Why not put your money to work?
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Well, ladies and gentlemen, thanks so much for tuning in to the Crypto Tape. I'm your host, Frank Chaparo, and I'm pleased to be in studio with Stani at a wild few months. It's been a wild year.
Yeah, thanks for braving all the traffic to get down to the studio. I know ETH Denver is in full swing.
Yeah, it's getting bigger and bigger, more people coming in. So, what's the energy like right now? I think people are excited on the institutional side, less excited on the retail side. From the perspective of a founder, what are the concurrent sort of trends that you see driving activity?
I mean, I think that there's more interest in crypto than there has been ever before. I think especially on the institutional side, I think there's more accessibility into digital assets in all sorts of whether it's self custody, custody, or even institutional access. DeFi has grown significantly. We see more integrations into traditional finance and into fintechs. We see also tokenization growing quite a lot. That is also a category that didn't exist much a few years ago and it's growing significantly. And stablecoins have had a really good tailwind. I think now we are in a place where we see more of these traditional institutions trying to figure out how to leverage the technology. I think stablecoins are most ahead. And this is thanks to the Genius Act. So what Genius Act simply did is that it sort of created a lot of clarity rules around stablecoins and now we've seen investments from Stripe. We've seen investments from other fintechs, e-commerce, and we see a wide range of adoption of stablecoins. And I do think there is now a really good tailwind. So overall there's more people excited about the space and trying to figure out how to leverage the technology in financial institutions.
I mean it seems like you were really early in seeing this institutional wave get set up. But maybe maybe too early to an extent, right? Um but that's all right. You know, we catch up. What do you think when you think about the state of crypto credit and DeFi? What are some of the impediments to really getting adoption to move at a quicker pace?
I mean, we have to first look into how crypto lending took off in the first place. So, what Aave is known for is simply bringing your digital assets, whether that's like Bitcoin, Ethereum, pledging that to borrow stablecoins. And the reason why Aave exists is obviously it's an amazing technology because it's built on smart contracts. It's decentralized finance. You have ability to access directly to this infrastructure. And you have all this sort of transparency and guaranteed execution. But why it exists from like a business perspective is because you couldn't go into a bank and ask a loan against your Bitcoin or Ethereum or Solana or anything else. And this has been like a funding gap effectively. And we saw a lot of centralized lending businesses being built over the years. And we saw Aave and DeFi being built. DeFi has proven to be resilient. So obviously Aave has seen multiple market cycles at the moment and it sort of improves the cost structure of that lending business model. So today you can for example borrow stablecoins from Aave at a 4 or 5% where the same sort of a transaction with centralized lenders will be between 7 to 12%. So there's sort of improvements there. Now, we've done really well with these crypto assets and Aave has been able to grow. We have now 42 billion worth of value net deposited into the smart contracts into the protocol. And last year at the peak we had 76 billion and 30 billion in borrowed stablecoins. So that is just explaining how much value there is and during the down cycles of the markets we liquidated during 10th of October over 250 million worth of collateral in just few minutes. A couple of months ago we liquidated in a week half a billion worth of collateral. So the system works for these native crypto assets. Now, I believe that Bitcoin, Ethereum and native crypto assets will keep growing and that's going to be a really growing category. What I'm looking forward also is to use the technology that we built in DeFi whether it's AMMs, lending protocols like Aave and using that to tokenized assets and simply scaling DeFi in our space in a way that we accept value outside of the blockchain by using tokenization and then using those assets as a collateral to borrow against. And to get that to grow, you need tokenization which means real world assets. And you also need to lend this liquidity that exists in DeFi into these traditional financial use cases as well.
So if I take a temperature check of the state of credit right now, the sense that I have from a lot of people that I speak to is on one side the yields don't seem as juicy as they were, especially when juxtaposed with the risk that exists and engaging with these markets. I think it feels like there's a new exploit every day. And so you have users that might think, is it worth that extra 1% or half a percent to play in DeFi when I can, you know, go to maybe a high yield checking account or something like that. At the same time there's a lack of borrow. And which is surprising to me because if you actually use a lot of these tools, it is so easy to borrow and to your point you can borrow at a cheaper rate. But there's a lack of borrow. Um, break down maybe those two elements.
