Bitcoin is back above $86,000. In fact, pushing towards $87,000 on weak job data and the biggest sell walls in the order books just disappeared. We'll talk about that very briefly, but more excited today to have a long conversation about tokenization and DeFi with Stani, the founder and CEO of Aave. This is going to be a great show. Let's go.
Good morning everybody. Happy Friday. As you know, on Fridays we have a huge show. We always have an amazing guest. I break down a few stories in the news and of course we do the weekly reckoning which is a review of all of the major stories of the week. Before I bring Stani on momentarily, I just want to highlight what just happened in the news. If you're wondering why markets are pumping, it's because we live in the upside down where when you get bad news, good things happen, apparently to your favorite assets. But the US economy added just 29,000 jobs in September, well below expectations of 89,000. The unemployment rate rose to 4.2% above the expected 4.1%. But this is the fun part. At the same time, prior months were revised sharply lower. July down 31,000 jobs, August by 29,000 jobs, etc. You may have listened to my rant on the Daily Wolf the other day where I told you that all of the numbers that we get from the government are fake and they're quietly revised when you're not looking. They actually revised how they calculate PCE this time to give it a softer print. Of course, that all means that the Fed is less likely to hike, which means apparently that is good for your assets. I would love to see Fed Chairman Powell walk down the street of New York City and ask people to lose their jobs so that Bitcoin and the stocks can go up. It's basically what we see. Okay, so Bitcoin obviously doing particularly well on that news, but it was doing well before we had that news leading to my idea that crypto is traveling in its own beautiful uncorrelated cycle. Now that we got that out of the way, I'm going to bring on Stani for a much more interesting conversation. Good morning, man. How are you?
Good morning, Scott. Really good. Really good. How are you?
I'm doing great. It's been too long since we've had a conversation. I'm glad to have you on. I think last time we were recording and not live. So first of all, let's maybe just kind of generally talk about the state of DeFi right now. It seems that things are absolutely booming. We had this sort of moment in the bear market I think where once again there was unnecessary fear, uncertainty and doubt and people were, you know, saying that it was over and we had all the hacks and all these things and then since then that was very clearly a bottom and it seems like we're once again rising from the ashes here and DeFi is really booming.
Yeah, I think DeFi, especially the more mature protocols, have been always resilient through all the market cycles and events. It seems that DeFi is the way to build resilient financial infrastructure and now in the past months we've seen that also liquidity is coming back to DeFi. There is additional utilization and there's been a lot of product developments and milestones on our front as well. So it's been a really great few months.
So let's talk about those milestones because I think that probably a lot of people don't even understand how far DeFi has come, right? I think people probably still think of a liquidity pool where you can go borrow and lend without a third party in between, but you're doing a hell of a lot more than that at this point.
Exactly. So I mean, Aave started as essentially a protocol where you can supply stablecoins and use assets like Bitcoin, Ethereum as collateral to borrow against, and this frees up capital that you can use, for example, for other strategies or pay bills, for example, in real life. What's interesting is that we've been able to process over four trillion in net deposits and one trillion in borrowing volume, and that's just with a few hundred lines of smart contract code. So there is no settlement teams like traditional lenders have, or large departments of people actually doing this with agreements. Everything runs on a system inside of a blockchain which makes it really efficient, and the efficiency shows now on the crypto lending side. For example, you can borrow at roughly 5% on Aave, and if you do the same sort of transaction in OTC or with qualified custodian collateral, you will be paying between 7 to 12%. And now what we want to do is bring that efficiency and success that we have with crypto assets into all assets with the means of tokenization. And as more and more assets are coming on chain, these can then be made productive by using them as collateral and unlocking capital. And this is a huge opportunity because this makes capital more productive. And this is a big opportunity for Aave because it expands the addressable collateral in the market that Aave can tap into.
So yeah, you had the huge announcement that I want to discuss. Coinbase tokenized stocks now live on Aave v4. This is what you just mentioned, but I mean this is massive because this is against tokenized stocks, right? So now we kind of are seeing the first iteration of what will become possible when everything's tokenized and sits in one portfolio. I think everybody here intellectually understood that in DeFi you could borrow and lend against your crypto as collateral, but imagine when you can borrow and lend against your entire portfolio, right? What you can do here. So maybe talk about what exactly this is. I know it's on Base.
