VDAO Ep 12 The Hidden Risks of Stablecoins (And Why Decentralization Matters) | Michael

Transcript

Hey, Michael. Welcome to the podcast. >> Hey, Chris, thanks for having me. >> So, to kick things off, I'd like to start with a question about what motivates you as a builder in crypto and generally like what's what's your why? Yeah, I I think my why is very much tied to Ethereum and when I got to know it in 2017, you know, that was in the ICO bubble and what was like obvious that now we could do peer-to-peer finance. We were not relying on intermediaries. We could send tokens around. We could cost these things. And just seeing this technology was uh yeah kept my fire or

ignited my fire and that's what I'm passionate uh since then. Yeah. Really being able to to have this freedom tooling which I think Ethereum is um and which enables peer-to-peer finance. I think that's really great. We didn't have that before. um we just had you know uh banked people unbanked people and since then we have self-banked people so that really caught my interest and I was before like in a normal corporate environment where we did digital innovation and talked about disruption and honestly once I saw that I said hey that's the only disruptive thing um I see in the digital space then yeah then then I made the jump and never

regret it >> so it was like the P2P P element as in like people being able to so disintermediation like you can send your money to anyone else without having to rip through the financial system. That was what really that was the inspire in inspiration. >> Yes. You know and it's very much a builder thing. It's grassroot movement. Now, uh, you're my kid, I'm already older, you know, could in in in the garage, build something that you could roll out worldwide and people would use and find find useful, for example, mainly for the financial uh, sector.

That was always my angle. I'm very much into DeFi and all these things, although you can use Ethereum for other things or blockchains. And what about your you kind of touched on this a little bit, but maybe if you could we could double click on your root like into crypto itself like you you were in finance before and like what was it like yeah what was your journey to to get here? Hey, I have a computer science and economics background and was I was mostly in the online space for the digital channels of a big telco company more on the business side. So I was becoming less and less technical and then Ethereum happened here in Switzerland. I'm in Switzerland and actually through a lawyer. I I I heard of the DAO hack and then kind of uh

everything get started and then um first I I built a startup in in the space where we really wanted to bring financial products on chain and solve the big problem of finance. The reconciliation of data that every financial instrument is kind of um lives in a thousand of systems and needs to be replicated for operation, for analytics, for reporting and yes, we wanted to bring kind of all this logic into a token and and and but that was way too early. I still like the idea, but I think it takes another five to 10 years. And what was it like back then in finance like when you were jumping so deep into crypto? Were people

like what is this space you were going into? Like what was the the vibe then like back in the early days of crypto? >> Difficult to say because I don't have a finance background. So I didn't came from a financial institution. So, Ethereum and the whole space taught me a lot about finance, which I I'm grateful for because I think yeah, it it's uh really important and I think very few people understand how money is created and kind of how it's intermediated, how risk is handled in banks. So, that's really cool. So, I don't have that angle. Yeah, I think not much to to say there. I mean, the people that are in the space understand it. The others didn't understand. I didn't care about the others. So, yeah,

I think it's still like that today. >> And do you think like back then in the in the Ethereum community like it what I'm hearing more than anything is like it was like exciting and it was like a learning thing like you were jumping in and like there was this opportunity this new space opened up this P2P space that wasn't there before and uh and what was the community like back then? Hey, very vibrant. I mean soon after kind of DeFi started which was such a great phase seeing that seeing all these projects the collaboration the modularity of these systems uh really playing out and I think that that was really cool and uh yeah >> a lot of like visions of what could be

done like it was like anything was possible right >> yes and a lot of things were built you know you had year and kind of oh we have these walls we have taxes we have that established and also the and compound the lending markets. Yeah. So I think that was great. Re more recently we have seen a bit less innovation but back then I think uh uh yeah it was full full of builders with new ideas. >> So the the theme of our our podcast here the the Vita podcast is all about um resilience and anti-fragility.

And uh I I like to when we speak to guests on the pod to just like check in about what these like what these terms mean to our guests. So I want to put this question to you as well like what does anti-fragility and resilience mean to you? >> For me it's very much empowering the individual to be sovereign and independent. Um that's why I said Ethereum is for me freedom tooling and how can you become free if you are not captured by a system meaning a government or a corporate. Yeah. And and I think that's really important. I'm not saying I need just to rely on Ethereum

and governments or big corporations are no good. But having the option I think Ethereum brought in the optionality especially in the financial sector that we didn't have before. You know 100 or 200 years ago finance was peer-to-peer. You did just finance and that was the normal thing with kind of the the the speed of money with telecommunications. You couldn't do that anymore on on a scale. That's why you needed intermediary. Uh so we can go back and we have this optionality and why it's important to be also independent from governance and and corporations.

Yes. Be because you know for example financial system can be used as a weapon. Uh you can be deplatformed. You you had you know these truckers during COVID in Canada. You have journalists that lose their bank account without a trial. stuff like that or um people in countries where they have dollar restrictions or where their savings are confiscated or taking a haircut. Um yeah, I think that's why it's important and you know it's very powerful and I see that in Switzerland. In Switzerland we have this unique political system where the citizen can stop any decision.

