Repo Is $16T. Onchain Credit Is $5B. What's Missing?

Transcript

Hi everyone, welcome to another episode of Bits and Bips the interview. Uh my name is Steve Erlic. I am the head of research at Sharplink and also your host for today. Uh really excited to be back with all of you. Uh sorry I missed last week. I was a little bit under the weather, but we have a terrific show. H but as always before we get into it, let's just take a brief moment to hear from some of the sponsors who make the show possible. If you've been loving Bits and Bibs, don't forget that the show is transitioning to its own feeds on X, YouTube, and your favorite podcast player. If you're not already subscribed to Bits and Bips on its own channels, go there now and hit that subscribe button so you can keep up with our twice weekly live streams and macro meets crypto

breakdowns. Bits and Biss will only be on the Unchained feed for a few more weeks. So subscribe today to be ready for launch. You can get all the links at unchainedcrypto.com/bitsandbbits. Welcome back. Now, as always, before we actually begin, a brief disclaimer. Nothing that you hear on the show should be considered financial or investment advice. For full disclosures, please see unchained crypto.com/bitsandbips. And let's begin. Um, today we're going to be talking about the repo market and trying to bring it on chain. Uh, the repo market, as my guest, who I'm about to bring in will tell you, uh, is widely considered to be the central nervous system of of basically the entire financial system. It's one of these

giants that many people don't think about until things potentially go wrong, but it's really the oil that makes everything go. So, it's only natural to try to bring it on chain. And my guests today have found a clever way to try and do that. So, let's bring them in. First, we have Craig Burchil. He is the head of lending at Falcon X, uh, one of the top prime brokers in the crypto industry. So welcome Craig. >> Thank you. Great to be here. And uh and second we have Matteo Pendalfi who is the CEO and co-founder of Pareto an onchain credit infrastructure provider.

So welcome Matteo. >> Thank you. Thank you. Glad to be here as well. So I've been really excited to have the show. I know we've been working on it for for a couple weeks. Um for one, it was a great opportunity for me to really kind of dive in to see how Repo could work on chain. And it's not quite as simple. There's a lot of uh overlap, but it's not quite as simple as it may seem. and we're gonna get into all of it. Uh but before we do, um just very quickly, Craig, maybe I can start with you. Can you please just explain to people in the audience who may not know what the repo market is and sort of uh contextualize is sign its significance in the financial industry?

>> Yeah, it's it's it's interesting. So So repo is I mean technically just repos are just repurchase agreements. It's an agreement to essentially say um hi I'm going to um you know sell you something today but I'm going to be buying it back at some at some future point in time. Um but the interesting thing is uh it's a derivative and um but it's evolved into a market that um spans uh really is at the heart of the uh global financial system generally. Um it's one of the core ways that institutions and financial institutions manage their balance sheets. It's also a core way that the uh government interacts with uh financial institutions and is is

essentially a way to give short-term lending um in a way that's not a not a traditional loan. And so what you can do in the repo markets and you can also do long-term repos which you will go into. Um but it's it's a way to say hey um I have cash maybe I want bonds someone else's bonds maybe they want cash um or some other asset and we can go and quickly just swap them together knowing that this is only temporary and uh and you have one side of the the repo that essentially serves as the collateral for for the other side of the purchase. And this has evolved uh you can think of them akin to loans um uh really but from more of a short-term liquidity basis sometimes even uh a lot of times

intraday repo is common um but it's a way to kind of facilitate and grease the wheels of the global financial system and you know like for instance at the end of 2024 there was approximately $16 trillion in government bondbacked repo that was outstanding globally um and that's about 80% of the total repo positions that are out there. So, this is a massive massive market in the traditional financial world and and what we've seen is um we haven't quite gotten there yet in the onchain markets and these are starting to develop as as we'll go into here. But the the long story short is they're effectively forms of short-term loans. Uh and they're a way to um provide liquidity and optimize balance sheets throughout the financial system.