And what's actually happening here is that this is a market deployed on Base where you can use Coinbase tokenized stocks as collateral on Aave and borrow USDC. And the collateral that can be used is Apple, Amazon, Google, Meta, Microsoft, Tesla tokenized versions. Users that are non-US audiences where you can actually borrow that 24/7 basis. So whether that's even during trading hours, outside trading hours, over the weekend, and with efficient loan-to-value ratios and interest rates. So this is why I'm super excited about this is because we're entering into a world where we're using decentralized protocols and DeFi in the context of traditional assets that are coming on chain. And I believe that the biggest catalyst for tokenized assets is by being able to use them as collateral.
Yeah. Making your assets productive. So you've been talking about this for years. It's actually happening now. We had, I feel like you and I have had conversations about this like a half a decade ago.
Probably just shrugged it off that this was impossible. Now it seems like we've reached that hockey stick parabolic adoption phase where it's happening faster than people anticipate. The one thing I want to point out though is that you made it very clear not available to Americans as usual.
Exactly. Not available. But the reason why it's possible from a technical point of view is that now you actually have access to price feeds that are 24/7. So because of the innovation of perpetual futures, which is a crypto-native innovation, you actually have markets of stocks outside of typical trading hours and you can use that data to price these assets when it comes to the collateralization outside of trading hours, over the weekend, and adjust parameters based on that data. That's why it's available today and this is a significant milestone and that means that effectively we're able to bring more and more assets on chain and make them productive by using them as collateral. Coinbase tokenized stocks on Aave is just one step, but we're going to go even further and obviously there's the Aave Horizon where you can use other RWAs as collateral. That's a half a billion market size, anything from tokenized money markets, T-bill funds, and receivable finance products. I believe that this category is the next big unlock for Aave and DeFi in general.
I didn't even think about the perpetual futures aspect of it. It's really incredible when you think about how many innovations came from the crypto market that are now becoming mainstream and are forcing traditional markets to basically adopt them, right? I mean, so yeah, obviously the borrowing and lending that you're talking about without a third party in between, but the fact that perpetual swaps, which kind of seemed like a speculative Degen product, are now forcing all markets 24/7, 365 and allowing you to have the price data to do this on a weekend just blows my mind.
It's incredible. It's incredible. When I started to build DeFi back almost a decade ago, 2016-17, I really imagined at some point there will be a world where a lot of the activity and assets are basically existing directly on chain and this is the world we're going to. And what's even more exciting is that once you have these baseline primitives, tokenized assets, lending protocols for borrowing and lending, for trading, automated market makers, what's going to be exciting is to see additional primitives being built on top. So we're going to see various different products being built on tokenized stocks and with DeFi. And this is a huge opportunity for just finding new financial use cases for users.
Okay. So for the audience who may not deeply understand all of this, let's say I'm just an average guy not in America and I own Tesla stock or Apple or Microsoft, non-tokenized, normal. So if I say, 'Wow, I really want to start to put this to work in DeFi, but I have no idea where to start.' How does this actually look for your average person who doesn't quite get it yet? Because I definitely know that the crypto natives will get it, right?
The crypto natives typically get it because they can go and access the assets. So the same way, non-users will be able to access the asset, come to Aave, and then effectively place that asset as collateral and borrow stablecoins. What I think will even more simplify these integrations is seeing actually more centralized platforms integrating this type of activity. So we're now in a place where these primitives are being born on chain directly. So you have tokenized stocks, you have the ability to use them as collateral, borrow stablecoins. The next step, natural next step here is actually seeing this integrated into these more centralized operators and platforms where you can directly borrow stablecoins, convert them into also dollars, and spend those dollars in real life. And I think that is sort of an exciting future and also the level of abstraction that we need then for the wider audiences in the future.
So clearly a lot of this is subject to legislation and regulation depending on what region you're in. So we did not get the Clarity Act passed. A lot of people thought that if we did get the Clarity Act passed then we would be doing all these things as Americans, right? Which we're not. But it seemed that the SEC and CFTC are stepping up to try to still make that a potential reality in the future. What would need to happen in your mind for Americans to be able to participate in this? So the SEC obviously already has the innovation exemption and Reg Crypto which are starting to talk about how we'll be able to do tokenized stocks. So we can get into whether that'll work or not, but is that what's needed here for this to happen? Simply for those regulations to basically be, you know, turned into rulemaking.
