Cap Labs: Insured Yield & the Future of Stablecoins - Benjamin Sarquis Peillard. Ep 618

Transcript

This episode is brought to you by Nosis, building the open internet one block at a time. Nosis was founded in 2015 and it's grown from one of Ethereum's earliest projects into a powerful ecosystem for open userowned finance. Nosis is also the team behind products that had become core to my business and that of so many others like Safe and Cow Swap. At the center is Nosis Chain. It's a low fee layer 1 with zero downtime in 7 years and secured by over 300,000 validators. It's the foundation for real world financial applications like Nosis Pay and circles. All this is governed by Nosis DAO, a communityrun organization where anyone with a GNO token can vote on updates, fund new projects, and even

run a validator from home. So if you're building in web 3 or you're just curious about what financial freedom can look like, start exploring at Nosis.io. Welcome to Epicenter, the show which talks about the technologies, projects, and people driving decentralization and the blockchain revolution. I'm Sebastio, and I'm here today with Benjamin, who's the founder of CAP, and CAP is a stable coin protocol that has insured yield. Now, I know insurance can trigger some people, but um we'll get into all of that and how the protocol actually ensures uh its deposits and how it generates yields. We'll talk about the restaking component here, how I use a symbiotic um to um secure the deposits

and a whole bunch of other stuff. Um hey Benjamin, thanks for joining. >> Thanks for having me, man. Super excited about this. >> So you're um you're currently in uh in China. Um, like I'm I'm curious uh just what's your impression of um Yeah. What's your what's your high level impression of China? Is it the first time you've been there or uh and like Yeah. >> No, I I've been to China many times. I speak Chinese. So, um I go I come every year to practice Chinese actually. Um and so this year I kind of combined my language practice with meeting some crypto people. But yeah, I love China.

It's a wonderful place. >> Did you live there for a while? >> Um, I studied here for a year in Beijing during college. Um, yeah. >> And like what's your sense of uh because I think for like a lot of people in the west uh it's kind of hard to put a finger on like what Chinese life is like? And I I re I recently listened to Selex Freedman episode with this this woman who um is like Chinese and sort of like a Chinese economic and policy expert and and she gave she gave like a I think like a really sort of like um she gave me sort of a an eye openen look eye opening look on like what life in China is like what people's aspirations

are like like um how how people sort of deal with the things that you know sort of in the west we see as like state control and sort of bad, right? Like that but that people actually thrive in these in these conditions. Like what what's your sense of like uh what life is like in China and what are the biggest kind of misconceptions that people have about China? >> Yeah. I mean I think there's like the people that have been to China and the people that haven't and other people that haven't have a very macro view of China. So like politics, economics, world power, like struggles, right? Um but I'm from a small country. I'm from Chile. From my point of view, China is the same as the US, right? They they remind me very much of the US. It's like

big country uh type of culture. Um with a lot of diversity, obviously a big economy. Um you know, I was just in the rural China last week or like earlier this week. Um which is, you know, very different from Shanghai where I am right now. Um but they're miles ahead of everywhere else, man. like all the cars are electric um super clean it's very safe um you know the absorption of techn or the adoption of technology in everyday life I think it's higher um at least consumer technology compared to uh the west especially Europe right like it's not

even close um they don't use cash they didn't use cards it's all like we chat or Alip pay um so it's the digitalization of the countries. It's already there. It's been there for many years. >> Yeah, it's super impressive. I think like that's probably one of the things that I I've not been to main mainland China. Like I miss Hong Kong, but like adoption of technology I think like in Asia. >> Oh, it's very different. I think Hong Kong is it's amazing. I love Hong Kong. My first startup was in Hong Kong, but um mainland China is uh it's a different thing. It's a different uh completely different place in my opinion from from from a living standard obviously not from a political point of view.

>> Yeah, it's it's crazy how like you know being in Europe and I don't want to make this all about this but it's just interesting to kind of get your perspective on this. Um how like in recent years there's been kind of a reversal and a like rejection of technology almost in Europe. And I wonder if that has to do with the fact that like a lot of technology uh in Europe is owned and operated by by US companies. If it's more of a kind of geopolitical rejection than an actual technology rejection. But it is worrying to see like European people and European kind of political um uh discourse be like super anti-technology. It's like it's just so weird.

>> Europe is at least 40 years behind China. At least >> like if you go if you compare Berlin >> oh my god like they used they use cash you don't know what elevators are you know what I mean like electricity like it was like all the AC is not in most places and then you come to like Shanghai I just shared a elevator ride with a robot you know that was delivering something to somebody in the hotel so it's just like you really can't compare um I mean love Germany right I actually came up with the idea of cap in Berlin Um but um no man it's just like crazy how how different and and people really don't think about that because again people's idea of China is very

like macro about politics about economics. >> Cool. Well let let's set that topic aside. >> You're going to put a clip of me like fighting Germany uh is fine. >> Yeah. Yeah. We'll we'll use that as a hot take clip. But um >> yes like what tell like you we know you studied in Germany or sorry you studied in China and and and you you came up with the idea for cap in Germany but what like what's your journey and how did you end up here like how did you end up in a p on a podcast talking about your uh talking about your your your China journey and uh your uh your founding of this company.

