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Ethena Labs: Enabling the Internet Bond | Guy & Conor

1 hours 20 minutes 11 seconds

🇬🇧 English

S1

Speaker 1

00:00

1 of the largest deficiencies we see within USDC and USDT is that they sort of externalize all the risk of the product onto users and then internalize all of the yield to themselves, which we think is a pretty crazy construct as a product. But it is pretty like indicative of how strong the actual demand for stable coins is, right? You're actually telling people, you take all the risk, we're going to keep all the return, and there's still $130 billion of demand for a product like that.

S2

Speaker 2

00:28

What's up, everyone? Welcome back to another episode of ZeroX Research. This show is made possible thanks to our fantastic sponsor, the Atom Accelerator.

S2

Speaker 2

00:35

If you're a developer looking for the home in the industry, the Atom Economic Zone welcomes you. Today is August 7th, and as always, we have a great interview lined up with Guy and Connor, 2 members of the Athena team. And Athena is a protocol looking to build a truly decentralized and scalable stable coin on Ethereum. I did want to take a second to give a little self-shill to our conference we are hosting in Austin, Texas in September.

S2

Speaker 2

00:58

If you use code 0x30, you can get a 30% discount on those tickets. So be sure to do that. Hit us up on Twitter, and then we can go grab a beer down in Austin. It's September 11th through 13th.

S2

Speaker 2

01:08

It's 1 of the best conferences of the year. So we highly recommend you come. But before we get in the interview, we are joined by Ren and Matt to discuss the latest market happenings. Matt, why don't I hand it over to you to start it off?

S3

Speaker 3

01:21

I am putting centralized exchanges for trading perpetual futures in the hot seat. This is because of the amount of innovation that's currently happening in the decentralized and on-chain perpetual futures landscape. If we look last week, GMX launched V2 of their product.

S3

Speaker 3

01:33

It looks to address a lot of the problems they had in V1, such as a lack of ability to attract LPs. This is because A, to be a liquidity provider on GMX and just for some background, you know, GMX liquidity providers are the counterparty for every trade. So anyone can go trade there and you're trading against these LPs who go and put assets in there. Anyways, if you're being a liquidity provider and V1 of GMX is product, you are taking directional exposure to every asset.

S3

Speaker 3

01:58

So this was things like Bitcoin, ETH, LINK, Uniswap, USDC and in a basket that was a composition that may not have been what everyone really wanted. You know, maybe I don't want the GMX governance token holders telling me what amounts of these assets I have to hold. So in V2, they address this with isolated liquidity pools where you only have to provide liquidity against, you know, whatever asset you want. So I can go and provide liquidity only against, you know, maybe Bitcoin or maybe Ether or whatever I want to hold.

S3

Speaker 3

02:27

So this is 1 very, very cool factor. And then the second thing that I think is most interesting, Oh, another thing is because of these isolated liquidity pools, eventually we might even see permissionless asset listing. So in V1, there's very few assets listed because you needed this liquidity in order to facilitate trading in V2. As long as someone's willing to take the other side of the trade and provide liquidity, that asset can probably be listed.

S3

Speaker 3

02:47

So GMX will probably be listing far longer tail assets in the near future and maybe even permissionless asset listing. The second 1 is there was in V1 a lot of people said that it was a benefit that the liquidity providers were taking on the risk or whatever you want to call it of trader PNL. So if traders were going to lose a lot of money in aggregate, GMX LPs were going to win. If traders won, then they lost.

S3

Speaker 3

03:14

Some people liken this to being the casino with traders being the casino. Although for a while this worked really well because traders were losing a ton of money since January 1st of this year, traders have actually just been wrecking GLP providers. So in V2, there's a way better function for balancing open interest, meaning for making sure that there's an equal amount long and short so that instead of a risk of trader P&L, more so liquidity providers are just pocketing those fees more like a VIG with a sports book or something like that, which I think is an amazing model when compared to the likes of the way V1 worked. Additionally, you know, Synthetix is heating up with CCIP launched recently.

S3

Speaker 3

03:53

It's going to go cross chain. So soon we'll see Synthetix Purpose V2, not just on optimism. There should be a huge benefit given that Quenta and Polynomial, which are the 2 biggest exchanges for trading synthetics PurposeV2 are actually ending their incentive programs at the end of this month. So this is like a little bit of low key alpha.

S3

Speaker 3

04:10

But if you trade on those exchanges for the past few weeks, you've been able to get more money in OP and token rewards than the fees you were paying. So this will end at the end of the month. And, you know, whether or not any of those users and volume that they've received is sticky or not, well, it has yet to be seen. But anyway, CCIP should be a huge benefit for them.

S4

Speaker 4

04:28

What's going to happen to this ecosystem of applications that have taken GOP and made it a core piece of their product. There's a couple of yield aggregators that have really built a product around this. And are they just like shit out of luck at this point?

S3

Speaker 3

04:45

Some of them, yes, and some of them no. So V2 actually allows an even better mechanism for partnering with products that want to build in the GMX ecosystem. But that being said, a lot of the builders who've spent time building these delta neutral vaults on top of GMX or whatever are kind of shit out of luck.

S3

Speaker 3

05:01

So while in the long term, it'll probably benefit people that are looking to build on top of GMX, a lot of the builders who've been there recently might have put some effort into verticals that aren't gonna be too beneficial in the long term.

S2

Speaker 2

05:15

I got another question for you and sorry to put you on the spot, but I guess if let's say someone goes and lists Pepe tomorrow and that's like an asset that people can trade against if P&L goes so negative that the protocol is left holding bad debt. What happens in that scenario?

S3

Speaker 3

05:32

Yeah, so actually they don't have like there's no road map or tweets or anything that say that they're going to support permissionless asset listing. Rather, like I bothered the team a little bit to get that information that that is something that's planned in the future. So we'll definitely have to see how, you know, first these longer tail assets go.

S3

Speaker 3

05:48

And then I'm sure, I think that really the question there is like how much trust you have in GMX's liquidation mechanism. And the protocol realistically may not be even liable for those debts. So I don't know. I think it has yet to be seen, I guess.

S5

Speaker 5

06:04

My take here, or just initial knee-jerk reaction, was that liquidity in DeFi is fairly fragmented already. Like just having the whole GLP versus all of the other options out there, at least in the current environment is kind of like a big ass. And nowadays you're increasing the complexity on the user.

S5

Speaker 5

06:25

You know, sure, like the original V1 basket had like Ving, had Uni in it. But now as a user, you start to think, oh, do I want to choose between like BTC traded PNL or like ETH PNL or like any other token and I think that fragmentation makes it even harder. Or even like just looking at it from like a super like simple perspective right you look at GLP as a whole it's a nice number because you say like GLP as a whole has a total like X dollars of liquidity but now like you silo it to certain markets saying BTC has like 10% of that liquidity, ETH has like 15% of that equity and it just from like a numbers perspective doesn't look as nice. I don't know whether V1 will still be available when V2 goes live.

S5

Speaker 5

07:13

If it is, I think it'll be very interesting to see sort of the dynamics between providing liquidity between v1 and v2 and how much really migrates to v2 and whether that's like something people actually want at the end of the day and going back to your point about trader pnl it being like wildly positive this year. I think on aggregate, you can expect people to get liquidated, they'll DJ and gamble and lose but that's on aggregate over a long term. I think the case against GLP has always been what if everyone is long and GLP gets, sorry, everyone is long as a bull market and GLP gets completely wrecked. I think that's definitely true.

S5

Speaker 5

07:56

Like at 1 point, everyone was like super duper rich in the bull market, but it's basically with a question of whether the GLP holders can last long enough to get to the bear market and then everybody gets liquidated then they'll make bank But yeah, I just think it's an interesting approach of sort of tackling all of the problems that GLP slash GMX had in V1

S4

Speaker 4

08:19

Matt does this change who the fastest horse in the perps race is? Between DYDX, GMX, Quinta, Level, Vertex, we're seeing aggregators like Mucks come online. Like Who's your favorite here?

S4

Speaker 4

08:31

Who's the winner?

S3

Speaker 3

08:32

Yeah, honestly, I don't think this really changes the top spot rather, it gives GMX a fighting chance again. If you look at volume and fees market share, GMX was, I wanna say around 20 or 25%. We could probably pull up a chart.

S3

Speaker 3

08:49

20 or 25% about a year ago, August, September last year. And now it's probably down to for volume, probably under 5%, under 10%. So they've really been getting hammered by some of these newer products. A lot of that's airdrop hunting and maybe incentives, things that aren't sticky.

S3

Speaker 3

09:04

But at the same time, they have been getting out innovated by new entrants to the market. Anyway, so this gives GMX a fighting chance to return to that like Kingspot. At the end of the day, I think if the DYDX v4 manages to actually succeed, have a user experience that really abstracts away, you're in the cosmos, makes you feel like you're just using an app, no matter what wallet you're connecting with, no matter what asset you're starting with. I think the DYDX team is really strong, has proven that in the past and still maintains the dominant share for both metrics that I just mentioned as well.

S4

Speaker 4

09:34

Yeah,

S2

Speaker 2

09:35

I hate to say it, but I do think that GMX is days are limited. Potentially, I know they just reduced fees pretty drastically, but I was looking at for every 10000 dollars of volume traded, how much revenue does D.Y.D. X bring in versus GMX and for GMX?

