Stablecoins' Edge on TradFi - DeFi Today Devconnect ARG

Transcript

All right, everyone. We have our next panel coming up, which as I mentioned is a stable coins panel with Ash from the Ethereum Foundation who's leading stable coins from Ethereum Foundation sides. We have Kanan Lee in the middle who is the co-founder and CEO as Prodax, the selfproclaimed special forces of Ethereum stable coins. And we have Benjamin from CAP who are building verifiable uh infrastructure for stable coins. So, please Ash, take it away. >> Thank uh thank you very much. Is that on? Yeah. Thank you very much, guys, for coming today. I hope everyone's had a good time in uh Argentina um eating plenty of steak and drinking some mate.

So, thanks Hanon. Thank you very much Benjamin for joining um me today. Um I think we've got a pretty cool panel up and uh I think we'll jump into it here. So little bit of a high level one to set the tone. Um I want to know what you guys think is working in DeFi today, what's not and generally what's working um on Ethereum and what's not. Um and uh and just sort of elaborate as to as to what we need to one block there to to on board the next trillion um in capital.

>> I I think um well thanks so much for having us Ash. It's uh it's great to be here and uh what a wonderful country and what wonderful uh meat and wine they have here. Um I think what we're seeing primarily work in DeFi at least for the customers that we we're handling that we're seeing on the ground is this kind of lowrisk DeFi concept I think is resonating a lot. Um, what I mean by this is not some crazy levered uh, wrapped counterparty risk on counterparty risk on counterparty risk, but rather something that's easily understood. Uh, it's very clear what the risk the user is taking is. And the yield is okay, right? But it's not some crazy number that's going to get you

rich. Uh, but it's a it's a yield number that allows you to put assets to work. And I think that's sort of what we're seeing uh resonating in the market. >> Yeah. >> Uh well, first of all, thank you to to you for hosting this and for the EF for organizing a great conference. Um from our point of view, there's two sides of DeFi. There's managed DeFi and then there is um open protocols, right, that use smart contracts. What has always caused user losses um has been managed DeFi. when you trust a team to make decisions over people's money. This can be a vault product, this can be a Dow making decisions over the parameters of a of a lending market. Um, in general, humans getting in the way of DeFi. Um,

the other side is open. >> Do you want to dig a little deeper there into what happened the other day with Stream? Like, >> well, yeah, if you look at what happened with Stream or it's all kind of like very foreseeable because it happened last cycle with Celsius and with Blackfi. Um, humans make mistakes and smart contracts are supposed to, you know, improve the the trust assumptions on humans. Um, yet every cycle we seem to fall back on on the, you know, 20% APR, you know, deposit your money with me and I'll do something with it. Um, the reality is if any of these teams are good hedge funds, they wouldn't be stable coins. They would run a hedge fund in Wall Street. And so I think we should really stop trusting these teams to um do strategies on behalf of users because they're not regulated. they're

not covered. Um, and it it's not quite clear what the risks are that people are getting into. >> I guess they're not even using the basic stuff like Nexus Mutual, right? Like >> Exactly. I mean, first of all, Nexus Mutual is a wonderful uh thing to be using. Uh, but even even then, like I just don't think we should be trusting humans uh in the first place. So, the other side is open protocols. So, look at things like like Morpho, like CAP, like Ethereum for example, where you have immutable rules that all actors must abide by. um and um are executed by smart contracts because smart contracts don't fail. They don't uh well as long as you write them well. Um they uh they enforce rules coldly. There's no calling up a smart contract and asking it not to

liquidate you. Um I think if we were to focus more on smart contracts and less on human dependencies, I think we can make DeFi a lot safer. >> I think connected to that there's this abuse of the word stable coin when it comes to these strategies. um if it's if it's just a hedge fund, but uh the way you get to be an LP in this hedge fund is that you hold the stable coin, it's kind of it's kind of an abuse of the term. >> False premise. >> It's sort of a false premise and sort of um misleading. I think I think, you know, we should probably adopt some other vocabulary like yield coin or something.