Um that's called the referendum. And even though we don't use it that much just having the optionality to opt out is very powerful because just for the politicians knowing that the possibility is there they will behave differently and I think the same thing is if you know okay you can't stop money or people have an option like Bitcoin this will put pressure on people to um uh yeah hopefully we actually we don't have haven't seen it but for example to don't devalue the the currency or you can't just kind of capture your citizen and and give them no option than your own local currency stuff like that. I hope um that's what means for me kind of the

resilience or sovereignty especially yeah I rather use sovereignty. >> Yeah. So you're describing this like self sovereign like the sovereign um individual in a way like the ability for uh people to transact freely between one another like um and I guess it is interesting like like how Ethereum and crypto in general can bring up those questions about like what is money, what is the where did it come from and how has that evolved over time because like you say in the early days right like maybe even barter like before there was a financial system there was like barter and then it like evolved from there and

I mean we don't need to get into the history but I see what you're saying like if the individual has to rely on a centralized entity they are less resilient because if anything happens to that entity then they're they're screwed right or if the entity turns against them >> and locks them out then they're like like what do you do >> it's really the locked It's not that we they're not good and we need to escape from it. Just uh you don't want to be locked in. >> So you're you're talking about maybe I better uh to paraphrase what you're saying is like optionality. You think like optionality is important. If we want to be resilient, we should have options. We shouldn't it shouldn't just be like one system and that's it. And you know also not only governments also

more and more also big corporations that kind of I don't know credit cards that dictates what it's allowed not allowed and who's uh yeah >> yeah and just on very practical terms like that if your bank goes down you can't access your money right like if you're whereas in crypto you can it's on chain it's there it's yours it's in your your control. Yeah, exactly. >> Cool. So, I know you're you're a builder in the in the DeFi space and I'd like to move on to to dive deeper into this um topic and I'm really interested in this topic and I think our audiences as well around like resilience as it relates to

uh money. Uh and um there is a lot of talk about stable coins. I mean, it's kind of been going on for the last uh year or so, like, but I wonder if you could just at a very basic level talk us through what are stable coins and perhaps uh the different types of stable coins that are out there. >> Sure. And I mean, it's already interesting maybe to ask yourself what is a dollar or all dollars the same, you know, because I think probably there's only one dollar and that's if you hold it in paper. um because the counterparty is the US already your dollar in your bank account is another dollar because

it's your bank's counterparty risk and if you had the Silicon Valley bank suddenly it wasn't worth a dollar anymore you you know so it was different it's a different dollar and so a stable coin is a a dollar on on new rails on on kind of world rails and it also is usually represented or a claim that has the value on something like a dollar. So usually I I think we have the centralized dollars. I think the the safest and most centralized dollars are like government mon money market funds where you have treasuries then or bankruptcy remote and then you have um you have a token that is tied to it and

that gives you a redemption right of $1 and now this digital token is worth a dollar because it's a claim that is very strong. So that's um a potential stable coin and we from liquidity are on the other end also issuing the protocol is also issuing a stable coin with a very strong claim because it's enforced not with law and intermediaries but in code and secured by Ethereum giving you the right to redeem $1 worth uh of stable coins for the underlying collateral.

here the collateral on a treasuries but it's Eve one of the strongest collaterals out there uh or on chain um rocketpool even rep so two LSDs more and of course because they are volatile it's uh over collateralized so you have always enough backing uh of of this stable coin and of course you also have margin calls if kind of the the loans are are are getting too low so I think and that's a decentralized stable coin and again now you see the optionality you have a stable coin that users have self-created or issue themselves every time I open a borrowing position I'm the issuer of this stable coin actually and then you have a stable coin issued in in

the centralized world I think these are for me two main main stable coins kind of the CFI and DI there are then also nuances and you have a lot of shade of grays in the middle where you add a bit. Oh, it's more a hedge fund and they do a lot of stuff. Oh, um, but it's not regulated and they do also some DeFi stuff and mix everything together. But I I call it the trust me bro zone in the middle because you're kind of adding the worst things of of both worlds. uh you know the risk the technical risk of DeFi which you have um together also with kind of this intermediate finance

uh risk or counterparty risks and and and and all these things um in a less transparent way. So like with these uh two different types of stable coin that you're just describing um like on the CFI side it's more like uh the collateral or the the backing if we can call it that is still offchain. It's like in a bank somewhere but like onchain you have some representation of the the dollar and uh in the decentralized model that you described

uh instead of that it's like it's Ethereum that's backing the the the asset or some other like it's like fully onchain. Yeah. So that it's like decentralized in that it's backed by an onchain asset rather than like this onchain offchain asset. And why I like to show these two things because I think these are the two extremes. So people that know don't know liquidity with liquidity we try to really go as decentralized as possible so that there is no intermediary. Nobody's between you. you as a user, you don't you have or I as a CEO of the company don't have more rights and possibilities than any user because the protocol is immutable.

So it's really just code. It can't be upgraded. There are no admin keys. All the collateral is onchain. Everything is transparent kind of taking out every intermediary that there could be. So these are two examples of how stable coins can come into existence. But maybe also from a user perspective, it's good to say how stable coins are different. So I think there it's also important to say C5 sense stable coins are very good at payments, you know, or an exchanges um kind of for the payment use case. And for example, such a D5 stable coin as we are is less probably transactional. It's more kind of holding a a stable coin, a

sovereign stable coin that is not tied to thread file and has other risks and maybe more for for saving use cases. So I think you know it makes sense to have maybe also different stable coins for different use cases. So that could be also a distinction of stable coins. What am I using those stable coins for >> in terms of like the the resilience of these two different approaches? I wonder if you could tell us a bit about that like what's your your take on that like the the risks as there you talked about a a little bit in in terms of like the trust me bro scenario where or within the decentralized stable coin side but I wonder if you could yeah just double

