Something better than USDC for your Ethereum? - Michael Svoboda. Ep636

Transcript

Welcome to Epicenter, the show which talks about the technologies, projects and people driving decentralization and the blockchain revolution. I'm Fedrica Anst and today I'm speaking with Michael Soda who is the CEO of liquidity a >> banking is under pressure. Sable is a much better product than having your dollars in your bank because there you have the counterparty risk and this bank you know in Germany might lend the money to banko. We had kind of this huge scandal and you're not aware of it. We see these forces now playing out with Genius Act, with Clarity Act. Honestly, it's not about the users. Regulation is actually used to protect the banks or create the mode. Liquidity just follows 100% of the borrowers fees to the stable

coin holders to facilitate that peer-to-peer credit market. It's very hard. It's a very competitive market. But that's why we tried with liquidity v2 and bold to have a very clear and distinct value proposition rather serve a niche but be very clear. Liquidity the protocol is a governance free Ethereum protocol that lets users borrow a decentralized dollar against ETH at self set interest rates. Before I talk with Migra, let me tell you about our sponsors this week.

>> This episode's brought to you by Lido. As Ethereum staking continues to evolve, more teams building staking products are running into a familiar challenge. On one hand, poolled liquid staking gives you liquidity and access to DeFi, but can limit customization. And on the other, bespoke staking setups offer more control over things like pricing, performance, and operator selection, but they often come with added complexity and less flexibility. LITOV3 is changing that with ST Vaults. SD Vaults is modular staking infrastructure. It lets builders and institutions deploy custom staking vaults tailored to their specific needs. At the same time, they're staying connected to SDH as a shared liquidity layer powering Ethereum's broader DeFi ecosystem. If you're just looking for a place to

generate yield on your idle assets, Lido Earn makes it super simple. It offers curated DeFi strategies built around SDE. You deposit once, you choose a vault and manage everything from a single interface. To learn more and start building with SD Vaults, go to lido.fi/stvaults and get in touch with lighter contributors today. >> Hi Micah, it's good to have you on the show. >> Hi Feder, thank you for having me. >> Cool. Um, before we dive in, who who are you? Uh, and what originally got you interested in all of this?

>> Yeah, so I'm Michael. I I live in Switzerland and I was working in a normal corporate telecommunications in the digital space and we were talking about disruption and uh I was talking to B2B clients about disruption and then I heard about blockchain and I realized this is really the only disruptive thing that is happening right now like the internet which took out intermediaries for coms and media this will take out intermediaries in finance and that fascinated me and then I quit my job because it's not going to happening in this big corpor corporate and I jumped into the crypto world. I think that was 2019 around the ICO craze.

>> Mhm. >> Liquidity itself was founded I believe a year or two earlier right by Robert who's still with liquidity but in a more researchy background role. Can you talk about the original rationale for the founding of liquidity? So what did Robert feel was fundamentally broken or missing in how onchain credit and stable coins were being built at the time? >> First I think he he was really fascinated by blockchain. So he was working before for defininity on consensus algorithms and then I think the maker um kind of sparked his interest being able um to issue your own stable coin be your own national bank

kind of I think was a very cool concept he saw that and he just immediately came up with ideas and said hey we have blockchain technologies why do we need governance can't we automate that maybe we can also make it interest free do we need to have interest you know you can break with all these par paradigms and he also thought he can create a higher loan to value ratio. So with these propositions he set out to create a more efficient more autonomous borrowing protocol that is was very similar like uh single collateral die and that's what he did what he set out and it was launched in 2021 was been running since then and had more managed more than 5 billion in TVL had it has its own stable

coin LUSD. what what um kind of talking about kind of like this early maker era there there were a couple of events that must have shaped kind of how Robert and then also you kind of thought about protocol design right kind of like there was the infamous Black Thursday um that kind of led to um the rise of um DPAC tools um so uh maker still has the >> PSM >> PSM as the tech stability module. What lessons did you take away from watching Maker evolve in real time?

>> Yeah, I mean Maker set out to follow a path maybe more of growth taking in more diverse collateral getting exposure to threat which helped their growth. They also introduced the PSM with USDC, a centralized stable coin to keep the pack, I think, which helps the product. But I think Robert was very Ethereum aligned and just wanted to get out most of the technology, creating like the most Ethereum dollar-like um money you can get, you know, by reducing all intermediaries and all kind of dependencies. But one big learning that we learned and that also kind of um um got introduced in V2 it was for example we had this interest free loans. So you

had only a one-off fee which was very interesting. If you talk to thread people and you said you know you don't pay any interest it was like totally puzzling for them that was very um viable in a low interest rate environment and when these rates kind of raised then the protocol wasn't designed for that. It still works but it had drawbacks on the collateralization ratio. So a learning was there. How can we design the interest rates in a more dynamic way to um create an equilibrium or have a a rate and a pack that can better self regulate itself and that was definitely a learning and and I think again I think what I really like why um

