Real Yields, Real Institutions, Real Problems

Transcript

[music] >> For our next session, we're going to have our first fireside chat for today. And for this one, I'd like to bring out Julian, who is the founder of State Capital. We're going to talk about how DeFi is going to change moving forward and just to the evolution of DeFi from last 7 years to now. So, please give Julian a big round of applause. >> [applause] >> Welcome.

Um Julian, you've been in this space for quite some time. You've been very crucial to helping DeFi get to where it is. Whether it's optimizing curves on on the yield side to uh just making a lot more of these new protocols and uh composability kind of uh in action. And my first question to you is kind of having seen how everything is evolving, uh what do you think is considered DeFi in 2026? Do you have a new definition or is it still the same thing that we kind of saw 5 years ago and and uh it's the same world, but slightly different or that's no longer the same story?

>> Um yeah it's it's quite interesting uh moment in in decentralized finance because it's not I don't think I think DeFi has evolved completely to a new um a new concept where now um the primitives of DeFi are mostly being used by traditional finance. Where before DeFi or how we started in the space was to completely move away from traditional finance to a new world where all those different uh financial products will be

uh more secure, more transparent, more accessible. What we're actually realizing is that those different pieces of technologies that we've been building for more than a decade are now being used by the big guys that we were trying to replace. So, it's a it's a big uh big change, uh but probably probably uh something that we should have expected. >> I I I in in in a way it is a little bit funny um that uh this is going to how things have evolved. But, from kind of your conversations with DeFi founders or even institutions, are you noticing that the institutions are actually asking for decentralized finance or do they just want the primitives to simplify their engineering

work, but they don't actually want things to be decentralized or liquidity to be on chain? >> Well, I I believe um traditional financial players didn't really care about decentralizations. As long as you they can cut costs, uh make their operation more efficient, and uh tap into new market shares, uh that's what basically they're looking for. And at the end, they can position the narrative to say, "Okay, we are decentralized and more transparent."

This is potentially something that they will like to push forward. Well, what institutional players are looking for is make more profits, have bigger market shares, get more adoptions, and try to compete in a in a big uh big oceans of competitors, right? So, you need to cut the margins, you need to I mean, increase the margin, you need to get into new borders of players. And that's what they've been trying to do and being able to be uh to execute in using decentralized financial primitives.

>> You definitely have I would say a lot more perspective on the European market on the institutional side. And you definitely keep up with a lot of the stuff that's happening on the US side. And uh what I'm curious about is are institutions behaving the same way on both continents or do the European institutions care about something different compared to like the American ones and and they have slightly different priorities? How does Europe kind of differ in this world? >> Yeah, I spend half of my time in the US and half of my time here in Europe.

Um if I can like summarize like on a higher level, is that European they write the rules uh and also dictate the regulations, but at the end of day the Americans are the one distributed the having the distribution, so I think European they care a lot about values and trying to make things beautiful and and and in the correct way, where in the US it doesn't really matter if it's beautiful or not as long as you can distribute and increase profits.

So that's I think European they really need to change their mindset about at the end of the day if you're trying to regulate something but not push for innovations and and try to bring innovation to market and solve real problems, then at the end of day whatever you regulate will not uh you're trying to stop something that you're not you you still need to have people innovating and creating value in order for you to regulate. And that's the big difference between the US and and and Europe.

But we see this tend to the extreme in in Asia, where Asia is actually the extreme. It's just like open the gate to everything. >> Yeah, I guess it's the same more on that. So, I guess what kind of what are the Asia side of market sort of cares more about and and like in that case is there a difference between North America and Asian markets? >> Well, it's um think cuz we also try to do uh to be involved and exposed to the I want to say Asia is mostly in China. But, China is interesting because they opened the gate for innovations, but they're still you feel like you don't really feel like walking or doing business with a company. You feel more doing business

with the state, which is very different. The state is dictating how innovation should be pushed forward. And we see this I mean in in crypto or or in AI, they really they are the founders. The state is the founder. Is the one dictating how startups should behave on the on the ground. And then the startup they just execute the the vision. Well, in the US it's mostly driving by uh private companies. And then the the state is trying to keep up.

And and in Europe is there's not really uh anyone doing uh like like uh big piece of moving infrastructure whatsoever. So, the state is just trying to stop everything, which is a bit of pity. We've been We've been a lot of progress. I don't think Mika is necessarily bad because you still need to regulate and understand what you're doing. We also need to accelerate and inject capital resources, energy into founders that they can then build and be regulated uh after.

>> Kind of coming back to just the DeFi that crypto people know, what protocols or primitives are you excited about right now in kind of just the DeFi landscape? Are there still innovations happening from your perspective or have we kind of just settled on the stuff we have now and there hasn't really been a lot of interesting DeFi protocols out there? >> Yeah, the phase of building protocols of it's quite not finished, but for new like a founder to build a new primitive or new protocol, I would say it's extremely difficult. Now it's mostly about products being built on top of existing protocol.