click let's double click on that a bit and also if you could bring in like the risks on the CFI stable coin side as well and how decentralized stable coins might help address them. Yeah. And you know with trust me bro I didn't mean the decentralized one because the question is always who do you trust in CFI you trust humans intermediaries on the D5 side because you trust code if the code is not good you have a problem too. So these are the two things the trust me bro is kind of a mix and especially a mix of the risks um what could go wrong. So I can highlight what I what I think a decentralized stable coin like the liquidity one which is called bold. What are the different

properties that you get that are different from a centralized stable coin? So the first thing is a risk thing. Yes, this thing has a totally different risk because you're not exposed to threat risk like a counterparty. Silicon Valley Bank goes down or your circle the issuer you know with USDC you still have some some uh circle risk if circle goes bankrupt I think you have some risks there um the the collateral that is backing it not not everything is in treasuries the cost of the operational things we've saw kind of uh private keys getting stolen um jurisdictional risks

um so that's one diff difference you get a really different risk profile and actually you know that's also true for for a dollar or stable coins in in general they have a different risk profile some have more counterparty risk um some less and with uh bold you can diversify your stable coin risk and you say okay I trust here the full the technical um technical co I also have technical risk and maybe I have then also C5 stable coins which are also a good opportunity. So, one is the risk perspective. The second feature that such a stable coin like B brings to the table is uh sovereignty and more

control. Yeah. Because you really control it. You have strong property rights. Nobody can blacklist, freeze it or take it away from you. Um everybody can mint and redeem. You know, with a lot of stable coin as a retail user, you you just have tax liquidity. There's no counterparty. Actually, with some of the big stable coins in DeFi, you not even have a claim. No, you you're holding a token and you just believe in the team and and everything and the only thing that you can do is go to a DEX and exchange it. Hopefully, they will give you something bad. But honestly, for the very big ones, you don't have a legal play. With uh with Paul, you at least can go to the code and Ethereum will

enforce kind of the the redemptions. And another thing is for example the mandate is enforced we so liquidity can't add or remove collateral so terms and conditions are or are or um agreed and also with with some of the stable coins these strategies really change and you're not aware you know maybe that that was a um a caric trade now it's in treasuries now it's in defi yield uh so again that's what I mean with control and sovereignty and then you also get better transparency because everything is on chip with uh liquidity it's 24/7 verifiable um and yeah you can assess everything it's very um very transparent so I think

these are the the the properties you you get with a decentralized stable coin on the other hand with a centralized ones um of course if something happens um you should be able to go to court if it's set up well it's bankruptcy remote you you get kind of the the treasure is there. So if something technically goes wrong probably you you have better ways to also reclaim some things if it's set up properly you know that's why I said this in the between the zone where you not even have a claim you're just at the mercy that uh somebody will give you >> um part of your back >> and to make it re really extreme I really like this these two different

models because they're so different so one is you know the centralized stable coin it's run by humans um backed by treasuries controlled by nation states and the alternative is you have something that is run by code backed by crypto and controlled by its users >> I love it by its nature that has to be more uh resilient right like or antifragile >> I would argue >> yes yes exactly it gives you really more control but let's be honest with all the hacks it it also has some risks you know we re rely on technology and technology can go wrong but as we have seen actually most of the problems are more

on the operational side these days >> um yeah >> yeah I guess like one of the things that comes to mind on the centralized stable coins side and maybe maybe we need to go go there in terms of like what is money like that question keeps floating around here maybe we need to go there but like on the centralized stable coin side like the uh you mentioned Silicon Valley Bank. If the provider who's who's holding your money goes it gets into problems, then your money is like you're in trouble, right? You have to go to court and like who knows what's going to happen. Like it's a lengthy process. You've got that counterparty risk. And then in addition

to that you have the the the bigger risk which was I think for many people who got into crypto in the early days a big factor of like the stability of the monetary system itself. Uh and I wonder if you have any any thoughts about this question or relating to like even the dollar itself like what is the dollar itself now that's issued by the government compared to like in a previous era where it might have had some uh redemption value for for gold and so on. Yeah, it's a big question, you know, and and I mean as I learn more about the monetary system and how it's used by a government, the more I got fascin fascinated with, you know, what

Bitcoin created and what we can create with Ethereum because it gives us the optionality to opt out of these uh government currencies and rely on world currencies that are not controlled by by by government. I think that is great and and and again you know with with these and and both both are useful. I'm not saying one is better or worse than the others and also you you know before we said from the risks um there are different risk but both can be also viable alternatives. So for example for bold we we we uh blue chip is an organization that rated rates uh stable coins. So I think PayPal has the highest and Ripple USD on the centralized u

stable coin side because they are bankruptcy remote and backed by treasuries and on the decentralized stable coin side uh liquid is bold and previously LUSD or highest ratings and actually they have the same rating. uh you know surprisingly bold had a better rating than USDC because it has less counterparty risk and and Ripple was even now also better than USDC because it has the PEXO setup which seems to be the the gold standard a bit in the US before the Genius and Clarity Act. So that that was really uh great to see that you can get safety or minimize risk with different ways.