>> Was and I mean from my understanding at imitator I want to bring you in on this too. I mean, like you said, Craig, they can be for varying durations. They can be rolled over um from day to day and you just pay an extra day's interest if if necessary. Um but they're really a massive way for for everyone from like hedge funds to to banks to money market funds, whoever to get access to cash over very short-term durations um when necessary. And and they're key cogs because if you look at different types of players, I mean, it involves like like clearing banks like like BNY Melon, investment banks. I mean, this all kind of works together and if something gets kind of um jammed up, it can be calamitous. Matteo, maybe you can because I would think a lot of people

who perhaps don't know repo remember what happened in 2019 when the me when the repo market kind of uh closed up and the government had to step in with some uh some superpowers. Can you kind of explain what happened there and how the repo market has changed over the last five years? Well, yeah, you know, the September 2019 episode has been, you know, quite of a destructive stress test for the repo market. You know, uh what happened is that the overnight repo rates in the uh US spiked from around 2% to over 20% in a single day pretty much. So you know as you mentioned the Fed had to intervene with emergency cash injection for kind of if I remember correctly was the first

time since the financial crisis and you know the subsequent like what happened after that is that created this is what created this standard repo facility as a permanent back stop. So essentially what happened is that a large corporate tax payment drained reserves from the banking system and uh at the same moment that a large treasury settlement hit and you know reserves were more cons concentrated at a few large banks that anyone had mold modeled. So you know the banks with taxx reserves were reluctant or even unable to just lend them into the repo market fast enough. partly because of balance sheet constraints and from post crisis

regulation partly because of settlement timing. So you know the the key insights here is that the problem was not a lack of cash in the system but it was an inability to redistribute cash quickly or quickly enough through existing infrastructure. So you know the plumbing in general couldn't move liquidity where it was needed at this speed the market required and this is kind of a parallel onchain credit which is quite direct because you know fragmented infrastructure uneven liquidity distribution across protocols no standing back stop mechanism limited ways to redistribute capital under stress those are are the same structural

gaps repos evolution was designed to address. So the the lesson is that the market structure has to be designed to favor and to function when conditions deteriorate, not just when the they're favorable. So you know, you have to build the plumbing before you need it, not when you need it essentially. Yeah. And we're going to get into that a lot later because I'm not an expert on on repo like like you guys are, but one thing I do remember from that time period, and please correct me if I'm wrong, is that the Fed basically there were limits to how much banks and and I guess whoever could borrow from the Fed um through overnight repo and the Fed basically from then on just eliminated

those limits. So there's kind of like an unlimited amount of of money they could borrow. Uh, and that would help anyone arbitrage like like the peer-to-peer repo markets back like to par and and that's a critical backs stop to help make sure that these markets remain fluid during times like like you said Matteo when there may be enough cash but there's not enough liquidity. Is that is that fair? >> Yeah, that's pretty much fair I would say. >> All right. So, um, one other very quick question I had before we get into onchain credit is uh how repro is being used today. I I hear a lot about basis trade and and in a lot of ways like some hedge funds, other groups like really levering up using using repo to u uh I guess exponentially grow the size of of

returns they can generate from from small um discrepancies in basis trade. Um and uh Craig, maybe you're the best one to answer this, but could you just talk a little bit about what's happening there and how that plays with the way repo markets operate today? Uh yeah, just just the the repo market generally. Uh yeah, I I think I think uh there's a few different like use cases for repo and and honestly like if folks think about like if you're familiar with like the CFI uh lending markets in in crypto for instance, like if you hear like about open term loans for instance, it's like those are essentially very similar to uh to overnight repo. I think um there there's a few different situations. One is if you need short-term cash for any kind of uh

liquidity, whether you're a firm or um you're trying to bridge some kind of liquidity temporarily um or you're outright trying to generate liquidity for leverage. Um you know, you may want okay, short-term cash or cash that you know is going to be constantly kind of rerated. You can pay it back any time. Uh you know, it's only expected to be, you know, like you hear about overnight repo. Like it's really just kind of these like ongoing one-day loans. But then you also have if you're a cash lender um you know and maybe you're running a uh laddered treasuries uh you know portfolio or you have some commercial paper um you know you can utilize repo as just a a generally considered to be a low-risk way to kind of deploy capital. It's sort of set it

and forget it. And then the other thing is um not only does it finance bond inventories for for dealers and market participants, but it also is a what's become extremely popular in um at least in the US is because of um uh regulations that have come as a result of Basil and um and uh bank risk weighted assets treatment. The long story short is sometimes it's actually better for the bank and actually makes the bank money in a sense um to have certain assets on their balance sheet, you know, at the end of the day. And so they may actually be incentivized to swap cash into treasuries or or bonds or um or you know trade out bonds for cash.

