Discussion on the current state of the crypto market, including the emergence of bald figures discussing fiscal responsibility and the sales force's global reach.

Introduction to the Crypto Market

Introduction to Arbitrum as a solution for high fees and slow transactions in the Ethereum ecosystem.

Introduction to Arbitrum

Introduction to Harpy as a security partner for wallet protection and prevention of theft.

Introduction to Harpy

Discussion with Guy from Athena Labs and Arthur Hayes on the topic of stablecoins and their involvement in Athena.

Discussion with Guy and Arthur Hayes

Arthur Hayes shares the history of stablecoins and their role in the crypto ecosystem, including the challenges faced by exchanges and the emergence of Tether.

History of Stablecoins

Discussion on the reliance of stablecoins like Tether on the traditional banking system and the potential risks associated with this dependence.

Issues with Tether and Stablecoins

Arthur Hayes proposes the concept of a synthetic dollar created with crypto and a short perpetual swap position, aiming to address the reliance on stablecoins and the banking system.

Proposal for Synthetic Dollar

Guy and Arthur discuss the origins of Athena Labs and their collaboration on the concept of a synthetic dollar, leading to the formation of Athena.

Athena Labs and Arthur Hayes Collaboration

Discussion on prior attempts to create similar concepts and the challenges faced by decentralized exchanges in scaling the idea.

Challenges of Prior Iterations

Introduction to Athena as a stablecoin platform, highlighting its TVL, user base, and impact on the narrative.

Introduction to Athena

Discussion on the risks associated with Athena, including funding risk, counterparty risk, and the role of the insurance fund in mitigating these risks.

Risks and Insurance Fund

Explanation of the behavior of funding rates in extreme scenarios and the impact of stake-to-ETH returns on mitigating funding risk.

Behavior of Funding Rates

Discussion on the scalability of Athena's strategy and its potential impact on interest rates across different financial sectors.

Scalability of Athena's Strategy

Discusses the importance of not getting front run on Ethereum inputs and the execution hedge on the other side. Considers the type of attack factors and the potential outcomes of certain trading strategies.

Reflection on Ethereum Inputs and Execution

Explores the cost of liquidity to get in and out of Athena, and the potential impact of everyone wanting to exit Athena at the same time. Discusses the redeem fee and the 7-day cooldown for asset redemption.

Liquidity Cost and Asset Unwinding

Discusses the rationale behind rebranding Athena away from stablecoin to synthetic dollar or synthetic internet bond. Considers the naming conventions and the industry's approach to dollar-denominated assets.

Rebranding to Synthetic Dollar

Explores the composability of Athena and its integration with both CeFi and DeFi. Discusses the potential use cases and the focus on yield-bearing infrastructure within L2s and Perp Collateral on centralized exchanges.

Composability and Integration with DeFi Protocols

Discusses the potential challenges and regulatory issues related to the introduction of a Fed stable coin and the impact on the stable coin market. Considers the profitability issues for the Fed and the Treasury, and the political dynamics surrounding stable coins.

Fed Stable Coin and Regulatory Challenges

Considers the potential unknown risks and fragilities in the stable coin mechanism, including counterparty exposure, custodial setups, and the role of insurance in providing an extra layer of security.

Unknown Unknowns and Risk Mitigation

Discussion on different avenues to capitalize the insurance fund, including selling part of the treasury to people and capturing a spread.

Capitalizing the Insurance Fund

Insight into the beginning of the bull market, the potential for price sensitivity, and the stickiness of flows into ETFs.

The Beginning of the Bull Market

Discussion on the involvement of institutions, banks, and ETF providers in the crypto market, and the potential downside of passive investing in crypto.

Institutional Involvement in Crypto

Exploration of the tradfization of Bitcoin, the potential impact of passive investing, and the role of the community in responding to the concentration of crypto ownership.