>> You know life is crazy, right? Who who knew we would be here together talking about cryptocurrencies in a in a podcast? Um, no. So, I mean, I've been in crypto for for quite some time. I I I started, you know, in the Hideera Hashcraft space doing some infrastructure there. Um, Oh, yeah. Okay. I I started a stable coin four or five years ago on Polygon. >> So, uh, been in the stable coin space for a while. Uh, and then obviously most recently I started Cap, uh, about a year ago, a little over a year ago. But yeah, that's kind of my my little my little short spiel about crypto.

>> What was the stablecoin project you were doing before? >> Chewyo. >> Oh, yeah. >> It's like um very very different, right? It's like uh at the height of DeFi summer um type of project. No, no fundraising, you know, max allow to the community. Um airdropping strangers. I don't I don't even know who owns the token. um uh like the largest whales is like random people. Um but yeah, it was a wonderful project. It was the first crosschain stable coin. >> Okay. And this was on Polygon.

>> Yeah. Well, Polygon started then Phantom Avalanche. Um before you had OFT or XRC, we invented this idea that um the token when you bridge it from different chains should remain the same. It should be funible. Before us that wasn't the case, right? you would have wormhole avalanche USDC or you know layer zero wormhole avalanche USDC Ethereum or like some long string like that and so you had some crazy pools on Salana for example with all the different versions. >> So before the show we were I was asking you about your hot take and and you you said that you think that stable coins are less safe than what people think they are. Can you uh expand on that? Why

should people be worried about their stable coins? >> I mean, I don't I wouldn't say you should be worried uh but I I do think you should be cautious about um you know, where you put your money because what happens every cycle is that you know, we learn certain lessons about um you know, what is safe and it's not safe. But it's usually the people that get burned that actually retain the lessons because if you lose money um you really remember uh you know these kind of lessons. If you don't lose money or if you weren't there then you don't know what to look for. And so there are a few things that um you know are kind of being done again in this cycle that I'm worried about that have been done in the past. For example, overrusting third party bridges, right? um even though we

have these token standards that's supposed to have minting limits. The minting limits are the size of the market cap of the tokens, right? So there's like not really any like you know protections there. Uh when it comes to you DeFi, we're we're rebuilding Celsius and a uh and um all these different um like what's it called like CDI lending platforms that were building onchain and they didn't suddenly become safe, right? It's the same issue of unsecured lending to teams, but now we're doing it onchain. Uh, and I think that's very unsafe and I'm worried about how that's going to end up. Um, so yeah, in general, I just think we should be very cautious about uh money because it's money in the end of the day. It's

not a game. Um, and people can, you know, get hurt. So you know we used to talk about stable coins in three buckets or at least you know I think like around 2021 people would talk about stable coins as like there was the algorithmic um you know the likes of >> over Yeah. And then you had sort of CDP over collateralized and then um and then centralized like USDC or something like that. Um, do you think those categories still stand today and or or do you think that we're sort of um finding new types of stable coins?

>> Yeah, I think that um definitely one of those kind of died or it's like not very big anymore. CDPs are not big anymore. I I I think in general synthetic stable coins at least in number, they're not that big, right? Like there's one big synthetic stable token right now that's extremely successful and it's Athena, right? Synthetic meaning it's not fully backed by dollars. It's partially backed by other things that are not dollars. Um but by and large more stable co most stable coins today are uh eventually redeemable for the dollar whether it be T bills etc. So yeah CDPs have definitely gone down in size. Um obviously algorithmic ones are gone. Um so really now we find ourselves in um in

a world where there's two main buckets I think where you have yield bearing stable coins and there's many different kinds of yield bearing stable coins and you have these like non-yield bearing stable coins that are you know backed by bank deposits and um they're you know genius act compliant like PYUSD like USDC etc. >> Why do you think the the overcolateralized model didn't work so well? Right? Because I mean like I think the the the starting principle of say something like Maker Dow was to have a highly decentralized stable coin. Um and with with no um kind of like no USD collateral or at least no reliance on

centralized stable coins as collateral. And I think for people a lot of people in crypto that got into crypto as a rejection of the fiat system that's like a very powerful idea. Um you know today like size is maybe you know in the top five but certainly lot in the top two uh which is dominated by USDC and US and then we have projects like FX right that um claim to be super decentralized but I you know I talked to them on the last episode and it turns out that you know the dollar peg is actually based on is sort of relies on USDC. Um yeah, why why do you think those like haven't really taken off and would do you think they should like do you think there's a space for highly decentralized stable coins that are over

collateralized? >> I mean we have to acknowledge what the discourse is today in DeFi, right? In the last cycle it was decentralization, right? How can we um stay away from the traditional banking system? Uh and this was largely due to how regulators viewed crypto. They did not want to engage with us. you know, they they were going after teams. Um, and so you saw the rise of projects like Liquity, which is arguably the only uh decentralized stable coin, right, in in crypto. Now it's different. What what is what everybody cares about now? Institutions, institutions, institutions, right? How can we partner with banks? How can we connect to the traditional finance uh system? And um these fight guys, they don't want to

play any games, right? They don't want um a stable coin that is not backed by dollars because that is risky. Um objectively it's very risky, right? Because we're not um the US government. We can't print dollars. Uh and so um this uh kind of push to be compliant or at least uh adjacent to Trafi has pushed our whole industry to uh forget about decentralization and and focus more on scalability. you you think the industry is really forgetting about decentralization?