>> And I love the way that you're framing this like it's not it doesn't have to be about us just like completely rejecting government like we're going to do 100% of everything on chain and we're not going to touch fiat or like like we're not going to touch dollars in the in the system. But it does like introduce optionality which in itself I think actually could be a benefit to the bigger system if there is a shock in the big bigger system if something happens you know there's this alternative that um may actually benefit from shocks that's anti-fragility point right like there's there's some shock and yet this system is is there and can't be switched off uh and in relation to that though like Um we talked about circuit

>> just giving you a little little thought experiment you know now with the genius act and clarity act which are great you know because now they give give you a regulation a lot of certainty that makes a lot of sense this will give good stable coins the EU didn't do a good job with mo I don't know Switzerland it up too so there aren't many good frameworks now the US has a very good framework will be the home of all these stable coins export these stable coins to the world. Now, everybody is holding these US stable coins and that's what I meant what I meant also with regulatory risk.

So, imagine the US would have a leader that comes up with great ideas. And one idea could be people I don't like um can't use my stable coin or I freeze them or I give them a cut because I can't do any um trade tariffs. So, let's You're using our dollar. Nice dollar. you should pay for it. Uh let's take five. These things be become possible. Um uh yeah and you know I I taking a bit to the extreme but also lately not so much to the extreme.

That's why I think optionality is is so important. >> Extreme is catching >> and you know for example now with bold or our stable coin that's out of reach. Nobody will mess with that. If you hold that, nobody can take a 5% cut or take it out out of your wallet. >> Yeah. >> And that Yeah. That gives us power and freedom, I think, as as users. >> Yeah. And I think that's quite that's quite rare in the stable coin space, right? Like lots of the stable coins that are out there, including the the ones that would claim to be decentralized, have these features where they can add in uh block like they can block your transactions.

uh they can uh kind of curtail the use of your your funds programmatically. It's it's embedded uh in the code. Um but uh with the fully decentralized stable coin approach that you're advocating for like what you've built with liquidity, that's not possible at all. Right. So that you're introducing this optionality. There's an opt out from the biggest the bigger system. If you want to do it differently, you can take this this approach. >> Yeah, exactly.

>> Yeah. I'm curious just if we could uh we don't have to get super technical about this, but like if you could also touch on like this peg mechanism that is used, right? Like so the bold stable coin is pegged to a dollar, but it's not actually backed by dollars. It's backed by Ethereum and the Ethereum can be removed programmatically and it can't be the stable coin can't be blocked. It's like fully decentralized. But yeah, like what's your your take on like the peg and have you guys or just have you generally got any thoughts about whe like pegging to the dollar or pegging to other currencies whether like

where your what's your take on that? >> So two questions. Yes. first I think to the dollar because it's just 99% uses the dollar. I think that's in the future hopefully we have a a different currency. Um and of course you could use another one but I think just yeah out of practicality and when market force it gets the dollar maybe I can quickly explain you you know how how how the model works and it was already maker introduced that and was the pioneer for that. So the decentralized stable coin are and that's the nice thing or minted by the user. Every time somebody wants to borrow against crypto like ether stake ether could be also something else

it pledges the collateral into the protocol and the protocol mints the stable coin. So that's how it comes into existence and then you pay like for a loan a borrowing fee and as long usually it's 150 or 200% over collateralized like if you would take a margin loan with your bank and there are margin calls except no banker will call you. the protocol will be very harsh and just liquidate or kind of uh can open up the liquidation process so third parties can liquidate your collateral like that is always made sure that it's it's fully backed. Um yeah that's how a

stable coin a pure crypto stable coin comes into existence. That also makes it not so efficient like other stable coins where you just can put a dollar into a bank and then issue a mint a stable coin. That's sometimes also the critique. These stable coins are not so scalable. But again, you know, I'm not saying everything needs to be a cryptostable coin and they also don't need to be so big because maybe they just need to have this clear use case where they offer diversification being the dollar of last resort and it's okay to have a centralized stable coin for transactional stuff and maybe they're also not an Ethereum because of transaction costs and so on.

>> Interesting. Yeah, I guess like the way you talk is like it sounds like you're just very realistic about like the simplicity and the the way the system is right now. Like the system is primed around uh intermediaries and so on. So wholesale transition of that system onto a fully decentralized uh chain is going to take time, right? uh like but if that system goes down what is the last resort like if there's a massive shock to that system where do people go and I I would suggest that it would be like to something like what you've just described onchain fully on

chain >> yeah I mean we have seen that you know when Silicon Valley bank happened a lot of people um came into the stable coin just because it doesn't have these dependencies might there be a ripple effect if liquidity dries up and so on, who knows? But but of course, uh again, especially if if if you're in countries where things can freeze or if you don't want to be exposed to some risks, um then our system is really great because it's not tied to anything else um except for EH and and Rockerpool, E and LDO. So you're only exposed to the risk, you know, like we've seen recently with the hex, then you're in a wall, the wall dries up.

>> Um, and and kind of you have this ripple effect even though you hold USDC, you might still be impacted. Um, so I guess one of the themes or the threads of this conversation has been around uh around risk and how decentralized stable coins and specifically the liquidity model helps to address that and and kind of promotes resilience and anti-fragility. I wonder just to bring back this point you made earlier about how there's uh a kind of saving use case here for people that rather than it being about transactions uh a transaction use case or like a payments use case although it's possible uh perhaps you know the first use case for people is like

saving. So, I wonder if you could talk us through like uh just like as an average user, I've got funds on chain like how can I use this to save and generate some some yield and uh or like some uh if we were talking in traditional trady terms like interest like how can I gain more on my deposit than I put in? Uh and is it safe? >> Good question. Yes, let's dive into it. So first yes liquidity has two sides and I explained the borrow side and you can also earn by depositing the stable coin and then you earn the borrowing fees and actually it's quite simple you know if

