Pareto: Customizable On-Chain Private Credit Marketplace - Matteo Pandolfi. Ep. 613

Transcript

arbitrage opportunities are now like always available and so the fs that we were using to deploy into the arbitrage bots were idle for some time. So we were like okay we need to find a way to make that more efficient. In 2022, we realized that most of the customer base for Idol Finance was traditional funds allocating across different strategies and one of the major feedback that we received at that time was that yield optimization is great but we need to take care of risk and risk diversification. So at that time we decided to introduce yield the trenches pretty lines can be really customized from underwriting terms covenants to compliance requirements. This is

something that like for example Maple or Centrifuge is a bit limited. I would say the credit lines that we have are curation based. So we are not the only one that are underwriting these kind of credit lines but we opened up this process also to third party curators. >> Welcome to epicenter the show which talks about the technologies projects and people driving decentralization and the blockchain revolution. I am Federica Anst and today I'm speaking with Matio Pandulfi who is the co-founder of Pareto a credit coordination protocol that evolved out of Idle Dow in and is building onchain markets for private credit. Before I talk with Matio, let me tell you about our sponsors this week.

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Nosis, building the open internet one block at a time. >> Matthew, it's super nice to have you on. >> Really excited to be here and yeah, thanks to the entire Epicenter team for hosting this session to all of you for tuning in as well. >> Cool. Mateo, tell us a little bit about yourself before we dive into Pareto. Um, what's your professional and academic background? Yeah. So, uh, before founding Paro and as we are going to go through in more into details, idle da back in the past.

So, my background is in finance. So, my academic uh uh career was pretty much in finance and entrepreneurship. So, it's kind of like a good mix between uh uh that that brought me into DeFi. This kind of like you know innovative market but still really related to finance. Um before actually starting with Parto and and Idul Dao I was working uh on financial risk analysis. So I was consulting with major financial institution in Italy like in this sabo for example on their credit desk. So essentially doing helping on the underwriting process and due diligence process in order to create these kind of like corporate bonds instrument for

these financial institutions. What drew you into the blockchain space um in in the first place? >> Oh, that's a that's a really good question. Uh because I I've been brought into the DeFi space by my other co-founder, our CTO and uh who made me um find find out about Ethereum at first. Um at that time, I'm actually I was actually still a finance student and um we were exploring Ethereum. We he had a background in computer science and with my background in finance, we were thinking how we could build something uh on Ethereum and the first instance of

something that we build um onchain was actually um touching the arbitrage and arbitrage bots. So you know what we know right now as ME uh at that time was still called PGA PI Price gas auction you know. So we started um building these kind of bots that were looking on at discrepancies between checks and dexes and arbitrageing price across these assets. And um and yeah, so that that was kind of like the first uh instance and the first way where I realized that we could really create something that was

completely programmable and automatic and was really like changing the way that I was used to see finance because you know from the academic but even from the professional background I always swing like finance being quite seed. So all these kind of closed system that were all like communicating internally and not to each other and with Ethereum that was like the first time that it was my aha moment is like okay that that's really composable and that's something that we can build automation that on that that runs on chain and runs 24/7.

So that was the the first time I really touched with my hands um Ethereum and and the power of smart contracts and then you know I I just got into the rabbit hole of that. So um we started exploring lending protocols. That time there wasn't even a it was only compound and the ydx and uh so then everything evolved into what brought us into idle finance and then parto later on. >> When did you decide to kind of discontinue the arbitrage bot? Um that's a good point because idle finance came out from a need that

we had for the uh arbitrage bots because actually you know arbitrage opportunities are now like always available and so the fs that we were using to deployed into the arbitrage bots were idle for some time. So we were like, okay, we need to find a way to make that more efficient. And um so I would say that we proposed idle finance as a way to optimize the yield on idle finance in 2019 on an acatoner on Gitcoin. So I think that was 2019 when we decided to focus completely on an idle finance and put aside the arbitrage

bots. So I would say 2019 we started the arbitrage bots back in 2017 2018. So yeah we ran that for a couple of years and then decided to focus completely on idle finance >> and was the um rationale for kind of moving over purely a um return on investment kind of play or what were the drivers here? scalability. Uh, one of the major drivers were scal scalability because with the arbitrage bots, we saw that by increasing the AUM, the TVL of the arbitrage bots, we were actually reducing the margin of the funds for the arbitrage opportunities. So, we we were

really focused on building something on Ethereum that could be scal scalable, you know. So when we started implementing the very first version of idle finance into our arbitrage bots, we realized that we could manage 1 million to 100 million and the result was pretty much the same in terms of return of the capital because the kind of optimization could be applied with more capital compared to arbitrage bots. So building something that was able to be scalable and to be offered also to a more broader audience I would say because you know arbitrage in general is quite a niche uh product or in general it's a niche

concept that not not a lot of users grasp or understand in general. instead um like automating the yield generation optimization optimizating yield generation across different protocols was really something that was clicking with uh DeFi users at the time. So I would say yeah scalability and also being able to offer this kind of product to a broader audience and let let them understand the product to a broader audience was the main driver of us focusing completely on idle finance.

