Stablecoins Finally Found Real Yield

Transcript

bankloation. I'm here with K Sora. He is the founder and CEO at REI. Karn, welcome to the show. >> Thanks for having me. Appreciate it. >> And uh back on the podcast today, we're getting some extra help here. Avichel from Electric [music] Capital, who is an investor in Revichel, welcome back to the podcast. >> Good to see you, man. Thanks for having us. >> Ken, I'll just start you off with the easy layup. Uh what is REI? >> Yeah, we're we're an onchain reinsurer. We take in stable coins. those stable coins find their way to primarily US insurance companies that that capital lets them write insurance business they collect premiums percolates all the way back to this onchain capital layer uh and uh that's what it is we back 35 insurance carriers half a billion in business um and should uh should grow to

about a billion over the course of the next uh sevenish months. >> Cool. What do we need to know about reinsurance to be productive in this conversation? And why is a blockchain? Why are smart contracts the right substrate to build the frontier of reinsurance? >> Yeah. Yeah. It's look, it's a massive boring business. There's about a trillion in reinsurance premium that's processed annually across, you know, dozens of very large reinsurers. Munich, re, Swiss, Lloyds of London. All of it is basically just a pot of opaque capital. it's attested to kind of asynchronously uh and the product that they sell is a promise. It's a promise to pay their insurance company customers if things

happen. And then the second part of that is to prove that they can pay at a given moment's notice, right? And so u being onchain and utilizing onchain capital is probably the most elegant use case of of uh in my mind onchain capital and that it fulfills both of those things. We take in capital that anyone in the world can can see at any given point in time. Regulators, insurance, you know, insurance company customers, the insurers themselves, uh, anyone with a computer can see that we are good for their promise and that we're solvent at any given moment in time. It's also a massive pool of capital that they can take diversified risks and the cash flows back into this pool of capital being transparent. Um, uh, you know, something that's never existed before in

this space. So what part of the capital stack around reinsurance is blockchain tech doing this on smart contracts? Uh you know you're built on Ethereum using stable coins. Uh what part of that are you improving now? Is this like a um are you guys simply improving your the business model margins by using blockchains as your backend or what's what's really the secret sauce? What's the X factor here? >> Yeah. So so in two parts. Uh if you think about reinsurance as a product, it's another capital source for insurance companies. The first part is the manufacturer of of the product of reinsurance. The expense ratio is is lower. We're a much higher operating leverage business. We have a h you know

less than a dozen employees uh will be on track to be a multi-billion dollar insurance market. uh in comparison to legacy reinsurers that have tens of thousands of employees, legacy business, leg legacy infrastructure, that's a meaningful difference in just the expense ratio load. And we're the first to find scale on with onchain capital and build transformers into all D5 protocols that now use us uh or or we're composible with to pull in capital in a way that hasn't been done before in this space. And our viewpoint is at scale as we as we kind of proliferate through these borland markets as folks are using us our products on pendle u and the like that we have a cost of capital is competitive if not superior to practically every reinsurer in the world

um and so there's nothing special about money that is used as security collateral to secure these obligations and we think we could just form that uh at a lower cost to a greater extent that anywhere else u w within traditional insurance. Vichel, when you were talking to Kin looking at Ry at Electric, uh you're a VC, you audited things, you kicked the tires. Uh what got you excited about what RE is doing, what what it can do? Yeah. I So, so maybe zooming because you know VCs are very high level. So, zooming out for a second, the thing that that there are like two things that kind of caught my eye about this particular thing. Um uh and it's a you know if you step back and think about what is re what I think the way to think about it is there's this

regulated fintech business and it's a it's a registered Cayman Island you know you have to get licenses there's regulators there's there's rules you have to follow and then there's um the onchain piece and the smart contract piece. Um, and so kind of from an end consumer perspective or an end customer perspective, this just looks like a reinsurance business, right? It just solves the same problem. Um, but there are two things behind the scenes that that make this work much much better. So, one is the fact that if everything runs on smart contracts, auditing and regulatory compliance become much cheaper and easier. You know where your money is. You know how to track it.

There's a ledger. It's everything's super clean and and a lot of fints are about how do you move the money around and where's the money sitting. The second is uh I think the stable coin capital market piece is really really really interesting. I think we have this like a lot of people have the concept of stable coins and they're going to move money around and people want dollars and the way we think about this is okay you're going to have today you have a couple hundred billion you're going to end up with $5 trillion of USD stable coins on chain and all of these people are going to say yes I'm so glad I have dollars now wouldn't it be great if I can make 4% using treasuries and then immediately a large percentage of those people I think 20 30 40 50 maybe 80% of

them will say wait a I would like to make more than 4%. How do I do that? Uh, and so they'll go hunting for yield. And so the really interesting thing about stable coins, in my opinion, is that you have created a new capital market. You're going to have $5 trillion hunting for yield and they will want products. Uh, and so from a business perspective, yes, you have a fintech, but if you look at a lot of these fintech, you often have a very big capital markets function because so much of the job of a fintech is going to the capital markets and raising all the time. This is why like Blackstone exists, right? right? They take all this debt, they trunch it, they securitize it, they sell it to the capital markets.

