How KelpDAO's $290M Exploit Nearly Killed DeFi | Stani Kulechov & Mike Silagadze

Transcript

This episode is brought to you by Fidelity Crypto. You'll hear more about them later in today's episode. Nothing said on Empire is a recommendation to buy or sell any investments or products. This podcast is forformational purposes only, and the views expressed by anyone on the show are solely their opinions, not financial advice or necessarily the views of Block Works. Our hosts, guests, and the Blockworks team may hold positions in the companies, funds, or projects discussed. All right, everyone. Welcome back to Empire. [music] We've been talking about uh Kelpa and A and, you know, all all the all the, you know, craziness that's unfolded over the last two weeks. Defi United, the you know, bailout, whatever you want to call it. And um yeah, I've

been, you know, talking to Stani on the side and, you know, Mike, obviously, Ether stepped up in a huge way. So, decided to bring them both on the podcast. We've got Mike who's the CEO and co-founder of Ether as well as Stanie who many of you already know. I'm sure he's been on the podcast many times, but you know, founder of a soy. Mike, welcome guys. >> Yeah, great to be here. >> Yeah. How much how much sleep have we gotten collectively in the last two weeks? >> More in the last few days. I think uh it seems like the worst is uh is over and the the ecosystem kind of pulled through. So uh so it's been better in the last little while, but uh yeah, it was an intense week for sure. Yeah, I think the the the first day out of the

uh the the bridge exploit like the the first few days was probably the the most difficult. Um you know, it's uh couldn't really sleep much for various reasons, but also because we're sort of uh against the time. Um obviously now it's a little bit uh more easier, but um there's still um good amount of work to do. So uh yeah, it's running still low. >> Yeah. >> Yeah. The thing that um surprised me, I guess, and uh and bothered me is at least to me, it was so obvious immediately within a matter of hours that this was an existential threat to DeFi. Like it was just the sort of like step one, two, three, four,

I was like, "All right, game over." Like this is it. Uh and so the it was so clear that like, okay, people needed to spring into action immediately start addressing this thing or else it was going to spiral. And I think in fact if it wasn't for the work that that Stani and his his team and you know some others have have done that was the default path I don't think people recognize that uh uh just like just without that intervention without that you know that effort that that people put in the default path was just a complete blow up of DeFi. Yeah, I think uh not everyone really understood sort of like where uh we were at that point uh in in in the space because like you

know effective this wasn't uh uh about a it was about uh DeFi as an ecosystem in overall and and how to manage this sort of like uh big capital movements that are done also uh quite programmatically and I think that the the the protocols uh involved and the teams involved typically are uh really diligent. Uh we work with them on day-to-day basis. But when something like this happens where you sort of have a remote dependency uh where things happen um and it creates a um attack vector and affects the whole space. That's sort of where things needs need everyone needs to sort of like uh

uh move and figure out the uh how to what what are actually the next steps because that's that's the first thing to to to figure out and I I think to Mike's credit uh Mike was there uh at the very beginning and realized sort of like where you know what are the pos potential paths that things could go including the extreme worst case scenarios. um Yan realized that how important this is for uh uh for DeFi and that wasn't the case for everyone to understand at the first uh glance but it it sort of like helped uh quite a lot during the process.

>> Yeah. Mike, can you maybe walk us through why this was such you I'm reading your tweet here. It says uh you know FTX uh he said you know we committed 5K ETH to the Kelp hack recovery fund because we thought there was a real risk that this could have killed DeFi. FTX would have looked small in comparison. I'm not sure if that's just a bold statement to get your tweet, you know, more viral or if that's like if you genuinely believe that, but if you I'd really love to hear the thought process behind it. >> Yeah, you know, it's it's pretty straightforward, honestly, and I 100% uh you know, stand by that. um you know I'm sure lots of people have read about uh kind of the high level events that took place but the basic idea is you know kelp had a certain structure to their

crosschain their bridging uh setup uh they of course were using layer zero but they had a certain structure they they decided on and that was exploited uh by you know DPRK North Korean hackers um and So the direct impact was about 200 some million dollars that were stolen. Um but what it meant and the default path for for for teams when something like this happened is to sort of pull back lawyer up get super defensive. Um and that's what was happening that you know it's u it's hard to fault a team for for doing that right. You're in this extreme situation. Uh uh you don't know

what to do. Most people haven't lost $200 million before. So, you don't know what you would do if if you were placed in that in that spot. So, the default is all right, lawyer up, pull back. Okay, what's the safest thing that you can do? Well, the safest thing you can do is declare bankruptcy. Say, all right, this wasn't our fault. We're now encumbered bankruptcy. Now, if that happens, if if they had chosen to go down that path, which I think uh I don't want to speak out of turn, but I think their council was advising them very strongly to to do this, um uh then it's not a $200 million problem anymore. Now it's a billion and a half dollars because there was a billion and a half dollars of RSSE sitting out there and if you know if if CalP had gone into bankruptcy that

that's you know that's now locked up that 200 that $ 1.5 billion isn't moving anywhere for probably years as we've seen how long these these things take to play out. So now you have a billion and a half dollars that's stuck in DeFi. A lot of it in you know in a markets but also on compound and oiler and a lot of other uh protocols. Every one of those protocols uh frankly is now because now you have a billion and a half dollars of assets that aren't going to move. So there's going to be um at least a liquidity crunch because you you know you won't be able to pull them out for for years which then would have had a cascade effect on the lending protocols.

