Decentralizing the Dollar on Ethereum | Michael & Colin

Transcript

it's it's a funny one it's uh it's kind of like Insurance you don't need it until you do we we saw usdc deeg um why did dpeg because there's dollars in a bank account and people woke up one morning and realized that the bank that those B dollars were in no longer existed nothing said on zerox Research is a recommendation to buy or sell Securities or tokens this podcast is for informational purposes only and any views expressed by anyone on the show are solely our opinions not Financial advice Pacho Ryan and our guests May hold positions in the company's funds or projects discussed what's up guys welcome back to another episode of zerox research today I'm joined by Luke from the blockworks research team and Michel

Colin from liquidy uh decentralized stable protocol Colin Michael thanks for joining thanks for having us um before we get started do you guys want to tell us a little bit about what liquidity is and what you guys are building over there sure so for those that don't know liquidity is a CDP based borrowing solution with a stable coin called L USD um it has been around for three years um people have issued more than 4.6 billion in loans one of the most forked protocols on ethereum um T5 protocols um yeah and it's running it's immutable it's running for three years

without any problem so far so it's really one of the few truly decentralized protocols and what does it do so what can the you users do with liquidity um if people hold e and only if um um they can borrow against it so a user would deposit if into liquidity then they can take out a loan in L USD and use that for buying a car for um um using it in in any other way I think the specialty of liquid is really that it's uh fully decentralized you have only a oneoff fee kind of that that was an innovation you don't have an interest rate um you only pay 0.5% and L USD has the reputation of

being really a sound and Sovereign stable coin like the Unstoppable stable coin in defi I think that's in a nutshell is uh liquid and that's the version one so we're working on a V2 and I can tap kind of what's coming there but maybe First Call in did I miss anything important about liqu no I think it was beautifully said so uh yeah very much focused on decentralization it's it's very much in our ethos we do um what we can wherever we can to uh reduce any points of centralization uh and we kind of run the gamut on that including the the fact that we don't run any of our own front ends access our our application everything is open source and put out so people can run themselves and something we're very passionate about uh and we

think will help push the space forward interesting and I definitely want to get more into that um focus on decentralization later but before we get into that maybe you can explain what liquid V1 was or is um given that it's still running yeah so you mean we W I mean I hope I explain that a bit by saying it's it's it's a borrowing solution or are you rather V2 I guess I more so mean what is changing from V1 to V2 is better way to put it so um mainly two things you know one is really something a lot of user asked us is can we have other collateral especially lsts having a yield bearing collateral so V2

will introduce multic collateral um we will the protocol will accept if lios st e and Rocket pool if so they were really again restrictive because we want to keep the Key properties of liquid we want people like this immutable kind of [Music] decentralization no upgradeability so we two will be in the same um we have the same qualities that's why we restrictive with the collateral you can't play around and change it later so that was a user need which we address um with V2 and the other one was um um shortcoming of V1 which was designed in a low

interest rate environment where it worked fine with the oneof fee but there lately as interest rate rates Rose um this had negative consequences for the borrower which had to have really over collateralized positions and we can deep dive later into that why why that was so we introduced kind of the innovation of users at interest rate to address that challenge um to allow people to borrow with again high ltvs in all interest rate market conditions and I think these two ideas together n nine months ago then then really kick did off uh where we ask ourselves in a retreat how would we build we want today what are the learnings and how can we improve it and

mainly because nobody else has done it we were forked a lot but kind of we we didn't see this um really um substantial Innovation so that's how it started and that's um the main difference so V2 will also be immutable and no governance what's the choice behind that why are we going fully mutable and governance free as opposed to some Alternatives I'm I'm happy to jump into that so yeah something that actually really surprised me um I know Michael and the other guys had been around and seen it so maybe it became more innate but um when we talk about immutability and and decentralization I think a lot of people kind of think about this as really the the hardcore eth Maxi crowd

are the only people that care about this uh and what really surprised me when we started talking to users was some of our biggest most advanced I guess defi institutional probably the best way to talk about them you know multi-billion dollar businesses they said hey we really like liquidy uh for a lot of reasons but one of the reasons that we care most about is the fact that you guys can't change the rules like you have no more rights than we do um and that blew me away to understand that people cared about immutability and decentralization for a reason that isn't idealistic philosophical um that they can actually reduce their risks because they understand a protocol they understand where it can be attacked and they understand that it can't change the rules later on down the line if somebody says oh we don't like this or we don't

