Next Generation Stablecoins w/ OneTrueKirk

Transcript

[Music] thank you right now the conversation around stable coins is chaotic most of the energy gets sucked into their regulation or the cbdc black hole that our entire industry currently orbits around maybe if you're in the right circles you can find gimmicky or domain-specific threads to pick apart but it definitely requires looking today's guess one true Kirk is one of the best people to talk about the entire domain of stable coins Soup To Nuts not only does he have deep experience in

crypto and actually building stable coins he's been spending the bear Market thinking about questions that will directly inform the next generation of stable coins how do you need to rethink collateral given the volatile nature of defy how do the latest Innovations and governance come together with stablecoin design and what is a mature stablecoin industry mean for ethereum and for this world if you're someone who is interested in the most important most stable primitive in defy you will love this conversation one more thing before we begin

please do not take Financial advice from this or any other podcast ethereum will change the world one day but you can easily lose all of your money between now and then all right let's get on to the show foreign thank you so much for joining me welcome to the podcast well thank you so much for having me it's a pleasure always happy to talk shop and um ramble on about the things that I'm researching at any moment or finding interesting so um yeah thank you for having me no awesome well we're definitely going to get to that portion but before we do like you know I'm a big believer that um that as cool as the tech is what's

even more important are like the people that choose to you know like belly up to it and like dedicate their lives and their careers to it and so um at least half this conversation I want to hear like who are you Kirk and like what's your story and what brought you to ethereum well as you might notice from my manner of speaking or writing I am kind of an academic bent and I come to this from a sort of a history and an economics perspective in terms that's what I studied in school but I was also always close to you know stem sciences and especially space and um yeah I was really into um my friend and I started a robotics Club in in college and I got to know a lot of programmers that and eventually thought well maybe I could try that too

um basically realize that getting Hands-On and building stuff was a lot more fun than purely being stuck writing about it uh you know it is interesting to read and write about stuff and I'm a big believer in a having a first principles and theoretical you know complete understanding of systems um but at a certain point you get stuck and think well I could never make these kind of changes in traffic and I used to always get frustrated watching you know whatever might be happening in in politics or economics or the Fed was doing be like why are they doing this and I feel like I who I'm even a non-expert might be able to have some insight into it and just to think that you can't get a grip on anything right or have traction anywhere it's so hard everything is closed right in traffic

you have to go through a certain path to get anywhere and so through learning to code you know I got more Hands-On with things and that is also how I learned about um you know Bitcoin and ethereum and the things that were getting started um and I wasn't like super early to these things um it was probably around like 2014 that I became about my first Bitcoin I think I mean you're pretty early no but I mean not like I only but even then I didn't fully grasp its significance you know what I mean it was only like apparently like oh you know the like I I saw people use crypto when I was in high school to do like um you know purchase things on the

internet um we'll leave it at that um yeah I didn't use it that way myself and so it wasn't until I was in college that I bought any and even still the significance of a turing complete you know system like ethereum eluded me until later uh but once I really understood that and it was once I saw maker Dow that it really became clear to me what was possible to you know and I understood how dye worked um I'm very interested in um when you like first heard the call of the world computer it sounds like it was around maker Dow but um what like what was going on with you and in your life between like 2014 when you first like at least understood that there was something to mess around with and then um what maker that was like 2018 right 17 maybe like what what were

you doing in the meantime well so after I graduated I started working as a programmer doing all kinds of different things you know wherever I could get my hands on some work um and one of the things I was really interested in was censorship resistance a decentralized Computing and I I got into learning about some things like Althea Network and also Urban which you probably have heard of um and it was through orbit that I really got fully into ethereum actually that was kind of my starting point maker Dow was what made me realize I had to work on this right but Urban was what first got me thinking oh I could learn how to write a smart contract and because I became friends with some people who were working on orbit um including Philip monk who was one of the developers at planned and I had gone

to San Francisco just for a conference that actually my wife was going to for work um and I happened to you know I hit them up and say hey could I stop by the Clone offices and just talk to you guys learn about orbit and in that conversation he said you should really learn solidity because it'll be hard for you to get any work doing Urban stuff right but you can definitely potentially get some work doing solidity things um and he because they use like these identity nft Registries right for anyone listening that they're pretty simple they're a whole like peer-to-peer networking protocol but they do ownership of the name space on ethereum so that's a fairly simple smart contract intractable where I could start you know get started with it and understand it and I tried writing some extensions for urban related stuff to kind of dip my

toes in the water and in doing all that I learned fully about maker down and die and how to actually use ethereum and was trying it out and that's when I thought okay I have to actually just get a job working at some company in this space to fully learn um and so I started out I got a job at a startup that at the time was trying to build a cross chain non-custodial decentralized exchange um you could say that their goals were in some sense analogous to Thor chain [Music] um but with the difference being that they were sort of a um had kind of a compliance first mindset of like it's non-custodial so like we want to architect it so like all the market makers can easily trade on it and not worry about their compliance and there were some some things to do with

that that I won't go through too much because in the end well I learned a lot about the difficulties of like different layers and Trust assumptions um and came to conclude that the task that I was working on was impossible um right and to do it I was minimizing the way that we wanted to yeah yeah I mean a huge like the story of this industry is like the vision is always like seven or eight steps above like what the technology could allow um at the moment you have the vision and oh my God just so I go back and watch like the 2014 videos of vitalik talking about ethereum and to like just now be getting to some of those things it like really blows your mind right um but sorry just to like scoot back to the maker your maker down moment like

what was it about that like are you like I and I kind of hope I know the answer because like I think um people are drawn to ethereum for a lot of different reasons right and like some of it's about like economic reasons and some of it's about like the um the like existential things around the economics like you know censorship resistant like that kind of stuff some people it's about like the computer science like some people it's about the nfts or you know like whatever we can come up with one's reasons but like when when you let's say minted your first die like what was it in that moment that where you're just like oh my god well I think for me a lot of it comes out of a lifelong the reason that I wanted to study history and economics

