Navigating the Paradox of DeFi and Credit - TOKEN2049 Singapore 2023

perfect thank you very much I was just told by the crew that they handled it like with festivals here so they always keep the last person for the biggest act um so I'm gonna be the last one between you and drinks um so please bear with me but appreciate everyone that showed up so today I'm going to talk about the Paradox of defying credit just very quickly about myself my name is Jacob my background is in startups primarily like consumer marketplaces for everyone in Singapore like food Panda I was one of the early guys for Asia and fintech so I've done a lot of alternative lending in Southeast Asia and then about two years ago I actually started a D5 project called cleopol so cleopol is a D5 credit Marketplace for institutions so basically institutions are being vetted there's some risk assessment being done designing contracts and then they're opening borrower pools and those borrower pools can then be funded by anyone in D5 we've launched approximately one and a half years ago and have originated over 400 million US dollars in loans so into the topic so what is this paradox so D5 D5 the division of D5 is obviously to build a trustless financial system um you don't really need to care who is on the other side you don't really need to care who you're interacting with the only thing you need to trust in is the code so the solution for D5 lending was where obviously they over collateralize Landing protocols such as compound Ave and maker you don't really need to care who you're lending to as a bar you need to post collateral you're getting a smaller Loan in other cryptocurrency if the collateral decreases in value um it's being liquidated lenders are getting back their money that's a great solution now what about credit credit actually comes from the Latin word crede which means trust so you trust you give someone money and you trust that person it's gonna pay you back in the future um obviously something very very different and credit is obviously interesting because it allows us to open up the market to a lot of different borrower profiles but it also comes with a lot of difficulties so that's credit and D5 is credit and dfaction a good fit so um there are a couple of uh protocols that try to tackle this primarily you can map them and to do different um two different types of protocols there's the ones like Maple Finance clear pool and trufi that focus on trading firms as counterparties mainly high frequency trading firms doing Market risk neutral strategies across different exchanges and because they don't have any direction exposure they should in theory be pretty good counterparties the other ones are guys like centrifuge goldfinch and credits so they have fintechs and credit funds as counterparties and basically what's being happening is always some um you know receivable financing so you're basically lending against a deal that is secured by receivables most likely invoices or something like that now how did that play out as you can see here this is the lending volume of the D5 credit players unfortunately it looks a little bit similar to a lot of the crypto charts we see recently some people call it the Christmas tree um you know it it really picked up it reached 1.6 billion dollars at its peak that was approximately mid last year and then I was a bit lazy with the chart so the the the intervals are like on a quarterly level but you could really see that you know three AC and FTX incident this is when it it it crashed down and and and became a lot a lot smaller and there was also a little bit of a shift from the majority of the landing volume being with the crypto native trading firms such as Maple uh trufai and then also clear pool and it shifted a little bit more towards the real world asset receivable financing bonds such as goldfinch and centrifuge one of the reason is obviously that people are not really Keen anymore that much on crypto related exposure the other one is also that those loans are usually longer in antenna so what happens to be honest a lot has happened and a lot of not good things happened there were defaults and people lost money across all of the or five out of six of the the protocols that I just mentioned they were defaults and and people lost money and there were a lot of people saying and I saw a lot of tweets where people said credit and D fight that doesn't really work those two should not be done together so what went wrong uh what went wrong is the same thing that you know went wrong in in C5 there were a company misrepresenting their financials there was an assumption bias we all felt that the Alameda guys are geniuses and there's no way they can lose money because they're sort of owning the casino right um and you know there was an African faint check that you know took the money and violated their their covenants and spending on something else there was also a little bit of a tendency that basically what we just did is we took C5 we put it on chain and then we applied the magic formula which is liquidity mining right so this is one of my favorite memes in crypto you know the humble D5 farmer saying it ain't much but it's honest work right so for those of you who don't know those are like like Farmers yield Farmers or people who Supply liquidity into D5 protocols and then they earn the native token in those protocols and then usually they sell them and you know unsurprisingly a token goes down now when this started you know all of the D5 Landing protocols were fueled by Massive incentives so you had like 40 50 percent um and even 100 was not that unusual not with this protocols but with other ones right now what happened is that a lot of people got into the market they didn't really look