Bitcoin Flows & DeFi Value Are Driving Crypto's Next Repricing

Transcript

ETFs and Bitcoin have just infiltrated the advisor community in an extraordinary degree. I think the flows are just going to accelerate from here. When you have Morgan Stanley, you have Charles Schwab, you have all the RIAs, I think you're going to see many more inflow days than outflow days. It's worth noting that leading DeFi protocols are really lowly valued, right? Aave is a massive new piece of financial infrastructure. Its market cap is the same as Papa John's. Uh that's absurd. Now that we have a better regulatory environment, we're seeing a lot of efforts to unify these lab entities with the foundation entities under one single umbrella, and this is great for token holders. Aave's

fully diluted market cap is 1.5 billion. So, that's basically a 10x sales uh multiple for a relatively early stage kind of growth company that can be the backbone of the modern finance. And you could buy the whole space for 10 billion dollars. As always, note that none of the information discussed constitutes investment advice or any offer,

recommendation, or solicitation by Blockworks Galaxy Bitwise or Anchorage, or any of its affiliates to buy or sell any securities. Everyone, welcome back to Inflection Point. I'm joined as always by Matt Hogan and David Lawant. Um hey guys, how you doing? How how's your week been? Uh doing great. It's a great time in crypto. So, excited to be here. Doing great. A lot going on. Prices moving. Let's start the convo. Yeah, let's do it. Uh Matt, you're So, new um Las Vegas right now, is that correct?

That's right, yep. I'm at the Bitcoin conference out here in Vegas. Uh I haven't been to the conference yet, so no on-the-scenes report, but I have chatted with some people in the lobby. The mood is is uh optimistic. A lot of talk about stretch and digital credit. Um but I think people are feeling certainly uh maybe better than they have in in in six or or eight months. Yeah, for sure. Um Bitcoin did nearly touch 88,000 a few days ago, so I I think maybe that has some optimism in the air. Um and then some something else I saw from this um little-known company called Bitwise is really nice chart uh um

showing that the institutional demand, and it's institutional demand here as measured by the um flows of ETFs and digital digital asset treasuries, we are approaching um net positive again, and we haven't been at these levels since prior to the 10/10 um October crash, so maybe this is another reason for some of this renewed optimism. Yeah, I think that's exactly right. Look, I think if you think about Bitcoin for the last 9 months, you had some arms rowing in one direction and other arms rowing in the other direction. So, you had sort of institutional pulling for a while, and then there were outflows.

Uh but you had retail selling that was pushing in the opposite direction. I think what this is pointing out is the combination of strong ETF inflows, strong corporate treasury purchases from strategy via the stretch instrument, and then reasonably strong purchases from long-term holders of Bitcoin, sort of OG crypto. When all of those are rowing in the same direction, the price goes up, and I think that's what we've seen over the last, you know, 6 weeks. And I'm actually fairly optimistic that all of those things will continue. I feel very confident that ETF flows will continue to be strong. We can talk about why. I feel very confident that strategy will continue to issue stretch and buy Bitcoin. We can talk about that, too.

And then, I think the sentiment on the retail side has shifted from fear of the 4-year cycle to like very cautious long-term optimism. So, I don't think that that's going to be fighting against us as much as it was for the last 7 months. So, you add those together and I'm I'm reasonably not straight up to the moon, but I'm reasonably positive. Well, maybe let's talk about those um those BTC inflows on ETFs because I was looking at some some data and I I've seen nine days of straight net inflows. And again, this hasn't happened since September. So, before the 10/10 crash. So, you know, any insights there?

Yeah, I mean, I'm happy to take a stab at it. I'd love to hear uh David's view. Uh ETFs and Bitcoin have just infiltrated the advisor community in an extraordinary degree. I'll give you two anecdotes that point towards why, and I think this is what's driving flows. Uh one, you had Morgan Stanley launch a Bitcoin ETF, I think 14 trading days ago. It's had 14 straight trading days of net flows of positive flows. Every single day, money coming in. Um I think that's a sign that that part of the wealth community is starting to allocate. You also had Charles Schwab posting a video talking about 2 to 7% and Bitcoin allocations in portfolios.

That's absurd. When David and I wrote the first paper on Bitcoin's role in a portfolio, I think we were uncomfortable talking more than 5%. And now you have Charles Schwab saying, "YOLO in 7%." We'll see what happens. That's extraordinary. Um and then I was at a conference yesterday in Phoenix, a standard advisor conference, not a crypto-specific conference. And I started my speech by asking the room, "How many people in here own Bitcoin. And usually it's like 10, 20, 30% of the room. It was about 150 out of the 170 people in the room. I think it's just become purely normalized. I think um I think the flows are just going to accelerate from here. When you have Morgan Stanley,

you have Charles Schwab, you have all the RIAs, uh I just I think you're going to see many more inflow days than outflow days. Uh for for years to come, to be honest. I'm actually really bullish about that. Love to see it. Uh agree with everything Matt said. It's awesome to see this demand coming both from the corporate side, the MicroStrategies of the world, and from like the more traditional financial advisory ETF flows. The other thing I would highlight is this is probably also coming on the back of a much more risk-off broader market environment, right? If you look at like the broader risk asset uh uh spectrum,

we were seeing traditional markets spiking up and down or swinging huge amounts depending on what the news flow regarding the Iranian conflict of the day was, right? So like the strait is closed, oil is up 5, 6, 7%. Uh if it's open, it goes down. I think over the past many weeks, we started to see the market um I I don't want to say becoming more comfortable, but probably accepting the current normal uh risk-off uncertainty a little more. Uh there's this popular saying that the market dislikes uncertainty more than it dislikes bad news. I think we're now kind of going a little bit past the uncertainty phase.

