Breaking Down DeFi Lending: Bring Back the Liquidity | Charles, Kirk, Dion, Alexandre, Ayesha

our next panel and for this one Our Guest will be talking about breaking down defi Landing so we have a yesha from MNC group Charles from dydx uh Kirk from Moro uh Dion from termless and Alex from sorry up shift upshift all right there you go um thanks guys uh so I'm not going to be the party pooper on D5 because the honest truth that it's one of the only functional element for ethereum and I was a very early team member at consensus so I take a pride in saying this so here we have like experts that you know as a fund we like love working with and we've seen grow thoroughly in the industry um and I like how defi gets its own little private room because the alpha we're about to share um so for quick background I worked at eminency group we're a multi strad hedge fund uh previously we were known as logger Prime and I also teach at NYU uh blockchain and DLT I run a research lab there um a lot of my research has been focusing on ethereum for past three years or so and I just wanted to quickly introduce my panelists and then we'll take it from there hi everyone I'm Kirk I'm the governance lead at Moro which is a immutable lending platform that's on ethereum and base and you know coming soon to an evm Network work near you so I'm hurting the cats in the governance forum and running the cross chain growth strategy so we can talk a little bit about that on the panel I hope hello everyone my name is Charles I'm with the dydx foundation dydx is a defi protocol we've been in the business since 2018 we focus on perss which is one of the largest market in crypto and we migrated one year and a half ago or so from etherum to our own app chain on Cosmos and last year to give you an order of magnitude of the size of the protocol we moved about $270 billions doar of trading volume so well established and uh very very much focusing as well on lending because it enables our our users further hi everyone my name is Deion Chu CEO of term labs and um you know where defi lending protocol allows you to borrow and lend against your crypto assets on ethereum at a fixed interest rate hi everyone I'm Alexander alreef the co-founder of upshift upshift is yet as soon to be announced a yield tokenization protocol that is running vaults and enabling other partner protocols to to uh run yield strategies curated by managers similar to uh some other panelists here um upshift is built on the August stack August is a wallet infrastructure uh currently built for institutions um that governs the way all of these strategists and curators are managed um August processed about 7 billion in transacted volume in December um and uh yeah we're excited to go public soon so Alex I'll start from you right like let's let's let's come this way um how do you think and how has defi moved to manage accounts you brought this up it's a pretty interesting concept um you know PRI prior to this there was a talk about how defi is like not really metamask anymore and then you know how would you say that you've seen that grow towards managed accounts yes I think I'm I'm not the only one here like there are vots on Moro there are VTS coming to term there VTS on dydx um defi has become more professionalized you know I it used to be that you could just put your stable coins on Sushi Swap and earn a gazillion per APR right um these days they're over and and I think first question is where does the yield come from there's token rewards trading fees on amm and demand for leverage in the for in the form of per funding and all of these things have become harder to manage as the space has become more and more professionalized univ V3 is way harder to manage than univ V2 um funding Arbitrage and funding strategies are moving around all the time and so for users and that it it's just become easier to package all of these things into professionally managed vaults and so it abstracts it completely abstracts away the the complexity from users and that's generally the trend that Finance has always taken you know technology is just bundling and unbundling and repeating the cycle uh we the first wave of defi unbundled everything and made the user experience pretty hard for the average user and so uh it seems like the trend is going towards repackaging that in in things that are easier to use di do you want to add like on how the in investor base has a bit become more sophisticated like now we see it like more funds or more sophisticated investors or high net worth other than just like you know every other you know retail investor yeah for sure I think that the ethereum defi ecosystem has really matured in the last few years since the last cycle you know as Alex mentioned earlier the earliest version of Unis swap was a simple pool you know two-sided liquidity um not the most efficient a lot of impermanent loss but it worked because it was the early days everybody was still experimenting and over time you see on chain a lot more institutions getting involved um just as a point of reference if you look at a the top 1% of users account for 50% of tvl it's a $3 billion protocol so something like two to 400 users you know are controlling like 15 billion on a alone so you see that socially lending protocols it does tend to be much more sophisticated institutional type of users you think about retail users they're not looking to earn 5 to 10% you know they want to trade meme coins