Every CFI exchange has assets in uh you know various lending protocols. Tons of every DeFi protocol you know has assets in uh uh in a and everybody else. Uh so this is something that it wasn't just going to impact uh Kelp. It was going to impact everybody. So that was the what what to me seemed like a clear Armageddon scenario. And again everyone's default path was sort of to pull back, lawyer up and uh and and throw their hands up. Um, and so what I said again to repeat was the one team that really just stood up and said, "No, we're going to fix this. Let's raise a recovery fund. Let's let's actually make sure that this blow up doesn't happen."

Was was A. They just took the responsibility. In many ways, this was out of all, you know, plenty of blame to go around, but out of all the parties, uh, they were the least responsible, right? Um, uh, but they just took ownership and, uh, really ran with it. So uh so that was great to see and I think in the end all the work combined ended up averting that disaster scenario. >> Yeah, if you think about it like from the asset perspective like the asset itself is it's basically backed on on mainet. So sort of like most of the backing is there and and obviously the effect is more on all twos and the the kind of like um uh challenge is what basically Mike said

is that you know if you choose the sort of like a traty path of like everyone just uh lifts their hands up and uh basically takes protective measures uh nothing here can be actually solved. And you know we saw a lot of that and we saw a lot of uh uh sort of like a uh direction going towards that. And from a perspective we you know one path for us would have been to just focus on okay how do we solve this for a perspective uh how do we apply a haircut and call it a day um and continue business as usual and um register the um uh deficit and and pay that to the uh protocol treasury and balance sheet and uh revenue and and

and move onwards and sort of like a write it off and make the protocol whole. And what we realized is that there was so many stakeholders involved in this uh incident and uh protocols uh LPs uh uh different teams cascading effects uh and whatnot. So we realized that actually like if we really want to get everyone onto the same table, we need to find a a sort of a conclusion that really satisfies everyone. And that is basically to go as as as whole as possible and and find the means of of doing that and and figuring out how everyone can actually contribute in uh the most resp responsible way um

uh into this. And that is what sort of like the the the the the big difference here and why DeFi United was born is because it wasn't about how do we uh sort of like a write this off on a but how do we make this whole uh ecosystem whole and restore the confidence and that confidence restoring is far more greater than any sort of like individual uh protocol impact and I think where uh Mike and Ether Y uh played a a a a huge role is that they were sort of like a mediating and and getting everyone on the table uh pushing any sort of like a lawyers out of the

table. these people don't belong into Web Tree uh and things needs to be sold between founders and teams and natively and and and to Mike's uh and their team's credit they were the ones that actually were taking a lot of sort of uh uh putting on the table ideas that uh you know you necessarily won't do that from a you know kind of perspective of like why would you come and help other protocols and even sort of like in the same uh landscape where they offer similar products uh and doing that uh for the sake of restoring the whole confidence in the space and that is very rare. I don't think that is even sort of like a solution that people think and

more in the traditional finance. Um and once this whole DeFi uh United started to actually um kick in and we saw like the support, it sort of changed the whole narrative from like oh these teams are just pointing fingers at each other um into like okay let's all come together uh and really you know uh sort of like a restore I won't call it like a rescue or any sort of like a bailout because bailout is forced obviously by taxpayers and whatnot. This was more of like hey we all have skin in the game we all believe in the space and we sort of like uh everyone is uh improving their security but we need to act now and uh for the that we restore the confidence.

>> Yeah Sty you said um [clears throat] I saw one of your tweets you said it was the hardest couple of weeks that you've that you experienced in your entire life. Was there a moment in time that you maybe in day one or day two of this unfolding that you thought you know maybe maybe this is the thing that kills a >> I wasn't thinking about a to be honest I was thinking more about DeFi um you know and what are the consequences of of DeFi because I I do think that a is sort of built to be resilient like the the when when you think about protocol building like you you you optimize for that sort of like um not the 99% that works but let's say 0.01% 01% that things do not work and how do you reestablish the

resiliency basically and we've obvious seen multiple market and credit cycles from like the 10 of tents uh the FDX and um and and and uh even in the early days of DeFi like black Thursdays and Mondays and whatever uh there was but uh it sort of shows the resiliency and and for me what was more important is to was to understand like what's actually we have to do to ensure that people have confidence in DeFi because we don't just work on uh smart contracts but we do a lot of policy work we do a lot of uh you know work with institutions and you know and actually institutions were the most supportive like we got a lot of emails uh from stratify institutions that were offering

help and trying to figure out how to progress because they have so much belief in the uh technology even though we have more uh skin in the game So that was really uh surprising. So I was more of worried about uh how this affects uh DeFi than uh than anything else. And I think we felt really lonely until a lot of the other sort of like a stakeholders like Mike and and their team came up and and sort of were like putting solutions on the table because that was like a very difficult place to be in. And you're so limited by time constraints, resources, and I think even DeFi United could have been done in various different ways. But like when you have to move fast and execute like you really just uh operate on on on you know what