The Tradfization of Bitcoin

Insight into the interest rate market, future trading, and the potential for growth in the interest rate market within the crypto industry.

Interest Rate Market and Future Trading

Discussion on the market potential of Athena, including its appeal to traditional funds, crypto funds, and entities from TradFi.

Athena's Market Potential

Concluding remarks on the bull market and a brief mention of Arbitrum as the title sponsor.

Closing Remarks

- The piece discusses the emergence of bald figures like Larry Fink promoting fiscal responsibility
- It also mentions the launch of a security partner called Harpy to prevent wallet theft
- The conversation revolves around stablecoins and the concept of creating a synthetic dollar using crypto and short futures contracts
- It also mentions previous attempts at creating tokenized hedge funds on decentralized platforms but highlights the potential of the derivative market for scaling the concept securely.

- The derivative market is not large enough to scale in a secure way on chain
- DEXs are split across different chains, making it difficult to pull together into a single source of liquidity
- The launch of Athena allowed users to buy USD or SUSD, with strong growth since its launch
- Common criticisms include funding risk, trade execution, and custodial and counterparty risk
- Athena sees funding risk as a self-correcting mechanism based on market demand and supply
- The biggest risk to Athena is counterparty risk, particularly with centralized exchanges and third-party custodians.

- Discussion about the risk of betting on the US banking system or centralized crypto exchanges to help crypto survive
- Focus on funding rates and insurance fund size in extreme scenarios
- Use of staked Ethereum as collateral asset in Athena's backing
- Scalability of the strategy and impact on funding rates
- Aim to bring interest rates between DeFi, CeFi, and TradFi in line
- Need for a consortium of exchanges for success
- Concern about public position being targeted by hedge funds

- The speaker is discussing the potential for a hedge fund to manipulate Athena's position and cause a cascade in the market.
- They address concerns about liquidity and the potential for users to not get their assets back if the market dips.
- The speaker also talks about the rebranding of Athena as a synthetic dollar or synthetic internet bond, and the need for industry-wide naming conventions for stablecoins.
- They emphasize the importance of composability and integrations with other DeFi protocols for Athena's success.

- The cost of borrowing USDC should converge to RWA rates
- Yield bearing collateral on DEXs and SEXs can increase capital efficiency
- USDC holders are more yield sensitive than USDT holders
- USDC is already sharing yield with distribution partners
- The minting and redeeming process for Athena is done through known counterparties and is KYC'd
- The stable coin market faces potential challenges from the Fed and traditional banks
- Tether and other stable coins pose a profitability issue for the Fed and Treasury due to their fully reserved nature

- The use of physically backed US dollar stable coins poses a profitability issue for the Fed and the Treasury
- Tether has grown so big that it is now the 22nd largest holder of treasuries, causing liquidity issues in the market
- Central bank digital currencies (CBDCs) may not dethrone stable coins due to the strong political influence of commercial banks
- Unknown risks and fragilities exist in the stable coin landscape, including custodial setups and insurance concerns in DeFi

- The speaker discusses the beginning of DeFi summer and the changing yields in the market
- They talk about the potential for underwriting super normal returns through a USDE and capitalizing an insurance fund
- They believe the bull market is just beginning and discuss the impact of institutions buying up Bitcoin
- The speaker also discusses the potential downside of passive investing in the crypto market and the sectors that interest them for investing

- Discussion of the emergence of bald figures promoting fiscal responsibility and the launch of a security partner called Harpy to prevent wallet theft
- Conversation about stablecoins and creating a synthetic dollar using crypto and short futures contracts
- Highlighting the potential of the derivative market for scaling tokenized hedge funds securely
- Concerns about funding risk, trade execution, and custodial and counterparty risk in Athena
- Use of staked Ethereum as collateral asset in Athena's backing and the aim to bring interest rates between DeFi, CeFi, and TradFi in line
- Potential challenges and unknown risks in the stable coin landscape, including custodial setups and insurance concerns in DeFi
- Discussion about the beginning of DeFi summer, changing yields in the market, and the impact of institutions buying up Bitcoin
- Consideration of the potential downside of passive investing in the crypto market and the sectors that interest them for investing.

