project. >> There's a lot to unpack here. Maybe let's go um a little bit back. So you you said that um you kind of uh joined the web 3 ecosystem 8 years ago. What was it that drew you in? Because kind of like you came from a fairly traditional conservative finance background, right? And kind of like I mean the the gap is still there but back then it was immeasurably wider

than it is now. >> Absolutely. And I think back then the narrative why I joined web 3 was still I would say relatively new. Today every ecosystem took this narrative of financial inclusion giving people access in countries where they don't have proper access to financial primitives via web three way. these types of narratives in the past eight years we have heard them a lot from everyone from Libra to Cello to like all the ecosystems out there but still I think this is one of the most important things we we still have to solve. We didn't go to the billions of people yet that using

that use web 3 every day. Um, and therefore back then this was what drew me to this industry that maybe there's a new technology that can allow people to easier access financial primitives. Maybe this would solve uh many different problems in many different countries where maybe the financial infrastructure is not as advanced as in in Germany if you can call that advanced or in other countries of the world. Um and and maybe this this technology um has the promise or um yeah can can actually solve many of these problems that are closely linked to deeper economic problems of different countries. How people can

exchange value? How can how people can have ownership over certain assets? Um and I think these problems are still there today and therefore we still have to continue to work on those. I I was recently joking with a friend that initially kind of our drive was to bank the unbanked but kind of we ended up unbanking the banked. >> Um h how do you how do you think uh this happened? Where do you think we went wrong? >> This is actually very very good way of of phrasing it. Um, I think this is very very true and I think it it gets like or it becomes even more true when we now see the new projects that enter the

space that build all their own L1 or L2 um and and try to do the same in the end unbanking the banked um or maybe even banking the banked but using different type of technology stack. Um I think um what went wrong was probably a bit lack of focus of the industry what we're trying to solve for as always with new technologies um speculation hype uh markets yeah post different challenges for builders to stay focused on solving these problems. Um I think especially uh the DeFi summers and and now maybe

people already talk or talked about a stable coin summer and all of these different things led to a lot of speculation. Uh the price action in many different assets in this field. Um made some people poor, some people rich. Um but we yeah didn't didn't focus on on actually solving that problem. So maybe greed was the problem why we weren't focused. Um yeah, maybe now it's the time that this industry focuses again on solving the problems that we want to solve in the first place.

>> Yeah, I I I I couldn't agree more. So kind of you you have this entire background in economics and kind of um in in crypto everyone is is an economics expert, right? So kind of like how does how does your experience in academia and kind of trfy institutions shape how you think about money and financial systems and how is how is that different from how you see kind of the the the ecosystem average kind of thing? >> It's a it's a good question. Um and I think actually coming from an econ academic background in the end um I don't know if that helped in in in this

in this industry. I hope that it helped. Um I think where sometimes maybe it didn't help was actually that we approach many things much more conservative. um when you're building especially in our case building stable coin platform building for um onchain FX solutions building also um with users in mind that are in countries where their livelihood depends on this technology to work then you do this in a in a much more conservative uh way. um building these things in a much more conservative way could also then sometimes mean growing slower than many other projects that shoot up. Um I think in in the stable

coin space everyone knows about the stable coins that that didn't build very conservatively and then then at some point also went under. Um but even those who are still around um there's a lot of questions that economists um I think would have question marks um when it comes to counterparty risk when it comes to efficient pricing of a stable coin depending on the underlying collateral when it comes to um for example so-called fiatbacked stable coins that are actually backed by credit money in a bank or money um in in uh a securities account. Um when it comes to questions around counterparty risk, when it comes

to questions around what is the true price of that collateral, if there is counterparty risk, if there is credit risk, um and so on. I think all of these questions didn't really matter in the in the past eight years when um also the question of uh how volatile currencies actually are didn't matter in the past eight years. Um both of us are spending a lot of time in in Europe uh against the um euro the dollar this year alone lost 20% in value. So maybe there is a place for other stable coins than just dollar

based stable coins. But in the past all of this just didn't matter in in in in the industry um because a other crypto assets were much more volatile than currencies and b um growth was often much more important than things like counterparty risk or proper collateral and so on. And I think this is maybe where we had always had a bit of a different approach. Um we are still around which is good. Um but that also meant we we grew much slower than many other projects in the space.

