Every Fintech is Launching a Stablecoin Product

Unknown Speaker  0:00  

Simon,

Sy Taylor  0:10  

welcome to tokenized. The show focused on stable coins and the institutional adoption of tokenized real world assets. My name is Simon Taylor. I'm your host, author at FinTech brain food, and head of market dev over at tempo. Joining me, as always, is Mr. Kai Sheffield, head of crypto visa. How you doing, Kai?

Cuy Sheffield  0:27  

I am fantastic. We've got two good friends of the show, a lot to talk about. It's been a busy week. Let's get into it. Oh, has it been a busy week?

Sy Taylor  0:35  

Making a return is Nick Philpott, who's co founder and head of partnerships over at zodia markets. How you doing? Nick, I'm very well. Thank you, and I'm making a return. Is Paul Fran book, who is the co founder and CEO of Morpho. How you doing?

Unknown Speaker  0:49  

Paul and Bill, thanks for having me again.

Sy Taylor  0:51  

Thanks for being back before we get into the good stuff. Got to remind viewers and listeners that views and opinions of contributors may be their own, and please don't take anything we say is taxed, legal or financial advice. Always do your own research, folks. And before we jump into the stories, wanted to talk to Nick about your new report by Standard Chartered and yourselves titled beyond concentration, where non USD stable coins can scale. So some interesting figures in this. You might not have the report to hand. So I'll just read them out for you. USD stable coins now account for 98% of stable coin market cap, no longer 99 whilst USD participation in FX is 89% and cross border is 50% so unpack this for me. What is the report saying in those numbers?

Nick Philpott  1:40  

Yeah, so the genesis of this is really from a nagging suspicion I had that people are focusing on the wrong currencies when they look at stable coins outside of the dollar. And a part of that comes from, I think, standard charters and my sort of different perspective on the world. It's very much it's a British bank specializes in emerging markets. I started my career in Standard Chartered Nigeria, for example. So it's a different perspective from perhaps the rest of a lot of people in crypto, and it's that a lot of the focus tends to be on predicting success with stable coins that are attached to G 10 currencies. But actually, that's not fixing a problem, right? So if I'm in Argentina, Australia, South Africa, Singapore, I could probably open a Euro bank account, maybe a Canadian dollar bank account or a sterling bank account, with relative ease. I could probably figure it out. And then when I instruct a settlement cross border with those currencies, it's going to pretty much do what I expect it to do, and it's going to be quite quick and efficient. If I, for example, wanted to open a Turkish lira or a Mexican peso or a Brazilian reais bank account in Singapore or Australia. Good luck. Not going to happen. So if you're creating stable coins that are linked to these currencies, then very quickly you can start to globalize those currencies and make them much more available. You're leaning into a very visceral problem. It's also a sense that, actually, we're also going to see probably regional blocks start to emerge. So it's not necessarily the case that your currency has to be better than the US dollar. You just have to be better than what's in your neighborhood, for example. I could look at the Kenyan shilling, for example. Arguably, is already a stable coin of sorts, with M PESA, you know, the mobile money that allows its currency to travel across borders. Stable coins could turbo charge that. And so very quickly, I could see the Kenyan shilling, for example, becoming a regional currency in East Africa. That's effectively the thesis.

Sy Taylor  3:34  

Makes complete sense. I'm sure we'll come back to it a bunch more throughout this conversation, but Kai, I felt like you wanted to jump in and ask Nick a quick question on all that stuff.

Cuy Sheffield  3:43  

Yeah, I think it's super interesting. It's something we've been talking about for a while at visa, that we think stable coins are technology, and we think that every major currency, every currency, should come on chain at some point. It hasn't developed as quickly as I would have liked to see it. And particularly, like you said that the biggest opportunity seems to be in the longer tail emerging markets. But I'm curious what you're seeing when you talk to banks and you talk to regulators, like, Why has it been so slow to get some of these currencies up? Is it the banks aren't equipped to be able to issue like, Why? Why aren't we seeing stable coins in most of these markets, where you see clear demand for them to exist?