>> Yeah. Yeah. I mean, yeah. I mean, I don't not to sound like a Debbie Downer, but like for real, I think like people just don't um they don't value it as much as they care about scalability, right? If you're looking at, you know, centralized L2s, if you're looking at every single stable coin that's coming out, right, is is centralized in nature, either because of their collateral or because of the team's uh administrative power over, you know, the protocols. You know, we're no longer counting how many multi-IG signers there are on uh uh these multi-igs. We're no longer worrying about time locks, right? the idea of fully uh open sourcing your codebase is no longer the standard. Um

so just as like a review of where we are as an industry um it's just factual to say that decentralization for for DeFi protocols in general is not at all at the top of mind. [Music] >> Do you think that's a positive development? And and if that's the case then why do we still why would we still call it DeFi? like what is the distinction there? I mean is is it just like is it just fintech with better tech? Uh is that like the direction we're going in or like is there still some viability in the D part of FI?

>> Well, I think blockchain is not just decentralization, right? There are many things about the blockchain that are good for finance. Composibility is one that really comes to mind. Um, right. Like a lot of people talk about rebuilding uh Swift. We already have it. You know, literally any chain in the world with tokens can just can be Swift, right? It's just send and receive between wallets and there you go. It's done. Um, and so, you know, that's very powerful. >> That that's that's interesting. I've never >> And I don't think it's negative. I just think it's like it's part of any industry, right? You know, like right now AI probably is in a um like a moment of high uh

romanticization of what you can do with with AI whereas crypto we've definitely gone through dissolution then now we're looking at mass adoption and when you look at mass adoption you have to get rid of the things that most people don't care about you have to focus on the things that most people care about and for us you know boomers in crypto uh that you know maybe we cared a lot about max decentralization in the past you look if we want the world to use crypto. Um maybe we need to think about what everybody else cares about too. What do you think is like if there's one thing that the industry needs to kind of maintain as a core principle

um when interacting with the trady world or like traditional finance kind of regulated world like what what is the one property or the one thing that like we can't deviate from in order to remain successful and like have a future where you know this whole project has not been in vain. >> Well, part of us maturing as a military mean that it means that we're no longer um sort of unified in values. We're definitely in a multipolar world um within crypto. Uh where different groups have different values, right? Things that they think we should keep.

Personally, uh the group that I find myself in is uh that of safety. I I really think that um the transparency of smart contracts, the immutability of smart contracts can provide a lot of safety um and if we can maintain that um then we can make finance better than it is today. I want to kind of come back to what you said earlier where decentralization is uh less of a is a value that is like sort of um not not as coveted as it was perhaps previously, right? That we're moving more towards um we're moving away from from the decentralized aspect of crypto.

Do you think that like is isn't isn't it true that the infrastructure layers need to remain decentralized otherwise they just kind of like they're just databases right and like this entire project has been kind of useless we could have just built new data we could just like done this on databases is is there some amount of value right like is it is it like that maybe the higher layers of the stack are less decentralized um but the lower ends of the stack are still >> I'm talking about I'm talking about like DeFi I'm talking about stable coins right? Stable coins, DeFi, people don't care about decentralization as much as they used to. Um, for base layers, they do. And and the writings on the wall, who has the most stable coins in crypto?

It's Ethereum. And nobody comes close, right? We've seen so many people try to make their own stable coin chains for many years. There have been many, and they really haven't kicked off, right? The L2s don't have a lot of stable coins at all. And and it's because at scale money is not dumb, right? At scale people care about principal protection and and so that's why they're on Ethereum using the applications on Ethereum. And some of those applications might be, you know, less central decentralized than we would want them to be, but um at least as you said, people care about the base infrastructure being decentralized.

>> Well, I think we'll come back to this maybe a little bit later, but um let's talk about CAPS design. Uh so you know broadly speaking there's different participants within the protocol. Um we have also sort of like different technical modules different smart contract modules and um and CAP utilizes reststaking to ensure its deposits. So give us a high level and maybe we can kind of drill down into the different parts. >> Yeah. So, CAP is a stable coin protocol to generate yield for users in a way that um we can one ensure the PEG at all times and two we can protect um users from the activities that must be done to

generate yield right uh and the way that we do that is by two products one is CUSD which is a digital dollar and this digital dollar you can mint it with other stable coins like USDC or money market funds like Benji and Bidd um what's great about that is on you don't need liquidity, right? Because at any point you can just redeem 100% of the market cap, no slippage and and and then and you're good. So you don't need to spend money on curve or or any sort of uh AMMs uh which is quite nice for us. Um and it also means for users they can leave whenever they want, right? They don't need to be worried about uh about the peg. The other product that we build is uh you know the staked version of it where which generates yield and this

