What Is Low Risk DeFi and Why Will It Win I Marcin Kazmierczak

For this one, I'd like to bring in Marson to tell you all about how to make being worthless a lot better. And welcome. Thanks. All right. Hey everyone, I hope you're still today.

I'm going to talk about low speed what it is and why I'm Maround and also before I start I want to review this one post from Italy that came around 24th November raise your hand if you've seen that post and you read it okay I would say 10% of the audience so it dwells into the laws of D5 like how devices and why to be an exciting point for that notion to right now become a tremendously important part of the road map and the ecosystem itself. So the problem that data is expecting there is that material has some goals and also the revenue aspect to sustain the network. So on one hand you have solutions that could bring a lot of traffic and revenue such as leverage, e-commerce and financial applications and on the other you have all those uh good solutions around social privacy predictions and so on that might not necessarily have the most sustainable business model but are used for the economy agenda for tier 2 global culture. So the solution can be just treat one of those categories as a revenue generator. So then it can heat all the others so that the whole ecosystem is sustainable.

And effectively this is also how Google expanded its own business search. So Google search and ads is essentially the one uh particle or product of Google that generates revenue. Therefore, they don't have to necessarily monetize some of the other aspects they're creating. Like all the products that they do around is based out of the revenue generated search or is putting some more users to uh see apps essentially. So Lauri with a goal of achieving global democratized access to payments and savings in valuable asset categories is what can be done for Ethereum.

And we're talking about major currencies with competitive interest rates. So not just US dollar but also euro hopefully Argentina and peso, Brazilian real and so on and so forth. Stocks, bonds, commodities and similarities. I graduated quantitative investors in economics. So I have background and there's this notion of cash which is essentially a business or product that generates consistent cash flows over its lifespan.

So over a long period of time it doesn't necessarily bring you like just one big spike of revenue and then you don't know what to happen next. It's rather like very consistent. So this could be this low of D5 or two so that developers can also focus on the uh general goods solutions that not necessarily focus only on the revenue generation. So the two main categories that points out there are the basic function of pay savings. So it's called global finance.

so that Ethereum can be properly from the ground up global layer for settlement and those payments and well understood tools like synthetic assets and fully collaterized and the ability to exchange between these assets. So essentially gas and someone could ask all right but both of those primitives have been around for quite a while. So what change now? Well, for first the changes in the regulatory environment and perception of blockchain solutions globally, including the United States, but also Asia, Europe and so on. With the current regime, people are waiting linked to experiment and invest into onchain finance solutions and you can see global giants such as revolute roof and other feed applications essentially going into that direction.

My world take that you can take from this talk for example is that within three four years we are not going to have tech companies involved we're going to have confidence they're going to utilize both of the race because those that are not going to adopt the crypto settlements will just be a disadvantage in terms of fees and the intermediaries that would be the whole process. So crypto does not have magic principles for sustainably creating much higher yields than it is in Shopify. But here it does have a magic principles for making the economic opportunities that already exist globally and permission accessible no matter whether it's the United States, Mexico, Argentina or any part of the world. But then users can follow. It's difficult to choose the right assets, lending markets and holds for risk appetite.

So in this post there is low risk it's not very clearly defined is lowrisk def is it also compound is it morpho is it using unis swap so it's a spectrum right so risk is usually a spectrum it's not like binary like zero or one and here I have a question to to the audience please help me when was the last time you allocated your money in defi for uh one year or longer and you didn't touch them. Raise your hand if you have okay maybe like three four people. The problem with D5 is that everyone has ADG like everyone sees a new opportunity every week, every month, every two months and we define the yield in APY which is high percentage yield in a yearly basis and Harmony keeps a position for one year. So here we see this contradiction between keeping something that sticks for a longer term like in finance you know some of the T bills can be like 30 year old long or even longer. So we shouldn't just chase the high year opportunities in short time rather think about allocation that is diversified portfolio.

So in order to help users navigate that, we brought Fredora which is the define platforms helping to understand the correlation and the trade between higher yields and also higher res because those two go many times apart. It's pretty live on morpho. It's going to be visible on morpho front end within a couple of days hopefully tomorrow maybe early next week. So you're going to see a specific yield opportunity in the vault and then next to that you can see the rating between DA. It's going to go live sparkler and article is to rate 99% CDL in the vote to tri so that users can take more informative choices.

