Good morning, everyone. I think this panel will be great because three of the panelists have a distinct experience and also a current crypto kind of background. So, for example, Hunter, I think he has a product management background before starting Bitwise. And Bitwise is currently about 9 billion, if I'm correct, across many different product lines, from SMA products, private market funds, and etc. And Jacob actually has a background in a crypto hedge fund, which is Polychain, which is one of the largest and oldest crypto funds. And then also he has DeFi primitive experience before starting Lombard, which is a BTC yield platform. And lastly, Elizabeth recently changed your role to leading DeFi strategy at New York Life Investment Management. And before that, she worked at New York Life Insurance Company for more than 10 years leading venture and tech innovation.
So, I think that today I want to frame the panel: like from Hunter, we want to get a lot of insight on what institutions actually buy. And for Jacob, today's panel title is the yield. So he's the one who's building the yield product. So how a yield product is actually being built and how the yield is actually coming from. And lastly, Elizabeth, we'll get a lot of insight from her — with all the interest and the product building, what institutions would say yes to the many categories of yield products in crypto. And also what would they say no to, so that we can have this triangle that gives a lot of insight from demand and yield, and then risk, and also the product package and adoption. That's how I want to frame this analysis. So, yields, I see in crypto, for the last five years, we've had many yield products from not just staking and lending, but also basis, now private credit, and also the option premium, and lastly, tokenized yield — the yield from TradFi, the tokenized product. So, starting with Hunter, and then I'll go to Elizabeth. What demand do you actually see from institutions about this field? And hopefully you can say what they actually buy.
Sure. Hello, everyone. It's great to be with you today, and I'm pleased to be sharing the group with you guys. We put out a report on 15 interviews or conversations we had with different institutions — endowments, pensions, sovereigns, family offices — about a month ago, to provide some texture on this. We've seen several hundred million dollars of inflows from institutions this year.
I think when thinking about solving for an institution, the biggest important thing is knowing that the institution is super busy with other stuff. And I think it's less that in many cases they are philosophically opposed to some particular thing, but more that they have 99 other things going on. And so, is there an opportunity that is suited to them that you can help them see clearly is, I think, the biggest obstacle. So, this year one of the things we've seen growing the most is a lot of institutions have exposure to Bitcoin already. And they want to add some yield. They want to be able to make it productive, make their Bitcoin productive, and you see several hundred million dollars come into solutions that we provide. And Jacob also has a fantastic solution he'll tell you about to add yield to their Bitcoin.
By the way, let me note that Jacob's product recently launched a Bitcoin call option strategy, actually managed by Bitwise. So, we'll get there later. So, before that, Elizabeth — so Hunter said about the institutional demand from institutions. Do you agree, and what are you actually interested in?
I think it depends on the definition of institution. There are some other institutions that are utilizing the cheaper fees, actively, without a service institution like that. But the show makes my talking — that is still in my notes. Like all of you guys, I think Frank was first to be excited about the active community of them. Part of what they want is to be helpful and nice to the new people. There are already trusted partners than ours — I mean, they trust us with serving, buying and selling, not as the capital. And so we could be owned by those conditions to help educate the public and explain what custody is like there.
Your thoughts? No... Just to add on — recently, New York Life Investment Management organized a high-yield corporate bond. Would you touch on that product a little bit before we go to the yield part soon?
It was a partnership that we had done with Suterd — we took the flagship product from Bitwise. This is available to Mountain View and investors. All people here then.
Everybody here. You will not be left out. Yeah, that's good. Alright. So, we talked about demand. Now let's talk about where this yield is actually coming from. So, first to go to Jacob. Tell the people what you're building and where this yield on Bitcoin is actually coming from.
Yeah, definitely. So, hey everyone. Lombard is an on-chain finance company. We've been building in this space for about two and a half years now. Before that, I spent a few years investing in it and a few years building another, you know, DeFi primitive. Lombard is focused on Bitcoin specifically. Bitcoin has a number of unique challenges in the on-chain space. So, whenever we talk about where the yield comes from, the underlying sources are always somewhat the same — you know, reinventing finance on-chain doesn't change the way that yield is produced, except that in the early days of on-chain finance there was a lot of sort of artificial yield that came from equity-like incentives being distributed to those who were early supporters of a product. But as the space has evolved, a lot of that initial incentivization that maybe onboarded the first wave of users into on-chain finance is starting to go away as we start to think about a much larger scale and working with institutions.
Certainly, a lot of — both Hunter and Elizabeth on stage here — I mean, the type of size that they're talking about is often not the type of size that on-chain finance products have historically been able to service. So, yeah, I sort of jumped around over this, but the underlying source of yield often is still trading — trading in the form of leverage, demand for borrow. We see this in on-chain borrow-lend, which is probably the closest thing to having product-market fit in DeFi. Permissionless liquidity flowing into on-chain lending protocols that then allow for collateralized borrowing. This is the foundation for a lot of earn programs for fintechs. It's become sort of the baseline for stablecoin yield. And where Lombard comes into this is, underlying all of that stablecoin yield is borrow demand — borrow demand dominantly from Bitcoin-collateralized borrowing.