yield comes from two sources primarily at the beginning from the base yield of each asset. So for example all the money market funds earn the US treasuries yield uh and then the stable coins which are not allowed to share the yield because of genius act um we use some um different strategy for each of them depending on their circumstance. for example, USDC would put it on a um because it's an over collateralized lending market. Uh but that's that's not the exciting part. The exciting part is the other kind of source of yield. Uh and we've built this sort of allocation engine where third parties uh like regulated financial institutions or D5 protocols can compete with each other to

generate yield for our protocol. Uh and the way they do that is that they provision loans from our reserve um and pay some sort of fee, right, in exchange for the loan. Uh and they go off and they all execute their own strategy. So there could be a thousand 10,000 of these kind of yield generators competing at one time to generate yield on the stable coin. Um but we don't trust any of them. And so before they can come to our protocol and generate yield, they need to convince a restaker on Symbiotic or IEN layer to vouch for them with their cryptocurrencies. Um, and if the yield generator were to default and not pay back, we can slash whoever vouched for them. Yeah, I I'll stop there.

There's a lot you can go into, but that's the high level. >> Yeah, it's that's that's great. Thanks. So So there's two products. There's the CUSD which is the non-year yield bearing stable coin and you have SDCUSD uh which which generates yield. Like why would someone hold CUSD over USDC? What's what's fundamentally the difference? >> Well, it's all about integrations, right? In in a lot of integrations in DeFi like per Dexus or um you know pools etc. you can't use uh yield bearing assets. You need a pegged asset. And so, um, if you look at some of the larger, um, yield bearing stable coins today that have a staking kind of module, um,

they all have lower than 70% staking rates. And that's because of these integrations. >> Yeah. Okay, that makes sense. And so like, so if we just kind of recap here, so the the user deposits some some collateral and in this case it's it's a stable coin. So USDC or USDT um that goes into the protocol um and then you have the operators that are hedge funds um primarily institutions that will use those those coins to go and generate yield. So they're implementing their own

strategy and some of those some of those might be implementing like super high-risisk strategies others may be implementing like lower risk strategies but there's like a basket of strategies there and then we have restakers that are acting essentially as the backs stop as the insurance fund for uh against those USDC's like against those deposits. >> Insurance fund is a very passive term. I would say they're sort of uh the decision makers. So instead of having a DAO say you know we're going to put our money here we're going to put our money there resters say you know susqhana you get to generate yield for cap on $10 million or amber group you get to deleg uh you get to borrow 20 million to

generate yield uh and so they decide who gets to uh make yield but in order to do that they need to vouch for them and so it's a bilateral relationship it's not like I as a restaker I vouched for wintermute and now if Amber Group defaults uh I'm I'm getting slashed I I I'm only exposed to whoever I vouch for. And why is that important? Because these um yield generators, what do they want to do? It's not their money. So, they want to generate as much yield as possible so that their spread is very high. Resters, what do they want? Well, they want yield, right? Because um Bitcoin and ETH don't make yield compared to the dollar. It's not even close. You know, the cryptocurrencies are not productive assets like the

dollar. And so, they come to restaking land to get some sort of yield. they don't want to get slashed above all else and so they're never going to underwrite extremely risky strategies or extremely risky um third parties and so that kind of balances out the system. >> I don't know if you're familiar with this protocol. I mean it's it's still like in the early phases of de development. It's not released yet. They have like a website but um mezzanine where they have like kind of risk trenching um >> yeah the trenching stuff. Yeah. I mean there's there's big >> so would it make sense to have like risk trenching here so where you know you might have like low risk right where you're getting kind of like the treasury yield and then maybe some higher risk

and then like some very high risk and then that all those different sort of yield sources are um are being combined to provide the yield to the end user but there is some amount of like kind of backs stop where the higher trenches are protecting the lower trenches. >> Yeah. So here's the thing. I don't think retail has the mind to be making these decisions. Um and so we abstracted away. Um right, you're right to say, you know, we have all these strategies, but the dollar holders don't get any exposure to the risk, right? If you're holding stakes USD, you are not exposed to the risk of the strategies. Who's exposed is the resters, right? And so it doesn't really matter. You don't have to trunch

it because what would you tunch? There's no risk to tunch. Um the trunching is on the other side where restakers can choose like hey I am super risk averse I'm etherfi so I'm only going to delegate to bank of America just to give you a random example or maybe I'm rester xyz and I want to get as much yield as possible let me delegate to a cryptonative market maker right um and so you you'll have these different trunching on the other side and it's important to keep it on the you know protocol or B2B side all this trunching because uh there's a lot of complexities, right? When Ether delegates to a institution, they're not just trusting them, right? They're signing some legal paperwork on the side to uh arrange what will happen if they

get slashed, etc., etc. Who is in a good position to sue Bank of America, right? It's not some, you know, uh, small farmer at all, right? It's, um, these big projects that have raised millions of dollars, they're in a good position to sue. And so we're kind of shifting a lot of the burden of these um decisions and management to the resters. Um obviously not for nothing, right? They get more yield than ETH and Bitcoin have ever seen. >> Okay. Right. So so the resters have legal agreements with the operators, the market makers, the crypto the crypto private equity funds, etc. Um and those agreements lay out the types of

strategies will have kind of like risk management uh provisions etc. And the resters are on the hook for those operators doing their job right. >> Exactly. And the operators are on the hook to the restakers. So you could put it like this. The stable coin holders are protected by smart contracts. They don't need to trust anybody. the restakers are protected by the law and so then um they should only delegate to good counterparties right uh soana may lose money sometimes like everybody can lose money but they are are a good counterparty right if they owe you money they'll pay you back right and so um that reduces the risk for the resters