If you see like Morpho uh you have a different P&Ls. Now we get into a phase where the market is extremely matured because you have those protocols that have been able to handle billions over like uh years. So the risk is not necessarily on the infrastructure level. Now the risk is being pushed on people building products. So mostly on the curators, strategies um So for anyone that wants to build and compete with Curve, Morpho, Aave, all these different players, it's extremely difficult. Now you have those protocols being used by most some of the biggest and traditional players like Robinhood

providing 7% yield being built on top of Morpho and leveraging Steakhouse curator. So even for yourself to build a protocol is tough, but also now to build strategy and curation to being something that's above 7% yield you can do it, but at 0% risk, I think it's really impossible because Robinhood, for example, they provide 7% plus up to 2 million insurance uh to your um deposit, which is not something that we've seen in the space. So now if you want to build something that will really disrupt the market, you need to come up with things that traditional finance used to do. Like, bring the uh insurance products, building

confidentiality. We have the market that I would say that some of the biggest opportunity in the market right now are mostly in in privacy, confidentiality. Because this is what is left. Traditional players, they won't be playing uh or depositing capital much. They don't have the privacy aspect and privacy is still not really solved right now. Even so, you have Zama and those different protocols that are trying to to tackle it. But you still need to have players that build uh on top of it. >> So, speaking more of privacy, we obviously hear that a lot, but what's a good way to handle and satisfy that demand?

If people want to still use the existing contracts, um or protocols, whether it's Aave or or Morpho, um for any of that to be private, you kind of have to force the protocols to also be on the new rails that supports private transactions. Is that more realistic? Do we do mid-term solutions, or does that mean you're opening up an opportunity for like a private version of Aave or private Morpho to start as a new project, maybe, and that can kind of frog-leap and and become the the go-to choice for institutions? >> Well, I think the protocol is the like the rail.

And then you want to incentivize or allow any type of products being built on top of it. So, if you want to have full privacy, half private, um but more speed, more transparency, whatever. This This was the goal of Ethereum, right? Being uh composable. For example, you have a pool of liquidity of Zama, Zama steakhouse, uh and Morpho's, both 50 million. You can operate, you can deposit in a full confidential way. You can have your liquidity yielding, your deposit yielding, and not being exposed to your address uh being revealed.

Which I think is a big step and that's the reason why if you have five blocks now also have the functionality of earn leveraging more full. They also bring in privacy. They're all moving into that. Soon you have potentially more than a 50% of the entire uh earn uh TVL on DeFi that will be fully private. Not necessarily that funds will be moving to private full privacy, but you have more deposited deposits. So the TVL will grow, but you also have that less access to what's behind. Uh so concept like I mean those things that we were against back then, but I think if they build correctly,

it kind of makes sense and it brings more uh safety for users, but KYC, AML, pool of liquidity, isolated liquidity, uh fully private uh uh TVL. This will This is It's obvious and very likely that we're moving forward into that path cuz it makes a lot of sense. >> Um you said something also interesting in your last answer, which was kind of how you get to offer like high yields and you kind of mentioned that you can you can only do that now if you're offering those structured products that a lot of financial institutions do. And my kind of question is when we look at yield right now in DeFi, how sustainable is that? Is this a real

organic demand from borrowing or is it kind of just token incentives sort of making it like that, but it it's not actually going to be redeemable at the same cost? And sort of how should people think about yields in the space moving forward? >> Yeah. Well, the yield coming from Robinhood or Revolut is really sustainable because they have deep pocket. They have access to uh deep liquidity. So, the 7% is what I call intrinsic value. So, it's coming from lending and borrowing.

If you look at Ave, currently, I think you have approximately what what an 11 billion dollars worth of uh the deposits there. And about 30 31 or 30 I think it's 36 or so near 40% utilization rate. So, this situation utilization rate of that lands deposits from users is yielding approximately 128 million a year. Uh I think over the past 30 days, Morpho has made more close to 20 million net profits.

So, those things is like people depositing in uh I don't know, like an asset borrowing dollars and selling it because they believe either dollars will go down or they want to buy their they want to buy something or they want to rent something. This is this is actually real yield. Then, the opportunity for people in DeFi is building exotic yields. So, instead of having seven Now, the 7% is the other rate. It's whatever you can get for free at zero risk. So, for you to provide a tool and a a feature that people will be using, for example, for myself, for me to move away from 7% at zero risk, I think I will price it twice. So, I will want I will be looking for 14%.