There were quite a few uh projects that kind of um centered around that, right? Kind of I mean in the very beginning it was things like insided that kind of let let you kind of uh switch funds between um make and ara if memory serves correctly. Um and then um uh kind of more sophisticated things like J uh come came along. So ho how did idle dowo kind of fit into that landscape? >> So I think we had the lucky and the opportunity we have been lucky and we had the opportunity also to meet like instad team or even Andre Crowner from even before like them um building out

their products. I would say InstaDup is being uh uh really great that they're they have been really great builders and uh but never really focused on yield optimization and automation of that yield optimization. and they were more focused on providing uh uh great tools for uh borrowers that were using like for example compound a or even maker and I would say that insta falls more into the uh into into a different category compared to idol finance why and idol finance are pretty much similar actually I remember a lot of conversation in telegram with Andre Kroni at the beginning on how to solve some like

initial issues of yield optimization. Like there was this pingpong effect that we found out at the time that was affecting yield aggregators which means that essentially when um when you move a big chunk of the funds into a specific lending protocols, you also influence the interest rate on that specific protocol. So if you don't have um control on the funds and a control on the influence that you have on the interest rate, you might end up into a ping pong effect, which means that you move all the funds from protocol A to protocol B because protocol B has the higher interest rate. But when you do

that, you're lowering the interest rate of protocol B and might become lower than uh the protocol A. So the yield aggregator sees that the higher interest rate is again on protocol A and so you move back the funds from protocol A. So you see that you create this kind of ping pong effect between uh um by moving and rebalancing funds. So um we have been like talking a lot and understanding what was the right you know algorithm and optimization mechanism to uh tackle this also with Andre Karns at the beginning and then I think um why did a great job on um I would say the positioning and narrative

built around the yield aggregation. At the time we were quite you know um for starting idle finance as I mentioned we started with a Gitcoin aceton. So we won that Gitcoin aceton and then we got uh uh accepted into um an accelerator in New York with consensus and so we kind of took a more professional approach I would say or institutional approach to the product. Instead I think at the very early phase of wir they took more a digen approach which turned out to be the right narrative. So I I I I would like say um that that they they did a great job on

that side of things and of course then the dev team and the community that formed around was really great. So uh congrats of course on Wernern and Andre Crown on bootstrapping this at the beginning and I would say that we we kind of at the end of the day defi was a small market at the beginning. So the way that we were looking at competitors uh at the beginning was more like competition rather that pure competition. And so turned out that like one of the major partners for idle finance was wire itself like some of the strategies and the vaults that W had at the beginning like for USDC, USDT and

DIY um were based on idle finance yield optimization for a big chunk of the funds that they were managing. So it turned out to be kind of like more a partnership rather than a competition with uh uh with wire finance uh for example. Of course over time defy market evolved become more sectoralized more you know professionalized and of course competition came out. But I would say that early times of DeFi, I really enjoyed the early time um times in DeFi because it was all about like cooperating together and trying to build like you know all the uh legal pieces that you could put together in DeFi. was

really about this sentiment was really about this uh um this philosophical uh you know work together to grow the market instead of competing competing together to shrink the market to each other. >> What ultimately kind of drove the pivot from from idle to uh PTO? I would say that we focused a lot in um for on yield optimization from uh since 2019 to I would say 2022.

In 2022, we realized that most of the customer base for idle finance was institutional funds. So institutional funds allocating across different strategies and one of the major feedback that we received at that time was that yield optimization is great but we need to take care of risk um and risk diversification. We need to mitigate risk for the liquidity providers. So at that time we decided to introduce um an additional product line and an additional primitive to the product suite which was yield the trenches. So essentially a primitive that could um where we could u build the senior and unit trenches, senior medicine in unit

trenches on top of potentially any DeFi y old source and um and so this this was a response to these kind of feedback that we received and um the senior and junior trenches in this context kind of being um different rates of return for different levels of risk, right? Oh, do you mean something else by that? >> No, no, that's correct. That's correct. Essentially, senior trench is uh the most protected uh vehicle investment vault uh that is protected by the junior trench. So, whatever there is a default because of an act or a loss of funds by the borrowers or these kind of loss of funds, juniors are first uh first loss

absorption layer. So they absorb the the loss on behalf of the senior because of this risk that they bear they receive also on higher yield compared to compared to the senior trenches. So we we introduced this primitive. We started building around different kind of yield sources in DeFi over collateralized lending staking in order to understand also where was the product market fit for this kind of product line and we realized that most of the product market feed was on institutional credit. At that time we were working with protocols like you know Maple or Clearpool that were doing these kind of first instances of institutional credit on chain and we