if you mint the stable coin and maybe you sell it because you want to buy a house the stable coin doesn't disappear somebody needs to hold it and so that's why usually you you get an interest on the other side but yeah if you have a stable coin and you want to earn yield. Yes. Um the stable coin has to work, you know, so has to do something to earn the yield. Uh it's it's called earning the yield. And um that's quite a journey, you know, and it it's so different how this can happen. So you can put it into liquidity and I explain how it works and why I think it has little risk. You can put it into a wa you can hold uh one of the major stable coins and stake it and

and get yield. But what people don't realize and I recently made a talk about that and and was fascinated yes that people don't realize that the stable coin goes on journey like you would go on a journey uh you know and you have a travel agent um which you have no claim by the way mainly in DeFi against it. You take airlines, these are different protocols. You stay in a hotels because your stable coin, people think they're just sitting there and earning yield. No, somebody's taking it maybe having custody, putting it in an offchain asset, putting it there, maybe there it's locked up. uh maybe in it travels to 30 different places met you know kind of kind of the stable coins are allocated to 30 things and you visit

different countries uh you know where you have better jurisdiction better functioning trains uh stuff like that where also things can go wrong and the more dependencies you have the more things can get wrong. So always if you earn you need to think about how many dependencies are there and for example in liquidity it's very simple you put the stable coin into the protocol and it doesn't leave the protocol it's almost like in your wallet at any time you can take it out and you still earn yield I think which is great so the only thing that it makes it's if there is a liquidation a margin call on a loan it's used to buy the E um at the discount so you earn and you can buy E at the dip,

which it's a great strategy for some people that don't like it take an out of compounding versions that compound the yield then um into dollars again. But you see you have the protocol risk um and you have the oracle risk and the stable coin stays there very few dependencies. Now I take just as an example one of the bigger ones uh in in in the D5 space when you put it in their savings module you know it it might you know be on four to five centralized exchanges on custodians in uh 20 different strategies being offchain onchain some things

having a longer duration this is like a hedge fund um that targets a n of one where you have no clay and you almost get the the same yield, but people chase one or 2% more yield and don't understand that their stable coin has to go on a much adventurous journey. You know, maybe taking an airline like a new protocol that's not so battle tested, but they don't know. And then they hope on another chain and then they have a team that has a multisc that is not well secured you know kind of the whole operational thing and it's traveling through all these hopes while just getting one one% more and again

then you are in in the trust me bro zone because you have no accountability also you know in the world creator model which I like but again you have morpho these are just the contracts like liquidity then you have the world creator they just say okay we allocate Okay. But you you don't have any claim. So um they take a fee but have no accountability and downside risk. So the the burden is really on you. But I think yeah most users I see just say okay this is 5% and don't realize how much more risk they they might take just to chase uh a bit more. It makes me think of like the days of uh Terra Luna, you know, like 20% yield and on stable coins and

all that. Like I wonder like what's your take on that? Do you think that we've been as an industry kind of got used to these extreme high yields and just people come to expect it even though on a purely um mathematical level? It's like just not sustainable, right? Because like the how can it be that you can generate 20% yield consistently over years and years and years and years, right? It's just not it's not um credible unless you're well as we've seen several of the protocols that have offered that have collapsed right?

>> Yeah. But but you need to differentiate. I think Terral Luna was a Ponzi or kind of um pump and dump game. >> Then you still had high yields, but somebody had to pay for it. So who's paying for for this yield? If it's not a pump and dump, it's a project with their token. Maybe also, you know, right now PayPal and Ripple also give incentives and rewards. They pay for distribution. So that increases the yield you can get. Um, and it might be a go to market strategy. You know, Revolute I get every week I get the email from Revolute that I can earn 50 bucks if I refer somebody.

So they're clearly also paying for that. Um, that's fine too. That has been compressed lately. Um but I think that's the second source and and then of of course you have more the sustainable and organic one like in the liquidity model where just kind of the borrowing fee is funneled through the other side. Uh and and yeah that's the yield you get from the borrowing fees or or the liquidations. Um but that sometimes and also makes makes it hard in this market if you just get the double the yield from a good stable coin like PayPal and that just has has an extra um budget to throw at them. And would you say in general like people have to go to if they're chasing

that higher end yield, they have to go further up the risk curve in terms of like their stable coins might be doing more work or like like they might be they're taking more counterparty risk potentially. Whereas with this model that you're describing with liquidity, it's like it's risk adjusted. It's sustainable and it's programmatic within a system that's like like as you identified the what was the two things like the oracle risk and the collateral >> technical risk. Yeah, >> these are the two things but you know as soon as you're in DeFi you probably have the technical risk and the oracle risk.

Um so use it and there we just I think compared what could possibly go wrong you know ask yourself and the more dependencies you have the more things can go wrong and I I can't guarantee 100% the safety but we what I can guarantee is that we minimize the things that can go wrong. So I think you can either say okay I go for a yield that has a little dependencies and a trust in cold or then I would go to a fully regulated one where I say okay there are controls in place uh I have real claims um but that's what I said what do we have in the middle the trust me bro zone where um you need to have a claim you neither have kind of responsibility and

visibility and yeah I I don't think this space can survive like that because it's like the wild west in in early finance where you just give money like a risk blank check to somebody and he invests and then things blow up. That's why we have regulation today. Not because we like things but just because things blew up. Um >> and in between it's currently like that. you you give somebody money, he can do with it whatever he usually these are good teams they execute well they return something but occasionally something blows up and then um regulation comes in and then these things are not legal anymore. So I think the the two models