>> so what what constitutes a slashing event then how are like what's the flow of capital for end users to be made if like one of the operators, you know, loses all the money, you know, like >> Yeah. So, we are a a completely onchain platform. Everything's smart contracts and so we don't really know if the borrower lost the money or not, right? What do we know? We know how much money they borrowed and we know how much money they've been delegated. And so, we track the collateral to debt ratio. So, how much delegated value is compared to the amount of loans. And if that ratio falls below a certain threshold, then that's when we liquidate. Sort of how

overcolateralized lending markets track loans like a and morpho, right? Okay. So I guess one way to look at it would be that it's under collateralized lending where the trenching happens between the operator and the rest and it's kind of like abstracted away from the end user >> sort of. Yeah. I mean, it's like it's a three-sided marketplace, which allows for, you know, three different interpretations of the model, right?

Depending on where you're looking at it from. From the point of view of the stable coin holder, it's a miracle, right? You're having an overcolateralized lending market that's giving you three times the rate of a, right? And you're like, what's what's going on? Right. Uh, and it's because you have this coincidence of wants and needs of these three different parties coming together. >> Yeah. I love a good cow. coincidence of once. >> Um, yeah. Cool. Okay. So, and um, so who are the operators? Like practically speaking, who are you working with and like what kind of strategies are they uh, implementing? I mean, if you if you I guess I I guess like you don't know unless you're talking to them, which I I suspect you are.

>> We know. Yeah, >> we know because they tell us things. Uh, which is nice. Um, so uh, we launched a month ago and for the first two weeks we focused purely on setting up the reserve, right? Bootstrapping it. with USDC we got just over 100 million in organic user deposits from uh in USDC and recently we started uh onboarding the restakers and the operators now in terms of the operators there's ample demand for liquidity right now there's um there's a lot of market volatility there are a lot of opportunities to make yield and so um demand for for um loans is pretty high we have uh operators like amber group or like uh GSR who are you

know bluechip market makers in crypto. We also have Sushana, IMC and flow traders which are their counterparties in the trackfy world. You know these are huge enterprises over 200 billion in AUM. So it's not just some random um you know companies that we've put together. And then finally we also have some um DeFi native names right like Gauntlet soon to have RE7 as well. So there's definitely a mix and that's the that's the goal, right? Because right now you have all these stable coins that are just making yields from treasuries or maybe basis trade. I can come to you and say, well, we're going to make yields from anything that the dollar can touch because we can have a theoretically

unlimited amount of operators to the extent that restakers are willing to underwrite a theoretically unlimited amount of operators. Okay. So, this is kind of like where that the kind of like insured or covered loan um component comes in where like the restakers are covering the >> perspective we we look at it as guarantees. >> Right. Right. Okay. Um has there been a slashing event? I mean I guess you like you launched a month ago but um that's I suspect not.

>> No. And you know, we're we're going through great pains to make sure that there's no slashing events within at least the first year. Um because that that would be bad, right? You don't want people get spooked for all sorts of reasons in crypto. Um and so at the beginning, we are whitelisting who gets to borrow. So even though the final say is actually at the rest level, CAP as a team is can can block certain people from borrowing even if they have delegations. And this is because the last thing we want is for somebody to start up a restaking protocol and delegate to a memecoin trader and lose all their money and get slashed because then all the other restakers are going to look really bad and their users are going to start getting scared like oh

are we next even though um you know a memecoin trader has nothing to do with susanna it's completely different risk profile. >> So which restaking protocols are you integrated with? Right now, every single major restaking protocol is either delegating or is in the process of delegating to cap. Uh some of them are faster than others. We're very happy with, you know, Renzo as our first uh delegator on Symbiotic and Concrete the next one, but then Stakesstone and Hyperithm have already delegated this week as well. So, very happy with them.

Uh and obviously excited to work with all the other ones that are on the way. Yeah, I know you guys are working with symbiotic, but like what's what's unique about symbiotic that kind of like uh makes this all work as opposed to say like other protocols like Ian layer? >> I have to be political here. Um you know they're both great projects with great teams and we are integrating both eventually. Right now we're in audit for for layer but we started with symbiotic we actually finished the code in Feb and we've audited five times with like Trello bits spear bit um recon sherlock a bunch of uh top tier auditors um what do I like about symbiotic well it works

right all the uh all the kind of uh um features that we needed are were live when we needed them and so we were able to launch there um the team is very um you know high quality. They know how to ship and so everything kind of worked the way we wanted it to work. Uh and then finally obviously the modularity is actually pretty interesting. Uh because obviously CAP is not the original intended use of restaking, right? It's not the original intended use case of of um shared security as a whole. Um one could argue it's one of the best in my opinion. Uh but we can go into uh what I think about shared security later. Um, but yeah, that's that's why I like