And so it's actually created just this uh balance sheet um I mean gimmick would be the wrong word but sort of the the dynamics of banks maintaining their overall balance sheet and riskway asset portfolio has been a massive driver of especially like centrally cleared repo um in in the uh in the traditional lending markets. So, it's it's all the reasons why someone would want to borrow generally and all the reasons why someone may want to lend on a short-term basis, but there's also this massive balance sheet management uh um game that's being played. >> Gotcha. Yeah. I mean, it's it reminds me a lot of like staging a house or something before you get ready to to sell it to stage the books for the end of the week. Um what you touched on one quick issue and then I promise we'll get to the onchain stuff, but there are two

forms of repo. Um I guess like centrally cleared or like I guess quoteunquote like triparty repo and then there's also the the bilateral nature of it. Um maybe Matteo, could you just briefly sort of explain the differences between the two and um as far as I can tell, again I'm not an expert, the central the central um centrally clear repo uh appears to be much bigger and that has the added benefit of basically the other parties not having to sort of take counterparty risk to each other. >> Yeah. Well, so yes, with um the first kind of repo that you mentioned, essentially the they're governmentbacked. So uh the liquidity pool there where you can tap for uh these kind of like ripple loans is

definitely more solid and you know provides a better and more more confidence to in general the players in the repo market. uh when we are talking instead about um the frag party or bilateral kind of infrastructure you know uh that's kind of an answer of the repo volumes growing over time and also the operational burden of managing only with central clearing uh becomes unsustainable you know so you allow also to have collateral by like custodians like BNI or Melon or even JP Morgans you know stepping as a triparty agents handling collateral selection, substitution, you know, daily valuation,

settlement on behalf of both parties. So you make the entire process more streamlined in this way uh because it's at capacity in terms of demand and neither side manages you know the operational complexity directly. This layer didn't change the economics of the repo, but it dramatically reduced friction and created standardization in how collateral was managed that you know made it easier for new participants to enter um the market. So yeah, it's similar kind of similar scenarios with like bilaterally by bilateral collateral uh which adds adds an additional uh layer of efficiency for the participants

that are in the repo market in general. >> Okay. All right. So let's let's Oh, go ahead Craig. >> I was just going to say one thing I'd add for like folks that are familiar with the crypto markets. I think that the analogy that someone uh could look at is like let's say you're trading bilaterally through an ISDA with derivatives and there's there's benefits to that in the sense that my firm can customize the exact terminology that may go into something. You can have more bespoke trades. You could choose where the collateral is, whether it's a triparty or not. You have a lot of flexibility based on your relationship with that counterparty, your judgment of their credit risk profile, things like that. But the downside to that is you have to go through that process and that papering and that negotiation with every single individual uh provider and you

unless you have the systems and things to keep you have to keep track of all those little things that you negotiated over time in between. There's benefits to that in some cases, but a lot of times if the you may and this happens at derivatives for people may go, hey, let's just trade it on paradigm and block it to derivate. Well, what what's actually going on there is basically everyone, okay, we'll we'll agree on a price, but everything else is standardized. The settlement is standardized, the collateral management is standardized, um all the different, you know, the marking time and the pricing sources and everything is sort of in this unified piece. So that's that exists in the repo markets too.

centrally cleared in the sense that that all that is set and you're just kind of trading on a price with someone versus bilaterally where you're really kind of customizing the configuration. You can understand why people would be excited about the centrally cleared side of it because it makes things just a whole lot easier. >> Yeah. Gotcha. All right. I think that's kind of a Sorry, that's a kind of a good briefing for for everyone to make sure we're on the same page. U let's turn to the onchain markets. So, uh Matteo, um this is your area of expertise, although I guess that would obviously apply to Craig as well. Um, but can you just kind of like level set for us? Um, what does online or what does onchain credit look like right now?

