DeFi: The Race to Power Global Finance

Transcript

Hey everyone, it's great to have you here. We're going to have a panel about DeFi, yields, fixed rates, everything concerning DeFi. Um I'm Sheraf Elm from the Solana Foundation. I do special situations. Whatever that means really. Um and today perhaps you can you guys can introduce yourself very briefly to start with. Maybe let's start with you Luigi. >> Sure. Uh Luigi D'Oro Demeo, I'm Chief Strategy and Business Officer at Aave Labs. Joined about 5 months ago and prior to that was at uh Avalanche for about 5 years.

>> Yeah, I'm TN, founder of Pendle. We're a rates trading protocol. >> I'm Charl, Head of Strategy and Growth at Kamino Foundation, a credit protocol on Solana. >> All right, let's get started. So um the 10-year Treasury right now is 5.3%. That's extremely compelling, high, safe, and scalable. Um a lot of LPs have actually moved off-chain for that reason nowadays. So I guess my question is how can we as an industry retain deposits in times when the market's down and our yields are roughly comparable with the safest market in the world? Maybe we can start with Luigi.

>> Yeah, sure. I mean I think it's a question everybody's grappling with, but I think it's also uh an issue that stemmed from what the historical demand has been in crypto. Uh historically that demand has been soaking up cheap capital and deploying that into larger, more profitable trades. Whereas I think now that we're seeing fintechs come online, other non-banks looking to leverage things like earn programs and also bringing their distribution on the borrow side, there's two sides of the market coming in and we can actually deliver a net higher yield since there isn't that intermediary trying to collect the large net interest margin in the middle. So um I I it's a matter of like getting the right use cases and distribution and then um because there isn't that large net interest margin

taker that we're able to actually uh provide a higher yield. >> Well, I think there's still a lot of opportunities that arise from inefficiencies on chain. Um the at least from where I can see, one of the bigger avenues of yield that is native to crypto is coming from funding rates. I think funding rates um will very likely it it it's it's it's a it's an outcome of perp markets and with perp markets now becoming a lot more a lot more active and bigger in scale.

different venues, they tabulate funding rates differently. So, there would be some structural differences between the various venues and given the inefficiencies that we observe between all these uh funding rates, there are there are some fairly attractive yield to be to be taken and I don't believe it's uh extremely well capitalized, but over time with more instruments coming on board, I I I do believe like it's it's probably not uh it's it's probably going to be quite quite uh common to have like 10, 15% just trading all these uh funding rates on perp.

>> Got it. Sharon? >> Yeah, it's a good question. Um I think it's it's going to be frankly it's going to be impossible to actually offer on chain yield at the same 5% while taking on a meaningful amount of risk. That's just not going to happen. But, I think fortunately uh the way we think about the internet capital markets is that as all of these assets come on chain, there should be a really robust diversification strategy. And so, think about the whole um access um that we are fundamentally enabling by having the uh internet capital markets, uh ordinary users can get access to products that they otherwise wouldn't have had. They probably might have needed a private banker or a US

brokerage, for example. So, I think fundamentally this is about access and diversification through different risk and return strategies. >> Got it. Okay. So, we have also been talking about the institutional bid for a long time now. It has mostly materialized through ETFs. But, we haven't actually seen, as far as I'm concerned, Wall Street directly deploying into DeFi products. It's almost like I'm wondering, have we been kind of fooled that the institutions are coming? And is it hasn't it worked out the opposite way where we are tokenizing their products and we're consuming their products? So, um what hap- My question is, what has to happen for Wall Street to kind of directly deploy into us

instead of vice versa? Maybe Sheryl can start. >> Yeah, um I think the way that we were thinking about Wall Street coming on was probably more on the lending front than deposits. Um and that's probably why there's been some uh uh misunderstanding there. I think that's kind of the wrong way to think about it. Um the order could almost be flipped in that I think Wall Street is coming on as borrowers, they're coming on as issuers, as managers. So, for example, on the borrowing side, uh we work with a Nasdaq-listed company, Figure Markets. They essentially are borrowing from our platform in order to

invest into whether it's real estate or auto loans, for example. We work with very institutional players like FalconX, which is one of the largest prime brokerage. They are our pilot partner for fixed rates. Um folks like Galaxy, a listed company, is also a curator on our platform. Um so, I think there are many ways in which Wall Street is participating um on the borrowing, issuing, uh managing side as well, particularly as we are seeing more SEC RIA curators uh coming into the fold. Uh whether it's Bitwise and there are quite a few more to come in the pipeline.

