Why Crypto Needs Better Insurance Models | Drew Patel, Karak

Transcript

our goal is to create like a universal reaking layer not be focused and married to one chain I know Yano uh said hey I don't know if going to Every Chain makes sense but our perspective is hey look this is like critical infrastructure it doesn't have to only live on ethereum there's use cases all over the entire cryptosphere for reaking infrastructure why are we like saying only lives on ethereum only on an only ethereum token why why are you why are you Shoring it this episode is brought to you by say say's V2 upgrade introduces the first high performance parallelized evm already live on public devet M net comes later in Q2 you can follow along with the say Journey on X say Network say is

spelled s eii go follow say onx say Network hey everyone the polygon Community grants program was launched with one billion tokens All For polygon Builders really excited to share that on today's episode of Empire season one of the polygon Community grants program is now live it features 35 million in madic to support the next generation of polygon projects join the aggregated future today by applying at polygon.net [Music] uh today we have a very special guest

which I've had the benefit of knowing uh through multiple Cycles I guess um and I've had the privilege of seeing them build uh for quite a bit of time there's a really fun and unique story behind it we share in this pod but we have drew co-founder of karac Welcome Drew to the show thanks for having me Santi so Drew uh give us a very quick intro on who you are um and what is KAC uh it won't be brief my background is is a pretty fun one and very unique I would say um so I started I first got the crypto I was 13 uh so this is 2013 um I decided hey I was watching YouTube video

so I I had recently built like a small computer I was like I was really into like Tech at the time like building DIY stuff like that and so I watched YouTube video um and they're like yeah Bitcoin at $30 I'm like what is this Bitcoin thing so I uh I went to bitcoin.org I think at the time and I I didn't read the white paper I'll tell you that thing I don't even know if I've ever read the Bitcoin white paper um but I just like saw GUI minor downloaded GUI minor and started running it I'm like wow this thing just sends money to a like or sends this Bitcoin thing to um your Bitcoin QT account and is keep streaming in and every day I would run it the run the Bitcoin minor every time when I would go to sleep and I would turn it

off when I come back from school and so I got really into it I'm like this is pretty cool I took all that Bitcoin I started selling it for for um keyboards and mouses and things like that but like it the story was telling itself it was like okay I can't get a credit card I can't get a debit card because I'm too young I would like to buy Steam games or just random gaming gear I can do that by just running this program my computer and then selling Bitcoins for Amazon gift cards to like bit instant or whatever and it like it unraveled pretty it was pretty obvious what the benefit of this was right it wasn't like to me at the time it wasn't like an investment or anything it was like oh it is internet money you know this makes sense this is like runscape

GP or or WOW gold but like you get it in a different way instead of putting hours grinding and cutting trees you you just run a program or computer that runs a fans a little extra hard um and then so I started really get yeah I was 13 I don't know what I don't know a what I was doing when I was 13 definitely not that um I wasn't I didn't grow up like San Francisco or any like Tech heavy place so it really was like it's a story that's very strange when I think about it I'm like this was pure luck and life could have gone very differently if I didn't like get into it just because I watched the video and then I really started getting into solidity around 2016 so one of the first big ethereum

hackathons happened close to where I lived and I was like screw it uh it was summer I was like I'll attend um and before that I prepped a decent bit and then I learned how to write smart contracts from there then I Ed at coinbase on the wallet team where I built like a simulating uh thing like simulate transactions to make sure you're not getting rugged this is before a lot of like the metamask like the warnings you have metamask uh existed so this was like one of the first things that told you hey this transaction May ruggy or whatever um and this was AR the Heyday of D5 summer and then yeah it was like look it makes sense to do something D5 security related I I I see people getting rugged left and right uh I see hacks happening left and right I think

there's something here like if we can work on a security solution and that then we started looking at reaking here in the past uh I would say since like November well we work at staking during the mar market so we thought about staking and staking uh risks and how do you prevent those risks or how do you underwrite those risks the reason was that that was like the only yield in the be market like everyone was using staking as a 4% this the best you're going to get during the bear and so we really put our brand to staking spent a lot of time trying to model staking ethereum staking model the wrists bucket the wrist see if you can underwrite it working with traditional under like Insurance Underwriters and reinsurers like hey is this something you're willing to to put money towards and to

underwrite um and then as reaking emerged we're like this makes sense this is sort of what we initially built during defi summer like smart contract protection but instead of protecting smart contracts only you're protecting like more like these new unique decentralized tasks that maybe go beyond smart contracts but are still running in the same fashion still have the same um same rules that you're trying to like protect against yeah Let's uh pause it for a minute because this is at a time where I was obviously def5 summer was very active on chain and was constantly thinking about smart contract risk and you go and talk to a lot of normal insurers I certainly went and talk to aons of the world

and um some kind of reinsurers and no one really wanted to touch this space and even today it's really challenging to get any sort of insurance and size um then you reached out I was just leaving parfi so um you know I'd love the audience to to hear that because I think it's very unique about your style and really conveys because throughout this pod I think we're going to be talking about generally Insurance security obviously the whole Space has taken a whole form in terms of um you know where you are now but I'd like to just lay out a little bit more context before we get there yeah so um the story about when we initially reached out um you were I mean

on our radar like cuz you were the only one at the time talking about smart contract risk well I was watching podcast and the only person talk about it was you you I can L tell you exactly what podcast it was you're you're your monitor is behind you you're wearing a blue hoodie if I remember correctly I remember exactly the video I'm like wait hold on this is the only guy talking about this we should reach out but you were at Pari already and I think you guys had already done a few Insurance deals or crypto Insurance deals so we held off yeah we're very active with like good risk car uh no no it was risk it was Nexus Mutual but it has it own challenges yep yep yep yeah so one day I woke up I was browsing Twitter it was like 9:00 am and I'm like

and I see your post about you leaving parfi and so internally I send a message saying hey Santiago left Pari send a message and then you know that's when the message came to you outlining what we're building and and and and and why we wanted you to be part of it so it like it wasn't was a message it it was a full couple page document outlining y why you wanted me to invest and look I've invested in over 100 companies um and I don't think I've ever gotten a memo to that extent uh from anyone so that immediately to me was very unique uh in the way that you know but anyways you keep telling the story Yeah well yeah so

that was a synopsis we knew you this you were one of the few or only person people to talk about as at least from an investor perspective and we're like we got to get this guy we can't get him one day came we can get him bang send send it off um but yeah like I think even and through all our conversations we've had we've always talked about like the different like we've had conversations throughout the lifespan of Defi and now into you know whatever you want to call this cycle through defi summer into now and we've always talked about the like how we think the space should look at security and look at Insurance um and it's you know it's changed quite a bit I think initially we're like initially our thesis

was these smart contract like during the Define Summers smart contracts will as they go through time become more and more secure so the idea is hey compound a etc deployed they'll iterate But as time goes on as long as they don't get hacked they will develop Lindy and become more secure here into a point where it is possible to underwrite or to protect against these risks in a way that makes sense for all parties involved right and that was our initial uh idea and I think it started to have legs but then I think the bay market showed us you know it was a Frank reality check for where

defi was and subsequently where defi risk really was right one the yields disappeared so if the yields appear like so it has it has to make sense for you to like the amount you're taking from the person's buying protection it has to make sense for them and if the yields were so compressed which they were during def5 summer or sorry during the be Market there wasn't much demand for it right and you can't build something like can't build I Pary thinking hey maybe there's an opportunity to build a bank or an insurance company like a birkshire hathway model right where you can start insuring you have a diversified book of insurance and then

you start writing coverage the problem is to your point yeah the yields went from you know teens to five to less than treasuries and you're like well that's really challenging right because then you can't really charge a premium um but the general premise that has always excited me about just the ability to create more sophisticated Insurance models is that you can measure risk far more effectively in an open transparent system like that to me is a core primitive that hasn't been fully explored and when you guys came to me I think you had probably the most thought out Vision which as we'll get to in the Pod is iterated quite a bit right because you know defi changes a lot you