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Mike, why um Stonyie credited you for going above and beyond. Why was this the I know you said it was, you know, could be FTX level and you know the cascading effect could have been Yeah. I mean, really taking down DeFi, but um why can you just walk me through maybe a little more detail of like how the how Defi United why why you decided to make this the moment that you guys really stepped up and like how it came to be and even other ideas I'm curious about of like what else were you guys considering solutions? >> I'm probably uh I don't know exactly how much I can say but I I was air on the side of transparency. Yeah, we threw in a lot of different ideas. One of the big ones that we were talking about is just Ether acquiring Kelp. basically just

taking on the liability like it was, you know, trying to do that in the span of a week is uh terrifying because it's you're basically buying a black box and you have no idea what you know uh what's in there. Uh it could have taken us down as well, but we were willing to do it. Did I think in the end it it wasn't uh the right solution, but we went pretty far. >> Did you did you give them did you give make them an offer? Yeah, we went I mean we were exploring like three or four different things in parallel and this was meaning like legal docs going back and forth. So this was one of the one of the paths that we were going down. Uh I mean the the thing we were trying to optimize for was just like how do we as quickly as possible

get this uh sorted. Uh another thing I think people don't appreciate is just how stupidly lucky we got. I mean ETH has been basically flat for like two weeks like 2300 like on the dot. uh there would have been a big freaking problem if ETH suddenly dropped by 20%. Which happens like any random Tuesday, right? Iran starts shooting again uh ETH drops 20%. the problem suddenly gets a lot bigger especially when you know utilization >> wait explain that why why the problem gets so much bigger then >> uh well so in lending markets and I'm sure Stanny can comment more on this right when the utilization is 100% uh you can't liquidate so the uh that could have led to frankly a much worse cascade

uh where you would have had a lot of bad debt uh uh in place so that that created this extreme time urgency because we were just like watching the you know this price uh hoping that it didn't uh uh didn't move and we we needed to act quickly mostly to restore confidence. Even just making an announcement I think that you know what we were doing uh you know went a long way to give people sort of a feeling of like all right this you know it's going to be uh taken care of and as soon as the announcements went out immediately you saw at least the stable coin markets uh start kind of cooling off like now there's hundreds of millions of dollars of liquidity uh available the ETH market is now cooling off and lots of um uh sort of unwinding

taking place so Uh that's why I think okay we're we're we're past kind of the worst uh case scenario. Um but yeah you know Ether was in this unique position I guess in that we actually had no exposure. None of our vaults had any RS exposure. Our position even in a was such that we were short ETH because like the looping on our vault is such that it uses wrappy ETH. Our asset is our staking asset as collateral and borrows ETH. So even that actually we we could easily unwind it without you know taking any uh any exposure. I mean our total cost for the you know the increased interest rates on the uh on the uh the ETH borrows was like something of 400

ETH. So it was not you know it was not something that was a major issue for us. But the what I saw was if DeFi blows up Etherfy can't exist. So that's why I didn't give a [ __ ] about it was is it a competitor? or is it a like it doesn't matter if e if D5 blows up, we can't exist. Uh therefore, like we had to throw everything we have at it. I mean 5,000 ETH for us is not a a small amount of um uh capital, but we we just felt like we had to throw everything we had at it in order to make sure the uh that everyone pulled together, everyone actually, you know, gathered in a room and were talking to each other to uh to solve the problem. So >> yeah, >> and and as I said, thankfully we we got

there. >> So I also noticed that when uh Ether uh came out publicly, a lot of the D5 projects that they didn't have a a skin in the game were starting to actually uh um contribute as well, which was really uh incredible from Frags to to other ones. So it's it started a really um genuine movement in understanding like where like why is this so uh important and I I think this um uh it really helped to bring everyone also on the onto the same team. I I think without uh DeFi United and and without basically my coming and and actually trying to get people to to

solve this um I think we were in the first days in uh it was a really um hard situation because in one way you're dealing with uh you know raising funds in one way you're dealing with um analyzing what needs to be done for the attacker's position you on the other side you're dealing with the sort of like a human relations and then you are dealing with the Dow. So like the the sort of focus is really difficult to uh uh keep keep engaged and I think that uh if if you believe in in in DeFi and what it could bring and you know it's it's it's sort of a thing where everyone just comes and step in on on their own

will obviously there are people who don't want to support and uh they don't see that as a as a path forward and that's totally fine but we believe that if this technology and these protocols are going to scale in the future. Uh we have to ensure that basically uh we have the the the stability and and these markets quite quickly regain. So uh the the the the challenge with DeFi is that the capital moves extremely quickly and signals move uh indicate really quickly. So in stratify you know there's c certain bottlenecks for example for liquidity movements and I think that's something that we have to uh think about going forward is that you know if you have a temporary loss of confidence

which in a case basically means that you know there is uh positions liquidity uh available but not at a specific time so you have to wait the confidence to return and for our surprise it was pretty uh interesting to see that really quickly you saw stable coin liquidity come in back um and later eat liquidity and and and some of the uh participants that wanted to help they were actually helping by supplying liquidity. So they were like betting on DeFi and and betting on NAV and and and the sort of like a pushing the confidence that really um really actually helped and they obviously enjoyed the higher rates than than usual.