symbiotic. >> Yeah. What what do you think about shared security? Like what are the really valid use cases for shared security other than like this guarantee, this this loan guarantee, which I I agree. I think is like a really cool implementation and like use case for restaking. Yeah, I mean I I think it's it's interesting that you know when I read Ian layer's white paper I saw universal marketplace of trust which I interpreted as you know you have people with money which is ETH right and they have nothing to do with it because ETH doesn't have as many use cases as the dollar and then you have people with skills right and there's some sort of trust economy where the people with

money can guarantee the actions of the people with skills But then in practice, everybody was starting to build these POSOS uh like networks where um they were just validating off-chain data. And I thought to myself, why are we limiting um this technology to just validating off-chain data? If you think about it, validating data is not a very high margin business, right? So can you really pay um the high cost of share security just to validate data? And the answer is no. Right? Right now these um validation systems are generating zero

dollars in fee. Not a scent, not 10 cents. They're generating zero. A and that's because you know you have to constantly validate a state, but you don't constantly generate fees. And the only way to make up for that um imbalance in the accounting is to issue incentives. And that's why Ethereum has inflation sometimes. That's why you know Bitcoin gives the token right the whole point of layer and symbiotic is that you don't need to have another token and you just reuse the value of these tokens that have real value. But I if you if you don't generate yield then how do you pay right? Um anyways, so I I was not very happy with most folks focusing on validating data. Uh and I thought that

we should really expand the use case of these guarantees to any sort of activity. It just so happened that I'm using it to allocate funds of the stable coins collateral to generate yield. But it really can be anything. you know earlier when we were talking about kind like decentralization and um whether or not like it you know continues to be relevant. Do you think that this particular use case for reststaking that is using a decentralized validator set and the um the assets that gain value due to that decentralization to secure or act as kind of like onchain insurance. Do you think that that's a

use case that can grow and can kind of scale and become, you know, the the resol for for restaking? Because like I I agree this whole like data validation like doesn't seem like a really good business long term. >> Yeah, I I think guarantees in general uh are definitely the way that restaking will survive and will thrive. Um if you look at a lot of um you know asset managers, bullch bracket banks um one thing that they really like about crypto is obviously the composability. the other party smart contracts, right?

Because a big problem in tradi is having to trust other people. Trust is the biggest issue with finance. And so smart contracts can alleviate that and organization systems like Symbiotic can alleviate that. And so I think there's ample PMF for it. And and that's on like the the demand side. On the supply side, in terms of like ETH and and and Bitcoin, these assets have a lot of value. And I don't think we're paying taxes in Bitcoin anytime soon. And so there's not going to be a lot of use cases for Bitcoin compared to the dollar. So this use case of reststaking or using your assets to delegate to other people, I I think it will have a lot of PMF for a long time.

>> So we touched on this a little bit, but you mentioned the Genius Act. um and you know that some stable coin projects were kind of like Genus compliant and others probably won't be. Um what do you think will be the dividing line there and you know for those projects that are Genius Act compliant um is it mostly then just kind of like having access to US traditional financial system and maybe that's the dividing line between what we consider to be kind of like the DGEN projects and those that are not DGEN. Um yeah, what's your what's your kind of like long-term take on that?

>> Yeah, I mean I think we definitely live in a multi polar world outside of crypto as well. So there's it's not the case that, you know, the US says this is what we need to do and everybody does it. Uh there will be folks that are not compliant and they're just maybe, you know, putting their foundations in the cments and living in another country and and kind of like just not paying attention to American laws at all. you know, changing their UIs to block Americans so they can say, you know, we don't have to follow the laws. Um, CAP is our first round was with Susana and our last round was with Franklin Templeton. Two great American institutions. There's no hiding from US regulations, right? We're also American.

Um, and so the way we're going is the way of compliance, right? And if regulators have a problem with us, we're we're prepared to um to change things, right? Um, and I think if if you want to get big, if if you want to be a large financial institution in the future from the landscape of of crypto, um, complying with American regulations is key because that's where all of the world's money lives. >> Yeah, I agree. I think like this change, this change in administration um, really has opened up the gates for a lot of capital to come into the space.

And I I I think like a lot of people see it as like, oh, like this legitimizes crypto in the US, etc. But the offshoot of that is that there's just like potentially hundreds of billions of dollars that can flow into the ecosystem. And um and that's not going to happen in probably not in places like Europe where the political discourse is very different. Um although I think there has been some there has been some departure a a little bit like at the E level from the CBDC's now that they've seen kind of like what the Genius Act includes and what it can mean for US companies. There is a little bit at least I've I've I've kind of seen on Twitter and stuff some backtracking uh

to to something that looks more like the US system. Um yeah, what what are your thoughts on kind of like you you mentioned multipolarity um where you think things go from here if we look at like you know the big polls right so like US Europe bricks and China >> well I'm I'm not worried about Europe too much from a capital markets perspective um most of these large institutions that are involved in crypto within Europe are uh invested in us so IMC flow traders Edge Capital, Flowesk, they're all uh not only investors in CAP, but they're also operators, meaning they are prepared to borrow and generate yield