There's pension funds on the back end. It's it's a whole apparatus. And what you've done is you've collapsed that whole thing now into a smart contract. And the stable coin markets are just the capital markets now. And so I think the future architecture of fintex looks something like what re is now, which is on the front end, it's a regulated fintech to the end customer. It just does the same thing. It just solves the same problem. It's built on smart contracts so that the the operations of the business are much more efficient from a regulatory compliance perspective and there's AI agents and stuff built in and K talk about that and then you have this capital markets piece which is a huge part of what it is to run a fintech and and that is just the stable coin markets onchain. Um so that architecture

I think is is what the future of fintech looks like. Uh and I think re is is the the first that's actually sort of pieced it all together and is making it work. So I think what you're saying avich correct me if I'm wrong and then K I think I want you to also hop in here is that uh you know there's $170 billion of stable coins on Ethereum that number is growing everyone's bullish on the total supply of stable coins in the typical reinsurance world providing capital to reinsurance is kind of just gatekept it's it's you know it's stratfi it's gatekept uh it's not accessible to me it's not accessible to most people on the internet uh and it's kind of just like the siloed Wall Street thing where you already need to have a bajillion dollars and know who to talk to and a vicual what you pointed to

is like oh there's this reinsurance business there's actually two parts to re we'll get into this later there's re the onchain part and then there's recover which I think is what you were alluding to a vual with just it's just the normal reinsurance business that part's nothing new it's the onchain part that's new and so instead of going to extremely uh wellendowed financial institutions who have a ton of capital who are interested in the yields that they get from reinsurance what Kin is doing here with Ry is simply pointing that opening, that funnel, that access point to onchain stable coins. And now whoever has onchain stable coins can get access to the yields that reinsurance provides. And so that's the democratization thing. That's the onchain, that's the blockchain ethos

thing. Is this correct? >> Yeah, that's right. So if you think about who's supplying capital to this market right now, it's pension funds, it's sovereigns, it's ultra high net worth individuals and certain family offices that want some exposure to a market that's completely uncorrelated with equities, with crypto um and the like. And you know what we've done is turned this into something that cuts up slivers of insurance risk and makes them tradable across all of DeFi, right? So there's secondary market trading at this completely uncorrelated, you know, economic value stream that now exists. And so yeah, that's that's a good characterization.

>> The thing I would add, David, I think is um so there's the the customer benefit piece of this, which is okay, now you can democratize access to to all of these. So from the capital market side, the other customer, the other side of the market here are the people that are purchasing the reinsurance. And if you think about a lot of fintexs, again, sort of 10,000 foot 50,000 foot view, you know, you can't really you can't really create or destroy risk, right? And so if you think about for lending or you think about reinsurance or insurance markets like there are there are like three components to it. There's the base rate and you're not going to beat Treasury yield, right? You just can't borrow money lower than that. Uh there is the risk that you're taking on uh from a from a customer perspective. So

if you're underwriting workers compensation or you're underwriting a 760 FICO score credit borrower on the consumer side or a 580 FICO borrower, that's just a certain percentage that gets, you know, imputed into saying like I have to lend you money at a certain rate to ultimately make this risk make sense. And then the third is the operational efficiency of the business, right? So if the business is more efficient uh at running the business for whatever reason, AI, crypto, stable coins, whatever, that then gets packaged into the net yield that the that the borrower of that money, the recipient of that fintex benefits and as a product has to pay. Right? So those are the three components. So you're not going to reduce the you know, as a as a as a startup, you have no control over the

Fed funds rate, right? You don't have any control over the base rate. Um you don't really want to try to underwrite better. Like I think that's a huge mistake that a lot of fintexs make is they try to say oh here's this pocket of people and FICO isn't good enough or like hey all the other people who have been doing insurance for 25 years are dumb like we have a better way to do it. That's usually not the case. Like usually these are pretty sophisticated market participants that have underwritten the risk correctly. So the the place where you have leverage as a business to to ultimately compete as a startup is to be more operationally efficient. So like from a from an ethos perspective, the I'm going to hit the capital markets on chain is like is very compelling in terms of democratizing access to phenomenal yields like you

know 12 to 25% yields for the average consumer they can now just participate. But from a business perspective, the thing to to understand is that because you can do smart contracts, which means you can do your regulatory function much more easily and efficiently. And because you can have a capital markets function that just says, "Here's a smart contract. Dumpt money into my smart contract." And now I don't have to hire a dozen people to go pitch all the pension funds all the time and pay these people $500,000 a year and yada yada yada. You have operational efficiency in your business. you've actually lowered the cost of running that function inside your business which then means you can go offer a lower rate on your reinsurance to those same customers. Uh which means you can actually eat market share, right? So ultimately from an investor's perspective or a founders's

perspective, what's compelling here is that the operational efficiency allows you to offer a product that's better, cheaper, faster and as a result you can get up market share and as a result you have as a startup you have a shot at competing because historically if you wanted to go compete in these capital markets you needed to hire 15 people to scale. It's just like a really brutal exercise and now you have an operational efficiency advantage. Like I think that's that's the other piece of this that makes this I think the right model for fintech startups going forward. And this sort of aligns with I think what we're seeing broadly. You know AI and you know modern platforms allow the firm to be smaller and operate at a higher scale simply because every you know individual has just more leverage to what they can do using using crypto

tools using blockchains using stable coins and then also using AI like keep keep companies small let them punch above their weight class. We're we're seeing this trend. We started this trend in crypto with things like, you know, UniS swap versus NASDAQ, you know, 100 employees versus 10,000. And now with with Hyperlquid, even versus Coinbase is like 14 people versus another thousand. And so I think the the firm is uh getting smaller because of AI and these tools. And so, you know, everything you're telling me of each makes a ton of sense. You know, we can operate more efficiently. we can disrupt you know slower moving uh gargantuan incumbents in the space using the modern tools but is that is that like a thousandx opportunity or is that just like a 30%

you know efficiency upgrade to a traditional business like why is this the big thing rather than like the marginal improvement thing >> I think this is rewiring of of ancient plumbing right so you know just stepping back fintex insurance companies a big part of this is hey u sophisticated underwriters every risk has a price there's a convergence to ultimately what that is and maybe excess economics or rents get kind of get stripped away over time part of the argument here is like again uh twofold production of the product cost comes down so marginal cost of production comes down and if you have a a you know set of integrations or edge like we do into internet capital markets

