The Melting Block: How Cross Chain Security Helps Diversify Your Portfolio, Projects & Protection

all right everybody how you doing I'm uh Steve from hellborn I have my liquid death does anybody else think that this is a beer when you look at it and it's actually water maybe just to hang out and see oh I don't drink beer but I look like I do it's good though all right we're gonna go into talking about risks and you know the title for this is the melting block how cross-chain security mistakes can expose to risk but I actually think a better title for it is comparing the risks between the great financial crisis and liquid staking derivatives because that's the topic on here so it's the big stake and you know we'll get into the details on that in a moment but I want to start off with a quote from Jurassic Park anybody see Jurassic Park before yeah that's great one of my favorite movies um Ian Malcolm played by uh Jeff uh Bloomberg he says your scientists were so preoccupied with whether they could that they didn't stop to think if they should and he's a Chaos Theory mathematician so you'll see why that's relevant in just a moment but when we talk about risks on staking you know there's usually two ways to look at it the risks to protocol and then the risk to Capital and to protocol it's you know things like Mev extraction censorship cartelization and we're not going to be talking about that though you know because that's you know there's like three or four other talks on that uh here at East Denver we're actually going to talk about the risks to Capital uh the funds and this is something that nobody really talks about other than like getting hacks and stuff we're gonna look at it in a different way so this presentation Stars two individuals that we're going to go through and they have two different perspectives we have the Degen who's going to look at the investment side of it and yellowing and getting as much apy as possible and the Normie who's a little hesitant and uh looks at the risks involved so start the Degen so starting with staking what do you get from staking you lock your native Assets in a network and you support the consensus and you get rewards for it staking Rewards let's go one level Now liquid shaking you create a derivative of that locked asset that's earning yield and then you take that and you can use it for other you know D5 protocols earning rewards from that as well then you've ascended cross-chain liquid staking now we have another layer you mint a wrap derivative of that previous derivative that's earning the yield already into another protocol which usually done through a bridge and that is going to be burned or Lots on the native chain mint the other one while that other native acid on the other chain is still earning rewards from the consensus Rewards wow so much so much yield but Normie says that looks like double free money right double free money that's right Normie what's the risk though yo what's the gotcha so let's start again at staking well one risk that we look at is you know for you know to to the capital is slashing the operators they have penalties with it if it's not you know usually up then you can if you have a node failure or validity or failure you can lose funds from that on some protocols hacks and bugs I mean being a hellborn we know all about this all the time it's what we do no guarantee that code is developed error free and that can have inherent risks to Capital and also unproven and yet to be written code now this was a screenshot from you know late last year um it's actually in the ethereum uh each one to eth2 marriage I blocked out the names for it but this two developers discussing concerns they have about withdrawing and really basically what they're saying is don't worry we'll figure out secure way to take the funds out later because people want their yield now so just go ahead and merge that code and that's okay well I mean they did figure it out you know Shanghai is coming out and stuff that's great but that's like a risk too like I mean shouldn't we go through think about that before we put you know billions of dollars in it okay medium risk that's that's not too bad I guess it's a medium risk let's go to Rick liquid staking now so all that another layer on it first you have the price risk that the exchange of the liquids taking derivative you know something like steak teeth is lower than the inherent value um that can you know be done from withdrawal restrictions or you know High volatility and then you have adoption risk now E2 doesn't you know doesn't really have that problem but other you know staking chains May where the value of that liquid staking derivative based on the asset um you know if it does not get enough adoption it could be problematic and that could cause a financial explosion again hacks and bugs again the other layer that happens so all right now we have a higher risk so what the f about what about Crossing liquid staking another layer around that so we've taken all that risk from before let's put another wrap around that and you know first what is it you know this is the process when you have the wrap derivative based on the liquid sticking derivative that's minted by the bridge integrated on there like a vault they'll always you know the cross chain Bridges unless you're something like Thor chain which is like native uh you know held in the volts there so you see up there we have these three three you know uh layers of of derivatives and all of them earning Rewards seeking rewards yield torn rewards and then deep fry protocols that you invest on the other chain over there the Degen is very very turned on by this one he must know how do I do this even more so let's let's it's very hard to explain it's better to visualize it so what exactly is going on here we have our proof of stake chain with the native asset okay we locked it inside consensus and you're getting the you know the reward validator Rewards then you go through a staking contract or you know to make your your derivative your state either State whatever it is and that's you know done through things like lighter or whatever so now you have that wrapped one and you can invest that on the native chain if you want or you can go across the bridge and go into another one you know let that there you know burn it there mint it here and that's done with like wrap tokens smart contracts and so on and get your wrap state eth and then you can invest it in D5 protocols so you have one two three four five with the bridge as well uh how often do smart contracts get hacked a lot so if any of those components fail then you're disconnected from that native asset and you won't be able to unwind your position you could lose everything ludicrous risk right now so this is this is our third character on here anybody see The Big Short before yeah a couple you guys yeah okay big short yeah so big short is a movie um about Michael burry played by Christian Bale here I actually know Michael Murray he lives uh he has a house in South Beach we talk about this a