know yields come down well it's not viable to write um to Ure against something where you know people there's no demand for it right um or viable economic model but conceptually I think a core primitive here is if a system is transparent you can and you know the parameters you can measure risk programmatically in real time 247 365 you know your counterparty you know who you're interacting with that hypothetically should allow you to measure risk more effectively and therefore price it more effectively and so it could it should in theory create a vast variety of not only financial products and Primitives but also just an

insurance IND industry and of itself and maybe it's not going to be your actuary it's going to be a solidity engineer or just a smart contract engineer or a Dev that understands these systems and can price that policy far more effectively or you know options risk management in general um and so anyways I I think you guys maybe we should get into kind of the evolution of your thinking in terms of the opportunity set of how you've thought about it over the years where where what you've seen and kind of where you are now leading him to obviously karak yep yeah so I think you touched on it in a world where like again our initial thesis was all the information

you need to price this thing should be available on chain and like it's there right it's not like traditional Insurance where you know Progressive tracks your driving but only keeps it internal to Progressive it doesn't share with like all state or whoever right if you can see it policy is renewed annually which is the most inefficient thing ever like health or driving now you have Telemetry systems right that can real time you know measure like Metro mile but it conceptually it's like for me it's one of those industries that just going to totally transform right the idea that like we write a policy and you renew it every year it's like well what happens within that year you could become a crack addict you can become a reckless rver your financial

counterparty could be taking whole amount of risk that you're not going to be able to see I.E Abacus the Global Financial crisis yeah but anyway I mean so so you you touched on a point which is hey if the data if if all the data you need to actually fish price like act actuly price this thing is there in public and transparent you should have a very efficient market in that everyone's got the same information so then it should be a competition to the fairest price point right this would all be true if there wasn't one category of risk that exists and that's smart contract risk right so if it was purely just structural risk and governance risk then I think for the most part like that worldview would have played out and we'd actually have a pretty efficient risk

Marketplace for what is I mean for defi now but I think because you have the additional element of smart contract risk that it's it's not something you can to sit there and observe like a lot of these attacks they take all the money they're gone right if they you run through flash spots or whatever you don't see the transaction till it's over um and so it's not like a run on the bank that slowly occurs for the most part it's you know here's $400 million poof it's gone uh and how do you really actually model that right and how do you underwrite that because say you have like 10 or five billion or even a billion dollars to unwrite all this and then the oil a finance attack comes and $400 million your balance sheets wiped

out like you have to do leverage you have to Leverage is a very key component you have to be able to underwrite two things or more with the same dollar else you're better off literally just farming the thing that you're under right you're going to get a better yield right so to make it worthwhile that someone taking all the smart contract risk and taking all the smart contract risk for all these protocols you have to provide a yield that makes sense and you have to allow them to use leverage but since everything's decently like especially during def5 summer a lot of stuff was tightly cor Yi on top of Y top y on top of Y on top of Y yield stack any failure in this whole stack analogy of of money Legos and a Jenga Tower right yeah exactly um and so that's why I think

it's tough to to to do Define insurance do I think it potentially possible yes but it's a very difficult problem that I don't think you can sort Tech at like it requir and I think we've talked about it a lot it requires like a like a fundamental change I think in how defi works you need a lot more protocols um and you need to like have uh Insurance limits um it's yeah it's pretty complex hence why like even Nexus like lot of their underwriting is now mostly e staking right or staking types things because staking staking is way more easy to model right you know exactly when where the loss will occur there's four different clients there's DBT there's so much stuff that briide

security and prevent slashing on Sten but that really doesn't exist on Defi and then and when a contract upgrades in defi consider the Lindy effect basically reset okay It upgraded now you had to restart from Square zero new protocol yeah yeah there are opportunities like slashing risk right you can Ensure against that you know it's like you know the maximum loss right which is either 5% 10% which is easy presumably to absorb and the probability is quite low the the other far more catastrophic risks that we all know of are you know like a you know an exploit of a some like Oiler that that's probably really

hard to insure against absent you know a offchain insurance company that has a huge book of PNC and other stuff that can absorb these losses it's like a you know catastrophe Insurance exists right there's hurricane there's all these like weird risks and solvency risks that you know fat tales as TB would call them you can always get an insurance there was always a price for it um the question of course is like Market participants may not be willing to pay for it um and it's not very economical um but so in in in this process of observing these kind of challenges the bare Market it's it's kind of really challenging when rates come down what um what then sparked the idea

for karac and what is karak I guess now that we're here yeah yeah so I mean as I said like it became a point where everyone's just doing staking looking at staking a lot of pro on staking and so we started really looking at staking risk we're like hey how like again staking risk doesn't have the same challenges as Define insurance it's a lot more consistent it's way more easy to model you know the rules you know the slashing rules you have DB of all these different no uh execution clients you have different uh consensus clients so the risk is a lot less and it's way more model like you can model it and then you can sell it potentially to the traditional insurers as or reinsurers um and you know maybe get like aund or $10 million line to to underwrite right and so that was our our thinking so we put a

lot of time into this understanding what's going on on e e two staking and bucketing it and um bucketing the risk and trying to model that out so you know we grabbed all the attestations we have I think a few terabytes of it now on on the at one point on the cloud and then we were just processing and seeing if we can build models here um and as that was happening I think the reaking movement started to come alive and you know as we started looking at reaking we're like wait this is very s similar to what we were doing on the defi Insurance side right reaking in itself is basically a task and then a slashing condition slashing condition meaning hey if something goes wrong there's a a loss or like T and this incentivizes The

Operators that are running these clients to basically behave correctly and to not um you know not provide false data or not run the task incorrectly or not try to be moous yeah um and we're like wait this is the same let's look the groundwork here for people that might have no idea what they're talking about here proof of State protocols like ethereum Cosmos tesos they you're it's called proof of stake because you have a token you provide Economic Security by stake taking that token you may be randomly selected if you're validating to validate that particular Block in the same way that a Bitcoin miner May well has to prove puzzle you know and and submit the data but in the Pro a stake system the security of the protocol

comes from stakers meaning you have a salana you have ethereum you stake the process of staking for the most part is done by professional organizations right these are the liers of the world right that you delegate to your tokens and they will do that for you and they in exchange for that reward they will keep some of that and then share that to the user that whole process has some risk attached to it because if the validator does not submit if it gets selected if it doesn't submit in time if it gets all these different conditions where if it acts maliciously or is not uh you know is not online then it gets lashed and

the slashing is you lose not the entire stake some stake usually it's less than 10% in a slashing condition and that tends to be a very low probability event like for the most part A lot of the top validators don't get slash because they have redundancy they have multiple systems in place and that's why most people don't stake themselves they offload and delegate to a professional Staker right whether it's through coinbase or through Lio or some other organization ation right is that fair just to kind of level set yeah I I think it's it's fair I think for the viewers just think of it here you're given a task and in the POS chains this is validating the network but think of it

you're given a task and you're given a reward and then there's a penalty for messing up and those are the three things you to look at and then when you think of it in reaking form you're doing the same thing you're just doing a task you're getting a reward for that task and if you mess up you get a penalty just like you do on the POS chains but in in reaking the task is like it's more arbit it's not as like you know eth2 has been researched for a very long time a lot of these chains Cosmos salana there's a lot of work into making sure um like the task is very well defined even E2 I think has a formal spec in reaking there's an additional risk because the task is is not as U it's not asy question but why would people restake like what's the what's

the opportunity there the opportunity is very simple additional yeld I don't think anyone there's no like I mean unless you really care about alignment and all these other things the only the one linter there's additional yield in exchange for additional risk right nice well said um so so so karak is uh you're seeing the reaking movement really take off after you know the beacon chain goes live Lio gets all these deposits grows in tbll you know largest T5 protocol you know in terms of deposits value being secured by the protocol and then there's this reaking opportunity you guys say okay what what did you see there um what