what the base yield was they didn't really look for the counterparty was and then later when all those tokens unfortunately went down they were left with very very low real yields and they were complaining that they locked themselves up for several years right it also you know sometimes protocols didn't really do a good job in pricing the risks properly because they had this you know tokens they could just put on top in order to attract liquidity right but let's look at the facts actually Toto lost or total defaults across those six protocols were roughly 60 million which is obviously a lot of money but if you put that you know compared with the uh in relation to the you know 1.6 billion that's roughly three and a half percent um total defaults in C5 actually just the four main players talking about nearly 22 billion dollars and three of them are the main C5 players right so the other day actually I met a founder of one of the large C5 lending players who is still around and he introduced himself with hello I'm the founder of the only C5 lending player that is still alive right so there is slightly exaggerate but not really much um so how does D5 actually improve credit first one obviously very obvious but very important transparency now when you you know put money into the the Celsius Etc you know it was like putting it into a black box you didn't really know what was happening um they had problems nobody knew about it those problems grew larger and at some point they were too large and I think most of us at some point last year we probably received an email that said dear customers I'm sorry but the withdrawals are being held right and then we're gonna resolve it at our earliest convenience and that earliest convenience probably like 10 years if we're lucky we can get anything back now D5 does not does not uh prevent defaults from happening they're still going to be defaults however if anything happens we can see exactly you know who has what loan what is the exact exposure and that can prevent bigger holds from happening right so that's very important I think here as well as an industry we need to do a better job you know just because it's D5 doesn't always mean it's transparent I've seen you know D5 protocols that only show what they want to be seen right but generally if you have anything on chain all the collateral all alone the loan details that is already a huge Improvement second one code is law so you know on our platform if you don't repay within five days it triggers a default when FDX incident happened some of those players reached out to us and asked hey you know can we repay a little bit later can we sort of like um you know discuss about it we said like no there's nothing to discuss this is a protocol this is how the code works you either repay or not so now that is also very important because history has shown more and more very often you know the moment there is any sort of like you know like like restructuring anything is happening people trying to like extend um you know when the default should be called that very often goes at expand events of the lenders so if anything is wrong a default should be triggered immediately and liquidation should be started immediately as well so we see that works really well finally these days you know if if if if anything you know D5 needs to be better than the traditional counterpart is forget the C5 lenders I'm talking about peer-to-peer Landing Platforms in a normal world so liquidity is one of those things where D5 can be better right like Dynamic sort of like models where you have utilizations within pools you can take out the money quicker or maybe tokenization of debt tokens right where you can create a secondary market now that is still in a very very early stage nobody really figured it out but I think D5 can actually solve this and improve it and the last one is composability this is something I'm very excited about we've seen that you know with our protocol clear pool there's a lot of there's several other D5 protocols that built on top of it you know one build a tranching product on top of our pools there is like a urine Finance where you can get access to different real world assets yield sources combine it with t bills there's a lot you can do and more than just Leverage finally why do we need credit in D5 well the D5 lending Market the over collateralized one works well but it's a market of 13 billion the total crypto lending Market is roughly 100 billion right now and then obviously just to put out like a very big number the non-bank commercial and consumer lending Market is obviously a lot a lot bigger so if you want to really you know make D5 more than just a small Market between crypto natives we got to tackle the credit Market uh finally I want to conclude with a a quote This is actually a quote that was not invented by Ronald Reagan but it was used by Ronald Reagan in the Cold War it is trust but verify it's actually a Russian proverb uh I can't really pronounce it I tried pronouncing it with my Russian CTO this morning and he had no idea what I was talking about so I'm just gonna keep it in English but basically during the nuclear uh disarmament right during the discussion with Gorbachev Ronald Reagan you know constantly said we need to trust each other but at the same time we need to verify that everyone is doing the right thing and I think this can be a good slogan for defy and credit and I think you know DFI can actually help to make credit um a lot more transparent and a lot more verifiable so I think we still need to trust a little bit but we need to do everything possible to make it the most verifiable um there is so thank you very much I think this is the last speech I wish you all uh good rest of the day [Applause]