Transcription
To compete with a DEX, to compete with another lending protocol or things like that, you would have to redistribute maximally every dollar in value to users of the platform to maintain your your moat.
GM, good morning. Welcome to the Milk Road Show, the daily crypto show where holding for 3 days now counts as a long-term conviction. I'm your host Kyle Reedhead and today we're joined with Alexander Cutler, co-founder of Aer Drrome, the main decks and liquidity hub on base and Mgan Merlin sorry Egalitee co-founder of Morpho Labs a lending protocol on Ethereum and and I think many other chains.
Today we're going to discuss where DeFi is going next, how DeFi will be adopted and used globally and things you need to understand or look for to capitalize as an investor in the DeFi space.
Before we get started, please support our show. If you're on YouTube, uh, please subscribe, hit that like button, and drop a comment below. And for our podcast listeners, a fivestar rating and review would mean the world to us. It really helps us grow and keep bringing you the best possible content.
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All right, let's bring Alexander and Merlin on to the show. Gentlemen, how you doing today?
Good, good, good, good. Thanks for the the invite.
Absolutely. Well, we're excited to have you on. Um you guys have been crushing it. Uh both of you guys have been crushing it. Your teams, your your um the products that you guys have created. Obviously being on base, it's also a very hot topic, I guess, and we've seen a lot of growth there. So, I'm excited to kind of learn a lot about what you guys are doing.
Um, let's you know what? Let's just start with a quick intro. Why don't you guys walk us through just real quick what is Air Drrome real quick? What is Morpho? uh and if there's any relevant background you want to explain uh then you can do that as well. Alex, why don't you start us off?
Yeah. Yeah. Thrilled to be here. So, I think the best way to think about uh aerodrome is as a metaex. So, obviously decentralized exchange infrastructure is just one of the cornerstones of of DeFi, you know, and of the onchain economy. If we're going to have all these tokens, there needs to be ways for people to uh exchange them. And so from the earliest days, right, we've seen decentralized exchanges pop up. And this is, you know, an exchange like, you know, like Coinbase, like Schwab, anything. It's place you go and you can get from one asset uh to another. A decentralized exchange just does that same function um but built on smart contracts using permissionless liquidity pools and things like that. There's no centralized intermediary uh needed in order to facilitate these um exchanges. And what makes Airdum unique is it is a metaex. And a metaex basically combines all the best primitives of uh previous dex models. So the best of unis swap, the best of curve, the best of primitives built on top of curve like convex all into a single streamlined design, single economic model designed to provide traders the best execution, liquidity providers the best rewards and also uh token holders 100% of the productive value of the deck itself.
Amazing. Melan, why don't you uh give us one next?
Right. Um, so in our vision there's two building blocks to to recreate the whole financial system. So Alexander is representing one which is like the the trading side uh by the the the decks and there's then the landing side that is the second building block and with with that with both of them you can recreate basically almost everything and so we are building an infrastructure to uh for onchain loans so that to give the the opportunity to create landing uh services and product on top of Mofu. So you can see Mofu as like this uh this this kind of a landing primitive where anyone can create markets uh can create uh product on top and offer those services to their end customers.
Awesome. Now let's start this show sort of talking about you know DeFi today and then where I think DeFi is or where we think DeFi is going to go uh in the future. For those that weren't around last cycle, DeFi really kicked off and had its moment, let's say in 2020 when we had DeFi summer. I don't know if either of you guys or at least your companies were around back then. I feel like they they weren't uh back then. Correct me if I'm wrong.
No, not a drone. Was more fun.
No, no. I I was a DJ running around. I fig I figured that.
So, yeah. Same. Yeah, we all were. Yeah. On our side, we started in 2021.
2021. Okay. Right. Makes sense. So, uh, for those that weren't here, it was a wild time. It was the first time we really saw, you know, what a DEX was and and you know, you could lend and you could get yield and you could do some of these things. It was very clunky. Um, but it was a wild euphoric uh time for a little bit there. And then basically since 2021, um, I would say the metrics of DeFi and and more specifically probably the DeFi tokens um, have been kind of down only. And then over the last year or so, things have really started to see a resurgence here. Um, we've seen the metrics and the use uh and the adoption of DeFi really start to pick up. The TVL really start to pick up. We've had a lot of innovation uh and a lot of new apps like your um Air Drrome and and um and Morpho that have come along. Uh, and even some of the tokens have gotten a lot better because I think the products have become more resilient. They've been battle tested. They're generating a ton of revenues which is really cool. They're doing buybacks as you mentioned Alex. Um, and so it sort of feels to me like DeFi, at least in the crypto space, is like the one sector that's maybe crossed the chasm to be like more of a legit industry, I think. Um, I guess the first question is like, do you guys think that we're there yet? Have we crossed that chasm or do you think there's still a lot a lot to go? And then where do you think we go from here? Like what's the next phase of DeFi um based on where we are today? Uh, we'll let Alex, why don't you start us off again?