>> You guys um spun out from Cello. So you were one of the founding team of Cello. Um and kind of tell us about this. I mean, we've had Cello on several times, both Marag and Renee, and kind of uh I think the listeners are well aware that it's kind of like it used to be this mobile first L1 that was kind of um uh centered around um the global south and payments um and kind of became an L2 or is in the process of becoming an L2. Um so so I think kind of this is uh but kind of what kind of drove you to kind of start a um a new kind of stables protocol kind of out of from that

background. >> Yeah, very very good question. Um I think as you mentioned payments financial inclusion and with that stable coins always have been extremely important for Cello. Um, Cello as a now L2 is still focused a lot on stable coin transactions. Um, there are wallets with Valora and Mini Pay on on Cello Live that um since day one actually had the focus on emerging markets and on on end users, retail users that want to send easy transactions. And some of the features that back then were very very new on Cello that you could abstract

away all the like difficulties around gas fees for example by paying gas fees in stable coins where important features um for an ecosystem that was focused on on retail that was focused on stable coins. I think um in general for the L1 and now L2 cell it is important to have many different stable coins live and not only Mento stable coins but also the market leaders tether circle they are both alive on Cello and I think it's important for the blockchain at the same point or at the same time it's important for Mento to at some point uh launch its markets and go live on other ecosystems

as well. So what we are currently really focused on and where we can maybe also talk a bit more about later on is that we are now actually rolling out our crosschain strategy and want to launch Mento on on many different ecosystems out there. Um so similar to uh my my belief that we need to have many stable coin um providers or offers on Cello at the same time Mento should also sit on many different uh blockchains and platforms as well. >> Maybe before we kind of dive into the architecture of Mento um kind of one final question to kind of set the stage.

So, stable coins are obviously kind of a representation of something that kind of like we've had in the offchain world, not going to say forever, but for a very long time, right? Do do you see stable coins more as a bridge to existing financial systems or do you see them more as a foundation of a new one? >> It's a good question. I I think um probably I need to think a bit more about uh about that. I think a um having the opportunity to transact in stable value, whatever that means, is a foundation of uh or a foundation for onchain transactions. Um and stable could mean

stable to the underlying currency like a stable coin usually works. Um if I'm in uh in Europe a stable coin should be uh should represent the euro and therefore I can do transaction onchain also in euro when I have to pay for a service that is denominated in euro or if I have to pay my taxes in euro and so on. Stable could also mean um stable to a basket of goods like all these like uh stable coin projects that want to go in that direction where stable means uh stable coin should follow um purchasing power basket of goods in a certain

country which is I think extremely interesting in countries where there's high inflation of the national currency and I think these assets um are extremely uh important and stable could also just mean um transacting in an asset that doesn't have that high inflation um and and uh as as the local currency. So I think in some way for for proper transactions um stable coins in some way are a foundation uh and then we still have to define stable to what um on the other hand I think we are also just in the beginning of basically uh that that field um where we need to explore more what currencies actually

can do. Um I think in the beginning what we did here in the in the past 8 years basically is mimicking currencies as they already exist and just bringing them on chain and there's already a lot of value in there. Um but you could imagine going forward there's even more what we can explore like certain use case currencies um new currencies uh for for uh yeah specific type of use cases for saving um maybe for saving you need a different type of currency than for transactions. um in transactions also back then in the cell ecosystem. We've talked about demorage in the past a lot like setting certain incentives to

people in a currency ecosystem to transact more um as an as a means of monetary policy. Um so I think on the one hand yes stable coins in some way are foundation for me for this technology um to work in in in the real world. on on the other hand, I think it's also just a start and from here we can actually experiment with currency much more and and can come up with newer solutions to many problems. >> Yeah, super cool. Let we'll come back to that for sure. Before we do that, um let's uh dive into how Mento works. So if you kind of look at Mento's design, um at a high level, can you describe

what the main components are um that are that make up uh the protocol? Absolutely. Um so there's two main components in general. Um one main component are the stable coins and they uh many of the stable coins that today are live on Mento are actually also Mento stable coins. Um but we also integrate more and more outside stable coins as well. So for example USDC and USDT are also integrated in Mento in the second component. The second component actually on mentor are uh new types of markets. Um and uh to explain a bit these new types of markets and why we came up with this um I have to talk just for a moment about FX um as a as a

primer and about um the FX markets and how they today exist also on chain in general. Um FX markets uh globally are huge. Uh the bank for international settlements um estimates that the FX market um globally is $7.5 trillion in daily volume. Um in the end FX markets mean just the exchange for different currencies basically one currency for the other and then there are many different specific more specific types of FX markets. There are spot market, there are forward markets, there like swaps, FX swaps, which is a combination of a spot and a forward um

transaction. Um and uh the spot market alone is $2 trillion uh a day in in volume. So in general we can can say it's the largest market in the world because every time when someone either wants to exchange currency or wants to do um business crossber they might uh enter this FX market >> and and tell us how how this works kind of like in the traditional world. So kind of like say um kind of I I I'm um I'm dodge bank now. Um so kind of I I have probably accounts with various banks around the world in different currencies. So kind of like h how how do I go about um kind of uh settling trades from one currency to another. So what

exactly is it that kind of sets the rate here? >> Yeah, absolutely. And this is already where it becomes in traditional world really really uh complicated and actually also where the technology that is used is different uh between different countries between different currency zones but even like between different um providers that actually allow you to access the FX market. Deutsche Bank is a good example because it's still one of like the top 10 currency traders in the world. There's JB JP Morton, there's UBS, there's City Croup, there's Deutsche Bank, there's H SBC, there's Goldman Sachs, there's many others, and they all in some way as banks engage um in the FX market.