>> I think uh everybody stopped using stable coin the moment Genius Act passed. Like you should like track the changes in UIs. Maybe you can look at PRs, but as soon as Genius Egg passed, you know, Ethena is now a digital dollar. I I can't remember the last time Sky has said stable coin. Uh we've never called oursel a stable coin. I think we say digital dollar as well because you're right like you have all these like complex like money markets that are set up on top of stable coins which is actually very beneficial because if you have a you know receipt token that's stable now you can loop it on a etc. and all these things that you were mentioning are not so quite safe.

Yeah. Yeah. Absolutely. >> How do you guys, so that's the broad level. How do you guys see what you're building um with codeex and then cap fitting into this world? And you know, a little bit about where you're going as well. >> Yeah, I think what we see is that um well, Ethereum is the dominant place where most stable coins are today. Uh but I think you see lots of challengers on the horizon in the form of Tempo and ARC and other folks. And our mission at Codex is to make sure that Ethereum continues to be so dominant in stable coins. And we continue to innovate at sort of the very cutting edge of what's going on here. Um, and I think in particular, we're focused on how can we make this barrier between fiat and

stable coins disappear. Now, traditionally, this is not something a chain uh team focuses on. This involves a lot of work that traditionally is out of the kind of circle of competence of a of a normal chain team. Uh, but you know, we are not a normal chain team. Um and so that that's what we're focused on today. Um our goal very much is to uh make stable coins make sense for not only these sort of crazy edge case countries and situations uh but rather make sense for a kind of mainstream audience including many mainstream businesses and if we do that then uh you know we'll have fulfilled the oldest dream in crypto which is this dream of a global electronic cash system.

>> Well I'm an Ethereum maxi and you know that's why I'm I'm building on L1. Um I think it offers the strongest guarantees for users u versus I say other chains. Um specifically what we're doing within the context of you know smart contract protocols that are meant to protect users uh is we've uh imported this primitive from trifi called shity bonds uh which are very similar to credit default swaps and we're using it to protect uh our users from the risk of the yield generation that happens at our protocol. So at CAP we have this digital dollar that on the back end has several regulated institutions like Susuana like flow traders etc constantly competing to make yield on our dollar. They're

borrowing via private credit and they're generating yield on the dollar depending on their ability to generate yield in that market condition. But before they can come in they need to provision a shity bond which is again similar to a credit default swap. And if they were not to repay, we can use smart contracts to automatically slash them uh and recover the, you know, the the loan for our users. So using smart contracts, we're able to recreate that on Ethereum. >> What are they willing to pay for that credit at the moment? Like what, you know, and largely speaking, what are the big risks they're taking with that? >> So they're willing to pay the overarching unsecured premium for the dollar. And so we're we're pretty much tied to um the overall like capital market. So if you look at Wisdom Tree

and Apollo which do unsecured lending, it's around 10 to 15% depending on the market condition. Um and um what we do is we give some of the yield to stable coin holders that um are taking a secured position. So they're getting let's say 50% over the table rate and we're giving the credit spread to ETH holders. um which is quite interesting for them because the difference between the unsecured and and these seccured dollar premiums is greater than the unsecured premium for ETH and so you're able to give ETH guys a great bond on IE layer >> do they know like the holders um taking this position underwriting it do they know the risks they're taking like >> yes yeah so for us um just like uh you were saying uh we try to keep retail in

the safest position so um US dollar holders are completely protected by these IE layer uh asurances that that we've built and symbiotic. Uh the ETH guys that are underwriting the institutions are institutions themselves, right? They're not retail that can come in and underwrite another institution. Um they have to have at least $5 million. So qualified investors >> and so the underlying credit exposure is uh like US corporates or >> Yeah. So it's uh I mean today I can name uh some like sushana like um you like uh flow desk flow traders amber group these kind of folks.

