CeFi Is Dead, Long Live DeFi | Vance Spencer & Michael Anderson

Transcript

eventually you're just going to move to where the most capital efficient markets are unfortunately with cfi and c5 lending we we confused leverage with capital efficiency now i think there's an element that's transparency in addition to capital efficiency because you want to know that your counterparty is at least going to be around for the next week month quarter [Music] all right everyone welcome to the very first episode of bell curve we actually had episode zero that went live before but jason what's going on man welcome to the show welcome to the show i'm excited about this yeah me too man um all right we're gonna be giving you guys an intro in case you guys uh just a refresher for what bell curve the show is bell curve is a two part show per week and it's divided into

different seasons so in season one jason and i are going to be going over a thesis which we call the d5 credit boom which is we're going to be talking about the unlock that fixed income lending is going to have in crypto uh we did we detailed the entire thing out in episode zero so definitely go back and listen to that it's only like 10 minutes you only have to bear through so much of jason haha sorry buddy uh but it's it's it's good it really says says mike number two which you'll get we'll get into why mike is mike number two but uh yeah yeah just be careful who you're roasting here i feel betrayed i feel betrayed uh but the tldr of that basically is we've got a thesis we're exploring it in three parts part one of the thesis we're calling it

the death of c phi that's what michael and vance are going to be talking about with us today so that's all of the the recent implosion and c5 is going to push a bunch of activity out into defy that marginal activity is going to cause a big boom and renewed interest in defy one of the unlocks that we're going to get is the transformation from variable into fixed rate interest that fixed the ability to borrow at a fixed rate is going to lead to a renaissance and defy credit markets they're going to be a whole bunch of different structured products on top of that uh that fixed that fixed rate ability and then we're going to see that's going to be a big part of the next boom uh the next the next bull cycle um so today we're going to be talking to michael and vance basically

about part one of that thesis which is what are the repercussions the second order ramifications of the recent implosion in c5 and what type of activity is that going to push out into define what their thesis is for d5 in the next bull market exactly let's get into the show do it all right everyone we got episode number one of belker joined by uh mike one and mike two it's still tbd on who is bike one and who is mike two and then we got uh we got the real alpha coming from vance today uh this is episode one of a seven part series that we're doing uh exploring what is going to kick off the next uh bull market specifically around fixed rate lending uh this entire episode is about kind of the death of c5

and and the kicking off of of d5 so mike you want to do the uh honors to uh to kick the show off you want the first question of the first episode of the first season of bell curve yeah all right i i'll michael i'll pose this to you because you actually were the one who used this on a phone call with me you talked about uh you know everything that we just saw in c5 is going to be basically c5 is done we're moving into a new era of d5 you just like walk us through why you think that is what's the thesis yeah so uh to be specific i would say centralized finance as it relates to crypto finance is uh just really having a tough time right now uh when everything uh was living in an opaque unregulated uh and uh

when all dust is done with settling uh we'll see how shady it potentially was but um in a potentially shady way as well it's really hard to be able to put trust in into those institutions anymore um and and what i'm referring to is everything from you know the celsius uh voyager um uh bankruptcies and um you know everything else that has happened over the basically the last four months and uh it's really it's really difficult to not see in in the future those types of institutions will need to be regulated like financial institutions in in the way that we would trust a bank or a or a traditional lender and i think that that potentially breaks their business model they don't have the ability to get regulated right now they don't have you know the strength of the balance sheet to be able to go off and

compete with traditional financial lenders and so you're trying to stuck between a rock and a hard place and and what i think this does at the same time is it gives an opening for d5 protocols who actually very well performed throughout all of this confirmation and violent upheaval uh liquidation everything uh d5 performed pretty well throughout uh you know there were liquidations nothing really broke uh tangibly um and everything kept on humming along and i think that was probably more of a feature of the over collateralization and basically the lack of capital efficiency that you potentially had with uh with centralized uh crypto finance lenders but you you don't have the rehabilitation or the off sheet

balance sheet uh off-balance sheet transactions that you would have uh if it was centralized and not on chain and transparent so there's a lot going on but uh you know ultimately kind of the way that i put it when we talked mike was you know c5 lost and and d5 is kind of remaining to be the victor yeah i'd love to get a little bit concrete i don't want to like rehash the whole three arrow celsius voyager stuff that's pretty been pretty done i want to start talking about like second order effects right um so let's say like one of the the first order effects right is that c5 is basically delevered right and like the stats that i've kind of got is like these c5 lenders were kind of running it like six times leveraged they've taken that down to like one or 1.5 um and basically they're just kind

of in like a frozen wait and see type state so i'd love to get like concrete thoughts from you guys about what were the services that like centralized lenders exchanges etc that we're providing to the market who is no longer going to be able to be served by those like what type of activity is going to move off of those platforms and like find a new space and defy yeah so the the way that we borrowed just to break it down when we do borrow there's a few different kind of sources one is just like on exchange leverage so you know you lever up uh an eighth position you know you go like on the perp swap you know 10 to 100x whatever your your flavor of leverage is you can do that um for us as an institution places like genesis places like

um places like genesis places like uh nexo um like that's kind of like another source like we we kind of stuck to like the genesis side of that market but the other kind of side of the institutional lending desk is like the the block fish the celsius is the voyagers and those are the ones that i think are probably not going to be around anymore the ones that were like taking in retail customer deposits letting them out and you know genesis will serve kind of like most institutions that go up to them that have good creditworthiness kyc could balance sheet i don't know what the process for voyager or celsius underwriting was i mean like exposed facto doesn't appear that it was very strong but like those are the people who know who will no longer be in the market and if you think

that you know celsius was lending out you know half of its book at the peak maybe that's like five to ten billion voyagers probably like another billion um sells like you know like you could probably get towards like okay there was like 10 billion of like net leverage that was lent out by those people and that's the stuff that frankly is gone and i think you know that is domino effect into places like genesis tightening up their balance sheet as well i think for us the question is now like okay there's there's cheaper rates in d5 than in c5 and so you know why would we use you know c5 if we really you know didn't have to and i think the answer is basically like you can get white club service you can get like you know billing statements you can get all that stuff like that that's

kind of trivial in the sense of like on chain lending like all of the information is on chain there's tax accounting packages that are built around it um so yeah i mean it's it's a really good question as to like do places like genesis really stick around either um because that is the the avenue that seems most vulnerable to being disrupted and put on chain um and so yeah i think this all happens in probably the next six months like genesis is gonna figure out pretty quickly that um there isn't quite as much borrowing demand as there once was and any borrowing demand that there is is rapidly moving on chains uh and they're moving on chain for a couple reasons the rates are cheaper and i think the underwriting is actually more advanced on chain at this point like if you look at things like maple and the

