• theswissroadtocryp

Liquity, an Ether backed stable coin, created in Switzerland

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[00:00:00] Micheal:


[00:00:06] Micheal: .


[00:00:06] Micheal: But I think it's just an important point that you need to have had somebody accountable. If there's an intermediary that is accountable, but now you give it back into the hands of the users. It's an option that they say, Hey, I go for something that's created by the user, which we agree on, which we are fine to work with and we take the risk and we have, we can see the balance sheet, how it works.


[00:00:30] Micheal: We can see how, um, how it's programmed and if you feel confident we use it. So you give, uh, Freedom, but also responsibility to the users.


[00:00:47] Didier: in the Swiss Road to Crypto, we'd like to discover interesting projects in Switzerland.


[00:00:51] Didier: In this episode, we discover a stable coin protocol named Liquity. It is a collateralized backed stable coin. It is backed by ether. When one opens a position, one has to put ether into a smart contract to get L U S.


[00:01:06] Didier: There's a stable coin. It is therefore completely different in construction and Terra Luna that completely melted down recently. Its closest relative is Dai stable coin. However, Liquity has two major advantages. First there is no interest rate and second the minimum overcollateralization ratio is much lower.


[00:01:27] Didier: It is 110% compared to 150% in Dai I will speak to their COO Michelle Swoboda and he will describe how it works. They're great recent success, regulatory issues, and much more.


[00:01:41] Didier: But first a word from the sponsors who helped make this show possible.


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[00:02:20] Didier: T S R C to get a 20% discount. Again, the coupon code is Metta 22 T S R C. So Metta like metaphors I'm 22, like the year and T SRC, like the Swiss road to crypto without the. T. So T S R C the Swiss road crypto, and get a 20% discount. It is a one day forum. So everything is packed into one day. So you won't waste your time on top of that, as it is in a beautiful location, overlooking lake.


[00:02:50] Didier: So you can't go wrong.


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[00:03:50] Didier: Next up Blockfi. Do you want to get interest on your crypto, whether in Bitcoins, stable coin to ether or many other crypto assets, but you hear all the hacks on the defi platforms and lack of trust in the protocol. You're afraid that the protocols are not sufficiently battle tested or that some nefarious actor will get the keys to the protocol CFI or centralized finances and alternative with Blockfi, majority of the assets are held in cold storage with Gemini.


[00:04:16] Didier: They lend your assets to market makers and brokers and use by and large, the same risk management techniques as banks do to manage credit risk of their counterparties. Furthermore rates are guaranteed for 30 days, so they don't fluctuate every day. Like in defy. The main difference here in Blockfi vis-vis bank is you do not get a guaranteed by a regulator like the FDIC in the USA or the Finma in Switzerland


[00:04:41] Didier: so, if you do have a situation like a run on the banks, block five will not have an explicit guarantee by the government, but with a proportion of your crypto assets, it could be worth it. And of course, let me remind you. There are no explicit guarantees from an outside source and defy either. And defy is fraught with all sorts of risks that most people don't appreciate.


[00:05:01] Didier: And also if you own crypto and want to use crypto as collateral to get alone in fees, that you can do that on block fire as well. Next up shift crypto, are you looking for a hardware wallet to store your Bitcoin or other crypto assets? Consider a bit box made by shift crypto they're based in Switzerland and have been very well audited.


[00:05:20] Didier: The CEO Douglas backroom was on this podcast and you can find that episode in the same place you found this episode. The other co-founder Yohanas Shelly was a Bitcoin core developer and submitted his first line of code to Bitcoin core in 2000. 13 also, if you like cool design, this product has the coolest design of all hardware wallets.


[00:05:40] Didier: I know use the link in the show notes to get started and to help support this podcast. And finally brain trust. Are you a software engineer, UI designer, content manager, content marketer, and would like to work independently, the freelancer and you think privately held platforms like Fiverr or Upwork take much too much of a company.


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[00:06:21] Didier: Looking at the two episodes I did with Adam Jackson and your favorite podcast player, Adam Jackson is a co-founder and CEO, and find out more about how brain trust works, click on the show notes to get started and help support this podcast.


[00:06:34] Didier: Welcome Michel.


[00:06:36] Micheal: . Hi


[00:06:36] Micheal: Didier


[00:06:36] Didier: Michelle, can you describe a liquidy, what it is and how it works?


[00:06:41] Micheal: Yeah. So liquid is a protocol on Ethereum and it allows you to take out loans, interest free loans against your Ether collateral. And you can do that by, um, minting the stable coin and the stable coin is called LSD. So it's a borrowing protocol on Ethereum. What is that? Look at it from the tradfi perspective.


[00:07:06] Micheal: So I always compare it to Lombard loan, something people are used to. So you have at a bank, you have your securities and you can lend against them. So Liquity provides something very similar, but for people that are holding crypto and specifically Ethereum. So people can come to the protocol and protocol. I mean, these are smart contracts running on a Ethereum so everything is automated and autonomous.


[00:07:34] Micheal: They deposit the collateral and the protocol provides them with a loan, um, that then they can use.


