Recreating TradFi in DeFi: Are We Sowing the Seeds of the Next 2008? | Ben Ward - RockSolid Network

[Music] hey how's it going everyone how's that volume can you hear me at the back cool awesome well hey my name is Ben uh and I'm here today because I wanted to pose the question are we setting ourselves up in defi for a 2008 style financial crisis and a little bit about myself and my background and why I'm interested in this question uh I started my career in tradire uh and I saw how those businesses were run that's what inspired me to join crypto and uh I've been in crypto investing and experimenting since 2016 I've been in the industry full-time since 2019 and in my first role was managing $100 million crypto treasury deploying into various defi strategies and since then have set up uh my own company raised a preed we're still in stealth um but wanted to reflect on all of those experiences to try and provide some insights and ask some hard questions about what we're building in Defi and so the tldr of my presentation is I think defi is starting to show some cracks uh much of what I think we're building in defi feels like a crypto casino and I think many of the products that are being built in defi right now are simply rebranded and repackaged trafi products and in fact many of those products are what led to the 2008 financial crisis now of course all of this is ironic because Bitcoin explicitly was launched as a reaction to the 2008 crisis and Satoshi referenced the crisis uh in the Genesis block of Bitcoin but that said I do think the meow is finally shifting away from the crypto casino and we've seen that just last week starting with mcoins so I think now is an important opportunity uh to reflect on some of those things and talk about what might a better D look like so I'm looking to do that today so why do I care about this topic as I said I started my career in trafi and I saw inside some of the world's largest financial institutions Banks wealth managers all those sort of things and I saw how their businesses were run and I saw the bad incentives and I saw how they treated their customers so that's what originally inspired me to want to work in crypto um that same Insight that same experience is also what's leading me to be a bit skeptical about what's being built right now though because much of what is being built looks and feels like what I saw inside of tradire and so I want to make sure that we don't just repeat those same things in defi in crypto and specifically I think a lot of what we're seeing right now looks and feels like 2008 so we're seeing funds and investors chasing ever higher yields we're seeing innovators building overly complex products in order to address those yields we have experts telling us the math doesn't lie don't worry we've got power Brokers and mercenary Capital that are holding the pur strings and deciding where this Capital gets deployed and fueling many of these strategies and in terms of systems we've got assets and risks being repackaged and reh hypothecated and what I mean by that is assets uh being taken repackaged and passed on to other people in order to generate higher yields that's what we saw with collateralized debt obligations which was the key thing that uh led to the 2008 crisis we've got tides of capital that are chasing yields waiting to be deployed we've got new assets driving up the risk-free rate um and what I mean by that to be specific is we look at Athena for example um people the market sort of describes it as risk-free uh they're paying 9% apy and so if I'm an asset allocator and if I believe that Athena truly is risk three at 9% um then I'm looking at any other opportunity if there's an opportunity paying 5% why would I put my Capital into that when I could put it into a thing there at 9% now what that means is that's driving the required return for other projects higher 9% is now kind of the minimum if you accept the premise that it's risk-free and so you see projects and protocols and investors driving and chasing ever higher yields with mostly more leverage in order to beat those rates um and you hear people saying This Time It's Different um it's crypto it's different now whenever I hear someone say This Time It's Different that raises red flags for me and specifically what we're seeing is old risks and old products simply repackaged with new language so we've got a basis trade stable coin I mean what is that let's be honest it's an offchain hedge fund yes it's been tokenized and it's put on chain but fundamentally the strategies that are being used are just a hedge fund um is it a stable coin I mean that's debatable you could make an argument about that um but those strategies have risk if the fing rate turns negative there can be a risk of asset loss is that stable I would argue not uh we've got risk we've got raking what is that that's simply risk rehypothecation um which leads to a contagion risk as I said that's what collateralized debt obligations were um in 2008 we've got looping and yield amplification what does that mean they're just two giant euphemisms for a lot of Leverage uh we're just borrowing a lot of money and using that to power higher yields there's nothing really Innovative about that that's been happening for thousands of years as long as finances existed um but that's also one of the things that led to the 2008 crisis we've got things that are quote unquote fully backed um are those things fully backed um in some cases yes in some cases no but even where they are fully backed if the asset isn't liquid or that liquidity isn't available when you need it um that also can lead to Contagion uh we saw that with usual money I mean the underlying assets were there they were good for it but at a time of Market stress in January when those assets were required um the liquidity wasn't there and a d EG happened um and finally decentralized we call a lot of things decentralized that's why we're supposed to care about this industry as Builders uh but you know I would argue most things aren't decentralized we see frequently uh withdrawals get paused Bridges get paused when hacks or exploits occur we saw that over the weekend last week um and yeah that proves these things aren't decentralized if a small group of people can push a button and these protocols turn off and even more systemically I'd say at the industry level we like to talk about ourselves as a decentralized industry but in reality there's a core group of people that's early whales early Founders