Scaling the DeFi Mullet: How Exchanges Are Going Onchain | Armani Ferrante - Backpack | Phil Girard

[Music] yeah that was a great and very wide discussion of on uh ethereum and the EF and things like what the EF is today versus what people want it to be uh but next up we have Phil Gerard from coinbase Armani fante from backpack exchange Brian peligrino from layers Zer labs and uh 0x Loth from Moro and Margo uh nirk from coindesk and this is scaling the defi mullet how exchanges are going on chain thank you yeah let's all go on stage hi everyone how are you doing today [Music] all right well Welcome to our panel scaling the defi mullet we're here to dive into one of the most dynamic shifts in crypto the evolving blend of centralized finance and front ends with defi back ends the reality is is that most users probably often enjoy smoother ux and compliance layers that like centralized institutions offer but they also want to take advantage of the real Innovations and compossibility of defi backend so with that as this model scales there's also going to be critical challenges like how to ensure interop between ecosystems how do we enhance security and ux and what are the roles that institutions Bridges and other Financial Primitives play so here we are today talk about all this you guys are going to answer all these questions but why don't we get started with the ux part how can fintex apps and exchanges make the UI simpler for you know access to defi yields or loan programs or whatever any kind of solutions who wants to start with that I can I can start with that go for it so the the thesis of this talk is the defi mullet so if you're not familiar with it it's that like the mullet the aircut is like it's beautiful when you look it in the front but on the side there's lot of complex thing going behind um at coinbase we just launched a product called uh crypto back loans and it's exactly that um you have to try it it's like this great oneclick experience that creates a lan own chain integrated with Moro um and it use the power of defi but you don't have to know anything about defi so yeah I think this is where where the game is going and how we can build those experiences yeah I want to ask also maybe because I see Brian right next to you about bridges like what kind of role they play what are the biggest challenges right now in making cross chain defi accessible for CI users and where do bridges come in to solve this yeah sure uh I mean I think when you talk about when you talk about D5 mullet what you actually want from like a user experience you want them to not think about gas not think about the underlying chain and just have some product abstraction right like they want a front end and they click and they do something and so what do you need to actually do that you need uh some of the new upcoming eips give you the ability to basically have a wallet that's denominated in largely stable coins they don't need to have underlying gas or gas can be sponsored uh and so you need something again where the user it should be a single click uh gas should be abstracted and chain should be abstracted now gas abstraction between chains is already done we've done about a billion dollars of gas abstraction just through layer zero itself on quoting you know nqu Pathways across chains so that's done at scale um chain abstraction largely done you can do multihop you can uh do a bunch of embedded delegated calls down the downstream and so like a lot of that stuff uh is is pretty solved you need front ends to be able to connect to multiple rpcs at the same time so the user doesn't need to manually think about it like there's a bunch of other things you can do to make life nicer but I think with what we're talking about in terms of like purely CI to custodial uh whether it's Robin Hood whether it's PayPal whether it's coinbase whether it's whoever these all all all of that is just going to be fully abstracted away so I actually think we're we're mostly there on a lot of like the Lego pieces um yeah well okay well I guess I want to ask then a little bit about the coinbase and andoro integration that you know you guys had announced the the Bitcoin Loan program back in in January and I think that's like a prime example of of this defi mullet like concept so does this integration suggest that centralized exchanges and institutions will increasingly rely on these types of defi protocols for Lending rather than managing their own books well I cannot I don't know the future but personally I think this is really where the game is heading like if you look at own chain uh compared to traditional Finance uh you want to open a loan in traditional Finance takes multiple week you have to sign paperwork you you have to kind of do talk to human but with onchain is just like this instant experience takes like 10 second you can do it on a Sunday uh available 24/7 so I think not only loans but all the onchain Primitive uh can be kind of built in this way and we're going to Leap Frog uh the banking system and I think the technology is ready now with the moro like for loans like they uh they have like this incredible like a 600 line of code uh protocol that's super simple but super robust and yeah it's very secure I'd love to have lot like talk more about it if if you want yeah sure so as you describe the the beauty of this product is like from the coinbase experience a user has a Bitcoin balance and eventually has usdc at the end of the flow what happens is like BTC is going to be turned natively into CB BTC and then take a de position on the mofo protocol the money is taken from the blockchain from the CBBC usdc Market which is canonical that means that anyone conbase does but anyone could tap into this Market in the future and I think the biggest Edge or the most interest thing for fex is Network effects so the biggest the moro Network effect is the deeper the liquidity on Moro becomes and then the price impact on fex become like super interesting and fex Sexes I think are getting closer to Banks they all competing towards the same clients revolute was nothing 10 years ago I think now they have like 60 million users and you think about like the key product of Landing is like interest and depth of liquidity and so I feel like the more the more so like