Yeah. I mean, regarding the exploits, this happens in the edges of DeFi. So, what decentralized finance simply means it's an open system. So, when you think about the traditional finance, you know, it's very hard to build there anything because you have a gated system. You need to have different licenses because you take funds of user custody, right? And when you think about DeFi as a sort of like infrastructure and programmable environment, anything can be built at any part of the world. So that is the gift of open source that innovation can drive and we see things being built like Aave for example. And in DeFi you have protocols and teams that are focusing on building for scale and mainstream adoption. And then you have experimentation. So there's a clear difference between protocols that really built for mainstream and that are going to be the backbone of sort of like all credit and finance. But I do think that there is a risk curve and the lower end of the risk curve is in some ways you have lower yields and it's an interesting question because there is this idea of whether actually the DeFi risk at the lowest end of the curve let's say lending against Bitcoin and Ethereum is actually less risky and to explain that a little bit more is that when you think about a system like Aave all these liquidations against liquid assets are sort of like economically mathematically guaranteed. So smart contracts have qualified parameters that are agreed upon before setting up in a way that economically you can liquidate these whole positions so that the collateral that is backing these loans Ethereum and Bitcoin at the current scale is able to absorb all that. So the market believes that you can absorb all that liquidity. But that being said, I do think DeFi is in a place where you have sort of a surplus of liquidity. And what it means is that it's a good and bad thing. So it's a good thing because what we were able to solve in the past 5 years is that we used to have a deficit of liquidity. So we had all these interesting opportunities and growth not enough liquidity. Now access to DeFi has been more easier. We see integrations into exchanges like you can use Aave through Kraken for example and fintechs and you have this enormous amount of liquidity. Now the equilibrium has changed. So the next thing is to figure out that now that we have all this liquidity and we have exhausted a lot of the existing native use cases, how do we actually take the opportunity of DeFi and channel that liquidity into new borrowing opportunities. And from a perspective, what we are excited about is the Aave v4 because that's a new iteration of the Aave protocol that allows to actually lend not only against ERC20 tokens, ERC721s but also against data. So we probably will see use cases where DeFi liquidity means real life credit use cases and that is sort of how we can actually use DeFi surplus liquidity to fund real life opportunities.
And you know it can kind of boil down to just expanding the collateral types. Yeah. And you know, right now it is limited to Bitcoin and Ethereum and ERC20s in many cases, but as we're seeing the direction shift to tokenized securities and equities, you can imagine a world where all of these things are composable and all of these things can be levered against and that creates really interesting outcomes for people. How do you see fintechs taking advantage of that? Is there going to be a world, right, where I might have a mix of a portfolio sitting on chain that's stocks, crypto, maybe it's private credit, and I can leverage that to borrow and then go make a home purchase or a car purchase and all of my financial services can sit within that wallet infrastructure.
That's the dream. Um, that is the dream. Um, I do think to get there it's sort of like a bumpy road. Uh, because I think some of the bumps we solved. Um, I think DeFi is more accessible than ever before. Um, thanks to also embedded wallets allowing users to have control over their funds while at the same time having a simple, secomorphic user experience. Login with emails and passwords and sort of a familiar experience. That is what we've been doing with the Aave app. Um that is a mobile consumer offering. Um and a lot of fintechs I think will integrate DeFi as a way to actually offer a yield source and can choose what sort of a yield source they want to offer to the users. Um and doing that is actually very interesting because it removes sort of like the necessity to build a lending business or managing funds and having that transparency and also having execution that is verified on chain. So I do think that that is the one piece of fintechs being able to provide liquidity as well and that is happening right. But what I'm more interested about is that how we can actually look at the user bases of existing fintechs and how we can actually channel liquidity into those use cases and create new credit opportunities and fund the credit gap there. I think for fintechs and what DeFi can actually do a lot is to restructure the cost structure of the lending or let's say credit markets. So the necessary use case for DeFi for fintechs isn't cheap liquidity it can be cheaper cost structure. So if you can use smart contracts to automate transactions, risk management, automate all this execution that happens on paper by humans. Um it can DeFi can do what basically AI is now doing for cost structure as well.