saw that like liquidity providers and lenders were really appreciating senior and unit trenches for institutional credit lines because different credit funds different edge funds or families offices had different views on these specific institutional borrowers that were lending. they were lending to. And so using senior unit branches allowed them to to customize the riskreward profile of their entire credit exposure of their entire credit portfolio. So we realized that most of the product market fit was there but we received also a lot of feedback from both borrowers and lenders that the credit infrastructure was not

ready for institutional needs. Um it was really kind of like mimicking a compound and have a interest rate model which was a pain for the borrower because is it was a single borrower that wanted to with a v variable interest rate that operationally speaking was terrible because they were looking more at the interest rate that they were paying compared to doing their own business. And in general the terms and the underwriting process for these kind of institutional credit lines of onchain at that time wasn't really customizable and modular I would say and um so we realized most of the product market fit

was there there was room for improvements on the credit space so we we said okay we need to uh we have a clear opportunity over there and we wanted to build and improve that space that part of the defi uh that defy sector let's say. So that's pretty much how we transition to uh to parto. We started working a lot with institutional credit lines and then we realized that we wanted to improve the credit lines themselves and that's how essentially parto came out.

>> Tell me more about um the institutional borrows. So kind of what kind of um institutions were they that they were willing to kind of borrow in this very competitive market on chain where kind of you you can go to your local bank and probably get a more competitive loan. That's a good point because of course they could access um um you know could originate on credit lines from a traditional bank but the process of origination um takes a lot of time especially the kind of borrowers that we're working with right now are pretty much you know institutional funds that run delta strategies or market makers or

prime brokerages and um the process of originating a loan on and managing that that Luon in a in a traditional way uh usually takes a lot of time and resources from their team and usually the teams are not like really uh huge in and so the the overhead is really tangible for the final borrower. We we recently actually run a use case with one of our major borrowers which is FalconX uh one of the leading market um prime brokerages and um what came out of the use case is that before using onchain credit lines so relying on

traditional uh credit lines uh took around 80 hours per month from their team to make sure that in order to originate all the documentation was there making sure that all the lenders were aware of updated terms and also doing manual reconciliation. What came out is that now with the onchain credit line they have to dedicate two hours per month the same team. So operationally speaking the improvement for the borrower is really tangible. There's a streamlining process that is happening on the operational side of things. you know onchain credit

lines are pretty much self operating compared to a traditional uh credit line. So that's that's I would say the the main um advantage of operating an unincing credit line and secondarily I would say also being able to um have a credit position than that that is composable is a big advantage for for these kind of borrowers and a big advantage I would say also for the lenders at the end of the day because you know being able to use a credit position as a collateral in a morpho oiler for example or create an an interest rate swap instrument using

pendle for the same credit position. It's really powerful for the lenders. So lenders have a better let's say UX when lending to the this kind of institution and in turns borrowers are able to originate more liquidity with these kind of credit lines and streamlining the process of managing these kind of credit lines. >> Cool. There's um a couple of projects kind of doing very similar things in the space. So kind of the likes of Maple and Centrifuge and so on. So how is your approach different or is it different from your competitors?

>> So it it is different. I think um center foods they started like really early. So they did a great job at you know pioneering on that on this kind of area. And um also Maple they they kind of pivoted I remember back in uh maybe it was 2020 2021 and then they focused completely on on chain credit. Uh so both are doing great jobs on expanding this kind of space. The main difference that we wanted to implement since the beginning of Parto was to make sure that we have a highly customizable uh protocol. So credit lines can be

really customized from underwriting terms, covenants to compliance requirements and that's this is something that like for example in maple or centrifuge is a bit limited I would say but also and more importantly the credit lines that we have are creation based. So we are not the only one that are underwriting these kind of credit lines but we opened up this process also to third party curators. It's kind of if you look at what happened with Maro and other overcolateralized lending protocol in the past where they introduced this kind of curation role that's essentially the same that we're doing with uh parto

compared to other onchain credit uh credit products. This allows us to have again more scalability for these kind of products because we're not the only one underwriting new borrowers but we have other creators that can provide this kind of underwriting capabilities and also in our longer term vision the the curation based model allows us to work also with you know kind of like traditional financial institution. Instead we see more like products like Maple or Centrifuge kind of a in-house underwriting uh uh company. So that that that that's uh that's pretty much like the the main difference that we have.

It's an open curation based model versus all inhouse underwriting process. So underwriting is actually really um skilled task right. So kind of like what it kind of takes is um kind of you need to understand the books of this company. You need to understand the business prospects. You need to kind of um you need to calculate the default risk and the associated um uh interest you need to charge in order to kind of break even. Te tell me how this process is handled um within PTO and kind of like how how you outsource this to others.