I joined liquidity is all this innovation interest and then with V2 we have user set interest rates also something very cool go to your bank and say hey I would like to have this interest rate that's something you can And um that was also a decision again a lot of protocols set the rates by governance or by utilization and then it spikes and we took really a a market approach who's the best to decide which rate we should have in DeFi. So we let the users decide. >> Okay, maybe let's dive into how that works in just a second. But let's just contrast that to how Maker and AB do it, right? Kind of like the the the two main players in this arena, right? So basically ma in maker um the interest

rate is set by governance and kind of like it's fairly slowmoving. It feels a little central bankish to me sometimes there's a lot of governance and in a it's algorithmic but that also means it can spike unpredictably. So kind of if you take out a loan um and initially your um your rate was I don't know 5%. It's possible it kind of spikes to 10% or 15% and there's nothing you can do other than kind of repay the loan and kind of get out from under it. Let's kind of walk me through how the mechanics of liquidity work end to end.

So kind of I know that the range of collateral that I can deposit is very limited. So say I have ETH or some sort of um wrapped staked ETH token. What and I want to borrow USD. What actually happens step by step inside the protocol? >> So um like with every collateralized stepped position protocol or CDP position, you come with your collateral. So if or rep staked if or or if we only have these three collateral to again don't have dependencies on on other collateral that we feel are less safe.

So kind and of asum native as possible and you selfissue a loan. So you deposit the collateral into the protocol where it's held where it's not lent out. It's always there and then you can take out the loan up to 90% loan to value. Um so let's say you put in 50k in E. You take out a loan of 25K you get that in the protocol stable coin bolt and then you can set the rate. Uh so you can say okay I will have for example 3%. Um, you do that, you get the bolt. Usually what you do because you take out a loan because you need liquidity, you will swap it to another stable coin offramp into fiat for

example. Or if you say, I want I get a cheap borrowing rate. I don't know, right now it's 3% on E, which is low, you could farm somewhere else for 10% and that could be also your use case. So that's the the borrowing side. I think that's quite straightforward and simple. And maybe the the question people ask now, okay, how do I set the rate the way? Why is everybody setting it to zero? >> Exactly. This would have been my first question. So kind of like if someone tells me you you can borrow money here, what what kind of interest do you want to pay? I would go like zero. Why don't people do that?

>> Yeah. So for that, we need to look on the other side. We're really a market, a peer-to-peer finance market. So we have the borrower on the other side um we have the stable coin holder you know because essentially if you want fiat you sell the stable coin and then somebody needs to hold it they can't disappear you know if everybody sells it and nobody hold it then it depects so um it's like the stable coin holder is like your creditor on the other side and now you both need to agree on the right rate because if the rate is not high enough nobody will hold it. So borrowers um have an interest to pay enough yield because there is like a stick you know look at you have like the carrot and the stick. So stable coin holders have a stick if the stable coin dex below one

everybody has the right to redeem the stable coin at face value. So that's also something that you don't have in many protocols. You can go come with the dollar and you get really the underlying collateral. Try to do that with your fiat or your USDT. And this is called redemption. So if I have 10,000 in bold that is below pack, I can go to the protocol and say okay I want now this is only worth 9,500. I want 10,000 in E as from the collateral and I can exchange that and this redemption hits the the borrower with the lowest rate. So you see kind of the stable coin holders are chasing the ones that think I have the lowest rate. They have also the highest risk they get redeemed. they don't have

kind of a a economical that's not an economical penalty. It's not a liquidation where you lose 5% of the value but you just lose the exposure of your underlying ETH which can be also for some people they want to avoid that. So if people see that oh I get redeemed I might really low I going to higher my rate and this protects me from the redemption. So you have now this market where borrowers adjust and stable coin holders um with the redemptions are are driving the rates. So you have really marketdriven rates and it's like a two-sided market of borrowers and the stable coin holders, the the creditors and I think it's one of the first time I've seen that being implemented like that and the beauty is it's actually very direct. you know these parties talk together if you think about it like how

it's done in other protocols as you said okay I don't know stable coin dex or we have a problem there is a governance proposal we increase the rate the yield funnels through a a complex system while while in liquidity liquidity just funnels 100% of the borrowers fees to the stable coin holders to facilitate that peer-to-peer um credit market at the end >> I have a couple of questions so maybe let's kind of apply this apart a little bit. If ball doesn't trade below a dollar but at a dollar or above a dollar, there's there are no redemptions, right? Kind of like I am not at risk of having my collateral kind of sold, right?

>> Mhm. Your loan gets repaid kind of from a third party. >> You have less debt, but you also have less collateral. >> Okay. But if a bulk trades above a dollar or at a dollar, this doesn't happen, right? This only happens kind of at DE kind of at at negative DPEG. Why if I don't expect this to happen? If I don't think this will happen, why am I setting an interest rate at all? Am I at risk of not being matched if I don't set an interest rate?