S2

Speaker 2

09:48

It was like 21 bucks and for D.Y.D. X is like 2. So I just don't understand how volume will actually stay on GMX with fees being so high in comparison to DYDX. So I definitely agree and echo your points there, Matt.

S3

Speaker 3

10:01

Yeah, I guess just to be a contrarian to myself, GMX does have an impressive ability to attract these retail users and have them stay there. I'm not sure what it is necessarily, you know, first mover advantage, being on Arbitrum, meme culture, literally, could be meme culture, but they've been very impressive with having users stick and enjoy their product, which is something that I don't know if I could say for a single other DeFi application, maybe Uniswap. So impressive.

S4

Speaker 4

10:32

Ren, who you got in the hot seat or cool throne this week?

S5

Speaker 5

10:36

It wouldn't be a week of ZOX without us talking about Coinbase in some form or the other. So we have Coinbase in the cool throne this week. Last Thursday after market closed, they announced their earnings.

S5

Speaker 5

10:48

It was pretty positive all things considered especially given the market climate of crypto as a whole in Q2. So the revenue came in at 708 million that's versus analysts estimates of 629 million so a roughly 10 plus percent beat. After those results came out, the stock went up 10% post-market but then retraced that entire move. I think the market was kind of confused about how to value Coinbase or what to think of Coinbase.

S5

Speaker 5

11:19

But yeah, if you consider that the Q2 2022 revenue was 808 million and consider everything that's happened between Q2 2022 and Q2 2023 including Luna, 3AC, FTX, it's pretty impressive that the revenue has basically only decreased

S1

Speaker 1

11:35

12.5%

S5

Speaker 5

11:37

year on year. Of course, there's other like sort of factors that push back against this increasing revenue. For example, declining interest income given lower USDC market cap.

S5

Speaker 5

11:48

USDC market cap has continuously been on the decline versus USDT, which has posted record profits. The market cap is still continuing to increase. But I think there's a few points to stand out. The first is that Coinbase has a fairly sticky retail user base.

S5

Speaker 5

12:05

Perhaps it's the only option or only convenient option for a lot of users in a lot of countries or even the United States too and transaction revenue from that front is still fairly strong. The retail take rate, basically like trading fees used to be around 1.5 percentage points at the end of 2022. But someone in Coinbase basically went, hey, I think we can charge more. And so actually the consumer or the retail take rate is

S1

Speaker 1

12:35

2.2%,

S5

Speaker 5

12:36

which like I guess to you and me, like just trading on like Perfdex is where you're facing fees of like 5 bips, 10 bips, 20 bips. 2.2% is to be quite frank, that's insane. But there's still a decent amount of beta users that are still paying for that.

S5

Speaker 5

12:53

And of course, talk of the town was based, it's going to fully launch on August 9th. And L2 was probably the word that I heard most often in the earnings call. Brian Armstrong just kept on saying L2, L2, L2, arbitrum, optimism, base, polygon. That was really sort of the narrative for half of the earnings call.

S5

Speaker 5

13:13

And he mentioned that Base will be monetized through sequencer fees and Coinbase can run up these sequencers as others can over time. Probably just 1 more fun thing about the earnings call was that Coinbase had relatively strong subscription services revenue And 1 component of that was eavesdropping. And basically, Brian said that the outperformance in that was driven by higher MEV boost rewards. And I think most of us thought that was pretty cool to hear, like in a TradFi analyst earnings call.

S4

Speaker 4

13:47

Yeah, that's a really great synopsis there. And on your point about, I think you said an average transaction fee for trades on the platform was

S1

Speaker 1

13:58

2.2%.

S4

Speaker 4

14:00

That does seem ridiculous, right? But if you think about it, like the on-ramp kind of has that privilege. And of course, if you're actively trading using just like the Coinbase front end, okay, yeah, that's probably a bit nuts.

S4

Speaker 4

14:10

But if you're converting, you know, dollars from your paycheck into crypto, You kind of don't really have a choice. And once you get into the ecosystem, right, you have better alternatives, but where you can execute your swaps, but you know, for dollar to crypto transactions, I mean, you really got 1 option if you're a US based resident and that's really Coinbase.

S2

Speaker 2

14:30

And I'm doing it too. It's like, if I'm on or off ramping, like I'm going to Coinbase. Of course, I'm going to support that company.

S2

Speaker 2

14:36

They're fighting the good fight for us. Like, I think they might just kind of realize that they're the best destination for any U.S. Based customer. There really is no second best.

S3

Speaker 3

14:44

OK, but we're not paying 2.2 percent. Like that's only on the I haven't used Coinbase in a while, but at least back in the day, you know, the way it worked was if you use the Coinbase dot com front end where you just like easily put a credit card in and buy, you pay the 2, 3 percent fee, whatever actually absurd number it is. But then you go to the order book exchange and your fees go down to like 50 bips or 60 bips.

S3

Speaker 3

15:05

Still ridiculously high when compared to most other on and off ramps, but reasonable, at least in my head. So anyways, yeah, if you're a user, don't pay 2 to 3 percent when you're using Coinbase. Go figure out how to use an order book and save yourself that money. It's not that hard.

S3

Speaker 3

15:21

So that was an interesting point about the L2s though. How I actually am criminally underexposed to L2s and like, I think that it's clearly a forming narrative. So like, what's the best way to get exposure? If you guys have an opinion there.

S5

Speaker 5

15:32

If you want specific exposure to base, there probably isn't a good way to do it. I'm not sure if buying Coinbase stock as exposure to base is the best option you have. Definitely don't go out and buy that meme token vault.

S5

Speaker 5

15:48

That's not how you get exposure to BASE as a whole. I think probably your best bet for getting exposure to BASE specifically as an L2 would be to buy tokens of projects that are specifically launching on-base but with a strong existing brand outside of base. So the best example of this is probably VeloDrome, Optimism's largest DEX, by a pretty decent margin, make a good amount of fees, but they're launching basically another version of that on-coin base called Aerodrome with its own token, right? That's probably the best way to do it in my opinion.

S5

Speaker 5

16:25

Like sure, you can buy like existing dApps that exist on other protocols, but like I'm not gonna go buy for example Uniswap or some other like big lending borrowing protocol that's gonna deploy on base just as my exposure. I think it has to be a token specific for that on base.

S4

Speaker 4

16:43

Yeah, and of course, none of this is financial advice, but it is kind of interesting because you also noted, Ren, that sequencer revenue is like that's how the profit generated by the sequencer is how Coinbase is going to like essentially realize profits from base. And already in the first couple of days since launch, It's generated 1100000.0 dollars with, you know, fee L2 fee revenue, less L1 call data costs. So it's already you know, I think we're like what a week and a half into launch and a quick million bucks in Coinbase revenue.

S4

Speaker 4

17:13

So you know, again, not financial advice, but Coinbase itself is going to accrue a meaningful amount of value from Base L2.

S2

Speaker 2

17:23

1 thing to add on to the Aerodrome comment, Ren, is I guess they're giving 25% of their protocol fee revenue to public goods funding. So I'm just kind of wondering if that's going to be like a normal trend. Are a lot of projects from Optimism going to use the same tech stack, go to base, kind of be like a bit more public goods oriented just because of the nature of base?

S2

Speaker 2

17:45

I don't really know. But I have a trouble time like seeing like, okay, like, do I want to own Arrow or do I want to own, you know, Velo? Like, I just don't know. It's like if a quarter of all revenue is going to public goods funding, I just don't really know how that shapes out in terms of token performance.

S2

Speaker 2

18:01

But yeah, like Dan said, not financial advice at all.

S4

Speaker 4

18:04

Another interesting cool throw on this week is PayPal actually. Didn't think we'd see them back in the news, but they've been off and on with crypto for a while. Most recently announcing PYUSD, which is an on platform stable coin.

S4

Speaker 4

18:16

So it's funny, it's like a couple months ago we were talking about protocol-specific stablecoins with the launch of like Aave's Go and Curve's CRVUSD. Well now we're getting company-specific stablecoins with the launch of PayPal's PYUSD. And so they announced that customers will be able to purchase, send, convert, and fund purchases with this new stablecoin in the coming weeks, which is pretty big news because PayPal itself has about 400 million active users. And this announcement comes just a few months after PayPal enabled crypto purchases for its Venmo users.

S4

Speaker 4

18:51

And I think that probably my personal biggest takeaway with this announcement is they are launching this thing on Ethereum. And so, again, like we're seeing this increasing narrative of things that are like we used to get. I don't know, it felt like in the bull market, you'd get this like crazy big announcement of a, you know, a real company partnering with like some random ass blockchain project that like you knew was a scam if you spent time in this space. And it was like, great, just like another meaningless partnership.

S4

Speaker 4

19:17

But now with the SAP news and now this PayPal integration, this is kind of what you'd imagine adoption actually looks like. And it's all happening on Ethereum. So that's a pretty interesting takeaway for me personally. Now, the stablecoin itself kind of got a lot of heat.

S4

Speaker 4

19:32

It's actually issued by Paxos. So to create the contract, they forked the USDP, 1 of Paxos stablecoins contract. And they're like randomly catching heat on Twitter because This is like a very old version of Solidity, but again, it's forked from an old stablecoin So of course that's going to be the case. So I was like this weird thing people were hating on And then it also got a lot of hate for being like a centralized stablecoin because it has a freeze functionality That is not surprising at all.