The fundamental format of how Wall Street comes on, I think, is quite different from what we have been expecting in the past. It will not be permissionless pools. A lot of them are looking for permissioning, KYC. They think about things like, "Okay, is this a legally enforceable uh collateral?" For example. Um so, I think it's probably a different format than what we are thinking of, but they are definitely coming online. >> Got it. Tian? >> Well, well, I I very much agree with what Sheryl said. Ultimately, I think it boils down to just maybe a bit more clarity on how like these assets will be treated on

chain before they feel comfortable participating in on chain opportunities. And I also think like the other potential draw is the utility on chain. It's like just having all this tokenized representations of the underlyings is good on chain, but if it's just tokens um that are not utilized, then it's not going to be too meaningful. They have to be utilized, maybe lending, borrowing to begin.

But beyond that, it's really crafting interesting strategies that you might have difficulty executing off chain or something even completely or totally normal on chain. Generally that yield through the composability advantage on chain um and and make that a a a a good draw of liquidity. >> Does it lose it? >> Yeah, I think it's uh it's a matter of really understanding and defining institutions, right? Like if we're talking about like bold bracket banks depositing and lending into DeFi, I think that's like not happening right now and it's not near term. It's also not

uh really in their interest. Um but if you're talking about non-banks, uh different type of hedge funds, um even even large market makers, traditional ones, they are increasingly depositing into DeFi, lending into DeFi. Um one of you know, there's a bunch of blockers though for that to grow. One is uh obviously the first question, which is disparity into the risk-free rate and lending rate. Uh so like I think if you saw risk-free rate back you know, very low, you'd see a lot more uh institutions come in. But uh the other thing is um you know, connection to qualified custodians, for example.

Uh you know, many institutions need uh certain types of infrastructure to be able to deploy capital and a lot of them are not at a level where they can do that via MPCs or different type of non-custodial wallets. They want to see their assets sitting in a qualified custodian. And so, you one thing we've done at Aave is we're we're actually in the process of building a uh an integration with Anchorage directly and and other custodians whereby assets can sit in a qualified custodian, let's say Bitcoin, ETH, other digital assets, um and then you can draw a loan out on Aave directly. And so, I think those types of integrations are key to seeing that uh that spread collapse.

>> Yeah, these are very fair points. Okay. I think there's one topic that's quite interesting nowadays, specifically tokenized stocks. So, that's a question primarily for actually for all of you guys. Tokenized stocks has been a huge narrative. We've seen with Robinhood and Solana leading in that regard. I know that Are they going to be offering out tokenized stocks as collateral in some in some way? I know it's early days, but which user segment is most likely to benefit from this on chain? And what makes borrowing in DeFi more compelling than a trap five broker? So, maybe we can start with Shero if you uh >> I think there are a lot of global users that just simply don't have access to US

equities. So, if you think of most of the Asia market in Latin America as well, a lot of them simply don't have access. So, it comes down to access again, which is what we talked about before. There's also a lot of crypto native people who frankly just would rather having one platform for both their crypto native as well as fundamental stock equities. And they want to take leverage on that. So, I think it is opening up to a very different platform of users. On top of that, it is a very clear advantage over traditional brokerages wherein any of the liquidation methodologies are extremely clear. It's very transparent.

Many times when a brokerage is not exactly evident the ways in which you get margin calls. Um yeah. >> Yeah, I mean we we actually launched our first tokenized stocks on Ave about a few weeks ago on base with Coinbase stocks. Mag seven, so seven stocks. A lot of work went into understanding the Oracle design and liquidation of those stocks because of the weekend risk. I think in terms of like who are the users for these, I think there's a few.

You know, Mafu already mentioned all in terms of like non-US exposure, etc. And then I think there's just really interesting products that you can build with those being on chain that you couldn't in in TradFi, right? Like they end up becoming structured products, like depositing uh a single single stock collateral, borrowing dollars on DeFi and putting that into a higher yielding trade, basically running a carry trade that people run on Bitcoin, um and then re- re- uh rehypothecating that yield back into the underlying delivers like a net positive yield on the stock. So, then I think you'll take a product like that and see, you know, whether it be central ex- uh centralized exchanges, um FinTechs, uh different wallets offer

that product as a uh as a differentiator versus, you know, uh putting your stock in a normal brokerage and lending it out so that the broker can actually make that spread. So, I think like no different than dollars being tokenized and that yield being democratized, you're seeing the same thing with equities. >> Gozit, Tegan, I'm wondering, have you explored the tokenized stocks vector at all at at Pendle in terms of fixed rates on stocks, or is that something you're exploring at all? >> Yeah, so with respect to tokenized stocks, we have done our our our first implementation was with stETH x, which was issued by x stocks, um the underlying being stETH

yielding around 11 and a half percent. So, that worked out pretty well. There were maybe 20 odd million in TVL for that specific market because the yield was fat and it became interesting for people to speculate on that. However, a lot of tokenized stocks, they don't offer that much of a yield. Many tech stocks that are very popular these days, they have They either give no yield dividend yield or sub 1%.