However, then there's also many non-financial institutions that also um engage in the FX market. There are many like broker dealers that allow customers to engage in the FX market. And in some way when they engage in the FX market, there's always in some way some pre-trade moment when basically parties that want to engage in that FX market want to agree on uh transaction. There's then the trade execution, there's the clearing and there's the settlement and all of this when these traditional players basically engage in that FX market typically takes uh around 2 days until an FX trade is settled. um it takes even longer when there's a weekend

in between. It doesn't work 24/7. And here we're already basically now describing many many problems that actually could be solved with onchain technology. Um because yeah, this market doesn't work 24/7. This market doesn't settle immediately. And because it doesn't settle immediately, clearing and settlement are um all uh prone to risk in some way. There's a settlement risk, there's a counter party risk, there's of course also price risk that that can be hedged um away, there's a regulatory risk when you basically um go between different uh countries. So this it the whole FX market is extremely complex. Um and it gets even more complex because it

it works on many different um technology stacks um globally. Um there's large settlement houses including the exchange in Chicago and like many other settlement houses um Eurax and others that that then help with the settlement of an exchange trade. Um and and because it's such a wide range of parties that engage in the FX market, there's so many problems. Um the dollar is actually uh still the most traded currency also in traditional FX. I think it's in around 80 to 85% of all um FX transactions. The dollar is a part of that transaction. Um

the largest FX market is between euro and dollar. And then there are all these other currencies like yen, pound, uh Australian dollar, Canadian dollar, Swiss Frank, Hong Kong dollar that basically in decreasing importance are also part of of um this FX market. And actually that high percentage of the dollar in all FX transaction is another problem. Actually this is act this is the reason uh or the dollar is in such a high percentage of international FX transaction because many markets don't have direct liquid pairs. So if you're for example in Kenya and you're doing business with Ghana there's often not a

direct Kenyan shilling to Ghanaian SD FX market that you can access. Not only because maybe you don't have access to a bank but also because there is just no liquid interbanking FX market between Kenya and Ghana. So what you typically have to do is you have to exchange from Kenyan shilling to US dollar and then from US dollar to a Ghanaian SID and I mentioned before typically between pre-trade trade and then execution and settlement there's a T plus2 days window until a trade um settles. If you then have to go from Kenyan shilling via the dollar to Ghana and SD, then it's already four days at least um until until your trade settles. So all of this

makes the FX market extremely complex. Um and I'm I'm convinced that a part of this market should move on chain so that globally um users can actually access this market on infrastructure that runs 20 runs 24/7. Um that settles almost immediately. Um and where you can basically use the same infrastructure no matter between which countries and currencies you want to do business. And we are with Mento focusing on this FX market. I mentioned the first building block of Mento which is stable coins. Currently there are 15 different

currencies live on Mento. Um all the G7 currencies that I mentioned before. So the dollar, the euro, the yen, the pound, Swiss Frank, Canadian dollar um and so on. Um but we also have a few more exotic currencies live also the ones for example that I mentioned the Kenyon shilling and the Ghana and Si. Um yes >> I want to hear kind of like how um how these uh currencies kind of like are set up fresh and kind of and so on. But be before before we get into that let's talk about the FX part first just because we're in it already, right? Um so I I see why um you see potential for disruption here. So obviously kind of like if you had um an int intentbased uh

kind of uh settlement layer um that was capable of kind of doing ring trades in in an atomic fashion. Obviously that would be vastly superior to kind of like waiting two days for any link of of the any leg of the trade. uh specifically particularly because because I'm sure you can't lock in kind of things for in two days from now, right? So kind of like if you go from A to B via C and you go from A to C first and then kind of like the C to B uh uh leg disappears kind of like you have to go back >> try a different that sounds like a nightmare. So tell us about um tell us about um the FX system that that you you've built.