Yeah. Um, I would say we've definitely crossed the the chasm. You know, I think um if you look at what DeFi is now from the earliest of days and and you hit on some of this, you've got protocols that have clear defined product market fit. And I think you know two of the uh most important verticals are the DEX infrastructure um and then the the lending market. These are protocols that have, you know, uh, tons of users. They generate tons in fees. Um, and they are the essential backbone of the the the broader onchain economy. And I think you know one of the big shifts which I think you already hit on from those early days is that now it's not just that the to uh that the protocols are being used um and uh that they are resilient uh but the tokens themselves have utility right and this is a big change because in the early days tokens were basically launched and used as kind of like insider extraction vehicles right and the reason why you saw DeFi tokens down only forever is because, you know, fundamentally they were just used to allocate to insiders to be sold. They didn't have any real claim on uh protocol revenues. They didn't really have any like onchain utility. And so I think what you've seen now is that not only are the protocols themselves um achieving like product market fit, but the tokens themselves are the mechanism for operating these protocols. They are useful. um they do uh play a role in the the economics broadly, but in terms of what comes next, right, uh we're already starting to see the first signs of this. Coinbase is directly integrating and distributing um DeFi onchain rails, right? And they call it the DeFi mullet. So, it's Coinbase in the front as the distribution layer and then it's DeFi on base on the back end. and Morpho and Coinbase, you know, were the pioneers here with the uh Bitcoin loan product that any Coinbase user, right, can go and borrow against their Bitcoin. It's an amazing product. It's something that Coinbase could have never offered directly, but they can offer via onchain rails. And the demand for this product is so high that, you know, DeFi, uh, all of us, Morpho, Moonwell, us on the liquidity side, Aerome are struggling to keep up with the demand. And now Coinbase has also added DEEX trading. So if you're trading on Coinbase now uh you have access to any token that trades on uh Aerogone and Coinbase says that they believe in the next like 5 years or so 10% of global GDP is going to come on chain. So if you think about the demand for products and services like dex trading infrastructure like borrowing against your your assets and basically the full composability of what DeFi unlocks distributed by Coinbase and now tapping into 10% of global GDP order of magnitude larger than where we are now. It's like we are just in the earliest of days.
Millie do you have anything you want to add on that?
Yeah. No, I think Alexander uh summed the the situation really well. I think DeFi is basically blockchain PMF to be honest. I mean it's the the purpose of the first purpose for blockchain and this is why it is working so so well because finance is you have to move a lot of value and you want to um to to have like the as as the the least trust to put into human beings. Um and and and blockchain offer that environment uh that makes trading landing boring as safe as possible and as efficient as possible and you can only do that on onchain fully onchain infrastructures uh such as aerodrome or mofo that are globally accessible. So what that means is that you have deep liquidity. So better rates, better uh price, trading price uh than any other uh thing that you can uh you can get offshain. Uh we I mean with the onchain loan uh product that Coinbase did on top of Mofo, people can borrow BTC against their USC at like um now it it's a bit higher but it might be like six 7%. And we had institutional people that have BTC uh option I mean in c custody and that they are borrowing USDC against that and it's the LTV is maybe 20%. So they can only borrow $20 against uh $100 $100 and it has 15%. On MO for you can borrow up to 86% at 6%. And they were asking why can't we get access to that trait and it's just because they are locked in that right final word that is uh siloed and and that not everybody can see the opportunity sees it and deposit capital to lower the rate. Why on Mofu you have many individuals that can access and see that that situation the opportunity the demon that is coming from from Coinbase and just land USDC and and get the yield and and we have large actors like Spark or Etheina uh but we have also like just small individuals that are just putting $100 um and and earning a lot of yield on top of that. So you have global access of liquidity and also you don't have to operate the server or the back end. So you offload everything that the infra infrastructure that any chain or any s sorry any bank or fintech needs to reproduce internally with their own security team blah blah blah they can just dedicate everything to the the blockchain itself. And maybe the last thing is because it's relying on immutable code. I mean you don't have to rely on many layers on the inter intermediaries that are can take a a cut on your on the fee and that can at any moment just shut down and turn on turn off the the API and and and I mean you're not locked in. You can just like integrate you own the stack from top to bottom. And that gives a lot of creativity and and room for innovation for distributors like Coinbase. So yeah, that's that's just yeah um that's it.
Alex, you you you mentioned that I think you said Coinbase couldn't even offer the service of like um loans against their their their Bitcoin, but actually they I mean they did offer it in a small way. Was it like 2020 or 2021, something like that? Um, but one, it's not super scalable. There's a lot of risk for Coinbase. It's very expensive because of all the things that Merlin just talked about. And so like it was a product, but it wasn't a great product for them. But just integrating into um their their app into Morpho, well, what a way better product. So much less risk. I mean, basically no risk on them, right? A little bit, but not much at all. Um, it's way way way cheaper for Coinbase. So it's a way better product for Coinbase. And then obviously it's also a big win uh for Morpho to do this as well. I forget what the growth numbers are. Merlin, I don't know if you have them on top of your head, but since you guys have integrated Coinbase, the numbers are completely off the charts as far as I understand.
