The Yield vs Risk Dilemma in Lending Markets - Panel

Hey everyone. Uh, glad to be back. That was a quick one. Uh, today we have fantastic panelists to talk about the hard choice between growing the yield, so going for the strategies that generate the highest return, and also the risk because one and the other usually goes in per. I'm Marson, co-founder at Redstone and also uh right now Credora, the D5 risk ratings platform methodology.

And I would like to start with a round of intros from our panelists. So, uh maybe Carson, we start with you. So, from the left to the right.

Hey everyone, I am Carson Brown, uh senior product manager at Gauntlet, uh working across really all of our vault strategies.

Hi everyone, I am DH MCO at Fluid. Fluid is a liquidity protocol. We have a lending market and many more things in the future.

Hello, I'm not Sam. I'm Nadia. um co-founder of Spark and COO.

Beautiful. So, I like opening the panel with an icebreaker. So, here it comes. If you had $1 million in your pocket today, it can be $1 million of USDC to make it simple on Ethereum, what is the attractive APY uh you to put the money into a single strategy for a year? So, what is the APY you would expect for one year?

I mean, easy. It could be 1 million, it could be 10 million, it could be 100k, I will use a spark. And it's not because I'm biased, but because um we take security seriously. So, if I want to just like sleep and don't think about my money, I will lose the spark. But actually, um our treasury, like Fenix Lab's treasury, is using the spark savings to do that.

Good thing. I don't want to like talk about a lot about Spark, but you could use USDC, you could use USDS, you could use USDT and uh put your money on Spark and sleep without thinking about it. Right now it's 4.5. Yeah, in my case, I would just use I would I would think about the exposure I have rather than the yield.

uh the yield will be dictated by the market and the yields are changing based on you know conditions around us. So I cannot predict what will be the yield but I want to know what is my exposure and I want to have exposure only to let's say blue chip assets uh with clear underlying with clear liquidation engine and you know things like that. So I just want to put my USDC into the place where I will not have exposure to let's say risky exotic assets. So I use fluid for that. [laughter] Yeah.

And then and the market will dictate the yield.

I guess if I have to give a yield number, honestly, it wouldn't it's not necessarily determined by the yield. I would say it's determined by like the expected consistency of that yield. If I have a year of exposure, you know, if someone said you can get 12% and it's consistent and there's no risk, that's obvious. But realistically, that's unrealistic. like frankly sparks four and a half%.

I you know that's pretty solid. I think I'd find opportunities maybe get five to six but if you're seeing anything above that uh advertising consistency I think that's quite unrealistic. So I think everyone hit hit it on the head. It's really not about the yield number. It's about the underlying risk.

It's about the consistency of that yield especially if you're exposed for a year. Um so yeah I'd probably say I don't know five to six%. Okay. So the reason I'm asking this question is in crypto everyone has ADHD and it's not our fault. It's how the industry is constructed with cryptocity claiming new yield opportunity over and over and all the time.

So the question is right like what is the satisfying yield that you just give up the opportunities that are over there and you do not FOMO and you just keep consistently into one strategy for a year. I personally have done it with spark with the previous product with sdi when it launched. I did keep like a very long position on fluid specifically and I also kept like small position on morpho in a manage vault by gauntlet but myself I many times I was tempted to potentially like move that asset to this new vault or new yield strategy or new farm because there are so many so that's not an easy like task to do but switching gears a little bit what is one biggest misconception you would like to clear about the protocol you're creating so may it be spark fluid or any of the Gauntlet products. Is there something that you would like to emphasize that people get wrong about you?

Yeah, I mean I think people generally put Gauntlet in a silo. I think people put Gauntlet in different silos, but overall someone has generally a singular perspective on what our company does. I would say the biggest misconception is Gauntlet is pretty active across every vertical in DeFi. Um obviously we have a pretty active vault curation team on Morphobe. [clears throat] Um but we also have a lot of per strategies.

We do a ton of just research and mechanism design etc. um report publishing. We work with Dows. So I would say biggest misconception is just how broad uh gauntlet is in terms of what we end up doing across the space.

DMH.

Yeah. The the biggest misconception about Fluid uh people often think that it's a lending market or it's a DEX. It's none of this. Fluid is a liquidity protocol. On top of liquidity protocol, we built many different protocols.