S4

Speaker 4

20:01

If a private company or like a public company is launching a stablecoin, like they are already a centralized company, you're going to have to trust to use this thing. It's like no different than USDC and USDT having a blacklist function. So just don't use the stablecoin if you don't want to hold a centralized form of money. I don't know why this was getting so much heat.

S4

Speaker 4

20:21

I thought this was very strange. Why would PayPal go launch this decentralized form of money that some of these protocols are trying to make? That's just not going to be the person to do that. That's not going to be the entity that does that.

S4

Speaker 4

20:32

Obviously that's still like a goal we wanna work towards building, but yeah, not sure why we thought PayPal would launch that. To me, what matters here is the transparency. So like this thing's on chain, everyone can go look at the contract, everyone can go see the transactions and kind of know like what's going on in the backend with this PYUSD when you're using it on platform. Now I imagine that PayPal itself won't like every time a user purchases a good on using PayPal, I don't imagine they see that as an Ethereum transaction.

S4

Speaker 4

21:02

I think they're going to do a lot of the bookkeeping in their own internal system and then kind of like true up transactions when need be on chain. And eventually if the users want to off board PYUSD from the platform to an external wallet, then they'd have the ability to do so. And that, of course, would be a transaction. So yeah, it's going to be really interesting.

S4

Speaker 4

21:21

I'm excited about the launch, and then there's this whole other wave of things that it's going to be really, really interesting to watch happen. How do they drive liquidity for this token? Because that's so imperative to keeping a token pegged. Are they going to launch an AMO or a PSM like we see with all these on chain protocols and their stable coins like there's a whole world that they'd have to unpack if they really did enable external transfers which they said they're going to do.

S4

Speaker 4

21:40

So I'm going to watch it's going to be an exciting 1 to watch this 1 unfold.

S3

Speaker 3

21:45

Crypto Twitter really loves to get upset about the stupidest things like I totally agree with your take but it's honestly for me This is the smart con the people that were you know Shitting on the smart contracts that they were using because they're older Yeah, you totally every time we launch something new we should a hundred percent innovate and do something that's not battle tested. That's a terrible take. I think using battle tested older smart contracts is actually totally fine for something like this.

S3

Speaker 3

22:10

And that pushing for innovation in that type of space actually sometimes isn't even a good idea. But yeah, just crazy to see all the hate.

S5

Speaker 5

22:20

I think 1 of the main takeaways for me is that this increases or in some sense increases the retention of sort of dollars within crypto. I think like a lot of people would be fine receiving say their wage or their pay in crypto and like USCC or UCT, but it's what comes after that that's really a pain in the ass. You have to off-ramp it, you can't really pay for anything in crypto today and there are sort of like interim solutions being built for example Gnosis Pay with the card that they've launched in Europe which I think will be available to American users soon but this gives you a lot more reason to sort of use stablecoins on a day-to-day basis, right?

S5

Speaker 5

23:03

For example, with PayPal, they have their PayPal debit card, you can pay your bills, for example, your Spotify, your Netflix, or whatever subscription, they have direct deposits, they have savings where you can deposit your assets and receive a 4.3% APY. And I don't know how much like this PayPal USD is going to be integrated with all of these services or products that PayPal has. But if it is integrated, even to like some extent, I do think that's a pretty big move from PayPal's side, just because it makes stable coins have much more value from an everyday consumer perspective.

S2

Speaker 2

23:43

The first thing I thought about, not going to lie, was, I don't know if you guys remember that headline a while back saying like any transfers over $600 will be reported by Venmo to the, or sorry, to, by PayPal to the IRS that, that kind of just like sits in the back of my head. And I'm like wondering, man, I should probably go read those terms of service. Cause to me that feels more like a doc scheme than anything else to me.

S2

Speaker 2

24:04

Not going to lie because I don't really know the main use case for PayPal. I get it for cross-border payments and I get it for maybe like switching money around between international accounts for PayPal as a business, but I don't even know if that's legal either using like their stable coin per se. So I don't know. I'm interested to see how this 1 pans out for sure, but not entirely optimistic.

S3

Speaker 3

24:28

Connect your Ethereum dressing at $5 free.

S2

Speaker 2

24:32

Yeah, yeah, exactly.

S4

Speaker 4

24:34

Hey, I'm excited for the experiments. Like we need people testing this shit. And like, I haven't actually done this and it literally just hit me right now.

S4

Speaker 4

24:43

But I'm fairly certain that SAP's they're like cross-border payments thing was on Cepelia testnet. And I'd love to go find that contract and like mess around and see how much value has been shoved through that thing. Obviously, it's testnet, so it's not real money. But I'm curious if like any clients are like fired up to use this thing or not.

S4

Speaker 4

25:01

So that's another thing that I need to put on the to do list.

S2

Speaker 2

25:04

Definitely let us know what you find. But on the kind of similar same vein is the Coinbase L2 talk. I've got Arbitrum on the cool throne.

S2

Speaker 2

25:13

They announced bold last week, which stands for bounded liquidity delay. And it's basically a dispute protocol. And it represents, in my opinion, 1 of the most progressive attempts at a large ETH L2, actually trying to decentralize to date. Today, how Arbitrum works is it's basically a permission set of validators who can submit challenges if they detect an invalid state transition, but bold is going to make it so that anyone can participate in the dispute process and make sure that the chain is actually operating as it should be and in an honest manner.

S2

Speaker 2

25:45

So it's honestly super cool. Any chain can use it, it's like super modular. So any orbital chain or maybe Nova or Arbitrum 1, and then they're also gonna let the DAO vote whether they wanna actually implement the protocol. It hasn't gone live on Testnet yet, So definitely keep an eye out on that, but it has been audited by Trail of Bits.

S2

Speaker 2

26:06

And honestly, just in general, it's a really good step forward for ETH L2. So you guys got an extra cool throne this week.

S3

Speaker 3

26:12

I go a step further. I'd say Arbitrum is the only L2. Like what is an L2?

S3

Speaker 3

26:17

You're trying to rely on Ethereum security. Okay. With a permissioned set of people who can submit fraud proofs. Is it really an L2?

S3

Speaker 3

26:24

Like, not really, but it's the closest thing we have today. It's better than, you know, a multi-sig controlling the bridge like some of their optimistic roll up counterparts. Every L2 today has a lot of points of centralization. And this was really the last thing that Arbitrum, actually the second last thing that Arbitrum really has to figure out before it's like truly fully decentralized layer 2 on top of Ethereum.

S3

Speaker 3

26:44

The last 1 being the Security Council, which is like 9 members who can veto any governance proposals or push anything through a 9 of 12 multi-sig, sorry. But yeah, like this is a huge step. And just for reference, like the reason it's so hard is because if you let anyone submit fraud proofs, right, then I'm going to go, if I'm a malicious actor, I'm going to go submit that every single transaction is malicious and I'm going to halt the network. So it's like a denial of service attack on Arbitrum or any other L2.

S3

Speaker 3

27:09

So finding a solution to this is like a huge step forward and has been something that the Optimistic World team has been thinking about for years now. So this is the first real good attempt at it. And very, very exciting.

S2

Speaker 2

27:19

Yeah, they did say in the blog post, too, that there's an upper bound of 7 days for this process. So like you said, like those denial of service attacks can't happen in their scheme, as at least they believe, believe so. So that's that's super interesting.

S2

Speaker 2

27:32

And then on top of that, there was another point I was going to make, but I'm blanking on it right now. So I don't know, Ren, Dan, do you have anything to say about this?

S5

Speaker 5

27:40

I think it's interesting that they're leaving this up to the DAO to vote. I doubt this will happen, but I think 1 super interesting scenario would be for whatever reason the DAO votes against this sort of like protocol upgrade. I think that would be like a super whack scenario.

S5

Speaker 5

28:02

Totally plausible. I'm not sure why anyone would vote against it, but totally plausible. Maybe they think there's like some technical risk or like no 1 really understands it and just guys just vote. But no, I agree with both your points Sam and Matt that this is a big step in sort of like decentralizing the protocol.

S4

Speaker 4

28:19

Can L3s that are built on top of Arbitrum, can they do they have any sort of cross native interop between the 2 L3s? Is that not possible?

S3

Speaker 3

28:31

Yeah, so L3s is like kind of a misnomer, but whatever. It just means that it uses Arbitrum's inbox, meaning it uses the same sequencer and settles with Arbitrum transactions back to L1. So all Arbitrum orbit chains, the L3s and Arbitrum are synchronously composable.

S4

Speaker 4

28:49

So the L3s also post directly on the L1? The L3s don't post to the L2?

S3

Speaker 3

28:54

Correct. With optimistic rollups, L3s are a bit of a... An L3 in an optimistic rollup looks very different than an L3 and a ZK roll up.

S4

Speaker 4

29:03

Interesting. Okay. Today I learned.

S3

Speaker 3

29:06

Technically you could say that off-chain labs would probably give me some shit for that and say, yes, it does settle here. But if I settle here, it means that the transactions go into the same inbox contract on an arbitrary.

S2

Speaker 2

29:17

Yeah, that was a good question that Dan, the point that I had forgotten a little bit earlier was just that there could be infinite number of malicious validators, you know, disputing your valid fraud proof, essentially. And as long as there's just 1 honest validator, then it's going to work. Like the chain will go back to its correct state.

S2

Speaker 2

29:37

So I just thought that was a pretty cool takeaway as well. But Dan, you want to take it home and tell the folks about the Atom Accelerator a little bit?

