$5B On-Chain Credit: What's Actually Working and What's Still Missing

Transcript

Let's turn to to the onchain markets. So, uh, Matteo, um, this is your area of expertise, although I guess that would obviously apply to Craig as well. Um, but can you just kind of like level set for us? Um, what does online or what does onchain credit look like right now? >> Yeah, that's uh that's a really great question and I think that we can have, you know, a lot of like parallels that u we can we can draw with repo markets in general. uh the current state of private credit on chain is that we we see real progress at the moment but still I would say we're still early as a market structure itself you know as of today we see that we have more than 5 billion AC

distributed across 2,000 more than 2,000 different onchain credit assets and that's a meaningful growth. So but it it also points to a market where there's still infrastructure building phase and not the scaling phase. You know what what actually what's actually working at the moment is that the borrower side has matured significant significantly. um institutional counterparties like Falcon X are accessing credit on chain with clear terms define collateral arrangements and legal structures that hold up to institutional scrutiny. You know that's a real change from you know the first generation of functioning

credit and where the borrowers were often you know crypto native entities with the thin credit history and limited accountability in general. So I would say the current state regarding the current state of credit also the underwriting layer as also professionalized being professionalized you know um there's multiple professional underwriters now that do from a credit and reporting perspective do uh brings traditional credit underwriting incentives or you know uh discipline to uh onchain products which is quite significant for the for the ecosystem in general and um and you know apart from these or like the the better

infrastructure, the better underwriting methodology, more legal clear um certainty for the final borrower and enforcability um even composability is starting to demonstrate real value and that's exactly the parallel with repo market because the fact that you can use an onchain credit facility or even a RWA asset in broader terms um as a collap collateral in a different off over collateralized protocol in a D5 protocol. Uh well, you know, that is does something that that is be beyond sitting in a bulletin yield, you know, it's it's a meaningful proof of concept for what the next phase for launching

credit looks like. Yeah. So there's definitely like improvements from what I see looking at even like two three years ago on the on chain credit. There's still room for improvement. I would say there are still like aspects that needs to be improved from a from a market structure perspective, but that that would be the current state of I would say. >> Um I'm looking at rwa.xyz right now. I mean like you said the number is about 5.13 billion. It looks like by far the biggest is syrup USDC. That that's Maple Finances um lending pool for for uh stable coins and uh I mean Craig I see Falcon X has one. Uh I'm familiar with uh

um is Acred is Acred considered here one of the the Hamilton Lacyiz one. Does that fall under this category too? >> Should be. >> Um so I mean how is this stuff being used today? Because this type of credit, I mean, this is different obviously than um like taking out margin on a for like a derivatives type of trade and things like that. How is this being used today? >> Um and do you mean from from like our perspective as an issuer or um >> both? I mean I mean if you could talk about specifically how people are using your your credit vault, I'd love it. Um you don't have to mention names, but just even more generally like how is online how is onchain like private credit being used today?

Yeah, it's interesting and I think there's a few different um buckets of use cases and so like uh you mentioned uh syrup USDC and that's why like there's kind of these different flavors and depending on the metric um you know it's it's we have to make sure usually that we're talking kind of apples to apples because there's a lot of flavor now of onchain private credit um so there's there's some where it's essentially um you know folks that are uh delegating or investing in some kind of a yield strategy um but with the idea that it's going to be um you you're going to have like a receipt token or something that's going to be generating yield or you could stake it um and and generate yield. So that's like if you think about like USD with Athena um or USDS with Spark or Syrup USDC um you

know it's it's essentially someone's going to go run a yield strategy but there's kind of these like it's quasi like pegged to a stable coin and sometimes people will consider them stable coins. It's a separate debate um but it's it's kind of a receipt for your yield sharing strategy. Then then you have um more like traditional private credit strategies that have come on chain. Um uh you know there's like uh JTRY a lot of what the securitizing and centrifuge folks have done. there's a Apollo AC you know um even you know to some extent PO Finanara's um onchain credit facility like kind of folks that are running these strategies in the traditional tradfi world and are actually finding a way to sort of bridge it on chain um as for them it's a way to access obviously um additional aum and