Nick Philpott  4:27  

That's a good question. So to be honest, we don't talk to a lot of banks anymore. Perhaps, you know, sort of tier two, tier three emerging markets banks, but the tier ones we tend not to talk to, there tends to just be too much in the way of POCs projects that are not really going anywhere. And for a small company, we have to have a very, very clear eye on how we can monetize some of these efforts. Otherwise we just wind up spinning our wheels until we run out of cash. That's no good for anybody. Actually, a lot of the conversations tend to be with central banks and, to a much larger extent, with commodities companies, so oil, gas. Metals, mining, agribusiness, shipping, et cetera, because they have to grapple with the consequences of the fact a lot of these currencies are very difficult to handle. I think in particular, we see opportunities in the eastern hemisphere. So you're looking at Aussie, kiwi, Singh, Hong Kong, cnh, et cetera, Philippine pesos, another great one. A lot of those currencies have very difficult cut off times. So if you're trying to trade Philippine peso, for example, in the United States, the likelihood is the Philippines is already shut Philippines is massive remittance corridor, so you're almost already tying a whole industry's shoelaces together as you try to scale something as critical to so many people as cross border remittances, I think, with the passage of the genius act that's also lit a little bit of a fire under some of the central banks in some of these countries, because they've realized that almost a tidal wave of dollar stable coins is going to start coming across borders. And trying to ban some of this stuff is just impossible. If you look at analysis as top 20 countries in terms of crypto adoption, quite a lot of those countries have bans on crypto in place. So I mean, if I was being perhaps candid and a bit provocative, you'd want to sit down with some of those central banks and say, How's the ban going? Because it's clearly not working. So what can they do? And I think the answer for a lot is to think about fighting fire with fire. You know, get your currency out there. Get it on the global stage. Stable coins are the perfect delivery mechanism.

Sy Taylor  6:24  

Makes complete sense. Well, links us nicely to our first story. Speaking of stable coins, ramp, the Neo bank for businesses, one of the fastest growing companies in the world that happens to not do just AI, they're a FinTech company, but ramp Spend Management cards, CFO dashboard for high growing companies have rolled out usdt support. They'll support the stable coin on Ethereum Solana and the tether black plasma network. And they've also added one to one US dollar and usdt on ramps and off ramps, all free, which is quite interesting. And this is part of their stable coin account where you can deposit supported stable coins such as USDC and usdt, convert between them within ramp and use that balance to pay card statements, bills, vendors and reimbursement. So the CFO just kind of gets one spot to manage the whole thing. From Paul, I'm interested in your view here. I know you've been speaking to lots of FinTech companies. Ramp is certainly leading from the front, and I think it speaks nicely to what Nick was saying there. The genius Act has kind of unlocked some things. What are your thoughts on adding tether in particular, and other stable coins outside of USDC. Yeah, I

Speaker 1  7:44  

guess it's interesting, because for a long time, USDC had been like the vastly dominant player when it came to like us institutional adoption, and it's actually pretty new for usdt to win some of those like partnerships and adoption into the FinTech space. And, yeah, you know, like, it's pretty obvious this is going to be a very wide variety of stable coins for quite some time in the coming years. And obviously, usdt over the many years of existence, have accumulated very, very strong balance sheets and have the capital that is necessary to basically continue to propagate the network and accelerate it in very vast ways. But the good news is that the Tai is absolutely insane, huge. It's like the entirety of the money supply, basically, and so I think there's going to be room to grow for pretty much everybody. I'm not sure USDC and usdt have to compete that much because everybody wants to move to stable coins, every single FinTech that we've been talking to as like a roadmap to move entirely on chain over the course of the next two, three years. I can't think of a single FinTech that does not have that or, if you put it the other way around, which is incredible, right? And then you think about, okay, those fintechs were supposed to bring distribution to traditional financial products. And so you have tradfi Now looking at this and say, hey, if everything turns into USDC, into usdt, well, what products am I gonna get funded? Like, you know, it's used to be AUM for me, so I also have to come on chain in order to capture those stable coins deposits, right? So it's, it's pretty interesting to see. I think now that USDC and usdt have become so strong players, they have the necessary resources to go further in the adoption cycle and continue to build the network, and in my opinion, is just going to accelerate and snowboard over the next few months, as it has been, frankly, ever since the stripe acquisition of bridge was really like the kickstart of this cycle of stable coins. But I do genuinely think it's just the beginning.

Cuy Sheffield  9:50  

Huge shout out to the ramp team. I mean, they've just been shipping and executing at an incredible pace, both in stable coins and AI like it. Every day there's a new tweet out. It's like they're a foundational AI model lab company in terms of the type of research and work that they're doing. So very, very impressive. I think what's, what's interesting about this announcement to me is, as far as I could tell, I think they're the first large major US based FinTech to announce an integration with usdt and support for usdt and like, publicize it as, like, an announcement. You know, there may be others that are using usdt in some forum, but they haven't put out public announcements that they're using usdt. And so I think it's this interesting scenario where, like, there's no question that there's just an incredible amount of utility that USCT offers, given the very kind of deep markets and liquidity that exists all over the world. And so if you're a ramp customer, and you're doing business in emerging markets, being able to send usdt to a supplier in Colombia, like that, that is, like, probably what that supplier wants, and like that's that's a, like, amazing product for the customer. I think on the other side of it is the recognition that usdt is not a genius compliance stable coin USA tea issued by anchorage as a separate product. Like that sounds like that's structured to be a genius compliance stable coin. So I think it's always really interesting to see how different companies are looking at the kind of risk versus reward trade offs. And what does it mean for a US FinTech to offer access to a non genius, compliant stable coin to their US customers and and I think at this stage, obviously we don't know. It's just not it's not clear. And so I think that they seem to be moving in the direction of, let's provide the products that our customers want. And usdt clearly has demand from customers. Where you see other fintechs and other companies say, Okay, I know USCT has demand, but like, I don't want to offer a non genius compliance stable coin, so I'm going to use USAT. And then you have to figure out, Okay, what about USAT converting to usdt. So it's gonna be really interesting to see how that plays out. But Nick, I'm curious your perspective as someone who you kind of publicly use usdt and USDC, I assume USAT. What do you see as what does it mean for a US entity to offer customers usdt in the kind of current

