Risk-Free Yield: Building the Fixed Income Layer of DeFi

Welcome to this panel. So this will be the panel about um riskfree yields of a very broad topic. I'm Matias from chain security, CTO of chain security. And um to get started like just a quick introduction round from everyone on this panel. um like to see how how each one basically uh contributes to helping going from this former very wild wild west times of yields uh to this more stable risk-free yield um discussion we all have today.

Hi everybody, I'm Stefan Rust. Um been in Bitcoin since 2012. Um but we launched Max Cap which is a protocol that allows people two token protocol which allows people to have a yieldbearing stable coin and then allows the stewards of the protocol to actually participate and ensure yield and provide that. I'll talk to him more about later. Um hi I'm Yaro.

Um I'm building molecular that's um uh my like kind of latest project. have been doing DeFi and crypto since 2017. Um, essentially Molecular is a um is the way we see we should on board um the idol uh crypto capital like the stable coins and ETH which is sitting uh passively on the wallets and we do it by creating the money market fund like infrastructure um that allows people to just deposit their crypto and sleep peacefully. Hi, I'm Gaspa. I'm one one of the co-ounder of spectra previously called API.

We do interest rate derivatives in DeFi. Uh that's provide tools to for you to speculate on the various on the yield variations but also to provide a fixed income instrument. Yeah. Hi, I'm Darren Kemas, co-founder of Iipore Labs. Uh we build two products.

One is the IPOR protocol which was literally founded around defining what's the risk-free rate on chain and creating a peer pool interest rate swap around that. Uh and the other one is Fusion for automated asset management in DeFi. Hi, I'm Alan uh founder of Covenant. We provide low cost of funding for asset issuers and protected yield for depositors. Uh so basically stable coin banking and we do this through a perpetual permissionless transient mechanism of onchain.

Thanks everyone. So just to get quickly a little bit more into into depths for for this like um so in this world where we have more and more complexity right is it like uh important to to go and and simplify it a question for Oh thank you that's the that's the my key question for me is um I think like the main uh the main problem in DeFi right now is not the tech but kind of the broken UIX and uh broken communication and um even like saying risk-free uh yield uh probably for me it sounds wrong um it's like a shady shady uh promise so um yeah I think we need to kind of simplify everything from from interfaces to the way we explain how things work because I would say like nine of 10 D5 protocols um a normal person wouldn't be able to understand what's what's in there like even even the words are um different and unknown. Um so I guess that's the ultimate goal right now for the entire industry to kind of understand that if we really want to uh bring not even not even talking about bringing new money to crypto but even making the money which is already in crypto which is already on like these are hundreds of billions of dollars sitting on the wallets of people because they don't understand how to start doing anything with that. So yeah I guess that's the ultimate task for for the entire industry. uh short follow-up question to Darren on this like um what's the role of the public benchmark in there to to to basically enable a lot of this?

Yeah, I mean if we look at the term risk-free in traditional finance, you can typically consider it as the treasury rate or between financial institutions something like an interbank off-road rate like the libore or something like the so for right so there is already contextualization about what does risk-free mean and it's typically around different solveny calculations uh and this is what the risk-free rate is in traditional finance and you actually use that as your kind of benchmark rate to structure different uh debt uh derivatives and deals around it. So actually we look at that idea of basically what is the risk-free rate in finance in in trady and bring it to DeFi. But in DeFi we have a very nice construct which is people borrow in DeFi. They borrow against a high quality collateral asset and that information that rate information is printed on chain is printed out the rate modules in a compound and morpho and oiler and fluid. So actually you have a very nice public benchmark.

It's smart contract based and it's on chain. So we take that and we say this is the best proxy to risk-free that we have in DeFi. Risk-free though there's a bunch of nuances around that. like risk is always tied to well I mean risk in one in one sense tied to obviously the smart contract risk but it's also very much tied to the collateral that you have the ability to liquidate the collateral but all of this nuance is really around like can the b can the lender be made whole and in DeFi we have this beautiful construct so we take that we created a benchmark and we allow you to trade it pure to pool so that creates this interest rate swap market which is kind of your base of the the fixed income ecosystem. Uh I mean Spectre also does very uh it does a derivative on kind of a different type of yield.