>> No. So if if a stable coin is above, then people or or kind of advanced users will set really low rates. They can benefit, you know, because they can't get redeemed. What this means now the borrowing fees and the yield that is paid out gets smaller until it flips. But this kind of reduce the problem that we had in V1 that the stable coin could depack above. So this happens now uh very rarely and the peg is quite good for a decentralized one that is not pegged to any you know kind of treasuries or centralized stable coin. So this puts then the pressure down.

More people are probably selling the stable coin because they don't have enough yield. then it goes below peg and then you have the opposite mechanism you know the ones that set it low now now racing again on the top and then you have you're getting this balance >> so if you compare the current rates with protocols like um make and a where where are we at with liquidity >> yeah so um I mean always much more volatile so you don't get that much I think it's it's quite low on average you know I'm maker I had to look up but usually so the proposition of the borrow side is that liquidity at always quite low and predictable rates because it's also so efficient you know the system is

not taxed nobody's taking away revenue so the spreads are are are really low so I think I don't know right now with the markets I I haven't looked up but a month ago maybe you know maker was at 5% for even and liquidity was at 3%. Why do you think kind of forced deleveraging through redemptions um is a better failure mode than the traditional liquidation cascades that we see in the other uh CDP protocols when loans are underwater.

>> Yes. So these are two different mechanisms and we also liquidity has also liquidations and liquidations are here if your collateralization ratio that is backing the stable coin gets too low. So then like in every protocol you get liquidated there is a margin call and then your collateral is taken away and you're taking a haircut and your position is wiped out. But that's something different. That's the the over collateralization loan to value and um that happens just to your trophies is dependent on your collateralization ratio. Redemptions everybody can do redemption and that has to do with the pack and only the ones that have low interest rates or um

targeted. So these are two different mechanism. Why why do we have them? Exactly. To let the market define the market rate to not need a governance to be able to to do that um algorithmically or let the market decide and also to introduce I think a really nice feature not many stable coins have that every user has the right and can instantly redeem for the underlying collateral. um that's the redemption mechanism and it helps the the pack and not the the overcolateralization of the protocol for that that's liquidations like in any protocol. So you you have deliberately only very small set of collateral options, right? So kind of like as

someone who now wants to redeem collateral because ba is trading below a dollar, can I do I have to take the lowest interest um vault um or can I choose which collateral I want to get back? because it's possible that kind of I mean the the probability is low but it's pro possible that kind of like one of the liquid staking tokens kind of has a problem right >> sure so v1 was only if there you didn't have the problem but like the market adopted these or wrapped staked e as the next safe place and well what we did you have like three branches of these collaterals and they are managed quite independently so the system detects if

people kind trust is collateral less. It it will shrink faster. But if you redeem, you get from all three markets, but it's split up. You can't choose because also the stable coin is backed by all these collaterals. And you could say yes introduces a bit more risk. But if you compare that with what other stable coins are backed, you know, it's still amazing, you know, kind of if you see all these collateral that other stable coins have, you can't even redeem. And if one of those fail, the risk is much greater. So yes, I agree. So you can't choose and you get it in a proportion, but it's still way better than I think any other DeFi stable coin that is backed by crypto because then the crypto needs to be a collateral that

is probably less pristine than Eve and the two biggest uh staking ETH derivatives. >> I hear that. But kind of in in principle kind of like if one of those um liquid staking tokens were compromised kind of like I'd get a haircut by by kind of getting um a proportion of the collateral back in a compromised token, right? >> Yeah. You know, you have that you have that risk. you wouldn't have that in in Eve and then kind of it could happen that the protocol can handle some some things so that this branch just shut downs and tries to reduce as much bad depth as possible and then yeah then it's kind of turned off. So yeah it it's built with that in mind of course you don't want that and if it's

catastrophical is 50% is wrapped staked Eve and kind of wrapped st loses 50% in the value yes the the system has a problem too. Yeah, we already touched upon this lightly earlier. So, kind of liquidity is um notably governance-free and immutable, right? Um and you you already said that kind of this was super important to to Robert. Um why why was removing discretion and by that also emergency controls so so important? And I mean basically because it costs you flexibility right?

>> Yeah. Sure. And everybody makes that compromise. But from a user perspective, what people like about liquidity, you have this predictability. You don't have to check every two weeks, is it updated? Has the parameter change? You know, under the hood, some of the big protocols are doing quite a lot of updates which you're not aware. You just think, oh, it's protocol XY Z version two, but it changed in between. So I think for the user that gives them also this um trust and predictability and kind of we need to change but we need to change in the hard way. We need to redeploy the system and people need to get out and um but this gives the the users also this guarantee that there is not a governance that can change things

um and somebody else uh in in control of it. So I think it was really with this ethos um enabling sovereign users with sovereign dollars without anybody being able to interfere with it and also because it's more efficient you know I I know maker I just saw these numbers recently they have 100 people budget of 30 million um managing that of course they have real world assets and probably do a lot of stuff but it's just beautiful to see that bold to manage a stable coin don't need any of that and and it can work uh yeah quite well.

