Mountian Protocol - Yield Bearing Stablecoins And Their Implications On Market Structure

hey guys um big shoes to fill but I'll try so today I'm going to talk about yield bearing stable coins and the implication of Market structure um if you need to go to the bathroom the tldr is if we want to bring big flows to crypto we need Yi bearing stable coins and this is the argument uh why so let's go for it um the slides are uh representing my own sorry how do I go next so this is my own views this is not Mountain protocol nonfinancial advice all the good stuff so if you want to take a picture uh but let's go so the I think we all know this but it's good good to review so um stable coins were started when rates were were very low uh 2020 uh with Co rates went to like almost zero 25 BBS and most of usds and usds run uh started after that so kind like the concept of a Yi bearing stable coin uh was not a thing at the time there was there was no demand for that and only kind of like 2022 and and mostly 2023 rates started to go up and probably will stay uh non zero for for the foreseeable future so now we have a case for uh why yield bearing stable coins but before we talk about crypto I'm sorry the reason um with non- yield bearing stable coins we were pushed essentially to if we if you want yield you need to re hypothecate your stable coins right so um Seb was talking about fractional Reserve banking that would be your SDI uh you can go to uh a as well so you can you can lend your uh your assets essentially you're taking your IOU claim of your non-yield bring stable coin and re hypothecating that IOU claim uh in some way right e either uh lending it out uh in a fractional Reserve model uh with ethena with guy that's that's going to come afterwards but essentially you you have some kind of risk reward if you if you want to earn any yield when the yield bearing uh when the stable coin is at zero so if we look at trfi trfi has integrated kind of like the sare or the risk-free yield in most of their products on the left we see high old checking accounts those are essentially a commodity uh if you live in the US unfortunately if you live outside the US probably wise is the only way you can get that um uh via trap but they are very well integrated uh recently for uh businesses this is even more common right so sweep accounts um get getting yield on on on your banking deposits and here is two startups so we have um brex cash on the top and Mercury on the bottom both advertising something like 5% interest rate and if you talk to any business Treasurer uh this is kind of like St table Stakes uh for how they they manage their money and especially for for financial products right so this is a very kind of like assumed thing that you're you're going to have access when when you talk about trfi the exception to that that rule is retail right so this is a picture from Bank of America but all of the big four banks in the US will have this they will essentially give you a savings account with if you're in a platinum tier three BBS of yield annually and this is what Bankers call Lazy Lazy money these are folks that are unsophisticated and therefore you can extract a lot of a lot of value out of and that's why the big four Banks uh create so much value uh because they didn't have to pay for for their deposit so this is the exception that confirms the rule so retail uh in the US and and in my experience retail in most places don't get don't get paid for for their deposits because they don't have the negotiating power and the sophistication to manage it now going back into um into re into crypto we now have several I I um founder of mountain protocol we're one of them so usdm we have an option to bring those stpi products on chain in a regulated way so full Reserve stable coin uh that essentially rebases every day and passes through most of the sofware back to to the holder so essentially a US Treasury strategy that gives you kind like the the re reward um that is associated to what the tri fight products uh would give you um and and therefore now we complete kind of like the efficient Frontier uh in crypto so why why why yield bring stable coin so why even talk about this if we have a if we have SD we have ethena we have all these all these cool products and at least my view of how I I think about the market is there's three big use cases for stable coins the biggest one and I think the one that we're all most familiar with is crypto speculation and crypto speculation is kind of my mental model for anything that would disappear if you were guaranteed that Bitcoin and eth would be flat for the next 10 years right so anything that if Crypton and E is flat you wouldn't do that to me falls into crypto speculation so it's everything that has to do with lending and leverage and options and derivatives and stuff like that that are tied to these types of products so that is probably us here that's most of us who participate there and I would say that is where usdc is the biggest on Defi and usdt is the biggest on on on CI exchanges the next one uh is inflation hedge I'm from Argentina for those who don't know me and my introduction into crypto was this second use case and that is massive use case mostly for usdt which is I want to exit the Argentinian peso right now give me anything that looks like a dollar right and usdt on Tron has given uh that use case a big home and most of the at least my mental model why usdt so big comes by that this second use case um and then there's the last one which I think is the one that we're all excited about but I put it in in kind like nonbold because it's still very small right so Stables are better rails I think we've all tried stable coins and know intuitively going back to the banking system is is very complex when you have to pay in Fiat is very complex but this use case I would say is like single digit percentage of stable coins today compared to the other two and the main reason for that is the this use case the first use case is I want to earn 30% plus right and there's a risk associated to earning 30% apy Plus or or some kind of of numbers like that inflation Edge you get a lot of people that want to exit the Argentinian peso but uh it's not a big percentage of the total money supply right there's 20 trillion US Dollars how much of that is sitting in Argentina in Turkey in Lebanon Etc it is sizable but it's not the the majority of the M2 this one is the real big one and this is the whale that that that we want to bring in so how how do we bring this uh these users into crypto this big money doesn't Target 30% apy