But the whole idea is what's risk-free? How do we create this risk-free benchmark? How do we build this yield curve in DeFi? And how do we uh basically uh you know replicate what we have in Tradfi but having something more um more transparent more automatable that we have in DeFi. And perhaps next thing to Stefan we um uh we have that index but why is it like uh for sustainable returns why is it important that you tie to real world data?

Yeah. So, I mean I I like sort of um a lot of the analogies and what do we do when we've we've launched a token. Two things. How many of you have actually seen Billions the TV show? Billions.

Billions. I guess. Yeah. No. Okay.

Over there. Five people. Do you guys like it? There's a character in there called Axel Axel Rod, right? Axel Rod.

He runs Axe Cap or Axe Capital. And basically he's a GP of managing funds. And what do GPS do? They're general partners. They are the fund managers that assign and define riskreward return.

There's no risk-free yield. I mean, that doesn't exist anymore, right? So, how do they achieve a yield? And they have to hit a hurdle rate. and a hurdle rate.

Anything above that hurdle rate, they earn money and they take that money, a percentage of that money from their investors, the people that give them money. And so what we're trying to do is replicate that model and allow anybody to be an axle rod because there are so many smart people in the room. Look at I mean we work very closely with IPO like Darren. I mean they he knows where do I get the best yield? Those are people that aren't, you know, sort of Harvard educated, have gone through the right schooling, have been through banks, but they are onchain.

They know the onchain transparency. They've lit the they're literate around all of that. How do they become the fund managers of the future? How do they participate in a stable coin that has a hurdle rate as true inflation? The true inflation beats inflation and then ultimately shares additional reward with themselves who are generating the yield in excess of trueflation and at the same time participate providing that excess yield to the participants that are the LPS in the fund.

The LPS are the people that are giving the money to the GPS. And so that's what we're trying to build all onchain, self-custody, fully transparent so that anybody can see where you wouldn't see anywhere else what that opportunity would look like and what that yield would bear and what the underlying security looks like. Stefan, would you argue that the hurdle rate is the risk-free rate or how do you set it? Yeah. um we we'll uh we we kind of go up and up the stack of complexity and then this is where this where we come both best both to like spectra and then also to covenant right perhaps for Alan um like here in your case you have a system where like depth uh should be priced by the market directly and yes why why is that important?

Well, I think at the end all of these mechanisms, it can be complex or simple, but at the end of the day, it is going to be priced by the market. And if you have a system that is not priced by the market and it's a fixed price, the market will basically go to it if it's like underpriced or will get away from it if it's overpriced. So, at the end of the day, it is everything is market priced. I would argue. Okay, fair point.

Um, but I think one one thing I find really important is we in in crypto I think we have to get better at at communicating where the yield comes from because I think a lot of people in crypto if they don't know or at least in industry if you don't know where the yield is coming from you always feel the yield is coming from me that's giving you the capital. So how do we better show where that yield is coming from so that my risk amplitude drops right just explain in simple words not using some terms like native internet money or whatsoever it's like people don't get it uh when you give them the analogy saying hey okay you you do trade stocks right say yeah of course and you do know what like a short long position is yeah I know and you know there is a fund in yeah that's how Athena makes But in crypto I have you say okay that's clear but what's native internet money that's that's the problem that the words use a quick hot takeick for this group uh and I was talking with Matias about this earlier I I have this hypothesis that uh onchain risk-free rate or the the rate over US dollars if you will can be lower onchain than offchain like actually lower because of the demand for stables What do you guys think about that? I think that like uh what we saw if we look at the market. So for example, this this IPO index it's it's based on what's happening on chain right? So when we had uh when we had the uh the the you know the trfy rates near zero 2020 2021 uh you were borrowing at in DeFi and you could you could you could earn 10 15% peranom right so low interest rate environment in tradi means we're in risk on and that means that people are actually taking a lot of risk in defi they're levering up they're using the money markets to actually get leverage on assets right so that means that you have this inverse correlation and then what we had with the rate hikes actually those those rates drop to uh sub 2%.