>> Yeah. Are there any teams that you want to call are the well I guess there's the the good and the bad. So, are there any teams that you think really stepped up that you that you want to call out or I guess any teams that were frustratingly maybe absent from the conversations? [laughter] >> Maybe I don't know for uh maybe in a few months, maybe in a year we can talk about that. But I think uh yeah, >> but shouldn't there be some sort of like I mean I'm not saying like you know for the Game of Thrones watchers like you know shame shame shame but like I feel like if this is a you know Mike if you're right if this was an FTX level event like you know the people who are so 40 billion dollars like this

>> right so it's kind of crazy to me that someone if it really was that scale which I think you're right like shouldn't everyone have stepped up and There weren't there were there were a lot of people who joined Defi United. There were a lot more who did not. So >> yeah, I mean I guess you know definitely there were a lot of expletives in the telegram chats you know bitching and and complaining and um so for sure there was frustration that you know one party or another didn't step up as much as they could have. On the other hand, I guess um like I've ran other businesses before at at scale. So like I've you know I've been in lawsuits. I' like to me I'm like okay I know how this works. I kind of have a

playbook of what uh how this this turns out. So this fear um maybe just some of us are wired differently. there there's less of this fear to me the fear of inaction was much greater than the fear of like just sort of rushing into the unknown and and trying to solve the the problem whereas maybe some of the other teams that maybe didn't step up or acted too slowly. Um, I think it it mainly, you know, came out of fear because if you if you're facing potentially a whole bunch of lawsuits and even criminal liability in some cases, uh, it's very easy to just lock up and freeze in the moment and uh, uh, you know, and then that's how things get worse, right? If

uh, you know, through inaction. >> Yeah, I I I I agree. I think there were sort of like uh, uh, at the beginning a lot of selfish selfish behavior. um all the way to the LP level. Um and and um I I think um I think once we got past to that like uh you know fingerpointing because I think everyone published their sort of like um you know reports and whatnot and you know and then at at the point when DeFi United was basically launched I think that was the uh the the the pivotal moment because at that point it was about okay this is not about whose fault this is who to blame. Um

it's about basically like you know what are the next steps um how to restore um how to mitigate in the future and how to solve uh this and I think that's uh obviously the teams involved uh including eerfi and and laido and etheina and and bunch of other ones has been really uh helpful and also teams like uh mantle and even in ethereum side like obviously we uh try to reach out to everyone on um you know including Ethereum Foundation and a lot of the uh sort sort of Ethereum um guardians as well and uh um Joseph Louvin was um willing to step in as well and and a bunch of other people. So it

really showcases that actually there are a lot of good people in our space and willing to really help. Um what it means for me personally is that at least uh I know in the future you know who are the uh true friends and willing to step in and also it it it means that um how we can be helpful and step in uh if this happens to someone else and there is cascading effects so how to uh prevent that. So I think that the the biggest win here is um that people weren't too selfish and trying to protect themselves instead that they turned into a mode where they're trying to figure out like how do we solve this on chain within the

communities and in a way that uh really restores everyone's confidence and everyone is happy and the happy path for everyone is 10 times harder than the happy path for a happy path for etherfy or happy pad for uh someone else. So there was a lot of work to uh uh to to do there to to to get to that point and also the Dow coordination was even [laughter] I never coordinated with six different Dows at the same time with proposals and voting and it's been like a quite a uh quite an experience.

>> Well, what happened with uh with Arbiter? I think that's like you could make probably a movie about this whole insane situation, right? Where arbitum uh again I'm probably speaking out of turn, but effectively took back the money that North Koreans stole. Um and then thankfully that was uh you know through a process that money is now on its way back to to users. So that was a remarkable I mean um that that could have been the thing that made made things turn out differently, right? if that money wasn't uh recovered like that 30k ETH uh uh made made the hole a lot more manageable than uh uh than without it. So it's yeah it was it

was a pretty wild uh situation. >> Wait, Mike, say one more thing about the arbitum situation. Why was it such a a movie like scenario? >> Well, I mean so North Koreans uh you know stole a bunch of ETH. it was a bunch of it was sitting on arbitum and so arbitum took I don't know the exact details but they took a vote they took a you know collective action to basically pull back that uh that ETH if they hadn't done that if the North Koreans had uh you know pulled the money off of arbitum and then started uh you know their their swaps on on Thor chain or whatever they were uh whatever channels they're laundering it through um that I mean that money would have just been gone and now you have another 30k ETH, you know what, $80 million to uh uh to

fill. Um which would have just made it that much more uh painful. >> Yeah. Are we through I know we're through the worst of it, but are we through the whole situation? >> Still actions to be taken. So um obviously the there's still out of the six DO governance proposals there is uh one left on mantle. Uh the arbitrum governance process is quite long. So that's um another one and compound uh governance proposal as well because obviously they uh have some actions there including liquidating the uh attacker's position proposal to liquidate the attacker's position on a is uh was released u and actually um as

an onchain vote in uh an hour ago. Um so that is happening. So once that has been done the backing starts and then everything sort of like uh restores and the nature uh heals by by that time. So there's obviously that and also I I think there's a lot of work uh across D5 uh to actually talk to a lot of uh you know teams institutions and whatnot and educate about the uh the incident and also a lot of teams have been taking efforts to actually improve their um trust assumptions toward for example uh bridge infrastructures and I think that's some something that's been really helpful also a a different multisig