- The speaker is excited about new crypto narratives, particularly in AI and interest rate markets
- They believe that interest rate markets in crypto will be a significant opportunity for trading
- They also discuss the potential for Athena, a crypto platform, to attract traditional finance customers
- The overall sentiment is bullish on the market and the potential for growth in the crypto space

- Speaker excited about new crypto narratives, especially in AI and interest rate markets
- Believes interest rate markets in crypto will be a significant trading opportunity
- Discusses potential for Athena, a crypto platform, to attract traditional finance customers
- Overall bullish sentiment on market and potential for growth in crypto space

In today's episode we are joined by Arthur Hayes and Guy Young dive deep into the world of stablecoins and synthetic dollars. They discuss the counterparty risks associated with Ethena, a new synthetic dollar product, and how it aims to provide a decentralized alternative to traditional stablecoins like Tether and USDC. The conversation also touches on the challenges faced by algorithmic stablecoins, the potential impact of institutional investors entering the crypto space, and the exciting opportunities in the growing interest rate market within the crypto ecosystem. To close out Arthur shares where he thinks we are in the cycle. Thanks for tuning in!
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- -
Timestamps:
0:00 Arthur's Stablecoin Musings
9:28 History of Tokenized Hedge Funds
11:47 Ethena Overview
16:34 Arbitrum Ad
17:20 Harpie Ad
18:33 Risks of Ethena
24:25 USDe Yield over Time
29:28 Defending a Cascade
35:05 Rebranding USDe   
45:35 Minting & Redeeming Process
48:14 Stablecoin Endgame
1:00:39 Where are we in the cycle?
1:09:09 Top Narratives this Cycle
- -
Disclaimer: Nothing said on Empire is a recommendation to buy or sell securities or tokens. This podcast is for informational purposes only, and any views expressed by anyone on the show are solely our opinions, not financial advice. Santiago, Jason, and our guests may hold positions in the companies, funds, or projects discussed.

You've just started to see, you know, bald motherfuckers like Larry Fink going on CNBC talking about like fiscal responsibility and all sorts of other bullshit that we've been banging on drums for the last like 15 years.

Like the sales force is just starting around the world of, hey, you know, put your assets here, we'll protect your gets inflation, you maybe made 10x on some shit coin that you bought and you sell that now.

Like this is not even, not even there yet.

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So the Arbitrum team reached out and they showed us the platform.

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Before we jump into today's episode, I'm excited to share Empire's first ever security partner.

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Harpy is not just a security solution, they are a peace of mind solution.

Harpy is the only wallet security solution that protected 100% of its users from attacks like the Ledger 1 in Q4, which was an off-chain signature attack.

To learn more about Harpy, click the link in the show notes or visit harpy.io forward slash

All right, everyone, welcome back to Empire.

We've got Guy from Athena Labs And we have Arthur Hayes joining us.

Arthur, I thought it'd be fun to actually pick on you to start.

You've been writing about stable coins for, I don't know, as long as I have been reading you, whether it's like, you know, I remember the Luna Brothers piece from 2022.

There was an article from 2021 talking, you know, that I remember when you were writing about stable coins, like the height of the last market, basically you were calling for a change in stable coins.

I'd be curious, like, what is your story of both thinking about stablecoins but also meeting Guy and getting involved in Athena?

Yeah, so I mean, stablecoins and Tether was kind of the pioneer of this back in, I don't know, 2015 when they started, whenever it was.

Right, so back when I used to trade a lot more and be more involved in the exchange scene, you know, when I started in 2013, after MTGOX failed, then banking became a really big issue for the entire crypto ecosystem and exchanges lost big accounts.