like that um so that is something that I think um is truly under undervalued in the space um now there are a lot of benefits of being able to upgrade your protocol and change things um but I think from a user's point of view it's great to know that the things will always work the same way that they do look no further than how Unis swap V2 Works uh that's still one of the the biggest X's out there um and it can't do anything differently than it did when it was launched years ago so so given that liquidy V1 and the LUSD contracts were immutable and governance free what were the primary limitations or problems that this might have introduced for the overall mechanism design of V1 that

ultimately created the context for the need to build liquid eb2 yeah I could talk about that so the first one is and and apologies um it's going to be a bit Financial uh and a little bit academic um but generally the idea here is um in V1 a user that wants to borrow LUSD um like if they were to borrow die from maker uh needs to put in collateral so for us it's just eth uh it's just one collateral and they can withdraw LUSD now when they do that they pay an upfront fee that's half a percent it changes a little bit depending on demand but it's a oneoff fee and after that they pay nothing so you can imagine that you know a protocol that says hey you can mint money for half a percent and

keep that borrowing position as long as you want at some point when somebody else like maker or a is willing to pay you on Stables 5 six s 89 20 uh 30% with Athena you can imagine there's an imbalance there so the way that V1 kind of handled that is by saying well um we we have this unique mechanism that we call redemptions what is a Redemption Redemption is um is something that's unique and focused on decentralization and uh what it allows is anybody that holds one LUSD is able to turn around and grab one $1 worth of ether uh from a liquidy V1 borrower essentially close off their loan now it's not a liquidation it's something very different that's based off of the

least collateralized loans in the case of V1 what that meant is that the average loan or to be safe you need to put ever more collateral on the back of that here's the academic part um you can kind of think of that as an embedded interest rate because by placing eth in there a you need to Pony up that eth but you're also losing money versus what you might get out of a staking revenue or the ability to put that in something like a and earn a rate on top of that so uh it's by foregoing uh any interest you would earn on that and actually funding to put that money up uh controls how much LUSD you can so you really do arrive at something that is an equilibrium um but it's not directly felt in in an interest rate like you would see in a more uh traditional

protocol currently fast forward to kind of the higher interest rate environment um right now you need to put in roughly four or five dollars per dollar you borrow uh when you compare that to another protocol like a maker like an a uh it's generally two to three times higher than the and and why is that just to to dump it down it's this Arbitrage trade people borrow cheaply in V1 then they exchange it for another stable coin where they get more yield by exchanging it you sell it you dump it so um you don't have a demand and if you sell it the stable coin would go below p and that's kind of the the the second function of the Redemption is to restore the P so if LSD

is below P people go and redeem um which is good because the p is kept but it's not so good for the borrowers uh because they get redeemed how can they avoid it by collateralizing more and more their positions to not be redeemed to be higher so it's a race um that goes up and that was kind of the main Challenge and there where the is also where the innovation of user set rates come in which provide another way to create this balance between Supply uh and demand uh of the stable yeah so to address some of those problems um V2 introduces user set interest rates which

seems to be really novel and Innovative mechanism that I don't think we've seen anywhere else so while V1 facilitated redemptions from the troves that were paying the the lowest loan to value V2 will facilitate these redemptions from the troves that are paying the lowest interest rate um additionally users can delegate this authority to a third party or some other contract so I'm curious at large what Behavior do you expect to see out of users um do you think they will pay in line with prevailing Market interest rates um do you think they'll undercut Market rates to get the

cheapest place to borrow or do you think they might pay a premium to the market rate to avoid redemptions yeah so kind of in in our um scenarios we we see kind of three phases um so in the initial phase uh it's very much that people will follow uh what others are putting out there so people will look and say how much do I need to pay to borrow a maker that that sounds about right I'll I'll pay that and there probably would be a lot of grouping around that because people really don't know what to do um after you know we arrive at an equilibrium and it may be that in the early days people have to pay less or more uh because of other factors that are in in the early stage of the protocol for a variety of different

reasons um once we've kind of crossed that that early hopefully few few days maybe a couple of weeks uh and people start to become familiar with how the protocol Works um we're starting to see kind of a bigger dispersion and what this means is some people go all right this is where I'm worried about the risk and I want to move away from that risk for for reasons like taxable events uh or maybe needing to to rework on the collateral if the market moves uh I get redeemed and then the market moves up well that means I lost some opportunity there so they want to avoid that and they're they're willing to say I'm willing to pay a little bit more than the average and and maybe this is in line with somebody like an a maker maybe it's slightly better and I'll come back

to that um but there's also other people that go exactly that question what how far can I push this what's the least I can pay to borrow um and we'll see more sophisticated actors that have um greater technology trying to push that down so they can ARB inside the protocol or or outside of this and then kind of the third phase where we hopefully grow larger than that is the the protocol itself starts directing what a rate can become and we talk about a defi reference rate and what do I mean by that um if we look at traditional financial markets there are lots of different uh rates rates out there that are reference rates um um so the one that we talk you know depending when the show comes out the federal federal feds

