Are RWAs the Answer to the DeFi Boom-Bust Cycle? Niklas Kunkel - Chronicle Labs

awesome okay uh I think we can get started so hi everyone uh my name is Nichols kungle uh little bit of background on me um I've been in the crypto space for quite some time uh was part of the uh founding team of maker Dow uh kind of late 2016 early 2017 um and uh was a maker for about six years before before starting Chronicle um so what I kind of want to talk to you about today is real world assets um but I I want to talk about them more with the lens of how can they help defi um because defi has a problem um and and it's it's not what you might think so um very quick shill on Chronicle is we are uh an oracle protocol uh that's spun out of Makow about 2 years ago uh we currently secure about10 billion in TBL uh making us the second largest Oracle in terms of assets secured uh behind chain link so I think in order to highlight what the problem with defi is uh we have to talk about maker for a second and you'll understand why so here's a graph of the revenue that maker is earned going back to uh 2021 and so if you kind of look at the dates what you'll start to kind of realize here is that um there are very you know much like Peaks and valleys that correspond to you know the uh let's say the hype cycles of crypto right so in 2021 we had defi summer right uh you know going into 2022 right we had uh you know the the bull run right um and then going into 2023 right yeah things are starting to pick up again but we have this massive spike in Revenue um and it's a little bit different than the others and I I I think you'll understand why in a second so where is all this Revenue coming from well uh if you go to this is from maker burn.com so you can verify all of these numbers yourself in in real time um and what you'll find is that Maker's currently making around $155 million a year uh just from Crypt backed loans so these are are you know uh loans against ethereum against Lio Stak eth against rap BTC um and including right um uh kind of credit delegation to to spark protocol right which is a kind of a a money market that uh that formed in uh in in late May of last year but I think the more interesting piece is actually where is all the other Revenue coming from and so a really good chunk of makers revenue is coming from Real World assets and so why is this relevant why why is this important well if you look at this history of like maker Dow's revenues you know going back to to 2020 uh what you'll find is that in the blue you have Revenue earned from uh Crypt back loans and and the the problem emerges that people only want to borrow against crypto when they want to get leverage and they only want leverage when number is going up and so what you'll find is that D5 protocols like maker like a like compound uh you know like Moro um they have this problem where you know they make a stupid amount of money in the bull market um and they you know size up their teams and they you know expand into new product verticals and then the bull market ends and their revenue just drops off a cliff and all of a sudden they have to downsize right and they have to do these Mass layoffs they have to cut off you know um interesting like Innovative new product verticals that they were attacking right and they kind of go into this like survival mode just trying to make it across this uh uncertain uncanny valley before kind of the next cycle and so um I think two maker credit they they recognized this very early on and said okay uh we really need to diversify our revenue streams um and so real world assets was like one really attractive opportunity to do that right and so you were able to um kind of smooth out this Revenue curve right where um you don't just have like this boom bust you know between bull markets and bare markets right uh you can at least have some floor to revenue that you'll receive from The Real World asset side right and so here you can see that right now you know maker revenues around uh I would say 65% of them or or maybe a little bit less I think around 60% of them right are coming from Crypt back loans and the remainder is coming from from Real World assets right and that's like a very healthy uh type of distribution however um there is no free lunch right um rear World assets are not this magical uh solution where you can just wave your wand and just start printing money like Financial Alchemy um there are serious kind of pitfalls uh that you have to consider um and I think the way that Protocols are going about it right now is is not the way that it should be done so right the the first thing that you have to understand about real world assets is and and this is going to seem very obvious right but it's important is that they're not crypto native right the the asset um that we're talking about right is not like an ethereum token or a Bitcoin token right it is something completely independent where the onchain token is a representation of something offchain um a good way to like imagine this actually is bridged assets bridged assets are kind of a halfway analog between crypto native tokens and between real world assets and what I mean by that is um when you say you know you bridge um you know ethereum from you know some eth from ethereum to uh another chain right or you bridge some die from ethereum to to another chain what you have on the other chain is not actually ethereum right it's not actually D it's just a IOU that is redeemable uh in the bridge you know that uh that you use to bridge right um and it has very different properties right it's it's not the the actual eth right it's a eth with a little asterisk on it right um and and that has kind of dramatic consequences right it means that uh the liquidity for you know a wrapped ethereum or a wrapped D on on some kind of L2 right is completely different from the liquidity for Native die or native ethereum on ethereum and so when you have a lending protocol right that needs to do liquidations it could be that you know Dy is super liquid but not on that chain right and so the risk profile of the asset has changed considerably because it's not the native representation of it and so this is the same problem but exponentially more complex that you have with with real world assets and so um I think there's kind of three or actually even even four kind of main problems uh that you have to kind of deal with when it comes to rwas uh the first is ownership um most rwas that you uh that you encounter today they're not they're not Bearer assets right uh if you happen to be transferred the token on chain uh it is very quite variable depending on which rwa you're talking about whether it's actually redeemable for the underlying asset right there's all kinds of um compliance restrictions like that that can come into play the other is liquidity right um you know we can talk about say like uh tokenized treasury bills treasury bills are one of the most liquid markets in the world right actually it might actually be the most liquid Market in the world however a tokenized representation of a treasury bill has no you know uh the liquidity of that has no correlation to the underlying liquidity of um of uh that that's represented offchain right and so this is something that D5 protocols then have to deal with right because uh they uh they have to make a choice right they either say well um we can't we either can't liquidate onchain because there's not enough liquidity and so we have to incur this time penalty of liquidating offchain or you know we're going to liquidate onchain because we can do it instantly but the liquidity profile of that is extremely diminished compared to the uh the native asset right and so the last is kind of counterparty risk and so this I think is actually the most relevant um because uh real world assets are quite opaque right when you see a token on chain that's kind of the ux of the the real world asset it's not actually you