credit oracle that they use you know they use an oracle which basically can tell them what our balance sheet is doing without exposing our positions to them and that's like perfect you know that's what genesis and all these big lenders should have been doing um and d5 is just leading the way on innovation with underwriting and risk vince do you think that some of this lend and borrow uh especially the retail end and borrow in the next cycle will it basically get consolidated under the exchanges uh like well coinbase and binance and ftx almost play the function of like nexo celsius and block find the next cycle or will it not even or will the exchanges not even play in that market because of they learn their lesson they see how it played out with some of these uh london bar only platforms and or will it all

move to d5 what do you think there it's it's worth noting that uh the lending i mean like if you look at like the i mean if you look at like the ftx margin lending book or if you look at coinbases like nascent lending program um or you look at like finances learning program like those are for the institutions retail can't get access to that but like i generally see institutional borrowing moving away from like the genesis of the world towards the exchanges because it's like a more holistic package they can cut your fees they can reduce your lending rate they can charge you on custody they have like a larger business model around lending than just the wedding deaths themselves and so i see like them eating that lunch

specifically but for consumers like they still can't get any credit from these exchanges and so like the highest and best use of their capital in terms of you know getting leverage is on chain and i think that's really kind of where the vortex uh in terms of like the black hole liquidity comes from um where places like celsius and voyager were kind of like servicing that retail demand before but now that those places are going to be gone or regularly like banks like the only place for that capital to go if it wants to get borrowed is on chain and so you know for one reason or the other it'll get there and i think by the next full cycle um i don't know if if we're going to ever see another celsius or voyager again i'm just not sure how that would play out so

you think a lot of the institutional borrow lens stays potentially with these big exchanges and then the retail borrowland is what drives into d5 maybe to jump in there i think it's a mismatch of product capabilities and needs right now but that changes very rapidly over time uh it's the ease of use it's as we were talking about like the fact that our cfo can get a brokerage or bank statement or some you know print out statement every month from genesis to say hey here's what your invoice is um you know that's just one product cycle away from being something that's built into a dd5 protocol as well so i i don't think that it's really going to stay i think it's just right now there's a mismatch but it's rapidly changing and frankly if you can start to

get more capital efficiency on chain uh you're going to have a much deeper desire to go on chain like eventually you're just going to move to where the most capital efficient markets are unfortunately with cfi and c5 lending we confused leverage with capital efficiency now i think there's an element that's transparency in addition to capital efficiency because you want to know that your counterparty is at least going to be around for the next week month quarter um you know that that's a tough position to be in from an institution the the other the last part that i would say like that we think about when we borrow and um like on d5 you know you have like the oracle prints like you can kind of update tenderly to notify you if your positions are getting close to you know

being in trouble um with c5 they'll just like give you 48 hours and you know it's like that's nice um but i think overall we prefer the transparency relative to counterparty risk for really large sums um and i think that is like the exact opposite of probably how we felt a year ago what made you it's the is the reason for that switch just like is the ultimate thesis here really about opacity when it comes to because i think this was like a lot we're not just talking about like an insignificant like oh there was like one bad actor in the centralized lending space it was like arguably the majority right and if they weren't like outright bad actors it was like at the very least there's a lot of irresponsibility i think going on

we fortunately never really ran into this issue but imagine a situation where you call up a bank and you're like hey i need to get my capital back i need to get my dollars back i need to get my assets back and they're like hmm sorry that's a really tough position to be in especially you know when you're trying to manage multiple positions manage multiple counterparties manage you know a a wide array of active participation as we are um and you know this is all the the framework labs kind of active active side um the venture uh ecosystem for us at least is a lot more vanilla um but the the active stuff if you're an active participant like you're spread pretty far and if one party one counterparty gives you kind of like a block uh it

could have ripple effects throughout and just hearing the antidotes of what some of our peers have have run through and you know what it's like to have that response on the other end um you know it's never something that we wanted to be in a position to have michael i mean really what you're talking about is just a bank run right so all these small london bar platforms saw bank runs can you just explain why the idea of a bank run like doesn't exist as much in defy like why why isn't that possible in d5 yeah and this is something i i think i wanted to dig in earlier but but good time to bring it up now um really what these centralized platforms were doing they were taking in assets as collateral and these assets could be in the form of anything from usdc

bitcoin ethereum link you know any of the assets that are kind of like commonly used as collateral assets the problem though is that when you have uh when you have ill when you have liquid volatile assets as your collateral base it's very easy especially in downturns to be able to get close to a margin threshold where you won't be able to maintain the amount of borrow that you have in in a way that they will accept and therefore you'll probably get what's called the margin call and then you'll have to either put up more collateral to pay back uh to you know have to put a more collateral to to re-collateralize or you'll have to pay back some of your loan what's going on in the background though that i think is really important is it's

not like genesis is just sitting there and saying okay you have 100 btc here and you've borrowed you know 50 000 and then we're just managing this as a separate account they've got hundreds of towns they've got thousands of accounts and they're re-hypothecating these borrow and lending scenarios where they're taking the bitcoin that you have as collateral and they're lending it out to somebody else and what happens in these types of situations is you know imagine we're getting stuck uh just because we have three or four counterparties well imagine you multiply that by a hundred and you're talking about a centralized provider um and you know it could have been any of these and um you know just using genesis as the example but it could have been any of these that you you go back to them and you say hey i want to get my bitcoin back and they say

um sorry can't do that right now and you basically have to wait for them to either have the term loan end or you have to pay back the collateral or you just kind of have to hope that they don't end up margin calling you and selling your collateral to pay back your loan that you have with them so it you know these types of situations become pretty hairy pretty quickly but when you don't have the ability to view through to where your collateral is as you would in d5 that's where you really get into a potentially tricky situation and once again i think that's where we confuse leverage with capital efficiency so ultimately what we're talking about here is just two different models of providing financial services right and in this one model you have kind of the

legacy model which is this opaque bank and the risk there is you have no transparency into what's actually going on but two your assets aren't actually yours right now like the thesis is that a lot of people that were going to these basically shadow banks right for financial services they're actually going to go to this other you know source for different types of products and services which is d5 in general and i think there's probably like what we've been largely talking about is the ability to speculate so to take out leverage but then also like further off there's actually like legitimate products and services that like like hedging right you're risking a business or doing longer term borrowing and lending like real like real economy type stuff i think those things walk hand in hand because usually those uh those services require a mark like a deep

market of speculators um but let's actually just walk through like what one thing that i don't understand is let's talk about the leverage side of things first so right now when you go to somewhere like genesis they're actually leveraging that that flawed model of rehab authentication to provide you a loan right they're kind of underwriting you guys at framework and they're being like all right these guys have a pretty good track record they've got some capital like in case things go go sideways like and then they write you the loan how does that work in d5 like how does leverage creation happen in a defy type scenario yeah it's it's pretty simple um you send funds to a contract um and it's like a it's a like a buy asset type of contract and so like you're sending it to like you know an eth pool on ave um and then

