Resilient DeFi with Kirk Hutchison | Layer Zero

Transcript

the idea that we're gonna today in 2022 create an immutable system that will work forever with no changes is ridiculous right um every system that's ever been made has been changed a lot uh ethereum's a lot different than it was when it started bitcoin's a lot different than it was when it started there's nothing that will work without change and be adopted and used long-term without change however you can get it so that the procedures for chains are less subject to abuse welcome to layer zero layer zero is a podcast of unscripted conversations with the people that make up the ethereum community crypto is built by code but is composed by people and each individual member of the crypto community has their own story to tell cypherpunks understood that the code they write impacts the people that use it and layer 0 focuses on the people

behind the code because ethereum is people all the way down and it always has been today on layer zero i'm talking with kirk hutchison of volt and volt is a inflation hedge stablecoin it's a stable coin that is hopefully designed to restore and retain its value as inflation goes up and up and up which is a very timely conversation however we don't actually start the conversation there kirk has been recommended to me by many many different people from across the dfi ecosystem with universal universal consensus about this gigabyte nature of this guy kirk and so in order to meet this guy kirk and and get to know why everyone respects him i just decided to pull him straight onto a podcast and so

we dive down the rabbit hole of some very primitive d5 concepts that we haven't really revisited in bankruptcy for a very long time this concept of no magic numbers when we design our d5 protocols anything arbitrary in a d5 protocol is fragile and if it's fragile it's going to break and so we talk about that concept we he also is very very attuned to the world of monetary policy and economics uh and trying to apply the lessons of tradify and like economic history into the lessons of d5 so rather than just being like a more typical layer zero episode where i'm actually trying to go into like the soul and personality of our guests this is me just trying to figure out how kirk thinks and what he's trying to do and what does what he prioritized and i

find a ton of alignment with what he is building how he's building it and what he's modeling it after uh and so i hope you guys follow me down this rabbit hole of understanding kirk and also understanding volts volt and seeing where all this goes uh when the ecosystem that kirk envisions for the for the d5 ecosystem uh comes to fruition so let's go ahead and get right into the show right after we get to some of these fantastic sponsors that make the show possible arbitrarily is an ethereum layer two scaling solution that's going to completely change how we use device and nfts over 300 projects have already deployed to arbitrary and the d5 and nft ecosystems are growing rapidly some of the coolest and newest nft collections have chosen arbitrarily as their home all the wild d-fire protocols continue

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independent validators it's yield farming but with ethereum notes you can get started at rocketpool.net and also join the rocketpool community in their discord you can find me hanging out there sometimes in the chat so i'll see you there the layer 2 era is upon us ethereum's layer 2 ecosystem is growing every day and we need bridges to be fast and efficient in order to live a layer two life across is the fastest cheapest and most secure cross-chain bridge with across you don't have to worry about the long wait times or high fees to get your assets to the chain of your choice assets are bridged and available for use almost instantaneously across bridges are powered by uma's optimistic oracle to securely transfer tokens from layer 2 back to ethereum a token proposal is being deliberated as we speak in the across forum where community members

will decide on the token distribution you can have your part of across the story by joining the discord and becoming a co-founder and helping to design the fair fair launch of the cross if you want to bridge your assets quickly and securely go to across.to to bridge your assets between ethereum optimism arbitrarum or boba networks bangladesh nation i'm here with kirk hutcherson the co-founder of volt protocol and kirk has been universally recommended me from by a number of people who i know and trust in the crypto space uh the word gigabrain uh has been used a number of times to describe kirk i don't know where this conversation is going to go but i have a feeling it's going to be a good one kirk welcome to the show thank you so much david i'm really excited to be here and

um you know flattered by the kind words people have said of me i definitely am like you know kind of a theory cell as far as crypto stuff i come from a very mechanism nerd like look into the history look into all the nitty-gritty of it um and i feel very grateful for the opportunity to build and practice that now um but um yeah that's how i'd introduce myself fantastic yeah crypto definitely offers a blank slate for thinkers to begin to tinker uh so like uh oh i like that line uh i think you're gonna tinker uh so as a as a thinker kirk what do you think about what what are the subject matters that you often uh ideate in your imagination well the thing that got me

into crypto in the first place was like many people in general the idea of censorship resistance not just money um you know things like social networks as well uh and i took a brief soldier and trying to be a solidity dev i was never a particularly good one although i gained useful insights by trying to learn that um i became fixated after a while on the problem of scalability in governance and how you know if you look at like token governance models today such as maker dow how they decide to tune parameters in the system or add new collaterals there's quite a bottleneck of attention uh you know the attention of the whole dow at one time is not very scalable and so i was thinking a lot about that

problem especially in the context of stable coins and that's what drew me to fuse and you know rory capital and the tribe now ultimately uh was looking at more permissionless lending markets and thinking how could you govern deployment of pcv or you know lending capacity in one of those markets in a more scalable market-based approach and that was what was my original idea that was behind vault uh there's been quite a journey since then and a lot of other elements and the scope of the problem for me has expanded into the question of really how can you correctly make a decentral bank uh you know the fully symmetrical currency and credit market since everything you know all the

types of things that people need banks for uh in a totally transparent unchained way that is governed ideally by markets and not by votes uh because the votes are where it gets sticky um and i think anything that is like asynchronous decision making not very ideal for like a continuously running open system that's why ethereum or blockchains are so good is because they don't go down or they're not supposed to right there's always always there and it can't be disrupted um so having some of the principles about what makes l1 so good and thinking about can we take that um into these you know applications and you know make further strides in the design is really what i'm obsessed with and how we could um

yeah i i'm inspired a lot by what exists i also am inspired a lot by trad and learning about everything how that works and i think that there's a lot to learn as far as building those functions but not necessarily in the same package yeah i have a feeling this is going to be a pretty uh brainy and technical show so i definitely as we go along want to take some time to define some stuff to make sure that all the listeners are keeping up with us uh you used a term which i have not heard in a very long time a decentral bank uh now that's from a decentral bank is something um i think i think i might have memed this thing in 2018 when i was first getting into the world of content production and using it to describe maker dow it was

like i understood maker dow at the time to be like a version of a central bank as in it controlled interest rates it had a monetary policy it had like assets and liabilities uh but it was decentralized and so like how do you talk about these things well like let's call it a d central bank meme never really caught on but i think uh as we extrapolate from 2018 to where we are now i think what you're leaning into is like there is a more rather than maker dow being the decentral bank there is the concept of a decentral bank and maker dow is now just like one flavor of that or one implementation of that i'm getting the idea that volt is an alternative flavor of a decentral bank but before we go into vault can you talk

about the concept of a decentral bank you use some other words that i'd like you to define as well as in a fully symmetric currency that one left a question mark in my head as well as asynchronous votes okay so can we talk about like the model of a decentral bank for a model uh and then talk about those two uh dynamics of uh components of decentral bank symmetrical currencies and asynchronous asynchronous votes can you talk about those things that sounds great so if we i think maybe we should start by just asking about like in a modern context what is money and since pretty much you know at least the industrial revolution money means either a currency issued by you know a central bank