is this desire to know why the world ticks the way that it does right why do people do the jobs they do and get paid what they do and why are some people rich and others poor and there's many answers for these kind of things uh and any simple answer is wrong but um the the the key to me is that the the fundamental way that systems work as far as like how property rights are organized and how money systems and interest rates are determined are very important for these kind of outcomes and so trying to understand all that is a long-term Obsession and seeing that these kind of debates that Scholars have throughout a century of like how could money like how could we automate the Federal Reserve what should the FED really do how can how should Banks work um and the idea of maker I was like wait

someone had an idea about how money should work and they just put it right into practice right there there it is um and I can go and use it uh and to me that was magic um you know and it's not that I I didn't really even have a super strong use case to need personally to need to use a stable coin um you know in the sense that like since they're not readily certainly at that time and even now are not very usable for payments right in my day-to-day life um but I could see how they could be used for those things right and so I could see right away right this is if you know you could get people to use this it can replace so much of the Annoying infrastructure that exists in Banks and and it's much easier to deploy a smart contract than to write new laws

um or to create a trustworthy and as hard as it is to audit a code it's a lot harder to build a trustworthy banking institution in the real world uh you know so there's a lot of things you can do to try and experiment and push the envelope and so that was you know very attractive for me yeah and I think too like the the reality uh like I I am a huge um just believer in the importance of history and like a huge believer that um it's like important to recognize that every single thing on this planet at this point in 2023 is this way because at some point somebody decided it was going to be like that and like that's super powerful because it means that like everything doesn't have to be and

like you know there's space to explore all this new stuff and you know we don't need to go like that philosophical but um and I'll add one more thing to this story which is besides the maker moment the other critical moment for me with my My uniswot Moment which is that this time I was working on this decentralized Exchange and the narrative at this time was like decentralized exchanges can't scale uh right it's like the bandwidth of L1 trades will never be sufficient and so the whole thing we were trying to do is this independent like chain or thing to do it right so it's like you can never have decentralized exchange on ethereum will never be enough right the centralized exchange volume dwarfs it it's always going to be that way but as I was working I saw a decentralized exchange volume grow and grow and grow

uh and finally they released uniswap V3 and when I saw that I just said to myself oh my gosh not only is this design space on chain not fully explored yet it's not even close to fully explored right and I said that I need to spend way more time understanding everything about this from first principles and I have to quit my job um and so I did um like a month later and I'm just I had enough of a little Bull Run Nest Egg you know to equal like six months of income or so so I could felt confident in saying to my wife let me quit my job and I need to work on this and maybe eventually either work at a new company or maybe start something I don't know um and so that kind of launched me off and and so scaling as an issue has been

at the core of it for a long time you know the to me credit and money is like a CO even further back foundational but it is early yes it's a topic near and dear to my heart about like how do you actually sell settlement and exchange a quick little anecdote from like my uh pre-crypto and by the way it's just very funny to hear you say that you had like six months of income and you felt like that was like relatively like work and it's just like welcome to I can tell your brain was already like Changed by crypto if you thought six months was a long time but um anyway I uh so before I found crypto in 2021 because I heard Hayden Adams explain uniswap on a Bloomberg podcast and

um you know that like we can talk about why you know but just like the ability for like anyone to create a market and like I don't know if anyone will trade on it but like it exists was like that that was my um my moment where I was just like I need to drop everything to figure this out but um before that I was uh working for Anheuser-Busch you know which is like Budweiser Bud Light um and it's like by far the largest Beer Company um and it's the second largest consumer products good company in the world and one of my jobs was I was the cash manager for the US and Canada and so that's like 20 billion dollars a year which is like um you know just had to make sure it was there to get pay the bills and you know

whatever everything um that that entails and like my favorite story of like why crypto is like inevitable well like ethereum is like inevitable is so one year we um had like a 1.45 billion dollar tax payment and um so like it was one wire transfer for like billions of dollars right and so the CFO that day he walks behind me pulls up a chair puts it behind my desk and he goes Rex I'm gonna sit here until it clears like this is so important that like I just like need to know that it happens and so for eight hours that day I sat there calling the bank every like 30 minutes and going like Hey where's the wire and every single time they're like

Rex like you know how this works like it's a black box like parts of it are a different settlement Banks like we're you know we're waiting on liquidity like it'll get there like this is just how the system works like we tell you this every 30 minutes and then I would hang up the phone and say like they're working on it like I make up stuff to give them updates and then I'd go and like you know look up like the price of aluminum on my Bloomberg terminal or just like make up while the CFO is behind me you know and like for all of you who's never done like nine plus figure wire transfers like this is the system that runs the world today and um you know like we can talk about like decentralized finance and like the like scaled World computer and like all these

things that are going to be enabled by like like clients and dank charting blah blah blah but just like on money transfer like practical use like it's a it's such a better solution than what we have today that um yeah I don't know like I think um I think like on first principles like that's where I start with ethereum well I find that quite relevant given that I was on the receiving end of being debanked by Chase not long ago and faced quite a bit of trouble wiring the funds out you know they would they canceled any outgoing wires to Circle they were just said pretty much when I talk to the customer representative they said I'm sorry I don't know why there's no way for me to

find out why and you won't be able to get any resolution or answer before they close the account so you'd better get to a branch and just get a check and they said all right so in last year in uh in summer like while we're all like worried about our crypto lives so I got locked out of all of my money from Wells Fargo and get this completely unrelated to crypto completely unrelated to crypto but for like five months I didn't have access to any of my liquidity five months yeah and it was just like so ridiculous and they were just passing me around and I still don't have resolution but I have my money um you know resulted in me like dropping to minimum payments on all my credit cards like I ended up taking five figure loans from my mom and like you know a