Uh and so you have this kind of strange inverse correlation because you have the tightening of the of the monetary policy and then you're going to get the uh basically the tightening of the risk takingaking in DeFi. Could also be a different phase, right? That early on it was a uh a leverage phase for crypto and now it's more of a stable phase. Maybe I think well I think we're still in a leverage phase like one one of the main uses of the D5 credit markets is to leverage loop for yield bearing stables fair alo there is um I think from all this year there was a liquidity pressure in DeFi maybe because of the technical risk but liquidity providers still today are paid so much to provide unstable coins and so in an ideal world then we we create this great connection between CIFA and this gets arbitrageed way more but programmatically as you mentioned if we look at what are rates in DeFi, they're extremely inflated and they're because where the yield come from and usually the the answer is the VCs from points and and then you get um like people were not trading the funding rates through itina. They were trading the points that the value of the points of it then tokenized into principal tokens but as collateral doing some looping that's what phones were getting like hundreds of millions of buys of principal tokens at 40 50% APY.

So we're talking about like risk-free and um I think that this this is improving a lot luckily we we're moving away from from that but so I think in all those year we had so much hacks and people were just asking for the risk was not necessarily economical it was just security risk and so so that's what we had a a base rates on we are not putting funds if you're not getting that amount of money because we we get a every day so that was an important factor to take into account but I think luckily we're moving to a more mature ecosystem and now we getting to rates that are closer to organical demand um lending rates so borrow demand and not just borrow to farm the new air but real demand I I think one interesting insight could be uh when you look at the difference of rates on for USDC and USD and uh right now the USDC rates are higher um almost across all the protocols and that's the point where um there is more demand on um on the liquid on on the like uh borrowing side uh from from the companies from the institutions that can only work with USDC they can't work with USD because they can can't do the US on ramp off ramp easily um so I I think and and at the same time in USD there is an abundance of supply um because a lot of USD is like more like the gen crypto stuff but they cannot um uh lend this money to to to the companies institutional so I guess um it could be uh something that we should look into where the uh demand goes and where it grows. post or actually I I don't I don't think that's right about USDC USDT. USDC is the stable coin of DeFi. USDT is a stable coin of centralized exchange and also payments and remittances. So they they have a fundamentally different user base and we actually saw the USDT rate spike when people were trying to borrow USDT in mass to go into the plasma uh predeposit campaign.

But yeah, actually you have uh you have different rate dynamics between different stable coins and that's quite interesting because like so uh Deli Digital they put out a report they were looking at the IPO rate so there's the IPO USDC index USDT and DI index and in the time where Silicon Valley bank collapsed and you had about 4% of circles deposits we actually saw very interesting onchain behavior where people we had one very interesting player that was doing the contrarian uh they were doing the contrarian play where they sucked up all of the USDT liquidity available in the market because they could borrow it at 100% peranom to be able to actually sell at an 8 cent premium in USDT to a 8 8 cent uh dged USDC and repay that basis in a very nice weekend. It was a very nice weekend trade, but you have the rest of the market that's doing the opposite. So these onchain data points, the idea of risk and actually the different uh basically the different plays in in rates between different assets, it's quite fascinating and I think like you know I think there's also a lot of different stable coins plays here you know sitting on this panel. So different stable coins with different risk and the collateral uh the collateral quality and you know you have why is uh circle so considered pristine versus tether a bit more edgy because people are paying attention to what's happening on the balance sheet and the quality of the collateral of course but I would say I wouldn't fully agree with that that USD is not the stable coin for defi there is a lot of us in defi uh effectively and uh probably not less than USDC But there was a lot of us on Tron which is completely out of DeFi. So I mean to me the interesting thing is there's a big evolution taking place right now and I think we're the risk I think is actually shifting from treasury bills where that has been the benchmark to the IOR index right that's going to matter more that's the hurdle rate in the future because governments can't sell their bonds anymore nobody's buying the government debt which has traditionally been except for tether except for tether maybe but they're also now buying Bitcoin right so it's But um yeah, so you look at yeah, you know what's what's going on?