Nick Philpott  12:18  

regulatory environment? It was quite profound. So, I mean, I've always thought of usdt, in particular, as a Euro dollar for the 21st Century. Arguably, USDC is, in a way, although it's issued by a US entity. I tend to think of usdt as more of a Euro dollar because it's issued by a non US entity, in the same way that eurodollars, as they were sort of created in the 1950s 1960s a foreign bank dollar liabilities deliverable in a US bank if necessary. So where, in a sense, Euro dollars are just dollars outside the US banking system. Stable coins are US Dollars or US dollar assets outside any banking system. They're just on the open Internet. So in a sense, this is almost boomeranging back. So the Euro dollar system is almost coming back to the United States. The usdt, USAT thing, I think, is, I actually generally don't know. I suspect it's a little bit of branding. And I really too agree with Paul's point at the beginning that exactly as you say, Kai, we work with both the USDC team and the usdt team. They're both great teams, and I think both have got huge potential product market fit for slightly different use cases and deployments. I mean, I'd almost love to see, I mean, it's almost like trying to bring the Montagues and the Capulets together. It's probably completely unrealistic, but I'd love to see, at some point, maybe some sort of peace deal and breaking of bread between the two for the good of the market.

Sy Taylor  13:41  

But you know, maybe Pepsi and cola will do that, and McDonald's Burger King, you know, just it feels like there's too much water under the bridge there,

Unknown Speaker  13:49  

but dogs and cats will get married.

Sy Taylor  13:51  

But I do think it's interesting to Kai's point about how different tether feels now, to four or five years ago, there was a lot of fear, uncertainty and doubt around tether for a long time, and now you see them out there actively freezing addresses and looking to almost take a lead on AML and their effectiveness around AML. And I would not have had that on my 2026 bingo card, and sort of that institutional acceptance onshore of something like tether. I think ramp is one signal for that, but it's also the larger sort of hedge funds and folks that are historically preferred USDC as an onshore asset, but now, because they're on chain, because they look at vaults like Morpho and Arve and others, and they see trading opportunities there, you can't not be in tether if you are in the crypto digital asset ecosystem, And especially for payments Nick in the markets you operate, it is the dollar for the Global South. It's the Euro dollar for everyone else.

Nick Philpott  14:46  

It is pretty dominant. I mean, KPMG agreeing to audit tether, I think, also layers into exactly what you just said, Simon, so that, that not legitimization, but just that, that endorsement,

Cuy Sheffield  14:57  

if you like, Paul, what's, what's the current state of view? CT and defi right now, because I feel like that was the other interesting piece that you know USDC really was the default stablecoin and defi. Like, are you seeing more growth of of usdt there now? Like, why is there such a gap

Speaker 1  15:13  

between two it? It's a great question. So, so, I think the first thing interesting to note about usdt in defi is that entering in defi was slow and had a premium, because at the time, people, to your point Simon, were not trusting as much usdt. And you would actually earn a higher yield on usdt Because people were shorting it right, and so they would, I think I remember, like probably 100 bits difference in terms of rate with USDC, because you have short demand for usdt that it was more important than USDC. This premium has gone since right, but for a long time, protocols do not want to accept usdt as collateral, and for many years, right? So this time has passed. Now usdt is accepted across defi much more broadly. But what we notice in the user base is that the adoption varies a lot depending on the chain and the types of users using defi and usdt is very different from the types of users using USDC. So here are the two key things. Is usdt in defi tends to be more used by wealth in general. So you have very large wallets that hold usdt in very large quantities that make up for a great amount of the volume that happens in defi in the form of usdt, right? And you could tell, like with what happened on on Ave over the weekend, like the usdt users that are were locked, or actually very large users that were able to and were also much more reactive, right? Than the USDC users. The second thing is the chain. You have chains where usdt is absolutely dominant, and some others where it's completely absent, right? So obviously, base USDC is like, you know, we have $4 billion on, on, based on morphoid setters only in USDC for obvious reasons, or relationships between Coinbase, base and circle. But if you go to like the trans of the world, the plasma, obviously, which has tether backing, and Ethereum is a bit even, I would say, in terms of loans. But the user profile is very different.