funds rate the reserve banks uh set an interest rate that the the US government has to pay for debt uh as it passes through the the Federal Reserve banking system now people look at that rate and they look at the number of you know does it go up up or down uh how many bips that is the reference rate that's what everybody kind of glues around it's the the shelling point so to speak uh in the dollar financial markets and the Global Financial system what we're hoping to do is grow to a space where maybe we don't become the only rate but we become one of the main rates where people look to and say how much does it cost to borrow dollars in defi that's where we want to become if we're able to reach that uh that can open up a whole new kind of uh Cambrian

explosion of other defi protocols that want to build on top of interest rates and they want to do this efficiently because coming back to the the previous point that I wanted to hit on um and we'll come more into this but the protol passes all of that borrowing in income directly back out to stable coin holders and users uh liquidity providers it's 100% pass through uh so it should be as efficient as we can possibly get um inside of def5 so the hope is that we can quickly kind of get to that sustainable and um dispersion and then we get to a point where people start using this above and beyond just using a stable coin and borrowing system and maybe to touch on that and and explain what it means for users or why we think

we too can create this Benchmark rate for borrowing in defi I think it's important to understand the mechanism of the interest rate and how Market driven the the solution is I think it will be one of the most Market driven CDP Solutions out there and as I said it's the interest rate will help to create this equilibrium between borrowers who mint the stable coin and the holders who hold it because also in a CDP system you need both sides and you see if the sides aren't in in an equilibrium they deeg we have seen that with go you know which had to find ways how do you adjust that that we which had go to go through governance and so on and with V2 it's so beautiful it's so direct um and it's

amazing that nobody came up with that and how does it work so if you have the borrowers and now we have borrowers that um are very safe so they they they pay a lot of interest um people that hold a stable coin get a lot of um interest so we have a lot of demand then the people the pack goes overpacked a lot of people want to hold it so naturally the pack Rises what does that mean is okay now some borrowers they are not afraid of redemptions nobody would redeem $1 doar one um for a dollar of e it's economically not viable so this signals to the borrowers I can lower my rate or some borrowers would say hey I can go to

0.5% um and borrow cheaply so this means that then the um because there is less interest for the stable coin holders the um demand uh decreases and this means the PEC is coming down to the point where it can go below PEC and if it's below P that's actually a signal from the stable coin holders you're not paying enough so now borrowers are afraid that they get redeemed and the people that don't want to get redeemed increase their interest ratees and with that again kind of the the yield opportunity on the other side so you have a very direct mechanism to bring the system into balance and the beauty is it's not an algorithm like in in

landing markets or in curve it's not a governance it's in in the Market's hands in the in the user's hand and you can think of it like carrot and stick to to create the balance you know the yield is the carrot but now also the stable coin holders have a very powerful thing you know if they don't feel they get paid enough they just sell the the stable coin and borrowers get redeemed so that's really the stick hey if you don't pay more then we think the market should pay um you will be redeemed so people need to pay more so that's the mechanism that people need to understand and that's why see we think if it gets big enough it really should reflect the market the market rate hey guys

permissionless the event for crypto natives is heading west to Salt Lake City and we're bringing the biggest names in crypto together for an incredible can't miss event join me in the rest of block works on October 9th to hear from more than 200 Industry Titans including Nick white from Celestia shiram from Igan and Keon from Mona the conversations at permission list will be covering the hottest themes in crypto including modularity reaking the Bitcoin and Solon ecosystems Ai and crypto rollups l2s institutional adoption and of course the November election that will be right around the court we couldn't be more excited about this event is happening in one of the most beautiful places in the US ticket prices will be increasing towards the

end of June so get your ticket today make sure to use the code so I get some credit and bragging rights from the rest of the team uh use ZX10 for 10% off on your ticket one more thing we're also hosting the permissionless recka font in collaboration with blebox the theme this year is a multi-chain future to build a better cross chain experience so I don't have to have a heart attack every time I bridge to a new chain all hacka found participants will receive a free ticket to attend permission so if you're a developer come join us in Salt Lake City team up with fellow devs and build the multi-chain future so in V2 the interest revenues that are paid by borrowers will get paid to a bold stablecoin liquidity providers to the protocol's stability

pool could you touch on the role of the stability pool for backstopping the protocol and how this becomes a native yield venue for the Bold stable coin yeah um so kind of in short uh you can think of our stability pool as uh the place where we provide liquidity in the event of a liquidation what does that mean um if if there's a borrower inside the protocol who's borrowed bold versus their their underlying collateral and they're no longer in a position where their LTV uh is sustainable it it's become under collateralized compared to our minimum collateral rate um any user is allowed to liquidate them uh this as simple as kind of hitting hitting a