And I I fully agree with Matt. I think in our first episode, we said that Bitcoin will be chopping between 60 and 80K. And And that's pretty much what we have seen, right? Now we're getting close to the 80K. Bitcoin tried to breach the 80K level twice. I do anticipate that this is going to be a battle. You can see this in some of the more like trading dynamic liquidity type indicators. Um spot volumes are starting to recover, uh which is great to see. They're still low compared even to the recent recent history, which is uh pretty weak. Uh but we have been seeing Bitcoin spot volumes increase 20, 30, depending on the day, even 50%,

which is a big recovery from the lows that we have been seeing in March and early April. And the second thing I would highlight, this is the main indicator I like to pay attention to when Bitcoin is about to break a key resistance level or support level. Which is how skewed the Bitcoin spot order book is. The idea here is that you have all these buy and sell orders stacked on all these Bitcoin spot exchanges. You add them all up, and then you can basically kind of start to see if Bitcoin has uh is more skewed to buy pressure or sell pressure. And whenever Bitcoin hits the 80K level, you can start to see some sell pressure

accumulating. And and that's an interesting indicator to follow because if Bitcoin keeps hitting the 80K level, at some point I would expect the sell pressure to exhaust itself. And then Bitcoin would probably be ready to break and enter uh a different market regime. So far, this hasn't happened. So every time Bitcoin gets to the 80K level, the spot book gets like 10% skewed to the sell side, which is a moderately high skew. Uh I want to see Bitcoin getting close to the 80K level and the skew getting a little bit less uh tilted to the sell side. That's what was going to give me confidence to uh see a different market regime here. Yeah, I

absolutely agree with that for what it's worth. I do think that's still the channel that we're in. And I think we'll eventually exhaust those sellers cuz I think there is more institutional demand and more corporate demand that will eventually work its way through that, but we're not through it yet. And then I suspect the next channel will be uh between 80 and 100k with 100k being a nice behavioral sell wall that I think you'll see the same sort of pile up there. So uh we're we're in channel A, we're trying to move to channel B, I think we'll get there. Maybe we need the Clarity Act to fail before uh before we get there, we'll see. Um but I I do think we'll get there eventually.

Yeah, another thing about the um 80k level and depending on which data provider you use, there's a short-term holder wall as well. A lot of the um realized cost basis for short-term holders is around that 80k mark and you know, maybe they sell because they've been under water for so long and they just want to get out and break even. So what the psychological resistance and maybe there's some on-chain data showing some resistance there too. Um I feel a little bit more comfortable when if we could spend a few days above the 80k level, then maybe that kind of cleans it out. Um David, as you were you were talking about the skew uh this is on my timeline. This is maybe this is not on yours, you guys, but you know, there were levels where you know, max pain, where liquidations would hurt

the most people and it was between it was 80k and I think the next level was like 75k. And then on my timeline there's talks of market manipulation by maybe the market makers, maybe by some of the big whales. I'm always skeptical when I hear this stuff because anytime Bitcoins Bitcoin goes up, there's there's no market manipulation, but if it goes down or if it ranges, there's market manipulation. Maybe I'm not in the know, but did you guys have any qualms over this? Do you do do you have any fears that there's even a hint of this going on in this global market?

I I haven't seen these reports, but of course they always pop up, right? We just had the Jane Street 10:00 a.m. dump fud what just just a few months ago. Yeah, I I that doesn't ring right to me. The thing is that the Bitcoin market I believe is just too liquid for one single market maker to be able to move it one way or another. I I I do think that you can argue that sometimes the the Bitcoin flows they're very one-sided, so things tend to move a little bit more wildly than you would see in traditional finance, but I would argue that this idea that there's someone manipulating the price, I I I

think that's that's way harder to do than everybody thinks than most people think in this market. I I don't buy it. I haven't seen the rumors, I haven't seen the data behind it, but I'm I'm very skeptical. No, it's complete goofball nonsense. It's what you said, Mark. You know, it's classic confirmation bias when something turns out well it was because of your skill, when it turns out poorly it's because of bad luck. This is one of the most classic tropes in behavioral finance and we see it applied over and over here. As you said, there's no manipulation on the way up. Look, it ultimately comes down to who's buying and who's selling. That is what drives this market. Yeah. It is true that the market can have certain levels where you can have a lot of liquidations kind of accumulating and whenever we

breach those levels, the market movement can exacerbate one way or another. This is a typical dynamic of any market that has an active derivatives channel and Bitcoin has obviously a massive perps and data futures market. So, it is it is true that there are some areas where you can start to see some acceleration, but But fact that there is one single guy who's able to move the Bitcoin price towards that exact level to trigger things, that's yeah, to me very hard to to believe in.

