Uncollateralized Lending: DeFi’s Next Big Evolution | Sid Powell, Teddy Woodward

Transcript

i want innovative companies to be able to borrow against the value and the profitability of their business or against say real estate or infrastructure that they have in the case of bitcoin miners and use the borrowings to make their business to grow i don't think you can do that if you're only putting down liquid uh crypto assets as collateral so for me it's really more about what is the purpose of borrowing in a corporate sense it is to grow and to expand businesses um so that they can generate more profits in future and that profit is not to come from speculation before we jump into the app quick reminder that nothing on bell curve is financial advice everything is just a

meme hope you guys enjoy hi buddy talk to teddy and sid today this is a good conversation why would why do we pick these two guys to talk to me no matter how many times i tell you to not clap you are going to clap every time we start an episode so but i tell you i'm an italian we talk with our hands so so we've known teddy and said for for years now and there's we brought on these guys because they saw the two things that we were talking about in this season and really in this episode fixed rate lend and borrow and under collateralized lending they were doing this years ago right i remember talking to teddy uh three years ago and he he was just saying like we really

need fixed rate london bar in the space same with tid we've uh ted sid uh at maple we've known him for years uh and he's really been preaching the gospel of like under collateralized lending and how it's a huge unlock for defy and they were doing this back in right d5 summer 2020 when all the attention was focused on like these protocols that were doing over collateralized lending and so the attention hasn't been on folks like notional and maple as much but i feel like that is starting to change um and yeah this episode did not disappoint no absolutely teddy also used to trade interest rate swaps which is a cool call back to last episode we actually got into the market for interest rate swaps near the end of this episode and yeah sid and and joe and what those guys are doing at maple i kind of feel like they

are they're really pioneering and really banging the drum on under collateralized lending at a time when it's not super popular to be doing under collateralized lending in crypto thank you c5 so big shout out to those guys um it's a really interesting episode yeah it'll be a good one let's get into it let's do it all right everyone welcome to another episode of bell curve um i'm joined as always by my co-host jano uh and then we've got sid powell from maple finance and teddy woodward from notional finance gentlemen welcome to the show hey guys how are you yeah thanks for having me doing well doing well guys um maybe we can start uh just at a really high level here um

and you know in past episodes so far of the series we've kind of uh dedicated a lot of time towards exploring the unlock of fixed rate barring lending which i know we're going to be getting into we want to kind of connect that with this idea that i know both of you are actively focused on which is uncollateralized lending uh in d5 here we just maybe start at a really high level how do you guys think about the unlock that uncollateralized lending brings to crypto and then maybe we can kind of get into like what you see the ultimate opportunity or kind of market size b maybe in relative to over collateralized lighting um so let's start there with my two-part question how do you how do you guys read the unlock of on collaboration in d5 i can i can kick it off uh i mean the

unlock of uncollateralized lending is huge right like if you think of most businesses they are not set up to borrow by depositing liquid financial assets as collateral in order to borrow uh and so that is applicable in tread fire and observable in shred five and i i don't view that that would be different in um as we shift more and more to um to on-chain lending so my view is that uncollateralized lending is gonna be orders of magnitude larger uh but they're also we don't have to we don't have to differentiate between uncollateralized and collateralized lending purely in terms of digital assets like if you look at a lot of corporate lending it might be just secured by a lien on corporate

assets that's very common in banking today and would still allow companies and businesses to borrow on chain they'd just be you know registering registering security in favor of the lender uh off-chain when they do so yeah no i i think that's actually like a really important point sid that you just brought up uh which i think gets lost a lot of the time so you know like when people think uncollateralized lending in sort of like traditional c5 markets like it's not the case that you're lending money to someone and then like you know they can just do whatever they want never pay you right like you're essentially like when you lend money to someone you're like that loan is

collateralized by like the net assets of the borrower right so it's like it's not uh it's not just like you're giving them free money and so i think that's actually like an important point because in my opinion the the the real differentiation between uncollateralized and over collateralized lending is like whether or not you allow the borrower to use their collateral assets productively over the course of the loan or whether you sort of like force the borrower to give their collateral to the lender uh you know for custody over the course of the loan like i think it's actually like that's an important difference um it's like a different way of looking at it and and you know i i i think it's

an important thing to note because uh uh you know notional is actively expo exploring um we're actually about to launch a product that allows people to borrow from notional and and essentially keep the borrowed assets as collateral for the loan but use them productively at the same time so in this in in a sense it's like allowing the capital efficiency of uncollateralized lending but uh like still maintaining the kind of risk profile of over collateralized sending so you know to maybe use uh five-year-old language or bell curve style language basically like most lending really is collateralized but

when a bank is offering a loan to something like amazon it's not like hey take a billion dollars or whatever and park it at this bank but the bank is saying hey we've seen what you've done in free cash flow right for the last 10 years like we've seen you've got all these data centers which are pretty valuable uh okay we'll give you this loan you don't need to park that stuff with us and not generate any you know return on those assets but you know what's going to happen if you can't repay the loan so in that sense basically just under collateralized maybe isn't even the right word for it's just hyper capital efficient lending that's exactly it in my opinion yeah okay so my next question is in non-crypto right we have this whole setup via government and a system of

courts and protection like a whole understood um you know a whole rich precedent of property law which says hey if you renege on that then here's what's going to happen right you kind of get plugged into the system what is the digital app what is the crypto version of that right like how does how does how does that let's call it hyper capital efficient lending how do we how do we do that on crypto because we haven't really had any mortgage found on that right yeah we're not trying to we're not trying to enforce norms of repayment of loan using cryptographic mechanisms right so the way i think about it is we're doing you know lending is occurring through maple but if a borrower doesn't repay it's still recourse lending so uncollateralized doesn't mean on

recourse and to unpack that what you mean is what we mean is that if a borrower doesn't repay their loan on on maple uh they're still gonna have an action brought against them in courts you're still gonna have their their business you know bankrupted or wound up and so that enforcement is still gonna happen through the courts the only mechanism by which this is happening in crypto is for a very narrow set of loans which is loans which are collateralized with liquid digital assets because you can take it and just sell those assets to repair the loan but that's a very narrow form of borrowing and that's not actually solving the underlying problem which is that somebody has walked away from from an obligation you're not actually enforcing any obligations on them once you've uh

once you've sold those assets and so we saw that um you know the recent with the recent volatility from june july there were some loans that were uh under collateralized but they still had records so when uh when the borrower 3ac defaulted their assets were sold but there was still a court action then brought against them afterwards which showed that the ability to enforce on chain was kind of limited uh in that once you'd sold those assets if there was still a shortfall you had to you know you had to use the court system and so we're trying to use uh the blockchain for a more efficient way to manage and originate lending we're not necessarily using it to resolve disputes at the end of the day uh what i was going to say is that i think like uh so this this kind of

illustrates a uh difference in the approach that that notional and maple are taking because um you know like this uh notional does rely on sort of on-chain smart contracts to enforce repayment right so uh we like fully sort of rely on smart contracts to take the place of the legal system in in terms of the kind of debt uh default proceedings so i think like what would be good here is like uh first to introduce um this new product that we're about to launch called leveraged vaults right so uh leverage vaults on notional um basically allow a user to borrow at a

fixed rate on notional and deposit that cash into a white listed smart contract that executes a specific yield strategy right so they're able to a borrower is able to borrow you know something like 10 times their initial deposit uh and put the cash into a smart contract that goes and does something with that cash um and so the borrower is able to get a lot of leverage uh leveraged exposure to the returns of that yield strategy now like the the the important thing here is that basically notional retains access to the assets at all times while the borrower is using them to earn yields right so notional is able to liquidate at any time if the value of the assets

