Why Oracles Are DeFi's Achilles Heel and How to Ensure They're Not Manipulated

Transcript

Sure. I mean, at that it's uh people didn't know what they were buying, right? They were buying an SPV on an SPV on an SPV, right? They had like secondderee, third degree exposure. >> Hi everyone, welcome to another episode of Bits and Bips the Interview. I'm your host Steve Erlic, head of research at Sharlink, and we've got a terrific episode for you today. But as always, before we dive in, just a little bit of housekeeping. One, nothing that you hear or see on this episode should be considered investment or financial advice. Please see unchanged crypto.com/bitsandbbits for full disclosures. And second, before we dive in, let's hear from one of our sponsors.

>> This episode is brought to you by Cape, America's privacy first mobile carrier. Same premium service you'd expect from any other carrier, but designed so your number, your location, and your data actually stay yours. Get 33% off 6 months at cape.co/unchained. >> All right, welcome back. So, I'm here today with Nicholas Kungl. He is the founder of Chronicle Labs, an Oracle provider um supporting um the entire DeFi space with a heavy focus on on tokenized assets and um and we're going to talk about sort of the the landscape of DeFi where um the growth of tokenized assets and how they're being integrated

into the plumbing of the entire financial ecosystem and and really kind of one thing I really want to get into is how we can sort of understand the differences between various Oracle providers given how critical they are to this to this space and uh and explore how uh the industry has sort of dealt with certain challenges over the years as well. So, a lot to talk about. Nicholas, welcome. Thanks for joining. >> Yeah, thank you for having me. Um huge fan of the show and I I watch almost every episode. Uh so great to finally be on here.

>> Okay, that's that's nice to hear, nice to say. I I keep trying to get my kids to watch and they they are not interested at all. Uh so all right so let let's really kind of get started because Chronicle and and yourself it has a pretty interesting background. Uh I mean you've been in crypto for at least a decade at at this point and um it's kind of started with uh with Maker Dow the die stablecoin sigh uh I think now it's called USDS etc. Um it's a really fascinating project because it in many ways created the entire DeFi space.

And what I find most in uh impressive is that it's really never it's hasn't gone down. I mean just like uh Ethereum itself like it it's it's operated um through bare and bull markets alike and it's one of the real success stories and that's sort of the the origin story for for yourself and and what you're building at Chronicle Lab. So, um, maybe just for anyone in my audience who's not familiar with your background, could you just please walk us through what those early days were like and sort of how spawned the idea for Chronicle? >> Absolutely. Um, yep. So uh you know my background right uh I was part of the founding team of of maker and uh you know I think looking back it it seems

kind of like manifest destiny but like at the time you know there wasn't really any defi you know the only stable coin was tether um and there wasn't like a ecosystem of say dexes and and lending protocols right uh you know uh so I think It was quite forward-looking at the time to say, "Oh, there's going to be this DeFi and at the center of DeFi, there will be these stable coins and uh we don't want centralized stable coins where we want a decentralized stable coin, right?" I think uh like in in hindsight, it all looks very obvious, but at the time like it was very like out there and like experimental.

Yeah. >> Um, and so even like Ethereum as a chain, like W maker was originally built on Ethereum. Um, it had only been live for maybe like less than a year. There weren't really any apps on it, right? Uh, at least nothing nothing serious. Uh, so we really had to build everything from scratch, right? And and this is really kind of where like you know my journey started with respect to oracles is that uh you know one day we were building a debugger because there was no solidity debugger right one day we're building a dex because like it was actually the first dex on ethereum um

and it was because uh maker didn't have any funding and we're like how do we get funding? Well, if we build this like thing called a DEX, like we can sell some tokens and we can get some funding and maybe we can pay salaries this month, right? Like it was very much uh DIY build everything on your own, right? And and that included like oracles, right? So, >> uh this notion of an oracle didn't really exist, but we knew we needed a way to like externally price something in a uh kind of trustless manner. and and that really kind of was the um I guess like what what set everything off for me.

