Stablecoin Banking by Mike Silagadze - DeFi Today Devconnect ARG

Transcript

Up next we have Mike Silata who is the CEO and founder of Etheri and he'll be talking about how stable to can be used in banking today. Please welcome Mike to the stage. is the the clicker is up there.

>> Yes. >> Okay. >> Hello. Uh hi everyone. Uh thanks for coming out on I guess the last day of uh Dev Connect and one of the last uh talks. I'll try to try to make it entertaining. Um uh maybe as a quick um uh question just to get a sense of familiarity. How many people uh have heard of Ether? Oh, nice. All right, good. And how many of you have actually used the uh the product?

That's great. Okay, cool. Well, that's awesome. For those of you that haven't, I I'll talk about it very briefly, but uh mostly what I'm uh uh what I'm going to talk about is um uh what banking looks like on stable coin uh rails. Uh over the last uh I guess seven or so years, uh uh this uh ecosystem called DeFi has evolved and uh you know, we've developed some pretty amazing protocols. um you know ways to borrow against your assets, ways to create all kinds of crazy derivatives. Um but uh what's happened over the last couple of years is DeFi has uh uh stalled a little bit uh both in terms of uh deposits, in

terms of TVL, uh and in terms of number of users. If you look at the number of active users overall, that number actually hasn't uh been increasing. [snorts] And there's a number of reasons for that. I'm sure uh many of you and folks here probably you know use DeFi pretty regularly but many of you have tried to get a friend uh or someone to use DeFi uh you know who who's not you know a crypton native and you you probably have some idea of how that usually goes. So what I want to do is show you a fun uh little video of the current state of uh DeFi.

So let's imagine that what you want to do is just earn some yield on your stable coins. All right. All that work for 3% APY.

Uh I mean I chose I chose Kraken as the exchange and Rabby and Morpho. I mean these are kind of random uh uh selections. I think if I had chosen Binance and a MetaMask, it's pretty much the same uh the same kind of experience. So I wasn't trying to pick on any particular uh uh product. But um again, I'm sure you've had the experience where you you tell your friend, hey, you can get, you know, 15% on your stable coins. All you got to do is put your money into a and borrow some stables and loop it with Athena. And you know, the reality is you're spending, you know, days doing tech support after that. Um so, uh DeFi is completely incomprehensible to normal people and this is the reason. I mean,

this is still what you have to do. This is the reason why DeFi isn't growing and it's stuck at this uh you know roughly 1 million users. Uh and in fact I think it's actually worse than this. The reality is it there's probably a few thousand users not probably there are a few thousand users that basically hold all of the assets in uh in DeFi. So it's this very small it's a microscopic space that has the potential to be a you know a very large uh space. Whereas, if you were to uh deposit into CFI or or Tradfi, uh the experience is a lot simpler. You go to Kraken uh or whatever exchange, you deposit your money, uh you click two buttons, and you're done. And you're

earning five and a half, 5.2% uh interest instead of uh you know, three and a half or or whatever. Um so it's just easier. What people want is just a good product. Most people are not so ideological that uh you know that they uh they're they're willing to put up with extreme pain and like a a very significant learning curve uh in order to get you know some extra yield. And frankly that process that you know we we went through like that's a very scary process. Like at every stage you can get scammed, you could like make a mistake, you could lose your money, you could send it to the wrong network. there's there's 10 different minds that you could hit uh that will cause you to to lose money or get confused um uh that

you just don't have if you're using a transf product. So most people just want a good product. Uh they're willing to make some sacrifices for uh you know self-custody for um control uh but not not to to this degree. So what stable coin banking and this is still a loosely defined terms. I mean we're we're still kind of building the space but what stable coin banking means is basically making DeFi accessible and productizing it for normal people. Stable coin banking uh gives you the benefits of uh self- custody of composability with uh with DeFi while still being really easy to use giving you great yields and not charging you tons and tons of uh fees.

Uh and today that there's a bit of a meta around this like crypto neo bankanks are now a thing and ev everyone seems to be launching one. Uh back in 2023 uh and believe it or not we were pitching this you know uh the the ether staking protocol uh was always for us step one in our pitch deck in 2023. We we had this whole outline of a vertically integrated app uh and this vision of you know what what we've kind of come to build um and no one really knew what we were talking about. uh when we were when we were pitching it because it was just such an alien concept. The idea of actually building, you know, products that were usable was um it just wasn't even part of the consciousness honestly. Um and today there's tons of

players uh there's tons of people that are building it and that's great. And I think one of the powerful things about these stable coin banks, these crypto neo banks is that there's going to be a lot more of them because the barrier to entry is a lot lower. Uh so you can launch these things much more quickly. So you're going to see a lot more specialization uh and uh and more variety and that's that's great. I think ultimately that's going to be good for uh for users and that's what Etherfi is building. I mean the simple pitch for Etherfy is retain custody of your stuff. So everything is fully self-custodial controlled by uh you know your private key however however you want to uh control that with 3% cash back and roughly 12% yield on stables. Like that product alone, 10% yield on stables, 3% cash back, that's a

billion people could be doing that. Like that's already way better than anything else that Trafi has to offer. So what we need to do is package that in a way that's actually usable and uh you know and easy. And so for us, what that looks like is the suite of products in one integrated app that I guess some of you folks use. Uh that has staking which provides the base uh yield layer of the of the neo bank. Uh liquid which is the uh investing portion of it. Cash which is the borrowing and and spending portion of it. And soon soon to come uh etheri trade which allows you to take uh to make use of per uh uh using your ether portfolio.