once you have that uh you basically get what's called an lp token so like you get ae and then once you have that you can access their usdc liquidity and you can borrow up to uh i think it's like you know probably uh if the value of your if the value of your collateral uh dips lower than 120 percent of your loan that's when you get it so like you know the that's about the most you can borrow in terms of you know those dynamics um and like usually when we borrow like we'll put up like you know a lot of collateral like two or three x the amount of loan that we have and if it ever drops down like we'll re-top it out um and that's kind of how it

works for all of retail today and the thing about if you look at ave they have variable rates but then they have kind of like fixed rates which like get adjusted every probably like month or two or quarter like they're not exactly fixed um and so you can kind of lock in your you know cost of capital to some degree and so that's kind of like ave when you look at maker which is a different way that you can kind of you know get leveraged in d5 what they're doing is you're putting ethernet contract and you're drawing die against it and you know people aren't holding dye and lending it to you that protocol is literally creating that dye out of thin air backed by that collateral um and you know the the benefits of that model relative to something like ave are the loans or the rates are usually a

little bit cheaper because you're borrowing dye not usdc you know they don't have to have someone source and provide the usdc to ave you know they can just create it out of thin air like they do with maker and yeah it's it's a little bit different of approach but that's generally how leverage works in d5 that's um i mean the big difference there between like how we talk about leveraging crypto like the what you just described and how leverage is typically referred to in trad phi is that's over collateralized and over collateralized model versus if you trade like options or future like basically any type of derivatives in trad phi it's under collateralized um i was going to maybe double click into that perspective in particular we're starting to see with

things like gmx and some of the new decentralized trading protocols um where options and decentralized perpetual futures as they've been traded on centralized venues like bit max and derebit they're actually becoming viable and defy as well uh and so with a pretty strong uh liquid market you can get leverage from a perpetual future or an option for instance um which isn't the exact same process as what vance is talking about it's it's a little bit different but you can kind of get a more capital efficient model as you would have in centralized finance and d5 now can you explain how that works actually because my understand like at a bank right they send you like a line of credit um how does that work in a d5

scenario it's very similar to the the limitations and controls that you would have uh in in the comparison of like an ave or a maker to a centralized lending platform um if you put money into bitmex bitmex is a centralized provider they will take your bitcoin they will use it as collateral and then you'll be able to trade off of that collateral pool with some you know leverage effect and let's say you go up to 50 x leverage something like a 2 move down means that or up means that your entire collateral that you have trade against is gone uh and their liquidation engine manages all that and liquidates the bitcoin and sells it on market and um and and you know that's how it works that's also generally the way that it

works in d5 but you're putting up a collateral that is then managed by a protocol as opposed to a centralized entity the major difference here once again is uh it's probably not as fast because it's not centralized and as blockchains get faster it'll become more and more capital efficient in that respect but it is much more transparent you can see what all of your your assets are in that wallet all your positions are in that wallet uh and you you can trust that it's a unified oracle model that's updating the liquidation engine and then processing everything on chain and i know that historically centralized trading venues have had issues with people just kind of like randomly getting liquidated even though they didn't expect to be so i think it becomes more fair and

transparent but then that also provides the ability to have potentially cross margin where you can use some positions that are maybe in that protocol in that platform that are a perpetual future or an option as an asset that you can then cross marginalize with with something like you know a loan or something that you would borrow again so there are kind of advantages to having that transparent nature which is maybe the next step uh above where we are right now but that's i think directionally where things are going i feel like folks have been talking about defy options and d5 derivatives for a while now why haven't they taken off yet i think a couple reasons the first one is um like blockchain just have not been fast or cheap enough for you to really run these like

protocols which require you to you know update every 0.005 you know price change the oracle and the actual system um so that's been one challenge it's also been like historically very expensive for people to do it on ethel one like we've kind of only had really block chains that are fast cheap and reliable enough for the past like six or nine months for this to really happen at scale and like dydx is like an interesting example but you know like they didn't write any of their own code on starkware that wasn't really something that like had a long-term future and so i think a lot of people had trouble adopting that as a result and getting to that platform and you know depositing it in something that frankly is more of like a centralized custodial model didn't also check all the boxes for us in terms of you know

why we would use dydx versus something like a binance um longer term i think you know it's i believe that you know like basically all retail will eventually converge on decentralized venues um it'll be faster it'll be cheaper it'll be more transparent you'll have more visibility into how the insurance fund works when things you know that are bad happen you'll have more guarantees on the ethereum side the protocol will continue running in perpetuity versus things like bitmex which you know have notably shut down in periods of high volatility and liquidated people um and generally it's just like the most global platform for people to trade on and there's many benefits of that you know also like you can get tokenized ownership of it you

can give that to your users like the same playbooks that we saw work in d5 will work in d5 derivatives in my opinion it's mostly just been a timing thing um and so yeah i mean that is d5 derivatives i i think that personally like the people who crack that are going to be some of the large protocols in crypto like if someone airdropped you into crypto and told you to point to where the profit centers were you know it would be the perps and the options platforms um so on the on the perp side i think that that's a product that's unique to crypto that doesn't really exist in tradify and so like options are really big on robinhood obviously but like people have never used perpetual swaps like that's like a really amazing product and i think if that had been in tradify options would

probably be less popular i think we're seeing kind of the opposite play out here where first we're going to see adoption of the perpetual swaps and i think we're starting to see that with synthetics and gmx and uidx now and i think you know the ones that are fast follow us behind that that require leverage to do things like delta hedging are the options protocols and people like lyra i mean like we've backed probably four or five options protocols and like you know we've just been waiting for one of these to hit like lyra seems like the first one that has like the right confluence of the right ecosystem the right users the right user experience um and yeah we're hopeful you know these things just take some time so you know it to you know for folks who are listening who might not be aware the

option or the market for uh like options but definitely derivatives writ large is like many orders of magnitude larger than it is for spot and that's a relationship that already exists in crypto on centralized exchanges right the derivatives markets which is basically just futures for crypto on centralized exchanges is already larger than the market for for a spot is um so i i guess i'd be curious like do you guys see what do you think is the catalyst is are you guys just like you mentioned you've taken a couple of different bets on the space so far is it just like there's not enough liquidity yet there's not enough people who want to use decentralized options is there something that like gets us from point a to point b or is it just like a matter of time i i frankly think it's not really a

silver bullet i think it's a bunch of lead bullets yeah over time and we're slowly building out the infrastructure the liquidity uh i mean think back to six months ago basically nothing was on layer two from uh from an ethereum perspective um you really didn't have any liquidity on any of them either so your people are just getting used to what it's like to bridge over and be comfortable with that in the first place i don't know about you guys but like i i get nervous every single time i touch a bridge even if it is from l1 to l2 um and and so like all of those things are just going to take muscle memory um and and i think frankly one of the things that i i would love to see is a centralized bridge from l1 to l2 um

you know maybe a coinbase supported bridge you know optimism arbor drum wherever um just because you wouldn't have to use the decentralized version and that would just be become the trustworthy on-ramp um so those are some of the things that i i think about mostly i i think also just give it the backdrop of crypto macro and everything that's going on over the last few months like it's not really a desire to jump back into the leverage game anytime soon um and so it's it's kind of a confluence of a lot of things but i'd probably say those are the two biggest things in my book um i think the reason that we're focusing a lot on just this particular part of it is like speculation has been such a big use case for crypto writ large so in d5 feels it would feel incomplete to not talk about it but also