or maybe a deposit at a bank that issues its own independent notes um and usually this represents some kind of like a hard money value which could be gold it could be central bank notes and there's an understanding that the bank is taking part of that capital and loaning it out you know they have some portion of basically hard money reserves and then they have a loan book so not everything is fully liquid and they have to manage um you know the liquidity within the system to ensure the price is stable this is what central banks do too with bond markets and all that um but it existed with private banks too and this is yeah we could get into what is a bank in the gold standard which is a little different we won't worry about that for for right now but the idea that

users need convenient media of exchange exchange media uh you know so like you don't want to hold gold bars right you want dollar bills or now you don't want that you don't just want a credit card or a debit card um and so users need to deposit their value with some kind of an institution that provides those convenient exchange media and there's other functions that the bank does as well which is that different people have different time preferences with their money you know you might have money that you need to spend tomorrow but then you have money you don't need for five years or whatever and you're willing to have different levels of liquidity on those funds in exchange for getting some return and likewise there's people who need to borrow money and so those are all the things that a bank does uh you know

there's lots of and along with that banks also do deals with other banks where they buy and sell these types of debts and so essentially and and that ladder function is what the federal reserve and central banks have kind of taken over like they control and regulate how the banks can relate with other banks and other various rules but even before central banks existed it's natural for banks to have things like oh if lots of people come to redeem from them and they run out of liquid reserves that they would borrow from another bank to get what they need and have those kind of deals in place uh and these types of ideas are being brought up in d5 by others as well um like seb ventures from maker doubt uh someone i respect a lot and he posted a blog post describing like a clearings

dao where stable coin issuers could draw credit from each other using their own stablecoin as collateral when they had liquidity needs for example and i think that these type of structures can be very informative for d5 so when i think about a decentral bank i say to me what is the problem with money on chain today if we look at l1 tokens like ethan bitcoin the problem is that they're too volatile to be short-term money you know and i don't think that's ever going to change um they could be thought of as the equivalent of like you know the highest quality equities right in the future um or like other there's other or entirely new ways of thinking about valuation but they're not exactly the same thing as cash um now

stable coins at the end of the day all stable coins basically either depend upon a not necessarily sustainable incentives model or on centralized stable coins in order to maintain a stable backing and there's nothing that's like a conclusive exception to that that's shown to be highly scalable so far and we can see clearly the disadvantages of depending on like i'm not someone who's like a psm hater necessarily you know i under it's good that die has the psm but it's not good to stay that way forever and they're working on it right you know like maker dao is all over trying to diversify out of usdc risk but can you define mpsm psm is a peg stability module and the for a simple

thought about decentralized stable coins you could either be doing over collateralized lending where they're minted against an over collateralized position of ether or other assets or you could mint it directly against another stable coin in a psm which is a big stability module so and not everyone would call it a psm but it's the same thing like how you know the portion of frac supply which is backed by usdc is analogous to a psm type of operation um and then let's see so when i think about a decentral bank i think that all of these things that banks do like accepting deposits and loan origination you sort of it's going to be very you can't leap all the way there in one step you know these decentralized systems to have the equivalent of trap fi instantly uh but if we start to learn from these

i think it's possible to build a more resilient and decentralized stable coin systems especially if like you can if you can cut out centralized middlemen in the right way you know like with usdc circle controls everything we can see other things like how lido manages the validators uh or how maker dial is looking at then doing direct deals with different entities like bond offerings those things all can help mitigate counterparty risk but having a really like to me it's it's still done on like a case-by-case basis you know i mean there's no like clear transparent framework for how maker dow will scalably decide what kind of real world lending it will do without just relying on like an inside group of experts and so

figuring out decentralized and market-based approaches for these things um is one of my big goals and when i said a fully symmetric stablecoin i guess what i meant is one that has a a match between both being able to um to match make between those who wish to deposit their capital on the stable coin system and receive stable value and some yield and those who would allocate that capital and the lending opportunities that exist in a way that is fully market-based and the rates are derived from the market you know utilizations similar how often compound have utilization-based rates um but connecting that into a wider variety of activities potentially even including

real world assets because i you know i am a decent i say decentralization mostly rather than decentralization maxie because i do think that getting that last mile into the real world is very important and we can't just if if if the best decentralized systems because they're too purist minded drop the ball in the last mile and then just let the scams and such go direct to the people um that is not a good out ending and like when i look at how big like tara and ust got and then look at like how little attention is given to even you know the more ex promising like pure radically decentralized experiments like rye i just think that for volt at least it's one of my goals to really

be proactive in that regard at least and we can learn from um yeah i like what seb at makerdale thinks about you're like there are ways to anal to get close to the purity of a smart contract through the legal system not a hundred percent but um like we shouldn't be close-minded to the idea that there can be other consensus layers besides one blockchain right and the settlement layers and being in general the perspective of looking as holistically as possible at the how blockchain can fit into the world economy and in the taking a long-term view over five ten years right and how lending markets and capital markets can evolve that's all the type and historical perspective of how they've changed otherwise like

there's been many big changes in the world capital and financial markets in tradify in the last 30 years 40 years um and so understanding how digitization has affected them and then like looking at the arc of how things will go um i think that there's a i might be rambling a little bit now but i think that there's a lot of significance to um you know going to the kitchen and stealing the chef's secrets for traffic taking the best out of it and then um but keeping those robust decentralization and censorship resistance features uh but that's what's like a threaded the camel through the eye of the needle right so you have to be it's not an easy task but that's the problem space

okay so yeah there's a number of different rabbit holes that i think just opened up and the first one i think uh at the beginning you talked about like all these different stable coins that we have on ethereum frac style usdc tribe uh and i think you kind of alluded to how there's not really ever going to be any one single perfect winner of like the sablecoin uh systems but the the net results once we have what kind of feels like a commercial banking layer of private monies where we have like the maker dow making die we have the the tribe commercial bank making tribe we have the uscc commercial bank and doing uscc once we have all of these this commercial banking layer and and what i what i mean

by that just to be super clear is that in the tradify world we have the federal reserve which is the bank zero of the whole entire thing and then layered on top of that you have the commercial banking layer the wells fargos the you know jp morgan's the goldman sachs that have accounts at the fed and they trade and market make between each other but then ultimately everything settles down to the fed and i think what you alluded to is that if we do want a fully decentral bank it's not going to be maker dow that wins it's not going to be tribe that wins it's not going to be usc that wins but rather it's going to be an emergent product out of the interrelationships between all of these things and that's when we when we get the network of those things and these

financialization networks between all these stable coins that are mostly decentralized for the most part with the exception of uscc which is completely centralized um then at that point in time we actually do get this like emergent decentral bank that unlocks this like bankless future that we're all looking for yeah am i on track with this like general thesis here that's absolutely right it's sort of like you know the movie the incredibles right it's like if everyone's special no one is right like if everyone's a bank then no one is that's the bankless future democratizing access to the kind of powers that banks have and you know you can and i expect there'll be many more bank-like entities of varying degrees of centralization you know and from the spectrum of full decentralization

