Money for the Internet Era by Stani Kulechov - DeFi Today Devconnect ARG

Transcript

you. Hello everyone. Thank you for coming back. I hope you had the opportunity to have some lunch. Our next speaker needs no introduction. Uh but I'll do it anyway, I guess. He is Stani, the founder of Avid Labs, and he'll be talking about money for the internet era. Please give a big big big round of applause for Stani. Thank you so much. to get the uh to get the slides up. I'm a little surprised that you're all here after yesterday's ra.

I guess you guys uh were smart enough to leave a bit earlier to to make make to the uh this last day of um uh Devcon connect right? Okay. So today I'm going to like give a presentation about uh stable coins and a little bit of uh direction where I think that they're going to evolve um in in the future. And um on top of that at the end of the um talk I'm going to leave a few minutes for uh any kind of a questions that you might have.

doesn't necessarily need to relate to the talk itself but uh in general you might you might have about a or or defi um and so so if you have anything to to think about that's that's something to um think so one of the interesting things about money in general is that to see like how it's been evolving uh over time. So we've seen money moving from uh community uh money basically having a way of exchanging value uh over time into uh basically being a accounting uh instrument and at some point we've seen some standardization of of money. So, um being able to see coin uh mintage and

and and different kinds of uh stamps in money basically approving that uh it's a legitimate uh currency and and later uh we've evolved into uh effectively uh paper bank notes uh credits and and also the the the fiat money. So where effectively nodes aren't anymore backed by uh let's say a a commodity like gold but have a a separate um kind of a economy that that lives on uh by itself and and we know what basically u um different kinds of features that it it provides. So when when we look at the the the history of of money and how it evolves on every single step we have uh some sort of um

uh additional properties that makes that uh substrate in somewhat uh more efficient. So obviously uh coins uh created a standard that you can have a a sort of a trust of of of a currency right. So you don't need to um measure uh different uh sizes of of for example gold when you're trading. Um and then that coin standardized the the value exchange and then uh paper bank notes allowed uh people to actually then allow not to even carry the the community with you like gold for example and and coins itself. And electronic balances then made money faster to move across the

world and with the uh uh evolution of internets also to to actually understand settlement transactions, read the data uh across the globe um and having that information available at uh less than a few milliseconds. And um then obviously mobile wallets and getting the money close to people uh spending uh in transactions um made it far more efficient. Um and now the kind of latest evolution is the uh stable coins. So we all uh most of all we know what's what how stable coins evolve but but interesting about this uh whole uh evolution is is um the additional properties it it provides. So stable

coins are more uh transparent when they're on chain. in programmable uh you can set features uh into these stable coins on on on chain um and then could be used on on on in decentralized finance um in a very exciting uh way. So every kind of like uh evolution of of money adds something additional uh value that makes it interesting and and progressive for uh how we exchange value today. Um when we think about the evolution of stable coins itself um it's quite an interesting story right so stable coins started as a way of of uh creating a stable balance on a centralized exchange

so back in uh you know 10 years ago uh typically uh exchanges didn't have a a a bank um sort of a uh bank uh accounts um or like accounts for for users um for various reasons uh crypto was unbanked at that point. So um stable coins were a way to actually create uh this kind of like a stable uh trading primitive for a lot of uh traders on centralized exchanges. And a little bit later uh when DeFi started to evolve uh in 20 2018 2019 2020 um stable coins became also a way of uh using it as a means of uh a lending instrument and on over

collateralized lending and uh we from a we've been building DeFi uh uh before uh stable coins were on Ethereum um and that was like a really challenging uh point because you couldn't take really loans in uh in a stable value. So that solved a really interesting problem. Um I'm just going to share some of the interesting parts of um uh the most recent uh progress of of yield uh uh building. So now we see all kinds of uh instruments being built as a form of a stable coin. So maybe one of the simplest example is uh Bidd uh launched by uh BlackRock where you effectively

have a um uh money market fund on chain that at the same time acts as a uh stable value and a ways to settle uh transactions. Now um this isn't really kind of like a new thing of settling transactions with something else than than cash. Um, I recently heard that one way actually uh to to move dollars around uh in in Argentina uh uh between is is by using some of these treasury instruments and the stock market um and trading between uh the Argentinian exchange and and the US exchange. So in some ways these uh kind of like a T bills and and money market funds are ways to move funds around uh globally as well and and more

kind of a little bit more native exper native approach is the uh Ethe uh where basically you have a tokenized uh investment strategy um of a yield basis trade um that exists then um on chain that you can use on DeFi um and it's a uh interesting interesting kind of evolution of of building yield on top of that uh stability uh primitive. Um yeah, the way I think about these stable coins is uh it's it's creating this whole uh money layer um in in in in and on on chain that can be adopted uh

pretty much everywhere. And I think that uh what we kind of uh realize realized when we were doing our research is that the the market size of these uh stable coins are heavily tied into Ethereum. So the neutrality neutrality aspect plays a really big big role. So being able to be neutral, programmable and trusted and that's why we see a lot of adoption on stable coins specifically on Ethereum. Even though uh at the same time a lot of stable coin issuers can choose where they actually uh issue the stable coins and typically they issue them in across multiple uh networks.