you kind of subsume the market o over time unless people can kind of competitively respond respond quickly. Uh the second piece is u you know while underwriting converges kind of to to what price you know what price every risk should have responsiveness differs between each of the market competitors right and so if you've got these AI workflows that take in information at the top end where the risk is originated or sold that passes through a bunch of different intermediaries always all the way to the capital all the way to the risk bearer that happens at differing rates and in places like insurance it happens incredibly slowly Right. And so there's a a future here where both like AI and onchain capital make a really step function difference uh to to the

fundamental plumbing that moves trillions of dollar. So it's not a 30% improvement. It is the potential to to eat an entire industry. I think what I would add to that is the specifically the market dynamics with financial products are a little bit different than let's say a SAS business um or a media business um or some other businesses um and the reason is that like a 10 basis point improvement in something like insurance is dramatic right like that is enough where you can go out compete everybody else because the the market participants themselves are often dealing with such large numbers at scale that a little bit of efficiency like 30% is like you you are like a hundred

billion dollar company right like you are going to crush if you're 30% more efficient as a fintech business um and it's because the market participants are thinking about numbers in very small increments right it's like if if you can improve things by a couple of basis couple basis points you win like everybody will just switch over to you and it's also because your counterparts often are very very rational so you know if you're talking about a business saving a little bit of money on on something that they have to do every year they're totally going to do Contrast that with um like like do you really care if you're going to save 10 bucks a month or 20 bucks a month relative to your $100 a month you know Air Table subscription or your notion subscription or your Slack it's just like too much work to rip it out and so

you that's not why you make decisions that way. But for for these financial products lending think about a mortgage like how do people decide where to get a mortgage? It's like well it's 6.3 over there and it's like 6.25 over there. I'm going to that person. Right? It's like these are tiny tiny improvements that you have to make in sort of the net rate that somebody pays and the entire market will flip. So if you're right Avichel, I think what is uh going to happen on the re side of things, you know, assuming in a vacuum that the concept and and theory of re is correct that you know re re is only a 30% efficiency upgrade in one direction but the size of it grows very very very large that if you were if you are correct about your theory that would be the outcome correct that's right and

and and not only that but I think this is what's so compelling from a startup perspective is that if you manage to do this on the stable coin side with the onchain capital markets the way that re is I think it's going to be very difficult for the incumbents to tap into that same efficiency right so like everybody's going to do AI all the fintexs are going to do it the banks are going to try to do it and I think the on on the startup side you execute faster and you have a real shot at workflow efficiency so every startup is going to do that I think it's going to actually take these the banks and the insurance companies and mortgage brokers and helilocs and credit card companies it's going to take them a long time to figure out how to tap into this the onchain

capital markets And so I actually think that's a that's a durable advantage. So so not only can you get big on the back of this, but I think you're going to be competing against incumbents that don't know how to do it at all because they're starting from zero. And they're starting actually even farther behind than they are on the AI stuff. Um because they have no they're like I don't I don't know how crypto works. I don't know how Ethereum works. I don't know how onchain capital markets work. I've kind of I'm kind of waiting for clarity to happen. there all these sort of points of friction and compliance and tech and whatever AI is already green lit right so everybody's starting to move faster on AI stuff so I actually think the companies that figure out the AI piece and the onchain stable coin piece the way that reh has actually

have more of an advantage relative to the incumbents and so you get big and you just start eating up the market share from the big guys because they're not going to be able to tap into the same efficiency pools that you are they can't basically like with AI I think there's an argument that the incumbents will be able to to to gain those efficiency improvements and that open AI and anthropic have these forward deployed engineering uh teams that they're building because that's where all the money is. So, they have to go to the big guys. They have to go to the incumbents to get the workflow optimizations and and the AI companies are going to try to make that happen as quickly as possible. And so, that's a that's a tricky place to be as a startup. Now, I think you can still obviously build huge companies there.

You can move a lot faster, but there's like there's no forward deployed engineering organization that's going into insurance companies and teaching them how to do startups to to do stable coins right now, right? So, so I think this ecosystem actually has a more durable advantage because the incumbents have no idea what they're doing right now with the stable coin markets. >> And that is that that is the bigger idea by the way, right? So like while I own a reinsurer and the protocol controls and on onchain, you know, vast capital ocean uh what will and is already happening Bermuda reinsurers, Cayman reinsurers are approaching us to be able to tap that pool, right? And so it starts to behave much more like a Lloyds of London where you have this common capital pool that can feed any insurer and any reinsurer in the world. And that is a

massive idea. >> I I don't know if you want to go in this direction but I think this is like a fascinating thread to pull on which is you see this in a lot of markets like I was an intern at Amazon um right before they launched AWS. Um, so on the software engineer side, it was really interesting because the CTO Verer was already talking internally about how they were going to launch these compute products because Amazon was built on all that infrastructure and they were just going to take those things that that they were using as the first customer and open them up to everybody else. And so I think the the other thing that a lot of people are not fully appreciating right now is I think there are a handful of fintexs, you're kind of seeing ramp do this with AI, but I think there are a

handful of fintexs that are figuring out that the AI workflows and the crypto workflows like Stripe is kind of trying to do this um or actually infrastructure and if you solve it for yourself and you really get the flywheel going then you can go offer that as your AWS to everybody else. So I think a lot of these fintexs if they're done well actually end up having a second act. So the first is like can you be a 10 billion dollar company on the back of reinsurance or helocks or credit cards or whatever and then your act two is I've solved my own problem and so now everybody else in my industry should be running on my platform and so like the eventual the eventual thing here is because there will be these choke points that are like hey in in K's case you know Munich and Swissy if you want to

access the onchain stable coin markets and this is a multiple trillions of dollars of capital market sitting here at a net lower cost than you can get in other places you got to go through our infrastructure and now you're monetizing the whole industry. I think there will be a handful of fintexs that figure that out, you know, per per sort of industry slice, whether it's insurance, reinsurance, uh, credit cards, helocks, mortgages, like whatever. I think people will start to figure that out as infrastructure as well. And I think that'll be the act two for a lot of these attacks. >> And you're saying that that can could be in theory act two for re here. So like the if we're extending the metaphor, Amazon once upon a time sold books and now it's Amazon and re once upon a time sold reinsurance and then it becomes