You know, the US government couldn't sell its $19 billion, 20-year bond. They had to go buy it themselves. They couldn't sell a 10-year bond, which was only $10 billion. So all of a sudden, the risk is shifting. These governments have huge amounts of debt.

Now they're trying to say, "Oh, oh, oh, oh, oh, hang on. if you own our debt, you can use that as collateral to mint stable coins. So, the same banks that actually [ __ ] up the whole mortgage industry and generated the global financial crisis using mortgage rates as collateral are now using treasury bills as collateral to mint stable coins and give you stable coins. You think it's bad? I think that's [ __ ] bad.

Yes. I think that's definitely bad. That's why we are in the crypto world. It's going to generate a lot of liquidity for us. So, it's going to be short-term [ __ ] brilliant for all of us in the crypto world, but it's only going to feed asset classes like Tether that has now got a football club.

It's now got, you know, bitcoins. It's going to in improve Newuon because we're backed by commodities. We're using tokenized oil, tokenized gold, tokenized silver that are assetbacked by commodities. We in the fiat world need commodities. And if you think about how did the dollar get dominance?

It was originally all dollar backed uh goldbacked assets and that gold is now gone. In 1970 they switched and that created a huge amount of liquidity and instigated inflation. Right? That was the gener genesis of inflation all of a sudden. I mean okay there were other assets maybe other things that came in but but in principle money printer went burr and that's what generated uh you know astronomical turns and turn of event now what we probably sitting here because of that event.

Yeah. No we're we're definitely here we won't be here. Exactly. And so we will see a huge new generation of opportunities in crypto in the blockchain because of what's going on right now. And we won't feel it in the next 2 3 years.

Maybe in four years, 5 years time there'll be a a drastic event that will drive a significant shift towards our assets. Sorry, I've been hopping in the W. But but then then the risk is also into just using dollar dominated stable currency and not just how you back it, right? Okay. I mean if you think about banking in general now treasuries are being brought in and tokenized in a way through deposits but uh tell circle can actually invest in any sort of other well not anymore circle but te can invest in anything like football clubs or whatnot.

The future is really bringing all of those assets on chain to your point tokenized commodities but also tokenized loans. I mean you might hate it but tokenized mortgages as well and what does tether invest from the reserves? I guess they use just their revenue to to buy the football club, not like a collateral for for USDT. I'm pretty sure it's collateral. Where's the revenue coming from?

It's coming from the coll the revenue is coming from the collateral provided from the people minting Tether. And ultimately, it's coming from the yield from the bonds that they bought. It's coming from the appreciation in price from Bitcoin um that they sit on. And now they're launching a treasury. So with that treasury, they're going to be buying more Bitcoin.

Um yeah, I guess they're also lending money. they have l lending uh it's it's it's a beautiful counteryclical model that's extremely simple, right? When you hike rates because you [ __ ] up, you're like, "Okay, pay me." And then when you drop rates, they buy they have the best risk-on asset that's ever been known. So during the crisis or the crypto crisis when we when we crashed, they were redeeming I think what $19 billion a day.

I mean, what bank can do that, right? I mean, I don't know any fiat institution that can do that. In Cypress, they shut down the whole economy, right? They didn't allow people to or was it multi? I can't remember which country.

That's just because Tether's uh reserves, they they don't invest them fully, right? So, they keep it liquid because banks essentially they're uh they only have like a certain amount of reserves. So, they cannot survive the bank run. While uh Tether is supposed to be able to pay out like 100% redemptions, which is great, right? I mean, of course.

Of course. Well, maybe not. Liquidity is super cool. Maybe not at that redemption scale, but like literally DeFi has this mechanism where you don't have to ask anyone to withdraw. You know, the only thing that you have on a on a on a basic overized credit market is the utilization curve.

And as someone starts to withdraw, it makes people repay their loans because the debt terms are high. And this is a beautiful mechanism. Okay. It's like topic-wise, we actually moved into this one like which risks Don't we yet see which risks are not able to be captured? I've seen like a lot of things being developed recently where we can actually trade risks which before you kind of have to accept it was hidden, right?