>> How how many people do you have um in the company? >> Yeah. So we were usually around eight to nine people half of it developers and the the other half more operational or business side marketing. >> Mhm. That that really is a pretty small team. Tell me in some sense, I mean I I understand kind of the the ethos of kind of having this very pure only kind of uh stable coin protocol, right? So kind of I mean this is also why people loved single collateral die, right? in kind of when when multicolater die um kind of uh appeared there was definitely blowback from the ecosystem especially when then

kind of it became uh at some point 80% USC backed and and so on the flip side if you look at the outstanding amount of stables for maker and a there are also orders of magnitude bigger than niquity right kind of like and I I checked earlier today and kind of you guys have um 30 million um in um outstanding uh bulge and uh maker and a are 300 times bigger or so maybe I I look up the numbers of how big uh but it's it's it's in in the many billions right um so kind of seeing that kind of liquidity is more efficient in some ways what do you

attribute this to >> that it's still so so small >> yeah compar comparably is more. >> Yeah, I mean it's really hard to scale a DeFi stable coin. So, so yes, Maker is a big kind of first mover advantage and and and you know some Yeah, like USDC and USDT a lot of first mover advantage or you shouldn't compare the the lending market size with the stable coin size. So the stable coin size is smaller still much bigger than liquidity but all these D5 stable coins say go curve ethics they are around 30 to maybe 300 million so they are way way smaller than the more centralized ones. Yeah, I think mainly I

mean the big ones are USDC and USCT and there it's quite clear uh why they dominate because they're integrated you have all this utility and it's just so easy and for every new stable coin it's very hard to to get distribution and and adoption but that's why I also think some parties yes of course it's much easier to have USDC but I think also some people are maybe not aware of the differences between these C5 stable coins and I usually compare it, you know, like like the core with a combustion engine. These are if they are built well, these are government market money funds that just are tokenized um fiat products on chain versus the the

car with the electric engine which looks like a car which drives like a car but is built completely different and has other product properties and and other risks that could be interesting and I think a lot of people are not aware of it or still maybe you know kind of um trust the traditional system more but I still I think to me why why it's important is that it adds a new option that you can opt out out of traditional rails if you feel um like that and I think there they can shine but usually they only shine if things go south you know if things go wrong you you hope these things are there we had the moment with USDC when it depacked where LUD was

great and a lot of people switched to it yeah but to answer your question Yes, it it's it's very hard. It's a very competitive market, but that's why we tried with liquidity v2 and bold to have a very clear and distinct value proposition rather surf niche but be very clear. So you you know I think you have the traditional threat stable coins they can be fully regulated safety through regulation or I think on the other hand you have liquidity and bold that takes out as much as intermediary as possible and you trust the code and you have these two extreme I think they have a value because they give you safety from from different sides and we rather are totally on the spectrum and rather a niche than somewhere in between. I call it the trust me bro zone

where kind of people are just adding risk to it you know either by introducing a multi-Ic or being a hedge fund not regulated and there gets it's it's a very grayish area I think that we'll have a hard time when regulation kicks in and there we also see the the advantage that they say hopefully we c we can stay uh outside of regulation because there's nothing to regulate that's a bit a long answer but it's what was more why I think it's important why I'm passionate about it why I think it's a generally Ethereum native product you know can be only built on Ethereum in in that way and why I'm passionate to build it and further drive it but it it doesn't make

it easy that people understand it and and value it for for its proposition especially like you you me you know we live in I think you live in Germany and in Switzerland we have great financial systems we have good governments so we don't have this immediate that need but I think maybe from different countries in different region that looks a bit more different. >> I hear the spectrum. So kind of I fully understand if you hold USC you kind of trust that uh circle is sufficiently regulated and they kind of have uh the deposits they say they have. I also understand look it's maths you can check it out on chain argument that you guys are driving. I'm not fully caught up yet on the value proposition that you were

referring to. I understand it kind of appeals to a different set of people. But who's your customer? Who do you want your customer to be? >> Yeah, I think there there are three customer segments I think for whom this um can be interesting. So first of all, what are the properties you you talked about the USP? So I see three sorry three areas. One is no exposure to threat fire risk. So Bold by the way was rated by blue chip that's a rating agency that rates stable coin and it was the only D5 stable coin with a A rating A minus to be precise and the only one in the A segment without counterparty risk because there is no counterparty

out there. So I think for people that look at that and say hey safety level I can have centralized version where I have counterparty risk or I can have this D5 version without counterparty risk. So thread exposure is counterparty collateral centralized exchanges all the kinds um of risks you are taking on um to get the yield kind of taking out all these intermediaries and that I can tell you now for whom afterwards for whom this is interesting but that's that's the first really differentiator no other stable coin provides that this kind of risk profile and it's good for diversification the second thing is people that want to have more control so what bold also gives you is more control

