Iggy Ioppe on Why Gold-Backed Stablecoins Will Win

Transcript

Guys, welcome back to Stable Up, our weekly premiere stablecoin show powered by our friends at Frax. Check out frx.usd and frax.com to learn more about their genius compatible stablecoin. Without further ado, I've got Iggy Aiello, the CIO of The Network sitting here. Iggy, welcome to the tokenization tower. Thanks for having me. This is awesome space. I love it. Man, I love the suit. 77th floor for those who don't know. Yes, sir, Iggy. Iggy, you have an extensive background. You guys are pioneering The Network. This is a new stablecoin on hyperliquid.

We're going to talk hyperliquid. We're going to talk Theo. We're going to talk more. But, let's set some context here. Iggy, how did you find yourself into the role of a chief investment officer at The Network? Walk us through some of your extensive traditional finance experience. Yeah, so I started my career in private equity at Bain Capital in Boston and then worked on buyouts. Then went to business school and started a software company that I moved to Bay Area. Ultimately, we grew it to 300 people. We sold it for 200 million. Then went back to investing but on the public equity side, initially covering tech stocks and software and internet and fintech. And then ultimately covering everything and then I ended up running prop trading in equities, long

short at Credit Suisse, which was a global across all industries. And analysts and PMs reporting to me. Then my partner and I started our own hedge fund, which was seeded by Blackstone Group. And then I incubated a couple other funds, we converted to family office and then I ran Polygon Ventures with also a partner for for a couple years. And during that process I met the founders of Theo. And they had the right vision for RWAs that that really aligned with mine and and uh pretty much nobody else was working on it. So, at first I became an advisor, then an investor. And now that they're they're scaling and they actually got product market fit, I jumped in to to

help them scale. And for the first time in 15 years, I'm a builder again. I've been an investor, you know, for most of my career. Yeah. So, so you were doing kind of all different types of derivative strategies and kind of like alpha-seeking strategies in the traditional markets for 15 years or so. Yeah, so mostly I was doing equities long short with I said with a private equity background. But, as part of long short, you have to know everything. Like so, we cover energy stocks, you have to know commodities, right? We cover home builders, you have to know housing market. We cover financials, you have to know interest rates and effects. So, when you're like in equities long short, you sort of have like a pulse on and then you talk to management teams from different companies. You see how they're hedging, how they're investing. So, you

have your pulse on kind of like all aspects of investing. Yeah. Amazing. And you mentioned that there was this ideal kind of state or vision that Theo had for RWAs that aligned with yours personally. What is this vision? What is kind of the tokenization thesis that you believe to be most accurate today? Yeah, so when I was at Polygon, we we did a lot of the early institutional deals like Hamilton Lane, for example, which is like, you know, very big other trillion-dollar institutions. And uh this was a huge step forward for like for RWAs for tokenization. Because prior to that, the quality of assets was like really low. It was adverse selection, right? Things that you couldn't sell in

the real world, you would kind of dump on the blockchain and and hope that this like you know, Bitcoin, you know, millionaires will will buy it. But, Bitcoin millionaires are actually really smart. They didn't buy it. So, the the second phase was uh big institutions, really blue-chip assets coming on chain. But, for various reasons, they put things on blockchain but didn't use the blockchain. So, it's not composable, it doesn't trade, it's not liquid. Often times it's white-listed permissions, geofenced, and so forth. So, the vision of Theo was to go to the third step, which is to actually make those >> [clears throat] >> financial assets still stick with blue chip but make them actually usable on chain. Make them liquid, composable, and all that the wonders that were invented in DeFi, for

example, be be able to to apply that to RWAs. So, that was the the thing that that I always wanted to do. And the team was like super crypto-native, had a lot of trading background. Quant market making, sort of like super smart both on the algorithmic and the and the blockchain side. It was a perfect complement to like what I know, which is like relationships on Wall Street, understanding all the whole range of like investment products and financial products. And you guys chose to build this on hyperliquid. Hyperliquid has had a lot of success as of late, especially in terms of publicity.

Iggy, are you very bullish on hyperliquid? Yeah, we're very hyperliquid aligned. But, we're not only on hyperliquid, just to be clear. So, we go to wherever liquidity lives. And obviously right now, hyperliquid is like, you know, a key venue. So, but we are, you know, part of the the secret is like a lot of people tried to get RWAs to trade and to make them composable, right? So, there is like a lot of, you know, things change on chain very very very quickly, right? There was a few months ago, hyperliquid had a lot of competition. Now they sort of regain, you know, on the on the perp deck side, right? You have the lighter and nester and a bunch of other. And then now they sort of regained a lot of their market share.