[00:07:43] Didier: Okay. Let me just make a quick, uh, summary of the, three types of stable coins that exists there. The fiat backed, stable coins, a bit like USDC from circle or USD T from tether or USD, G from Gemini, where basically you, you send money into a bank or into a provider. Uh, and they issue for you.


[00:08:05] Didier: a token on a, on a blockchain that represents a dollar you've sent them, but you actually send them dollars. So in fact, you're not distancing yourself from the whole problem of regulation of dollars. And number two is you have to a. Trust the people who are running the protocol that the, or in fact you have to audit them to make sure that when they issued a dollars worth of stable coin on the blockchain, there really is a dollar in a bank somewhere.


[00:08:29] Didier: They didn't issue a dollar 31. There's only a dollar in the bank. Then you have like yours or like Maker Dai as the other sort of main competitor to you collateralize back stable coins. Or usually you, put, uh, crypto assets into a. Smart contract, like in your case, ether, and a little bit like the Lombard loan you over collateralize, it meaning you, in your case, you have to drop in at least 110% or a hundred, $110.


[00:08:59] Didier: Let's say of ether to get a hundred dollars worth of , L USD in your case, the stable coin and the smart contract will, we'll verify that we're always over collateralized to a certain degree and we'll monitor that. And then things will happen if the value of the underlying collateral goes up or down.


[00:09:17] Didier: And then you add the programmatic or algorithmic stable coins, like a Terra melted down. And I have to say those always inspired a bit of doubt with me because basically you trust the central counter party to issue or redeem some sort of stable coin, uh, and what the stable coin is. Based on is, is difficult to, to prove.


[00:09:44] Didier: Usually you have to do a little bit of work. Like I think you had to mint some Luna coins or buy some Munich coins, but it's, it's often difficult to, to show actually in a programmatic stable coin, what work or what collateral is really behind it to, uh, to justify the value of a stable coin that they issue.


[00:10:03] Didier: And so for me, there they're inherently always weakened the market always will go and test it. Test week lines. And that's a little bit what they did with Tara that came crashing down. Like in fact, all programmatic stable coins in the past have come crashing down. I'm not aware of a single one that has ever worked.


[00:10:19] Didier: So your, your case, it's a collateral backed stable coin. So one puts up collateral in your case for the time being purely either. So of course the, the most common. Comparison to yours would be the maker Dao program, which issues the Dai stable coin. So in their case, it has to be over collaterized at least 150%.


[00:10:44] Didier: And in your case, it has to be able to be over collateralised only 110%. Can you explain a little bit, like why or where does this confidence come that you don't need to over collateralize more?


[00:10:56] Micheal: Sure. I mean you over collateralized to, um, um, to make sure if, uh, Ether price or the price of the collateral moves, um, that you're still over collateralized. So if you have a lower collateralization ratio, you have to be more efficient in liquidating this position and that's what liquidity can do. Because um, Maker in contrast to Liquity, uh, auctions off the collateral once kind of a pass system, 150% and that needs some time.


[00:11:31] Micheal: And the more time you have the higher, the risk that the collateral might go below 100%. So that's why they need a higher ratio,


[00:11:40] Didier: Because one starts, sorry. When we opened the position and liquidity, you start with 150% collateral. Is that correct? Or how much do you start with.


[00:11:47] Micheal: I mean, you, you set it at a level that you feel comfortable. The only thing that we say is you can go as low as 110 and then you get liquidated.


[00:11:58] Micheal: Usually you would go a bit higher. So, I mean, otherwise you instantly liquidated and price of ease move. So, um, But with, with maker, you have to have it higher because I already get earlier liquidated with a


[00:12:15] Didier: Yes. It's this idea that you seem more confident that you'll react quickly when there's a lot of liquidity, a lot of volatility that you'll be able to realize the collateral faster in a very volatile market. And so what gives you a low then then make or die? So what gives you that confidence


[00:12:31] Micheal: Because we have instant liquidations, so we don't auction it off. So people deposit um, there, uh, can deposit our stable coins into the protocol. So we have capital available. So in case it drops below 110, we can do instant liquidations. So the liquidation gets triggered and with the capital that is in the protocol, the positions get liquidated.


[00:12:55] Micheal: So within a few blocks, we can liquidate the capital and such. We need a lower, um, collateralization ratio


[00:13:04] Didier: I suppose you have a price Oracle and you are notified that the price of Oracle is not going to see a false price at some point or a.


[00:13:12] Micheal: Yeah. I mean, to all these systems, they are dependent on price Oracle. So that's, um, certainly something, one needs to be aware of. And if the Oracle doesn't provide the right prices, then. Uh, or can be manipulated, so that's a risk. So we have chain-link as an Oracle. So I think the entire defi system relies on them.


[00:13:36] Micheal: So that's something inherently there, but, um, we have also a fall back. So we not only rely on Chainlink we have a fallback Oracle and we monitor, the deviation, or if everything is working fine and we can fall back for another Oracle to add some security. But of course there's no guarantee. And, uh, Oracle, um, is a critical outside, influence to the protocol that we can't control it.


