Is the Yield Worth the Risk? | EBC12

Good morning everyone and welcome. I am pleased to be here today moderating this panel discussion at the European Blockchain Convention. Our topic today is topic today is profitability, one of the key concepts in finance, both traditional and on-chain finance. And today we will try to look beyond the loud headlines about the annual percentage rate. Let's try to ask a few fundamental questions.

Where does profitability actually come from? What risks are inherent in it ? Who ultimately bears these risks? And perhaps most importantly: when is the profit really worth taking on these risks? To answer these questions today, we have three great experts taking a look at the topic.

With us is Adam from Rockaway. With us are Dr. Nick Almond from Jito Network and Aldrin Damasa from Headout. So, let's hear their perspectives. Let's start with Adam.

Could you briefly introduce yourself and tell us a little about your role at Rockaway? Of course. Hello everyone. My name is Adam. I'm from Rockaway X.

Excuse me. I am primarily responsible for market- for market- neutral strategies through our core fund, the market- fund, the market- neutral fund, which we launched in 2022. We started as a specialized lender because we saw a lot of opportunity in a market where traditional banks didn't want to go, in the crypto space. They don't want to come in even now, although it's becoming a bit more popular. So at that time the industry really needed a lot of capital, so people were willing to pay a good interest rate on loans.

And then it grew into providing liquidity to DeFi liquidity to DeFi applications, essentially on-chain applications, and collaborating with founders. So, the fund's value proposition is monthly liquidity and double-digit returns double-digit returns . Thank you, Adam. Next up, we have Dr. Nick Almond from Jito Network.

Nick, could you briefly introduce yourself and explain to those who don't know what role Jito plays in the ecosystem? Yes, good morning everyone. My name is Nick. I am the head of the management department at Jito. I'm kind of an "old soldier" when it comes to DAO issues.

I have been pursuing the dream of building decentralized organizations for a long time. At the heart of Jito's operations is the DAO. We are one of the oldest projects on Solana. We just celebrated our fifth anniversary. And now we are working on the entire Solana stack, starting from the protocol layer.

So our first big project, and probably the one we are most known for, is our liquid staking token Jito SOL. It has the largest asset volume of all LSTs on Solana, with about a billion dollars under management. This is kind of the centerpiece of the profitability conversation. And recently we started working on the infrastructure for building blocks. Last year, we launched BAM, which aims to create high-precision control of market microstructure on Solana to allow institutions to obtain deterministic block ordering block ordering .

And just recently, we focused on consumers and launched a product called JTX, which is a trading terminal that gives people access to all assets on Solana. Thank you very much, Nick. And finally, we have Aldrin Temasa from CowDAO. Aldrin, could you introduce yourself and CowDAO? Yes, thank you.

Very happy to be on stage again here at EBC. So, I'm Aldrin. I am responsible for all legal matters for the CowDAO core team. CowDAO operates Cow Protocol and CowSwap, which is the main DEX CowSwap, which is the main DEX aggregator on the Ethereum network and EVM chains. One of our unique features is that we implement MEV protection directly into our system.

So it's a good place to trade. Yes. Thank you. Perfectly. So let's start with perhaps the simplest question before deciding whether the return is worth the risk return is worth the risk .

Let's try to understand what . Let's try to understand what exactly we are being paid for now. So, Adam, a question for you. Is there anything that deserves to be called a risk-free on-chain bet? And if not, what do you think is the closest to it?

Okay, that's a good question. Honestly, I don't think there's such a thing as a risk -free bet, not just online, but in traditional finance traditional finance . In school, we were taught that government bonds are risk-free. Of course, when we say "risk-free," we mean the absence of counterparty risk, i.e.

, the risk of default. I have seen several governments declare default. So I don't think default. So I don't think anything is risk-free. Furthermore, even now, even today, when you look at, for example, US government bonds, you may not see counterparty risk, but you definitely have duration risk.

So if you bought a 10-year bond or a US Treasury bond 2 years ago, I think it would have been worth about 92 cents on the dollar. So, if you had to sell them, you would have to record a loss. I think blockchain offers a much better value proposition from this perspective, and I believe the closest thing to a risk-free rate is lending protocols. There are quite well -known lending protocols, for example on Solana, such as Camino, which historically have not had any incidents related to smart smart contract risks, etc. And you can provide loans against high-quality collateral, like Solana, Bitcoin, or Ethereum.

