How to use DeFi to facilitate the fiat funding of crypto companies

Transcript

good morning everyone and welcome to paris my name is uh victor champion i'm the founder of a company called collat so this is my second time at scc last year i was here as a lawyer and i gave a talk about the regulation of d5 and of course a few months after that at the top of the bull market i quit my job and i created this company so uh kolat basically it's a company that provides fiat loans collateralized basis by crypto to crypto companies so quite classic but i will explain more so there is a common thinking without the ecosystem that everything can be done and should be done

without using fiat um it's it's quite right because of course crypto and stable coins are a great way to transfer value uh without friction but still uh i truly believe that crypto companies still need fiat and will need chats for many years that's because stable coins are not a convenient way to transfer value and make payment in the real world right now so a crypto company still has expenses like wages rent taxes providers or suppliers to pay and using stable coins for these expenses is not convenient because in most cases

stable coins are not treated as legal currency uh basically it's never the case so you always need at some point fiat so a company needs fiat and to get fiat they need either to sell the crypto that they have raised or obtained as a revenue or the other option is to collateralize that crypto to obtain a fiat loan from a lender so this is a what i'm going to focus on so there is a problem with uh centralized crypto lenders of course you have still the possibility if you are

very like skilled with defy to collateralize euron crypto using defy borrow stable coins and then sell those stable coins for fiat currency but it's uh it's quite complicated and there might be tax consequences so i want to focus on the use case of centralized lender that lend to you fiat currency in exchange for your crypto [Music] basically they tend to reuse the collateral that you provide to them it's often in the terms and conditions so they reuse it basically in three ways first way is to make collateralized loans to other clients or the borrowers which is

quite straightforward second way is to invest it in fire to generate a yield which basically is the same because at the end they want a yield on your deposit and the third way and i think the worst is to lend your collateral to otc counterparties without collateral so making under collateralized loans to basically market actors like market makers and hands and this is very risky and they tend to of course lack transparency because you don't know exactly what has been done with your collateral where it's gone plus of course there is a the fact that

this activity where you take the deposit of a client and you lend it to other customers in order to get the best yield adjusted for the risk this is in essence a banking activity so the risk management here is absolutely crucial and it has been learned by like centralized lenders and banks basically for many years because for centuries there have been that exact kind of issue and with the supreme crisis had the of course the opportunity to focus on that but for crypto it's much more recent so risk management is not as professional in this company that as it is in traditional banks

so yeah they act like banks but they don't have the same procedures and this is very risky so this is uh this is absolutely insane this is an extract from from a settlement between uh the acc and block fire a few months ago so basically what it says is that block file during two years had a statement on their website saying that basically all the loans that they make with the deposits of their clients are over collateralized but basically they have that statement here i'm going to read it it quickly became apparent that large institutional investors were frequently not willing to post large amount of collateral to

secure their laws so basically nobody wants to borrow with collateral everybody wants to borrow without collateral which which is absolutely logic so they were under collateralized for a long time while having the inverse statement on their website so basically this is a this is insane [Music] plus there are other issues um whenever they invest deposits of clients uh in d5 there is a huge gap between the yield that they promised to their depositors this is like from nexo's website yesterday basically 10 unstable coins and the yields that you actually get using d fire

using d file right now so this is the basically the lowest risk strategies in d5 right now and the yields are between like 0.5 and two or three percent not ten so the gap between these strategies is basically uh covered by uh companies like blockfi and nexo by uh under collateralized loans that are made to otc counterparties which is where precisely where the risk is and this is not appropriate because defy is still very risky so the risk premium should be like probably around 10 so you should get in the lowest risk strategy in defy you should get around

ten percent a year to cover the fact that even if the risk is low uh there is a lot of uh remaining risk like uh even if you use like ave or curve which are audited protocols you have the risk of using a metamask the risk of a front-end hack and media or many other risks so this is of course not ideal so we should try to make collateralized fiat loans more transparent so how can we do that the what i want to propose is that first the collateral of depositors of

borrowers must not be reused by the lender because the collateral belongs at any time to the borrower the property is not transferred to the lender and this is a very important concept especially in french law you don't transfer the ownership of your collateral when you put up collateral to obtain a loan it still belongs to you and it will only be transferred if there is a liquidation so basically it's what i want here not everything can be decentralized making fiat loans basically cannot be decentralized it will remain centralized for very long time but everything or more things can be made more transparent