Numbers goes up. Uh, yeah, know I think there's 1.2 two billions of collateral uh of BTCS collateral and maybe 800 mil of uh active loans something that that's since February just in six months or something that so it's it's a crazy and and thankfully we have drone uh for the DEX liquidity in case there's liquidation that that should happen but maybe we can talk about that later right
Well, this is the Legos so it's interesting there's there's two things that came out of the DeFi summer days and even maybe before that was the DeFi mullet was a common thing that we talked about but didn't actually exist back then but we we definitely talked about it. Uh, and the DeFi Legos which was like these DeFi companies building on top of each other and integrating with one another. You don't really get this so much in the in the traditional world but the DeFi m you guys already kind of talked about what that is Alex you explained it which is basically fintech in the front DeFi in the back right you explained it Coinbase in the front. Okay, so we we know which uh where you guys care about. Uh, but it is true. Coinbase led this. They were the first ones to do it and they actually did it with Morpho were the first time that I think this has happened really. Then we saw Airdrome getting LinkedIn and so we'll talk about kind of the growth and what that's happened. I know it's very new for you guys, but maybe you have some insights for us. I think like a has done this with Kraken. As far as I understood, Moro, you guys are doing this with um Crypto.comz well. Is that true? I saw this in our in our grow community channel. So verified it. We have Crypto.com uh Gemini and uh what else can I say that is not confidential. Uh, no, we did Bit Panda and we have a few other centralized exchanges that that we've done this.
So my question to you guys is like obviously it's it's seen some great growth today so far. Is this the future of DeFi? Like is this where adoption comes from? Is really the DeFi mullet and it is mainly using these um apps that already exist today that integrate into DeFi. Like obviously there are people who use DeFi, you know, with a MetaMask wallet or whatever and they go and use it, but it's I feel like that growth is less over the last few years. We're not getting a lot of new people, let's say, into the crypto space. Um, but we are getting more and more that are using it within the apps that they're already in, whether that be Coinbase or Robin Hood or Crypto.com or whatever. So is that really the future that you guys see? And also after you answer that, what are those partnerships like? Like I know in your guys cases, I think Coinbase might be an investor, so that's great, but you know, Crypto.com, etc., you just kind of see them as a client or are they like like how's that partnership work for you guys?
Um, Alex, why don't you start us off?
Yeah. I mean uh I I think I I do really see the the DeFi mallet like experience being the primary growth sort of uh vehicle for for DeFi generally like there will always be power users, right? There will always be, you know, the people just like the early internet who want to get under the hood. They want to really understand things. They want to go like direct to um some of these products, services, chains, uh get get their hands dirty. But for most people um you know they don't know the protocols that underpin the internet. Um they don't know all the technology that needs to come together under the hood uh to make it possible for them to tap to pay you know on their phone uh for them to stream and watch videos across platforms. They don't need to know any of that. They just know that these are products and services that are better than or enable something for them. uh that wasn't possible prior. And so when we think about the uh breadth of all the things that the onchain economy will disrupt, it's it's literally any industry um that is like maintaining some degree of healthy margin on like a product or service or or even institution um whose entire you know institution itself the entire firm can be distilled down into immutable code and that margin now is basically a bounty that that this onchain product can provide a service that's faster that's real time that is lower fees that better rewards its users and like I think a lot about you know payments uh global FX uh remittance you know all this sort of stuff and uh using your bank to move money around is still just a giant pain in the ass sometimes and that's uh with me speaking as the benefit uh being you know an American and having one of the better systems of which to do this. These will kill you. You know, the lag time will kill you. It's it's a terrible experience. Um, you're not earning the greatest yield in many of these high yield savings accounts, things like that. It's it's all just not that great. So, people who can wrap um onchain services that have far less of this value extraction, far less intermediaries, it's faster, it's real time, it's cheaper, it's rewarding you better. They won't even need to know that any of this is onchain. They'll just know that this is the best banking app I've ever used in my life. I'm getting the best yield. My dollars in there. I can tap to pay it anywhere I want to tap to pay it. I can send money anywhere in the world and it's instant and real time. And I think that is how the benefits of all of this work we do on chain will translate to consumers. And you know the the one example I will just give here because this exists right now. Um, if you are trading between uh US dollars and euros right now and you go to the absolute best of of tradition in in Paris as an American, right, it's going to kill you. Uh, if you pay right at the merchant, it's going to kill you. They're going to take percentages. But let's say you're even super smart. You're using Transfer Wise or, you know, something like that. It's it's better, but it's still not great. right now today on aerad drone the rate you get in uh uh swapping you know dollars to euros or euros to dollars is better than anything tradi can give you and these are you know billiondoll banks billion dollar companies you know they've done the best on the traditional side that they can possibly do and we're beating them right now and so then it just becomes a distribution bank how do we get that rate you know in the hands of of more people how do we get it plugged in to people's devices So they can tap to pay and access that that liquidity. But if it's a better product, this is the the web revolution, right? If a better product can be delivered, if you can uh distill something into code, it's just a matter of time. Um, and I think that will happen in all these verticals that we're building around.