Like I remember back in the day Bitfinex had an HSBC account and you had major banks unbeknownst to probably their compliance departments had crypto exchanges that were using them.

But once MT.Gox failed and that whole shit show went down and there was more scrutiny around crypto, you started seeing banking become a lot bigger issue for a lot of the major exchanges.

And so they played this cat and mouse game where, you know, for a time it was Taiwan where all the exchanges thought some Taiwanese banks that were cool with crypto.

And then the Taiwanese banks corresponded to the bank of the US said, we don't want more crypto.

And so it became this constant back and forth.

And into the breach step, you know, tether, which was like, hey, how are we able to do it?

You can stuff some dollars here and we're going to give you this US dollar token that's going to ride around the crypto exchange ecosystem.

And basically you as the exchange don't need to have banking relationships.

And obviously you have exchanges like Binance.

Binance, I don't know if they have a bank account even today.

And their whole order book was based on tether pairs.

So stable coins as a concept of we want to bridge, how do I get fiat into crypto when the banking system is hostile for obvious, for obvious reasons, there's this stable coin thing.

And so, you know, Tether started very small and obviously now it's like 100 billion AUM.

And my whole, I guess, problem with Tether is not that they're shady or they're lying about the reserves or any of that FUD shit that you hear on the internet.

I think Tether is a great business, it's run very well.

My problem is that Tether relies on the banking system to exist.

If the banking system says, we don't wanna have this proto US dollar bank servicing crypto, it's very trivial for them to cut off all the banking relationships with Tether.

It would be literally a phone call from any regulator or any major banks saying, we don't wanna have Tether in the system anymore, and boom, Tether's gone.

Right, and we have to deal with that shit show, the DPEG, Redemptions, blah, blah, blah, trading mayhem.

So we have this great product that we need as crypto ecosystem, yet we're relying on the trad-fi motherfuckers to give us access to this product.

And so my thinking was, well, why are we doing this?

We have derivatives, we have crypto, we don't need to use the banking system.

We can create a synthetic dollar by combining, you know, and originally my thought was Bitcoin and a short futures contract or a short perpetual swap, the inverse types that were margined in Bitcoin, and we can create this synthetic dollar.

And we can use a synthetic dollar throughout the ecosystem for anyone who wants to park money into crypto, into a crypto dollar that can ride around the ecosystem when they don't want to own Bitcoin or Ethereum or any of the other shit coins.

And so I've written about this concept, you know, many times in different flavors throughout the many years that I've been writing the CryptoTreater Digest.

And then I penned this article, Dust on a Crust, calling again, like we have this big issue in our ecosystem, in our market structure.

We're relying on Tether and Circle and First Digital and, you know, Binance USD when it existed.

These companies that just hold dollars in bank accounts to power a lot of the trading pairs.

Why don't we use something that's owned and operated by 1 of us, where the exchanges themselves are owners and the exchanges themselves have invested interest in making sure this survives because they wanna make more money.

And so I was like, well, why don't we just provide this concept of a synthetic dollar that's created with crypto and a short perpetual swap position.

And I wrote this article about a year ago, and Guy read it and sort of started working on it.

And we kind of crossed paths in the summer of 2023 and sort of, you know, the rest is history.

So Guy, did Athena come out of that post or did you have the idea and you basically brought it

to Arthur and he's like, you're like, I know you're talking about this, I've got this idea or is it, hey, you've got this idea,

It was actually slightly earlier than that.

So it was that Lunar Bros piece that you actually mentioned just went down in 22.

That was actually when I sort of resigned from my job and started to think about Athena more seriously.

But it was when at the beginning of last year that Arthur put out the dust and crust.

That's when I started to step it up a bit more seriously and put a team around it and that kind of stuff.

So it had been something that I've been thinking about for a while.

We'd seen previous iterations of this similar idea on chain in the past where they tried to do it purely using decentralized exchanges.

And I found that just intellectually a very interesting type of idea on Chain.

