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 Ehrlich. 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. Uh but as always before we get into it, let's just take a brief moment to hear from some of the sponsors who make this show possible. If you've been loving Bits and Bips, don't [music] forget that the show is transitioning to its own feeds on X, YouTube, and your favorite podcast player. If you're not already [music] 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

[music] macro meets crypto breakdowns. Bits and Bips will only be on the Unchained feed for a few more weeks. So [music] subscribe today to be ready for launch. You can get all the links at unchainedcrypto.com/bitsandbips. >> [music] >> Welcome back. Now, as always, before we actually begin, uh brief disclaimer. Nothing that you hear on the show should be considered financial or investment advice. For full disclosures, please see unchainedcrypto.com/bitsandbips. And let's begin. Uh 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. Uh so it's only natural to try to bring it on chain. And my guests today have found a a clever way to to try and do that. So let's bring them in. First, we have Craig Burchill. He is the head of lending at FalconX, 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 Pandolfi, who is the CEO and co-founder of Paredao, an on-chain credit infrastructure provider.

So welcome, Matteo. Thank you. Thank you. Glad to be here as well. So, I've been really excited to have this 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 going to get into all of it. Uh but before we do, um just very quickly, uh 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 contextualize its signi- 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 technically a derivative, and um it 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 um And so, what you can do in the repo market, and you can also do long-term repos that 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 could think of them akin to loans. Um uh really but from more of a short-term liquidity basis, sometimes even a lot of times intraday repo is common.

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 in government bond backed repo that was outstanding globally. 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 on-chain market 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 and they're a way to provide liquidity and optimize balance sheets throughout the financial system.

What's that mean? And I mean from my understanding and Amit here, I want to bring you in on this too. I mean like you said Greg, they can be for varying durations, they can be rolled over um, from day to day and you just pay an extra days interest if if necessary. Um, but they're really a 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 when they're necessary. And and they're key cons because if you look at different types of players, I mean it involves like like clearing banks like like BNY Mellon, investment banks. I mean, this all kind of works together and if something gets kind of um, jammed up, it can be calamitous. Uh, Matea, maybe you can cuz I would think a

lot of people who perhaps don't know repo remember what happened in 2019 when the when the repo market kind of closed up and the government had to step in with some some superpowers. Can you kind of explain what happened there and how the repo market has changed over the last 5 years? Well, yeah, you know, the September 2019 episode has been, you know, quite 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 the if I remember

correctly, it 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 backstop. So, essentially what happened is that a large corporate tax payment drained reserves from the banking system. And uh at the same moment uh that a large treasury settlement hit. And you know, reserves were more concentrated at a few large banks that anyone had modeled. So, you know, banks with excess reserves were reluctant or even unable to just lend them into the repo market fast enough. So, 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 the speed the market required. And then, this is kind of a parallel launching credit which is quite direct because, you know, fragmented infrastructure, uneven liquidity distribution across protocols, no standing backstop mechanism, limited ways to redistribute

capital under stress. Those are all the same structural gaps repo's 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 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 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 through overnight repo and the Fed

basically from then on just eliminated those limits. So, there's kind of again an unlimited amount of of money they could borrow and that would help anyone arbitrage like like the peer-to-peer repo markets back like to par and and that's a critical backstop 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, one other very quick question I had before we get into on-chain credit is how repo is being used today. I hear a lot about basis trade and and a lot of ways like some hedge funds other groups like really leveraging up using using repo to

I guess exponentially grow the size of returns they can generate from from small um discrepancies in basis trade. 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? Yeah, just just the the repo market generally. I think I think 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 C5 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 uh uh a firm or um you're trying to do bridge some kind of liquidity temporarily, um or you're outright trying 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 re-rated, you can pay it back anytime, 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 you 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 uh 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 regulations that have come as a result of Basel 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 risk-weighted assets portfolio has been a massive driver of especially like centrally cleared repo um in in the uh in the traditional lending markets. It's 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. Got you.