So when we think about why Ethereum really matters in the context of stable coins or um any form of tokenizations because stable coins are just one part and and a form of uh tokenization of of assets. So having that transparent uh layer uh credible uh neutrality and and and this kind of like a deep liquidity is what makes Ethereum as a strong uh basis for uh stable coins. Yeah. uh and also the fact that DeFi has been able to create uh these deep deep markets uh is a really important factor for any uh any tokenized asset and

particularly related to to stable coins because that's where we are going to see a most of the growth uh in the future uh beyond these types of uh uh peer-to-peer uh transactions and actually the the utilization of of uh stable coins in different form of uh um use cases whether that's lending borrowing um using as a collateral for some sort of a trading activity um or or u distributing yield across across the world. Yeah, I think one exciting part about uh the adoption of stable coins is uh DeFi.

So the way I think about the future of finance is that there's three different uh blocks. So the the the the block one is um uh DeFi being a place where you get the best financial opportunities. Um so the reason that DeFi really will scale in the future and replace a lot of these traditional uh financial uh systems and and and and businesses is because uh decentralized finance by its nature is an open level playing field for anyone to come and innovate and and and create algorithms and these algorithms then battle for the open uh liquidity that exists in in in DeFi. So for example uh when you think about AMMs uh every

single iteration and improvement on AMMs will increase the liquidity uh and flow flow of that liquidity that particular uh AMM uh through let's say aggregators and and so forth and same applies also in lending uh any sort of uh innovation on uh these lending algorithms uh increases the liquidity uh and utilization of of uh and depth of these uh liquidity pools. Uh so so in overall this is why defy is where the best financial opportunities will exist. So that's the block one uh and and the block uh two is uh tokenization. So uh to scale decent and just finance we need to go beyond the

native assets. So um the main use cases for for uh DeFi lending for example is to collateralize against Ethereum and and Bitcoin and and borrow against that. Um and to to the the the value that we have natively on chain um has a certain certain uh ceiling that will grow over time as the whole uh ecosystem grows. But to really get more adoption and move uh DeFi and and and move onchain completely into the traditional finance um there we actually need to bring the value from tra traditional finance um into onchain and that's where tokenization comes into play and um what we're doing from a perspective we're

also applying the the uh the same protocol the a protocol that we use with native assets um for these token assets with with a horizon simply using uh money market funds uh treasury funds as a collateral to borrow uh stable coins. And then obviously the the last bit um which is is is is uh the the the third uh kind of like a block of future of finance is then the aspect of this uh stable coins. So they allow uh the participants to consume DeFi. So to access DeFi uh you have to be at the same format as um as the onchain world.

So uh you're able to consume these opportunities uh whether it's borrowing against uh some particular um collateral. And then the second point of that is also the ability to uh extract uh the financial opportunities in form of yield or some sort of a um other way uh effectively. So stable coins have been around here right but uh in terms of the transactioning um the growth has been enormous. So I saw this slide uh recently and and and the data that as of today stable coins are transacting more than than than Visa. And actually to

verify this data we actually went uh to Visa and asked about this information which they confirmed is that uh stable coins are slowly taking more set uh settlements in the background and it's an interesting way because um with stable coins you can bypass the um the typical inefficiencies that you have in traditional merchant settlement networks um waiting for uh over the weekend uh for liquidity uh next day liquidity or or even even further and that all creates credit risk across uh different uh participants whether that's a credit card network or merchant or um whoever in that uh uh supply chain. So as we see

this is just the the the the five year of of progression of of stable coins and how we're selling uh transaction today overcoming the uh the visa uh settlements at the moment and I think uh DeFi really took off when we started to rece when we started to actually create yield um and that yield uh is was on top of the uh stable assets. So, um the the the the fact that uh you're able to use a stable coin and extract yield is is a uh kind of like a um use case that brought a lot of momentum. So, going back in 2020 um