what? Sorry. Sorry. Yeah. Yeah. In in internet capital market for all of insurance, right? So so Lloyds it's uh uh you know the the >> it might be it might be worth talking through the history of Lloyds. I think people may not even understand how interesting Lloyds of London is as a as a business. >> Yeah. roughly 330y old insurance marketplace started in coffee houses in London. Um you know folks who were attempting to self-insure uh transatlantic trade um morphed into one of the largest insurance markets in the world. They have roughly 103 distinct underwriters from around the world that bring in business. uh the Lloyd's market market much like the reprotocol dictates who the acceptable counterparties are lines of business

capital requirements uh has a governance council that that kind of oversees all of this and behind it a very large pool of capital that secures the network for for a lack of better term. So a ton of our own inspiration comes from from Lloyd's and and uh that that itself is you know it has licenses in all practically every country in the world has laws that have been drafted that enable local insurance companies and underwriters to be able to transact on the network. That's the northstar for us. It's really interesting like I'm I'm such a huge fan of going back and reading the history of finance. Um because because finance and capital markets are technologies to allow us to coordinate and and share risk and then go pursue really big opportunities. And

so I mean Kin correct me if I'm wrong but but I think like if I say anything incorrect here uh you're you're the expert on this but you know I think if you look at Lloyds it looks like a DeFi protocol. Like when I first like understood it when K first explained it to me I was like holy [ __ ] this looks like a DeFi protocol. There's like a bunch of money sitting here. there's like a governance council. People come in and sort of like pitch their idea to the capital market pool. You sort of like section off the risk. You squint at it and you're like, "This looks kind of like Morpho and A and uh Silo and you know, you start squinting at it, you're like, "Holy moly, we just like reinvented Lloyd's London on chain, right?" And they just look so similar.

Um, and so for anybody who hasn't gone back and read the history of this stuff, I think reading about like the joint stock company and the Dutch East India Company and Lloyds of London and these things that have been around for hundreds of years, you look at them and you're like, "Oh, we're just doing the same thing now with smart contracts." Like the structure of these things as protocols looks very very very similar. It very it it rhymes. Like you can look at it and say, "Oh, this I get why this is going to happen in a very particular way." >> We don't say it too often anymore, but we used to say it quite frequently on bankless is we are just speedrunning the history of money and finance on chain. >> Yeah. Yeah, including including human coordination. Uh >> K, I want to learn a little bit about uh

the reinsurance market. Just how how big is this market? How many how much dollars change hands? What what kind of metrics can you put behind the market that you are going into? >> Yeah. So a trillion in premium globally about >> a trillion in premium that means like a trillion dollars gets paid. >> Yes. Correct. So so premium there's policies out in the world that are sold. In our specific case, we cover very plain vanilla, low volatility stuff like auto, home, workers comp, um, you know, a commercial property, the basics, very little >> because you're getting started, right?

So, you're starting with the basics, >> correct? Yeah. So, nothing that's super high volatility, nothing with a binary outcome that says I we destroyed capital or we we made a multiple of our money. Certainly, like you titrate that type of stuff in at at scale, but as of right now, low volatility. So, trillion in reinsurance. What I'll say about that, what's really nice about that, I think, is that it's law of large numbers, right? So, so you're not talking about like, oh, hurricane hit Florida or there's wildfires in California. That stuff is really hard to model and you have tremendous loss risk, but you know, like what are the odds that for some reason, I mean, maybe like if an asteroid hits the earth or something, there's a bunch of workers comp policies in Massachusetts and Florida and California that have to get paid out all

at the same time, but a lot of large numbers that just doesn't happen. And so, what that means is the business is really predictable. Um and so then as as like a capital provider into those markets, you're you're you're you know the bounds of what you can expect are very very well understood. Like you can you can run a spreadsheet model and it all >> right because once again we are not competing on uh K and re's ability to underwrite. We are uh competing on the ability to attract a large amount of capital to take advantage of the law law of laws numbers. So we're starting with the basics. We're starting with probably the least volatility thing ever >> kind of just to like prove out the market and like I don't know maybe K as things get larger you can insure more exotic things but like we'll save that

for later. >> Yeah, that's right. You want to build the muscles. You want you want to attract the underwriters around the world that have the specialty in that particular domain. Right. So if it's earthquake or if it's flood or it's fire, what you want to be is the capital source or the most sophisticated actors in the world to be able to tap this and and deliver economics rather than trying to kind of build that muscle entirely yourself. Um >> yeah, so so massive reinsurance market. This sits below even bigger insurance market. So we're talking about 7 to 8 trillion in just insurance premiums across health, life, normal insurance, property and casualty. Yeah, correct. Uh and so this is the stuff that you will buy from your broker or you'll buy on the the internet. Um uh and you know what you'll see is that even that starts

to over time kind of start to converge, right? Because you if you abstract everything away, all of it is kind of just supported by a massive pool of capital. Um and there'll start to be fuzziness around those edges. But so it's it's incredibly large. Uh 12 I think it's roughly 12% of global GDP. 12% of global so of global GDP is yeah the is the one trillion in premiums that are paid that like the >> the entire the entirety of the insurance market so the seven and eight 78 trillion of insurance plus the trillion >> one one uh framework I heard at at one point so I can't take credit for it I think it might have been I can't remember it was so I don't want to mistribute it but you can literally even think about the government as an insurance company right like what is the

government ultimately doing it's like you know fire and police and the army and like you know provides serviceare and Medicaid and the military and and specifically insurance services right it's like just in in case something terrible happens that's the stuff the government should do so I think there's an argument that actually like it's not like 12% of GDP it's actually like% cuz it's like all of the stuff the government actually like back stops ultimately is it's basically like the government is a giant insurance company >> but but with both guns yeah it's an insurance company with guns >> with guns yeah that's right $100,000 is up for grabs MetaMask and Ono are giving it away in the Ono trading competition.

