DeFi in the Aftermath of the CeFi Unwind - TOKEN2049 Singapore 2022

well welcome everyone uh so we've got an exciting panel coming up now uh with uh maybe somewhat controversial and definitely cool uh definitely topical conversation around the C5 unwant and what it means for D5 moving forward uh my name is Joe from Maple Finance so we're an Institutional lending protocol uh and then joining me we've got will CEO and co-founder of element Finance we've got peers hey CEO of RDX works and we've got do so maybe guys just to kick off if you want to give a couple of minute overview of what it is your products do the problems that you're solving and maybe something on your on your background as well yeah so I used to be an eth2 researcher before going into defy uh me and my co-founder played a big part in a lot of uh the things involved in the merge um some other aspects with what you see um has sort of come in uh the latest developments on E2 so I'm the CEO and co-founder of element Finance element Finance is essentially a yield stripping tool so we take different yield positions in the market um let's say like Maple Finance as an example that provides yield on the lending side um and we split that into two basic uh pieces this is the principle that you put down and then the interest that you earn so if I put a million dollars in on the lending side that's a million dollars in principle any interest earned over the next six months um let's say or a year 10 that would be collectible through these interest tokens which are 100 you know a hundred thousand dollars in this case um and this this enables a lot of interesting things in particular it allows us to take different variable positions in the market we can boost the apy on top of that because we're essentially issuing these trading markets that are on these like interest tokens variable side but are also on the fixed rate side which are these principal tokens so we essentially facilitate uh fixed rate and variable interest markets that have a number of different uh pieces of utility with them but yeah that's the general overview on on that it allows as well a lot of people to be able to leverage into the interest on the variable side and as a side effect this sort of creates more conservative fixed rate instruments that are really good for treasuries Dows institutions people who are sort of hedging against interest rate drops uh such as you we saw recently in this uh in this aftermath so yeah cool uh so I'm Piers uh CEO of RDX Works RDX works is a core developer of the decentralized finance protocol Radix Radix is a layer one protocol focusing specifically on decentralized finance it it launched about a year ago has a market cap of around 600 million dollars and we spent the last three years focusing in on a problem that we actually see in the crypto space universally which is that it's basically really difficult to get developers building defy applications and web3 applications it's really difficult to get developers in the space because solidity and the evm are really unintuitive difficult things to build with and we still see huge amounts of hacks and exploits after even after two or three years of building these kind of Technologies so what we did is we created a programming language called scripto which came out of the development with working with almost a thousand D5 developers and projects to get to something incredibly intuitive and Incredibly safe to build with that launched in December it already has over 3 000 developers in the community and today it went live on alphanet um and so you can now actually deploy test uh programs test defy applications on top of Radix Ledger which will then be going live on the main net next year yeah um you know good to see everyone I see many kind of you know friends and you know familiar faces so for stable it helps with the different governance including parts of optimism maker Dao and many others and also besides stable node I'm also with a maker as well and then I'm helping as a delegate so helping with the in the governance and proposals so nice to meet everyone okay great and so I don't want to spend too much time on it but obviously it's been well hyped the crash of C5 uh but it has also been combined with some crashes on the defy side we're all very familiar with Luna uh and so wanted to get your guys reflection on why it happened but less maybe on the risk management side and then that we know was abused and more around the reflections that you guys have taken from it and maybe some of the strategies that you had to implement in order to manage things for your protocols and the projects that you're working on yeah I would say like hey element Finance uh we never used any yield sources and the Terra Luna ecosystem um I think because when we were doing uh basic analysis on economic analysis on whether these things could be sustainable we found that it clearly couldn't so I think a lot of these there were strong signals um in that direction if you sort of just looked into it a bit deeper I think that's one of the reasons why our platform is you know generally maintained its safety and it's sort of reconfirmed you know when we look at different yield sources we look at different attempts and approaches is to continue to do that due diligence that we've like been doing that's sort of our uh our takeaway yeah I think the uh there's two things like on the on the C5 side um there's it there's clearly been a proving out of the importance of transparency like um I like what you guys do with Maple and what you guys would do with element like there is the the have the ability to actually lend out to counterparties and not have that as a black box and have that on Ledger uh has huge advantages and you know you guys not having massive amounts of defaults versus things like eight three AC and stuff like that is Testament to that however defy has its own set of problems which is basically hacks and