Sy Taylor  17:18  

It is so interesting how the user profile, the use case differs, and so you need to sort of support both at this point, like you can't pick one between the other, and your clients are going to ask you for that. And ramp is ultimately driven by its client, like a lot of good businesses, I do want to give a shout out, as Kai was briefly mentioning, too, to Alex bazanov and Andrew chapello over at ramp. Shout out, you guys, both listeners to the show. Both got to be on the show in the near future, so we'll hear a lot more from them. And they're also both going to be at FinTech node com this show, which I hope you guys will join me at as well in San Diego on the 19th and 20th of November. And you can get your tickets@fintechnodecom.com that's my little advertisement done. The next story, speaking of accidental advertisements, is DoorDash are going to offer stablecoin payouts in tempo in a push towards everyday crypto payments. The co founder Andy Fang said there's real promise with stable coins transforming financial infrastructure, not just in America but globally. He mentioned in the video with tempo that they operate in more than 40 different markets, having to integrate with multiple different payment systems in multiple different countries, multiple different off ramps would be extremely difficult, and in doing it the traditional way, specifically because of the markets they operate in, and Nick this sort of speaks to some of the points you were making earlier, cut off Times, cross border and fees and everything comes with Kai, we've seen a lot of these payouts use cases come before. Do you think that the gig economy platforms are going to be the next ones to take it up after, you know, deal and sort of gusto and all those guys have kind of done with it? And do you think that payouts use cases, one that's, that's going to endure?

Cuy Sheffield  19:02  

Yeah, I think so. I think it's been something that we've been talking about for several years now, is, like, it just, it makes a lot of sense. I would say it's been slower to scale that I would have initially expected. But I think that doesn't mean that it's, it's not going to scale. It's just, I think two or three years ago, you're like, oh, yeah, Uber's gonna pay all their drivers. Meta is gonna pay all their creators. And it's like, yeah. But it takes time for these companies, they have very complex treasuries, to figure out. How do you switch that over? And then you've got to think about, okay, well, what about the the off ramps that those those customers have, or the drivers, once they get them, what's, what's the easiest way to spend? I think as we get more stable coin link cards across many of these markets, that makes it even easier that if you can work as a gig economy worker, get paid in a stable coin, then immediately spend it. I think that makes a lot of sense. I think privacy is a question of if I'm Door Dash or Uber, am I do I want to have all of my payouts be. To be seen on chain, and so I think that's where it's great to see tempo leaning into new privacy solutions and other chains kind of adding that. So I think it's gonna happen. It just it always takes longer for this to scale than some people expect. But I think this is a good, good sign that it's moving in the right direction. I think Door Dash is just such a well run company that like of anyone like they have a lot of opportunity to figure it out.

Sy Taylor  20:25  

Nick, any thoughts, yeah,

Nick Philpott  20:27  

I mean, so shameless plug of another piece of research that we did with Standard Chartered. So we identified in terms of the holdings of stable coins, and there's a tether USDC, and to a smaller extent, the others, it's really a barbell. So one end, you've got what we lazily called the sort of Mayfair house use case, which is high net worth individuals, often in countries where, you know, local banking system is unreliable, local currency is highly volatile, lots of inflation, etc, etc. And so they were formally buying houses in in Mayfair in West London, often a store of value. They weren't living in them go to Mayfair. That's partly obvious. Almost no one lives there, and instead, they're now buying and holding stable coins, because this is very much a return of capital use case, rather than a return on capital use case. And guess which part of London is seeing sort of 25 to 40% decreases in property values? I'm sure this has a part to play. The other end of the barbell very much relates, in my mind, to what DoorDash is doing, which is what we call the Argentinian taxi driver. We picked Argentina because Argentina holds more physical US dollar bills than any country after the United States. And so what this is doing, what stable coins are doing, is replacing dollar bills that are stuffed under mattresses or buried in gardens all over Argentina and countries like that. So the moment it starts to become a closed system where goods and services can be bought and sold in stable coins, you're going to start to see the development of a parallel economy. And certainly, I've seen photos not from Argentina, but from a Latin American country sent by a friend of mine of goods in a shop in the airport priced in one of the stable coins. And the moment you see that, you know that the local currency is it's only a matter of time.

Sy Taylor  22:11  

Yeah, it's pretty, pretty cooked. Paul, any thoughts on this story and the stories like it?