configurations And I think in overall um the space is realizing uh the sort of uh threat that is coming from North Korea and and basically how do you mitigate against that um especially as these exploits become very uh targeted. Um so there is a lot uh lot of sort of like a work um in terms of like security and education that needs to be done uh still there and restoring the sort of like uh uh whole um confidence uh in in in DeFi. >> Take a disciplined approach to crypto investing with Fidelity Crypto, a platform built inhouse using over a decade of crypto experience. At Fidelity, you can trade crypto and

stocks together, backed by industry-leading security. When you can see your accounts in one place, it's easier to make [music] smarter decisions. Get started at fidelity.com/crypto. Crypto is offered by Fidelity Digital Assets, NA, [music] is not insured by FDIC or SIPC, and includes risk of complete loss. securities offered by Fidelity Brokerage Services LLC member NYC sipc can we focus on a for a bit because I want to talk about kind of lessons learned for the industry and you know maybe there's there's a bunch of ideas that have been thrown around but you know if you look at a like dep you know your guys' deposits fell from like

around 70 75 to around I think 25 or 30 so you know obviously this like hit you guys hard I'm curious just you know you've been running this thing for coming up I think 10 years now or coming up on 10 years like uh just curious how you think about lessons learned from the a perspective like where you go from here how you think about the future >> I mean in overall the TVL is um is sort of a metric that isn't u the the most purist to measure uh cult factor because a lot of the TVL for example comes from um different uh business lines so it can be um lending stable coins against uh bitcoin ethereum um leveraging uh for example yield bearing stable coins or um uh leveraging

for example uh staking yields as well and and that staking yield business is quite uh substantial. So when you see at the leverage u momentum that actually shows shows in the in the charts. So once the actual um when the confidence picks also the market picks up a lot of this uh looping will uh reactivate as well. So that is interesting. But overall what we think is and this is more like a wider of a perspective is that um you know we have to actually expand DeFi out of existing use cases as well. Um I think we're uh sort of in that 100 to 200 billion uh market size that we've been uh in the past uh few

years um more or less depending on the market uh and credit cycles. But what we truly want to achieve is that where ABA could actually be used as a whole like a backbone of all finance and credit. So you know if you issue credit you should do that uh directly on or indirectly through a uh and that way we get actually more diversification for these uh business models um and also business models for example that don't depend necessarily on the native uh strategies that we uh we for example have. So it's all about diversifying and I think um I mentioned this somewhere else is that I sort of see the future where uh the underwriting risk is tied uh more

closely to the balance sheets and and revenues of the uh of a DAO. uh meaning that uh in the future it becomes even more important uh to be able to cover sort of like a black swan events and events that might be out of the control but you indirectly might be underwriting uh that type of a risk. That is why I think um strengthening the the balance sheets uh creating different ways to actually protect uh the protocol. we have the a native protection mechanism with umbrella um but also coming up with different forms of uh insurance as well down the line. So I think that's the sort of like a future we're heading at.

>> Yeah. How do you think about risk management as you guys try to you know if you're like credit for all the global capital markets like let's say this vision works out you need you need way more assets right that you can you know borrow borrow and lend against. How do you think about um I think I saw a suggestion on like a formal risk matrix uh for new assets like bridging risk and restaking complexity and max supply limits like how do you think about just the risk of of of all these new assets? Well, the thing is that um and this ties to the the the the point of the u tying the lending closer to the balance sheet and uh the sort of like kind of like balance sheet economics is that um in the future a should not be in the place

to actually underwrite all risks. um you know because obviously there's a lot of uh debt that is or or let's say lending businesses that's you know are our tail end and it's it doesn't necessarily bel uh belong to a so I'm less sort of like a confident of this model of like lending as a purely infrastructure because someone needs to take the risk so if you remove um the risk management from sort of like a one layer um it moves to another layer for example in in that point. So from office perspective um it should be the the the prime location for prime assets um and also obviously new use cases but from a prime

uh standpoint uh up to the extent that the balance sheet and future revenue uh can cover uh these types of uh initiatives. So I won't see a uh at least the the the Aida governed uh pools uh being sort of like a free-for-all, you know, list anything you can. And partially a success has been that we have been able to keep a lot of these assets that had problems or configurations, whether it's it's pricing or something else out of the um a protocol. you can still license the technology and create uh all sorts of markets, but where the a brand actually stands, it's in that sort of like a prime uh asset quality.

>> Yeah. One one more thing here and then Mike, I want to jump to you in a sec. Is son, if you're less bullish on onchain lending infrastructure, but more bullish on um like big balance sheets, what what does that actually I mean, usually to get a big balance sheet, you go raise a boatload of capital. like are you gonna like I don't know go raise a billion dollars or how do how do you what are your plans to kind of bolster the balance sheet? >> Yeah, I think um what we noticed is that um confidence plays a big part on the um lending infrastructure. Um and then if you have a model where sort of like you know there's no one taking that risk and doesn't have the skin in the game um it ends up in a situation where there's uh misaligned incentives and you will see

sort of like a arms uh raised towards capturing more risk because of the yields for example and we've seen this uh in DeFi going on and on but I think when you can actually pair skin in the game balance sheets uh and risk management and you end up in a place where actually you make more rational and better risk decisions. So I think that's anyone can use obvious infrastructure for uh creating new net novel lending markets for example but I think that where the actual mass capital will sit in is in these large pools that are backed by uh protocol native balance sheets. Um so that is sort of the direction we're heading.