>> Yeah I I think we're seeing this emergence of new sources of yield um as well I I think like on the payment and stablecoin payment side you're seeing a new source of yield which is effectively the preunding of stablecoin payments globally. um and you know various PSPs need uh a balance of stable coins in a certain in a certain uh fashion and you can charge them a yield for it. I think um I think this direction is where the future is right where uh the yield is on the other side of some productive activity. I I think the kind of days of uh vintage DeFi where you know it's a DEX token that uh the source of the yield is the governance token of a venue

that you can speculate at. I think that's a tired and old game that is not super interesting. >> Yeah, with the risk premium paid, we need to be beating the T bill, right? That's quite competitive now. Um >> and most protocols don't beat the T- bills. If you look at the average lending market today, the average dollar in a lending market in crypto is not beating uh the T bill rate which is insane. >> Yeah. There's no chance to sort of hedge your staked ETH um and earn anywhere close to the T bill of yield, right? >> Oh, I know it's st but like u dollar. Yeah. Yeah. E is doing great. I >> I think the design space has just broadened out a lot, right? So like under a u you know maybe antagonistic American administration uh like the Biden administration it's very difficult

for crypto systems to plug into the world of atoms and when you don't plug into the world of atoms you have a much smaller set of possible yield opportunities and you end up doing these kind of like empty casino games that you know don't go anywhere but I think now the design space is much more much more interesting um where are the places where crypto can catalyze more economic productivity in a productive way and then pass on a piece of that productivity to stakers. I I think that is the prompt that um you know we should all be thinking about.

>> Yeah. October 10, right? Um you got exposure there in this market to you know these market makers, these these funds that you're talking about these names. Um you know there's speculation that there's been a blow up um in that market specifically. traditionally, where have they been sourcing the credit that you're supplying them? What do they like about your product versus where they're getting it from? And the risk exposure you have to these days where you have cascading liquidations. How do you think about that?

>> That time wasn't fun. >> What's that? Sorry. >> Uh it was uh not great. We've had three uh major market downturns, including the one we're having right now, since we've launched the protocol. But nobody has to falter. there's been no slashing events. Um, you have to remember that these guys that we're working with are regulated financial institutions. We've audited financials that, you know, they get released every month. Um, it doesn't matter what happens in crypto like because the resters or the the shorty bond holders that are underwriting uh the borrowers, they're underwriting a credit entity, right? They're not underwriting a strategy. So even if flow traders loses um on the strategy that they're deploying with the borrowed funds, they have 14 billion dollars assets under management, right? With a guarantee to repay the loan to the the

person that's underwriting it. So um yeah, there's as long as there's like no systemic risk across all of finance, uh then we shouldn't see like flow traders is not going to go bankrupt because ETH went down, right? >> Yeah. Yep. Makes sense. Um I guess like there's actually a big push at the moment. You know, you have S SNP Global coming in. Um there's the ratings obviously um Sky that would have had to pay for that um to bring this legitimate legitimacy to the space. Um this is going to need to happen more and more, right? I think um Creda the other day they've announced that they're going to do lowrisisk DeFi ratings. Again, there needs to be

funding for this stuff, but to build out these risk frameworks, like this is core to how financial markets work today is that there is an education around risk and risk management. And probably increasingly so, we're seeing that in this environment. You have participants that understand it, that have played in it, high sort of frequency guys and and um just generally people that have been close to the EVM. Um but in educating this next chapter, we're going to need you know to bring in the capital more um risk terminology frameworks like where would you start there in terms of in terms of what's the number one um number two number three you know um you know big risks that you guys see and and ones

that you would point um people to. I I think the biggest um miscalibrated perception of risk today are largely in traditional markets. So let's start with the S&P. So the S&P is viewed as sort of this risk-free place to put money if you don't know what what to do with it. But I think what is underappreciated is uh the growth of the S&P in the past two decades has been because there's a lot of large tech companies with zero marginal cost and no capital intensity. No capex just keeps on growing infinity.

You don't have to put money in the ground. It just keeps on growing. What we're seeing now in the AI era is actually that these companies are transforming into capital intensive positive marginal cost businesses. Each incremental use of the product costs something. Each incremental user costs something. And so, uh I'm not sure that's widely understood that when you put when you buy the S&P index, you're putting like half your money into one single correlated bet on AI. So, um, then there's private equity and private credit, which have their own problems. And I'm a little skeptical generally of this democratization thesis where you're basically offering these, uh, products now to to retail. Why are they being offered to retail now? Um, let's think about this for a second.