for you know the onchain community it's a way to actually invest in private credit through some kind of an onchain vehicle um those tend to be have you know stricter permissioning but not you know not always there's There's interesting evolutions that are going on in that. But so then there's so there's kind of folks that okay, I want to get into a a traditional private credit strategy or I want to get into a traditional treasury bond strategy or aa CLLLO or something like that that I would normally do through a a brokerage. Um but instead I'm going to be able to now access that on chain and that tends to be a different profile. Um and then and then um and we you know it's interesting like wi with our facility and some of the others that have come out. It's a bit of a um it's a bit of a

mix in a sense of uh kind of both concepts actually is where I'd look at it. Um you know we we don't have a daily liquidity concept. We don't necessarily like have a stable coin or anything like that that's going to be involved. Uh but what you can do is you can effectively participate in the yield generated through through a portion of our loan book um that's been that's been tokenized. And so um you know this I it's an interesting merger because what we like about it is um you can have these facilities and and we do um bilaterally with folks or um through kind of the traditional financial rail.

Leen had a had a had a big ABS just through traditional rails. Um, but there's actually a lot of a lot of capital, a lot of interest, and a lot of unique utility that comes in when you can access the onchain markets, too. And we've experienced that, frankly, in some cases by accident. Um, in where we've realized that, hey, folks go, well, maybe I can borrow against this token. Maybe I could do a repo type facility. Maybe someone will lend. That's outside of Falcon X. folks that may want to go do that. But it creates benefits for us too as you sort of have this secondary market that's evolving that you didn't have as much in traditional finance. You had a secondaries market. You you could but it would be hard go and like borrow against your private credit. But the

onchain markets in some ways are a lot more agile in that sense uh for lending against these assets even the traditional ones. >> Okay. So I I I certainly see a lot of the overlap. I mean, the idea of people being able to to put up assets, borrow against it. You can smart contract everything so that there's like sort of like liquidation prices and and ways to roll things over. You can even create like a digital escro account to hold things for like um to release funds when certain conditions are met. A lot of overlap, but I I do want to talk about a couple of things that make the repo market in traditional finance very unique, and I'm curious how you think they apply to crypto. Um I mean for one repos I mean they stand for repurchase

agreements. They have a very specific sort of like legal so we're looking for like they operate a very unique legal space. Uh I'm not sure why Craig's smiling but I'm excited to hear um and I guess maybe you know where I'm going where like the owner or I guess the uh the lender can actually has right to those assets and can sell them directly. you don't have to go through some sort of laborious bankruptcy process like in case there's a default which is unlikely because these are very short-term loans. Um but smart contracts we all know they're they're called smart contracts but they're not necessarily smart and in the legal sense they are not contracts.

So how does that apply here? >> Uh Craig go ahead. Oh, yeah. I I I was just going to say I think so this is one of the the like what you were alluding to is is kind of one of the So I would get asked questions all the time by people especially like in my former role at Membrane where we would end up talking to a bunch of different lending fests that are getting established. And if you ask anyone this the question of do I do it in a repo agreement when you're first like when you're starting the business or do I do it in a master lending agreement um is a is a big question. The answer is because like you're you're there's a few different reasons why you might want to do repo, but like bankruptcy um the

avoiding a bankruptcy stay is actually like one of the core components of that as well as sort of its classification on on your balance sheet and how it's considered like from a risk perspective. But um but because of that, the reason I was smiling is you have to document it in a very specific way as a repurchase agreement um for it for it to you know truly be considered a repo and not just a loan. Um, but it's been interesting in my experience having seen repo agreements in the crypto space and and we can do either, but you find folks you have to kind of play this translation that goes into it and you can and to translate a loan into a repo agreement like we've seen term repos now there there's there's an argument that you know you you have to really watch how

