Welcome to Epicentre, the show which talks about the
technologies, projects and people driving decentralization
and the blockchain revolution. I'm Frederica Anst and today I'm
speaking with Michael Soboda, who is the CEO of Liquidity.
AT banking is under pressure, Sybil code is a much better
product than having your dollars in your bank because there you
have the counterparty risk and this bank and in Germany might
lend them the money to Banco. We had the kind of this huge
scandal and you're not aware of it.
We see these forces now playing out with ACT with Clarity ACT.
Honestly it's not about the users.
Regulation is actually used to protect the banks or create the
mold. Liquidity just follows 100% of
the borrowers fees to the stable coin holders to facilitate that
peer-to-peer credit market. It's very hard.
It's a very competitive market, but that's why we tried with
Liquidity V2 and Bold to have a very clear and distinct value
proposition. Rather serve a niche, but be
very clear. Liquidity Protocol is a
governance free Ethereum protocol that lets users borrow
a decentralized dollar against ETH at self set interest rates.
Before I talk with Michael, let me tell you about our sponsors
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today. Hi, Mike.
It's good to have you on the show.
Hi Fredrique, thank you for having me.
Good, before we dive in, who who are you and what originally got
you interested in all of this? Yeah.
So I'm Michael. I live in Switzerland and I was
working in a normal corporate telecommunications in the
digital space and we were talking about disruption and I
was talking to B2B clients about disruption.
And then I heard about blockchain and I realized this
is really the only disruptive thing that is happening right
now, like the Internet, which took out intermediaries for
comms and media. This will take out
intermediaries in finance. And that fascinated me.
And then I quit my job because it's not going to happening in
this big corporate and I jumped into the crypto world.
I think that was 2019 around the ICO craze.
Liquidity itself was founded I believe a year or two earlier,
right by Hobart, who is still with Liquidity but in a more
research re background role. Can you talk about the original
rationale for the founding of Liquidity?
So what did Robert feel was fundamentally broken or missing
in how Unchained Credit and Sabre coins were being built at
the time? First, I think he was really
fascinated by blockchain, so he was working before for the
Infinity on the consensus algorithms.
And then I think this maker kind of sparked his interest.
Being able to issue your own stablecoin, be your own National
Bank kind of I think was a very cool concept.
He saw that and he just immediately came up with ideas
and said, hey, we have blockchain technologies, why do
we need governance? Can't we automate the debt?
Maybe we can also make it interest free.
Do we need to have interest? You know, you can break with all
these paradigms. And he also thought he can
create a higher loan to value ratio.
So with these propositions he set out to create a more
efficient, more autonomous borrowing protocol that is was
very similar like single collateral dye and that's what
they did what they set out and that it was launched in 2021 was
been running since then and had more managed more than 5 billion
in TBL had its own has its own stable coin LUSD, but.
What kind of talking about kind of like this early Maker era
that there were a couple of events that must have shaped
kind of how Robert. And then also you kind of
thought about about protocol design, right?
Kind of like there was the infamous Black Thursday that
kind of led to the rise of Deepak tools.
And so Maker still has the PSMPSM, yes, the tax stability
module. What lessons did you take away
from watching Maker evolve in real time?
Yeah. I mean Maker set out to follow
up half maybe more of growth, taking in more diverse
collateral, getting exposure to tread Fi, which helped their
growth. They also introduced the PSM
with USDCA centralized Sablecoin to keep the pack I think which
helps the product. But I think robot was very
Etherium aligned and just wanted to get out most of the
technology creating like the most Etherium dollar like money
you can get, you know, by reducing all intermediaries and
all kind of dependencies. But one big learning that we
learned and that also kind of got introduced in V2.
It was for example, we had this interest free loans.
So you had only a one off fee, which was very interesting.
If you talk to threat high people and you said you don't
pay any interest, it was like totally puzzling for them.
That was very viable in a low interest rate environment and
Wendy's rates kind of raised. Then the protocol wasn't
designed for that. It still works, but it had
drawbacks on the collateralization ratio.
So a learning was there. How can we design the interest
rates in a more dynamic way to create an equilibrium or have a
a rate and the pack that can better self regulate itself?
And that was definitely a learning.
And, and I think again, I think what I really like why my joint
equity is all this innovation, interest freeness.
And then with V2, we have users set interest rates also
something very cool, go to your bank and say, hey, I would like
to have this interest rate. That's something you can do.
And that was also a decision. Again, a lot of protocols set
the rates by governance or by utilization and then it's
spikes. And we took really a market
approach who's the best to decide which rate we should have
in Defy. So we let the users decide.
OK, maybe let's dive into how that works in just a second, but
let's just contrast that to how maker and are they do it right,
kind of like the the the two main players in this arena,
right? So basically in Maker, the
interest rate is set by governance and kind of like it's
fairly slow moving. It feels a little central
bankersh to me sometimes. There's a lot of governance and
in Ave. it's algorithmic, but that also means it can spike
unpredictably. So kind of if you take out a
loan and initially your, your rate was, I don't know, 5%, it's
possible it kind of spikes to 10% or 15% and there's nothing
you can do other than kind of repay the loan and kind of get
out from under it. Let's kind of walk me through
how the mechanics of liquidity work end to end.