opportunity were you seeing and and kind of walk us through kind of how you're building KAC and what is kind of the the angle there yeah so as I said before it's very similar to what we built during the defi summer it's you know if you get to technicals of what we were doing was basically you write on chain invariants and say hey if these invariants are triggered payout occurs well here we think if you think about reaking you're basically again here's a task run the task if if there's some issue slash and slash is is almost akin to the payout here it's just you're changing who the recipient is right instead of giving it to someone else you're burning it or sending it to a zero address for the

most part it's the same thing with a small few little small tweaks so when you look s we're like look this is this is our our wheelhouse this is our bread and butter we've done this this we we understand how to make and how to architect systems that are sort of open-ended and allow people to create their own rules we literally made a system that allowed you to plug into any dii protocol and Define rules that you want to to make sure and if there's a hack or anything and these invariants are broken you get a payout it's the same thing here it's like here's a task run the task you get a reward if you mess up you get slashed we just we know how to make that we know how to Define those contracts make that system very easily so it made sense when we

started seeing the reaking movement take off now when we looked at K we're like and and in the way we want to design it we're like there's a lot of politics that have been defined for reaking that we don't necessarily agree with I think one of the big things is that the people have you know sort of defined reaking have said is hey it should live on ethereum eth is the cleanest Capital it shouldn't live it shouldn't be a multi-chain protocol Etc and that was the first point of disagreement our idea is hey reaking is just putting do like you're basically putting dollars up dollars Economic Security in exchange for rewards why do they have to be in ethereum like can anyone make a case for

that aside from hey it's eth aligned or some BS argument aside from eth a pristine capital okay eth can be considered as pristine Capital One of the things we learned during the insurance phase was people are willing to undering other tokens too and the other side is willing to pay less of a premium in exchange for that right this called cost of capital if I let you underwrite with something beyond eth for example if I let you underwrite with usdc s die which is stake die that earns 5% like Bally follows a treasury rate um or governance tokens you're will probably willing to take less of a yield because you know the P the capital is considered Less pree on the other side the DSs or the AVS can pay less of a yield to uh stakers in exchange for that

you know less pristine Capital so our idea is one of the differing factors is hey let's make this thing run on any chain and take in any token and our idea is basically create a universal reaking layer right so if one day we want to add Bitcoin raking or I know I know you're gonna laugh at this one I'll say it because it's funny and it really exaggerates the point maybe you add Salon reaking you can but our goal is to create like a universal reaking layer not be focused and married to one chain I know Yano uh said hey I don't know if going to Every Chain makes sense but our perspective is hey look this is like critical infrastructure it doesn't have to only live on ethereum there's use cases all over the entire crypto uh

crypto like crypto Sphere for reaking infrastructure why are we like saying only lives on ethereum only on Main and only ethereum token why why are you why are you Shoring it I want to get to that because I think it's a very important question I want to pause here and then maybe just ask a very basic question like what is the worst that can happen because I think when people talk about risk they're very um they're very opinionated but not nuanced and so in in this restake stake improv a stake systems you stake you restake people going to chase yield we know that that's a common behavior of human beings what's the worst that can happen in when you think about the total risk

right there's been obviously a lot of concerns that people have been like oh this is this is going to create a huge problem it might even affect the entire liveness security of the chain one protocol really goes down like what in your walk us through like what are the biggest risks and what is the most catastrophic risk that you foresee in kind of this reaking economy um like just matter of curiosity is it catastrophic what is the worst case what is the most probable case worst case is zero everything I mean everything can go poof get sent to a burn address right that's like and if anyone says otherwise yeah practically speaking like how would that happen yeah so

um basically what can happen is if an unintended slashing happens say let's keep it basic the task is ADD of 1 plus one equals two somehow the slashing condition on the contract was messed up and that it thinks one plus one is actually three all the operators report two and everyone gets slashed right unintended slashing should have never occurred and then everyone just gets slashed and then the way the slashing was defined is a complete slashing of all the capital saying if anyone 100% not 5% yeah and we're talking about the worst case right the OD right the odds of someone catching that is pretty high though right if the contract is defining 100% slashing like most people would kind of spot that fairly easily unless it's like an injected code there that is

like a state actor that wants to take down an entire system yeah so their safety mechanisms one would be hey let's get it audited make sure it makes sense like make sure the DS like the slashing contract makes sense make sure your DSS or ABS makes sense and and and the slashing rules are are fair there's um there's like slashing VTO committees that's come in and say Hey you know we have five six seven days to adjudicate if a slashing is correct or not if it's not correct then you know we can cancel it in parth slashing there's mechanism in place but you know we have to think not only about now we got to think about when everything's completely decentralized when there's no slashing committee anymore when anyone's free to make an ABS or DSS and there's no humans

to sit there and judge um you know when it actually truly becomes a decentralized network this is this is the world that's potential like this is the potential for this uh for the infrastructure it could it could completely slash everything right yeah by the rules it's written in when in a completely decentralized prist environment with the handcuffs with the training wheels with you know everything on the risk can be much less um or it could be honestly zero too like there's you can build an ABS or DSS with no slashing I think that's the case right now not many or any of the abss live right now have any slashing right um so you you could have a zero% and you get 100% And or anywhere between what is your operating kind of base case

here so the base case I think for the most part slashing should pretty be pretty minimal if they actually if slashing become a a common thing this whole restating just doesn't work if slashings become a common place and you've gone from earning maybe 1% on top of your 4% that you're getting for eth so say you're getting 4% on eth now You' gotten 5% if if the slashing become common place and you start losing more than 1% or even half a percent I think I think this whole thing flips um and and the the public appetite for reaking actually goes south now this is me being very Frank about people I'm not gonna

I'm not gonna sell you on a story or a fairy tale this is the way I think it's going to work it's going to be like when you start having some of these first inial slashings actually I start thinking people are gonna start pulling my money out because they're gonna get scared right um and so I think when the first initial slashings you know in whatever platform occur people are going to start pulling their money out of lrts and pulling out of their native deposits because they're worried they're like oh you know now here's the risk it's not just been a points Farm anymore now now you know it well the The Meta is evolving quickly obviously with air drops and now you know farming um to your point around people are really saying hey was it really worth it taking that incremental

risk uh of actually lost some money can't even get my money out as quickly take seven 14 days to to bridge over and withdraw and the points or whatever the air drop wasn't as juicy and the yield is not there um I guess it brings me to the question how big of a market is this um you know we we certainly s with defi yield farming traditionally yields come down um the market sort of stabilizes and it's not sustainable to have these kind of super high yields um how do you think about now in a you know you you how much tvl can you absorb and what are the re staking

opportunities like I guess like there's a number of but I'd like maybe for you to kind of bucket them in terms of where is this yield gonna potentially come from yeah I'll give you a Frank assessment here too I think tvl is awful metric for this entire thing for the entirety of restating at tbls right now is the worst metric you can look at and I'll be I'll explain okay so 's got 22 billion 23 21 I don't mean eth price recently crashed so uh but around there right how do you pay yield on $21 billion when the IND the meme of the industry is there's no real Revenue right yeah yeah your protocols that make real Revenue but how are you going to

pay yield on 21 billion do with infrastructure it's it's a question that many people or no one's really willing to say it out loud and try to answer that question because I don't know if there's really an answer right um and for the most part is people farming like you you just can't pay the yield on $22 billion um and I don't even know if there's a need for that much Economic Security in one specific a like ABS or DSS I can't think you mentioned abs and DSs a couple of times uh for the listener like what are those things yeah so an ABS is 's term it's actively valid service our uh acronym is DSS distributed secure service it just makes

more sense but they're are two of the same uh for the most part um but yeah these are the actual services that run on the reaking platform um and they are the ones that will be paying for the economic security our view has been hey unless they're just going to create tokens that are going to sit there and air drop Contin the air drop and and go straight to zero you need to create a sustainable economy for this whole thing to work and this is why I said t- build is the worst metric to look at right now because you first need to start a sustainable economy before you start bringing a large Capital else the TV chart ends up looking just like that right after the air job it's going to look like that um and so when we when we the way we've

