Reality Check: The Requirements for Scaling Institutional Adoption

Transcript

Well, hi everyone. Thanks for being here today. So, yeah. So, for years the industry has talked a lot about institutional adoption and today we're finally seeing that real deployment happen. We also kind of need like a reality check on what it takes to scale. So, yeah, I'm excited to get into it with you today, Tomer. You know, let's start immediately with where are where are institutions actually engaging in blockchains today? And what makes them hesitant to scale meaningfully like in terms of volume on chain? >> Yeah, sure. So, hey, good to be here with you.

And everyone, thanks for sticking around. So, I think the biggest thing we're seeing right now is that institutions are in it's not it's no longer a question of like when and whether it like they're here right now and so the question is how it scales. You know, Stellar was built originally as an effort for cross-border payments. We're still seeing payments as a major use case for for blockchains. We're seeing on Stellar 75% year-over-year increase both in velocity and in volume of payments.

But in terms of what's happening right now with institutions, I think tokenization is a really big thing that we're seeing. This time last year there was around half a billion dollar TVL of RWs real real world assets tokenized on Stellar. Today we're approaching 3 billion dollars. That's 6x sixfold. It is is insane. We've blown through every projection that we had for tokenization and so I think that's really big. But like one thing and and one little stat that's really exciting to me is that even though Stellar has been around for 12 years since 2014, we had an increase of 85% year-over-year of developers in the

Stellar ecosystem. Now, Stellar 12-year-old blockchain, you know, some of some call us dino where we I I accept I accept that definition. Um but the fastest-growing blockchain ecosystem today is this 20 12-year-old DinoChain. >> Oh, actually, you know, before we move on and I love that you brought up tokenization cuz I do want to ask about that in a little bit. But what gives the fastest-growing, especially since you're calling yourself a DinoChain? >> Well, I think the fact that the industry has finally focused on the things that I think matter the most, which is myself and Stellar, which is everyday financial services.

And we've kind of like moved away from a lot of the distractions, you know, NFT meme coins and and, you know, various shenanigans. And we're finally the entire industry is zoomed in on everyday financial services and Stellar has been building up this infrastructure for finance for the past 12 years. We have a set of interoperable on and off-ramps around the world. Stellar is one of the most accessible networks out there. You can go into any of 400,000 MoneyGram agents and go to from Stellar USDC. So Stellar really has the the building blocks. And we also have we also have the ecosystem and we launched a new smart contract smart

contracts platform 2 years ago, which is getting more and more traction and it's kind of like brought a lot of builders to the ecosystem because there's a new DeFi ecosystem. So it's just a very exciting place to be at even though we've been around the block a few times. >> Well, you know, I find it this a very timely conversation we're having because it seems like there's been a lot of announcements around institutions and the Stellar network. And so I first wanted to ask about the DTCC announcement that Stellar will be its first public network integrated. And you know, like what gives? Like why what does that decision tell us about what an institution like DTCC needs or values when they look for protocols.

>> Yeah, so DTCC is kind of like the the clearing house of of the US. Basically, every trade that happens in the United States goes through DTCC. So, we're talking about yearly volume that measures at like quadrillions. Okay, this is a lot of money. And so, you know, DTCC are doing the right thing and looking to tokenize on public chains. They started with Stellar because you know, honestly, like I mentioned before, we have the institutional track record. We have an uptime which is amazing in the world of of blockchain. We have you know, we have the rails which are kind of like the building blocks in the infrastructure. And we also have you know, we've worked with these with

these teams for a lot of times, right? So, it takes time especially in the world of traditional finance to get the trust of these institutions and these companies. DTCC specifically you know, they bought a company called Securrency. We've been working with Securrency since 2018. And so, we have like a good amount of rapport with that team. And and that's important for getting these type of projects off the ground. >> I I feel like privacy is also a big sort of component in all of this. And so, when you guys are dealing with institutions, you know, I'm sure they're talking about that it's a major concern but also a need. And so, how Yeah, how is Stellar thinking about that while preserving as well like trust and compliance?