huge part about what crypto is to me is like control over my money and like when you're dealing with Chase when you're dealing with Wells Fargo when you're dealing with any size bank it's just they don't care about your life they don't care if you're gonna miss your mortgage like they don't care if like by closing this down like the like very real life that you've built up and are counting on is like gonna get screwed up and like what crypto is is like the ability to say like well it doesn't really matter if no one cares yeah I assert my right to Due Process basically um you know you can't like sure Circle could freeze my account but not not arbitrarily without explanation right and it's proof that and it's undeniable proof that they've done it right like

it's it's a public action that everyone can see um and they can definitely get in trouble if they do it to a lot of people for no good reason um and so it's it's not perfect but even a centralized stable coin like that is a lot better than a bank like this where it's just my word right and what can I do right nothing um it's probably in terms and conditions right I it's hard to even start like a public outcry um but if you could say look check the chain you know they're freezing all these people that's um that's something yeah and like in on chain we have options that are not even like centralized and like you know USD has its problems but like literally unless you're like a Russian oligarch like your your size can probably be held in LUSD right or like you could take a long

position in eth or like whatever but like point is is that like we have options there's a paradox where being able to defend it against attack decreases the odds where you will have to perhaps a paradox is the wrong word but um we'll think that that's a a positive thing and that you know sometimes people talk and even I will talk about the scaling constraints of certain systems so that doesn't mean they're not valuable right and giving these kind of perhaps not fully scalable but available refuges um still increases the overall Security in my in my mind yeah and um yeah I mean I think um there's a lot to unpack there but let's just continue on with this story so um we talked about how you were at this you know like cross protocol decentralized exchange and you just you realize that like

love them but like it just wasn't gonna happen and so um like what are the next steps and like can you just basically walk us from there to where we are today well I knew that the problem space I wanted to tackle was related to stable coins credit lending that sort of thing um and so I thought about I saw that unisotv 2 unit swap V3 the key difference was that it was much more expressive for the LPS um and it allows a lot more user preference in the defining the price relationships and of course you know as many others have have noted there's a few further you could go with that right and there's other designs where people think about well what what about different types of orders right or different types of this and that and there's lots of complexity you can do

um but my mind started to go in a slightly different direction because that's kind of the opposite of a stable coin right like uh what a stable coin is is a thing where you evaluate it up front and then you opt into a stable something right and it's a all stable coins are essentially synthetics right it's a synthetic debt asset of some kind or another right backed by different things and governed by different rules um but the the key thing when we say a stable coin is that um some set of rules and policies have to make it stable um and that's not each individual user independently managing that risk full and liquidity fully on their own uh and needing to like set ranges of prices and all those kinds of things um so that

brings in kind of a of a governance problem um and so besides the scalability question of like how do we let more users Express their preferences directly on chain we also have to say well what about the users who don't want to express their preferences too explicitly and have to actively manage things and instead have some kind of a replacement for the kind of passive financial instruments that exist in Trad five but without the same kind of centralized intermediaries and how can we have governance but without reintroducing these trust assumptions and I saw that you know again from very early on in ethereum people have spoken out against token you know 51 token voting all right vitalik is always ragging on it but I felt that there weren't that many credible

Alternatives um in in terms of how you could make a stable coin system work and so I spent a lot of time thinking about that problem and at first I was more focused on kind of the reflexor style autonomous control systems but I started to to to come to the conclusion that it's the computational difficulty of the problem of like there's there's no set of inputs that can fully explain how you should perf how you should lend right and like and risk and everything and interest um there's no like smart contract where you could fully describe all the things you should consider at all times in the market and at all future times to evaluate it and so instead you need to have a rule set yeah to elaborate on that a little bit

um so I'm sure if you've been on Twitter in the last week you've like been aware of the um Michael curve a CRV token of a situation and like one of the things that like really blew my mind through this conversation was realizing that whether it's Michael or people like him that it's not only this massive position in Ave but it's also in um Abracadabra and in fraxland and so like my thought is like how can any individual lending protocol like compensate not only for like you know the price and liquidity of a token but also like like the structure of like where that token is in defy and like

like you know you're basically taking on systemic risks that like you're not acknowledging and like I guess I just totally hear you in that like forget wearing it about it from like a gas perspective just from like a theoretical perspective like how do you um like handle the computation that like at the end of the day and Trad five the way we do it is just like loan officers and gut checks in the end of the day some human has to make the decision right and so it's my take that that human can't be entirely removed right and even in systems like LUSD and Rye there's a chain link Oracle right there's someone there's someone who is running a computer program that observes the results of an API feed that comes

from an exchange and computes a price and submits it at a particular time right and so that process is manipulable in certain ways um you know like the Avi style attack could be done on any kind of asset your or Market that's reading in chain link type feeds um the only question is like how much Leverage is there against that asset and how profitable how deep is the spot Market how profitable is it to manipulate or even if not manipulate as in the current situation right where it's like the price doesn't account for what would happen if you had to liquidate the position and so it's like the price isn't that meaningful um that's why you know in the in the Michael case it's not to to rag on on him in any way but it's more like people don't just unders just don't understand

the nature of the risk of such a large position right people say things like oh but the health factor is fine and I'll say well can you what would be the slippage right so like you can't the current price doesn't mean much right so you can't just use Oracle prices to guarantee that a loan is healthy at any size and then the question is how do you decide what's the max you lend against any particular asset and at what interest rate and so that gets to be a very complicated governance question and so I think that there's a lot of interesting work there and it's not just us there's a lot of other groups that have been doing interesting work on governance like I'll shout out um gyroscope as a stable coin that has been doing cool things as far as like governance circuit breakers well