Like in the 80s when Kravis was doing this by himself, he was keeping the the exposure. Why is that? Because he was making so much money. Why is it now that when institutions don't want private equity anymore, all of a sudden we're trying to democratize access to retail, is this democratization or are you passing on to the next bag holder? Um, I think those are where the most misunderstood and miscalibrated risks are. And to the extent that we as an industry enable that under some kind of tokenization sub thesis, uh, we we should be very careful. I think >> I I could not agree more with the private credit side for example uh because we have all these large firms that are bringing on their private credit tokens. I won't name any names

and they're having them uh be used in in DeFi. Uh meanwhile all of the private credit funds are not blowing up but they're having severe losses due to first brands and tririccolor uh because you know human decisions again uh ended in in losses. Um we don't need those firms in DeFi. We don't need those firms on the blockchain. We can use smart contracts to build a better finance. That was the original idea. >> Absolutely. And I and I think these kind of new exposures, right, new products that can be built because of crypto properties are what I think is most exciting. I think if you stick an existing asset that already exists in Tradfi and you go, okay, now it's on chain, you're almost definitely adversely selecting, right? Like what is

new? What is new is that there's a new set of bag holders. That's what's new. And um I I'm just very skeptical of that approach. U I hope I haven't offended anybody in the audience or you Ash, but uh that that's my view. >> Not at all. Certainly agree. So um you know we are creating um you know these new products. But a big part of this next chapter right is is um is distribution. And this is something traditional finance has very clearly routed. Um I know for instance even on the CME um when they go to pitch a new um a new derivative they have to find buyers um and sellers of it you know and

often 90% of the markets that the CME even launches are dead within 12 months. because they can't find liquidity and distribution there. Um you I guess what I'm asking specifically on your front and then cap how do we go from now to to far larger distribution? How do we understand within these environments that are traditionally they're hard to understand who your user base is? How do we have a closer interaction with those customers? How do we start designing for them with them? um you know there's still an immense amount of discovery to do but you know a lot of this comes from market research and understanding the problem space so you know with your side

I guess like some of the most successful sort of stable coins and and and stable coin execution environments um have been because they're on the ground integrating with merchants etc and then you know on your side um Benjamin how do we take this today and onboard far more um people that want exposure to your product. >> Yeah. Yeah. Um, not to sound cliche, but I I think like listen to the damn customer, right? What does the customer want? I think, you know, for instance, there's so much to build here, right?

The first thing we think of is um there's really no efficient way to hedge point FX exposure today. And I think those instruments are actually relatively straightforward to build. Um, you know, read a Robert Schiller paper on pers and and go from there. Um, I I think the distribution question is interesting. So you work with a large Trafi partner and they quote unquote bring distribution. If they bring if if all it is is that uh you are supplying a chain and they bring all the distribution, why should they work with you? It's not clear why they should work with you. Um and I so I think what is most interesting for us is the development of sort of these

frontier products on the very cutting edge these new needs that are emerging because of a shift onto stablecoin rails. We don't want to kind of um ride off the coattails of of some uh large existing uh institution. >> Yeah, I think I agree with you. Listen to the customers. Sometimes we build products and don't really think about who's going to use them because we like building cool things because we're nerds. for crypto builders. Um for me it's a regulation right? Uh I think we need robust regulation in each uh avenue of crypto in order to get full adoption in order to get um these five players to come in. um if the you know the election shows us anything >> is that something just to dig in on that is that something you hear or is that

yeah where does the regulation >> see like before the election u cap we were leveraging you know me uh and uh market makers to borrow from us and you know do the same thing after the election we're working with publicly traded companies and um the world's largest HFT firms and that would not have happened if it wasn't for the election and the change of regulatory outlook Yeah, interesting. Okay, take it take it a bit more high level. I think like we we touched a bit on it. Um, this is about reinventing finance as well as transitioning it into a more efficient environment. But we're talking about creating something better, you