over uh for example the stronger property rights. There is no freeze. You can directly mint and redeem. With a lot of stable coins, you can't do that. You need to be a corporation. You need to be on boarded. You're probably the last one in the queue. So that's another one. You you get more control and also predictability. Nobody changes the terms. So in liquidity, for example, me as a CEO of liquidity, I don't have more information and control over this product than you have. So I think that's also something unique level playing field. So we have no threat for exposure, more control, the full transparency and predictability because everything is is on chain. So I think these are three propositions not many stable coins have and you as a user you just get a stable coin you know that

it's built with the best interest in mind. You know the best user interest. So for whom is this proposition if this is the differentiating factor? I think three people. one one is of of course the self-s sovereign individual they just say hey I want to also hold dollars maybe dollars of last resort where there is not a government um where there's not a jurisdiction that can interfere and and I have strong property right lines like I can hold bitcoin I can hold a digital dollar that doesn't have ties into the tra traditional system and that values this control transparency and being able to exit into e you know with bold you can anytime exit to eve which you probably feel more familiar and you're again in your world without

needing to hop through traditional institutions. The second one is I would call lowrisk DeFi yield seeker that says hey I would like to have um uh some some decent yield borrowing fees native defy yield but I don't want to have the risk with all the other stable coins in the trust me bro zone you know where where people just are exposed to six different protocols where you have five different stable coins where it's looped where an team is running it this this transparency of the yield and I think this good risk adjusted yield. Um for people that are more looking for a passive saving accounts or like defy treasury qualities like you you want US

treasury yield. I think we are close to defi treasury yield. So this would be the second one and the third one treasury and asset managers that that want to have a risk diversification. So imagine you have 99 99% of your stable coins in USDC and USDT and we saw the USDC kind of Silicon Valley bank uh drama. You could say hey I don't shift everything but having five or 10% in a totally different risk profile with an uncorrelated yield not treasury yield um could be an interesting play like you diversify your portfolio. I think these are the the the USPS and target segments that would be most open and obviously these are crypton native ones. uh you know I think for for every new crypto

users probably USDC and USDT is totally fine I think but then the next level if you start touching all these different stable coins I think you should really think of how much risk you're holding for for that yield and there I think we're just a very simple a very clear and very honest play and I think people that want to have a bit this peace of mind yeah I think for those we're a good alternative >> over the last uh couple of years and months in particular um holding US dollars had its own risks, right? So, kind of if you look at how much value the US dollar has lost deliberately by most accounts, it was not a good time to kind of be a USD holder. Um, have you thought about but I mean the the the

fact remains that 99% of of the global stable coin market is US dollars, right? Is that on your side is that a design choice or is it a historical accident? would are you thinking about supporting um non USD denominated loans in principle? >> Yeah, I think the decision was it's just the dominant currency, you know, like it's the world currency. DeFi is denominated in that. So, it makes a lot of sense. But but that's the current time. That's why I think models like liquidity or or others really cryptonative stable coin are important that we have these cryptonative products that are on the crypto rails that are not dependent on traditional rails that in the next step today we are USD didn't

denominate maybe we can decouple from the dollar that would be the next natural step and for that we need kind of these kinds of designs and these kinds of stable coins that are backed by crypto and can decouple also from the dollar I think that should should be the future. We don't have plans, you know, right did it and maybe now would be a better time. Maybe they were too early. Now, if as you said like the dollar and and and all these global uh financial market shakeups, now would be the time. We don't have the plan, but I think it will happen and it makes sense. And that that's again you know why I think it's important that we have these stable coins like with electric engines rather than the combustion engines and because that's why we set out you know that's

why we started to build on on Ethereum to have our own financial rails and our own financial products and take finance also in our own hands not doing everything but just kind of being able to opt out if you think just things are going too crazy and in a direction we don't like. Um what are the fiat options you would be considering um if you went in that direction? Is it any one particular currency or is it a basket of currencies uh like yeah like special drawing rights or what what um where where do you think the ecosystem is going to go post dollar?

>> Yeah, I think post dollar more from a global perspective. I think we're entering a time of mult so dollar losing the dominance and maybe it's a multicurrency thing something new so I think it will be very interesting if we can have that or crypto has a bit its own thing I think that has potential other than that very difficult to say which currency of course I'm I'm Swiss I like the the Swiss Frank which is a great value um and there is a project called Frankencoin that does that so I think it's interesting because a lot of people should be interested in it It's a bit a harder model especially if you want to do it centralized because if you get no interest or have negative interest the business model doesn't look so interesting and frankcoin is is doing

a great job. So so I really love them but it's also really hard. It's a much smaller market and bootstrap that. So I'm I'm happy with what what we have and I think I rather take what we have. I think we have a good product and uh look that that we can get more adoption some critical mass so the project can sustain itself as I said you know and I think there we also need the support of users and the community not only liquidity but also other stable coins these things are not used we won't have the options when when we need them and then we only rely on the other options >> there's also a liquidity token right kind of can can you shed some light on what uh the token actually does and just