approached is like hey let's start small let's we Implement a $1 billion dollar cap because there's not many no one can make a case of you need more than $1 billion dollar in Economic Security like an application you need more than1 billion dollar in Economic Security so we implemented a deposit cap and now we're really focusing on building actual proper use cases that can provide sustainable yields outside of native token dilution uh to the end users um now you asked about what we think as like applications that can actually do this DSS's and abss that can actually do that um you have a you have a a few buckets to look at so you have people creating things like um or just adding additional security to already existing things so you have restake rollups right

um where basically you provide economic like you basically run clients uh that basically run the rollup you can in you can have uh decentralized sequencers you can simply just have Guardians that sit there and watch the state routs and if anything uh goes off it will just shut down or pause the chain um another bucket is you have you know Bridges basically providing Insurance across transactions across the bridge right so you know you're bridging our so for example Wormhole from A to B you can then provide insurance for that transaction route and if it doesn't get delivered you know the user gets paid out um another one is like ZK co-processors and like offchain compute um and then you after that you really start getting into some new stuff and

this is actually where blad focus is because I think this this can like power new economy so you have people building and you're an investor in things like hyperbolic right they're building uh decentralized AI like or compute using the POS system proof of sampling uh proof of sampling is one option for for like something that can leverage a decentralized network like this um actually a lot of teams are building AI projects that that that are are Ling uh DSS yeah the whole General concept that is makes sense is this idea of uh when people stake in a pro a state Network there's a lot of there's there's more security and it's very simplistic

mechanism the idea of activ validating services or your mechanism is to create more um possibilities into how that security gets shared distributed for different use cases like I've said it multiple times but like not every use case requires the same level of security meaning if you drive a Ferrari versus a Prius different level of security that is needed meaning insurance right the application itself if you're moving around a million dollars versus $2 for a game very different type of security that's required for that transaction right so that's a general idea right between it's actually the first very crude mechanism of you stay

it's a huge pull of security and now this allows you to be more flexible in how you actually utilize that pool of security this the kind of the whole mechanism has got the industry so jazzed up over the last couple years right go Ahad oh sorry to cut you off the two metrics you look at and you just point out is the actual utilization of the capital in a non-bs way okay like you can't be like here $6 billion dollar but is that six you really need $6 billion dollar so actual utilization of capital and then second from that is the yield being paid on that capital in non-dilutive token yes yes how sophisticated do you think this Market is to determine how much security is

required I think right now we're sort of taking and you know throwing a dart on a dart board and saying hey this is this is the amount we need right I hence why we started big and then now we're trying to figure it out when in reality in a rational maret it's probably good to go over and then cut cut and then find the equilibrium um as opposed to being under well I I feel you can make the you can make the argument for going under and and our approach is this why don't you allow DSS to Define limits say hey I only want a million dollars to Economic Security or two billion or two million because if if you if you don't Define limits in you have a bunch of capital then you're just going to see a rush of the capital the yield is GNA suck and

then everyone's gonna leave and the yield becomes like you bounce up and down up and down up down our approach is like hey why don't we allow these people that are writing DSS's to say hey I only want a million I only want two million of capital I want it for this duration of time so I don't have to sit there and wake up one day and be like half my capital is gone my thing's half as secure so basically come in Say Hey I want 90 days I want a million dollars from 90 days lock in and here's probably the the yield you're going to get Plus or Min you know based on market conditions yeah and then they can make it two million and then they can make it five million depending on their needs like the whole general idea for a listener is that you're basically

creating a Marketplace for security and if you're a particular chain or you're a particular application you're going to go out to the market and say I'm willing to pay this amount in my native token uh for this type of security going back to example of hyperbolic you need uh all this kind of verification or whatever they're they're running their whole business and you require a certain amount of security to operate that in a decentralized context and utilizing the chain and you know um the investor here or the market might look at that and say okay yeah the fair coupon here is x 10% 14% 30% based on a couple of parameters like the duration

of it the um perceived level of riskiness the opportunity cost a whole number of parameters but naturally speaking like the way people like I think the way I think of it is there should be an equilibrium right in terms of there's in the same way that you have you know markets you have a prevailing interest rate based on a ranking system of perceived level riskiness for a company like you know the rating scale right you're a triple A you're paying T Bill plus very small spread if you're high yield you're a risky company it's so that's how the market you know you know these yields are presumably going to move quite a bit and capital is going to rotate really quickly this shared

security is going to move pretty quickly and then that's going to you know adjust but your Point's a really good when which say we need these applications yeah right we need the applications first we we put the what's the saying you you the cart before the horse yeah our approach start start small start small create create create the use cases create new applications that can actually use Economic Security Beyond some mem okay get away from this whole alignment crap about I want to be ethine or whatever focus on the actual damn application build the application figure out how to the economic security actually slot in without shoehorning it in and then grow the tvl and actually get the delegations um that's the you got

model this episode is brought to you by SE se's belief about the world I think is a good one they believe that the evm is here to stay agree with that they believe that the evm is going to look kind of like what JavaScript ended up looking like in the web 2 world agree with that they also believe that the evm and its current iteration lacks a lot of the performance and scalability that developers need so what SE has done with their V2 upgrade is they just introduced the first high performance parallelized evm into the market today they've got Lightning Fast block times and finality of just 390 milliseconds what this does is it unlocks an entirely new design space with 100x the throughput of even some of the fastest evm l2s on the

market today sav2 is now live on public devet with main net scheduled for Q2 you can stay up to date with say on X say Network SEI Network big thanks to say this episode is brought to you by polygon polygon Labs is developing the next generation of open-source zero knowledge Tech to aggregate crypto liquidity and user bases empowering developers to grow in a unified web of interoperable chains with the agir that was a big mouthful so I'm going to tell you what it means in my in my words there's all these things popping up l2s and L3 and it's chaos right if you are building something you no longer have to

worry about bootstrapping liquidity you can basically just build in the AG layer to tap into the liquidity of the AG layer and the users of the AG layer you get the users you get the liquidity it's the AG layer it's hot it's by polygon Labs they've got the polygon Community grants program it was launched with 1 billion tokens Just For polygon Builders season one it's live right now it features 35 million in madic to support the Next Generation of polygon Builders join the aggregated future today by applying at polygon.net polygon.net because a skeptic might say

wait a minute here if you allow shitty collateral then that why doesn't that make uh the system more fragile walk me through that I I have the answer to that we you and I have talked about this a lot but like what is for that skeptic like what would you say yeah so it's ultimately a free market you know is someone offers up whiff if you want to take whiff you can take whiff as a as a DSS but you need to think about okay hey what does this mean for my application right in a free market you can do like our approach is to create a free market and let the market figure out what it wants to use and so yes someone can come in and bring a meme coin and restake with a meme coin but who's really at fault it's the it's the DSs that

accepting that shitty mem coin right it's not like it's just how the free market plays out so in CarX system we basically allow you to come and say hey and express hey I have capital in in this token who's who who can I what can I restake with and as a DSS designer or operator or the the DS Creator I can say Hey you know this is a bridge it's connecting a bunch of different networks together it's not just ethereum 2 and L2 it's etherium to avax to to salana to um to some Cosmos chains right so it's connected with a bunch of different networks hence you know it makes sense for me to maybe accept Capital Beyond just ethereum so I'm gonna say hey it'll take in avac it'll take in salana it'll take in U you know rap Bitcoin whatever and then people that have those tokens

can come and restake with you so it allows you to use tokens that make sense for your use case because ethereum is not the best or it's not the best Roi collateral for all these systems like can't just say hey e the only thing you should be restak with everything else sucks if it if it is a if it's a bridge that's connecting five different networks that have five different Native tokens why can't you accept all those tokens and why does everything have to be only deployed on ethereum itself again it's a bridge that's deployed to five different networks us to have deployments everywhere right um and and that's the core like differentiator it's let the free market decide what it wants to do what's the fair market rates willing to pay and what tokens is it willing to take yeah I think the I share