So the reason we do that is if you look at the proliferation of how the products are expanded we started with simple statements USDC USDT and then also D. Now it's called USDS. Then we went into various synthetic stable coins. For example, ETNA SUSD or USD on USD Yash. Now we have over 200 stable coins either regular ones or Ethereum and real world assets.

The evolution is fairly similar. So we've got tokenized treasury bills which was you know the fundament of the global economy. We went into tokenization of private credit with Hamilton, Apollo and other giants. Now we are tokenizing stocks. People are trading stocks from perpetuals and onchain.

We instrument other products that are well known in the ecosystem. And in D5 is the same. We started with a compound which were the two OG protocols back in 2020 21. For those that don't remember actually was the first one to launch and get really good traction but then e and then have it over and we have commissioned vaults on more and as it is of today on those platforms there's over 500 v. So how the user can decide which one to allocate money and keep it for a longer period.

So that's why the risk engine that we created [clears throat] we look into a number of risk risk factors such as network risk after party risk smart contract risk whether they are auditings or not operational risk or risk and many many other uh indicators and it's a very known uh solution infinite if you ever heard the name S&P woodies for pitch those are the three largest rating agencies infinite and they have a very sophistate isticated scale that you can see on the left side. So there is a difference in stratifier between BP plus and BGB minus and BBP because this is like for professionals it has evolved over the many many years. Our take is that for regular users in crypto right now, something simple is more useful because you need to be able to decide which yield opportunities are absolutely let's say let's say guard your trust and fundamentally have a high probability of exploding and which ones are actually good quality and sound. That movement is going to bridge the gap also between institutional investors and crypton natives because crypto natives know Twitter crypto Twitter they look for information they look for people to call out let's say for my friends because some of the solutions are designed from the getgo but as you go into mainstream into regular pling and we abstract away many of the context with crypto some simple form of communicating the risk is essential Who knows that chart? Raise your hands.

Who recognizes that chart? It's a very fresh one. Well, is a chart from Stream Finance XUSD, which was deemed to be a synthetic stable coins coded, which was worth on 2nd of November, a dollar 26 presumably, and then over a course of 24 hours, it dropped to almost zero, like essentially exploded. Stream Finance announced around that time that they had a hole of $92 million in backing for the stable coin and basically the uh whole eruption began because that asset was used in gold and lending markets and and together with it USD went down and a couple of other different people can say well it happens now and then no it doesn't happen now and then there are black events but that was not a black spoon that is fundamentally bad design with very low transparency and high risky operations and that was promising high yield and the crora uh system was not live when US XUSD uh was blowing up because it went live a week ago but we did back testing and looked at even it C rating from DA right so there were some very basic functions that protected it from getting a D but C is a very nasty scale. Like if you look into our scale, it's actually pretty um positive.

So in order to get a C, you really need to be like down there almost at the very bottom. So it just shows that if predator was present at that time, it would have probably protected some of the users that were not in phone because I can explain you how it ex exactly works right now when it comes to allocation of such an asset. Initially the founder and the investors like the family and friends see the initial capital into that let's call it 10 $15 million then the apes so people who look for the highest risk and highest uh rewards are allocating there as well let's call it $105 million you end up having a $30 million asset already and then the middle size uh participants think about the social group so others already that $30 million It's yielding, let's call it 15 or 20%. I don't want to be the stupid guy that is missing out. You start feeling fo.

So you're adding another $50,000 and it's replicated across plenty of people globally. And this asset ended up having at least $300 million in deficit even though fundamentally had very little transparency and was a risky risky um endeavor from the beginning. If there was the raiding early on after the initial seeding some of the people would start thinking okay this is the C let me check other opportunities and actually many other opportunities are B. So then you start thinking hey is not necessarily like the place that you want to put your money. So how do we do that rating?

First we look into the assets because um Crora focuses on rating the final strategies. So not only holding for example XUSD but putting this XUSD as a collateral or deploying capital into a vault. A vault for simplicity you can think about a place where you just throw your money. You don't want to think about it and it should generate you a yield. It's a bit more complicated but for simplicity you can think it way.