they want to get a lottery tiet make 10x 100x so it's just a very different user base and with the growth of lending protocols on chain that really is a reflection of growing institutional user base Charles do you want to add like how all of this like borrowing and lend is translating like or transferring to you at dydx right like because it's the same same pool of family at the end of the day absolutely we we able to kind of trace a little bit where are the usdc so the collateral you use when you trade on thex is usdc so we able to trace a little bit where are these usdc coming from and a portion of it is coming from lending protocols so it's very interesting to see how essentially even though we are our own chain uh and it's our own ecosystem just people will bring liquidity from should it be ethereum or layer twos or or Solana so it's an interesting way to get additional flow within within thex and we can trace that one thing we're exploring as well and is probably kind of building on what you were saying just earlier we launch at thex our own uh systematic uh liquidity provision system essentially it's an automatic Traders on the ydx so we we have about 180 different trading Pairs and it's not possible for the protocol to get like Market making agreements for all of these and sometimes some of those markets are not organically liquid uh so we launch this liquid liquidity liquidity system called the mega Volt where essentially a portion of the protocol fees are distributed into this mega Volt to provide liquidity uh but the size of this mega Volt went very very big very quickly uh so this mega Volt is operated by a third party operator called gotlet I think it's the name familiar in in the defi ecosystem and what we're exploring also right now is effectively the the mega Volt varies between 50 million to 80 Millions uh not everything can be deployed so there is there is an Avenue of research right now looking at how this essentially pool of liquidity within the protocol can be lended back to some Traders as the protocol level itself so we are very much exploring uh to give as much option ities for Traders mostly institutional uh to get access to liquidity and deploy it within the ydx so lending can come from lending protocol but it can come also when you have the resources and the engineering available to basically bring liquidity from your protocol to your own users which is something new for um Kirk I wanted to talk to you about your integration with coinbase right um I think it's pretty big congrats um what does it mean right like coinbase you know they've been doing phenomenal work but what does it mean for Defi and then um how does it pull down you know on on the pools levels so at the end of the day the vast majority of people in the world are never going to be like signing transactions and looking at call data right in order to bring crypto and its benefits to the world we need to be able to go through various stages of Less decentralized intermediaries in order to you know replace the if you think about you know 100 million people with $1,000 in their checking account how can we cut the margins of those Banks and bring them into defi lending and so the what makes Moro special is that it is not you like Ava or compound or maker a single pool with a single risk manager that's mutable it's a platform uh that anyone can build on and this immutable code base which has the highest you know audit density per line of code of any and defi gives big players like coinbase the confidence to expose their users to it you know naturally coinbase is very hesitant to expose their users to defi risk like we look at the bybit hack um even an nois safe which is a trusted pillar of the ecosystem can be vulnerable to front end compromises um so coinbase would be very hesitant to put user funds into any protocol that upgradeable uh so this you know very Lindy non- upgradable code creates a foundation that coinbase and not only them but in the future you know trafi players Banks wealth managers can be confident integrating for their users with the knowledge that it will never change no one can turn it off they can fully customize their own risk exposure however they want um and so that's what we're really excited about at Morpho is giving a toolkit right we have no opinions about risk anyone can build whatever they want on it dgen vaults with 25% APR you know safe treasury backed vaults with 5% APR and um yeah really have a customized experience and with our future products we will intend to keep going down this path of making it more and more customizable um and as simple as possible for people to integrate with um do you think in an extension and then please feel free to add like you know on thoughts because as Charles mentioned I know Alex you're working on it and ter is probably also looking at do you think other ecosystems can be as liquid as ethereum as ethereum probably not not anytime soon but the way we see it is morphos relationships do all of these people who are building on top is similar to the relationship between ethereum and the l2s ethereum does not preference or prioritize any L2 they provide this neutral based infrastructure that other people can build compelling businesses and diversified use cases on and so that's what we'd like to see and so you know maybe Morpho on world chain will never be close to as liquid as Morpho on ethereum but that's okay because it's a different user base