Yeah. And probably mass geographical cohesion is probably even more unlikely. The last last thing I wanted to touch on this is, you know, with with earlier we spoke about Morgan Stanley releasing their BTC ETF, you know, Goldman Sachs also has their income generating BTC ETF. Are we going to expect these traditional financial institutions to continue to launch ETF products like how OFP index launched stable coins or do we think the market's consolidated enough here?

Um look, I think you'll see more ETFs by firms, for sure. That's what you see in the traditional ETF channel where people don't notice, but like Charles Schwab has a crypto equity ETF, right? I mean, people just if they think they can make a market and there is billions of dollars demand coming into Bitcoin ETFs and Ethereum ETFs and Solana ETFs, they're going to stake their claim and get a piece. I do think you'll see still most of the assets and most of the volume stick with the incumbents. That's what we see everywhere else in the ETF industry, but you do see these bespoke ETFs come on board. I think that's going to be Look, Morgan Stanley is being very successful

with it. You know, it's already going to be one of the more successful ETF launches this year, full stop. So, if they're successful, other people are going to look at that and say I wonder what we can do as well. But it's net good for the system. It just means more people align behind crypto with their brand, their education, and their resources. I think everyone, including actually Bitwise, even though we theoretically compete with them, should cheer it happening because it's it's growth in the ecosystem. I agree. Matt, do you think it makes sense that maybe these new folks were launching the, let's say, old vintage ETFs, right? Spot Bitcoin or maybe equity maybe a volatility premium.

Do you think these guys who are coming in now, they need to bring something more to the table? I guess in this case is owning their distribution, right? Because just coming like out of the the blank and just coming with a with with an ETF is hard, but a lot of these folks, they they own their distribution, so it does make sense sometimes to to have their own vehicle. Yeah, I mean, distribution is king. I don't think you can launch as a de novo asset manager a Bitcoin ETF and expect to get any traction if you're just new to the market with no reason for existing. But if you come with trillions of dollars of assets behind you and a high-quality brand name, of course, you can carve out space.

Um Uh you and and we're seeing that right now. We're going to continue to see it. But again, I want to emphasize, it's just good. Like it's strictly good. It just means more education, more discussion, more normalization. Uh we're going to wake up in a world in a year or two where most investors have some Bitcoin in their portfolio. And these are the steps that get us there, and that's going to be an incredible outcome for the space. What I love about this is it might not feel like it, but it's still very early. Even even for Bitcoin, which is an asset that has as much airtime as it gets, uh I think it's still early. It's super early. It's super early. These things will play out over 5, 10 years. That's the kind of

uh it's not a Bitcoin supercycle, but it's a supercycle of institutional inflows in in that it's going to play out over many, many years. Um that's just the way this game works. Yeah. It's crazy that I agree it's super early, but it's crazy to say that the molten an that's, you know, nearly two decades old, approaching approaching that number, but yeah, it it it has a unique background in in that respect. Uh, you know, I have a a 16-year-old son. He's still pretty early, too. Um, so, you know, he has he has a lot of work to do. So, I think it's normal.

It's the passage of time. Um, teenage phase, still growing up. Okay, love it. Um, so, you know, last week we spoke about the hack. I think that was the entire episode. Um, you know, it's been roughly a week since then, and there's there's been some some progressions in the space. I think one of them that comes to mind is, I mean, and for viewers, if you want to find out more details about the hack, I encourage you to listen to last week's episode. Um, but you know, what I thought was interesting is like this kind of DeFi United Relief Fund. It's, you know, it's the stepping in of different private entities, you know, Aave DAO itself is contributing, I think, about 25,000 ETH, which is, I think, 60% of their

treasury, roughly. Um, Mantle is putting in, um, Stani, the founder of Aave, is also putting in like 5,000 ETH from his own personal funds, Etherfi, Lido, and a few others, you know. Um, so, you know, this seems like a very wide, holistic community effort to try and make users whole, and maybe help restore trust in DeFi markets a little bit. Um, I I'll I'll I'll I'll stop it there for now, because I have some other thoughts, but um, what what do you guys think about what's happened in the past week, and anything that I I forgot to mention? Well, well, I'll I'll let David go in a sec, but the one thing you didn't mention was the government

stepping in to bail it out. Uh, you left them out of the equation. In the traditional finance world, that's what would have happened. You don't see banks rallying together to bail out Silicon Valley Bank. That's not what happened, right? You see the government stepping in with taxpayer funds. I think it's actually beautiful. Uh and really inspiring to see DeFi recognize the importance of Aave to the general ecosystem, the unique nature of this hack, and to step in and fill that hole because we're building a multi-trillion dollar industry, so it's worth it. Uh I've personally found it uh inspiring to watch uh is is my my take.