[00:14:03] Didier: Okay. Because, before I invest in something I always want to see. It's sort of a bit of battle tested you you've been around for about two years. And then recently you've had a lot of growth, I think. . Do you want to describe a how long you've been around and how, how much, uh, how many assets you have now?


[00:14:19] Didier: How many LUS you've been creating so on because your growth has been quite impressive.


[00:14:24] Micheal: Yes. So the project started more than two years ago. The development, it tends to life more than a year ago. And since then the, the protocol itself issued and managed autonomously and in an automated way, more than 4 billion in loans. So people took out of the protocol or the 4 bln in loans within space in 12 months, which I think is amazing and shows the power of that.


[00:14:50] Micheal: And during these 12 months, the protocol. on Ethereum handled that in an automated way. So I think that's really great. And then at that time, the protocol also generated 28 million in revenues, um, out of the issuance fee. So that's also something special and a differentiator to maker. Usually people are used to that.


[00:15:10] Micheal: You have to pay an interest rate if you borrow. Uh, and I think that's also something special in defi.. So we are able to provide interest free loan. So we don't have the concept of an interest rate that you pay over time. Every month for every year, we have a one off fee at the beginning that's really low.


[00:15:26] Micheal: So zero 5.0 0.5%. Um, uh, and then the longer you holds the loan, uh, the cheaper it gets, or it's kind of a fixed terms for these loans. And I think that's, uh, something really interesting and that's where the revenue comes from.


[00:15:44] Didier: Yeah, exactly. So the revenue for liquidity, the protocol you're going to take the throw 5% when somebody creates open the position and what is this, what is this money used for, for development or, uh, what's the point of this?


[00:15:58] Micheal: Yeah. So liquid is a protocol and it's immutable. So we developed it, deployed it. Now it's out there. Right now it's like a public good, you know? Um, and, and the revenue goes to the protocol. So, um, and then it's distributed directly from the protocol to the users Or.


[00:16:21] Micheal: the users that holds LQTY. That's the protocol token that incentivizes the whole ecosystem and it's not tied to the company.


[00:16:31] Micheal: So we have a company in Switzerland, Liquity AG, um, but that's not tied to the protocol. We developed it in a sense that it can live on its own. Um, and, uh, and everyone goes to the protocol and people that holds the token LGTY can stake it in the protocol and we'll get, uh, part of the, the fees that that protocol takes in.


[00:16:56] Didier: Okay, because the company Liquity, how does that, how do they make, get any revenue or make money?


[00:17:03] Micheal: Yeah. So Liquity where we raised funds from investors with the promise that they developed, uh, the project, uh, launch it and then investors and, uh, team members also get these tokens. That's how they can participate and are aligned. Um, the company doesn't, um, live off revenues, but it's, it's really, uh, from the funds of, of the investors.


[00:17:31] Micheal: And that's also the goal of the company.


[00:17:34] Didier: Okay. And the investors hope to make back money by owning the. Oh, the governance token you said. And, uh, that should go, that would give them more value over time. Is that the idea because more money will accrue to the protocol. And so the tokens will have more value.


[00:17:48] Micheal: Exactly. I mean, the users that use it then, um, um, the value should go back to them. So for example, this, the stability pool, depositors, they also get the LGTY. So kind of the people that use it can get, um, this token and they also then participate in the revenues of it. So it's like a, um, closed ecosystem where, where users can profit from, from each other.


[00:18:15] Micheal: And the important point is it's not a governance token, so there's nothing to govern. You know, terms and conditions are fixed and will never change. Um, the token is really to incentivize different use cases. So people that provide capital for the liquidations, people that provide front ends, that's also something, you know, do, um, can earn LQTY.


[00:18:35] Micheal: So that that's how we can align the incentives in the system with the token.


[00:18:42] Didier: Yeah.


[00:18:42] Micheal: That's how it's useful, not for voting or changing.


[00:18:46] Didier: Why did you feel that you didn't want to put in a interest rate because you thought it would attract more people faster or is there any other reason?


[00:18:55] Micheal: I mean the main goal was to provide a, an attractive product for the borrowers. Um, Yeah. And, and I think that that's what happened, you know, and Because.


[00:19:07] Micheal: there is no company behind it that says, okay, I want to, uh, get the revenue. So we give it back to the holders. And so the first goal is to have a, an, an attractive product that attracts followers.


[00:19:21] Micheal: And, uh,


[00:19:22] Didier: Okay, because you had, about 4 billion uptaken one year. So how did people discover you? Was it organically within defi platforms or how did you become known? Would you say, how did people you, I suppose you didn't do any marketing or a little bit how.


[00:19:38] Micheal: Yeah, I think it was early defi summer and I think definitely a good timing, but at the end, really in defi


[00:19:47] Micheal: tokenomics can help to attract and bootstrap an ecosystem of users. So at the beginning, it was very attractive to, for example, provide, uh, ASD into the protocol. And so that helps to bootstrap the borrowing volume and also the volume in the stability pool that we need.


[00:20:06] Micheal: And that was mainly due to these economics, built into the, the protocol with the token so they were extremely interesting yields. So you borrowed and you could deposit that and earn a decent money. And that boot strapped the base community. And then from there we expanded the ecosystem. So it's not enough just to have a good TVL.


