Niklas Kunkel - Are RWAs the answer to the DeFi boom-bust cycle?

Transcript

cool okay uh let's get started uh so I want to talk to you all about today is our real world assets the answer to the defi kind of Boom bust cycle and uh you know what do I mean by that um typically what you see in defi is that uh revenue is generated you know from typically yield um and that is highly like correlated with you know the volume that's being traded or the volume that's being borrowed right and so when we see kind of this e and flow of like activity uh in defi you know uh from the bull market to the bare Market you know we see this like very

very volatile um kind of graph of like Revenue generation right and uh this is uh you know a problem that I think uh young companies face like in in many Industries um but part of like the maturation process is to start smoothing out that Revenue so you have like continuity of of operations right because the last thing you want to do is hire like 50 people 100 people in the bull market just to then have to like uh let everybody go at the end and have like this huge brain drain right um so uh how do how do we get there um I kind of think real world assets are like uh a

significant like piece to the puzzle here and uh so I would like to take some time you know to to tell you why I think that is and and how you can kind of go about doing that uh that yourselves so um quick shill uh about us uh we're Chronicle um we are an oracle protocol that spun out of makerd Dow uh fun fact um at maker we actually created the first Oracle on ethereum in uh went live on mnet and May of 2017 um and the reason we built this Oracle was because at the time there was no existing Oracle solution uh so when we were trying to build D um you know we

had to like before we could even start building D we had to build out all of these other Primitives first so you know maker created the first oracles on ethereum we created the first decks on ethereum we created the first like solidity debugger we actually just spent like the first 18 months not even actually working like writing a single line of dcode um and just like building up like the uh the infrastructure that we needed um and so oracles were were a big piece of that um so I I want to talk about uh maker a little bit and so uh to kind of get you guys up to speed right uh what does maker Dow do uh maker is a stable coin protocol uh right we have a uh

stable coin called D um it's uh backed it was originally backed by just ethereum uh then a few years later right we added the ability to use multiple collateral types right so you could start using uh all kinds of uh you know Lio staked eth or WRA Bitcoin right or even uh link tokens right what whatever it is um but about two years ago maker took um a pretty significant step and started using kind of offchain um collateral right so uh assets that were not kind of crypto native and so uh here uh you can kind of see all this data on maker burn.com but

what essentially this is is it's showing like all of the revenue that maker Dow makes from uh crypto collateral right and so you can see up here right there's like different types of vaults that have um you know different uh loan to value ratios and different interest rates and you can see on the column on the uh on the far right you know uh how many uh millions of dollars makers is uh kind of making from that um so right uh this screenshots a little bit old I think it's now up to like 200 million um there thereabouts and now let's take a look at the real world asset uh Revenue right and so what do I mean when I say a real world asset because I feel like this is

kind of like a meme that's like thrown out and like uh you know what is the tangible like actual asset that we're talking about here um due to the um increase you know of rates uh by central banks um treasury bills became extremely lucrative over the past couple years right with uh most central banks having around you know between four five and 6% rates um and from an investment point of view right this is a essentially risk-free return right and maybe not as much as an potential equity return right but it's like uh it's good enough uh for the safety that it provides and so this was like the Catalyst for rwa taking off

and really like finding product Market fit uh because when uh markets are bullish right um people want to lever up right um and uh that generates right a ton of like borrowing activity but when markets are bearish nobody wants leverage when goes down um there's barely any like borrowing activity uh the consistency of treasury bill Revenue here is is very very significant right so you can see here um at the top right we have montales Cazale block tower Andromeda and coinbase custody those are all essentially uh vehicles for holding short-dated uh us treasury bills um with

kind of like rolling uh maturity is like every month um there's even another one on here HV Bank um HV bank is a smaller bank in east coast of the US uh that writes mortgage loans and essentially maker is underwriting uh those mortgage loans and you know we have a deal with the bank where the bank has to hold on to at least you know 50% of the exposure to that mortgage right uh to uh so they don't have Mor moral hazard of just like writing uh bad loans right um and 's a couple ones on here but I I I don't want to go into this too much but there's essentially a plethora of opportunities here all the way up and down the risk