So uh with parto that that's a really good point in the sense that underwriting uh is it requires a lot of skills and also a lot of domain expertise I would say that's why also we started with you know institutional digital native funds. So we are which are most familiar with what we have been doing in the past. So we completely understand the kind of deployment and strategies that they're going to apply to the credit lines that they're opening. And um of course like the first step it's pretty much like um uh as you mentioned a scan and review of the uh credit worthiness of the borrower which

is given by analyzing the books and the balance sheets of these kind of borrowers. making sure there is enough equity for example to be able to uh cover for any losses to be and I would say that like there's been some experiment in underwriting in the past I'm not talking about parto but in the past there's been some experiment in underwriting small companies for example which turned out to be um a bit too much naive and um and so I would say that like in order to bootstrap and grow to this kind of credit space. We need to start with more solid corporation and institution at the beginning just to make sure that DeFi still get a good

reputation on on credit side. Then it really depends on the kind of deployment. For example, we work a lot with Maven 11 credit uh as a curator uh for file connects and what they do is pretty much um on the underwriting side of things for the credit line that we have. Um there's been a lot of work around the covenants that are around the credit line. So the borrower has a certain kind of parameters and action that they can do and at the moment Maven 11 is monitoring that and we're doing the same for other borrowers like Fazanara or Bastian Trading for example.

So it takes uh an initial screen of the wealthiness and uh and creditworthiness of the borrowers and then it takes also monitoring tools and monitoring capabilities for making sure that the healthiness of the borrower is still there. Um it's a bit manual at the moment but our like goal in the next I would say year is to automate that process and actually just to introduce a bit a new concept here but what we see as a really interesting uh um implementation into this kind of uh credit line is zero knowledge technology because what we what we realized is that

most of the information and data that we need to monitor and review to make sure that there is a good credit worthiness for a borrower are sensible data for the borrower. The borrower doesn't feel really comfortable in making this kind of information completely public both for compliance reason but also for like just to be ahead of other competitors and not to fall behind other competitors. And what we saw is that like ZK technology really fits well in this kind of area on monitoring credit wariness and covenants for certain credit lines.

So I'll give you a really really simple example of that. Let's say that a credit line for an institutional borrower has covenant a covenant that says that the borrower can only deploy funds into tier one exchanges and no more than 25% of the entire loan amount can be deployed into a single uh exchange. So the borrower doesn't want to expose all these kind of data for uh all the reason that they have and by using ZK technology and more precisely ZKTLS we essentially encrypt this kind of data and what the lenders receive is a proof

of the fact that the covenant is respected and so also that the co the creditworthiness of the borrower is still there and um and in this way we also automate may be processed from a more traditional monthly reporting or like a certificate of collateral on a specific custodian that is issued then you need to completely rely on a single data source. Two, the idea is to have the borrower being able to plug in multiple data sources from centralized exchanges, custodian accounts, bank accounts even encrypt this kind of data.

So all the sensible information are are protected and it's privacy preserving for the final borrower but the lenders on the other side are able to get a proof of the fact that the covenants are respected and the borrower credit worthiness is still good. >> Is there some sort of second opinion um for the underwriting? So kind of do you have different companies kind of look at the same loans or um kind of is is the is the underwriter in some way incentivized or penalized if they kind of make a wrong assessment. I mean wrong assessment goes a long way here, right?

Because kind of like everyone acknowledges from the get-go that there is some level of risk and kind of in order to kind of say whether something was calculated correctly or not kind of you would actually have to run this experiment many times and kind of like you're only running it once. So um kind of so kind of even if kind of like there's only a 2% chance of default um that is acknowledged kind of like those 2% can materialize right so kind of h how how do you do quality assurance on the underwriters >> that's a good question because we have been thinking about this because of course like underwriting process is not like um um mathematic something that mathematically you can uh you can always like be right. So of course uh overall

we we could expect defaults in the as as as we scale up this kind of credit protocol. So we cannot like say no okay there won't be any defaults. So we need to build around mitigating also this kind of default risk and one way at the moment essentially each credit line can be curated by a single uh curator. So there's a one entity that takes care of uh uh of underwriting and monitoring uh the alleess of a borrower. But the guard rail and the essentially the protection that we embedded into it is that the curator is also a legal representative for the lenders. So it doesn't take care only on the under of the underwriting

process and monitoring process for the borrower. But in a case of a default the creator in this case is becomes the lender represent legal representative towards the borrower. So the incentive of course for the curator is to make sure that they are doing the right calculation in order to get the default risk and also to make sure that they didn't they don't underestimate this kind of default risk because then they are responsible for uh any um legal representation for the lenders which is actually another difference from other protocols. other protocols. Essentially,

if you if you are a lender and it happens to be uh default, uh it's up to you uh to go to court to to file um the bankruptcy for example um documents in order to get back in usually multiple years and proceed from the liquidation of the borrowers. Instead, in the setup that we have is the curator that is also taking care of this process. So of course because of that the curator is more incentivized to do a proper uh due diligence and proper monitoring of the borrower even if it means to be more conservative than uh uh than the usual process but that that's the initial

incentive of course this is not the final like setup I would say over time for example yeah having multiple creators with kind of different roles like one uh under writing initially and doing the due diligence. Another one doing uh monitoring just to have like multiple parties that provides a um an understanding of the borrowers makes completely sense. But yeah, at the current time that would be the incentive for the curator to provide a proper due diligence and provide a proper underwriting process.