If you don't provide 14% on USD, I won't be depositing because the risk will be too high. And in order for you to provide 14% or 15%, you will then need to have different type of strategies like farming different type of protocol. I will also need to understand the risk because now you are the curator. You are the one building the strategy. The risk is on your side. So, I need to price that risk. I need to provide uh really good yield in return, otherwise I won't be using it. So, for the curators and strategists, it's becoming more difficult because now you have a like a minimum rate that people understand. What's the the minimum that you can get? Before in private banking you can get 3%

then you could get 2 or 3% from your bank. Now we're talking about 7%. So, now those guys they're playing in the DeFi uh the DeFi world. So, but it's possible. We have for example in our capital we have the vertical called gaming capital. We provide 15, 16, 18, but we need to make partnership, you need to make rounds and those type of things. Which is at the end of day it's really viable because you also bring efficiency, you know? Uh efficiency to the market. How do you arbitrage? How do you capture the spread? All the different things make sure that when you do a swap on curve or when you lend you get the best rate.

Almost like zero spread, zero slippage, all different. So, you need those different actors. Of course profits are also going uh going down because you have more actors being able to do so and you also have big guys that can bring huge amount of liquidity. At the end of day what's beneficial is for the the end user cuz end user they have better yield better access to liquidity and less UX issue. Can you imagine that people using Revolut or Robinhood they never they don't actually understand it's using DeFi. So, as a DeFi ecosystem we should also understand that we kind of won the narrative. It's being used is there.

But now we also need to find and reinvent ourselves. What do we what can we provide now to the ecosystem that whatever we build over the past decade is already now being used by big actors. So, it's kind of a a fight that we won. >> How sustainable is being able to offer 40 to 80% interest and yields and and also like for higher volumes? Like it's a good question like be for a few million, but do you get to scale that up to eight figures or no? >> It feels very hard.

>> by now it's quite possible because uh I mean, I don't want to shoot myself in the in the foot, but all those different ecosystem and blockchains they're trying to survive against uh Ethereum. And they either they're moving from L1 to L2 and they're L2 being a product to L1 to Ethereum and they are incentivizing people to build liquidity on their their chain, so they're distributing uh uh incentives. For example, in Merkle from Angle or Vote Market from uh from Stake DAO, we have distributed more than 200 million incentive last year.

Uh and this year we're going for 150 or 200 so the amount of incentives for people to keep users in their ecosystem is massive. So again, the winner at the end of day are the um the the users. Uh this is what happening, so now you have maybe 15 15 big chains. This is what we've made as a >> 15 or 50? >> Sorry? >> 15 or 50? >> Oh, we have 15.

>> 15, okay. I would say yeah. I think there's no 50 chains. Just wanted to make sure I didn't hear that. >> A few years ago we knew that the chains will go and disappear like uh slowly but surely. And now the speed is getting uh is in like getting pretty uh pretty fast. It's increasing, so uh yeah, right now for users having liquidity is a right time because you get incentivized to get the yield. Of course, you need to make sure you you price the risk correctly. >> Yeah, I think that that makes a lot of sense. Um I I'm glad to hear there's still opportunity. Uh maybe my last kind of question to you would be uh for any kind of founders in the room who are thinking about starting something in DeFi or taking advantage of DeFi, uh what advice

do you have for them to make a really good product or kind of big from your perspective how D5 is evolving, which you think they should focus on or not focus on if they're trying to be building this space? >> Yes, so we've seen all the different faces. Before there was a I'm not sure if you guys have been there for a long time, but there was someone creating a landing page and doing the ICO and raising 100 million and 50 million. That was the kind of like high-level narrative and then we wanted to building real products that could potentially disrupt an entire world of traditional finance. Now we also moving away from this one.

Then we got into real products and the reason why D5 has also changed dramatically over the past few years is because whatever is like a software someone building a piece of tech that now today technology is getting commoditized by AI. Everyone can build all those different products almost. So whatever matters two different big aspect of a builder and that's what we at Stake Capital always look for and is the distributions.

If you have yourself access to distribution that no one has access to could be like in any type of businesses. And then proprietary data. So if you have access to information that no one has access to, this is also very valuable. So if you have those two things and you and you have an idea that kind of not about the principle, not about the value, but more about is it actually solving a real problem? Then if I was you, I would actually spend more time trying to build it cuz this can be extremely valuable.

But on the other side, if you think about building a good-looking product and landing page and whatever, right now this is not going to pay out because anyone can build a landing page, anyone can build any type of technology right now, I mean software. So, you really need to think about, okay, what is these things that I'm building that is solving a real problem. And if you have this thing, uh then you should be able to pitch it and and get attention for people interested into financing it or whatsoever. >> Distribution is king, seems to be uh >> is that is massive, yeah.

>> Amazing. Well, Julian, thank you so much for this amazing conversation. Please give him a big round of applause. >> [applause] [music]