Will On-Chain Repo Reach $1 Trillion? One Reason Yes, One Reason No

Transcript

Craig, one one thing you you mentioned, I wanted to ask you about uh sort of how repo could help with like deleveraging moments, especially during periods of market stress. Uh immediately made me think of a and everything that's happening there trying to restart those markets. Um how do you think like a mature onchain repo market would help in a situation like that? >> Yeah. No, a absolutely. I I mean it's a great example. Like for instance, you you because you had this sort of whole secondary market that started going around with with the death tokens and the swaps, a lot of like what fluid was doing. Um but that was fundamentally built on trading out of your position.

Uh there's a lot of situations where you don't want to trade out of a position. Um you want to keep the same position. You just need the liquidity right now. Mhm. >> Um, and so that a a mature repo marketer or a mature repo facility would have let you do that. Okay, I've got uh I need my ETH right now and I'm willing to go and post, you know, whatever it may be either off my balance sheet or that's even in in a some other debt token, whatever it may be. I'm willing to go and repo that to get to get the ETH that I need for my for my obligation over here or to post this additional collateral or or to pay this loan back so I don't get liquidated or or whatever it may be. There were a lot of you know a lot of folks on different sides of

that. Like it's that that's a prime example. Everyone was happy with their positions. Then this black swan situation comes about and um folks may like if folks had the option, everyone probably would have loved to have kept their positions and maybe paid a little bit of interest for it or something but just kept things going. But you have a general liquidity dynamic which then causes all sorts of problems uh where people are selling. Now you have assets that are selling off. Now you have interest rates that are spiking. Now you have people that are getting liquidated that otherwise would have never been liquidated. Like you you have this whole kind of cascade. you have a deep pegging risk that's that's going on and now you pressure on all the LSTs and and the execute and things like that like none of that had to happen. um uh e like not

that repo solves everything, but it would have solved a whole lot in that situation. And you run into the same thing with like these short-term liquidity facilities like with the ETFs. There's a lot of interest um with ETFs, with folks that are managing large treasuries of ETH, Salana, stakeable assets um that would love to have all of that stake, but they need some kind of repo facility essentially that's going to go and guarantee them that they'll be able to have the liquid right away, even if something's in an unbonding period. And and you could take the same thing in the redemption cues in in RWI. It's the same thing. It's something's in a redemption queue somewhere. it's either being unstaked or it's being redeemed or you're waiting for the a situation to play out. Um, but you need the liquidity

now and you're just going to pay a little bit of interest for it as opposed to selling out of your position on on a secondary market. Um, and um, so I I think it I think the last thing I'd say is this this because of how Morpho is designed, it's where I've seen this kind of deleveraging concept outside of obviously like the A situation probably the most because you have situations where um, you may have vault curators that are going and um, you know, they have to balance their liquidity situation and they have to assign LTVs that like like liquidity is a massive thing in the back of their minds in addition to the riskiness.

of these various vaults and how much they can allocate is all dependent on the liquidity profile of different assets and so they can give a higher LTV and they can do a higher allocation in the morpho markets when the liquidity profile increases and so um because what'll happen is the liquidity situation dries up the um and the morpho markets are doing the ticking interest rate situation that they do and now people's trades are blowing up and people are at risk of liquidation and what they and they need to be able to delever that situation. They need to be able to get their their liquidity either out or get additional capital in. And so and so how would you do that? And so

like we um we currently have like within our product set off for deleveraging facilities for folks not just necessarily against uh our credit token but also for other uh other assets because of this dynamic. Um, and what that'll do is it'll actually increase the capital efficiency of the market overall because now the morphomart because the vault curators feel confident um in what they're allocating to in the liquidity profile thanks to repo, they can now actually extend more liquidity into the system. It doesn't have to stay trapped because of the um of the difficult redemption windows and so on and so >> gotcha. So I mean the traditional repo market measured in the trillions. Uh, Matteo, how big do you think onchain repo could get in the next say five to

10 years? >> Well, in the next uh five years, I would say um I'm pretty confident to say that it would reach the uh trillion figure, at least one trillion figure. It's something that it just makes sense with the current pipeline of, you know, firms and traditional players that are looking into on these kind of onchain applications. So, uh, I wouldn't be surprised to even see it like before the next five years. Um, and that that's going to be as as I mentioned before, it's going to be kind of like an hybrid approach. So, we're going to see more and more, you know, kind of like less differences and but more a united approach to work

together on improving this kind of situation. And um and so yeah, I I would say it's something reachable within the the next five years. >> Okay. And uh Craig, for you, give me one reason why it will get there and one reason why it will not. >> I think it it will get there because of those dynamics that that I mentioned and things that are already happening. You're you're already seeing a lot of these platforms go and release these types of facilities. You're seeing people like us and and other market participants be involved. Um and so you that that's the bull case is this is necessary and it's already kind of begun to happen and these facilities are being are being offered. Why it won't happen um I think is because

is that necessarily actually I guess repo in all cases um or are people going and implementing this in a variety of sort of different ways? I think one of the one of the benefits of centrally cleared repo for the banks is that it's like something you can do like clockwise and you can automate it to an extent and you can use it as part of your treasury management strategy and capital's flowing and it's all governed under the same agreement and there's standardized terms um and um and and that's to get our industry on that and I'm not sure like that is a gargantuan challenge. I know that there's folks actually my uh alma mo at membrane uh they they're I know they've worked on this to try to

get folks on a standardized gymra repo form uh to try to kind of create this but to create this sort of like standardized market in general right now is a extremely difficult thing to do onchain is probably one of the best places to start frankly um but that's standing up and getting an entire ecos basically starting a new exchange or you would have one of the exchanges that would that would need to do it um That's a massive barrier to entry. >> If you've been loving Bits [music] and Bibs, don't forget that the show is transitioning to its own feeds on X, YouTube, and your favorite podcast [music] player. If you're not already subscribed to Bits and Bips on its own channels, go there now and hit that [music] subscribe button so you can keep up with our twice weekly live streams and macroe crypto breakdowns. Bits and

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