>> What happens if the underwriter just doesn't do it then? So kind of like say the the borrow defaulted and kind of like there are 20 lenders that kind of now I as an underwriter meant to represent and I just don't do it and I kind of just kind of uh step out of my business and let it default um start up a new underwriting business and kind of start from square one until because kind of defaults are kind of if you if you play it in any way kind of correctly defaults are rare.

right? Kind of like default should be rare. Um so if if I kind of if I can run my business until the first default unfettered um is isn't am I not incentivized to do that? No. Yeah, I see I see what you're saying, but actually um there would be liabilities for the underwriter as well. So, um, of course I I see what you're saying that you just like close out the underwriting business on on that entity and you open up a new one, but you completely destroy the reputation of your underwriting process.

>> So, these are known entities, you know who they are and kind of like there's kind of like a soft reputation even if it's not onchain kind of you know. Oh yeah, >> I would say that yeah institutional like in general onchain credit is bas given we work with a spectrum of collateral because we could we can enable borrowers putting collateral of course but we can work with a full spectrum of collateral from kind of uh standard uh collateralization ratio to even zero collateral. I think it's all about reputation like all these kind of lending is also reputation based lending. So, >> okay,

>> I see a lot of also borrowers, institutional borrowers at the moment that are looking at this kind of under collateralized credit lines as a way to to build a uh a credit score that is like it's it's on chain. and all the interest payments that they make, all the repayments of the notional that they make is essentially something that builds a credit score that is on chain and it's immutable on chain. So I would say that what like a a big part of the of managing these kind of credit lines is also making sure that uh the borrower but also the underwriters has this kind of reputationbased

way of working on the credit lines. >> Okay. So I think we kind of covered the how and the the why and kind of the what. Maybe let's let's uh look at the how. So kind of like uh if if you if you um could walk me through the mechanics kind of like from the lender's deposit to kind of how the credit gets allocated and how the yield is paid out and how often kind of these loans are um novated and so on. I think kind of that that would that would go a long way.

>> No. Yeah, absolutely. So well um the process of lending out to uh to a specific credit line um we from a UX perspective I would say we made sure to make it as uh as much similar to the normal D5 UX as possible. So initial like you know liquidity providers could feel if they were still like in DeFi. Of course there are some compliance requirement that we need to respect depending on the jurisdiction of the borrower. So all the credit lines at the moment have a KYC process that you need to go through as a lender before being able to deposit. Um and so after that like you can uh of course you can access

all the data around the the borrower or all the data around the performance of the vault and make sure that these respect the riskreward profile that you want to have for your for your credit exposure. um the kind of like the duration the and the interest rate models of the credit lines really depends on the borrowers because as I mentioned before uh we build the protocol around uh customizability and modularity of the credit lines. So the borrower can really decide how the interest rate model um behaves and what is the duration or the

the covenants of the of the credit lines. So just to give you some example just to let also uh the audience here understand better understand how the current credit lines works. uh we do have usually like weekly to monthly duration of these kind of credit lines at the end of which the borrower needs to pay the interest rate. The lenders can request withdrawals and uh and borrowers have like different duration from weekly to monthly to satisfy this kind of withdrawal request. And um and so the interest rate model for example it's decided be with the underwriter but

also the borrower. So for example Fazanara uh which is one of the borrowers that we have wanted to have um flexible on shin credit line that with an interest rate that was based on an external benchmark. So Fazanara Digital is currently running a bio delta neutral strategy doing a you know a funding rate arbitrage strategy and so they wanted to have the onchain credit line attached to the performance of this kind of funding rate strategy. So we took a a benchmark which is um the open interest rated uh BTC funding rate times 1.3 which turned out to be 88% correlated to Fazanara

performance and so we integrated this kind of interest rate model into the into the credit line. So that that's how we can like the customizability is really um it's something that can be used within credit lines and uh and really changes the way the credit lines work. For example, instead with Falcon X is pretty much traditional. It's a fixed rate facility uh with 30 days call back period. So it mimics a bit more the the traditional kind of credit lines that they already had but with the advantage of now for example Falcon X credit line is being used as a collateral in Morpho. So

lenders can also you know perform looping strategies on Morpho or even just you know use it as a collateral to borrow out to USDC and deploy USDC somewhere else. So you bring also more capital efficiency. So the process of deploying funds is pretty similar to D5 uh standard I would say UX apart from the KYC process. Um different story also for USP and SUSP which is the yield being stable coin that we uh we put on top of that but I'm going to stop here. I'm not sure if you have other question on the on the credit lines itself.