immutable smart contracts to you know just circle but in a different legal jurisdiction and a different um you know different backing exposure and i see there being a wide diversity and them having yeah the more inter-like network they are the more resilient the system can be and i'm really inspired i'll share a little bit uh my favorite um living economist george selgen who has written a lot about like the scottish free banking era and some historical periods of robust banking networks that did not rely on a central bank and you know there's interesting things to learn from there as far as how they manage liquidity crisis or currency also for the um from a d5 perspective but i think there's

yeah clear historical and theoretical evidence the central bank actually um generally contributes instability rather than stability to the system and that a decentral network will be far superior cool i definitely want to go into that but also i want to just like double double tap on the uh fully symmetric money system i might be wrong on this but like my the way that i'm trying to understand this is like if we talk about like tara luna for example i'm guessing that that is a fully non-sink uh symmetric money system as in it is extremely lopsided and it was so lopsided that it collapsed and like with the idea that i see you nodding your head so i think i'm on the right track

here uh is that like when when tara like nick carter had this tweet about tara luna that i really liked where uh he said the day that tara sold off ust to purchase bitcoin to have bitcoin on the balance sheet was the start of the collapse because they took they it was a lopsided system they took away liquidity out of ust to buy bitcoin in in hopes they're like okay we're gonna have this bitcoin to like defend the peg one day not realizing that like if you sell ust to buy bitcoin you are causing the deep hegging of the ust you are taking weight away from one side of the market and and you're you're adding a bunch of selling where you are not creating enough buying uh and so with if i if i'm understanding

like symmetric versus asymmetric monies it's when there's like th there's the in equal buying and selling it was like kind of my general understanding for that uh and so if we have like money crises it's because there is an imbalance in money and so if you if you are telling me that like the the dollar for example or the way that currencies generally maintain their peg is being buy symmetrical where there's like efficient sufficient market participants on both sides you have both depositors and creditors right you and these things are balanced enough and the markets are efficient that makes a symmetric money which is a which is for a stable coin purposes going to hold its peg if it's symmetric if it's sufficiently well balanced am i on track here yes and and you know symmetric was was

off the cuff there might be other ways to describe it but the so and of course tara had many other problems but in general there's a there's a general class of problems we could talk about and it applies to every stable coin that exists today is that there's no such thing as a stable coin whose backing is 100 instantly liquid for dollars right uh and so what that means is that for every stable coin there's a condition under which it might trade not at peg um and for some stable coins those conditions are extremely remote um for some of them they are very likely and the the worst failures of peg will always occur when people don't know what's going to happen and so

in the case of um i'll bring in one of the examples from this scottish banking period it was a common feature of many you know so these banks would issue notes right in exchange for gold you know gold deposits and the note would be in fact principle redeemable for a certain amount of gold um although the bank was fractional reserve and some of these notes came to carry what they call an option clause and the note said that this bank is either redeemable in gold on demand or from the moment you brought it in payable in gold at a certain interest rate in this much time and so by putting this clause on the no the anecdotes it gave people the confidence that at least if they couldn't get their

money right away the bank was solvent and they would get a certain interest rate and so and that also meant that if the bank had a liquidity crisis those notes converted into bonds and then had a higher value right and so it kind of you can see a similar principle at work to you know and of our compound when lots of people want to withdraw their money you know the interest rate goes up to incentivize people to close their loans or more deposits to be made and so that's like a very responsive and symmetric system uh and it facilitates matchmaking of those who want more yield and those who want liquidity and so you can't necessarily guarantee that a silver clean will always hold peg with a system like this but it should make any discount more rational and limited right so um if you know

like in the case of dye because people know it is over collateralized even in a case where more than half the dye supply had to unwind and they depleted the psm it's not going to go that much below peg before people then refill the psm by arbing because they're confident since it's over collateralized and so the knowledge in um the knowledge of the mechanism by which it would return to peg or the mechanism the amount of haircut you might take if you need instant liquidity demand making that as clear as possible and predictable for the participants makes the system more stable so one of our you know things we're thinking about a lot is if you have a stable coin that has a significant illiquid backing component um let me take a step back have you

checked out uh interest protocol no i have not it's a new kind of compound or ava style market with a native stable coin that was released recently um gfx labs was behind it and the idea of a stable coin that is responsive on these kind of same yield curves makes a lot of sense uh zav and compound but then the question is if you're gonna bring in let's say more psm or real world type of assets or do these kind of um you know loans or bond stuff that maker dao is considering how do you do the right feedback between that and the interest rate that you're giving out on the stable coin and how can you do a a market mechanism also to decide

like how liquid the stable coins backing should even be like if you ask me should the stable coins backing be 99 liquid should it be 50 liquid that's not something i want to arbitrarily decide right let's say that a market should decide somehow and you can look at like the frax collateralization market process it's something kind of similar like that and in this case it would be like not choosing how under collateralized it is but maybe just how illiquid it is um that kind of idea interesting interesting okay um so just to just to go and define like what makes a good resilient stable coin all stable coins that are going to be robust resilient anti-fragile like and you know sustainable have to have what you call symmetric marketplaces as in

like you know a balance right is that that's part of the definition here yes and and this idea of symmetry is really it's about liquidity that's what i would emphasize is that there needs to be a two-sided liquidity marketplace and not just like fixed rates uh anywhere where there's fixed rates or things that are not responsive there's problems that's why when maker down has to go in and manually tune the interest rates right that's less than ideal the curves on oven compound are better the anchor fixed rate was a problem and we have in fact realized that the idea of pegging vault to a fixed rate of the cpi is also a problem right yeah we'll we'll definitely get into that um actually actually no let's go down that rabbit hole right now can you just illustrate like why why is it fixed rate a problem like we see this right now in

the japanese bond market i believe where i think there's something like a cap on like the yield of the bond market they have yield yield curve controls of like point two five percent so they're fixing their whole entire bond market can you can you explain why a central bank would do that and what problems are arise as a result so central banks generally serve political ends that's what i would emphasize and that i don't always know why they do what they do because it doesn't always necessarily look like the best idea in the case of the the bank of japan if we just at a basic level ask what is the effect of very low interest rates on the economy is that it makes borrowing cheaper and

the reason that they might want to make borrowing cheaper is because there's lots of what you might call zombie companies in japan's economy that are heavily indebted and don't have strong growth prospects especially if rates rose they would collapse and this is the case with the united states economy as well but it's significantly worse there so if rates go up um it would lead to significant social disruption and so that's what they don't want uh and it's but at the end of the day it's like an incentivized system it's being propped up by the central bank they can't keep it that way forever um so oftentimes keeping it that way longer doesn't make things better when you ultimately need to change and you know that was the case for tara right like

um i mean the fact that it's unbacked in the first place means it won't work but even if it wasn't unbacked and if it was instead just like imagine like we'll offer this 20 yield and then we'll go and like we even just look at something like celsius right that's a more um yeah if you're like we'll go offer eight percent yield and then we'll go stake eat and it's locked up for a year it's like well what if they want to get out and then if you don't have a clear marketplace to sell off your illiquid collateral in some way in order to or give people like a defined haircut on exit and that they knew up front what it would be um you get panic and bank runs in chaos right okay so we're going back to the symmetry thing uh is it the supply of