So kind of, I know that the range of collateral that I can
deposit is very limited. So say I have ETH or some sort
of wrapped staked ETH token. What and I want to borrow USD,
what actually happens step by step inside the protocol?
So like with every collateralized depth position
protocol or CDP position, you come with your collateral.
So if or Rep staked, if or, or if we only have these three
collateral to again don't have dependencies on, on other
collateral that we feel are less safe.
So kind of as human native as possible.
And you self issue a loan. So you deposit the collateral
into the protocol where it's held, where it's not lent out,
it's always there. And then you can take out the
loan up to 90% loan to value. So let's say you put in 50K in,
if you take out the loan of 25 K, you'll get that in the
protocol stable coin bolt. And then you can set the rate.
So you can say, OK, I will have for example 3%.
You do that, you get the bolt. Usually what you do, because you
take out the loan because you need liquidity, you will swap it
to another stable coin off ramp into Fiat for example.
Or if you say I want, I get a cheap borrowing rate, I don't
know. Right now it's 3% on Eve, which
is low. You could form somewhere else
for 10% and that could be also your use case.
So that's the the borrowing side.
I think that's quite straightforward and simple.
And maybe the the question people ask now, OK, how do I set
the rate? I guess.
Everybody setting it to 0. Exactly, this would have been my
first question. So kind of like if someone tells
me you, you can borrow money here, what what kind of interest
do you want to pay? I would go like 0.
Why don't people do that? Yeah.
So for that, we need to look on the other side.
We're really a market, a peer-to-peer finance market.
So we have the borrower on the other side, we have the stable
coin holder, you know, because essentially if you want Fiat,
you sell the stable coin and then somebody needs to hold it.
They can't disappear. You know, if everybody sells it
and nobody hold it, then it D packs.
So it's like the stable coin holder is like your creditor on
the other side. And now you both need to agree
on the right rate because if the rate is not high enough, nobody
will hold it. So borrowers have an interest to
pay enough yield because there is like a stick you know look at
you have like the carrot and the stick.
So stable coin holders have a stick.
If the stable coin D packs below 1, everybody has the right to
redeem the stable coin at face value.
So that's also something that you don't have many protocols
you can come with the dollar and you get really the underlying
collateral. Try to do that with your feet or
your USDT and this is called redemption.
So if I have 10,000 in bold that is below pack, I can go to the
protocol and say, OK, I want now this is only worth 9500.
I want 10,000 in EVE as from the collateral and I can exchange
that. And this redemption hits the the
borrower with the lowest rate. So you see kind of the stable
coin holders are chasing the ones that think I have the
lowest rate, they have also the highest risk they get redeemed.
They don't have kind of a, a economical, that's not an
economical penalty. It's not the liquidation where
you lose 5% of the value, but you just lose the exposure of
your underlying Eve, which can be also for some people, they
want to avoid that. So if people see that, oh, I get
redeemed, I'm really low, I'm going to higher my rate and this
protects me from the redemption. So you have now this market
where borrowers adjust and stable coin holders with the
redemptions are, are driving the rates.
So you have really market driven rates and it's like a 2 sided
market of borrowers and the stable coin holders, the the
creditors. And I think it's one of the
first time I've seen that been implemented like that.
And the beauty is it's actually very direct.
You know these parties talk together if you think about it
like how it's done in other protocols as you said, OK, I
don't know stable coin DPEX. So we have a problem.
There is a governance proposal we increase the rate the yield
funnels through a complex system while while in liquidity.
Liquidity just follows 100% of the borrowers fees to the stable
coin holders to facilitate that peer-to-peer credit market.
At the end, I have a couple of questions.
So maybe let's kind of apply this apart a little bit.
If bulk doesn't trade below a dollar, but at a dollar above a
dollar, there's there are no redemptions, right?
Kind of like I am not at risk of having my collateral kind of
sold. Right.
Your loan gets repaid kind of from a third party.
You have less debt, but you also have less collateral.
OK, but if a bulk trades above a dollar or add a dollar, this
doesn't happen right? This only happens kind of at
negative DPEG. Why if I don't expect this to
happen? If I don't think this will
happen, why am I setting an interest rate at all?
Am I at risk of not being matched if I don't set an
interest rate? No.
So if a stable coin is above, then people or kind of advanced
users will set really low rates. They can benefit because they
can't get redeemed. But this means now the borrowing
fees and the yield that is paid out get smaller until it flips.
But this kind of reduced the problem that we had in V1 that
the stable coin could D pack above.
So this happens now very rarely and the peg is quite good for a
decentralized one that is not packed to any, you know, kind of
treasuries or centralized stable coin.
So this puts down the pressure down more people are probably
selling the stable coin because they don't have enough yield.
Then it goes below pack and then you have the opposite mechanism,
you know the ones that said it low, not now raising again on
the top and then you have you're getting this balance.
So if you compare the current rates with protocols like make
and other where, where are we at with liquidity?
Yeah. So I mean always much more
volatile. So you don't get that much.
I think it's it's quite low on average and I'm maker I had to
look up, but usually. So the proposition of the
borrower side is that liquidity had always quite low and
predictable rates because it's also so efficient.
You know the system is not taxed, nobody's taking away
revenue. So the spreads are are really
low. So I think I don't know right
now with the markets, I haven't looked up, but a month ago maybe
you know Maker was at 5% for Eve and and liquidity was at 3%.