in the smart contract falls too much so you know basically uh that is a way of like allowing the borrower to have hyper capital efficiency whilst while like still retaining the sort of like uh on chain guarantees that smart contracts give you and uh you know don't require you to have to go loop in the legal system or any of that any of that stuff um yeah so so i think that actually kind of ties into your question pretty well teddy i think the leverage vaults are really interesting i want to talk about that in a second but i actually just want to go i'm curious like about the why behind a lot of this and i think the y can be

applied in like maybe to two different questions one is um like d5 historically has centered around over collateralized lending right if you look at most of d5 london borrow it's over collateralized um and actually some people would say that that is a feature maybe not a bug so i'm curious like i guess why is this the challenge that you guys decided to take on under collateralized lending and then like maybe that's the same question as the second part but like why is this so important to moving d5 forward um yeah so so i think like you know the focus on over collateralized lending uh in d5 is in in large part i think just a function of how new the space is

like uh things and you know like things in d5 take a long time to build right because like there's so much risk involved there's smart contract risk doing new stuff like takes a lot of time and the space hasn't been around for very long right so it naturally sort of started with the easiest thing and the safest thing to do which is over collateralized lending um now i think like the under collateralized unlock it really just comes down to capital efficiency right it's like uh if you can allow people to use the assets use their collateral assets productively while they're uh you know being collateral for loans that they're taking out like you are

delivering just massive capital efficiency improvements um and something that like defy has not been able to do yet but like you know obviously syd knows this firsthand because that's what maple does um and i think it's just like you know in general it just comes down to just like massive capital efficiency improvements for me for me it comes down to and and i wholeheartedly agree with everything teddy said about the you know the over collateralized lending product was easier to build um not that it is easy to build but it was just a natural first um first version of the product where you say okay we have this uh liquid you know liquid crypto asset we can take possession of it we can put it

in a smart contract and then the smart contract can be programmed to liquidate if xyz commit um condition is met you know being a threshold collateral value uh but if i look at where we need to get to 100 years how useful is a product in a hundred years where you have to have either of bought you know ethereum at 1 100th of the price it is 100 years from now um or you inherited it like there's no business that is set up that is sitting on you know one and a half million dollars worth of liquid financial assets that it is then going to borrow against for a productive business purpose if we look at most of the uh most of the use of borrowing and lending

uh on chain of date of the over collateralized variety has been to take a l express a leveraged view on uh on the direction that a crypto asset is going to go so you know you put down uh rap bitcoin or you put down if you borrow stables you buy more bitcoin or you buy more with it so you're taking a leveraged speculative position or you're just monetizing the fact that you you know uh bought bitcoin a wreath or some other asset really early and you're using it for consumptive spending what i'm talking about and what i think is useful is i want innovative companies to be able to borrow against the value and the profitability of their business or against say real estate or

infrastructure that they have in the case of bitcoin miners and use the borrowings to make their business to grow i don't think you can do that if you're only putting down liquid uh crypto assets as collateral so for me it's really more about what is the purpose of borrowing in a corporate sense it is to grow and to expand businesses um so that they can generate more profits in future and that profit is not to come from speculation yeah i would i maybe actually i could um quote uh teddy from the own your own white paper the white paper that notional published this is i guess now a little bit dated in terms of uh you know the data but in 2018 there was some 16 trillion dollars worth of outstanding

corporate debt in the u.s uh 88 of that was uncollateralized and again we're using that in that somewhat fluid meaning but overall when you look at the analog it's you know it's it's it's pretty stark right um you know that the way that london goes on in trade find it makes sense to me that that would get replicated in crypto because even just thinking about it as from blockworks perspective as a perspective borrower you know if we were gonna borrow it would won it would probably have to be at a fixed rate right we're not gonna borrow at a rate that might 10x um you know uh in in a month from now um even if it's just temporary and then b it would it wouldn't make sense for us to do like a collateralized loan where we converted some of our balance sheet like

into eath and then like park that somewhere and then got utility it's like no we would just want more money right like so that we can actually actively invest that and be capital efficient with it so when i think about it from the prospective consumer of debt in this space like from a company standpoint it makes an enormous amount of sense because over collateralized lending is basically just a way to get leverage off the assets that you already have right in a way so i would i would guess that the actual market for productive debt is at least an order of magnitude larger yeah yeah i think that's true cool does that mean does that mean that the the customer set is going to really

change for london borrow because i feel like the customer set of in the user set of like the aves and compounds right now is obviously your funds and your funds who borrow from these things but it it really is a lot of consumers um when you start switching to this like under collateralized lending uh model you can it really unlocks it for companies right which is what mike is saying does that kind of turn on the lend and borrow market in uh for for protocols for dows right who historically have only had one way to raise capital which is their equity and through tokens uh but does this like unlock this huge new in d5 that's never even been explored yet maybe sid i'd oh said i also have a uh my maple hat i forgot to put on so i will throw this question i'll throw this

question to you and put my maple hat on love it love it uh yeah absolutely so if you think of a dow as a as an organization that's been set up to you know pursue a business purpose um then you know the focusing the borrowing and lending market on chain onto corporate borrowing purposes would open up that as a segment i think what we saw uh over uh you know q2 of this year was that there was a bit of a shakeout there so you had a lot of dowels that were you know turned out they might have been sitting on the token might have been a group of competent people but they were sitting on something that hadn't yet achieved product market fit so i think what you what we would want to or need to see would be a dow that's found uh product

market fit such that they have a product that's generating revenues for them and that they have you know a team that is sound that is cooperative because management due diligence is something that goes into this underwriting process but then you know assuming that they pass that credit worthiness test they would be able to borrow and they would be able to borrow without having to just put down a huge whopping chunk of assets um and and you know the borrow would be based on expected future profitability and their ability to uh to service and repay the loan so i think it would force them to adhere to higher standards of operating and you know professionalism amongst the management team there yeah and i i think this is like a like a

really cool sort of growth area and um to to kind of take it back to what we were talking about at the beginning of the conversation uh you know when when someone lends to something like amazon or ford right like implicitly they're like lending against the future cash flows that that business will generate right like that's sort of implied in the loan um now the cool thing like with defy is that you can precisely sort of define and tokenize those like like the future revenues that the protocol is going to generate right and you can explicitly use that as collateral against the loan right so you're collateralizing a loan with a profit that hasn't yet been generated

right um and i think that like that is uh that's definitely gonna happen and i think that's like a a really cool sort of application of um of d5 yeah this might be a real like middle of the bell curve question here um but uh if you collateralize a loan with like governance tokens is that really a collateralized loan or is that more uncollateralized right because i when i think of collateral it's this like safe thing that you can seize basically um but like a governance token is could fall ninety percent in the next two months so like how do you think about uh giving out loans that are backed by these governance tokens right yeah well we saw uh some credit

risk for sure go go go ahead teddy uh yeah yeah i mean i think it's like it's like somewhere in the middle right it's not uh you know like i think uh collateral sits on a spectrum right of of quality um and you know if so if you have ether rap bitcoin or something like that you know you feel comfortable saying that when someone borrows that you're not taking any credit risk uh now if if if you're lending to a dow and they're collateralizing 100 with their project token that is volatile and not super liquid you know it's better than not collateralizing with anything it's not like that collateral is like worth nothing from a lender standpoint but you know if you're actually going to make that loan like you're going to do

so with the knowledge that you're taking credit risk yeah yeah so i mean an over collateralized loan there's still a probability of default and there are a ton of defaults on you know maker and rva and uh and compound over q2 it's just that what you're doing is you're saying we don't care about the probability of default if the last given default is zero and the last given default is zero is if we if we sell the collateral um when it's above the value of the loan and so you look at porter finance um when they did that over collateralized ribbon loan so that was like 500 percent collateralized from memory what they're looking at is if the borrower defaults collateral is