finex get into these permissionless markets they have access to high highly competitive banking products that usually we like permissioned close source and kind of like extractive so I'm not exactly sure for instance if you think about earn or borrow but like it's very difficult for revolute or any ftech even conbase to issue a loan at a like at a cost which is close to like the treasury bill right so you have this um yeah I think that tapping into the network effect of permissionless liquidity is like super big and the other thing which I think interests ftech is integration cost so if you're fintech and if you're building on top of like someone else you have a big technical depth if you use something like Moro in the case of coinbase you using six lines of immutable code immutable code means like you have to do this integration once and it's done forever so this ownership of the stack via like immutability is I think another big part of like great interest rate great products but also like a one of technical cost that never changes in the future I also think it's super important that we just like address that like the mullet is great we've talked a lot in the past about like creating better consumer experiences and I think the last 18 months has been like onboarding retail and creating better but if the rails in the background aren't like really really solid like we tried an iteration of this prior where there were like 50 y combinator companies that were all building front ends for Luna Tera right like you you actually need the the underlying things to strong robust and like have Primitives that that work uh and are secure because uh at the end of the day like just abstracting way for the end user if the if the protocol beneath isn't actually really sound is is uh probably more problematic than helpful I would love to piggy back on that Brian so I think what all three of you kind of touched on but not explicitly articulate is what I would argue the most important primitive to unlock the D5 mullet which I think a lot of people in ethereum already understand especially relative to other ecosystems which is account abstraction so you might ask the question why do people use centralized exchanges it's because it's the best user experience that's it um centralized exchanges figured it all out um so build a product that looks and feels like a centralized exchange however we all know that self- custody is the most important uh uh uh property uh of of of crypto if we don't have self- custody then kind of like what's the point what are we all doing here that's all go back home and go work in AI or traire or whatever um and so the question is ultimately how do you achieve the centralized exchange user experience where it's genuinely your home you have this great product email password toofa you're in but how do you do that without losing self- custody um and to motivate this maybe for people that aren't so for for which this isn't so obvious um I was I opened up the soul flare app the other day it's one of the popular Wallets on on salana and I was going through the account setup process you know standard wallet thing right set up your pneumonic copy it so on and so forth and they give you this really jaw-dropping statistic it's really spectacular what they tell you what they tell you is $4.2 billion $4.2 billion is lost uh uh every year from people that lose access to their seed phrase if that is not the most spectacular utter failure of a product I don't know what it is um and and this is like wallets today so so it's it's my view that wallets are completely and totally and utterly broken there are zero exceptions to this um it's more than every centralized exchange hack or collapse every single year we're basically giving knives to a bunch of babies and everybody's stabbing themselves it's very very it's like ridiculous uh uh and so I think this is like the the topic that I think needs to be solved and I think I think luckily the pathway is relatively straightforward and clear from a technical point of view um I think from the perspective of of like how do you actually get Distribution on a account abstraction I think the biggest challenge is just path dependency so the way most apps are built are not built with account abstraction in mind and so whether it's resource constraints uh uh design patterns and smart contracts um or one of like a million other edge cases that people have not accounted for because all of these run times and all these smart contracts and all these apps have been built with eoa public Keys as the the the concept of an identity um I think that is like the big Challenge and so I mean it's really cool to see ecosystems for example like near like build from scratch with the account abstraction in mind but I think that is one of the big mountains at ethereum and salana and and the industry at large needs to climb um and like it's very hard to come to consensus on on like what those patterns and standards are but I think that is the Primitive for me that I think needs to get complete and total dominance to unlock the defi mullet in a really meaningful way yeah I want to linger on that a little bit cuz uh at coin Bas we've been trying like for several years to do this thing and we've tried bunch of things nothing stick and I think what really made it for you like the self- custody aspect I think was the really tricky part um and for us uh I want to share a secret uh with with you guys if you want to experiment in other company uh we we combined pasy with smart account and uh layer twos and that's really what made it like those three technology coming together is really what created that experience and I think that thing wasn't available or production already like a year ago and that I really really hope that I think 2025 2026 we'll see like more and more of the these things come out because the technology is ready now and yeah it's incredible experience if you haven't tried it like you should you should like it's completely different than setting up like your seed phrases um so yeah this was a great like roundabout but and you it we hear a lot about wall of abstraction and smart contract capabilities for recovery and things like that and and bringing those easier experience to the user I I also