This is a very simple and understandable tool. The advantage is that liquidations happen automatically, by code automatically, by code , so there are no margin requirements or relationships with a banker. It works like this : if you are to be liquidated, you are liquidated, so the creditor is protected. You get about 4% return on such deposits, and I believe that this is the closest to risk-free income risk-free income that we have. Okay, great.

Great idea. Nick, do you agree with this? And also from a staking and infrastructure perspective, what exactly are investors being rewarded for being rewarded for when they earn from staking? Where does this staking income ultimately come from? Yes, the question “where does the income come from” is something that for a long time in the cryptosphere was better left unasked, but I think we are now starting to get a clear answer to it .

I think there is no such thing as "risk-free", right? Risk cannot be completely avoided, but aside from stable credit markets, I believe that LST, effectively as a staking of the underlying asset on Solana, is as safe an income as is possible on this network. Jito SOL is effectively equivalent to the underlying asset. It is the same liquid asset for trading, so it can be used in Camino and other DeFi Camino and other DeFi projects. The profitability that underlies this—I honestly think it's a very interesting thing from a financial perspective.

This profitability is fully auditable at all stages auditable at all stages . When you look at the profitability of gSOL, you essentially get network inflation. Solana issues coins and gives them to validators to secure the network, which is how most Proof-of-Stake networks work. So, part of the income is an inflationary reward. We just voted to reduce this core inflation.

But on top of that, there are priority fees, where people try to get into the block as quickly as possible due to arbitrage opportunities or the launch of new tokens that are causing a stir. And this creates additional income above inflationary rewards. And we also have the so-called gSOL tips - this is an have the so-called gSOL tips - this is an additional economic mechanism economic mechanism that allows you to get priority in the block queue. This means that you have an asset whose return is directly proportional to the activity of the network. So you don't have to wait for quarterly reports or anything like that.

You can check the profitability at the level of each individual block. It is completely proportional to the level of adoption of the network, which, in my opinion , is a very interesting source of real economic value. Thank you very much, Nick, for the educational course on staking. Finally, Audron, a question: when someone tells you, say, I get 7-9% return on staking, what does that number mean to you? What questions come to mind immediately after being told this to understand whether it makes sense or not?

Yes, when I see an API like this, it means almost nothing to me . Of course, questions arise: where does this income come from, and what levels have been implemented between the validator and the user. Is the person offering this 7% a the person offering this 7% a custodian? Does this 7% this 7% resttaking require any liquid positions? All of these additional levels, which can be technical or organizational, carry additional risks.

So that's what I'll be looking at to understand if this return is worth the risk. Of course. OK. Now, obviously, we know that the only constant is change. We would like to understand how on-chain risks have evolved recently or how they are changing now.

Adam, from your perspective, has investing in the net become safer over the past few years? Have we become better at understanding, structuring and assessing these risks? Is it perhaps riskier now than it was in the past? Uh...Honestly, I think we've definitely improved the risk situation.

Risk management has definitely improved. It's a little funny because I came into the industry in 2020 after the "summer of DeFi", mainly because I saw... It's a little bit counter to what people see, because they usually see headlines like, "Oh, it got hacked." "It's broken." "That's how much was stolen."

"That's how much "That's how much was stolen." "That's how much they stole." But I believe this is more a consequence of poor management than the risk itself. So, you know, I joined the family office then. We kept our money in a Swiss bank, and we were actually earning a negative interest rate on our savings account.

That is, we paid the bank to keep the money with them, which is simply absurd. And you know, you could go online and generate 20% risk-adjusted returns. You could have gotten more in 2020-2021, but then you would have been exposed to unnecessary risks. And look, I have proof of this. If you look at our fund's performance, for example, we have only had two losing months since inception, that is, over the past 5 years.

And the maximum drawdown was 2%. This simply shows that it is possible to manage cryptocurrency funds on the blockchain relatively safely and receive very good adjusted returns. But certainly if you look at the returns and the risks, the risk has decreased, but the returns have also decreased. So I would say the risk-adjusted return remains the same. It may be smaller, but the risk is also smaller.