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I think um I know that there's people listening going, "Well, if it's all just the DeFi mullet, this isn't the promise of crypto. It's not, you know, decentralized. It's not self-custody and blah blah blah." And I I feel like I always have to do this like disclaimer of I think for me the the real purpose of crypto and what crypto offers is the choice, right? Which is if you want to use the, you know, your Robin Hoods or your Coinbase or whatever and not have self- custody, which a lot of people will choose to use that because it's just easier and it's where their money already is, then they have that choice. But if Coinbase ever does anything wrong or Robin Hood ever does anything wrong or you just, you know, you want to go somewhere else, you have the choice to take your money off that and go and use Morpho or Aerod Drrome directly, right, with self- custody. And that's the key because we never had that previous to crypto. And so it doesn't mean everyone has to go and do self- custody. That's just not how the world's going to work. Uh, and so I think people just need to be okay with having the choice. Um, and and I agree. I think this is the way that DeFi really gets adopted because honestly, it's kind of hard to use DeFi. Most people don't want to use DeFi the way that it's set up and that's not a knock on DeFi as it is today. That's just I don't know a lot of people don't use a lot of financial instruments even in the traditional world. So it's just kind of normal. So the easier and the more accessible we can make it through these apps that everyone's already using. Why would we not do that?
Um, a question on competition at least on where this will go today. when you think of competition of I don't know lending apps you think of like Morpho and I don't know a right like you think of this like in cryptonative companies but or protocols sorry but at some point there's a few ways that competition can come in one I think is like I don't know banks could launch their own lending protocols or their own dexes Robin Hood is launching a chain I don't know if they're going to integrate with you guys if they're going to launch their own so first question is is this something you guys worry about or what do you think's going to happen there and then the second question on I guess this is sort of competition But so you're linking into Coinbase and into Crypto.com, etc., etc., that means they control the users. And when they control the users, they typically can control a lot of the costs. And so, so far, I'm sure nothing has happened or at least I hope nothing's happened. Um, but at some point, they could come to you and say, "Hey, we want you to lower your fees, and if you don't, we'll go to, you know, X competitor." Is this something that's already happening, something you guys are thinking about, and like how do you guys think that this will play out in the future? So there's sort of two questions there on on competition. Merlin, you can start.
Yeah, maybe the way I would think about that is do you think that uh uh an internet is h competing with uh the internet? And and the way we think about it is you you see MFU as a network that is globally accessible that is also you can use from Monday to Sunday at every hour. uh anyone can access it wherever you are on the globe and this is something that a bank bank cannot offer and you won't have that deep liquidity that you have on Mofo and at some point some point there will be so much liquidity on on Mofo that you'll have the best rates if you interact with Mofo and then that's what we call the network effect etc and at this moment so the mo is liquidity is what you're saying basically Yeah. Yeah. It's a network. It's Yeah. Um and and then at at this moment, of course, you can take a small fee um and but that fee should be represent what's like the value of that network and be correlated to what's the switching cost um to to go to another network and and and so I think the the fee should reflect that. uh it should not be extractive but it should be sufficient so that we can maintain and continue innovating and improving that network but cutting you as a bank uh would mean that you don't benefit or you don't provide that uh that best rate that best price that that best whatever to your end users so you are less competitive and in a world where I mean banks fintex what they want to is make profit. So they have an incentive to provide the best product. And if you want to provide the best product in in finance, it's basically like do you have the best price? Do you have the best experience and do you have the best rate? So that's that's our approach. So I don't think we are competing because we are really focused on the infrastructure and they have the the whole distribution. And this maybe comes back comes to to the second question, but maybe Alexander, you'd like to to add something.
Yeah. Uh, I mean I think you you nailed it. Um, I do think there has been confusion in the space at times uh with some successful uh D5 protocols and them deciding where in the stack do they actually want to fit. And I agree entirely that, you know, there are those of us focused on being kind of the essential rails of this onchain economy. And if you are the essential rails of the onchain economy, anybody who's distributing, be it Robin Hood, be it a major bank, be it be it Coinbase, is going to need to tap in to your rails if they are going to provide the best experience, the best rate uh uh to their customers. Um, but there are some in DeFi who said, you know, we want to own the customer. We want to be the front door. You know, we're going to launch a competitive wallet product. We're going to throw fees on our front end because we believe somebody will come to us instead of Robin Hood or or Coinbase. And and I think there's like a bit of hubris in there and there's a bit of like losing focus on, you know, where the moat is actually created. And the mode is created in in being the best Rails in having the most liquidity in maximally redistributing value to users of the platform versus you know extracting it out to a private entity or or something like that. And that is where like even if you work say a Coinbase or Robin Hood you said you know well should we just build our own Dex Rails or a bank or build your own lending protocol. What would be in it for you? Um, and then where would you get your margin that does not make that like custom uh piece of uh software uh less competitive against you know protocols like Morpho or Air Drrome that's going to be maximally capturing and redistributing that value to users right it is much more useful I think for them to be that distribution layer um take some degree of margin or fee off of that you know from the distribution but uh they aren't going to be able to add fees you know, to say a DEX trade um if they build their own DEX liquidity infrastructure without making themselves less competitive versus us. So, why do it, right? Just tap into the the best rails. And and by the way, it's also very interesting, I think, because like with something like Aeradrome, it is very very cool that um Coinbase is distributing um you know, every token that is live on Airdum. So in a way that they are like uh directing flows from their 100 million users directly to our liquidity pools. And you could say like well hey aren't they kind of like vampiring their own centralized exchange here? Um in a sense maybe but they are also growing what they can distribute by orders of magnitude. They're dropping the cost of each token that they distribute significantly. They're lowering the regulatory risk. And hey, by the way, they own um a large portion of VE Arrow. They vote each week on the platform and in doing so they earn a percentage of the total revenue the the platform um creates. So they actually can increase their margin because they can take a front-end fee from the distribution and also take a percentage of the total fees the platform generates. So it's actually very advantageous for them and is a way that they could, you know, increase their margin even beyond their centralized uh listings without them needing to build the infrastructure. Uh just owning a portion of the decentralized infrastructure is probably much better for them.