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insure those those people and so you are a step further away from the risk but you also need to be larger as a result and so you're how do your how do you get paid? How does reinsurance get paid? Complete this like flow of >> Yeah. So, so, so insurance companies buy reinsurance for a variety of reasons like maybe they feel they're too concentrated in a particular you know geography or line of business. Perhaps they have uh you know faster than expected growth ambitions. Uh perhaps they want to diversify into a new line of business. All of that requires capital. Uh and so they they could go to market for it. There's a certain cost of capital for that. From a regulatory perspective, it tends to be advantageous to buy reinsurance because you have

these other regulated counterparties that could now funnel you cash that enables those ambitions, whatever they they they may be. And so, very likely, you know, your home insurance policy, your auto insurance policy or what you have, what have you, some part of it is reinsured by one of the major reinsurers, right? I I almost guarantee it. Um, and it's it part of it is diversification, part of it is just ultimately what's the ambition of the team that's running the insurance company and what do they convince their board to do. >> Is that just because there's there's somebody out there who's willing to take more risk for more yield and then somebody out there who's who doesn't want that much risk and will pay someone to take that risk and so there's you can kind of like slice up risk and yield in

any different way and that's kind of what in the insurance market does >> to to some extent. I mean like what what you would be looking at as an operator is hey I'm in a in a business that uh involves some risk right and and some volatility uh I want some part of my economics to look much more defined and like fee like right and so as as a somebody who's running you know the bankless insurance company you'd say I'm much happier earning 20 or 25% for just originating the insurance policy you know servicing the insurance policy and I want to send the risk out the door or at least in some part so that I can dampen volatility in my earnings. Right?

There's there's a very specific purpose for reinsurance and it is as a capital source that helps to achieve that end. >> Okay. K tell me say I am a depositor of USDC or stable coins into RE. >> What do you do with my money that I just deposited? How does that get into the system and what what does that do? >> Yeah. Yeah. So, so as a stable coin depositor, you'd end up in kind of one of the capital tanches that is of varying degrees of risk remoteness and liquidity. Uh, at the bottom of the, you know, the capital stack is our own money. And so, one of the ways we've been able to convince, uh, the DeFi market that we're a credible place to park capital is by putting our own capital at risk and eating what we cook,

right? And so there's roughly 77 million in our reinsure assets that are are on underwriting risk today and act as first loss. There's a reusde product which is kind of like a mezzanine layer that is relatively high yielding uh less liquid that folks can park their money into receive a deposit token go do things in in DeFi and then a fairly liquid uh senior layer called RUSD uh which is minimum doubly overcolateralized very remote from insurance risk and is you know there's all sorts of markets have popped up around this already on Morpho and Fluid uh on Pendle that uh you know folks folks take advantage of today. Um, and so that's the capital

structure, but critical to all of this is we are the only folks in market that eat our own cooking, put our own our money where our mouth is and and uh protect the depositor capital ahead uh ahead of everything else. >> So when I deposit stables into re does it does you guys just hold on to it or do you guys take it into tradi and you know >> Yeah. So so there there ends up being two components to it. Um the kind of the beauty of the insurance business is it's not a lending business. It's like going out the door right away.

>> A big part of our reason to exist is to prove to the world that we have the capital in case certain things happen on mass, right? Um and so there there remains a significant amount um on chain and risk-free and related assets. And then as capital is called for by insurance companies that finds its way through a transformer in the form of a regulatory compliant note uh that ends up in segregated trust accounts. So it's all kind of risk-f free assets assault bankruptcy remote and segregated utilized by the insurance company and then returned by the insurance company.

That's that's the basic flow >> and that only happens when somebody needs to get paid out because like something bad happened, right? I don't know if there's a technical word for this in the insurance business. It's it's actually um it's actually kind of more mechanical than that. So, you know, each of the insurance companies is regulated. They need to show solveny. Part of their solveny is showing reinsurance credit. And so, there are distinct points in the in the year where they need to check a box that says, "Hey, capital has moved into a trust account. It is available in that trust account um for any sort of adverse development." And as time passes, premium earns, risk risk is removed, that capital comes out the other door.

That's that's the basic flow. >> And then and then retakes it and puts it back on chain to provide the yields to the depositors. >> Yeah, that's right. >> Okay. One one way to think about it kind of mechanically for reinsurance business is like um the government has certain collateralization ratios. So because the numbers are well understood here, what you can do is you can say I will put a dollar in a in a in a trust account, a segregated account and that serves as collateral for up to5 to $7 worth of written premium. So let me let me know if I misspe anything I think car >> what that means is that you're essentially right if those people because they're looking at these as large a lot of large numbers they're like well I could borrow money myself at

like 4% right or five 5%. what you have is essentially that dollar is levered right five to seven times and so in effect that pool of capital can earn 5x the risk-free rate right so that pool of dollars because it's underwriting $5 essentially that have been lent out and you know you only have to pay a certain amount out you're actually making like 20% [clears throat] on on that um and so then you do have some loss ratios you do have to pay a certain amount out the business needs to take its cut and so you can very quickly back of the envelope you can say okay well if you're if you're operating like a 5x leverage ratio here. Uh that pool can make 20%.

You take out all your fees and now you can see why uh the people who are putting the money into those smart contracts that's getting offboarded into these trust accounts could make 10 12 14%. Right? It's it obviously these things are variable. There's a lot of risk. Not investment advice in any form, but you can very quickly do the back of the envelope math. And now you're starting to talk about um return for stable coin holders in the teens, but in a way that you're like, wait, I understand the risk here, right? This is not [clears throat] like a Terra Luna situation where it's all, >> you know, exogenous to crypto and it's all self-referential and when it unwinds, it unwinds in a terrible way.