It's a lot of interesting elements. I want to focus on UX UI just for a moment and then I want to talk through like credit risk analysis and sort of think through how maybe institutions are viewing the creditworthiness of the users on this platform and the robustness of these platforms. Obviously you guys made headlines for that infamous $50 million swap. Does DeFi have a big UX problem and how do you guys solve for that? And when you think about the value of centralized options like OTC where something like that may or may not happen and DeFi, how should large institutions think about orders of that size and where to trade or where to swap, where to borrow, where to lend given some of these constraints.
Yeah, I don't think on interface level I don't think DeFi has a UX problem. I think that DeFi is going to be used by different audiences. So the existing audience that uses DeFi is very sophisticated and the reason for that is that to use DeFi in the first place you have to be sophisticated enough to access stablecoins or access to a self-hosted wallet for example, acquire stablecoins or other digital assets and then manage your gas which is the transaction fees and then you can use DeFi. So there's a lot of complexity around that and I think that the future for DeFi is to be more of a replacement of the financial back end. So DeFi needs to be neutral, permissionless execution environment where you can do any sort of trades that you want because on chaotic markets you can't block transactions for any reason because you might have users that want to leave their positions for whatever price they want to. But when it comes to consumers for example they need an experience where it is familiar. So we have to abstract away wallets. We have to abstract away the concept of transaction fees or gas. On ramping we have to move to a model where you can on ramp a dollar that is a dollar in the fiat system should be also a dollar in the blockchain system and this is important because no retail will actually understand if they're moving funds from one system to another and they will lose anything between 40 to 200 basis points. Networks needs to be abstracted and everything needs to feel really intuitive. So that is sort of like the consumer DeFi experience and that can be achieved by going directly to consumers what we're doing with the Aave mobile experience or integrating DeFi into exchanges that have some sort of a self custody wallet. Kraken, DeFi Earn is a great example for that or fintechs. And we recently announced an integration to Shopify and they have over 21 million users, creators and sellers that can now actually hold their balance in a like a significant example that the actual experience depends on where DeFi as a kind of a backend system is integrated and from OTC perspective I think that becomes even more interesting. Because the OTC desks actually are sort of like sources of sourcing liquidity. And a lot of the OTC desks actually use DeFi for sourcing and trading and hedging and I think it's a really amazing source of capital.
So focusing on the credit risk element, how do we get a temperature check of creditworthiness in DeFi? That's one element, right, that hasn't necessarily been replicated. You know, you don't get a sense of, you know, Stani's 800 credit score through these apps. So, how do we replicate that? And from the perspective of like an institution or a provider, how can they sense without a certain amount of collateral the credit robustness of a person participating.
I mean credit itself, it's a really old concept and I think the blockchain doesn't really change creditworthiness that much. Um it is like there's hard pieces to it because there's certain elements about blockchain that makes it very unique like basically settlements that are instant. But we have already in some ways credit which credit means just trust right. So stablecoins we trust that stablecoin issuers have certain amount of collateral they have let's say T-bills they have cash and so forth that is some sort of a credit but I think the hardest part is to figure out how credit will take adoption on chain because you can have a model where you could use Aave v4 in a way where you give credit user by user. It's a question whether that's scalable or whether we should create credit facilities for example for institutions that actually then lend out so being sort of a warehouse or should the model be tokenization. So we take something like Horizon which is a market where you can use tokenized assets and securities as a collateral and borrow stablecoins. The collaterals there are anything from like T-bills, money market funds and AAA credit for example. We have one particular AAA credit fund which is a diversified portfolio of corporate bonds for example and so forth. So the interesting question here is what is the right form factor that could scale then to millions and hundreds of millions in the business of users and could be backed by a system like Aave. I think that is one of the most interesting things to solve and probably also the hardest thing to solve. So credit will happen. It's easy as a sort of a form but choosing the right form factor is the challenge.