worthless right because what's someone going to pay for um a bunch of ribbon tokens if ribbon if the ribbon dow had defaulted but where the collateral as a protective mechanism comes in is that if the volatility of the ribbon token dipped below a required collateral amount before the required collateralization level before the event of default occurs then you would sell the tokens so that you can recoup the value of loan but you're doing that before the borrower defaults so you gotta like it's it's a measure of sequencing or a matter of sequencing you're not waiting for the borrower to default and then go we're gonna sell the tokens you're waiting and if the tokens drop in

value you're selling them before the borrower defaults so that you still protect your position so in that way it's still um it would still be considered collateralized but the arrow of causation is going the other way does that make sense yeah it does it's a good deal i was thinking about it's a good deal for the it's a it's a it's kind of interesting it's a good deal for the issuer and probably for both parties in general because it's another way you can actually incentivize the uh um whoever's issuing the debt to not actually sorry it's a good deal for the borrower that's collateralizing it like ribbon in this case uh because what you don't want to be as the um you don't want to actually cause a default because as soon as you cause a

default then basically their equity goes to zero and then whatever collateral backup you had becomes useless anyway and to your point said like that makes sense because this was just that was just a single issue right there's not like an enormous amount of debt outstanding but you can imagine if they did if they issued a whole bunch of debt then not everyone could sell the collateral at the same time right like someone wouldn't be able to get out only the very first people would but it is it is kind of an interesting way of aligning incentives right between yeah yeah it is uncommon though you wouldn't typically see uh a borrower you know in track in that in a trad five sense collateralize alone with you know their own equity like share wouldn't you wouldn't see apple collateralize alone

and apple shares right you have seen one really famously do it enron sailor yeah and really yeah they had a bunch of those little uh off-balance sheet vehicles as collateralized and one stock so that's a fun little part of history yeah that we keep yeah yeah i'm not saying that yeah but it's just i mean that is a relatively similar structure do you guys see though i mean cause we've talked about in past interviews with this uh this series just when if and when dows add debt financing to the mix right a lot of dow growth is based off of issuing rewards um and basically all the financing that's been done to date either on the dow level or you know the company equity levels but equity level financing at a

certain point you would think dials will become big enough that it's like hey maybe we do a product market fit maybe we do have uh cash flows that are relatively predictable going out into the future at that state you would probably guess someone on you know the finance team is gonna say hey we should be looking into debt as an alternative here and especially and the reason i'm singling that dow's out here is i would kind of think that if it's a dow you'd rather source that on chain versus like trying to go to a bank or something like that but what do you guys what do you guys think of that hypothesis yeah yeah i think i think it makes a ton of sense i mean in general like uh you know like you'd rather borrow like i suppose it it all depends but but i

think there's a lot of situations where you'd much rather borrow than than sell equity or sell tokens right um and especially you know like i protocol communities i think would definitely be in favor of that where that's a possible course of action uh and then you know as for where they get that loan from the thing is like if if like the protocol or if the dow doesn't have a legal entity and and most of them don't or uh it's it's hard to fit into the legal framework um you're not gonna like you're not gonna be able to like have a traditional sort of legal contract or loan agreement right like when you when you lend to to this

dow uh if they're not a legal entity how do you like set up a legal contract right but they are they're a non-chain entity and so it's like i think it will they will naturally fit uh you know into a contract that is codified on chain i think that's like just a better fit for the nature of the business right it's an on-chain entity and i think it's just makes more sense that like loans to those uh to those dows are going to be you know sourced on chain and like governed by smart contracts not legal contracts we're kind of seeing something similar though michael where any any stable coin that's issued by dao

is kind of an unsecured loan to that dow in a lot of cases unless it is immediately redemptive for the assets held in that dow um you're kind of an unsecured creditor to a smart contract um in that if there's a hack you have no recourse right like we saw you know we saw this with faye there's there was no recourse to get those funds back and get a payment there um um where do you guys see opportunity in terms of um

new lending do you want to have a first crack teddy yeah sure so so i think that uh you know i i think that the majority of the demand in the near term is going to come from kind of the same stuff that we've seen recently right or uh basically i think like the majority of the demand in the near term comes from sort of trading and speculative use cases uh because i think that like that is still kind of the main driver or it's just the main sort of source of economic activity in crypto you know i think like we are starting to see it you know at least on a fully on chain uh in the sort of fully unchained crypto

native economy if you will i think we're starting to see you know glimmers of uh economic activity that isn't purely speculative but you know the reality is that most of this is still is still kind of centered around trading right um and providing liquidity and and uh stuff like that right so i think that's still going to be where kind of the near term demand is going to come from i think that you know dow borrowing and and some of these use cases are super exciting and i do believe that they will come to fruition um but i i you know i think just you know realistically in the near term it's it's not like going to be the major source of

demand for this yeah i expect uh i expect you'll see more sources from uh corporate borrowers who are currently outside of crypto coming into the space as on-ramps get easier so i cannot stand using banking facilities like i hate i hate using my card i hate transferring money between accounts i love using usdc i can transfer it from you know like well transfers between wallet is extremely easy and the only time i ever off-ramp it is when i need to put it towards a debit card or a credit card just so i can transact and buy coffees and food um within i would be very surprised if within three years you're not using

some form of digital payment on your phone to transfer money from your you know erc 20 wallet or your solana wallet directly to the wallet of a merchant um you know which could be a cafe or coffee shop because they're going to be able to take your payment without paying three percent to the visa or the mastercard network like you know just economic reality is going to set in that that is going to become the normal way of doing things as soon as the uh you know as soon as people are kind of aware of and able to access that technology so when that happens i would see more borrowers who might be fintechs they might be sas companies but they're going to be outside of what we

would call crypto native today who are going to be you know taking out loans on chain because apples to apples it will be so obvious that it is 10x better than going through currently your bank or your venture you know your venture debt credit fund i sid i i so so this is something that i've i've sort of thought of too and um uh is that like kind of you know people ask like what's going to drive sort of mainstream adoption or mass adoption of d5 right and it seems to me it like it's going to be when you know you can actually pay people with stable coins and people actually want to like hold stable coins and they can use them right uh in the in the in the way that you know we use usd

or cash today um and i i like that that makes a lot of sense to me i'm curious kind of you know what do you think stands in the way of that happening right and and i wonder like to what extent uh if you want to sort of like get into the real economy so like branch out from what is cryptic native uh to what extent is regulatory clarity a necessary precondition for that happening and and i i don't i mean i don't know i'm just asking if you if you have an opinion yeah sure um regulatory clarity is what would help larger institutions like banks to get into this space i note that banks can't offer digital banking

services that occur on chain to anyone uh at the moment none of them will one underwrite that regulatory risk as far 2 there was recent guidance from the sec that a bank would have to consider uh any crypto asset held in on deposit as a liability and therefore hold cash against that so that means banks are going to be very slow to offer digital services um or digital asset services to their clients what is going to happen then is it would be like forbidding walmart to offer online ordering or online you know online delivery so some the free market will create entities because people will see the opportunity and see that it's profitable and they'll raise capital and then go and build out those businesses that will

just operate in a slightly different way so you can already see that there were a ton of uh of entities created that could either take deposits or offer you know fiat on and off ramps but those entities will spring up and they will just own that part of the workflow so you'll probably take money either you'll take us dollars convert it to usdc house it with one of those entities and you might have you actually wouldn't even need a debit card you would just use a phone app to pay for those things with merchants but that regulatory clarity prevents the you know the 100 billion dollar plus incumbents from offering that service and it creates the vacuum through which new entrepreneurs will create new businesses that can operate there i know there are a ton of you know