S4

Speaker 4

29:45

I do indeed. I do indeed. So as always, like to give a little shout out to our wonderful sponsor, the Atom Accelerator, who is looking to improve the quality of builder in the Atom Economic Zone.

S4

Speaker 4

29:54

We want to bring more attention, more effort, and ultimately more funding into building within this kind of subdivision within the Cosmos ecosystem that's really focused on improving the Atomos money and really just driving home what the Atom Economic Zone can do. We've seen a lot of success in Ethereum, DeFi, and we kind of want to replicate some of that over in the Cosmos ecosystem. So I was just talking about native cross-chain interoperability, which the Cosmos Atom Economic Zone has this with IBC. It also has interchained security and things like stride and duality.

S4

Speaker 4

30:29

I've leveraged this to kind of help push forward the innovation that's going on over here. We'll soon have native USDC coming to the ecosystem with the launch of Noble. And so again, if you're looking to build within this ecosystem, check out the Atom Economic Zone. We'll put a link in the description and they are giving funding on a rolling monthly basis ranging from 10, 000 to 1 million dollars.

S4

Speaker 4

30:50

So again, this is a call to the builders. If you have a great idea that you're just looking to get kickstarted, be sure to check out the link in the description.

S2

Speaker 2

30:59

So we are joined by 2 members of the Athena team, Connor and Guy. I want you guys to intro yourselves and maybe tell the audience a little bit about the protocol Athena.

S6

Speaker 6

31:08

My name is Connor. I'm leading research at Athena. Before then I had a traditional finance background working for a pension fund for about 4 years.

S6

Speaker 6

31:16

So about as far away as you can get from crypto. And then about 2 years ago, I made the decision to get into crypto professionally. So I joined Kyco, who are a market data provider. And I sat on the research team there.

S6

Speaker 6

31:30

So I spent nearly 2 years there talking about kind of market liquidity from like an asset and exchange level as well, but also kind of 2 main focuses on stable coins and derivatives. So it was already kind of aligned in my interest with Athena and as well kind of spent my time writing about the need for a stable coin like Athena are building in the space. So yeah, when I heard kind of what Athena was doing, I was immediately on board. And yeah, I'll let Guy take it from there.

S1

Speaker 1

31:58

Oh, yeah. So my name is Guy, started my career in traditional finance as well. So initially that was an investment banking work in London and then moved to a US private equity slash hedge fund in the US.

S1

Speaker 1

32:11

We focus primarily on financial services. So we're looking at everything from buying banks to insurance companies, fintechs and then distressed debt situations as well. I sort of got into crypto, I had a friend who was a DeFi founder back in 2019, and I was straight into DeFi back then, and was sort of doing that on the side of my day job until mid-well 3.22 when Luna collapsed. And it was just after Luna had sort of gone down, Arthur Hayes came out with 1 of his thought pieces around how we might think about a crypto native dollar that could truly sort of live outside of the banking system and actually scale.

S1

Speaker 1

32:48

And yeah, read his base and quit my job like 3 days later to start building out what we're doing with Athena.

S2

Speaker 2

32:53

That's awesome, I love to hear it. So can you kind of explain why you think a decentralized stable coin is so important? And maybe if you could touch on that Arthur Hayes piece a bit and explain maybe some of the inspiration you took, but also how the actual implementation Athene is going after is going to be different.

S1

Speaker 1

33:10

Yeah, sure. So I might just start on the, why I think it's important. I think What is crypto trying to do?

S1

Speaker 1

33:16

It's trying to create sort of a parallel financial system that sits outside of the existing 1. But the most important financial instrument in crypto is a stable coin and it's completely tethered to the existing system. So I think most of what we're trying to do in DeFi is a bit of a joke if basically the most important asset is completely centralized. So I think we've sort of seen in the last year as well, just how important it is to actually just have something that we can be self-sufficient with, whether that's SVB at the beginning of the year or what you saw with Paxos and Binance sort of getting shut down.

S1

Speaker 1

33:47

I think it's becoming more and more evident that we actually need sort of a solution that exists within crypto and we can sort of depend on. Yeah, Arthur's basic idea was, and it's there's been previous iterations that have attempted a similar thing, is basically long a crypto asset on 1 side and then short a perpetual on the other. And those 2 things coming together creates a synthetic dollar position out of those 2 positions netting off. Arthur's core idea was around Bitcoin, just around the size and scalability of that market.

S1

Speaker 1

34:17

And he was pretty insistent on this not trying to be purely decentralized. So you sort of have to accept the fact that centralized quantity is needed to actually scale this to a size that's actually meaningful for both ourselves and then actually users who want to come to the product. And so, yeah, we took the idea, 2 small adjustments around swapping out Bitcoin for Staked ETH initially. Bitcoin is sort of something that is possible further down the road.

S1

Speaker 1

34:42

And then the other piece was just around how we think about creating interesting connective tissue between DeFi and CeFi where we agreed that you need centralized liquidity to get this to work. But we thought that there were pieces of DeFi that we wanted to retain. And that was sort of transparency, and making sure that the collateral was sitting off of centralized exchange servers. And so we think we found a pretty interesting middle ground between keeping assets off of an exchange.

S1

Speaker 1

35:07

So you reduce your counterparty risk to exchanges and then still be able to access that liquidity.

S4

Speaker 4

35:13

So what's the perk of kind of finding this? I don't necessarily want to call it a hybrid solution because I think it does keep a lot of the core ethos of DeFi. It's just kind of like giving the takeoff there.

S4

Speaker 4

35:23

The tradeoff is you are leveraging some of the liquidity on central exchanges. So I guess the question comes, why? Does this help promote scalability?

S1

Speaker 1

35:32

Yeah, exactly. So I think maybe just background in terms of how I philosophically think about the space, I'm, I think, a bit more pragmatic than other founders who are maybe in the space. I think you sometimes see people who either are trying to produce products that are scalable and useful for like millions of people, or you sometimes get idealists who are just super focused on like broad definitions of decentralization, which are only really interesting to a hundred to a thousand people.

S1

Speaker 1

35:58

I definitely fall in sort of the camp of the former, which is I'm more focused on producing a product that's actually useful for people and then walking back towards decentralization. And so I think for us as a team, we sort of ask ourselves the question of what is it actually within decentralization that you care about when you're not trading on an exchange. And for us, it's just looking back to FTX, which is you just don't want your assets sitting on FTX when that sort of situation unfolds. And being able to disaggregate custody from trading and execution is actually a step change improvement from what we had.

S1

Speaker 1

36:32

And this is sort of how traditional market structures work in the real world, which is those those 3 functions being jammed together is like a complete abnormality within within crypto versus normal markets. And I think it's our view that that's going to change over the next 12 months. And we just want to be part of that.

S4

Speaker 4

36:49

Are there any existing stablecoin designs that you think like did something really interesting? Of course, outside of the 1 you're building. But I'm curious to see, like, you know, did you like leverage the ideas that have been tested and tried?

S4

Speaker 4

37:00

Or like, how do you think about the existing landscape and maybe some interesting things that currently exist?

S6

Speaker 6

37:06

1 that we were kind of quite aligned with, I guess, was UXD. So they also adopted a Delta Neutral approach on Solana, decentralized markets. The issue with them was that they couldn't really scale.

S6

Speaker 6

37:19

So they could scale on a collateral side of things. So essentially like Delta Neutral Strategy hedging your collateral 1 to 1 allows you to kind of adopt a near 100 percent collateral ratio. And So they were scalable from that side of things, but the fact that they relied kind of solely on decentralized perpetuals on Solana, they couldn't really scale to the size that was needed. And so from that side of things, we thought there was a definite improvement that was needed, and hence the kind of CeFi connectivity that we're making.

S6

Speaker 6

37:46

Also, like liquidity is interesting. But then you've kind of got a lot of stable coins popping up now. And I think generally it's like a comment on DeFi in the last few months that there's been a lot of stable coins and protocols kind of using staked Ethereum and like forking old DeFi protocols and using staked Ethereum on top of things probably sounds ironic coming from a protocol that's doing something similar, but that's not our main kind of our main value add. So yeah, there's been a kind of, I guess, a lack of innovation in the space right now.

S6

Speaker 6

38:16

And yeah, a lot of those stable coins, they're needed from a decentralized standpoint. It is good to have a decentralized, like a fully decentralized alternative. But the problem is they just can't really scale. We kind of know that by now.

S6

Speaker 6

38:28

We've seen plenty of examples of stable coins that need like 150, 160 percent collateralization because they take on obviously the fully decentralized collateral in Ethereum and Bitcoin. What we're doing is obviously taking on fully decentralized collateral, but we're obviously making trade-offs and trying to get that CFI connectivity to access that kind of liquidity so that you can scale it into the size you want to actually reach like a hundred million users rather than let's say a thousand kind of DeFi whales.

S2

Speaker 2

38:56

So I think it'd be helpful if you guys just kind of walked us through the process of like, if I'm a user and I want to mint $10, 000 of USD, where am I going? What collateral do I provide? What's actually happening underneath the hood?

S2

Speaker 2

39:10

And when I want to redeem it, what does that process look like as well?

S1

Speaker 1

39:15

Yeah, sure. So we try and abstract away a lot of the complication that sort of sits in the back end for the users. So what we're basically doing is providing a pretty simple front end that looks quite similar to when you're derived at something that looks like Uniswap.