>> Yeah, so I think you know, there is definitely a glass ceiling to what we as an industry can accomplish without having very clear privacy solutions. It doesn't make sense to have a payroll solution that's built on a completely transparent system. It doesn't make sense to have a like a merchant payment solution. You can't have your competitors see all of your all of your um, all of your flows and all of your competitors um, and your relationships. So, that's definitely something that we need to to solve for. Um, I think one thing and by the way, privacy is something that has been talked a lot about in the world of blockchain for, you know, probably the better part of

like a decade. Zcash launched in 2016. It's a great project. I love it. But, I think that historically we've talked about privacy in the context of kind of like this all or nothing Cypherpunk version of privacy, which is great in some situations, but uh, in a world in which regulated financial institutions need to work and you need to have like selective disclosures or sometimes non-selective disclosures. Like, you need to have a more um, I would say nuanced system. And so, and and these systems look differently between use cases. They look differently between uh, between jurisdictions. And they look differently between technologies. And so, what we're trying to do at Stellar is uh, we take a building blocks-based approach and a

transparency-first approach. So, we do believe that it's important for the core L1 Stellar to stay uh, transparent. We don't want to um, negate all the benefits of a public blockchain when we introduce transparency. Because when we talk with these asset issuers, they are uh, you know, they're they go to block explorers. They see what's going on with their assets. They're excited about that. We don't want to take that um, verifiability openness uh transparency away from them. But, we do want to enable builders to build private applications on top of them.

So, what we do is on the L1 itself, we introduce um, building blocks. Today, it's mostly around zero-knowledge cryptography, which is I would say the leading tech for privacy these days. Um, and then we allow builders to come in and build solutions on top of that. So, we have things like uh, Stellar private payments that the Nethermind team has built. We have confidential payments or confidential tokens coming from Open Zeppelin, boundless are building on Stellar. So we have a lot of these different solutions that are getting built. Some of them have different privacy guarantees. Some of them just obfuscate, you know, amounts of payments. Some of them also anonymize payments.

And so it really depends on on the right use case. >> Right. Well, you know, I do want to jump back into like the array of news that's been going on around Stellar. And earlier this week MoneyGram had announced that they're launching the MG USD. Is that the right way to say it? Okay. MG USD stablecoin on Stellar. Um So yeah, what does that tell us about like where institutions are headed and like why stablecoins are becoming so central to the payment stack? >> So I think what it tells us is that institutions are finally serious about it.

Because when an institution is issuing their own stablecoin, what they're saying is, you know, until now we've been, you know, around with small amounts of money, right? And so when you have a small amount of of of of, you know, USDC or whatever stablecoin on your balance sheet, you know, no one cares about that, right? But when these numbers grow, you're starting to think, okay, I have like, you know, money on the balance sheet that it's not actually working for me. And so when an issue when when an issue or so when an institution says we want to issue our own stablecoin, it means that they are ramping up adoption of stablecoins. And stablecoins at the end of the day in this universe of everyday financial services, stablecoins are kind of like, you know, the cash of this universe.

They're they're the checking account of this universe. And so they're kind of like the base for everything. >> Mhm. Right. Um how does CAP-77, the quorum freeze, like tie into all this? Like can you explain that maybe to a non-technical audience and and where it sort of fits in and and, you know, institutional adoption? >> Yeah. So, um you know, this goes into the question of security, which is a lot of institutions are coming on board. You know, they kind of like in the world of blockchain we like to say about systems that they are you know, trustless. Trustless is a really terrible word to use. Please don't use the word trustless when you talk with institutions because they're looking for someone to trust, right? And so

I think that we're seeing a a bit of a security apocalypse happening right now across the entire cybersecurity space but also in blockchains. I want to make sure that we protect projects and users as much as possible. And so the specific protocol that you mentioned quorum freeze cap 77 is basically a way to allow for validators on the Stellar network to freeze balances on demand in case there's an ongoing hack. Now this is something that we've been seeing happen a lot in the in in the past few years.

We had you know, swing the cetus hack last year. We had the balancer hack which had like multiple blockchains freeze balances. But the problem that we have we recently had the you know, the layer zero killed out attack and that that led to the arbitrum security council actually freezing a bunch of funds there. And so the reality is that the tech allows for some form of governance to take action. But unfortunately, we've done a poor job historically with making it clear what are the processes for making that happen both from a technical perspective and

from a governance perspective. So this specific change in the Stellar protocol gives the validators of the network which are the you know, effectively the governance body of the network an authority to if there's an ongoing situation to temporarily freeze balances so that we can handle some of these security issues that we're seeing right now. >> Yeah, that's you actually you you tie it in so nicely because I was going to ask about the DeFi exploits of last month or I guess it's June now. So, April. Um which I think at some point someone said it was the worst number of like >> Worst month.