So how are you what are you guys doing to address those challenges?
I think going forward and with the Aave v4 launch main thing is to partner up with the right institutions that have distribution, underwriters that already are experienced in credit. I think that's the most important thing and then use Aave as a sort of a rails for liquidity. Um starting small with small proof of concepts and building from there. I think that's the way to figure it out. Um we don't have all the solutions yet, but I think getting experiences is the most valuable thing to do now.
Some of those solutions can just come from partners. Yeah, that makes a lot of sense. Just thinking about crypto broadly and how the industry's changed. You mentioned the regulatory element which I feel like opens the door to feel like the crypto industry because of the pre-existing regulatory environment pushed us into the structure of labs and foundations and sort of trying to figure out a unique way to structure what you know exists in the traditional world as companies. And so that changes politics. It changes decision making. And it changes to some extent the speed at which you can execute and make changes. You've been doing this longer than anyone else. Looking at the structure of DAOs and foundations and the way that crypto companies operate in market. What mistakes can you glean and how do we move forward? I mean, I imagine that the one question everyone's asking is is the value accruing now to the equity versus the token. Um how do you see the future looking with regards to sort of corporate governance in crypto?
I think that you know the dual model can work in some cases. In our case we came to the conclusion that the best model is a token-centric model where sort of like all the value goes into one asset and the reason why it's the most preferred is because it creates least amount of uncertainty and the most certainty and with that model and I do think that DAO itself has been experimental and they are a great way to govern public goods. But at the same time you want to have the highest possible execution and that means you want to have a system where you have least amount of politics and you can focus on execution. So I think the token models are the way forward. And I think the future of token-centric models and onchain protocols and DAO in general is sort of somewhere in between looking at private markets, looking at public markets and looking at onchain tokens and trying to figure out if we want to create a better version of governance that is far more superior than public markets, far more superior than private markets. What are the components that we need to put together these sort of ingredients to create a better way to govern financial systems and I think that's the future where we can actually use onchain so we can use the transparency, smart contracts to enforce certain rules that we can agree upon and eventually have the token holders decide always on the very big matters. And we probably will see in the future ways of actually even raising funds directly on chain in a better way than what we do in a public market for example or private markets and create more access. I think that is the future where we are going towards.
So DAOs aren't dead. They're just going to be reconfigured. Yeah. Evolve or die.
You're probably having a lot of conversations this week with folks from the institutional world. What do you think they get and don't get? I got stopped on the way over to the studio by someone who used to work in banking now is basically a researcher in crypto and he's having a hard time still even in this environment getting folks from the institutional world to take seriously the innovation that's happening within our industry. There are some things that seem to be clicking, but is there anything that they're not grokking yet?
I think everyone is excited about the space who are working in institutions in some sort of digital asset capacity. The biggest challenge is to figure out is the tokenization piece. What to tokenize, what is the value proposition, what is the right product. I think a lot of institutions, banks, asset managers that are focusing on enabling crypto custody, crypto trading are doing low hanging fruits and I think that provides enormous amount of access. Um, same for fintechs. Um I think the challenge is to figure out the tokenization part like how do you tokenize what you mentioned Frank earlier like wouldn't it be nice that we have this environment where you have crypto, equities, private credit, all this value infrastructure in the same environment and you can just choose what you want to hold in your portfolio, borrow against, and how do we get there right so this is a really big problem because you have to create some sort of catalyst in the RWA space and I think that's the sort of like challenge that everyone is trying to figure out. No one has a particularly clear answer to that and I think we're going to see a lot of attempts on tokenization. Um some of them will grow a little bit, some won't, but there's going to be one or two examples which will move the needle.
And with all this happening, is there still time for the raves? Yeah, there's still happening, right? I remember you posted something a few years ago. You had some issues with your health. You had like a gallbladder attack. That gave you some time to pause and reset.