um you know deep options markets that's kind of like the clay that you can use to make other types of financial products right like the theme of the season is transforming variable into fixed uh interest rates and you you can't do that if you don't have a deep and liquid market for options um i actually kind of want to transition to like that part of the discussion like what are some of the different types of financial products that you guys are excited about in defy vance i actually heard you describe this on an old episode of bankless uh where basically like one of the big innovations that defy has is you've like if you wanted to create a financial product before your path to doing that was like working at goldman for like 20 years and then making some weird institutional products and like marketing it's a tiny group of

people whereas now you can be like a 12 year old in indonesia and like write a contract uh and and like millions or hundreds of millions of dollars from flowing into it so like on actual like services like products that people are going to use in d5 like what is the overall advantage of a d5 versus a c5 system and then what are some of the new products and services that you guys are either investing in an underwriting or that you see coming to market during this this bear cycle uh d5 relative to c5 advantages i would say there's probably four uh the first is just like global wallet distribution so historically you know like think about like all the australians in d5 kane and you know the whole gang the gmx guys

like all of these people like historically australians have been confined to australia like they have not been able to ship global financial products to every country in the world but now you have global wallet distribution and so you write a contract if you're a kid in indonesia if you're a kid in australia you can have people in china the u.s western europe eastern europe use it like you get instant global distribution that's just something that you know there are no non-geogated app stores globally like if you want approval to launch in one market it looks very different from another especially in a category like financial services so that's the first one um second one is just like composability and just like the ease of development um you know it's a public blockchain you can look at somebody's die stablecoin

you can put it into your contract you don't have to go off and build that yourself you can leverage and stay on the shoulders of everyone who's come before you from a development perspective um and that's what makes you know creating an insurance company in 50 to 100 lines of code possible on a blockchain where it's just not possible in a centralized institution so that's the second one the third one is just like tokens are very powerful and that's not something that's endogenous to defy itself it's endogenous to like just this new ownership and governance model that is in crypto and so if you're building a centralized financial service in goldman goldman owns that you know there's like you're not bootstrapping an ecosystem around it you're bootstrapping clients around it but you know that relationship is not as symbiotic as you have somebody who uses it you give them ownership you

give them a reason to come back you make it more sticky you direct feast the token you can spin the flywheel it's just this way to generate more reflectivity more ownership more loyalty that doesn't exist in in tradify and i think the fourth part of d5 which is you know advantageous relative to competitors is just like this is where the fringe of internet culture is and you're going to have different things develop on the margins than you will at the core of these you know large centralized financial institutions and so um like you know like we're somebody's building a inflation protected stable coin um they built that the last six months like you know like that's crazy and nobody really builds that in centralized financial institutions sure there's maybe products that service roughly the

same area but like that's net new you know people are tokenizing commodities and like figuring out interesting ways to use those in financial protocols launching like there's just this weird fringe you know culture that's just pushing things forward just a much faster pace and so i think there's basically four benefits and and those are them no i mean that's kind of the breakdown that we have of just how we view this space really large and vance kind of touched on this but there's a lot of elements that aren't necessarily defy specific but just endogenous to this industry overall and i think that sort of the the last point of the the crypto native culture is really kind of the biggest component because right now um

it's really interesting and it's cool to be working in web3 and it's the the one area of innovation in the tech industry that if you kind of take your your scan around all the different subcategories basically there's like two places to be if you're interested in technology there's like zero knowledge proofs in web3 or like artificial intelligence and what's going on in ai and and frankly the stuff that's going to happen in ai is going to happen at the various companies because they have all the data and the trading models to be able to get there and and so if you want to push something new if you want to push something that's creative fundamentally creative there's only really kind of one substrate to be dealing with right now and that's web3 so i i

definitely would double click on the internet um internet native culture as being a huge component of this whole thing let's let's say all this plays out let's say we do have this big d5 credit boom if you look at the last cycle there were kind of three maybe say three buckets of borrowers you had the retail borrowers you had the the funds that would borrow capital and deploy it because they thought they could earn more than the borrow rate and then you had um like the bitcoin miners ended up being a big a big group of borrowers who like what is what is the group who leads who who are the borrowers that feel fuel this next credit boom obviously you probably have those three the funds the retail folks and the bitcoin miners but is there another group that that hasn't participated that

will now participate i i actually think so and that's ethereum stakers or ethereum staking pools um and the ability to put even dollars in to a unified staking pool that people are willing to borrow to be able to go off and stay can earn that yield and hedge their price risk i mean this is what we're talking about when it comes to things like options or or perps and the ability to build structured financial products if you have the ability to hedge the price risk of eth and earn the nominal real yield sorry not the nominal the real yield of whatever percentage that is in eth terms that's a huge uh advantage product that just frankly isn't even possible uh

in most crypto ecosystems right now and definitely not at the scale that you would have with ethereum and so i think that's actually like one of the most undervalued components not only of just like what d5 can build but also just what the merge means because it someone's going to pick up that flag and run with it and it's probably going to be a large financial institution who structurally builds that product yeah i mean i think the incentives for more borrowing are unique to staking like over the next couple of years and i say that because um let's say that you know you want to start a credit fund and basically what a credit fund is is like you are taking on lower risk you're not like shooting for

like a double or a 3x or a 5x in the next year you're shooting for like a 10 or 20 um you know return and you want to do it relatively safely and generally the types of strategies that these credit funds employ are like lending to other people uh basis trading so like doing cash and carry where you like you buy eth and then you'll short the perp that's in contango and you'll earn guild from that and then i think like the third kind of arrow that's about to be put in that quiver is like the the staking uh carry trade where you borrow usd uh or or you have usd you buy eth you stake it um you know like you're earning probably like at this point five or six percent yield you'll borrow more usd against that

you'll buy eth again you'll stake that and so you've kind of doubled your position at that point and maybe you're instead of like five to six percent you're earning like 10 percent um but it's a relatively safe trade because like you're not just gonna you know get blown out unless the divergence between steak teeth and eat really kind of becomes material um which over the next year you know should become less of a risk but like all of the incentives are geared towards these types of trades being the new ones that are put on um and i think the ones that probably become less relevant um in a scenario where eth just is driving the market is like bitcoin miner financing um and that's historically been like a very healthy area of the credit market because

mining is super uh us dollar intensive in terms of like you have to buy machines you have to pay people you have to pay electricity costs um yeah i mean after all the bad loans of this past cycle that feels like an area where it's probably less of a you know like if you have three options in your credit fund manager it's basis trading it's lending to minors and it's staking basis trading and staking feel like the relatively more attractive options and ones where you can actually lever them up and get larger returns um i have i actually have a question for you guys about that you know the way it was described to me about just variable yields encrypted like where does that ultimately come from i think you can trace a lot of that yield like the ultimate source the stake rate for major