so how do we do that this is the proposal of collat which we have been working on for a few months now and of course the collapse of celsius and the near collapse of block fire and genesis has inspired us to move from that model to this model so the model model is quite simple and it re-uses uh something that is very accessible and easy to use in d5 right now which is diagnosis safe interface so basically you create a two of three multisig address technically a smart contract through the gnosis safe interface the borrower sends the collateral to that multisig address the collateral

never leaves this address so this provides transparency to the borrower because borah just needs to look up the address of the contract on etherscan and just check that everything is still there and basically everything that is in that address is the collateral which is okay so it allows uh like a multiple assets uh collateral and then the borrower can reinvest by himself the collateral on d5 protocols in order to generate yield that will cover all parts of the costs of the fiat loan and of course since since it is a 203

multisig multi-address collat or basically the lender or the intermediary controls and validates all the transactions of investments in defy just in order to control that funds are not going to work like high-risk protocols so you might be wondering um if that's too risky because it's easy to like evaluate and liquidate tokens like is bitcoin or stable coins might be different for deposits on d5 protocols i think it's not the case because basically anything that has a market value

and can be liquid can be used as collateral and the market value of d5 deposits can basically always be calculated um yeah it's quite important to note that when you make a deposit on a d5 protocol in most cases you obtain what's called like a proof of deposit so when you deposit on rv you get a a token which represents your deposit when you provide liquidity to a pool like on curve or uni swap you obtain a lp token or nft if you use uni v3 and in base basically in all cases these tokens are transferable

so you can directly transfer them into a collateral address and their value yeah the 8 ok has value because it represents your deposit [Music] so um in conclusion there is that legacy model that we are trying to move away from and that post celsius model that we at golot are trying to develop so the legacy model is a model where the lender is managing the collateral it's opaque because you don't know exactly what is being done with your collateral and the risk is basically around the fact that the intermediary or the lender has to

select its own borrowers so the due diligence must be made on counterparties which is the banking activity in the model that we propose the borrower is responsible for the management of his own collateral which is a big difference so it's more transparent it's completely transparent actually and the focus on the risk is on the fact of evaluating and making due diligence on d5 protocols in order to evaluate the risk of these protocols because basically of course you cannot assign the same categorization ratio to lack east in a wallet or east that has been

deposited on rv or curve so you need to have a discount and calculating that discount is the core of that new activity so it's much more similar to rating agency [Music] so we have time for a few questions and uh if you're interested follow me on twitter or come ask questions after the conference and i have some t-shirts if you want thank you we have like three minutes hi thanks for the presentation you

mentioned collat validate and control the transaction what do you mean by that is it is it a signer of the multisig yes basically it's a two of three multisecond so the borrower has a key call it has a key and a third party which is basically a regulated cryptocurrency so in order to move anything within that address either transfer it away or invest it in a d5 protocol you need two keys out of three so in any case the intermediary must control and validate what the borrower suggests it's more like a suggestion collat does not make the investment or does not

propose to make an investment that controls and validates what is being made so basically we have a white list of protocols that can of course change over time and we validate transactions so you mentioned the methodologies from from banks how yourself you will manage this risk assessment of the protocols and evaluates which one are fine enough it's based so this is quite complicated of course a lot of companies have tried to create their own frameworks to evaluate the risk of the five protocols there are a lot of methods you can look of course at the audits but in most cases uh it's not

sufficient because the audit it doesn't always focus on the whole risk it's more like the contract risk and the risk from the code there are the risk there is a risk from the tokenomics for example a protocol can be exploited at the tokenemics level and this can create a loss for the depositors so it's quite uh it's quite broad so basically at the start you basically rely on common knowledge uh common sense which is that the most secure protocols are the ones with the most liquidity on it and the the ones that have been around a long time without collapsing like rv of course uni swap curve and a few others and then you slowly expand from that

by uh like accessing new protocols one at a time in order to evaluate the risk and of course you you modify the level of collateral based on the the level of risk so you can use a protocol that is more recent and potentially more risky but just the amount of collateral that you get for that will be much lower than the one you would get by depositing an rv thank you everybody [Applause]