So, you have to really know where liquidity lives, so you are there, right? And you integrate with those protocols, but also you're not diluting, right? You don't want to be integrating with Well, you want to be integrated, but you don't want your liquidity to be diffused across a hundred different venues. So, you have to be always watching and making sure that, you know, you're in the right place. So, that that that's part of like the crypto-native kind of a DNA and and the hyperliquid DNA that we have. Yeah. So, what what is your then your personal thesis on hyperliquid? Do you have one?

Like, what is the As far as like it is an investor, I'm extremely bullish. I mean, if you I mean, it's not it doesn't I think that's a consensus. Few consensus is right most of the time, by the way, right? So, everybody wants to find like when you're right and non-consensus, that's like your and then you can brag about it at cocktail parties as an investor. But, a lot of the time you just go with consensus. I mean, hyperliquid is outperforming Bitcoin, for example, massively in the last few months and like year-to-date. So, I think the latest thing is is a big success with with Unit, right? The trade.xyz, where I mean, you have several assets that are trading a billion plus per day.

And you had gold trading like hundreds of millions a day. Now oil on on trade.xyz is trading. I mean, it reached basically for the last, you know, eight or so days has been over a billion. Yeah. >> And and also, the most interesting thing to me is the price discovery is incredibly accurate, right? So, when you look at when CME futures reopen on Sunday at 6:00 p.m., you see the on-chain prices, you know, within basis points, right? Within a few pennies off off. So, so you know that the price discovery that during the weekend was correct. Mhm.

Mhm. So, how big do you think this can get? Like, what is what is the, you know, it's trading at like 40 billion right now or so FDV. It depends on kind of the the way that you map it. But, are are we talking bigger than Binance, bigger than Nasdaq? Are we talking kind of like smaller? What is the what's your hyperliquid bull case? Mhm. Interesting. Well, so uh I mean, I don't know, you know, we haven't really like done the the full investment case. And I tend to be like very like, you know, model-driven and like cash flow driven. But, you know, the beauty is hyperliquid falls into like the general category of what's working on blockchain now, right? So, when I was at Polygon Ventures, we're investing a lot in infrastructure, modularity, L1, L2, data availability,

all kinds of, you know, different combination permutations. So, the good thing is now we have unlimited block space that's that's fast and cheap with low time to finality. That was not the case even like even in 2021. So, I would say now is the time for I believe it runs on its own chain, but it is primarily an application, right? That happens to have its own infrastructure. So, the general theme of like applications that actually give people real utility, that's what's going to work in crypto as a whole, not just like in the RWA space. But, I mean, I could definitely see hyperliquid reaching, you know, again, I'm not I'm not not financial advice. Uh DYOR. But, I mean, I could definitely see it reaching a hundred billion in

in market cap. Yeah. Yeah. And because there there there are peers that that have less revenue that that have higher higher market cap. They're not peers, but other crypto projects, let's say. Yeah, but they're all doing the same thing, yeah. Yeah. Yeah. Interesting. So, part of the Theo kind of design here on hyperliquid and on other blockchains is actually by tokenizing gold as this kind of gold-backed stablecoin, or at least partially collateralized by gold or perhaps fully. Um Why tokenize gold? What what does that give you? What properties does tokenize gold give you to enable a better collateralization property for a stablecoin? Like, what

does that really enable? Right, so there's like several steps. So, so broadly like so, we're going to tokenize a variety of things, even on our like medium-term like plan. We started with T-bills, then we tokenize gold. The third product we'll launch here is THUSD, which is actually backed by our tokenize gold as as one of the layers of how we do it. So, you can buy directly tokenize gold, TH gold. Right, and and the number one benefit there by far is that it's a gold with yield. People have been using gold for 6,600 years as like, you know, medium of exchange and and way to preserve wealth and payment. And throughout history you had to pay to use gold. You had to pay to store it, you had to pay pay transport it, you had to have security, had risks,