curve right from the safest thing like treasury bills all the way up to you know municipal bonds corporate credit uh Structured Products um whatever it is right and you know higher risk higher yield lower risk lower yield so um taking this is a graph of kind of like the uh distribution of the sources of revenue uh that maker has had uh since uh since its launch right and so in the blue here this is revenue from uh crypted uh loans right and so you can see up until around like uh you know halfway through 2022 right 100% of Maker's Revenue came from these Crypt

back loans and then you see in the in the white uh sorry in the uh yellow I'm a little bit color blind uh you see in the yellow uh category Mark Public Credit right and this is essentially the uh the uh predominately the treasury bill Revenue that maker is seeing right and so maker has managed to in you know uh around 18 months uh really diversify its Revenue stream that it's not so dependent on this like boom bust nature of of uh like cyclical nature that we have in in Defi and so you know for those of you working in defi like here or like you know uh innovating new things I would encourage you to like

explore these like opportunities because even though like uh it may sound more comfortable and easier you know to STI stick to crypto native uh you're really leaving a lot of opportunity on the table by not like exploring these other options but you know with anything um it's not a free lunch right uh rwas like add an enormous amount of complexity um and so I I think the way to sum it up is rwas are not crypto native right um when you have a token on chain right uh you can immediately get you know the supply

you know who the holder is right you know exactly how much they have right you can even query the price in a decentralized way on chain rwas don't have this because what typically what you have on chain is not the rwa itself it's a representation of the rwa and so this leads to a lot of problems when you're integrating an rwa that you don't really have with Crypton native collateral because essentially the way to think about the rwa token is it's a dummy token it's just like an entry on your Ledger and so you require a lot of context um and a lot of data uh

like metadata that corresponds to this uh rwa that you don't really need in that Crypt native context and so um while the metadata for an rwa is going to be very unique to the type of that real world asset um I want to quickly touch on a non-exhaustive list of like some of the factors and categories of data that that you may want to consider right and so for example let's uh let's start with custody so um when you have a real world asset right it will be custodi in you know um in some kind of institution

right and there are are kind of various risk factors here uh but typically you want some kind of um bank or some kind of trust uh that is the custodian of the asset right and it's important right that you have some mechanism to uh determine and assert in real time you know how much of those assets are actually sitting there in custody because remember what you have on chain is just a dummy token right and so uh that dummy token could be completely worthless if there's not sufficient amount of Assets in custody right or it could be one: one right but uh you need

to have real time data kind of asserting uh what's actually there in in the real world you know so we have a mirror image representation of that on the crypto side uh let's talk about liquidity right um I think in crypto we get really wrapped up in oh this is the price of the asset um and I think um a gentleman from chain security yesterday was talking about Oracle as defi I think uh summed it up really well that uh we shouldn't think about price as like a static number we should think about price in the context of uh how many

tokens y can I get if I sell x amount of tokens on the market and so it is a price with the context of liquidity because you you can have a very high price with very low liquidity and if you were to sell a 100,000 500,000 a million dollars into that market uh you will have a drastically different price impact depending on the liquidity and so with real assets um some of them are extremely liquid right you know I mentioned treasury bills earlier treasury bills are one of the most liquid markets in the world but others are extremely IL liquid right uh they may not even be publicly traded they may only trade in like dark pools uh some of

them are never traded right they're just held until maturity right and so um it's not as simple as just oh here is the price of this rwa let's bring that on chain and now people can borrow against that rwa uh the liquidity and the discounted pricing uh as a factor or function of liquidity is extremely important um counterparty risk right [Music] um let's kind of talk about like how rwas are structured and while there it's a very young Market at the moment and where there's very little standardization of how you legally actually structure one of these um I

want to delve into one example using maker um to kind of give you a sense of like what are the different like actors involved here and how do they all interact so in a maker kind of structure what you typically have is you have a trust and the beneficiary of that trust is the maker protocol itself and essentially this trust in its bylaws uh essentially can only uh execute instructions that are given to it by maker governance so maker governance has to do a vote and the trust can only do anything if maker gives it instructions um next to the trust you