I fully agree. This is one of the most exciting things to see in DeFi in a while. I mean, to Matt's point, there's no lender of last resort. There's no John Pierpont Morgan in 1907, one single person architecturing a recovery of the system. Just all these players coming, some out of their self-interest, right, Mark? Like like like the mental uh the mental thing is a loan. Uh the Arbitrum is kind of uh a freeze that that they have done in the chain. A lot of them are just uh kind of donations.

So, very interesting to see these things coming out organically, kind of grassroots. And last I saw, I think they've already collected more than than than the shortfall. So, uh I guess the next step now, and and I think Aave released this just last night. I I didn't have time to read it, but I think Aave has already is starting to lay out plans on how to restore the the the the the protocol functionality, right? We we talked this about uh we talked about this last week, how a lot of these Aave markets are frozen, they're at 100% utilization rates. So, now that the resources are in, there is a path towards uh restoring

normal C4 all these markets. It's going to be still very interesting to watch because the execution here can be very interesting. Of course, it's still going to involve Kelp DAO, it's going to involve Layer Zero. Aave has said, "Hey, they made extra precautions to make sure that there's no the attacker is not able to like kind of inflict further damage. It's going to be done in tranches to make sure that everything is properly walled off, all the risks are taken into account." So, I'm very interested in seeing how this is going to be implemented, but the the sheer fact that the industry came together to to rescue and make users whole, I think was one of the most awesome things I've seen in a while in DeFi.

Okay, I I didn't I didn't realize they've already covered the shortfall in in just a week. That's that's crazy how quickly things move in this space. Um and and then, you know, what what what's interesting with Aave is that, you know, it comes at a time where they have other issues going on. I I I don't want to use the word issues, but it they have some governance issues with um uh I think a few months ago there was concerns over the token holder rights, so to speak. Um there's there's the Aave the protocol, but then there's also the Aave Labs, which is a for-profit entity that um that runs the front end. They run the Aave app. They partner with other institutions. And

the these while these while Aave Labs helps um I guess marketing and expand the user base of Aave the protocol, which is just this the core and the software and the DAO and the token holders, there there was concerns over this misalignment between the equity of the Labs and the token holders from the actual protocol. And so, this led to a a proposal, which was refined and discussed on the forums, the beauty about the space, and the proposal was for all of Labs' profits and revenue-generating activities to actually now go towards the DAO and to the treasury of the Ave protocol instead. Uh And in exchange

because you know Ave Labs still has still has bells and and personnel and still needs to attract talent because you know they haven't recently raised hundreds of millions of dollars. They were out they came out 8 years ago on the lend. So they still want to be able to incentivize growth and so the the I guess the trade-off or the compromise is that the Dow will be funding Ave with 25 million dollars in stable coins over a period I think of like 2 years as well as some tokens to help with incentives.

Um and you know if we put this into you know zoom out a little bit we can see that that you know that 25 million if we just look at what Ave does on a you know quarterly basis where you know on average we're looking at a hundred million dollar revenue run rate. So that's about 25% added on. Um but then again and then the costs on the side maybe it's about you know 20 million. So net net this seems like a positive thing for for Ave. Um did you guys have any thoughts on this proposal? I have thoughts um not even on the proposal but also on the the bigger issue.

And I think Matt will probably agree here with me. Uh when you talk to institutional investors about these more let's say deeper DeFi crypto tokens, one of the first things that always come up is that historically there's been a little bit of a disalignment between the token holder rights and the equity holder rights. And by equity holders I mean that a lot of these protocols they kind of were set up in a way that it was very popular at the time and this is probably just for regulatory reasons that you had a you had a foundation entity which was usually non-profit and sometimes headquartered in

Switzerland or some favorable jurisdiction. And this non-profit was in charge of taking care of the protocol. And then you had another entity, which they used to call it generally like the labs entity, which was for-profit, and it was kind of an engineering or perhaps application development arm that would use the protocol to produce to to to to to produce applications to run on top of it. So you always had this non-profit foundation on one side and then the equity labs entity on the other side. The token holder, so if you own a an Ave token or a Uni token, you are

basically lumped in more with the foundation than with the labs unit. And and this kind of disconnect or potential misalignment here has always been an issue. Now that we have a better regulatory environment, we're seeing a lot of efforts to unify these lab entities with the foundation entities under one single umbrella, and this is great for token holders because now their interests are completely aligned. We had something similar. I mean this has happened with a bunch of other protocols.

Perhaps maybe the big one that I can remember recently was UniSwap. UniSwap also did some sort of unification. It also enabled a fee switch because at the time UniSwap was not generating revenue at the very end of 2025. And now just a few weeks ago Ave came with this Ave will win proposal. And the reason why this discussion started to become relevant especially in Ave circles is because there has been a few instances in which token holders started to complain that the labs entity was siphoning revenue out of of of what would be token holder rights into the entity. So, they basically what they did

was they did a bunch of things in the desire of a winning proposal, but I think for the discussion we're having here the the biggest one is that now uh 100% of the uh revenue that is generated in all the Ave complex goes to the protocol treasury. And then governance will decide how to allocate these resources. The labs entity is actually going to be funded by the the by the Dow. So, basically by by Ave. In a sense, the Ave token holders are kind of taking the responsibility to fund the labs entity, but on the other hand, they are able to now capture 100% of the

revenue for Ave. I think on on that here this is ex- should be extremely positive for Ave holders, and more broadly this theme of having more alignment between token holders uh and and and all the entities that are related to to the protocol is very positive. Yeah, I absolutely agree. It's hugely positive. This is correcting a wrong that was forced onto the DeFi community by poor regulation, which basically didn't allow for this kind of alignment as David was speaking, and forced this unnatural separation that creates conflicts of interest. And now they're being put back together sort of like a like a fusion style.