>> Absolutely. Um and actually that we are so this is the way how mentor markets worked actually from from day one. Um but now in our endeavor to go crosschain um and when we talk to many other foundations outside of the Cello ecosystem um we actually recognize how important this is to have these types of FX markets actually on chain because in many ecosystems um on chain this is potentially also the reason why there's not a huge adoption so far um for non-doll stable coins at least one of the reasons and that reason in the is that typically markets on chain um are so-called AMMs, automated market makers,

where the price finding actually happens on chain and the price depends on the relationship of two assets that sit in such an AMN um to each other. So, and this concept can be even more generalized. there can be like more assets um combined in in an AMM but in general there's two pools of assets and the price depends on the quantities that sit in these two pools in this AMM. Um now the problem is that the price of euros in dollars is not determined on chain at least not now. Um I've mentioned that the global market is $7.5 trillion daily. The euroto dollar market

alone is$2 trillion dollars daily. So the price of euros in dollars is determined offchain in these interbanking markets within these institutions or between these institutions that we that we've mention mentioned and in general on on global FX desks. These AMMs are not great in mirroring off-chain prices because someone has to actually enter that AMM and rebalance these pools so that they actually correctly represent um the current price of euros in in in dollars for example. So what we've done differently in in our markets is actually and and this existed also on

chain before but in the past actually couldn't be couldn't be built out very efficiently. It's oracled driven markets where we query a range of different oracles. Um already today we we work with chain link a lot. Um and chain link has has great oracle infrastructure. We also work with redstone. Um we work with a few others. Um we're also now looking into integrating PH and other Oracle providers so that we can actually for our markets um that instead of AMM we call FPMM fixed price market makers we can query a wide range of oracles um about the FX rate um and then allow

users to swap directly at this FX rate. um these markets, these new type of markets, these FPMMs, these fixed price market makers on mentor um is what we in the end call distribution pools because they are great markets to basically allow users very efficient access to different currencies on chain. So you can easily access then these 15 currencies you can easily access for example the euro. What we already see today is that a lot of actually users, traders come in and basically uh use our markets to for example source euro every time when on other diff other type of markets for example on unis swap the

price of the euro is not correct because these pools are imbalanced um at the current FX rates and therefore uh arbitrageers for example use um these fpms uh already. Um what we also need to supply then the stable coins in these FPMMs are in some way then what we call expansion pools um markets where these uh stable coins are minted into existence. Um in today's setup of mentor we have a single reserve that single reserve um is over collateralizing all the stable coins that are outstanding.

the reserve is fully on chain so that everyone can verify that this reserve exists. Um, and against this reserve you then can mint stable coins into existence. We always had the idea to basically hold collateral in many different currencies in this reserve. However, there is not so much local currency collateral um in existence today already. So there's not a lot of tokenized Kenyon shilling government bonds and a lot of Philippine peso government bonds. Actually Philippine peso there are tokenized government bonds but they don't exist for every currency in the world. Um therefore basically this this single reserve has um in some way holds an FX risk um

because the collateral mostly is actually dollar collateral um mostly is actually other dollar stable coins like USDC, USDT, D um and and and so on. Um the reserve is overolateralized because it also earns yield. All the yield is flowing back to this reserve. So for example, instead of D, this reserve holds stake D. Um I think it's called SUSD or something. Uh it's not called stake D anymore. Um it it also holds for example a yieldbearing euro stable coin and others. Um but in a future version of Mento Mento V3 that we're now um soon

auditing and rolling out still this year um we also offer CDPs um in the end built on liquidity V3 um CDPs where users then actually can borrow local currency into existence by posting uh for example a dollar stable coin into a CD DP into a smart contract as collateral. Um and therefore mentor in the end let's say has three components.

One component is in in general as a product the stable coin. Then the second component are these CDP type of markets where users can borrow local currency stable coins into existence. And then the third element is these FPMs, these fixed price market makers that allow users to swap one currency for the other. >> There's a lot to unpack here. Yes. And I I I have I have many questions. Maybe I'll start with uh kind of like uh explaining kind of how I understand this. So kind of like there's one uh there's one centralized reserve pool and kind of like I can I can borrow different assets against it. So kind of

like if I want to go from currency A to currency B kind of what I do is kind of like I uh I uh um I clear my debt um of currency A against this reserve pool and then borrow currency B uh instead. Is is that >> is that a correct? Okay. That that's that's clear enough. Um then um you you say that kind of you uh bec because the main trading venue and the thing that determines the price isn't natively onchain, you rely heavily um on uh price oracles, right? Yes. So these are notoriously tricky, right? So

kind of um if if you um if you look at um uh price oracles often kind of like especially kind of I mean the currency ones oft they they usually they don't update kind of like uh during weekends for instance and kind of they don't update um often outside of trading hours. So kind of like it's kind of it's very much a 9 to5 sort of feed. Um and but obviously kind of like price movements happen outside of of these trading hours too, right? So kind of sometimes kind of like you you don't you don't have trading for the weekend and then kind of like the euro US dollar trade is kind of trade trading is taken