l ones and like really like eth the e stake rate is like the variable yield and in finance you have this concept of the risk-free rate right you also have a perpetual source of yield in the form of the us government right which is like constantly borrowing right and then the whole financial market kind of transformed that that debt into various products so do you guys view i mean in the same way that like bitcoin borrowers you know miner is like a big form of borrow do you eventually see kind of like a thriving market for the transformation of that variable stake rate for eth into something that's fixed so you get a bunch of like options type activity around that and then you can build other structured financial products on top of that fixed rate well i think you just hit the nail on

the head um it stems from the borrow rate or sorry the the real yield rate which then to be leveraged into structured products based on tenor and and what i mean by that is you'd basically be able to say okay the the eth real yield let's say is going to be somewhere around five percent uh in eth terms and then it's going to cost you some amount to be able to get basically the negative price impact of what that would be over a certain a period of time and you're gonna have to pay for that duration and so it's gonna cost it basically it's gonna cost more and more the longer and longer you go out which means that you're gonna have to pay more for that hedge but you could also you know you let later it you could do a bunch of different things and over

time i i think we're going to start to see basically a yield curve for for what is the risk-free rate of crypto and that risk-free rate of crypto i think is going to be denominated i mean our bias is going to be that it's going to be denominated in some form of the ethereum yield the ethereum real yield because it's most widely used and it's basically the the most sustainable that you can assume what's going to be really interesting though is activity and and bull market bear market cycles are going to have a real impact on what that risk free rate is and what we've seen at least with ethereum in particular is that more eth not just in dollar terms but in eth terms is consumed basically in the form of revenue for the ethereum protocol as as prices go up

and it has that effect over time and so what you can kind of assume is that the risk-free rate will go up over time as as markets go up which may be kind of this auto hedging auto rebalancing effect where as markets get a little bit you know bullish or a little bit frothy potentially you know you kind of have this this balancing out we're like oh well i'm going to go sell some of my assets because it's just like safer for me to hold this this like eth structured product or this eth risk free rate uh kind of thing and it'll be kind of like the shift from like historically you'd see like stocks to bonds where it's like 60 40 and like uh let's get a little frothy let's move more into bonds like i i could see that being kind of the the

thought process that you have over time the the irony of what you just just described there is like we're we're talking about this on the day when jerome powell uh is you know divoting his tea leaves right and basically what you're talking about is like a market-based pricing for interest rates right where you when you get when things get really frothy the cost of capital goes up that should like turn things over and then there's a same thing on the way down the cost of capital the real yield that you're getting gets cheaper so it encourages people to borrow right well yeah well in particular what i was saying is the risk-free rate which would be probably a major variable into what you'd consider to be the cost of capital in other places and if it's risk-free ish you know that that would be kind of the way the way

that you'd have to assume it trad five the risk free rate is basically the 10-year right whatever yield you're getting off the tenure which the fed doesn't like directly control but they control sort of they control the shallow end of the curve um so let's talk about like you vance you were starting to get into like some of the the fringe experimentation that was going on in in d5 like what are some of those things that you guys might be interested in because really i think the future that all of us envision here are is d5 eventually becoming larger than not only the c5 part of crypto but even challenging you know the size and scope of of trad fi in general and you need some financial products right that people want to use writ large and in mass to do that so where do you guys see

that innovation occurring today i guess in dfi or like what would you be what are what are some interesting areas that you guys might be looking at yeah so i i think um like talking about uh kind of the four different like super powers of of d5 which are like you know global distribution wallets um composability just the easy building if tokens is a new form of just distribution marketing incentivization and then internet culture i would probably add a fifth which would be you just have like this endogenous growth of you know wealth within crypto you have you know 600 000 addresses that are active on a daily basis they're super wealthy uh they're willing to try new financial products you have 100

billion or so of stable coins on chain you have 22 million each i think that's you know like almost 40 billion dollars of ether locked in d5 so like you kind of have all these interesting things happen but at the same time in the background you have you know and depending on if you're a bull or a bear cycle but like over time just like the amount of wealth on chain being created to use these products is increasing so much and like if you were a traditional fintech you would kill for these types of customers you just like don't frankly exist in um you know traditional finance like the this is like a crypto native thing and like the crypto native customers are like some of the most valuable part of the flywheel and that keeps it spinning and they're not just static they're growing wealthier they're

trying more things they're bootstrapping new asset classes every single time and so i think the things that we look for are there's like obvious unchecked boxes um and so like you know if you want to look at the categories you have borrowlend you have spot trading you have derivatives you have insurance you have options you have fixed rate lending you have like things for like payment for order flow you have things like staking like you know those are kind of like i would say some of those categories have their winners already like we don't see many people funding new amms to compete against uniswap we don't see a whole lot of new borrowlend protocols being funded to compete against compound rabbi like that is relatively settled i think on the innovation side um

i think you know frankly one of the most innovative and like new things that is especially a little bit new and old is ethereum and like the birth of like real internet money and like internet money is a meme obviously but like being able to create something that people identify as their base asset like i would probably say my base asset same with michael is eth and it's just internet money that's not associated with a specific nation state that pays us a yield um and that we have a lot of confidence using as not only money but also just like you know our largest asset and so i think that's like relatively new and i'm getting off a little bit of a tangent here but um people say that like you know the risk free rate of of eth is going to really hurt d5

because like you know what d5 protocol will be able to compete with like five percent real yields and i think that's like actually the totally wrong way to think about it because when you have five percent real yields and people are staking eath and they're putting it in defy you're literally like supercharging f5 with these yields um and with this additional wealth creation that's happening on a more rapid basis now that it has yield and so i think like the birth of that specific concept of internet money is like so innovative and it's going to power a lot of use cases that frankly we can't even see right now um but yeah i mean on the innovation side i think it's kind of this dimension of like okay what are the new financial products that we can build what are the new financial products that

we should build like can build i would put like you know the wrong intersection of that as like something like squeeth where it's like a really interesting financial product like it's really cool on paper but nobody actually really wants to trade that because it's like so complicated and like sure we can build it but like should we build it like probably we should focus on things that are a little bit you know closer to home in terms of you know things that people understand and know but yeah i'm trying to think of like the the really new innovative stuff in d5 that we've seen as of late let me give you a couple examples so like one is like payment for overflow and and like the whole wallet dichotomy so like if you're phantom if you're zapper um you know if you're rainbow if you're any

of these wallets like a lot of these wallets just like frankly have like a modernization problem and traditionally how the monetization problem is solved in regular finances you basically sell your order flow and this is actually like a really interesting monetization model the only problem with it in traditional finance is that citadel is the only person who is basically allowed able to bid on any disorder flow and you know we've backed a protocol it's called d flow it's it's basically the first on-chain payment portal flow protocol where um you know if your wallet you can just plug in d flow and you have market makers you have dows you have individuals you have anybody who can run this software who's able to bid on your order flow ahead of time so it like decentralizes the process it opens it up to people just beyond citadel and it

