DAPPCON 2024: Spark: Why Composability Matters - Sam MacPherson

Transcript

hello everybody uh this talk is spark why composability matters so let's get into it first uh who am I uh I'm Sam mcferson I'm co-founder and CEO of Phoenix Labs I've been an ethereum fan since 2017 defi user since 2018 makeer core Dev from 2020 to 2023 and most recently a spark contributor from 2023 onward so let's start with a big question why are we here maybe it's for the gains maybe it's for the memes maybe it's just for the friends we make along the way for me at least one of the main reasons that I'm here is to empower the individual now you may ask um why does this

matter it matters because there's this everpresent tension between governments and individuals where governments have this top- down Authority individuals are more of a bottomup emergent um thing as well so this tension exists and it's important because uh there's always this natural tendency for things to consolidate and centralize and move towards the power naturally shifts towards governments on the one side so it's important to supply individuals with as much tools as possible to make sure this Power Balance is always balanced so some of the tools that governments use um is uh Fiat currencies so Fiat currencies allow governments to

regressively tax unsophisticated actors via inflation another uh issue is with the banking system where Banks uh extract value from low information customers not everybody even has access to Banks this is the world's uh unbanked so here's a little bit of a oversimplified uh version of uh the way things work so governments with the uh invention of fiat currency um allow governments to run liabilities much much higher than their assets and they've used this to scale up and well this is useful for scaling uh it carries with it the problem of inflation and normally this is kept at uh you know they target like 2% inflation in modern

times but sometimes when the deficits are very large you get uh issues with inflation like we're seeing now and now we're in the next phase of this where the uh monetary policy tools that the government has available uh are rate hikes and so we see this uh take the place of uh or take uh the form of rate hikes and you know everybody's holding cash is great like oh awesome I'm getting all this extra yield on my cash um to then this is a tool to fight inflation and so Banks wrap this up uh they hold t- bills as their assets and then they expose this to people uh in the form of money market funds and so you see the Monopoly man on the top he is the sophisticated actor is able to get uh protection from inflation uh by holding you know hard assets or being uh

going into these money market funds and uh the people who are holding cash the unsophisticated actors you know maybe people just don't have access uh their purchasing power is eroded over time but so we see this examples of this uh in like Argentina and turkey but really this is the end state of all Fiat currencies it just it's just a matter of how long it takes the temptation to print money is just too high by the government's in charge and we just reached this end state where cash becomes more and more undesired by the population governments uh will eventually put in capital controls Force citizens to use the country currency to try and boost demand money market funds provide shielding for sophisticated

actors in businesses and really the ones who lose the most out of all of this is the unbanked and for example in Argentina about 50% of the population is unbanked and so they have this extra taxation against them and what's this uh manifest as is like really every it just facilitates this flight to safety via centralization we see it within the countries um for example in the US when there was the banking crisis last year you see all the money consolidating into these Gip Banks this is the you know two big defail Banks and then you see this uh even within uh between countries as well where everybody is uh piling into the US dollar uh you see it like Latin America like people prefer the US dollar

because it's just this uh pile of cash where everybody's uh going into and because everybody's going into it it provides this extra degree of uh safety so this isn't great I mean how do we how do we fight back and really access is the key it's not going to solve everything but uh we want to subscribe everybody to the risk-free rate of the currency so to mitigate some of these effects governments still increase rates inflation is still a problem it doesn't solve all the things but at least now you are no longer taxing uh poor people dis disproportionately so now everybody has access to this currency that is receiving the uh the base yield as opposed to just US Dollar Cash which gets a roded more

rapidly and defi democratizes access we can see this last year um the emergence of t- Bill products going from basically zero to now uh you know approaching a billion and the growth has been uh accelerating with new players on the scene such as um um Black Rock uh you see the gray there more recently um this this Market has just been booming and this is um in the underlying thing that's driving this is people want access to this yield they do not want to give it up to the uh issuer so savings die is kind of a little bit of a unique product here in that um the uh the die savings rate is actually above the uh trafi risk-free rate um So currently it is 8% maker

targets a 25% uh cash Reserve right now this is in uh liquid stable coins uh such as usdc um such that it can uh maintain High liquidity well still targeting this yield that is uh ideally going to be uh bigger than the US dollar risk-free rate because it has access maker has access to the uh defi yield as well so far total deposits into s into the DSR are uh 2.1 billion so it's a fairly big uh product now you may ask yourself you know the past few years I think have taught crypto a valuable lesson in you know there's Yi where is the yield coming from it's very important to know this the yield should be sustainable and being paid by actual people in a sustainable way so savings

die yield sources first and foremost the base yield is provided by short duration treasury bills this really should be the uh yield that any US dollar stable coin is providing by default users who are depositors into these instruments uh are taking most of the risk and they should be rewarded for that risk so SII provides this base yield uh by default now if defi is happens to be yielding more and in Bull markets it it often does we can uh shift some of the backing into defi lending this is um lending operations such as uh maker core vaults spark lend um these are the kind of things that you're used to uh how maker was founded where you lock up your eth or lsts or whatever and then you borrow

die you pay that stability fee and that's the fee that's going uh to uh SII holders so uh yeah this is for defi native crypto lending more recently we see uh products coming on chain like Athena that allow access to the centralized exchange uh per field so this is the uh more generally this is the cash and carry trade where you go uh long on say eth and then you short the uh pers and it allows you to take out a delta neutral uh hedge position now I mean this is nothing new but what is new is that uh Athena has tokenized this such that it can be used uh quite easily as collateral in uh defa so maker has been able to tap into this and the the great thing about this is centralized