Speaker 1  22:15  

Yes, I Tricos Kai's point on stable coin adoption taking slightly longer than expected. I think, as you know crypto enthusiasts, we've always all would want this to go much faster. I think that the inflection point we're all looking forward is when stable coins become an expectation, right? Like the same way a merchant is expected to accept Visa, right? Otherwise, the merchant is is never going to be successful, and so I think it requires so much energy to get there, so much like, you know, funding and spending and like just working to go to market and get those large and complex enterprises to do the move of, like, adopting the stable coins, and also so much shared belief that this is actually going to become a thing, such that We all march towards that goal, such that we effectively reach this inflection point, that this is what is, you know, obviously taking longer, but with moves one after the other, like like the one, like DoorDash and and all the others that would will come next, I think we we just build momentum to reach this inflection point. And once we reach it, I think the adoption is going to be extremely fast. Because when you think about it, if it becomes an expectation to run on a 24/7 like, you know, cross border, extremely cheap system, like, like, stable coins, then immediately, if you're not fulfilling this expectation, you're at a massive disadvantage compared to competition, right? And so so my, my thesis on this is that is actually going to be pretty radical as soon as we start to get close to this inflection point, which is we're only going to get there with big brands like DoorDash, like, you know, coming in and believing in this, and they will have the early mover advantage and will be the first to benefit from the system. Actually, think we're not so far away. To be frank, I think we're plausibly six to 12 months away. Six months is maybe only more ambitious set of things to have, like a much more global realization, not talking like the more techy companies, but literally more global, like the consumers like starting to have this in their mind.

Sy Taylor  24:19  

Yeah, we've talked on the show before about Western Union and MoneyGram and some of the traditional brands Nick. And I do think it's interesting how it's not just like big tech adoption and innovator adoption. And you've seen that in Zodiac markets as well, with import, export and that sort

Nick Philpott  24:35  

of thing. Yeah. And I was gonna say with something like DoorDash, it's, it's not that scary to spend 10, $20 on a food order using a new currency and just giving it a go. If you're a corporate treasurer of a mass consumer goods company, an insurance company, an oil trading house, you're thinking in terms of security, liquidity and yield in that order. So taking that leap is pretty extreme. It's. The same with any technology development you know, buying a smartphone for the first time, if it goes wrong, it's not going to be existential. Switching your life savings into a completely new asset that you don't trust, that you fully understand. That's, that's, that's a big ask.

Sy Taylor  25:15  

I think that Crossing the Chasm thing happens slowly, then suddenly, doesn't it? And it's, it's kind of interesting. We've gone past the innovators now, the 2% who will try anything into the early adopters, the 13 or so percent that will try something new. The chasm is still in front of us, and I think that's the that's going to be but what I'm encouraged by is that the momentum is still coming, no matter how much we're in the weirdest bear market for crypto, I think I've ever seen in like, it's the prices aren't dying, but nothing's happening. It's just crawling sideways and weird. The fact is, the stable coin stories keep coming. And you know, I think all of us around this call see the payments conversation really, really getting adoption. One thing people missed in this in this launch was tempo also announced a partnership with coastal community bank, which those of you who follow FinTech will know is the sponsor bank behind companies like Robin Hood, they do a lot for card programs. They do a lot for lending programs, one of the more respected community banks that does sponsor banking as a product in the United States. And there you're working with tempo for cross border on off ramps between the USA and Latin America. So this is a bank leaning into bank like use cases domestically in the United States. And I think they join Cross River and lead in doing that. But what I think is interesting about coastal is they've never been quite as far out on the risk curve. So to that point about early adopters, I think we're also there with some of the banks as well.

Cuy Sheffield  26:51  

I would just echo that there's a huge opportunity for regional banks that are forward thinking and lean into the space like they could just they could do things that they never would have been able to do before. And if you think about most regional banks, if they want to enable cross border payment services to their customers, they're dependent upon correspondent banks that they have to go through. There's no way for a regional bank and coastal community bank to send money to a regional bank in Brazil like there's just that that doesn't exist now with stable coins, it could and so being able to have regional banks transacting directly with each other, cross border, 24/7, in real time, I think, is a really big deal. And I think that that's a that's a good innovation, and the ones that lean into that can

