Andreas Fletcher - On-Chain Undercollateralized Credit: Banking but Worse

Transcript

I'm Andreas thank you very much for being here last chance to flee the title could be misleading I'm actually going to talk very much Pro under collateralized credit not against underlied credit uh quick recap uh I've been in crypto since 2013 started my journey at deuts bza which is one of the biggest exchanges doing a lot of prototyping there traditional Finance versus blockchain permission blockchains prototypes worked on a lot of research projects and implementation projects with um dut bundes bank which is the Central Bank of Germany then 2018 I didn't want to work in the traditional Finance world because I thought they castrated everything good away from blockchain uh so I joined brainbot which

um is a older company that's been in the ethereum space since 2014 doing Raiden which was one of the first scalability Solutions State Channel Technologies and I've been doing product ownership there for the trust science Network which is uh also under collateralized credit Mutual Credit system um some people might know it as the original Ripple idea and my last product there was Beamer Bridge which is an optimistic Bridge I've joined Wildcat protocol a month ago so first time presenting it very excited about it and uh let's dig in so let's quickly recap of you know collateralization over collateralization

under collateralization like how um is it done what different models are there and you have the traditional you have the over collateralization and then you have the under collateralization which could be no collateral or less Capital less collateral than your borrowing and I split it up into four categories risk assessment collateral accessibility and lender interaction in the traditional Financial world if you want to have a credit you typically need to have some type of risk Assurance towards the bank it's either income or it's a property to get a credit or it's good reputation and the overall collateral

could be anything as long as the bank accepts it uh in terms of accessibility is accessible to almost everybody but uh you have to have a lot of paperwork you have to do kyc you have to do AML you have to have a bunch of contracts um that nobody understands and in terms of lender interaction if I want to lend or if I want to borrow it's mostly directly through the bank through Central entity if we look at over collateralization as the word implies if we do risk assessment the risk assessment is basically you have to have more collateral than you're actually borrowing and the factor is something between like 1.2 to 2.5 of the

collateral that you're borrowing against and the excess accessibility is quite good in terms of that you can get it since you can get it on defi protocols that don't require any kyc or AML but you need a bunch of collateral to actually borrow money out of it so the entry is very low um lender interaction is then basically through the UI through the DB um simple if you understand what you're doing and how it works but can be complicated for people that don't know how to use meta mask or any other browser extension now if we look at under collateralization um it's mostly that here again the comparison to the

traditional Financial world is very similar you do have to have some type of risk Assurance you need to have some type of reputation that you will give the money back because one of the challenges that you have in crypto is that you typically don't know who the counterpart is and lending money to somebody that you don't know is then there always the question okay will I actually get the money back that's one of the main reasons why we have this over colorization because people don't want to deal with the counterpart who is it who uh will it be in a year will he actually give my money back Etc and the accessibility here is therefore also similar to the traditional Financial

world you do have to do some kyc some AML and also some paperwork legal framework Etc the you know and and credit could be anything out of Simplicity I'm going to use the concept of money and credit even though money is super complex and just to make sure we understand what money is because uh working in crypto for over 10 years I've heard probably hundreds of definitions of money this is one of my favorite pictures that I made it's a picture of a huge poster that is uh in the money Museum of the German Central Bank that basically defines money and the most favorite sentence is the one in

the on the right side it doesn't really matter what money is made of or what form it takes all that counts is that it is accepted as a medium of exchange unit of account and store of value this can only work if people trust money and then now we Define money but then we need to Define trust and that's a topic for a different presentation if we look at the and these numbers are important to you know bring my point over why I think that under collateralization needs to be much more prominent in defi these are money supply numbers um of the traditional world and money is in the traditional sense not

only money we have different categories of money um they're defined through M1 M1 M2 and M3 um for Simplicity reasons we can just call it central bank money and Commercial Bank money where central bank money is the very small part there physical currency and whatever deposits are within the central bank this is real money this is like cash equivalent um that doesn't have any counterparty risk except if the whole currency system fails it's not the money that you have in your bank where if the bank goes busts you might not get your money back because because that is money created by