with with that risk level they're targeting 8% 10% 12% right so this is low risk low reward high volume monies that that that uh that can be brought in and the case that I want to make to you of with sorry with some of the examples is yield Bank stable coins are not only benefit this use case they are necessity uh to to make this use case work so here are some examples the first one is uh reinsurance so today you have a 300K so this is a a pilot but there's a policy uh a travel policy that is backed by uh usdm today there's also a reinsurance policy for hurricanes in Florida so real word use case uh also backed by usdm uh today and if you I want to show take you to this uh item here so the 9 to13 has to do with if there are some losses you might be at 9 uh if there are no losses you might get 13 but that includes the 5% that usdm is currently paying so if you take out that 5% you go to 4 to 8% uh in in in return if you wanted to do this without a yield bearing stable coin no investor would ever go in and say I'm going to take hurricane risk or travel risk or whatever risk that is for 4% if I can lend to the US government at five right so the the premium that you get paid in trafi for the risks already um assumes when you compete with trfi that there's also going to be a complement uh of sulfur inside of that product for context this industry only out of Bermuda which is where we're regulated out of is as big as the stable coin industry right uh today and it total like 400 billion dollars so uh it could be quite like a multiplier to the total stable book coin market cap second example and one I think I would love to see is Forex so if we think about the existing amm economics right so if you go to a Unis swap if you go to uh curve you're going to see your Revenue if you're an LP is fees from swaps which is usually very small and incentives right so how many pools survive without incentives not that many probably the usdc eth pool and and some others most of the pools require some incentives because you have a lot of costs for B direct costs are cost of capital and operational cost right cost of capital includes your opportunity cost but also you have impermanent risk cost even if you are in a uh in a stable pair if you're in the usdt usdc pair and usdc deegs you're going to get 100% of that dpeg asset so you still have some impermanent loss risk and you have Smart contract risk if we want to scale Forex so that we can bring euro to dollar Forex on chain no one is going to be able to pay for incentives so the incentives are out so and if you want to compete with with the banks the banks are putting sulur uh their assets on on sulfur so essentially you're going to have to able to make make money from fees on swaps you'll have to put sfur in uh in order to get to that uh 8 n% that the capital providers are looking for and the advantage of of crypto is we're going to be a we are able able to provide lower cost of capital because essentially you're targeting more people and hopefully access lower cost of capital operational cost and these are the things that we're working on uh to to reduce the risk of but essentially if we're going to bring Forex markets on chain which are huge we kind of have to have a yield bearing stable coin making those pairs specifically for the ones that have the most risk which are kind of the volatile pairs which is uh Forex the the last one is three party arrangements so three party Arrangements I think most most people here are going to be familiar with trip party uh repurchase agreements or reverse repurchase agreements which is kind a big backing for stable coins usually the way they work is you have two parties agree on something you have escrow and you have an escro agent which essentially is the is a two out of three multisig if you think about it but if you wanted to participate in a repo agreement with someone uh you would have to have several uh tens of millions of dollars in order to be able to access that market because this structure is very complex this structure in crypto is a lot easier and um the amount of money held in escrow in different places is huge right so from uh buying a house to collateralized loans there's people doing collateralized uh loans in dollars in Argentina with this uh type of model so they put uh usdc or probably usdm into a safe account acting as a party agent so this is the type of product that can bring a lot of volume uh into into crypto by reducing the cost of the rep Arrangement uh down to uh almost whatever you have to pay the three-party agent uh essentially so to close um Ying stable coins uh are a key piece of bringing this third category that we introduced at the beginning uh on chain and I think bringing that that that category on chain is a required M for what we're all doing here to be successful I don't think we can build the future of the economy just with the first two use cases the I would say one of the big reasons why this money is not coming on chain there's many I think uh regulatory Clarity the security of the smart contracts there's a bunch of items one of them is uh the ability to get kind of sofware yield uh in in in in your Investments to participate especially because you're targeting 10% epy so this is like half of your Target is is the sofware yield and uh the good thing is a lot of the infrastructure to build this to bring this products on chain we've already been building so we've been building lending markets we've been building uh amm we've been building derivatives uh I think on the on the three examples that I gave I could have given 10 so I'm I'm very excited with with uh with what can come uh into uh into crypto and it's great because we on the three and I I wouldn't discard all of what we've done previously we've reduce the risk of our smart contracts and so on a lot because they've been battle tested with with billions of dollars so it is easier to jump in and now we're ready for prime time for this kind like 10% apy big money uh to actually come in and and and play in crypto so that's it um the the big message is you'll bring stable coins requirement to bring big capital on chain so if you're building a product and you want something that targets 10 12% and not 30 I think enshrining yield bearing stable coins in your protocol is kind of a a requirement and if you want to talk more about this um I'm super uh I'm super excited about this topic this is uh I think that the thing that we've been kind of waiting for so feel free to um reach out and I'll be around for the next rest of the day to to chat about this thank you