that's papered up to not just be considered a term loan and and truly be considered a rep purchase agreement. So, it's been very interesting to kind of see a lot of that more than I uh you know, more than I had in in the past in my career and see how different uh financial institutions, especially folks coming in from traditional finance who tend to like repo a little bit more, they feel that it's safer, will come and try to adapt it to the crypto markets. Um uh and then but then there's other reasons, taxes, etc., why sometimes someone may want to do something as a loan instead or or regulatory status or something like that. Um, how to to answer your question though about the the how do you actually go and effectuate this on chain? I mean, I'm a I'm a CFI p. I'm a hi-fi person in the

sense of DeFi and and CFI in a sense. And so, um, >> I'm gonna I'm going to steal that term. I like that. >> Yeah. Yeah. It's it's actually my old CEO Carson Cook used to um he coined it for me. But it's uh I think that um you know I am I I think that it doesn't all necessarily have to be done in in a smart contract basis. I think you could probably have a pretty robust repo market that touches the onchain ecosystem that doesn't it doesn't have to all be programmatic. Like I think I think if we like what what you need is a product that's going to work and scale and make sense for the people that are going to be deploying liquidity into the ecosystem. If that can all be done on

chain and people can be comfortable um and and then then great phenomenal like then then people will do it. But if you have some component that has to go offchain for some reason or everyone has to sign a piece of paperwork and then it can all be run by smart contracts or something like that like that's fine too and and I think that is going to kind of be a nuance like because there's like to have a lot of the larger players like they may touch on chain us included uh but a lot of times you want some kind of a paperwork piece that's involved uh to to some extent and possibly to reap some of the benefits that come with why folks do repo generally. So, um, it it was a long-winded answer, but I I just like I don't think we have to like have a

one-sizefits-all model as this space evolves. >> Gotcha. Makes sense. And and Matteo, uh, just in light of everything that how the repo market uh, in Trafy has changed in the last few years, uh, natural question to ask is whether we need some sort of central bank backs stop or some sort of big liquidity pool. Uh, do you do you see the need for that? uh or is there a way to to handle this on chain without a quote unquote lender of last resort? >> Well, um that's a really good point because you know liquidity is one of the most visible gaps at the moment I would say. So, you know, tokenization improves transferability, but you know, it

doesn't automatically create an active market around it. So I actually agree with Craig in the sense that there's a there's a line between D5 and CFI that is kind of fading over time and we see more and more overlaps hybrid models between D5 and CFI which it just makes sense because we need to force adoption of smart contract application but it needs to make sh make sense for the market itself. uh to answer your question regarding having like a central authority that backs stops the liquidity. I would say that it becomes less important in a market structure built on chain that allows participant to uh provide secondary liquidity and

tap from a global pool of liquidity. So in a sense these expand also the audience that can be part that can participate into these kind of markets. So it makes less important the participation of a central authority that provides back stop liquidity but I would say it doesn't completely eliminate the need of that. So you still need to have um you still like it's it's good to have a central authority that allows to have backdrop liquidity and I I think that if we look at from an onchain perspective with a with a more composability and also global kind of infrastructure that can be available

it each coordination uh effort from different central authorities to make sure that they can provide altogether at the same time a back stop liquidity. >> So I would say becomes less significant from an onchain perspective but still it doesn't eliminate the need of it. >> Okay. Um, I think at this point it would make sense to just have you I maybe Craig you could start just explain um the the setup that that you guys are rolling out with your um version of sort of like onchain repo and I I have a few more questions after that but but yeah please just just sort of paint a picture for for the audience.