the Banks through credit and if you compare the overall depbt which is equivalent to money and compared to the overall market cap of crypto you can see that crypto is not even 1% of the overall World depth money supply and now if we look into like the over collateralization models yeah and this is always with the background background um thesis of why are we actually doing crypto and there are a lot of long-term Visions but one of the long-term Visions I think is to provide an alternative to Banking and to provide

a better alternative to banking um and therefore we need to also create Concepts that are better than banking but then also fulfill the need of retail so that retail actually accepts crypto and can use crypto for daily activities now over collateralization we have example of Ava compound and then the stable um coin Market um you can see that the overcollateralization is not generating enough money to flow to compare it to the traditional world and the collateral orations are really you bad in terms of that you need 2.7 um billion to create 900 million of

borrowing money or um value that is being generated so if we compare the traditional world where we like have uh um a growth model that is very small on the left side and extends to the right side and compared to the models that we're using in crypto it's actually exactly the opposite way which if you compare the numbers will not work on a long term we cannot compete with traditional Finance if we keep up this model where we say we need on the left side like real like Bitcoin or ethereum um in its value to then

generate Commercial Bank equivalent money that is much lower compared to what the traditional world needs and this is like the thought model that I have why I think that under collateralized credit is very important we just need to find the right method to create it so where are we now um we're basically uh at a stage where we were able to create technology that on the technology side can compete very well with the traditional Financial world and the the thesis that we can break down Central entities is proven the question is why do we still need Central authorities why do we still need Central parties and

it's not there or we don't need them to hold our money but we still need them for some elements kyc AML um creating contracts that are legal binding but we don't need them to hold ownership over our assets my bank does not need to have access or ownership over the money that I have of my bank they can still have a copy of my passport they can still do kyc and AML checks they can still do reporting they can still send my data to the IRS I'm happy with that what I'm not happy with is that I have to go to the bank and ask for permission to withdraw my money because they have ownership and crypto is something in my opinion that can change that and should change that overall and in terms of stable coins and

this is now the the the overall opinion that I hope somebody can challenge in the Q&A later on or maybe not but if we look at what we currently have we have stable coins and we have different types of stable coins we have Fiat backed stable coins we have cryptocurrency backed stable coins we have algorithm stable coins that I put at the down right corner because I'm definitely not going to talk about them because they don't work um we also have commodity backed um stable coins which is more of a toy in my opinion um but cryptocurrency backed stable coins are quite simple for example D you need to have cryptocurrency you have to deposit

it you get D you have to bring over collateralization so you have to bring in more value let's say like $150 worth of eth to get a hundred US dollar worth of D and that works very well because if the eth value goes down it has to go down a significant portion up to the point where the collateral is not you know sufficient anymore to um back um the value of the $1 us value of Di and then we have Fiat back stable coins um you usdc usdt and if you actually look closer at them they're actually under collateralized but people typically

don't realize it because it's a good marketing stunt we have 100 billion in usdt we have 30 billion in usdc and what is the Fiat that is actually backing the value of those tokens it's Commercial Bank money and Commercial Bank money by definition is under collateralized money because it is not backed 100% by Central Bank money so the D5 space already has a huge portion of under collateralized value it's just not framed that way and it's Market very smart to actually give the impression that it is back 100% by you know real value and then if something happens like

last year a bank goes bust in the states the stab coins dpeg and luckily usdc and all the other stable coins went back to $1 us because there were still enough capital in other Banks and the um the FED in the States was very quick in acting on the default of that bank but in theory if there's more than $100,000 worth of money in your bank account you only have legal entity and that's in Europe to $100,000 or Euros because that's what the state guarantees that if the bank goes bus and you have more than uh or less than 100,000 in your bank account

you get that from the state but if you have more than 100,000 it's tough luck you have to go in front of court and hope that you get it back so we already have under cized value generation in crypto um and the overall Assumption of don't trust verify that we have in the space is very good but we should think about how we're actually using this um the biggest mechanics of economy is fractional Reserve so under collateralization of value and currently only banks are focusing on it only banks