exchanges defi is still relatively small um centralized exchanges are at least in order of magnitude bigger so this is a huge amount of uh yield source that uh that maker can Source here and so let's look at the maker collateral portfolio over the years um so this is since the Inception of uh D in uh 2019 over here you can see that the orange here this is a crypto Leverage um so this is the uh backing of die that is uh filled by users who are taking out leverage usually on eth uh but also Bitcoin um you can see around 2020 this is a black Thursday event here when uh D started trading above $1 and the uh Peg stability module was

onboarded right around here um in order to uh bring the price of D back down to $1 and so this is um this is really the only way to scale a stable coin is you do have to back it uh with a centralized stable coins so it was added here and then you know there's the bull market 2021 and the total aggregate uh die demand uh briefly touched 10 billion but then came back down and you see the demand for leverage just cratered right around here maker was receiving a lot of criticism for just being wrapped usdc and it was not entirely unfounded but I mean this was never to be the uh end state of things the plan is always to rotate this into T bills and so you see at the beginning of 2023 this is the green here this is uh the t- bill direct

t Bill exposure of the balance sheet so maker rotated these stable coins into yield bearing T bills which then it forwards the yield on to uh users via uh SDI and then more recently you see you know here's the bull market from the uh past few months and then this little bit of blue here this is the uh the new market this is Athena exposure here where maker gets exposure to the cash and carry trade and this even this small amount here uh is able to provide uh pretty pretty massive uh returns so let's talk about the power of composability so first and foremost uh you get ease of access this is um if you want to go into uh savings die it's as easy as using your favorite exchange and you know you swap whatever asset uh you

want and then you just have access um Integrations is another huge benefit um so with these tokenized uh yield bearing stable coins you can use them as collateral and lending markets or dexes and you just get this extra level of uh Capital efficiency and this leads to the third point reducing opportunity costs for um LPS so indexes if you are uh Market making with U usdc or USD there is this implied opportunity cost that you have to deal with where you not receiving the risk-free rate you are forfeiting that to the issuer and so um to reduce the barriers here SDI we want to forward this uh yield to the users to get improve Capital efficiency within defi so we can run over some use cases

uh for SII so this is the first use case that we got which is um that was uh somewhat big and this is lending so you can use SDI as collateral to take out loans of uh eth and Bitcoin this is useful for hedging or shorting or whatever you want to do and because you're using STI collateral instead of say usdc you get this uh nice uh DSR yield on top that you can uh rely on which is great so this has been onboarded into spark land as well as a and uh it's it's proven to be a pretty popular product um additionally uh indexes um so due to the 25% cash Reserve with usdc you can treat uh SD pretty similarly to uh usdc um maker uh holds these large cash reserves to

ensure redeemability is available in most cases um and then you can use this for further pairing with stable coins or other assets or whatever so and then the market makers uh can are able to receive this uh yield instead of again forfeiting it to the issuer um and then third use case savings you know this is the most common use case where you just want to yield on your cash and so SDI is a perfect place to park your funds there and whenever you need to pay somebody um you know or exit into Fiat uh you can swap out to usdc whenever you need so here's the chart of s usage uh since it was uh became uh was launched at the beginning of 2023 but it became popular around August of 2023 so we see

the vast majority of the use case uh the uh the gray and even the green these are EA wallets uh and then treasury is the green um so these are people using it as a savings product even it's perfect for like businesses or you know individuals who are just uh holding cash and they want this uh they do not want to foro this extra yield you can see the purple at the top uh this is the uh lending usage so this is uh SII as collateral um so there's been uh some nice usage there and then more recently you have uh Dex uh the the blue sort of uh to the top right here um this has been kind of growing steadily this is usage of SDI as pairs in dexes and so at Phoenix Labs one of the

products that uh we've just released is called Cash and savings and the goal of this is to make it easy to get in and out of SDI dealing with things like the um ERC 4626 the fact that uh the units are not uh rebasing kind of a pain for users um you know you don't think like this so we are try we are extracting this away such that you can can swap your idle cash into savings die and then when you want to exit you can exit at size and so um I'm announcing now a few days ago we just released this product it's on mainnet we released it on nosis chain as well so you can get in and out of a sexy die which is which is awesome so here you have an example of the withdrawal page and um so you can

keep your money in SII earning that yield and then the minute you need to pay somebody you need to pay a provider whatever you need to pay them some specific amount uh you can exit 10,000 and then it does all the calculations for you and facilitates the swaps uh through maker core infrastructure and due to the PSM and the liquidity uh maker offers one toone swaps with usdc at the scale of hundreds of millions of dollars so if you need to exit with 100 million like right now you can do it so where is this all going we want SDI um and then the rebranded version when that's out to be the uh savings account of Defi and so the next steps we're going to be taking

is ensuring that you have access uh at scale to the DSR through SDI um on all of these uh chains so users can feel confident that when they uh have cash on these chains in usdc they can swap it in a desti get that yield and whenever they're ready to pay pay providers or exit or whatever else the liquidity is there and maker will ensure that one toone swap is there um other integration we're looking at we're very very excited about things such as nosis pay these non-custodial uh Visa cards where um people can pay for things you know you so you hold your uh idle cash in SII and then right when at the point of uh you make a purchase you can uh then uh move it out into the

nosis pay uh Visa system so this is very exciting uh development so really we want people to think about spark as your self Sovereign digital Bank you can hold your cash in ESI you make purchases with nois pay and you take loans with sparland and so you may ask yourself we're starting to reach a point where do you really even still need a bank and this is exactly where we want to go so thank you [Applause]