>> Yeah and maybe I can and maybe I can set the stage and and give it to Matteo to kind of go into the the productization. Um but the the I think one of the core reasons that that this is really interesting I think um at this time in um in the crypto ecosystem uh because repo has been around forever like this has been a a like there's always been this dynamic that there's repo and tradi not necessarily uh as much in in in uh in deep in you know crypto but I think what's interesting is now you have uh like stable coin repo is something that I've been hearing a lot about which is folks want to swap out their PYUSD for USDE or um uh or I need I mean we run

into this all the time. You know, my desk doesn't want to go in and burn something. We have something coming along the way, but we have to go settle USDT with this client right now. Wouldn't it be great if we could, you know, access a repo market and just quickly swap our USDC for USDT and then, you know, we'll handle it afterwards. like especially as all these new stable coin products are are rolling out um there's a lot of uh and and no one wants you to go and burn stable coins and you may not want to and so like you you kind of have an interesting dynamic actually where uh a robust repo market could be actually extremely valuable for those types of things um that type of activity and it's all a lot of times kind of the short-term stuff as well as the

long-term stuff so with the abundance of these new stable coins I think it's been um it's been uh that's that's one driving factor And then the other driving factor is the illiquidity like the liquidity profile of a lot of these new RWA. Um, and this is something that we've gotten especially involved in and again, you know, Matteo will go into a bit here with with what we're rolling out is you have this gigantic problem right now where um folks want daily liquidity uh especially folks that are going in levered looping or uh as part of just their overall treasury management strategy, they need the peace of mind that this is a temporary deposit. Well, but the problem is that's not really and ourselves are included in this. That's a huge pain um to go and offer a lot of times and it might just

not work in your fund strategy of how you're deploying. You may have quarterly liquidity and maybe it's gated and uh um and uh you just will have a different profile on what you can offer. Well, does that mean that those folks just can't get invested in those products anymore? Maybe not. Maybe you can create um uh different bridge facilities, repo facilities, uh lending facilities as ways to create this liquidity or even deleveraging uh facilities. There's separate thing we could go into for things like if the morpho markets are blowing out, you may temporarily want to delever. You could do that in a repo. Um and so like that I think is another big driving factor for why these markets uh make sense because a lot of people are

trying to solve this ili liquidity problem um uh with with these new RWAs and I'll hand it to you on on the the product. >> Yeah. Yeah. Absolutely absolutely agree on the like there there are definitely a ton of different like projects and teams that are working on the secondary liquidity problem in the sense that it's definitely tangible for an allocator perspective that with the tokenization of the credit facilities you need to have also uh this kind of like uh instant available liquidity I mean in some forms um the composability again of this kind of uh products uh helps us in

uh in some ways in the sense that I'm seeing like different flavors different models applied to being able to provide these instant liquidity. Uh you can have like coordination mechanism that allows to um you know coordinate a call back with the borrower itself which if you look at a traditional credit facility it would have taken like days and days of structuring legal reviews and everything but from an onchain perspective instead is just a contract call a an onchain transaction that that appears. So uh but that's just one me methodology to to handle this kind of instant liquidity.

You can have uh repo markets on morpho for example where you can post the position that that you have that the collateral that you posted on morpho already again. So you are re repoticating that collateral into another market which effectively gives you like instant liquidity that can allow the leveraging for other operational purposes you know and um and in general like having market participants that provide and you know even a simple allows to I'm I'm sorry, M. We're having

a little trouble. >> Uh uh I'm sorry, M. I think we're having a little trouble >> hearing you. Um why don't you try one more time? Can you can you hear me now? >> It's a little better. It's a little better now. Yeah, sure. Sure, sure, sure. Okay. Okay. No. Yeah. I was saying that also having like participants in the market that can provide directly secondary liquidity and uh you know beer the counterparty and duration risk which you know in traditional finance there's many different firms that do this kind of role in the market. Uh well what I'm seeing in DeFi and on on chain finance

in general is that the combination of all these kind of projects and teams working towards this kind of goal of providing instant liquidity for RWA assets is is quite significant and I think that in the next couple of years we're going to see uh quite of an improvement that would kind of make uh you know quite of a no-brainer for a for an originator to just use an onchain structure instead of of a traditional structure. If you've been loving Bits and Bibs, don't forget that the show is transitioning to its own feeds on X, YouTube, and your favorite podcast player. If you're not already subscribed to Bits and Bips on its own channels, go there now and hit that subscribe button so you can keep up with our twice weekly live streams and macro meets crypto

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