The Rise of Real World Asset Vaults | Roundup

Transcript

The reason we're doing this episode on looping is because you need a compelling product, right, to put in front of those people. Um, and and looping might end up being that, right, for because it is it is only possible to do with um tokenized assets and like, you know, native issuance on chain, right? It's just far more frictionless so you can create like a better product. >> This episode is sponsored by Canton, the only public permissionless blockchain built for institutional finance. We'll hear more from Canton later in the episode. Blockwork's digital asset summit is back in New York March 24th through 26th. We'll have top speakers from leading asset managers, financial institutions, DeFi protocols, crypto companies, and policy makers all under

one roof. Think Black Rockck, Coinbase, Robin Hood, and more. Follow the link in today's show notes to buy tickets, and make sure to use code Bell200 for $200 off at checkout. See you there. Hey everyone, quick disclaimer before we get into today's episode. Nothing said on bell curve is a recommendation to buy or sell securities or tokens. This podcast is forformational purposes only and the views expressed by anyone on the show are solely our opinions, not financial advice. Our guests and I may hold positions in the companies, funds or projects discussed. All right, everyone. Welcome back to another episode of Bell Curve. You got me, Miles Z. Guys, how we doing?

>> Great to be back. >> Good day, everyone. Yep. >> Miles, how's the new house bring for you? >> It's amazing. I don't know if uh I was I was just extremely excited about my treadmill getting here. Um which by the way, like it's amazing. I only I paid gym membership fees for so long and I would basically just go and use the treadmill. Like it was pathetic. Um >> I was going to say, is this an aspirational treadmill? Is this an aspirational uh gift to yourself or is this >> I mean it's not like New Year's resolution. It's more like hey we should like exercise again you know um and you know cut cut friction right um so I think things are looking up in terms of

the uh the health wellness you know index less so on market prices for my health and wellness but like at least for health >> you got to be locked in you got to be on openclaw you got to be claw maxing come on dude there's no time you can run when you're dead you can be healthy when you're dead My agents are running over here, I'm running over here. >> Apps to be vibe coded. >> Exactly. Like it's it's great for, you know, when like I don't want the prompts to return to me too quickly. Like I want them to think for a good 20 minutes, you know, and then I can get a just bang out a little run. Um come back and everything's done. It's a good deal.

>> This is you vertically integrating. You're like part of your own energy. >> That part's aspirational. We haven't gotten to that level of setup here, but uh >> can I try a theory out on you guys though before we get into we've got actually a really interesting show today on RWA looping and vaults. But uh so okay, wait, can I can I show you this? Have you seen this this these charts that have gotten passed around here where there is this these in this insane growth in new websites and um can you guys see my screen? Yeah, new websites, you know, skyrocketing 40%, new iOS apps way up. GitHub code commits in the US and the UK, you know,

also all way way way up and to the right. I have a uh I have an analogy to give you. I know Z's going to push back on me in this and I know I'm the AI uh boomer of the show, but I think that there's a again if you're going off the idea that the friction of creating new apps goes to zero eventually and has already gone down quite a bit. That's kind of similar to tokens and what did you see in 2021? you kind of saw this explosion of tokens and new projects and forks that came from genuine innovations in DeFi, onchain trading, yield farming, things like this. And one thing that I think people forget is that these things generated a ton of revenue.

These weren't like empty, no economic protocols. Like the total rev that was generated back in 2021 was like 12 billion. It's like three times higher than it is today. So you could point to real metrics as well. So I'm just wondering like there's some analogy to be made here right of a bunch of stuff that can get made but then ultimately you need to curate distribution ends up mattering um it's the stuff that you put around the software and you could see I don't know this kind of big boom you know in AI generated apps same way we saw a ton of new tokens does that resonate validate my validate the you know the analogy guys

>> I I I think if you look at these graphs um you know all of us understand the amount of apps going live right now because of AI but I think the main difference here actually is that tokens are tokens and they're always going to have a price attached whereas some of these apps are launching but a lot of these apps are actually personal apps. So maybe they just improve someone's personal productivity and they have nothing to do with you know trying to make money or you know having equity attached. So I think there is some analogy there you could probably draw.

The biggest analogy you can draw I think from this graph if you speak to any vibe coder who is trying to make money from vibe coding which is very difficult to do. It does come down to distribution which of course is also a crypto problem when there's a lot of L1s and a lot of apps and tokens. Uh how do you attract the main audience that exists in the space which I think is a big problem right now. But with AI, you already have these massive behemoths which have the biggest audience which already have the distribution which makes it harder for vibe coders. So whereas in crypto I think we have some chains with distribution, but it's still I think potentially up for grabs longer term. So that's my two cents there.

>> Yeah. I don't know. My issue with your like analogy is is kind of similar, right? um that we can spawn a ton of tokens on uh you know pumpf fun like there was no real differentiation between them um but there you was arguably like a I don't know for a second there a flight of investors to quality um and maybe that will actually happen more over the next like you know 6 months to a year once the market starts to recover um yeah we'll get a lot we'll get a lot of slop just like we had a ton of shitty meme coins that and and if you can monetize the like um you know the abundance um factor then you're

going to make a lot of money right >> I want to maybe bring up one more point which is actually relevant which is a bit off topic but uh there's a guy on X called YQ who actually vibe coded a new client which is extremely performant for Ethereum essentially the tweet says two weeks ago So I made a bet with Vitala and that one person could agentic code an Ethereum client targeting a 2030 plus road map. So I built ETH 2030 702k lines of go 65k uh 65 road map items syncs with mainet. Here's what I found. And essentially if you just scroll through the tweet he's saying that he has delivered what Ethereum road map is trying to achieve but within a very very