[00:20:28] Micheal: It's also important that you can use them, for example, our stable coins, um, that, um, they can have good integrations into the defi system that you have additional tools. For example, um, analytics. So you understand what's happening in the protocol, something you mentioned, you know, if the centralized players center has stable coin, you need to trust them.


[00:20:50] Micheal: So, um, with Liquity you don't need to trust us. You can verify because you have real time audit reports on the whole system


[00:21:00] Didier: okay. Yeah. So you seem to be saying that as yields were high, that in entice, people do borrow money on liquidity platform to, to do yield farming elsewhere. That's what I understand. But how did you become known in the defi space did you organize or was it just the organic, uh, marketing and, and I don't know, on Twitter. How did you become known in faculty to


[00:21:21] Micheal: Yeah, mostly organics that's through Twitter and, um, this it for me, opportunity.


[00:21:26] Didier: And now getting to the regular in Switzerland, are you regulated in Switzerland or this is the whole question of a really decentralized protocol. How does the regulator look on it or.


[00:21:41] Micheal: Yeah. I mean, the company developed the software code and deployed it and now I don't have. Operational function. So, um, it's really one of the most decentralized protocols. The protocol runs on it own. Um, we can't change it. We have no control. We provide no front-end, um, we don't take any revenue, so, so it's really operating on its own.


[00:22:06] Micheal: Um, so Yeah.


[00:22:10] Didier: Okay, because let's be, because recently you, , can you explain that your, your link up with Bitcoin Suisse people can, uh, use your protocol to, to borrow money through Bitcoin Suisse? Do you want to explain that?


[00:22:24] Micheal: Yeah. I mean, every user can, can, can use the protocol directly deposit, Ethe take out a loan. Um, but you do need to be defi savy. You need to know how to use a wallet and so on. And, um, what Bitcoin Suisse does now is for a user that holds Ethereum, um, they provide now convenient way to use Liquity. So they do all the leg work and the operational stuff.


[00:22:52] Micheal: They already have the Ethe in custody of their customers and the issue. If they want to have a loan, they before provided it from their own balance sheet. And now the customers have the option to directly take it out from Liquity and they will just facilitate it. And, um, the interesting part about that is then that?


[00:23:12] Micheal: the customer has the protocol as a counterparty because it takes it out to directly from the protocol.


[00:23:19] Micheal: So, and, uh, again, then our company. What we did, we just educate the Bitcoin Suisse and they did it on their own. So we don't have any agreements or partnerships between each other. So it's really a thing between that. the user of Bitcoin Suisse and Liquity as a protocol.


[00:23:35] Didier: Okay. And that's a little bit, why ask the question before of, of regulation or does Finma have anything to say in this or they do that they need to get into some sort of a authority or from a regulator, or are we completely outside of that?


[00:23:51] Micheal: No. I, I think we, we closely looked at how the regulator sees things and what he thinks is decentralization and how he supports it and how kind of we see the signals that something is really decentralized. So not just sort of decentralized. Um, and we, we really tried to, take all, all these hints from the regulator, the account and say, how can we do something?


[00:24:18] Micheal: Really decentralized leveraging the, the, um, the benefits of blockchain technology. So it's like also with Ethereum, you know, kind of if it's sufficiently decentralized, and it's really on its own, um, and not controlled by a central central party, um, that's what we wanted to create.


[00:24:41] Didier: What was behind my question is that all they're sort of two things. One is that in general, if something really is decentralized and there's nobody you can hold accountable for it and a regulator in general , what they want is somebody they can hold accountable for.


[00:24:55] Didier: So if I think a regulator is very uncomfortable with you really see the decentralized protocols. And he can't hold anybody accountable for it. However, on the


[00:25:05] Micheal: but yeah, but I think it's just an important point that you need to have had somebody accountable. If there's an intermediary that is accountable, but now you give it back into the hands of the users. It's an option that they say, Hey, I go for something that's created by the user, which we agree on, which we are fine to work with and we take the risk and we have, we can see the balance sheet, how it works.


[00:25:29] Micheal: We can see how, um, how it's programmed and if you feel confident we use it. So you give, uh, Freedom, but also responsibility to the users. That's also something we see with which the wallets, you know, I have control of my assets, um, and I don't need to regulate that, but of course, if I give the assets to an intermediary, we better regulate that.


[00:25:54] Micheal: Um, but I also see no reason why the regulators should start now to regulate your own wallet, um, because you have control over it and you're responsible. So, um,


[00:26:07] Didier: Oh, I couldn't agree with you more. However, I think that the, I see banks even in Switzerland or different, uh, supposedly defy providers, crypto providers in Switzerland. Sort of, uh, bragging about the fact that they are regulated. And if they're regulated, they got some sort of approval by the Finma, which is by definition for me already a form of censorship, but they tell you crypto with censorship resistant and decentralized and all that.


[00:26:37] Didier: So it's a contradiction for me. However, it makes people feel confortable that they're putting their money in something that's regulated. So when they don't understand that they feel a little bit protected because it must be regulated.