>> Yeah, that's uh that's a really great question and I think that we can have you know a lot of like parallels that u we can we can draw with repo markets in general. uh the current state of private credit on chain is that we we see real progress at the moment but still I would say we're still early as a market structure itself you know as of today we see that we have more than five billion AC distributed across 2,000 more than 2,000 different onchain credit assets and that's a meaningful growth. So, but it it also points to a market where there's still infrastructure building phase and not the scaling phase. You

know what what actually what's actually working at the moment is that the borrower side has matured significant significantly. um institutional counterparties like Falcon X are accessing credit on chain with clearer terms define collateral arrangements and legal structures that hold up to institutional scrutiny. You know that's a real change from you know the first generation of function credit and where the borrowers were often you know crypto native entities with the thin credit history and limited accountability in general. So I would say the current state regarding the current state of credit also the

underwriting layer as also professionalized being professionalized you know um there's multiple professional underwriters now that do from a credit and reporting perspective do uh brings traditional credit underwriting incentives or you know uh discipline to uh onchain products which is quite significant for the for the ecosystem in general and um and you know apart from these or like the the better infrastructure, the better underwriting methodology, more legal clear um certainty for the final borrower and enforcability um even composability starting to demonstrate real value and that's

exactly the parallel with repo market because the fact that you can use an onchain credit facility or even a RWA asset in broader terms um as a collap collateral in a different over collateralized protocol in a D5 protocol. Uh well, you know, that is does something that that is be beyond sitting in a bulleting yield. You know, it's it's meaningful proof of concept for what the next phase for onchain credit looks like.

>> Yeah. So there's definitely like improvements from what I see looking at even like two three years ago on the on chin credit. There's still room for improvement. I would say there are still like aspects that needs to be improved from a from a market structure perspective, but that that would be the current state of onchain. I would say >> I'm looking at rwa.xyz right now. I mean like you said the number is about 5.13 billion. It looks like by far the biggest is syrup USDC. That that's Maple Finances um lending pool for for uh stable coins. And uh I mean Craig, I see Falcon X has one. Uh I'm familiar with uh

um is Acred is Acred considered here one of these that the Hamilton lacy curitized one. Does that fall under this category too? >> It should be. >> Um so I mean how is this stuff being used today? because this type of credit I mean this is different obviously than um like taking out margin on a for like a derivatives type of trade and things like that. How is this being used today? >> Um and do you mean from from like our perspective as an issuer or um >> both? I mean I mean if you could talk about specifically how people are using your your credit vault. I'd love it. Um you don't have to mention names but just even more generally like how is online how is onchain like private credit being used today?

Yeah, it's interesting and I think there's a few different um buckets of use cases and so like uh you mentioned uh syrup USC and that's why like there's kind of these different flavors and depending on the metric um you know it's it's we have to make sure usually that we're talking kind of apples to apples because there's a lot of flavor now of onchain private credit. Um, so there's there's some where it's essentially um, you know, folks that are uh, delegating or investing in some kind of a yield strategy um, but with the idea that it's going to be um, you know, you're going to have like a receipt token or something that's going to be generating yield or you could stake it um, and and generate yield. So that's like if you think about like USDE with Athena um or USDS with Spark or Europe USDC um you

know it's it's essentially someone's going to go run a yield strategy but there's kind of these like it's quasi like pegged to a stable coin and sometimes people will consider them stable coins. It's a separate debate um but it's it's kind of a receipt for your yield jaring strategy. Then then you have um more like traditional private credit strategies that have come on chain. Um uh you know there's like uh JTRY a lot of what the secure ties and centrifuge folks have done there's a Apollo's ACred you know um even you know some extent PO Finanara's um onchain credit facility like kind of folks that are running these strategies in the traditional tradi world and are actually finding a way to sort of bridge it on chain um as for them it's a way to access obviously um additional

aumumumumumumumumumumumumumumumumumumumum and for you know the onchain community it's a way to actually invest in private credit through some kind of an onchain vehicle. Um those tend to be have, you know, stricter permissioning, but not, you know, not always. There's interesting evolutions that are going on in that. But so then there's so there's kind of folks, okay, I want to get into a a traditional private credit strategy or I want to get into a traditional treasury bond strategy or a AAA CLLO or something like that that I would normally do through a a brokerage. Um but instead, I'm going to be able to now access that on chain. And that tends to be a different profile. Um and then and then um and we you know it's interesting like wi with our facility and some of the others that have come out. It's a bit of a um it's a bit of a mix in a

sense of uh kind of both concepts actually is where I'd look at it. Um you know we we don't have a daily liquidity concept. We don't necessarily like have a stable coin or anything like that that's going to be involved. Uh but what you can do is you can effectively participate in the yield generated through through a portion of our loan book. um that's been that's been tokenized. And so um you know this I it's an interesting merger because what we like about it is um you can have these facilities and and we do um bilaterally with folks or um through kind of the traditional financial rails.