up again and kind of like you have an instant movement of I don't know a percent or something, right? So, how how do you deal with the imperman impermanent loss that's kind of incurred by these by by these uh by these gaps in your price feed? >> Very very good question. Um so in the end um these FPMs try to be more efficient than AMMs by allowing users to exchange at the exchange rate every time when there is an exchange rate update. So basically every time when the oracle delivers a new price then these basically markets are set to this price and in many very liquid currencies um this can happen every second. Um however

in between seconds or as you said for example outside of trading hours um on weekends for example um there is no price update and in these times basically these FPMMs basically fall back to AMM. So basically they then work completely um in the same fashion as as a standard AMM as for example unis swap works when you have like two pools between a euro and a dollar. So every time when there is a price update, these offer more efficient pricing. Um when there's no um price update from an oracle, then they fall back to the AMM solution. Um and and therefore basically users cannot exploit the market than on

on a weekend for example. >> What does this mean in terms of spread? So kind of like if you if you kind of obviously kind of an FBM can can work much more efficiently than kind of like a regular AMM because kind of like here you can you can um take advantage of um knowledge about market movements and kind of try to extract value. Um so I mean the way that kind of pools generally defend against this is by kind of like putting a spread. So kind of like there's I don't know 25 basis points spread um on fairly liquid markets on weekends. So how do how do you handle this particularly for markets that are prone to larger movements?

>> Yeah, absolutely. And I think this is the important part that especially um uh during uh trading hours when there is oracle updates the spread can be much uh closer together. Basically we can offer a more efficient price and then the spread um also depends on still a few different things. A there's a small fee for the platform. This is in the end next to yield revenue. How mentor as a protocol um as a decentralized protocol is is basically being financed in some way. There's a small fee um and then there is an additional spread that depends a bit on a the volatility of the

currency and then b um on the reliability of these oracles. So we know that then some oracles for example for Ghana and CD um are less reliable for example than uh oracles for US dollar um because there's just less uh trading venues and basically this can be accounted for in in in the spread. In general, the resulting overall price of then one stable coin you purchase for another stable coin um should be a more efficient price than in an an AMM. So this is always basically the um I would say benchmark um that >> it's a lower floor, right? Kind of like

if that's kind of like what you default back to. >> Yes, exactly. Um yeah and and this is then basically because we're coming from a lower floor um we we can offer like more efficient pricing than in these types of markets. >> Mhm. Yeah. Yeah. That that makes sense. One thing I was wondering kind of like who actually uses these, right? So kind of like if if you um uh if you think about it kind of like it's a pure purely onchain representation of the currency. So kind of like it it kind of conveys the risks and the benefits of the currency, but you can't spend it anywhere, right? Or you can you can only spend it on chain kind of like with people who accept it. You can't go to kind of like the local Aldi in Ghana and kind of say I want I want to I want want

to spend this here, right? So how how do you think about um connecting it to um where most of um the where most of finance finance lives i.e. the legacy rails in terms of on and off ramps and kind of integrations with IBAN and Visa and so on. >> Yeah. Um is a is a complex question. I think there's like many different elements here is a great question. Um I think the first element on who uses it today. Um currently I would say in general there are two types of users. Um what we see currently on Mentor um in terms of usage we currently this month

last month drive around 100 million in volume a day. Um this is approximately basically the volume that that moves over over Mento um per day. Um and uh we have the majority of users is actually retail users. The majority of volume is actually traders. Um on the retail user side um these are users that actually in different markets access mentor to optimize for example for off-ramping fees or on-ramping fees. Um so for example mentor is directly integrated in mini pay wallet by opera. In miniipay you have different pockets in different currencies. You for example have a USDT

pocket and you have a CUSD pocket. And then if in a certain country or on a certain day um either the offramping or on-ramping price for tether for CUSD or for circle for USDC is cheaper and basically people just swap into that currency and they access these markets. These are typically relatively small use um amounts that are being swapped. Um uh however these are a lot of trades and a lot of users that that we see there that in the end optimize for for basically the offramp uh users could also go and and use other integrations that are

built out locally. There's for example a project in in Africa called Pretium that for example in Kenya and in a few other markets where Empessa is big um allow you to basically go from a Kenyon shilling into Kenyon shilling in Empessa. So users then could use a mentor to swap from a dollar stable coin into a Kenyon shilling stable coin. and they use Pitium to basically go into Empa and then often they use Empa um to to pay at a local store. Um so here uh again we see a lot of users and smaller amounts that are being swapped. larger amounts are being traded by what I would say either bots or or more professional

arbitrage traders that actually then for example query the price of dollars, euros, yen and whatever you have on for example unis swap um and then basically arbitrage between the mentor markets and the unis swap markets and and a few other markets here >> but these are value extractors right so kind of like I mean obviously they provide a service by kind of like updating the price but they provide that service at the cost of the liquidity providers. >> Yes. And in the end basically at the cost of the liquidity providers in AMMs for example where the euro or the dollar or whichever currency is just not represented correctly here. They're basically extracted.