a ton of very large customers who are banked by citigroup by jp morgan by wells fargo who call those companies or their bankers there and say hey you know we we have some customers who want to pay in usdc or you know um uh some vendors who want to receive payment in a digital asset um particularly those who are kind of in the entertainment sector uh but the banks can't actually serve that need so they're forced to take their banking services or rather their their banking business to other uh providers who can do that um how do you guys think about the changing environment and rates in between tradify and crypto and where does that create either headwinds or potential

opportunities for you because like a year ago the whole there was a lot of talk about bringing in capital from trade fight into crypto to chase some of the yields that were available and now those yields have compressed largely in crypto but it makes sense to me then that the inverse of that actually could be true that it should be cheaper to borrow than in crypto as well whereas it's getting more expensive to borrow in in tradify frankly so i'd be curious to just get a sense of how you guys think about just the changing rate environments which are weirdly kind of inverse of each other in crypto versus tradify uh yeah so so that's um that's actually

something that i found like very i suppose like very surprising um so you know as as tradify rates you know like us treasuries or something like uh you know three and a half percent or uh you know wherever they are right and that is substantially higher than than a lot of uh than a lot of yields that you see in sort of d5 protocols and um i like i've personally been very surprised that like uh that this cache is staying in defunct right it is not exiting the system or it or it has not exited the system so far i i sort of would have expected that um you know people would kind of do that to

take advantage of higher rates that they can uh achieve off-chain um so far that so far they haven't now i i think that you know eventually uh yes if it's cheaper to borrow and defy than it is in c5 um yeah eventually that's that that will happen right so there will be sort of mechanisms for people to you know borrow borrow and defy as opposed to c5 so you know like if somebody and i think probably like probably the way it starts is uh so if you know if you think about like you're taking out a mortgage uh you're borrowing to buy a house uh if you are a very wealthy crypto person you

know it makes sense now to borrow against your crypto assets to fund your purchase of a house rather than actually just go get a mortgage because the rates are substantially better for for like borrowing on chain so i think like you might see that sort of marginal activity like to start with um just because that functionality already exists uh i think it's like super interesting to think about like how you can sort of um you know like bring in the borrowing demand that that sort of like you know borrowing against real world assets i think that's like very interesting i i think it's like a really hard problem uh and it's it's going to take

a i would say a while to be able to solve that um but i do think that like you know with the divergent rate environments like for the first time there's actually like an economic like incentive for doing that right because i think that you know people talked about real real world assets uh you know a year ago and at that time it just didn't make any sense it's like why why would you borrow in d5 versus c5 when rates are so much higher right like it's cool but it didn't make economic sense and you know now with that actually there being an economic incentive to do so i i can see that you know there's more kind of progress made to that but uh i think it's like a really kind of tough

and long term problem teddy have you have you flipped on your because i remember earlier this year when you were talking you were pretty bearish on real world assets like in maybe q1 or something you're like yeah like over hyped not gonna happen anytime soon but it sounds like your mentality on that is kind of changing no i i would i i still agree i still believe what i said so i think that you know ultimately like my feeling on that is still that it's going to take it's going to take a long time and you're not going to see it any time soon you know and like and by by soon i mean like within the next year or two i i just i don't think it's likely um and so you know that's kind of not where we've been focusing our efforts just because like i think that kind of

the hurdles to actually making that happen are uh are substantial and and you know maybe what is actually required to be able to borrow from an on-chain protocol against something like real estate like maybe what the way it turns out is that what you actually need to do is like you need to like pass a law in congress that explicitly recognizes uh defy as like uh you know like uh that explicitly sort of like makes this possible um i think it's it's quite possible that like that's the kind of outcome you would need yeah sid how do you think about that because

i you know real world assets are really interesting i think a lot of protocols are considering them right now because you can just really increase the total addressable market and increase the kind of supply side of that of the of the equation but also when you're a protocol you and you inherit with real-world assets you kind of lose the advantages uh of d5 and kind of inherit the problems of tradify so i'm curious if you agree with teddy disagree where you fall out on that yeah i mean we we've always held that the the bigger benefit in doing lending on chain is operational and settlement it's not uh necessarily bringing management of credit risk on chain so the use of real world assets in on-chain lending is the way it's discussed today is actually a very narrow very narrow

form of lending or it's it's a very huge market but it is one type of lending which is they're talking about lending to asset originators so you're lending to a company that does loans and that company is tokenizing its loans so if it does car loans it's tokenizing ownership of the car or a secured shadow mortgage on that car and bringing that on chain but what's happening is you're still lending that you're lending that lending company uh us dollars usdc so it's on chain but then that company is converting it into fiat off chain and then it's sending out the money off chain so you still have the problem of it needs to record in a spreadsheet or some other database that all of those repayments against a thousand car loans uh which ones

occurred so it's still the costliest element of a securitization is still occurring off chain which is you have to pay a bunch of people um and have them spend a bunch of time recutting spreadsheets to say which loans are repaid and which ones weren't then it's sending the money back on chain to one omnibus account and then recording which of your organized loans received money and which one didn't and it's in arrears so you still have the whole whack of the inefficiency or the inefficient part is all happening on chain all you've done is found a way to easily get that lending company money and so that's why you're typically seeing the lending companies that want to pursue that are naturally riskier in nature so what i'm more interested in is keeping the loans on chain and um you

know maybe you can tokenize the security so you can do a loan against you know a 10 million dollar commercial real estate piece of commercial real estate and if you tokenize ownership of that you could do that loan on chain but that's where the loan itself is on chain as well as the security so the problem with a lot of real world assets just to bring it back again is that the actual loans are off chain and you're just recording like a you know recording a registry of the security on chain but all of the inefficient parts still happening off-chain um what we're looking at doing is doing loans to uh businesses that are maybe outside cryptos these could be fintechs or sas companies record still recording like a

security off chain but the loan itself would be kept on chains it's almost a little bit of an inverse but i see that as a bridge towards real world asset lending where then we can start to record a ucc filing or we can put the asset in an llc and tokenize the ownership of that llc that's where we start to then bring the security on chain for what is already an on-chain loan how do you guys what do you guys think about um you know just the idea like again maybe looking out into the future a little bit uh right now the vast majority of you know we're talking about collateralized versus uncollateralized but we're also you know i also want to get your opinion on fixed rate versus variable lending right i kind of kind of understand and i've unpacked why most of

the the lending and borrowing that's done in crypto is variable rate but i'd be curious like to what degree you think it's an unlock that fixed rate lending comes on chain and then you know if so like what are the roadblocks that you guys see associated with that like why hasn't it happened yet um so so fixed rate lending is on chain uh that's i i do you're gonna say in in what like as a is a meaningful enormous percentage of it you know like the majority is still terrible right here um i so i think that uh um i i guess there are so there are a couple reasons i i think uh first of all when you when you talk about like the majority of of uh lending being variable rates i think that's

that's generally true in d5 and not not c5 um so like uh uh in the markets that that you know it is more active and i think those are all or generally fixed right as well and and so i think that you know why it's happened in in d5 is partially it's that you know again d5 is relatively new uh and variable rate protocols are are easier to build and easier to bootstrap and so they just kind of happened first um but also i think that you know so i think that like for the majority of d5's existence