And to use our existing model to strip the dividend yield from its underlying and to trade on just like 1% dividend yield is not too meaningful for most people. So, we will make adjustments to our mechanism to better support that kind of asset. Um there will be newer elements that we'll have to introduce. But by and large, we want to be able to offer our infrastructure to cater to a broader base of assets, including that of tokenized stocks. Um but as it is right now, we have launched like Nvidia and Pfizer markets, but the traction has been traction for both of these markets were

fairly slow. >> Yeah, I suppose uh the question is not so much who's going to lend against this, but who's going to actually borrow uh if they can access capital markets. So, that's going to be a big topic. Um I have a question about fixed rates. So, fixed rates in DeFi have been around since at least 2020. There seems to be a seems to be a resurgence now with Morpho, Camino, Yieldster, um younger teams like Supernova. But historically, most fixed rate attempts in DeFi have sort of failed.

I'm wondering what why did Pendle succeed in that regard when others didn't? That's for you, TN, and then I'll ask the rest something else. >> Yeah, so I for us, I I I think the the I So, fixed rate is a very broad term and category. And of course, like with lending markets, there are also fixed rate offerings, and and we're starting to see that. But for users who use Pendle, I think the consideration in order to obtain that fixed rate is still fairly difficult.

Like let's say if I go to a lending market, um they like users probably want to just lock in the amount they earn or they borrow, right? But when they come to Pendle, it's maybe a bit more on the speculation side. And the outcome here is that yeah, maybe you can lock in um stablecoin uh yield at 5 6% because someone else is willing to take the other side. Now, I I I do think the considerations are quite different for both of these platforms, which is why I think like fixed rate is a fairly broad uh term to cover uh all these different verticals.

Now, as to how we position Pendle, I think over the course of the last few years we've been very diligent in keeping up with trends and trying to adjust Pendle to cater to all these trends. So, at one point in time we were very involved in Lido's STE and Rocket Pool's REETH. We were also very involved in the Arbitrum ecosystem to uh so we were big beneficiary of the the growth of Arbitrum in 2023. And then EigenLayer popularized the points. We we structured our product to cater to points trading. So, made all these points that represent activities on chain, make them tradeable

before the tokens' life. Uh and then synthetic dollars and stablecoin being one of our core offerings last year. This year is more about adjusting it to RWA assets, and I believe going forward in the next foreseeable future, it will be a lot more emphasis on that. >> Sheryl, how do you think fixed rates can succeed within the lending sector specifically? >> Yeah, I I very much agree with TN. I think a lot of um I I think where Pendle gets a lot of its demand, it's really from this uh um separate category in which, you know, there is uh yields, that's points.

People want to speculate um on the yield token, and the fixed rate product is a very nice byproduct of that. Um in this current environment to what Tian said, a lot of it is really about RWA carry trades. And right now on Camino, we have a fixed rate multiply available for carry trades currently at 55 million dollars. We think that the underlying uh motivation is quite different. Here you're really looking at RWA carry trades, looking at more uh different sophisticated trading strategies.

Obviously, I think there is a very favorable duration to that in which a lot of RWAs um have a duration to them. And so, when we have fixed rates, it's a very nice match between the both sides of the equation. Um and uh I think naturally a lot of borrowers would like fixed duration fixed rates. A lot of it is really up to the um lenders who might have to pay out for a term premium for that. >> Yeah, makes sense. What about you, Luigi? You have the deepest lending market. Most of it seems to be variable.

Is there Are you making any attempts into the fixed space as all or >> Yeah, no, I think uh a few things. I mean, Aave had fixed rates back in the day. Uh long time ago. And it also can still provide fixed rates uh just without duration. Um so, it's not it's not impossible to do. The thing about fixed rates is like I I think Cheryl was alluding to is it it's really an issue in terms of like it's a one-sided market in crypto uh where nobody wants to lend at the fixed rate. Uh especially not in any real duration. Like maybe a month, 2 month, 3 month potentially, but any real duration, there's not a lot of interest because uh the interest rates have moved a lot in in in the space and in in traditional finance as well. And so

taking on that duration risk, the premium doesn't it hasn't seemed to be worth it. The other problem is building this out on a peer-to-peer marketplace makes it really hard to bootstrap demand because matching fixed rates in traditional finance is really somebody taking interest rate risk question. And so you really need those participants who want to speculate on interest rates writ large to come in to an order really bootstrap that market. Otherwise, if you're just matching natural buyers and sellers, you'll have a one-way market.