gives wallets like monetization in a box and like that is like a new trend where you know surprise surprise the person who started this protocol was an ex hft trader at one of the largest hft shops in the world like this new wave of people coming from citadel from jump from you know hrw from drw like these are the new people who are going to kind of define the d5 the next like two or three years and they're going to bring a lot of the tools and tricks that they learn these places with them and so i think like broadly it's hard to point to like a ton of like okay like there's 50 new innovative trends here they are but like payment for overflow is one mep is like another um but all of these things are coming from the people who you know once

kind of ruled the roost in trad five which is exciting well only thing i'd add uh just to that real fast is i i kind of think of it as like and historically i can't remember who originated this concept maybe it's fred wilson at usv but like you have basically an infrastructure build out and then an application that's enabled by that i think it were fundamentally in an infrastructure build-out phase for the next generation and a lot of the applications that are working now are the ones that were were built based off of the last generation of infrastructure and basically that's layer twos that's oracle's that work that's you know um wallet solutions that are that are usable uh but right now like we frankly are waiting to see what this next generation is gonna be based on what the infras is doing right now

i've i've got a question actually and just a comment vince on that uh that idea that you know a five percent real yield is really going to hurt innovation that actually might be more a reflection of the times where basically everyone thinks you need zero percent interest rates to fund anything or produce any sort of innovation um because like historically i think that's actually pretty in line with what uh what yields have been but i i guess one thing that i mean the subject of this like interview series is like just uh debt debt products in in crypto in general which we haven't really seen like defy native debt products um the tradify equivalent right is like when when even they're signaling about the drop of interest rates that leads this huge boom across everything right so i'd be curious like do you ever see a world

where you know we're talking about uh real yields based on the e-stake rate that kind of moderate based on in these like form these very natural kind of boom and bust cycles do you ever see when there's like basically a lowering of the real yield and therefore a corresponding drop in the cost of capital do you ever see that causing a boom because right now like most of the boom cycles in crypto are based on like new token distribution mechanisms right be it like uh you know icos or yield farming or nfts or whatever it is but theoretically like a lowering of the cost of capital and crypto should lead to the funding of new projects on the margin and like the way that it does in a in a tradfi type system so do you guys ever see a world in which we have this like rich

ecosystem of defy native debt products and like that is actually what sparks the boom or like what kicks the cycle off as opposed to more of like the token distribution side of things i think i think if you have um like if you know the 10 year is at like three percent right now and you know the eat steak rate is at like six or seven percent um you know like your total cost of you know like if you're a rational person if your cost to convert your usd into each stake it and then hedge out that risk is less than the actual yield that you'll then you'll get like you know that should draw a lot of dollars into the system and drawing more dollars into the system is you know fundamentally

positive for crypto more interest more bullishness you know more price action um that kickstarts part of the flywheel um on the other side when you know you're just like and that's like kind of like drawing in capital from tradfi to d5 and like i think that's fundamentally positive um and so that could bootstrap part of the cycle i think on the other side it's like if eath is a five percent real yield six percent real yield whatever um and you know that that's kind of just like the natural like bar for a lot of the investment that happens in the space and i think that that also kind of like skews people towards more risk-taking behavior if that is going to be the natural kind of like barrier um

and so you know more risk-taking behavior means more things that are innovative getting funding it also probably means that uh you know if you think about how the eth yields work basically eth yields are you know part inflation but they're also just like revenue for the network and revenue is calculated as uh the number of eats spread per day times the price of that eat um and for real yields to decrease basically what you need is is you know the following to happen price of eat needs to go up enough where the quantity of eats spent per day actually goes down um because if you have like you know picture eats going up while fees rise on a quantity basis as well so like back when eat was 5k 10 to

15 k eats per day was being spent um really what you need is for the quantity to decrease as the price increases um and there's some barrier where that happens but it just implies that like things would need to get much higher in price for quantity decrease before any of this re-rating actually happens so i don't know there's a lot of factors at play but i could certainly see and i certainly expect eth you know to draw a lot of attention capital and just innovation into the space overall maybe one thing to touch on here which actually i think just came out like yesterday or the day before is uh is the example of what happens when you kind of move past token incentives into something that's uh a real yield as well um synthetics and and

were you know an investor and have been for for many years um they just came out with a proposal to stop inflationary rewards going to the stakers and this would be basically a turning off of you know a massive amount of inflation inflationary yield every single week to synthetic stagers in lieu of just having uh susd which you'd kind of consider basically to be the real yield of the protocol um you know going to the synthetic staters only and so i think there's there is an element of like okay five percent you know that's a really tough bar to hit you don't have to hit that right out of the gecko you can have inflationary rewards be something that subsidizes growth and

engagement and frankly distributes ownership to the point where you get to that success benchmark of saying okay now we can turn off the inflationary rewards like hey we're ready to turn on just the the real yield um and and you could maybe say that that's what ethereum's doing i don't think that it's really been planned to that effect but it is kind of a similar one with you know getting rid of uh a bulk of the inflationary awards in in the form of eip1559 where you burn the transaction fees and post-merge you're going to have lower inflationary awards in in the first place so there are some elements of how you would do this uh how you'd subsidize it which i think are definitely success points guys if all this plays out and the debt markets really do get built and advanced

all those products that you're talking about do actually get built right now the only real way that folks raise capital today is with just equity issuances right you raise you issue tokens and you get capital and you use that capital to grow the project in traditional capital markets debt is much bigger than equity right and so i'm curious if you guys like how you see the debt markets playing out specifically for dows right do dows go out and instead of issuing a bunch of tokens do they uh do they go raise debt do they raise debt on like a recurring basis based on like the revenue that the protocol's spinning off is it like a one-time raise like does it look kind of like what pipe has done for for sas revenue like how do you guys see this this world playing out maybe michael had 13.

yeah i i was gonna say pipe uh as a potential model healer if you have sustainable real yield in a dollar denominated you know core revenue producing function um there are a ton of new financing mechanisms that don't necessarily cost as much as early stage equity might um and frankly aren't as potentially burdensome or disastrous in the form of a full-on debt offering um as you would see in you know sort of the two models that exist in in corporate uh in the corporate world how this relates to i mean i could see there being some flavor of somewhere in between you know having something where you have a debt-like financing where there's some

nominal yield associated with it and maybe a convertible element at a certain point you know based on some success criteria um i i personally haven't seen anything like that but as we get to a point where you have you know real yields becoming the norm you know having these these protocols be fee generative um such that they can sustain themselves and you need to pull forward some of that revenue to be able to subsidize cost or or grow head count or do something new um i'm sure that there would be options for that but to go back to kind of the original point that's a perfect place where structured products become a real viable option here um so that that could be i think you know a point of innovation just in terms of the