>> So I kind of I'm just kind of like taking issue with the fact that kind of like I wouldn't I wouldn't have called them users in the in in the sense that kind of like they're not looking for the product itself. They're kind of in a in a way they're kind of like abusing the product. >> Yeah. And I mean depends a bit if it's actually abusing the product um or basically accessing currency at the right price um to then maybe abuse the fact that on AMMs or on other market places >> um the price is actually not represented correctly. So um maybe sounds a bit uh sounds a bit weird but actually then abusing other type of markets >> that that are uh that are not efficient on chain. Um I think that is for sure a second um second user group. Then we

also see more and more actually speculators that want to speculate or trade on FX direction basically on on uh taking directive bets on um on on FX prices. We've seen this less in the past just because any other crypto asset is more volatile than currencies. So in in the past years, users were more excited to I don't know, leverage uh up their Bitcoin exposure by factor 10 and trade on this than on trading on on FX. But we're seeing more and more actually traders that also want to take direct directional bets on on FX. Here we can for example or why are we seeing this?

Because every time the volatility of for example the dollar spikes up, we also see a spike in trading volume. Um one one interesting incident or two maybe are a last November uh in uh during the election in US uh the dollar became more volatile and then this year um during the so-called liberation day where Trump announced tariffs random tariffs uh not random I don't know if they're random or not um tariffs for for for every country in the world the dollar became more volatile. Um this as a neutral statement um the dollar just became more volatile

and on these days for example we saw more than half a billion in trading volume just on one day where users actually want went for example from dollar stable coins to euro to Swiss Frank to Japanese yen to pound and so on where basically users maybe bet on uh a loss in value of the dollar against other currencies. Um, >> and they do this they do this onchain because the latency is much smaller, right? >> Yes. Um, and maybe also because they're actually onchain traders. Um, and I think this is in some way um also a a group um of users that we neglected a bit in in the past by focusing so much on building out like retail product in

some way and also focusing so much on maybe getting traditional FX traders onchain. We neglected a bit that we actually have a lot of traders on chain. there's a lot when there is or if there's something going on on chain then it's trading. So we actually have um we have traders already um that that uh trade on chain and here we are offering new types of markets in the end and and basically new trading venues and this is I think still helping the goal of making for example currencies more accessible in every country of the world. it still is helping that small business in Kenya that is doing uh

business with for example uh someone else in Ghana. Um because he now we actually make these local currencies more liquid on chain and when we make the overall platform more accessible and the overall platform thanks to these arbitrageers, extractors, traders and so on becomes also more liquid then actually also these these currencies these local currency stable coins become more usable. >> Yeah. Yeah. I so I uh I I didn't want to uh I I yeah I I have no issues with traders in principle. So kind of like I mean if if if you have a hypothesis that the Kenyan chilling is going to go up

against the US dollar, you should be able to kind of trade on this. Um I I was just kind of like trying to make the point that um some of some of the order flow um especially kind of like uh with um these um more market neutral traders kind of is is toxic and kind of hurts the protocol. >> Yeah. No, I I agree and um I agree on the on the other hand, basically what we're trying to offer is basically uh alternative markets and with that an alternative to everything that currently exists on chain because we think FX in general currently on chain cannot work

because the necessary infrastructure and most importantly for me the necessary basically market infrastructure is not existing. So basically we're trying to to to offer this uh to users and maybe one more one more um item here. So what you actually can do if you want to express an opinion on a currency that for example the canyon shilling is appreciating or depreciating against the dollar for example you can do this actually in two ways. you can actually directly trade on canyon shilling and dollar stable coins, but you could also use these CPS and borrow one currency into existence against the other and therefore you could then even if you want to leverage yourself up um and and and do whatever you want. I the the

other thing that I wanted to add is that in the past um I think having access to dollars has been um described as the main use case of stable coins. Basically giving people in countries where there's high inflation access to dollar as the as a huge use case. And I I think it's a huge use case. It's it's certainly true. If you're in a country where where the inflation of your local currency is extremely high, it's great that you can get access to a local currency. However, this only is true when you want to save and when you want to hold currency. If you need to borrow, if you need to get a small loan, then it's actually not true.