the outstanding dollars for whatever this bank that we're going to talk about whether it's maker dow tribe whatever the supply of the outstanding dollars needs to be balanced by the available liquidity and when that when those things are balanced or is that is that like the symmetry that we're looking for here as in like if there's a uh if there's like a billion dollars there needs to be like 10 times more liquidity than a simple coin that's only 100 million dollars and it's that that's liquidity that is like if there's sufficient liquidity then the peg will be sufficiently defended yeah to an extent although i would say i'm not sure what the right liquidity ratio is but it certainly does scale with the size of the system and then the other thing is that um

there needs to be a feedback mechanism that's the most important thing is that there has to be when it like and this this happens with i'll give an example of how fracs works uh where there is a feedback mechanism like if i go and you know redeem some fracks i get a certain amount of usdc and a certain amount of you know fxs and as i do that the frac system adjusts slightly its preference in the direction of being more collateralized so as redemptions occur it will seek to become more collateralized in response um now overall i'm a you know a pro over collateralization individual um that's for sure but um

nonetheless you know we can learn good mechanisms from everywhere and the the fact that there's any system variable that is fixed and can never change that means that there's probably a market condition in which that's wrong uh and so that's the kind of the insight that i've arrived at and um you know and needing to change it by a vote is also probably wrong because sometimes things happen fast and um it'll be much more smooth if it can be according to a curve or a market process okay this yeah this opens up uh something i i've always been fascinated about in the crypto space um i mean solimani one of my personal heroes in this space i say that every single time i bring you bring him up uh gave out this line in 2017 i think it was a tweet or is on a podcast or

something and uh he actually doesn't remember saying this uh and so uh he said that he set the line no magic numbers uh and while i was only very young in my like career down crypto like i understood that line uh like as soon as he said it like no magic numbers and what he meant by that is like if you if a human just chooses a number a parameter and it's just arbitrarily chosen uh that is the definition of something that is not anti-fragile it is literal fragility because it's a fixed number if it's something that's fixed it's fragile and so if we are trying to make uh a censorship resistant human resistant like

long-term sustainable uh financial systems we can't just be picking arbitrarily arbitrary numbers it has to be a dynamic system that can respond to the inputs and outputs uh that are around it right and so this is where this is always where crypto starts to look a lot more like nature more than it does finance i mean definitely it looks like finance but like it borrows properties from nature and so there are a number of systems out there like you've already talked about the dynamic interest rates of compound and ave as the utilization of these assets inside of compound navi go up the interest rates go up and what that means by that is like if there's if ave has 100 eth deposited into his vaults uh people have supplied 100 eth and no one

is borrowing anything well then the interest rates on that youth are basically zero because we won't need to incentivize people to borrow it as that number goes up that goes right it goes up slowly at first like 10 each gets borrowed so interest rates go up a little bit 20 gets borrowed so interest rates go up a little bit if we get up to 80 eats borrowed out of the 100 each that's deposited the interest rates that are being charged uh by the uh borrowers goes up a lot uh because at some point if you hit like 99 ethan to borrow out of the total 100 that's deposited there's no more liquidity in the system uh we got one each left uh and so we have to dynamically increase this interest rate to naturally balance out this marketplace and incentivize more deposits or to incentivize people to

repay their yield a similar system also part of uh rye rye the sable coin is like this governance it's called a what is it called uh it's basically like control theory it's like a natural governor uh kirk can you just talk about this dynamic of like a self self-referential feedback mechanism and how it can take us from like a fragile version of finance to an anti-fragile version of finance yeah i think that let me think about first thing about the best way to put it in words here's a i like to give people very concrete examples so let's think about this you and i um are you know we have two avocados between us one of them is ripe today and

one will be ripe tomorrow and we each have one dollar so the question is um yeah or you know there's an avocado seller present how much is the one ripe avocado worth and how much is the unripe avocado worth it's a good question how do we decide right because i don't want to over bid on my avocado right and so yeah we get very quickly into the questions of like how does market pricing work and at the end of the day most likely the avocado seller sets a price because he exchanges with many people or who knows what happens but any system needs some way to regulate otherwise what if you know i get word before you that the avocados there and i run to the store and buy it

undercut you um and this is you know these kind of examples are what happens when there's like you know a liquidation failure in a lending market um you know something doesn't happen at the right speed when it could have been sold for the right price but it wasn't um and so you even if you do have a you know there's always a chance that something could still be mispriced right even if you do have feedback loops but the sorry i'm i'm jumping my words i think we need to step one step back and just ask like what is a market and if we understand that what a market is in general is like an information system where

there's the whole economy and like how does someone decide what something is worth to them it's based on their own needs and so based on their own needs they'll pay the best price they can figure out for what they're going to get you know i have my income i have to decide what i'm going to spend it on and those prices propagate into the economy and the market and they inform the sellers and other things and it all comes together to be expressed in the prices which are an information signal and when you have like a um in order to have a market you need the ability for the free exchange of this kind of information and the easier it is for people to you know connect economically the more efficient the market will be

so running on a blockchain this 24 7 global always online you know where anyone can be a market maker or a liquidator compared to these opaque tradify systems it's much smoother uh and for lending and borrowing that's why it's the difference between like um you and i'll critique this is a stable coin that i kind of like but there's one thing i don't like about it which is lusd the fact that it has a fixed fee on minting and no ongoing charge um introduces instability into that system uh and if the the the fact that it is instead a um liquidation only model that's just based on like you have to top up your

collateral um it means that incentives are applied in a more staccato way you know like when the liquidation actually occurs instead of a smoothly adjusting rate um and so you can see that like it means like traders and crypto will often like to look at where the liquidation walls are right a lot of people will have their position at that spot um and probably we can do a lot better with like automatically regulating these things like people are already working on like d5 saver type of stuff that will automatically adjust your collateralization to be responsive to the market movements right so that's another type of feedback that's very beneficial for the users where you don't want to just be like or like even i'll draw an analogy to

like univ3 right it's more of a market of opinions because instead of just being stuck to like oh it's this price and this curve only you can say oh i'll put whatever curve i want right it's my opinion and then i can change it in the future too with flash liquidity provision on different curves um anything that allows like more granular market choices and also brings people together into like a smooth place where they can all exchange in the market together will make things less risky and better and this is observed in trad fight too uh i was just reading a book um i got involved in a little uh d5 you know d5 slash meets tradify reading group and the first book of the week was an introduction to repo markets which i found um very well written and

talks about some historical perspective of how like and just for the listeners a repo market is one of the main types of like quote low risk tradify yields and banks do it and all kinds of things and it's basically like let's say i'm a stock trader and i have some home depot stock and i want to leverage up on it i do an over collateralized loan basically just like compounder ava with the bank where i give them you know 100 of home depot stock they give me a 50 loan at a you know half percent or one percent interest rate and then i go do whatever i want with that i either short home depot a hedge or i lever up whatever my my plans are um and this is a huge you know huge huge market that only really came into existence um i know the uk market was