button inside the contract rather than most protocols which say hey you need to go out and Source bold in the market you need to bring that and you need to claim the underlying collateral against that now uh defunct liquidated loan we we Source uh the bold that we need directly from the stability pool you can kind of think of this as a fixed price amm because what happens is somebody who's placed bold deposited bold in loses that bold for the liquidation and receives eth from under that in a prata share compared to everybody else inside of the system uh it's not one person gets picked out at random or anything it's a prata across everyone in that system it's not at a 1:1 ratio uh as somebody that's uh receiving eth or an

LST you actually get a slight um discount so that means that for every dollar uh that's liquidated you might receive A1 five uh worth of eth you can pull this out whenever you want you can swap it back into Boulder you can swap it into another stable coin if you so chose lots of people also decide just to leave the underlying eth inside of that um but it's a way to kind of uh give a bonus back to people that are doing this as well as paying them on an ongoing basis through that stability pool uh funding rate so with the stability pool as a native yield venue for the stable coin uh the more bold is supplied to the pool I guess the less you can expect that yield to be um the less bold there is in the pool the higher you might

expect that yield to be um I'm curious what you expect that yield to bold stability providers to be as it relates to Market rates then additionally like at large where do you expect to see bold utilized across Defi and the crypto economy with uh liquidy B1 and LUSD we saw about 50 to 70% of the LUSD supplied to the protocol's um stability pool and I'm C what you expect that to look like for v2 yeah great question so um for the first part um the the protocol itself as we said passes out 100% of what it what it earns through borrowing 75% is

directed towards stability pool uh the other 25% goes out and I think we'll come into this later into what we call protocol incentivized liquidity pil um which means is being directed towards people that are providing uh LP or some other um growing uh Initiative for bold we would expect that to look maybe like OTC or something like that um it's a very open protocol and we'll come back to that but the idea here is um the the rate that people are borrowing at let's just pick a number and say 5% annualized the hope is stability pool rates and pil rates should be very closely matching to that maybe slightly above maybe slightly below but it should be very closely matched to that obviously there can be

times where there's more kind of reasons to pull bold out and use it outside of that in which case we might actually see uh moments where this comes up now we could also just see uh the the absolute rates come down depending on the reason for that kind of um exogenous pull of of bold away can I answer your second question I think uh it would be very fair to look at you know the borrowing rate uh initially and the the stability pool or pil rate as probably very similar to Market rates I think I pulled out five or six it's probably not a Million Miles Away um for an unincentivized pool um The Hope is though uh obviously that this can bring in uh more uh more uses get traction outside of that market any

bold that's pulled away raises that rate right up um now we can talk a little bit more about this and where there's kind of other incentives inside of that um but in kind of an equilibrium state it might look something like that something to highlight there is and and we touched on this if I'm doing the same thing in a in a more typical um borrowing lending Market uh like an A or like a Moro I might get paid one and a half% to deposit whereas to borrow I'm paying 7% so the goal here is really to kind of align everything and bring it down the middle and to touch maybe on that from the user perspective on V2 you know what kind of benefits can they expect now or how does the user set interest rate and

these new changes translate into benefits where then also the the growth would come you know and need to distinguish between the borrower side the stable coin side I think of on the borrow side yes I mentioned different lsts that's nothing fancy um I think what will be interesting that you have a predictable market rate uh in V2 I think that's interesting that you said so it's more predictable you have more control over the cost and so on so that's something really unique that you can borrow on your own terms no other solution offers that that you become a rate maker not rate taker so having this attractive predictable rate and

predictable again you know because in a landing Market or in curve that the rate can be very volatile it can be 2% it can be 50% um you just exposed to that and everybody has the same rate in maker it's the governance you know it maybe 48 Hours uh before when it changes but it it just changes like governance um wants to do that we expect much smoother um average rate that follows the market so I think that's interesting on the borrower side what V1 already had and V2 will keep is high loan to value ratios so I think it will be a very attractive place to borrow and just kind of uh we got R in V2 of the recovery mode so you

have even higher realizable loan to value ratios this also means that you get liquidated really late compared to other Solutions together with this um p with this incentives for liquidity I think gives you confidence to use the borrowing um side and we also reduced the liquidation penalty so you see kind of the the borrowing experience um has some benefits has has some unique um features that others don't have so hopefully that will drive the borrowing side and on the stable coin side um I think the biggest change is that now with bold that's the name of the new stable coin compared to LUSD you get uh Native uh sustain real yield because you