Leen had a had a big ABS just through traditional rails. Um but there's actually a lot of a lot of capital, a lot of interest and a lot of unique utility that comes in when you can access the onchain markets too. And we've experienced that frankly in some cases by accident um in where we've realized that hey folks go well maybe I can borrow against this token maybe I could do a repo type facility maybe someone will lend that's outside of Falcon X folks that may want to go do that but it creates benefits for us too as you sort of have this secondary market that's evolving that you didn't have as much in traditional finance you had a secondaries market you you could but it would be hard go and like borrow against your private credit but the onchain markets in some ways are a lot

more agile in that sense uh for lending against these assets even the traditional ones. >> Okay. So I I I certainly see a lot of the overlap. I mean the idea of people being able to to put up assets, borrow against it. You can smart contract everything so that there's like sort of like liquidation prices and and ways to roll things over. You can even create like a digital escrow account to hold things for like um to release funds when certain conditions are met. a lot of overlap, but I I do want to talk about a couple of things that make the repo market in traditional finance very unique, and I'm curious how you think they apply to crypto. Um, I mean, for one, repos, I mean, they stand for repurchase agreements. They have a very

specific sort of like legal That's the word I'm looking for, like they operate a very unique legal space. Uh, I'm not sure why Craig's smiling, but I'm excited to hear. uh in I guess maybe you know where I'm going where like the the owner or I guess the uh the lender can actually has right to those assets and can sell them directly. They don't have to go through some sort of laborious bankruptcy process like in in case there's a default which is unlikely because these are very short-term loans. Um but smart contracts we all know they're they're called smart contracts but they're not necessarily smart and in the legal sense they are not contracts.

So how does that apply here? Uh Craig, go ahead. >> Oh, yeah. I I I was just going to say I think so this is one of the the like what you were alluding to is is kind of one of the >> so I would get asked questions all the time by people especially like in my former role at Membrane where we would end up talking to a bunch of different lending desks that are getting established and if you ask anyone this the question of do I do it in a repo agreement when you're first like when you're signing the business or do I do it in a master lending agreement um is a is a big question. The answer is because like you're you're There's a few different reasons why you might want to do repo, but like bankruptcy um the avoiding a bankruptcy stay is actually

like one of the core components of that as well as sort of its classification on on your balance sheet and how it's considered like from a risk perspective. But um but because of that, the reason I was smiling is you have to document it in a very specific way as a repurchase agreement um for it for it to you know truly be considered a repo and not just a loan. Um, but it's been interesting in my experience having seen repo agreements in the crypto space and and we can do either, but you find folks you have to kind of play this translation that goes into it and you can and to translate a loan into a repo agreement like we've seen term repos now there there's there's an argument that you know you you have to really watch how

that's papered up to not just be considered a term loan and and truly be considered a rep purchase agreement. So, it's been very interesting to kind of see uh a lot of that more than I uh you know, more than I had in in the past in my career and see how different uh financial institutions, especially folks coming in from traditional finance who tend to like repo a little bit more, they feel that it's safer, will come and try to adapt it to the crypto markets. Um uh and then but then there's other reasons, taxes, etc., why sometimes someone may want to do something as a loan instead or or regulatory status or something like that. Um, how to to answer your question though about the the how do you actually go and effectuate this on chain? I mean, I'm a I'm a CFI person. I'm a hi-fi person in

the sense of DeFi and and CFI in a sense. And so, um, >> I'm I'm going to steal that term. I like that. >> Yeah. Yeah. It's it's actually my old CEO Carson Cook used to um he coined it for me. But it's uh I think that um you know I am I I think that it doesn't all necessarily have to be done in in a smart contract basis. I think you could probably have a pretty robust repo market that touches the onchain ecosystem that doesn't it doesn't have to all be programmatic. Like I think I think if we like what what you need is a product that's going to work and scale and make sense for the people that are going to be deploying liquidity into the ecosystem. If that can all be done on