that sentiment the market is always the Arbiter of Truth and far more efficient predictor like people obviously are now hyped up about poly Market well yeah when you have $300 million on the line it's a far better estimation of what the market is telling you ver signal versus you know someone having a opinion on what the pristine collateral should and shouldn't be the learning that I had in um def's uh like a money market like a and compound the difference between a and compound a was able to cont way more TBL because it was more much more agile and onboarding collateral and it's not so that you shouldn't be taking these tokens like sushi for instance or Wi-Fi is collateral it's the amount and the Caps that you set on that and that is um it's

almost like a mosco's efficient portfolio construction most people would be intuitively say hey wait a minute if you add private Equity hedge fund venture to a portfolio you're going to it's going to make it way more risky and actually it's not because what you need to focus on is the corelation among set assets and in different scenarios how does one bucket of allocation perform one might widely outperform Venture might be super high performer while everything else crashes if you didn't have Venture in that portfolio you would have been kind of screwed because everything's so tightly correlated yeah which goes back to the initial observ you made over time I

guess like if you have two systems one like that has only ethereum collateral versus another system that allows other types of collateral well then you're presumably introducing like some decoupling like less correlation between this a bucket of different types of collateral now there might be other issues which I want to get into with you is what are the complications of allowing other types of collateral do you think about the Caps that you're setting you mentioned this 1 billion cap what are the other types of collateral like how do you think about the Caps who's setting these caps is it an internal risk committee is it just uh based on

what yeah um I I think you brought a good point it's the lending markets have short us all the ways you can you know think about accepting collateral I think the closest one we're most akin to is actually Moro Moro lets you accept anything right everything's isolated in own buckets right and so here everything's isolated in its own buckets and the only like where the collateral comes and meets is when the DSs chooses to accept multiple types of collateral for its Economic Security um you you touched on how do you like what are the complications of accepting multiple types of collateral well and this is a small Nuance it's how do you equate the the voting weight of these different types of collateral right um so for example if we have a governance token if

we have ethereum and then we have for for example bridged asset you're going to wait these things differently purely on if we just look at it very simpl like simplistically we're going to say hey based on dollars one ethereum is gonna be worth more than one usdc of course right 3,000 versus one so we're going to wait the we're each of these gonna have a different voting weight when they're delegated to an operator so basically you know think of it like shares for people at home think of it here I have shares I delegate it to an operator and they go and vote and actually run the task on my behalf and then I get Rewards umh is how reaing works well I'm giving different types of collateral and each collateral is going to be considered in in in different forms of value just from

the dollar fa like the face value of it but also you know the type of collateral if e is most pristine it may have a higher voting like you may get more votes for restating eth versus if you restake with I'm exaggerating but point is there one DSS um are there multiple people here like or organizations like um like how are because in this in this in what you're describing it really matters whoever is making that decision yes and so the person that we've given the rights to make the decision there is it's two parts the DSs is the ultimate

decider of what capital gets taken in so if they're like no we don't want to take in rap BTC you can't restake a rap BTC that's the final answer but again every like you can have multiple DSS's that do different things so you can have a warold DSS that takes in maybe like w or usdc and eth and you can have another DSS that's a re like a restake rollup DSS that takes in the governance tokens of various rollups so um they're the ones that ultimately decide and then you have operators are saying hey I will support this asset so if I'm an operator and I don't want to I only want to support pree collateral like ethereum like usdc then I can do that and if I'm an operator that wants to be more dgen and I want to support more governance tokens meme tokens whatever you can also

support that uh the operator meaning back to your example would be like a hyperbolic uh sorry the operators in this example would be someone like a figment or coinbase Cloud the validators themselves yeah yeah yeah got it and so there's two components obviously validators in this industry have a long track record most of the top 10 are the top 10 across all different chains from ethereum to tesos Cosmos it's all pretty much the same guys right um y this could be even coinbase right or binance running their own validators for the clients so they they um they they're like on one side of the spectrum determining what DSS they work with

right yeah so they they choose what services so if they want to validate the Wormhole one they want to they they can and if they're like hey this is a small one that we don't want really put want to put our reputation on line for because maybe it's not as thoroughly audited or whatever they don't have to operate on that one right so they are free to choose which just like they're free to choose what chains they're going to run validators for they're free to choose what dsss they want to to validate for what keeps the DSS in line and in check from taking too much risk it I know it's a me social slashing it's the social like consequence of it in the end right it's a reputational harm uh of it it's the you know potentially is getting a black market and saying you know No One's Gonna

really no operator is gonna delegate to you or operate for your with your DSS it's completely social again it's a permissionless protocol so no one can block anyone from doing anything there's no admin privilege good anyone can come in and and and launch their own DSs yep be I think it's important because again you don't want to be you don't want to sit here and be like hey we only want to work with this team or this team or this team and we want to like yeah you're you're not opinionated I I get it and I think it makes sense uh in the same way that the market you know is not opinionated you know you have multiple type of I almost like in it as an example there's multiple types of hedge funds they take all kinds of different risk there's this problem that is a

principal agent problem so uh anytime I invest in another fund I I do sometimes I always ask the question how much of your money is on the line how much of the GP of the entire fund say the fund's $100 million how much of that is your money and if it's less than a certain percentage I will not invest because there's just not enough skin in the game yep um and so then how do you kind of think about the just going back to this like principal agent problem like of a DSS of an operator like yeah they can uh are they Anonymous are they synonymous they launch it um they offer a really compelling opportunity and what I'm

trying to get at is the market may not be as sophisticated and they're just chasing that yield um and it and it blows up yep um how do you can you mitigate that um can you uh like what can you do to prevent that if if anything yeah so I think so again it's it's permission protocol so anything is possible um but the way you confront this I so we made a pretty flexible design where you can sort of do whatever like if you want to make your own custom Vault that allows you to take custody assets on coinbase custody or or binance custody and allows you to restake them and just have like a actual ricardian

contract where you write hey if you know if I'm slash in this event is admitted by a smart contract I'm actually gonna give up that money you can technically as long as a DSS says hey I'll take that capital in right if if you know you can let governance tokens in you can let stake governance tokens in you can let Bridge tokens in like it's it's it's so flexible like you can you can Define however you want to restake and as long as someone some DSS on other side is willing to take it in take that cap accept that as like reate capital and economic security the protocol allows it to occur now going back to your point a how do I create skin in the game well you can extend that that that flexibility design you can literally make it so the operator themselves has

to put up 10% and has to act like a GP basically put 10 15% up and you can make it so if there's a slashing they're first to get slashed right it's actually not too hard to to build you can create a 46 26 volt that has those rules where the you know the creator has to put 10% capital in and you know when that Vault gets slashed they're the first they're the ones that lose their deposit shares some some waterfall exactly right so it's you you can easily Define those rules in in the car protocol um and it's super easy to define those rules and create a vault and deploy that right so you can solve some of those issues uh within this open design we've thought a lot about uh or talked a lot about hypotheticals I'd like for you to tell us a little bit

about what's actually going on in the ground floor um walk us through kind of of it's been a couple months since you launched um or just fairly recently um what uh kind of activity and interest have you seen where is what's the state of the protocol today and what do the rest of the kind of next 12 to 18 24 months look like for you guys yeah um so I think so we launched in early April and it was been a pretty a pretty successful launch I would say we got to a billion tbll I think within like six weeks um and I know I did say TBL was a meme but it showed that there it showed that there's a a demand here for what's being built an alternative to I right people wanted something that you know is

open is GNA exist on multiple different chains excepts any asset and I think that's actually become sort of the industry standard everyone's like wait why can't you restake with all these assets right like we were able to challenge that and sucess there's better it's almost like you want to shop on Amazon do you want to just shop an Amazon in your local town or Amazon in the entire country or the world we want to have access to all products right exactly um and so I think we were successful in that mission saying hey this should be any asset and it should exist on multiple different chains um so we saw success there and from that uh after we launched we were able to start adding a bunch of various different tokens so we've added um the East the lsts uh some lrts even things