S1

Speaker 1

39:27

So you'd be coming with either dollars, ETH or STETH. And you can deposit any of those assets and we're going to have like the system at the back which sort of aligns our collateral to put on the hedges that we need in the background. So if you're actually just coming with dollars, you can sort of swap directly into USD or if you're coming with Steeth or ETH, we're basically taking that collateral. We have an off-chain server that's basically reading the contract that receives the collateral coming through from the user.

S1

Speaker 1

39:54

It's running a pretty simple computation to say, where is funding most efficient across the market to deploy that collateral? And so that's reading exchange APIs, which are external and outside of DeFi and then also DeFi platforms as well. It's basically making an assessment that can you take an entire collateral and deploy it on 1 venue or do you need to split that up between different venues to make execution as efficient as possible. And then it's basically saying, we need to send this collateral to X exchange.

S1

Speaker 1

40:23

You're then gonna distribute that to an off exchange custody solution. So that's where the collateral is actually held. That will be with custodians that you'll be familiar with. Guys like Copper, Fidelity, all of the big names that are 5 blocks.

S1

Speaker 1

40:38

And the key piece there is that the collateral is actually sitting outside of the exchange. When the collateral hits our wallet, an API call is sent to the exchange to say we need to hedge this exact amount of notional right now. And when we receive the API call back from the exchange to say that that hedge has actually been executed, we can we can issue USD to the user on the other side. And so the key piece there is that we can only issue that stablecoin once we have confirmation that the Delta has actually been hedged, because we as a protocol can't take on the sort of naked tail risk that ETH price moves and you haven't actually hedged yourself in that period.

S1

Speaker 1

41:15

So I think from a user perspective, it'll look quite simple and similar to what people have seen, which is arrive with dollars or staked collateral. But in the background, that's the mechanism that's taking place.

S4

Speaker 4

41:28

What is the timing of that look like? So if I go to the front end and make a deposit, the transaction has to occur on chain and then the off-chain server needs to read the transaction and execute some computation or some logic to fill the hedge. And then once the hedge is filled, it kind of needs to like ping it back to the smart contract in some way.

S4

Speaker 4

41:48

So what's the feedback time look like?

S1

Speaker 1

41:50

Yeah, so the actual request that you're putting in as a user of the front end is more of a signature request. It's similar to when you're going to 1 of the aggregators like a 0x or a match or that type of thing, you're signaling an intent that you want that hedge to be executed. And then you've got to remember that everything that's sort of occurring on a CFI level is like microseconds rather than seconds.

S1

Speaker 1

42:12

And so before the next block is actually confirmed within Ethereum, we already know has that has been executed and can we issue the USD on the other side. And so it's not going to be any slower than what you'd sort of see on chain with with other protocols, because all of the off-chain infrastructure just operates at 100x the speed of everything on chain.

S4

Speaker 4

42:30

Okay, so that makes a ton of sense. And when we think about the actual hedge itself, how do you think about the venues that you're using? Is it just kind of like if you have liquidity where interest, whether that be on chain or whether that be off chain, or do you have some sort of risk tolerance for which venues you are interested in using?

S1

Speaker 1

42:48

Yeah, we obviously need basic risk controls around this whole thing. I think 2 simple examples I could give you is, let's say funding on whatever exchange, pick your exchange, Bybit is better than the market. We can't have 90% of the portfolio sitting on Bybit if they represent 10 to 15% of the market.

S1

Speaker 1

43:06

There needs to be basic controls around a what is your contribution to that exchange relative to market share across the space. And then also what is your percentage of open interest on that exchange itself. So there are basic caps around how big can we be on a single venue because then you start to really influence the funding rates and liquidity on that venue. And then sort of global risk parameters around does the portfolio that you have within Athena accurately sort of represent the market share across the market.

S4

Speaker 4

43:39

Okay, okay, now that's super interesting. And then, so I'm curious, like I guess the obvious question then is when funding rates go negative for an extended period of time, I know you guys have done some extensive research on what this has looked like over the last 3 years and how that would impact the asset itself, but when funding rate is negative for an extended period of time, how does that impact the protocol?

S1

Speaker 1

44:04

Yeah, sure. So

S2

Speaker 2

44:06

do you

S1

Speaker 1

44:06

want me to run through the pieces why we're not concerned by that or just literally the sort of the downside and what actually plays out in reality?

S4

Speaker 4

44:15

Do the latter part and then like why you're not concerned about that being a factor.

S1

Speaker 1

44:19

Sure. Yeah. So you can basically just think about it as we have a liability to the exchange that we need to pay out that funding every 8 hours. The source of those funds is going to be the principal of the stablecoin.

S1

Speaker 1

44:30

So if we can't take the yield from Staked ETH to cover that and we don't have a sufficient size insurance fund to pay out that cash, you need to start actually using the principle of the stablecoin itself to pay out the funding on the other side. I would characterize this risk very differently to some of the collapses that you've seen in the past, where this is a very slow attrition of the principal through time, rather than something that collapses to 0 in a short period of time. I think the other piece just to highlight around this risk is that it would be quite strange, I think, for that to persist through time, because a user can see that there is a negative yield that's attached to the instrument. And that's going to be pretty obvious to people on the app itself.

S1

Speaker 1

45:14

And So for people to continue holding something that has a negative yield and that you know is going to experience a slow attrition through time is quite a strange user behavior where we would expect people to actually step out of the product when funding does go negative. I think the interesting piece about that is that when users start to step out of that product, you lift the short on the exchanges and that the process of doing so actually starts to lift funding rates across the market because you reduce sort of short interest across the market. So we like the funding rate is a risk to this whole thing. And there are a bunch of different risks with all kinds of stablecoins.

S1

Speaker 1

45:51

But I think the 1 here is actually, it's part of the mechanism design and we actually do quite like it, which is you have an exogenous interest rate, which acts as like an anti-reflexive mechanism where if supply is contracting too quickly and you're lifting shorts as a response, that's actually going to mean revert the funding rate above 0 and people are attracted back into the product. And on the other side of that is when it's going too quickly, you're going to be pulling down funding rates across the market, the product is less attractive for people to come in. And so naturally, sort of the growth in the stablecoin slows down. So where some designs in the past were super reflexive on the way up and down, I think this is actually going to exhibit characteristics which are in contrast to that.

S6

Speaker 6

46:31

I had my 2 cents there for the funding rates. The key there is that they're mean reverting. And we did a lot of research there over the last few weeks on the actual distribution of funding rates.

S6

Speaker 6

46:42

So there's a bunch of different things that help keep funding rates positive. There's positive baseline funding on some of the big exchanges. So Binance and Bybit have like positive baseline funding of 0.01%. And that's like 50% of open interest you're looking at there between Binance and Bybit.

S6

Speaker 6

47:00

And then you've also just got like a lot of kind of market dynamics. Crypto tends to be kind of long biased anyway. There's a lack, there's kind of a supply demand imbalance. We've got the demand side is there.

S6

Speaker 6

47:10

Definitely. We know kind of how DGN crypto people are and they want to be, they want to go long crypto. But there's no real supply side, definitely in the derivatives market anyway, a lot of institutions aren't at the stage yet where they're willing to kind of lend that capital to counter that demand side. So naturally, kind of funding rates have sat positive and we've seen that so like funding rates are mean reverting, but they also kind of are skewed to the long side as well.

S6

Speaker 6

47:34

So the longest streak of days we've seen like positive funding rates has been 9 to 9 days. And that was set like this year. And the longest negative streak of funding rates we've seen daily has been 13 days. So there's a lot of kind of points to be reassured about there with funding rates that they've shown up until now.

S6

Speaker 6

47:51

Obviously still very early days. They've only been around for about 3 years, but there's a lot of kind of reassurance that they are 1 main reverting and also at the moment, they skew positive.

S2

Speaker 2

48:00

Is the idea on the other side of that in order to spark demand for USDE going to be returning some of that yield to the stablecoin holders? And if so, is it like a seed token model where the amount that's claimable, the underlying pool grows, so the amount you can redeem USDE for will gradually increase over time?

S1

Speaker 1

48:22

Yeah, that's correct. It'll look a bit like a bolt, and that's obviously only eligible to some users outside of certain jurisdictions. There is a bit of sensitivity around that piece.

S1

Speaker 1

48:32

But yeah, the idea is that 1 of the largest deficiencies we see within USDC and USDT is that they sort of externalize all the risk of the product onto users and then internalize all of the yield to themselves, which we think is a pretty crazy construct as a product, but is is pretty like indicative of how strong the actual demand for stable coins is, right? Like you're actually telling people you take all the risk, we're going to keep all the return, and there's still $130 billion of demand for a product like that. So we think the opportunity is quite interesting where you can actually start to share some of that with with users on the other side. I think the other piece just to get to your question around the distribution and how we're thinking about holders actually getting coming into the product is I generally think people underrate the idea of distribution for stablecoins quite a bit.

S1

Speaker 1

49:23

We tend to sort of solve interesting academic problems within DeFi, but then forget about how is this actually ending up in the hands of users on the other side. I think 1 thing that looks quite unique about us is we obviously have quite a few centralized exchanges as investors and then also as platforms that we're going to be integrating and trading on. It's worthwhile just remembering where we could potentially be a really large and interesting fee opportunity for these exchanges because every dollar of Notional that we're creating on the stablecoin requires a dollar of derivatives being traded on the exchange. So those numbers get pretty big when you start extrapolating out stablecoin suppliers like into the billions.

