Samed Düzçay: Accessing Institutional Yield Strategies at Tori Finance

Transcript

[music] >> You're now plugged in to the Delphi podcast. Hey everyone, thanks for joining [music] us today. Today we have Sam from Tory, myself Yan and John from Ventures. Tory is a yield protocol that brings institutional grade Delta neutral strategies on chain starting with dollar hedge carry trades in emerging markets. Important to note that Delphi Ventures is a lead investor in in Tory, so we just wanted to get that part out there immediately. And to kick things off, let's I'd love to learn about Sam. Tell us a bit more about yourself and and walk us through the journey of that brought you into build Tory Finance and of what gaps did you see in the market that really made Tory worth building?

Sure, happy to. I'm Sam, founder of Tory. My path here has been a winding one, so let me give you the short version. I was actually mining Bitcoin as a kid when it was like still under 10 bucks and no, I wasn't smarter or patient enough to hold any of it, so yeah, like I wasn't one of the crazy stories that you've heard on online like when people people like found thousands of Bitcoins in a USB stick somewhere and then they were crazy rich in overnight basically, so I wasn't any of that. But like yeah, I'll be making peace with it for the rest of my life. But that was my real first like thing with crypto.

Fast forward to university, I spent a summer in Zurich at Google and my roommate at the time was writing solidity contracts for companies. If I remember correctly, it was an insurance company. This was around like 2017 probably, so still pretty early early days. Like the D5 was really just at the beginning of its let's say run up. That's when I got properly introduced to Ethereum and basically the whole D5 scene. I thought it was super interested interesting, but honestly my real passion back then was software and software as a service specifically, so I want to build a software company. So that's what I did. I worked at companies of like very different sizes from small startups to giants [clears throat] like Google and

many others in Europe and in the US. Eventually I built my own company. It was a software software as a service and I sold it to BTC Turk, the biggest crypto exchange in Turkey. That whole journey like going through COVID, multiple wars, market crashes and still managing to exit successfully on the other side was like a pretty unique experience and taught me a lot honestly. It was really only after like 2020 that I got serious about crypto. Since then D5 has seen a huge part of my day-to-day. It's like huge part of my day-to-day. I've invested in and been a part of like many protocols as an angel, as an early LP, as a regular user sometimes, like farming yield, farming points, basically everything you can do

in D5. From ones that failed literally miserably to ones that became giants as we all know today. So basically for the better part of the last decade, I've been sitting at the intersection of like both TradFi and crypto and managing like sizable capital at both ends both ends of the table. That's me basically and the Tory piece comes from what I kept noticing while doing all of that. Like stablecoins are now a multi hundred billion dollar market, more than 300 billion today. But the yield most holders earn on chain is frankly pretty like commodity like even below risk free these days.

Which is 4% mostly lending and LP positions that like recycler recycle crypto native capital. Basically nothing new coming in on chain. Meanwhile in real world, especially in fixed income strategies, there are like whole categories of yield strategies running high single to like mid teen percent that have funded that have funded like many pension funds, private banks, like sovereign funds and so on. So like this is a huge huge market and it's completely gate capped from anyone outside of private wealth management and basically the institutions with the highest amount of capital in their balance sheets.

So the carry trade is the cleanest example of all that. It's been around for maybe more than 50 years and it scales to literally hundreds of billions of dollars and it's basically inaccessible unless you have an eight to nine figure account at a top tier global bank or you happen to be in the right place with the right infra at the right time, which is generally hard to build because majority of these markets are very hard to access. So we asked you obvious question like can we package this institutional grade execution, hedge it back to USD, basically remove the local currency risk and bring it on chain in a way that's actually transparent and verifiable and that's basically Tory.

Thank you. Thanks for the overview, Sam. Um maybe so so when I when I mention Tory to my friends, my circle, like the number one question I hear is basically where does the yield come from? It's the it's the famous question now for anyone bridging, you know, TradFi to D5. So so I want to ask that to you, but maybe first for those unfamiliar, maybe if you could explain us what what carry trade even is in the first place, that would be helpful. Um and then and then yeah, please explain us where the where does the yield come from.

Very good question actually. Let's start at the very basics because this is what this is where a lot of people get lost. So the core strategy is global carry trade, right? And what is a carry trade? Like in its simplest form, you basically borrow a currency where the rates are low, for example the dollar, US dollar. You lend or invest in a currency where the rates are higher. Usually like emerging market currencies like think of Turkish Lira, think of Egyptian pounds, think of others, right? The difference between those rates is your yield. Assume there's a currency that gets you 40% a year in this case Turkish Liras or assume like 20 25% which is Egyptian pounds and on the other hand assume a currency in developed market currency like US

dollars where you get where you basically earn 4%. The yield differential from that is the yield you get. That's that's basically carry trade. It's one of the oldest most studied trades in global finance and it's been around for more than 50 years. Not not not something like exotic. Um now the obvious like there are lots of other questions, but I will let you basically um go on with that. Yeah, I mean the the follow up would be here is is basically you mentioned these carry trades are are being are being hedged to to to dollars, so you're not taking FX risk here.