as importantly what powers it doesn't have. >> Yes. So with liquidity v1 it had actually no power unless you could stake it and earned uh the the revenues out of the protocol. So the fees that were generated and with liquidity V2 because we said it's a continuation we wanted to give also value back to the LQDY holders as we recognized you know in the system the borrowing fees we shouldn't give it to token holders like most stable coins do it and then it goes into the Dow and then they realize if they don't give it to the stable coin holders the stable coin holders DEX and they have this complicated system probably wanted people that figuring out where the the interest should go. So we follow that

through. So we thought a better mechanism there how we can get value back to LKY is out of this 100% 75 goes directly to the stable coin holders which deposit their stable coin into the protocol and get this D5 native yield which was 3 4% and because we had E liquidations that spiked you know since inception it had sec six to eight% yield on a D5 native stable coin so I think I think that's pretty um pretty cool but going back to to LQDY and 25% goes to the liquidity venues. So also something very innovative liquidity recognized that um you need liquidity. So borrowers are paying for stable coin holders to

give them credit and they should also pay for liquidity because every protocol needs to pay for liquidity. You just don't see how it happens again and liquidity made that transparent. 25 goes to LP pools where LQDY holders can stake the token and they can direct where it goes and with that of course the idea is when it grows you you control 25% of the revenues and to which LP pools with which pairs um you create a a bribing market on top right now it's probably too small but we've seen first steps and that can become then also a revenue source for LKDY holders >> but you guys as liquidity ag um you don't partake in that revenue. So kind

of ho how how do you guys make a living? >> We have some treasury tokens. So in in V1 we also staked and like any other um person could participate in that. We're also incentivized indirectly of the value of LQDI that others get of it. I think that's that's also the main thing and liquidity was always set out to be rather self- sustaining. Um so not kind of to grow and make it bigger but rather have a really a small team and maybe even a shrinking team that um and the protocol should sustain itself. So you know out of the liquid LKDY revenues um some of it we use to make the runway

longer but these were actually the funds to bootstrap the the protocol and the idea is not to grow it and make a bigger team but rather make it self sustaining. So we are not set up to have this continuous big revenue stream going forward. Are you worried that liquidity might end up underresourced compared to systems willing to extract rent? >> Um, no. Because it don't it doesn't need, you know, what would it need the resources for? Now it's only growth. So yes, I think that's why why we in invest into growth to get it to the critical size. But again, you know, even with the liquidity, we build it in a way that LQDI stakers and the protocol can take

care of it and bring it to a size where it's sustainable. So this is really the goal. I think other teams of course they can extract more value out of it, make just because of the size, but I'm not sure if you then can achieve that much more. You know, kind of there is only some limitations or you can buy your success, you know, that's what most projects maybe use it for. you buy TVL, you do all these deals and then it looks great. But the moment where where it goes away, everything is away. So we try at rather smaller steps but but organic that the protocol needs to sustain sustain itself and uh yeah that's the main goal right now.

>> Is there a point where you think kind of this freess of governance design becomes dogmatic rather than principle? >> Why do you think so? I I think there's a reason why a lot of protocols choose to be upgradable, right? Kind of like you want an emergency off switch. You want some discretion kind of like you don't um I know that in terms of the smart contract um set um liquidity is a lot less complex than say a v3 or something.

I mean there's kind of just pure lines of code. Um so it's less likely that something is wrong. But even if you take um for instance the recent balancer exploit, right? Kind of like it was in code that was that had been battle tested for four years kind of there were hundreds of millions of dollars in it. In the end it was kind of a maths buck, right? Um and someone found it after years and years and kind of like it was exploited. So I think the idea that um you can write code so perfectly that you don't need a fail safe switch. I totally

understand your qualms with governance. Governance is complete pain in the neck. Yeah. I mean so basically make a maker governance is dysfunctional. I mean everyone knows this right and kind of like a less governance and more politics. I fully understand why you wouldn't want to subject yourself to that. But going the totally pure way in the other direction, it does have its risks. No. >> Yeah. And and I think you know there are different ways how you can do it. I think the ethos should go into the right direction. I mean why are we building on blockchain? Exactly. that not three token holders can decide and kind of

upgrade the whole system within 10 minutes. I mean that's why you build on blockchain otherwise we we can also build that in web too and of course we are a bit extreme but I'm not saying that everything is bad you know pause switch with with good governance and can can make a lot of sense and you can introduce that or these time locks that you have on voting can make also a lot of sense and there are areas where where you can't build it in an immutable way I mean that's why we also built the liquidity provisioning where where the liquidity goes that we built it in a more dynamic way where LQ device takers can um decide where it goes. So we recognize we can't make that immutable. But I I still think

there are a lot of good ways how you can design it to protect users and not take advantage of it. I I really like also the curve model. I strive a very nice balance of we can change some parameter but we can't take away fonts, we can't do much. we have a kill switch and otherwise we can upgrade also this this ethos saying if we find something we can create a new version and people can decide if they want to move and we don't force them and I think that's the the things I like about decentralization and there is a lot of wiggle room and it doesn't need to be need to be pure but I think we want to give the users the control and safety that blockchains provide in the best possible way >> okay I think I think that's a very fair