Interesting. So Coinbase, we'll just use them as the example. They own the token. uh they integrate you guys into their app and then they basically generate some revenue or some value uh because the token generates value. Correct.
Um, that's interesting. And then do they also charge a fee on top of it? So like when a user I don't know uses Moro or uses Aerad Drrome I'm assuming they add a little a little cut or a little fee in their own app. Is that correct?
On on Dex trading yes. Um, I'm not sure what it is. Uh, but when Brian's talked about the DEX trading, he said, you know, they're going to charge, you know, roughly similar to what they charge on and on typical retail trades. I'm not sure on the the lending side.
Interesting. So, on on the borrow side, they don't take a don't take a fee. Uh, but it's it grows the demand for CBDC. Um, so and USDC. So, and they earn like money on on USDC. So basically they have other ways and it creates a nice flywheel for them.
Yeah, absolutely. But that's interesting. So do you guys think as this kind of DeFi mullet um uh kind of plays out here and we have more and more apps, more and more financial companies, fintexs, maybe even banks that start to integrate into your guys um protocols. That's going to be the strategy for a lot of them is they're going to actually just buy the token and that's where they're going to generate the revenue from. Is is your protocol sort of buying back its token or I don't know if you guys you know give yield or however you do it. there's different ways to do it. Um, and that's like a way that most partners um will end up coming in and just kind of buying the token and doing it that way. Is that like a a strategy of these partnerships?
I mean, it's it's uh I think it should be the the way that they do it. And and there there's just absolutely no doubt though that, you know, Coinbase is on the the bleeding edge here. But, you know, it's no different than Coinbase wanting to hold, you know, a bunch of Bitcoin or ETH on their balance sheet, knowing that, you know, they are essentially distributing and depend on the success of these networks and want to share in the success of them. Um, I think it should be the same for for D5 protocols. Um, they don't want to make the networks not decentralized because then, you know, what is the advantage of them? But they do want to own a share of the decentralized networks that they're distributing to to the world. And certainly that's at the chain level, but I think that is also at the liquidity network sort of side of things, the exchange level, right? It's at the uh lending level. Um, you know, it's almost similar to how they think about Circle, right? You know, they didn't want to launch their own stable coin. U they wanted to invest in Circle and distribute it and then share in the upside of that. And I think um anyone who's building a DeFi mullet strategy, and I do I think there will be a lot of DeFi mullets should think like Coinbase, but I I will just say I think they are so far ahead in in their vision and thinking on this that, you know, it might not even be anytime soon we see somebody truly recreate it. I think you'll see a lot of people like kind of do an imitation, but they don't really understand the full stack of the the strategy. But I think over time, you know, the more success that Coinbase has, you know, the more you start to see this on Coinbase's balance sheet talked about in Coinbase earnings call, the more you'll see like other um distribution vehicles, institutions uh get more deeply serious.
Interesting. one of our um researchers at Milk Road Martin, he writes a lot about DeFi and one of the I don't think he's released this report yet, but I I think I just edited it so um I I get to to frontr run everyone else, but he talked to it was basically called platformization and he's talking about that this is the direction that DeFi at least the winning DeFi protocols are going, which is this kind of happened in the tech world too. So like Google, Amazon, Apple, they all became they used to be just like one thing like a device or an app and then they became a platform, right? Right? And then a bunch of others could build on top of them and that became their moat. If you think of like Apple today, it's the app store, right? And now they have millions and millions of apps and they charge like I don't know whatever it is 30% or whatever to be on there. Uh, and so and you see it with Amazon, you see, etc. So that was like what made the winning tech platforms and what Martin's theory is the same thing is going to be true with DeFi because liquidity is the moat. And so how do you get more liquidity? Well, instead of just trying to be your own distribution channel, you build and become a a platform. And if you become a platform and you have a bunch of different companies all utilizing your liquidity and adding to your liquidity, that's how you become the biggest DeFi protocol. From our conversation, I assume that you guys agree with this. And is that sort of what you guys are building towards?
Yeah. Yeah. Totally. And I think that the vision that we have is if you really want to to build that kind of platform, you have to have like a neutral platform. So where the governance does not have critical choice on how the the protocol operates. So the governance even though you can have like a very decentralized governance, you still have humans human or even like governance attack vectors that are here. So that's fine for I don't know maybe for the treasury or some like financial mechanism but for the core protocol we don't think that the governance should be able to update the logic while it's running because we have seen that in the past. So either they there were hack or just upgrade of the protocol that were basically breaking integration on top on top and protocol that were not operating anymore because they were tapping into a pro protocol where the smart contract interface and the logic had changed. Um, so we think that having an immutable protocol that is governance minimized is critical. That's one thing. Also the notoriety, credibly uh credible notoriety which was something that uh was coined by I mean I mean Vitalik I guess uh is is super super important uh because you you want to have that platform that is as global as possible and that does not discriminate anyone anywhere in on earth so that you can have the and bring the whole liquidity into one place and and also we think that minimalism and at least simplicity and one on how you conceive protocols and like uh I think Alexander you you were talking about focusing on one thing but focusing on on one thing and do it perfectly is the the critical piece and if you nail it then the platform becomes the best at what what it's supposed to do and and then everyone that needs that critical piece will integrate it because That's basically the the way it has been created.