actually so before we get to can you talk about like what your group is doing and um like what you think like good governance looks like and then can you tell us which gyroscope is doing my Approach which is a little bit different from what most people are working on is focusing around on the question of like well so I was first inspired by a concept people call optimistic governance and this came out of um well lots of people have worked on it but I was introduced to it through fade protocol um and um you know Tom wait among others who worked on it and and I had a chance to work closely with you have this basic concept of someone right we won't say who a token some subset of token holders a committee we won't worry about that for now can submit a proposal and then someone else

can veto it um and the idea being that instead of having everyone have to come and make a quorum to do anything as long as there's enough of a quorum to veto dishonest proposals you can let things chug along right and so you can have you don't want to have like one you this is still not good if it can do like arbitrary modifications to protocol code right and that still Demands a lot of like diligence that the average token holder cannot be expected to provide um but optimistic control over parameters right and certain narrowly defined and scope processes um is clear to me as a you know obvious step forward in governance right of like you have a certain quorum to modify a certain thing um and you can say all right you need this

percent of the token Supply to vote to onboard a new collateral token this percent to vote to strike off an existing collateral token there's this long voting period and you can have various rules and I don't think there's like a magic perfect answer right that's like an but but there's you can have customized rule sets that suit your risk and your preferences right and the level of trust like similar to Roll-Ups where you can have different levels of decentralization or whatever that fits your own preferences and there's many I can see more than one you know decent spot in the configuration place I'm not saying I have I'm building the only right answer for that but I think that that principle is really strong and could be applied generally and then on top of that you can unify that to some existing things like I was also inspired by like gauge style

voting where instead of everyone voting on like one thing you can direct a certain amount of power or resources to a certain place and so there's some Concepts like that where you can and and one way that I would refer to it is we know that there's going to be some amount of intermediation but if you can make it trust minimized that's the key right so like some people are the ones who are having more influence over the voting or they're directing resources to a certain place but they have skin in the game and there's veto over decisions so the system should kind of safely wind down in the worst case and and have like this kind of a rage quit or something yeah well first of all just quickly on the rage quit like I'm a huge like fan of protocols designing that into

um into the their ve systems let's just be frank about what we're talking about here and I think that that is like well actually I guess for locked LPS too but anyway I think that's like really smart both in terms of like giving optionality but also in a way that is like not only like safer the protocol but like actually healthy or like or like profitable um so huge fan of like those kind of designs but um returning to what you just said so in my head um I'm hearing like kind of two different styles of governance one is um you know I'm a huge believer that like evm and like blockchain is cool but that doesn't mean like we throw away everything that's happened over the last

like 10 000 years of like human coordination and whatever right and so I think like it's really beneficial to look at models in the real world and like the obvious model I see is like the the corporate structure of board of directors right where you have like this type of um like ability for every single participant to like Express their their voice in proportion to their share but like on the day-to-day and like on the like kind of like things that require like vision and executive like uh function um is like deferred to people that the community has like explicitly like lended their trust and so I think like that's one mode of governance and I

think that like kind of fits under the optimistic government uh bucket that you're talking about but kind of in my head on the other side of the spectrum is the gauge style right which is like really saying like what we value is like very um active governance by as many people as possible because like we think that that's going to express something um in a way that's like providing like valuable data to the protocol um and so I think um like of course like those two things aren't mutually exclusive um they're both like design mechanisms that you can put into one token but how do you how do you first of all can you just reflect on what I said but um also like what do you think are the types of things that are appropriate

for like the the more optimistic like Trust um approach and what do you think is better for the like every person should engage with every um every vote approach so I think that they don't need to be separate right and that the the question is if you want to govern a group of humans on chain you need the board right like that's what if you're developing software under that is owned by the Dow by people who are paid by the Dow or you need a board right something like that because then it's really like an unchain Corporation and that's amazing right I love that because it's much better than an opaque off-chain Corporation um and it's a much more even playing field for people in different jurisdictions all these things we could get you know but keeping that aside

for the gauge thing to really work well you have to have a perfectly defined problem space right and understand the resource that you're allocating really well um and so for certain things that's not so easy um it's not super easy for anything but for some things it's impossible and for other things you know you can do it with with work um and so I think that for example like allocating a debt ceiling in the lending Market is something you can do with a gauge um but determining interest rates across all the loans in The Lending Market is a little bit more difficult um and so you need some things like these optimistic governance patterns um and so there's you have to think carefully for each type of a you know parameter and I think that the kind of basic gauges right where you're just

directing emissions like a resource spend uh right is one thing but even then I have quite a few criticisms of those models right in terms of they're not being any skin in the game right between what you vote for and the profits you're making um and so that's part of what I want to build into this model where you know like think about how the Ava staking module works right you have people who can opt in to risk and have skin in the game um and I think of that almost like on a per per asset but not even per asset per lending term basis for every type of loan term that's available whoever's voting in the gauge is in a staking module right and has some kind of a skin in the game on involvement um but this this core idea of like a

discrete resource allocation being a source of data 100 that's I completely agree with it and for Lending markets you can't have one board evaluate thousands or tens of thousands of different potential collaterals to say what should be the current debt ceiling right now today right you might be able to say what is like a toxic loan term that shouldn't be here yes or no um but but governing like exactly how much liquidity should be in each one and exactly how much rate you need Market processes for things like that um and so I think that anywhere you need to have like a market-based process it's that's super interesting yeah well and I I definitely hear you and like very much agree that like what's so important is the problem space and like designing