[00:26:48] Didier: Can you , walk me through, somebody wants to create a position in L U S D. Tell me a little bit the procedure they're going to go through.


[00:26:54] Micheal: So, I mean, if, if you want to. Um, to open up a loan, for example, you need to have a wallet and then you go to a front-end. So there are different front-ends different providers that provide front ends. Like defi saver, instant app, um, or, or other front ends um, You connect, uh, it's as easy as you connect your wallet, something a defi user is really used to you say, how much of your Ethe that you have, you want to provide?


[00:27:27] Micheal: Let's say you have 20 Ethe which is worth right now, 40,000. Uh, and then you say you take out the loan of 20,000 LUSD and then you submit the.


[00:27:37] Micheal: transaction kind of like , the credit, um, requests. And, Uh,


[00:27:42] Micheal: two minutes later, you'll have you have your loan, you know, again kind of um, and then you have the LUSD in your wallet and you can do whatever you want.


[00:27:51] Micheal: You can exchange it, you can bring it to an exchange. You can exchange to fiat and you can use it. And the cool thing. So I'm one of the use cases and why people do that is they want to hold on to the. But maybe they want to buy a car. So maybe you want to buy a car. Um, instead of selling the Ethe, you could go to Liquity and take out the loan and you hold your Ethe and you still have your car.


[00:28:15] Micheal: Now, of course it will do that. If you think it's appreciate over time.


[00:28:21] Didier: , when I take out the position you can set out, in fact, it's ongoing, there is no term, there is no term to loan. Is that correct?


[00:28:29] Micheal: There's no repay re repayment schedule. I mean, terms and conditions first, or, um, set because it's immutable and when to take out a loan, you know, everything. So there are fixed term. That's also my, some people like it. You have the 0.5 issuance fee.


[00:28:43] Micheal: You pay that and that's it. And then you can have your loan as long as it won't, um, open. I mean, that's especially interesting now with inflation and, uh, you kind of inflate the way your loan.


[00:28:58] Didier: Okay. All right, that's it? Yes. That's coming back and inflating away. Our loans. Absolutely. That will come back. Uh, maybe. Yeah, for the time being L use one, does that purely and one gets dollars on one and puts up as ether. One cannot exchange yet for Swiss francs or euros. Huh?


[00:29:17] Micheal: Uh, one can, I mean, that's also a service that Bitcoins suisse which then provides to exchange it directly in francs or dollars. You as a user. So if you would go and do that, you can exchange it on a centralized exchange, like Gemini exchange ir into fiat, but then take it out or to the, into that, um, exchange in another stable coin and use it for something else or, uh, invested in another cryptocurrency.


[00:29:49] Micheal: Um, in defy that's fairly easy. You can do it on your own.


[00:29:53] Didier: Yeah, so , what are the use cases, your seeing for the current thing so far? Is it the people who are trading. Uh, and want to park some profit into a stable coin. Is it, it's a bit also, uh, people who have Ethe wan don't want to sell their Ethe and want to use it to, as you say, like, for example, buy a car, but do you have a little bit idea of like the use cases and the people who are using the protocol are mostly traders or.


[00:30:19] Micheal: Yeah, I see three main use cases. I would say like a normal users that take out the loan and because they want to keep the Ethe of need cash to buy a house car or something else. Um, that's one category, the second one or more investors or.


[00:30:38] Micheal: traders, because you can build up a leverage position on Ethe.


[00:30:42] Micheal: Also quite cheaply because you have one a fee and not an ongoing interest. So, um, that's an interesting use case and because of the low collateralization ratio, you can leverage up quite high. And the third ones are, it's an interesting. A bit more defi native. So we see Dao treasuries. So these organizations of other protocols which are taking on LUSD on the treasury.


[00:31:08] Micheal: First of all, because they like it. It's a defi native stable coin of Ethereum that censorship resistant and first having debt on the balance sheet is, is interesting for them. And then you'll get also an interesting yield. So it's like a treasury diversification and yield source for them. So that's. Use case as, and these are the three main drivers right now


[00:31:30] Didier: I don't understand how you mean. You will leverage up a position. If you, you over collateralized with Ethe you get some LUSD. And then how do you get leverage from that? When.


[00:31:39] Micheal: with the LUSD you buy again Ethe you deposit it again And borrow against it, and then you can theoretically lever up up to 11 times, but probably you would go three times. And we've, we've really low cost because it's a one off fee. So if you wouldn't want to be leveraged up for the next three years, that's a really interesting way to do it.


[00:32:05] Didier: And out of curiosity, how do you have any numbers on how much people in general over collateralized? Because you said at the beginning, you can choose a little bit yourself. Initially when you open the position, how much you want to over collateralized and people are over collateralizing by how much in general, do you have any number?


[00:32:23] Micheal: I mean, um, 150% is more on the aggressive side and two on the percent more on the kind of peace of mind site. So it really depends how quickly you can react, how confident you are in can react in time when Ethe is falling and kind of the network is congested. So it depends on, these things.


[00:32:43] Micheal: Yeah.