The natural question is like sophisticated, you know, listeners would would would question is like if you're hedging like to to USD, why does the spread exist because in you know, in theory the the reason why you have higher rate is that is that you're you're taking the risk of of this higher risk currency, right? So why why does the hedge doesn't eat out the spread basically? In a if yeah, that's basic financial theory. Let's let's let's call it covered interest parity like CIP. In a perfectly efficient market, yes, it should and it does. So in developed markets of the world, like there is no spread between those and if if there's a

spread, that's basically the credit risk, which is I mean something you take. But in reality in these markets on the ground, it's a very different environment. So first of all, there is a really high entry barrier into these local markets. You can't easily get in and get out. So getting in is a huge thing basically. Like you have to go through all the all the regulation, all the banking requirements, all the like tax IDs and everything, so it's very hard. Central banks in a lot of these places actively manage effects and local rates as a policy tool.

So they actively participate in the market using their own reserves. They set rules that limit basically who can play offshore and also onshore sometimes. So basically they shape how local liquidity is priced, right? So the FX forward curve isn't always set by pure arbitrage. So it's not like, you know, the FX hedge eats into the whole whole of the yield. On top of that like in many of these jurisdictions, most natural participants don't hedge their currency exposure because it's not the smartest thing to do. For example, personally, like I've been participating in these markets for the like good part of the last five to 10 years and I've never like almost never hedge my local currency exposure because it's not the right like like risk reward wise, it doesn't make

sense for me personally. The locals and most local institutions, even most like global institutions, they don't. So like that's actually the better strategy, right? If you don't hedge your currency exposure, you're actually getting five to six times sometimes like seven times more yield and since the central bank actively control the market, actively like set rates and use their tools at their hand, you're basically better off by not hedging. So there is really no reason for a local participant to pay to hedge. Sometimes they literally can't even. That means the buyer side of the FX forwards, it's like structurally thin, right? So nobody's really bidding for them. The result is that even after like fully hedging back to USD, a meaningful spread still survives. Um in practice over the

next over the last like five years, we see anywhere from like 3% for example after the Iran war started like a month ago, it went down to 3 4% levels, but up to like 18 to 20% each levels. So overall, it's a very volatile, very changing living market, but the rates are like again very much profitable on the longer term. So the opportunity exists because FX hedging market is structurally inefficient in the places like that we operate and that's not a temporary thing. It's a function of how the monetary policies and these central banks is run in these markets, which doesn't change overnight.

Yeah, and just to I think somewhat close the loop on on the position itself, it'd be worth I guess touching on the security of the hedge, right? If we're saying that the the position exists and you're not worried about the local currency falling out on you because of the hedge. So, then naturally the next week's point becomes the hedge. So, can we just kind of touch on on that component and and you know the safety that exists in it? So, overall the counterparties that you work with are multi-hundred billion-dollar banks, both local and global. Think of banks like, for example, in local jurisdictions, the biggest banks of the jurisdictions, and globally think of

banks like JPM. So, there are multiple bigger institutions that or that are already in these markets, that are already running these trades with up to like 10, 20, 30, 40, 50 billion-dollar levels. And the counterparties you work with, they're not, you know, uh the smaller players, where, you know, they manage hundreds of millions of dollars, but whereas here they manage tens of billions of dollars. So, on the OTC side, the banks we are dealing with, they're pretty huge. And there are different markets for the hedging like uh operations. So, there are spot markets, there are global markets, there are local markets. So, basically, the access here is the key, right? So, having access to more and more places brings you both stability and better pricing, which is the real alpha here.

Makes sense. Yeah. Um So, yeah, just uh to I guess rehash, you have two currencies, one uh that you borrow in that's lower cost, one that you deposit in that's higher yield. Typically, that's the case. This is the case because these are two different currencies, so you're borrowing in a stable one that is lower risk, so you you you pay a lower yield, the dollar. You're borrowing in a risky one that pays a higher yield because local government is typically trying to help support the price of it, so they're offering the Fed there's is paying a high interest rate to to support demand for the currency.

But the risk is that the currency is weakening. And and so, you need to hedge the currency. That hedge eats into the yield of the higher-risk currency, then it becomes, okay, you know, the security of the hedge is the important part. What you're hedging is the principal, right? So, in in an event where the the the trade goes south, um what what goes unhedged is the yield, and that's okay because that just means there's a a compression in in the yield spread, and and it just means it's likely time to unwind the trade. But ultimately, what you want to make sure you're protecting is the principal, and the the risk there is to this, you know, multi-hundred-billion-dollar, trillion-dollar uh capitalized institution that's usually supported by

the the the local government and and has never really gone under. And so, that's effectively the credit risk of your hedge, um and and it's what kind of gives you comfort in knowing that the principal portion at the very least of of this exposure will is protected. Exactly. And to add on top of that, yeah, like when you're unhedged, obviously uh the currencies are depreciating, but then um like in tail risk scenarios, like tail scenarios, uh which kind of happens almost every year these days, so I don't know if it's wise to call them tail scenarios even anymore.