Exactly. So guidelines are needed for figuring out how to deal with tokenization. It is true that the Clarity Act didn't move forward. There is some negotiations happening still there. What I'm expecting is that we will see more and more regulators coming forward and placing more guidelines. And this is very important because what's recognized here is that blockchain technology and these primitives are actually innovative and they provide net value for users and capital markets. What is really interesting to understand and where the industry is looking for guidelines is how it actually happens, where are the safe harbors, how to do it in the right way, and I think that's still a little bit unclear. So I'm personally looking forward to seeing more guidelines on this aspect because I think the biggest audience that could benefit most from the technology will be the users in the United States having stocks.
I mean, you know, like your average person in the United States, I don't know what the numbers are, but I would imagine that, you know, 90-some percent of United States capital markets, those stocks are held by Americans even just due to lack of access elsewhere. I'm making a number out there. But yeah, so that would be the major unlock. Interestingly, I don't know if you saw this, but this was today. SEC's innovation exemption poses constraint on bringing stock tokens to US, Robinhood crypto chief says. So this is from Johann Kerbrat over at Robinhood who we've had on the show a lot of times. But he's pointing out that yes, this is great what they're doing, but when you look at the way they're going to do it, there's major caps basically, at least in what's being proposed right now, in how many different tokenized assets any given platform will be able to offer, how much volume they'll be able to do in a day. And he pointed out, listen, even though Robinhood's not compliant yet because they're not backed one-for-one, don't have the dividends and all the things that they will need to get compliant in the United States, what they are already offering in Europe, he pointed out some of the assets are doing more volume than would even be allowed when this comes into the United States and we're just at the tip of the iceberg. So there's a lot of work to do for this to be.
A lot of work to do and I think Johann is absolutely right here in the sense that having too restrictive exemptions will simply mean that we create sandboxes and my experience with sandboxes is that it's really difficult to create a product and figure out product-market fit in these sort of restrictions and environments. So I personally want to see something that is extremely or to some extent pragmatic that it actually works and we can see these products scale and I think there are better ways to create guardrails around the technology as well.
So, as sort of the leader in DeFi, and you have been for a very long time, now that it's becoming mainstream, do you think that there's a sentiment from institutions that they can trust DeFi or do you still think there's going to be a major push to centralize all of this, you know, by the big banks and such? Like, you know, how will a Goldman Sachs interact with tokenized stocks and yield, right? Or a JP Morgan because they will. The question is will they do it on Aave or are they going to try to, you know, circumvent that and centralize it and control it.
I think what will happen is that obviously we already see the benefits of open protocols and what open protocols like Aave are able to do is that they're able to create wide networks and Aave particularly is a credit network meaning that when participants join the network whether by providing liquidity or drawing liquidity against collateral they're simply expanding the liquidity, the network effects. That means that every single participant increases the depth of liquidity and the cost of capital and makes it more attractive for borrowers to utilize that capital. So in other words, it makes sense to have one big liquidity network that everyone can join and by joining they are getting the network effects of an existing network and existing participants are getting the benefits of that network expanding and this is sort of like the beauty of these DeFi protocols and the same way as the internet grew. So the more information you have online, the more valuable the internet is. And I think the same thing applies to money and in particular for lending and borrowing. So the more liquid liquidity you have in a network like Aave the better these economics are. And I think that the actual true value proposition of DeFi is to enhance the cost structure of lending and borrowing. So if we're able to outcompete more centralized versions of Aave in the crypto asset space, I think the same will happen also with these tokenized assets down the line because you don't have to use the same amount of people that you would do if you would have a lending facility off-chain. You don't have to have a settlement team. You don't have to have all this sort of complexity, paper agreements because you can put all that execution into a few hundred lines of code and that is the significant improvement there. On top of that, you have full transparency and it's difficult to actually go and change the execution in the codebase. And that resiliency really is what matters. And if something is more transparent, it means it's easier to price the risk and reward. And that should be a path to actually more accurate cost of capital as well.
Yeah, that makes perfect sense. So, at the end of the day, the incentives will drive it. And the incentive is going to be to have massive liquidity all pulled in one place because I mean, how could a JP Morgan really participate in this if they don't have access to the global liquidity of it and have to kind of have that behind their own walled garden? They would never be able to do it.