>> Did you call it or an oracle then or what did you actually call that that um and what you needed correct me if I'm wrong is you needed to be able be able to understand the price of ETH because that affects the the LTV for the um the stable coins that were borrowed against that collateral. >> Exactly right. And so the way maker works in a simple way is you know you could lock up your ETH as collateral and you would borrow die stable coins against that. Um and so the protocol needed to know how much is an ETH worth, you know, both for uh determining the initial amount that you could borrow, but also just um check maintaining like the um collateralization, right, of the system over time, right? So if the price

of ETH dropped, it would know which uh loans it would need to to liquidate. >> Yeah. Just going back through a little of the history of of this myself as I was preparing for the show. I didn't even realize this, but it seems like a lot of the I guess the individuals that were those early day price providers were actually sudonmous because there were concerns that uh if they were identifiable, there could be pressure for them to man manipulate the price and thus manipulate the the value of of die. And it seems very it's almost like the antithesis of where oracles are today where it's named participants who provide that information and I'm generalizing across the whole span of oracles but in exchange for for compensation. So it's really kind of

fascinating how to me like that you saw a security threat with that and and I I guess we're overly cautious or not overly cautious but but perhaps appropriately cautious to maintain the fidelity of the price feeds. >> Sure. I mean uh when you look at a D5 protocol right the Achilles heel of any D5 protocol is its oracle right it lives and dies by its oracle if uh an oracle prints that ETH is a trillion dollars uh anyone can just go and drain all of the liquidity out of any lending market out of any you know um credit protocol right similarly if the oracle reports ETH is zero uh you can liquidate you know all

of the ETH positions, right, in a lending protocol, right? And you could start, you could potentially trigger, you know, if you're looking at the likes of A and Sky, uh you could potentially trigger like a liquidation cascade on ETH, right? That has far more second order effects than just the uh the the onchain liquidations. >> Yeah, absolutely. And um I guess just just to level set for for my audience. I mean most people probably know what an oracle is at least at a high level. Uh but could you just briefly talk about like how deeply oracles have penetrated crypto? Uh I mean not across like different types of

either assets or or or different DeFi protocols. maybe put a few dollar amounts behind it in terms of u either like like like TVs or or the amount of uh like daily defy activity that I mean I guess in a certain way almost all of it would require some degree of an oracle to understand price but could you just sort of ground that in some numbers for uh for the audience? So I I think it would be easier to say what are oracles not touching okay in crypto than uh than to go the other way around. Um you know uh in simple terms right an oracle is like an a data reference right so you have some data somewhere and that

somewhere can be you know uh offchain right it could be another blockchain right and it needs to be transported to wherever that data is needed right so um let's use like ETH as an example right you're fetching prices from all kinds of centralized exchanges from coin Coinbase, Binance, you know, OKX, Bybit, right? You're combining that with onchain sources like, you know, unis swap. Um, you may even be combining that with like, you know, the ETH futures, you know, on on CME.

>> You are aggregating all of this information uh and then you are you're shipping it off, you know, to the the blockchain, right, where it's needed so an application can consume it. And the the primary two things here right that Oracle needs to kind of concern itself with are one what are the data integrity guarantees right how do you ensure that this data has not been manipulated and two what are the data availability guarantees right how do you ensure that this flow of data continues and and doesn't you know doesn't just stop right because uh you know the the second worst thing to happened to an oracle is not

that it prints a wrong price but that it just like stops printing any updated price right and now a D5 protocol right has no idea whether it is solvent or not or whether it is issuing you know safe credit safely or whether it is like issuing credit at a loss >> yeah that's yeah I mean all those points make a lot of sense and I think uh anyone that's followed the DeFi space over time has seen some of those concerns or risks really come to to reality. I mean, we can talk about a few of the various sort of issues with price from like the mango markets exploit, which was a quote unquote very profitable trading strategy to u to even what happened on on on 1010 when I think

it was what was it like USD price was different on Binance compared to other exchanges >> and I I think I think those two events are very different though. finding ways to have accurate pricing also harmonize it across like various platforms and stuff. So there's not those like there's there's not those sort of hiccups that can lead to liquidations and etc. Um it just underscores the importance of the work that that you guys do. So, let's talk a little more about Chronicle Labs in particular because uh one of the things I found really interesting about your company is how how you really focus on RWAs now and in particular making sure that when someone buys a tokenized asset, they can be sure that the asset

uh the underlying collateral is actually uh there you maybe at the DT DTCC or or or just it's it's not a token that's minted out of thin air. So can you talk a little bit about what you guys do and sort of the problem that you're trying to solve? >> Sure. So I I don't think it's actually you know our um you know it iterating right and expanding into tokenized assets is really all that uh surprising or different from what we previously did. Um, you know, the role of an oracle is to preserve the integrity of of DeFi.