wanted to ask a little bit on the security side of things like how are you guys thinking about like teaching your users about the risks or the advantages of of accessing you know loans on chain or trading on chain versus like trading versus a centralized model how do you teach your the users um like the risks and rewards of each well um well there's multiple aspect to it I think there's a moreful aspect to it like talking about like the uh the coinbase in integration uh with Moro on quen side uh there there's many thing we can do uh add guard rails around uh for example the Morpho protocol uh the Morpho protocol allows you to take a 80% 80 6% LTV loan but when you use the coinbase app we add some additional guard rails around that you can only go to 75 we had like loan liquidation notification for you so really like this Pro like user first experience uh but then on Moro side I guess there's some additional security feature in there yeah but I think just the thesis of the mullet is exactly this like you drisk the back end by using blockchains and immutable code and then you provide the front end with as you were describing like super like TFA recovery like all the features that like no one needs to know they have a wallet then they need to use the wallet and that's it I think the Mallet is essentially der risking exchanges with like infrastructure which is unchain immutable can't change like we talked about before like disintegration uses 600 lers of code it's a single Market you put CBBC you BRC that's it there's nothing else there's no like mingling of funds conbase doesn't manage any depth position it's like a user has a private key he doesn't know takes a dead position has usdc on his balance and then can do anything he wants with this usdc so I feel like the how do we mitigate with security we bring this kind of like hybrid imperative and makes it a standard uh in every exchange so I wonder actually how backpack is backpack for instance building with the coinbase like an obstruction Suite do you have your own things are using like pay masters or like how do you how does the industry you know like go towards the same standard of abstraction on kind of exchange level yeah it's a great question so we we said earlier in the back here that we would have trouble finding disagreement uh but let me let me let me let me uh uh throw some spice into this um so I think there's two aspects of risk when you're talking about Defi and defi predominantly helps you with one of those aspects the custody aspect um you know you your keys your coins so on and so forth however when you're using any Mar platform uh uh I don't know if this is obvious to people but you don't actually have self- custody you don't own your assets when you lend you don't own your assets when you trade per it doesn't matter if it's on binance it doesn't matter if it's on on on a uh it doesn't matter it doesn't matter where it is the the margin system owns your assets um and in order for this system to work the Liquidator has to be able to unilaterally take you out um you can't just like pull your funds out no matter what you are subject to the rules of the system whether it's utilization or whether it's you know some some some operator uh offchain or whatever and what defi gives you is the ability to decentralize that risk uh the ability to you know verify that the state transition is correct uh but ultimately the question is who is modeling those risk parameters um and and is that correct um and I think this is maybe one of the more important aspects of the security conversation that people uh uh don't necessarily touch or or or or maybe acknowledge um uh uh and bankruptcy is a valid State transition uh uh uh uh whether you're in defi or whether you're not and and and so when we're talking about this conversation of whether it's how you build it or how do you educate users um those are like the two topics that you need to touch on and the second topic is exists regardless of where of where you are um to answer answer your question I mean I think with with backpack we do have an account abstraction uh product maybe without going into technical details although I will kind of kind of uh say that you it is possible to do it without losing self- custody in like a genuine sense like no no marketing no gimmicks like the code's there it's verifiable um if the exchange tries to rug you you can unilaterally withdraw your funds with nothing but a terminal and an internet connection to a validator um and and that to that to me is self- custody uh uh and so I think it's tempting when we're talking about the defi mullet to take shortcuts uh uh but I think you have to have or consider all these things when you're talking about risk insecurity and so on and so forth Brian I want to bring you into this uh and explain sort of the role of interop solutions how does that fit into everything we're talking about right now and how does that become a standard piece of infrastructure in the defi mullet experience yeah I mean I think I think in a large part we already are right so lab has about a hundred billion do of assets built on top of right now like $240 billion of asset issu is $100 billion of actual assets um and you start to see more and more of people that live at the intersection of the defi mullet so PayPal announced their py USD this going to be integrated within the PayPal platform right we uh two days ago I was announced that we were the number one provider so we'll be doing the Wyoming uh State Bank um the Wyoming stable coin so all of these things are are starting to bridge these parts of whether it be fex whether it be traditional Finance whether it be whatever into these underlying ecosystems are entire role has always been we're happy to be quietly in the background and no user should ever think about us we're a thing for developers we're a tool we're a mutable all of these things and what you want is those assets to be able to be used when you're talking about like a user experience a user doesn't care that the app they want to use they want to lend to a pool that's on arbitrum or on optimism or on Bas or on whatever chain they they don't care it's on salana none none of that matters to the end user there's a thing that they want to do some product feature or