Andrew Redden I The Search for Sustainable Yield I Last Labs I Pragma San Francisco 2024

[Music] and for our next talk we're gonna actually go right into that so the next talk is going to be Andrew from last telling you about how we can think about yield in a much better way so without further Ado please welcome Andrew on [Applause] stage thank you oh excellent hey everybody I'm Andrew um we're going to talk today about uh the search for sustainable yield which is kind of interesting it's a bit of an oxymoron um but uh I got a bit of a bold statement for you um this is just some background about myself I've been in the space for a little while um but ultimately you know like a lot of people are prob going to hate this maybe some of the hard builders in the space but yield actually has product Market fit in our ecosystem um it's really kind of uh um you know highly financialized in nature if you look at our space it kind of speaks about what's going on today um but ultimately like it is the second largest category of all applications on our ecosystem uh the first largest being stable coins actually which is actually a large part of the yield itself um but when I say yield like what am I even talking about yield is an interesting term it actually comes a little bit of History here from farming it was actually like the definition of yield is ultimately like the amount of additional crops that came came off the land from the seeds that you planted and so depending on how you farmed and tended to your land um you actually got more more Roi and that kind of translates into more actual food for the table which generated more money for you as the farmer itself but like what does yield actually mean like beyond the farming definition in the financial sense it's really your return on your investment but yield itself is really just like the market pricing and inefficiency so a great example of this is uh I'm sure you've all familiar with it um is Athena so Athena allows you to tokenize the basis carry trade you know long the spot short the per um so this captures funding rate and they made it really easy for anybody this is not a new trade by the way this has been around for a long time U but it required a ton of capital to actually pull off um anyone could do it but honestly to do it at scale you needed hundreds of millions of dollars to have it make sense um Athena when it started had crazy yield rates you know 69 80% but over the last few months it's trended down to essentially the risk-free rate it's actually lower than the risk free rate today so when we say searching for a sustainable yield it's kind of an oxymoron because yield actually Trends to zero as the market figures out how to make it more efficient but like if we talk about yield in terms of the size of the market it's massive like we're talking $92 billion and only other like I mentioned earlier the only other Market that's larger than it today is stable coins but if we look at all the yield that exists out there and this is a snapshot of it as of the other day um you know you know a big market leader we have right now today is liquid staking tokens so ethereum is actually a pretty healthy source of yield now when it started also had a crazy high yield rate you could get 10% on your eth essentially the risk-free value rate of a bond uh in crypto that's insane that does not exist okay like you should never expect that that's going to happen but we've extended this down and we see repackaged lsts now as um liquid staking re or liquid reaking tokens they're becoming a massive segment as well people want access to efficient yield but what that does is it continuously drives rates down and so what we are trying to do here is actually look at what is sustainable yield like how does one actually get access to sustainable yield if all yield is trending to zero then what is actually sustainable by default zero is the only thing that can actually be sustained in yield but that's not always the case because as we see with our ecosystem we're highly financialized in nature and so sustainable yield at least my thesis on this is that it's actually driven by productive assets D mostly ones that are sourced through utility that utility could be speculation it could be actually enabling and backing um different ecosystems could be the uh lsts we talked about as well it has to be highly responsive to Market demands if a new emergent Market happens that can generate interest you there has to be a way for yield to or liquidity to flow to that ecosystem to capture that demand because again yield is really just like a result of a of an inefficient Market sustainable yield has to be a form that's risk adjusted and weighted you know any investment strategy or any investment banker um will tell you that if you have too much of your Capital exposed to any one sector or any one type of asset you're in for trouble you're in for hurt great example of this Leman Brothers 2008 they were highly exposed and overleveraged and um and also you know re aoec all of their Capital towards the real estate industry when that exploded it literally destroyed one of the oldest banks in America and so it also needs to have holistic Market exposure and that means being exposed to everything that's not just crypto assets that's not just rwas it's not just dpin it's literally being exposed to the entire aggregate sum of all Financial activity everywhere so that's kind of what we're actually trying to accomplish here at last we are trying to design a system um that allows us to stabilize holistic yield and what I mean by that is if we have access or we've created a way to get exposure to all the different things inside of an ecosystem we want to convert all that capital and that value into something tangible and real for users and that today is actually stable coins everyone wants access to stable money everybody wants to be comfortable and feel like they're not going to have the rugs pulled out of them um some of us here myself included have probably um been uh you know the the victim of uh you know technical collapse and crash or sorry technical issues or a crash in the market and has lost money as a result of it for me it was Oracle failures on black Thursday with maker um and so we want to give people comfort and and Safety and Security around having their money and what it's looking like in terms of how they get access to it um we as a design are complimentary to other networks so our goal isn't out to be out here and to try and take users from other protocols we're actually flipping it on its head we're paying people to go put their money to work on other chains and other protocols by Design um as a as a thesis for our Network we believe in