>> Yes. You said there is compile 3 KYC. Is that just for the lender or also for the uh just for the borrower or also for the lender? >> Also for the lender. Yeah. >> And what are the requirements on the lender here? >> It depends on the borrower in the sense that different jurisdictions are require different level of um of KYC. For example, with Falcon X it's US-based and we do let's say um traditional KYC process. So getting all the documentation source of fs corporate uh documentation if it's an entity that is deploying fs into falcon x and so I would say it's more traditional kind of

KYC process. We introduced also in partnership with our KYC provider which is keying um the proof of KYC way for some of the some of the borrowers are fine with it and essentially what we do is letting the user log in into our application via Coinbase, Binance, OKX accounts and this allows us to henerate the KYC level that they have on those centralized exchanges. So user doesn't have to redo again all the KYC process with this kind of KYC um process that we have but they just need to log in with

uh Coinbase, Binance, OKX or even we do have Revolute for example as a possibility to login with and we hinder it and we get a sort of like proof of KYC and that's for some jurisdiction enough for the borrower to be respecting the compliance requirement that they have. So those are the two current uh uh ways that we can uh allow lenders to KYC and depends on the on the credit lines and the jurisdiction of the borrower >> and are the timelines for um borrowers and lenders typically different. So kind of like my naive assumption would be that as a borrower kind of I prefer longer timelines whereas as a lender

kind of I want the uh I want to be able to kind of recall my loan kind of like from week to week. Do do you see this in practice? >> Yeah, we definitely do see that in in practice. I would say it's pretty much a process of finding a kind of um credit market equilibrium in the sense that we do receive requests from borrowers to have longer uh duration of these kind of loans and on the other side lenders ask for shorter durations in order to be able to recall funds. uh what we saw is that using a marketplace approach to that. So the borrower can propose different duration and let the lenders

feel the um the credit line that they prefer to have. Uh makes sense. Of course like the the behavior that we see is that usually borrowers um prefer to have longer duration but for longer duration they know that they have to increase the interest rate. So it's kind of like having the borrowers bidding and providing these these these different terms to the lenders and then the lenders find an equilibrium and find a sort of like natural deployment into the vaults that they respect that they respect the riskreward profile and also duration that they want. So there is kind of a

process of uh finding the equilibrium at the beginning where the borrower uh propose different duration and different interest rate models and the lenders pick and choose the one that they prefer and yeah having this kind of like marketplace approach allows this allows us to have like multiple proposals from a borrower. lenders decide which one is better for them and naturally then the borrowers keep the one with more liquidity into uh that that is being allocated into it. >> Okay. You also kind of briefly touched upon this earlier but kind of there's also this um synthetic dollar product that you have. Walk us through that.

>> Yeah. So um we decided to introduce this kind of synthetic yieldbearing uh asset into built on top of the credit lines because well on on one side we we wanted to create a sort of like index of this kind of credit lines. What we observed is that some institutional allocators um wants to control their credit exposure. So they want to create their own credit allocation and so they pick and choose different credit lines with different allocations and that's uh that's that's their own decision. But some other like institutional allocators actually wants

to have exposure to pretty much a diversified basket of credit lines and they don't want to really like trigger and control all and and and monitor all the exposure that they have. they're just fine with all the borrowers and they want to have exposure to all the borrowers and um so on one side USP and SUSP which is the name of the uh synthetic dollar and yield bearing synthetic dollar that we have allows to have a basket of asset to access a basket of credit lines instead of having to pick and choose all the credit lines and um and on the other side actually this creates a way for less sophisticated investors to access these

kind of credit exposure. You can see that as a sort of like you know ETFs compared to pick and choose stocks and build your own stocks portfolio. And um so the way that that USB and SUSP works is that you deposit USDC or in the future USDT and uh USDS for example. And these stable coins get allocated across a basket of credit lines which currently we proposed an initial allocation mechanism which is kind of henerating also the expertise that we build with idol finance and the old aggregation with idle finance. But in this way in in this instance it takes the borrower creditworthiness the duration of the

loan the interest rate model it creates a diversified allocation across these kind of borrowers and also always keeps a reserve that is highly liquid to be to being able to meet withdrawal request from the from the stable coin. And um so this gives access also to a less sophisticated but also to a I would say a permissionless kind of audience because having this kind of syntic dollar and eelbearing centic dollar allows us to apply the let's call it circle model. You know, if you want to have USDC and mint or redeem USDC, you

need to be KYC. You need to go through circle on boarding process and then you're able to mint and redeem USDC against dollars. But you can actually acquire or or sell USDC on secondary markets on on Nexus for example. And these this is something that we can we can apply as well to USB and SUSP. So permissionless user that doesn't want to go through KYC, they can acquire uh USP in unis swap curve balancer for example st it and then eventually sell it back into unis swap balancer or curve. So this allows also to broaden the audience and the access to this kind of crediting

index also to a permissionless kind of audience and not only to a permissioned kind of audience. I I have several follow-ups here. So, the first one being kind of like a mechanical one. Um so, seeing that I can kind of um deposit into this pool anytime kind of how do you make sure that the size of the pool is commensurate with kind of the borrow volume that you see. You're saying that um since you can deposit into USB whenever you want, how do we match that with the borrowing request on the other side?