your um you're designing like your ve system in a way that is actually like achieving goals that you wanted to and um so you know I think like we can have a conversation about like okay like did it make sense for like you know Velo velodrome or like solidities wait solidly style dexes to like flip um flip what curve did in a lot of ways and you know that's one conversation but um another conversation is like Innovations on like the gauge system and you know like I'm unfortunately I have to say like this project like may have been a um a like victim of the just the Cycles in the bear Market but um are you familiar with Fiat Dao at all oh yeah

closely familiar I've yeah I've I've met and spoken with Max quite a few times yeah and so like they used to do like a lot of good content um back in like um early 2022 and so one of the things that um I remember them talking a lot about was like using the ve system in a new way and like what I loved that they were talking about is basically like instead of talking about using gauges to um do like emissions it was like using gauges to basically uh backstop like with the insurance buffer like different pools and so what that does is basically like give the market more confidence that it's a less risky loan and um

effectively like change interest rates but in a way that like is um like really leaves the decision in the parts of the protocol that like are controllable and makes sense as opposed to like just kind of giving like the wild market like the ability to just like mess with parameters willingly yeah you definitely have to watch out with yeah manipulation risk in any of these kind of things of course um and yeah I like that model a lot and the other curveball I'll just throw out is that it doesn't necessarily have to be ve right like instead of calling it because ve is really makes people think about a time lock but the the goal I don't think should be making people lock up their tokens for some duration but rather coupling the lock of their tokens to the

risk of whatever decision they're making right so make sure that like if you're casting a vote um you know let's say and and you know I'll get a little more concrete for our specific system because I think that's more interesting is that let's say that you're voting and for those listing just think about a maker Dow style system where you have different vaults types that can borrow under different terms right so you have your own individual deposition and you can so that'll be just the analogy we're working under that's familiar for people um so in turn but then imagine instead of the the existing maker governance you instead have these kind of gauges that are allocating this debt ceiling and the idea would just be that if the debt ceiling that you have voted with is utilized right like you have voted a debt ceiling towards a certain NASA and

someone is currently borrowing you could only unstake from that gauge if there's enough unutilized debt ceiling right so then you can't go and unvote once you voted and someone then borrowed until they repay their loan um and then you will receive interest from that and also you could unstake as and you can imagine someone else might be willing to come in and stake on year one and then you could unstake that kind of thing but the idea should be that the the lock should be coupled to the ram notifications of your decision and you shouldn't be able to like walk away clean uh like stake vote and then unstake and leave and then the risk hits the protocol so if you can couple couple it towards the decision you're actually making and also give you rewards specific to that decision I think that

that is a design ideal and that's probably different for Mark you know for a decks it might be something like oh you escrow it for like a week or a month or something and then based on the trading rewards that have been received on that pair you either get a reward or a slash right because it's basically we're saying hey make an honest prediction of the yield on this pair and if you're just getting like bribed and taking your own profits that's great but we're going to slash you a little bit to be like a base fee you know um you could have however you want to do it um and I think that for different types of protocols there's anything that is like directly handling money in a very mathematical way I think it makes sense to do this for things like ens right it would be different

right and it makes much more sense to have like a board or a foundation um for other types of structures but for it's a very mathematical lending Market or or exchange having um tight coupling between the decisions and a financial outcome makes a lot of sense to me yeah man my like wheels are spinning just thinking about um everything you're throwing out here and you know like for anyone that's like feeling a little uncomfortable with the like the idea of matching the um like your staked Ave right with um like duration of the loan it's like that we do the same thing with the collateral like because we have to right or no sorry not the collateral like the the assets that you have loaned the lenders in the market are potentially stuck right so why shouldn't the governors be in the same boat

I don't know how you would encode this but on a philosophical level if anything they should be taking more risk yes and we we definitely interpret it the same as maker right where that token is supposed to be the first loss um and we don't have the exact same you there's lots of people and this is kind of an aside but there's lots of people have written interesting things about kind of the economics of the maker emergency auction and also maker buy and burn and kind of critiquing them hosu has some interesting things on that and also in in the light of this potential you know Ava V2 bad debt that might result from the curve position people have been talking about how the office taking module works and kind of Reviving interest in that and it's clear that trying to sell your governance token in

an emergency is not a great idea right it's not going to make you a ton of money but um maker also has this concept and Ava have a concept of reserves or the Surplus buffer right where they have this accrued profit from lending and so if you understand the governance token as like a share of those reserves right that's what they're directing around when they're staking um and part of the idea of the lending Market should be like you don't want to have those reserves leave the protocol early on because you should be growing right you want to be always growing the reserves and one of the criticisms of maker Dao is that this buy and burn and even roon now has pushed to stop the buy and burn and then and accumulate you know strategic reserves like ethnow but for a long time they bought and burnt a bunch of maker

at the top and then they had to sell it off at the bottom in an emergency and they ended up losing a bunch of money so and I think Ava would be in the same boat if they had a staking module lost now but they've had more time to they have accumulated a decent amount of reserves right and they can they can use reserves from multiple markets if they need to so that helps and so I think that lending markets should think a lot about just like better infrastructure for how the reserves pay off bad debt and how bad debt is marked down and I guess that's one other topic I would highlight as being of great interest to me is what happens when the worst happens right how do the lending markets perform when they fail and I can tell you guys some story we can talk about interesting

stories from what we've seen like you know Vault protocol had integrated fuse on the you know when the fuse hack occurred and so I had a front row seat to having to not just front row seat but was you know responding for the audience um the fuse hack is better known as the Rari hack yeah and I I distinguished that because Rory had um there was actually more than one Rory hack and so there was a rarity accelerator that was act prior um so I I try to be technical uh in that regard because the well for the real history is If part of the when Fey and Rory emerge part of the deal was the the loss from the previous Rari hack being paid off uh by the tribe down um so there's some interesting things like that no very cool and I think