exploits like we we we've kind of taken it as like the cost of doing business that sometimes the these pla these programs uh get exploited for billions of dollars and that kind of seems unsustainable as well so I think that there's a wholesale shift both in understanding that transparency can lead to Bender letting better lending practices is a more sustainable yield and that you don't need to build Ponzi schemes to be able to build something sustainable in the D5 space but there is also the fact that the entire industry has a problem with hacks and exploits which really needs to be addressed for the next cycle and that you know that's the big thing that Radix is working on uh and I I hope to see in the next cycle that we're going to be moving away from technologies that tend to cause these kind of hacks and exploits in the first place yeah I'll say that especially the those you know recent exploits as well as the incidence has kind of shown that within both crypto as well like traditional field as well as like C5 build have been very interconnected and then especially what we saw was that not just you know this issue of transparency but also the fact that like um you know liquidity was also not there and a lot of times it was um you know kind of locked and so even if they want to solve their issues they realize for example they you know put it in you know like a different C5 you know Partners like 3ac or Celsius that also made the problem worse so we definitely saw the industry became more interconnected and for you know better words they also meant that when there's an incident like this the impact gets you know greater as well yeah and peers maybe given you are launching the or announcing the launch today can you talk to how you're balancing that transparency element that is so important and what D5 really does enable with the protection against hacks and and security exploits yeah I mean it's it's you know it's a relatively technical area I think one of one of the problems that we do in in the way we build uh blockchain Technologies today the way we build smart contracts is that um everything on top of something like the evm or something like uh in in a D5 contract is essentially uh the The Ledger itself doesn't understand what these assets are right so like if you create a erc20 contract you're actually defining not just the token but a balance of tokens as well so you're not relying on The Ledger keeping track of balances you're relying on this contract keeping track of balances and so everything that happens on top of ethereum or Solana or Avalanche is just based message passing between smart contracts that causes is actually the root cause of a large amount of these errors that end up happening because of the all of the checking that has to be done in how these smart contracts work together on Radix what we do is we make the resources the the assets that you care about a native function of the Ledger and then the and then you end up being able to be much more secure in how you can handle asset transfers because the Ledger actually understands what it's handling so the ability to have things like re-engiency and recursion the ability to actually make mistakes where you up don't update one balance in one smart contract but doing another and end up accidentally transferring to something to someone all of these kind of things can be um abstracted away from the user and you can create much more secure D5 applications as a result of just changing the way you architect something and it is it's a wholesale thought process where you completely adjust what you are using The Ledger for where you're saying look we now know that D5 is product Market fit for a huge part of crypto let's make these ledgers understand what assets are so that then we can build much more simple smart contracts around them instead of having to do all of this boilerplate just to Define what the hell it means to be a token every single time you create a token or an nft or something like that so our our thesis is actually start again from scratch and how you actually Define assets on top of a public Ledger and create a much simpler programming language around that that treats those as native features of the language um which is you know radical from the point of view of no nothing that has been created in solidity is compatible with something like Radix but once you get started the intuitiveness means that you're able to build something like uni swap or Ave very very quickly and we think those kind of tools not only of the fact that it makes it more secure to build but also makes it way easier to get developers into the space right like getting a developer up to the speed to understand how all of this message passed and error checking and all that kind of stuff happens on top of ethereum is really hard whereas you could if you can give people more intuitive tools we can get more Talent into the space and make it easier to build the incredible next generation of D5 that is necessary to create more transparency on Ledger around more sophisticated Financial products than we have today yeah absolutely and I think yeah once you've got more developers coming into the space and whether they're existing developers in Banks or other financial institutions that don't have to learn solidity or can interact with things more easily in languages and things that they understand then product development comes and more participation hopefully developers are the prerequisite for innovation in the space yeah absolutely and so we'll would love to hear your thoughts on the everyone talks about the highlights that the crashes had between the transparency elements of C5 and D5 but what are you seeing in terms of the other things that have been highlighted from this crash and what this means for for D5 in terms of learnings that we can take moving forward yeah I think there's I think there's a lot of learning so I think uh I think peers