short time span. uh if you scroll down to the bottom, he did it within a budget of about 5K if you can see here. So he's essentially streamlining the Ethereum road map that is four years out uh by taking six days and spending 6K. So I do think now that blockchains have something similar which is also being seen with vibe coding outside of blockchain that even people can vibe code their own chains and clients to make these things go faster and get better over time. And so I think that blockchain is ultimately extremely impacted as well by this vibe coding phase. And it's going to be interesting to see if Ethereum and some of these larger incumbents adopt these clients or if actually it might spark a new

innovation and blockchain design in general because I think there's actually never been a better time almost to build uh fast chains. The question again is like who cares and what apps do they bring? So yeah, I found this tweet quite interesting on my feed this week. Well, you know, it's funny like first of all, Vitalik's tweeting more about AI than crypto, which tells you just about the state of things at the moment. But yeah, I I guess that's a really interesting example, right, of you can do a lot of these things. But part of the value of Ethereum and Ethereum's Ethereum's governance is that you have to get buy in from everyone, right? I don't think it's just about technically shipping these upgrades. Um

I think that would take a lot shorter time. I think the reason that for good and bad takes now the Ethereum road map is too long. It has to compress like it's too you can't the idea of a six-year road map is nonsensical I think in tech um in general. But yeah I this is but this is part of where vibe coding has to come from everyone right like everyone's like no it's not going to come from my thing all these other things sure but um it just takes a little while to >> that's interesting. Yeah, I I haven't actually thought about like if the Ethereum road map would accelerate just given, you know, the the productivity boosts that we have now. I think that's a bit of a like more of a coordination problem than like an execution problem in in some senses. And it's also like

it's like a verification problem, right? like you have to you can't just be vibe coding like um updates to actually like Ethereum's you know core clients in prod um without significant security reviews right and so you would think like the auditors are actually stand the most to benefit here but I think they're you know definitely looking at um uh either getting disrupted or or transforming how they do business today which might be good so we don't have to all spend 500 grand every time we want to like push out, you know, a new app or a new chain to get audited. Um, that's been just like uh an underappreciated bottleneck, I think, of

like smart contract development and chain development. >> Before we get back into the episode, here's a quick word from our sponsor, Canton, the only public permissionless blockchain built for institutional finance. >> Tradfi wasn't built for 247 markets. Defi wasn't built for regulated institutions. But Canton is where the power of finance meets the promise of blockchain. The only public blockchain with institutional-grade privacy, true composability, real assets, real markets.

Why reinvent finance when Canton makes it work the way it should? Canton, where finance flows. I'm going to get us to uh the topic of today which is um RWA vaults or vaults RWAS and RWA looping. Um, and maybe before we get into that, I think to to maybe highlight and underline why I think people are so excited about this as a um as a as a category is it feels like onchain finance is really taking off with stable coins kind of leading the way. And the story that I want to highlight here uh for people is that

Meta actually just announced that uh Meta just announced that they were going to be getting into re getting into the stable coin game. And if you've been in crypto for a number of years, remember Libra um happening in uh 2019. And look, I'm going to show this on a map. It's not quite as dramatic as I'm making it sound, but if you look at back in June of uh 2019, the total stable coin market cap was like about a billion of total uh circulating supply and then just a a little while later is 170 billion. And so obviously not all of that is uh you can't just say that Libra created all of that. Obviously it also failed. It never

got off the ground. But the Zuck has a very good nose for an interesting market. I think it really made people think, "Wow, this is something that's real." And if you know, if you just start doing some back of the napkin math, I mean, the total Facebook uh universe of applications between um WhatsApp, Facebook Blue, and Instagram has like three and a half billion users. I mean, even if you just convert a very small percentage of those into stablecoin payments from their marketplace, that's a hu that's, you know, that's somewhere between it's somewhere around $500 billion of stable coin market cap, right? in a very short period of time. Then you start asking well where does that go? Um it probably wants yields and that's when it finds its way into the morphos and the a of

the world into these vaults and these yield for probably first money market like yield generating strategies. So you know if you look at morpho this week it is ripping um it's like one of the only coins that's in the green. It's doing super well. Like people might disagree with this but I think a part of the reason is front running these flows. Um, and yeah, I I want to explain the, you know, kind of the business model that is emerging here. And maybe Miles, I'll give it to you because as you pointed out in the in the uh pre-show notes here, you were pitching this to Fidelity in 2021. Um, you know, back when uh because I think Finance was the original uh vault, you know, automated yield

strategy uh type protocol that like really nerd sniped a lot of people on this topic. But can you just give us an overview of like what vaults are and then slot them into the history of kind of asset management rappers that has people so excited. >> Yeah, I got a bit triggered this week when I saw Fidelity had posted a there was a job posting from Fidelity that was like uh DeFi vault product manager. Um, and I'm like, wait a minute. I know I definitely pitched this at Fidelity a long time ago and I looked up like I I actually found the document and it's starts off like there's an unmet need for turnkey but customizable solutions that abstract away the complexities associated with deploying funds into

DeFi and vaults are not new, right? Like I've I referenced year like a bunch of times on on this document. Um there was another class of what we call like pseudo vaults we can um that were more centered around this DeFi mullet you know um approach right so this were like meow originally there was one called donut and the idea was like just make it incredibly easy for users to onboard um put money in from their bank account or from their debit card or credit card um and and especially back in the day I mean the yield was like really really high if you remember those were doing like you know um where where it was

incredibly hard to find any sort of actual like good yield because interest rates were zero right and so you but you could get like eight or nine% in DeFi especially when there was like a lot of um demand for speculative leveraging and bar like borrowing in order to go long on XYZ things or short right um and it was just I think like way too early Um to be fair I don't think like the demand side for uh allocating capital into vaults has um still even like you know five six years later it still hasn't really broken out of uh the cryptonative um you know investor side like I I could

be wrong we need to look at the data but Zave I think you were looking at something that was showing that it's fairly concentrated right it's like cryptonative institutional funds um and okay so like 5 years later now uh instead of cuz at the time I remember with with urine I mean the the assets that like you were uh depositing you know into or you were borrowing lending these were all just cryptonative protocols or cryptonative like or crypto like L1 tokens right there was some stable coin activity back then um but it was nothing like RWAs right where we have you know let's say like a tokenized private credit fund from Apollo um and if If you loop that, you can get 20%