know, and I think that's sometimes lost in this modern um, you know, version of DeFi that we need to, you know, um, win very much today versus like continuing to push this broader vision, right? And so like we're still a very long way off a consumer being able to hedge their fuel exposure for the year to lock in a price and you know create a budget around that, right? Um that's something to me that I would love to do. So, I'd love to buy 5,000 gallons of fuel today as a consumer and know exactly what I'm paying, pay a subscription rate, um, you know, to manage the the margin of that product, have some interest, um, you know, credit product attached to that all on the back end, and then, you know, ultimately get exposure, pay a pay, you

know, a small monthly fee to to know what I'm, you know, getting for my fuel, right? So, that we can we can do that now and we can create these products. How how do you think about that the the broader vision? How do we ensure that the the builders yes today commercialize and and ensure we generate revenue but also you know remember where we're going. You know sometimes we get lost in the weeds of it. Um yeah I'd just be interested to to sort of see and end on this note.

>> Yeah I I think it's a balance. I think, you know, if we produce some sort of ivory tower, uh, super cool thing that, like, you know, Ben and I enjoy talking about in a corner here, but no user on the planet ever wants to use, you know, that that's probably doesn't bode well for our companies. Um, I think we got to be pragmatic. I think it's also um a progressive thing. So, what you were seeing happen first is stable coins, which makes sense because everything else needs to be built on top of some sort of payment stack. Let's say you wanted uh a thriving corporate credit market working on Ethereum and and codecs and and blockchains generally.

Well, what do you need for that to happen? You actually need uh corporates to be transacting on stablecoin rails in the first place. And what happens when you have that occur? Well, you get a really interesting data source. Now imagine that you have uh you know privacy needs to be implemented obviously but uh imagine you have an onchain record of every transaction that this corporate has made in the past two years. What kind of underwriting could you do? You could do a much much more sophisticated form of underwriting than is currently possible in traditional Rails. You could lower the risk of these credit instruments because you now have more information. That stuff I think is very very exciting but it's probably too early. I think if a company were focused

on that today, it would probably die. >> Yeah. Exactly. And I think the way that, you know, traditional companies address this is they have their R&D departments, but I guess today we don't have the capital allocation to justify that. Um, as sort of the leading indicator to show the market where this is going and to buy into me, you know, today, but ensure they still know that this is a visionary entity. Maybe for me, there's just not enough of that today. like where are we going? You know, that's that I feel like we've lost that. But yeah, keen to >> Yeah, I think it would be great if there weren't so many tokens. Um I think if it this industry had less tokens, we would be more advanced because founders wouldn't make money so early and they

wouldn't leave our industry. Um right, it happens so often. People raise at insane valuations. They OTC and they they leave and you never heard of them again. Um that's important because overall DeFi will be the future of finance. is written in stone. Technology always overcomes and if this is better than the old model which it is, it will become the new model. Uh the question is how fast and I think if we uh nurture a culture of of building good products and not uh bu nurture a culture of cashing out u and just you know leaving the industry then I I think we can advance much faster.

>> I think the cash out plays are very very shortsighted. I I know like we're headed into a uh you know possibly a bare market. >> Don't say that. >> Okay, I take it back. Uh we're clearly headed into a bigger bull market. Um but uh and okay, well then my sentence doesn't make sense. >> Go ahead. Go ahead. >> All right. So So like it's the price some of the price is going down, right, guys? Like let's be real. So some of the prices is going down. People may feel a little like h you know like is this stuff even real anymore? It's really real now, right?

It's not like previous cycles. Like you still have the Treasury Secretary of the United States talking about stable coins all the time. Like it's real now to an extent that is not was not the case before. And the founders that Ben are describing who like just want to get in and out, you know, okay, go do that. You know, I'm sure they can buy a nice house somewhere. But it's incredibly short-sighted. There's a massive massive market opening up here. Trillions and trillions of dollars of value. And you know, we just need uh patient builders who are also pragmatic and actually listen to the customer. Um that that would be my take, Ash.

>> Yeah, it's going to be a grind, but uh I'm glad we've got characters like you, Benjamin, and on building um this future. Thank you guys so much. We'll end it on that note. Um Julian, amazing. you know, thank you for putting to today together DeFi today and I hope to, you know, see this uh event um you know, grow out um over time and create this forum. Hopefully we bring more um you know, bankers together to to see where we are going and what we're pitching. So, thank you guys. Um I appreciate it.