know the guts and what's like you know uh what's happening behind the scenes right so um just to give you an example of how an rwa might be issued right uh you could have a trust and that trust could have a you know beneficial owner that is some onchain protocol um that trust right is then connected to a broker right and the broker is the one responsible for you know uh doing you know asset transfers right security purchases sales whatever then you have another party that's a custodian right uh frequently you know this could be uh some kind of custody provider sometimes even a bank right sometimes even a very large bank and then apart from that right you could have an auditor right someone who is auditing um that uh and asserting right that okay something is actually in custody or uh asserting that you know the pur purchases and sales that a broker made you know are are actually you know that their claims are representative of what actually happened and so you have an enormous amount of parties that are uh that are present you know just for the generation and issuance of this one asset and the the problem is from any dii protocol that is now trying to integrate that rwa um they're presented with this huge puzzle of counterparty risk where each of the parties in this equation has um a significant amount of moral hazard right to uh to not be entirely truthful um and so to you know to to give you an idea of why that might be the case like uh let's let's take a look at maker as an example right uh maker has around I think1 and A5 billion dollars in credit extended into uh rwa kind of treasury bill exposure now um maker would like to you know be sure that you know those treasury bills like one you know actually exist that they actually are in custody that they actually have the exact kind of duration uh that they're expecting that they have the exact kind of yield to maturity that they're expecting you know for uh something that might not be T bill right they might be interested in a certain risk adjusted yield or a certain uh net asset exposure to a certain uh asset class right in in that portfolio um the problem is every single actor in this chain has this moral hazard to lie right because as long as maker is supplying credit all of them are making money on fees as soon as maker cuts off that credit line right all of them are not making any more money anymore so so when it comes to the reporting of this data um you you run into this problem that you can't actually trust any of the individual parties right you can't trust the broker when they say I purchase this Bond you know with this qip with this you know duration with this yield uh you can't trust the custodian to tell you yeah yeah yeah I have all of this in custody uh you know pay me my my basis on you know uh what what I'm holding in custody for you you can't trust the the auditor like on their own and so you end up with this web of of actors and people and institutions that are quite opaque and so this is this is kind of the the the monster problem that defi has to overcome in order to successfully integrate real world assets and so what I think needs to happen is that we need to get rid of the opacity and we need to get rid of the um manual kind of reporting of data and we need to get rid of the trusting of any individual provider of data and come up with a solution that allows defi protocols to have have real time Automation in response to real time data and so let let me explain what this means right it means that you need to have automated reporting by all of the different entities in this chain it means that you don't trust any of the data that any of them individually report and it means that you try to get symmetry right um what do I mean by symmetry well if the trust says gives an instruction to the broker hey please purchase you know um $10 million of you know short dated treasury bills with you know the following kind of uh duration it should match up exactly with what the broker says uh that they made in purchases it should match up exactly with what the custodian says you know they receed from the broker and are not custody it should match up exactly uh with what the auditor right is confirming that the custodian has in custody right and so only through this information a symmetry symmetry can you actually uh report data with a high confidence interval such that um you are minimizing the moral hazard of of getting this data from any individual actor and so now once you have this data and you have uh this real time uh broadcasting of this data to defi protocols now there's a ton of stuff unlocked here and so what you've really created is is an oracle but I want you to break out of like this mental sandbox that you have of an oracle just reporting price and start to think of how much more useful it can be when a Oracle reports metadata that is anything but the price right um you know when it comes to say a portfolio of bonds right you want to know what is your asset exposure to a particular asset class right you want to know what is the delinquency rate of of that portfolio um what is the term you know uh so what is the duration risk right um when when protocols have this now they can start making all kinds of automated decisions whereas right now they're just using oracles to decide do we we liquidate or do we not liquidate now protocols can say well um let's let's use yield as an example yield optimization well in this rwa over here we're earning 4% but in this one over here we're actually earning 6% so let's automatically red delegate credit from this rwa opportunity to the second one right uh same thing with like asset exposure right we think we have two to much exposure to you know uh us issuers or to Singaporean issuers right we want to rebalance some of that exposure let's red delegate some credit from this bucket to this bucket right uh you could even think in terms of like Risk adjusted yield right in ter instead of just absolute yield right um now it it's also in terms of safety right um when an rwa starts to have kind of uh starts to express you know undesirable behavior in terms of um you know one maybe non-performance uh but two uh jeopardizing kind of the the credit health of the position right the D5 protocol will need to have circuit breakers right in place that can allow them to uh react in an automated fashion right so a good example might be the the uscc dpeg right uh protocols like maker like a like compound were uh very much not prepared to handle um the uscc dpeg because it required manual kind of intervention right and not necessarily manual intervention from say the team but manual intervention from governance and so these having these automated circuit breakers is the only way to ensure that like the D5 prot article is not the one left holding the bag so so to speak right so this automation is really what is kind of critical to drisking um the integration of rwas into D5 protocols and oracles are the way that we're going to get there right but again it's only going to happen if we if we drisk the oracles from from the moral hazard right and we we just get a symmetry of of information so um should come as no surprise that this is you know what we're building at uh at Chronicle um and so if this interests you um you can come build it with us uh we're looking for backend Engineers we're looking for smart contract Engineers we're looking for you know devops infrastructure Engineers um all all kinds of technical people so um if this interests you you know um you know come up and talk to me or you know you can reach out at uh hello Chronicle labs. org um you can also if you just want to learn more about us or keep in touch right uh you can follow us on Twitter at Chronicle Labs uh or come check out our website chronical labs. org so um I think I have like a minute or two for questions uh so I'll uh I'll just leave it there cool what's up I can all right yeah just [Applause] Shout