Um yeah this in in this world which risks now like you but you can also go into like which risks did you enable to be traded now but but which are you still missing uh before we we get something even more stable or decently stable. Yeah. No just one thing. So we we create interest derivatives, right? And that's plugged on top of um mo most um most frequently stable coins yield opportunities.

And so we then we talk to LPS and basically they're they're interacting and trading and getting bonds on top of those opportunities. And one thing funny that I realized like the last years is they're less um worried because most of those stable coins had the same very much centralized mechanism. I think that's a risk that we don't see um at the same um time line because like when it was a smart contract risk of a crazy algorithmic things it was getting act you know in 6 months and it's when it's a fully centralized thing where there's a lot of money that is sitting in banks account and and very centralized exchanges and that kind of stuff then people don't realize it but eventually you know we we we are kind of growing the the the risk with the amount of liquidity that is there and maybe one day you know it will it will pop and we will see I mean basically my point is this is not priced in because we're used to evaluate that something is safe because it's not act in six months but you know the very much centralized thing it can take a bit more than time to um to pop and break and so I think that's not not necessarily something that is priced in enough and and that's also because uh the risk that you're um betting against is not just a hack it can be regulatory risk, regulatory risk. It can be founders living can be things that you know takes a few years to appear sometime. No, I would agree with that.

I think we started off with more sort of algorithmic slash protocol risks and now the more we start bringing real world assets on chain uh we getting more and more trappy risks uh which are sort of counterparty risk operational risk from teams are they actually keeping those assets the value of those assets real world risks and so on. So, um, yeah, it's expanding. I think the risks are expanding. And that even goes back to what you were saying about the the the leveraging and the financial crisis in the US, right? We're actually replicating it in DeFi.

Uh, also USD denominated, some asset back, some algorithmic, very little algorithmic. I'd like to see more algorithmic, but the reality is, you know, it's going to be the assetbacked or depositbacked. We're adding a lot of leverage to the system and this is where things blow up but it also means that more liquidity is coming in to DeFi. When liquidity comes into DeFi, people tend to be able to eat it up and take leverage. You didn't have this happen after the collapse of FTX and this like uh you know 2022 2023 period because you had let's say the the credit facility was crushed.

Ethereum price drops, Bitcoin price drops. So you have an actually overupp of of uh of stable coins and that's just on this utilization curve. It's not being able to be eaten up. But as you bring RWAS on and those are able to be leveraged against stable coins, you actually increase the credit facilities. So we're we're able to I mean you were talking about what happens when this liquidity comes on.

You'll see a lot more risk-taking. You'll see a lot more utilization. you'll see a lot more activity, but you'll also see increasing risk that you mentioned for the for the financial crisis. So, you know, there's uh there's a lot of there's a lot of risk and leverage that's entering the system and this is an also an inevitability. So, on that note, the risk, right, I mean, we went through the whole Luna, you know, etc.

That was particularly around algorithmic risk, right? I mean, that really hit the whole DeFi industry pretty hard. And do you think we've recovered from that? And do you think as we're now shifting to more RWA risks coming on chain, when will we see the shift back to more innovation in the algorithmic era? Um, again very soon.

Sure. But but do you do you really think that was an algorithmic problem? I mean I mean like the uh all this uh crash I guess it was because like the collateral this algorithmic uh collateral was was a uh like vapor vapor value and nothing else. I think yes a very interesting discussion but we probably can talk too long about that's true historically like the question is like have we have we really seen a real algorithmic uh stable coin which which failed algorithmically that's okay yeah more perhaps philosophical we definitely saw a very big one fail which had a lot algorithmic part in it you already touched on another thing which was like We look a lot of economic risks here but there are also a lot of operational risks and and in practice we have seen actually operational risks taking a heavy toll historically like I mean uh I'm moderating this panel as a security auditor um and um generally am not the right person to ask questions about economic risk but of course I see like the smart contract hacks I see the like key compromises and I came from also a place of like how banks do it even if they act with crypto which for them was just holding Bitcoin right back in the days uh the the early banks right so 201617 and and they treated operational security really different than perhaps even the best ones do today here differently in the sense of very thorough um do you see this risk the operational risk is that priced in do We do we take it too not serious enough basically today. What what are your impressions of this?