product categories going back to what vance was saying you know building something that we can versus building something that we really need um you know this feels like if there is a demand for it it feels like something that we both can and and potentially need to build i think maybe we can start to wind down here and just like you know rewinding to what we kind of talked about the beginning of the show right death of c5 this like new era of increased growth let's say in d5 um like if you look at exchange volumes versus uh maybe let's use the extra uh volumes that uh centralized exchanges do versus decentralized exchanges still the majority of the volume is in centralized exchanges even though you're starting to see like there were days where uniswap flipped coinbase base in volume and stuff like that um i'd be curious to see

like just how you guys see and let's say the next bull cycle whenever that whenever that ends up coming like how large do you see d5 being in terms of like the balance between c5 and d5 activity um and if you're looking at it basically in terms of like exchange volumes or if there's like a better metric that you're paying attention to i think i think next cycle like at least kind of how i expect it to play out i think we'll have probably like a trillion in in tbl locked in d5 that would be kind of the next high water mark we got to like 130 140 billion actually probably more than that i think it was like 150 or 160 last cycle um and that was across all of the chains um i think uniswap is probably you know flipping coinbase on a more consistent

basis or like coinbase kind of gets out of the exchange business writ large like michael and i were talking about this last night like it seems like the future of coinbase is really um you know you know two or three things one is coinbase wallet two is coinbase staking and then three is kind of like you know the exchange business that they have today and i think coinbase wallet eventually eats their exchange business where like you know when you open your coinbase app in the future it's just your wallet and like you're you know trading through open source liquidity pools on chain versus like what coinbase has on their back end um and then staking is like you know it generated what like 170 million dollars in the last quarter profit like that feels like a business that if it grows in order of magnitude is generating you

know as much or more business than their exchange today and so like i think d5 will not only you know continue to grow and grow by you know an order magnitude or two but like it'll kind of like fundamentally uh redesign a lot of the exchanges that are already in the space on the centralized side and so i think that the products that stay really close to the chest in centralized finance are probably like the derivatives platforms those are the most profitable they're also that's regulated um but like there's going to be an emergence of the decentralized options for people that you know want to use d5 for you know the four or five major reasons that i kind of outlined before um but i think the other thing that we've noticed over the past you know years or so is that

you know we launched a thousand d5 protocols collectively as an industry maybe more and i think people are really mad that not all a thousand worked and you know uh not all thousand have significant market share but it was just never gonna break down that way frankly and the fact that we have 20 winners is phenomenal and we created those in the past two or three years like and we're lucky to have you know probably five or six of those in our portfolio like we call that a dub and we we absolutely love that and uh you know like how many more d5 protocols will there be will there be you know 20 more will there be 30 40 will it be 100 more i would say probably there's going to be another 20 winners when all said and done maybe they're more regional maybe they're more

regulated maybe they're or you know they just have a different angle on customer acquisition but um i think yeah that's kind of my perspective i think a lot of the winners keep on winning um i think the people who are still building and still innovating in the bear market are going to grow their market share uh just like you swap has like 80 or 90 of spot amm volume right now you know when the bull run picks back up a lot of their competitors are going to be you know basically out of business and they're just going to eat all of that upside as the bull run happens so that's my perspective at least the other one i would say that we haven't talked about today is maple yeah um and maple is just like probably the best positioned um new credit creation venue in all of

crypto you know they they're doing like a billion and billion five and loan originations every quarter um they're growing like crazy their underwriting standards and innovation on that side is just like way further ahead than c5 um and they're also like an interesting venue to get exposure to staking where they have like purpose-built staking pools that go off and kind of facilitate the credit trades and carry trades we were talking about um so yeah i mean they're definitely one that we happily watch for and you know full disclosure we own a lot of maple but yeah they're good people they're australians we love them they're great vance do you think in in c5 uh you saw basically like some of the winners like the coin bases and ftx's and finances of the world basically just try to eat

market share across the board so like an exchange would go into uh you know they might launch a custody product or acquire a custody product then they would uh acquire like a london borrow product and then they they would acquire like a prime brokerage type uh a software platform like coinbase acquiring to gomi is this going to happen in d5 like will the aves and the like the blue chips of the world eat market share from other folks or will just do you think new smaller companies like startups will will win like will unit swap in ave and compound expand out or what does that look like i mean there's kind of like two schools of thought here one is like the ave and like they're launching a stable coin called go gho and if you look at the rates between ave and maker dow the

rates on ave are usually a little bit higher just because like they're not able to just like hypothecate the stable coin out of thin air relative to maker and you know them creating their own stable coin is just like a direct shot at maker they're trying to basically vertically integrate lower their cost of capital get more market share and so i think like you know there will be some people who choose to do that frankly like that's more of an opportunity that's available to international teams that are outside of the us um like i remember when compound was going to have their own chain was going to have their own stable coin like none of those plans came to fruition i think for a number of different reasons but one of them was probably regulatory and so like it kind of really matters like um

you know where you're domiciled you have a lot more degrees of freedom freedom if you're international um and yeah i mean look at what synthetics is doing versus what dydx is doing you know it's like a very night and day comparison in terms of you know like how aggressive they're being on the ecosystem side on the incentivization side on the vertical integration side um and so yeah we're gonna see both approaches um but some people are gonna be able to do it and others just won't yeah all right guys i really appreciate your time it's been a fascinating conversation uh we will see you next week for the roundup cheers guys thank you guys all right man man

michael and vance wealth of knowledge there what'd you think of the episode uh really good episode really good first episode just kind of setting everything up and framing the conversation for the entire season uh yeah i'm always impressed talking to those guys just there they have a wealth of knowledge of not just what has happened but i will say like what is coming down the pike yeah i would say that too to just walk through everything again to reiterate the reason that we wanted to talk to these guys is i think they were the ones who really planted this idea in our heads of the death of sefi and like a new uh reinvigorated growth in d5 let's say i thought they did a really good job of just recapping what the advantages were of d5 over c5 right so with c5 you've got the opacity right you have no

trans like no visibility but then there's also that persistent risk of rehypothecation that you have in c5 and there's even if you do everything right uh you know even if you manage your own risk appropriately you know your lender uh the person who's lending or the person that you're deposing your assets with on the c5 side of things cannot be good and then you just basically have no recourse and they're more power and there are constant stories about this like marco hodes has a really if you want like a trad phi analog go see what happened with marco hodes and goldman sachs right um really really uh you know not great stuff and you have very little ability to record what happened with marco hodes i don't know that story um i mean mark code is a very famous short seller um i forget which which position

this was of his at the time but basically he was completely in the right and he managed his march of requirements right and everything his side of the story but it's been corroborated pretty widely uh and goldman just sees his collateral anyway close stopped the straight out at a big loss um and he eventually ended up being right on the anyway you can hear him talk about it on some episodes of grand williams but like this is i've heard the constant you know this this happens to short sellers in particular uh it's it's a big challenge so just understanding who your counterparty is there's only so much that you can do and only so much recourse you can have in a c5 type system yeah what'd you think about vance's idea that retail would actually be the first to flow into d5 i i completely agree with that yeah i i