take if you now kind of zoom come out. The global stables market has absolutely exploded over the last couple of years. What are the thoughts that you have when you see that? What are the challenges that you see? What are the topics do you think about? >> Wow. Um, very open question. >> It is very open. >> So, I mean, but what I see is in the past we had just this continuum of stable coins and everybody could do things. We had Terra Luna when know we have a maker model with which was fully crypto now has real world assets we have people that tokenize carry trades it's a bit the wild west and I think what the biggest

thing I see is is that clearing up and as I said of these two models you have these regulated ones in m or genius act clarity act which makes a lot of sense you want these treasuries in the most safest way and we know how it's done in thread on So we will I think we will see these models gravitate to that that will become a commodity you know you can't differentiate that much and then you will have the fully decentralized one which hopefully will survive because regulation will say okay that's something genuinely different and there is no intermediary and that's fine and the all in between the trust me bro zone where you just could operate I think there you the the air will get very thin

unless you get the right licenses because you can't tell me that you can do anything in between where you're not controlling users funds stuff like that which is probably clear that like in traditional finance there needs to be another setup so I see this clearance I I think of of the picture I think it will be really interesting on the centralized ones you have USDT and USDC but what happens next and there I really like the model uh by the way was a great podcast with Zack from from bridge which makes a lot of sense you know there it's just a commodity they provide the commodity they take a fee no thrills because yeah the product is simple but the interesting part is what are people

able to do with the yield that they get which players can can monetize that and create the model and for example bridge is issuing a native markets stable coin on hyperlquid and there we already see people need to use this yield for distribution and liquidity like liquidity, you know, that's what we use it for and and we will see there are models that might work and that will create new stable coin in combats that that will be able to to survive in in the space. So that that's about the things that I see moving changing and that will be interesting and and on the decentralized one our electric cars I hope we see more adoption there more

recognition and um that this is another model a model that should survive and hopefully um and I think also as an ecosystem we we need to fight for it that people not just say hey this is dangerous like self-driving cars you know oh my god we should avoid them because we have built a self self-driving credit system and people might be afraid of that but I think just that still these things are possible um because I think it should be a right that you and I can facilitate peer-to-peer finance we shouldn't be forced that this has to be done in an intermediate way because it wasn't the normal way before 200 years um before there were banks

that was the way how how you did finance and it was totally okay to do that on a peer-to-peer level >> I hear that um and I I kind of just just to be just to be clear I kind of I I fully subscribe to that so it does really appeal to me. So kind of I also really like single collateral die and so on. I also like ry so I know which c camp I stand in. Um Zach also said something else interesting on the podcast namely that he kind of sees banking and stable coins kind of converge rather than having kind of two parallel financial systems in perpetuity.

um kind of do you think the user base um of um liquidity is going to evolve? Do you think at some point uh JP Morgan will have liquidity positions on their balance sheet? >> Hey, could be I mean from a risk diversification point and also it's interesting because there is no counterparty so there's maybe not the AML topic. So we had Bitcoin Swiss in Switzerland that facilitated direct loans with liquidity. So not on their balance sheet, but they just facilitated directly with liquidity and that was possible in a regulatory way because there was no counterparty to it. It was the the protocol that issued the stable coin. So these models can

have some advantages. Also institutional players really like the predictability, you know, that maybe they're not reliant on a maker governance and what's happens there. So I I think they're not going to shift to it. But as I said, as as a risk diversification, adding that to the portfolio, if they understand it, um I think that could be interesting. And on the other side, I'm not sure what what Zack said there, but what you see is now banking is under pressure. You know, that the banking model with these tokenized treasuries, stable coins, they are eating really their market. So, I'm really interested to see how this is will evolve be because banks will see people um move their money to the stable

coins because honestly a PayPal um stable coin is a much better product than having your your dollars in in your bank because there you have the counterparty risk and this bank you know in Germany might lend the money to banko we had kind of this huge scandal and you're not aware of it and with foxes you your your money is parked and you you get a yield, you know. So, with banks, you they they give you the risk without giving you the yield. So, and and we see these forces now playing out with Genius Act, with clarity act, honestly, it's not about the users. What they are arguing about who should get the yield. So, regulation is is is actually used to protect the banks or

create the mode, which which I think is is a bit paradoxical. And I just want to highlight it that I think half of it is regulation is used to protect the users but half of it sometimes it's also to protect incumbents and the same for for Miko you know Miko I don't think they made stable coins better or less risky for users because they forced I think to hold more of their backing in bank deposits where you take on the counterparty risk of banks. So that was really questionable to me. That's an interesting take on the regulatory um side. Can you give us more um specifics of how you think um the