This is like totally uncorrelated risks, geographically uncorrelated, sector uncorrelated, uncorrelated crypto. And I can see why if if the company can make 20% on the money, why I as a capital provider into the company could make init. So just so I'm getting the flow, there is stables that remain onchain and th those get kind of like the onchain rate, the Athena rate, uh the yield rate that you get from USDC onchain just because why not obviously and then re takes some of that capital and deploys it where it needs to to collateralize other insurance companies because that's just what's required in the industry world and and to be compliant and you know solvent. that money is like the productive money that's like collecting

the fees and you know earns the actual yield. So a little bit of money comes out, a lot of money comes back in in the happy case so long as no systemic thing happened that wipes out all of insurance. Um and so a little bit of money comes out, a lot of money comes back in and then that gets added back into the pool and turns into the yield that the USDC depositor like me put in there in the first place. >> Yeah. Yeah. So, so just to be sure, there are exclusions for the systemic things. Those aren't a real thing in our business, but uh yeah, fundamentally that's it, right? So, the insurance company pays us premiums. Those premiums end up being investable float, right? Uh we layer a safety cushion over on on top of this to absorb any sort sort of

volatility. A law of large numbers says if we do this across hundreds or hundreds of insurance companies, our results are very very stable. Uh you know, we've got 51 active insurance uh treaties today. we'll get to the hundreds in short order. And so volatility continues to dampen uh kind of as that happens. And then, you know, if you zoom out a little bit, this is this is exactly, you know, insurance companies and asset managers go together like peanut butter and jelly, right? Like what we're seeing is a whole bunch of premium come in at zero cost of capital that could be invested at the risk-free rate or if you're Bergkshire Hathway, it's invested amongst their their asset management arm and generates a return that's kind of implicitly levered as a result of that, right? Um so yeah, Berkshire has Geico and has

Genri that that generate all this premium float ends up being invested. Apollo has Athen you see this kind of everywhere. Uh but yes, investment income kind of a lever position risk-free rate plus uh the insurance margin because because you still expect to make money on the insurance is the totality of the economics. >> So then in that case, what are the vectors of success that you really have control over? Because we're not trying to we're not trying to improve on underwriting, you know, we're not trying to mess with any of that. you know, they they figured that out. You're trying to just like access more and more capital. So, Karen, when you wake up in the morning, what do you think about like what how what what are the numbers that you want to make go up in order to make the the whole startup successful?

>> Yeah. So, so look, I I think the business ends up being a function of how much capital we have that that we're able to deploy and and the reason the reason for that is as we go to market and we talk to these insurance companies, a big part of it is like, hey, they like money. They want to know that they're working with a counterparty. It's more efficient. That marginally is going to cost them slightly less over time. The as we talked about the production of the product of reinsurance uh can happen as low as possible cost now because of these convergence of these technologies. Um so so I think about TVL formation. I think about bringing in so capital and I think about human capital in a sense that there are these existing relationships. there are these understanding of these markets locked in

in like the heads of people who have managed these multi-billion dollar books of reinsurance business and how do I attract them u you know to read and so uh that's how I spend most of my day it's like thinking about uh TVL formation and who to who to bring on to the team to kind of continue to accelerate the top line um and so far we're doing a pretty good job of that you know half a billion in business is nothing to sneeze at uh it be one of the the very few D5 protocols at a billion run rate u over the course of the What what are the yields that you get? There are two tanches. So there's the senior tunch and the junior tunch. What are the yields that you can get? Uh do you know that?

>> Yeah. So for the the senior the senior tunch is fixed. It's a it's 250 basis points above risk-f free. Um and then for the mezrunch I think it's between 800 and 850 depending on what's deployed. >> Okay. So 8 above risk free or >> above risk free. Yeah. >> Okay. This once again a bip is 850 bips is 085% above risk-f free. >> So eight and a half%. >> Eight and a half percent. Okay. That's that's more like it. Okay. So the risk-free rate is something like three or 4% these days. >> Is that about right? 12. Yeah.

>> Yeah. >> Yeah. That's fair. >> 12. Okay. >> Correct. Yeah. So, so then why would I ever buy Stretch if it if it deps and goes $8 off of its peg and it's only giving me 11%. And you're telling me that I can get like 12 point something%. >> W with all the collateral attested to all in in segregated trusts. Yeah. >> Right. >> Which which >> Well, David, I think you're you're hitting on exactly the right thing here, right? which is like I think the thing that has been missing for so long and but we talked about it for several years in crypto is the productive use of capital, right? This is a capital market. You're going to take these dollars and you're going to do something useful with them in the world. And and again, I would really recommend people

go read the history of why things like insurance or reinsurance exist in the first place. But they unlock people, right? They unlock productive formation of capital. They let you go build a factory. They let you go build cars. They let you go do stuff in the real world. It it lets a small business go run their business and be a dentist because you can have liability insurance. Like all of the these like things are actually productive in the real world. And so rather than this being like some feedback loop inside a crypto based on you know the price of the asset and if the asset unwinds then your yield gets destroyed and you're in a death loop because you got to sell the asset to pay the yield. This is actually uncorrelated and it's going into the real economy where it's funding things where those businesses can can make 18