So, let's take a step back and ask, okay, how do how does how do these things compare? Like, how does a crypto neo bank compare to traditional banks? And so, how do banks actually make money? Like, what products do they offer? How do they make money? Well, very loosely, what they do is they uh you put money into a traditional bank, uh they go gamble with it on stuff, they give it out in loans, they put it into long uh long-term uh mortgage bonds. Uh then they uh if they lose the money, you pay for it e either in taxes uh through a bailout or uh uh or just the you know the institution goes bust. Um uh but if they don't lose the money then they get to keep the profit. It's a pretty great business model. Uh it's been around for thousands of years. Um uh and uh and it

probably will continue to to be around. Uh but more uh uh more specifically, I guess like how do they actually make money? Well, there's basically three three to four different uh business lines that uh you know are there for most banks. One is called net interest margin. So that's basically you put you know your money into a bank account. They pay you some they basically don't pay you any interest on that but they go and invest it and put it in T bills and lend it out and do stuff with it and they get to keep the profit. So if a bank makes 5 to 8% on their deposit base, they pay you nothing. Uh they they make a lot of money that way. Um uh so uh this is like a very core metric for that most banks

track is their net interest margin. How much do they get to keep versus what they uh you know pay uh pay you. The other business model uh is interchange and various you know fees that they charge. Uh this is when you spend money with the bank uh typically with like a credit card uh program that they run. Uh they make uh the Visa charges the merchant uh about 3%. Uh so the convenience store or whatever uh they're buying stuff at, they typically pay 3% on all the card purchases which of course means they just raise their prices by 3%. So effectively you're paying for it. Uh the bank earns one to one and a half% depending on the exact deal that they have structured. Um, in addition, they uh will, if you track it,

you'll notice that they charge you very aggressive uh uh foreign exchange fees and all kinds of hidden fees for everything that don't seem like much individually, but actually add up to be pretty substantial. And this makes up another, you know, 20 30% of their revenue depending on on the bank. And then most banks will have some sort of wealth management arm uh that basically you deposit uh your money into more speculative uh assets into stocks, bonds, mutual funds, whatever. Uh and they'll charge you uh either a management fee in many cases. They'll just charge you an AUM fee if it's a managed account. Uh various brokerage fees. Uh they they might feed the uh the order flow to a you know a hedge fund so

they trade against you. Um, and usually they'll make quite quite a bit of money on kickbacks from mutual funds and other managed products. So if a a bank is recommending that you buy whatever some specific uh mutual fund, they'll usually get uh you know a trailer on that uh for for driving that that investment. Now how does this compare to uh crypto neo bankank? And I'll use Ether as an example I because I think we're we're kind of pretty far along down that uh path. Well, Ethery's protocol revenue actually breaks down roughly the same.

So the biggest part of the chart, this this part here, uh that's our staking revenue, and that's like the base yield. U we charge a lot less than a bank does um uh by about an order of magnitude. We take a small share of staking rewards. We take 5% of staking rewards. U so it's like 15 basis points basically. Um uh and that makes up about 50 60% of our revenue at any given time. The blue section there is our liquid vaults. Um those uh those go go up and down but basically that's the D5 strategy vaults.

So that's another 10 20%. And then the growing part is ether by cache which is interchange revenue. It's mostly interchange revenue. Um and then a couple of other uh layers. So, so it actually looks very similar, but the difference is if we were a trady financial institution, um, you know, we we'd be charging a lot more. We'd probably be charging five times more from uh our customers and therefore the product ultimately would be more extractive and uh and worse. And so if you compare for for example a more modern uh neo bank like Revolute to to Ether what you find is a EtherFI just has far fewer employees uh is is a ratio of how many assets uh you know Etherfy

is responsible for versus uh you know Revolute the ratio is just a lot higher in DeFi. Uh and what that means again it's just more efficient. It's a more efficient system and our revenue is a lot lower relative to the amount of assets under management. Um, and that's a good thing. That's that means actually this system is just much more efficient. If Ether was u uh you know a trady institution, we'd probably have five or six hundred employees. So that would be a much higher cost basis that we'd need to carry uh which would then need to be passed through to to users. So this is why I mean we can talk about uh all kinds of different things but this is why uh DeFi neo bankanks defi banks are going to eventually dominate because