>> Yeah. Mike, how does this impact how you think about Ether's strategy because you guys are so active in DeFi, right? So, >> yeah, for sure. So, I mean to to give context, you know, EtherFi has we have a couple of different lines of business. We have the staking uh protocol. Uh we have the DeFi strategy vaults that we call uh liquid and those obviously participate in uh in A and across DeFi. And then we've got our uh DeFi Neo Bank uh business uh which includes cards and treasury management and so forth. Um underlying that is actually a lending market. Um and we uh we hope to in the next little while migrate that to an AV v4 uh instance. Um, and so that um, that very much aligns with what Stanley is is

saying in terms of our goal is to allow users to to provide tokenized stocks, commodities, different assets, more RWAs that are backed by real world uh, economic activity um, and then be able to borrow against that and uh, you know, use it in kind of their financial uh, lives. Uh so uh the power of this uh uh of that kind of infrastructure is that it allows these sort of more decentralized pockets um that are isolated from uh you know from each other instead of having you know one giant uh pool where if something goes wrong it it has this contagion effect on uh on all of DeFi.

>> Yeah. Are there any um any suggestions that you guys have seen that that you really like? Like I saw a lot of folks talking about why don't we have insurance yet in DeFi. I have you know many thoughts on that. >> It's too expensive. It would cost you you know 15% a year. Uh I think this is the problem in DeFi is if you actually look at the risk involved uh you really need to be you know getting paid 10 to 15% a year. Um but what's happened is a lot of the speculative and you used to be able to do that but now a lot of the speculative premium has gone away just because of the nature of the the market we're in the market cycle. Uh and so yields have compressed and now people are basically going out further and further out on the risk curve for lower

and lower yields. You know you protocols that may be paying you 6% when really they should be paying you 30% for the risk that you're uh you're taking. Uh and I think the the root cause of that, the source of that is that everything is founded on this speculative premium. Basically, one way or another, everything is trickling down from people betting on the price of Bitcoin, ETH, and whatever else going up. And that has to change. I mean, unless that changes uh to where it's actual economic activity, businesses producing cash flows that are driving this uh this stuff, um uh it's it's not, you know, it's never going to be uh uh there's never going to be enough yield to cover uh the the risk. And so the today get in

this environment, insurance is impossible because any sane underwriter is going to charge you way more than the yield that uh you're getting in in DeFi these days. >> Yeah. Yeah. I echo on the aspect that um the reason why um sort of where we are in in in in DeFi at the moment is a lot that that economical opportunity comes uh from native crypto assets and and this is actually good because um you know people are long on native assets long on Bitcoin and all these sort of uh important DeFi uh protocol tokens. So there there's like a really important uh infrastructure there. Um and and that's going to keep growing. But what where we

have to get into is is basically like using the DeFi infrastructure that works really well on these native assets and expanding into uh traditional assets um RWAS and I think that's u uh and credit like purely like using DeFi liquidity and and uh channeling that to directly to opportunities that are in real life and helps uh consumers, businesses, institutions with their uh funding and infrastructure particularly that's something something that I've been uh uh researching quite a lot um and then uh bringing those sort of like uh uh assets in in a way that they can be used uh

native natively more uh in an interesting way. So I think we have to get into that place where uh we sort of have uh much more wider uh diversity and that changes the economics for for everyone whether it's insurance whether it's basic yield uh the risk uh profiles and uh and so forth and because I don't think that um you know there's this like discussion about uh you know whether lending pools should be like maybe like isolated or uh shared but the matter of fact is that if there is a confidence issue to defy liquidity will move from all the protocols um typically at the same time and that creates uh liquidity crunches. So it's more about how do you

diversify as as wide as possible and uh the a horizon market was a great example because while everything was happening horizon was growing at the same time because people had the confidence on this sort of lending against RWAS um not having the same sort of exposure in completely different asset classes. So, I think that's the way to to to uh sort of like uh uh improve the economics of of uh of these instruments. >> Yeah. What do you guys think about the risk of uh we've had more hacks this year than like ever, right? So, I think we're at like 700 million on the year so far. It seems like North Korea is probably enemy number one for the industry. I'm curious maybe Mike just

how you think about like how do we how do we scale this industry and how do we scale onchain capital markets if you know we're trying to fight off North Korea and they're you know they're getting there's these hacks every you know other day. >> Yeah. Um I I don't have fully formed thoughts on this, but here some ideas that uh that I've been thinking about is and things that we're doing at at Ether is we really need to stop the decentralization theater. Um because there's a lot of things that protocols do that um are done in the name of decentralization without really helping uh the the aspects of it. Um but instead just

encumbering uh the protocol's ability to act in uh emergencies. Uh I think there's a way to preserve the non-custodial nature of of DeFi protocols uh and true decentralization as far as decision-m management um and how these things operate um without putting in a lot of the sort of theatrics. So, I I do think that things like blacklists are actually good. Um uh and we're going to be implementing that because it allows you to act in in case of emergency, in case law enforcement, uh uh like believe it or not, you operate within, you know, uh within a a universe of legal systems and you have to be able to abide by them. um um and

other protections that come into place uh including uh ability to pause offchain monitoring that automatically triggers uh contracts pauses. I think a lot of these hacks can be prevented because like in the end it's not that hard to detect when all of a sudden there's an anomalous, you know, $300 million of capital that moves. It's very easy to detect that. uh but we put in all of these um theatrics that prevent us from actually being able to act um in a in a reasonable and I think there's a difference between um the standard to which a blockchain needs to be held to a blockchain like Ethereum where you you really do need this like ultimate uh autonomy and decentralization versus a