Then if you if you need to get a small loan to build out your business in Kenya as an entrepreneur, you actually have the preference for local currency uh because your revenue is in local currency. And I think also there is an additional use case for um for local currencies, lending or credit in general. Um that is huge because in many countries of the world this is actually another feature with onchain technology that we can actually help with basically making maybe even credit more accessible um by with this infrastructure. Um but then it it needs to be for many users of the world credit in local currency because revenues are in local currency

and the the one who gets uh who gets the loan shouldn't be exposed to FX risk. >> Absolutely 100%. I mean could also go your way. So kind of I um I I bought a house and uh and finance it with um a CDP uh onchain and kind of obviously that was priced in US dollars and that's gone tremendously well for me. Uh yeah, I think I mean obviously you can also go the other way, right? >> Congrats. Um it was good. I mean it's speculative but it worked. >> It did work. Um so maybe let's kind of shift gears a little bit. I kind of want to talk about kind of like the wider stable coin landscape. So kind of um kind of like for the longest time there were um two different approaches or maybe three different approaches, two

used approaches to to um uh to stable. So kind of there were um centralized custodial issuers. So uh people like Circle and Tether um and then there was um cryptocolaterized um al cryptocolateralized stable coins right so like uh like D or SUSD as it's called now. Um and then kind of there were algorithmic frameworks and kind of like things like um Teral Luna and uh basis and so on. maybe let's not talk about them because kind of like they never um they never had traction in a sustainable way and kind of like the these two kind of turned out to be the ones that um uh that kind of bore the the the brunt of the sustainable

traction. So now with kind of Mento and and the and more recently M0 labs kind of we see the rise of something else entirely which is kind of like a decentralized issuance framework rather than kind of having having kind of like these centralized in some sense issuers. H how how how do you um how do you see that? It's a good question. Um, and in general, a USDT and USDC are massive and are continuously growing. So, currently at least um it it looks like that this

is a very successful uh direction that both of them have taken. Um, and I think uh their risk profile also changed over the past eight years. I think a few years ago um there was uh yeah the risk was just on a different level. I think with their success and with maybe also being a bit lucky that basically interest rates went in the direction where interest rates went to um they they now are like uh more sustainably more sustainable in in their overall setup. I think that changed over the past years >> and they are more sustainable because kind of like they reap those rewards

kind of like that's their business model, right? Kind of like they they hold trillions of funds or billions of funds in custody and kind of get three and a half% on on key bills or whatever kind of like they they they kind of turn the money into. Right. >> Exactly. And that mostly works when interest rates are positive. That works. Uh maybe also one of the reasons why there are less euro stable coins because actually the interest rates have been negative longer for longer in Europe um compared to the S um is could be one of the reasons. Um and then actually also sometimes um for example with USDC there was that problem when Silicon Valley Bank went sideways um where not uh users were not really

sure how much of the collateral were actually was held with Silicon Valley Bank where then actually that credit risk we talked about before materialized and and USDC depacked um and I think there's certainly use case um that for for these stable coins um they are very successful. Um I think um there's also you not every part of the tech stack in general has to be fully decentralized. Um and USDC USDT are certainly not decentralized but there's a use case for them and therefore basically I think it's it's it's good that they in general exist. um with other models. I think uh what we're now actually offering is

giving users more choice and that users have more choice can uh can come from either different users have different preferences but it could also mean different users just have like want to do different things. So for example, if you want to get a loan in Kenyan chilling um or if you want to exchange from Kenyan chilling to Ghana and city, you cannot use a USDT. And therefore, it's good that these new types of stable coins also in local currencies exist like a Kenyan chilling um stable coin or a Ghana city stable coin. In general, in the longer run, we don't want to differentiate too much because we think um and and here we've seen a lot of

research actually in the past that these new types of stable coins could be in some way raised to the bottom that like to grow actually market share, a stable coin issuer now has to forward uh either all of the yield that they earn on collateral or even more than um they earn on collateral to actually gain market share. Um and then you many of these stable coins increased in circulation while there were a lot of incentives and then they decreased again when there when the incentives were running out. I think in general for Mento the larger um business model is actually in offering proper swaps and proper FX infrastructure between these

different stable coins and therefore we are also integrating um other stable coins as well. I've mentioned that we already in Mento markets have integrated USDC and USDT and in future will also integrate other stable coins. I think there's also an regulatory element um to it. Um there will be different regulation in probably uh most of the regions of the world. Um there is now Mika in place in in there's this Genius Act in US. There's some regulation also in Singapore and and I think in Hong Kong and something is coming up. There's regulation also in the Philippines but there's also no regulation in many other places of the world. So I think also from a regulatory perspective we'll see

different offerings. Maybe there are countries where actually a stable coin looks more like a CBDC and there are countries like the US or also areas like Europe where stable coins can actually also be issued by other by other issuers. Um and then depending on the use case users probably also have different preferences um for different stable coins. So in general what I want to say a bit complicated um is there there will always be many different stable coins. I think what we want to do is we want to offer proper infrastructure for these stable coins and we want to make sure that there is a stable coin for every country in the

