Guillaume Nervo, Merkl | Institutional Stablecoins Need a Revenue Distribution Layer

So hi everyone. Um so yeah, Merkel is an infrastructure uh for stablecoin issuer among among others um to distribute their revenue to their end users. And so uh last year so at the stable coin summit I was talking about uh the savings 2.0 uh and it's going to be like a sequel to to to what I was talking about last year. So uh I don't know if you saw but beginning of the week circle stock plummeted from like 20%.

And so it was following the clarity act discussion and also like some some kind of agreement between senators um saying that circle cannot compete with bank deposits in the sense that they cannot distribute revenue just for holding your token. So USDC holder cannot just receive uh yield for that. And so clearly like the market sees that as a as a threat for for circle. And I'm going to try to to show that it's it's not like doomed. Uh there are like other opportunities to to to to leverage on on on this clarity act.

Um so it's going to be in two parts. So I call it run rate fits none in the sense again that uh savings uh like the savings rate as we know it already like a yield bearing wrapper uh just give like a fixed rate for every users and I'm going to say that there is like a better world where you adapt the rates. Uh then we're going to talk about like regulation. So it's mostly US focus uh but uh I think it's what drives the market right now. And finally, we're gonna s like compared to last year where it was more theoretical than anything, it's uh live in production.

So uh last year u again yield bearing rapper um was like the main thing to distribute revenue and there was like some targeting uh um like campaign to distribute revenue but it was uh spread out and not really scalable maintainable and reliable. So what we was seeing with decentralized stablecoin was LP deals. So it was like private deals that you get with liquidity providers um but it was not disclosed and not for the public. Um and on the centralized stcoin side um some are public like circle that had agreement with Coinbase to distribute uh yield to USDC holder on Coinbase uh because it's a public company so they had to disclose that but Teta is also having like this kind of deal with centralized exchange in general and since then so using like a more a more scalable system so Athena has been doing that So targeting specific use case uh PayPal too is also doing that and and reple USD is also also on this. So uh just a few things.

So he was talking uh the person before was talking about stablecoin stable coin stack and uh so stable coin has been around for for quite some time and it start to commoditize in the sense that there's like some corner store like uh component of a stablecoin that already developed by other provider like third providers and you don't need to build it from scratch. So uh some of the thing and and I think the main important ones are like primary market. So how you issue and redeem uh the token so the stable coin in this case uh access to diversification of your reserve. Um so this is like real world asset ts uh credit products and also like defy defy yield. This is pretty well commoditized too.

You don't have to tokenize your US bill yourself. they are like players doing that for you. Um lending and borrowing operation again like a moro oiler on on Athereum facilities um or players that allow you to build on them uh and products built on top. So this is like perpetual and and this kind of other product. And so for me like the the two differentiators that you can have compared to other stable coin or first treasury allocation.

This means uh so um curation of the assets you accept in your treasury but also uh the the percentage of the allocation you allocate for this assets. And this is highly discussed uh again like for for a couple of years. And so I'm not going to focus on that. I'm gonna focus on an less talk uh topic which is revenue distribution. And so this just mean uh to who I should like distribute revenue, how much and how can I distribute it.

Um and I think that's something that has been disregarded by stablecoin issuer in general, but it will come again with some of the regulation we're going to see after that. Um just a quick recap uh on this. So um there's a stable coin supply there's a ST supply which is a yield bearing version of it and so you have like some kind of like formula formula for profits and you want to optimize that when you're like a stable coin issuer. Uh the thing is that okay so you're going to earn some some some yield on your reserves. This is E and you're going to pay some uh interest to the ST version which is the R.

And so first one thing that just like pop up is that everybody has an interest like to deposit into the ST version otherwise you're just losing on yield you have the same risk. So it's just going to tend to one. Um, and so another thing is that the the yield that you pay to the stakeholder is going to tend also like to what you earn because you'll stick with one rate for all and so you need to accommodate everyone. And so in the competitive landscape, you're just going to go to zero for your profits. And so what I proposed last year was to instead of giving like a fixed rate to everybody, you give a rate based on the financial product your user used.

And so financial products uh are just like idle balance so just holding the stable coin uh providing liquidity so it's more native kind of action uh lending etc but also like offchain action and also like less common uh less common rewarded action like uh like you can have like cash back uh on your card and this kind of stuff and so this uh of course like the formula on the right is strictly better than the formula on the left because you have more degree of freedom and so it's better and so what is already working again like Coinbase has an agreement with um with circle to pay 3.5% on everybody on anyone holding USDC uh again tu on on on on centralized exchange but and and also like decentralized stable coin and like onchain stable coin have some mechanism but it's not suited for like hundreds of or thousand of D5 protocol uh hundred of of chain. So you need a solution for that that is scalable that can like enlo anything. So the regulation so last summer there was a first federal law on on stablecoin which is named genius act and it was only focusing on the issuer side. So not on the platform, not on the exchange, not on the wallets, really only on the issues.