APY. Um, or you could, you know, loop staked Barra or staked ETH, right? Like five times for, you know, the same APY. Um, and to a cryptonative, you know, fund or high net worth individual, like that's a much more attractive private credit's a much more attractive like um, you know, riskreward profile, right? Like you're not going to get liquidated overnight when the market pukes. um private credit takes a a you know a lot longer to repric and it's just less volatile. Um so I think like the uh the the the space has matured. I mean the problems back then were like really around the counterparty risk. How do you know you're not like depositing into the same pool as you know the the North

Korean hackers? Um it was also about complexity. Sure. Like even, you know, let's say if you're trying to get funds from the advisor channel, like they're not going to know how to set up a Fireblocks wallet and do manual looping themselves, right? But they might be able to do one click, you know, from a custodian into something that's operated by Steakhouse um or operated by Bitwise, who is now getting into it, right? So, we've come a long way, but there's still um a lot of I think like un you know um realized potential from in terms of like the demand side and breaking out of cryptonative um investors. And I think there's still like market structure issues that make it very difficult for RWA markets to be

as competitive and efficient as their traditional counterparts. Um, so yeah, I can that's a little bit of a history lesson and a vic and a victory lap for me. Like welld deserved, I think. But um, yeah, there we go. I'll turn it back over to you guys. One thing that I would just to even zoom out for a second of the history of vaults in crypto is there's a history of better rappers within uh, asset management and money management in general. So I mean literally if you and it kind of goes across different assets, right? like a couple maybe maybe just to trace how this has worked in stocks is actually Matt Lavine from Bloomberg has a really great analogy about brokerages being a an investment store. Um and you know we use this word financial product but you

don't necessarily always think about it like yeah literally just trying to wrap a strategy or type of exposure or product. That's what a financial product looks like. And you know the first kind of big innovation on the not the first but one in a series of stocks was mutual funds. And you had an active, right? Instead of just buying a bunch of different stocks, you could buy into this common fund where a really smart manager was allocating actively to these stocks. That was shitty from a tax standpoint because whenever someone sold, everyone had to pay the cap gains in the fund. Enter ETFs which are essentially warehouse trading receipts, right? Right. So, it's a more tax advantage just better way of getting the same thing. And I think that's what what vaults ultimately are like you're sl

you're slotting that into uh it's it's a form of asset management. Um now maybe can you Miles help us understand outside of what these things are doing today? What are some of the fundamental advantages of vaults as a rapper? >> Yeah. know I would also say like just to go back and look at the trades, you have financial adviserss, right? And financial adviserss started off by like picking individual stocks and bonds and then they evolved to picking um individual mutual funds, right? Fixed income and equity. Um and more recently they um are being disrupted and they're also like deploying into SMAs, right? So

you go to Fidelity and you say like here's my financial profile, here are my goals. Um, and I don't think actually like DeFi vaults are there yet, but you have personalized vault management, right? So now you have like let's derive what this portfolio construction should look like um, and how it should evolve over time based off of meeting this person's individual goals, right? If they're risk on or if they're risk off, maybe they're they've just retired, right? that's going to shift the uh construction. And so it's all the same themes, right? It's it's abstracting away the complexity. It's um making improving like personalization. It's uh you know, delegating risk management. Um

and yeah, I see the same thing basically happening in involving with with vaults uh today in DeFi, right? Um we've gone from like Zav you were just telling me you were trying to deploy like manually right into um you different sort of like yield farms and it still sucks. Um it's really really painful and it's the discovery part is painful. Like the actual operational complexity is painful and the security risks that you're always worried about are are really bad, right? Everybody's constantly clicking bad links that drain their wallets. Like that's untenable. that's not going to scale beyond, you know, cryptonnative like experts and folks that have, you know, um, let's say other motivations to

be trying these things, not like putting their life savings into this. Um, and so you're just pushing complexity up the stack, which, you know, does introduce intermediaries, but vaults are of course different, right? Like vaults have, you know, they allow you to maintain self-custody. Um, but you do run into trade-offs, right? like the the the more control you want to retain probably the less flexibility the vault manager has and so we'll start to see like some longdated you know f like you you put it in and you can't take it out for a year you can only take it out once a month um and then like where they actually deploy into I think is another problem um back when I wrote this I wrote about a arc you remember a arc it was a um you know walled garden version of a right um and

it just never took off because it was you know could never compete with the liquidity of of the main market and frankly like the demand side was not there um and it still was not there spec what I mean by that is like the borrow side um so yeah I think we're like it's um you know still early things but you can see how this like roughly tracks to the trady evolution. >> Yeah, I I would agree with that. I also think there's been a lot of innovation in um in even like ARC has kind of evolved into Horizon and there's more one-sided KYC you know where you um uh you don't have to KYC both the borrower and the lender that adds unnecessary

friction and you know there's a whole bunch of stuff that has evolved here one thing that I would like to analyze is uh before we get to the RWA looping and why people are so excited about that is can we just take a look at the value chain of vault And I want to understand who the different players are, who stands to benefit and what distribution means here because Miles to your point the like RAIA channel um and like the wirehouses that's a huge distribution channel for the ETFs right so okay if I had to um you know if I had to summarize who are the different players uh or like what what is the different value or the the entire value chain here um there's the