OK. Thank you very much. Nick, from an infrastructure perspective, what has generally changed or improved over the last few years in terms of security, validator infrastructure, liquidity, or maybe what do you think is the biggest change? Yes, I think it's been an interesting few years. I think we are entering such a phase of maturity in the cryptosphere.

And, first of all cryptosphere. And, first of all , I think there's a very interesting phenomenon where the market and, you know, these are open cryptoeconomic systems. Anything that can be broken will be broken, right? This is a kind of Darwinian evolution of the network. I think the overall security model has changed a lot because of AI.

I think we've seen a lot of security issues related to the use of AI. Most recent hacks are not breaches of smart breaches of smart contracts. These are compromised keys. That is, these are people who literally befriend others at conferences, and then it turns out that they are North Korean terrorists. These are the things.

So yeah, beware of that. But yes, I think the security model has improved overall. Regarding these smart Regarding these smart contracts, we are now moving into the world of formal verification. This is a double- edged sword. AI now, we just kind of stole Navier-Stokes using this economical process, and with AI we can do it with smart contracts.

So I actually think that the most secure systems are going to be blockchain blockchain systems, because you can. So I think we're going to end up in a world where the crypto world is more secure than secure than any existing web 2.0 infrastructure. And in general, the entire market has evolved, for example, we have eliminated sandwich have eliminated sandwich attacks from the network. For example, Solana now has a very, very low number of sandwich number of sandwich attacks, and things like BAM, a product that we launched, allow us to verify every transaction from start to finish.

So people will start to people will start to really study the entire transaction flow, understand everything and feel quite confident. But I agree that with this maturity, we are no longer getting those crazy double-digit or even triple-digit returns that we used to enjoy. And that's okay. Yes, absolutely. Certainly.

I think everything fits together. It is estimated quite accurately. Yes. This is great. Azar, what are your thoughts on this?

Do you think the risks have been minimized, or as the ecosystem matures and becomes more complex, new points of failure emerge and the risk surface increases? What is your view on the current situation? Yes, I will be very cautious here, as a lawyer, in the sense that on the one hand, I believe that a lot of the risks have been minimized over the last few years. Why? Because, as Nick said, the infrastructure is maturing.

We see very strong professionalism among the validators themselves. It's no longer just guys in a garage validating the network. Additionally, I also believe that auditing standards are getting better, despite what we saw last year with the hacks, but again, it was n't the infrastructure itself that was being hacked, it was social engineering. So in this matter, the risk, in my opinion, has decreased. On the other hand, now that these risks have decreased, we have the opportunity to have the opportunity to really play with assets.

We have the opportunity to multiply the effect of the asset. But from the moment you start multiplying the effect of an asset, you also multiply the risks. So, which operation carries which risk in the transaction, in the process the transaction, in the process , and here we don't have enough visibility enough visibility , or at least it's very difficult to understand what risks have been added to the process. So, yes, that's my question as a lawyer my question as a lawyer . It depends on the circumstances.

There are advantages and disadvantages. Good. OK. Let's now move on to the investor's point of view. Adam, in your opinion, what kind of yield is actually attractive enough to attract serious capital allocators to the network?

Do you think there is any specific minimum bet that is worth keeping in mind? And what, in your opinion, needs to happen to consider such profitability sustainable? Over 10%. I mean, it's simple. Look, I don't want to say it's easy, but we've seen projects but we've seen projects that scale.

You actually need to offer more than 10% offer more than 10% at least initially to get real demand, right? We initially worked with a project called Henri, which is the fastest growing RWA on Solana. They have a token called ONYC, and they give you access to essentially the reinsurance market. The project was closed for several reasons. I won't go into details.

Maybe I'll tell you if we have more time, but overall they've scaled because the yield is over 10%. And the reason is that then you can integrate into other protocols like Exponent, you know, you can break the yield into tranches, you can have senior and junior tranches, you can put it in Camino, you can borrow against it. So, you, as a user, can create your own exposure. And that's how they scale. This is actually the most used token on Solana in the RWA space.

It's not like you just come in and force people to buy it. People really enjoy working with it. And that's the reason why it scaled. We've seen a lot of this because we help RWAs scale in general. And we've seen a lot of people come to us with 6-7% yields, and my response is just, " response is just, " Guys, this is really hard to scale, because if I can get 6-7%, I can just go and buy U.