It can be DEX lending which we have now and there will be many more protocols in the future. And then each protocol itself has a lot of complexities, a lot of innovations. Especially I think the most misunderstood thing is how we can utilize dep from the lending market as a liquidity on the DEX. How we create this capital efficiency. how we became the second biggest um DEX on Ethereum within 3 months purely because efficiency no incentives no you know privatal piece and so on yeah so it's a complex protocol it takes time to understand it and it doesn't take only you know one hour one day to fully understand it for me the most confusing was instad versus fluid but you already cleared it out and I believe now fluid is the token fluid is the protocol and everything around it Nadia

um So I mean it has been a yeah different misconceptions but I think the latest one is that um right now we are also more for curators and probably a lot of people think oh okay they're more for creators just like as gun ladies I don't know and I think that's a misconception because actually a spark is not just that one team of people like doing risk coration it is uh it's part of like a a double dowo if you could say so we have like a very strong security parameters and we are super super super conservative because whenever we on board a new assets and whenever we like do risk assessments it has to be approved by two different governance processes the spark governance and the sky governance in each of these two processes involve different risk teams. So just to give you an example the uh in the spark governance process we have a risk council composed by L2BIT Aragon and block works. So we have not just Phoenix working on new proposals but we also have a team of like very well recognized uh actors in the ecosystem analyzing what we are proposing. everything is open community can give us their opinion and then it has to vote be to pass through a vote uh for the sky espark governance and the sky governance. So I think that if people could understand that they they will automatically know that um we are not like any other risk curator.

Yeah, I would say with big power comes big responsibility. That's the reason there is also so many layers for the governance over here. Um, Carson, Gauntlet is one of the biggest, if not the biggest, uh, vault creator right now on Morpho and other platforms. It's been, I believe, about two years since you've been doing that. What are the key learnings that you have so far and something you would like maybe to share with people maybe especially with some recent blowups like we've seen stream finance, elixir going down.

It is a hard job. I I believe people underappreciated. So, any thoughts here? Yeah, I think the the the biggest one is just maintaining a long-term view. I mean, Gauntlet has been around for eight years now.

Um, doing lending risk management for long before um we are active on Morpho. And so, obviously, there's a lot of short-term opportunities to juice yield maybe 50 to 100 bips. Um, but the biggest thing is maintaining that long-term view and understanding is, you know, making a decision now that might boost performance. uh of a vault for a few months, is it worth it? If we think three years from now, five years from now, 10 years from now, um is this really going to justify this action?

I think for a long time, as long as you kind of center yourself in that long-term thinking, you can filter out a lot of um kind of short-term opportunities. I think the other one is, and I think we're all still kind of figuring out, and obviously you are too, but being able to communicate risk. I think that's one of the best things we have on the like within Morpho Vaults is being able to trunch and assign risk. Um, and I think we're seeing that really expand across a ton of different opportunities. But communicating that risk to the user is generally not straightforward.

Obviously, you can like name a vault, you can uh represent some APY that people make a determination based on what that must mean for risk, which I think is generally what people do. people see like 10 plus high risk, sub five low risk, and that's generally like I think how most people make these determinations. Um, so with risk ratings and with proper communication to the users, being able to make sure you're able to provide essentially a product that they want, uh, and make sure that they are really depositing into exactly what they want and understand what they're kind of getting exposure to. That's very interesting take that um you you said that people look at the APY and they assign risk to it and I can tell you with Redstone before acquiring Cordora we've done some infield uh unofficial surveys and usually people don't think that way the way they think they segregate the vault by TVL so how much is deposited and then they look at APY so they don't they strip away sort of like the risk component because they don't see it on the platform they rather think about the uh social proof and what peers are doing. So if people already put a lot of money into specific strategy and it has a good yield that means they have already done the due diligence.

So you kind of try to piggy back on some others people decision before. So this is also where uh uh yes so this is usually where does a funny side over here uh this is the reason we are bringing credora in general. So essentially helping them to have a visualization of the risk on the platform. So they have yield, risk and amount of money deposited in one place so they take more informative decisions. Okay.

DMH fluid has this advantage of having a DEX right now, right? Like being the liquidity layer. A doesn't have it. Compound doesn't have it. Morpho doesn't have it.

Tell us what's the actual biggest advantage of having it like what's the superpower now? So our lending market is powering our DEX and our DEX is powering our lending market. So how our lending market is powering the DEX because we can utilize depth from the lending market is liquidity on the DEX. This creates a zero cost opportunity for liquidity providers. Like our biggest uh DEX pool of USDT USDC is it has around $130 million uh in liquidity but it has zero dollars in TVL.