And when DeFi was just using kind of cryptonative assets, right, like uh a bitcoin or an ETH, that was actually relatively simple because the protocol, right, was holding on to the actual asset >> and so it just needed to know how to price that asset. Um, with the expansion of DeFi into tokenized assets, I mean there is an incredible uh opportunity here um to you know one not just like expand DeFi out of its like very like self-contained

scope, right? and open it up to, you know, the entire ecosystem, you know, catalog of financial assets that are out there, right? And this is incredibly attractive for everyone involved, right? From an asset manager, um, you can say, well, I want to give my clients, you know, more utility with their assets, right? So if my client can you know lend this asset uh to earn a yield you know now I can provide like more utility to to my clients right and so um I think if you're looking at like a a black rockck or fidelity right that's very very attractive to them right from a DeFi

perspective I mean we're about to um you know take this from a $200 billion market right to a potentially you know hundred trillion dollar market Um, however, there is a there is a risk here, right? And it's that uh tokenized assets, right, are not cryptonative, right? Um, and so regardless of whether they are, you know, what you would call like a wrapper or whether they are like issued actually issued on chain, but like the underlying assets are are sitting somewhere offchain, right? that presents a whole new problem, right, for DeFi to deal with.

And so it's actually imperative, right, that uh oracles are are keeping up, right, and are ensuring that DeFi through its integration of these tokenized assets, which I absolutely believe is necessary and critical, but that DeFi protocols can like maintain their uh integrity and maintain this like anti-fragile property, right? Like you mentioned earlier, right, that like it's amazing that like Maker has like, you know, survived, right, for not just survived, but like thrived for 10 years. And that doesn't just happen, you know, through serendipity, right? That comes through like very rigorous analysis of like every part of the system and like every edge case that you can find yourself with and really just like

mapping out like how the protocol should respond in every single scenario. >> Yeah. And as soon as you as soon as you open Pandora's box with tokenized assets, that problem becomes a lot more complex. And so, you know, as an oracle, like we're here to simplify that. We're here to say, okay, here is this tokenized asset, and we can provide all of the metadata related to all of the context that comes with that tokenized asset. So a uh lending protocol like a morpho, like an a like a sky um can handle it in a you know uh responsible riskmanaged manner.

>> So let's let's ground this in just like one or two tangible examples. U one of your uh one of your clients is Black Rockck and I I believe it's uh supporting their their tokenized treasury fund Bidd which which is the largest in the world. uh talk to me about specifically what you are are doing for them. Um how like what are the services? How do you um Yeah. Yeah. Just kind of please walk us through like that relationship. >> Absolutely. Yeah. So um very important relationship for us, right? I mean Black Rockck is the largest asset manager in in the world. Mhm.

>> Um and you know they recognize right the need for oracle infrastructure when it comes to tokenized asset. So when you have something like Bidd um from a protocol like a DeFi protocol's perspective, it doesn't know what a Bidden is, right? Even if you feed it like a price, it can't account for all of the other um let's say like independent variables, right? And so what we're essentially doing is saying okay um we can connect like to the back end where all of the assets are actually being held right and we can say and go okay we know you know there is this

treasury bill you know that was bought for this amount it's going to mature on this date right and it's going to be worth $100 at maturity um and you know there is this overnight repo to JP Morgan and there is this other overnight repo go to Deutsche Bank or to Royal Bank of Canada, right? And so we can really rebuild the fund from like first principles from the ground up like from saying okay here are the actual assets underlying the fund and now we can we can recompile in a way like the the entire fund. And so um this way we can like independently like kind of come up with our our own you know nav and and

share price, right? identify any kind of um maturity, let's say blips, right? Like you want to have relatively like smooth like uh uh maturations, right? You know, like a portfolio of of bonds and a portfolio of treasury bills, right? And so you don't want to see that like 30% of the the portfolio, right, is going to mature in in June, right? Or uh you know, or next uh next August, right? because it means if the fund needs to do a bunch of redemptions, right, they could potentially need to, you know, sell some of those at at a loss, right?