chain and people can be comfortable um and and then then great phenomenal like then then people will do it. But if you have some component that has to go offchain for some reason or everyone has to sign a piece of paperwork and then it can all be run by smart contracts or something like that like that's fine too and and I think that is going to kind of be a nuance like because there's like to have a lot of the larger players like they may touch on chain us included uh but a lot of times you want some kind of a paperwork piece that's involved uh to to some extent and possibly to reap some of the benefits that come with why folks do repo generally. So, um, it it was a long-winded answer, but I I just like I don't think we have to like have a

one-sizefits-all model as this space evolves. >> Gotcha. Makes sense. And and Matteo, uh, just in light of everything that how the repo market, uh, in Trafy has changed in the last few years, uh, a natural question to ask is whether we need some sort of central bank backs stop or some sort of big liquidity pool. Uh, do you do you see the need for that? uh or is there a way to to handle this onchain without a quote unquote lender of last resort? >> Well, um that's a really good point because you know liquidity is one of the most visible gaps at the moment I would say. So, you know, tokenization improves transferability, but you know, it doesn't automatically create an active

market around it. So I actually agree with Craig in the sense that there's a there's a line between DI and CFI that is kind of fading over time and we see more and more overlaps hybrid models between D5 and CFI which it just makes sense because we don't need to force adoption of smart contract application but it needs to make sh make sense for the market itself. uh to answer your question regarding having like a central authority that backs stops the liquidity. I would say that it becomes less important in a market structure built on chain that allows participant to uh provide secondary liquidity and tap from a global pool of liquidity.

So in a sense these expand also the audience that can be part that can participate into these kind of markets. So it makes less important the participation of a central authority that provides back stop liquidity but I would say it doesn't completely eliminate the need of that. So you still need to have um you still like it's it's good to have a central authority that allows to have backup liquidity >> and I I think that if we look at from an onchain perspective with a with a more composibility and also global kind of infrastructure that can be available it coordination uh effort from different

central authorities to make sure that they provide altogether at the same time a back stop liquidity. >> So I would say becomes less significant from an onchain perspective but still it doesn't eliminate the need of it. >> Okay. Um I think at this point it would make sense to just have you I maybe Craig you could start just explain um the the setup that that you guys are rolling out with your um version of sort of like onchain repo and I I have a few more questions after that but but yeah please just sort of paint a picture for for the audience.

>> Yeah and maybe I can and maybe I can set the stage and and give it to Matteo to kind of go into the the productization. Um but the the I think one of the core reasons that that this is really interesting I think um at this time in um in the crypto ecosystem uh because repo's been around forever like this has been a a like there's always been this dynamic that there's repo and tradi not necessarily uh as much in in in uh in you know crypto but I think what's interesting is now you have uh like stable coin repo is something that I've been hearing hearing a lot about which is folks want to swap out their PYUSD for USD or um uh or I need I mean we run

into this all the time. You know, my desk doesn't want to go min and burn something. We have something coming along the way, but we have to go settle USDT with this client right now. Wouldn't it be great if we could, you know, access a repo market and just quickly swap our USDC for USDT and then, you know, we'll handle it afterwards. like especially as all these new stable coin products are are rolling out um there's a lot of uh and and no one wants you to go and burn stable coins and you may not want to and so like you you kind of have an interesting dynamic actually where uh a robust repo market could be actually extremely valuable for those types of things um that type of activity and it's all a lot of times kind of the short-term stuff as well as the

long-term stuff so with the abundance of these new stable coins I think it's been um it's been uh that's that's one driving factor And then the other driving factor is the illi liquidity like the liquidity profile of a lot of these new RWAs. Um and this is something that we've gotten especially involved with it and again you know Matteo will go into a bit here with with what we're rolling out is you have this gigantic problem right now where um folks want daily liquidity uh especially folks that are going in levered looping or uh as part of just their overall treasury management strategy. They need the peace of mind that this is a temporary deposit. Well, but the problem is that's not really and ourselves are included in this. That's a huge pain um to go and offer a lot of times and it might just