Why do you think kind of force deleveraging through redemptions
is a better failure mode than the traditional liquidation
cascades that we see in the other CDP protocols when loans
are underwater? Yeah.
So these are two different mechanisms and we also liquidity
has also liquidations and liquidations are here if your
collateralization ratio that is packing the stable coin gets too
low. So then like in every protocol
you get liquidated, there is a margin call and then your
collateral is taken away and you're taking a haircut and your
position is wiped out. But that's something different
that's the the over collateralization loan to value
and that happens just to your trophant is dependent on your
collateralization ratio redemptions.
Everybody can do redemption and that has to do with the PEC and
only the ones that have low interest rates are targeted.
So these are two different mechanism.
Why? Why do we have them exactly to
let the market define the market rate, do not need a governance
to be able to to do that algorithmically or let the
market decide. And also to introduce I think a
really nice feature not many stable coins have that every
user has the right and can instantly redeem for the
underlying collateral. That's the redemption mechanism
and it helps the the pack and not the the over
collateralization of the protocol for that.
That's liquidations, like in any protocol.
So you, you have deliberately only very small set of
collateral options, right? So kind of like as someone who
now wants to redeem collateral because bald is trading below a
dollar, can I, do I have to take the lowest interest vault or can
I choose which collateral I want to get back?
Because it's possible that kind of, I mean the, the probability
is low, but it's possible that kind of like one of the liquid
staking tokens kind of has a problem, right?
Sure. So V1 was only EVE there, you
didn't have the problem, but like the market adopted these RE
even wrapped staked EVE as the next safe place and well, what
we did, you have like 3 branches of these collaterals and they
are managed quite independently. So the system detects if people
kind of trust this collateral less it, it will shrink faster.
But if you redeem, you get from all three markets, but it's
split up. You can't choose because also
the stable coin is backed by all these collaterals and you could
say yes into it introduces a bit more risk.
But if you compare that with what other stable coins are
backed, you know, it's still amazing.
You know, now kind of if you see all these collateral that all
the stable coins have, you can't even redeem.
And if one of those failed, the risk is much greater.
So yes, I agree. So you can't choose and you get
get it in a proportion, but it's still way better than I think
any other Define stable coin that is backed by crypto,
because then the crypto needs to be a collateral that is probably
less pristine than EF and the two biggest staking EF
derivatives. I hear that, but kind of in, in
principle, kind of like if one of those liquid staking tokens
were compromised, kind of like I'd get a haircut by by kind of
getting a proportion of the collateral back in a compromise
token, right? Yeah, You know, you have that,
you have that risk. You wouldn't have that in Eve.
And then kind of it could happen that the protocol can handle
some something so that this branch just shut downs and tries
to reduce as much bad debt as possible.
And then, yeah, then it's kind of turned off.
So it it's built with that in mind.
Of course, you don't want that. And if it's catastrophical, it's
50%. It's repped stake EVE and kind
of repped stake EVE loses 50% in the value.
Yes, the the system has a problem too.
Yeah. We already touched upon this
lightly earlier. So kind of liquidity is notably
governance free and immutable, right?
And you, you already said that kind of this was super important
to to Robert. Why, why was removing
discretion? And by that also emergency
control is so, so important. And I mean basically because it
costs you flexibility, right? Yeah, sure.
And everybody makes that compromise.
But from a user perspective, what people like about
liquidity, you have this predictability.
You don't have to check every two weeks is it updated, has the
parameter change. And under the hood, some of the
big protocols are doing quite a lot of updates, which another
way or just think, oh, it's protocol XYZ version 2, but it
changed in between. So I think for the user that
gives them also this trust and predictability and kind of we
need to change, but we need to change in the hard way.
We need to redeploy the system and people need to get out and.
But this gives the the users also this guarantee that there
is not a governance that can change things and somebody else
in in control of it. So I think it was really with
this ethos enabling sovereign users with sovereign dollars
without anybody being able to interfere with it and also
because it's more efficient, you know, I'm a maker.
I just saw these numbers recently.
They have 100 people budget of 30 million managing that.
Of course they have real world assets and probably do a lot of
stuff, but it's just beautiful to see that bold to manage the
stable coin. Don't need any of that and and
it can work. Yeah, quite well.
How how many people do you have in the company?
Yeah. So we were usually around 8 to 9
people, half of IT developers and the the other half more
operational or business side marketing.
That that really is a pretty smart team.
Tell me in some sense, I mean, I, I understand kind of the the
ethos of kind of having this very pure only kind of stable
coin protocol, right. So kind of, I mean, this is also
why people loved single collateral dye, right?
And kind of one when multicolateral dye kind of
appeared, there was definitely blowback from the ecosystem,
especially when then kind of it became at some point 80% USCC
backed and and so on. On the flip side, if you look at
the outstanding amount of sables for maker and Ave., there are
also orders of magnitude bigger than equity, right?
Kind of like I, I checked earlier today and kind of you
guys have 30 million in outstanding, but and make and
have a 300 times bigger or so. Maybe I'll, I'll look up the
numbers of how big, but it's, it's, it's in, in the many
billions, right. So kind of seeing that kind of
liquidity, it is more efficient in some ways.