I had to pay to divide it up, to cut it up, you have to pay to test it to make sure it has I mean there's like everything you do with gold has a cost. So, with our model, all these costs are covered, right? So, there's no asset management fee, for example. Like even if you buy a gold ETF like GLD, there is a cost there, 40 basis points a year. It have not not not terribly expensive, but it definitely does add up. In our case, all those are covered and you also get a yield. Uh for the first time we can get into, you know, how that works. So, that's the foundation for THUSD, which is the gold-backed stablecoin. So, THGZ starts with that. So, we already have a yield native and actually gold native yield, which is the first time

not just in crypto, but the first time in the history of TradFi as well. There were ways to get yield on gold through private providers. You have to KYC KYB, it's a very expensive process. You have to have have high minimums and it's available only in like if you live in extremely developed financial market like like the US. There's never been a product you can just buy like an ETF that says, "Hey, here is gold and it pays a yield." A mutual fund ETF, that that never existed. So, so building blocks for THUSD is TH Gold.

Then on top So, so once we have that gold, now we're delta one long gold. What we do next to create the stablecoin is we actually short gold in the form of perps on chain uh and or uh CME futures to harvest the roll yield. And the beauty of that is let's say if people are super bullish on gold, what happens in general is the curve, the CME curve that's usually in contango, it starts to flatten out. So, there's less roll yield to harvest because everybody's bidding up the physical gold, the near month.

But what happens when people are super bullish gold is the funding rates on chain for the perps become higher, right? Because everybody wants to go long in general. So, we can by shorting gold there, we can get a much higher yield. When the opposite happens like now, people sort of forgot gold for a little bit because everybody is excited about trading oil. Right now, contango is quite normal. We can get 4% yield uh from harvesting that the contango on the CME futures. And there's less of a funding rate that we can get on like Binance and Hyperliquid. So, the beauty of this strategy is we can go depending on like the mood of the crowd, we can go and collect the higher of the two

yields. And when we stack that with the gold native yield, then we basically get a stablecoin that with, you know, I don't want to say like uh let's say minimal risk. And the risks are very clear to everybody, right? So, it's like we, you know, of course, sometimes you can have market conditions where you you don't have the contango and you don't have the yield on chain. But at the minimum, you always get the yield that's native. Right. And at the minimum, we can also get the yield, which is TH bill, which is the risk-free rate, like now 3.6%. So, it gives you a much higher yield than just doing the T-bills with pretty much nothing but the protocol risk and execution risk on our side. Right. I mean, so those are the

two main risks. Um actually I had Yuki here from Ten Bin Labs talking about the yield on gold and he mentioned that it was anywhere from um like 10 bips to 50 bips is like the expected yield on gold. Uh so, less than a percent, you know, half a percent. >> yield? Like like the yield that he's able to get on gold, yeah, by like lending it out or something of that effect. But you're saying that effectively by putting on the basis trade on gold, leveraging CME futures off chain and the discrepancy in funding on chain on Hyperliquid, there's enough liquidity on Hyperliquid for the size or or the types of volumes that you guys need to be able to facilitate that trade

cuz I don't think the on chain market is mature enough to to facilitate those at scale for gold perps. Right, exactly. That's why we need the CME. But isn't it isn't the difference between off chain on chain where you guys get the yield? Yeah, so let me actually there's a couple of questions in there, right? So, first of all, the native yield we get is is much higher than 10 to 50 bips. Uh because we have the scale and we have like the sort of blue chip partners, uh we get the gross yield is 2 and 1/2%. And then after our partner management fee, we expect to to to keep for our investors like 2.2 to 2.3%. I have a hard time believing you get 2.3%.

>> gold. So, there's also in the gold lending market, there is gold loans and gold leases and the yield ranges from 10 bips or sometimes even negative because in general again, gold you have to pay, right? >> Right. So, from zero, let's say, all the way to 15%. If you're willing to do longer term, let's say if you do a four-year gold lease and you you work with gold miner that's pre-production, right? They say they're a couple of years away from production, then you can get as high as 15%. So, we studied that market like very extensively, talked to many different providers. We settled in on this particular uh arrangement to start because here it's a extremely secure, it's over-collateralized by 20%, blue chip partners.