And I think that problem is less pronounced with uh money market funds like Bidd, uh like other money market funds that we support like uh centrifuges, Janice Henderson, JTRSY, like Superstates, USB. Um I think it's more pronounced in um products that are like really popular right now are CLLOs's um because they are you know as monetary policy rates are dropping um CLOS's have have higher yield right and so those are a little bit more interesting right uh but they're also a little bit less liquid right so that's that's kind of where where the risk part of the equation comes in okay >> right and so Chronicle is really able to

give you that like magnifying glass like full view into like the guts of of the fund. So, uh a D5 protocol can like basically plug that into their risk management system like to handle these assets appropriately. >> Okay. Um one more quick question and then we have to take another break, but I I just want to just drill down a little bit more specifically on on on what you're providing to to Black Rockck because I just want to make sure my under my my uh listeners understand. So your services are you actually pricing the the tok or pricing the treasuries that that and the other elements of the money market fund that underpin the tokens or is your job really to uh just verify that like what QIPS are in there

like what the maturity dates are if there's if there there's any like leans against them like that kind of stuff like like what precisely is like is your role with um just using that that one engage engagement as an example and and and and then I guess sorry not to make the question more complicated but it is interesting because like like like things like Bidd or I guess maybe Benji as well from Franklin Templeton etc. like they're starting to be used as collateral for um >> y >> and I would imagine that you probably get some questions from from primes and other people that are accepting them to to make sure that those assets are are are fully backed. So I'd really just love to kind of get a sense of that.

Mhm. Yeah. Absolutely. Right. So, as I kind of alluded to previously, right, we are starting from first principles. So, we don't take anything at face value, right? We know which assets are in custody >> and we rebuild the fund, you know, from there. What I mean by rebuilding the fund is you know we say okay like we are pricing these D bills using this methodology and given all of the treasury bills in the fund given all of the overnight repos and their expected yield right we are coming up with this nav does that you know how does that compare to what the fund admin is

reporting um how does that compare to you how does the yield that's being reported uh contra compare and contrast to the yield that we are you know calculating right so um I wouldn't like I I think the way to um think of an oracle's role in tokenized assets is more of a neutral reconciliation agent >> um right because you know in traditional finance you know you have all kinds of conflicts of of interest right And so there is this separation of roles right so when you have like a fund right you know certain parties you know someone will be a fund admin someone will be a

custodian someone will be like a transfer agent but you usually don't see like a lot of overlap in in these roles right you know uh take BNY as an example right BNY is one of the largest custodian banks in the world right um you know is the custodian for fiddle uh but then on a different, you know, product that uh that we uh um support for securitize a securitize stack, right? BNY is the subadvisor on on that, right? And so they're they're acting like in this fund admin capacity. And so it's kind of the same in DeFi where if you have a, you know, lending protocol and there's a risk curator and there's an oracle, um, you don't want the issuer

of a tokenized asset to also be the one that is like reporting like the pricing data into a market, right? The same way you don't want like a risk curator of the market to also act as the oracle. There needs to be like this separation of of duties, >> right? And so the oracle, right, really nestles in nicely into being able to be like this neutral arbiter of like these are the facts relative to um to this tokenized asset. And so whether those are I I I think it's important, right, that you're not just doing Simon says, right? U not not all all oracles like I think go about this the right way. Yeah.

But it it's important that you're not just doing like a side and says like the issuer told me this or the asset manager told me this, right? That you're really going as far back into the chain as like down this like uh let's call like the factory line that like comprises a tokenized asset um and are really just like checking every step in the way, right? And like it's okay to report what a fund admin reports as long as you have reconciled and determined that those numbers are accurate. Yeah, it's funny. This reminds me of my interview last guess was last week uh with um someone who was a provider of basically an index for for GPU computing. uh I think the

first one who was really kind of out there and she told me that she's been getting flooded with inquiries from like perp dex providers that want to make markets and they asked her if she would be willing to sort of make a market on her index and she flat out said no because of the perceived conflict of interest in uh that I mean I mean not that she would I guess try to manipulate the price for the index to go up but certainly the ability could be there for someone um who was uh perhaps a little less honest. So I I I understand the importance of what you're saying there.

Okay, let's take a very quick break, but when we get back, we're going to talk more about um where the RWA market is going, how oracles such as um those provided by Chronicle are going to fit into it, and uh and a lot more. So stay tuned. >> If you hold crypto on your phone, your biggest vulnerability isn't your wallet, it's your carrier. AT&T, Verizon, and T-Mobile have been breached again and again. And SIM swaps are still one of the easiest ways for attackers to drain accounts. That's where Cape comes in. America's privacy first mobile carrier.