What? What do you attribute this to?
That it's still so, so small. Yeah, comparably small.
Yeah, I mean it's really hard to scale a Defy stable coin.
So so yes, maker is big kind of first mover advantage and and
and and you know some yeah like USDC and USDT a lot of first
mover advantage over you shouldn't compare the the
lending market size with the stable coin size.
So the stable coin size is smaller still much bigger than
liquidity. But all these defy stable coins
say go curve ethics. They are around 30 to maybe 300
million. So they are way, way smaller
than the more centralized ones. Yeah, I think mainly I mean the
big ones are USDC and USDT And there it's quite clear why they
dominate because they're integrated, you have all these
utility and it's just so easy. And for every new stable coin,
it's very hard to to get distribution and and adoption.
But that's why I also think some parties, yes, of course it's
much easier to have USDC, but I think also some people are maybe
not aware of the differences between these C5 stable coins.
And I usually compared, you know, like like the core with a
composition engine. These are if they are built
well, these are government market money funds that just are
tokenized Fiat products on chain versus the the core with the
electric engine, which looks like a car, which drives like a
car, but is built completely different and has other product
properties and and other risks. That could be interesting.
And I think a lot of people are not aware of it or still maybe,
you know, kind of trust the traditional system more.
But I still think to me why, why it's important is that it adds a
new option that you can opt out out of traditional rails if you
feel like that. And I think there they can
shine, but usually they only shine if things go South.
You know, if things go wrong, you you hope these things are
there. We had the moment with USDC when
it D packed where LUSD was great and a lot of people switched to
it. Yeah.
But to answer your question, yes, it it's it's very hard.
It's a very competitive market. But that's why we tried with
liquidity V2 and Paul to have a very clear and distinct value
proposition, rather serve a niche, but be very clear.
So you, you know, I think you have the traditional threat 5
stable coins that can be fully regulated safety through
regulation. Or I think on the other hand,
you have liquidy and bold that takes out as much as
intermediary as possible and you trust the code.
And you have these two extreme, I think they have a value
because they give you safety from from different sides.
And we rather are totally on the spectrum and rather a niche than
somewhere in in between. I call it the trust me, bro zone
where kind of people are just adding risk to it, you know,
either by introducing a multi sick or being a hatch from not
regulated. And there it gets it's it's a
very greyish area. I think that we'll have a hard
time when regulation kicks in. And there we also see a the the
advantage. So they say, hopefully we we can
stay outside of regulation because there is nothing to
regulate. That's a bit the long answer,
but it's what, what's more, why I think it's important, why I'm
passionate about it, why I think it's a genuinely Ethereum native
product, you know, can be only built on Ethereum in, in that
way and why I'm passionate to build it and further drive it.
But it, it doesn't make it easy that people understand it and
and value it for, for it's proposition, especially like
you, you and me, you know, we live in, I think you live in
Germany and Switzerland. We have great financial systems,
we have good governments, so we don't have this immediate need.
But I think maybe from different countries in different region
that looks a bit more different. I hear the spectrum.
So kind of, I fully understand if you hold USCC you kind of
trust that circle is sufficiently regulated and they
kind of have the deposits they say they have.
I also understand look it's maths.
You can check it out on chain argument that you guys are
driving. I'm not fully caught up yet on
the value proposition that you were referring to.
I understand it kind of appeals to a different set of people,
but who's your customer? Who do you want your customer to
be? Yeah, I think there, there are
three customer segments I think for whom this can be
interesting. So first of all, what are the
properties you you talked about the USP.
So I see three, sorry, three areas.
One is no exposure to threat, fire risk.
So bold, by the way, was rated by Blue Chip.
It's a rating agency that rates stablecoin and it was the only
D5 stable coin with a rating, a minus to be precise, and the
only one in the A segment without counterparty risk
because there is no counterparty out there.
So I think for people that look at that and say, hey, safety
level, I can a centralized version where I have
counterparty risk or I can have this D5 version without
counterparty risk. So threat 5 exposure is
counterparty collateral, centralized exchanges, all the
kinds of risks you are taking on to get the yield kind of taking
out all these intermediaries and that I can tell you now for whom
afterwards for whom this is interesting, but that's, that's
the first really differentiate and no other stable coin
provides that this kind of risk profile and it's good for
diversification. The second thing is people that
want to have more control. So what bold also gives you is
more control over for example, the stronger property rights.
There is no freeze. You can directly mint and redeem
with a lot of stable coins. You can't do that.
You need to be a corporation, you need to be onboarded.
You're probably the last one in the queue.
So that's another one you you get more control and also
predictability. Nobody changes the terms.
So in liquidity, for example, me as a CEO of liquidity IGI don't
have more information and control over this product than
you have. So I think that's also something
unique level playing field. So we have not heard for
exposure, more control, the full transparency and predictability
because everything is on train. So I think these are three
propositions not many stable coins have and you as a user,
you just get a stable coin, you know that it's built it with the
best interest in mind, you know the best user interest.
So for whom is this proposition? If this is the differentiating
factor? I think three people, 11 is of
of course, the self sovereign individual that just say, Hey, I
want to also hold dollars, maybe dollars of loss resort where
there is not a government, where there's not a jurisdiction that
can interfere and and have strong property lines.