It's all it scares me a lot. I mean like as uh as as a protocol founder it's it's something that uh really is always in the hat because um you can create like the best security practices within the team always having MPC wallet infrastructure multi- signatures but um the problem is that we never know what we don't know and we might not be aware of the risks that are there that we we don't know and uh um for me right now I think this the the the best practice is to um create the the most permissionless um framework and infrastructure as permissionless as possible and uh as onchain and non-dependent on uh on the team as possible. Um that's probably the best mitigate risk mitigation strategy right now. So when you uh make the um asset holders uh essentially being able to veto the the uh like the whitelisting new assets or moving funds and stuff like that that is like you creating an effective safety switch which is in the hands of the people uh who are like the liquidity providers and uh then yeah sovereignty comes with responsibility but um probably that's that's the only thing I can think of as a ultimate security framework right now. I think as a as a crypto industry, we are taking more operational risk than than people realize.

And I think part of it is it's hard to move fast and break things when you're talking about money. And so that's why banking is very slow and we are growing fast. And so there's going to be a bit more risk than maybe some people would would want. But we're getting better and better uh through audits, through other mechanisms to be safe. and and banks can erase or reverse risks by changing an Excel spreadsheet in entry.

Yes, exactly. So this idea of having immutable contracts is is absolutely scary thing. Something you mentioned is that you know uh and also related to this question is from both an economic and technological standpoint, you should never accept a lower rate in DeFi than you get in TRFI. But that is not the case. It's it's it's not the case in in practice.

I mean, it's this is also like uh but you know, if you're talking about riskadjusted returns, you know, which is something you mentioned, riskadjusted returns should factor in the potential for full loss of assets that's implicit in the smart contract risk. So, I don't think this is being priced in very well. Uh but it's also the market that's that's pricing it in. I have a side question. In in Treadfi, the risk-free rate is kind of like the same for the borrower and the lender, but in crypto, you you're doing indexes.

Is it the same or you have two different rates for borrowers and lenders? So, the IPO index we started as just the mid-market rate between the market weighted borrowing and lending on a compound V2s and now it's on a compound V3s. And if we start to incorporate something like siloed morpho and oiler pools uh or for example like fluid then you get a whole range of different rates and how to synthesize those it's actually a very difficult question. uh the risk contextualization. The first thing actually we talked with some guys that were doing uh different interbank offered rates.

they were uh IBORE structurers and they're like how do you how do you uh uh how do you quantify the risk of every collateral asset at the atomic level on a the short answer is actually you can't at the smart contract level you have to look at it in aggregate you can't know at the atomical level how much is being bought against what asset so D5 has a different construction that you can't do it uh so granularly but it's so the IOR index is a very macro thing it It's implicit on a on a uh on a I wouldn't say rational but maybe uh a more efficient market but because we have such an expansion of innovation along the credit space uh actually you get more liquidity fragmentation you get more rate volatility so the IOR index we we also be launching some derivatives around the IBT of specific assets because you need to be able to price an individual ual asset because I think the index what we started is a very macro vision but that won't be so useful until we get to an efficient market. So now we're starting to build derivatives around the I specific IBTS but that has more risk because you have higher volatility of market risk, liquidity risk and and and everything around that. So yeah it's uh we we'll have different in derivatives for the borrowing rate, the lending rate. They have different risk profiles. So uh we we touched on this topic also like that the rates actually are driven by many factors right and then can be lower than what would be perceived as a risk-free rate and sometimes sometimes it's higher um and then uh borrower and lenders sometimes are I mean on one platform it's kind of clear but but you look at it often from different platforms perspectives So what drives this uh in in our industry that that we see this kind of fracture across different um protocols, different uh rates we see um and and which which sometimes seems to decouple from Trefy.

What what drives this? These are the incentives. Um it's no it's it's a norm in DeFi to pay for liquidity right now these days. So essentially you're um like many protocols pay uh for someone to bring liquidity to them. So that's something you like don't see very often uh in in in Treadfi when uh in when you kind of uh bring money to the bank and bank uh pays from its own reserves uh to to make you keep that money there.