like touched on one which is definitely being much more careful uh in auditing you know the smart contracts that you have auditing is not just um not just isolated to bugs in the in the code right it's also does this work as an economic system like does this scale um what type of vulnerabilities does this does this particularly have right um when you look at basically the crash and everything that happened CFI sort of I think there is a lot of incompetence there if you did basic economic analysis you could see that all these stable coins are being like propped up artificially this is this is not a um this is not a sustainable uh method to go so I think it brought a lot more attention to just being much more open as far as does this system work does it scale I think there's a lot more caution now um as a result I think there's going to be a lot more trust with teams that take security very seriously to economic analysis on things simulations at scale I think a lot of this would have been avoidable if there is good simulations at scale I think that is going to now be a much more important part of um of defy and everything in general um I also think it it sort of um begins separating some of the C5 and D5 systems as well um I think Terra Luna was an example of of defy gone bad and then we sort of Saw C5 gone bad um and you sort of saw what was left in the trenches is defy good um the things that that sort of maintain themselves and so this is a really good build cycle um you sort of Saw after the crash in you know 2017 into 2018 and 2019 um you saw a lot of productivity during during this period and a lot of learnings from um you know from everything that that occurred and so uh I'm I'm generally optimistic I think uh safety um security is a huge learning through this I think uh due diligence having a strong team um uh lessening the hype and having a bit more um a bit more attention to uh simulations and and data in general before launching a product is um is the learning because you can't really when you have billions of dollars going through a system one of the things that you to be careful about you know that's a bit different than normal Tech is the concept of like build fast break fast right in this case when you have lots of funds going through things you you need to be a bit um a bit more diligent so yeah go to and do as you and I are the the only non-technical people on this uh stage now what are your what are your thoughts around the opportunity for D5 in the real world I know you work a lot obviously with maker uh and there's been a lot of discussion around real world assets how we can or can't bring them into the defy ecosystem so love to hear your thoughts on on how that's going to progress and how we can accelerate that yeah I mean especially at the beginning stage of D5 a lot of interest for working with institutions was potentially taking advantage of device very high yield especially back then like D5 summer eels can be eight to even 12 percent I mean anchor you know um when it was functional was 20 right so that was kind of the thesis that maybe we can bring those C5 and those institution into D5 to take advantage of it but then especially recently with what's happening that um a lot of you know yield on D5 has been very low so it makes more sense for them to you know borrow from for example using D5 has been something that a lot of different like for example as well as maker and others have been kind of pushing for maker yourself also have been for example um you know working with different banks in both U.S Europe and others to trying to provide loan most recent was the suction which is the French Bank we provide over 100 million um you know Thai which was compared to you know dollar and they converted Euro so I think there's a lot of opportunity but I do think that especially for now because of the what's happening with the inflation and there's the U.S treasury it just doesn't make so much sense for them to deposit into defy um you know they have to go through all the risks just to get like one percent two percent um so I think it makes more sense for them to be able to use the system to basically borrow cheap so I think that's the way that a lot of them are going I think it's really interesting how you define it as sort of a reversal before it was sort of bringing bringing it into uh into defy because the rates were really high right 20 like yield is incredible yield is like dropped and dried up significantly and so now it's sort of this opposite like how do you bring these like real world assets into D5 because there's a lot of innovation behind D5 once you take that as collateral once you take those real world assets so a lot of the things you can do you can have a stability module for die and you know a number a number of things and so um yeah real world assets I think is particularly interesting there you sort of add the Innovation cycle of D5 but you have sort of the deep liquid um liquidity of you know what what's in the real world but uh yeah I really like how you mentioned the reversal um it's really interesting yeah and you're seeing it you're seeing it more and more with uh the with the yields that have now gone so low know like institutions are now looking at it and going hey that looks great um I would like to I'd like to tap into that market and like uh the the maker Dow uh way of of lending um I I'm seeing more and more people uh who are looking at that and going yeah we'd like a 10 million dollar 20 million dollar 50 million dollar line of credit because there's all of these um lenders that have these revolving like so if you think if you think about um payday loans uh or if you think about um credit that like sort of buy now pay later companies right now they're lines of credit don't work for what they need because they they basically need to be able to borrow uh lend and then turn around and borrow immediately on that in a very quick way in