um just to like tie a bow on what you were just talking about um in terms of like using your own token to defend um like or using your own token in uh emergency situations it's like look I understand why it was architected this way and the the reality is it's because like you have nothing else to sell in that moment but um you know just to not recognize that the moments when you need to sell the token to raise funds are going to be the moment when the market has the most questions about your protocol and therefore you're going to get the lowest prices is like you know it's a recipe for disaster it is a literal recipe for like selling low and and

um like taking on bad debt and so um you know again like this is the nature of innovation like we all like have to take from um like our we we stand on the shoulders of giants and like thank you Giants for taking the licks for us yeah the whole a whole Tower of Giants at this point so while we're like still in this maker World um I would love to like just hear your thoughts and Reflections on what maker is going through in terms of like this transformation and like if you want we can talk about the like politics and like the end game of it all and whatever but like to me all of that's like noise um and like what's more interesting is just like watching the one of like the OG

um D5 protocols like really make a legitimate attempt to like reach off chain and like create a hybrid business that straddles both and I'm wondering if you agree with that characterization and if you do like what how do you think that's going and do you think it's a good thing well that's a good good set of questions well let me let me take that from the end do I think it's a good thing um yes do I think it is going well [Music] um um not as much right so like conceptual I think it's a good thing but I'm less convinced on the execution and so and and again not to get too much into the internal maker politics but but it is noteworthy that this push into real

world assets was initially driven by a group of contributors in maker dial that have since been driven out uh you know and basically roon is still continuing that same vision in a way and that's what's interesting right the maker Dow is still pursuing this path towards being real world asset heavy in a sense but now with kind of this um defensive mindset um maybe even paranoid mindset which is a little bit different um and so I'm going to give basically the good and the bad of both and to give a fully balanced answer uh and so the the bad of how things were before roon came back in was that there was not enough um not enough fear of God in everyone right as far as risk um and to to provide my like little

um piece of the story in this so as I was first getting into crypto at the end of 2021 I applied for a job for maker Dow and um it was as part of like it was under Sebastian it was like part of the um like strategic analytics something like that and but like all of my interviews were with like the real world assets people and you know like I was from The Real World Finance so I think like that's just um who they have me talking to and you know to me like the the biggest like takeaway I had was just like oh my God does anybody know what anybody else is working on and like this just seems like a like like uh like like huge blob and so um anyway I'll let you continue but that was just like my

impression from um getting rejected from a job there no that's absolutely right so there was there was too many disorganized groups and a lot of wasteful expenditure going on um and also just things like inconsistent management of Asset Risk and interest rate pricing other Shenanigans but there was an organized direction towards fixing these problems um and so some people within strategic Finance were cleanly aware of these things and frequently highlighted them and there was a push by certain maker holders to to think about something like a maker Constitution and a board um and there was debate about this right some people said no we shouldn't change it right and so it wasn't clear where it would go I'm not implying that there was a clear consensus that was disrupted but from my point of view there were

credible proposals towards a beneficial Direction and starting to you know grow the Surplus buffer and have you know more sophisticated management of the psms and liquidity and the problems were acknowledged and I think that progress was slow because there was no central leader who had strong control over the organization um but what I've seen since is that kind of the opposite right where I feel like now well it's got to the point where roon effectively has unilateral control over maker um in this they've enshrined a program where like you have to be Anon to be a delegate uh and so most of the experienced delegates are being for slash have already departed along with a lot of the experienced

teams of the Dow and you have a situation where roon can like more or less just push votes through by himself I don't know exactly how many tokens he controls or through intermediaries but even what he publicly controls is huge um and it's very difficult for anyone to do anything different so then the question more interesting question becomes well what's roon's Vision right what is what is maker maker Vin's Vision going to be like uh because it's not all bad but there are things that concern me and mostly it's just that I feel that there are certain examples of extreme and unrealistic thinking um and like not what I would consider to be sober risk analysis or cost benefit analysis going on but at the same time there are decisive changes being made for the good

um things just like simplifying the overall the goal of paring down the overall organization and centralizing it around a unified objective um is very is absolutely correct but when I see what's happened I see Talent loss and I see a strategy that is not necessarily risk minimized in the way that I would like to see from maker um yeah I know I mean I think that um I I don't say this with any like humor or as a joke like I mean it seriously like it's the dictator's dilemma right it is like this is like an energetic person who has a vision can like really like tighten things up and bring like a massive like blob into this like tight organization that can really

like affect change and do things but like the flip side of that is like like dictators like whether it's because like they can't stand other people like sharing control or it's because like competent people like want to have real responsibility and real input like they end up like pushing away like they're real sources of like feedback and like information and like um just like what makes like an organization stronger than a leader and so um you know that we're makers seems like it's like living and dying on like roon and um just like be aware that that's the that's what it what it is now and the

other just note of caution that I would give to people is if there's one thing I've taken away from building in this space it's that complex new systems are very scary from a smart contract security perspective um and like both Ava and compound have had bugs slipped through that accidentally froze markets in the last year um and that's scary and it certainly when I hear about things like in the end game plan and all these sub-dials and new structures new synthetic assets I think whoa I would be nervous right I'm just hopeful that they won't make too many alterations in the existing core protocol and will remain conservative um but that's what that's one of the hardest things for the average end user to evaluate risk about in a D5 protocol right smart contract risk

um and so just be wary when you see changes happening right a lot of new things going on like that it's not you know the Lindy factor that you may think it has um Can erode uh and so that's what I am most concerned with um because like people are very worried about like usdc risk or a particular like monotalist collateral I'm less concerned right I think that maker Dow it's current collateral basket and current size are unlikely to result in problems my issue is with their Direction at scale right if they were to grow 10 times on the path that they're going I think that they could get into a lot of trouble um but smart contract risk can strike at any time and so definitely I'm going to be keeping a keen eye on that um and um and I'm honestly thinking that