So that's not uh usual and regarding like this fragmentation of rates. Um so we've got so many blockchains and new chains that try to attract liquidity and sometimes you see okay the other uh market you you you are able to get um USD on sillo chain for like uh 1.5%. The problem is that as soon as you borrow it from there um um they the other side can pull off liquidity and your your collateral is effectively locked there and then the depth of that liquidity pool is so small. So you really need to be an expert to kind of be able to effectively utilize those things because um these higher or lower rates they can be deceptive.

They are there only for the first like 100k and then it changes drastically. So um you really need an expert or you need some analytical platforms uh to kind of navigate that. Um I guess that's uh and incentives are the main reasons. Yeah, very much agree on this. I think um lack of arbitrage because defy has its economy of its own because of incentive point and many thing and the bridges are hard to build and and the reason why people are not necessarily arbitraging those rates is because exactly the the risk is not necessarily factored in and out to factor.

So, so yeah, right. You get twice 10 times the yield that you would have with a T bill, but are you going to take that arbitrage? You're going to be locked for for this amount of months. It's a protocol. It's a few people in the room.

Do you really want to get exposed to this? And so that's why the I think the risk factor is is just too important at this stage for all this to be arbitrage. But I think we are seeing some actors that are taking those arbitrage opportunities on a few places and they definitely are pushing the rates down because they know they have the liquidity and they have a better understanding of this but it's it's there's a risk management issue and lack of arbitrage. Yeah, I I would uh so like you know the IPO protocol started with the the the assumption of an efficient market and then over multiple years we realized that the market is not efficient at all. So we built fusion which is a market efficient engine to allow other parties to build on top of that to actually arbitrage these rates but it's it's quite nuance you mentioned about liquidity.

So the the ape goes on DeFi llama they say number high they put their number they put their assets there number drops say you you rugged me like no you don't know how to read onchain data you don't know already how to read depth but there's a lot of sophisticated actors that are actually starting to coordinate crossmarket uh like for example like on fusion we have multiple people that are building multiple leverage loops if you can have this asset here this yield bearing stable coin on this siloed market on on on morpho the PT instrument the salary market on oiler the PT instrument on a you have multiple liquidity loops that you can arbitrage or have your most effective allocation but just people aren't sophisticated enough to do that but you have more and more sophisticated actors and as it grows in complexity as it grows in different dynamics actually we used to track track through the governance forums all of the governance decisions around the interest rate curves across all markets and that was just we realized it was just stupid. We couldn't do it. So we just fork we fork the chain to understand exactly what the rate curve is at this time. Uh do full simulations for asset allocation and that level of sophistication is quite difficult. It's quite unique and nuanced to DeFi.

But you know this will be the engine that powers asset management of the future in DeFi. So I think taking a step back you could argue the risk-free rate is the inflation rate of the US dollar should be that and then anything up or below that the US treasuries is just mainly market forces right like there's a war people want US treasuries interest rates go down or risk rate go down crypto is like its own microeconomy more and more linked with a with stratfire but it's still a microeconomy and so we we can have different rates versus try depending on supply and demand hand on crypto for either leverage or for stables and that can go back and forth depending on what's happening on chain. But I think we have that in crypto, right? I think we we we we have different countries. Think of every layer one as a different country.

Every layer one has different interest rates, you know, they have different inflation. Um all of them need security by the way just so plug because we're always changing and I think the advantage and slash disadvantage that we have in crypto is we're super transparent so as soon as something goes wrong everybody knows about it everybody learns about it everybody adapts it and the security guys audit it according to the learnings that have been shared and that's done within a month a week a year you know depending but it goes so past that in the traditional world they don't know about it because they're keeping it secret. They don't want to tell anybody about it. You know, they don't know. They're keeping it on their spreadsheets, you know, and they're adjusting it accordingly over time.

But all of these changes are happening in real time. And I think right now what I'm already thinking is for our coin, you know, we at the moment guarantee our token holders yield of inflation. So we give you inflation adjustment, true inflation adjustment. And now I want the GPS to have IORE adjustment. That's your hurdle rate at IIPORE because the IPORE is going to be a target that they need to beat in order to be able to reward.