[00:32:43] Micheal: The last time we talked, you were very um, uh, skeptical about defi. And that was one thing. If, if something changed in, in, in the meantime,


[00:32:53] Didier: Well, two things have changed, uh, mostly, uh, to a large extent because of you, because I was always, uh, skeptical of defi that, uh, people think they're reinventing finance. , but that they really just redoing what everybody's always done in the past.


[00:33:10] Didier: However, Because of you and because of somebody else, because of Romain Braud was on another podcast, I discovered that, uh, there are two or three really big advantages of defi. The number one is that you completely reduce friction because you basically, you take up the data silos in the database silos. So, uh, because you're taking out the database silos, you're, you're tremendously reducing friction.


[00:33:39] Didier: And when you reduce friction and increases, activity, and increase, it increases of also a bit creativity in the space tremendously. So what do, I mean, you're reducing database silos and reducing friction. For example, if you, in the past, do you want to do, like liquidy is, you could say it's a Lombard loan.


[00:33:56] Didier: So obviously you put up collateral and you get money against your own collateral. So on the one hand, I like it because it's relatively safe because the person puts up collateral. However, in a bank you can almost never take this money out of the bank. And they're going to predetermine what you can use it. Whereas in defy, you get a token or a wrap token that you can move around quickly from one protocol to another and most protocols and factor or clones of ether of Ethereum.


[00:34:23] Didier: So it's relatively easy. So that's. Uh, way of taking out the database silos of saying, I put up some collateral in bank a and he gave me some money and I want to move it. The bank be to do something else. You can't really do that in the classic bank. Whereas in defy you can. So that's a tremendous advantage.


[00:34:41] Didier: Uh, like I say, I sort of criticize criticize. I sort of make fun of people in defy. Everything they think of is already been thought of before. It's just that they didn't see it. For example, uh, they think that they are young and defy. People want, everybody always wants to make money fast. Right? That's that's what attracts people let's make a lot of money fast.


[00:35:05] Didier: So there are two or three ways you always make money. Fast. One is basically leverage. So leverage you get it through futures, you get the two options. So in defy the reinventing future, they're reinventing leverage. To try to make money faster, but there's nothing new there in my book. And number two, the other way is they call it rewrap in tokens.


[00:35:26] Didier: We try to call it rehypothication which means you take the same asset and you sell it many times, or you create many different liabilities off the same asset, but people did that in the financial crisis. And in the, in the real estate debacle 2009, you know, you would take one. On a mortgage back from a bank, and then you, the bank wants to take it off its balance each.


[00:35:47] Didier: So it sells it to a mortgage backed securities company to an SBV that puts it in a mortgage backed security. So they they've made some money by selling it to , the special purpose school and some guy decides he wants to do a CDO, collateralized debt obligation. Let's put a lot of, let's put a lot of mortgage backed securities and collateralized debt obligation, and then let's do a CDO squared.


[00:36:09] Didier: Let's do a CDO made of other CDO's. And basically the same loan has been resoled many times. And every, a lot of people made a little bit of money in between by reselling it. And that's. We, I rehypthefication to a certain degree and it's also what people do in defi and they call it re wrapping and they think it's great.


[00:36:26] Didier: And they think they've invented something new or are they saying, for example, ah, let's re let's call it. Uh, you can tokenize anything. Yeah. But people have been tokenizing anything forever. I mean, I remember in 1998 I sold the bond. That was a. The receipts where the, um, the sales of the music of David Bowie.


[00:36:49] Didier: So basically we tokenized or we put in an SPV, a special purpose vehicle and, uh, the future revenue of David Bowie's music. So people have been told people have always been thinking, how can I sell future cash flows for today? However, I agree that in defy. You only do the, the friction tremendously. And by reducing the friction tremendously of do how easy it is to do something, you're going to increase the amount of activity that happens tremendously.


[00:37:20] Didier: And to a certain extent, you. I'm not really sure you can call this creativity. People defy. They still think they're being creative, but maybe they are. Maybe they aren't. I mean, it's a little bit like saying a meme is a, you know, you take a video or a picture and you put it and you put a little, you know, you've maybe put a little caption on it and you're trying to communicate something when people have always been communicating a little bit like that forever.


[00:37:45] Didier: It's a slight innovation without being. Uh, great. I dunno, a great innovation. You'll sell me. I'm a bit of a party pooper. Who's a too negative on defy, but, uh, that's a little bit, uh, uh, but certainly the idea, the idea that you can reduce friction is a good thing. The idea that you can really make it decentralized is a good thing.


[00:38:09] Didier: Uh, but that's why I asked you about the regulator, because if you really are the centralized, the regulator can't do anything, but people still want a regulator because it makes them feel secure because they don't understand something well enough. And so they're still going to a regulator because they figured to get the real money, which is in the banks.


[00:38:31] Didier: The banks are only gonna give you the, the banks are only gonna, you know, they want to get money from people in the bank still. Most people in the bank we're going to ask you, is it regulated? So I still have this tremendous contradiction there.