created in the 90s that's not that long ago and the motive of creating it and like legally allowing it because before it was like only banks can do these types of deals and then they made a market where like oh now any like firm can do it because their goal was to reduce the volatility in the bond markets and allow people to like hedge their positions in that and it worked and the bond markets grew after that uh and so you can see that making a place where people can like trust how the rules work and more people can participate it grows the pie for everyone and so that's one of the things that's of course really exciting about d5 when you think look in the long term certainly okay so i think we've talked a lot about some just big ideas right like resiliency through multiple decentral

banks we've got we've talked about control theory and how that keeps things balanced uh if the parameters are tuned right uh tuned in a dynamic fashion i i want to start to get into some more specific things about like the current state of defy and the problems you see in the current state of defy and how we get it to that future that you just alluded to where like the pie is very very big uh and so like how how do we what what why what parts of defy are preventing the pie from getting a lot larger that are like consuming your brain space like what what are the problems that you are working on right now well one thing you know the central thing that we're working on right now at vault you know directly at the moment is this liquidity management system

where you know people may be familiar with the die savings rates you know so there's a version where people can take their die stable coin and lock it to get yield it used to be some yield on it now it's it's been one basis point for a long time but who knows that the bear market maybe will go back up um and the idea that a stable coin could be natively yield bearing yeah we initially created vault as the idea of the inflation-resistant stable coin and a hard target on that u.s consumer price index inflation peg but what we've realized of course is that in some market conditions the risk that's needed to achieve a hard target may be unacceptable it's a magic number and we need to get rid of it that doesn't mean that you know the goal of the system is still to preserve user

value and it'll create a marketplace where that's possible but it's just that sometimes it's not up to me to decide that eight and a half percent interest is the right amount at the right risk level and so creating a way that risk and interest can be priced um by the users is what's key um so we're working on a way to to build a compound or ava style utilization curve into the the stable coin and have concepts of the difference between liquid and illiquid reserves uh you know the difference between like holding dye or pha versus let's say holding um you know for a very simple example like think about what's the equivalent of usdc for diet for volt it would be like tokenized wrapped treasury inflation protected securities uh you know uh these some kind of a trad fly inflation

head instrument right like let's say there was some tokenized you know thing that we could get for that um so some maybe like you know that's earning nine percent whatever so it's like ten percent of the pcv is in that ninety percent is liquid and a way for the market to choose how that breaks down um you know having all those kind of design features so that's what's our most proximal thing um the other big classes of problems i see in d5 today are one the lack of like longer term debt and liquidity management you know most dows or stable coin issuers are on chain it's pretty difficult to get longer term borrows only against a very very narrow

range of collateral like east only right and even then the markets aren't very liquid so with the ability for a stable coin issue where like maker dow to access or give out longer term debt is highly beneficial banks you know can real real world banks construct a yield curve and have like a management of the liquidity of the underlying things and so that seems like a powerful area that will have a ways to go still uh there's not a huge amount of traction there are some cool projects but nothing that has had like runaway product market fit yet and then the other thing for me is yeah really cracking the governance nut i think that token governance is a very thorny thing especially when the more money is

involved and so really getting that right and checks and balances in the system uh is critical so one of the things that we're working on for the next volt upgrade is governance rights to the stable coin holders and i was very excited to see the recent lido proposal along similar lines of putting various checks into the powers of the lyto token on state teeth and we like that idea like you know ultimately in the vault system the goal is that in some way the you know the governance tokens would be able to onboard new yield strategies or or venues and then allocate you know pcv or or choose in some kind of a market how that um is directed but we would like the vote holders to be able to veto or say no uh to bad

decisions you know i don't think it's right to expect stable coin holders to proactively go and like decide should we do this or that you know or like um weigh the merits of a highly nuanced government's decisions but they should at least be able to say like no we don't want this um you know like it's even in governance tokens like maker getting participation from the holders is tough um so it's not like we expect all stable coin holders to be super engaged in governance but giving them especially the large holders and in a relatively small quorum the right to veto negative changes is a great security check so you know thinking about those patterns a lot ave is the leading decentralized liquidity protocol and now ave v3 is here ave v3 has powerful new features to

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staking while enabling you to get liquidity on your stake if you want to stake your east soul or matic and get liquidity on your steak go to lydo.fi to get started that's l-i-d-o-f-i to get started yeah the uh another thing i learned from uh amin sulmani is that if you remove the ability for one party to bully you around uh he he called this a rage quit mechanism out of moloch dao where um uh if there was a proposal that was going through uh and it was accepted by moloch the molok dao uh they would go into get implemented in seven days and if you didn't like that and didn't agree with it you could rage quit without before that proposal was implemented and so you

would remove the ability for anybody who was a whale to who was governing and controlling governance if you just were able to quit they couldn't bully you around and this check on power it always protects the minority and it gives a minority a voice and so i think that it's an interesting checks and bad it's like checks and balances is definitely the right word but also at the same time isn't the goal of this whole uh bankless future is for having governance minimized things right and so like i think any time that there's a vote i'll say i'll take a leaf out of the elon musk's book and say uh he says that anytime there's a user input into something that's that's an error and i'll and i'll say the same thing for governance is anytime there's a vote

that's a bug that we need to remove uh and like and i don't know how far we can go down by doing that process over and over and over again like the bankless the bankless utopia is literally all the way to the point where there are no votes uh and and i guess that kind of sounds scary it's like no votes like what like we just are ruled by these algorithms and like kind of like uh so i i kind of want to go down that rabbit hole where like if we do agree that like the idea is that anytime there's a vote that's a failure we want to do and we want to establish some like market-based equilibrium algorithm that that removes the need to vote and we have this future where it's everything on as device completely automated

is that the actual utopia that we want or does that actually like lead us down in accidental dystopia well the one so i very strongly agree with them the dangers of of mutable systems however i think it's a necessary risk and so we have to tread you know thread the line where it's going to be very the idea that we're going to today in 2022 create an immutable system that will work forever with no changes is ridiculous right every system that's ever been made has been changed a lot uh ethereum's a lot different than it was when it started bitcoin's a lot different than it was when it started there's nothing that will work without change and be adopted and used long term without change however

you can get it so that the procedures for chains are less subject to abuse right and so that's what you said with like the rage quit right things like like unit swap will make new versions but migration is voluntary right uh so like opt-in is a great pattern um there's some things for which that works better than others and you have to like um you know think about ways that certain like dynamic or lending systems can be safely um moved over or and then when especially when there's a question of like um protocol controlled value um you know these questions can get a little interesting of how it will work but i am pretty much in favor of the idea that the smart contracts themselves should be

as minimal as immutable as possible and then it should be frequent changes and you know voluntary migrations but also the tools to make that relatively easy um and simple uh so that's something that we're thinking about now right as we're looking at some of the next iteration of the volt system you know is not immutable or fully decentralized today that's certainly the goal but in the first you know almost all d5 projects today are controlled by multi-sigs and even the ones that are controlled by token governance you know a small number of whales in the core team have enormous influence there's a few that have really gone the extra mile and attained you know distributed and effective centralized decentralization and you can see this when the founder tries to push things

around and they don't work um you know there's only a couple instances like that compared to like l1 projects like ethereum there's a long way to go for pretty much all of d5 um but i've definitely been reflecting a lot looking at like the things that went too immutable too fast in my opinion and then well let me take one step back once people just need to be a little more careful launching tokens for things um and like launching a token for an immutable thing and then having the team only have like a whatever few year vest is very questionable in my opinion um it's just like at the end of the day the incentives are not there for new