get the Yi of the borrowers so I think that's a really interesting feature of a stable coin now you have def yield we we call it actually the saving side or the earning side of bold We compare it to defi treasuries maybe for the first time you get something you could compare to treasuries in in the real world and why do people like treasuries in the real world you don't have a counterparty risk with B you just have the the contracts of course but no party no real world assets no governance and you get a decent yield and that's a product um yeah right now I think there's no re real alternative um where you can get that so I think that's really

interesting um compared to also we one to finish maybe just the benefits comparison with the user set rate we have we should have a we have a better pack mechanism so the the pack should be more reliably around one can still be volatile it won't be so good like usdc or usdt um and like with we1 and L USD you you get a sovereign and risk minimized stable and maybe we can touch then on that what's the benefit of truly decentralized stable it's just kind of another type of dollar which and a lot of people don't know that is directly redeemable so you can anytime tap into the underlying liquidity of Eve and lsds

and that's an important part because most other stable conss don't have that you might have a PSM if it's full um and and but you're exposed also to these risks so I think that's something that we keep um um yeah and that would be the interesting part on the earning side so together I think it needs to grow but you you see some Innovation benefits on the borrow side and I think really on the saing side with these defi treasuries now you have this D5 building block that's immutable that is predictable Dependable that is running that has Market rates I think that's a very interesting building block

protocols don't have right now to build additional products on top of it what can you do if you have now this native defi yield can you use it in perks and and and other stuff so that just okay took a bit long but I just wanted to give that take on your question how we see it grow and why no it's perfect and kind of want to talk a bit more about that building block aspect and how you guys want to become kind of the interest rate across crypto and defi but first um liquidy V1 like you mentioned is one of the most forked protocols I assume V2 will also be forked quite a bit um are there any plans for you guys to capture revenue from this is there is this something that you guys considered

before or is this more of a we're doing public because we're building strong immutable smart contracts and that's just how it's going yeah we had some learnings from wew we were forked a lot and I think there weren't a lot of synergies so we we also thought how can we um create more synergies between what we build and and our Forks so the first thing with our code will be Source available but it will have a BSL license similar to what Unis swap did Moro and and some others so this means you still have the code you see everything you can read everything it's trans parent and after 3 years it will also become open source but for

some time um you you can't just copy and Fork it or kind of it's uh not advisable um so we took the same part uh and and with that we um pioneered a bit the concept of friendly friendly Forks others have done that too but we tried I think really in a unique way where we team up with other teams that want to take the solution this offthe shelf CDP solution which allows you now for other l1s or l2s to create a system for Native dollar liquidity let's say orbit room or on theosis chain taking the base asset

and and getting cheap uh credit on on these systems so I think there we saw a lot of demand we we signed more than 15 Lois with these um parties that are interested uh to create that like that and what it helps them is to that we don't kind of have a a wild growing ecosystem of forks it's much more coordinated we try to give them um make them like more distinct between each other so not everybody uses the same collateral and maybe also why did we decide not to deploy um 10 Forks of ourselves with all kind of different collateral I think the forking is the easy part we've seen that if we want Forks there weren't so many successful

Forks so I think the key thing is not the forking um and we we have the techn the technological knowledge to do that but I think the hard part is always the business part to grow it and that is just not easy to scale first of all it needs to be in your DNA I think we have that for ethereum but for a lot other ecosystems we are just not the the best business development and most rooted in this ecosystem so we thought key for the success of such Forks is that these people are entrenched in the ecosystem have credibility understand it and can develop an ecosystem around such a solution so that's what we did teaming up with friendly forks and then also how we did it is okay we give you an off the

shell Solutions we help you we have a lot of synergies on on our partners being it from audits modeling and and and a lot of this stuff that uh these Forks can tap into and the goal is that they also give something back um mainly to grow liquidity and into the ecosystem so that's how we uh approach forks and and and try to give them something but also get something back for uh for for our ecosystem but also our shared ecosystem that makes a lot of sense and I I'm happy you brought up that um it's not just about forking you need to do BD and you need to actually grow in the ecosystem because there's something that