Like I can hold Bitcoin, I can hold a digital dollar that
doesn't have ties into the traditional system and that
values this control transparency and being able to exit into Eve.
You know, which bold you can anytime exit to Eve, which you
probably feel more familiar and you're again in your world
without needing to hope through traditional institutions.
The second one is I would call low risk defy yield seeker that
says, Hey, I would like to have some, some decent yield
borrowing fees, native defy yield, but I don't want to have
the risk with all the other stable coins in the trust me,
bro zone. You know, where, where people
just are exposed to six different protocols, where you
have 5 different stable coins, where it's looped, where Ann and
team is running it. This, this transparency of the
yield and I think it's good risk adjusted yield for people that
are we're looking for a passive saving accounts or like defy
Treasury qualities like you, you want U.S.
Treasury yield. I think we are close to defy
Treasury yield. So this will be the second one.
And the third one, Treasury and asset managers that that want to
have a risk diversification. So imagine if 999% of your
stable coins in USDC and USDT and we saw the USDC kind of
Silicon Valley Bank drama, you could say, hey, I don't shift
everything. But having 5 or 10% in a totally
different risk profile with an uncorrelated yield, not treasury
yield could be an interesting play like a diversify your
portfolio. I think these are the the the
USPS and target segments that would be most open.
And obviously these are crypto native ones.
You know, I think for for every new crypto users, probably USDC
and USDT is totally fine, I think.
But then the next level, if you start touching all these
different stable coins, I think you should really think of how
much risk you're holding for, for that yield.
And there I think we're just a very simple, a very clear and
very honest play. And I think people that want to
have a bit this Peace of Mind, yeah, I think for those we're a
good alternative. Over the last couple of years
and months in particular, holding U.S. dollars had its own
risks, right. So kind of if you look at how
much value the US dollar has lost deliberately by most
accounts it was not a good time to kind of be Ausd holder.
Have you thought about, but I mean the, the, the fact remains
that 99% of of the global stable coin market is U.S. dollars,
right? Is that on your side?
Is that a design choice or is it a historical accident?
And would are you thinking about supporting non USD denominated
loans in principle? Yeah, I think the decision was
it's just a dominant currency. You know, it's the world
currency. Defy is denominated in that.
So it makes a lot of sense, but but that's the current time.
That's why I think models like liquidity or or others really
Krypton native stable coin are important that we have these
Krypton native products that are on the crypto rails that are not
dependent on traditional rails that in the next step today we
are USD denominated, maybe we can decouple from the dollar.
That will be the next natural step.
And for that, we need kind of these kinds of designs and these
kinds of stable coins that are backed by crypto and can
decouple also from the all that. I think that should, should be
the future. We don't have plants, you know,
rye did it and maybe now would be a better time.
Maybe they were too early. Now we've, as you said, like the
dollar and, and, and all these global financial market shake
UPS. Now will be the time.
We don't have the plan, but I think it will happen and it
makes sense. And that that's again, you know,
why I think it's important that we have these stable coins like
with electric engines rather than the combustion engines.
And because that's why we set out, you know, that's why we
started to build on on Etherium to have our own financial rails
and our own financial products and take finance also in our own
hands, not doing everything, but just kind of being able to opt
out if you think just things are going too crazy and in a
direction we don't like. What are the Fiat options you
would be considering if he went in that direction?
Is it anyone particular currency or is it a basket of currencies
like yeah, like special drawing, right?
So what, what, what? Where do you think the ecosystem
is going to go post dollar? Yeah.
I think post dollar and more from a global perspective, I
think we're entering a time of multi.
So dollar losing the dominance, maybe it's a multi currency
thing, something new. So I think it will be very
interesting if we can have that. So crypto has a bit it's own
thing I think that has potential.
Other than that very difficult to say which currency of course.
And and Swiss, I like the the Swiss franc, which is a great
value and there is a project called Frankencoin that does
that. So I think it's interesting
because a lot of people should be interested in it.
It's a bit harder model, especially if you want to do it
centralised, because if you get no interest or have negative
interest, the business model doesn't look so interesting.
And Fronk and Coin is, is doing a great job.
So, so I really love them, but it's also really hard.
It's a much smaller market and bootstrap that.
So I'm I'm happy with what what we have and I think I rather
take what we have. I think we have a good product
and look that that we can get more adoption, some critical
mass so the project can sustain itself.
As I said, you know, and I think there we also need the support
of users in the community, not only liquidity, but also other
stable coins. These things are not used.
We won't have the options when when we need them and then we
only rely on the other options. There's also a liquidity token,
right? Kind of.
Can you shed some light on what the token actually does, and
just as importantly, what powers it doesn't have?
Yes. So with liquidity V1, it had
actually no power unless you could stake it and earned the
the revenues out of the protocol.
So the fees that were generated and with liquidity V2, because
they said it's a continuation, we wanted to give also value
back to the LQDY holders as we recognized, you know in the
system, the borrowing fees, we shouldn't give it to token
holders like most stable coins do it and then it goes into the
Dow and then they realize if they don't give it to the stable
coin holders, the stable coin holders D packs and they have
this complicated system probably wanted people that figuring out
where the interest should go. So we followed that through.