But Bitcoin, a trillion-dollar asset, sits outside the scope of smart contracts and some of the big ecosystems we traditionally think about — Ethereum and Solana. So, Lombard was built to sort of be this bridge between Bitcoin and on-chain finance. We built a couple of different security primitives that allow for Bitcoin to transform into forms that could be used in the ETH and Solana space.
And the one last thing I'd note on this is, Lombard kind of made a name for itself on a product called LBTC. This was the first yield-bearing Bitcoin in the on-chain financial world, or at least the first at scale. This was a multi-billion-dollar product at one point. It's the only yield-bearing Bitcoin on major money protocols. And the premise of it is, users deposit Bitcoin into the protocol and then that underlying Bitcoin is deployed to a Bitcoin yield strategy, and then they receive a receipt token that they can then go use throughout the on-chain finance space and even fund some on-chain lending. So, you get a lot of capital-efficiency benefit from this. And, you know, I think we explored all the on-chain yield sources we could. We sort of capped out on capacity and had to start looking off-chain. So, this is how we started working with Bitwise. So, now the actual Bitcoin is deployed to an off-chain yield strategy, but represented by an on-chain, kind of an ERC-20, sort of almost like a tokenized version of an off-chain yield strategy. So, yeah, that's sort of the gist of it. I'm sure we'll talk about this more.
Right. Before we go to the risk side, just one more touch-up point: you recently launched an on-chain credit product, if I am correct. Would you touch very briefly on that product for the audience?
Yeah, really quick. From the beginning we've been thinking about what is the optimal yield strategy for Bitcoin, and it turns out there is no perfect answer. So, you know, we have a call-selling strategy underlying LBTC. We have an on-chain credit strategy that's sort of fully on-chain, a very cool sort of primitive, in partnership with a protocol called CapFi Dives. It's probably not worth getting into, but it brings multiple parties together in a complex way that allows for underlying Bitcoin collateral to back, you know, on-chain lenders with a borrower who's borrowing off-chain. So it's sort of like the borrower is paying for collateral and paying for stablecoins. It's pretty cool.
But what I will actually note on this is, this was sort of our first step into credit, but the demand for Bitcoin credit is immense and perhaps the most scalable strategy for Bitcoin yield. So, we are exploring a lot of different ways to bring off-chain, partially secured credit on-chain. So, I think this is maybe where, you know, maybe in a couple of months we'll have something to announce.
So, in crypto, there are so many passionate entrepreneurs or technologists building a lot of different types of on-chain DeFi products. But now, even though the supply is coming — supply meaning product is coming to the market — how would institutions take this? So, I want to touch on the risk part a little bit, because institutions want return, but not necessarily DeFi. They're concerned with transparency, liquidity, counterparty risk, and compliance, legal and operational complexity, and etc. So, it's like a balance between TradFi and then this entrepreneur type of thing. And I think the tension is here: how much TradFi can tolerate the complexity and return, where does the balance happen? I think this is a great question to Elizabeth — because you guys are either on the TradFi side or those who are talking to TradFi about what they actually want to buy. So, going to the two of you, tell us about the risks the institutions are talking about, even though the return looks fantastic. And Elizabeth, specifically, what are the checkpoints that are very hard to check off from a risk perspective? Let's start from Hunter.
Sure. (clears throat) Off to start — this is a great question already, and it has become as well a great question. In my experience with institutions, you need to be able to explain what risks are. So, one of the reasons I think that this year you're seeing a few hundred million dollars into the option strategy for generating yield on Bitcoin is it provides a clearer and more bound answer to the question about what the risks are versus, for instance, lending the Bitcoin, which historically was one of the common ways to try to generate yield on Bitcoin. So, you can, of course, decide whether or not those risks make sense, but I think being able to articulate, here's what you're exposed to, here are the risks, is really important for an institution.
I will also say that a reason that we published this report with conversations with 15 large institutions is that I think there are many institutions that are doing more than people realize, but they just don't put out a post on Twitter about it. So, one of the largest holders of LBTC is a traditional financial institution. And I think that may not be intuitive always to people. So, I don't think it's evenly distributed, but at least from my vantage point it's been exciting to see the fantastic people inside of institutions, and they're looking for those opportunities where they can understand the risk, they see a benefit, they see how it bolts into something that they're trying to do. And I think there's going to be more and more quiet adoption over the next 12 months of things where they can understand the risks.
What risk — if you could pick one or two, what are the most common risks that institutions mention?
The biggest is counterparty risk. So, who are the counterparties that my assets have exposure to? I think one of the reasons ETFs have been so successful is, you know, the risk is so tightly wound and identified. Right, you have full disclosure to your filing, you have audit with KPMG on the underlying products, you have a vaulted custodian. But if you're accessing yield, to Jacob's point, are you lending it to someone, and who? Why are they borrowing it? Like, what are the terms for margin call? There's a lot of detail there, right?
And again, I think one of the things that has surprised us this year — not to overly belabor the point — but we've seen hundreds of millions of dollars come into our separately managed accounts that are running options strategies, actively managed options strategies that generate yield on things like Bitcoin. I'm very excited to do that with Cboe BZX. One of the things that appeals the most about that is not that it generates some yield that, you know, we can have them, but rather that you can have a clear conversation about who's the counterparty, who's your risk — your risk is a function of all — here are the risk metrics. Does that sound right to you?