S1

Speaker 1

50:00

And so to the extent that you can actually incentivize exchanges on the other side to say, you're actually going to see fees not only in the generation of this product, but actually potentially as part of the yield that's being generated. That's a really interesting sort of carrot to then incentivize exchanges to distribute your product on the other side. So my perspective on this is rather than us going to find 10 million, 100 million users ourselves, why not actually create a product that's compelling for, yes, some people on chain, but actually just make a compelling product for 5 exchanges, which have 100 million users on the other side and let them distribute to those users for you with the right sort of incentives that sit around that. So I think that is a slightly different piece of this approach and again is why we see sort of our connections to centralized exchanges as quite important for the product.

S4

Speaker 4

50:47

Yeah, I know that that makes a ton of sense. And when you noted the piece about USDC or Circle and Tether, for example, kind of internalizing all of the revenue generation that the collateral assets are making is a great point. But what that ultimately ends up becoming is a phenomenal business.

S4

Speaker 4

51:04

Those those 2 entities are raking in cash. So from looking at the protocol from more of like a business lens, how is the protocol going to generate revenue? Is there like a take rate on some of the yield being generated?

S1

Speaker 1

51:16

Yeah, so I think you can very simple numbers here, like stake-to-yield somewhere between 4 to 6%. The basis in the futures market, if you include the bear market of 22 over the last 3 years, is somewhere between 5 to 7.5%. So when you add those 2 numbers together, it's actually a pretty interesting unlevered yield, which gives you a lot of room for maneuver to think about how you distribute that yield.

S1

Speaker 1

51:40

My view here is maybe slightly nuanced in terms of how you think about that distribution to users where really what you're competing with, to some extent, you're competing with like risk free rates in the real world. But there's clearly a lot of trapped capital within crypto that hasn't gone out to fetch those yields and is still sort of sitting there in USDC and USDT. Really like the hurdle rate that you're trying to clear is either 0 with those products or like a very what is quite a small yield now in DeFi, roughly 3 to 4 percent in terms of what you can get on dollars in some of those blue chip DeFi protocols. And so if you're actually adding somewhere between 8 to 12 on the asset side for this product in normal conditions, and the rest of the markets at 3 or 4, I'm not convinced that you need to pay out the full 12% to users to still attract them into the product.

S1

Speaker 1

52:30

And that gives you a pretty large scope to capture some of that to the insurance fund within the protocol. So the idea here is that whatever's being captured by the protocol from that yield is going to capitalize the insurance fund to sort of make it a more safe and secure product going forward and gives us the optionality to start thinking about other products. Like, do you want to add Bitcoin? You want to add ETH without Steeth?

S1

Speaker 1

52:51

And all those sort of ways that you can think about scaling the product even more.

S4

Speaker 4

52:57

OK, very, very interesting there. And I want to quickly jump back to scalability. So you mentioned that it has this self-correcting mechanism where if the funding rate does go negative, you'd expect users to exit the product.

S4

Speaker 4

53:11

And that ultimately takes some of the open interest off of the perps market and increases, in this case, the funding rate. So with that being said, to me, it sounds like the scalability of the product is tethered to the amount of liquidity available on the perp side of the market. Because I imagine if it does rapidly increase in total supply, then you'd eventually find this equilibrium point where there's like, based on the total, maybe it's like maxing out the total amount of liquidity on the perps market. And it's, you know, the users are kind of like keeping it balanced there as funding rate goes negative.

S4

Speaker 4

53:46

Is there like a way to imagine what that size is or is that just like, you know, kind of like an impossible question?

S1

Speaker 1

53:55

We can give like rough numbers for the market as it exists today. And then there's sort of views about how that might evolve going forward in time. I think 1 thing that we might just point towards is something that we saw at the back end of 22.

S1

Speaker 1

54:09

I don't know if you guys remember the ETH proof of work arbitrage trade that went on there, where traders were long spotting from 1 side and then short futures on the other to collect the risk free sort of proof of work airdrop on the other side. Conceptually, that's very similar to what we're doing here, right, which is your long staked ETH on 1 side and then shorter futures on the other to collect the risk free sort of proof of work address on the other side. Conceptually, that's very similar to what we're doing here, right, which is your long stake ETH on 1 side and then using the same derivative instrument on the other side. And what we actually saw from the data in that period was that open interest on exchanges went from 8 billion to 16 and then back to 8 in the space of 2 weeks.

S1

Speaker 1

54:39

And that was all in a pretty orderly way, which to us was actually a pretty strong signal that if there is a demand to expand the derivative market for a specific use case, which in that case was quite similar to what we're doing, the market can sort of handle those flows in a reasonably orderly way. That's not to say that I don't think some of those yield dynamics that I was describing earlier don't change through time. So I think natural compression of state deeth yields through time is expected like bull market aside, depending on what sort of happens with activity on chain. And then naturally, as this product grows through time, I think it's reasonable to assume that that basis within the futures market does get compressed as well going forward.

S1

Speaker 1

55:19

But that's going to be a natural outcome of us doing our job successfully on the other side. So I do think there are limitations, absolutely, if you're thinking about just stake-to-eat collateral right now with derivative market as it exists today. But there are obviously different avenues that you can start using other collateral like Bitcoin going forward. And there's no there's no sort of mathematical reason that the derivative market can't be a multiple of spot markets going forward, which is actually what you see in traditional markets across a bunch of different instruments.

S1

Speaker 1

55:50

So at the moment, perhaps as a percentage of ease market cap, sub 10%, so somewhere between 5 to 8, depending on when you look, that has like a lot of room to grow to support this product going forward. And it's pretty natural, I think, as more institutions come into the space, that tends to be the product they actually tend towards.

S2

Speaker 2

56:09

Now, you mentioned at the beginning of the chat that USD Steith as in Lido Steith and then ETH will be, you know, eligible to be deposited on the front end. So do you mean like USDC and USDT or do you mean US dollars on the centralized exchange side and then also like the raw ETH that gets deposited? Does that ultimately get staked by you guys?

S2

Speaker 2

56:30

Like is the whole entire product ultimately converted to state ETH and then hedged accordingly?

S1

Speaker 1

56:37

Kind of, yeah. So if you're coming with dollars, actually what's functionally happening is you're just going to be hitting a curve pull or AMM on the side. And in the process of that curve pull becoming imbalanced, market makers are going to perform the arbitrage against the mint and redeem contract of the protocol.

S1

Speaker 1

56:53

And so it's not actually users who are coming in with dollars to swap into Steeth or ETH on the other side, it's actually them swapping into dollars in an AMM. And then the market maker sort of closing that loop which sort of kicks kickstarts that whole mechanism that I described earlier. If we are receiving ETH, yes we will be distributing them to different staked ETH providers that could include Lido, it could include more like enterprise-grade staking solutions like Lubil or even exchange native stake products. So as you know, Binance has a pretty big stake product, Coinbase does, OKEx as well.

S1

Speaker 1

57:27

And there's pretty sort of interesting Rebate opportunities that you can get for the users on the other side there Which is if you're taking an ease and depositing into those those state Products you can actually try get a bit of a kick back to the users on the other side So yeah, actually that is what's happening and I think to your question around how does that interact with exchange frontends going forward. This is clearly quite an interesting product to be sitting behind 1 of those earn pages on an exchange frontend where they sort of abstract away that complexity for users to basically just deposit into this product on the back end to again, as we sort of said, distribute our product, but actually just get a yield for their users on the other side.

S2

Speaker 2

58:06

Okay. That's super interesting because my next question was going to be, are you at all worried about Steeth and Lido dominance? Because that's obviously a hot topic amongst the Ethereum community and you guys are going to be very reliant on the health of the Ethereum network itself. So I guess I was going to say, are you going to try and reduce your reliance on Steeth over time and expand the market share more evenly amongst other staking providers?

S2

Speaker 2

58:27

But would your answer just be that? Like, yes, if Steeth dominance got super high ETH, raw ETH deposits and US dollar deposits, you just you know, sprinkle into other providers? Is that kind of like the answer to that question?

S1

Speaker 1

58:40

Yeah, I think Connor does have some views on this. I might just pass on to him as well. But You just got to remember that we have a lot of platform dependence on what other people require rather than us sort of driving that decision.

S1

Speaker 1

58:51

So if we just simplify that question into what's more important of liquidity and decentralization, you won't be surprised to know that exchanges care more about the liquidity piece in terms of using that as collateral. And we just need to think about our users, which is how do things go wrong on our side? That's with liquidity. It's, I think, a far lower probability that sort of decentralization is something that actually is a core reason why what we're doing fails.

S1

Speaker 1

59:19

That's not to say it's not important. I think there's a lot of really intelligent and important discussions going on around that topic. It's just not something that we should be leading because it's not the biggest risk, I think, to what we're doing. The biggest risk to what we're doing is making sure that collaterals are liquid and we can put on the positions for our users in the right way.

S1

Speaker 1

59:36

So I don't mean to deflect away from that question. I just think we have different things that we're focusing on versus other LST providers who are more focused on that decentralization piece. I'm more focused on making sure that things are liquid and allows us to provide the best product that we can for our users.

S6

Speaker 6

59:54

Yeah. Yeah. My point on that was on the same page. Guy covered it there pretty well, but it's just a personal thing, but I'm not sure how much kind of risk management you're doing or reduction of risk by taking on other forms of staked Ethereum.

S6

Speaker 6

01:00:09

So Lido dominance isn't something that really concerns me right now. Like it's kind of dominant for a reason. And that's because it's got like the best validator set. It's been battle tested.