[00:38:44] Micheal: But I mean, to summarize that the first point. Yeah. Which I really liked. We just say the siloed data databases that, uh, gone away. I think that's an important point. And the why is it like that? I mean, we've fintech what they did so far. It's just kind of putting lipstick on a pig because the fintechs changed the front-end, but not the back end of the financial system.


[00:39:06] Micheal: And I think we should we Defi we create a new financial backend where now the databases are not in silos within these companies, but on a global ledger. And where does the innovation come from? I mean, something that you said now you reduce friction and so on. Now these protocols, um, two things, first of all, uh, you can easily move now your assets.


[00:39:30] Micheal: So if you have assets somewhere, um, and you're earning yield on it, you can take it out easily and put it somewhere else to that. In traditional finance that you take your securities portfolio. You have to exchange everything and then kind of bring it to another bank. So it's really cumbersome. That's something easy.


[00:39:46] Micheal: And the other thing is the composability I think that's the innovation, not the means that are out there, but that now somebody can come and see a product like Liquity, for example, and can build something on top of it permissionless. So now people have these products that are out there and can combine those and innovate on those and they are open source.


[00:40:07] Micheal: So. And norm, um, speed in the development and innovation, because before these products were in companies, you couldn't access them. Um, everybody did that on its own and something that's kind of signalizes this, everybody's talking about opening banking. Know, so banking was closed, then you had open banking.


[00:40:27] Micheal: Great. What's the open banking. It's just kind of in these closed databases, you can get some data in and some out, so they open up a bit. But I think with defi, you bring that on a whole other level. You have really open finance because you don't have the silos anymore. And everybody is working on the same, based settlement layer, which is built there.


[00:40:51] Micheal: And I think for me, that summarizes what you said and a big part of the innovation I think will be possible. And also the reason my bill state.


[00:41:01] Didier: Okay. Yes and no, I, I, as I said to you, once before, I think we're going everything grow. It's a little bit like the internet in 1997, everything you're being promised, you're going to get it, but this is not in this version. It's going to have to be deconstructed and reconstructed. And then later it'll be reconstructed in a more solid way.


[00:41:21] Didier: That's a little bit, my sort of gut reaction. I even wonder if, if Ethereum will be around. I mean, because,


[00:41:29] Micheal: Yeah, we changed, but, but the thing is, will it last, will it have an impact? And if you compare it with the internet, you already answered that question. Internet took some 20, 30 years, it had a major impact, and I think the same will be here, but of course it needs some time, but now you see it in the niche cases you see it happen with, with my previous company we managed


[00:41:51] Micheal: our assets in a wallet, which is a bank account with the bank. We are able to do most of the things we needed for the.


[00:41:57] Micheal: company. And we just need to have the bank account to pay taxes, uh, and maybe a credit card to, to manage some service providers. But we had the optionality to do it in a different way without an intermediary.


[00:42:11] Micheal: And for most of the things for such a company in the space, it worked really well and flawlessly. And the only thing that will change that maybe your company or kind of other companies will do the same in five, 10 years. Yeah. Maybe, maybe it takes a bit longer.


[00:42:28] Didier: We'll see, I, uh, on the one hand, I'm counting on the developers to make a user interface that makes it easy enough for the average guy who doesn't feel comfortable enough to manage his own keys, to manage his own wallets. To really act in a decentralized or really tough sovereign way that scares a lot of most people.


[00:42:48] Didier: And most people won't do that, but I'm counting on developers to, to make that possible without going through with centralized solutions. So I hope, I hope that happens. , the important point is that people have a choice. That if I want to, if I want to park my ether and the centralized solution and use Liquity on a centralized solution, I can do that.


[00:43:10] Didier: And if I want to do it on a completely decentralized way, I can, will I, that that's also an improvement that you can, you could say you can now with cash, but in reality, you can't.


[00:43:21] Micheal: And what was the other thing? So, one thing I understood this really, that you think we have the silos that are broken up and, uh, take a lot of the friction out and allow for innovation.


[00:43:35] Didier: Yeah, that's it, that's already a very, that's quite a big improvement. And the other point that I thought was interesting that you also showed to me was, um, token omics, which isn't well, you know, which applies to blockchain in general, not just to defi, whereas, uh, which allows you to sort of, um, Make the users of the platform, profit from the platform in a certain way, because you're going to give them some governance token or some token, uh, by using the platform or contributing to the platform.


[00:44:07] Didier: They're going to gain some token related to the platform. And especially if you give this a certain limited amount of this token, And if more and more people use this platform and get these tokens, uh, they're going to be sort of like richer a little bit, like owning shares at co-op and value or something.


[00:44:25] Didier: That is also a big advantage that you don't get in the bank. Really. In other words, if , more and more people use the bank because the bank does a good job of serving its clients, the client of the bank, doesn't really profit. Uh, the, the, the shareholder who the bank profit, and now it can be different than the users of.


[00:44:43] Didier: It's a little bit like a mutual or like a cooperative, but the more sophisticated way. And that's also a people will realize that little by little, they can make, make money like that. So that's also an advantage that you don't have in a classic financial. And I think that's also a big advantage.