So we thought a better mechanism there how we can get value back
to LK device out of these 100 percent 75 goes directly to the
stable coin holders which deposit their stable coin into
the protocol and get this definitive yield, which was
three 4%. And because we had EAF
liquidations that spiked, you know since inception, it had 6
to 8% yield on a definitive stable coin.
So I think I think that's pretty, pretty cool.
But going back to to LQDY and 25% goes to the liquidity venue.
So also something very innovative, liquidity recognized
that you need liquidity. So borrowers are paying for
stable coin holders to give them credit and they should also pay
for liquidity because every protocol needs to pay for
liquidity. You just don't see how it
happens again. And liquidity made that
transparent. 25 goes to LP pools where LQDY holders can stake the
token and they can direct where it goes.
And with that, of course, the idea is when it grows you, you
control 25% of the revenues and to which LP pools with which
pairs you create a a bribing market on top.
Right now it's probably too small, but we've seen the first
steps and that can become then also a revenue source for LKDI
holders. But you guys as liquidity AG,
you don't partake in that revenue.
So kind of how, how, how do you guys make a living?
We have some treasury tokens. So in V1 we also staked and like
any other person could participate in that, we're also
incentivized indirectly of the value of LQDY that others get of
it. I think that's also the main
thing and liquidity was always set out to be rather
self-sustaining. So not kind of to grow and make
it bitter, but rather have a really a small team and maybe
even a shrinking team. That and the protocol should
sustain itself. So you know out of the liquid
LKTY revenues, some of it we use to make their own way longer,
but these were actually the funds to bootstrap the the
protocol and the idea is not to grow it and make a bigger team,
but rather make it so sustaining.
So we are not set up to have this continuous big revenue
stream going forward. Are you worried that liquidity
might end up under resourced compared to systems willing to
extract rent? No, because it don't.
It doesn't need, you know what, what would it need the resources
for it. Now it's only growth.
So yes, I think that's why why we invest into growth to get it
to the critical size. But again, you know, even with
the liquidity, we build it in a way that LK device takers and
the protocol can take care of it and bring it to a size where
it's sustainable. So this is really the goal.
I think all the teams, of course, they can extract more
value out of it, make it just because of the size.
But I'm not sure if you then can achieve that much more.
You know, kind of there is only some limitations or you can buy
your success. You know, that's what most
projects maybe use it for. You buy TBL, you do all these
deals and then it looks great. But the moment where where it
goes away, everything is away. So we tried it rather smaller
steps, but organic that the protocol needs to sustain,
sustain itself. And yeah, that's the main goal
right now. Is that a point where you think
kind of this freeness of governance design becomes
dogmatic rather than principled? Why do you think so?
I think there's a reason why a lot of protocols choose to be
upgradeable, right? Kind of like you want an
emergency off switch, you want some discretion, kind of like
you don't. I know that in terms of the
smart contract set, liquidity is a lot less complex than say RV
three or something. I mean, there's kind of just
pure lines of code. So it's less likely that
something is wrong. But even if you take for
instance, the recent balance they exploit, right, kind of
like it was in code that was, that had been better tested for
four years, kind of there were hundreds of millions of dollars.
In it in the end it was kind of a maths buck, right?
And someone found it after years and years and kind of like it
was exploited. So I think the idea that you can
write code so perfectly that you don't need a fail safe switch.
I totally understand your qualms with governance.
Governance is a complete pain in the neck Yeah.
I mean, so basically make a make a governance is dysfunctional.
I mean, everyone knows this, right?
And kind of like others, less governance and more politics.
I fully understand why you wouldn't want to subject
yourself to that. But going the totally pure way
in the other direction, it does have its risks, no?
Yeah. And and I think, you know, there
are different ways how you can do it.
I think the ethos should go into the right direction.
I mean, why are we building on blockchain exactly that now 3
token holders can decide and kind of upgrade the whole system
in within 10 minutes. I mean, that's why we build on
blockchain. Otherwise we, we can also build
that in that too. And of course, we are a bit
extreme, but I'm not saying that everything is bad, you know,
pause switch with good governance and can, can make a
lot of sense and you can introduce that or these time
locks that you have on voting can make also a lot of sense.
And there are areas where, where you can't build it in immutable
way. I mean, that's why we also built
the liquidity provisioning where where the liquidity goes that we
built it in a more dynamic way where L2 device takers can
decide where it goes. So we recognize we can't make
that immutable. But I still think there are a
lot of good ways how you can design it to protect users and
not take advantage of it. I really like also the curve
model. Let's drive very nice balance of
we can change some parameter, but we can't take away forms, we
can't do much. We have a kill switch and
otherwise we can upgrade. Also this ethos saying if we
find something we can create a new version and people can
decide if they want to move and we don't force them.
And I think that's the the things I like about
decentralization. And there is a lot of widdle
room and it doesn't need to be need to be pure, but I think we
want to give the users the control and safety that
blockchains provide in the best possible way.
OK. I think, I think that's a very
fair take. If you now kind of zoom out, the
global sables market has absolutely exploded over the
last couple of years. What are the thoughts that you
will have when you see that? What are the challenges that you
see? What are the topics you think
about? Wow.
Very open question and it's very open.
So I mean, but what I see is in the past, we had just this
continuum of stable coins and everybody could do things if you
had Terra Luna. Well, now we have a maker model
with which was fully crypto, now has real world assets.
