Fireside: The 3 Sources of Yield for Stablecoins

hi I'm Sam I'm co-founder CEO of Phoenix labs and uh we're focused on uh building out spark which is um a subd dow or star in the sky ecosystem formerly known as maker Dow so we're responsible for allocating the balance sheet for uh usds and deploying it into lending markets such as uh spark L which is our Flagship uh lending Market as well as we deploy into like a Moro uh more recently fluid so really we're just uh allocating stable coins across all of Def all right given the title of the fire side uh can you give us a quick refresher on the three uh sources of yield yeah so and I want to be clear this is uh at the when you get to like a large scale like billions of dollars this is like scalable yield I'm talking about so um there are three primary sources that we have access to right now within Defi and I'll go over um historic how we've uh how we've had access to these so um the first one was uh actually uh crypto over collateralized loans so this is the original um maker protocol that like everybody was familiar with you have a CDP um you have some eth you stick it in a CDP and then you can mint uh the die stable coin so the yield from borrowers who are uh depositing the eth collateral and usually they're using it to lever up this is a yield that people are willing to pay and it's a real yield and so this is the first yield source that we've been using at scale and then in uh 2022 as we saw the rise of uh interest rates we saw lots of tokenized T Bill products come online and so this is the second one which is um treasury bill yield which is because of the um because of the interest rates going up the zero yielding stable coins such as uh tether and uh usdc um there was this pressure to have a yield bearing stable coin so now um D was able to onboard this as another ma major yield source so that it could get access to the risk-free rate and then the third one which has largely been um more privy to um you know funds and you know centralized actors now is on chain this is the uh funding rate that's available on centralized exchanges uh so this is uh most popular example of this is Athena which has tokenized uh this this funding rate and so this gives users in defi um access to this yield and all of these so the the capacity of T bills is quite large um it's basically infinite compared to the size of Defi and the crypto over collateralized loans and the funding rates have the scale about tens tens of billions of dollars I think you briefly covered this in just your answer right now but um given that usdc and USD are the biggest stable coins in like the entire space uh how do yeld bearing ones kind of compare like why are they yeah so I view their stable coins is a very overloaded term I view actually them as two main categories so there's feedback stable coins and in particular usdc and USD are fairly dominant in this so you have onshore dollars offshore dollars respectively um and so these sort of act as the money layer the M1 of the onchain environment so they're all fully backed by um fiat currency and Banks and treasury bills stuff like that then there's the next uh level down the uh like the hierarchy of money if you will so if uh the usdc usdt or M1 usds sits as the largest um M2 or the credit layer so as credit you're able to um ex the capacity can actually be much much larger um and in exchange the uh the stable coins are more like the onchain banking system broad banking so you can do lending through cdps you can do lending uh through the basis trade um and what this means is you're running a fractional Reserve which allows you to have a higher yield that out outperforms the uh risk-free rate and so um yeah this is kind of the environment and this this is the main differentiation between something like a usds and and usdt usdc okay cool slight pivot I I'll give you some time to talk about what you're currently doing could you I think you briefly explained what like the relationship between spark and uh maker but perhaps maybe talk a little bit more about that yeah so I think it's a useful analogy but um you know it's not exactly true but it's like it's useful analogy to think of Sky um with the the way it's uh transformed from the previous um everything in one like Dow maker Dow setup sky is now transitioning to having a uh what is similar to a central bank it's it's not a central bank but it's a it's a useful analogy and then the subd Dows or otherwise known as stars spark being one of these are more like the commercial banking uh side of things so doing lending more with users um and you know accessing uh more distribution channels whereas sky is focused on basically doing wholesale lending uh to subd Dows like spark and then spark can really focus and uh meet the users where they're at how does this tie into like the three sources of yield that you just mentioned um what you're doing at spark um so with spark I mean there's kind of been an evolution here so we started um with launching a lending protocol and we connected to the sky balance sheet by having this um Amo direct injection into the protocol which was really the thing that grew it from zero to um one of the biggest lending markets in the space within the span of like less than a year um but this sort of strategy of directly injecting liquidity into uh protocols we've we've moved on to like a generalized version of this which we're calling the spark liquidity layer which now works uh multi-chain so and it works across all stable coins so previously we were just doing usds and now we support usdc and soon we will support tether as well so the idea is that like lending markets across um you know you have your a on arbitrum or Moro on base or you know a on mainnet or spark on mainnet whatever the idea is that we will just do a direct liquidity injection into each of these protocols so that users um can get the the best borrow rates possible on whatever whatever application they choose to use so the I think the best way to think about this is that um to within the capacity of the sky balance sheet which is quite large um we're able to solve uh US dollar liquidity fragmentation within um all of defi essentially Every Chain that's that's supported and so right now we're on ethereum we're on base uh we'll be launching on arbitrum soon we have salana and so um yeah this is really just the idea is to remove the friction that comes with the liquidity fragmentation with this multi-chain uh world that we're living in right now and on the uh other side is we have so this is the the borrowing side so we inject liquidity into other lending markets on the um if users want to uh lend out their stable coins so say you have usdc you're on base and you want to get a yield you can just uh deposit it into the the savings rate there this is available on the um Spark app so yeah it's really just like a no-brainer way to get access to the aggregated yield across all of uh defi CI and trafi perfect we have two minutes left I want to end it on a somewhat positive note I know crypto's been kind of going wild especially every Friday there's something new that happens last Friday there is a large hack one of the largest crypto hex ever bip it lost approximately $1.5 million to the the pesky North Koreans um but previous Cycles uh this exploit would have caused major like uh Cascades in defi like just tons of uh other hacks going on um I guess what has changed this cycle like why didn't that happen I mean so much like last cycle was was was just craziness like there was teruna like these things by Design were just complete nonsense um now we actually have like sane constructs so um The Exchange hack is one in particular that's like an event that you know well we don't like it to happen you know it's something that pla ibly will happen and so having the risk controls in place that we haven't seen in the past such as segregated custody of funds is uh super important I think this is a a point of resilience that I think was not there last cycle like um you know everybody's just throwing money around and it was like of course the whole thing was going to explode so having it it just demonstrates the importance of having proper risk controls so I think um the buybit hack was a very good uh test run run of of showing that the resilience of these modern systems that have been built I think it's def is much uh much more stronger these days awesome and then what are you looking forward to in uh 2025 2025 yeah I think just like uh really getting this system online I think um like our spark liquidity layer so the Automation and like really having the ux just get a lot better for people defi I think ux is still like such a big problem in Defi and this is like all across the stack like wallets applications um liquidity management this kind of stuff so for the portion that we are uh responsible for um I'm very excited to solve this issue in in practice and then the others there there's very smart people working on all the others and really having people using non-custodial defi by default is just going to make uh the world a much safer Place financially and improve people's lives awesome thank you we're out of time um questions anyone raise your hand but if not we'll move on to the next panel