DeFi protocol that has a DAO has labs companies that operate it that that just need the tools to be able to intervene when things go uh go sideways and I think the most effective protocols already do that. Um um and I think that just needs to become a standard rather than uh as I said sort of decentralization shibiliths that uh uh you know people people parrot. >> So what would you actually do concretely Mike? you would say, you know, if there's a uh >> we'll put in a blacklist so that you can actually like block like the same way that Tether or Circle or others have again uh there's a there's a spectrum there, but having the ability to just block uh addresses of malicious actors

with a governance process. Maybe you block it for 24 48 hours and then requires a you know vote um to uh solidify that that block. uh ability to pause the contracts uh uh in uh again extreme circumstances. Um uh thing there's half a dozen other things but things along those lines that actually >> time locks and delay. >> Yeah, time locks should be uh like default on everything and we we have them pretty much everywhere. um uh so that you can't you know if someone takes over your multi-IG uh they can't just you know upgrade the protocol to uh to pull everyone's uh funds. Um so there's certain things that um just should

become best practices and just become expected and they should become part of the audit to get listed on you know any major uh whether it's lending venues or dexes or or whatever at least disclosures should be made around this uh this stuff. Yeah, I agree. The the the emergency responding is um is very critical. Um and there is sort of like because uh I I believe in the the decentralization and um where it helps and the permissionless sort of aspect of it but there there needs to be sort of a uh middle ground where you can take also faster actions as well. So I agree there and I think a lot of the hacks that happened uh the past couple of months also were a lot of like a key

compromises. So they weren't really contract hacks itself. So I think um uh including the the the bridge exploit of the um the kelp layer 01. I think that's um it's more about the web um you know to security aspect and that's something that we you know we've uh um recently uh received a sock two at a station and it's it just showcases that defy is going towards also direction of trying to secure the infrastructure around the contracts uh you know the traditional uh way and that is where where the weaknesses are and

the measures that these folks are trying to take to to actually penetrate is unbelievable. So, uh it's just about investing more and more resources to combat of these things and this is something that the all industry has to really um um understand like it's you can't run a uh D5 front end that is built by claude uh anymore. Um you know it's just a asking for uh issues. you you can't really you know have like a weak uh signing mechanisms uh anymore like you really have to build for scale and then you know the worst outcome possible. So um because these things will happen in the future and the

important thing is to uh understand how to react and how to uh improve the security. um the space is open. So that's the beauty of DeFi that anyone can come and build uh you know open innovation and that's what got me here into the in the first place but also the stakes are coming increasingly high at the moment and we also try to do a lot of things in public in the sense that whatever uh improvements we have we are trying to share that uh with the community and other teams uh to sort of like u raise standards ac across and I think a lot of teams are doing uh the exact same thing.

>> Yeah. Um I have a I have a totally separate question more around investor relations, but anything else on the just kelp, all of this stuff that that we missed that we should talk about? >> Well, I think uh I mean this is probably a separate episode for you guys, but just the level of sophistication and uh just how terrifying frankly these attacks have been. Um, looking at what happened with, you know, with Drift and Kelp being the most recent ones, this isn't like, oh, they, you know, put a virus, somebody downloaded a Zoom, uh, a fake Zoom thing and they got take over took over their machine and, uh, stole their private key. Um, I mean, these are multimonth, sometimes, you know,

multi-year uh, compromises that, um, are extremely sophisticated. uh in in watching these things. Uh I mean I think anybody that uh uh is operating the space needs to be paranoid uh to uh to a very high degree just because of um just how sophistic I mean these are you have an entire country where basically their top minds their top you know computer science uh graduates are being put into a government department whose mandate is to steal money you know from crypto protocols. This is like in the same way that we have a department of health and department of education, they have a department of stealing crypto funds. And you have some pretty sophisticated uh uh

you know actors in this u in this entity. Um uh I mean if you've read the transcripts of the you know there's been leaks of their uh their discords and communication uh logs like they're they're treating this like a business, right? They're like they have leads. they have they're operating this as in a very sophisticated and professional way. Um and uh it just it really raises the bar. I mean you really need to get to a point where um you're almost impossible to compromise right to to be able to operate in this space.