that I think are risk adjusted or address risk is either you address risk with regulation or you take out the intermediaries that pose the risk because somebody takes custody or does decision on you and replace it with code and then you don't need regulation I would argue because you don't have an intermediary then you need more like um technical soundness or approval like you would have for your haird dryer you know that there's a technical assessment that this thing is safe and maybe something more like that is needed to um guarantee that that this product fulfills kind of the the basic safety requirements or that a multisc that has some

upgradability secured in in a in a good way you know that that is feasible. Yeah, >> that's how you can reduce risk in my opinion. And everything else as you said, if you chase yield, >> yeah, the yield has to come somewhere. Your stable coin is traveling somewhere. Just think about this image. Okay, there's another airline, another hop, another banana republic. It needs to visit to get you the 0.5%. Another dependency, another hop. Um, something can go wrong. Um yeah, you mentioned earlier like the vault model like the vault uh manager model and um I wonder if you could just talk briefly

about how liquidity is different like is is it the case there's this term and again I don't want to get super technical but like this term rehypotheation right like that that essentially means that you deposit your collateral and tell me if I'm wrong here right because I might not have this right but like my understanding is that rehabilitation means you put your funds in. So like in the case of liquidity, you're depositing uh your ETH, you're taking out your stable coin, uh you can get some yield on the ETH and on the stable coin if you deposit again. But um reepication would be like you put it in a vault and then someone else is actually like taking that out or like putting it somewhere else and taking

some custody over it and like essentially like or or even sorry rehypotheation of your collateral. So you've put your Ethereum in there and someone's taking your Ethereum and like they're using it in like 10 different places to like generate yield or something like that in liquidity that's not happening right all the funds you know and that's the beauty don't leave the country or the hotel they just stay there so not much can happen yeah you need to think about it like that so first you need to think from the collateral perspective the collateral is always there on a lending platform like a uh you know This collater can also be lent out. Um, so then sometimes it can happen that

it's not there. It's kind of like a liquidity crunch. You might get it back, but just not not now. Yeah. So that's then then it's used with liquidity. Again, you don't have that. And the same on the earn side. If you deposit the stable coin, it just stays there. It might buy the E, but it's still in the protocol. And usually if you earn, you know, your dollar is taken, it's bridged, it's put somewhere to to work to earn uh earn yield. That's the um that's the purpose. It's for example in a world it's lent out and then the question is yeah against which collateral? Um, okay, it's this new stable coin from this unknown project uh

which might have a mint function and then things happen and then okay um the collateral is is is gone and you don't get your uh your deficit back. >> Mhm. >> So there you you have kind of this discretionary risk I think with with lit uh which liquidity doesn't have it has a technical risk. Nobody can take the decision add something or make a bad decision where to allocate it suddenly while you sleep change the risk profile add another collateral um that's what I mean with these dependencies that we lately see just be um have a lot of lot of risk and spillover effects that could happen and and I think that makes it uh

rather unique or kind of like uh as I say what are the uses of of liquidity you either have a bit the sovereign maxi that just says, "Yes, I want my dollars. I don't want anybody in between. I want to have a strong claim. I don't want to ask anybody. Nobody takes it away." You have the asset manager that says, "I I like the B stable coin. It's for me a risk diversification. I don't want to hold everything in one stable coin. Maybe Coinbase freezes by court order a wallet that shouldn't be frozen, but this means kind of, okay, our runway uh for the next three months is just blocked. So I want to have the some extra cash or earn a yield with another dis risk profile than everybody else that is maybe in or morpho. And then you

have the third person that is and the person we're talking now about is really low uh lowrisk defi yield users. I want some yield but I want to keep it simple. I want to have transparency. I want to have it predictable. I'm already in DeFi. I'm taking some technical risk. I don't want to offboard it because maybe for three and a half 4% that we get right now in DeFi it's better to hold treasuries but you say I don't want to do that then this might be the alternative and say okay yeah let's uh let's do that uh let's have not some discretion but let's earn some borrow fees or buy some ETH um when the market dips because that's what happens with your with your bolt that is used for liquidations. So we've kind of in our

conversation we've touched on the the optionality and the the kind of uh alternative that the decentralized stable coins and specifically liquidity and bold uh offer and I can totally see the benefits from the point of view of like if there's a disruption in the external financial system this is there you know uh but one of the things that we're uh exploring in this podcast it, as you know, it's the antifragile network states podcast. So, we're also applying that to like uh food systems, water systems, like how can we if there's a disruption, how can we be sure that we've got like local sovereignty over our food systems, water systems,

energy systems, data, all of these these things. Um, and that brings us into the kind of this network state or what we call antifragile network state, which is all about optionality. Um and uh I wonder do you firstly what's your take on network states in general and secondly do you think that liquidity or bold rather might have a a role in uh kind of parallel structures that are trying to set up new types of uh transaction new economies and like experimenting in and innovating in that that space. Yeah, I think there are just some things like also privacy and money

and other things where I think it's it it's really important um that yeah, you're not captured. As I said in the beginning, I think I'd rather focus on on on these things kind of the the the core human freedoms. Um, yeah, I think that's a bit my my angle on the other things. Yeah, right now I'm I'm there. I'm I'm less involved. I think we're just such an interconnected world. I think yes, we need to together make sure that this planet, this humanity, and all our different religions and races get along.