And so the part so it's a there's a bunch of stuff stay said here there. But the thing that we really care right now for this talk is uh that issuer could not issue any yield uh to their to their users. Whatever they were doing, they cannot pay some revenue to their users. And so what happened is that there was a gap in the Genius Act that was okay. So we're not going to pay directly user.

We're going to use third parties uh platform exchange. So again the thing with with Coinbase and exchange in general and we're going to pay them and they're going to pay our user down the line. And so there was this gap and so um US senators are working on another law. So the clarity act and as I was showing on the circle circle chart at the beginning there there has been an agreement so it's not like passed yet but there has been an agreement between like the two senator working on this on this on this low and so this say so a couple of things again but we're going to focus on on a narrower part that the thing that was not possible like to distribute yield for the the stable coin issue is going to be extended to platform but for a specific use case which is you cannot just reward for holding the stable coin itself but you can reward it if there is like an embedded risk into owning the the stable coin and so this is kind of like the the thing we were talking about just before which is you will be able to uh provide liquidity to receive reward if you provide liquidity lend to uh to to to some D5 protocol But the thing is like the limiting part is not like the rate you're going to pay but it is the risk that is taken by the user down the line. And so there will be like rule making because it's not clear like what is enough risky or not.

And so there will be rule making down the line to say okay this is risky or this is not. For instance like depositing into a smart contract that doesn't do anything. Is that enough risky? Is it like uh enough to be rewarded? And so uh just like as a quick uh quick uh quick uh uh feedback on what what I said.

So on genius uh platform could do whatever they want like to dispute yield issuer couldn't. Now on clarity they can do both the same thing and they can only reward like based on the risk. Um okay so this was like theoretical before like last year but now it's in production and so you need to have like a couple of feature that's what we develop at Merkel. So the first one is like the per product precision. So the thing about like allowing to distribute a yield depending on the financial product this is a necessity because this is what is happening in the clarity act.

you need to be able like to differentiate uh like users holding your stable coin and what they do with it. Um anti- gaming. So this is more like defy kind of native because we've seen a lot of uh of incentive reward gaming like for instance looping uh your assets against the same assets and like gaming like rewards you're receiving but also like more fintech kind of kind of issue for instance I don't know if you use revolute but revolute there is like the ref points and it's not distributed continuously because it was game by users and so it's distributed afterwards uh to not be um to not be open to to attack. Um after that there is a bunch of rules that you can add and it's more like on the issue side just to protect on the amount you're distributing again to be uh flexible and like optimize your your your your balance sheet. Uh another thing is the composability tracking.

uh in DeFi uh we we take uh pride in in composability but then you can end up with multiple layers of financial product and so you can have like you can want to to reward like first financial product but another financial product is going to deposit onto this one etc etc and so in in Merkel we saw very commonly like six financial products layers and so you need to find back the end users of it and so this is also very important for the regular regulators because if you cannot say how this end users receive the reward, you're going to have some problem like um uh like attest that this user is eligible for for this reward and it's not like in a in a loop of of the regulatorator u chain abstraction is just like to have a an easy interface for for for your users. Um so a few example of uh some some sony issuer that have have used this solution. So Etheina also have like a yield bearing version but instead of distributing like imagine they are making 5% on their on their treasury instead of distributing the 5% directly to the stakers they distribute the base of it. So like 3% and the two additional percent they are using like the thing about targeting specific use case. Uh so one of their program was liquid leverage just to increase the the the size of their which is in the end what stable is are playing for.

Um then PayPal PayPal is actually like playing the game of like clarity beforehand. uh because they only reward like lending uh lending uh financial action uh on different chains. So Ethereum, Solana even if it's not the the topic for this conf but uh on different chain um and a which is more like a defy focus narrative to to help them rep so keep the stability of one go equal $1. uh that we help them uh design to. Um so just a a quick numbers on on Mel.

So we have been distributing like 1.5 billion plus uh tokens in dollar uh for the last two years. Uh a couple of five million addresses rewarded. So it's not really users as you know and and a bunch of as I was saying for the scalability there's like they're going to be like 100 chains and and thousand of protocol and so doing that on your own may not be the optimal because it's the same rule for all the stable cocoon protocol too and so there's like three forces and they all converge to the same thing. Uh first one is the economics.

So as I was showing it's uh uh just suboptimal like to have one rate for all and so you better like adapt to the financial product. Regulation two is also going to ban just basically uh if it's passed on on May or after that um the the possibility to dispute to just raw uh stable coin and competition just because you need to compete on few on few features when you are a stablecoin issuer and one of them and I think the main main one is going to be revenue distribution. Um thank you that's that's all for me.