world that users can actually access local currency. Um but uh I think it also makes sense to have regulation like for example Mika where if you are a fully centralized issuer if this really looks like a bank your business um then maybe it should also be regulated like a bank or if it looks like an ETF maybe it should be regulated similar to an ETF. If it's fully decentralized, then you should also make sure that actually the information um the data, the collateral and so on are all very accessible and transparent. Um and I think that that makes sense and therefore it's maybe good that there's so much competition

between different stable coin issuers. >> How do you handle the governance in Mento? Say for instance, I want to I want to induce you to kind of um list a new currency you don't have. So say um the Namibian dollar um how how would I go about this kind of like whom do I need to convince and what are what are the measures I kind of like need in place for this to happen? >> Yes. And in the end this of course on the one hand is is nice because everyone can participate in a protocol like that. Um but on the other hand also makes it really really complicated. Um so with mentor governance is on chain. Um there's a governance token the mentor token. Um and with this users can decide

for example which new currencies to launch. Uh users can also decide which new ecosystems to launch on and users can also decide for example about fees. Not only what we do with the fees that come into the platform but also how high the fees should be for different pairs. I think this is on the one hand nice because it actually makes it decentralized and gives basically um control to users. on the other hand, it comes with all of the problems that also have been discussed in in this podcast and others um before that that come with decentralized governance because in the end it's always hard to find educated governance participants that are willing to spend some time to read into proposals. Um so we try to put out from

mentor labs a lot of like research and try to put out a lot of information on how in general men works. um make this all very transparent. But I think in general this is something that can only be improved um where basically we be uh can educate users even more of basically what are the implications of adding more currencies what are the implications of certain fees and so on. I think uh sometimes here governance gets it right and sometimes it doesn't. Um and in general it's it's uh yeah all of it is onchain governance. Um but it doesn't really make our life easier.

>> Yeah, I I see that. I have one more thing I'd really like to talk about and that's kind of um MetaMask recently came out um kind of with its announcement that they will launch their own stable um coin uh built on M0 infrastructure. Um can can you walk us through how M0's approach differs from from Mentos? >> So in general basically M0 has a focus on dollar. So I think the very short answer is we have a focus on on the FX part and local currencies. I think what M0 is doing is basically um giving a standardized basically platform to launch different dollar based stable coin is is certainly valuable. I think is really really important um because

with that we we again standardize a part of the technology stack um and I think for the dollar it also makes sense because um most of the stable coins out there are actually dollar based stable coin. In terms of mentor we focus a bit more on the local currencies. So we focus on basically actually having um the different oracles to exotic and less exotic currencies. We focus on basically having these markets where also M0 stable coins can be integrated um and and can can allow users then to swap at the FX rate. So I think here this is the the the FX part is the key difference to >> are you looking to kind of integrate more directly with um banking and

payment systems? So kind of offering for instance um your Ganaian users kind of the use of um Mento stable coins natively from from their banking application. >> Yeah, I think in general we want to integrate Mento where users swap between different currencies. Um so for example if you today already use uh squid router if uh to to swap from one currency to another then uh squid router calls the mento functions to swap um between different currencies and if you actually want to swap into a currency where currently no um there's no supply then squid router actually also calls that minting function of mentor where

basically local currencies are minted into existence. So we want to integrate in in routers, we want to integrate in wallets, we want to integrate in like uh everywhere where users basically want to swap from one currency to the other. Um I mentioned this pockets feature of mini by Opera before. Um I think this is also interesting because he uses uh want to swap to to basically get the cheapest off-ramp um and and want to use Mento. So in the end uh everywhere the where users want to swap um between different currencies and I think first what we're now actually focusing on is bringing Mento um crosschain onto other

ecosystems so that basically this then also becomes accessible uh on on more chains than just um and then second we want to also yeah roll this out in in different venues in the end. >> Super cool. Where do we send listeners who want to get involved? So kind of contributing to mento um whether as developers, community members, users. >> So I think one landing page is of course the web page mentor.org um and and users can basically there find um also the the GitHub um the blog uh the docs page docs.mentor.org um the white paper um and so on. Um then

there's of course also X or Twitter um the MentoLabs account where we basically want to keep everyone informed on everything that is new around Mentor. Um and in general also um I think the team is is always happy to talk to users to talk to builders. Um we uh large part of the team is actually based in Berlin. Um so we always happy uh for users that want to want to build on top. I think especially when it comes to building for FX, there's a lot that is completely untapped in web 3. Um I mean we now actually offering swaps basically where you can go from one currency to the other. Um there is also futures, there's hedging platforms, there's so much more.

There's options, things you can actually build on top. So we really want to excite more builders also to to use basically that that mentor functionality. >> Super cool. Thank you. Thank you so much for coming on, Marcus. >> Absolutely. Thank you so much for for having me and yeah, I really enjoyed the conversation. Thank you.