20 30 you know if you have a business that's growing 40% a year because it's a real business then yeah you're happy to buy insurance on that business because it's growing 40% a year right and so that's a real productive use of capital um and so that money flowing back is I mean this this is the glue we always talked about right is like actually this is you're now having real net productivity impact in the world and that that's not fake return that's real return Um, >> which I think is awesome. I mean, that that was always the promise of this stuff is we're going to glue it together. It's actually finally happen. I think it's so funny, too, that it's happening in the in the bare market because this is what always what happens, right? We like had all this hype about this kind of stuff 5 years

ago and then and then, you know, DeFi looks like it's dead. But now you can actually wire everything together end to end between regulatory being clear and the stable coin markets being clear and smart contracts working and the fintech people having figured out how to offboard. It's like all of the infrastructure now exists to finally do the thing, but it's the depth of the bare market. So, nobody's paying attention. Uh, and so by the time people figure this out, you know, we'll be like kind of raging bull again and people will be like, "Oh yeah, why wasn't I paying attention 18 months ago?" Um, but it's I think to me it's really amazing that all the pieces now fit and it actually works end to end. You know, these guys are it's it's not theoretical like they're actually using the dollars from stable coins to go do stuff in the

real world with them. >> Yeah. K, you mentioned when uh people come and deposit USC, they get a receipt token representing the collateral inside of the system. Uh, you know, speaking of what Avichel just said about puzzle pieces fitting together, that's a puzzle piece that you are allowing to go into DeFi and DeFi people can do DeFi things with it. The first thought for me is looping. Uh, can I go and take that receipt token, collateralize it, you know, get a loan on that, put more USDC into the pool and like loop up my yield position cuz like don't you expect that to happen?

>> Yeah. Yeah. So, so it's happening, right? So, so we've had uh we've had a number of the top tier curators do their risk assessments on our products. Uh Steakhouse um you know Chaos Labs uh has looked at at us um and you can now yeah you can loop against uh reproducts on Morpho on fluid and a bunch of other borland markets. >> What what kind of yields are they paid out? Uh so on on a fully loop basis I I think it's got to be high teens low 20s uh is my last check. Um but you know that that >> do those things make you nervous or I mean you're what you've been saying is

like yeah you give lowrisk insurance to very stable like outcomes. So like I don't know I I've done pretty stupid stuff with that money. I don't think like kicking the tires just with you guys right now that doesn't seem like the stupidest. >> Yeah. So, so from my perspective, right, I I think what we care about is making sure that we we take in the capital. We show the world that, hey, on a riskadjusted basis, this is a great place to park stable coin capital. We have less to say, less to say on what people decide to do in broader DeFi, right?

>> Uh kind of of their own valition. um that's to everyone's own kind of >> right >> risk outside of your >> and and honestly yeah not not giving financial advice in any regard but the the infrastructure is all there >> yeah but yeah but you're stoked about it because any growth in the looping product ends up with just more stable coins inside of your product which is what you want in the first place >> which is what which is what will say with like look at these capital markets that are available this is what that that looks like >> that's right yeah it it just it makes the the product and offering more compelling and yeah it helps capital formation for sure.

>> By the way, this happens in Trophy too, right? So so this notion of of looping as we call it in DeFi. It's like this this is like the the financial people have all figured this out, right? It's like hey, I got some relationship with the pension fund, they're letting me borrow at 4%. and like these guys giving me 12 and like if I just like stack that a few times I'm just arbiting the spread and I'm taking some some risk that that that thing like you know if if the risk is greater than I thought then like I eat in my own margins but like you know leverage and and what we call looping which is like borrowing from one place at some rate to go invest it into some other place that has a higher rate and capturing that spread. That's that's that's what finance is all about, right?

And then the question is can you find capital providers that will continue to lend you at that at that rate. Um so yeah I don't think there's like anything untorred about it as long as people understand the risk that they're taking and people understand you know when when and when they can't get you know incur losses and that sort of scenario >> right >> uh K the retoken is coming or is here today because that's why we are recording this podcast and releasing it today. What is the retoken? What does it do? How does it function in the system? Yeah. So, so it's a governance token for the the re ecosystem. It's intended, you know, as we discussed, kind of emulate Lloyds of London governance. So, it dictates who the acceptable counterparties are, lines of business, what capital is required, and it governs

importantly the common pool of capital, the size of that capital when it gets released, um, uh, the economics that acrew to the network kind of, uh, over time. And so, that's that's the goal. The the beauty of all of this is that we're not inventing anything new. This is like 330 years of uh of evolution in the insurance market that's found its way on chain um as a starting point. >> What um so Lloyds of London it it was the model of this token as you said. Um what was what's the incentive to govern?

Why would I govern? Why would I care? >> Yeah. Yeah. I mean it it has the potential to be a enormous sum of money that protects tens of millions of people around the world and that has an investment policy that access is is valuable where it's pointed to is valuable um uh in in you know every asset manager and every reinsur insurance company in the world should be interested in this right if we are if we are in a position to be putting tens of billions in whatever the secular trend of stable coin market is into a pot um that is now accessible to this broad market. It you know it it uh it becomes a really high lever tool for for folks

to to be holders of the governance token. >> Mhm. Right. So if you have a lot of the governance token you can allocate cap the capital of the system towards certain endpoints. you as a large holder of the token have some sort of like internal alignment with it because if you choose poorly if you are corrupt then you're you know invalidating the value of the tokens that you hold and clearly you hold a lot because that's why you you have the power and influence in the first place. K, this has been just like the broad concept of like governance tokens in DeFi and and the philosophy about why they are valuable in the first place. Not most of them have not worked that way. Uh just if you look at the price on the market and

there's been sometimes the product themselves didn't follow through. Sometimes the product did follow through but the token was a governance token that didn't capture value. Why will this one be any different? >> Uh there's a real business with massive cash flows behind it, right? Um and so if you think about uh a a central fund analogous to to Lloyd's the economics that it acruse the uh economic dispersement or accumulation to protect the network and to protect insurance companies uh there is there is a a sum of economics and cash flows that can perform multitude of economic actions that that show value here. So I think what you're asking about is like governance and and distinction between value acrruel. Uh, I think it is super

valuable to potentially be controlling the largest insurance capital pool on Earth over time, right? Um, and uh, and the the the knobs and parameters that dictate kind of how it moves. >> Cool. Cool. Uh, Carton, when we log off of this podcast here in a second, what are you going to go do back at Re? What do you What do you need to go get your fingers dirty with? What's on the near-term road map? What What are you trying to get done like this quarter and this year? Yeah, it's you know I TGE is is a trying experience. I'm glad that that we're kind of past it. We have a real business to run. I we're running at you know adding a couple hundred million more new business over the course of the next couple months. And then we're