Sy Taylor  27:33  

benefit a lot, yeah, as a FinTech, no, that's the one that really stood out to me. DoorDash has the name value, but this is the one where, if you start to unpack what that means for correspondent banking, it is quietly enormous, especially with sort of the nature of FinTech and the corridor us to Latin America, and they are live and in production. So let's see if we get any more in the near future before we get on to part two. I do just want to pause here while we hear a quick word from our sponsors. This episode, if it's not obvious, is brought to you by our friends at visa, a global leader in payments. Visa's tokenized assets platform vtap uses smart contracts and cryptography to help banks bring fiat currencies on chain. Vtap allows financial institutions to issue Fiat back tokens, improving financial efficiency and enabling programmable finance. You can check out the links in this episode's description to express your interest in vtap. This episode is sponsored by privy, a stripe company stable coins, can move money anywhere, but only with powerful wallets at the core, trusted by more than 100 million accounts across 180 countries, privy power, secure, customizable wallets that enable you to go global from day one, from fintechs to consumer apps. It's the infrastructure making the future of money programmable. Stop building with privy. Learn more@privy.io This episode is sponsored by m zero. Stable coins are becoming global financial infrastructure. It's time for that infrastructure to mature. If you're a brand, you should have your own stable coin set to the behavior of financial flows moving through your product. If you're an issuer, you want to be the stablecoin partner for the most valuable brands. M zero is the only platform where issuers and brands get together to build digital money products for the world. M zero. Make your own money. Get started on M zero.org. Thank you to our sponsors. Story number three this week was, well, the defi drama. There was a $292 million exploit. So kelp down a liquid restaking protocol was exploited for that amount after an attacker tricked its cross Chain Bridge. Into releasing around about 116,000 RS eth that was effectively minted without any real backing. The attacker then used the fake backed RS eth as collateral on alve to borrow real assets like W Eth and stable coins to leave Alvey with about $196 million in bad debt. So of course, Arve itself was not hacked, but it believed the RS eth was real and was an eth like collateral asset. But that exploit triggered a defi panic, an almost a run on AAVE, a run on the bank scenario with more than 15, 16 billion withdrawn over the coming days. So Paul, I'm sure you've got lots of questions from clients about this. You understand this almost better than anybody on earth. Can you explain what happened here, and sort of what some of the challenges are with bridging with staking tokens and some of the interconnectivity that exists in defi, sure.

Speaker 1  31:05  

So I guess first to understand what is happening is still happening at the moment, one needs to understand how a protocol like Avi operates, right? So AAVE operates like a bank. People get to deposit their assets into the protocol, and then AAVE gets to underwrite a number of investments. And they do this by choosing which collateral are eligible to take money from the poor, right? And so through their due diligence process, they underwrote RSS, right? And so during the bridge hack, that happened, well, the attacker, which presumably is Lazarus group, would have borrowed $200 million of ease from the abbey pool. When this happens, the first thing is, there is uncertainty if this loan is ever going to be repaid, right? And obviously, given the collateral, we don't really know if the collateral is still backed or not. We'll touch on that, but there's still ongoing debates around, is this fully backed or not? We don't know if this position will be ever liquidated, but at the moment, AAVE has not realized any bad debt. Is important to mention this, right? Maybe on Main net, it won't have a bad debt. Maybe it will have, maybe it will have on other layer two, we still don't know, depending on how the losses is realized. And so what happens next is, because we don't know the lenders, the first thing they know is that they know that if they withdraw now, they won't be taking any losses, right? And this is the reason the first thing you saw on the average protocol is like, because every East lender is starting to withdraw from the protocol. What happened next is the rate is going up because this is the other mechanism and how they've built. The thing is, the rate goes up to trigger more repayments to release more liquidity. And so when this happens, basically more people are able to withdraw as bars unwind. But we end up in a situation where the staking queue of Ethereum is also loaded, right? Because people were doing staking leverage, and now they're not in a position to unwind such large positions just because of the staking queue, without creating deep eggs, without creating liquidity risk. And so you end up in a situation where the market is blocked. And if I'm not mistaken, there is currently $5 billion of eth that has been illiquid for, I don't know, like close to five days now. And the second problem that comes with it that is important to understand is all the borrowers that were borrowing USD, that were using eth as collateral, are not in a position to be liquidated anymore easily. What I mean by this is that if the price of eth goes down, well, if you want to liquidate a borrower on AAVE that is collateralized by eth, you can't seize the collateral, because the collateral is re amplified and is being borrowed and is not available, right? And in this situation, you have a complete commingling of all the markets of AAVE, where now the USD markets are at risk as well, and so this is why we've seen the exact same flight from the USD market. So right? Every single USDC and usdt market on Main net have been fully liquid for the last five days as well. And so progressively, people repay, people withdraw in the next block, like there is race for people to withdraw, like, what's going to be the next liquidity that can be available? And so this is why we've seen the the liquidity of Ave stabilizing. I mean stabilizing. They've lost like, $10 billion a bit more than this, over the last five, five days. But the reason it does not go further for now is because people can't withdraw. The protocol is like a fully illiquid so the question is, where do we go from there? And the path to remediation for Ave is to figure out where the loss is going to be realized. And unfortunately, it's not only dependent on that. This is like legal actions going on. Is the probably going to be the asset issuer? There is like, you know, a bridge involved. And so. It's figuring out as quickly as possible where the loss is actually going to be realized in order to be able to, you know, activate the relevance like slashing mechanisms and re establish liquidity into the markets. But until then, I think that the fair market will continue.