>> Worst month ever in terms of DeFi hacks. And so, I find that to be an interesting time period especially as institutions are coming more and more more and more on chain and they start to see things like that. And so, like what kind of safeguards do we do not just like Stellar but other blockchains need to take into consideration or and institutions what kind of what do they need to think about in terms of alleviated alleviating episodes like or mitigating something like this. So, >> Yeah, so I think worth it's worth not spreading panic right now because we are seeing a lot of this in Web3 and the reason why we're seeing more of this in Web3 than we are in kind of like Web2 and other FinTechs is just because Web3 is so transparent in its core, right?

So, everyone can see that something is happening. The reality is, you know, your banks are not going to tell you about this but hacks happen all the time and they're also seeing a surge right now. We're seeing a surge because AI assisted hacking has like become more more dominant and you know, our friends in North Korea have been like getting really good at at it. And so, security is you know, there's no um security is not kind of like a a yes no black or white, right? It's we we like to think about security as security in depth which means that you want to have as many layers of security as possible.

And so, in the Stellar ecosystem we've been putting an emphasis on security for a while. We actually started when we launched our smart contracts platform a couple of years ago. We also launched an audit bank program. The audit bank is basically this sponsorship service to if you are a DeFi protocol that is launching on Stellar, uh SDF will actually hook you up with uh reputable auditor to get uh to get audited. We also uh have been collaborating and continue to collaborate with some of like the biggest name in security, uh whether it's uh Blockaid or Hypernative or um you know, Certora, which provide um uh formal verification for smart

contracts. We think that formal verification is a really important building block in the world of security uh moving forward because what we're seeing with AI-assisted hacking right now is that um you know, basically anything that can be hacked will be hacked and we need to do um a better job in kind of like hermetically sealing uh our smart contracts. And finally, uh you know, one interesting thing about this wave of hacks that we've seen recently is that they're not actually code issues. They're more about kind of like the secops. So, um you know, North Korea will get to someone in your organization. Maybe it's through uh kind of like falsely advertising a job and they get you to

install something on your computer. Um and we're seeing a lot of these kind of like long game uh style cons that are happening in the crypto ecosystem and these are what are leading to actually kind of like some of the biggest hacks. And so, we really need to up the secops game um in the ecosystem. Uh we've actually collaborated and are collaborating with Blockaid, one of the leading security um experts in the space in order to provide this um service for Stellar um projects and we're about to announce a few more um projects in that space.

>> It's cool. Well, I'm getting towards the end of our conversation and I did say that I wanted to get back to tokenization and it feels like it's become one of the biggest buzzwords of the industry. Um but I wanted to hear your take if there's actually genuine attraction or is this all just like another hype cycle? >> I think it's somewhere in between. >> Mhm. >> Um and so we are seeing a lot of RWAs being issued and I think that uh like the the evidence is undeniable. Like like the numbers are huge. Um I think that we're also seeing them becoming more and more usable. So if last year or a couple of years ago you would have asked me what's the uh landscape of RWAs, I would have told you

um it's getting better, but they're not that usable. And when I say usable, I mean, you know, if there's an asset that all it does, you know, if a company is just kind of like tokenizing and by by taking uh creating like a a row in a database and just kind of like doing nothing with it, uh that's not really interesting. The power of blockchain, the plow the power of DeFi is in interoperability. And so we want to make sure that these assets are usable across the spectrum. We are seeing a lot of companies that are um coming to the table right now and they're taking assets that were initially issued in like a very closed-loop, a very um restricted way and uh are allowed themselves to be more interoperable with

other DeFi protocols, with other wallets. And so we're seeing like an an opening up there. I do think that one big issue that we have right now with RWAs is distribution. So we we're seeing a lot of to a lot of tokenization. That means that there's a lot of supply, but we haven't seen that met with demand yet. That is, who is actually um you know, purchasing these tokens, who is actually holding them. Uh you know, we're seeing Stellar historically has been very strong with um um with uh you know, upcoming regions like, you know, Latin America and Africa and we're definitely seeing uh uh users that are holding some of these assets in a way that allows them to get access to

um you know a a form of like high yield savings accounts. Um but that's still small numbers. Um I think we are seeing some big institutions put like big numbers there and that's that's encouraging. Probably the most promising layer is around small medium businesses around the world. We're actually seeing a lot of adoption right now in Europe for assets that are um RWAs that are issued on Stellar because it gives these SMBs access to the type of uh financial instruments that they don't usually have access to. And you know, this is all happening on the back end. On the front end, they actually have no idea that they're using blockchain at all, which is awesome.

>> Well, you gave me 1 second left. So, I guess that's it. But uh thank you so much for your time today and for such an interesting conversation. So, yeah, and thanks everyone. >> Thank you.