not work in your fund strategy of how you're deploying. You may have quarterly liquidity and maybe it's gated and uh um and uh you you just will have a different profile on what you can offer. Well, does that mean that those folks just can't get invested in those products anymore? Maybe not. Maybe you can create um uh different bridge facilities, repo facilities, uh lending facilities as ways to create this liquidity or even deleveraging uh facilities. There's separate thing we could go into for things like if the morpho markets are blowing out, you may temporarily want to delever. You could do that in a repo. Um and so like that I think is another big driving factor for why these markets uh make sense because a lot of people are trying to solve this

illquidity problem um uh with with these new RWAs and I'll hand it to you on on the the product. >> Yeah. Yeah. Absolutely. absolutely agree on the like there there are definitely a ton of different like projects and teams that are working on the secondary liquidity problem in the sense that it's definitely tangible for an allocator perspective that with the tokenization of the credit facilities you need to have also uh this kind of like uh instant available liquidity I mean in some forms um the composability again of this kind of products uh helps us in uh in some ways in the sense that I'm

seeing like different flavors different models applied to being able to provide these instant liquidity. Uh you can have like coordination mechanism that allows to um you know coordinate a call back with the borrower itself which if you look at a traditional credit facility it would have taken like days and days of structuring legal reviews and everything but from an onchain perspective instead is just a contract call a onchain transaction that that appears. So uh but that's just one me methodology to to handle this kind of instant liquidity.

You can have uh repo markets on morpho for example where you can post the position that that you have that the collateral that you posted on morpho already again. So you are re repoticating that collateral into another market which effectively gives you like instant liquidity that can allow the leveraging operational purposes you know and um in general like having market participants that provide and you know even from a simple allows to I'm I'm sorry, mate. We're

having a little trouble. >> Uh uh I'm sorry, M. I think we're having a little trouble >> hearing you. Um why don't you try one more time? Can you can you hear me now? >> It's a little better. It's a little better now. >> Yeah, sure. Sure, sure, sure. Okay. Okay. No. Yeah, I was saying that also having like participants in the market that can provide directly secondary liquidity and uh you know beer the counterparty and duration risk which you know in traditional finance there's many different firms that do this kind of role in the market. uh well what I'm seeing in DeFi and onchain finance in

general is that the combination of all these kind of projects and teams working towards this kind of goal of providing instant liquidity for RWA assets is is quite significant and I think that in the next couple of years we're going to see uh quite of an improvement that would kind of make uh you know quite of a no-brainer for a for an an originator to just use an onchain structure instead of a of a traditional structure. Okay, great. Um, we're almost out of time. I have a couple of quick follow-ups or or things to finish up with. Um, Craig, one one thing you you mentioned, I wanted to ask you about uh sort of how Repo could help with like deleveraging moments, especially during periods of market stress. Uh, immediately made me think of

a and everything that's happening there, trying to restart those markets. Um, >> how do you think like a mature onchain repo market would help in a situation like that? >> Yeah. No, a absolutely. I I mean it's a great example like for instance you you because you had this sort of whole secondary market that started going around with with the debt tokens and the swaps a lot of like what fluid was doing. Um but that was fundamentally built on trading out of your position. Uh there's a lot of situations where you don't want to trade out of a position.

Um you want to keep the same position. You just need the liquidity right now. Um, and so that a a mature repo marketer or a mature repo facility would have let you do that. Okay, I've got uh I need my ETH right now and I'm willing to go and post, you know, whatever it may be either off my balance sheet or that's even in in a some other debt token, whatever it may be. I'm willing to go and repo that to get to get the ETH that I need for my for my obligation over here or to post this additional collateral or or to pay this loan back so I don't get liquidated or or whatever it may be. There were a lot of you know a lot of folks on different sides that like it's that that's a prime example.

Everyone was happy with their positions. Then this black swan situation comes about and um folks may like if folks had the option, everyone probably would have loved to have kept their positions and maybe paid a little bit of interest for it or something but just kept things going. But you have a general liquidity dynamic which then causes all sorts of problems uh where people are selling. Now you have assets that are selling off. Now you have interest rates that are spiking. Now you have people that are getting liquidated that otherwise would have never been liquidated. Like you you have this whole kind of cascade. you have a deep pegging risk that's that's going on and now you have pressure on all the LSTs and and the execute and things like that like none of that had to happen um uh like not that repo solves everything but it would