lot and it's a it's a it's a great movie for investors it shows like what happened during the great financial crisis of 2007-2008 so quick recap on what happened during that Financial meltdown um it was mostly caused by a derivative derivatives Morgan gives back Securities and uh cdos which are collateral debt obligations both of them really were contributing factors to uh this humongous uh you know impact that just changed the way Finance is done today so the the steps involved what happened first is like you know subprime mortgage lending with adjustable rate loans uh what that means is giving you know how house loans to people that should not have house loans and hey it's cheap now but in five years it's going to go way up you know the interest rate then they took all of those loans put them and resold them as a derivative to investors called cdos and then all of a sudden the mortgage loans began to default and that was because well people really got in over their heads from such easy loose lending so the underlying started to become at risk so the investment pools of all those cdos and the mbs's they lost value that went down the main collateral and people started to panic investors and Banks and they said okay well we need to unwind our position let me go back you know you know if you look at the the liquid staking let's let me go and put my rap token back in there redeem it for uh the staked one through the bridge and then take the bridge and go back and get my like native asset out so the version of that for them was I need to go and cash in my uh my CDO and you know just sell that so I can get my money back before it goes down so they started to deleverage all of that but they couldn't because it was a cascading effect a death spiral that you know the liquidity that was withdrawn um and all the extreme risk that was there there was too much counterparty risk for the for the people that sold it I know that's that's purple and hard to read it but it says the liquidity withdrawn by dealers due to extreme risk made exiting that position and getting your collateral impossible there was no liquidity left and the people that had it didn't want to give it up Financial meltdown that's what happened at the end so why is it similar why am I even talking about this isn't fud because there's amazing things being built here but we need to think about sometimes like what exactly are we doing for a lot of this because we all want this to succeed and there's a lot of risk here that's very short-sighted and short term so part of the great financial crisis subprime mortgages you know that was unproven collateral adjustable rate loans led to volatility NBS CDO derivatives margin by the institutions with leverage and then really deep positioning That Couldn't unwind here's some of the similarities in in defy you know you have unproven collateral you know that's being built developers here in bitterling staking protocol volatility cryptos is you know volatile uh derivative assets so your liquid statement is wrapped margin use on retail and then complexity Bridges and cross chain is complex we audited it all the time we you know it's it's amazing what these developers can do they can write and how they can connect them but with with complexity comes risks to security you know the complexity and security are are the enemies of each other so how did it all end back then you know you had after all the liquidity outflow and the shrinking capital and the collateral just the Locking out the banks there they got bailed out the Federal Reserve Bank okay stepped in and they they loaned seven and injected 700 billion dollars they printed it and uh you know to finance the portfolios of all these failing Banks and you know it sucked and but they came in and they they bailed them out to get things back on track and then they implemented a lot of compliance and regulation like socks and you know reporting details and you know there's a lot of changes to the way they do it you know the standards were looser before so they implemented that and ever since then we've been you know sucking at the the Federal Reserve bank's teeth since then unfortunately three months later the first Bitcoin block was actually mine too right after all that it was kind of a it started it all you know the anti the anti-fed but where we go with that so who would bail out defy so that's you know something to think about sandbank Friedman's not here to bail us out anymore right yeah just kidding yeah so just wanted to thank you guys I know um ran through that hope you thought it was valuable and if any questions out there right now have a few minutes left you know to go on yeah yeah this isn't the Doom call it's like you know this is very uh just be aware of things as an investor or as a builder because you know they can they can Cascade to systemic risk and um nobody wants that yes he has a microphone over there he'll bring for you he's getting a microphone given this risk what is the best path forward is it for people to just I'm out of risk they have or is it if you were to regulate what would you regulate like what's the sort of I would say like their solution yeah there's no regulation can be good and bad I'm not pushing for over regulation I think it's not offering something that's so short-sighted like apy and yield that's just ridiculous amounts that can't sustain itself we saw that you know many times with uh with Celsius and block five and even the algorithmic stable coins like once the yield went down a little bit for Tara Luna just got that collapsed there's not enough liquidity there so it's doing things sensibly and not being not being so greedy I think is what it is there's a lot of greed in in defy and you know when you look at staking which is an amazing way of doing consensus when you make a liquid staking derivative what the difference between proof of work and proof of stake proof of work you're providing hash power you're sacrificing electricity you know and paying for that to secure the network with stake you're sacrificing your ability to use the stake you know the asset you're locking it in a validator and that's your that's your investment to help you know build the network so you're kind of cheating in a way by when you're when you're doing like mistaking it's just like especially if there's no margin or collateral around that like you can take USD and take the USD have a 70 margin collateral rate and um you know use other things that invest it but then you get a margin call so that's the equivalent of this you know there's no margin needed the Margin Call is you just lose your funds completely so do we need to think about and just look at some of the mistakes made in the past and not repeat them in what we're doing right now yep other questions okay all right guys hope you all enjoyed that um and uh yeah we'll be at the booth right over there halborn come say hi uh I think that's you know there's lots of I'll talk about where we do cyber security um thank you come say hi there you got some swag over there too