Um so, the local currencies can depreciate like 10 to 20 or even 30% overnight. So, if you only bring the local currency on chain without hedging it, without hedging the local currency risk in these markets, um you are taking a huge risk by basically like because like the main thing like the main thing DeFi offers, well, the main things is lending and borrowing and basically leverage, right? So, if you're onboarding a local currency in that lending market, you're basically taking immense risk when it's unhedged, um because that currency can literally depreciate like 20 to 30% overnight. Um so, that's one of the reasons also why it's uh wiser to tokenize and bring something on chain when it's like completely hedged, uh especially in markets like these, yeah. And as you

said, the credit risk you're taking is kind of minimal because you're dealing with banks that have been around for the last like not even decades, last 50, 100 years. So, yeah, that's as minimal as it can get. And as you said, even if something happens, the governments usually bail them out because these institutions are so large that, you know, one of them going down affects the whole economy in not just that market, but the whole like global economy. So, it's better off if, you know, um in a very very very tail risk scenario, like, for example, Credit Suisse, like Silicon Valley Bank, it's better to just like uh float them back up rather than, yeah, basically let them die and then uh go under. Um and even in that scenario, even if the worst case happens, um

in our case, we are dealing with not cash instruments, but like papers and basically things we can take back from the custodian, even if the custodian goes down, right? So, even if for some reason the biggest bank in that jurisdiction goes down with our assets in their balance sheet, since we are dealing with bonds and papers, basically, we can take them back, right? So, it's obviously a very minimal liquid scenario, and it's something that we definitely don't want, but yeah, even in that scenario, it's not the end of the world. Makes sense.

Sam, uh we we touched upon the the design of the strategy, right? Your your goal is basically you want to stay delta neutral, you don't want to take directional risk. You also are hedging these positions, so you're not taking FS FX risk. Um but it's one thing to kind of, you know, target this as a as a design principle, it's another thing to implement it. Um could you maybe give us insight into like how you're executing these trades? Uh like the actual execution of the trades, um and and what are like some of the uh like give give us a bit more insights into your implementation there. Because uh the poor quality execution uh you know, with a poor quality you can

you can have these targets, but not necessarily achieve them. Exactly, it's a very very good question, the right question to ask. And I want to draw a line there. So, the way to think about it is actually hybrid. So, Tory is a strategy manager, right? Tory brings something that's off chain, brings it on chain, right? So, Tory defines the mandate and the risk parameters and defines what it tokenizes. And basically trades that are in scope. But then the execution is not done by Tory. The execution then runs through institutional execution desks in each of these markets. Assume a market in Turkey or Egypt or like any part of the world, the execution is done by a team that is regulated. And in many cases state-backed or partnered with the leading institutions, basically all the

pension funds and all the other like banks in their local jurisdictions. So, they are doing billions in volume. They work with premier global banks. They have multi-decade track records, more than 20, 30 years. And they have more than 10, 20 billions of dollars in their AUM. So, one of our partners, for example, has spent more than 25 years of history executing basically similar strategies for pension funds and trust funds. Um these execution desks operate strictly under our mandate, so they cannot deviate. They execute what Tory prescribes and basically nothing else.

Now, why this structure? Um because there's a clear distinction between strategy design and execution. As you said, on paper you can design a perfectly delta neutral strategy with no FX risk, no crypto beta, no market risk, nothing directional. But design and implementation, as you said, is not the same thing. A strategy can be like market neutral, delta neutral on paper, but still delivers some kind of directional risk in practice if the hedge is imperfect or if the execution is not done right. Assume, for example, you off-ramp USD to your local account, and it sits there in the local currency for a day or two, and overnight something happens, right? So, it's something that can happen to a team if they are not executing things well. So, we separate the two. So, Tory basically defines the strategy, and institutions

literally the ones that, you know, have been running these same things for the last like decades, whose core competency is execution, they do the execution. And we pay a fee for that, but it's minimal. And the trade-off is that we are consciously making basically the fee we are paying in exchange is is exchanged for the safest possible execution. So, that's, you know, something um that's a nice trade-off that we are making. So, we could trade everything ourselves, but we choose not to because there's no world in, you know, like which our internal execution is going to beat a desk that's been doing this for the last 30 years, have like hundreds of people in their trading team, etc. So, yeah, um that's not basically like but like also something I want to make something like

really clear. That's not the same as Tory basically sending money to a fund manager and hoping for the best. That's, you know, in the past something that failed multiple times. I don't want to give names, but overall uh people know what protocols they are, and that's not what we do. Our partners basically execute under the same like tight constraints with full reporting, with the defined risk limits, and with basically no discretion outside the mandate. So, overall, they do what we say, on on on only what we say, but they do it um with a team that's been doing this for the last like decades. Nice. That seems like a sensible trade-off, right? You're you're you're you're paying some fee uh to these uh basic execution desks to to execute these trades on your behalf. You're

setting the mandate, you're you're uh basically uh keeping track of the of the trades, but you're not kind of uh trying to to uh you know, do this yourself, where, you know, a a hedge could be imperfect or there can be deviations of the strategy. So, um yeah, it it only makes sense. I I think it's a very sensible trade-off. Exactly, exactly. Like paying [clears throat] 20, 30 bips or similar a year to have the perfect execution is a trade-off that everyone in the industry should make, to be honest. Yeah. And we've seen that it's failed when people or teams don't do that in the past.