the culture and others have said this as well that the culture about Security in defy just needs to change and be more collaborative and so part of what I hope is that more people will do more building in public early um and do more peer scrutiny and review of each other's code so this is just a shout out to anyone who's listening and interested in that that we would love to uh you know of course have limited time but would love to provide peer code reviews and also to get peer code reviews of what we're working on and would encourage like that to be more of a more of a thing like it's not enough to get one or two external audit teams who don't have deep skin in the game and and then just like one it's it's hard to be assured but if you think about the

kind of practices that they do in um Aeronautics and Other Extreme security applications in in other software Fields it's common to have a whole separate team that writes tests without even looking at the code right you get the same spec to the to the code team and the test team and they make it and at the end the code has to pass s um and I've had you know I have friends that went to school with me who went JPL and have told me about all this and I think if we're writing code that piece aspires to be immutable that's going to secure millions or billions of dollars over time then that's the least that we can do uh and so we can try to do that internally but but it's it's a big burden on everyone who's a researcher developer to have all that testing and

security infrastructure in-house so I think the culture of peer review and basically normalizing that it should be considered absurd and Reckless to submit a governance update to a major Dao without getting it signed off on by like The Operators of its major competitors as well right like compound Alba Dev should run each proposal by each other publicly like why don't they um you know and a lot of things like that seems like it would be just like a cultural norm that could be enshrined um where like you can't publish a scientific journal without like a randomly selected set of reviewers right how could you how could a daoist sign off on a proposal without the similar scrutiny um that that was managed in a very public way and and of course they have you know they contract with security shops but I just feel that it's not the

same thing to have purely outside professionals who only come in occasionally you know and episodically well look I mean I think um everything you're saying here like draw is like we have a couple problems here one is like we have an auditing industry but like we have an auditory in we have an auditing industry that like like we have like actors like sir Tech who like is a well-known meme that if you get audited by surtic you're like one week maximum away from getting hacked like that like that is the fact that that is tolerated is a reflection of like the fact that we're not taking any of this

seriously yet I think like peer review and everything you're talking about is great and I think um you just covered kind of two things there one is like on the code side and one is on the like just like responsibility in like decision making side um without proposals um and you know I think um at like the the kind of like dirty underbelly of this whole conversation is like this whole thing is predicated on the idea that you think that that one thinks that Dows are like really good faith organizations that are like trying to like make decisions in concert over the Internet by using this new technology and not like a way to issue like

unregistered Securities that you can use as exit liquidity in a way that like people can't track that um like where the money's going and like the how many people are involved in like that kind of thing and so you know I think like there's a lot of like hairy questions in our industry and a lot of like things they like really need to be like like identified and like we as a community to excise and like say we will not tolerate I think there's a lot of things that we need to have like really good like good natured like energetic debates because there's not a right answer and I think there's like best practices that are already like appearing and that we um like should be skating towards and I think it's a big all hairy mess but uh you know while we

just have like 10 or so minutes left of this conversation I'd love to just kind of like pivot um like away from like what is and like like look more at um what's coming and so like within the context of like lending markets and like the things that you're working on and like governance like as you look forward whether it's new like protocols or designs or like technologies that are going to be enabled like what is really like getting you excited and um and yeah what is getting you excited about the future in in an era that um it's hard to even get out of bed knowing that we're in this industry well at least for me it's it's hard to stay in bed uh both because of the exciting things I'm learning about and because I have a a baby at home uh so

um as far as what's what's coming up um what's really caught my fancy recently is the idea that so people have been focused on generalized scaling for a long time and the ethereum context um but I've begun to ask myself things like well how can I push the limits within specifically where I'm working and that has led me to understand things in slightly different ways um one example would be like so normally for a roll-up like arbitrary optimism you have this kind of canonical Bridge right where you send you know if you need to send and that's also the sequencer selector right you know it's the contract where State updates are posted and where you send funds if you want to send them to the rollup we can call it whatever we want I don't care Bridge Gateway proposer Hub anything um and this is where all of the

non-native assets of that roll up are and it also presumably is coupled with the state route of the roll-up so this native assets are there too right um and especially for non-native assets like all the eth that might be on Roll-Ups it's just sitting there doing nothing right like the it's whatever you position you might have on the roll up from the perspective of mainnet the eth is sitting there idle in that contract doing nothing at all so just to like really drill home that point like what you're saying is today let's say there's a million um Ethan arbitrum but from the perspective of ethereum that that's just like one million each sitting in one smart contract not moving just Ethan a contract not able to be used to validate

or anything of Interest right um but you might ask yourself well what if you know it's a Hot Topic is eigen layer what if in some kind of Rocket bowl-like mechanism stakers could bid to get in on some of that eath right and stake that eth and use it to validate um but without yet ever leaving that contract right because the rules for that staking so it's basically like a wrapped in the same in the same way that when you you know staked via rocket pool or other truly decentralized taking pools it has to pass through some kind of a Gateway right so if you're running a rock pool node um you know and you posted some eth collateral you can't get your own eat back without also returning the eth from the you know our eth holders uh that

they provided and so you can do a same sort of thing here where you can do collateralized but but to me while eigenlayer is cool I have it's like the the weight it's all over collateralization I mean like the restaking we use that term because it's eth right but if you we actually have a word for that in traffic which is rehypothecation right um you know we whether it's it doesn't matter if it's eth or usdc or uni token or anything right any token that you deposit in the roll-up contract that's doing something on L2 but it doesn't mean it has to be idle on L1 and so we can start thinking about interesting things we can do not only restaking but also like lending markets where you can simultaneously be using the same