January we launched the first version of the A protocol um and few couple of months later um COVID started to to to be around everywhere, right? and and two months later it was a full lockdown everywhere. So back in 2020 what really happened was uh quite interesting is that everyone was under lockdown and government interest rates went completely to to zero uh part of uh trying to boost the economy uh by the the the governments. So what happened is that you had a combination of uh low interest rate environment um stable coins existing on Ethereum um people having a lot of time to

explore financial opportunities um obviously we're in lockdown so you have a lot of time to be on your computer and and and and and learn things and um and the last and most important thing is that's the economical hardship. So at that point when people are concerned about their economical well-being um that makes everyone to seek new opportunities. So in 2020 we saw the first kind of a real momentum for decentralized finance and that was fully powered by stable coins. So you could go into decentralized finance and earn uh anything between uh three to 4% uh yield on a very low risk basis. While

at the same time in the traditional world um the interest rate markets were were zero. And that combination plus the combination of uh issuing governance tokens to directly to users created DeFi summer and highly driven by by these uh stable coins and being able to utilize them. And when we think about uh where we going uh from here um I do think that the utilization power what we can have with stables on on on defy is what will really grow uh itself the the stable coin market. We're going to have a lot of settlements uh and merchants uh settling transaction with stables. But

it's the DeFi that really helps to grow because you can start collateralizing uh these positions. Um whether it's lending or per trading or any other type of a uh innovation. I personally don't think really that kind of like a banks will disappear uh when we think about DeFi. I just think the way banks need to operate uh in the in the kind of like a DeFi powered uh future has to be different um has to be more competitive and I think actually DeFi can help banks to also reduce their uh operating expenses and and and cost.

I also think that stable coins and tokenized deposits that are issued by banks will coexist because it's a two different types of a risk um profiles. When you have a tokenized deposit u you're effectively taking a credit risk of a bank. When you are holding a stable coin you're typically taking a credit risk of let's say more on the sovereign governmental uh level. But what I do think is what going to is what what is going to happen is that we're going to see more of actually financial rails changing into more DeFi rails. So I think what will happen is

that we will have uh embedded DeFi uh which means that as interest rates are going to go down again um because you can't keep interest rates high enough in the in the traditional world uh as that will uh that can actually cause the the slowness of the economy reduces the opportunities reduces borrowing reduces opportunity. So we're going to have a similar situation where um we're going to enter into a macro environment where interest rate markets are going to go down and the D5 opportunity will increase at the same time because you have this uh less correlated yield and financial opportunities that exist in in DeFi and a highly efficient uh capitalization uh system and we all know

how quickly liquidity moves in in D5 across different protocols and where we're going with this uh essentially actually is that stable coins are effectively the way to uh to to build this this this gap between uh DeFi and and traditional finance by seeing embeddings of the the technology and over time I think uh tokenization piece is is really important here. So think about stables as the kind of like a cache leg of of of of DeFi and then the the RWS is the the the the kind of uh

yield leg or like where the actual uh consumption happens. Um so you have the consumption on the RWA side and then the extraction on the stable coin side and I think that institutions will come in specifically loop this particular strategy. So you bring assets on chain, you need utilization. Um you need a cash leg and and that's going to be stable coins or some ways even tokenized uh deposits and to get all together that creates uh fully onchain uh capital markets and 247 liquidity for for all the users.

So the onchain stack what we're we're going to see is simply the isance layer originate assets stable coins RWAS uh credit I think credit is going to be the next really big thing um that we're going to solve uh and and bringing that uh onchain um obviously the settlement layers the the primitive layers like the the lending protocols um and then the application layer and programmability is is really important here I I think uh one particular uh important thing to to uh think about here is that stable coins is somehow um comparable to to something like HTTP and I think also like D5

primitives by themselves is that they're just a ways of creating rails to to operate. So whether uh that's basically moving value around or actually then utilizing that value in some ways but kind of like an an open open form and some things that I think is going to come into play is um the onchain credit that's something is is is really fascinating because we created this interesting um interesting way of allocating capital in DeFi. I think that part is solved. So it's it's very easy to get capital into financial opportunities if they're sound and safe and and there's arbitrage. But what we really haven't solved is how do

we get outside of the traditional ways of like collateralizing against like Bitcoin and Ethereum. Um we're now collateralizing against RWAs. But I think the the the the most biggest opportunity is how do we take the the DeFi liquidity and we have consumers on the other side uh and identity and connect them all together and AAX is uh also really fascinating area. So how do we actually bring more local stable coins uh into onchain and are able to actually do a fax trading far more efficiently um and far more with a better pricing and obviously there's a cross border settlements um as well that is going to

be really big. So obviously like on infrastructure perspective like we're progressing really well. So we have stable coins tokenization is happening. Uh DeFi has been maturing uh really well over the past uh five years and and a lot of the issues on DeFi uh the few of the of them are happening more on the edges of the D5 like the core D5 is is is really working well and we see it on ongoing basis with everything that is happening in the markets. So the next kind of like a next kind of u uh stage is to really nail down the consumer aspect like how do we hide a

lot of the abstraction complexity and get into a place where people don't need to think about stable coins at all. It's just money for them. You know it's it's it's dollars or pesos or whatever uh currencies they want to use and they can access DeFi under the hood. Um, and everything should be purely purely hidden. And the abstraction is the key because if you can create the same type of an experience or even better that exists in in the in the uh existing traditional um kind of like a fintech world, then we get to a place where actually we can onboard more users.