Yeah. No, no, makes sense. I think, you know, throughout the pod and and just from the perspective of listeners, both generally and then more acutely based on what, you know, things that have taken place over the past couple months with with with exploits and and stuff like that. So, I think the natural questions people want to ask are, you know, how this is put on, why this exists, where the true kind of opportunity is is coming from. So, I think, you know, just getting to that part would be good. And then in terms of, you know, where this yield is exists because of of a situation that you guys have found? Is it an edge or is it is it is it an

accessibility? Is it a combination of kind of all of the above or or maybe something else? Would love to just, you know, give people a better understanding of why this yield exists because, you know, naturally at the moment people are are looking for it in in crypto in particular because there isn't much and so I think whenever it does exist people are naturally skeptical because they think that there's potentially unaccounted for or or kind of hidden risk that that isn't really clearly reflected but but it's what allows the yield to be where it is. So, the edge is really access, not really something um else. It's mostly access. The trade itself, it's not something proprietary. Like any institutional LP doing serious diligence

can see exactly how it works. Um the hard part is actually getting into these markets as foreign capital. Think about like what's involved operationally. You need a local bank account in the each in each jurisdiction. You need custody arrangements. You need tax IDs. You need regulatory clearances. You need KYC KYB documentations that gets basically reviewed locally and very diligently. You are looking at months or sometimes even years to onboard into each of these markets. And realistically to be taken seriously by the top tier desk, you basically need, you know, a nice balance sheet. Let's think of like JPM or others. You'll need at least like eight to nine figure balance sheets to just sit at the table.

So, even once you do get in, like there's a second layer which is pricing. So, the big counterparties capture most of the spread. So, if the gross opportunity is like eight to nine percent, a smaller player might walk away with five or six. That's, you know, what happens when you work with a PB, like prime broker globally. Assume you are trying to run this trade from Europe from US where you don't have any direct local market access. So, for the same underlying, same everything, you basically get five, six percent whereas in reality if you had direct market access, you could have gotten eight, nine or even better rates, right? So, that's 30 to 40% less yield for the same same thing.

So, the edge here is structural. Like we have direct market access in each jurisdiction that we operate in. Plus multiple lines across different counterparties because each line, like basically we can actually shop rates day by day, right? And capture more of from that spread for the same underlying. So, one desk for the for the for a day can give you a better much better price than another desk. And it could be reversed the other day. So, access and having different options is the real like edge here. And the OTC desks give, you know, the bigger players better pricing because precisely because of the volume that you put that through them.

Um access plus volume that basically gets you better economics than a typical participant, especially one that's trying to access these markets from like global jurisdictions, not from the direct market itself. Yeah. >> Access and and and volume, abstracting all of that away from end user, that all makes sense. Um in a in an alternative world you could have just as well operate this as a traditional fund structure, but but you didn't do that, right? Like you you basically also um tokenize these positions um and put them on chain. Could you walk us through like the benefits of of tokenizing here? Um what what where does the on-chain part come into play? And

how does it benefit the whole the whole project? So, yeah. Um that's also a very good question because tokenization piece is where everything is like everything compounds, right? So, building up from scratch like Tory has two tokens, right? So, the first one is uh what you get when you deposit USDC USDT. Think of it as a like synthetic dollar product that, you know, represents um a $1 on chain uh redeemable. Um the second one you get is when you stake the first token. So, staking is what earns you the yield. So, the basic flow is you basically put USDC or USDT, mint the receipt token which is TRSD, stake it, earn yield.

Like four steps, very easy. Now, what tokenization unlocks, the stake token is liquid and composable. That's one thing. So, you can take it to a lending market and use it as a collateral, borrow USDT USDC USDT or any other stablecoin or whatever from the lending market available, and deposit that back into Tory, stake again, and basically loop it. And you can repeat that several times, right? So, that's basic lending market principles on chain. So, when you put the numbers on it, basically let's say the DeFi borrow rate is like five percent and the stake token is yielding you what, like 10%?

So, you are taking a carry trade from global market market, like literally a traditional market, which gets you 10%. And you put it on chain and you basically get an advantage, another carry trade from the on-chain component itself again. So, there's a five to six percent, you know, yield differential on chain. So, the each loop captures you five to six percent more. So, loop it a few times and your basically effective yield goes above like 20, 30 or even 40% after the borrow costs and after the yield itself. So, a traditional fund structure, you literally cannot do this because most of these assets, money market instruments, they are not able to be collateralized in traditional markets. So, you can't take, for example, an LP interest in a hedge fund or somewhere and use it as a collateral

and get a loan against it. You are locked into redemption windows. You are locked into basically all the regulatory like requirements. And that's the yield you get, like nine to 10%. That's it. So, you can't compose it. You can't do anything with it, right? So, that's what you get in TradFi. Um there are some trade-offs. So, by design, our oracle is going to be priced at NAV, not market price. So, there is no cascading liquidation risk from market depeg because these things can depeg on chain. So, anyone can manipulate the price on chain if they have like, you know, enough stakes and they can basically bring the price down and use it to their own advantage, which won't be possible with Tory because we use the net asset value NAV pri- NAV priced on the oracle itself.