We have people that tokenize, carry trades.
It's a bit the Wild West. And I think the biggest thing I
see is, is that clearing up. And as I said of these two
models, you have these regulated ones in Miko Genius Clarity Act,
which makes a lot of sense. You want these treasuries in the
most safest way and we know how it's done in Treadfi on Che.
So we will, I think we'll see these models gravitate to that.
That will become a commodity. You know, we can't differentiate
that much. And then you will have the fully
decentralized one, which hopefully will survive because
regulation will say, OK, that's something genuinely different
and there is no intermediary and that's fine.
And the all in between the trust me, Bro zone where you just
could operate. I think there you the, the air
will get very thin unless you get the right licenses because
you can't tell me that you can do anything in between where
you're not controlling users funds, stuff like that, which is
probably clear that like in traditional finance, there needs
to be another setup. So I see this clearance, I think
of of the picture. I think it will be really
interesting on the centralized ones, you have USDT and USDC,
but what happens next? And there I really like the
model. By the way, was a great podcast
with the heck from from bridge, which makes a lot of sense.
You know, there it's just a commodity.
They provide the commodity that take a fee.
No thrills. They can't Yeah that the product
is simple, but the interesting part is what are people able to
do with the yield that they get, which players can can monetize
that and create the model. And for example, Bridge is
issuing native markets stable coin on hyper liquid and there
we already see people need to use this yield for distribution
and liquidity like liquidity, you know, that's what we use it
for. And, and we will see their
models that might work and that will create new stable coin in
combats that that will be able to, to survive in, in the space.
So that that's about the things that I see moving, changing and
that will be interesting. And, and on the decentralized
one, our electric course, I hope we see more adoption there, more
recognition and that this is another model and model that
should survive. And hopefully.
And I think also as an ecosystem, we, we need to fight
for it that people not just say, hey, this is dangerous, like
self driving course, you know, Oh my God, we should avoid them
because we have built a self self driving credit system and
people might be afraid of that. But I think just that still
these things are possible because I think it should be a
right that you and I can facilitate peer-to-peer finance.
We shouldn't be forced that this has to be done in an
intermediate way because it wasn't the normal way before 200
years, before they were back. That was the way how how you did
finance and it was totally OK to do that on a peer-to-peer level.
I hear that and I, I kind of just just to be, just to be
clear, I kind of I, I fully subscribe to that.
So it does really appeal to me. So kind of I also really like
single collateral dye and so on. I also like rye.
So I know which camp I stand in. Zach also said something else
interesting on the podcast, namely that he kind of sees
banking and stable coins kind of converge rather than having kind
of two parallel financial systems in perpetuity.
Kind of. Do you think the user base of
liquidity is going to evolve? Do you think at some point JP
Morgan will have liquidity positions on their balance
sheet? Hey, could be, I mean from a
risk diversification point and also it's interesting because
there is no counterparty. So there's maybe not the AML
topic. So we had Bitcoin Swiss in
Switzerland that facilitated direct loans with liquidity.
So not on their balance sheet, but they just facilitated
directly with liquidity. And that was possible in a
regulatory way because there was no counterparty to it.
It it was the the protocol that issued the stable coin.
So these models can have some advantages.
Also institutional players really like the predictability,
you know, that maybe they're not reliant on a make of governance
and what happens there. So I, I think they're not going
to shift to it, but as I said, as a risk diversification,
adding that to the portfolio, if they understand it, I think that
could be interesting. And on the other side, I'm not
sure what Zach said there, but what you see is now banking is
under pressure. You know that the banking model
with these organized treasuries, stable coins, they're eating
really their market. So I'm really interested to see
how this is, will evolve because banks will see people move their
money to the stable coins. Because honestly, a PayPal
Sabacod is a much better product than having your, your dollars
in, in your bank because there you have the counterparty risk.
And this bank and Germany might lend them the money to Banco.
We had the kind of this huge scandal and you're not aware of
it. And with Poxos, you, your, your
money's parked and you, you get a yield, you know, so with
banks, you, they, they give you the risk without giving you the
yield. So, and, and we see these forces
now playing out with genius, act with clarity, act honestly.
It's not about the users what they are arguing about who
should get the yield. So regulation isn't is is
actually used to protect the banks or create the mold, which
which I think is is a bit paradoxical and then just want
to highlight it. I think half of it is regulation
is used to protect the users, but half of it sometimes it's
also to protect incumbents. And the same for for Miko.
You know, Miko, I don't think they made stable coins better or
less risky for users because they forced I think Oil C to
hold more of their backing in bank deposits where you take on
the counterparty risk of banks. So that was really questionable
to me. That's an interesting take on
the regulatory side. Can you give us more specifics
of how you think the Genius and Charity and Mica Act, how they
protect banks? Is it just that they disallow
the passing on off of yield? What?
What is it specifically? Yeah, exactly.
I mean, that's something I learned with crypto, how a bank
works, you know, your deposit, your your, your money, you don't
get any yield and they can lend it out with some nice interest,
with leverage. You know these are the.
Many times over, right? I mean kind of like they can,
they can lend out like. 8 times leverage, you know, we think
these are these are decent crypto, the one that they need
regulation. So that's a very risky business
model these days, especially if people can just with a click
move all their money out. You know, it's not designed for
that kind of duration of risk is not managed like that.