>> That's a really good question. At the current scale of USB and SUSP, that's not being an issue. >> But >> so you have more you have more borrow demand. >> Exactly. We do have more borrowing demand at the moment, but it's an aspect that we have been thinking about. And I think that what fits very well is that we can also integrate you know blue chip defy yield sources as a way to park this kind of capital if there is not enough borrowing demand. um like for example deploying into SUSDS so um the old DSR from maker DAO or uh into a USDC uh Ethereum pool which are

kind of you know blue chip >> back to the idle dow exactly >> um okay second question um kind of previously kind of in terms of legal defensibility so kind of previously kind of I can how you say, "Okay, we're just we're just kind of uh the matchmaker here." Kind of like this is a onetoone relationship, but kind of like with um USP arguably you're offering kind of an investment product, right? Are you worried about that? Um so the legal clarity around that still to be shaped I would say but yeah we are bit uh like we we're we're thinking around that and like we don't want to completely being

uh like investment advisors I would say on this kind of thing because of course yeah um like with the old aggregators if there is a central team a central entity that just propose the allocations So uh you end up to be an investment advisor and that's kind of borrowing a concept from what we build also with IDE finance which is that we um the allocation mechanism for the USDC or USDT or USDS that we that are backing USP it's open. So essentially parto we don't have the a token live right now.

It's going to be um it's going to be released because the governance process of parto in this case uh would be able to also elect credit allocator managers. So we're not going to be the only one proposing a location but there would be a in in idealistically speaking a network >> marketplace again for different investment strategies. Okay. >> Exactly. Exactly. >> And checks out. >> Um, okay. So, USB um currently maybe I I checked this morning and didn't seem terribly liquid, right? So, kind of what's what's going on there? So, kind of like what's the what's the rate of return you're currently offering and why

is it not attractive enough for users? >> I would say so we currently have around uh 4 million four five million into into USB. I think it's still taking a bit of time to bootstrap the liquidity over there because what we are missing in our opinion is the um additional use cases with integrations with like over collateralized protocols or pendals. So I would say that like currently the interest rate on SUSP is around 11 12%.

And um and it's really like depending on uh on the borrowers that we have. Currently we do have like three borrowers integrated within SUSP and we need to expand that in order to make sure that we can on one side diversify the exposure more for this kind of index but also being able to allocate to higher yields in order to become more attractive in general for the market. I would say that the major problem that we found out is to you know bootstrap the integrations. So being able to use SUSP as a collateral in Maro Oiler or A for example create a more liquid fixed rate facility. So for example in Pendle being

able to to have this kind of fixed rate and of course I mean um we are still early in the development of SUSP and I think we can make more um you know we can uh we can push it more on the visibility side of things which is something that we haven't done a lot yet but because we wanted to have all the infrastructure ready and tested out and battle tested I would say. So I would say it's not really about the interest rate because if you look at I would say Atheina for example uh what is right now Atheina should be around like five 6% if I remember correctly they are overly allocated also to like USDS so it should

be quite similar to the SSR rate um so it should be around that so we're kind of like we're giving double of the of the interest rate of that so I don't see the interest rate as a major problem. I see more like being able to integrate the USP and SUSP across other protocols, which is something that we're doing. We started with Oiler a couple of weeks ago and bootstrapping that. We're going to push with more >> getting things listed as collateral is is it's it's a pain.

>> Uh yeah. Yeah, it is. But I mean, it makes sense. It should be kind of like a >> It should be a pain. But >> Exactly. Exactly. otherwise it's uh it's higher the the risk for DeFi in general and um but also like pushing on visibility and the location is something that we're going to do in the next month which would be helpful to understand what is USP what is SUSP what where the yield is coming from and this we expect uh will bring also more liquidity and more scalab scale to the uh to USP and SUSP >> okay um credit in some sense is more opaque than most DeFi activity,

right? Because kind of like it it heavily depends on um offchain books that you don't necessarily have access to as as a user. Um how do you make this compatible or do you make this compatible with um the real time transparency that people um expect from DeFi? That's a that's a great uh point and um so the currently it's difficult to make this kind of process really like comparable to the real time automation and monitoring of DeFi but we need to go there I mean uh that's um like we we need to improve from you know traditional loan that

often rely on you know quarterly monthly reports to verify borrower health and um and you know this creates also a risk lag because you know you might find out that find out too late that a covenant was breached for example. So yeah like ZK TLS implementing ZK TLS would be the first step towards that towards a more automated monitoring process and also being able to have a a diversified uh access to different data sources from the borrower allows us to like verify from multiple

data sources that the borrower ELF is there compared to just a single go like data source or a single auditor that makes the um the auditing process on the borrower. So I would say that like one of the current implementation that we have in mind to to solve this is to create a sort of like this kind of ZKTLS model where the borrower can attach multiple data sources with different even like frequency of data but like to try to be as close to the real time monitoring process that we have in DeFi and um and so like monitoring and uh automating in this