And that's something really important because um if the underlying yield ever dropped below the borrow rate, which is again unlikely because of structural reasons, users would have to unloop. And each unloop step takes like normally um seven days to unstake for the stake token STRSD. So, loops are a tool for like sophisticated users who understand the timing and who understands the secondary market like pricing dynamics. Um and also like one last thing to mention, maybe internally Tory does not take leverage. The protocol itself is completely unlevered. Like the yields you get is from unlevered money market instruments and FX forwards, basically hedged money market rates. And the looping itself on chain is a user choice. So, it's a nice it's not a

protocol's choice. Like we don't take any kind of leverage on behalf of like anyone or in the protocol itself. So, the tools are there and it's for the users to take advantage from at their own will and, you know, like risk frameworks. Yeah, no, I I think just to kind of reiterate and and why the two are are so synergistic aside from just the economic side of things. Uh So, you have you're combining two products, right? On on one hand it's it's access to the highest tier institutions to put on a trade um that that's gatekept usually by combination of relationships and capital. And then on the crypto side, the the tokenization component enables a utility that was previously completely

unavailable to those putting on the trade in TradFi. So, meaning if you are in fact putting on the trade in TradFi, you have a better setup to do it if you actually pivot that money to crypto. And so, it's not just about an access thing. It's actually improving an existing very large market which makes it very attractive. And then, you know, in particular what what that what all what it also means is that because the crypto component can be so yield enhancing, when you're building the TradFi component, you can opt for the most safe and and and kind of rigid structure, which potentially might be paying a slightly lower yield than someone putting on the trade in in a slightly more risky way, right? And and so, and and it makes sense for you to do that

because you can enhance your yield via crypto. And so, you get to take the best part of the TradFi setup, the most trusted, longest standing, most durable kind of setup for it and then use the crypto component to not add to not to to basically take on no additional TradFi risk to enhance the crypto yield. And then, on the crypto side, right, just to to reiterate, the the NAV component is really the big one. When you see a lot of these unwinds, it's because the the assets are priced based on the DeFi price in crypto and and that is kind of manipulatable by a large sell, like you mentioned. Whereas if it's based on NAV, the NAV price reflects the hedge. So, the the amount that the the NAV price can go

down is is very gradual based on if there's a world where there's a negative yield, then, you know, a negative uh small negative yield, the amount it goes down by day is the yield divided by 365, right? And so, what that means is you don't have these large one-off uh down markers in in price and and that's what you're really afraid of. And so, what that allows you to do is take on even a modest amount of leverage where you still need this insane event that's basically never happened on a hedge position to take place for there to be an unwind and and so you you can actually enhance your risk pretty materially and everyone can kind of take their own amount of risk that they want to take, right? Cuz in the end, you're not if if the whole if if everyone has taken on a certain degree

of leverage and price comes down, you're not taking on any additional market risk from anyone else's leverage because in the world where they unwind, that will never force your position to unwind. So, when you're taking on leverage, all you need to think about is the the NAV price coming down, not some liquidation cascade. I think that that kind of gives people isolated exposure to to to the risk and and and it and it makes it a much more kind of I think comfortable position. And so, yeah, the idea is you can you borrow in your your collateral is this dollar hedge position that can only go down gradually when there's a negative yield and you borrow in a in a much cheaper currency and you're basically putting on a second carry trade in crypto where you're borrowing

in cheaper USDC to deposit in higher yielding Tory. Yiannis ready to loop. Yeah, [laughter] I I I feel like yeah. Nice. Exactly. Explained it better than me to be honest, yeah. No, not at all not at all. Appreciate it, yeah. And so, you know, Go ahead. Yeah um I wanted to also like shift shift gear a bit to kind of transparency and auditability. Like when we were due diligencing you, I think a big part big question on our head was basically, you know, there's lots of operations happening off chain.

Uh how people are going to feel comfortable about depositing into this? Um so, yeah, I want to give I want to basically give you an opportunity to explain uh some of the things you're doing on that front. Um basically, you're abstracting a lot away, right? But in doing so, um that requires a bit more trust in the Tory structure. So, um what can users uh like in Tory what how transparent you can be what can users through through the verify in real time and and what part still requires trust in in Tory and and its counterparties would be helpful to to walk us through that.

So, this is one of the most important things in the infra, as you said, because this is something off chain and we are bringing it on chain and, you know, we have to make it very transparent and very visible and we have to be we have to make it like as much as possible like to real time as possible. Um so, that's some something what we have worked on heavily. Uh we are going to be working with Accountable. So, Accountable is a third-party attestation provider, fully independent. So, they run a server in a trusted execution environment that literally no one can touch. Not the Tory team, not the Accountable team, not the infra provider, literally like no one.

And that server has directory access to all of Tory's custodian bank accounts and basically asset balances across every venue that Tory operates in, either off chain or on chain, doesn't matter. And in real time, Accountable fetches balances from every source, on chain off chain, and constructs an on chain balance sheet. So, they use zero knowledge proofs, so the underlying position data is like privacy preserving while the aggregate is like fully verifiable on chain. So, the strategy overviews, like breakdowns, the collaterals, all the liabilities, which is also very important, and basically like everything off chain, not the tradeable details, but anything beyond that, everything is fully transparent on chain. So, what does that

mean for the users? Any Anyone like the team, investors, users, everyone can verify in real time on chain that reserves match liabilities dollar for dollar and that the hedging ratio is correct. So, positions are genuinely delta neutral. So, the system genuinely doesn't take local currency risk and any kind of market directional risk. And that off chain positions are basically reflected on chain, so there is no like off balance sheet risk, right? So, we are not, for example, uh we're not getting a loan from someone that we are not telling anyone about.