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>> All right, welcome back. So, I want to talk a little more about sort of where RWAS are going and and and sort of some of the the unique challenges that that um these new directions could create for for a company such as yours. Uh I've been in crypto for almost 13 years at this point. I mean, probably as long as you have if if not maybe maybe a little shorter, but I've been in since 2013 and I've heard on and on again about tokenization, RB RWA, etc., etc., and some of the the promises that are offered um from most of my experience um they've been unfulfilled although it does seem like today things are different uh I think there's probably about like $30 billion in in tokenized assets outside of stable coins uh the

number may not be entirely accurate but it's a ballpark and there's a lot more uh and it seems like two big categories are like money market funds treasuries that we spoke about but then also uh alternative assets the the ones that are not quite as as liquid, uh, private credit, uh, etc. that, uh, tokenization could offer a way to sort of reduce some of these illquidity discounts that they trade with. I'd love to get your thoughts on that part of the market in particular. Um, are you doing anything to support them right now and where you think that could grow to?

>> Absolutely. I mean, I I think we kind of get a frontline seat to seeing like where the the market is heading, right? Because we see what clients are are working on and and how we need to adapt our technology to to be able to support those those use cases. Um, you know, as as you pointed out, right, I think the shift over the last 12 months has, you know, as monetary policy rates um, you know, have kind of um studied is how, you know, can we kind of increase yield, right? It's it's no surprise, right, that in DeFi, you know, people love uh their yield. They love their kind of yield looping strategies, right? So, uh the race has been to create products that are, you know, attractive to that

part of the market, right? And and that's really where we've seen CLOS's take off, right? So, we saw um you know, uh Centuge with Janice Henderson launch JA um right uh we saw like what else have we seen? Lane and and and Acred. >> Exactly. Right. There there was the Apollo Acredics, right? Uh you know, all all of these which which we actually support at Chronicle. Um and I think even just yesterday or I think it was like two days ago now. Uh we announced right that we were supporting Galaxy's uh first uh tokenized CLO. um which you know I I think is quite interesting because you know Galaxy if if they're

getting into tokenization I mean they're going to be a really huge huge player. I mean they have the uh they have the the network uh and they sit kind of perfectly nestled in between you know DeFi and and on the Trafy side. So I think I think they're they're going to do really well. Um and I mean like the the product that we support there right is um Galaxy is either directly or indirectly right uh letting people borrow against their crypto right against Bitcoin against ETH soul XRP right whatever it is um and so you know all that we are doing right is we are getting like the loan book from um from Galaxy um and then we're going to their custodian right we're going to Anchorage

and we're checking like okay um Is there actually, you know, all this BTC, all this soul, all this XRP, all this ETH in custody? You know, can we trace every way, you know, every Satoshi, you know, that is claimed to be, you know, as collateral on these books, right? We identify the the liabilities. Um, and now we can say, okay, you know, this CLLO is, I don't know, 200% collateralized, right? And so, okay, and it's yielding 7%. Right? So it's it's giving pretty good yield, >> right? And so now one like anyone who wants to potentially buy this Galaxy CLLO, right? Like can see okay look into

the guts and like know that like someone independent like Chronicle has like validated all of this. Um but two now someone like Norfo uh you know you can have a vault and you can create like a looping strategy on this, right? So you can juice your 7% yield into 14 or 21%. Right? What have you, right? And that's really like what like you know it's this two stages of like what Chronicle enables like one it's the transparency that gives like the confidence in these assets and then two right it's the ability for DeFi right to to integrate them.

>> Yeah. Yeah. So, I mean, in terms of like what's what's coming up, you know, we're we're seeing, for example, like REITs, uh, like real estate investment trusts are, uh, there's a couple of those, um, coming out. So, we're excited about those. >> Um, I think, uh, you may have seen, uh, Centerfuge just announced, uh, with New York Life, uh, that they're going to be releasing a new like, uh, a new fund as well. Um, I I think kind of equities right now are are really hot and I think it'll take a while to get there, right? Like you were alluding to before, right? That there's like all these promises and uh some of them have panned out and some of

them haven't. I don't think it's it's a matter of it it hasn't it doesn't pan out. I think it's more a matter of just like it needs more time than anyone thinks it does. But like the the promise is huge, right? Like if you go if you have some stock, if you have Tesla stock and you want to go borrow against your Tesla stock, like your broker is going to charge you like very high single digits, low double digits, right? Mhm. >> Um versus in DeFi. I mean, uh if you're going to lend these things with a I don't know, LTV of like 30% or something, right? Um you know, DeFi will like offer you like

mid to, you know, high, you know, single digits on this stuff like all day. Like if you look at a what do you get for lending USDC? you're getting 2.7%. You're literally getting less than T bills like uh so there's I think there's really an opportunity right for um DeFi to kind of be the mechanism where it can uh one of the flywheels for uh tokenized equities taking off is just going to be this ability to to get leverage against your equities at like much cheaper rates than than you can in in Treadfi with your broker.