Um and of course there's conflict on how much one side should be compensated or the other. Negotiations are always challenging, but the idea of aligning it in a single structure has to be great. It's worth noting that leading DeFi protocols are really lowly valued, right? Ave is a massive new piece of financial infrastructure if it can get through these challenges and exist. Uh it's like magic to use. It provides a core essential service. It's market cap is the same as Papa John's.

Uh that's absurd. Right? It's 1 and 1/2 billion dollars. It's smaller than Sweetgreen's, which makes nice salads, but is not a major new piece of financial infrastructure for the world. And I think the reason these market caps are so low is because of this division and the the lack of ability to accrue value to the token. I think if we can fix this at Aave, at Uni, at other major DeFi protocol tokens, I think there'll be a re-rating upwards significantly higher in market capitalization. And I actually think there's going to be an opportunity for investors because there's going to be a lag between the reality of value capture and people realizing the value capture.

And so I again, I think I think broadly speaking, DeFi will re-rate upwards uh by a couple of factors if we can get this kind of alignment. And I think they're pretty dramatically undervalued right now uh versus their importance in the world. Yeah, just just with that some numbers what Matt just said, I think Aave generated something like 115 million dollars of revenue in 2025. Um now in 2026, they were they were on track to to meet that or probably even surpass that. Let's see how the how fast they will recover from the hack, but I think it's realistic to assume that they could generate a similar amount of revenue in 2026. So, around 100 let's say 140, 150 million dollars.

Aave's fully diluted market cap is 1.5 billion. So, that's basically a 10 times sales uh multiple for a relatively early stage kind of growth company that can be the backbone of the the finance uh or the financial system. So, uh I I I agree that valuations in the DeFi space more broadly have been depressed. Of course, there's ass- asset selection here, and which has its its its early enough that we don't have a lot of certainty on exactly which protocols are going to win. But generally, I think the multiples that we're seeing in DeFi, especially for the ones that are able to

generate meaningful revenue, they seem quite compressed. Yeah, I mean, you could buy the whole space for $10 billion. So, we could talk about asset selection, or just like you could buy the whole thing. Uh it's a really low valuation for what these things are trying to do. Either the market thinks they're not going to succeed, uh or it doesn't understand that the sort of ghost tokenomics that have plagued this industry for the past few years are being rewritten into real value capture. Uh and I think as it realizes that, I again, I think there'll be this significant re-rating upward.

Yeah, I definitely think valuations are compressed. And if we're looking here at Aave's income statement, and you know, Aave Labs should add, you know, roughly 12 to $24 million on top line. But, you know, and then you mentioned, you know, you're looking at 10x price to sales, you know, relatively, you know, attractive multiple for something that's in, you know, emerging growth stage. But then also, what I think what people miss a lot is what flows to the bottom line, because a lot of those funds are either just going to go directly to the treasury. They're either going to be used for buybacks, they can be used to earn interest on top of them. And so, you know, I I I think what the space maybe needs to lean into a lot more is maybe price-to-earnings

ratios. And then, you know, depending on the protocol, if, you know, like Aave, it's going you know, it's going to earn fees in multiple asset types, and you know, it's going to affect the what the balance sheet looks like as well. But, you know, if you just if you just look at a protocol on a on on maybe give it a discount and put it in US dollar terms. Uh these protocols look extremely attractive on a price to cash flow basis. And that's something you normally only look at for very mature protocols in the chart five space. And the fact that many, you know, dozens of these D5 protocols, you can value them on a price to cash flow ratio. Um and with these absurd like this sometimes it's less

than 1x. Um I I do think that uh a a re-rating is is justified, um especially if there's some regulatory tailwinds. Um and then I I I'm not I don't want to comment too much on this, but I saw this tweet um yesterday that um one of I don't know this I don't know this protocol, um but they they they signed up for Blockworks token transparency framework. And um apart you know, markets do what markets do, but the um the poster here claims that just from that news alone that their token price jumped by 17%. And this is not necessarily saying that there's any token holder alignment in this protocol. It's more about

it's more about the transparency behind it. So at least investors know how to start the price risks and growth and where that um where that cash flow is actually going. Yeah, 100%. I'll just give a shout out to the token transparency framework. I think it's incredible work uh and it's available and anyone can go find it. It's really uh phenomenal look through at the risks and how these protocols are aligned. And I do think you're making a broader point, which is look, generally speaking, token economic rights are never going to be worse than they are today. They're going to get better claims on the economy. Generally speaking, uh I think D5 regulation is going to get clearer and better in the future. That's not a guarantee, but I think that's the

general direction. Generally speaking, I think transparency is going to improve. These are like good trends to get behind. Um I'm pretty bullish on it. These are excellent trends and it's kind of crazy how recent it is then like a regular investor can see something similar to an income statement in order to underwrite an investment decision. I mean, we're we're growing as an industry. It's awesome to see 100% kudos to the Blockworks team there. We need more of those things and we're I I think we're going to get to a point in which investors will start to become way more comfortable with investing in tokens exactly because of these types of initiatives.