for our stable coin protocol. Uh and so that's that's all you need to see, right? The the people that need to be involved are involved, and we'll have to see what regulators do about that. Um obviously, there's nothing to say about South America, right? Because they're having fun. They use crypto. They don't care about, you know, the tokens. they they've been using stable coins for a while and they'll continue to use stable coins in the future uh because they're a wonderful use case down there. Um our our job is going to be to try to tap into as many of these regions as possible and the way that we're doing that is by accepting collateral assets that are integrated in each area. So, you know, America will have the stable

coins that are popular in America. Uh Europe will have, you know, the money market funds and the stable coins that are are popular there. Our job for CSD is to add all of that as collateral. So if you want to enter our yield system from Singapore, you can do that maybe through OOB or if you want to enter our system from Germany, maybe you can do it via Deutsche Banks, you know, money market fund. And so no matter where you are, CAP will be able to connect uh via these kind of integrations with the money market funds and with the stable coins.

Yeah, I think my my kind of high level view on the Europe US situation is that the US very early I mean even like I think US institutions maybe maybe the government uh like the previous administration didn't see it this way but at least like institutions saw crypto and stable coins as a um as like a a technology that could uh improve uh composibility, improve improve um reliability and and um and security of the system as like something that needed to be adopted by the industry with the administration kind of giving that a green light. Now it feels

like it's you know full steam ahead. I think European banks and European financial institutions at least like the most more traditional ones um are more risk averse and I think there's um there's like regulators and policy makers are kind of um sitting in this really uncomfortable position where pushing stable coins or the advancements of stable coins in Europe kind of undermines the power of traditional banks. Um and probably it will take a really long time for stable coins to be kind of fully adopted in Europe in the same way that it you know Europe was kind of behind the US in

terms of its adoption of e-commerce any technology in Europe just takes a long time because institutions have so much political power and at the same time I mean not that they don't have political power in the US but they're very riskaverse they're very adverse to change they're very comfortable in their position they're not pro innovation. >> I mean, all all traditional industries are >> true, but I think I I think in Europe there's an even stronger sense of uh wanting to sort of like sit on your laurels and uh sit on your established uh uh role like position as an incumbent which um kind of informs policy.

>> Yeah, I don't want I don't want to say too much about politics. and and my our marketing uh person is going to be looking at at this interview and you know pulling their hair out. >> So I I wanted to maybe like let's let's just kind of do a thought experiment here and you know let's kind of overlap stable coins on the traditional finance system. Um so you know if we look at if we look at kind of trifire right like let's let's take a country like France um you know the central bank or at least the European central bank like issues euros flows down to the French central bank the the French central bank um then lends those eur those euros out to uh

lends out those euros out to to to banks right regulated banks and um and then those banks then like issue their own kind stable coin, right? Their own uh version of the euro uh to to depositors, right, to like their their um uh to their customers. And you know we have like you don't you don't see it as a as a user of the system but in reality you you have like a societal uh eurocoin and you have like an LCL stable coin and like you know for Americans these bank names are not going to mean anything but like you have the banks right like that are issuing their own version of the euro and that's kind of abstracted away um but it works

because you have this really good interoperability between all of these systems because we have kind of nationwide payment systems and then and there's the backs stop and it's underwritten by the central bank which itself is underwritten by like trusted institutions and their ability to lock people up, right? Um in crypto it's a little bit more complicated because um we don't have this kind of like institutional backs stop and the interoperability is is also there's there's sort of complexity in the interoperability aspect as well where like you know your CUSD is not um as fluently interoperable with any other stable coin because the risks are kind of like different.

Do you do you kind of like see this parallel as kind of being relevant? And where how do we get to a point where anybody can just be using any stable coin and they're they're not kind of encumbered by this um uh this problem that like the different risk profiles of the protocol introduces where these different coins are not interoperable. >> Yeah, I think it's a matter of um like the design of the mechanism, right? CAP works with every single onra ramper, offramper, every single payment provider, you know, every single bridge.

Why? Because we're instantly redeemable for USDC, right? And you can within our reserve, you can swap within all the the tokens, right, between the money market funds, between the different stable coins. So, you know, you tell me there's an issue of interoperability, certainly not a cap, right? because that's how we've designed the system. And you'll see that happen uh with larger companies like Coinbase for example. You know, they take PYUSD deposits um as USD just like they take USDC. And so it's just a matter of who trusts who. Cap trust Franklin Templeton and also they trust Black Rockck. And so now we can act as like a bridge between them. Uh Coinbase trust Circle and they trust PayPal. So

now they can act as uh uh they can act as a bridge between them. And so uh as long as you kind of grow this pie of trust, you can start seeing this these connections. And it's very similar to the banking system where overseas banks can connect to each other via, you know, this wire system that we have um in Trafi with the added benefit of uh of how elegant crypto is right for uh organizing token transfers. But it's not a very difficult problem to solve. I I just I just think we need is if you have a good design then interpretability is pretty easy.