>> Yeah. One thing I was actually kind of really dying to ask you is I want to get your thoughts on some of the I guess controversy that surrounded like for instance the SpaceX IPO and and some of the markets that were spun up um where people were able to kind of bet on the the price of some of these preo shares or private market shares and I I know with the SpaceX I mean I think there were a couple of like tokenized providers that had to give back the money because they weren't able to procure the shares out there and I mean that seems to be like the types of issues that a company like yours would uh I guess make sure um do not does not do not happen. Yeah.

>> Yeah. Sure. I mean at that it's uh people didn't know what they were buying, right? They were buying an SPV on an SPV on an SPV, right? They had like secondderee, third degree exposure. And yeah, when it came time to, hey, I want to get my shares, right? A lot of these things blew up rather from fraud or just improper legal structuring, right? Or just they never got the shares, right? Um but yeah, right, the this is really what Chronicle is is here to do, right? Is just give you absolute endto-end transparency into everything, right? And that's what's going to keep DeFi anti-fragile. That's how we're going to scale DeFi with tokenized assets and keep DeFi, you know, um, from from not having the same systemic risks

that we see in the in the traditional financial industry. >> Yeah. And I also wanted to get your thoughts on you talked a little bit about like looping and and and just additional ways to to to get yield. Uh, obviously like CLOS's, private credit, etc. there is the promise I guess to make more money even though the industry is a little little under assault um in in recent months but I yeah like I said I'm really interested in your thoughts on what happened with the kelp account and in particular how it affected a uh because I wouldn't have to like rehash the entire story of what happened I would imagine just about everybody listening and watching knows or or could quickly look it up but it because of like the the unbacked um

wrapped ETH or which whichever one it was uh the markets basically froze up. I mean I know I know AI had one big um liquidity pool. Morpho is more segmented etc. So I get that there's some design differences but uh it led to some very hard decisions. It led to I mean I'm not getting getting into what happened with arbitum and what they did to free certain funds but it it led to it exposed a lot of cracks in DeFi infrastructure and and one saving grace I think is that it was primarily contained within crypto. uh for everything to happen as as bad as it was it was within crypto. But if people are going to start using tools such as yours to employ deploy looping strategies

across DeFi with like actual real world assets not just like derivatives of ETH. Um that could become very very problematic especially with assets that uh where like for instance the spire price may not be the the liquidation price. I actually wrote a story when I was um at Untrained on Anchor in particular. I noticed I think a mistake in some of the marketing material where it's an interval fund which means you're not supposed to be able to get out your money. You can only get out your money on a quarterly basis and they can cap the redemptions. Um and I think there were some discrepancies inadvertently on on the marketing um surrounding that.

But it just shows the danger of these types of products when people are just look thinking about dollar signs and and and I'd love to just get your thoughts on kind of what are some of the lessons learned u for your business from that one exploit in particular. >> I I mean I think it's very simple. Um, you know, I I think what people fail to recognize is that all of these interop protocols like a layer zero, right? Like a chainlink GCIP, that's an oracle.

>> Um, anytime you use like, you know, cross-chain communication, anytime you're doing bridging, bridging one token from another token, uh, sorry, one a token from one chain to another chain, right? Um these are all oracles just whitelabeled with a different name like you know crosschain or like bridge. Um so it it really comes down to the layer zero oracle was compromised and the D5 protocol was um insufficiently you know riskmanaged uh to to deal with that. Um and so it it doesn't really call into question like oh oracles are bad. No you need oracles right? Um, but you need to

be very careful about which oracle you choose and you, you know, when you're deciding, oh, well, this one like costs a little bit more, right? I'm going to go with the cheaper one. You need to understand like the choice that you're making that you are directly trading security, right? The security of your users, of their funds, of, you know, the ability, you know, the existential risk of your protocol or your company, right? uh to save a few bucks, right? And like uh I I think you know uh I think the bad players, right, get weeded out over time, right? And you see like players like Jane Link, like Chronicle, right, that have the Lindy, right? We've gone I

think not quite 10 years. Uh I think we we launched like the first oracles on Ethereum in May of 2017. So um come come May uh next year we'll be celebrating you know 10 years on chain without a single oracle hack. Um, right. And that's right, that that's like what you don't see, right? That's in like the marketing material is just like this cuz you you don't lock your way into 10 years, you know, without an incident, right? That comes from a culture of just extreme delusional psychotic like focus on on security and durability.