So all of that liquidity is created out of depth from the lending market. Uh at the same time time our DEX is improving our lending market because for example one of the features that we have and no other lending market uh in DeFi has we have active liquidity crunch protection. So when you know like when Ethereum goes down in price uh liquidators come liquidate the positions and let's say for protocols that have a hypotheication um like a and fluid for example and normally utilization of Ethereum is around 90%. But what happens when positions get liquidated the utilization goes to 100%. And then liquidation cannot happen because there is no ETH left in the protocol.

If there is no ETH left in the protocol, liquidators cannot come and liquidate it. They they have to repay the debt and see the collateral. But there is no collateral on the protocol left. But on fluid when Ethereum price goes down, you have the same thing. But on the DEX side, when Ethereum price goes down, Ethereum USDC DEXLP is getting more Ethereum.

So more Ethereum is entering the liquidity layer from the DEX and Ethereum is leaving uh the protocol on the landing market side. So in our case we cannot get this liquidity crunch when liquidators cannot seize the collateral because it's absent in the protocol. Um that's already what we have. I mean like the day we launched the DEX we already got this active liquidity crunch protection. uh we can do more things like uh prioritize liquidations uh on our deck.

So there are more things that we can do but we haven't done them yet. But even this liquidity crunch protection is already big thing. The other big thing of course like users can uh use that DexlP as a collateral so they have better capital efficiency they earn more yield and yeah and same like with smart dev borrowing costs. So for the borrowers, we always have the best conditions on the market because like they have higher yields on the collateral, lower uh borrowing rates on the dep. Is it fair to say that compound a those lending markets are a feedback loop with dexes for example unis swap and whatsoever?

So they go back and forth and what you're trying to create is more like a cycle in the sense that it still lives within the same ecosystem.

Yeah. So like how fluid architecture fluid there is a liquidity layer and every protocol contributes to the same liquidity layer and utilize the same liquidity layer. If I deposit to the lending market I deposit to the liquidity layer. If I deposit to the DEX I deposit to the liquidity layer. If I'm you know if I take if I make USD swap on the DEX I deposit USDC I withdraw USD from the liquidity layer.

Everything like all liquidity shared between every protocol and there will be more protocols in the future. Okay, beautiful. Thank you, Nadia. Spark also has a couple of products. One of them is Sparkland, but recently also launched Spark Saving V2, which happened to be pretty successful with filling the caps very quickly.

Can you tell us what is the innovation with V2 and I will repeat, you keep your treasury there, right? Like a spark.

So the difference between B1 and B2, it is more like a UX um improvement. So B1 it was all based in SUSDS. So we in the back we are using the sky savings rate but the sky savings rate comes from the yield that we generate through the spark liquidity layer which is the capital allocator. That's the reason why spark also manages um morphol for example we are just like allocating liquidity in the best places with the risk adjusted uh for us. Um but the difference with savings between is that we perceive the need that people have about if I deposit to USDC I want to earn yield on USDC and I want withdraw in USDC.

So that's the thing that savings V2 uh provides. So right now we have uh three stable coin vaults with USDC, USDT and USDS and one ETH vault. And uh I think like the the things that I like the most about the savings v2 is that you can deposit any of these assets and withdraw in any of these assets. We don't charge a fee. You don't have a slippage.

You have access to liquidity at any point of time like there's not like a oh I don't know like uh there's not enough funds in the pool and you have to wait. That doesn't exist in savings. If I deposit 1 billion I can't withdraw 1 billion. So, and also something that is amazing I believe is like rates are what we call transparent. So, it is the same rate if you deposit $100 or if you deposit 1 billion, we keep the same rate because of how savings B2 works and is how well the spar liquidity layer works in the back.

So, yeah, I would say those are the main difference between B1 and B2.

Interesting. So I think it can be also has the potential of becoming like a benchmark for like let's say this lowrisk actually allocation that has a very simple UX for the user to interact with. Um people like bold predictions right now it's November in 2025 one year ahead. Imagine we meet again at stable summit probably in Africa or maybe Asia at Defcon H maybe in Warso. By the way we are a big proponent of making it in Warso next year in Poland.

What is one prediction you have or thing you would like to see in the lending category as we move forward either in the vault and permissionless markets or in the lending in general? Do you have any Carson?

Yeah, I mean I think in the next year it's really going to be on upgrades on the protocol side. I mean obviously we've seen a start talking about a v4. Morpho is starting to launch Morpho V2. DMH is talking about adding new protocols to fluid. We're hearing all about Spark, you know, savings v2.