Um because if not yeah I'm not sure if uh uh yeah you then can escape I don't know you know kind of the these kind of events. So >> yeah and I guess I was getting more at the at the potential for a payment use case there within these uh spaces like the the liquidity model although it's primarily being used for savings and yield generation and so on it can also be used for payments in the same way like circle like USDC could be right >> yeah but but you know stable coins deploying is the easy part it's very hard um to grow it. It's it's a

distribution thing. You have the dominant player USDT and USDC and then you have to buy your way into it. You have or you either have the distribution channel or you incentivize it. So that's why I think ter has a unique opportunity they can keep because they were first all the interest earned. Nobody else will be able to do that. either they force them or they have a distribution channel where they can then or otherwise they need to take the yield to pay people to switch to this other stable coin. So even if I like the idea it's very hard to achieve you know in the case of liquidity users would need to vote with their feeds do that because otherwise

you would need a huge budget uh to kind of push out the incumbent or you have an event where people and say okay now it's enough I switch. So as much as I like the idea, I think you need to have either a strong community, a strong foundation or somebody that um establishes that. But what I like for example u you know um a project that is using the liquidity model is Alpen. So that's a bitcoin uh blockchain. I think there it makes a lot of sense. You know they say we have bitcoin and we want a stable coin that is only backed by bitcoin. They will also have other stable coins but just having kind of in their own ecosystem one and hopefully they can establish it. They just say I

hold Bitcoin and if I want to have the dollar value and of what is closest to my Bitcoin then it would be such a a stable coin you know that's why I also think we are a Eve believer project because you either hold your ETH or we can cater to your two main use cases. you want to borrow against it because you don't want to sell it, but you need liquidity and uh you say, "Okay, I still need stable coins, but ideally I want to have a stable coin that allows me to exit to my my beloved asset and and that's Ethereum." Um yeah, so I think in these cases and for these scenarios having this um dollar kind of um basic dollar that is tied to the ecosystem or

blockchain that provides cheap credit and is enshrined and secured by it. I think is is still valid. I mean and that's what we tried with liquidity. I would call it it's as close as it can get to an Ethereum dollar. >> I don't know a project that comes closer because Ethereum doesn't have its own dollar. decide that and I think um it's as close as we get. Ideally in the future we can don't need oracles. Ideally in the future maybe it's not a dollar like Vitalik pointed out but I think for the time being it's as good as it gets and it's still um it's still cool that it's possible. I love that you you just touched on Vitalik's posts there and I wonder just before we we finish up if uh I mean also if there's anything else you

want to add but just to if you could touch on this point about like where do things perhaps evolve from here and like in this space uh what do you imagine playing out as it relates to oracles and like uh backing like what's yeah what's your take on on how things might play out or what what would you like to see play out rather >> first what what I think what what will happen and then what I would like to see >> I think what we'll see is maybe it's a bit delusional but um we we on on new rails you know I think again

these two poles you have CFI or DI if it's CFI it will be regulated there will be similar rules and it will have just new rails you know, which is great. Having a world led ledger, being able to transact worldwide and not having like open banking, but kind of open finance. It's an advancement, but it's a bit delusional or an illusion because just because it's on a world ledger doesn't mean you are allowed to distribute to everybody. The same rules apply and that will get very complicated. Right now we are in this grain zone where you can be a world creator actually an asset manager but don't adhere to the same things or create financial products and dise worldwide even though it's not

possible and we already see it with Miko where kind of USDT and die uh you can't touch anymore kind of if you're in in EU institution so and with that we introduce the whole messiness also again of um CFI so that's a delusional part even USDC you know I don't how how they achieved it but USDC is a funible stable coin that is regulated at the same time in the EU that needs to apply to Miko and and and the US. So the USDC I hold where is it regulated? What kind of stable coin is that? And you know they do the magic that kind of reserves are in both sides. Now imagine uh China has the same, Russia has the same and we

have another one at the end there circle. gets more complicated and that's why Trefire is so complicated, so expensive and we have so many fees. So we reintroduce a bit the same problems and I'm not sure um yeah the there will be advances like settlement is better and so on but there will be also a lot of um known stuff on the other side. I think the decentralization will bring in so cool things like for example our stable coin which I say actually shouldn't be regulated and right now I think under Miko it wouldn't under the genius act I hope that it stays like that if things are truly decentralized um that we can

use these products and that different regime applies like the US with the SEC that looked at front end which I think nice acknowledge if it's for the user if it's transparent it's Okay. If you do kind of traditional thread fighting, then you're rather a broker and it should it should be regulated as a broker. But I hope to see that we get um this this freedom to create then a product like Boulder stable coin that you can distribute worldwide. Now you can do that, you know, because it doesn't apply to regulation which applies to intermediaries because we don't have intermediaries. So that would be my wish. Right now I'm a bit hesitant because I see a lot of signals that people just say it needs to be

regulated, there needs to be an intermediary otherwise we we kind of um make it illegal which would be really a pity and then I think we need also users how can I say really see the value of these solutions otherwise I think it will stay so first the risk is here that it stays a niche >> and the second thing is that it's kind of um it's taken kind of uh it's right for for existence And I think we as an ecosystem we also we need to care about these things. So lately we created this initiative called trustless force for the more decentralized stable coins like curve and and and and ethics protocol because we as ecosystem if we believe in

these solutions we need to use them so they are there when we need it and just you know what people don't realize if I hold USDC I just moved I mean the token is on Ethereum great but you can print it on Tron you can print it on plasma you can say there's PVL on Ethereum but actually it's in treadfi it's it's you know hold somewhere there so by by holding USDC kind of we offramped value to the original system that's not crypto by holding a decentralized stable coin that it's backed by crypto uh you bring back collateral on chain that it's secured now by Ethereum imagine 5% of the stable coin supply 300 billion would