experience or application that they want to interact with they should be able to click it shouldn't matter where their assets are from so you can move one of the nice Parts about us uh with this new tether the usdt zero integration um you know we moved $80 million into ink for $150 right you basically move like unlimited size there is no longer this restriction of external Bridges you're not paying 10 bips or 15 bips to do these transactions it is literally you move a billion dollars for like a fraction of a cent if you're going between salon and an L2 um and so that ability just allows those rails to be as as seamless as humanly possible again the user shouldn't care where their asset lives right now they shouldn't care about the chain they shouldn't care about the gas all of that stuff is getting abstracted in the back end uh and I do think there is this component of of Education to the developer to the end user uh on on what they're actually interacting with again you you can make a really beautiful interface that has Tera Luna as a back end and that's like not a good thing right so you have to be able to build rails that are robust and I've been battle tested uh and expose the users to them and give people kind of uh ideally free choice and free markets and self- custody and all of those things that come along with it and uh for the users who want a more Bank ofi experience or the fintechs who want to expose that back end I think that's great as well Loth I I quickly want to get back to you on uh Moro and I want to get your take on how you see moro's lending model being integrated into more CI like experiences so the the kind of like beauty of Moro is like you can have markets for any assets that means any sort of compliance but with the caveat that the product of defi is as as I said Network effect in depth so the bigger the CB BTC Market becomes the more people can borrow and lend to it with the best terms um and the best rates which I think is is like very important so the mor for protocol and I think this markets going to grow and be integrated in the back end of like all the fex so a Sexes like conbase is the first step that you think about like other players like Robin Hood like revolute who have their native stable coins they might want to create like another product from that they can create a Moro Market they again expose their users to single collateral by virtue of Moro being like isolating Landings so the compliance aspect or the the fact that you can expose your user to a very specific part of like the stack with a code that cannot change an oracle that cannot change an LTV that cannot change is very strong and I think like Moro doesn't like pretend to be more than it is which is you know a market on chain that was deployed once and um you can just build like any type of abstraction on top with the guarantee of the infrastructure being here and running like forever and as as I think we kind of alluded to like payments is the back kind of like the backbone of defi so as you said you can like transfer money for a fraction of the cost what if you can take out money permissionless at again a fraction of the cost where like a lot of people today like you know cannot borrow with their assets and you know the the BTC product is a good example of like take a BTC loan without creating like a taxable event is a very big moment for like retail so I feel like um the role of M will be like across the stack from like we starting with centralization centralized exchanges but you know tomorrow you see Fidelity Apollo coming on train they have Rebo assets that so could have like some sort of like new use cases so like a credit F on chain where anyone can take take a depth out of this and as a lender you could be exposed to this and get something like 10% that's pretty big so I feel like it's a very hybrid moments right now the molet is one aspect of this but mofo can be used for like any type of assets and so I'm very kind of like excited to see this newer assets new like exotic or non-exotic um typology of collateral onchain that would enable lots of new use cases you bring up bring up like mainstream adoption and you know tapping into Morpho or def or whatever kind of experiences they can get by going on chain and and we we have to I have a sign here that says wrap up so um I do want to wrap up on that note and ask you guys is this defi mullet just a transitional model or is this going to be the dominant structure for the next 5 to 10 years especially as mainstream institutions start to pay more attention to crypto and and Defi and everything that it has to offer why don't we I don't know do we want to start with our money and then make our way back so I think it depends on what your looking for I think what defi ultimately gives you what everything on chain ultimately gives you is the ability for different people that otherwise wouldn't work together to ultimately like work together right everybody in the US is happy with us Capital markets they're the deepest they're the most liquid Capital markets that exists in the world and so it's like why use defi right and the real answer I think is because you get Global Capital formation you get people from China people from Europe people from Africa people South America you're opening up Capital to the entire world to coordinate in a way that they otherwise wouldn't work before but I have 25 seconds left so I'll just stop so I believe it's going to be hybrid for the reason you just mentioned I think like defi should focus on code and liquidity depth and whatever the abstraction on top should focus on like abstractions and like bringing distribution yeah I mean to answer the question yes Glo Global permissionless markets should be able to provide ideally better and more exotic rates that eventually front end will want to expose their users to yeah same for me my answer is yes like for example emails right nobody knows what IMAP is like you don't know what the underlying protocol is you use email and I think we created the same kind of primitive you're opening a loan you're not like going on chain going to a lending protocol so so yes is my is the end game great well that's a good note to end on thank you everyone for your time today thank you panelist [Applause] good