The borrower has been in business for like almost 100 years. It's actually the largest jeweler in Southeast Asia. So, they need to finance their gold inventory. They have a couple of tons of gold typically and they want to sell jewelry. They don't want to take the price risk on gold. So, we will add other uh as well, uh potentially a little bit longer term where you don't have immediate liquidity. But hey, so so first of all, the native yield we get is higher. Mhm. And then on [clears throat] chain, yes, the whole idea, one of the ideas behind Theo is that the yields on chain have come down. Right. And there's there's limited capacity to generate yield on chain. This is not, you know, the DeFi summer anymore.

Uh so, we will use we will short the perps on gold uh where where where we can up to the capacity and then the remainder will do on CME. And on top of that, of course, we'll watch the rate. So, if somehow, you know, let's say the perps invert, right? What we you know, we're not going to take the other side. We're just going to do everything on the CME. But CME trades 100 to 250 billion of notional per day of on gold. I've actually forgot exactly, but it's in the order of hundreds of millions. It's definitely more than 100 billion billion, right? Not not million. So, for our purposes, it's unlimited capacity.

We can always get that. Yeah. Yeah. And then so, the stablecoin backing effectively the execution risk from the team is part of it, the uh kind of change in gold price or change in the collateral asset price. And then on the stablecoin, just by owning the stablecoin, am I getting that yield baked in or do I need to take the stablecoin and use it in a DeFi protocol or in a market somewhere? >> No, that's something you can add on top. That's the whole idea, right? So, THUSD, which is the third product, right?

That's the gold-backed yield coin. That, you know, will work as collateral Yeah. in in in Hyperliquid and in Morpho and Penrose. So, you can still do all the same thing if you want. I mean, most of the projects that we see that try to get you yield on gold, they just do that. Right? They try to lend it out and then generate some kind of return. That that you can stack on your own. The whole idea that we'll make it composable and then it's permissionless for you. You can do whatever you want. You can just hold it as an investment or you can, you know, you can make it very very active.

Yep. Yep. Understood. So, the way that we kind of have the stablecoin landscape laid out here is you got like these yield coins and you've got genius compatible like basically one-to-one backed stablecoins. Obviously, THUSD fits in this. You guys >> not a genius genius stablecoin, yeah. >> bucket. Yeah. You guys just raised 100 million in the pre-deposit and you know, you kind of talked about allocating that capital now that it's kind of part of the portfolio, if you will. What does that look like now? Like what does actually allocating that 100 million dollars into these strategies look like?

Yeah, so I think we're starting with exactly what we described. So, it goes pretty much 100% into TH Gold. Uh so, then we get that native, you know, 2.3% yield. And then uh we're going to do mostly CME to start. So, that's part of the reason we're like crazy busy is we're we want to diversify, right? We to minimize the execution risk, we're onboarding with like multiple TradFi FCMs, they're called future commission merchants. These are people that have a seat, if you will, on CME where like futures are traded. This is like the the canonical gold contract is is on CME.

So, we're onboarding with like other sort of uh gold OTC desks and thing things of that nature, so we can we can have like other backups and and failovers. We I mean again, the the beauty is like the the founders of Theo like they have this quantitative market making background in TradFi. So, we're building this extensive system that gives you alerts for anything that can possibly go wrong. For example, our gold loan is denominated using LBMA auction prices. So, there's this like the the spot price of gold is is set twice a day in London. That's not the same thing as the CME. In general, there are a lot of like really smart people in

TradFi that are arbing those two things, but there could be a little bit of a basis. There could be basis because of the time because the first London fix is actually very early in the morning in the US. So, we're monitoring to make sure that that basis doesn't, you know, that doesn't blow out. So, like any sort of basis trade, the sort of standard standard things and alerts that you have to look out for. And then so, we're we're making sure that that's covered. Yeah. A lot of kind of playing playing through every different little way that this could fail and then building safeguards. Yeah. Yeah.

And if there's excessive volatility in gold like we've seen over the past several months, is this something that amplifies or kind of reduces the profitability and effective effectiveness of this basis trade? Uh so, I would say it in general it's good for THG gold which was our like second product because the more interest in gold the more people will buy that and just be long gold and get a yield on it and then still you know be able to use as collateral in in DeFi. And then for uh you know for it it so it depends. In general increased wall it could be like either indicate like kind of a fear or greed.

So, I would say it's it's it's fairly neutral. Uh but you know wall um if you look at like on chain when there's wall there's volume but wall meaning volatility, right? Yeah. So, people you know trade or active traders are attracted to things that move. Mhm. >> So, in general it would be good because it would increase the the open interest and therefore would allow us to harvest more more yield on chain. Because on chain yield at the end of the day the the the roll yield on CME is not going to be more than 4% for like maybe like a few hours here and there.