So we are assessing the probability for example of loss or of a what is the potential loss giving a default on an asset which is used in such a strategy. Then we check the markets. So we quantify the pro probability of significant loss within a particle market and on morphine each vault is constructed for plenty one or plenty of markets and each market has one or more asset. So it's like many to many kinds of like correlation and we can assess all of them. So if you're just going to ask about the spin glasses we can give you a rating but the most interesting is actually a vault and our our assumption is as we go into this global defy movement and defy and it's going to expand into platforms such as Robin Hood and Revolute and every complexity is going to be stripped away.

So imagine one click on Robin Hood and you just deposit into a specific strategy that is going to give you 6%. Those kind of thinking people would like to expose only the highest standard and most risk opportunities for new users because they are very much risk. So some of the inputs that we put into consideration LT liquidation LTV so what is the actual liquidation moment for the strategies and what are the payouts for liquidators so if liquidators are actually sent by some closed positions when they're underwater allocation distribution so whether utilization is at a high capacity for a market or it's just utilized 10% or more at a lower rate with profile that's very interesting one so we also look at the history of the market and the participants in there if they're actively manage their position. So if for example their collateral drops if they add more collateral or decrease the exposure of the lens on the lens stack or whether they're very passive so they took a lot and they just wait until they're going to be inflated or not collateral trading which I talked about returns distribution so what is the distribution of returns cost during volatility in the market and par liquidity data so what is the slippage and how much of an asset that you allocate into can be sold at a given time to a given slippage. lending markets utilize fundamentally different types of oracles and also look into that.

So this is one of the inputs and I will break it down a bit even deeper because redstone originally is also one of the top oracles of markets. We understand that trade very well. There's the hammer oracle which is many times called the market oracle which looks at the market how you could trade specific assets. So you can think about USDT you don't think about it as a $1 you trades currently on Binance it can be 0.99 right in a large volume it makes the difference exchange rate oracle so you can look at prop state if which is the liquid staking token from LIGO and exchange rate oracle looks at the smart contract of LIGO so what uh if you can get for one rup state if you redeem right now and wait month period versus the market oracle would look at the slippage and how much e you can get if you sell it on the text right exchange and you can also have hardcoded oracles which was one of the problems with stream finance I can bet I was talking with not I personally but my team was stream finance and we were promoting like hey guys you should get an oracle if there's a black if there's a a defect of your asset the market should probably reflect how it's behaving and many of the vault oper operators hardcoded one.

So even though the ass you saw the chart before was trading at 10 cents or even less, they hold the red the oracle at one because this is how they design together. In the market methodology, uh we do a pair price simulation. So here is a slipage curve for Bitcoin. So imagine you're depositing into a vault USDC or bitcoin and the vault is allocating to one of those countries to rapidly. So we look like what is going to be a slippage given specific liquidation profiles and then we also simulate a different scenarios after the liquidation.

So imagine h the liquidation and loan value and whether the asset will keep on plummeting or maybe it's going to start to recover. And if you're going to sell on the decks with higher slippage is going to push the price down ahead and more liquidation scaling liquidations are going to happen. So it's essentially simulation of stress test of different uh situations of the market and what is the final result. So as I mentioned a vault can consist of plenty of markets. So one can be a market with few rating the other can be a market with C rating the other can be a market with D rating.

Then we look on the distribution. of how much money in this specific vault goes into partial markets and we give a rating of the final vault. Why we are so obsessed with our vault? Because this is the easiest primitive. It's the primitive that the general public is going to use because the general public doesn't want to look at their loan values.

They don't want to understand gas. They want to understand all the complexities of D5. They just want to deposit their funds and hope like feel safe that it's not going to blow up and they are not going to lose all the money that they allocate into that strategy. So as mentioned is already uh going live it's live on the back end is going to front end in the next couple of days. Spark as well.

We're already cooking uler. I'm discussing that with compound ama fluid also other ecosystems such as sonana cham and so on. And the goal is to rate as much as possible so that users can very clearly differentiate from strategies that are trash from those that fundamentally make sense and can have money of theirs for a longer period of time. If that's of interest, h feel free to give us a follow on trora network. myself.

I'm Marcelo. Whenever there's a crash, I'm also uh trying to explain what happened. For example, 10th of October was a very interesting one where USD uh the stable coin synthetic stable coin from ETNA defects on Binance on a flash crash to 60 cents per moment causing so devastating liquidations on that particular day. So Ben would like to chat more about lower speed and why it's to win and ask Dr. feel free to question later and thank you very much.

Enjoy your team. Thank you.