they are 10 times more efficient to operate. Uh uh they're easier to launch and that's why we see you know I think Stanny was up here basically talking about you know their version of it. Uh you know we've seen a bunch of other folks launching as well. So there's just going to be a lot of these and it's going to be great. It's going to be great for customers. Uh another thing I didn't mention is that these things also have global reach. So Revolute because they they take custody of user assets. Um they need a banking charter. They need licenses much much more heavy duty licensing uh you know in every region that they operate. Whereas Etherfi uh we do require licensing. We have uh four compliance people full-time. So we do a lot of uh a lot of that stuff but it the

the burden is just a lot lower uh uh for us and because we don't take control of user assets that's the the main reason and so this is great this is a huge win for the industry and for users and this is a massive market to go after um you know if you look at u this is you know the neo bankanking space not banking just neo bankanks just revolute and chime and new bank and and others this is now close to a $200 billion market so that's about a hundred times larger than all of DeFi. Um, you know, which is this, you know, this grand casino. Um, there's a market that's hundreds of hundreds of times larger out there available if you actually just build uh real stuff for for users. So, um, uh,

and we've been doing that and have had, uh, you know, a tremendous run, quite a bit of success over the last, uh, little while since we launched the the full kind of neo bankanking suite. We've become the largest non-custodial uh uh DeFi bank player and and continuing to grow uh really nicely. Um and again, if you've used the product, you know, it's not very extractive. It doesn't charge you tons of fees. It has um uh it has much lower fees than, you know, any Trafy institution and rewards you a lot a lot more because it's just a fundamentally better uh system.

Um, so that's that's really the takeaway is uh you know if you build real stuff for people that actually use it that market is a thousand times larger than this giant casino that uh you know uh most of DeFi unfortunately is building uh towards um uh so that's my my message. My takeaway is just go go go out there, build real stuff, focus on real problems. You'll make a lot more money. Uh you'll build much bigger businesses than uh than trying to do, you know, another casino with with extra steps. Uh thank you.

[applause] >> Thank you, Mike. We have some questions from the audience as well. So I'll start with the first one which is do crypto neo banks operate under the same banking license as traditional banks and if not what regulatory framework applies to them and why do they differ additionally in the case of a platform like I guess you mentioned this already a bit but maybe if you could say some more. >> Uh yeah so they don't operate under the same licensing they don't require a banking charter. I'm sure there's going to be a legal battle around this at some point. So um it's not you know the the traditional banks aren't just going to quietly go away. Um but no, so EtherFi has a vast license. It's called virtual

asset service provider. We're working on a bunch of other licenses to be able to more vertically integrate. Um but it's it's a much lower bar. Again, the main thing is if you're not taking custody of user assets, meaning you can't steal people's money or or um uh then it's a much lower regulatory uh bar. And it also lets us operate globally. >> Cool. Well, that's globally. Uh there's one question that's very simple, two words. When Africa question mark >> uh it's really hard. Certain markets are just really hard. So every country that we operate in, every country that we in one way or another can issue cards to or offer the liquid vaults or whatever.

Every single country we get a legal opinion. Um we if there's a license required, we partner with someone that has that license. So, and we we have um I don't know maybe 50 countries that we we operate it that we have some way to to offer services to. Um and yeah, Africa is really hard because that there's uh it's it's very uh it's very easy to do stuff that gets you fined or or in trouble or gets Visa to turn off your card program. Uh India is also really hard, basically impossible today. Same thing with mainland China. So, there's just certain regions that are really hard. Uh I don't that I don't really I don't even see a light at the end of the tunnel unfortunately.

>> That makes sense. Thank you. And then finally, there's what are the risks when using Ether? >> Um there's tons of risks. I think objectively it's more risky than using a traditional bank right now because this this is still fairly new technology. Um so just you know uh you have to be aware of that. Um I mean the biggest risks are DeFi I would say. Um especially if you're using the liquid vaults and you're borrowing against them. you know, you're exposed to pretty solid protocols like uh like a like uh like you know, unis swap. Like these are blue chip protocols, but this is still DeFi, right? That's not um um it's not the same level of risk as like a you know buying a T- bill in your Chase account

or whatever. Um so I would say that's probably the biggest uh risk. And then [clears throat] a new question just came in. It says are you looking to integrate with banking systems on deeper levels and even build some services for them? >> Um I'm not sure what the what kind of services I guess the the question is asking but uh yeah what we want to do is build uh the last milei rails everywhere. So what that means is um uh basically fiat on and off ramps everywhere um with every you know uh every major system in in different jurisdictions. So, for example, in Brazil, we recently turned on Pix, so people can fiat on and off super easily with really low fees. It's the cheapest

way to buy dollars. Uh, I think in Brazil at this point. Um, uh, here we're going to integrate with Marcato Pago. Um, you know, in Canada there's Interact. Uh, in the US there's, you know, zel and PayPal and whatever. So, so all these things we're eventually we're we're working on plugging into. >> Okay. Well, thank you very much. Let's thank Mike one more time, please.