like PT tokens governance tokens like um blast was one we I think we we added last week things that help tell the story on what we're trying to do um and so that's been the past uh past few weeks and now we're finishing up the the V2 audit so we're going to the third audit for v2 um security is pretty important to me you know I try to keep it very simple like smart contract Dev should write smart contracts in in a way that's super simple for others to understand audit and get it audited multiple times because in the end you want to be able to sleep at night without and you don't want to have to carry your computer in your Ledger and you know everything around with you 247 because you need to potentially respond spend time and actually get this thing

secured make sure it's well audited don't cut Corners there so V2 is almost ready to go and go for launch here in the end of July um we're onboarding tons of DSs Partners again we have we're trying to create actual use cases here that are just not non-diluted like not just dilu of governance tokens people that actually want to use the services and get take the economic City so working with Partners like War which we announced um about two weeks ago and we're helping take Wormhole and make it more decentralized right which meets the goals of of the Wormhole community so creating a decentralized validator set that can work alongside the the existing Wormhole Guardian Network potentially looking at creating a decentralized relay Network so the ux for the user

that's bridging becomes even better um and and working with other partners right so another one working with Hyper native which is basically building a a security Oracle so how can we power security oracles that provide more security new use cases that we haven't seen before that can create products that can actually pay the rewards uh to people that are reaking um and then beyond that there's tons of Partnerships I can't really talk about but the big takeaway would be hey these are new ideas that aren't just like the the current INF for memes that everyone's just like man this over like the current High pric uh fdp INF for memes right things that are completely new that only reaking can really power we're really excited about that because

I'm actually you're actually creating new usable products for people versus playing the infra game mhm um and so that's like the way we look at like integration like that's the way we're we're looking at Integrations those type things but yeah like that's the current state and then I can you know I can sell you in the future forever if need be well before we go to the Future uh this idea I've had for a while I just want to validate with you and you tell me how you agree disagree but didn't C OS really Pioneer this like ages ago this idea of shared security model and allowing like you know when you think about cosmoses you have like atams as a hub and then you have like chains like

dydx and you're you're borrowing security um and from the from the hob and um in some ways we're going more in that direction like it feels a lot like a borrowed concept like Co Cosmos is this kind of curse protocol has build a lot of really good Tech and then people then just borrow it uh meanwhile Adam as a security substrate is sort of TBD uh and the price kind of reflects that but um but it feels like that no like you know you have where I was going with this question a do you agree B do you foresee a scenario where you can now spin up chains like l2s or l3s or whatever and l2s or just other chains far more

efficiently because you have multiple types of collateral and you can very easily spin up like a you know if Dy if you're not dydx if you're another protocol you want to launch your own chain they can borrow security from karak in this Marketplace and get it far more efficiently than it has ever been possible before in this industry yeah so on the cosmos point I think there's so you can make cases for both sides I think the idea of bar security I think was pioneered by Cosmos but again as you I it's it's the ideas and the execution are two separate things um and and like there's a lot of politics on that side versus like actually getting like I'm not on I'm not on that side of the

of the crypt sphere I'm saying there's a lot of politics that were that that sometimes get involved and and and and muddy what like muddy muddy their goals um but I would say I would give it to him like there's no point of withholding credit I think yeah the credit is probably due to is is due to the cosmos ecosystem saying hey you can do the shared security um the there there's one world where you can say hey the idea of their their way they looked at sh security was hey another chain can borrow this security and they were really only thing on like a chain level I think the way I look at it is and I I have figure out how to word it properly but it's like there's a whole world of smaller applications that

sort of everyone is talking about reaking is ignoring applications that only want one million two million1 million in security they're not a whole they're not a whole chain it's hard for them to justify having to run a whole Cosmos chain and and talking with all these not every one is dydx yeah exactly and so yeah effectively what this does in my mind is it lowers the cost right because if you're you if in order to bootstrap security you have to give out all this inflation crazy inflation like Bitcoin did in the early days um and new chains in Cosmos you look at a bunch of it has historically been quite expensive this Marketplace lowers that cost to bootstrap security because Marketplace

inherently makes things more efficiently because there's Better Price Discovery and there's more competition I.E lowers the cost you don't have to dilute yourself you don't have to have these crazy inflation curves you can now do it in a more efficient cost efficient manner exactly which Cosmos hadn't historically allowed you to do to that degree exactly you want make it super simple for people to Bor get borrow the economic security and create tools and applications like you you you could make it so you can borrow Economic Security but you need to create the stuff that people can actually use it with easily you you need have the op stack alongside the borrow security you can borrow security like I mean it's kind of whatever but you need to build like

infrastructure and applications on top of that so that people can actually borrow it easily you need to build restake rasses to make allow people to oneclick launch restake rollups right um I don't know if they really solve that part where you know here's things you can do beside launching Cosmos SDK chain with that security and going through governance processes to actually get it included in the a was probably another factor that Pro probably made it why like the reason why their shared security model hasn't really taken off like there's a lot of politics versus just a clean Marketplace here's applications here's economic City bam yeah um well now that we're talking about politics which I hate um

there's still some degree of politics in the system no and maybe you want to just talk a little bit about what those are and I know Ian has like this veto Council of sorts and to your point around like the analogy of guard rails uh in place to make sure that the system kind of takes off smoothly uh what are the like shades of politics in the system in in karak I mean the the the in ours I I think and it's go all the way back to the beginning of the podcast I've been here since 2013 I've seen the entire crypto landscape change um and I'm not saying that because I'm not trying to say that because and say I'm wise or I'm so wise that you know I'm it's well

beyond me that's not the point it's to say I really don't believe in this idea of alignment I think alignment is kind of a meme like what does it actually mean being eth aligned and not like who also who cares about alignment like who are you really trying to press here um I I I think you do a good job you especially like when you talk about Sal like Salon has presented a decent challenge since a whole ignment Meme and so I think it's pretty easy to talk to you about it which is saying hey I think the whole alignment thing is just like it doesn't matter like let's be adults in the room let's talk about what it is like let's not I think the other bit of reaking it's been talked about as like a lot more than what it is I tried

to I try when you talk about security people that talk about alignment don't appreciate correlation and that that is at the heart of how you think about insurance and risk management it is it boils down ACC it's moscowitz go study mosit efficient portfolio construction Frontier and then tell come talk to me about alignment as it relates to security um exactly and that's really it um you guys yeah so you guys just to kind of Round Up for this chapter of the Pod um reaking took took off a lot particular as e you know the beacon chain launches there's a lot of tokens that are

delegated to the lights of the world they're staking their ethereum and then there's this kind of idea of oh you know there's all this security that's pulled let's offer reaking or you know to you know distribute this Security in more efficient ways conceptually we haven't really found out a lot of what those Ed Cas are really going to be there's 20 billion plus of tvl chasing yield but it we haven't really solved the um the sustainable sources of yield per se you have guys have said in contrast to enan uh which is kind of the competitor here so to speak they've garnered a lot of tvl um they've been ethereum align only

ethereum is collateral it's pristine that's kind of their stance you guys say hey wait a minute no we're going to introduce all kinds of other types of collateral will have a more leair approach to it um unless you set the right parameters allow any people someone to come and you know it really depends on the application the operator and the DSs to figure that out and that's the market we're just here to provide a useful platform for the security to be shared more efficient way because you know crypto is not just a theum so far so good so far so good I mean there's more I can add I I think on the differentiation stuff I think sure I I

think I I think from a developer perspective the way again I'm a developer I I I'm sitting here defining the protocol as the solidity engineer or the lead solidity engineer right so I'm a developer I understand where it sucks to work with like we since we're going through insurance we were integrating other protocols so I understand what sucks when when integrating other protocols what design sucks what Design's elegant and simple um and and so from a developer standpoint it's super easy to build on carak why you don't have to do any these Pol you don't have to jump through politics you don't have to make sure it's ether line you can accept whatever collateral I don't care what chain you deployed on I'll you know we'll de we'll Deploy on all the evm chains and soon beyond that deployed on