Yeah, I mean, it's maybe it's it reminds me a lot of like staging a house or something before you get ready to to sell it. The staging of 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 on-chain stuff. But, there are two forms of repo. Um I guess like essentially cleared or like I guess put it put like triparty repo and then there's also the the bilateral nature of it. Um I mean, maybe maybe tell you, 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 the central um essentially cleared 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 they're they're government backed. So, uh the liquidity pool there where you can tap for uh these kind of like repo loans uh is definitely more solid and you know, provides a better more more confidence to internally players in repo market. Uh when we're talking instead about um at the triparty 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 uh uh becomes

unsustainable, you know? So, you allow also to have um collateral by lay custodians like BNY um Mellon or even JP Morgan's, you know, stepping in 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 our collateral was managed that. You know, made it easier for new

participants to enter the market. So, yeah, it's similar kind [clears throat] of similar scenarios with like bilateral bilateral collateral which adds adds an additional layer of efficiency for the participants that are in the repo market in general. Okay. All right. So, let's let's turn Okay, go ahead, Craig. Well, 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 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 could 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 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 with derivatives where you see people may go, "Hey, let's just trade it on Paradigm and block it to Deribit." 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. 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 customize 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. Got you. 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. Let's turn to to the on-chain market. So, Matteo, this is your area of expertise, so that I guess that would obviously apply to

Craig as well. But, can you just kind of like level set for us what does online what does on-chain credit look like right now? Yeah, that's that's a really great question and I think that we can have, you know, a lot of like parallels that we can we can grow with repo markets in Zopa. 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 5 billion across distributed across 2,000 different more than 2,000 different on-chain 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 significantly significantly. Institutional counterparties like FalconX are accessing credit on-chain with clearer terms, defined 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 on-chain credit and where the borrowers were often, you know, crypto-native entities

with 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 has 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 on-chain products, which is quite significant for the for the ecosystem in general.

And um and you know, apart from these all like the the better infrastructure, the better underwriting methodology, more legal clear um certainty for the final borrower and enforceability, um even composability is starting to demonstrate real value. And that's exactly the parallel with repo market because the fact that you can use an on-chain credit facility or even a RWA asset in broader terms um as a collateral in a different off- over-collateralized protocol in a DeFi protocol, uh well, you know, that is does something that that is be beyond sitting in a wallet earning yield, you know, it's

it's a meaningful proof of concept for what the next phase for on-chain 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-chain credit. There's still room for improvement, I would say. There's still like aspects that needs to be improved from a from a market structure perspective, but that that would be the current state of on-chain credit, I would say. Um 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's that's that's Maple Finance's um lending pool for for uh stablecoins.

And uh I mean, Craig, I see FalconX has one. Uh I'm familiar with uh um Is Acred Is Acred considered here one of these that the Hamilton Lane Securitized one, does that fall under this category, too? >> be. Um so, I mean, how is this stuff being used today? Cuz 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 it just even more generally like how is online How is on-chain like private credit

being used today? Yeah, it it it's interesting, and I think there's a few different um buckets of use cases. And so, like uh you mentioned uh Syrup USDC, and that's why like there's kind of these different flavors, and depending on the metric, um you know, it's it's you we have to make sure usually that we're talking kind of apples apples cuz there's a lot of flavor now of of on-chain private credit. Um so, there's there's somewhere it's essentially um you know, folks that are uh delegating or investing in some kind of 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 Syrup