quite a granular way and mostly the financial markets are all about these long-term instruments so you go out and you raise a 100 million dollar Bond and then you're paying interest on that for five years is and you've got to use that 100 million dollars over that course of that period whereas what D5 is presenting is his ability to get much more flexible financing for death instruments that um that actually appeal much more to the kind of financial products that you're seeing growing up in the in the web 2 space in the fintech space such as things like klana and stuff like that so I think that there's good we're going to see a lot more of that of companies that are sort of web first much faster moving in terms of lending very good credit ratings but can't match their lending and borrowing their their their financing and lending books well enough in the traditional space and are coming to crypto to be able to get much more flexible financing than is available from a bank yeah agree so go ahead will yeah I was going to say it um although I stable coin yields have significantly dried up I think uh eth yields are actually not that bad and so um sort of when people you know the markets sort of begin to drop and uh people are looking at coming back in and bringing Capital back into Eve um sort of the more volatile versus the stable assets um you know there are yield opportunities there and uh and that ends up being like really good for an entrance into into this space and then if you also look at you know compounding gains as if you're long eat in the long term um that sort of increases further so you know we're also in this shift from like stable Colonials dried up um to sort of more volatile asset yields um will now sort of be uh be the norm and so there's sort of interesting ways in D5 by the way we I did like a post on this called decollateralize where you can like get exposure to let's say ethiold while still holding on to stables and I think this is a whole interesting interesting area to explore as well okay and um obviously there's been large drop-offs in tvl for D5 you know close to 95 percent uh and so a big impact and so I think is there been any Reflections from you guys when you're thinking about it for your protocols one how you're going to drive liquidity because in the end we can build all these fancy things and they can be fantastic but if there's no money circulating through it then it doesn't really matter and any lessons we can take from the C5 guys that have been able to track a huge amount of liquidity into their protocols and whether you need to be thinking about the right balance between Capital markets sales and those elements about the commercial sides of D5 protocols and not just pure technical yeah so my I have an interesting take on this um I think one it's sort of finding the good yield sources I also think uh even low yield on Leverage can be great yield um so this is something that you know we've sort of been uh been playing with so we're working on like a V2 and sort of prioritize like a dual sided leveraging Market that's actually sustainable um and then also looking at like strong good what we consider sustainable yield sources such as Maple where by the way we're huge fans of maple um excited to integrate with um uh you know it's really cool what you all have done so um yeah that's sort of that's sort of my take on on that I think that the um I think basically we go we're now going into a build cycle like we do every like you know four years um and the the there's going to be a question of where yield is coming from for the next cycle I don't know that that's clear yet um I think that uh a lot of what we're focusing on is giving people safe safe places and abilities to be able to play with as many different business models as possible um including looking more at regulated um Finance so one of the things that we built is something called instapass which is a AML kyc compliance stack that you can use with your platform to be able to create more easily and experiment in for example um regulated uh yield Farms or something like that now the reason that I uh I'm hesitant to say this is where yield is going to come from this is clearly going to be coming from more sophisticated sources it's clearly going to be coming from sort of more like like I was talking about force of like traditional credit markets traditional uh Bond markets like places money market funds where people are looking for being able to more granularly match the kind of product types they need but ultimately I think we're going to be going through a period of working out what how to build these new product Types on top of public ledgers and there's going to be a bunch of experiments there's going to be a bunch of failures and I think that's what this time is for and so mostly what we focus on is making bridging into protocols as easy as possible with as many asset types as possible making it as easy as possible for D5 developers to add on things like regulation to their platform and making and focusing on educating the next generation of D5 Builders as specifically getting as many of those from the traditional Finance space as possible so they can be bringing in their own learnings of how they've been building uh in the traditional Finance space but like ultimately I think that this is going to be it's going to be a hard you know one two year period of of working out what the next way of building a scalable uh yield generating um platform is and you know what you guys are doing with Maple for example with market makers and and stuff like that that's clearly good sources of yield but it needs to expand beyond our Market um as it is today and yeah that's going to be a lot of experimentation and failure before we work out what that looks like yeah and I think yeah one of the big benefits coming out of it is that hopefully we get out of these ponsonomics tokenomic inflationary rewards being the