So, this isn't a weekly snapshot, monthly snapshot, like quarterly at attestation. It's continuous like real time, very verifiable and on chain. So, what still requires trust? Uh the strategy execution itself. You're trusting that our mandate is being followed, that our counterparty selection is basically sound and good, that our risk parameters are being, you know, like respected, and we mitigate all of that by working with regulated institutions with more than 20, 30 years of track records, and by limiting any single counterparty's exposure and basically like making it um all under a policy. So, the execution layer is where trust lives, but that's, you know, true of any RWA product um that you uh may interact with on chain

or even off chain, doesn't matter. So, the Accountable part is a really big, you know, thing and that's why I think like um most products these days like they are more focused on off chain strategies because there is not many opportunities that still remain on chain. So, Accountable and similar solutions are going to be a very big thing going forward. And without that layer, like on chain RWA yield is just trust me, bro tech. With it like you can verify the things that matter and limit trust to the things that you actually have to trust. So, you know, it's a perfect solution for products like Tory.

Makes sense. Appreciate it. Um so, just to kind of chat through uh since we have some historical precedent on on these carry trades historically, if we get comfortable around some of the other risks, the the the other natural one is, you know, how these trades typically play out and and where the risks are in the scenarios when they inevitably do uh begin to unwind and and the position is no longer uh appealing. So, there are again, as you said, like different drawdowns at different scenarios where a drawdown might or might not happen. Um so, when a carry trade unwinds, if you're unhedged, obviously you are taking a drawdown, you

are taking a loss on the carry trade itself because the people will be fleeing the local currency, the local currency will depreciate, and you're going to basically take a loss, right? So, that's what happens when you are running the trade unhedged. That's the risk people take for the highly higher yield. Again, to give you an example, for example, in Turkey you might get these days like 45% API like yearly, right? Uh if you are running it unhedged, in US dollar terms that could be what like 15, 20% depending on the inflation and uh TRY the lira depreciation. But that's the risk you take. Like if someday a war happens, a, you know, like a policy changes, something happens, you can lose 20, 30, 40% of your money overnight and it happened over like in

the past like we have seen events where the currency has depreciated more than 20%, 30% overnight and you're if you're unhedged, you basically take that loss. But when you're hedged, you are basically not taking any loss on the local currency side because on the nominal side, like if your currency depreciates, your forward, your hedging instrument's price basically increases in the same rate. So, basically you are you are delta Like when you are basically taking a position and taking an inverse position on the other side, if one of them appreciates in price, the other one depreciates. So, by structurally building a position like that, you are eliminated eliminating that risk. But what happens in that scenario to

products like Tory where the market risks are not there, where the instruments are hedged, you are only taking a risk on the future capital and on that capital's yield, not, you know, the yield you are if you have fixed because when you enter a position, you basically fix the yield. Assume you buy an instrument that a fixed income instrument like a government bond that gives you what like 20% and assume you buy a forward which hedges that local currency exposure, which is tenor matched, so they are expiring at the same time. Assume they're expiring in 3 months, both of them. And assume that cost you 5% or 10% uh for the year. So, there's a 10% differential. You that 10% yield, that's what you get over the next

3 months, no matter what. Um if for whatever reason in those 3 months something happens, the currency depreciates, the yield spread changes like forward instruments, their prices go up or the local yield goes down, you don't care. The yield is fixed for you and you get that rate for the next 3 months. But any new capital that you put in, yeah, you are taking a risk on the yield side. The yield might be lower, it might be higher, you know, it's a volatile market condition. Um but yeah, if you're basically hedged, you're not taking a risk on the capital you put in, but you're getting it only risk is for the new capital and for the yield side of things, which might narrow down, go down like from 8, 9, 10% it might go down to 3, 4% in tail scenarios like

when wars start, uh but it might also go up, right? So, for example, if, you know, the market is um now better compared to the past, then the yields if the central bank, you know, changes their policy, increase interest rates or something else happens, then it might go up to like 12, 13, 14, even 15%, which, you know, happened over the last years. Yeah, now that that that delta part I think is the is the really important part, right? And it's a using just round numbers, if you use $10 to borrow 100 Turkish lira, your forward contract is just saying I get to sell this 100 Turkish lira at this predetermined price. So, if the Turkish lira nukes, your forward, like you said, increases

in value at the same rate as your Turkish lira position depreciates. So, those two offset and and all you're really losing out in the yield [clears throat] portion. And and these forward contracts are extremely liquid, right? So, in in a world where you the the yield is really coming down and it's just not an attractive position to have, but your your hedge but like it it you know, the hedge is still going to last for another month and a half, you have the ability to exit both positions because they are incredibly liquid and you you don't have to be in a position where you are taking on negative yield. So, you have kind of max flexibility in that situation.