returning all value that's captured and created by the network itself its deposits uh and its activity back into the hands that actually of the people that actually created that value to begin with and so our whole model in economic thesis is around cash flow reinvestment and ultimately we aimed to make all the yield that's captured into the network exportable to other places so when I say complimentary to other networks it kind of sounds like a little bit of a Kumbaya or like oh I'm sure um but ultimately what we want to allow people to do is to restake their value their yield bearing assets from other networks and other ecosystems and bring it to us and what we what we offer in exchange to these other protocols is we say Hey you can import our stable coin back you get access to yield which may not exist to begin with on your ecosystem um and so cash flow reinvestment again is like probably one of the oldest tricks in the book when it comes to businesses um if you look at your typical crypto protocols today um they actually focus on detention they don't focus on driving Revenue they don't focus on growth outside of the attention economy most protocols um will use that attention that they capture and they launch a token as a means to actually try and drive value but incentives today are highly misaligned with the actual user base they often come from inflationary tokenomics or inflationary econ um economics and they're not sustainable by Design they're hoping that at some point in time the attention grows so large that when they launch these assets that attention just swallows them up the price moons and somebody gets a liquidity event we don't think that's fair we don't think it makes sense for a longtail economy to actually Thrive and to grow one of our mantras we actually have here at last is actually it's part of our namesake is build to last we don't build for hype Cycles we don't build for narratives we try to build systems that actually can stand the test of time backed by quality economics and actual good game theory thinking so our whole model here is to take external Revenue that we capture from different protocols and pay it back to people like Builders through rev sharing agreements and an incentive Marketplace to help them grow we want to ensure that our Governors have access to actually an incentive to be there um you know I can't really see hands that well but I'm sure some of you in the ecosystem have been a part of dows some of you may know that like participating in a dow is sometimes like a very onerous or like um painful process vote voter fatigue wanting to actually go and show up it sucks when you feel like like you're obligated to do this but your only reward is some incentive that you got maybe two three months ago we see this with like retroactive public goods funding there's a lot of complaints on Twitter there's a lot of complaints in the ecosystem around how it is to actually be a part of these ecosystems you get literally no renumeration for doing this so we want to flip that on its head again and say Governors you should get paid to vote you should actually have a financial incentive to want to drive an outsize return that does have its challenges in terms of how we actually design and think about our systems But ultimately at the end of the day anything is better than the current status quo we have as what we're seeing right now in the ecosystem it does not scale it always ends up being the same group of individuals not necessarily the individuals the people themselves but largely whales who get delegated these massive piles of tokens and they only vote for their own incentives they don't actually care about the will of others and so we're trying to ensure we have a model that allows for those that are on the ground actually doing the hard work get paid for it and ultimately liquidity providers Drive our ecosystem any financial application to date needs large scale deposits of liquidity and so we want to make sure that everyone that participates in our ecosystem we actually allow for them to get paid across the board always and so our mission we basically say is that you know our chain our design is all around at the end of the year the The Entity that operates and facilitates things should actually have made no money it should have given all the money back and so when I talk about exportable yield like one of the things I've noticed from ecosystem to date is that we actually have this cambering explosion of new networks and I admit we are actually adding to the noise in a lot of respects but one thing that's common across all of these ecosystems is access to yield is tant amount they're always looking for a way to drive value since yield is such a massive product Market fit it makes sense to try and Associate your network with it one of our missions here is to make that super easy for new emerging ecosystems to tap into to the overall aggregate yield rate that we collect and so um you know if you think about how this works today you know typically speaking you go and you make a partnership or you work with somebody to drive revenue and to drive value to your yield source for your chain we've seen some cool designs emerged in the last few um the last year blast being one of them doing the native yield chain allowing you to get real-time access to that yield on your ecosystem but exportable yield how do you make that scale and so one of the models we're thinking about now is that those that actually come and participate in our ecosystem will be incentivized to proliferate the stable coin to other networks and other ecosystems rather than having to forge a partnership with us to make that happen it should be able to anyone to actually be able to go do that and drive value and drive um income as a result of that so we do this by um allowing for our model for governance it's a vot escro system um it uh it has its own little flavor and feel to it though where rather than just having one protocol be able to deposit onto a gauge or to have a bribe Market we actually open that up to to literally everybody on every chain every protocol you can come in and you can get a way to incentivize participation in your ecosystem including exporting that yield back out so how do we actually work like I'm making some lofty claims here so what's the secret sauce that we actually are able to do what we want to do and so ultimately at the core of all this is really our accounting engine and so it's a fancy way to talk about you know State updates on other chains one of the things we've been toying with over the last year is how do we do this in a way that scales it's simple to go and get a ZK proof of one two State slots on ethereum or base verify that