process for the borrower so they don't have to provide manual uh reports and monthly or quarterly reports. It's kind of a step towards going close to the real time monitoring that we have in DeFi. >> Yeah. So my worry is primarily about malicious behavior. Um so I do agree that kind of um all kinds of um unfortunate business u consequences and so on. And I think kind of like this is well quote by this um I'm not a finance person but kind of I know that kind of like if I needed to kind of um make books look good depending on kind of like it I I would book things different

ways or kind of like I would delay the booking or I would kind of I think there's different ways of kind of fudging the books right so that kind of a crisis is not immediately apparent. Um, do you have any guardrails against truly malicious borrower behavior? >> Um, yeah, I would say not relying solely on proprietary data sources. So I would say like getting financial statements, bank record, the trading activities in general to form this kind of borrower reputation shouldn't be something that a borrower itself is providing but it's something that we fetch from data sources that are

third parties and for example it's a read only API from a checks account. So the borrower itself cannot really like manipulate this kind of data. It would be the checks that should be manipulated. Of course, there's an assumption, >> but they can open a second account, right? So kind of like I can have one clean Binance account and open a second account in the same name, right? >> Yeah. But the when you're opening this kind of credit line, you're attaching like the either like uh like all the funds that uh you are borrowing out for the from the credit line should be verified that goes to that specific uh checks account and all the activity

around that checks account is what we are monitoring. So the collateral that you're using the the kind of uh trading activity that you're doing from that account is what matter for the lender. So I would say this kind of like credit line should be u getting a mix between other accounts but should be related to a specific checks account from the borrower side and uh in general like the way that we are also structuring from a I would say legal perspective the the credit lines is that they are SPV based so they're also bankruptcy remote from the let's say main company as well.

>> Okay. >> So that that's >> so you're trying to ring fence as much as possible. >> Exactly. Exactly. >> So if the PTO interface and kind of like the centralized entities behind it kind of disappeared this afternoon, um could I still unwind my loan or redeem my USP just by interacting with smart contracts or do I kind of um rely on you guys to kind of provide this service to me? No, it would be possible. The way that we made the the protocol itself, especially on USP and SUSP side, is that there can be a way for um the DAO itself to change for example the mean admin

controls for the allocation mechanism for example. um that also allows to let's say recall back all the borrowers all the funds from the borrowers and repay all the USP token holders. So if uh we call it uh we have been calling this kind of test with our legal advisor the Bahamas test. So if all the team decide to go to BAS and just don't build um the protocol anymore, we need to have a way to let the community and the token holders to be able to change the parameters and to change the admin controls recall all the borrow all the loans and repay back the uh and repay repay back USP and SUSP. So

yeah, we have been thinking about that and uh since the beginning the protocol is made to be open in a way that it doesn't only rely on the core team. Maybe as as a closing question um if you look at the onchain um private credit market and PTO in particular, what does success for you guys look like in the next two to three years? >> Nice. Great question in the sense that of course the main metric that we're using in D5 is TVL. So uh that's kind of a northstar for all the D5 projects and that's what we need to um what what

we're focused on growing over time and that comes of course from creating a more and more diversified trading marketplace. So what I see as a growth driver and potential expansion for parator in the next two three years I would say is to gradually introduce noncryptoreated borrowers. We want to have a way to give away also to lenders and liquidity providers in general to not rely only on borrowers that are related to the crypto market because then depends on depending on the market cycle you're completely subject to the market cycle and um so

the first driver would be to expand into more corporate bonds, corporate loans kind of credit lines. So introducing kind of like fintech companies or um crossber payment facilities, credit card companies, account receivable companies still related to finance and fintech but that would be the first expansion and um so creating this kind of more and more diversified marketplace that would allow also to grow USB and SUSP diversification power and allow also to work with a larger basket of borrowers borrowers capabilities and loans in general to grow um to grow also USPS and

SUSP. So I would say two three years we on board new kind of corporate borrowers we on board new curators that in our vision are also like traditional institution that bring their own underwriting process and due diligence process on chain without having to build everything from scratch. And of course that would be like meaning a TVL that goes above 1 billion to like numbers that were more like you know creative market is a 15 trillion market all around the world. So we do have a lot of room of expansion here in DeFi.

So like our first like milestone is 1 billion of TVL but then we need to think big with like this kind of number and we need to grow from there. >> Cool. Um, Mateo, where do we send people to find uh to find out more about Pareto and kind of potentially um borrow or lend some money with you guys? >> I would say let's definitely uh direct users and the audience that is interested to learn more about Parto to Parto.credit. That would be the main point of access where you can access the dashboard. So you can see all the BS, read about the borrowers that we have, read about the strategies that they're running. uh and understand more also

about USP and SUSP. And then I would say if they want to also keep up with the announcement that we're make, which lately are a lot actually uh to follow us on Twitter at parto.credit. Um you can find all the links at parto.credit for Twitter as well. Um to uh look at all the announcement that we're making and also to read the uh blog post and the articles that we made with our partners. >> Perfect. Thank you so much for coming on, Mateo. It's been a pleasure chatting with you.

>> Thank you. Likewise.