have solved a whole lot in that situation and you run into the same thing with like these short-term liquidity facilities like with the ETFs there's a lot of interest um with ETFs with folks that are managing large treasuries of ETH Salana stakeable assets um that would love to have all of at stake, but they need some kind of repo facility essentially that's going to go and guarantee them that they'll be able to have the liquid right away, even if something's in an unbonding period. And and you could take the same thing in the redemption cues in in RWI. It's the same thing. It's something's in a redemption queue somewhere. It's either being unstaked or it's being redeemed or you're waiting for the A situation to play out. Um, but you need the liquidity now and you're just going to pay a

little bit of interest for it as opposed to selling out of your position on on a secondary market. Um, and um, so I I think it I think the last thing I'd say is this this because of how Morpho is designed, it's where I've seen this kind of deleveraging concept outside of obviously like the A situation probably the most because you have situations where um, you may have vault curators that are going and um, you know, they have to balance their liquidity situation and they have to assign LTVs that like like liquidity is a massive thing in the back of their minds in addition to the riskiness. of these various vaults and how much they can allocate is all dependent on the liquidity profile of different assets

and so they can give a higher LTV and they can do a higher allocation in the morpho markets when the liquidity profile increases and so um because what'll happen is the liquidity situation dries up the um and the morpho markets are doing the ticking interest rate situation that they do and now people's trades are blowing up and people are at risk of liquidation and what they and they need to be able to delever that situation. They need to be able to get their their liquidity either out or get additional capital in. And so and so how would you do that? And so like we um we currently have like within our product set off for deleveraging facilities for folks not just

necessarily against uh our credit token but also for other uh other assets because of this dynamic. Um, and what that'll do is it'll actually increase the capital efficiency of the market overall because now the Morpho because the vault curators feel confident um in what they're allocating to in the liquidity profile thanks to repo, they can now actually extend more liquidity into the system. It doesn't have to stay trapped because of the um of the difficult redemption windows and so on and so on. >> Gotcha. So I mean the traditional repo market measured in the trillions. Uh Matteo, how big do you think onchain repo could get in the next say five to 10 years?

>> Well, in the next uh five years, I would say um I'm pretty confident to say that it would reach the uh trillion figure at least one trillion figure. It's something that it just makes sense with the current pipeline of you know firms and traditional players that are looking into on these kind of onchain applications. So, uh, I wouldn't be surprised to even see it like before the next five years. Um, and that that's going to be as as I mentioned before, it's going to be kind of like an an hybrid approach. We're going to see more and more, you know, kind of like less differences and D5, but more a united approach to work together on improving this kind of

situation. And um and so yeah, I I would say it's something reachable within the the next five years. >> Okay. And uh Craig, for you, give me one reason why it will get there and one reason why it will not. >> I think it it will get there because of those dynamics that that I mentioned and things that are already happening. You're you're already seeing a lot of these platforms go and release these types of facilities. You're seeing people like us and and other market participants be involved. Um and so you that that's the bullc case is this is necessary and it's already kind of begun to happen and these facilities are being are being offered. Why it won't happen um I think is because

is that necessarily actually I guess repo in all cases um or are people going and implementing this in a variety of sort of different ways? I think one of the one of the benefits of centrally cleared repo for the banks is that it's like something you can do like clockwise and you can automate it to an extent and you can use it as part of your treasury management strategy and capital's flowing and it's all governed under the same agreement and there's standardized terms um and um and and that's to get our industry on that and I'm not sure like that is a gargantuan challenge. I know that there's folks actually my uh alma mo at membrane uh they they're I know they've worked on this to try to get folks on a standardized gymra repo

form uh to try to kind of create this but to create this sort of like standardized market in general right now is a extremely difficult thing to do onchain is probably one of the best places to start frankly um but that's standing up and getting an entire ecos basically starting a new exchange or you would have one of the exchanges that would that would need to do it um That's a massive barrier to entry. >> Yeah. And well, I guess we'll have to have you guys back on in 5 to 10 years and uh and we'll we'll see we we'll see what plays out. Um but thank you both for for joining. Um we're going to have to end it here, but uh everyone um thank you for watching and listening. Stay where you are. U this is the this is it for bits and bits the interview this

week but in a moment Lara is coming back to do an unchained interview with Alex Wesley of Artemis who's been making the boldest call um we've seen in a while for repricing Coinbase Circle and Kraken is AI native finance infrastructure. You'll want to stick around. Come on. Come on.