right like the def whales on na Ava who are managing a billion dollars are going to want the you know strongest possible security guarantees on mainnet but tens of millions of people who want to earn some savings on $100 $1,000 of their savings through the world app um can be very happy there and served through this you know different user Centric product that's primarily mobile app Centric um that has minimal gas costs so um to me it's not so like it's not only the most liquid Network that's Val valuable but what's valuable is multiple differentiated use cases that can expand how many users we can reach to eventually everyone in the world maybe to build on that and to come back to your questions will some of ecosystems be able to uh grow closer to the size of ethereum I think what Moro illustrates essentially new strategies in terms of distribution I think all of us in the industry in defi we can do a better job at Distributing product and if we look at how Financial product are distributed in trfi uh distributed via B2B Toc uh if you want to buy a fund from Black Rock it's very hard to get an an account directly with black rock right you you will get it from your broker or your bank so what we what we spend a lot of time working on right now at the dydx foundation is looking at how we can essentially reink the distribution of of dydx and and uh and D products in general and essentially if you're looking for new users for D protocols you can try to can of steal them from your peers within the the onchain business but the next step uh is basically like the the customers which are the most ready are coming from CI uh and there is great conversations to have with the the binance the con base of the world where essentially there are all those centralized exchanges are in the global race to acquire licenses most of those licenses are only for spot so as soon as binance or con Bas get a license in a in a country most of the time they have to stop lending with their customers they have to stop Futures uh and what this big pool of customers Behind These CI players uh what they want to do those exchanges is essentially keeping the customers within their ecosystem so they are all building the same strategy they are all building wallets the con Bas wallet the binance wallet and the Le goes on and it's it's I think an opportunity for many defi protocol should you be in direct lending should you be in trading like we are uh to essentially bring your products where the users are and you will be surprised how the conversation are evolving it's a little bit counterintuitive to think like should I go and engage with CI to grow my D5 project but I think you should and there is an alignment uh you can do Revenue share I suppose you guys are doing Revenue shares with with conbase I think we're going to see what uh Moro very elegantly executed on being replicated on many different other topics should it be for swaps for perss or or many other topics so the web three distribution I think is is probably starting a new chapter and the early movers in this strategy is to bring products where the users are will pay off big time I would I would Echo that as well I think um historically the space has had a lot of opinions about how to manage distribution and and who who the users are um we've taken a stance and to have as L we obviously we have technical opinions and there are Tex taxs we prefer and we prefer lower lower fees but in general we'll just go where the customers are and different different customer profiles live on different chains different sizes of transactions have different security requirements and if you look at the life cycle of liquidity um for all Emer protocols it seems like the pattern that's emerging is you know first you engage a bunch of you know D5 funds to provide largely mercenary Capital to bootstrap your liquidity then you integrate with more defi traditional venues your receipt tokens get listed elsewhere you integrate your receip toin with the Morphers of the world you allow a bunch of defi looping Etc and then over time you plug into the real organic distributions with you know eventually the new banks of the world the C5 venues of the world and you know you're seeing it with Athena just wrapping their product into an SPV or or an actual fund vehicle and so fundamentally we're building D5 plumbing and I think we have to be realistic about the fact that you know in general you don't distribute the plumbing it's abstracted away between between the user and like behind a a layer of much more um userfriendly interfaces yeah I think my view is at least as far as evm world goes it's going to be very very hard to unseat ethereum L1 as a primary liquidity layer um and if you think about it a blockchain has Network effects just like social networks or something like uber it's really hard for one person to unilaterally switch when everybody else is still you know on the other system so I couldn't start driving on the left side of the road if everybody's still driving on the right side I'm going to get run over and every player has the same kind of thought process when I'm launching a new protocol do you want to go somewhere new or can I go here where all the liquidity is and where all the business is and so unless there's a concerted like coordinated move somewhere else it's very hard to unseat that Network effect you you see it in social networks like you have Facebook copycats of Facebook won't