versions to be made that use the same token um so that's kind of a problem but that's almost like separate from these like core mechanism questions that i'm trying to you know that are problems to figure out but i think that it's important to make sure that um incentive alignment is there um and in the case of something like maker dow right it's obvious that the incentive alignment would be there even if they were to build a successor to die you know they've already built science it seems crazy to think that there might be a third one right after sci and dive but but maybe there could be who knows um and if they did that and built a whole new entire system um that was voluntary migration they could do that and they have the infrastructure needed to keep teams

working and building on it right and that's like credibly neutral and trustworthy and you can can count on that when it's like everything is built by some kind of a centralized labs entity but they're still trying to pretend it's fully decentralized you have to wonder a little bit you know throwing a small amount of shade on uni i think they're great builders but sometimes it's like you know i just feel a little weird when i see like uniswap's labs ventures doing big investments when the uni token is like holders are kind of in the dark about what's going on um so transparency is big for me and that's you like i think transparency should almost precede decentralization and that first of all like who are these people who are supposed to decide right when you give the tokens out like um ethereum is not decentralized in the

sense that like all the east holders have to decide how it works right um that would be kind of ridiculous um however they are able to opt in or out very readily um and the kind of like peers those who can run the clients of the network can all opt in or choose right it's the majority consensus of the people who really like care and have skin in the game effectively decides the fate of the network and that's pretty good robust decentralization uh about as good as you can get and it's very hard in my view to get there with token voting system and so these things need to be thought about very carefully and not rushed into is one of the things that i've been realizing lately is like i think that over the next couple of years we'll see really great governance systems designed

but we can't expect like expecting products either to be fully decentralized at the first mvp or things to be immutable when they first are created will lead to dead ends but at the same time things should not be allowed to scale to excess before they have achieved those goals you know that's one reason that we've done a cap launch on vault and will not be like you know significantly allowing the supply to grow until the core issues are ironed out and it's more hardened as far as changes but i do think it's also there is a need for experimentation and that's where like these debates about like regulation or what should be allowed like there is a great need for experimentation and just freedom and sandbox to do whatever you want but i think there's also a room for industry standards of responsibility

and things like i think a big lesson we can draw from this bull market is you probably shouldn't do like uncapped public launches of a lot of types of experimental financial products [Laughter] it can lead to trouble now probably shouldn't doesn't mean should be illegal and you know but it's still like it causes trouble and so it's wise to think carefully about you know these are the types of lessons i've drawn i think maker dao again is like i keep pointing to them as like my golden favorite example of a stable coin issuer and like the place to look of maker dao's culture is if a change is gonna happen like it needs to be so thoroughly justified and there's all these stakeholders who are gonna weigh in and that bias against change like yeah let me i'll tell a little

when when rocketry got started uh in california and like the people who would eventually go on to found jpl were just sneaking outside of caltech and firing off rockets in the canyons where no one lived around like that experimentation was good it was also good that now like today in the aerospace field there are such strict standards for software security right like far more than for any d5 project you know i have a friend who worked at jpl and it's like they have entire separate teams working on the tests and the code and the people who write the code haven't even touched the test and at the end it all has to work perfectly right and it's like they have everything so specified and so many eyes on it external firms were like even almost the best in the business it's like oh we had two audits you know by

these two big name firms it's like well that sounds great but like when was the last time like of our compound checked an audit on one of their collateral tokens and what governance changes have been going on like even at this moment there's like a bunch of collateral tokens on average where if a malicious change went through they could just infinite mint or something and and rug you know there's so many buried risks um and so that's why i respect makerdale a lot being like no you like very few collaterals per asset collateral caps keeping them very small getting rid of things um so those types of choices um and also just a completely open and transparent decision-making process that's what's so good about defy like you can see everything that happens on chain and it's even better if the

decisions are all out in the open and so that's something you know it's hard for small projects because at the end there's only so many people who care or understand you know and you have to just you know it's a small team who's figuring things out but um as things grow making sure all of those those rails are laid out and transparency is super huge and i'm very i'm going on another little tangent here but i'm very much an enthusiast and proponent although we haven't implemented these things at vault yet of like decentralized front ends and informatics hosting you know like decentralized subgraphs or um ipfs based um distribution of sites you know there's a lot that d5 products can do to just the simple fact of like making the site the front end an immutable link

um like front-end security is such a can of worms too like there's so many things that need to be carefully minded um so you after all of the like heady days of the the last year i've definitely taken a long look at like just how deep a rabbit hole true security really is and what it means to have a security culture and that yeah i really admire like the ethereum core devs and their process and so defy needs to learn from like these robust decentralized existing orgs i think maker dao and like all core devs and they they are the ethereum culture is really strong and that's what d5 needs to not get lost in and you know sometimes move fast and break things is good but sometimes the ethereum instinct of no

slow down and contemplate um is a good one uh slow down contemplate and make sure it's really designed the right way for the long term and decide everything based on the best long-term principles not based on short-term opportunism or incentives this so i mean i'm 100 in alignment uh with the other property about maker dow that i i definitely admire is that and this became super obvious right after the terror collapse is that the growth of maker dow lags demand or at least the the growth of die supply lags demand whereas like ust was minted in a growth strategy it's like we'll me we'll mint all these tokens so that we can go like do things like mint a token so people can have the tokens like mint the money uh and then all of a sudden like it fell

over uh dye supply is the opposite of where like it only grows if there's sustainable long-term die demand pushing up the die price on the secondary market creating an incentive to mint new die and so this constraint on how fast this thing grows is what makes it and protects it and makes sure that it's always going to be stable uh and so like using these principles same thing with like ethereum block space too right like ethereum block space is so constrained yet it actually has gone literally 10x in supply since 2015 when ethereum first got started uh and so like the theorem block space supply has grown 10x but everyone feels like that is this ethereum scaling is going so slow because if we juiced up the block space

supply like it would turn into solana and then it would crash uh and so these ethos of like constraining growth while we are in a hyper growing environment like constraining growth is probably pretty okay like yo we're going to be fine we're still going to grow um so so kirk i i want to we we touched on it a little bit uh but i want to just like formally go down the vault rabbit hole uh let's start from the very beginning like what is volt and how have you applied all these principles that we've talked about so far in the podcast too to building fault let me quickly run through like three visions of volt uh the because there was a time when volt was actually going to be a fork of rye that's because i really admire the controller model and the idea was that vault was going to

be arrived focused on long tail defy asset lending this is a very bull market idea back when you were getting like 20 to 50 rates and fuse you know on longtail d5 tokens and thinking that that would be a very you know effective way to do an inflation resistant stable coin with a floating price but targeting the inflation rate return uh so offering a lower borrow rate than maybe people were already paying it for those long tail assets but more return to the users [Music] we ended up moving away from that just because of kind of the complexity of the ry implementation and it's really made to be immutable and just be eth it wasn't you know the kind of more scalable and modular thoughts that we were looking for wasn't um there although i admire the the team and the