Mhm. Um, how do you I'm I'm curious and and forgive me, I may not just be familiar enough with your business model, but how do you account for something like that? Like like a token that um like for instance a Bidd token and I I know I think it's based on Ethereum, but I don't know if it's available in other chains or not. Um maybe uh but like how do you make sure that if certain tokens need to be able to move crosschain or or even like across like L2s for instance that >> like what would you do if somehow somebody was able to um trick uh layer zero or or one of those um connectors to mint unback tokens like how would you

handle something like that for one of your >> So on the lending protocol side so I'll just use a as an example here because we're we're talking about the the Kelp Dow incident but this this goes for any any lending protocol >> they need to have you know circuit breaker safeguards in place right and whether they are getting that data on their own or whether they are getting it through an oracle they need to have those risk systems in place right so in in the kelpdow incident right uh an attacker right was able to convince the bridge right that uh with this false message to unlock the you know locked uh kelp dow right on on Ethereum right uh

that shouldn't have been unlocked right because the corresponding kelp on on the the uh the source chain right was not uh was not actually burned right to to do this um from a risk management perspective you should be checking the supply on every single chain uh that a a token can be on right and like summating those and like ensuring right that there is no mismatch right between the amount that is floating around versus like the amount that the token like even just saying asking the token contract how many RS exist that's not enough like and if you notice any wonkiness what do you do you immediately freeze the market you

do not allow anyone to uh you know uh have the protocol take on any more risk, right, by taking on more debt against these assets, nor do you allow anyone to like repay and like take stuff out, right, until like this whole mess is is sorted. You just pause. >> Yeah. >> Um, and it's it's just, you know, this has nothing to do with tokenized assets already. This is just like a slightly more complex, let's call it like a DeFi asset, right? And we're already seeing lenders struggle to keep up with the complexity of that when the risk management solutions are quite simple, >> right? And so when it comes to tokenized assets, the complexity of this just becomes, you know, exponential, right?

And so yes, it's on the oracles, right, to develop uh the ability, right, to get all of the required data, all of this metadata, all of this context, right, and compile it uh so it can plug into the risk management systems of these lending protocols. But it's the onus is on the the lending protocols, right, to take uh that risk management seriously, right? and to create these, you know, not like a phone call or there's like an alert that goes off or something, that's already too late.

>> It needs to be real time automated and and triggered by, you know, data that is um provably correct. >> What do you see as the biggest areas of growth for your business in the next say 5 to 10 years? I I mean it's hands down tokenized assets. I mean we >> even within like the the distant tokenized assets like particular asset classes >> like like let let me paint you a picture, right? So today Chronicle secures just under $15 billion across DeFi and and tokenized assets, right? So we're you know we're not quite at chain link level u but we're you know

five times larger than say like a bith or a redstone, right? is is not even close. And within that business, right, um about 10 billion of it is, you know, pure DeFi and 5 billion of that is is tokenized assets. Those 5 billion in tokenized assets, we have done that over the last 18 months. Like we didn't release our tokenized asset oracle till January of um of uh of 25.

Right. So it is that is easily by far right the the fastest growing part of our business and you know I expect that you know by the end of the year um frankly the tokenized asset business you know will uh will be bigger than our pure DeFi business. Um on that front to me it has to be the the equities. Um the like there there is a a there are problems that you have with funds that you don't have with equities and and vice versa. And I think there's like a kind of like step function kind of here.