base execution ution layer, which I think you'd be tempted to say that doesn't matter. I will point out that Ethereum has a commanding lead here. Um, for for what reasons I'm not actually 100% sure. Like in a lot of ways, I think Salana is kind of better suited. Like I think you want an environment where um you know, borrow lend and onchain trading are tied at the hip, right? For a number of different reasons, liquidating being one of them, although that matters in our world. Ethereum has uh critical mass for the time being. Um so you know the base layer the execution layer there is the uh the vault or lending infrastructure itself. So in this case that could be

like a morpho or a or whatever uh there are the actual curators um and we're starting to see like far more uh diversification in different types of curators. If you kind of had gauntlet and steakhouse that started to begin with and they were these generalists. Now you're starting to see Bitwise um and actual asset managers that have a pre-existing distribution move into this space which is super super interesting. Um uh the issuers themselves so anyone that's issuing like an RWA um and then uh the kind of distribution so like aggregators, brokers, sexes like sexes and earn programs are huge. um like the ORM programs for sexes might be the

equivalent of the RAIE channel for today, but I you know that's a whole already big value chain. Um and I guess I'm wondering like where who do you see winning the most in this? Like what what are the most challenged parts of that chain and who stands to benefit the most? >> Yeah. Uh I put out a tweet about this a few weeks ago. Um I think in that value chain there will be a few winners across the board. Um I wanted to start with centralized exchanges because I think they are probably the biggest winner in terms of no matter how many strategies that go live on chain as real world assets keep maturing and there's more assets and more choice for these

curators uh to select from in their own sort of ETF- like strategies. I think exchanges still have the users and therefore they control the economics. Um and so if you look at a uh protocol like Morpho, I do believe that some of the bigger vaults there, a lot of those uh a lot of the TVL in those vaults actually comes directly through exchanges which already have the users because still most of the capital in these vaults on chain at least are predominantly retail or like what Miles was saying maybe like a you know liquid fund manager or cryptonative VC or whoever it is. So that's still the path right now. So and I think that will be the path for some time. So, Coinbase is winning at least right now. I think an emerging winner is

someone like a bit wise who already has the distribution, but they can actually create more interesting strategies on chain via Moro and they capture that whole value chain all the way from distribution to the yield and fees that they capture on a protocol like Morpho. Um, another winner here I actually think which is interesting which I had no idea about cuz I spend a bit less time in this space than you guys is actually a company like securitize like the kind of asset issuers a bit similar to like circle and stable coins from what I understand they kind of own the risk compliance uh area within real world assets and they're known they have an established brand and so people come to them to tokenize assets in the first place and get that stamp of approval and they have that choke point in that value

chain I think that's going to be incredibly valuable longm term as well. So I feel like that space is somewhat already consolidating. So and then the last point I want to make is the protocols themselves. So you have Morpho and RF. Um I'm still on the fence around like long-term do they capture the most value in this value chain. I think they capture some value. I'm unclear as to exactly how much but it is worth mentioning because I think Moro for me I always think about with vaults and curation and I actually use Moro and have liquidity in there etc. Uh, Ave for example, I haven't really used for vaults um in the past or reward assets for that matter either. But again, here Ave's growth in the last month has like doubled their reward assets in the last 30 days or something like that as D5 TVL

has gone down like 20 25%. So that shows me what's happening in crypto and in DeFi right now is that as DeFi TVL drops actually reward assets continue to increase and the question is on what platforms are they increasing? Who is the distributor of those assets? And also where is the liquidity funneling in? And I think that space is drastically changing in real time right now. And for me, the jury's out long term. If I had to put capital into like who is the winner of this, I think you could have many different positions here. But it's unclear for me right now the biggest winner long term in in this value chain.

Yeah, I think we'll see like um vertical integration for those that own the customer relationship, they own distribution uh with you know like the managers, right? And I and I I always kind of like reference Fidelity as you know that's my main point of reference but like Fidelity wins trust both by like starting with the mutual fund managers right they have been like okay I I trust giving my funds to like a guy like Will Dana right who's been managing money successfully for like 30 40 years manages $250 billion um and then I'm going to keep my money parked at Fidelity because I'm I'm allocating to him and like whenever I want to buy a stock on my own, I'm still just going to

go back to where my money sits, right? Um, and I could see like even Robin Hood playing um a role here. And it's not going to sound like DeFi vaults necessarily, but it is going to look like SMAs. And um, you know, once you're there, it's like, okay, how do I um ask Robin Hood to do more for me that I'm willing to pay for? Um, and my money's already there, right? and I've already built trust with them because my money hasn't, you know, disappeared uh since it landed there 5 years ago. Like I could see that and I and I do think that's where Bitwise is playing. Um and I think like the golden the golden goose here again is like how do you um uh basically win the non-cryptonative

demand side. Um, and Mike, you you made the point earlier that what has actually like what investment product has been able to break out of the cryptonative bubble, it's, you know, ETFs that just give people like, you know, allow them to check the box, say, I have like 1% of my portfolio allocated to Bitcoin or to ETH or like a mix of crypto, right? And if you were using Bitwise, one of Bitwise's vehicles for that, right? or if you're using Black Rockck or Fidelity for that, like there's it's very likely that you're going to look for their next product, right, that might be doing a little bit more here. Um, so I think that's that's like the the killer use

case, but I don't know if it's all about just like convincing people that they, you know, like the reason we're doing this episode on looping is because you need a compelling product, right, to put in front of those people. Um and and looping might end up being that right for because it is it is only possible to do with um tokenized assets and like you know native issuance on chain right um and you the you know it's just far more frictionless so you can create like a better product but without it being like strictly a better product than what exists outside of crypto there's really no point for you to you know invest in the crypto version of this asset or this