Exactly. Like once you buy the instruments, you fix the you fix the yield basically. >> So, you're not taking any negative yield risk for the duration of that instrument and when the market is at a negative yield for whatever reason it might be, doesn't happen that often. It's a very very very tail scenario, but in that scenario you just won't enter the position. So, you always have Euro bonds, you always have like T-bills from US T-bills. So, there are always other options to fall back on to. So, that's also why it matters to be flexible and be a multi-strategy kind of like company where you know, you're not depending on a single country, a single asset, a single strategy but you have fallbacks on you know, basically that you can depend on, right? So, that's also something important which we haven't mentioned, but you know, after

the after the question, I think it made sense to explain. Um but yes, exactly as you said. So, the only risk you take is um for the new capital and on the new capital, the yield basically you're fixing and not the capital itself. Yeah. >> [snorts] >> Sam, I also want to get get uh um your thoughts on recent DeFi hacks which is like very scary few weeks for for a lot of people. Um You know, it started with I I forgot about the order, but basically Drift and Resolve was hacked and very recently Cap Dao got hacked. In total, those three I think account for uh more

than 600 million uh dollar >> Some somewhere around that, yeah. Yeah. of of a loss. Um do you have any lessons learned from them and like how are you uh how are you thinking about security at Tory like in face of all of this? So, yeah. Like um there are lots of lessons learned for not just Tory, but for many products, many protocols on chain. And that should be a wake-up call for the for the whole industry because both products like all three products had passed audits. And my takeaway from that which I wrote publicly about that is that audits check only the contract logic. They don't check key management, signers or any infra or basically

whatever like you built on top of those contracts, right? So, both Drift like Resolve and afterwards Cap Dao, they failed on the operational layers, not on the contract layers. So, how do we do things differently? I don't want to obviously compare like any protocol uh or say that like any protocol is superior to another, but like uh just want to explain what Tory does. So, our minting contract enforces one-to-one collateral chain. So, you can't mint an unbacked token even if you control any of the keys, right? So, the contract contract will just not allow you. I can give you all my private keys, all the like signers, everything and then you go to contract and you won't be able to mint a single

TRYSD that's not backed by one USDC, USDT or any other except except collateral. Um on top of that every contract upgrade like goes through a time lock that is currently 24 hours which might be increased in the future and there's no fast path. So, that's the Drift scenario. So, Drift um multi-sig signers were exploited. They were basically um I don't want to go into details, but like the hackers got access into those signers and they made a malicious update on the on the software and then they were able to basically manipulate the markets and get more than hundreds of millions. So, that's what happened. And with the Resolve case, the issue was basically you were able to mint unbacked tokens

if you had the right access. So, that's a structural not a like contract level thing, but that's usually something operational that audits don't They check it, but they you know, like they don't um basically penalize you for it. Also like we also enforce the least privilege at the role level. So, the minter can only mint, the pauser can only pause, the upgrader can only upgrade. So, there's no like um basically super admin kind of thing that does everything. So, compromising a single role is bounded by that's like roles' abilities. That's also like basically decreases the blast radius if something were to happen. Um in our case on the contract level, everything is

limited. So, any person, even the team, they cannot do much, but like in any case, if something is um exploited, if something is basically um you know, like out there, then yeah, the blast radius is as low as possible. Off-chain, basically 2FA on everything, no single person with access to anything, no stale credentials, like multi-party multi-party production infrastructure. So, basically we're doing whatever we can to protect that off-chain infra as well. Um and on the on-chain side, we've been audited by Sherlock and Nethermind.

Maybe the top uh two teams out of like five, 10. The Nethermind audit and the Sherlock audit, they're both public in our documentation. Um we have a we will have a $1 million bug bounty which is probably going to help with um some of the hacks as well. And the answer is like no system is unbreakable. There's always a way to break systems. The goal is to just like make it you know, as low like make it like hard as hard as possible. Difference between Tory and what we saw in those exploits is just layers. So, we added the layers that audits usually don't cover like time locks, monitoring, scope roles, like hygiene both off-chain and on-chain, limits on everything. So, again, for example, the last hack Cap Dao, uh there were no limits on the bridge

side. It was protected by a wall of one signer. Again, it's something operational. Um I don't want to go into details on that, but like overall, uh putting the limits putting basically scoping everywhere is what you can do, but then again, no system is unbreakable. You can always find something. Your role as a founder, as a um engineer is to just to make sure that it's as hard as possible and even if that happens, the blast radius is as low as possible. So, always think of when something happens, not if something happens because think of always like it could happen, right? So, your job is to just make sure that if it happens, you know, or when it happens, the blast radius is low and you know, it's not

affecting the whole system and it's not crashing everything down to zero. We've touched on this briefly before in the context of some other questions, but I think it'd be good to discuss it a bit more directly and and you know, naturally in in these protocols and and kind of based on what's been happening recently, stress tests are are important thing to think through. So, you know, one of them is is kind of the one that's limited to Tory specifically and and it's one where you have a lot of people that want to run for the door whether they want to unstake or or sell the asset in in the DEX if they don't want to kind of deal with the unstaking time.

Can you kind of walk us through that stress test and and how Tory is is set up to to deal with it? Definitely. So, that's a very good question to ask. So, there are different scenarios to that. Um the the first scenario would be the depeg without a drawdown. So, the setup is like strategy is fine, there are no losses, but for whatever reason, there's a contagion from another protocol, a rumor, a mass exit for whatever reason and users want out at once, right? So, assume like 10, 20% of the users, they want out and they don't want to wait for the full 7-day period.

So, they start selling on DEXs, the token trades below NAV in the secondary market. So, what happens? The first thing to understand is that this is a secondary market event, not a reserve health event. So, the reserves are intact, the strategy is intact, the peg on market price is just decoupled from the peg on the NAV. Then this is very really important design choice kicks in. So, the lending market oracles for the token check accountables proof of reserves data which is real in real time showing what the reserves are, showing the valuation of the tokens, not the DEX market price.