like fixed rates weren't like from a borrowing perspective they weren't a critical need and like the reason for that is is when you look at sort of like the history of borrowing and defy uh you know one when it you know when d5 first started you know basically there's only one reason anybody ever borrowed and that was to go lever levered law right uh so you'd put your eth down and like compound rave uh borrow stable coins buy more eath and when you do that you know like basically you're playing for like uh tripling your money in two weeks or something right and like you paying a variable rate of interest whether it's five percent or fifteen percent apy it

doesn't materially affect your economic outcome so it's just like not that important for you to be able to fix your rate when what you're doing is something so speculative with such like a broad range of outcomes right and then like uh and then you had d5 summer and now people were kind of had a new reason to borrow and that reason was sort of uh you know borrowing stable coins so that they could farm yields uh while retaining their crypto exposure um now for most of d5 summer or sorry for most of 2021 i guess uh yields were really really high so you could borrow you know you could borrow stable coins uh

at five ten percent and get seventy percent apys so when you had super high margins like that again you know i think fixed rate lending or fixed rate borrowing is nice but it's but it's not critical because you know uh the if you're getting 70 apy whether you're paying 5 or 10 to borrow like just isn't that important um but i think that increasingly and going forward fixed rate borrowing is going to be more and more important because margins have come down substantially uh so like the difference between the sort of borrowing rates and the yields that you can earn with capital uh have

like compressed a lot right so you know maybe borrowing rates are something like two to three percent and uh you know you can earn five percent right and so the margin between your borrowing rate and sort of the yield you can earn with your stable coins is very very low uh and because of that if you want to lever up and uh gain higher returns uh if you're using variable borrowing costs with margins this low like you are exposing yourself to a lot of risk right because a small movement in the borrowing rate can completely like erase your profit margins um and this is actually something that you know i think d5 users have seen

firsthand just recently uh with um and this is kind of getting into the djan weeds a little bit but like a popular trade recently has been to borrow eth on ave mint steak eat borrow more eat and sort of do that leverage loop um where you're relying on sort of variable borrowing rates because you're borrowing youth at a variable rate and you're earning the stake to eat yield right which puts you at a ton of risk to increasing sort of eth borrow rates and that has happened over the last few weeks and so people that have done that trade are like you know the last few weeks we're looking at like negative 50 negative 75 apys on that strategy

right uh so it's like pretty like pretty dire and i think that um so i think that like in this environment as you know things have become so much more efficient uh fixed-rate borrowing becomes like really critical and this is kind of like uh you know the product that we're delivering with with leverage vaults that uh you know we haven't talked too much about yet but but that's kind of what the point of this product is is it's allowing you to uh borrow to fund a yield strategy with fixed borrowing calls yeah yeah we we talked with uh simon jones of volts and he was kind of talking to us i have to tell you this is your background too and uh interest rate swap markets and you know we were taught in the

interest rate swap markets are a critical component for how fixed yields get created right because basically even out in tradify right there's kind of a variable loan which maybe it's like used to be libor maybe now it's so far and then you get like so for plus one percent or something like that and someone will basically you'll use uh options markets to lock in a fixed yield and someone will basically take the other side of that bet so it's like there are three reasons why you would use uh or there are three purposes for these types of markets which is one speculation i feel like check we've got that in crypto right uh so boom we've got that um but then you also need people who are trying to risk manage basically uh and i'm blanking on the third reason uh but

it's all it's like actual actual real use case for this so it's like corporates that are hedging you know foreign exchange rate exposure or things like that or there's risk management that's going on um you know with big with big you know hedge funds and stuff and i feel like that that more professional use case is what we are maybe missing right now and those actors i think eventually will will come but they're not here yet it's it's it's because we don't have 10 in on chain lending so far so if you look at it there are open term loans um done in c5 they will generally have a fixed rate we have maple does fixed rate loans um notional does fixed rate loans but what's missing is tenor out across a long enough time

horizon so it's when you're looking at i'm going to deploy capital but it might be for two or three years uh and so i want to lock in a spread like i'm comfortable assessing what spread i should be paid let's say it's 500 basis points but i'm not sure what the benchmark i should be paid that spread on top of is that's why like that's why it exists in trad fights you might have you know in australia we used to have like bbsw but or sulfur but what you're saying is that basis could move out and i'm comfortable with the piece i want to lock in now is my you know corporate or my counterparty credit risk and that's what i'm getting paid the 500 basis points for if i just set a rate

if i set a rate a fix right now on a three you know on a three year loan then i'm i'm taking like i'm sh i'm you know i'm i'm short the risk that uh the benchmark rate goes right out and then i'm not getting paid an adequate spread versus what i would have been if i'd actually instead maybe locked in benchmark plus you know 700 or 800 basis points or 7 what we're looking at now is we're looking at launching pools that would do longer dated loans and that's where you're going to start to get antenna and that's where people will want to start to lock in either lock in or hedge and and take a variable position on interest rates over that kind of tenant but

that's where you start to get more professional um you know professional balance sheets and who need to hedge that risk yeah i i think it's also like um so in terms of interest rate swaps uh so i think like generally you know one of the biggest reasons that those instruments exist um is to balance different preferences between lenders and borrowers so basically like like the you know the the driving engine of the interest rate swaps market in tradify um is the fact that like you know you've got as you've got

issuers debt issues got borrowers and you've got lenders and sometimes they like the borrower wants to borrow variable but the lender wants to lend fixed right and so how do you reconcile those two preferences and so basically what what you know like what will happen is the borrower will borrow at a fixed rate from the lender because that's what the lender wants and the lender is going to give them a good price because they're sort of like matching their preference and then the borrower actually wants to pay the floating rate because uh you know maybe the floating rate is going to be lower for the next two years before going up such that it's higher than the fixed rate for the for the following three years the loan or something right and then the borrower is

going to go trade an interest rate swap with a bank to get them the floating exposure that they actually want uh while at the same time the lender gets the fixed exposure that they want so it's like interest rate swaps like that's really why they exist um yeah and so the the problem then being in crypto that there is not a header you know heterogeneous enough pool of both borrowers and lenders to basically have there be a mark a market for standing in the middle of those transactions yeah i think i mean like um you know i i think that it's like you need

you need that demand to be there first i i my feeling is that like the interest rate swaps kind of comes second uh yeah or in the sense that like yeah go ahead yeah is that kind of the problem though always in crypto is that like you're sitting around waiting for demand for two years and then it's like more demand than you you know you're drowning in demand and like your biggest problem is like how do i fulfill all this demand i actually remember i keep attributing this to celcus i'm sorry circus so this wasn't you but you know i remember reading this very compelling piece about why dexes were never gonna find product market thing never and it was because like well what's the point right more capital efficient better trading on

a centralized exchange so that will win the professional traders and then it'll be like hobbyists you just think it's cool to trade on chain and what nobody saw coming was mev so you know what i mean it's just it's always very easy and i actually remember another quote again from 2018 um you know it were basically the thing everything that was getting funded back then was c5 capital market stuff like exchanges and lenders and that sort of thing and everyone was like hey we've got all this great infrastructure but nothing to trade and then suddenly it's like there's more to trade than what to be clear mike i'm not i'm not suggesting that like you shouldn't try and build these things uh because like the thing is like you know all this stuff like when you're building like

like hardcore protocols right that's like heavy on the tech uh it takes years to like get it to a point where like it really really works you know so it's like you know basically like my sort of feeling with it is that you have to be willing to take risk in the sense that like you're building for something that you have to like like anticipate it being there even if it's not totally there yet because it's going to take you years to like get your product to a point where like it is able to satisfy this demand and if you wait till the demand is is there like probably you're gonna lose out to somebody that started building it two years earlier right what does what does crypto look like in