I want to ask about uh for stable coins integration and composability is key um how do you guys approach this when you first initially launched V1 how did you approach it um and now after years what what do you think is like what what makes a stable coin H usable composable something that's actually popular on chain what are some learnings you guys had so I'd actually say that there's there's a number of steps kind of before you get to the usability and composability that that are kind of behind the scenes um and a lot of them kind of come back and and Michael was was hinting on it a lot of a lot of stable coins rely on a number of different factors that are that are almost invisible to users uh these could be things like keepers uh Liquidators

thing things behind the scenes um and kind of making sure a stable coin first Works um the way that it should that the protocol is active and has kind of a a community of people that are doing these things rather than just one team behind them is step one um so that that's a big part of it now when you're able to prove that uh that makes a lot of the other Parts a lot easier things like um getting liquidity uh in uh either through dexes or centralized exchanges uh which is harder for most stable coins especially decentralized stable coins like ourselves um being able to kind of get that is is the next step after that you can start talking about Integrations and things like oracles getting prices for them that are available on chain so

that you can integrate them into places like Moro or a so that people can use them as a portfolio with their other assets to borrow and lend against is very critical once you kind of hit these layers you can start talking about many other things that can come up uh and being able to do kind of some of the offramp on-ramp uh aspects but that's you know three or four steps down the road and and LUSD we were going down the road in that um and I think that will help us on our journey uh with bold because we're familiar with these teams they understand the way that we think about security the way that we think about developing these markets uh and ensuring and fostering their success in a decentralized way um so I think that that will help us um kind of get along

the way it's very critical I think um we look at bold slightly different than I think we looked at L USD um before my time but uh in the discussions that we've had um it's kind of will sit lower in the stack and I there will be people that want to use bold as a payment asset or um want to put it inside of a crypto credit card but I think that's kind of less the desire and the desire is more to kind of help Foster this building block notion um to help Foster a very solid very robust collateral set which is something that interests um people that are very sensitive to the decentralized nature of stable coins which very few stable coins are able to offer at that level um so kind of the real important thing for us is making a

really good asset that is at the same time liquid and accepted in in D5 venues yeah I think what it boils down to is having really a clear target audience and profile of the stable coin so we really Target if Believers and we we want to have this sound and Sovereign dollar like this defi treasuries so you can uh really attract people uh with that and and Target that I think that's a problem of a lot of other stable coins which lose a bit their profile and as Colin said because we are so decentralized we said yeah probably with the properties will we be the the stable coin for payments of stable con of chice

for payments we have usdc we have tedar it's probably not our turf H but how we built B I think with this building block and being native to Def I think that's a very interesting um growth way and now with the also real sustainable and predictable yield on The Bold having something like these defi treasuries for treasuries uh I think it's also more appealing than than in LD so you you can go to this more crypto native e Believers communities and and offer them something that is differentiating and there is demand and hopefully then growing demand that makes sense I um I want to ask about something that you guys brought up a while back um

which is protocols building on top of liquidity uh specifically interest rate like building on top of interest rates first of all I want to ask how do you envision um liquidy becoming I guess like the interest rate of crypto or defi is the something you guys are going to actively work towards or is it more so like we're building a really good product it will naturally happen um my second question is what protocols do you think build on top of this obviously um typically teams don't like to limit other teams and say oh we want this we want that but like you guys obviously spend a lot of time thinking about it so I want to hear like what would the ideal protocol look like what are some things that you guys have

explored yeah so I think there's there's kind of some important things I mean interest rates uh so the way I like to talk about Finance in general is I think finances is a discipline that that looks at two things uh it moves money or or value across space and time um in crypto in defi we've been very good at kind of moving money from one pocket to another blockchains are very good at doing that tokens are very good instruments for doing that um with kind of more elaborate Finance we start looking at moving across time with D5 most things are very short-term um we're able to put money in it's got a variable rate that rate goes up everybody leaves the market pretty quickly within a matter of you know minutes hours uh days compared to trfi

it's very very quick very very short term now that is a limiting factor if we want to do something that is real world um very few people can say hey I'm I'm willing to put up enough eth uh to over collateralize a loan and then if those interest rates become too high I can swap out of those and move my my solution someplace else are out to try that would allow me to go out and buy a large purchase like a car or a house um so that that's a very limiting factor that almost makes defy uh completely irrelevant to anything real world um or even kind of coming a bit closer uh if if I want to do something like invest in a private round for a token or a startup and buy Equity uh that's locked for

months or years using def5 may not be a great solution and this is something that a lot of people do um it it's you know less grandiose than than going through the off onboarding but funding a team that wants to to launch something and taking a part of that is something that a lot of people in this industry do um that is something where having a more dependable interest rate could become part of that you could also Imagine um being able to strip that out and say well there's the other side of this um and those interest rates uh become very useful if we want to be able to discount cash flows um because again we're moving money across time we're moving future money today and that looks very much like a discount rate so lots of people talk about things like Pendle and Pendle

does a very good job at doing that um so there there's you know an argument that some of the the principles that pendle's looking at would be things that would be very complimentary with what we're building um the other thing that's quite popular in in crypto especially now are per and derivatives um most of those are done either with very centralized systems or they're done with um very volatile rates uh the funding rates can be much more volatile even than a uh being able to kind of Rin that in so it looks more like traditional markets makes those markets themselves tradable um and that's something that's really big to give give you an idea in trafi um interest rate derivatives outstrip the size of uh Equity derivatives things