I mean and then you know with that transparency I've been looking at Ave and looking at you know this this bad debt that they've accrued and then I'm I was trying to think of a TradFi analogy to it and I was and you know the utilization rates have gone up on this re-staked ETH because it's it's it's kind of difficult to get out of so because the Ethereum staking queue probably has like a couple billion dollars waiting to be staked right now. So and so and then even exit there takes a while it depending on how long that queue can be. And then if you try to you know exit on the market exit from your looping strategy and then exit from r ETH by swapping it for something else in that kind of size that will also you'll

also take a price impact there. And so then it made me think about you know Ave's risk management and it my TradFi analogy was maybe this was a duration mismatch and it kind of reminded me a little bit about Silvergate and back when you know they technically had the assets but it you know they had the backing but it was inflation interest rates went up so the the debt was was went went down is discounted and and so it had that mismatch and then that led to a run on the a run on the bank, which ended up in its in its um conceding.

But, that kind of that kind of thought process hit me with RV, and then I and I and I only realized that Spark, which is another competitor, they did not allow for RS ETH. They removed it from their from their protocol in January of this year for for similar risks. And, you know, I mean I I would I was in the camp that maybe staked ETH was safe, and then you know, you know, restaked ETH maybe you have to do a little bit more introspection there depending on who the restaking provider is and and and what exact what AVS is or whatever they're called depending on the provider that they're into. But, um is is that I I think that's also something

that's maybe under discussed the liability duration mismatch with some of these uh lending protocols, and I haven't even seen a dashboard that goes through this in depth for any of them. And, I would love to see something maybe like in traditional finance if if I'm looking at a bank's um you know, 10K, it has categories of assets like um rated regulatory there's like tier one capital, tier two, etc. Um I'm I'm I'm I'm wondering if maybe, you know, we need to in implement some kind of lens like that into for these protocols as well, especially as they start to get larger and and and and they're and need bad debt like this. I mean, this one was a hack, but maybe any other bad debt from I don't volatility and macro could

even have a bigger impact that maybe maybe the private community alone is not um large enough to step in for. Yeah, that's the fascinating analogy. I definitely think RV had something similar to a run on the bank uh type of situation. Uh perhaps the the Yeah, the other things I would highlight here is that once the RS ETH pool gets fully utilized, and if you own rUSD, and if you want to have or change that exposure to another asset, one of the other things you can do, for example, is use your rUSD as collateral and withdraw USDC or USDT.

So, that's how these things start to spread out a little bit towards the the other pools and other pools that that can be higher. Um I think um in theory uh the situation should be resolved and the market should be able to clear again if interest rates were able to float to whatever price that the market needs to clear at. The way I understand that Aave works is that there are caps. I mean, these these are dynamic caps. They are set by like these governance and and risk managers, but but interest rates cannot go from 3% and then liquidate all the leveraged

players and then let everybody get out. So, like there are a few cushions here, which I think are honestly prudent. I do believe that we should have these caps and these sorts of cushions. So, that's what that's the big reason why I don't think the market was was able to clear because otherwise you would just basically liquidate a huge amount of folks for an issue that in theory was not even maybe yeah, directly their fault. I think there's there's a discussion to be had here on how much you want to have interest rates to fluctuate. I think it was Circle who suggested that you should just spike interest rates, liquidate all the leveraged buyers, and then come back, and then and then reset the markets for normalcy.

And I think what Aave is trying to do is something that is a little bit smoother. That's that's my understanding of of the current situation. But But for sure, there's there's a lot to think about in this risk governance and risk curation management. Uh we talked about the aggregated uh kind of liquidity format that Ave has that uh Ave V4 kind of uh fixes at least in a partial way. So, there's a lot of big architectural questions here. Yeah. I think I think it's a great uh analogy, Mark. I mean, I I generally think many of the problems that we had are problems we've seen in traditional finance. You talked about liquidity mismatch.

Uh looping has never ended well in traditional finance, either. Um and it didn't end uh well in this case, too. So, I do think there are a lot of lessons to be learned there. I think the system will be improved uh through this process. Um but there'll probably be additional issues in the future. I know we wanted to talk about prop AMMs. Maybe David, maybe you can give a a background on what prop AMMs are. Um well, I I can have a high-level one for us just to to start a conversation.