liquidity on L1 and L2 and I'll shout out someone else who's doing related work there's something called the distributed amm or the the Damm um that I believe comes out of the the Stark net um context um where it's like you can have one one pool but it allows multiple contracts um to have trade at separate um I don't want to mangle the explanation of how that works too much but I would encourage anyone who's interested to look at the way that they allow the same liquidity to be traded against from multiple consent consensus layers but this is sort of the opposite right because I'm saying oh well what if what if we're not worried about what's

happening on L2 right but but we're saying what if that funds that is on L2 without worrying at all about what it's being used for Who currently owns it um on L2 could be earning yield and then that could go to all of the people who are on the L2 for anyone who's like hearing this and just being like Oh my God like we are such degens like things are so crazy like how can you like be layering risk like this I mean like at the very most basic it's like arbitrim could just Swap all the Ethan that smart contract into stake teeth right and then like I I like then then that eth like is backed everything that's on the L2 is backed like it can always be um like redeemed one for one for you know steak

teeth or arbitrim can do that like can do the swap for you or or the Redemption for you but like in the meantime like arbitrim can like be like Gathering new eth and they can distribute that to you know people on their roll up they can use that as a buffer they can like you know anything but like man like this is like an incredible just like idea and insight and just um like if you know me you know that I like I'm a big believer in eigenlayer and like not even necessarily in like the company although I'm a big believer in tree ROM but like I'm a big believer in the Paradigm and the idea and like the transformation and what it means for like ethereum and smart assets um but man this like you just open it up

like way more like why I mean this is even more basic so man like mind blown look I'm glad that I'm glad that interests you because I've definitely been spinning with all the possibilities and it all started off just asking the question like how could a lending Market have a fungible debt unit on multiple scaling layers and how do you handle things like bad debt getting safely reported and I started to realize well it's very difficult unless you can tightly couple the state on L1 to the state on L2 in the bridge contract but I realize if you can do that there's all kinds of things that you might be able to do that are interesting um and so I think that you know one one example of the significance of the funds that are on the bridge contract

being borrowable are that normally on a roll-up it's very common that the prices of assets won't be exactly the same as on mainnet right because of the um you know the withdrawal delay um mostly and there's Bridges but that you can't get around the fact that final settlement does have to occur with mainnet and so there'll always be some kind of a anytime there's a meaningful imbalance and demand to hold certain assets on the roll-up versus mainnet there'll be price deviations and well I thought well if you can borrow funds from the roll-up that means that you could do something like this right let's say that Ethan the rollup is trading at a premium to ethon mainnet oh sorry let me do that the other way around Ethan on the roll up is trading at a discount to ethon mainnet

because people are trying to exit the roll-up um but but what they're real they're not really trying to get off the roll up they're actually just trying to sell to sell eth right there's net sales of eth they would be fine to stay on the roll up as long as they could hold stable coins and so they're dumping you know they're dumping each for Stables on the roll-up and so normally we would have to wait and say okay someone is going to have to move stable coins from mainnet to the roll up and buy roll-up eath so that they get to close that Arbitrage and then they're going to have to wait for the withdrawal delay to withdraw that roll-up youth back to mainnet to close the loop uh so they have to wait that and and the degree of capital that's willing to do that delay defines

um you know the the price deviation people will actually see and but the question is what if instead of waiting like that I could go ahead and um provide usdc to the roll-up um on L1 right on the L1 contract not bridged yet right but provided to the L1 contract and then borrow eth from the Roll-Up um on L1 and use that to lever up my position enough to fully satisfy the demand of on that roll up to swap from east to usdc and then after all that's done I can Bridge my whole debt position onto the roll up

um and so I I can then go ahead and sell all that usdc for roll-up eath and close my debt position out uh and so I can do a leveraged Arbitrage but settle it quick and so I'll still have to wait to get my full profits off but I don't have to wait to close the Arbitrage right so I can close my depth position and just wait to get my money and so there's lots of things kind of like that that we might be able to imagine um for contemptive applications and like I haven't thought about this fully in the decks or exchange space but I imagine that there are things that are very interesting within order settlements um and swaps within the same kind of thinking for sure for sure and I think like on the one hand like the introduction of ZK MDK Roll-Ups like

ruins that like specific Arbitrage you just talked about but on the other side like completely changes what's possible because of like the instantaneous communication the instantaneous trustless communication between um the different layers like is is like really going to transform what we're even talking about here so um I wish we could go on forever I um but unfortunately like we got to keep it to an hour what this does mean is like Kirk we got to get you back on and we didn't for those of you listening at home we didn't even start talking about the original purpose of this um this conversation which is like ethereum scaling and the ethereum roadmap so um Kirk I hope I'll see you again soon and um before I head out like can you just

share with the audience um where they can find you um if you can share the name of the project you're working on and just like where people can learn more about the things that you're interested in well you can find me anywhere you care to as one true Kirk Twitter's the best place feel free to tweet at me and I'm always very happy to talk shop and thank you so much for you having me it's a it's a real pleasure I work remote and I'm you know my colleagues are also all remote so it's always nice to just connect with people who are sincere you know enthusiasts who know about what matters in the space and are trying to learn more about and drive it forward so anyone please don't be shy and I got I was you know the project I originally built what we called Vault protocol we

deprecated the V1 and we're now calling the successor the ethereum credit guilt um you know a little bit aligned with the immutable ethereum values too um and you know I was originally started just cold tweeting at people and it's thanks to the grace of people who've talked to me and helped me did you meet people that I'm able to work on this full-time now so um yeah please if you're listening and and that's you and your you know I'm very happy to have a call and you know help anyone any way I can wow wildcard well thank you so much and again I hope to see you soon back on this pod yep same to you and and hope to get the chance to buy you a coffee or a beer in person one of these days no I I will definitely make sure that happens

but I will be buying the beer okay well we could take turns uh yeah all right man have a good uh good rest of your day and I'll talk to you soon thank you