Cuy Sheffield  35:17  

Thank you, Paul. This still makes my head spin. This is the questions I've got for people. And I'm like, Okay, now listen, let me just like, try and say, in the most simplest form, how I would think about this if I'm like, someone sitting at a bank, and tell me where I'm probably wrong. So like, tell me where I'm wrong. Ethereum is a proof of stake blockchain, and so the way that Ethereum operates is people take the token eth, and they stake it, which validates transactions on Ethereum, and you earn yield for doing that. So that's like first concept that you have to understand for this. However, when you stake eth, it's locked up for some period of time. There's some withdrawal Q. And so when you're staking your eth, you can't just immediately withdraw it, but the people who stake eth, some portion of them, want liquidity on that eth. And so there are these things called restaking protocols, where you could basically get a token that's like an IOU on your staked eth. So your eth is like, staying staked, but you have a token that is somewhat liquid. Now I still don't fully understand the mechanics of like, how that token can be liquid as an IOU, while your eth is like staked. So there's like that ecosystem, and then you get to like, all right, you have these new IOUs on eth that is locked staking, and there's some period of time it takes to unlock the eth to actually be able to redeem one of those IOUs now the challenge is that some protocols, in this case, Ave, are accepting those IOUs as collateral for people to borrow against, which it seems like on the surface, and I'm no expert on this, that's kind of a risky form of collateral. Like you could argue that eth alone is a risky form of collateral because it's very volatile, but an IOU on eth that is locked up that you can't access for some period of time sees an even higher risk of collateral. And so when people borrow against that, and the way that protocols work is when it's a collateralized loan, if the value of a token goes down, you have to be able to immediately liquidate it. But then that's dependent upon you've got these tokens that are locked up. It just seems like, in the first place, stake teeth is a very bad form of collateral. Like, it's very hard to, like, operate a lentic protocol at scale with stake teeth. And that's just like, I think I'm like, one, maybe two levels, and then you've got this bridge hack that someone's like, minting stake deep out of nowhere that doesn't even correspond to stake deep. So, like, it's very hard to explain this to someone in tradfi and have them be like, yeah, that all makes sense. I think the takeaway to me that I've been telling people is lending protocols, technology, smart contracts, are very, very cool and have many innovations, but only if you either trust what the collateral is backing them or the way that the underwriting is happening. And so to me, it's kind of a shame that you have this amazing tech of lending protocol, but then you put this, like, very, very risky form of collateral in it, of staked teeth, that then leads to these cascades, then impacts the whole protocol and like, and then everybody gets like, oh, we shouldn't do on chain lending. And so where am I wrong? Like, how would you all disagree with that, or

Speaker 1  38:57  

take a different deal? I think the separation you outlined is the key, most single, most important thing that institutions must understand lending on chain is the technology and asset management is like the financial part of things. Lending is fund financing in general. It is a fundamental piece of the financial system, and so it obviously has a role to play in finance, and the question becomes, what do you lend against? Right? And I think that the key thing for institutions to understand is that you can underwrite any type of loans on the blockchain, using smart contracts and blockchain technology, and get the benefits of like 24/7 and openness across like, you know, the world. But in that case, you could also use this technology for bad collateral. And in the case of Ave like, they probably, you know, could have done a better job at, like, underwriting at this collateral. So the mental model is differentiating the smart contract and the lending technology from the bank in itself, and how the risk management within. The bank is done is like the most important part.

Sy Taylor  40:03  

Nick, I'm so curious for your thoughts on this, because financial markets in tradfi Haven't been short of risky collateral in their past, nor rehypothecation. Do you want to unpack it the way you would to tradify?

Nick Philpott  40:16  

Yeah. I mean, none of this is new. So by sitting here reflecting. I mean, I used to write a series of articles comparing each of cryptos crises to a historical crisis. So FTX, that's Refco, 2005 Voyager. Digital is the Knickerbocker trust from 1907 etc, etc. One coin, the ruknig natova thing that's very similar to a guy called Gregor McGregor, who sold government debt of a country that didn't exist and took down a major UK bank in doing it in 1830 is this maturity mismatch in a sense, because you've got locked assets that are incumbent, they're slow assets, and you've you've released fast assets against them. That's just a maturity mismatch. That's fairly straightforward. You're buying liquidity. So that's just discounting. That's quite normal as well. I mean, you've even got sort of weird analogies, like cross chain bridges, if you're going between two institutions. In the olden days, between the London Stock Exchange and the Bank of England, the runners used to be armed, and they used to be usually ex military, because you're carrying physical bills. So someone would kind of do you over and your assets are gone, or they'd switch your assets for fake assets or fake bills. All of this has been done before. So the technology is different, but the intellectual framework to sort of hang the controls on is the same. The implementation of those controls may be different, but the theory and the history, it goes back centuries. None of this is new,