And maybe we can even start one step behind. Um one of the big innovations in DeFi was this concept of the automated market maker. It started, I think, in 2018 with Bancor and Uniswap. These were some of the earliest folks who started to use this idea. And the idea is to basically uh introduce something that is an alternative to um something that is an alternative to the central limit order books that we're used to seeing, for example, a centralized exchange. So, this automated market maker, they they they use these constant product functions, which basically regulates the amount of the

the the amount of assets that are sitting on a pool uh at any point in time. And And kind of automatically adjusts uh how much is in a trading pool. Let's say if you want to swap ETH for wrapped ETH or ETH for a stable coin, right? So, you have these these kind of pools that have these inventory of assets and then this function kind of regulates this in a way that these things are always set in place. This is how a lot of the earlier DEXes worked and this is a great model, especially for assets that are not very liquid because it allows you to uh it's it's particularly efficient in price discovery

uh for less liquid assets. The thing, however, is that this traditional automated market making model has a few drawbacks. And the the biggest drawback it has is that if you are someone who is providing liquidity to these central to to to these decentralized exchanges that work on automated uh market making uh scheme, uh you tend to incur in a lot of slippage. Basically, you are kind of being adverse selected and you end up actually kind of losing money. You can compensate that in some other ways with protocol fees and things like that, but this is a a a a tough flow This is a type of flow that if you're providing

liquidity, you're constantly at a disadvantage. Uh there is the benefit that it's very transparent and it's very open and everybody can use and you can pull all these people to kind of participate in this market making um kind of mechanism. Um over the years, we started to see basically things evolve, I would say from here in two ways. The first one was things like Hyperliquid and Hyperliquid just adopted a central limit order book on chain. So, basically Hyperliquid went to the, let's say, traditional model that you can see in a centralized exchange, but they were able to produce a blockchain that is very performance, so you can produce this uh uh this you can uh reproduce the centralized order book on chain. The

other way that has been emerging, I would say for the past year or so, correct me if I'm wrong here, Mark, but over the past year we started to see the model of the prop AMMs. And these prop AMMs, they are slightly different in the sense that uh you are not dealing with this public uh permissionless pool of liquidity providers that anyone can join. So, it's basically something that is um a lot more a a closed architecture. Actually, consumers don't even see these prop AMMs because they are not a consumer-facing piece of the technology. They're basically just attached to the liquidity aggregators, but because they're closed,

because they're dynamic, and because they're professional market makers, they can quote you much more efficiently. So, some folks see this as a very interesting alternative. It's kind of a new model of automated market making. It's more, let's say, closed in the sense that it's not like the traditional AMMs that anyone can join, but on the other hand, they're much more efficient, especially for the liquid assets. I think uh this is basically happening on Solana right now. Ethereum has a few limitations that doesn't allow it to happen on Ethereum so far. Uh but I think a big chunk of Solana's flows are now routing through prop AMMs, especially for the most liquid assets,

these things can be exceptionally efficient. Yeah, that's right. I mean, it it it really picked up in late 2024. And here I'm showing you a chart on Solana. Solana is where these prop AMMs are really proliferant. And this is just for spots. Um obviously, um you know, futures and perpetuals, that's dominated by Hyperliquid. But for spot trading on on Solana, it's it's between, you know, 50 and 70% of total volume across the chain at any time. It's starting to become popular on base as well.

Um, and I think base is another good home for proper MMs, mainly because, you need one, you need cheap fees, and then two, you need very um, short block times because for these professional market makers to give you a quote, they don't want it to go stale, they don't want any bad flow. Bad order flow, so to speak. So, the shorter block times really helps with that. I think Ethereum might be a while away. Maybe it can suffice with maybe like a ETH USD or stablecoin to stablecoin pair. But on Solana, it's clearly dominant dominant uh, method right now, and I think the only reason that it's come down in recent times, which is ironic, is because uh, meme trading has started to pick back up in a couple of in in your in recent months, and memes um,

these professional market makers are not going to give, you know, put quotes out on this. Um, so, those are still uh, handled by traditional AMMs, or maybe in some cases even um, concentrated um, liquidity pools. And like you mentioned, David, these prop AMMs, they're not necessarily consumer-facing. There's no like Uniswap app that you go to. So, like some of the prop AMMs are, you know, Tessera, HumidiFi, or some some of these other ones. Um, you you you typically get access to them through aggregators. And so, they these have also helped aggregators with their volumes because instead of going directly to whichever

front end maybe that you were used to, you were going to go for what's going to give you the tightest spread. And whether that's going to be on Jupiter or Titan or DFlow, any of these other aggregators, and we're only speaking about Solana here because this is where it's proliferated the most, it's it's also really changed the the whole market regime in in this dynamic as well. And I just wondered, I mean, you know, I want to hear Matt's thoughts before, but then I also wonder if if if prop AMMs are the end game or these chains are going to mature even more and then we're going to actually see what traditional finance does and it's just, you know, regular order books.

Well, that's an interesting question. I'd love to know what what David thinks about that it to the extent that you can run a traditional order book efficiently on chain, I think is a uh an interesting question uh for Leont. Um yeah, 100%. Um I think we'll get there. My perception is that well, Hyperliquid does that already, right? One of the reasons why Hyperliquid has such good UX and why it's giving like even big exchanges like Binance a run for their money is that they are able to replicate this uh claw, the central limit order book architecture on chain. Um I think we probably need a few more performance enhancements in order to run this bare at a L1 level of

Solana's probably a lot closer to that than than Ethereum. Uh maybe we're going to have like new projects, these like super fast projects, things like um Mega E or uh you need a level of performance that might not be here yet for the L1s. Uh but I think I I I don't know. I think it's going to be very interesting to see this battle between the prop AMM model and the on chain central limit order book is one a very interesting one to see. I don't know, maybe we're going to have different winners depending on the type of market that you're trading in.