It's very close to risk-free rate in general. It's just a cost of capital. But on chain 10% right you know 9.5% is is fairly standard pin or it could be a lot higher. So, in general we would like to to harvest as much as we can on chain before we go to the CME. So, the more on chain the better the better for the yield. Yeah. And that's not just on Hyperliquid. That's going to be across other venues as well. Uh definitely. Yeah. So, like you know Binance has gold perps. And they're like there there will be more. And essentially because with oil right now it's only Hyperliquid. Like Binance hasn't launched their oil perps yet. I mean there's a couple of like smaller venues but but they don't have as far as like the big

the big venues also there. Yeah. So, we will definitely um harvest the funding rate arb everywhere that it exists on chain up until you know not moving the market. Mhm. Okay. And then when it comes to the kind of community side token side we're in this really weird era of tokens, right? Where Hyperliquid has came and set the standard for revenue, for buybacks, for kind of creating a environment that is actually you know beneficial long-term to its holders rather than destructive. I think a lot of the tokens are destructive in their models. Does Theo need a token? Do you guys require one? What what is the what is kind of like the financial

modeling here for why a token could be involved or or or kind of how you guys thinking about that? So, I was a crypto VC before. So, I definitely like analyzed the business model of Theo before I invested and and you know certainly before I joined, right? >> And what did you come to? >> Yeah. No. So, so so again it fits into the the application theme first of all, right? It's like it needs to be an application not infrastructure, right? Infrastructure is done. Uh application is actually useful to people. So, we're not in a rush to to launch the token uh but definitely it's it's part of the road map because we want to share our business model with everybody who is a participant in the ecosystem. Like the key for Theo Theo is a network, right?

That's the reason it's called Theo network because there's multiple participants institutions custodians fund administrators, tokenization partners, DeFi partners, chains, investors of course, right? Separate investors actually put money in the vault which is different from from TVL. So, there is you know there is this multi-layered network effect that we want to build. And of course if everybody is also uh a token holder that gives them an additional incentive to to kind of a build this virtual cycle. Yeah. Understood.

>> And then that's the beauty of of of you know I had to use the word web3 but that's the original promise, right? It's like you share you know the the first Uber driver didn't get rich even though he was absolutely essential for Uber or the first thousand Uber drivers, right? So, in crypto you actually can make sure that your early users early adopters are rewarded. Yeah. Yeah. What do you think the growth is going to be for THUSD, right? Like you guys have a hundred million dollars in the pre-deposit that filled in 10 hours.

Are you are you expecting to be in in the billions this year? Is it like going out and raising capital from LPs? Is it doing it just on chain? Is it a combination? Like Like how does one scale a stablecoin to to the billions and and and beyond? Like what does that actually look like? Yes, I think we're going to scale more slowly because we actually want to to give people proper yield, right? It's easier to offer a stablecoin that gives you nothing. Right? It's like great. Give us the money and we'll just we'll just sit on it and then we'll we'll put it in T-bills and capture massive spread. Best business model of all time. I mean look I I I'm sure you wish you came up with that. Yeah.

>> Uh so, uh I would say we we have visibility over a few hundred million. Yeah. Not not not not financial advice or anything but we wanted to cap it at a hundred for the for the initial like Genesis vault because we want to make sure again we're very conservative, right? So, we launched THBL last year fine-tuning our tech our infrastructure on THBL which is still risk-free rate. It's actually a super safe product. Then we launched gold which is also pretty much like a risk-off you know gold had its moment but in general it's considered a safe asset.

Right? Now we go to this gold back you know yield coin. Um so, we want to make sure that everything works you know well for a bit before we start to to grow TVL. So, our goal is to like I think I was at Amazon way back in the day before I started my own tech company. There was this trade-off between GBF get big fast and GRF which is get right first. Mhm. So, during the dot-com everybody went GBF and then they all they all disappeared even though they all had the right business model, right? pets.com had the right business model. It's a massive massive industry now. So, we are more on the GRF side. Let's get this right. Make sure we work out all the

edge cases and corner cases and then then go big after. Yeah. AEO P thank you for joining us in the studio today for this episode of Stable Up guys powered by our friends at Frax. That wraps us up.