like the S&P 500 or the footsie um by a margin of 1,00 to one they are just absolutely gargantuan markets um being able to bet on the interest rates of the US dollar is massively larger even than the dollar treasury markets uh these are massive massive massive markets um and being able to do that inside of defi is something that opens up a lot of doors um be them derivatives be them um a user that wants to lock in rates wants to be able to lock in their their borrowing cost wants to be able to speculate on what rates might be in the future are are markets that are just right for development um and there are some teams that have started to look into that but are limited by the liquidity Beyond a very short term and the simple answer also to that is that

we build V2 a bit more open than V1 so it's easier to build on top of it so for example that others can repay your debt or um increase and reduce your collateral so interest rate swaps are possible so trying to make that more open um for other protocols where we want was maybe more closed so in V1 um all protocol revenues generated by the fees Association with opening positions and redemptions would flow to stakers of the liquidy token and across crypto we've seen a lot of teams be averse to turning on a fee switch or

returning fees to token holders whether it's given the regulatory climate or the development team would rather just pocket the revenue for themselves um so there are really few such cases of uh protocols returning Revenue um to token holders so I'm curious how your team has navigated this regulatory climate as it relates to returning fees to the Token holders and then specifically what will be the role of the liquidy token for v2 yeah maybe let's start with the the the second one so I think what we realized is that we have a really good user base of the token holders of lqt

you know there wasn't uh um uh governance so far but it's well distributed 97% of of the tokens are are distributed um people are very value aligned so we wanted to leverage that so lky plays also a role in in V2 so you have like with like this dual reward opportunity you can stake it in V2 and you still get like in V1 when you stake it the the revenues um now and uh on top of that you when you stake the longer you stake the more voting rights you get which I think it's a very interesting mechanism so if I stay for a year I I might have 10 more

times and the Voting Rights than when you started but if I on stake I lose all of them so it's kind of totally the opposite of this ve economics where you get first locked um for a long time so with us you don't get locked but you lose a lot if if you go out which I think is very nice and elegant value aligned and what can you do um as colen mentioned 20 so there's a 100% pass through of the borrowing interest 75 goes to the stability pool to the holders which I think are very important in the ecosystem and then um we think for a stable coin it's also important to provide liquidity for the stable coin and that's an unsolved problem you you

know how do other protocol solve that somehow maybe there is a Founder maybe there is a governance that does all the coordination so we found for a immutable solution we want to give more certainty to users and um ensure on a protocol level that um users can take care of liquidity so 25% goes into that pocket which is mainly aimed for liquidity which but of course needs to be ideally immutable which it is but also adaptable so that's important all the stakers and the people that can vote can't change anything on the core protocol like in V1 not upgradeable not immutable the only

thing they can do is decide on an ongoing basis where are these 25% best used and we think initially what we will enable are um that it can be routed to liquidity be Unis swap or curve and so on so they can decide where should It Go but it's a very open and flexible module I think it's in the interest of the users LTD holder to First grow the system ensure liquidity and then the system is is very open you can bring in new models modules um and um divert the revenue where you think it it adds most value perfect I

am I feel like this is something we've haven't discussed yet and it is probably one of the most important things um why do we need decentralized table coins what is like why um I feel like a lot of people don't really get it and you guys might be the best team out there to evangelize this it's it's a funny one it's uh it's kind of like Insurance you don't need it until you do right um we we saw usdc D pegged um why did dpeg because there's dollars in a bank account and people woke up one morning and realized that the bank that those Bank dollars were in no longer existed and that the the Federal Reserve had to come in and kind of bail them out and they may not um so having any kind

of concern about that is is something that people should worry about I mean if you ever worry about where your money is sitting if you ever spend any time trying to divers diversify risks um one of those key risks is you know who's holding your money custody risk and even for trafi uh that's a very important topic so for us we have tether we have usdc they represent more than half of the stable coin Market which is held inside of a small number of financial institutions that's essentially a backbone of the value inside of uh Global crypto uh that's super important um so being an alternative to that we feel is is a very important thing to people uh as I stated earlier um lots of users have came came to us and said

decentralization immutability is important um not not having those rules changed and rug Pulled Under underneath us uh when we've already invested in it is a very good thing um I think the other thing that's kind of maybe uh underappreciated is having not only being decentralized but having your underlying asset redeemable by anyone anybody can grab that underlying asset means that our stable coin can be liquid against other stable coins or other assets but you can also get an asset that is actually ether which makes it as liquid as ether so by virtue I would make the argument that LUSD is is above and beyond usdc or tether and is more