work but maybe you have something like Instagram or Tik Tok that offers something new and then you can also build a network effect there but evm by definition is exactly the same so how do you get some other evm that's exact copy L2 or another L1 that does exact same thing as ethereum has the same limitations as ethereum to kind of take that liquer I just think it's very hard great um Dion I actually have a question for you I wanted to and Alex like feel free to anyone chime in I wanted to talk to you about collateralized lending right uh we like at the fun we've seen like some C5 players blow up over the years right and obviously the argument was that look D5 works right and then um we see like options on term and then you know uh on you guys um collateral and how important it is and then the emergence of collateralized platforms coming back why is it I mean yes it's important but why does it so much matter now then aside from like what we've historically seen the blown UPS yeah I think the limit ation of defi is also its strength in defi all of your counterparties are Anonymous you only thing you know is your public address you have no idea who they are um so you can't sue them and you can't chase them down so it's very hard near impossible to do unsecured lending on chain to somebody you don't know so all lending to date on chain has been collateralized and collateralized lending is the most secure type of lending in trafi um um you know obviously there are a lot of limitations to that if you don't already have money you can't borrow money only people who already have Capital to begin with are able to access Capital but also because of that all your loans are much more secure because there is something backing it and worst case scenario you can seize the collateral if there is bad debt so when you hear about cycles of credit growth driving boom buus Su Cycles leading to bad debt and financial crisis that's always coming from unsecured credit um but it's really hard to go over your skis if you always require real hard collateral behind a loan and so because of that defi lending has been very safe all defi lending is backed by real and liquid collateral and so you see when even with Bitcoin Falls 90% Peak to trough The Lending Protocols are you know well are solvent and that's not something you have in Trad fi it's just not possible if you do unsecure debt there will be people people who can't who can't pay we'll see what happens over time but as far so long as D5 stays collateralize then I think D5 will be really safe but there will be a lot of use cases it just won't be possible I think the last thing I would mention along those lines is that you know another key real strength of the blockchain is addressing counterparty risk so in trafi you lend to somebody lend to your bank or borrow from a bank think you're trusting that they're holding on to your collateral and if they go under you might lose your collateral with a smart contract you don't have to trust anything the collateral stays there there's no private Keys you can't hack aosa safe it's programmatically locked in the smart contract so I think that is really you know one key use case of the blockchain is removing that kind of middleman custodian role and turn it into a smart contract that you know is super secure Alex do you want to quickly add to it I know you said w't talk about your parent company yeah as much as as much as I love collateralize lending I think it's also you know a limiting factor to how much crypto can grow um at some point we have to crack portfolio margin in the space um for more than pers um at some point we have to actually it's not really credit like we collateralize credit there's no credit risk right like you have risk on your collateral but you're not EV valuing your counter part party um at August we do a bunch of OTC lending uh we provide the tools and I think defi being on a blockchain alone is still 90% cheaper to operate a financial firm um by virtue of the fact that the loan is on chain you can inspect the counterparty in real time issuing the loan is programmatic you don't need to deal with layers and layers of paperwork and you can Implement blockchain level transaction approval policies to control what your counterparty does with the with the funds and so so at August basically you know if I borrow a million dollars and tell people that I'm going to buy eth with it um I lose admin control of my account my the admin control goes to my lender and so if I try to buy some other coin that's not ethereum the transaction failed um and so we're trying to push in that direction to enable more and more credit and at some point we're going to have to do that to do that and the hope is that you put more of the credit on the blockchain and migrate the tra traditional Financial BS onto toia Kirk Charles quick thoughts on it like 19 seconds just a final thought is like there's an arm race between under collateralized lending and tokenization right and so the question that I would encourage you all to think about is what are the interesting asset classes that can be readily tokenized and in general that's things that are more fungible right like not your house but like ETFs but there's a lot of things you know 99% of the world's assets are not there yet but they're coming soon any quick last talk from you well okay thank you so much we're like over time um hope this was helpful thank you thank you thank you