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 it's quasi like pegged to a stablecoin, and sometimes people will consider them stablecoins. It's a separate debate. Um but it's it's kind of a receipt for your yield sharing 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 JST RY, a lot of what the Securitize and Centrifuge folks have done. There's Acred Apollo's Acred, you know, um even you know, to some extent you know, Fossil and Aura's um on-chain credit facility. Like kind of folks that are running these strategies in the traditional TradFi 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 AUM. And for, you know, the on-chain community, it's a way to actually invest in private credit through some kind of an on-chain 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 that 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 triple-A CLO, 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 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 stablecoin 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 it 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. Ledn 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 on-chain 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 a repo-type facility. Maybe someone will lend it." That's outside of FalconX. 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 on-chain markets in some ways are a lot more agile in that sense 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 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 the whole things for like to release funds when certain conditions are met. A lot of overlap. But I 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 they stand for repurchase agreements. They have a very specific sort of like legal It's what we're looking for. Like they operate in a very unique legal space. Uh I'm not sure why Craig's smiling, but I'm excited to hear. Uh and I guess maybe you know where I'm going where like the the owner or I guess the the lender can actually has right to those assets and can sell them directly. Don't have to go through some sort of laborious bankruptcy process like in case there's a a default, which is unlikely cuz these are very short-term loans. Um but smart contracts, we all know they're called smart contracts, but they're not necessarily smart, and in legal sense, they are not contracts. So, how does that apply here?

Uh Craig, go ahead. Boom. 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 the question of do I do it in a repo agreement when you're first like when you're starting a business, or do I do it in a master lending agreement, is a is a big question. The answer is because like your your there's a few different reasons why you might want to do repo, but like bankruptcy 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 but because of that the reason I was smiling is you have to document it in a very specific way as a repurchase agreement for it for it to you know truly be considered a repo and not just a loan. 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 truly be considered a repurchase agreement. So it's been very interesting to kind of see a lot of that more than I you know more than I had in in the past in my career and see how different 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 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. 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 C5 person I'm a high-five person in the sense of D5 and and C5 in a sense and so I'm going to I'm going to steal that term I like that. Yeah, yeah it's it's actually my old CEO Carson Cook used to coin it for me but it's I think that you know I am 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 on-chain ecosystem. It 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 and and then great, phenomenal. Like then then people will do it. But if you have some component that has to go off chain 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 cuz there's like to have a lot of the larger players, like they may touch on chain, us included, but a lot of times you want some kind of a paperwork piece that's

involved to to some extent and possibly to reap some of the benefits that come with why folks do repo generally. So, it was a long-winded answer, but I just like I don't think we have to like have a one-size-fits-all model as this space evolves. Got you. Makes sense. And and Matteo uh just in light of everything that how the repo market uh trade finance changed in the last few years, uh natural question to ask is whether we need some sort of central bank backstop or some sort of big liquidity pool. Uh do you do you see the need for that or is there a way to to handle this on chain without a {quote} 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 DeFi and CeFi that is kind of fading over time and we see you and more over maps, hybrid models between DeFi and CeFi, which it just makes sense because we [clears throat] don't need to force adoption of smart contract application, but it needs to make sure make sense for the market itself.

Uh to answer your question regarding having like a central authority that backstops 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. We saw in a sense this expand also the audience that can be parties that can participate into these kind of markets. So, it makes less important the participation of a central authority that provides backstop 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 backstop liquidity. And I think that if we look it from an on-chain perspective with a with a more composability and also global kind of infrastructure that can be available, it it should coordination effort from different central authorities to make sure that they can provide all together at the same time a backstop liquidity. So, I would say it becomes less significant from an on-chain perspective, but still it doesn't eliminate the need of it. Okay.

I I I think at this point it would make sense to just have you Maybe Greg, you can start just explain the the setup that that you guys are rolling out with your version of sort of like on-chain repo. And I I have a few more questions here from that, but but yeah, please just 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 cuz repo's been around forever. Like this has been a uh a like there's always been this dynamic that there's repo in

tradfi, not necessarily as much in in in uh in deep in, you know, crypto. But I think what's interesting is now you have uh like stablecoin repo is something that I've been hearing a lot about, which is folks want to swap out their PYUSD for USDE or or um uh or I need I mean we run into this all the time. You know, my desk doesn't want to go mint 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 stablecoin products are are rolling out, um there's a lot of uh and and no one wants you to go and burn