be um really held in decentralized stable coin coin that would mean we will bring a lot of demand for crypto um on chain again um and I think that would be the beauty of the system. >> Yeah. >> But but as with risk and other things so first here I see sometimes people don't care that much. I mean the same for privacy maybe I should you know use more signal and so on and sometimes we are just too lazy and and and not too consequential and the same also for the risk. How many people accept the yield without the transparency giving really a risk blank check with no claim to get some yield is is is also astonishing but it's the reality and I think that also

uh won't won't change. Yeah. >> Yeah. I couldn't agree more with almost everything you've just said and I think like the point that you made about the security of Ethereum itself I think like is it's super valid like if there's all this on offchain collateral that's used to back centralized stable coins and so much of that is off it's all offchain and then something happens it's like it's it could become it could reach a scale where it becomes an existential risk for the entire uh onchain EOS system. Whereas with the CDP model that you describe in the liquidity model in general, like we're actually increasing,

as you said, like the amount of ETH that's being locked up, it's it's the Ethereum dollar in in that sense. It's it's making Ethereum more uh robust and more >> and unique and less replaceable. You know, the bold Ethereum dollar, you can only create that on Ethereum with these guarantees because it's really a decentralized network. It has a great collateral. It gives really a use case you can't replicate. You can't just say, "Okay, let's do that tomorrow on Tron because users won't get will get a different product."

>> But you can move 50 billion of USDC to Plasma. um okay it's less decentralized but at the end if I can tell you that I had a claim on plasma I can still go to circle and say I had this claim and it doesn't matter that much if it's on Ethereum on on plasma to be honest so I think >> that's maybe also a bit the sad thing that we don't have more use cases that leverage really the properties of Ethereum which is a such a great chain um yeah absolutely and it's crazy like that when you present it like this like and I'm not I'm genuinely I didn't bring you on just to show liquidity, right?

That was not the point. Like I I think there's like an interest in innovation here. But when you spell it out, it's like wow. Like why like this is this isn't a niche thing. This is like a foundational primitive or or or uh architecture for the growth of the Ethereum blockchain. So, um I think the more we can get the word out about that to the newcomers into the space, the the better to help them see that like supporting a project like this is actually supporting Ethereum and it's supporting decentralization and it's supporting like the values the the core self-s sovereign cipher pump values that the entire ecosystem is is built upon.

>> Exactly. You know, protecting if we don't care, who else should care? Why would we need Ethereum? >> You know, all these things and and it's okay, but then just let's look in in the mirror and uh and I think it's important. Yes, you know, there are other projects out there. I mentioned them, but I think yes, we need this value alignment. We need to care about these things. We need to support these projects that that bring these true use cases to Ethereum. I think I mean that was your initial question and maybe we we're kind of closing the circle. you know what brought me in the space and what keeps me in the space is is really the passionate passion about these things but as I said the future it can go both ways um and uh yeah it's not not

a clear path to success and victory uh I think we need to work hard like we do on the base layer and I think it's great kind of all the things we do there but we as a space on application layer we as a users being vocal because you know that's also something we do too little people that are so value aligned. We don't have a lobby or a community and just kind of you need to be a bit tribe and and really believe in it and say it's important and we care um and put it together and and I think we don't do a good enough job in in in that kind of valuing it as a community and and and the importance and being vocal and and and not just have single voices. you

know, Joe Lubin, he's so great and and he's doing so so much. Um um and a lot a lot of other people too, but it's almost like single voices and and and it's not kind of a a crowd, a community moving this force and I think that's sometimes a bit uh pity, you know, and then you have Vita League and you you have others. There's uh just before we finish up that on that point, have you seen uh uh Meta Lex Node from Metalex has got a he's trying to start a new community called Plebsec which is all about this what you exactly what you just described.

>> Yeah, I I have to head him up because you know we as I said with curve and ethics we we try we call the trustless force. Exactly. To say you know what what's the purpose? Hey, we want to support builders that build such solutions. We want to create awareness because it's hard to bootstrap and we need to drive usage. But but you know, it would would be my job to push it more and I'm grateful for the support I get, but just kind of running that be besides the company made me realize it it uh it's very hard and became dormant. So great to see that.

You know, I rather work with him or kind of merge these communities. So it's good to know yes we exactly need these things or you know the OGs lately Melt them just saying hey we we lost sight you know this threadfi RWA that's not crypto and she's so right Dagen just saying hey we lost sight of fundamentals these are wakeup calls um but you know there shouldn't be wakeup calls like birds chirping there and there that should be kind of you the army that you hear from >> thousand of kilometers kind of approaching and you know oh my god what is coming here and and that's what I meant. That's why I think it's great if we we if we we have these things and we should be vocal and the your part uh your podcast and your community is is

for sure also part of that and I just talked about money and finance but I think privacy is the other big thing. Um identity will be maybe also a big one. So yeah, any final comments you want to make before you wrap up? >> No, no, no. Let's It was great. Thanks for having >> Thank you. Thank you so much for joining us, Michael. It's been a really great conversation and uh looking forward to seeing more that army of birds talking about the cipher punk values arising in the Ethereum ecosystem.

>> Yeah, army of lions, you know, you need to hear them. >> I just said birds because you know, you hear a bird there. Oh, that's a bird and you hear it there and kind of Yeah. But that's not enough. Yeah. >> Yeah. Thanks a lot, man. That was great. Hey,