S. Treasuries today at 5%. So what is the reason for people to take on the risks of smart contracts and learn about this area? You just need to offer something unique, and 6-7% won't help here. And there is not even an option to "loop" the token, simply because you need to find cheaper financing cheaper financing .

So, someone has to lend you money at 4 or 5% so you can roll it over at 7%. And today it is very difficult to find a lot, especially a huge amount of capital at 4 or 5%. OK. Everyone take note. 10%.

Don't settle for less. Um, Nick. Nick, what, what, what, what can, um, what can on-chain on-chain markets offer that traditional financial markets can't? That is, what is fundamentally different fundamentally different ? Yes, I do believe they are fundamentally different in some very interesting ways.

So if you ways. So if you , if you consider that I spend a lot of time thinking about the market structure, the microstructure of the market microstructure of the market , how transactions happen in each block transactions happen in each block . If you look at the order book that you use on something like NASDAQ, it's almost a two-dimensional market, right? This is volume, price, depth. Um, and in, and in the blockchain market structure, you have this compositionality between all these different projects across the network.

So in network. So in any given block, you can combine several different transactions into one single transaction, send it in a batch, and execute— batch, and execute— you can borrow, you can arbitrage arbitrage , you can do all of this atomically in discrete time. It's really a different market structure, is n't it? This is a radically new way of thinking about finance, and I think it's a huge, huge opportunity. This is, um, a fundamentally different design.

Um, and we can also design this space. So, um, using BAM, we have the idea of ​​plugins. Um, plugins allow you to manipulate the ordering rules, and everyone can see and inspect them. Um, and it allows us to post things like market maker updates for oracles and so on at the very beginning of each block, which means you get this incredibly fresh price that you can then use for arbitrage. The result of that is that we get things like a proper AMM market structure, which on Solana is now so competitive that you can get slippage of less than one basis point on $10 million orders.

Um , we actually outperform the best levels, you know, like VIP 9 on Binance. Hmm, it's better in the online store . So trading on-chain is simply better, and I think that will continue to be the case. I think they will be more liquid, more structured, and provide broader access to a variety of assets. Okay, thank you.

Odume, from your perspective as a legal and compliance expert, how much of these benefits do you think are retained when institutional regulation and control are introduced? What is the impact of this? We can potentially retain most of the benefits of blockchain and DeFi, even if regulation brings some new restrictions. The bottom line is that, in my opinion, we don't want the regulator to try to transfer the traditional financial intermediation regime to DeFi participants. Why?

Because, as Nick said, we live in a world where composition is key, and every participant adds something to the operation. And what we would like to see, I think, to preserve all of these benefits is to really regulate risk. You are a custodian— risk. You are a custodian— you are regulated as a custodian. You are a money transmitter— money transmitter— you are regulated as a money transmitter.

You don't want to have a concept where one participant has to be able to control, stop, or cancel everything. cancel everything. First, we don't want to see this, because then all participants, from the smallest to the largest, in a single operation or transaction would have to act and block everything. And secondly, it's simply unrealistic simply unrealistic . Where does the risk arise?

At what point did we reach a breakdown? And was this risk regulated? This is what we need to strive for. So, we can potentially retain most, if not all, of the benefits of blockchain and DeFi without bringing back the intermediaries that were eliminated by the very design of blockchain. Of course.

Now, the last round of questions, very briefly, for the end. Try to answer as concisely as possible. Adam, what source of on-chain what source of on-chain income do you find most attractive today? Reinsurance. Good.

Nick, what risk do you think the market is overestimating today? I think people are focusing too much on these on these permissioned blockchains. They start to think that not having permits not having permits is a bad thing. I think institutions are being pressured to avoid permissionless networks and use things like Arc, which launched yesterday, which launched yesterday, which is a set of validators with limited access. In my opinion, this is not even a blockchain.

So, yes, I think the risks of decentralized finance are exaggerated, and you know, anyone can work with it and stay within the legal framework. Good. Finally, Aldrin, what is one risk that you think the market is underestimating? The most likely, and from experience, most likely, is the combination of all risks. Good.

Thank you very much. Thank you all, thank you very much Adam, Nick, and Aldrin. I hope this was helpful to all of you . Thank you very much, guys. Thank you.