liquid because it is exactly as liquid as ether which is massive um so being able to get those assets being uh sure of where they are um are very very important things in the times of Crisis as I said you probably don't care until the day you wake up and realize that you should have that's why we're trying to be here yeah and I mean to add on that I would say maybe LD and and then bow is one of the soundest dollar you can hold as a crypto person and Tech uh person and it's all about control who controls your money is it an institution is it somewhere else is it the state or is it yourself then I that's why I think B the new L USD is

the sound as dollar because only you control it you me it yourself um you can redeem it yourself and nobody's in between no intermediary nobody can stop you um you have all the control and and I think that's very unique giv LD and bold a very unique risk profile so it's about control are you in control are you dependent on somebody or not and I think there we are very unique and the other thing is just the risk associated to dollars a lot of people because they don't understand the financial plumbing and financial system aren't aware that not every dollar is the same every dollar has a different risk profile and LD and bold have just a

very unique risk profile I'm not saying that you need to have everything in that but actually if you think of it from a risk perspective you should diversify and always hold some of your portfolio um maybe also in LD and B just because it has no counterparty risk usdc and usdt have a counterparty risk okay maybe you like regulation and you think it's safe so so it's fine but just kind of okay just for the case like I mean we had it with our own treasury when when Banks went down we couldn't bu any USD um just because uh yeah Bank Banks um weren't able to do that in in Europe um then you have the the collateral risk B and LD is over collateralized and with

crypto so for a crypto person that's really cool because your dollar in your bank it's under collateralized you the bank only holds 10% uh of of of your dollars that you see in your ebanking actually there so you can't directly redeem and if everybody redeems you we have the Silicon Valley Bank uh debacle um and so on so I think um that makes makes it really interesting if you start to think about the risk that are associated with the stable coin and the control you have I think um yeah that's why LM bold is is really geared towards if Believers Crypton who care about

these topics and who don't want to be dependent and I think for these people they are a very interesting solution so at large we've seen the centralized stable coin Market generally be 50 to 100x the size of the decentralized stable coin market and even though D might be considered the incumbent in decentralized Stables is still substantially collateralized by uh usdc and offchain loans so I'm curious how you see the decentralized stable coin Market changing or growing over time particularly with the launch of the Bold stable coin and how much market share

you think decentralized Stables can actually take against centralized stable coin stable coins particularly with a better stable coin product I think it's you know I'd frame the question slightly differently um I think uh decentralized stable coins have the ability to expand the market rather than take market share I think there are a lot of people that use usdc and usdt for specific purposes around payments um now there certainly is a lot of usdc and US specifically usdc but also usdt and D um which as you stated is not 100% decentralized we'll come back to D in a moment um inside of def5 products and I

think that you if we have a a good alternative that's decentralized there will be a contingent of people that move there there's also some kind of regulations on the horizon um so I'm based in Europe uh one of those uh may have impacts on taxation which are more favorable for non-money uh classified uh stable coins meaning ones that aren't actually backed by dollars may receive more favorable tax treatment um now that that could be a Tailwind for for protocols like us but I think uh the the real big thing here is by having uh a stable coin that isn't subject to any uh blacklisting functions or doesn't have any controls or ability to be lost

uh opens up the possibility to have kind of these multi-month multi-year markets uh that people may be less comfortable uh with existing stable coin Solutions uh so it's really an expansion that I think we can get again I think as Michael and I were saying um we don't really see this kind of eating into uh a payments use case so it's not so much about taking away from there but it's really about creation of new money um because there is virtually unlimited dollar demand fantastic um Luke do you have anything else that you want to ask that's all for me it's all for me as well um guys before I let uh before we wrap it up do you have any place that

you want our listeners to go to to specifically look at is there any place that you would guide them towards to do more reading or more research sure so first uh our website is liqu it.org um where you find uh already some informations for v2 we have also released the code we have a very extensive and thorough read me there for the technical interested ones we have a blog post sharing more information there you also find the white paper so there's already a lot of information out there um then our Twitter at liqu protocol um that's I think the best way to follow us yeah I would say these are the resources

and to touch also on that topic you know timeline and so on where do we stand I say um I mentioned nine months ago we started the project right now we freezed the code we are in audit process the first audit passed we have a second audit we're doing some formal verification so fingers crossed that uh we don't have to go back to the drawing board um yeah potentially in two to three months we aim and then to to land perfect um guys thanks so much for coming on this was a fascinating episode I'm really excited to see bold come out very much a great chat thank you guys thanks guys

[Music]