underlying yield source and that we never return to that model again uh it should be sustainable repeatable yields that are driving D5 moving forward did you have any further thoughts though yeah I mean I just think that it happens in different like the cycles and then I think we're definitely in this cycle where liquidity is very thin and although it might be unpopular that we might have to go through the period where different deeper protocols have to you know consolidate we already saw some of the partners go bankrupt but I think that we have to realize even D5 protocols they eventually need to pay for operations and others and many of them won't be able to survive the bear Market if it you know um lasts longer so I think they will have this period where a lot of protocols especially if they're not competitive because we've seen so many of them copy paste right so there are too many copy paste projects that you're going to see a lot of those that kind of lack the Innovation they'll probably die out and the liquidity will get a little bit Consolidated and they will have another potential Market expansion it's kind of my thinking yeah I agree I think uh liquidity will be back and there's going to be something that's going to move the market again again we go through these natural cycles they tend to shorten shorten each time but I I love the move on more sustainable yield and there's there's a lot of things on that there's rwa's lending systems that that make sense um I think even just right like core validator positions right like you look at something like steak to eat or on other you know core layer one chains that come out um validator positions is a huge part Mev Mev extraction I actually think that'll sort of just merge in with like validator positions as a whole um but yeah I think these are those are some cool things that will come come out of it as well but I agree Cycles I think the liquidity will come back it's just we're in you know the beginnings of a despair cycle right yeah and so maybe with the the last few minutes we have left we're sitting here token 2049 in five years time what do we think the state of crypto Finance is going to be will CFI exist and what will be the balance if it does between C5 and D5 and the broader crypto Finance economy yeah I think Defy is going to massively innovate over the next couple years it always does in a bear I think we're going to see some crazy things we don't expect um I think C5 will ultimately sort of transform into regulated defy so like the core underlying nature of protocols underneath are sort of you know they don't have an opinion they're not necessarily you know controlled by kyc irregulated entities but then you can basically build rappers on these systems that do give access from a regulated perspective or institutions and Banks to touch because like if you look at this last like Bull Run for example you've never seen a time in like the financial system where like a 16 year old kid in his like parents basement could like write up a financial application that gets like billions of dollars going through it and like it's dangerous but it's also Innovation and so that innovation's moving um it's going to continue to move and then it's sort of just figuring out how to wrap that and connect that to C5 through regulated systems yeah I think I think that the um the big thing that's going to shift for these the these platforms is going to be uh options and derivatives are going to be really core to how you build more and more sophisticated products so I think in five years time you're going to see serious volume on options and derivatives that allow you then to create more and more sophisticated uh and granular Financial products the other thing I think you're going to see is um the concept of a uh a a weighted book of risk from the point of view of an individual so right now what we do is we go okay you want to you want to get a yield on your ether then lender at urethra you want to get a yield on your usdc then lend out your usdc but actually what you think you should think about is a balance sheet of assets and if you can create risk models that work around balance sheets of assets then you can do much more sophisticated things about things like re-hop authentication or prime brokerage or things like that which is going to again lead to this ability to Great to create more and more sophisticated Financial products that end up looking more and more like the the world that we see today so I think that in five years time it's quite likely that Dows will look increasingly like they have balance sheets like Banks even though they won't be called Banks and that those Bank those Dows will be able to do sophisticated things within defy that allow them to be generate yield for their whole in the holders of the Dows but use the financial products that are available such as derivatives and options as well as more sophisticated yield um sources to be able to create Blended products that increasingly look like financial institutions yeah I I think that there would be um working in in a parallel because I do think that there will be more sophisticated product but we're also going to see actually products that's very easy for people to use that they don't even realize that it's blockchain in a way like we already seen compared to for example 2017 or 16 like somebody remember ether Delta or like even early person maker it was very difficult to use but then now it's much easier and I can imagine that we're gonna have people who are like using for some you know like people who are able to understand and use it and then we have people who are basically like they like you know like basically D5 because part of their life and they really realize it I think it's kind of my vision and I think you know kind of my thinking in the future certainly hope so do uh so that brings us to the end of the panel big round of applause for our guests [Applause]