like two or three years to you like what seems obvious to you guys right now um that maybe you think is not that obvious to other folks but what what crypto looks like and specifically probably the lending borrow space and crypto in like two or three years that maybe others don't see yet sid maybe or teddy whoever i would just say i i definitely have one for this but i just like say sid you can go first i was gonna go for it but uh sure uh i think i think what's obvious is that in like in two or three years you're gonna see a lot of um a lot of people who weren't in crypto participating in this and by this i mean companies that are outside of the crypto native sector so you know one two years ago it was inconceivable that you would

ever have uncollateralized lending done on chain then it was you know then it was a big thing it was happening in c5 it was happening on chain i think two years from now it's going to be really obvious that you'll have companies who are outside of the crypto native sector who are borrowing or lending on chain because you'll have better access to on and off ramps and so then it's going to be really obvious because what everyone says now is why would you ever do this on chain when you just go and do this through a bank but when you have easy access to it then there's less friction and people will just go with whatever is a better user experience um easier to use more accessible and that's when an apples to apples comparison

becomes more readily available and where you know the marketplace can just decide to use it so i think two three years better access to on and off ramps that's where like that's where you're gonna start to see a significant jump in the volume of lending and borrowing done on chain uh yeah cool um i think that's sid i think that's like a really interesting perspective and it's stuff that i like you know personally like we you know notional is focused in a bit of a different direction um but it's you know it's interesting for me to hear uh your perspective um because i think that's like you know kind of the direction you're going in is also a very important direction um but anyway so so my like i guess the thing

that i think uh is going to be there a couple years from now and it's something that you know again we're working on at notional um is i think that what you're gonna see is like the same kind of uh so you know the same kind of lending activity that that is done in sort of c5 you know lending to traders to pursue delta neutral strategies that like uh you know that they're operating on a bunch of different centralized venues they're running these sort of uh very complex strategies across a bunch of different places i think you're going to see that same thing in d5 like you're going

to see a d5 version and it's going to make it clear exactly why d5 is so much like has so many advantages relative to c5 um and so to to make this clear what i'm you know uh so what i'm saying is like i think what you're gonna see is protocols like notional are going to be able to fund sort of leveraged trading accounts that can that give the manager of that account uh access to the funds that they've borrowed that they can use across a bunch of different dexes and uh you know perpetual trading you know perpetual swap trading protocols in d5 um

and uh uh basically like allow them to do all the same things that you can do in cfi but like because it's all on chain and because it's based on smart contracts you actually don't have to take any credit risk at all and that's what i think is like so cool and that and that's like i think it going to be a primary benefit of d5 over c5 that is going to become clear because i think like uh you know if you you know if you look at the sort of c5 equivalent right so so traders that are borrowing to again you know uh uh engage in delta mutual strategies across across centralized exchanges even

though what they're doing is very low risk you as a lender still have to take credit risk because you have to trust that they're actually going to do what they say they're going to do you have to trust that they're not just going to take the money and run um and uh and and like they're you know there is no way even if they are completely honest which you know i think in general like that's a relatively safe assumption it's not 100 safe but like uh it's reasonable to think that even if these borrowers are completely honest they can't prove it to you so you still have to like take this credit risk and the thing that's beautiful about d5 is like by lending to a smart contract that

that uh that allows these you know the owner of that smart contract to do these different things you can replicate the same that same kind of c5 lending but you don't have to trust the guy that's like operating that smart contract because the smart contract is codified to only let them do a certain number of like a certain set of things within like codified risk limits right like they like if they try to submit a transaction that that causes them to become too long or too short right uh the transaction will fail right uh so they literally can't not do or they uh they they literally

can't not do what they said they were gonna do um and that is like a step change improvement yeah that's an important point so just to maybe try to simplify that a little bit like let's say jason and i applied for a loan right for block works and we're like all right we're gonna use this loan the proceeds of this loan to fund a conference and hire more employees and get nice fancy new office in new york it would be like if we tried to spend those dollars for anything else the vendor just couldn't do it the dollar would disappear out of our hands except for the three things that we said we were going to use the lowest so that removes an entire dimension of risk and that makes you that makes for more capital efficient yeah and i think yeah and so i think what you're going to

see is that like it you know that's going to be reflected in financing rates on chain versus off chain it's like ultimately you know as smart contract risk kind of approaches zero uh you're going to be able to like you know finance activities but just completely removing the credit risk component right so borrowers are going to be more at lower rates and lenders are going to be able to take less risk should that right approach parity with like treasuries or some other risk-free rate then uh you know i that's that's a good question um i think you know there's always some like there's always going to be some amount of risk like you said said

earlier in the conversation right with like you know over collateralized loans still carry risk because like you know the the collateral could just nuke to zero before you liquidate and then you know uh the borrower becomes insulted so like there's still risk there um but i think yeah i'm not sure exactly where it should sort of be relative to us treasuries or something like that in general i think it really just kind of comes down to supply and demand yeah i'm just gonna say it sounds similar to you know the on chat like the on exchange margin products i'm not sure where they priced in their price kind of mid single digits but it's effectively where if um

you know ftx can extend credit via margin that's partially collateralized to you know one of the market makers or one of the high frequency traders they're still charged of an interest rate um but then the risk is that like there is there is risk built in somewhere there that needs to be paid for which would be that if you extend the credit to this shop and they go and trade on a decks if that dex gets hacked well you're still going to suffer a loss they could trade it they only traded it in a permitted place but there is still ultimately a loss that someone's on the hook for yep yep yep i think but i do think you know like over time and you know maybe this doesn't happen in the next year or two but over time smart contract risk

goes to zero i i think that that that is going to be true yeah i've got i've got one final closing question for you guys just on the of the point that you brought up about um one one of the things that interest rate swap markets do is they they match preferences between borrowers and lenders sometimes in tradify that actually works too well right like it did in 2008 right with uh you know basically hey there was an enormous amount of demand for uh home loans right and then what we actually had this mortgage-backed securities where you know we ran out of inventory for like good quality loans so we took a bunch of bad ones and we kind of packaged them up and then sold them and then made a whole bunch of derivative bets on those things and we

matched preferences but like it created kind of a speculative boom so i guess the question is most of the speculative booms and crypto have been driven from innovations in token distribution equity financing type stuff could be icos could be yield farming launch pads nfts but these are all how do i take tokens and give them to more people and more widely distribute them and that has led to these big specular manias if if this kind of stuff that we're talking about if we really do unlock fixed rate lending and we bring in that type of speculator right that that's kind of required to make these sorts of transformations and we do match our lender preferences it strikes me that that could lead to an enormous financial unlock and a lot of activity

maybe even too much so i guess the question that i have for you is do you ever see debt financing or kind of what we're talking about is actually ever catalyzing or fueling a boom in crypto yeah of course um debt financing i mean the speculative bubble arises whenever there is more demand for risk than instruments to satisfy it you get more complex instruments if you look at shiloh mania the um spot market for tulips uh was insufficient to meet the demand so suddenly there were options and derivatives on you know future tulip harvests and uh those had their own price and so that was because fundamentally you had

appetite for risk exceeded the supply of the supply of assets that were available so new ones were packaged and created if you look at 2008 the demand for those instruments exceeded the quality of exceeded the supply of good quality ones so we took you know equity level tranches in rmbs or abs it's basically you took the riskiest sliver of loans and then said because we're putting together like a thousand different kinds of these you know very low quality bonds uh if we package them together because they're non-correlated they actually act like a really high quality bond um you know in in a really simplified sense so i think the key thing is that debt is neither inherently good nor inherently