So, collateral valuations on lending markets hold that NAV. There are no cascading liquidations. The recursive borrowing, looping positions are safe precisely because of that. And that's the basically whole point of pricing of NAV. And actually protocol, the users, institutional participants, they can monetize that you know, situation, that dislocation. So, the users can buy back the basic the tokens from the market at a discount and then they can basically sell it to the protocol at a profit, right? So, that is something where you know, it's a primary secondary market arb that's done in the past by many institutions, many participants. I've done multiple times with different tokens and that's something that users can benefit from

easily. So, that's something that anyone can do. Um beyond that there is going to be 2 to 3% of TBL active on Tory smart contracts to enable instant redemptions and there's going to be active credit lines and liquid backstop provisions again to prevent any secondary market dislocation like that from happening. But again, uh there can't be infinite amount of money sitting on chain idly. So, if that were ever to happen, like if a dislocation ever happens, then the participants can profit from that heavily because the reserves are literally real time. So, people can do the math and basically jump in at their own uh will. So, practically in a market depeg without a loss, the system holds.

Lending positions are unaffected. And the protocol and the users can profit a nice amount by buying back the tokens at a discount. So, eventually the arb activity pulls the secondary price back to NAV. And the reason that, you know, like it matters is is a difference between a controlled event and a death spiral. Most stable coins, most like tokens, fail because they're in strategic failures. They're like liquidation cascades from just market price oracles. And we basically design to limit that risk and minimize that risk as low as possible.

Um so, the second scenario, an actual drawdown, it's the worst case scenario, an ugly scenario. So, the reserves are no longer no longer fully backing what's been minted. A real loss happened in the underlying for some execution or counterparty default kind of scenario. So, we have a layered defense. Uh the first line is reserve fund. So, we capitalize the reserve fund out of the protocol revenues exactly for that. In a small drawdown, assume like 20 bips, 30 bips, or whatever that's below the reserve fund, the reserve fund absorbs the losses fully, and basically the whole protocol reserves are fully protected. No one ever like notices anything, no one ever sees anything.

Obviously, there's a communication, but like the protocol is unaffected. If the loss exceeds the reserve fund, then the NAV reduces, and that's reflected in the staked tokens basically price. So, the users principal is impacted only to the extent of the gap. Um and what does the user like experience look like on chain? So, basically yield still first, then pause if necessary while the protocol basically assesses the risks and everything the situation. So, redemptions basically move to a controlled mode mode, and the accountable feed continues to show the reserves and real liabilities and everything in real time.

Um so, who takes losses? Basically, the reserve fund first, then NAV adjusts proportionally on the staked token side. Um and if for whatever reason, a huge tail scenario happens, um like more than the staked token holdings are affected, then obviously then the whole system is gets affected, but like that's um normally by design not you know, like um even in the worst case scenario, that shouldn't happen. That's a very catastrophic scenario, but even if that happens, that's you know, like when only the whole protocol reserves are affected.

Um we've also documented separate protocols for distinct scenarios like a depeg protocol, a drawdown protocol, a hack incident protocol, and these aren't these aren't like very uh small um insignificant playbooks. They're like predefined sequences with like actions and basically showing and teaching everyone what to do in each of those actions. That matters because like in times of stress, the worst thing you can do is improvise and act um you know, like randomly. So, we're also taking the right steps before anything happens because the philosophy is that not if, when something happens.

So, we're always like cautiously pessimistic so that, you know, we're thinking ahead and trying to protect um whatever at stake before the situation happens. So, yeah, in in the worst case scenario where like the second you mentioned where there's a drawdown in NAV, there's actual loss. Uh then the basically decision is on the user because they they can they can see the actual loss. Uh let's say, you know, the loss is 10%.

Uh they see that they can redeem uh 90 cents for every dollar that they deposited. So, then they can decide it's up to them to decide like if they can find a better price in the secondary market, they could sell, or they could just wait to redeem at that uh new kind of redemption value, right? Um Yeah. Exactly yeah. Okay. Yeah. Um Sam, thanks thanks for all this walk-through. I think it was it was really really helpful uh like talking very openly about a lot of this. Um my final question to you would be, you know, where is Tori at in terms of like uh product road map right now

and and you know, in the next uh weeks, uh what is top of your mind? What should people expect um in the near future from Tori? So, yeah, um we are basically getting ready for the launch um hopefully in a few weeks. Like within the next month, we are going to be live on ETH mainnet. Uh that is to be um published very soon. Uh the contracts will be live very soon. Again, they are both audited by Sherlock and Nethermind teams. Uh the accountable dashboard is going to go live with real-time proof of reserves, and the full architecture I've just described is going to be shipped live.

On partnerships, like we have institutional execution desks across markets, on-chain and off-chain credit line facilities that are being um set up, and basically active negotiations with different like protocols, lending markets, different both on and off-chain uh partners. Um on structure, there's going to be a clear like two-token architecture, which is also documented in the um protocol. Um yeah, like everything should be ready to go live uh very soon. Obviously, can't share much here, but like um yeah, very soon.

Awesome. Awesome. Um looking forward to do uh another maybe round two of this uh in a few months after after you guys launch. Always great to see the the progress and how things change if anything uh since we last discussed. But yeah, thanks for thanks for coming and uh walking us through through Tori. Yeah, thanks so much for joining. Thank you so much [music] for having me. You're now plugged in to the Delphi podcast. >> [music]