Like you're not going to see very like gradual incremental growth. I think you're just going to see like uh huge like S-curves like localized S-curves like play out. Like I I'll give you an example right? um on the um money market fund side, right? Like these have existed for a while now. Um people, you know, we know people on DeFi love to do their little leverage loops and and stuff. One of the problems, you know, not just with money market funds, but like with these CLLOs's and like other other types of funds is the redemption like ability, right? you you touched on this earlier, right, with the the Acred product like okay, you know,

you can only like redeem on a quarterly basis, right? So, there's kind of a problem here where you can get into the position if you want to build a leverage position, you can enter it very easily, right? Lock up your AC credit, lock up your JA, lock up your Bidd, your USDBs, you borrow against them. Great. um and then you just go and you buy more of that initial asset, right? And so you can enter a position extremely efficiently. The problem is when you want to unwind this whole thing, um you you know in DeFi we have like a flash loan, right? You take out a flash loan, you repay your whole debt. Uh you can

now withdraw your entire collateral and now you can sell your collateral on a DEX and you use the proceeds from selling your collateral to repay the the flash loan, >> right? And that's you know that that's an amazing superpower that DeFi has. Um, however, uh, now when it comes to, you know, the the underlying, you know, if the underlying asset is not something that you can just sell on a DEX, right? There's like millions of dollars of liquidity for, I don't know, some private credit product or for some like CLLO on a DEX. Well, what do you do, right? Someone needs to um essentially like offer a like redemption facility, you

know, for a fee, right? and essentially take on either directionally take on that like underwriting that risk or like find ways to to hedge that on the other side, right? And so that's still been like a really big piece that's missing. >> Mh. >> Uh but like just recently, for example, we saw Grove um who, you know, uh shout out great group of guys. They they just did their TG couple days ago, so cool. uh um they they uh they they launched a new product called like Grove Basin and essentially like for right now they're just supporting money market funds uh like uh Biddfuge and Sanderson's JTRSY uh but they'll now basically just they have a billion dollar like credit line

uh from Sky to just inkind you know allow you to redeem your JTRSY or your Biddc right and so now you can exit these positions um extremely efficiently and you know not having to go to like the issuer and do stuff you know like paperwork stuff or do stuff offchain right it's all just in a transaction right completely composable you know one transaction right def work >> right and so that's it it takes like >> it takes like new utilities like that that just unlock like the ecosystem like it's like a bathtub like filling with

water, right? Yeah. >> Like there's only a certain if the bathtub is this size, there's only a certain amount of water that can fit into it, right? >> As soon as we like open up like these new primitives now all of a sudden the bathtub is much bigger and the you can it'll fill up with water like immediately. I mean uh greed is uh everpresent, right? If there's money to be made um money will find a way. >> Okay. Um, we're just about time, but I have one more quick question I want to I want to ask you. Tokenized assets are clearly a growth area, but we are starting to see some some issuances directly on chain without an underlying like more traditional asset backing it. I I'm just curious your thoughts on on that and how um you might account for it moving forward.

>> So, um actually, it's kind of funny because I I get this question a lot like it's supposed to be some kind of gotcha. Um I don't It's not it's not meant to be a gotcha. It's just it's it's more just sometimes uh >> like for instance >> Yeah. It's it's not meant to be a gotcha. >> No, no. I I I I understand. Right. >> Yeah. Like like why have something that's backed by something whereas something could just be issued directly? >> So one one thing I want to say for example is you can have onchain issuance >> where the assets are still like custodied offchain, right? So, an example of this is the new uh BNY Bailey Gford uh product that was like just announced recently where it's issued

natively on chain, right? But the underlying uh loans like in the fund, right, are are still, you know, offchain, right? And so those will still require, you know, what I kind of consider like the very standardized like, you know, Chronicle proof of asset oracle. Um now you mentioned specifically right um funds that are issued onchain right where the components of the fund are also onchain >> like for instance like JP Morgan just announced they're going to issue um a money market fund on onchain. >> Yeah. But where are the underlying tus for that money market fund? Are they offchain or are they onchain? Right. I would >> tell you they're going to be offchain.

um >> can't wait for the day Treasury starts issuing issuing uh issuing bonds on chain. That would be awesome. >> But yeah, but let's let's like take this example further, right? Like let's assume, you know, that like we start tokenizing individual T bills, right? That's really cool, right? Uh now we can actually create like a natively issued, you know, onchain money market fund where even the underlying T bills are um are on chain, right? Um, but you still now have the problem of like, okay, well, I know that the money market fund is composed of these, you know, onchain T- bills, but how do I know that these onchain T bills are actually legit, >> right?

>> And so you again, it just becomes like the recursive problem of again I need to like go back and like now I need to have like proof of asset for for the underlying T bills all over. >> You still need to find that that source of truth, I guess, one way or another. >> Exactly. >> Okay. All right. Well, we need to to end it there. So, yeah, Nicholas, um thanks so much for for joining. Um we'll have to have you back again.