Genius and Clarity and Micah Act um h how they protect banks? Is it just that they disallow the passing on of of yield? Um or what what is it specifically? >> Yeah, exactly. I mean, that's something I learned with crypto, how a bank works. you know you deposit your your money you don't get any yield and they can lend it out uh with some nice interest with leverage you know these are the dig >> many times over right I mean kind of like they can they can lend out like >> eight times leverage you know we think these are these are dent crypto tractors no wonder they need regulation so that's a very risky business model these days especially if people can just with a

click move all their money out you know it's not designed for that kind duration of risk uh is not managed uh like that and so there I see really disadvantage now I have a product where I can deposit my dollars which are held bankruptcy remote and I still get the yield so I mean I would be really dumb if I wouldn't use it and now I mean these products or government market money funds they are aware I think with Fidelity you can open such accounts it's nothing new I think crypto just adds new rails makes it, for example, for me easier to get access without my bank and be able to use it in DeFi and repackage and rebuild it. So, I I think that's

great, you know, but I think that's what I message you. I learned with crypto that not every dollar is created equally and how different all these dollars are, especially from a risk perspective. Going back to this blue chip rating, what I also learned is for example USDC is only B+ rated because with USDC you still have some counterparty risk of circle. I wasn't aware of that and PayPal or even Ripple USD uh dollar is better because it's bankruptcy remote and it's a better setup. So these things really matter. And going back to to your question is yeah I think the breaking up this banking model they just got this deposit and could lend out and and

taking the spread. I think that's a bit uh breaking up and everybody says it's they're afraid saying okay credit for for small businesses will be very difficult but honestly most of these money went into hedge funds or or or a lot of other stuff and now I think just these two markets getting yield on your deposits and getting paid to uh lend out your money will be priced differently. So I think that's the pressure on the model that I see that these stable coins uh now offer will offer to to more users and and banks are afraid of bank deposit flights exactly as you said it because now they're getting more yield on their

dollars somewhere else. If I turn this argument around kind of if I'm a small business owner and kind of I want to get a loan from the bank. Um what they do is kind of they they look at um uh they look at me and uh my CV. They look at um my business plan. Um and then kind of they do some sort of risk underwriting to kind of see whether they think um I can make this work and whether they can kind of make their money back with interest. um kind of in in liquidity I actually need um some sort of well actually very specific capital IE in order to actually get a loan right so

kind of this entire underolateralized loan space kind of I mean we don't actually have to talk about the in between stages where kind of say for instance um uh in maker kind of you deposit rwas and so on um but kind of the really undercolateralized end of the spectrum is where most loans actually take place, right? Everything more or less everything that's not a mortgage um is severely undercolateralized, right? So, h how do you see that kind of migrating into uh the trusters realm or do you see that migrating into the trusters realm?

because kind of I actually see that as um the main skill set of banks that they have become very good at risk underwriting. >> Exactly. And it makes totally sense that they make it. So I'm afraid, you know, that's what I said. If I hold a stable coin and now some crypto team is giving under collateralized loans to market makers I think and I take a lot of risk and that's why I said okay maybe I I'm I'm just fine with 6% on on bold by not taking on all these risk because that's an old business underwriting business and traditional banking is very good in in in that and should be done by these people and the the role that crypto can play is that you say now depositing

stable coins for funding such companies that can underwrite the loans is now much easier, much more direct. So we already some years ago I talked to invoice financing companies that instead of getting a credit line from a bank would take credit from crypto investors and I think that makes a lot of sense as long as you you kind of have this regulated business and you're doing it in a diligent way but then again blockchain and crypto just become the the distribution channel. or just the the digital channels or rails for traditional financial products.

>> Cool. So, Michael, tell me what's what's next for liquidity? What should we watch out for? >> Yeah. So, um we really focused on uh building out the the ecosystem and the utility for for Bold. Um so being it you know kind of integrated in lending markets and then really beating uh the drum that people see this proposition understand that they get a a stable coin that can have the same similar risk profile like uh you know even better than USDC and die in this blue chip report that that were B+ and and Bald is a minus and getting a good yield and start using it. So that's really our

main focus. You know, the product is out there and now it it needs to be used. So we are really focusing in educating people, understanding the product proposition, the good yields we we achieved. So that's you know I told you you have the borrowing fees but um if you deposit the stable coin you also partake in liquidations and you can make 5% gain. So in these markets now where there were liquidations people earned great returns and just making them aware of that that kind of in this very risk adjusted way these are great earning opportunities that's really our main focus driving driving growth driving integrations and utility and I think that's the blue pen blueprint of

every stable coin holders and and that's really also the challenging part uh you know deploying the stable coin is always the easy part and we see that we have a lot of forks actually our model gets forked quite a lot and deploying it is the easy part. Building a user base, building utility is is really the the tough part. So that's our full focus. >> So where do we send people to find out more? >> Yeah, go to liquidity.org. Um there you have the website. Um there you can inform yourself. There you find front ends because even frontends are decentralized with us. So you have different front ends. There you have a very great and deep detailed docs and uh we have also a Twitter channel that's

the the main communication channel that's at liquidity protocol where you can follow us learn learn about us yeah and then help to push uh sovereign sovereign money and ethereum dollars. >> Fantastic. That's a fantastic way to go out um today. Thank you so much for joining us uh Michael. >> Thank you Feder for for having me. Hey baby.