And the difference goes so now look just on this panel we've come up with a new idea and now I want to implement it and I need a security auditor. Yeah, we we are almost out of time. let's say towards the end like what what um uh we have this thing currently going on with the Ethereum Foundation of about trillion dollar security. So going a little bit into the same thing. What does it take and it's one of the questions from the security perspective we are looking at.

What does it take that uh trillions uh move to the chain which basically is defined thousands of institutions are fine to store billions on it or billions are fine to store $1,000. Right? So both perspectives but in this case more from the institutional side of things. uh looking to 2030 or so, few years out, not too long. Um and then we we see the bond market, right?

Uh 130 trillion or so. And um we see our very small industry today. What does it take? What's missing or where will it go in four yearsish from now? What what is your like perhaps we'll do one quick round?

Everyone does a little bit crystal balling. What's going to happen? ETH at uh 100,000. So number one, I don't think we're a small industry. We're $3 trillion already as an industry whole.

Stablecoin is only 250 billion right now. And we think two trillion in two years. So this is going to go 10x in two years. I don't know SGForge, how many stable coins do you already have in circulation within your closed environment? How much does JPM already trading in their closed environment?

We don't even account for that. We don't even see that. That's not onchain right now. If that were onchain, we'd be very close to a much larger number than 250 billion. Um yeah, the the the stable coins uh would definitely grow like crazy.

Um that's definitely is going to happen. And uh so I I I I think we're going to end up um with uh two crypto worlds or two DeFi worlds like one is like fully regulated with all those institutions JP Morgan, Black Rockck, whatsoever having their permission blockchains and and stuff so that the bigger carps can um interact with them and the entire US can interact. Then we'll have our old good old um DeFi with um a little bit of looping here, a little bit of overleveraging here, some degen trading and stuff. And um I guess some something's going to be happening like in the intersection of these two worlds uh which going to be cool. So the capital is going to be moving here from here and there.

But I I think like the upcoming years are really like fascinating. A lot of great things going to be happening. Yeah, you shared that very um bullish view in terms of how big of an industry we're becoming. Institutional money is already here. It's just growing.

But then it's know it's not a one night thing. It's an iterative process where you you fix a little bit something you know it's legal. this risk management and then you bring a little bit more capital and then progressively your the demand grows with what you can also offer and um yeah I think we we're we're building the tools when you started spectra uh we we discussed with people saying like hey we're doing this you know it exists in traditional finance and people were well it's way too early but it's going to exist sometime it's going to be needed and used and that's what happened even over the years like build the tools that that makes this ecosystem safer and more modular and more profitable place as well. Like that's what we're all doing and I think we're we're definitely in the right direction. Yeah, if we see hundreds of trillions uh an inevitability to come on chain, we have a lot of capital flowing in.

We have a lot of different activities inside of DeFi. But one thing that for example uh IO labs we took a big risk on is that a lot of uh a lot of banks uh are they're very well set up to manage their own internal risk. But blockchain risks are a different beast. So I would say that there's there's a lot of DeFi builders. There are very few good DeFi builders thinking about security, scalability, and most of the guys I've seen come in from Tradfi.

They build all the bells and whistles. Uh some of them get hacked as soon as they deploy on chain. So there's going to be a few different infrastructure stacks are going to deploy a lot of this capital. And Fusion we built actually for this to take care of the security, the modularity. There's a couple of very unique things on top of there, but also it should be the stack that Tradfi is going to use as their entry to DeFi because smart contract risk is quite a different beast.

So, we hope that maybe the efficient market goes through fusion that that brings about the IORE indices and we have this uh hundred trillion dollar interest rate derivative market inside of DeFi. I think the only thing I would add I agree with all of this is is something we were talking about earlier about operational risk. How do you how do you bring the transparency that already exists in crypto in terms of like assets that are backing things, but can you bring that kind of transparency uh on the operational risk of the individuals bringing those assets on chain and and uh deploying things? Thanks a lot. Uh yeah, I enjoyed it a lot.

Thanks a lot for the panel. Uh we're out of time. [Applause]