>> Next question is a clip farming questions. Which product are you working on that you think will drive massive growth for your project in the next 6 months? Tell us about it. Maybe we can start with TN. >> So >> Can be an existing can be an existing product as well. So >> Yeah. >> I I I'm most excited about a product that we're building for us. So so um it is already live for about a year now. I I just think that So so one of the earlier points that I mentioned about yield being relatively undiscovered on chain, uh that's mostly from funding rates.

That's something that Boros caters to. So with the various perp venues, the deltas now become tradeable asset or tradeable instrument. Um with Boros, users can now lock in the the funding rate differences. So I think that's a very exciting opportunity. Now the capacity is still relatively small, but we're we're we're growing it. >> Yeah, definitely. Especially in the RWA perp space, I I there's quite a lot of demand for that. For sure.

>> What about you, Sheryl? What do you think is going to grow a lot of growth for you guys in 6 months? >> Um I think it would be still the RWAs that we have on chain and really matching them with a lot of the fixed-rate multiply trade product that we have going on. That has seen pretty good traction. For example, we have that with the OnRamp token, which is a global reinsurance token. Um we find that there's been increasing demand for this. So, very excited to bring on a lot more interesting RWA assets in order to carry on this trend.

>> What about you, Leuji? >> Yeah, so aside from the RWA tokenized stocks, which are which are very exciting for us going forward, the other is really Aave V4 being used as a modular infrastructure. It's not something that historically Aave has been known to be used for. uh we recently had a governance proposal for an outside curator come in to run their own market called Centora. I think you'll see over the next 6 months for Aave in particular winning a large share of that B2B market that historically hasn't really tapped into. So, I think that's something to look out for for the next 6 months.

>> Got it. >> Um Trump Trump administration has been in some ways great for crypto. Ever since he came to power, we got the genius act. Robinhood started to, you know, launch their chain. So, there's a lot more traction in that regard. Uh companies are embracing crypto more now. If Democrats return next cycle, does it require a change in business strategy or it's just business as usual for you guys? Maybe we can start with Sheryl. >> Yeah, I I think pushing for digital assets is relatively bipartisan. Um where the difference might come is really probably more in the pace of enforcement, but I think the direction

um set. At Camino, we are focused on making sure our product is institutional grade, is compliance ready. So, I would say nothing changes for us on a day-to-day basis. >> Tien, I think we'll mostly be status quo. Because all right, so my justification there is that like for for for for Pendle, it's a second order derivative. And usually it's because it's a later part of any um cycle.

Changes in um like a macro environment would probably affect the first order derivative much sooner before the second order derivative uh feels the impact. In this case, I think we will mostly just observe how things are. My sense is similar to Sheryl. I don't think there'll be um too many It's I I I don't believe there would be too too too many changes if um the macro environment changes. Um but if there were, then we will just take the cue from the first order derivative, see how things work out um before we we implement changes.

>> Mr. Luigi. >> Yeah, no, I mean I think I echo their sentiments. Like it really depends on I I uh you know, I don't think all Democrats hate crypto, but I do think like if you have a very adversarial administration, then obviously it requires a different uh mode of of of action. Um however, like you know, I think we're builders, and at the end of the day, we're going to find the path to to build whatever makes sense, and you know, we'll kind of roll with the punches, basically. >> Final question. We can keep it quick. Um since we're in Singapore, if you had to double down exclusively on West or Asia for the next 5 years, which one would it be and why?

Uh since Sheryl's laughing, we can go with you first. So, I used to be at Dragonfly, where Dragonfly really prides itself on East and West coming together. Uh Dragonfly is one of the um one of the VCs out there that really prides itself on having both a New York office and a Singapore office. Um it sort of echoes what we think about open 2029 with we were just talking about it off stage, wherein it's really important to have both New York and Singapore.

I would say that the US right now is probably setting an interesting precedent from a regulatory clarity perspective for a lot of the institutions in the space. And globally, every country is watching. Uh Singapore and Hong Kong have also been having rapidly evolving um regimes as well, with Hong Kong giving out, you know, VATP and stable coin licensing. It's no surprise that in crypto, a lot of the crypto-native capital really comes from Asia.

And ultimately, as a builder, we are really focused on building products that people use. Um personally, I live in Singapore, very happy to be based here, excited to increase adoption in APAC. >> Luigi. Yeah, I mean, if I had to pick to make it interesting, I would say the West. Uh I think the capital pool is deeper. Uh I think also it's where uh the uh assets that are most interesting to the people in the rest of the world are. And they want access to those assets, and so uh it doesn't mean to dismiss like another area because we're trying to grow, you know, globally, and crypto is in fact global. But if there is a concentration effort by way of headcount, then it's pretty clear where

we're allocated. >> Tim? >> Yeah, um I'm also more on the west side, more immediately, just because of the concentration of liquidity. >> Cool. Thanks, everyone. Cheers.