will have some kind of broker right because someone has to go and purchase and sell these Securities right uh next to the broker right you'll have a custodian right because the the broker then needs to um put those assets in custody on behalf of the trust the trust you know can own the assets but it can't custody them themselves um and then even next to the cust Ian you may want to have an auditor right um and so uh you know an auditor checking that you know the assets uh that the custodian has in custody are actually custody there and are actually you know what they claim to have in custody and so when you're thinking of like this data you have to think about

well how am I going to get that data um and I I think it's a trap to say like oh well like I'll just go to the custodian I'll just check what's in custody or oh I'll just go to the broker and ask them like what did you buy and sell or oh I'll just go to the trust and be like hey trustee what instructions did you give to like you know uh to for people to do right or or even the auditor and the problem here is that each of these actors have moral hazard right um they have moral hazard in the sense that if maker stops providing credit uh then they stop making money so there is a um incentive for them right

to uh FIB or or stretch the truth or or lie if you will right and so the only way that you can really start to build up confidence on chain in a snapshot of what the state of the real world is is by starting to have composability of all of these different counterparties right and so what do I mean by that well it would mean you don't just trust the custodian you don't just trust the trustee you don't just trust the broker you don't just trust the auditor you only trust them in when they all have symmetry and so what I mean by symmetry is well maker governance right sends money to the trust right and gives them

instructions hey buy 50 million of short-dated you know us treasuries right the trust will acknowledge that they received those instructions that they sent the money to the broker and that they relayed the those instructions to the broker and then they will attest they will sign with their key right you know this is this is what's going in this is what's going out you do the same thing with the broker the broker says I receed these instructions and this amount of money from the trust this is what we did we bought XYZ we bought you know xyz2 we bought xyz3 we have this amount this is the na this is the yield this is the duration right and then we send it to the custodian right and so you do this for actor in out in out in

out and so only when you have complete symmetry of all this information can you say with high confidence okay you know it's highly likely that they're not all colluding together um and so you can say with a fairly High degree of confidence yes like you know the protocol is uh uh can lend against this at this rate um because you know this is what's happening in in the real world and so the last thing I want to talk about is is yield right um a lot of these real world assets are yield bearing right that's why a defi protocol would want to extend credit to a real world asset right it wants to make money so if maker loans half a billion dollar

you know uh to some entity to buy t- bills well it's because maker wants to make t Bill yield but from the protocol perspective it the protocol has no idea how much yield it's generating right on on particular real world asset number one on particular real world asset number two on particular real world asset number three so the protocol is kind of like blind right and this kind of goes into the discrepancy between crypto native and non-c Crypton native right uh where you know in a crypt native sense the protocol has complete omnipotence uh over okay what is the yield what is the price what is the liquidity right and in an rwa context it doesn't have that and

so uh you know yield is an incredibly important part right and so let me like describe to you a context in which you know um an oracle could you know delivering all this data what kind of utility it provides to your protocol um so let's assume that maker has you know 200 million in rwa number one 300 million in rwa number two and 400 million in rwa number 3 uh the protocol wants to optimize the yield it's generating well using oracles it now has the insight into knowing that oh well it's generating 3% on number one you know 4% on number two and only 1% on

number three and so the protocol can now in an automated fashion right reallocate credit from the you know rwa number three that it has $400 million in um automatically send those instruct sign those instructions and send them to to the trust to execute the appropriate sales receive the money and then reallocate that uh to you know the other rwa bucket that's higher yielding right so the protocol can now effectively automate its management of credit and optimize yield right uh you can talk about you know um jurisdictional exposure management right maybe the protocol doesn't want to have all of its eggs in one basket right and it wants a

diversity of exposure between uh the US and Singapore and London and Hong Kong right uh Dubai right um and it can notice oh well right now you know we have 35% exposed to the us we want to get that down to around 22% right and do this automated rebalancing right in in this manner right um there could be other factors right so in maker Dow the die Peg is stabilized uh or hard the hard Peg is reinforced by a swap facility called the peg stability module or PSM for short and all it essentially is is a smart contract that has a bunch

of usdc uh or other stable coins in it uh that uh that smart contract will let you redeem die one for one so if you give it a die it could give you a usdc