>> I mean my question to you guys is I don't think it would be the customer choosing for the cryptonative ETF or vault let's say or cryptonative uh strategies but I think it would be that someone like a bit wise pushing that on the customer because they can generate way more fees then if they can wrap that in a way where the institution feels very very comfortable and maybe doesn't even know that it's got any onchain strategies to begin with so they feel more comfortable with purchasing it in the first place I could see like that it being like a more pushbased approach like into that market. But I I wonder right now how early that market is and who are these first institutions and customers that are demanding these strategies in the first place or is it actually someone like a bit wise going

out to them saying hey you're already in this private credit fund elsewhere we've got this onchain yields are the same maybe slightly higher supposedly transparency is better on chain less likely for anything go wrong here like have some of this product and and see if you enjoy it I don't know how you guys >> it's probably bit bitwise to large advisor shops right they give a presentation and then they go get their those all those advisers excited to sell it right to the actual end users that are that are you know deploying capital. So the end users have no idea. it's just like going to be part of like a yield sleeve, you know, a risk like the the riskier part of their fixed income allocation that's, you know, just kind of getting like um you know, constantly

rebalanced. And that that is the other hard part. Um when they're if these RWAs do not have equivalent liquidity to what is you know their like the traditional counterparts, then you cannot do easy rebalancing, right? And that's like, you know, a non-starter for an adviser um or a robo adviser or an SMA adviser. Um so I think there are some like really interesting teams like Tenben um that are trying to like solve those more like technical structural issues um that allow you to say like mint and redeem new shares of this RWA in a single block instead of you know only being able to

do so at the end of the month. Um so yeah once those things get solved like maybe I think there's a there's more of a story here but >> you can also solve we'll get into the structural challenges or but there are multiple solutions to that right which is there there's another which is you you can just have a different type of liquidator right one that's more comfortable warehousing risk for like a month um instead of you know flipping it instantly. And actually the point that's been made to me that I agree with is you think about it's more like credit investors, right? Like this is part of the reason why credit funds are getting into the space, it's like yeah, you know, if um you know, this is a high quality asset and it kind of sold off on chain, but I'm fine holding it for a

month, like maybe you have to pay them a little bit more, but you might not need an entirely different reconstruction. You just need a different type of liquidator. I would say >> I don't think that's right. I think you do need an entirely different type of construction because the way it works today with like private credit is that they will say okay let's get we have like um you know hund00 million like it's $100 million fund uh we're going to carve out an SPV for that we're going to then tokenize right and that but like it's just going to be that slice right and it's not that slice is not equal with the rest of the fund um and so to get like for that slice to go significant ificantly higher, right? It has to be like um less of this wrapper

around an SPV or like a special type of this fund. Um we see this with alts to be fair. Like this is how like alts can lower ticket sizes to like 5k. This like they have these special little rappers that you know it's like a one to many thing. Um and that's actually a harder conversation with with the supply side of issuers. um because that's a bigger lift for them to like, you know, have a complete makeover of how they actually issue and mint these assets. Um and if you bring them like a very large, you know, like u late like amount of latent demand, then they'll be like, "Yeah, okay, we'll do it. We'll invest in this." All they want is AUM, right? They don't care what kind of AUM it is really. Um but it is a bit of a lift. Um yeah,

but why is that impossible? Like again, if you you're talking about an unwind scenario, right? If you're levering up here or you're not. >> No, I'm I'm like literally talking about just like, okay, I want to rebalance my portfolio, which means I need to sell a little bit of this. Actually, I need to buy more of this, which means I Oh, wait. There's no supply, right? Because like it's all been the SPV has been tokenized and minted. So now I have to go create a new SPV, right? And I have to get a bunch of people that will like be willing to buy that stuff. um if you have like true native issuance which is like the um I forget what it is. It's like you know the the master the primary fund is being issued onchain. All of that goes away. Um but there's like

these junior versions of of these yeah of these funds that like are usually what's been tokenized um or what's usually been distributed to like low tickets uh through advisors and you know it's it's not like a first class citizen with the rest of the fund. >> Everyone in crypto loves to talk about transparency but would any serious business publish its payroll for the world to see or hand competitors its contracts? That's not a feature. That's a bug and it's why most financial institutions can't operate on today's public rails. Canton network is different. It's the only public permissionless layer 1 blockchain built with privacy at its core, sharing data only on a need to- know basis. That's why Goldman Sachs, NASDAQ, and Broadidge

are already building on the network. Only Canton delivers the network effects of a public chain with the privacy and control real finance demands. Learn more about Canton by following the link in today's show notes. So returning just one quickly before we get into the some of the looping mechanics here and the uh the challenges Miles that you're alluding to and bridging like the Dan Ellitzer from Nent called this the seam right the messy seam in between the DeFi and the CFI worlds. Um, one one interesting place to maybe take a look at here is, you know, there was this kind of duopoly of um of curators in the form of steakhouse and

gauntlet. Friends of the show, love both these teams, especially got a special place in my heart for steakhouse, but I think it's it's probably a little bit tough at the moment. Um, right, like with uh with what they don't have is distribution. Um, and so if you have I think the the bet was the Bitweisers of the world would maybe hire the steakouses of the world, but it seems like they might just in-house that. Um, and and there's probably I think that actually uh there's probably more there's some very vanilla like USDC style vaults which is super simple to rebalance and manage.

Um, there's probably some more exotic types of vaults and RWAs. I know steakhouse has different where they've got like their smokehouse and their uh their blue chip um you know USDC vaults, but I think that's probably the area. I know steakhouse has a great team. I'm sure they'll figure out um no way to play this, but that that's the kind of part of the space which already looks like it's getting squeezed. >> Uh or is it just like ripe for M&A, right? Um >> could be ripe for M&A. Oh my god. >> Yeah, I mean this is topical for me personally. Uh in the news this week, Bitwise acquired Chorus One, my former company. Um I think there are many uh similarities between the curator space and the staking space. Both are trying

to generate yield and both are trying to get distribution and increase assets under management. Like Miles was saying before, I think ultimately the big powerhouses like we've talked about someone like a bitwise they already have that brand, that distribution similar to the exchanges, the custodians, they already own the assets and the customer and the end user. And I think it's really difficult to out compete that. And if anything, I think again going back to our previous podcast, you have to kind of come up with some distribution strategy that is completely novel that is able to out compete someone like a bit wise or someone like that, which is incredibly difficult to do. And so Mike, you just said before the the thinking and the thesis was that eventually these asset managers would come on chain and maybe like kind of

work with these more cryptonative uh curators, etc. But it's being proven now that they want to control the economics. So much so that they've acquired chorus one where chorus one has staking yield. So maybe they're going to start building bolts with staking yield mixed with some other real asset yield on chain. So they're actually trying to almost out compete from day one the existing curators to be the number one curators in the space kind of because it's there's so many similarities with ETFs etc. So I don't think that cryptonative curators are going to go away like gauntlet and stakehouse in particular in the staking space. You have Figment, Block Demon, you have massive brands that still around today. They work very very closely with banks and stuff now.