important projects uh you know large Mega funds they control the capital um they control the capital the tvl that's deployed in these protocols um you know it's a sort of uncomfortable truth we don't like to say it one of the actions to trfi or the criticisms of trfi was these billionaires that you know lur behind the scenes and pull the strings now they're a different set of billionaires in crypto but we have just replicated the same systems um yeah so in many ways I'd say that the things that we were reacting to in trafi exist in crypto and exist in defi as well and so like why does that matter and how does that impact the industry and I guess I want to caveat caveat all of this by saying yes we're capitalists we're operating in a capitalist system and it's okay to want to make money and Chase higher yields but that has an impact on the industry and specifically um you know when we look at something that's really core to the ethereum protocol like staking um you'll hear people say why would I want to you know stake for 3% apy when I could earn 10x that in XYZ whatever the latest fad is um and what that means is that defi is riddled with bad incentives there like convolute increasingly convoluted ways to generate more yield there's kind of eyering headline numbers 10% 50% 1,000% yields and these projects are having to do that to compete for attention in this kind of attention economy that we have in crypto a lot of those headline numbers are powered by unsustainable air drops um incentives bribing mercenary Capital bribing yield Farmers to come to your protocol but as soon as those incentives dry up all the capital leaves um and all of this is often powered by increasing leverage as well which um is you know as old as Finance itself as I said but it's just rebranded with jargon and fancy words in crypto um and all of this leads to Contagion um contagion risk and so I just wanted to make a brief aside i' provide a real example that I encountered in crypto um so 2022 this is before um Tera blew up this is before three arrows Celsius FTX all that stuff um as I said I was managing $100 million crypto Treasury and I had really well-respected really smart known people in the crypto industry coming up to me and saying hey Ben you're being negligent with your company's money if you're not putting it into us like it's paying 20% it's risk-free like just go and do it and when I would challenge people who told me that there'd be these kind of handwavy explanations like oh it's algorithmic and oh you can look at it on chain look at the code it's fine um there's these cryptoeconomic incentives that make it safe XYZ fund that is the smartest Fund in the industry they're deployed in it and if they're doing it you should do it too now obviously all of this turned out to be untrue but what I think it's indicative of is this kind of tendency to have handwavy explanations for stuff that you know if you peel it back it's really quite simple it was a panomics around it but ultimately it was unsustainable now you know that's obvious in hindsight and I won't claim to be smart enough to have like pinpointed this spef specific mechanisms or the specific risks in us but something about it just kind of felt off to me the vibe felt wrong and so you know I decided to stay out of it and what I would say is that a lot of things that are getting built in Def right now kind of feel the same to me they just kind of the vibe just feels a little bit wrong like can I tell you what the specific thing is no but I think it's an opportunity to kind of re-evaluate what we're building and what's powering what we're building and ask ourselves some hard questions and you know I like this meme I always come back to it but where does the yield come from like if you can't get a straight answer to that question in one or two sentences in a succinct way I think that should raise some alarm bells and so like why now why did I want to give this presentation now well there's a couple of reasons the first is that the stakes have never been higher um there's more tvl there's more assets locked up in D5 than ever before but also we've got real world institutions participating in D5 we've got Banks we've got hedge funds we've got governments we've got presidents um and if some of these actors get burned um that could have lasting impact uh on the credibility of the industry and hurt us all I mean we just saw that just last week with the Libra Scandal and the Argentinian president I mean it was a failed thing um and in doing so that's like massively changed the meta around mean coins just you know in the space of a day and you know if you want to call mem coins an industry you'd say that's you know impacted The credibility of that industry now you know if we could see a president name your president deployed into Defi and something goes wrong um you could see a similar thing you know reputationally Rippling through Defi and also because of all the capital that's you know tied up in there and all the leverage that's been deployed that makes the impact of a Black Swan event you know even more severe um as this leverage gets Unwound and things Ripple through the industry but more positively I'd say The Meta is at a turning point um the Libra controversy last week like you can finally see people coming and speaking out about how toxic mem coins are I mean I would argue should have come sooner than that and why did it take people so long but you know there's starting to be a questioning of these crypto Casino style Dynamics so I think in defi we have an opportunity to proactively address this and try and make things better before a crisis blows up so that's what I wanted to do and so to do that and to I guess make it more tangible what a blow up might look like um I wanted to walk through a hypothetical and I wanted to caveat all of this by saying I'm not uh you know suggesting that this is likely or you know even may be likely and I'm not criticizing any specific protocol or reaking in general but I just wanted to do this to make it tangible and illustrate how something could Ripple through D with very similar Dynamics to what we saw happen in 2008 so with those caveats um let's just imagine that a popular LRT is exposed has large exposure to an ABS and that ABS gets slashed badly now specifically why this happens it might have been an attack it might have been an exploit might have been a mistake someone was running their software wrong like the specific reason doesn't really matter and in