non evm chains too so you don't have to choose some chain alignment or sacrifice uh what chain you're already if you're running a project on for example arbitrum right say your GMX like in this case you can run on the car infrastructure on arbitrum instead of having to do some bridging between ethereum Main and arbitrum and you can accept your GMX token your glp token your ARB token your eth token anything you want right it's super developer friendly to build DSS's and get running on car you don't have to deal with governance spokes you don't have to be eign you don't have to take the knee uh super like that's one thing I I should have touched on earlier it's very easy to build on K right I I'm the engineer right I'm not six six guys top like uh

have six people between between me and the protocol engineer themselves I'm the the lead engineer on the solite protocol so I have empathy for the end so what if I guess on that point what kind of interest uh from projects have you seen since you've announced in April and back back to your point which is probably more interesting where I wanted to go is these projects that you say need the one to two million of security like what what are those projects what do they look like uh and what kind of interest from developers have you gotten since you've kind of been more public about since April yeah we got a ton of interest from developers the developers that we're getting interest from are the ones like Hey how do I get how how do we

how do we get building like and have these been evm based projects or non evm or both uh I I would say uh predominant evm because those are really the only ones I've thought about reaking because it hasn't really been an option for nonm projects but we've seen a small sprinkle of of nonm projects come in say Hey you know maybe there for example wormal I don't know if you can consider it purely evm or you know partially in Sal evm yeah yeah and so we're working with people like Wormhole right um and there's a few others probably announced this week that also have connections to to non evm chains but for the most part it's been mostly evm developers but the type of developer that's come to us is like Hey how do I get started like where

docs let's get the SDK going and I match the energy I'm like look let's let's ship this thing let's ship a PC it doesn't it can let's PC a test net let's see how it works let's see if it makes sense you know you have this governance token why don't we let that get restak huh like let's give some utility your governance token right um and this attitude I think has done us pretty well we've have incredible BD we're working with a bunch of products projects and we're just focus on shipping shipping PC's and getting them to main net um and in terms of like types of projects again it's it's been a variety of projects again you have the AI ones you have existing infrastructure that's trying to add a decentralized component like wormhole you have um restake rollups which something new and nent um yes it's

a little bit across the board you have a lot of indexing and data stuff uh that's actually pretty new and that will probably make you know front ends more decentralized um yeah a little bit of everything I think in the space has reached out and said hey we're interested in in how do we get started yeah in this Final Chapter I want to get more of your general thoughts um one how do you measure success and what does success look like for you guys um and if you could touch on on that like what are the kind of the major themes that you're focused on in terms of maybe the type of applications um the overarching kind of uh theme of this chapter in this pod is

like why does this make crypto a a better industry what you're build like how does karak make it better what does success mean to you and how does that percolate in into the broader industry yeah I think the over and and you summarize it why does reaking really matter and how does it what does it mean for the end user and who is the end user um and so you know for us again and and the whole theme hopefully that I presented through podcast is really cut through a lot of the the random verbiage a lot of the academic memory I would say like a lot

of a lot of that stuff to really get down to the nitty-gritty of what reaking is who does it benefit and H and and and and what it overall means for crypto or Mak and in in that case making systems more secure um the way we measure success is look from a user it for users it's like how do we bring utility and yield to the end user and I already touched on that saying okay you have all these tokens Can you give them yield and if we are able to do that I think we're successful in the user's eyes because now we've taken users that have tokens that are potentially otherwise not generating any yield like governance tokens and giving them yield and giving them a reason to hold the token Beyond

up and down price action um the other way we measure successes like through ecosystem have we built a ecosystem of Partners of DSS's of operators that have created new types of applications and those applications are actually getting positive benef benefit from Economic Security so instead of just you know points farming all day is defi or is crypto better because of these applications being secured by Economic Security and versus them just existing in their current form without any Economic Security ever um can we enable again new verticals of applications that weren't that didn't exist before and and

can we enable them to be more decentralized and more fair and more open um and I think the third measure is security and slashing like I talked about it once slashing starts happening people are going to run away so when we look at security you know what's the what's the security of the the protocol look like what are the slashings how many slashings have occurred is there um is there censorship is like you know is operator is the operator set diverse enough is it geographically decentralized is it the same 10 20 operators that operate on everything or is it a good mix of professional operators and home operators um that's the way we we're going to measure success here again I don't think it's

TBL TBL really shouldn't be looked at because you know you can have 20 billion dollars SEC uh TV but if your security is not good poof it's gone right if if users aren't satisfied with it poof the money's gone if if there's no ecosystem there and there's nothing to put money in poof it's gone so that's again I think we in this industry we go one step forward and two backwards um and I think uh you know of course yields are not sustainable and but that's fine I mean I think the market naturally has an equilibrium to yields but what is is not really acceptable is is the level of just smart contracts right and and every time there's a hack or it really sets us back as an industry

and I mean you you and I have had these conversations over the years like until we have robust risk management in place this industry will not realize its full potential just won't um there throughout history there hasn't been an industry that has really taken off without proper Insurance y explorers wailing Expeditions uh home building and homeown like it's just you need proper Insurance otherwise you know and we know that you know this space is a lot of risk there should be a lot of yield um and you should understand where that yield comes from otherwise you are the yield exactly and I'll give the Frank assessment on on on the the yield and the risk right I'm not going to say this is going to this is the I'm not going to tell you this is the next coming of Jesus for eth or this

is the next coming a chist for ethereum right I'm going to be hey this is what's happening and these are the type of yields you're going to get because you do that task and here's the risk you're going to present yourself to yeah but I think it's a novel uh Endeavor to create a Marketplace for security and real-time assessment of risk because if you have a really you know one of the things that was super interesting was why insure you remember Andre launching Wier so so NEX is for users that might not be familiar so the short story is Nexus was required you to do kyc so only people if you were farming in a particular D5 protocol or putting money in a you could buy insurance say for six months uh insuring up to a million dollars in a and you

could buy it for $2,000 or whatever it was like super cheap actually is like grossly Enterprise um but you had the kyc so not everyone had access to it Andre then put a wrapper to that policy and allow people to sell it and that created a far more efficient market because it had better price now Hugh and the team at Nexus were pricing the policy and I had a lot of conversation with you I'm like how are you pricing it it just feels really inefficient my mind is like super underpriced um and it's not Dynamic it's not real time the market is always going to be a far far better um mechanism to price risk like look at options right I

mean this there's a way to do it like the if you want to understand the riskiness of a company go go look at Option pricing uh like literally black JS right um and so uh I think what you guys are doing is in my mind it's not so much about can you get the extra yield from your token can you get um it's really the the DSs benefit and the entire karak ecosystem benefits but it really is enabling lowering the cost of security by creating more flexibility and

opportunities for these applications to come into this free Marketplace and say price me security now and I need it and boom you get it and and that I think will um because security is Paramount if you don't care about security go build a centralized database in web to and just forget about crypto full stop uh and so I think that that to me is why this is so exciting not so much uh the meme of like you restake and then you know you you add yield on top of yield on top of yield like that's IR in my mind it's not sustainable it's not interesting I have a line that I think you would appreciate um it may be a stretch but I think I've listened a few of these so I can I can I think I've heard this before from you um

basically I'll I'll say carak is like reaking for salana um not actually literally reaking on salana let me expl it's like the philosophy of it right um one you know it's how salana presents like it doesn't care for these alignment memes right the the way Salon has presented itself it really cares for like building for 20 years in the future right um same here we're we not we don't care about the politics we don't care about alignment it's just build a great product for the end user the users will come and hopefully it'll be success if the idea actually works out um presumably also cheaper or more efficient right because if you allow more types of coll collateral then that should expand the opportunity set now you know of course like Bitcoin is now

all their AG right and you're going to see much more flexibility there you get a bunch of activity happening there after tap route upgrade you're going to have you know salana in of itself you have uh you know the high throughput chains optos say sui um you know Avalanche like those are all viable collateral types not only that but like we haven't even touched on this but like from a customer acquisition standpoint and attracting just a lot alignment like is the thing in terms of like by allowing other types of collateral on the margin it's beneficial because you tap into those communities and all of a sudden that if you're a application that that that is interesting that on the margin like you care about that right you care