>> I want to like kind of zoom into this trust aspect. And this kind of circles back to what we were talking about earlier like you know a lot of people in crypto got into crypto because of kind of this rejection of the fiat monetary system. So if you talk to early Bitcoiners and like early Ethereum folks like this this this this idea that fiat which actually um the etmology of that word kind of comes from the word trust right you it's a monetary system where you where you trust others um you know crypto kind of felt like it was a rejection of that I mean didn't feel like it was a rejection of that um of that of that idea and you know hearing you speak now it sounds like you're talking like we're going

back into kind of a trustbased system. Um but with one kind of one uh distinction is that because risk is now kind of spread across different uh restakers uh different uh kind of funds etc. In the case of CAP, it creates a a more opaque c kind of like authority to who is responsible, right? So it actually makes things more complicated for the end user uh who has like suffered some damages because of misconduct, right?

>> Well, it depends on how you do it. Like for example, like with us, you know, we take Benji, we take USDC as collateral and you can track and see, you know, these are the collaterals we take. It gets more complicated if you know you're uh backed by ETH but then you also put money in a and then who knows where a is putting that money and and you have like these more complicated systems and there are such stable coins where you don't really know where the money is being put and so I agree with you that the the question of okay I lost money who whose fault was it will become more complicated when you have these stable coins that are kind of acting like hedge funds and putting their money in all sorts of places but it's certainly not the case of cap because we're all defi

PTSD um you know survivors. Um and we've built CAP in a way that um you're able to track what you've just described right who who is responsible for uh maintaining the quality of the collateral. I >> I guess it's not a reflection on CAP but just kind of like as the uh for the industry as a whole. So where the risk is more spread perhaps it means that >> the chances of something happening >> the yeah the chance of something happening is is reduced but you know >> well it's increased but it's like u the the the penalty of it happening is lower >> the sorry the penalty the penalty may be less right um but but also like the

crypto world operates in a space where you know there is a lot of opacity around like where operators are situated And certainly like I think regulation kind of can kind of like help with that where you know there may be like clear um paths to litigation when that happens but >> ah yeah I mean look at what happened to multi-chain the bridge they got hacked by the Chinese government or like a local government and all the money got stolen so Binance froze it circle froze it tether froze it they haven't returned a penny to users and the Phantom Foundation has been suing Binance and all these teams to give the money back and they've refused to do it and and they haven't been able to get the money

back because, you know, that's just how regulations are. Um, and so you're right. Um, I think and that's kind of why we built CAP the way we built it because I really just don't think that users are in a place to get any sort of recourse. If your favorite yield bearing stable coin the pegs, you're going to be suing some random Cayman entity, right, with um, you know, a director who is the same director for every other uh, Cayman entity in crypto and you're going to find yourself without a nickel of recourse. Yeah, I think I think this is where like regulation will play a huge role is where these entities need to be kind of like local in their jurisdictions where they're situated and where um they

become highly sort of entangled with the traditional finance system, central banks, etc. Uh but I think we're like really long way until that happens. >> Yeah, that's vision. you have to choose like do you want to trust the government or do you want to start trust smart contracts and I think any project that's in the middle where you're not trusting smart contracts you're not trusting the government you're actually trusting some random developer team I am very scared of those projects because I know I can trust the government somehow a little bit and I know I can definitely trust smart contracts I know darn well I can't trust random developer teams >> yeah well some some some people would definitely not agree with you that you can trust the a little bit, but that's a

conversation for another >> I trust like regulators more than I trust a random, you know, startup. >> In general. >> Yeah. Yeah. Yeah. I I think some some people might not agree with that, but >> Yeah. Obviously. Yeah. >> I guess like where the kind of proliferation of stable coins um does excel is offering these different trust assumptions. So you have like stable coins that are fully centralized where you don't have to trust anyone and then you have stable coins that are fully centralized and then you have like sort of things in between where you're relying on centralized stable coin deposits but those deposits are backed by a decentralized asset in the case of cap

right so like you're you're backing the you're backing the centralized stable coin deposit in the form of USDC USDT with an insurance or a guarantee that is secured by a decentralized asset and that might be like the the middle ground that we need uh to scale but then also remain decentralized. >> How could I disagree with such a beautiful explanation? >> Well, um Ben uh Benjamin, thanks for coming on. Uh anything you want to share before we wrap up? >> Nothing. I I actually I would say that, you know, a lot of people have said recently that the stable coin space is extremely crowded and there are too many stable coins, but I think they're wrong.

I I think there are not that many stable coins that are differentiated in crypto. And so if you are, you know, a founder that's trying to make a new stable coin, make it. you know, I I want there to be 100 new stable coins, a thousand new stable coins because the more innovation that happens, the more liquidity we're going to get on chain. And that will benefit everybody because it's much easier to convince somebody that's using another stable coin to use yours than it is for you to convince somebody that's has money like Bank of America to use your stable coin. Uh, and so yeah, I I just I would have a call to, you know, not be discouraged by, you know, how many stable coins there are in crypto.

Cool. Well, um, thanks for coming on. Enjoy the rest of your time in China and, uh, good luck with this. >> Thank you.