So, uh this is also another possibility. This might not be a winner take all market. But I feel like we're getting to the point where we're going to see the quote unquote final architecture for trading on chain, either a limit order book or something related to prop AMMs. Uh it's incre- incredible to see how much innovation we have been seeing. Uh a lot of these things are actually original DeFi primitives, right? These are things that DeFi added to the canon of financial primitives. Things like AMMs and and now the uh I think you can argue that the prop AMMs are an extension to that. So, a huge fan of the innovation that is happening in the space. Very hard to say

who is going to be the winner and how the end state is going to look like, but the good part of the story is that we're seeing improvement on a regular basis to the point that today you can have on-chain trading execution that can get pretty close or even in some cases surpass the level of execution that you can find in centralized venues. Yeah, I do think it will be I I do think the long tail of assets will maybe forever be regular AMMs, constant product, or concentrated liquidity because it's a long tail of assets. I don't I don't I don't I don't I think it's a little bit too hazardous for market makers to give quotes on that. Um we've been trying for order books on chain for a very long time. Hyperliquid has done it their

their their own dedicated L1 to do that. Um there's a lighter which is an L2 as well and and then even on Solana there's been attempts at order books on the L1 that have not just for lack of a better word failed and now they are trying to architect an I don't mean to trigger anybody when I say this, but they're trying to architect a ZK L2 on Solana. Um maybe that's not the exact technical definition, but that's kind of how I see it using a separate chain and then posting proofs back to the L1. To me that seems like an L2. Um I don't want to get bogged down on the details. Um but you know, something that's something else that's interesting that's that's been on my radar for a couple of months is there's this protocol called Yield Basis and you

know, they already mentioned that there is an issue with AMMs where there's impermanent loss. Um so pri- providing liquidity can actually be detrimental depending on the trading fees. Um and which is another reason why memes are so good for AMMs because the trading fees on memes tend to be a lot higher because it's typically retail who are a lot more price insensitive. Um but Yield Basis is this protocol um and you know for the audience at home the impermanent loss it is a square root of the function of the difference in the movement between the two uh assets in the pool. And so what Yield Basis does is that it gives you leverage, 2x leverage, and

that 2x leverage essentially cancels out the square root of the loss that you're getting from these price movements. And this is and I'm not just talking about a hypothetical uh project. I I don't want to comment on the token too much, just the mechanics. But this protocol has been live and collecting fees since November last year. And on BTC you they have different wrapped versions, wBTC, um Coinbase BTC, tBTC. They have ETH as well, the um wrapped ETH. And you know just just looking at BTC so far annualized you get depending on which which wrapped version you own and you deposit into the pool you're getting APYs between 5 and 1/2 and 10%.

And so that's that's taking an asset that historically is not productive and to get even to get even close to double digits like 10% yield on and not have any impermanent loss um is I I I think is a strong feat. And I I look at I look at this this mechanic as something that's not only maybe promising for BTC but maybe um real world assets as well because then there's a further incentive for you to bring your I don't know Apple stock on chain because then you can um collect some yield on it that you wouldn't be able to do in traditional finance without some kind of lending or option selling um uh plan on top of it. So, I I I do think

that's an interesting point and I I I do agree with you, David, and I think that um central limit order books are probably the end game because they're such an efficient design and they work without any real hiccups in traditional finance. So, but I I'm I'm skeptical as to when the timeline of these uh chains will be performance enough to handle them. Yeah, I'm with you, man. Um I I'm just happy that the industry has been evolving and iterating so fast and trying all these new models. I'm pretty sure we're going to end up uh where we have to be. The question is how long?

Okay, so I think uh we're running out of time and out of guests there. Um Maj just hopped unexpectedly unexpectedly. So, we're coming up on the hour mark and I think we'll call it a wrap there. Any um any parting thoughts, David? Um no, I just hope everyone has a great week. Um looking forward to seeing everything that's happening around the industry. Paying very close attention to the Zady K level on the Bitcoin side. And the final thing I would highlight, just maybe looking a little bit forward, uh we're getting very close to that the window of the Clarity Act potentially passing is getting kind of uh starting to to to look tight. So, the next few

weeks I think we're going to start paying a lot of attention to Clarity to see if it's going to make it or not. And that's probably one item that is going to gain a lot more attention uh in the market and the industry more generally. Yeah, 100%. I literally have a Cloud Cool Work schedule task to give me updates on a daily morning of any um any news or any new um impacts in the market regarding clarity, any rumors, anything. So, I'm definitely keeping an eye on it. And I hope everybody else is too. And I hope hopefully we can get some momentum and a little bit pressure behind it.

But, thanks for thanks for joining as always, David. And everybody at home, be sure to tune in next week. Cheers.