S6

Speaker 6

01:00:17

It's got like obviously very good market traction and it has enough to pay a good validator set. Whereas these smaller kind of liquid staking tokens right now haven't haven't got that kind of market traction yet. You're nearly It's not like you're diversifying by taking 10% Steeth, 10% Rockapooleath, 10% whatever else. I think you're actually potentially adding more risk by kind of diversifying away a lot of the staked Ethereum allocation.

S6

Speaker 6

01:00:43

So as Guy said, it's kind of not something we're concerned with right now. It's probably more of a question for the Ethereum ecosystem as a whole. And it's probably far down our initial kind of a risk preferences right now, let's say.

S4

Speaker 4

01:00:57

Yeah, no, I see where you're coming from on that point. As a builder, you know, you gotta focus on what's best for your users. So that makes a ton of sense.

S4

Speaker 4

01:01:03

Your perspective makes a ton of sense there. I do have 1 question as it relates to Steeth. So if that's the collateral asset being used, then you're long spot staked ETH, but shorting the perp of ETH itself. And is there like a, I guess like if Steeth were to de-peg, which of course with withdrawals lie, that's not the most likely scenario.

S4

Speaker 4

01:01:23

Staked ETH holders also have the ability to force exit validators. So there's like a lot of good place guards in there, but in the event that some, you know, crazy situation did happen where there's a material de-peg in staked ETH. Wouldn't that create a gap in between? Because you do have a bit of a mismatch there, right?

S4

Speaker 4

01:01:38

It is not the same exact asset on the perp and the spot side. So how do you guys think about the risks involved there?

S1

Speaker 1

01:01:44

Yeah, so There is absolutely a basis risk there that you're pointing out. I think you sort of got to 1 of my responses there before I did, which was I think post Shapella that risk is slightly less pronounced than it was when we sort of saw, it's not really a deep egg, but like the dislocation in pricing down to whatever it was like low 90s when 3 hours were going up. I don't think we see things as deep as that going forward, but that's not to rule out a small sort of dislocation in that price.

S1

Speaker 1

01:02:13

1 piece I'll just point out around what we're doing is we don't really use any leverage on the short. So if we're running a highly levered strategy over there and the Oracle price was with reference to StakeDeath's actual price, that would run the risk of us obviously getting liquidated on that account for our users. So part of what like our philosophy around this is just try to keep it sort of simple and safe and secure to just make this thing stable for users rather than push sort of the boundary in terms of returns and introducing leverage there. So that's 1 piece.

S1

Speaker 1

01:02:45

And then the other 1 is just more of a question of timing, where if every single user wanted all of their money out at the exact same time, that would force you to crystallize that loss on withdrawal, because you'd have to take that collateral and give it back to the user, which doesn't represent the dollar that they thought they put in. If this is something that's a temporary sort of issue every day, you lose 50% of your TVL, but you still got half of it sort of sitting there and it can sort of like recover in that period of time. And the basis can sort of close. That's sort of fine because you haven't crystallized the loss, you sort of got through it.

S1

Speaker 1

01:03:23

That obviously exists with normal stablecoins, I'll just point out, where a lot of the risk that you saw with bonds blowing up in the real world in the last year was a question of are you actually redeeming now to crystallize that loss on the mark to market value of those bonds? So really, it's actually exactly the same sort of risk there. It's just a question of how are you managing that duration risk, which is, does Everyone want their money out at the exact same time that you have that dislocation in pricing. So I'm not gonna discount the risk, but I think pre-Shapelo this product probably wasn't possible.

S1

Speaker 1

01:03:54

And I think that was sort of a huge tailwind for us to be able to do this.

S2

Speaker 2

01:03:58

So will it be one-to-one, or are you guys thinking about adding like a 5, 10% buffer just in case of like doomsday scenarios occurring or like allowing even more time to potentially de-risk and wind down a portion of the stable? And then also, have you guys thought about maybe putting caps in place in relation to the size of the insurance fund just for like ultimate safety?

S1

Speaker 1

01:04:20

Yeah, I think that's the purpose of the insurance fund. So like the effective collateralization of the system will be more than 1 because you've got that pool of dollars basically sitting behind the stablecoin. The purpose of that is for the negative funding risk that we described.

S1

Speaker 1

01:04:35

But then also to add, it can sort of be a bidder as well of last resort. So I think 1 interesting characteristic of this stablecoin is that you can prove in real time that the whole thing is solvent because you have the collateral there where you can sort of read and show users and you've got the derivative positions, which again, you can read and show users. So it's sort of like a real time value that you can actually make an assessment of, is this thing solvent? And to the extent that like the market value of the stablecoin is trading off of where you know the solvency of the stablecoin exists.

S1

Speaker 1

01:05:06

So if you can prove that there's a dollar that's sitting behind it and it's trading at 95 cents on curve, is there an interesting sort of solution where that insurance fund is also a bidder of the open market USD and then you basically socialize those gains between token holders on the other side. So we know that people are going to panic at some point in time going forward and you can't sort of control the free market price moving in panic. But I think there's an interesting sort of role that insurance fund can play in also providing basically a bid to socialize those gains with with token holders afterwards. And you can only do that when you can prove that the system is actually collateralized at 1.

S1

Speaker 1

01:05:44

And that is programmatic.

S2

Speaker 2

01:05:46

Yeah, that's a super interesting idea because I was going to ask, you know, what do you expect the volatility of the stable to be? You know, granted, like if you really want it to be prime stable coin for DeFi usage, you want that peg ideally to be as strong as possible. So I was curious as a follow up question to that, like, were you planning on a PSM of sorts?

S2

Speaker 2

01:06:05

But it kind of sounds like that insurance fund might be used for peg stability.

S1

Speaker 1

01:06:09

Yeah, I think only in proper dislocations. I don't think we want to be interfering with sort of normal market, normal market gyrations around the price. So I think you just got to let the free market do its thing most of the time.

S1

Speaker 1

01:06:22

But I think if there's a very obvious and defined level that you can define relative to the solvency of the stablecoin, where that can be a sort of bitter of last resort. I do think that's an interesting use of that capital, which actually benefits all the token holders as well going forward. So yeah, and yeah, we're working pretty closely with the way that the mint and redeem contract as well works is pretty similar to USDC where it's usually known counterparties to us who can do the actual mint and redeem. So unfortunately that's not going to be totally permissionless where the mint and redeem is done by any user.

S1

Speaker 1

01:06:58

It's sort of done by primarily market makers who carry out that function, which is similar to USDC. But when it's sort of out in the wild, in the same way that you can hold USDC without KYC and without permission within DeFi, that's sort of how most users are going to get access to USD. And so, yeah, we're going to have sort of market makers around this protocol in a pretty involved way. And they're obviously going to play a role to some degree in that possibility.

S4

Speaker 4

01:07:25

Do you need any protection to the upside here? Right. Because if we look at DAI and its history, there was, you know, its moment, I think it was a Black Thursday, where borrowers were rapidly trying to repurchase die on the open market to repay their loans as Ethereum, the price of ETH was crashing.

S4

Speaker 4

01:07:39

And of course, there's like a liquidation risk there, right? Like when you're in these over collateralized stable coins, It's because you're risking liquidation at the end of the day, which doesn't really seem like it'd be a case here. But I'm curious to get your take. Like, is there ever a situation where, you know, people that have minted USD and maybe swapped it into like ETH or some other thing like rapidly want to close their position and, you know, reclaim their staked ETH from the protocol, that would create a surge in demand that could potentially increase the price of the stablecoin.

S4

Speaker 4

01:08:10

So yeah, I guess we've seen Go from Aave recently launch that launch with no stability mechanism, so no PSM or AMOs. And that thing's been trading around 98 cents, basically, since launch. And they're working towards getting a PSM live. But we've seen this trend where you sort of need an AMO or a PSM model to kind of kickstart there.

S4

Speaker 4

01:08:30

So do you have any risks with even deep pegs to the upside?

S1

Speaker 1

01:08:34

Yeah, I think the deep pegs to the upside are interesting because I think it's more of a question of why does that not close down when it does deep peg upwards. And it's traditionally something that you see, as you pointed out, with CDP type designs where I think that sort of arbitrage loop of defining the stable point to be 1 within the lending protocol, and then expecting people to sort of repay debt when it's below there, or add collateral, it's just a bit sort of clunky versus something that's super efficient, where market makers are plugged in with APIs and it's all done in a completely algorithmic way to keep our peg in line. I think 1 question that you had around the market crash piece, which I think is quite interesting here is that, as you pointed out with Dai, when we had that market crash, people sort of buying to repay debt and that pushes the price up.

S1

Speaker 1

01:09:23

What's functionally happening to us on the other side is that in a market crash, you sometimes see dislocations in perp pricing versus spot. And so sometimes you see the perps actually trade whatever 10, 15, 20% out of line versus spot. That would be actually a pretty concerning risk, I think, if the design of this had us long on those exchanges on long perps. But actually, because always the positioning is to the short side.

S1

Speaker 1

01:09:47

When things are melting down, it actually tends to sort of work in your favor, where the whole market dislocates, it breaks down, and you're actually positioned on the short side, you thought that you were hedged for $100 of notional, and it turns out that the purpose price at 110 on the other side, And so you can actually collect sort of that extra P&L if the market breaks in your way. So I'm not sort of saying that's part of the design here, which is we're trying to pick up like strange P&L opportunities through the way. I do think it's interesting though, that on those market dislocations, it's likely that you are positioned in the right way where things are breaking down. It's most likely it sort of works in your favor.