are leveraging it um and they're leveraging it for the traditional Financial World they are leveraging it also for crypto but in our opinion we as CI people we as crypto people we should take this tool and actually make it our tool to build a better alternative than the banks are building it because the banks will enter the market heavily they've been trying to do this since 2014 uh the increase of cbdcs arising on the world uh is showing that banks are gaining more and more interest in conquering what crypto has built and taking it for themselves and that's why we built Wildcat um basically uh hands

off massiv uh configurable under collateralized credit markets that people can do and we've done it because we are the opinion that under collateralization currently sucks it's very lender driven and the main target audience currently is the lender side rather than the borrower side and we're basically flipping it um the goal that we have is to make under collateralization possible for each in every use case that you need credit or you need Capital to work and if you need a credit line to trade eth if you need um um if you're a Dao that just launched a token but you need to have um Capital to work with but you don't want to sell

your token you could in theory create a credit Market denominated in US dollars but pay it back in your token so that your token generates value but you're not actually needing to sell off your token in a public sale or an airdrop to generate that value you can still have the overall token in your treasury create a credit line against it and then generate value that you can use to build your protocol um by raising eth or usdc or die and the difference here is that where we as Wildcat basically provide the protocol we don't touch anything and

we don't influence anything the only Central part that we take in place is we onboard the borrower and the borrower then can create credit markets and he then needs to deal with borrowing uh to onboard the lenders so the people that basically provide the cash and he can do that by you know identifying big um big whales or he could open the market to retail if he wants to do that but we as Wildcat just provide the the standardized contracts basically um offchain and offchain to allow this and don't market around it so that um people don't basically F into it and the potential is

huge we saw the numbers already 130 uh trillion in bond market the crypto Market is still very very low in comparison to the overall credit that we have um on the world and if payment is a valid use case that we want to you know provide an alternative um to traditional Banks we will need some type of under collateralized markets small team we launched in um December we have 30 million in tvl currently across multiple markets and currently two borrowers and that's basically it thank you so much Andress are there

any question questions from the audience there's one um just please wait for the mic we have it for the recording um I did not understand how the under collateralized system work uh that you're proposing I don't know maybe you went through the dets in the beginning or not fail of the presentation um so under collateralization basically Bally just means um I want to borrow $100 worth of of capital and um typically what happens um in the over collateralization um I need to deposit

more value that I'm boring out now the under calization would basically mean that I don't have to deposit more value that I'm bringing out or that I'm borrowing so for example I would give you $10 worth of each but you would give me $100 worth of um D and that's the under collateralization Port so the collateral cannot cover the credit that I'm taking but there is still some um Reserve so that if I go default you still don't have 100% loss and basically the the risk parameter is then do you trust me enough to think that I will actually repay you the money

is that more clear borer the the what what we provide is just the basic protocol where you can actually create these credit lines or credit markets and we do provide some um we call it Master loan agreement which is basically a legal document if you um look at under lzed markets that have been in crypto in the past a lot of them went default a lot of them failed um that's mostly because they have a heavy focus on retail um so if like 10 thousands of people lend money to one

borrow you have 10,000 people that then go in front of court and need to basically sue the borrower to get the money back uh currently we're not focusing on retail we're only focusing on uh businesses so the quantity of lenders will be reduced and if there is some dispute in terms of that the borrower cannot repay the credit back then you can basically only have five people going in front of court and getting the money back and the history shown like in most cases the the lenders got their money back by default and there's very few cases where they actually had 100% of default risk but that's that's not what we're aiming for we don't want to have default and we want to have enough transparency and we have that by putting everything on chain

so that the markets can react um fast enough to basically um resolve any default and that's in comparison to what we have in the traditional Financial world we don't have the transparency that we have onchain and that's the the added value that we as crypto can basically provide full transparency compared to the traditional Financial world