Yeah. So those points make a lot of sense. And when I think about I asked about Coinbase or other banks if they could be competition. I think those points are why they can't really become competition. If Coinbase launched their own lending platform, no one else is going to use that. No one else is going to put liquidity into that because they control all the governance, right? So like you said, governance minimized, you know, and and having no one entity that can control it. Um, credible neutrality, all these things. If a bank just launches a lending protocol, they don't have that. And so they're not going to get the liquidity from everywhere else. So I think that's why this platformization way is what allows you to become the biggest and get the most liquidity. So that that makes a lot of sense.
Well, and and and I'll add one more thing there because I I think this uh and I gave a talk at um ETHC which I'll I'll I'll plug um but it it the one additional aspect of it is if the only mode if you if you can boil down the the firm if you can boil down an institution and into just immutable permissionless neutral code you can deliver these real time uh products like at scale. The only moat you have is maximal value redistribution to users of the platform. And so if you are a Coinbase, if you are somebody else and you are going to deploy your own infrastructure, there's no additional margin for the business that you can take out of it because to compete with a DEX to compete with another lending protocol or things like that, you would have to redistribute maximally every dollar in value to users of the platform to maintain your your moat, right? So it's just a very different equation. Um, and by the way you're investing in engineering and you're spending money on it. So you know why go out and build something if you're going to have to redistribute all the value in it. I think the only way it would ever make sense is if there is some primitive that they envision they see out there as an opportunity that nobody has built and it seems like nobody will build and they want to go distribute that. But if they can't give a liquidity provider, well I should say like on the decks if you cut liquidity providers rewards anything below 100% of the fees the platform generates you lose to somebody who gives 100%. And by the way we can also reward in like 1.25 1.5x. So you know where is the margin for anybody a traditional business to do that? You have to return all the value within the network to the users. And so I think that's just another key component.
Interesting. I asked at the beginning of this episode of where you guys think DeFi is going. And I just want to ask some questions in terms of some new I guess primitives or new things that are coming to the blockchain that we've never really had. So like previously what DEX have enabled and what lending we've had on on blockchains were all for crypto assets. And the big thing this year at least talk and some of it is coming but in many different forms is tokenized stocks. uh and actually not even just tokens but just real world assets in general. Everything is coming on chain and I think it's quite obvious. You've got the administration in the US who are like hey we're going to bring all of our finance on chain eventually. You got the SEC saying that. You've got you know Robin Hood already launching tokenized stocks. You've got Kraken doing it. Coinbase says it's coming. So stocks are coming on chain. And I'm just curious is this something you guys are building towards? How do you guys see this playing out? Like are we just going to start mixing inside of Airrum? you're going to be able to trade your Tesla for your ETH and your, you know, Apple for whatever. Do you guys think this is coming? And how far away are we from it coming? And then what are you guys doing to like kind of get ahead of that and be a part of that?
Yeah, know this, this is definitely coming. I mean, the long-term vision of DeFi is everything is running on onchain rails, right? Um, it might take 20 years to have 100%. But maybe five 10 years to have 80 80% or something like that. Tokenized stocks and and reward asset in general are definitely coming on chain. I think the the most important pieces to solve first is about liquidity fragmentation UX because you have some restrictions. So some some assets will be only restricted to Kawased users but all some will be fully permissionless but then you'll have like hundreds of those assets even like thousands or millions if you're bullish defy uh which we are all and and if you have as many pools as those asset then it can become a nightmare in terms of of liquidity fragmentation and I think this is our job to kind of solve as infrastructure to to solve those problems. So for instance, we are working on the v2 of mofo which will be in intentbased protocol. So instead of depositing liquidity into one specific market, you just say, "Oh, I'm willing to lend my USDC against any borrowers that have this basket of collaterals." And this basket of collaterals could be infinite or could be restricted to just a few ones that you think are the the only safe asset that people can borrow against against those. Or you can also list some requirements like I want to deal only with people that have Kawi one, two, three. You don't have to commit that liquidity. You just put your offer in the wide and whoever is matching your requirements then it's settled on chain and you the the liquidity is passed to the borrower. This is like cow protocol but for lending and borrowing, right? Yeah. Kind of. Okay. Interesting. Cool. And and so this way you solve the liquidity fragmentation and that on top of of this you can then bring a very nice UX for borers and lenders uh and that will enable and and smooth the on boarding on all those assets on chain. So that's like one way to solve. Of course, there's other component and build building blocks that we need to work on. The same way that uh infrastructure providers on the wallet side are working on ERC 337 or EIP7702 for account abstraction. Those are the kind of like very deep technical stuff. But once it's solved, then we can recreate a very uh smooth experience for end users that don't really care about all those technicalities and they don't want to spend like five transactions and do a KYC to be able to just trade one stock on a DEX, right?