stablecoins 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 it with the abundance of these new stablecoins, 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 illiquidity like the liquidity profile of a lot of these new RWAs. Um and this is something that we've gotten especially involved in and again, you know, Matteo will 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 leveraged 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 as a huge pain 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 and 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, lending facilities as ways to create this liquidity or even

deleveraging facilities which separate thing we could go into for things like if the Morfo markets are blowing out, you may temporarily want to delever. You could do that in a repo. And so like that I think is another big driving factor for why these markets make sense because a lot of people are trying to solve this illiquidity problem with with these new RWAs. And the tail end of the on the on the the product. Yeah, yeah, absolutely absolutely agree on the like there are 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 this kind of like instant available liquidity. I mean in some forms, decomposability again of these kind of products helps us in in some ways in the sense that I'm seeing like different flavors, different models applied to being able to provide these instant liquidity. You can have like coordination mechanism that allows to you know, coordinate a callback with the borrower itself which if you look at that traditional credit facility, it would have taken like days and days of structuring, legal

reviews, and everything. But from an on-chain perspective instead, it's just a contract call, a non-chain transaction that that appears. So, uh but that's just one methodology to to handle this kind of instant liquidity. You can have uh repo markets on Morpho, for example, where you can post the deposition that that you have that the collateral that you posted on Morpho already again. So, you are re- repo-dicating that collateral into another market, which effectively gives you like uh instant liquidity and that can allow deleveraging or other operational purposes, you know? And um and in general, like having those

markets is one that provides secondary liquidity and uh you know, even from a simple unit swap uh allows to have I'm I'm sorry, Mateo. We're having a little trouble uh I I I'm sorry, Mateo. I think we're having a little trouble >> hear me? 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 we're also having like participants in the market that can provide directly secondary liquidity and uh you know, bear the counterparty and duration risk, which you know, in traditional finance, there's many different firms that do these kind of role in the market. Uh well, what I'm seeing in DeFi and on-chain 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 you know quite of an no-brainer for for

an an originator to just use an on-chain 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. 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 Ave and everything that's happening there trying to restart those markets. Um Yeah. How do you think like a mature on-chain repo market would help in a situation like that?

Yeah. No, I I absolutely. I I mean it's a great example. Like for instance, you you you cuz you had this sort of whole secondary market that started going around with with the debt tokens and the swaps and 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 market 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 that's on my balance sheet or that's

even in in Ave, 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 as additional collateral or or to pay this loan back so I don't get liquidated or whatever it may be. There are a lot of, you know, a lot of folks on the different sides of 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 met 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 where people are selling off. 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 pressure on all the LSTs and and the exit queue and things like that. Like none of that had to happen. Um like not that repo solves everything, but what it 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 with ETFs with folks that are managing large treasuries of ETH, Solana, stakeable assets that would love to have all of that

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 can take the same thing in the redemption queues in in RWA. It's the same thing. If something's in a redemption queue somewhere, it's either being unstaked or it's being redeemed or you're waiting for the Ave situation to play out, 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. And um so I I think 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 Ave situation probably the most because you have situations where you may have vault curators that are going and 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 will 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 uh their their liquidity there 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 offer 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 market because of all 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. >> So I mean the traditional repo market measured in the trillions. Uh Matteo, how how big do you think on-chain repo could get in the next say 5 to 10 years? Well, in the next uh 5 years I would say um I'm pretty confident to say that it would reach the uh trillion figure, at least 1 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 this kind of on-chain applications. So uh I wouldn't be surprised to even see it like before the next 5 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 [clears throat] differences between DeFi and CeFi, 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 5 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 I 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, that that's the bull 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 alma mater at Membrain, uh they're they're I know they've worked on this to try to get folks on a standardized Jimra 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.

On-chain's probably one of the best places to start, frankly. Um but that's standing up and getting an entire ecosystem. You're 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 what 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. Uh this is the this is it for Bits and Bips the interview this week, but in a moment Laura's 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

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