And so there I see really disadvantage.
Now I have a product where I can deposit my dollars, which are
held bankruptcy remote and I still get the yield.
So I mean, I would be really dumb if I wouldn't use it.
And now I mean these products or government market money funds,
they are aware. I think with Fidelity, you can
open such accounts. It's nothing new.
I think crypto just adds new rails, makes it, for example,
for me easier to get access without my bank and be able to
use it in defy and repackage and rebuild it.
So I think that's great, you know, but I think that's what I
messaged you. I learned with crypto that not
every dollar is created equally and how different all these
dollars are, especially from a risk perspective.
Going back to this blue trip rating.
What I also learned is, for example, USDC is only B plus
rated because with USDC you still have some counterparty
risk of Circle. I wasn't aware of that and
PayPal or even Ripple USD dollar is better because it's
bankruptcy remote and it's a better setup.
So these things really matter. And going back to to your
question is, yeah, I think the breaking up this banking model,
they just got this deposit and could lend out and, and taking
the spread. I think that's a bit breaking
up. And everybody says it's they're
afraid saying OK, credit for for small businesses will be very
difficult. But honestly most of these money
went into hedge funds or, or, or a lot of other stuff.
And now I think just these two markets getting yield on your
deposits and getting paid to lend out your money will be
priced differently. So I think that's the pressure
on the model that I see that these stable coins now offer
will offer to to more users and and banks are afraid of bank
deposit flights exactly as you said it because now they're
getting more yield on their dollars somewhere else.
If I turn this argument around, kind of if I'm a small business
owner and kind of I want to get a loan from the bank, what they
do is kind of they, they look at, yeah, they look at me and my
CV, they look at my business plan.
And then kind of they do some sort of risk underwriting to
kind of see whether they think I can make this work and whether
they can kind of make their money back with interest kind of
in, in liquidity. I actually need some sort of
actually very specific capital, IE ES in order to actually get a
loan, right? So kind of this entire under
collateralized loan space, kind of I mean, we don't actually
have to talk about the in between stages where kind of
say, for instance, in Maker kind of you deposit RW as and so on.
But kind of the really under collateralized end of the
spectrum is where most loans actually take place, right?
Everything more or less everything that's not a mortgage
is severely under collateralized, right.
So how do you see that kind of migrating into the trust as RAM
or do you see that migrating into the trust as RAM?
Because kind of I actually see that as the main skill set of
banks that they have become very good at risk underwriting.
Exactly. And it makes totally sense that
they make it so I'm afraid, you know, that's what I said.
If I hold a stable coin and now some crypto team is giving under
collateralized loans to market makers, I think.
And I take a lot of risk. And that's why I said, OK, maybe
I'm, I'm just fine with 6% on, on bold by not taking on all
these risks because that's an old business underwriting
business and traditional banking is very good in, in, in that and
should be done by these people. And the, the role that crypto
can play is that you say now depositing stable coins or
funding such companies that can underwrite the loans is now much
easier, much more direct. So we already some years ago I
talked to invoice financing companies that instead of
getting a credit line from a bank, would take credit from
crypto investors. And I think that makes a lot of
sense as long as you you kind of have this regulated business and
you're doing it in a diligent way.
But then again, blockchain and crypto just become the the
distribution channel or just the the digital channels or rails
for traditional financial products.
Cool. So Michael, tell me, what's
what's next for liquidity? What should we watch out for?
Yeah. So we are really focused on
building out the the ecosystem and the utility for for bold.
So being it, you know, kind of integrated in lending markets
and then really beating the, the drum that people see this
proposition, understand that they get a a stable coin that
can have the same similar risk profile.
Like, you know, even better than USDC and Dai in this blue chip
report that that were B plus and, and, and ball is a minus
and getting a good yield and start using it.
So that's really our main focus. You know, the product is out
there and now it it needs to be used.
So we are really focusing in educating people, understanding
the product proposition, the good yields we we achieved.
So that's you know, as I told you, you have the borrowing
fees, but if you deposit the stable coil, you also partake in
liquidations and you can make 5% gains.
So in these markets now where there were liquidations, people
earned great returns and just making them aware of that, that
kind of in this very risk adjusted way, these are great
earning opportunities. That's really our main focus,
driving driving growth, driving integrations and utility.
And I think that's the blue pen blueprint of every stable coin
holders. And and that's really also the
challenging part. You know, deploying the stable
coin is always the easy part. And we see that we have a lot of
forks actually our model gets forked quite a lot and deploying
it is the easy part. Building a user base, building
utility is, is really the the tough part.
So that's our full focus. So where do we send people to
find out more? Yeah, go to liquidity.org.
There you have the website. There you can inform yourself.
There you find front ends, because even front ends are
decentralized with us. So you have different front
ends. There you have very great and
deep detailed docs. And we have also a Twitter
channel. That's the domain communication
channel that's at Liquidity Protocol, where you can follow
us, learn, learn about us. Yeah.
And then help to push sovereign sovereign money and Ethereum
dollars. Fantastic.
That's a fantastic way to go out today.
Thank you so much for joining us, Michael.
Thank you for everything for for having me.