bad it's a tool that can be used for productive purposes which is if you fund or give financing to a profitable business that can reinvest that at uh at reinvest that to generate um growth that so such as then a larger profitable business where it's where debt is a detrimental tool is when it's used to fund speculation or the packaging and creation of you know risky derivatives and that kind of thing but it's generally being used for a speculative purpose so it's leverage um based on forming a view of the future you know price appreciation of something so there's no doubt that that will occur at some point in the future for

um you know for crypto capital markets just because that has been the history of all capital markets since the beginning of time and um i think what's important is that you know appetite for risk will increase and decrease over time with with the market cycles but that when it does happen you don't have conditions that would make it systemic so you don't have you know a couple of exceptionally large players who are too big to fail such that if one of them goes under they would bring down the entire system so you need to think about it in terms of a a market structure where you don't have things like you know monopoly concentrations and you have the ability of the system to kind of withstand you know the

occasional shock which i think in in today's sort of heavily regulated environment is often lost because we try and reduce volatility at the expense of longer term fragility of a system yeah i i think it's going to be the dow's borrowing against their governance tokens i think that's what it's going to be uh just because i i think like you know because i think everything like those because you know like it sounds really cool and like it'll be really interesting and people are going to think it's awesome when you know when it starts taking off and then all these tokens are going to go rally and then be like oh my god i can borrow even more to like earn even more yields and then it's just going to be like it's going to be a spiraling thing and then you know and

then like well it all unwinds i so i could i could very very easily see that yeah here are here i was thinking that we were going to have like more stable booms and busts that the the booms would not be as drastic and but yeah how do you paint a picture of uh severe booms and busts in the future that's opportunity though honestly i just i just don't think you get one without the other even though you know this podcast is aggressive but the podcast called the choir that he's like deep dives on and they did this one on standard oil like a five-hour in-depth history of john d rockefeller and standard oil and the way they people should go back it's usually i'll put this in the freaking link of the podcast and listen to the description of what

the oil industry was like back then and um uh yeah it's just there are a lot of parallels to crypto i think yeah i i totally now he solved it with price fixing so yeah i don't know what a lesson there is enough there are always subsidies yeah yeah exactly i feel like because i i agree i think that it's like the boom and bust thing is just like it's some you know if you want innovation and if you want like all this stuff to happen like it's sort of like a necessary evil and i i just i feel like the reason why is that you know most people when it comes to like taking financial risk like they are not willing to do it unless it feels like it's a sure thing you know and then and then they like it feels that way to

everybody and it's self-reinforcing and and yes i think that's why what did what was mark twain saying it's uh it's not what you don't know that gets you hurt it's what you know for sure that just ain't right right yeah it's exactly right you know it actually wasn't even mark twain that said that mark twain apparently like fifty percent of saying contributing to mark twain he just like got this you know reputation for saying a bunch of brilliant stuff so whenever someone doesn't know it's like mark i said it but i uh i know mike said i know mike said this was the last that that was the last question and it uh but i but i do want to just add i have one other question i can't let you guys drop before i ask

this which is about um just like on-chain credit scores actually and like i feel like i saw all these pitch decks at the end of last year of being like all right you can't have under collateralized lending without without on-chain reputations and on-chain credit um and then what you saw is ave launched lens protocol and everyone i feel like everyone was kind of like all right well this is like decentralized social media but it's obviously a way to like get at the under collateralized lending problem i'm just curious if you guys think that that is like like a necessary thing for under collateralized lending or if you're like dad don't really need it like on chain credit is kind of overhyped i'm just curious what you guys think of that whole space um yeah personally like i i feel like you know a lot of the conversation

around under collateralized lending goes back to what we talked about in the earlier part of this podcast where it's like people have a misunderstanding of what it actually means like like it is sort of a misnomer right because like uncollateralized or under collateralized lending in c5 is not actually uncollateralized it's in in some but it but it did used to be actually teddy like the whole personal guarantee thing is a relatively new phenomenon like the last well what are yours i'm not familiar with what do you mean by personal guarantee like you you know the because it is it is kind of uncollateralized lending if you consider if it's if you don't have to personally guarantee the loan that you're getting and then you

can go through a bankruptcy court right to get that so that is sometimes you can take advantage of assets that aren't really theoretically yours and they couldn't get possessed okay um i i guess i guess my my what you know what i my what i was going to say is that in general it's like uncollateralized lending right it's like it's collateralized by the legal recourse that you have in the event of default like that is collateral right and and like you know yes the the borrower can go declare bankruptcy or you know there are things that can happen which means that you don't recoup what you're owed for sure but like the

idea that like you have no recourse that like there is no you know like legal recourse is just another like it's you can you can think about that as that is your collateral right um and like that so you know that that requires a legal system which has authority to go you know take your stuff right uh it has the you know like authority to go garnish somebody's wages right um and that doesn't exist unchained uh or like you know the way to do that on chain is to have assets that sit in a smart contract and a protocol has access to those assets right um

so you know i i think that yeah i i would just say i'm i'm not sure whether if like completely uncollateralized lending you know uh maybe a way that you can do it is this lens protocol where it's like you know if the guy doesn't repay well you can you can slash his social profile somehow yeah i can see that you can impose consequences meaningful consequences um but yeah i i i i don't know i think it's it's it's speculative still if i want to build a consumer lending protocol and uh start just doing consumer loans so i could do that that's where i might want to use a um an on-chain credit score but what i either want is that on-chain credit score has to be a better determinant of

the person's ability to repay the loan than their fico score or the on-chain score needs to factor in off-chain things like how much the person gets in their um you know regular monthly wage how much they typically spend like those types of things when they own their house or not so for a really good and useful uh on-chain credit score it either needs to have an oracle that pulls in these decisive facts about the borrower or that person needs to be conducting the bulk of their financial transactions uh which includes all spending all income generation on chain that's where an on-chain score is really useful so it either needs to be complex enough that it's factoring in plaid fico bank account scraping or the person needs to

be on chain enough that i've got a pretty good picture within that score of their financial health then it has to from for it to work for me and be like value or creative for my business it has to be uh i have to be doing this at scale so the reason an on-chain score was so attractive was not because it made me easier made it easier for me to decide to um to lend to that person because i could get an email set of bank account statements i could run a ficos uh score check manually where it was going to be really useful was if i wanted to write an algorithm that would write a thousand of these loans a minute that's where like you then start to get to scale economics so you need a really large supply of capital and then you

needed a way to produce those scores um or have a really large market of people who would borrow using that score so i think that it's just the size of the market is still too small at the moment so you either need a bunch of people who are just receiving usdc salaries um or and and who want to borrow or you need a really large supply of capital that's willing to finance um you know a lending business that wants to run this so i think it will happen in future it's just um the scale the scale effect is not there yet all right guys uh this has been a ton of fun we've taken enough of your time here uh folks want to find out more about either either of youtube projects or just follow you online or whatever

what's the best way to do it yeah twitter at uh so i'm at syrupsid on twitter and then we are at maplefinance one word uh or you can go to maple.financeonline to uh to find us yep and uh i'm at teddywoodward and on twitter the company is add notional finance and our website is notional.finance sweet sweet awesome thanks guys thanks appreciate it thanks a lot cheers all right what do we think uh we think it was a good one we think it was a good one i i mean just first of all i really like teddy and sid just like two very smart minds and i think they've been really ahead of you know i i remember talking to teddy

two years ago two and a half three years ago about like under collateralized lending and fixed rate loans and i was like oh man like really small market this guy's going after and here we are three years later and uh you know he seems to be probably pretty early on that trend and i just think they're both really smart and i like the episode i think a couple of key themes to pull out one was a pretty interesting distinction teddy made between that that under collateralized lending is a little bit of a misnomer and i think it's actually it's a really good point we kind of got into it into the episode but is there really such thing as unsecured or uncollateralized lending like when it because basically i think he he drew a really important distinction which is all lending's really collateralized like when