>> Should there be Mike should there be you know so Israel has like the Iron Dome right and it's a it's a tax on it's a tax on citizens but they you know you got to pay you got to pay that you know your taxes but then it goes into building this defense system. Is there like would you impose a I mean it's crazy when you put it like that like they you know the the smartest minds are literally going into this department to then go hack crypto protocols. Should we try to build some sort of the you know the iron dome of crypto and it's a tax on any protocol with more than you know 10 million FTV or something? >> I mean it that's look certainly maybe you create a security uh uh council and people pay into it uh to be a member and

in exchange you get you know audits and protection. I don't know, something like that. Almost like a NATO of uh of crypto. Um I I I I also uh I also believe that probably another strategy is to counterattack. I mean, I bet these North Korean networks are uh possible to infiltrate. They've got infrastructure, right? They have uh uh uh they have tools that they use to uh to manage their funds and moneyaundering operation. um it's not hard to imagine a counterattack and to pull those funds back and uh you know help victims recoup their their losses. Um so maybe it's we need a vigilante group of uh uh crypto um uh experts to to go after these guys.

>> Yeah. Yeah. Um, all right. I've got a final maybe closing question or closing topic here, which is, um, Mike, I would say you guys at Etherfi do every sing you guys are actually the company we point to a lot when we look at good investor relations, right? You you run your quarterly calls, you know, you do reporting, public dashboards, you generate real revenue with real users and real cash flow and real products that touch people outside of crypto. You've built a an amazing amazing amazing business and I commend you for that. Um but at the same time the token is down like 30% right in a year and Stani's you know your token's down like 40 or 50% in a year. Is there anything that you think teams can do

right now to catch a bid on their token or is it just like this is what the bottom of a bare market looks like? >> Uh I mean look correlation is just 1.0 on everything. Um you know um so that that's just the nature of the market that that we're in. uh trying to pick one asset versus another is almost pointless because again everything is basically just uh uh trading uh together. Um, I think one of the challenges that we're having is that in many ways crypto assets, tokens, D5 protocols are not investable, at least for fundamentals based investors because when you look at it uh you buy a token like what do you actually have a claim

to, right? Like you just have a memecoin with the name of the protocol in most uh in most cases. Um, and you know, we've done uh things like buybacks. I think Abby has done some buybacks and that has that goes to you know to to a certain uh that goes to to a certain degree uh provides some confidence that there's a connection between the token and the health of the protocol. But I I really think we need to go further um to actually create uh investor protections uh in within this sort of decentralized framework that that we have uh to make these assets investable. Um and we've already seen inklings of that. Uh I hate I hate to mention uh a competitor standing, but Morpho, you know, has

announced their Morpho One uh framework, and I think that's that's gone pretty well for them. Um uh because that the structure they put in where their labs company is actually owned by the uh the foundation makes it very hard for the lab company to rug token holders as as we've seen some labs companies do. Um but I I even that I think doesn't go uh far enough. Um, so, uh, what we're working on, and I I don't want to pre, uh, you know, pre-commit to it just yet, but what we're working on is is an open source framework for, u, uh, for token holders. Uh, uh, we want to implement it internally, uh, first,

uh, and then put it out there for others to use if they or iterate on if they, if they want. And that, my hope is will bring in fundamentals-based investors. they can actually look at a protocol and say, "Oh, wow. Look, this is a great business. It's growing. It's got cash flows. It actually makes sense." Um um there's a there's a reason to own the token because it has some exposure to to that. >> Yeah, I agree that the the it's sort of like a a framework question and when you look at a lot of these u uh protocols, it's really hard to compare even because a lot of the data isn't in a in a format that is very uh representative. Um and I I think EtherFi is doing great job on actually really like putting uh all the

pieces uh together and something that we've been um uh we're going towards as well. And and I do think that the the correlation is sort of a uh something that can be solved in on on back of that. So like if DeFi protocols um can be seen to actually you know for the fullest potential not just only uh sort of like um being limited to existing crypto assets and actually being the the protocols that uh run you know uh a lot of the financial plumbing uh the same way as like HTTP and IP protocols run the plumbing of internet um or let's say Stripe runs the plumbing of uh internet

payments Um I think we get into a place where people understand you know what is the sort of like uh direction uh and how do we get into a place where uh this technology could be used uh in pretty much um all the uh uh financial use cases. So maybe to tie it back to like the this whole DeFi united and the the recovery fund and Standy, you said this uh that I think was a very important point that this was not a bailout, at least in the traditional sense of a bailout where a government takes taxpayer money and throws it at some maybe failing financial institutions to prevent systemic risk. This was a a market action, right? this was many independent

in many case competing players coming together and uh um and helping uh the ecosystem thrive and and survive. Um uh in the same way I think as an ecosystem uh the the right approach here would be to put together some equivalent of GAAP accounting standards for uh protocols uh so that disclosures and reporting and I know uh you know you guys have actually uh put together uh some work on this uh but to standardize disclosures and reporting so that people can apples to apples look at DeFi protocols um and then creating uh you know framework uh you know around value acral and investor protections.

>> Yeah, I will ping you about that separately, Mike. A lot we can do together. So anyways guys, I know uh know you guys are busy. Um yeah, congrats on congrats on I guess getting through a tough two weeks and pulling together DeFi United and um yeah, this was interesting for me to just understand like yeah, how big the contagion really could have been here. So yeah, hats off to both of you guys. >> Thank you so much. It's been a pleasure to be here in a rough couple of weeks, but um uh you know, D5 will win. >> The show goes on. >> All right. Thanks, guys.