[00:45:02] Micheal: And it's not the only classic finance. I mean, that's kind of web two companies, um, that function also differently. So having now the possibility with tokens to create incentive. And bootstrap an ecosystem. Um, also in the non-financial space, I think that's really an innovation. And I liked that. You said, you know, it's like a collective or I compare it to a commons.


[00:45:28] Micheal: I think with tokenomics, you can scale the commons on a global scale, which wasn't possible before. I mean, everybody's used corporations to organize a system or. Uh, these were the two things and funding. Interestingly, you know, there is a third one often overlooked and kind of having a, uh, a, um, never really scaled


[00:45:51] Micheal: then that's the commons and I think you're coming from the French parts on the Valais you know, you had these commons for water and other stuff. So people that managed, um, Good slide like the water, uh, of a community. So it wasn't kind of a corporation. It wasn't a government, they self-organized, and self-control that worked really fine, but you needed to kind of control the other one.


[00:46:14] Micheal: You had to have trust. You have to see who uses the water and when, and then kind of in this local environment, it worked really well. And for me, tokens, take this model. I couldn't really scale so far and makes it scalable that you can have this commons around protocols around public goods, around organization, um, being used.


[00:46:35] Micheal: And I think that's really the, for me, the, the fascinating thing about these token Nomics and the possibility gives the. Again, the possibilities of these three or organizational form yet the corporation, as I said, the bank, he gets all the profits and the shareholders. You have the government with its pros and cons.


[00:46:52] Micheal: Hey, and that's a new alternative to do things more and more into the hands of the users, which is great, but which has also some problems. So it's not kind of the one, one fits all, but at least again, you'll have the option. And I think that's amazing.


[00:47:06] Didier: What you're saying is true for simple protocols that do one thing, like maybe a USD or you put an ether to get dollars, the sort of whole idea that you're going to have a Dao ruling the world. I'm always suspicious of it. It might work this idea of a common good and people using it.


[00:47:23] Didier: And people taking care of a common good works for a simple product. Once it becomes a little bit too complex and there are too many moving pieces and it needs to evolve with time and evolve with user demand. Then you need a leader, uh, an organization doesn't work if there's not a small group of leaders, and then you have the whole power thing again.


[00:47:43] Didier: So, uh, For the time being this whole idea of Doa's ruling the world, decentralized autonomous organizations. I mean,


[00:47:53] Micheal: I see it a bit. You know, I didn't say you, you need to rule the world with that. I just say you have an organization for its close skins globally, even for a small school, like, uh, like a protocol or like a fund that wants to buy the constitution. The amazing thing is that now people globally. Can organize themselves and control, for example, the funds, or even if you have a management and control something, taking away the, um, the control over the funds of these comments or collective that's, something that works and that wasn't.


[00:48:29] Micheal: Possibly before, because he had to at a corporation that's incorporated yet to do that legally. And now people can just enforce that. I, for example, voting with the token and take away from the management that the control over the assets of these comments, still possible. And that's really powerful.


[00:48:48] Didier: Yeah.


[00:48:48] Micheal: Do that with a corporation or a government.


[00:48:51] Didier: Well, I read for the time being, I think it's still for people who were comfortable enough with tokens and the interface has to be but easier. And for the time being, it's still for specific tasks, but I can imagine that will I agree with you that it will evolve with overtime and people will become educated in this whole new sort of field will have of managing things differently in a new business model will, uh, can arrive that that's true.


[00:49:15] Micheal: And it will come totally naturally. I'm sure. You know, it looked like people, um, manage NFTs. How convenient it gets once they have, because of NFTs is public private key infrastructure in their hands. Instead of sending NFTs, holding NFTs, voting for stuff, sending money, um, for the.


[00:49:33] Micheal: younger generation, that will be a no-brainer. I always say in 10 years, you have to explain the younger ones, why they need a bank account? What, what is that? And why should they open up one?


[00:49:45] Micheal: That's how I see the word.


[00:49:47] Didier: Are you looking to hook up with people in Switzerland doing cutting-edge work on NFTs, lightening and cryptocurrencies it's. So you should attend a one day conference in Lugano called metaphors them on June 13th. , there will be many speakers, founders, and CEOs.


[00:50:04] Didier: Like Jacamo Tuco, John Crane. CEO's super rare. David Printy head of finance for Italy and France, and many more. You can check out the complete agenda at their site. Metaphors dot C H when you are ready to sign up, click on tickets and use the coupon Metta 2020.


[00:50:22] Didier: T S R C to get a 20% discount. Again, the coupon code is Metta 22 T S R C. So Metta like metaphors I'm 22, like the year and T SRC, like the Swiss road to crypto without the. T. So T S R C the Swiss road crypto, and get a 20% discount. It is a one day forum. So everything is packed into one day. So you won't waste your time on top of that, as it is in a beautiful location, overlooking lake.


[00:50:52] Didier: So you can't go wrong.



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Didier Borel - 00:00:06: Welcome to The Swiss Road to Crypto monthly review for the month of August 2022. I'm joined, as usual, by Alex Poltorak, co-founder of Hodling SA and by Mauro Cappiello, co-fo