Sy Taylor  41:41  

and I think that sort of speaks to the relative maturity of defi markets, right? Like, there's a lot of it speed running, the lessons of history, and sort of, oh, well, I can make even more yield if I do this, and more yield if I can do this, and I can bridge the two this way. And it's sort of forcing maturity into it, but, but I think Paul's point here of, like, sure, but like, let's not throw the baby out with the bath water. Actually, instant. 24/7, programmable, composable. These are really interesting bits of technology, and I do worry about the optics of this sort of thing. I mean, Paul, you probably spent all week thinking about like that.

Speaker 1  42:16  

Yeah. So it's very interesting, because the reaction is much different from what I was expecting, the institutions we've been, you know, working with for a few months and years. For some of them, actually, they see this as an opportunity, because now they understand the technology, they understand all the benefits and why the financial infrastructure is going to be the future of their back end, basically, and now they're like, basically saying, Oh, but those guys, those guys are jokers. They don't know how to run proper asset management businesses. We are going to come in with our 30 years of expertise, you know, understand the technology, as we've been doing for the last year and a half, and we're going to do a much stronger job. And I've seen some asset managers, some tradfire actors, being super aggressive when it comes to like, getting distribution from the crypto native players running on on chain rails, and so it's very interesting, and their sales arguments are basically what I just described, which is like, Hey, we're not going to do lending against restaking assets. We're going to use the very traditional underwriting models, but using the on chain technology that and, you know, get all the benefits of deep liquidity, competitive pricing, etc, and we're going to package this and offer this to you distributor as under my big Trad find name that is trusted by everybody already. And that is actually very interesting to see, because I was kind of like, fearing a backslash is like, is this the FCX equivalent of defi? Or, like, you know, lemon equivalence? But the reaction is actually the opposite of what I was expecting.

Sy Taylor  43:44  

It's so interesting that institutions do see through these things, especially the institutions that have taken the time to know who Morpho is and be in a conversation with you, is they've come up the education curve quite substantially, especially on the buy side, the hedge funds and some of the asset managers that sort of eating defi for breakfast like these, are the best traders in the market by some level. So of course, they understand it. But even inside some of the FinTech companies who are more payments focused, I think the maturity there is stronger than people realize. Nick, any other thoughts on this? To round us out on the

Nick Philpott  44:22  

story, I agree with the technology point so stock certificates can be faked, but yeah, that didn't stop us from continuing to use stock certificates. Just using a really simple example, you recognize that the utility of the technology, yes, it comes with potentially some new risks. Yes, those risks are variations on a theme, but you continue to work at that technology in terms of adoption, improvement controls, etc, good practices, and you'll work out how to get better at them. Unfortunately, every now and again, you fall off the bike, but you know, as your dad teaches, you get back on the bike as fast as you can,

Sy Taylor  44:55  

absolutely All right, well, there's a bunch of stories we didn't have time to cover this week at. First one was about the Japan Securities Clearing Corporation partnering with Mizuho and Nomura to test government bonds on a blockchain. Really fascinating that, of course, Japanese debt is like the what makes the bond market and the financial markets go round? So surely, tokenizing it can make it work outside of cutoff times, and there'll be a lot of FX traders and others very, very interested in in that one. According to the information, polymarket is in talks to raise about a $15 billion valuation. No lack of dollars coming into prediction markets right now. Kivalis, the European stablecoin consortia, is partnering with fire blocks to issue its stable coin, and it's scheduled to release in age two of 2026 so surprising what can happen when the private sector gets its act together on stable coins and gets stuff done instead of waiting for the big programs of work from elsewhere. And Coinbase and bybit are said to be working together on tokenization, custody and distribution of US stocks bybit keeps coming up. Very interesting name. Go. Look at their partnerships. All right. So that is all we had time to cover this week. I want to thank everybody so much for watching and listening. This has been just an incredible show, amazing guests, Paul. If people want to learn more about you and more for where do they go to do that? Marfa.org and Nick for you, and zodia markets@zodiamarkets.com and Kai on x at Kai Sheffield and visa.com/crypto you'll find me at sy Tai on the socials at FinTech brain food.com screaming into the void, and of course, at tempo dot XYZ trying to build the next great thing. Thank you very much. And of course, before you go, please do remember to share this podcast with all of your friends. I think for some of the contributions from our guests alone, this is a shareable show. Come on, guys, hit all the Like buttons, all of the Subscribe buttons. It really helps us out, guys. Thank you very much, and We'll catch you next time.