S2

Speaker 2

01:10:26

Is there a plan for on the user interface to just have very clear insight into like where the backing is the collateralization like what's the plan for transparency on that front?

S1

Speaker 1

01:10:38

Yeah, I mean this is like absolutely core to our approach I think we look back on the last few years and I think a lot of the reason for the blow-ups that you saw in the last few years was actually just an arrogance from a lot of founders who didn't want to sort of engage with reasonable questioning and reasonable inquisition into how things were actually working. And so, yeah, part of what we're going to be producing is extremely detailed dashboards which have real time information around the solvency of the whole stablecoin. That's going to be broken down by custodian, by exchange exposure, everything that you can sort of like trace down to literally the single dollar.

S1

Speaker 1

01:11:15

I think it's part of what we think is actually interesting about this versus USDT or USDT where you're sort of waiting for for bank statements to come through from banks or auditor reports every quarter or whatever it is. Again, part of like what we found interesting about DeFi is having that real time view of what's actually going on under the hood. And if we weren't leveraging that, I think we'd be doing our users a bit of a disservice.

S4

Speaker 4

01:11:38

Super interesting. I love that focus. And honestly, I really just like your worldview of how you view what an interesting world for DeFi looks like and kind of being just an open, transparent financial system.

S4

Speaker 4

01:11:49

So good to hear it on that front as well. But earlier in the call, you mentioned the ability to add Bitcoin. So to me, it makes sense that Staked Eth is a collateral because it has that natural yield, whereas Bitcoin does not. So how would the tradeoff kind of work for adding Bitcoin as collateral?

S6

Speaker 6

01:12:06

I can take that. It would just, I guess, have like worse unit economics. Like so at that point, when you do take Bitcoin on as collateral, you're presumably going to be in the size of like a billion or multiple billions.

S6

Speaker 6

01:12:16

And you have to make that decision essentially, okay, do we want to scale this product to, as I said, reach way more users? And if we do, that's like a decision we're making, and we'd like this product can essentially still function without the staked Ethereum yield. And So again, if you look at like the numbers with funding rates, Bitcoin basically mirrors Ethereum funding rates in that the number of days where Bitcoin funding rates have been positive has been 75% versus 25% negative. So as I said, the kind of economics of this are still viable with just Bitcoin, hence kind of Arthur Hayes's post.

S6

Speaker 6

01:12:50

It's just obviously at worst unit economics, you don't have that extra little buffer that Staked Ethereum gives us. So if you add on the 5% yield that Staked Ethereum has, you get like that, that those percentage of like negative days essentially dwindles down to like

S1

Speaker 1

01:13:05

11%.

S6

Speaker 6

01:13:06

So it's just a different kind of setup in terms of your exposure to funding rates and potentially more of a drain on the insurance fund. But as I said, that could be like a trade off we're willing to make eventually to to scale the product even further and kind of achieve the goals we're after.

S1

Speaker 1

01:13:20

Yeah, I think just to add to Connor's comments and I echo everything he said, but I think in the beginning, you're going to ask the question of what is actually a fundable business that you can sort of grow in the beginning. If you take the idea of Bitcoin to try and get funded, it doesn't look that interesting, right? You're sort of saying, can you take naked risk that this thing doesn't blow up over the next few years?

S1

Speaker 1

01:13:40

And hopefully there's sort of a token that's attached to it that people buy into. I think that's a much harder sell than what could actually look like a really interesting sort of revenue generating protocol, which is if this thing is in this low sort of single digit billions at some of the yields that I was describing, back of the envelope math is producing like more revenue than every application that exists within DeFi now. I think you can sort of look across to Tether's profits and just see like what is actually the potential there in terms of them producing more than even BlackRock. The reason I'm sort of saying that is I think it gives you interesting optionality to start with StakeDeath first because it's a really interesting business and it's a fundable business and it allows you to accrue cash into that insurance fund and also raise capital for that insurance fund going forward and then at some point you've got enough in that insurance fund where you can then say do I want this to be a really interesting business or do I want this to be a protocol which can truly scale beyond the 10 billion in size?

S1

Speaker 1

01:14:37

And I think you need to start with the solid economics in the beginning to afford yourself the optionality to do that later.

S2

Speaker 2

01:14:46

Yeah, I absolutely love the way you're thinking about this. I've been pondering the idea of an LST backstable for a while and was like, man, I hope whoever does it puts a strong emphasis on the insurance fund. So that way 10 years down the line after that compounds for a while, you have a lot more flexibility in your design decisions to maybe try other things to scale the stable itself.

S2

Speaker 2

01:15:04

But I did want to ask you guys what your L2 strategy is. Obviously a part of the core Ethereum roadmap is moving users to L2, so therefore you want USD to be there. Is that going to be relying on people, you know, bridging it there somehow, or are you guys looking to mint it natively over there? Like, have you guys thought at all about the L2 strategy?

S1

Speaker 1

01:15:24

Yeah, I think we have an over-reliance on Staked ETH collateral sitting on ETH L1. I think if you actually look at what's the migration of state ETH and dollars to L2, I think it's been slightly underwhelming actually in the last sort of 18 months. My view on that is that Wales are actually just pretty comfortable.

S1

Speaker 1

01:15:44

I know we also have the curve news come out this week. So if we put that to the side, but like, they were pretty comfortable in those pools up until last week. And that's kind of where you saw billions of dollars of liquidity sitting and they didn't seem to be able to take on that risk to go to an L2. And so for us, as I sort of said earlier, it's really about being close to where is the liquidity for dollars and staked ETH in the beginning.

S1

Speaker 1

01:16:07

And that's ETH L1. There are interesting new L2s that are popping up, which have a deeper focus around staked ETH as an asset going forward. And there are interesting discussions that we're having there. I do think that also products coming out from some of the messaging and bridging protocols which allow you to access these sort of omni-chain deployments of your stable coin across chain in a relatively secure way in our view.

S1

Speaker 1

01:16:35

And so, yeah, the initial focus is ETHEL1 because of the liquidity that's sitting there. I think there are interesting developments on certain L2s who are focused on stake deeters and ACID. And it's something that I think we'll explore once we've really nailed the opportunity on ETL1.

S4

Speaker 4

01:16:51

Sounds like a layer 0 OFT if you ask me, but hey, I guess I gotta, you know, you gotta ask the question, like, where are we in development guys? Are we on testnet yet? And when can we expect a mainnet launch?

S1

Speaker 1

01:17:03

Yeah, so we're running with like team Proc Capital at the moment, trading with Conor's money and haven't lost anything yet. So that's going okay. The idea is like we're running those numbers now for the next 6 weeks.

S1

Speaker 1

01:17:18

And we have sort of investors who are in the seed round who are going to participate in just sort of like slowly growing the TV out before we open that up to the public. The idea is in 6 weeks time, we've got testnet forms on the Twitter, which you can sort of sign up to be involved there. And we're just going to do a very slow, secure and controlled rollout of the product in 6 weeks time for people to engage.

S4

Speaker 4

01:17:40

That's awesome. And, you know, I'm curious to get your launch strategy. You know, again, we've seen Go launch.

S4

Speaker 4

01:17:46

They launched very closely with Balancer. Frax has been very attached to the hip with Curve and the AMM ecosystem over there. What is your plan to kind of garner on-chain liquidity and create true depth for this stablecoin?

S1

Speaker 1

01:17:59

Yeah, I think obviously the news events this week, like slightly put that up up in the air, but maybe I'll just describe our general approach to these type of things, which is, we're generally quite agnostic to providers. And we don't really like to sort of nail down our own success on a single platform going forward. So whether that's an exchange, whether it's a liquid staking token, whatever it is, like I think diversity and sort of actually working with everyone towards the same goals is generally how we sort of think about things.

S1

Speaker 1

01:18:26

So we didn't have a strong tie up in the same way that you sort of described a few of these other projects. So I think there isn't a defined strategy with a single provider. We sort of want to work with others. And I think the other comment around that is that we have slightly less of a focus around actually incentivizing liquidity sitting on chain with just token incentives.

S1

Speaker 1

01:18:48

I just genuinely think it's, it's not something that's like fully sustainable through time. We're quite focused on actually just making sure that that exogenous yield that we're bringing into our product actually just stands on its own 2 feet, which is, we think quite interesting, because you're basically leveraging a return from StakeDeath and then the return from the futures market which all sit outside of like the core piece of DeFi and that sort of self-referential yield that you like often see within that and we just really want to lean into the fact that we think we have a really interesting a sustainable source of yield that we can actually bring on chain, which doesn't need as much of those incentives within those pools. So yeah, that's the general sort of comment.

S2

Speaker 2

01:19:29

Awesome. Well, this has been an absolutely fantastic conversation. I'm super excited to see where Athena goes and I'm definitely going to sign up for that wait list for, the, test net and I'll be sure to link that in the share notes, but Connor, guide, do you guys want to share people where they can find you learn more about Athena and get involved?

S6

Speaker 6

01:19:45

At Connor rider on Twitter for me. And I think the Tina, Twitter is at Athena underscore labs. We also have a Discord and a Telegram.

S6

Speaker 6

01:19:53

You can find all that in our Twitter.

S1

Speaker 1

01:19:55

And I'm the leptokotic tag you can see over there. Thanks for the time guys.

S4

Speaker 4

01:19:59

Appreciate it. Cheers.