So I do expect something similar with curators on chain today with like a steakhouse to start working with maybe some banks and helping them learn and educate. Maybe they put some capital in. We saw in the last week one of the big asset managers I think was thinking about investing in Moro itself. So this is kind of already happening, but I do think long term it'll be the same as staking. Consolidation will happen. There'll be M&A. Um, and I think the ultimate winner is again the team with distribution because it's just a yield product. Me as like a fund manager, one of the issues I see with reward assets today without going into looping because looping is a step above like what I'm even comfortable with myself is any real world asset I think about deploying into onchain. There's so much friction even for me as a non- institution or somewhat

of a crypto native institution of the KYC needed like me understanding the number of holders where the liquidity is if secondary trading even happens like where does the oracle pull from how are they updating nava or the reward asset there's a lot you have to think about before you even put it in one asset itself and so I think this space the reward asset space is still like very very nent I do think it will continue to grow but like as someone that's trying to get more capital into reward assets I struggle with it myself. And so that's why I think again on the distribution side, if Bitwise reached out to me saying, "Hey Zave, like we know your need is this uh you have this amount of capital and you want to put on chain and like here's a diversified basket and also would you like staking? You would

attach to whatever it is and they have some funky stuff going on in the back end." I can already see that being a very very plausible way of going. So, I think if more if uh Steakhouse and uh people like Gauntlet continue to get better, which I think they'll stick around, I I actually think they'll eventually turn themselves into products that own the end user. I could be wrong here, but that would be like my prediction. >> Let's talk about the RWA piece and the looping piece here because um people are really excited about this idea of RWA looping. And I think one analog that I maybe just a different way of phrasing this is like looping was just a way of it was a very specific financial workflow that was equivalent to just getting leverage right you were levering up um so you're taking usually

a product which generated some amount of yield like ste is the classic one you know and you're using a to borrow more against your position and then buy more so you're kind of levering up your exposure and your yield there um with RWA there all these complications you were getting into this a little bit before, but um yeah, the the what what's the right word here? Um what makes this more challenging is that most RWAs don't confer legal ownership and they aren't digital bearer instruments. So, you can't necessarily unwind them in the same way or scale into a position in the same way um that you would uh a digitally native um bear asset like ETH. So you need separate

instructions. Um there are different approaches in terms of how to tackle this. Um but people are really excited about this because mostly the takeaway if you look at the composition of deposits and borrowing activity that happened in morphonav. It's not on ETH. It's on um USDC and USDT. So I think what people are you know there's still people that want to collateralize their ETH and borrow against it but that market is relatively small. Maker figured this out in the beginning. That's why they moved into RWAs first. And so, yeah, people are really excited about RWA looping because I think they one, it's a way of injecting leverage into DeFi um and not having it be purely managed by CFI. Two, it's just a way to

juice, it's like a kind of a distribution channel and way to juice um you know, assets that are um you know, fee generating assets for the borrow protocols as well. So I think that's why people are so pumped about it. Um I was thinking about this before we hopped on uh like thinking about the evolution of like the supply side and the demand side of RWAS. Um, back when I was writing about the urine vaults, uh, I remember we brought in a centrifuge to Fidelity to talk about like what they were doing, which was basically like a um an a just for RWAs, right? And the if you looked at like the assets that you know or like the the the pools that you could deposit into, the amount of adverse risk was

like uh, you know, selection that you saw was terrible. I mean these were like really really lowquality borrowers that you were supplying USDC for. It was like um you know forwarding like like invoice you know forwarding lending for to truckers in Africa and and a lot of them went really wrong. Um I think uh Maple was the other one right and I think you would deposit in there and let like Alama borrow from you to go do something like that didn't work out super well. Um and we actually solved that issue. So like I've you know spot was was my Delta like interested in you know going after the RWA market at some point. Talked to

a lot of um tier one tier 2 asset managers and they're like yeah we're down we're down to tokenize and deploy it. Like we work with securitize they make it super easy. Like you just bring us the demand side right um and we'll we'll tokenize assets on your chain. It's not it's not hard anymore. and the assets are like decently high quality. Um, but I don't, you know, it's still pretty hard to drum up that side of demand. Um, so now we've kind of solved the like to some extent solve the adverse risk supply side. The demand side beyond cryptonatives is really challenging. Um, my brother my brother-in-law works in private credit.