And yeah, there's different reasons why people access DeFi. And Argentina is really great example where uh I came here first time four years ago and DeFi and and and and Bitcoin and Ethereum and and all these um kind of like um crypto primitives were used on a day-to-day basis and it's a way of actually preserving the the capital the the hard work hardearned salaries that many people have here and and seek for inflation protection in a in a world where we have uh a lot of fiat currencies uh world preservation becomes even more important and people will have to take more control over it but they need ease of access for that so that's

why we have to go directly to consumers we have to go to embedded defi and get a lot of these interesting D5 primitives integrated where the users are so the way we do it in a is we have a basically a very simple uh mobile app and once you download the app you can create an account uh with your email phone number and that's fully self custodial account that you can also recover and the main thing is that you can then connect rails natively uh on a move funds from your bank accounts into a set recurring payments you see simple local

currency that you have that might be dollar for example uh for in the beginning. Um, and just abstracting away everything that relates to to to to wallets, abstracting away uh networks, gas, uh, anything that is really new to to the mainstream. And I think uh if we are able to bring DeFi uh and and an experience where it feels very intuitive as any sort of a banking application but with really prime experience we can actually get a lot of people uh on boarded.

So if you want to join the wait list for the AV app, here's a QR code and I will leave some uh few minutes for also uh for some questions. Thank you. >> Well, Stani, thank you so much. I'm really excited to play around with the A app. Uh so we have a few questions here from the audience and I guess the first one would be do you see onchain credits replacing retail lending or capital markets?

>> Sorry what was the question? >> Do you see onchain credits replacing retail lending or capital markets? >> Yeah I think there's kind of like a two paths. So one path is that we will see uh tokenization um of credit. So we will see existing uh loan books of um um existing let's say um fintech providers or banks or anyone who is running a lending business and taking that loan book and tokenizing that and bringing that on chain and being able to access uh the liquidity of a I think that's one uh path uh to go forward. I think the second part that is uh very exciting is to trying to figure

out where credit doesn't exist because of uh certain inefficiencies or not enough market opportunity or not enough data to assess the credit and that's the one that basically I was uh pointed earlier where I'm most excited about to basically take the DeFi liquidity that exists already finding these financial opportunities that are underserved um because of uh any of these elements and then connecting them together and ensuring there is a good identity process and also underwriting process and I think that's the way to to bring credits in a right way uh on chain that is exciting because you're not just kind of like um using DeFi as as a way of uh um kind of like a tokenizing these

existing uh loan books but you're creating net new value and I think that's like a quite interesting approach. >> Awesome. Okay, thanks. And I have one more question before you wrap up. You mentioned deep liquidity is very strong point of Ethereum. Is this existing liquidity also important for new asset classes that are moving on chain like real world assets with a horizon? >> Yeah, and I think uh the deep liquidity is far more important than than um at least now I think it's more important than ever before um especially because u the liquidity get gets priced on chain. So if you fractionize liquidity um that increases the and changes the the pricing profile um and creates capital

efficiencies create situations where you can't necessarily pull funds out and can get stuck for example. So with AV4 our approach is that we want to consolidate and concentrate liquidity as much as possible to these so-called liquidity hubs and then from liquidity hubs we give credit lines to um spokes and the spokes are where you have the asset collizations um what assets could be listed launch to value ratios uh and that can be um existing assets or RWAs and that creates a risk segregation essentially so it's a kind of like a fine balance of ensuring ing that uh there's risk isolation while uh keeping enough uh liquidity uh concentrated and I think that's a really

important for bootstrapping new products and markets and and one of the things that when I talk a lot of uh with with developers uh they keep mentioning that they build a really interesting product and I typically agree uh but one of the hardest part has been to how do you actually get that product bootstrapped and and grow in in DeFi and with this model, you can innovate within the AV ecosystem, create a spoke um and then tap into and request credit lines from the main uh liquidity hubs. And if that innovation is proven to be um secure and and and scalable, you can scale it by uh getting more credit lines of the existing hubs or or or larger hubs. So

you can scale across uh the whole uh protocol. And that part I'm also quite excited because that opens up a for new innovation from uh from uh third parties. I see. Okay. Well, thank you very much. Let's thank Si one more time. >> Thank you.