Yeah. Yeah. I mean, I I totally agree like it's coming. It's obviously coming. I think it's going to move a bit faster than than people are uh expecting. Um, I mean, you're already seeing a great degree of proliferation uh right now, but um, nobody has crafted the right way to do it yet. And I will say, uh, for my part, I am very excited to see what Coinbase does here. I mean, Jesse and Brian have been explicit and and Paul, too, right? They've all been very very explicit that their goal is to get coin on chain and to do it this year and they
will do it in the most compliant way that they can, right? They they will go to regulators, they will figure out a way to do this. But my hope is that they write the playbook because I think all of the existing solutions right right now are just are are subpar. Um and you look at volumes on these things, you look at TVL on these things and they're very very low.
Well, um I think somebody will write a playbook. I hope it's Coinbase. And it will unlock an ability to bring the stuff on chain, tap into the permissionless rails, um tap into the global distribution aspect of all of this, and then as soon as the playbook is written, like it's going to move so fast. Um and so yeah, I'm very excited to see uh what what they're cooking here. But yeah, I mean, there's no doubt everything's coming on chain. Coinbase talks about being the everything exchange. We're already seeing a giant increase in uh RWA's deploying to base right now because they are getting that instant coinbased distribution and uh I think it's only going to accelerate.
Interesting. Um I think maybe my last question here, one of my last ones anyway is around having a token. Um so I'm a founder as well and I don't have a token and I don't have public equity thankfully either. So life is kind of easy. I can just focus on building my products and my services and it's all kind of good. when you become a public company, okay, now you have investors and you have to think about, you know, are you doing the right thing for your investors, etc. A token is is even different than that. And I'm just curious for you guys, like how is that different and what is that like? Because it's not just equity, as you said, it's actually an integral part of the protocol. And so, like, I don't even know what my question is here. I just more want to know what it's like to build a company that also has a token. Um, and how does that like factor into the the decisions you make and the things that you guys do? Um, yeah, any insights you can on this. I just want to understand what that's like building and having a token and how that's kind of different than just having equity like a normal company would.
I think uh tokens are the single best um like organizational tool organizational technology uh that we've we've created in the space. It's a tool for um aligning incentives. It's a tool for making these decentralized systems work and work at scale and work in uh decentralized permissionless ways. Now, the caveat here is that 90% of like the top 50 tokens aren't being used for that. Um as I said, they like 90% of the top 50 have zero value acrruel, have almost no like legitimate onchain um immutable utility like It's it's just insider exit vehicles, right? It's it's kind of gross stuff. But I think that uh given what tokens can unlock as this coordination tool, uh as this like deeply functional thing in these systems, I think they are great tools. Um and I'll I'll just illustrate, you know, this in the context of us because I think we're we're pretty unique. And I know Morpho's also done this in a very very interesting way, but uh Aerodrome never raised any money. So we're already pretty rare um in that way. Aerome never sold any tokens. Aeradrome never even allocated to individual contributors like vesting tokens, right? you know, I as a individual contributor to the protocol didn't get, you know, like 2% of the supply unlocking over two years to give me like some degree of of exit. How does this work, right? You know, how do we pay for things? You know, how do we incentivize people? Um, we are just a user of the token like anybody else, right? We have locked VE arrow. We vote each week on the platform to incentivize pools. we earn back a portion of the fees created uh as incentives and so that means from day one we were able to bootstrap based on actual protocol revenue. It means our incentives are aligned not towards creating some sort of exit event because we will never have a token to sell. It's all max locked but is aligned towards ensuring that the DEX is you know maximally succeeding producing as much economic value as possible. And by the way, it makes us an equal stakeholder to anybody else who locks the token. I mean, if you just went on chain, you farmed a bunch of arrow in the early days and you locked up, you're rewarded and incentivized to contribute to the protocol in the same way that the team is incentivized. If you are Coinbase Ventures, right, and you went on chain and you bought and locked, you know, a few percentages of VE Arrow, you're an equal stakeholder to the team. All of your incentives align in the same way. And so like I am very very like just maximally bullish on tokens but the caveat is I think every token should be maximally uh useful. Um I think it should capture and redistribute maximum value and if you do that you unlock things right which is you know basically like bootstrapping the second largest decks on EVM with zero of the traditional ways in which you do it. And that's like the value of DeFi, right? You know, you've got Aeradrome never having raised money, um, eating away at the market share of a $10 billion VCbacked um, you know, DEX exchange. And that's DeFi to me. It's not just taking the old model, replacing equity with token, and then, you know, actually making it even worse because tokens are not equity. It's worse than equity. And if it's just used to like soul sell tokens and extract from retail, it's worse than the old system. It's not even better. So maximally useful, maximum value capture and like I think if more folks in launching protocols thought about that from the very beginning, built tokens in from the very beginning, made their way of aligning incentives the same as any other token participant, the system would be a lot better. And yeah, I I would love to hear Merlin talk about this too because I think they thought um in very very smart first principal ways about how their token is leveraged as well.