So overall, I think it's really just updates to the biggest protocols in the lending space um and how they add tighter granularity on on risk preferences. I don't think there's going to be like some crazy killer use case that no one's thought about for lending. I think it's pretty straightforward. Maybe there's some collateral expansion and new types of uh assets coming on board, but overall I think it's really going to be um a lot of the big protocols making significant updates trying to migrate capital over to their newest uh newest deployments um and seeing essentially how that transition plan uh is executed. Do you mind?

Uh I think for for the next year there will be few new features I mean at least few more narratives that lending markets will try to unlock. It's fixed rates and more RWA exposure. I think fixed rates is like one of the most important unlocks and there are several ideas in the space how to unlock fixed rates. Even like we can say um Spark has sort of fixed rates. It's not a fixed rate it's rather than stable rate rather than fixed.

Uh but yeah, I think like more and more protocols looking into fixed rates how to achieve them because know whenever we speak with different institutions they say yeah we want to use defy but like we cannot accept floating rates. Uh so yeah I think many protocols will look into that and then uh this will also un unlock a lot of RWA assets uh in defy and on the lending markets especially

beautiful fix rate that yeah

yeah so first of all I support the warso uh event so yes and uh so my prediction I think it is more like on the I don't know how to call it but right now I'm seeing uh like this year we saw defy interacted with centralized exchanges is right. I believe that next year it will be DeFi interacting with banks, institutions and also on the other way. I believe that banks, neo banks and all of them are going to have rails in defi they are going to integrate in DeFi. So we will have like these hybrid stratfi defy solutions and I'm super excited about that. Yeah, we see Stripe, Robin Hood, Revolute, all of them

experimenting with onchain and I do believe it's going to just proliferate. My uh bold take is that in five, three, four maybe years there is going to be no fintech company. All of them are going to be fintech and crypto company like they're going to do both of the rails. As we still have three minutes, I want to touch upon one subject that is interesting insurance that is essentially still I would call it even non-existent almost in crypto and DeFi. I mean of course there's Nexus Mutual, there are a couple of protocols that are trying to offer some but in comparison to traditional markets there is very little choice and coverage.

Do you believe we can see some innovation in insurance in the next years and if so what has to happen for the insurers either cryptonative so Nexus mutual symbiotic IGEN layer or the traditional ones like Lloyds of London and the big names in insurance to expand to lending and DeFi in general

um I mean we've been having a lot of conversations around insurance I think the answer is yes there's certainly an appetite for insurance I I think it is kind of tough right now within the crypto space because generally insurance is expensive. [clears throat] You're not getting and the market is so correlated and there's not a ton of diversity of options. Generally, you can't ensure let's say like 20 different uh positions, get high capital efficiency, and have a high degree of confidence that they won't all blow up at the exact same time. Um, and so I think it's really cracking this code on how do you introduce more diversity in the collateral set that introduces more capital efficiency into the insurance side because right now I think there's a lot of solutions that work but are generally quite expensive um and don't necessarily make sense for most users who would be looking for insurance. So huge appetite but I think it needs to kind of figure out some efficiency there.

Yeah. So insurance is like very big in real world but in defy it's hard hard to you use now because yeah first of all it's very expensive you know if you take insurance even like for something like ours and you will pay the half of the yield and then like why would you deposit for 2% like doesn't make sense um and second thing like I think um many people are not sure like if insurance will pay off eventually maybe they need another insurance for the this insurance company. So

there is the whole category called ray insurance, right? Like of insurance for insurance.

Yeah. Uh and by the way like you know we have a layer which like has 19 billion TV or something and they have zero use case even though they like trying to do some reinsurance or something. So it's something that we need in space but for the moment I don't have a clear picture how it will be enabled and like what will be you know how it will work actually. Okay. Too expensive to implement essentially.

Yeah, I I second the guys. The problem is that um it's it's very expensive. It's not capital efficient and like I mean DeFi is not capital efficient because we are all over collateralized. So we're already creating frictions there. So I think yeah uh there's something there and would be great if we could like I mean there's an opportunity for all the new builders there.

um we try it in a way to solve it through uh the capital we need to have in our in in the sparks treasury whenever we want to allocate. So that's like a one of the efforts we're making but I think there's there's more to be done. So yeah agree with the guys.

Beautiful. And maybe I'm going to finish that you can right now use prediction markets as some sort of insurance. For example, there is a market whether there is going to be a DeFi hack until the end of the year and you can buy a yes and then if it happens, you at least have the payout from the poly market, right? Thank you very much for the beautiful panel. Give a round of applause to the panelists.