about tapping into the users of salana and other chains right wherever they may be yep uh quick side point I there's also a perspective where there's a and there's a world where most of these tokens that actually end up being restake are governance tokens uh versus you know pristine collateral like it gives use to governance tokens that otherwise previously didn't have a use right allows them to be used for eon of course with some limits right you want a mix of good collateral and uh and governance tokens but you can you can give use to tokens that didn't have a use and I think that's actually super powerful for a lot of end users like people may not care about reaking at all but if you're saying hey I can enable you to do something that token that otherwise you couldn't do anything all with that's actually pretty compelling

for a lot of users and then on the other side institutions to right institutions hold bags of all these various tokens they'd be willing to restake if they could you know if they could with governance tokens um but yeah back to my the salana thing I was saying um and I think you touched on it is like hey you got all these person collateral types of you know Su and Aptos and and salana and all these other different chains you know there's a notion that EV like evm should be the only place and ethereum itself should be the only place restake lives and it's the only game in town and again we're here to challenge that like you know create the free market and make it exist everywhere make it exist in all the chains anyone can show up and you know create two sides in the marketplace

and in the end like in the end the person that benefits is the users right they're able to to restake on their preferred chain or the chain they're working on developers can you know Deploy on the chains they already exist on um we're here to work for like and and develop for developers in the future not just where everyone is today um but yeah that's sort of the long way of saying it's like sort of like the salana philosophy right yeah you just care about the the end user and making it just a far better experience exactly um so just to round it up I mean I think this has been very balanc discussion obviously I'm biased I've known you for years I I'm an investor um and you know no surprise there I hope that this discussion has

been balanced and I want to end it with that tone in terms of I think there are time and time again in crypto it's important to just appreciate that there are unknowns and um I think this wouldn't be a proper um discussion about risk if we didn't probably end this episode with just uh that type of closing in terms of I think we've touched on a couple of the things that while this creates a Marketplace and it creates you know the ability to share security the ability to distribute it more efficiently for different types of applications and ultimately create a more efficient market to price security um which I think is beneficial uh the the unknowns

and the things that might you know we ought to just pay attention to is you know that this Dynamic of anyone the the permission this has both a blessing and a curse sometimes it's important the user might not fully appreciate you know might just see higher yield but it's like when you're going and buying like a bond right and if it if the coupon is 40% well yeah yeah it's 40% but what does that tell you about the viability of the company of the issuer so I think it's uh we touched on this but I just just want to reemphasize and I want you to comment on it so sort of the making sure that you know the uh the DSs uh you know uh understanding like that type of operator maybe creating a dashboard

right like the L2 dashboard is really good you see which one have fraud proofs which don't a ranking system maybe a rating system of these operators to make sure you know which are good what's their track record um would you agree with that is that something you guys are developing yes so I think I mean it it makes complete sense like these the end product that you're restating to is a highly technical thing that and if you're not an engineer you're really not going to know what's the how it actually works um hence also why we have credit rate rating agencies in real life because you can assign it's very easy to sign a letter to something and for the most people be like yeah very easy to understand letter right yeah um but something like this very technical there's gonna be a very

specific amount of people that can actually understand what's going on um and so I think one thing that's done decently well right now for beaking has the lrts because you've sort of offloaded the and delegated at least as like a like a small user you talk about World um ethery like a swell yeah you offloaded it to them and they're there to make the informed decision on where to allocate the capital yeah yes you you may have a principal agent problem but for them their goal is to make sure the capital stays in their protocol and the way they're going to do that is providing a competitive yield with a low amount of risk right so you've sort of you know with by using an LRT youve sort of offloaded your your risk analysis to

someone else that's actually NY reallyy deep in um staking and the reaking that actually has a direct line to the uh DSS's and uh that they allocate to and The Operators that are operating for them um and so I think that's one good thing we've done in the in the reaking cycle is you know create some like layers of abstraction for the end user so they're not actively having to do this themselves unless just sophisticated enough um but I think yeah you have to create dashboards you have to create you know you have to take audits for the dsss you have to sit there and I I think every user should at least look and figure out what's what their money is being allocated to even though it's inconvenient and maybe Technical and maybe timec consuming as

good practice you should figure out what's this allocating to what the source of the yield actually is is it just dilutive governance token or is it actually something sustainable um and you should become familiar with the risk and you shouldn't just you know Chase the next Farm because it could end poorly um so yeah I mean this is like anything else in the industry you should always put time and due diligence at yourself to make sure it makes sense to you if it's you know if it's a lot of word salad and fugazi fugazi maybe stray away from it right like be very re I hope I presented reaking is not very complex it's pretty straightforward you don't need research papers or even a white paper to explain

it you have a task you have a reward and you have a slashing condition if the task is messed up this why I'm I'm starting small in tvl right it's why instead of that you having a large amount and chopping it down it's like you start small and you allocate more and more and more as the DSs matures just a Time perspective as it develops has has better docks and as people come to an understanding of actually what's going on nothing like you can write all you want in a paper but nothing tells you how things are going to go better than actually running it no one's gonna tell you you know how the wisdom of the crowd's going to shape up if you know no one's gonna tell you how to analyze crypto Twitter sentiment about your DSS no one's G you can't

predict any of that start small build up from there and that's been our philosophy it's like this is the way it's going to work if something sucks at least or something is is risky hopefully doesn't get too much cash capital and it can be drisk or you know compelled to shut down before it becomes too much of a a nuisance yeah wise words from some of that started when they were 13 and still fairly young um very uh very interesting discussion hopefully this has been I mean I want to bring you guys on the Pod just to talk about risk because I enjoy our private conversations a lot of it just generally about the direction risk and where this in is going and we both share that passion we talk about it you know insurance is and risk talk about

risk is sexy uh at least for a few of us the most boring Topic in the world right it's the most important I think for crypto U security and and then uh creating more robust uh Risk Management Solutions in place and I think you guys are moving in that direction so um really exciting for what you guys are doing um thanks thanks for coming on and sharing your thoughts through um I think parting thoughts and also where you know best place for people to follow you or learn more about um karak yeah uh parting thoughts I mean if you're a developer and you're thinking about reaking or potentially adding restating to your application or building something new and you don't want to go and like build your own operator set and or build your own chain and you want to you know if you want to

focus on building the thing that makes you different versus this the the same like the same peer-to-peer consensus stuff you want to make something super fast and super secure reach out um you know we're a fast moving team you reach out you'll be talking with me within a few hours if you need be and we can start moving en coding pretty fast if you're a user and you want to potentially restake some of your assets we offer a wide variety of assets on currently our V1 so you can deposit things like eth eth lsts lrts pts governance tokens things like blast even um we offer a wide variety because again I'm trying to tell the story of all the assets that we can accept in the in the future and then if you are operator of professional operators can always reach

out and yeah you can find us on Twitter carore network uh car Network I don't we don't have a white paper actually we never wrote a white paper because we just never fail the need to build the product that improve the point you don't need to you know write a paper that 10 people will read but there there is documentation on the side people can go read no yeah there's really good developer documentation yeah yeah written playing English no math like I no there's literally no latex math equation in our documentation English plain English a 13-year-old um the next 13-year-old Drew that's listening to this and can go and look at it and maybe get started um really good story Drew thanks for coming on again and really enjoyed

this discussion and um hopefully users let me S listeners um enjoyed it as well and if you have any comments or want to learn more about it just always comment on YouTube you know we're reading uh them and commenting on them so uh I look forward to seeing some of those uh but otherwise thanks everyone for listening and um yeah we'll be back uh next week with the Roundup thanks aunti thanks true all right you heard about say a couple times just want to give them one last shout out big thanks to se for sponsoring this episode of Empire there are a ton of reasons to build on say if you want to get in touch with them you can reach out to me I'll put you in touch directly with the team you can also get in touch with them on Twitter at say Network you can follow the

journey at say Network they are currently live they've got sav2 on public devet today mainnet goes live later in Q2 really excited to have SE sponsoring and partnering with us on this episode of Empire [Music] n [Music]