He's like, "What the hell is Lupe? Who's buying this shit?" like I sent him the gauntlet article a while ago. Um they've like this concept is totally foreign, right? Um and and and to think that like yeah like the high net worth crypto natives are going to be like yeah I would love 20% on this private credit fund instead of you know looping some volatile like DeFi asset or like L1 asset. Right? To everybody else that still sounds nuts um or they don't get it yet, right? And so it's going to take a little while on the education curve just like it took a little while to get advisors to actually want to put an allocation of a Bitcoin and an ETH ETF

in their portfolio. Um so if you can you know say like here's the traditional asset um or the you know the traditional version of this fund here is the looped version of this fund because it's tokenized it earns double. And by the way, we have like the riskreward profile is like we've we have historical results at this point. It's probably like a year or two from now to say that it's like, you know, you're not going to get screwed here. Like uh we're not there yet. Um and by the way, private credit not as safe as people think it is. Like just look at >> all the people are talking about. Blue >> Yeah, like Black Rocks like you know or like sorry Blackstone. um one of their

funds like has had a massive liquidation and again to crypton natives you're like oh I'm running to like a you know traditional company like yeah >> there's a bunch of SAS there's a bunch of SAS exposure in these big >> yeah like like like so so you know it's it's it there's still some issues to be felt but but the evolution of like looking at the supply side downside is interesting >> you know what else is like do people do crypton natives even want private credit I'm actually even skeptical if that's the I that there was a you know how sometimes when American companies go over to China and they're like try to copy paste and that they're like no dude I don't want this. I I think that there's a little bit of that going on too where I think that some of the big

asset issuers looked at crypto and were like, "Hey, UDENS, you you like this. You like this risky stuff with a bunch of yield here. It's a perfect fit." And but but hilarious on the crypto native side like the institutions are here, you know, and and they're like, "Ah, this feels too they don't want it." Um I think is there's a there's a product market fit issue. >> Well, I mean, the institutions are here on the supply side. I just don't think they're here on the demand side. And I wanted to also bring up a case study cuz again I'm not as deep as you guys but I do actively look at deploying into some of these strategies. And one strategy I think makes a lot of sense for crypto right now in terms of timing is just like Maple Finances uh recent update to like lend out to institutional

borrowers. It's overcolateralized. It's it's the kind of reward asset syrup USDC. It provides a yield of like I think 5% something like that. like nothing really out there but also probably more than the average yield you could get even on morpho a right now and I think in terms of timing they've done like a really great job there and I actually just looked at a stat I think they've increased their TVL like 18x in the last year which is which I could be wrong but I'm pretty sure that's the fastest growing uh rewarded asset on chain in terms of growth and so sometimes it's just about keeping it simple in crypto as as like you know we're talking about looping a lot here like me as someone who looks at some of these assets like syrup USD C like that makes a lot of sense to me as soon as

I'm a bit less sophisticated than like an active hedge fund manager for example which I'm sure they're more degenerate and happy leveraging up on some of these reward assets but I think there's also a market for others that don't necessarily want to loop and just want exposure to diversified yield and I think Mike you brought up a good point of like do people want diversified yield so diversified right now in crypto where they also want private credit and I've also spoken very in like very closely with one private credit team in crypto which has a phenomen phenomenal team. Shout out to Zebo Z I V O E if you're interested to to look at them. But phenomenal team and I think at some stage long-term in crypto they're going to have like probably hundreds of millions in TVL. But right now the question is like that initial first

customer and that first demand and like it probably is a cryptonative allocator like someone like me or a fund manager then the question is they have high yield. is like 10 or 11% and I think the yield is packaged in a way that makes a lot of sense but there's a lot of education for someone like me or even like an active hedge fund manager in crypto to even understand on the private credit side like how is that happening how they tokenizing that how are they packaging that it's a completely entire new risk framing that a cryptonative person even a fund manager I think isn't necessarily native to so I think there's a bridging of both worlds right now and I think there's a timing thing here as well and if I had to guess I do think real assets are probably at least another year or two out from like real

native demand but I timing wise is a good time to start thinking about it including looping mic which I know that you spend a lot of time in yourself right now which I want to pose a question to you Mike on the looping side like as someone that has seen some looping strategies um I guess go live and startups build here um let's say you know tokenized funds which I think 3F might be working on which I know you spend time with um I remember like sort of seeing that back in the day and finding it very interesting in how they calculate now because I think that issue is not just with 3F it's actually with many teams in the space and liquidation of assets like what Miles was saying how not even tokenized funds but even tokenized you know private credit whatever it is there can be cases where

this goes entirely wrong offchain and in DeFi we have up-to-ate onchain prices and someone needs to liquidate these assets the question I've always had is like what if the nav isn't up to date and how do you actually price that in the first place like I know with different funds for example it's even hard for managers to get the nav up to date each quarter with their fund admin or whatever it is. So then how do you make that even more accurate in a way that a price oracle delivers out on chain? I I know there's people working on this but from what I understand some of the biggest world assets right now they still have like one oracle provider one oracle update you know maybe once a quarter and then there's so much in between in DeFi that happens. I don't know if there needs to be more

derivatives markets or hedging markets or prediction markets we could use for this. But I think that as like a category and opportunity and area I think is very interesting to then help products like 3F like really close that gap on like uh minimizing risk and helping people actually get more exposure on tokenized funds leverage there. So for me open playing field I think there's a lot to be built but very exciting times and I think we'll only continue to grow in the next two or three years. And maybe just to add real quick before Mike addresses that, like that exists in the traditional side too. So like traditionally illquid assets like alts are trading at like larger and larger discounts now on the secondary market, right? And so I think that's kind of what we're looking at here where there's uh it would be nice to have NAV

actually calculated like once a day through like proof of reserves or something like that because I think at some the Alama issue with Maple was just like nobody knew where the the money went, right? Um not just Maple Broadly. Um, but yeah, I think like uh it's not abnormal for like the secondary market price to be different than NAV and that's that is okay, but you do not want that spread to be like extremely high. And I do think that that's probably what's happens with RWAs today. Um, if you need to get rid of it, >> you guys are way overestimating my pay grade on being able to answer the specifics of something like that. All I will say is that I think uh so I obviously can't speak for any individual protocol here and yeah it's above my pay

grade but what I what I will will say is that generally what you're getting paid for I think as being a um as architecting a protocol is managing risks and coordinating by different uh coordinating different sets of actors right um in like one network or way of operating and I think the actors that you're going to need to coordinate in something like this are there are the borrowers, the lenders, uh the vault manager, curators, and then probably, you know, there's like the um the uh the ultimate the like the the liquidators as well. And I think like this is what I was getting at Miles with your like the point before. I think that

this will be a challenge around uh I think that there will be a challenge here around what it looks like to actually um liquidate a bunch of this collateral. Um, I think again there's a different type of um there's a different type of like if you think about what a um someone who's liquidating a a uh a looped steth position looks like that looks like an MEV style person, right? Like you're not taking any inventory risk. It's probably um atomic, right?