And so yeah, it's been something I've been thinking about for a while, but it was only really until a year ago when we started to really work on

Arthur, why do you think this is the right, I remember that I think it was the dust on a cross.

It was like 1NUSD equals, I think it was $1 of Bitcoin plus short 1Bitcoin USD inverse perp swap, something like that.

There have been so many, there's been like the Luna model, obviously that's a whole different debacle, but like, do you remember Basis from 2018?

There's been like these algo stable coins.

There's been like a whole verre of basically stable coins that have launched.

Why is this the model that you've kind of like set centered on as the right 1?

So the first thing is I don't think that we need to be decentralized.

We want to take this fiat money thing that is definitely not decentralized.

It's useful to us in our ecosystem, yet we don't want to rely on the banking rails.

So let's take the decentralization aspect out of it.

And once you remove that, then you're, the space of what you can do becomes a lot easier.

We have these exchanges, they're centralized entities.

They have a vested interest in trading and crypto happening much more efficiently to generate more fees.

And they need a fiat pair for some of their trading pairs.

So why don't we use these exchanges, these products that are battle, you know, hard, metal-hardened tested, right?

The perpetual swap, you know, BitMEX launched in 2016.

Every single major exchange has a perp swap.

The most traded product ever in crypto history.

We know how it behaves in bear markets and bull markets.

And let's create a synthetic dollar for real and trust the centralized entities in crypto that have a vested interest in this ecosystem surviving to safeguard this system.

And so I think that this has always been a great idea.

It's just we have to be hitting the head a few times to sort of come around and saying, well, let's trust ourselves to build something that we want to use for trading.

Guy, you alluded to this in a decentralized context of a tokenized hedge fund.

So can you just go through maybe prior false starts and why they didn't work and what about SINA is different and gives you conviction that it will work?

So 1 was UXD on Solana back in 21 and there was another project called Lemma.

They tried to do the same thing on Ethereum.

I think the very basic answer to your question is the derivative market is just like nowhere near as big to think about scaling this in a secure way on chain.

So just for your context, like C5 versus DeFi, open interest is roughly like 30 times larger.

And you can't even really think about like DEXs as a single pool of liquidity because all the main DEXs are actually split across different chains.

And it's very difficult to sort of pull that together into a single source to actually use as 1 pool of liquidity.

So the very simple answer is that it's basically just impossible at the moment, even with the market having grown since then on chain, to do this even like beyond 9 figures of size.

I think we also looked at what was done and I think it was actually done, it was slightly reckless I think within the risk management.

So to do this product on a single venue, I think it was actually quite dangerous because when there's a single venue that can be, where the funding can actually be pushed down by either just like the project itself or other people on there.

It doesn't allow you to sort of diversify that funding risk across different venues.

And so if you said to me, you could only do this on Binance, which controls like roughly 40 to 50% of the SACs open interest now.

I still wouldn't do that product if it was just on Binance, which is 15 times larger than the whole DeFi together.

It was a very explicit trade-off that we made, which is we thought that users would value scalability and a product that was actually useful at size over some of the decentralization pieces that those other projects offered.

And we thought that that was, if we were honest to our users around the trade-offs that we were making, we thought that was something that you could accept if we made some work around how we're interfacing with custodians.

So we can jump into how we're trying to reduce some of the counterparty risk to exchanges.

But that was a very key piece, which is trying to actually isolate the credit risk of the collateral outside of centralized exchanges, which we think is a nice middle ground between DeFi and SeekWay.

For those who missed our episode that we did a couple of weeks ago on Athena, maybe you could just kind of set the stage basically.

So you guys launched like a month ago, I think 800 million TVL, 35,000 users, like kind of took over the narrative for a little bit.

Can you just kind of outline Athena for anyone who might have missed that and then we can get into some of the risks like collateral side of things and funding risk and concept of a stable coin, all that kind of good stuff.