someone's giving you a loan if you're on a personal basis or a company basis they're doing it against something so they have legal recourse if you don't pay your loan and they're usually looking at something if it's a company maybe it's your account receivables your history of generating cash flow whatever your projections are any assets that you might have on your balance sheet if it's personal loan they're probably looking at your fico score and your history of credit and they might you know they usually you'd be doing it through your own bank so they basically have access to your bank account right that's kind of a collateralized loan too so i thought it was an interesting point that he made that these are real i mean the line between collateralized and uncollateralized it really so it's a little bit blurred and really maybe the way to think about it is how can you be

more capital efficient with the loans that you're that you're making yeah that is a really good point i mean it's similar to what alan brought up in the last episode about um like using governance tokens for uh collateral right is like is that collateralized is that uncollateralized like uh and i think there is this i love that he came out and just called the top yeah i was like yeah it's gonna be lending against governor's tokens yeah exactly yeah at the very end of the show though yeah exactly i i love that yeah anyone did that they collateralized like they if you go back the best one of the best documentaries ever smartest guys in the room so yeah everyone did and one did so much stuff but one of the the reason why i unwound so quickly is that

all these off-balance sheet vehicles many of which were collateralized by and stock and uh you know so basically it's this it's there's a death spiral effect that as soon as it looks like you aren't gonna be able to repay on those debts the value of the stock plummets you be you go you're further out of uh out of covenant with your with your lenders and that's that's how it looked everyone literally collapsed like oh yeah exactly for this reason so yeah i mean yeah that's the spicy take from teddy it was spicy i mean so we're halfway through the season right and i feel like there are some themes that keep coming up in the season and there are some themes that keep coming up that a lot of folks agree with and then some themes that come up that like folks don't agree with and i think one thing

that i've noticed a lot of people agree is inevitable it's just like dow's using debt right that feels like a very like agreed-upon thing i would say with every single person that we've brought on is daos are going to leverage debt instead of just token fundraising and equity in the next cycle agreed i think no one has really questioned the core premise because even though what we're talking about doesn't get a lot of air time in crypto today i don't think it's that wildly controversial right you know we're talking about fixed rate lending coming to crypto the it makes sense to me that more especially as the the level of borrower gets more and more sophisticated there's there's just more demand to borrow at a fixed rate than there is a variable one yeah so i think no one's really

questioned the core premise either maybe where maybe the one of the cons the thing that's always hard to get and teddy kind of dotted this a little bit during the episode she's timing all of this like when are we gonna have product market fit for this i think it's probably still the biggest question yeah i have at this point this season i mean didn't teddy just nail one of the problem like one of the hardest things about being an entrepreneur and building anything is like you do have to take a very con you have to form a belief and have a thesis take a very concentrated bet and build the thing before it exists because if you build the thing that already ex like for the market that's already here then you're going to be too late and i think honestly both of these guys teddy and

sid have done a good job at this with notional and maker uh and maple so one thing that feels like so everyone agrees dabs are gonna leverage debt one thing that people maybe don't agree on or honestly i think people are still trying to figure out their belief on it is like real world assets for uh as as like the supply side of the land and borrow um that that seems like a theme that like a lot of people are kind of noodling on and like don't have some i feel like there's like not a strong conviction across the board on whether or not people think that's a good idea a bad idea like maybe a little bit of both if i had to guess at the consensus it's kind of like everyone's going to hold their nose and do it but nobody loves it

that's what i think too yeah decent way to get to the bear yeah that's what i kind of think as well um i think it was interesting to hear both their approaches about doing everything on chain versus leveraging the legal system like to to the point that we were talking about when you're doing uncollateralized signing it's not really uncollateralized even in real world uncollateralized unsecured lending your collateral is the legal system that you're plugging into right it's kind of like a layer two borrowing security when you're a company building in the real world you are borrowing the security property laws that exist in the united states and the court system and executive system to enforce all that kind of stuff so it was interesting to hear their two approaches

where sid and maple they are leveraging the efficiency of unchained borrowing and lending and there's a certain amount of that that occurs on chain but ultimately if there's a default then the recourse is to go through the legal system which is you know it already exists so there are kind of pros and cons to it and then it looks like teddy is trying to actually make it so that everything can occur on chain and we're saying hey we don't actually need this legal system and we can actually build all this on chain i am not smart enough to know which one of those two things is going to work frankly i don't know i don't even know i they probably don't have to be mutually excited market will be sid's market will be bigger in the short

term but it's i like what i like where teddy's going with having everything on chain yeah that's i think i mean it's just hard to know i i think there's a there's a threat and initially the theme of the season was going to be on-chain maximalism and moving to on-chain infrastructure but i think there's a pretty smart argument that you can make for i can see the other extreme as well which is on-chain minimalism which is only putting very important or being more selective about the types of information that goes on chain and leveraging off-chain as well so i i kind of think i'm not i'm not smart enough to know which one is going to end up playing out end up playing out there yeah but but i did think we started to get into at the very end of that

interview some stuff that's possible in crypto and in d5 native credit it's not possible in the tradify analog and i always think those ideas are interesting to explore but this idea of yeah like if you applied for a loan if blockbus you and i applied for a loan we said hey we're gonna spend the proceeds on x y and z the bank or the creditor is implicitly trusting you and i that we're gonna be honest and that we're not gonna blow it at clubs or vacations or whatever and people do that i mean people do look at how some people spend ppp money so what's interesting about crypto is that you don't even have to trust that you can you can program it into the loan that hey

here's the loan but you have to spend it at x y and z otherwise the contract will not allow it to to be spent that does feel like an interesting innovation yeah that is really interesting i like that a lot you know the the last thing that was interesting then we can wrap this is uh in the in the round up with michael and vance we talked about how rates are now like lower in crypto um how rates are now lower in crypto than they are in in tradify and how that's a bad thing because it doesn't drive as many people into into defy right like the rates used to pull people in but you know teddy brought up this good point or maybe you said i forget who said this but you know you could look at like if you want to go get a mortgage today it's

because the rates are so low like the rates are actually lower in defy so that is like the the pro side of that um of that coin that we didn't talk about on the roundup is like and now it's you know you look at mortgage rates they're above six percent today like that is astronomically high and it doesn't look like there's any signs of it slowing down or going back below six anytime soon so uh yeah that's that's the other side of that coin of what could pull people in if i had to be determinedly positive about that headwind what i would say is even when there was an enormous spread in between the yield you can earn in crypto versus the yield that treasuries were giving you what it's not like i know i got a blowback when i voiced this on the

roundup but that spread even a five percentage point spread didn't draw in a whole bunch of hedge funds and banks that was looking to capitalize on that because the career risk those associating with getting yield from smart contracts was still too high so i kind of think people in crypto are very creative and you're already starting to see another use case emerge from yields and tradify being higher which is importing tradify yields so leveraging the balance sheet of big smart contracts like maker to earn yield that's available in tradify and people are creative i i bet there will be yeah i hadn't even thought about borrowing borrowing against your crypto assets to get a mortgage because rates are really high you just you just kind of never know how these things are going to shake

out in grade yeah who do we have next we have on-chain derivatives in liquidity with uh zeta and friction oh this will be really interesting that'll be a great episode and then after that uh the last two episodes of this season we've got ben foreman talking about who are the borrowers right ben started parify and then we've got uh uh i'll i'll save the uh we've got stani and then a surprise guest coming up as well so talking about defining the next bowl cycle so that'll be really good uh way to end it out yeah upgrade great bye buddy we'll see you next time see you next time folks [Music] you