think that the obstacles to uh institutional defy is still there and ultimately at the end of the day i think that's the big the obstacle being what like the kyc amount they don't trust aml and then also just the the mental the like even just listening to michael right like michael and vance are some of the most d5 natives that you'll you'll ever find and even they still have like apprehensions about moving their assets on a bridge right and their layer of trust like their real trust really doesn't extend that far out past ethereum main chain so there's just a lot you know you gotta you gotta deal with like the mental barrier for like an older uh demographic and tradify but then you also have to deal with like it's much more highly regulated and there's career risk that's associated

for them that isn't necessarily the key like if michael and vance like lose some i mean i mean it wouldn't be good for them either but like it would be really unacceptable right if like a pension fund you know loses money in crypto and then everyone's like well what did you think it's a scam so i think i totally agree that retail is going to be the first to move in in a big way but i do think for our thesis right to relay this back the reason why we focused the two legs of the discussion on the market for options and derivatives and then the market for products is again there's an inherent link between deep markets which are fueled by speculation and those are traditionally derivatives markets that's like that's the clay that goes into building new financial products right because the transformation that occurs

from variable to fixed interest is basically you're baiting it basing it on a floating variable rate like libor you want to isolate a part of that and you the way that you do that is via an options market so you need this deep speculative based um market where there's a bunch of leverage uh and that's an options mark and then you need that for there to be uh new financial product creation and i think that's the biggest we should really be diving into that for the rest of our thesis because i think the biggest risk there is just time and you know it we might be early on that part of that leg of the thesis i think but that's something that you and i should just be aware of and like continue to ask guests moving forward in the future i think they made a good

point too that the introduction of perps into the crypto markets will probably slow down uh we'll slow down options um i i think it's well actually i i want to double check this but i'm actually i think vance might have been slightly wrong i actually think the perp contract actually does exist in tradify is it it had just been never been widely popularized actually i didn't know that i didn't know that yeah that yeah i'm pretty sure it has been let me i'll we'll double check that and put it in the show notes but yeah i'm pretty sure that the perp actually has existed i think i'm actually not sure you know perps the big advantage there it just it concentrates liquidity right if you you know if you have options markets then you have different experience at different prices and

suddenly you could basically be trying to hedge the same thing which is your exposure to ethereum or something like that but if it's if you're doing it on a certain expiry then suddenly you just you just fragment liquidity so there's some there's some definite disadvantages to perps as well but i think that's the big one that perps has but at the end of the day i don't think it matters if it's perps or if it's options or whatever it is uh basically you just need that ability to to lock certain things in and hedge yeah so i love the conversation talking about the ability to create new products right if you are an innovator in finance and you want to innovate and finance you have to go work at goldman you have to convince the risk team and the tech teams and it takes years and years to go build a new

product but in in defy you know takes sometimes weeks or months right you know who transformed this this view of the world from his matt levine when he talked about like brokerages or banks are investment stores and like you or i have different needs right like you and i have different needs like hey you need a computer you need a phone that's like very easy to understand but we also have different financial needs right i need access to borrow so that i can afford to buy a house i need access to borrows that i can afford to buy a car i need like i want to be able to take i have this particular bet on how i think the future is going to unfold i need you to create a product so that i can get exposure to my particular view banks hedge funds brokerages they're

they're all they're creators and then distributors of different financial products it's just the the system that they have to create manufacture those products and distribute them to the masses it's very legacy type system i think the big advantage of defy is it just reduces the friction of product creation and distribution times x you know i also think for what it's worth that's why people in tradify get defy so much more intuitively and so much faster than they do bitcoin that's completely anecdotal but yeah i think they because they understand what financial services are and how they get marketed and distributed much better than the average person who if you were to say that a brokerage is basically distribution they'd be like what a brokerage is where i go to buy stocks it just doesn't compute in the same way i think that it does for chat five people yeah clear

something up for me so vance mentioned that that a lot of people think that the five percent rate on on staking is gonna pull capital is is potentially net negative for for defy my understanding of why people think that is because it uh like if you can get four percent on a on a protocol and like in a pool or something but you can get five percent just staking your eth then that's gonna pull capital out of the pools but it sounded like when you you had a different interpretation and so like what can you just tell me something so yes yes to both it all has to do with opportunity cost right right so what would happen today if the fed raised interest rates to five percent yeah capital gets pulled out of stocks right right exactly gets pulled up but the reason why but capital wouldn't get

pulled out if the rate of return for stocks was ten percent the reason why interest rates are where they are is because markets collectively don't think you can earn higher than a certain percentage return on your other options right people are very concerned about that other rate of return the reason why it might work with a higher percent uh like a five percent real yield right risk-free yield real yield that like your five percent is your hurdle rate essentially for new types of investments is crypto is growing like crazy right like the growth isn't really the worry quite so much i think in this space as it is for for tradfy so you're that's why that's like the distinction as well between where the fed controls interest rates at the shallow end of the

curve which is where banks borrow versus the long end of the curve which is less determined by what central banks are doing and more determined by where people think growth is going does that make sense it does sounds yeah so the reason why there's you need to the fed is basically had to lower their their their uh their interest rate is because their understanding of the economy is that it cannot bear a higher hurdle rate whereas in crypto um it we actually do think it is possible that you actually could bear that higher hurdle rate and the reason why that's ultimately better is because if your your hurdle rate for new investments is five percent as opposed to one percent then all of the new investments that get funded will return at least six percent whereas all

the new investments that get funded in in finance in tradify in the economy today won't return as much because the cost of capital is much lower does that make sense that makes sense yep that's why we have all these zombie companies yeah like that's that's why lowering interest rates to a certain point is actually counterproductive because it encourages mal investment yeah what's coming next this is a really good episode to kick off the season what is the next episode what are we talking about uh with tushar so we're talking about two things with tuchar right so here's what we covered on this episode where it relates to the thesis and i think we're largely validated right what i think we did cover in depth is that we see a much diminished presence of c5 in this current cycle but moving forward after

that it gets less and less and less in light so almost like the new bitcoin dominance right which is just like that's been a one-way track down essentially and i think that's what c5 uh is going to be relative to d5 moving forward as well so i i came away from this conversation pretty confident that that's going to be the case what we're going to be talking too sharp about is two different things one we're going to be talking about interest rate swaps so that's actually the market that performs that alchemy of transforming variable rate into fixed rates right so a swap is basically you're swapping future cash flows so people use it to like hedge interest rates but they also use it for for um uh you know options and things like that so uh interest rate swap markets in crypto defined native interest rate

swaps to char also was the one who gave us the idea of okay largely what token financing is is that some form of equity financing and that's what catalyzes booms in crypto we want to get his opinion on whether or not we think debt financing right the creation of a new suite of credit products whether that can kick off a bull waving crypto in the same way that equity financing token distribution innovation has in the past that's why that's what we're going to be talking about that episode drops next week if you guys are excited about it hit the subscribe button anything else mike that's it see you next week see you next week [Music] you