So it was roughly 2 weeks ago from now that we came out with the public mainnet that was just allowing users to come in and try the product with capped ceilings as we sort of opened up.

So we're pretty focused on ensuring that it was a pretty secure rollout and not just allowing this to grow as quickly as it could without constraints.

So the idea is that users can come in, they can buy either USD or SUSD, and we've split up the tokens between, in the same way that DAI and SDAI have approached things, which is you've got a stable unit, which is like the synthetic dollar, which is USD, and then SUSD is where you stake that same token to capture the yield that's being generated from 2 sources within Ethereum.

So you've got the staked ETH returns and then the basis from the futures market, which have been put together in the same instrument.

What we think is interesting about that is that I think crypto has like a bit of an obsession around yield, but it's 1 of like the biggest dislocations where everyone's obsessed with yield, but there's no like real actual source of cash flow within crypto outside of basically people paying for Ethereum block space and paying for leverage.

That's really like the only place that people pay billions of dollars for like real yield.

And so like really SUSD you can just think about putting together the only 2 forms of scalable crypto native yield in a single instrument and it happens that like the output of that is a dollar like instrument.

So That's how we split between USD and SUSD.

And yeah, as you said, we've had reasonably strong growth since we came out in about 2 weeks ago, and just sitting at over 800 million of supply

Guy, do you want to get into some of the maybe common criticisms about it?

So you guys launched and I think there's some, like there's the funding risk criticism, there's the I can do the trade myself side of things, there's the custodial and counterparty risk.

Maybe you could walk us through some of these like common criticisms and kind of debunk them 1 by 1.

So I think the funding risk is 1 that I think gets people's attention the most, but it's probably the 1 that I'm least concerned around out of all the different risks that sits around this.

So the very basic idea here is that there's usually contango within ETH and BTC markets where you're getting paid to short and like roughly that the market is generally long and willing to pay for that leverage to be long.

So on the funding race, I think it's 1 that I'm actually least concerned around relative to I think the attention that I got within the market.

And the very basic idea is that usually you're getting paid to be short within crypto.

There's a natural long bias to the market and they want to pay for that leverage to get long.

So yeah, naturally the markets tend to pay for leverage to be long.

And Athena is obviously sitting on the other side of that trade where you're capturing the funding basis from others who are paying for that leverage and are expressing a long bias.

So I think we can look back at 2022 as a reasonable case for how would something like this perform when basically every large entity within the space was blowing up and going to 0.

And I think 1 interesting piece was that basically funding averaged just around 0 through that period.

That's not to say that the data that you look back in time can always project what's going to happen in the future, because obviously Athena is going to have a pretty material role in the market if we're successful in terms of how you think about that break going forward.

I think what I'd just ask people to do is actually just think about it slightly differently.

That I think everyone had this assumption that Athena's gonna get so big and push the funding into negative territory.

But you've actually just got to think about the funding within the market is basically an exogenous interest rate to Athena system.

And people are just gonna express what is the level of interest rate that they are happy to hold this product.

And if they are not happy to hold it at a lower level, they're going to be stepping out of the product.

And in doing so, you have to lift the shorts, which allows the funding to mean a lot.

So I can give just like 1 example here, which is the funding has been roughly between 25 to as of yesterday, 65% for shorting ETH.

There is going to be a demand slope for everyone within the market where they look at this product versus other BWAs or USDC in the market, and they decide, I am willing to hold Athena's USD versus these other products at whatever spread to like RWA as an example.

And if that does get too close to other things that they can hold within the market, they're going to be swapping out and just going into a different instrument.

And that has like a self-correcting piece to the mechanism, which is if people are happy to hold it at 12 and it gets starts to get pushed down closer to 5, they'll step out and allow it to main about.

See all Empire transcripts on Youtube

The Future of Stablecoins & Synthetic Dollars | Arthur Hayes & Guy Young (Ethena)