fact you know by definition a Black Swan event is kind of unpredictable or unknowable but let's explore what happens next so the expected path and the path that we all hope for is that uh the collateral gets slashed um but that is contained uh to that collateral and because markets are liquid um the only people that lose money are the rakers but an alternate path um which is something that I'm concerned about is that there isn't enough liquidity so let's say for example that stake teeth is the is the collateral asset um Lio has a finite amount of eth on its platform for redemptions on the smart contract and let's say that gets exhausted straight away uh so now liquidity pools on defi getting drawn upon and as that's happening there starts to be a price Divergence between eth and Stak eth um LP start to realize that and start to withdraw their um their Capital out of these pools price Divergence continues more liquidity is withdrawn and suddenly what we thought was 500 million of liquidity is 50 million of liquidity but that even that is not enough this this uh sort of dep pegging starts to widen stde is trading at a discount and then suddenly oracles start reporting this to defi protocols lending protocols and as I said all this Leverage is built into the system there's all these strategies that are building on top of um essentially just borrowing money and Levering up and as a result these strategies start to be liquidated because the collateral asset is reducing in value so there's Auto liquidations that ripples through the industry um assets keep getting liquidated there's downward pressure on all assets and suddenly um the entire defi ecosystem's being impacted and this is obviously exactly what happened in 2018 in in tradire we had collateralized debt obligations trading at a discount to what they were supposedly worth things got liquidated liquidity dried up in the system and suddenly that rippled through the entire Global Financial system so yeah this is our 2025 edition of the 2008 death spiral replicated in defi using the tools that we created that were supposedly a reaction to to [Music] 2008 so what was bad about that setup specifically it was the a Reliance on centralized protocols and sort of finite pools of liquidity Reliance on fleeting liquidity that we think was there but was not necessarily there there's massive leverage contagion and cascading losses so how would we break that death spiral potentially uh one way would be to have guaranteed liquidity provided by the L1 and luckily what we do is well what we will have is that uh soon via the Petra upgrade on ethereum um Petra powered withdrawals provide instant liquidity and would allow validators to be drawn down trustless from 2048 e to 32 e so in an event where such a liquidation was occurring you could get that liquidity powered trustless by the ethereum protocol itself and what that means is the liquidation would be orderly it's powered by the L1 and that contains the losses within the reaking ecosystem and doesn't Cascade across defi more generally and what's better about this setup is that there's no Reliance on centralized intermediaries there's no Reliance on market makers or um you know specific centralized entities sitting behind smart contracts is guaranteed withdrawals powered by the eel1 and it mitigates contagion and as a result there's no cascading losses so audible side relief that's much better and I guess to kind of wrap this up like I think defi can do better and I want defi to do better I think the first thing we all need to do in this room is be more skeptical and don't believe your own uh as I said I think there's a lot of pretty vanilla tradire products that are wrapped up in a lot of jargon and mumbo jumbo but really it's just leverage um and it's just uh risk um just because it's on chain doesn't make it better inherently so be more skeptical and don't believe your own um we need onchain and protocol powered liquidity we need it trustless I think projects need to keep it simple and be more transparent with what they're building their risks and and where the yield comes from we should be prioritizing real protocol Revenue instead of ponies and you know unsustainable airdrop incentives and we need to be building products that people don't need to be bribed to use they should be using it because it provides them real utility um yeah and we just need to be realistic about risks but all of that's hard and I can say that as a Founder that you know projects are competing against the crypto Casino there's a finite amount of attention out there and there's a finite amount of capital and if you put a headline on your website that says 80% apy risk-free there's not a lot of due diligence that goes into that and those projects are the ones that get the attention so the incentives that we've set up um is why the industry is the way it is and just a brief shill you know what we're building is a new LST that we believe embodies these values and the reason why we're building it is because we were concerned by what we were seeing in the industry uh we're calling it Rock Solid a new liquid staking token what makes Rock solar different is that there's no leverage built into it there's no reaking we're offering the highest apy on the market but we're doing that without adding additional risk um and only exposing users to staking nothing else um and importantly as I mentioned earlier around Petra we're building for that so with our LST there'll be permissionless uh instant withdrawals so you don't need to trust us as a team you don't need to trust our smart contracts for liquidity um it'll be there in the case of Market turmoil um you can access that liquidity and we're supporting solo validators because we care about ethereum and we care about decentralization um we're trying to take share away from these centralized entities that are frankly bad for ethereum so yeah as as I said we're still in stealth we haven't officially launched but just wanted to give you all in this room uh a brief teaser uh if you want to find out more we're launching in Q2 you can follow me on Twitter follow our company Twitter account there uh and that QR code will take you to our website and all of our socials U so you can follow us and and get Early Access um but yeah thanks for having me today it was great giving this talk and um my DMs are open so feel free to DM me on Twitter uh or come grab me and we can continue the conversation in the room after this all right thanks every f