The transaction that you're putting through like you might not even need any capital of your own. when you think about liquidations um of re real world assets where you might just not have access like there might not be at least in the near future right you you might just not be the the nav on a >> don't you just hire like hire a firm right like in the same way that like Robin Hood hired Citadel to just route all of their order flow right don't you just have to like basically come to some agreement with a firm that they will like okay here are all the people that have been KYCed and whitelisted to deploy into this pool if it gets liquidated like you're going to buy it and it's not going to be and and that's very different than DeFi and like you know loop ste right which is where as

you were saying it's the complete polar opposite it's like whatever mebod bids the highest of the next block is going to liquidate those assets and then immediately flip it for a profit um just because it's a liquid you know one asset um so yeah I don't know how that works definitely a good a good call out um and probably an underappreciated challenge here. >> Yeah, I I want to mention one protocol which we haven't talked about in this episode surprisingly which is uh stream finance which was of course a very recent event which involved looping offchain trust you know recursive leverage and also composability like across chains. So, you know, that is a

classic case of looping that can go wrong. And I think probably timely even though millions of dollars were lost, I think that could have been a lot worse. Uh, and that, you know, shout out to the curators that didn't touch this, like I believe someone like a ga and state house, etc. actually weren't involved in, you know, using these strategies in their own vaults on war, for example. But many curators did touch this and you know little did they know that stream finance itself was actually looping underneath with the assets that it held. So by the time that people found that out and they started withdrawing there was a massive problem on the oracle side where the oracle was still pricing XUSD for example which was stream USD at $1 when actually there was more like 30

cents on the dollar available that they had to fund and back that. And so again here like I think the oracle problem is potentially still open as like something that people could build for for an asset like this. I think it requires more transparency, more trust uh and and further like what Miles was saying proof of reserve stuff like that. I think we can build a lot more infrastructure in this space to get something like a 3F or these other great projects building in the space uh further um credited I guess in the space in terms of like minimizing risk and making it easier for people to to trust like the the underlying apps. I actually think that the apps will acrue the value. So the infrastructure we build and then something like a 3F will

acrew the value long term. The question is like building that oracle, building that proof of reserves, everything else for rewarded assets and looping you need uh to get up to speed because I think stream finance proved that we don't have the infrastructure right now because otherwise probably that wouldn't have happened. >> You solve the oracle problem if you hardcode nav at $1. It's just like which like if you've looked at like some of the bad cases in the past five years in DeFi like it's pretty funny how many devs have just like hardcoded the thing that's supposed to be won at one and then it never goes very well. Um I I for I forgot about that one though.

>> Did you just see the different treatment that this was a big announcement from the SEC? This was new treatment that money market funds get. um which is uh the actually the like the intraday trading you essentially do just hardcode the nav at $1. Um and you're shifting risk from the uh issuer onto the the dealer uh side of the balance is these are like arcane nerdy things right but like it it's super interesting to me right that the official accounting treatment essentially just hardcoded money market funds at $1. Um so >> that's interesting. I didn't know that.

Um, >> I'll send you the article. >> If you tokenize the market, money market funds and you allow that to back a stable coin, right? You could actually just loop the collateral and have the stable coin pay out a lot more. That's exactly what we're talking about. Um, but again, you don't want to hard code it at one. >> Fine. It's fine. It's fine if you don't loop, right? Like for the most part, >> it is. I mean, yeah, I guess it deposits. I mean, we're treating these things as if there it really depends on, you know, when you're talking about like a nav calculation here, it really depends on what's in this stuff. Like ultimately what vaults express and the different types of RW there going to be a bunch of different types of RWAs that get brought on chain here, right? And

there will be some very vanilla uh strategies here, but there will be some pretty exotic ones um as well. And I think the reason like zooming back out to where we started, the reason why people are so excited about vaults and uh vaults is it's kind of the next generation of asset management, but it it feels like a more comprehensive rapper than almost anything that came before in the sense that you could very easily imagine an actively managed, you know, stockbased ETF strategy like what we're talking about is something which is far more money market fund like right this is a very encompassing wrapper and platform to manage asset manage to facilitate asset management and it's happening at a global scale, right? Like the the whole game of how distribution

happens changes here too. So >> yeah, >> it's just about figure fig figuring out BMF for like the demand side that just answering the why like rationally and if you have a version of that why that can scale beyond just like well it's less risky than the other DeFi stuff I used to be investing in uh then you know I think there's a chance here but it's we've only talked really about private credit. I mean there's so many different asset classes like we can you know that will be touched by this and teams are trying like there was an awesome team trying to tokenize munis and it was just a rough rough crowd to like get into even on the supply side which for private credit has already been solved the supply side of private credit is

very interested in tokenizing assets. Um, so yeah, there's there's a lot more room to run here, but I do think that any team should figure out the demand side first and you know, just how many people want to buy the stuff if they if they're going to go tokenize it and manage a vault that that you know people can deploy into. Not not earthshattering, but like you know it's scales appreciated. Yeah, >> it scales and yeah, this is the phase that we're in right now. You know what? Give me like nonerta doesn't need to be crazy gigabrain, you know, new dis new primitive every other week. Uh give me just something that works that like scales and people want to use. I think

that's the vibe. All right, guys. We got to end it here, but this was a really fun one and uh appreciate you both and I'll see you here next week. Have a good one, guys.