Yeah. By the way, Alexander Yeah. Uh Alexander, like a lot of respect on on what you've done with this is like super impressive and and I think like a lot of project could you just like take inspiration of what you've done. Yeah. So on MOU we we've raised money from this is uh of course but what we've done is you you talk about alignment and we think that this is one of the most important thing with tokens is don't have equity on the sides because there are many project where there's equity there's a token and what what it creates is weird you have two incentives that are might go in two different directions and and and that's that creates some like a weird situation where you don't know where the money will will or the which branch will acrue the value right uh on our side we we thought about like hey everything should be align on on like bringing as much liquidity to the network and the co token value is representing that the value of that network so and so If the in and if the business model that you want to is taking a fee on that uh on on that network then you need to concentrate everything all your effort on bringing on on increasing that network and because the the token is a reflection of that value then everything else is just like useless. So what's uh what's what's your incentive that the token and what you want to grow as a network effect and and if you align everything on that and you redistribute the the revenue to those that are like u like making the network um valuable then it creates a very nice flywheel where the the more liquid the more liquidity the more value acres to the network the more uh value across to to the token. Um, and which makes all uh all all people and stakeholders better off. Um, yeah. Yeah. Yeah. Awesome. Thanks. I I thought you guys would have great answers for that and you both did. So, thank you for that. That was that was awesome.
Um, we're going to wrap up here, but I just want to ask one one last quick question for you guys. I'm curious what metric you guys look at or what metric you guys care about. We so a lot of people look at you know I don't know Ethereum TVL for for for DeFi as like a successful metric and you know we're close to all-time highs on that right now. So I think that's an exciting thing to see that you know DeFi is finally making it back to those previous all-time highs of of back in 2021. So the question is where do you guys think this is going you know short longterm I don't know whatever predictions you guys have in terms of that but maybe it's not Ethereum DeFi you care but maybe it's I don't know your own TVL or maybe it's you know base TVL I don't know but what's the metric you guys are excited about and uh and give us kind of a prediction on where you think things are going in the short medium or long term in the in the DEX world
I mean I think you have to look at a few right um so obviously looking at Dex TVL but that alone can be just like an inflated meaningless number. So then you have to complement that with DEX volume. So how is that TVL being used? Uh but then also that isn't quite enough because you can juice that as well. So then you have to complement in fees, right? How much of that how much is that volume actually producing? But then fees isn't quite enough because if you're just redistributing it, you know, paying people to participate. So then you have to look at revenue, right? How much is it are you capitalizing and redistributing uh sort of throughout the system. So I think it's TVL volume fees and revenue on the DEX side and that is of course relevant to us but DEX is broadly but I I will like I'm so bad at predictions. I'm like I'm always just like one foot in front of the other like survive tomorrow. My prediction is always just more. Yeah, more more is good, right? We just keep doing more forever. But uh I do I in talking with some of the base team um I mean they are so wildly bullish on on the potential right and it's coming straight from Brian you know this prediction of what's coming on chain and it's coming from from their own plans strategy partnerships and uh somebody at base has been telling me for so long he's like legit chance base 10x bigger next year right? And um I do think that those are the types of multiples we can think about and that would of course apply to dexes that would apply to the chain itself that would apply to protocols like like Morpho as well. But yeah, I think we are going to be entering a phase of absolute insane growth. Um because the protocols have never been this good. The legal and regulatory landscape has never been this good. You've never had as many businesses, institutions, whatever getting in the game, pushing this distribution. And so yeah, I mean this is the moment I think we've all been uh building for. So I think it's going to get a bit nuts.
Yeah, great answer. Anything you want to add there? Yeah. Uh maybe on the landing side which is I mean we are not looking at TVR because TVR is total uh is what's deposited. But if you borrow, let's say like I'll take an uh dump example. If you you deposit $100 as a lender and there's a borrower that borrow those $100, you have zero TVL. So it's not really representative of the so we have a metric that is total deposit that sum the collateral plus the supply. Uh but that is missing the the number of loans which is on what you generate actually generate revenue. So we look at total deposit, active loans and of course like the fees that are generated for that and and that are redistributed to the lenders. Um so it's a bit little bit different uh to to the taxes and and TVL does not apply the same way uh from from both protocols. Uh as Alexander I'm not a great person as uh to to yeah uh to estimate uh figures but I mean I would not be um surprised if B instance I mean the mofo instance on B surpass uh the Ephreium uh instance that have like seven seven billions already. I would not be surprised that it crosses um that within the next year and I would not be surprised if more is in two years have like more than 100 billions of dollars if we are like I mean if we count all the institutions fintex as you said Alexander that are coming on chain they have the tools they have the there's the infrastructure we can see a massive growth very very rapidly so yeah we'll see um we had hands down building and and helping them on boarding them uh into the DeFi world and yeah we just need to build.
Awesome. Well guys, thanks so much for joining. Uh I know you guys are busy building and so it's always nice to take some time away and come and chat with us and and so we can learn a little bit more about what's going on. Uh but it was great to have you guys on and uh we learned a lot today. So I really appreciate it. Good luck to everything you guys are doing. Uh we're going into a crazy growth mode I think as well. Uh, and so good luck during that. I know those are are wild times as a founder. But, um, again, appreciate everything you guys are doing. And, um, you know, for the listeners, uh, if you're not already using them, you can use it in many ways. You can use it through Coinbase or you can go directly to Aerodrome or to Morpho uh, and check it out there. Um, and, uh, yeah, thanks guys. Really appreciate it. Everyone else listening in, thanks for joining in and we'll see you guys in the next episode. Thanks so much. Thanks guy. Bye-bye.
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