on chain but if you want to scale that up Beyond two three four five assets you know our goal is to scale up to a thousand 5,000 assets that are all generating yield across a ton of chains maybe we can't get ZK proofs for the some of these chains we want to deal with so how do we actually do that our goal though is real time uh yield acrel computations at scale across all assets that really comes down to a decentralized network of a testers and so what that looks like in a lot of cases is being able to incentivize people to a go fetch data at a block from some network but then have somebody else go fact check that data for them um ultimately this what this allows is us to bring all the yield that you're capturing across other networks into last as a first party primitive for you to utilize um our Network itself you know we are a sovereign rollup by Design um we want to make sure that this is where everyone has easy access to deploy any applications um we believe aggressively that the evm is really the floor of what an application developer wants or needs rather than the ecosystem the tooling is just so great uh it's really hard to Branch away from this but we don't think it's the only offering you should have available to you so we are planning on exploring some additional um models around the evbm um you know there's a great uh VM that's been done by arbitrum called stylus um it's evm Plus for those um that aren't aware it allows you to actually compile your code into wasum which expands the language opportunities that are available for your developers on your network so we're definitely exploring some of that stuff and we are hardcore Believers in the in the modular Vision one of the cool Parts about modularity is that as new technology emerges you can swap things out and you can actually enable for a better ecosystem a great example of that today um is the op stack in um the suent labs work that's done around the um you know converting your your optimistic roll up into a CK rollup and so these types of things it's it seems like silly to build in the the modern era of BL chains today and not have access to some of these toolings um as I mentioned we are a VOD escro style system we think it's a really effective way to allow for those that want to have a say to have one um we've done some interesting things around it where we believe that um you know your vote should count but it shouldn't be the only way that a system moves forward um I've been a part of a lot of dows that don't work and I have a joke I make a lot but I think Dow stands for truly does anyone operate and the answer is actually no um and so we are actually using what we call an optimistic governance system I think it was actually maybe pioneered by fra um so shout out to them but how it works is we have a council that actually sits there and makes decisions but you as a voter Your Role is actually to descent if you think something is not happening the way that it should or is healthy or good for the network you need to stand up and say I don't agree now what happens when you do that though is you actually Force direct democracy upon the system which is really slow and so if you say hey I don't think this is good we need to have a full chain vote we need to have a full Quorum get reached and and if it can't get reached it means you are correct if it does get reached though you get a strike the goal here is to prevent obstructionism which is a big part of a lot of our ecosystems you have one or two individuals who have a massive say in how an ecosystem should work but they don't care about anyone but themselves so for our model to work at scale we need to have a highly fluid highly capable governance system or governance model um and actually have it go forward what this does though is that it allows for people to actually come in and even if you want to have a small say you can still descent and it makes it easy for us to actually get corrective action on the system if we have a case where you know the council is not operating effectively we can hold elections to replace people on those councils and now it's interesting for me to say this I've been a very like um uh negative proponent of council based governance uh early into uh its design and I was really concerned around the censorship model and how that would work um but ultimately I've kind of seen the light and realize that you know highly friction-based systems really early on are what kill companies or rather sorry kill protocols and the Dows that emerge around them I've left ecosystems because Dows just can't get anything done they just refuse to agree and you get stalemates across the board so it makes really hard um it makes it really hard to make decisions and to try things that may or may not work and ultimately you know our model here is being built for Builders we want to ensure that protocols that want to come build alongside of us have everything that they need to succeed and ultimately that's access to incentives you know I've said it to a few people today but I'll say it again you know most protocols fail because they launch a token too early or they launch a token too late for those that launch it too early they have no idea what they're trying to incentivize they don't know the positive some behavior that they're looking to to drive incentives towards and so the issue is they have to spend a ton of money or ton of emissions to figure that out and often this leads to down only prices because you've given know so much of your capital or so much of your protocol value to early participants who ultimately just use you as a form of yield mercenary Capital comes in farms your token to zero protocol is dead because there's no interest see you later or if you launch it too late um you you you don't actually know what you're trying to incentivize you spend time Energy building new versions V1 V2 V3 really trying to dial in that secret sauce but you've been in market so other people have an opportunity to now examine what you're doing it's just a matter of time before somebody else says hey I figured it out I understand what they aren't doing fast for can follow next thing you know they launch a token 100 billion tvl you're in the dirt we've seen it time and time and time again throughout our ecosystems and I I guarantee you for those that are hacking this weekend if you just go look at failed protocols from the last like 2 three years like who didn't make it there's probably viable businesses there they just had really shitty operators and so I highly encourage you to go look at that we call it the resurrection model um but ultimately that's last we last Network we're all about stabilizing holistic yield thank you [Applause] [Music]