gearing up for Jan 1st 2027 which is when the insurance market kind of turns over and renews to crack a billion um in premium. And so we're no we're no longer you know a toy. We're no longer kind of conceptually interesting. It is a real market player with real market access and and capital to boot. >> Vichro, this is a question for you actually. Um there's a lot of Dgens on chain. In fact, it's kind of one of the few players that are left there. It's like basically Dens and Wall Street building on on in crypto. Are all of the the relevant parties that are interested in what RI is offering the the yields the 12 14% yields the reinsurance yields are they on chain? Like do we even like we talked about the stable coin capital

market. Sure that it totally exists. But I don't know if the parties that RI is interested in in collecting their capital to are on chain yet. Am I am I wrong in that or is there more people to bring on chain uh for the future of RE's growth? >> I think there are a lot of people still to come on chain. I mean I think the entire insurance industry ultimately you know needs to be here tapping into these capital markets. So again, if we go to this future world several years from now where there's five or 10 trillion dollars of stable coins slloshing around and it's just because it's the most efficient way to custody and move these assets and track where they are that the entire financial world should should move here. Um then a b a bunch of that will want to see healed and a bunch of

that will find its way to to these pools. And so you know the the onchain capital markets I think there will come a day you know um like 20 years ago 20 let's say 25 years ago let's say circa 20 the year 2000 right um there's this notion of going online and so you say like oh I'm offline >> uh and and I think onchain is kind of like that where people talk about onchain capital today or we talk about stable coins and I think there will come a day somewhere in the next decade where we just stop using that term like you can't be offline today there's no notion of being online or offline. It's just like, well, it just kind of merged. It just became the same thing, right? I think the same thing happens with onchain versus off-chain. And so, when we hit 5 trillion, it's not going to be

onchain capital markets. It's just capital markets at that point, right? Um, and they just kind of blend together. So, there's a long way to go to get all of those market participants that that need to be around for for around the table for that to actually happen. And I do think that happens over the next five years. Now, what's interesting is we've always thought about that, right? We we've been talking about like our thesis at electric back in 18 when we started was this notion of programmable money. We've always said that that's going to happen. I think the thing that um and by the way we can't take credit for that term. I think that term has been in the ether for a while, no pun intended, but but that was like our thesis paper that we wrote that said why should we even do this? And I think

the the thing that um the builders did was they created all of the supply like we created protocols, we created looping mechanisms, we created you know um Morpho Nav and we got gauntlet and stakehouse. We got all these components that are like hey I'm ready to go and the thing that was missing was the demand. It's like well why is somebody going to bring their stable coins in here? Why is somebody going to do asset management on chain? Like why is that going to happen? And the thing that we needed was that final last mile was I need to be able to take these assets and and get productive yield from them. I need to be able to do something useful with them so that the person who is holding this token or is putting the capital at risk knows that what they're

getting is 6 8 10 12 14 18 whatever percent. And I think that is what's starting to happen now. So I actually think like a lot of the plumbing exists like you're talking about the looping. The plumbing is in place to make the flywheels work. The last thing that we needed was the demand side, right? It's like why do the stable coin holders want to do this? Why do they want to put it into the plumbing in the first place? And it's to get yield. And now we can actually get productive yield. Um, and so that I think gets the five going. And then once the flywheel is going, then the bigger capital providers just look down chain and they're like, well, that's where I should be. That's where the money is. That's where the efficiency is. And so then the whole thing starts to at least that's that's

our bet, right? I think that's that's probably what the next 5 to seven years look like is now that the demand is all plugged in, the flywheel starts to work, the loops start to work, the the capital providers on chain start to work, and then the big guys start paying attention and have to move on. >> Mhm. >> K, the uh name of the podcast is Bankless. Uh we started it, you know, back in 2020 with the idea of like, oh, taking control of one's money because why would I put my money in a bank that's giving me 04% yearly yield? uh and they get to go do exactly what a vitual is saying, make it go productive.

Uh but they get all the productivity out of it. We get none of it. So what are we doing? Giving them the finger and we're going on chain. Uh there has been a number of products uh integrated into Coinbase uh that have kind of been uh of the DeFi mullet thesis. Um you know uh fintech in the front, DeFi in the back. Uh we got uh Morphos in there giving Bitcoin loans, Athena's in there now giving giving yield. Could you see re being like the new savings account? Is that an appropriate way to illustrate the product? Is that not is that not responsible in the same way some people are critiquing Sailor calling Stretcha a savings account? Like do you see the DeFi mullet thesis kind of playing out for just being a a funnel for capital

for real? >> Yes. So I mean c certainly like the the current state we are defi mullet right. We we run a traditional reinsurance business on the front end. We've got the machinery on the back end that is abstracted away >> but elegant and people will want to access >> the if you think about what reinsurers and insurance companies become in the limit they become the largest asset managers in the world right uh and so there there is a pathway here to something that's a little bit more diversified I I won't profess to having designs on that right now because I think there's tons to do in reinsurance and insurance generally speaking but as soon as you get you know you know you You have entities that are writing hundreds of billions in premium. There are natural segways and their natural their natural paths into other parts of

finance. >> Mhm. Avich Kin, thanks for coming on the show today and teaching me all about reinsurance and re and good luck with the TGE and I hope you guys cross a billion dollars sooner rather than later. >> Thanks man. Appreciate the time. >> Good to see you. Cheers, guys. Bank station, you guys know the deal. Crypto is risky. You can lose what you put in. Insurance is also risky as well. That's kind of the whole point. But nonetheless, this is the frontier. It's not for everyone, but we're glad you're with us on the bankless journey. Thanks a lot.