design of it a lot so we moved away from that to a the dye like model right with the the psm and also you know thinking that lending would be a this major component of it directly issuing vault through fuse and the and what i think is the the the bad part about this model is that like you said the magic numbers you know and i had always intended to make it more market-based in various ways but as the market conditions have changed yeah i think we've come to understand that it's not necessarily destiny that unchained yields will always be super high you know they won't necessarily always be more than tradify yields

and while there are those higher yields out there they require you to move significantly farther on the risk curve and so that's what's inspiring me to think about some significant changes versus the current volt v1 so your volt v1 is live today just um and it is a very fei like stable coin because ultimately we did not issue any volt as direct debt issuance as part of the v1 mvp so it's just minted through a psm and realizing that having like in the early stage of the project the team it's not desirable for us to manually make yield decisions especially risky yield decisions right that's the exact opposite of what the d5 project should

be doing uh and the goal is to create a what we've realized we need is a feedback mechanism where the vault holders can say you know this is the um when a vault holder says i either want to hold more vault or i want to get out the system needs to take that information and accept that feedback and say okay vote holders are leaving the system so we need to adjust the rates accordingly or oh we're minting more volt and there's various things you could adjust like you can adjust the actual yield rate that the vault is earning you can also adjust a mint fee um you know so like when there's very very high demand emit you can do like equivalent of an auction right and you're essentially with this yield bearing type of stable coin so there's thoughts to think about there like when

you are expanding the supply how do you do it and efficiently and as fairly as possible um because it will be capped at first and then at what point do you judge it safe to expand beyond the guarded launch but the um i'll just kind of sketch through how i envision the next step of vault working which is that there will be a you know the system will have a concept of let's say first of all let's say there's a a stable coin can have both liquid and illiquid backing so for dye the liquid backing is usdc the liquid backing is the loans of die you know so if you borrow die against east maker doubt cannot redeem that instantly unless they do emergency shutdown they have to wait for you to repay they can jack up their rates but maybe you don't care um

and so especially if you think that die is going to go further like below peg um or like something's happening like there there could be just being able to change the rates alone does not guarantee that those things will be redeemed and so you can categorize it roughly as liquid and illiquid backing and for volt we're thinking the target liquid backing ratio should be determined by a market process you know this is similar to how fracs has a collateralization ratio but vault would still be over collateralized uh you know by pcv but uh how that was allocated would be based on this liquid or illiquid reserve at first it would be 100 liquid probably and then just with depositing into other decentralized on-chain yield venues

whether that's offer a compound um you know a certain menu of them and optimizing the liquid yield rate and so that liquid yield rate would be like the minimum that the volt holders would earn and then you can say a portion of the funds within the protocol could then be available to go into less liquid or riskier yield venues so that could be as simple as like you know in let's say the protocol is 99 backed by um you know let's say the vault protocol has you know 100 of circulating volt and then they have you know 99 and seven cents of stable coins and three cents oh and like five cents of eth uh you know like just a tiny percent you know one

percent uh volatile backing right or it could be that tokenized you know you know yield bearing instrument from off chain or it could be an on chain loan like a dow to doubt loan a porter a bond to a dow it's let's say a seven percent fixed rate loan to a dow that expires in six months um and the mechanisms by which that those could be added will also have to be designed and i term that process market governance is like what i like to say for this whole theme and you know things where i think it's very maybe we could talk a little bit about governance token design i think it's very important that governments tokens have skin in the game along with their decision making

so you can look at like a lot of governments doing today we have kind of tragedy i there's a few common classes of problems i'd say one is tragedy of the comments this is what we see with a curve and other ve style emissions tokens where you know i take the best bribe i can get and i vote for that pool and who cares if that is actually good for the underlying dow or its revenues i'm just profit maxing for myself and i capture a spread on how much i'm dumping on the other holders versus how much i'm getting bribed uh you know so that has significant issues then with just token voting it's like majority rules and if you if you feel like you're part of the major minority it's like why even bother especially if it's a unpopular decision people will know what

you're voting for um and you have some things that are really cool like for example i like a lot um like the ava insurance module where ava tokens can put skin in the game voluntarily and opt into it to the seeking module and so you can envision things like what if they could stake but like per collateral token and then that set what the debt ceiling was for that collateral and they put skin in the game for that collateral specifically um and so that pattern in general like more gradiated or like smooth decision makings where you could stake to like a certain opinion and consequences and rewards associated with that stance um i

believe will have more effective results so we have sort of the vision of like vault protocol is almost like an abstraction around a compound or ava where holders put in a stable coin and they don't really care what underlying stable coin it's backed by it's kind of abstracted away and the governance token holders borrow those funds and deploy them into yield strategies and they can be liquidated right if they lose capital and there's some sort of a a market-based system and then there's interplay and that's why i talk about symmetry where the demand from the government's token holders to go and deploy in certain yield strategies is you know they'll want to go and pursue the best risk adjusted return whereas the vault holders will express their

requirements as far as how much they need to be paid to keep their deposits in the system you know they'll have this floating curve and hopefully it can all come together symmetrically to offer the um well not hopefully but rather through significant hard work and ongoing effort will come together to um get a fully symmetric stable coin system that can support a wide variety of different types of like yield activities more than just like i what i would call on chain repo you know over collateralized secured lending but also have other um types of yield instruments and things yeah the concept of a work token comes to mind and this was a term i remember being thrown around in 2017 about many many uh many many 2017 ice uh i guess ico tokens yeah ico tokens i think uh the augers token

was the first one i heard this uh classified as a work token where um if a lot of people just like buy these tokens and like if they buy the right ones and it goes up in price and then they're like yay but like the concept of a work token is that you you put it somewhere in the right box and if you put it in the right box then you get the right you get a reward if you put it in the right box and you have to determine what the right box is and so augur as a prediction market there would be like an auger market spun up around like the super bowl right and team a would win the super bowl and team b would lose the super bowl and then all the auger people all the auger token holders would come and they would put

their uh rep their rep tokens rep for a reputation and they would put it on the side of like team a won the super bowl and then they they would collect a small fee from uh the gamblers who were gambling in that market and the gambling would be denominated in like die or eat or something so there'd be a fee and then that fee would be shared by all the rep holders that uh that stakes their rep on the outcome of a particular event now there's many many many different marketplaces uh and so like rep was utilized uh the rep token was utilized across all these different marketplaces so it's not like every single person was voting on every single marketplace but you would go to the the idea is that you would go to the auger marketplace and then you would just like like stake your rep tokens that you have

in the markets that you know what the outcome was and then you would get a small fee uh and like this was a way to get a decentralized oracle onto the system sadly augur never really took off but it it made the token holders go do work and it was kind of like governance over the system like auger auger governance says that it like team a won the super bowl and then the token holders would go in and like actually move their assets and the value of their assets uh into this the right box and they would be compensated as a proportion of the amount of capital that they put at stake there and so like if they put if they put the thing their tokens in the wrong box they would get penalized they would get slashed uh and so if you're on if

you're if everyone and 99 percent of people said team a1 but you put it in team b you lose your tokens and so there's risk there if you choose the wrong side now maybe listeners are like well why would anyone choose team b it's obvious that team a1 well then we start to get into the more gray area types of prediction markets where the market is actually confused uh and so like there's perhaps something where uh like the outcome of something is is not totally certain and so we need to come to like what what does the wisdom of a crowd think uh like uh i can't really think of an example off the top of my head but you could totally example think of a an outcome where like it's kind of up for interpretation like if we're doing the sports metaphor it's

like all right was it like everyone just looked at the film was that was that the football player's foot over the line or not and like everyone's looking at the film and like everyone's baited like it is over the line it's not over the line it is over the line and then row token holders are gonna have to go and vote like is it was his foot on the line or not uh and then maybe like 75 percent of people say yes it's on the line 25 people say no it's not on the line uh and then the 25 people get slashed and the 75 percent of people get the rewards and then they also get the rewards of the of the uh rep tokens that was slashed so you're rewarding all the people for being right and the the reason why i want to go down this rant

is rewarding the people for getting it right is this control theory mechanism that we've been talking about where the market infl it like has this input and it uses it to balance out the actual inputs of the system uh and so if you're talking about like the volts governance token like uh staking it's it's like yes i believe in this market like this is not gonna get rugged the yields here are good i'm gonna stake my capital here and then the volt system naturally increases the debt ceiling the ability to mint uh and deposit capital into this one particular vault that sounds like a self-regulating marketplace regulating low governance overhead stablecoin yield bearing stablecoin marketplace uh am i am i on track here you're absolutely on

track okay cool uh so but how on earth maybe this is a going down a different rabbit hole but how on earth do you have uh do you find like eight percent yield right now to combat inflation on defy and that is the realization we've ultimately come to is that it is not my place to decide whether there is appropriate you know risk adjusted return at that yield and as we do due diligence into d5 yields today in general we conclude that they are mispriced as far as risk you know most defy yields are not enough to justify the either risk the yield is not enough to justify the risk that is actually present in the system and even well regarded safety five projects have a lot of

governance risks or things that could potentially go wrong with them uh and so there's a lot of care and concern that thought that needs to go into um like composability is huge but you have to be careful you're not just composing risks uh and so the that is the central reasoning behind our need to i think move to a floating rate system with the feedback is you know realizing that for me to say volt will always have eight and a half percent yield um is a dangerous dangerous thing that could lead to the system blowing up and being destroyed under certain conditions and what we'd rather say is that you know in the early stage the team will begin whitelisting you know certain yield

venues on a basis of most secure first you know like existing well-regarded d5 things and in the meantime be designing these mechanisms by which a decentralized process can onboard more yield venues and we want to you know keep the scale of the system reasonably small like it is now while all these systems get ironed out and then once they're well in place and have been working in production we can scale it up more and there'll be a parallel effort i think to look into real world assets and also not just like purely real world but maybe like what we could call like hybrid um on chain off chain things like um you know you look at maple finance right is an interesting example where it's

kind of like quote uncollateralized loans to these market making firms which should be scary to people uh in light of the recent three ac kind of stuff but you know they've they've said everything's fine and i'm you know not trying to throw shade at them but it definitely is a little spooky to not necessarily know what all these books of these people are um and so you can envision like maybe a middle ground that's one step more decentralized like there's a a special purpose legal vehicle that corresponds to a single borrowing pool right and that has very strict rules about what kind of things can be done with the funds and so i'm interested in both learning about not you know not saying that we'll internalize in-house all of these things too like there's lots of projects going on and i've been learning about the the efforts of

other real world asset or um also like on-chain native lending or credit market kind of projects and so i think it'll be very important over the next like month or two to um and i think there's con oh here's what i should really put it i would really encourage listeners to just look at the fact that there's conversion evolution happening among a lot of stable coin issuers today and if you go look under the hood at what maker dao is planning and what fracs is planning and when i look into my own head of what i'm planning there's a lot of the same things going on of stable coin issuers realizing that you know there's only so much demand for liquidity and on-chain repo markets just to leverage up against each right and

you need to be able to do more nuanced type of lending activities whether that's like a long-term debt against eth like i'm sure there's a lot of people who would like to have a one-year long bond on their state collateral right like that might be a different kind of a deal then i could get liquidated at any time so there's like room for more sophisticated lending markets um and so i'm excited to see what develops there that we can integrate with and also to what extent we need to build things ourselves but we really did realize that like if you're a d5 protocol and you're integrating with another protocol their code is your code you know like you need to have read every line um not just on your own but like pair program security review to their team every single line of code uh

and you need to do that again every time they have a governance change of any kind and so that's the kind of that's the truth right like that's the type of diligence that ought to be done in systems that's handling you know tens or hundreds of millions of dollars of capital or more and again that's one reason that we're starting small uh you know there's any new project has limited capacity and we have to be careful and quality over quantity for integration so we've been doing a lot of deep dives into all of the existing projects and know i've had a lot of fun i took euler protocol for a spin for the first time yesterday um trying to i had my nose to the grindstone for so long on vault it's nice to look around and see what else has been built and exists today so these

needle yeah euler protocol and interest protocol or the new on-chain what i would call repo style markets you know secured lending that interest me a lot um of course there's the classics of ava and compound and then there's the sort of ava and compound style real world asset things like tin lake goldfinch maple finance um so learning more about that whole landscape and where we can fit in but i think that vault will both have its own internal mechanisms and integrate with other platforms and i you know maker dow is the same way right where they're looking to build their own internal rural asset stuff they also have d3ms into ava other markets and so these kind of connections i think will become very robust but they have to be taking their time with and built very carefully

well kirk i definitely appreciate your perspective in emphasizing uh the conservative nature as we build out a brand new financial system for the whole entire world some conservatism and and slow moving uh is uh perhaps the right vibe especially as we are coming down off of a bull market where things only move very very quickly um kirk if people want to just learn more about volts and just follow you and and your other thoughts that you have where should they go yeah um so to learn more about vault you can visit us at vault protocol.io and you'll also find links there to our discord and you can find me on twitter or on discord and also on telegram anywhere you like as onetruekirk you can also

email me at kirk at fullprotocol.io yeah always happy to chat about any defy concepts and um just answer questions it's not limited to vault but and also to learn from others because to me the most limiting part of the whole like pandemic period was just being cooped up in a little box i got to my first ever crypto conference for east denver and i think that taking getting out a side of our you know crypto twitter is a bubble and even within d5 there's little bubbles right and so it's good to go outside that bubble and so i'm working on that a little bit um trying to learn more about like l2 stuff so volt launched on arbitrarium uh recently and i'm working on understanding a little bit more about the security and decentralization like uptime concerns with l2s and how that

relates to lending um lots of interesting stuff well it sounds like you are becoming an expert in every single facet of crypto so uh i'm glad that uh i got introduced to you this way by doing a podcast and i'm gonna keep an eye on on what you're up to and where your brain goes and i think we'll we to reconvene on the podcast at a later date and time as well thank you david i really appreciate you getting the chance to speak with you and um apologies for the connectivity issues on my end i'm gonna have to unfortunately grandma house internet has its limitations well i think we can edit all that out in post so no worries kirk uh thanks thanks for coming on my man i appreciate it thank you hey we hope you enjoyed the video if you did head over

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