Resilient DeFi with Kirk Hutchison | Layer Zero

Kirk Hutchison is the Co-Founder of Volt Protocol, an inflation hedged stablecoin built on Ethereum. Kirk is widely known as the gigabrain’s gigabrain when it comes to all things DeFi. As inflation continues to rise, Kirk couldn’t have joined at a better time. However, Kirk and David dive into much more than inflation. On this episode, Kirk explains symmetric money systems, self-referential feedback mechanisms, the problems with DeFi today, what Volt is and its future, and so much more. ------ 📣 NOTIONAL | Real DeFi Yield https://bankless.cc/Notional ------ 🚀 SUBSCRIBE TO NEWSLETTER: https://newsletter.banklesshq.com/ 🎙️ SUBSCRIBE TO PODCAST: http://podcast.banklesshq.com/ ------ BANKLESS SPONSOR TOOLS: ⚖️ ARBITRUM | SCALED ETHEREUM https://bankless.cc/Arbitrum ❎ ACROSS | BRIDGE TO LAYER 2 https://bankless.cc/Across 🏦 ROCKET POOL | STAKE YOUR ETH https://bankless.cc/RocketPool 👻 AAVE V3 | LEND & BORROW CRYPTO https://bankless.cc/aave ⚡️ LIDO | LIQUID ETH STAKING https://bankless.cc/lido 🔐 LEDGER | NANO S PLUS WALLET https://bankless.cc/Ledger ------ Topics Covered: 0:00 Intro 4:45 What Kirk Thinks About 8:36 Decentral Bank Terms Explained 13:45 What is a PSM? 18:16 The Bankless Thesis 21:20 Fully Symmetric Money System 28:05 Why is Fixed Rate a Problem? 32:12 Self-Referential Feedback Mechanisms 40:45 The Problems with DeFi Today 47:40 DeFi Utopia vs. Dystopia 1:00:55 What is Volt & Its Future? 1:09:25 Governance Token Design 1:13:35 8% Yield to Combat Inflation in DeFi 1:19:20 Closing ------ Resources: Kirk https://twitter.com/OneTrueKirk Volt Protocol https://twitter.com/voltprotocol ----- Not financial or tax advice. This channel is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. This video is not tax advice. Talk to your accountant. Do your own research. Disclosure. From time-to-time I may add links in this newsletter to products I use. I may receive commission if you make a purchase through one of these links. Additionally, the Bankless writers hold crypto assets. See our investment disclosures here: https://newsletter.banklesshq.com/p/bankless-disclosures

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Speaker 00

  The idea that we're going to today in 2022 create an immutable system that will work forever with no changes is ridiculous. Right? Every system that's ever been made has been changed a lot. Ethereum is a lot different than it was when it started. Bitcoin is a lot different than it was when it started. There's nothing that will work without change and be adopted and used long term without change. However, you can get it so that the procedures for chains are less subject to abuse.

• 0:25David Hoffman?

  Welcome to Layer Zero. Layer Zero is a podcast of unscripted conversations with the people that make up the Ethereum community. Crypto is built by code, but is composed by people, and each individual member of the crypto community has their own story to tell. Cypher punks understood that the code they write impacts the people that use it. And Layer Zero focuses on the people behind the code because Ethereum is people all the way down, and it always has been. Today on Layer Zero, I'm talking with Kirk Hutchison of Volt. And Volt is an inflation hedge stablecoin. It's a stablecoin that is hopefully designed to restore and retain its value as inflation goes up and up and up, which is a very timely conversation. However, we don't actually start the conversation there.

• 1:05David Hoffman?

  Kirk has been recommended to me by many, many different people from across the DeFi ecosystem with universal consensus about this giga brain nature of this guy Kirk. And so in order to meet this guy Kirk and get to know why everyone respects him, I just decided to pull him straight onto a podcast. And so we dive down the rabbit hole of some very primitive DeFi concepts that we haven't really revisited in bankless for a very long time. This concept of no magic numbers when we design our DeFi protocols. Anything arbitrary in a DeFi protocol is fragile, and if it's fragile, it's going to break. And so we talk about that concept. He also is very, very attuned to the world of monetary policy and economics

• 1:49David Hoffman?

  and trying to apply the lessons of TradFi and like economic history into the lessons of DeFi. So rather than this being like a more typical Layer Zero episode where I'm actually trying to go into like the soul and personality of our guests, this is me just trying to figure out how Kirk thinks and what he's trying to do and what he prioritizes. And I find a ton of alignment with what he is building. How he's building it and what he's modeling it after. And so I hope you guys follow me down this rabbit hole of understanding Kirk and also understanding Volt and seeing where all of this goes when the ecosystem that Kirk envisions for the DeFi ecosystem comes to fruition. So let's go ahead and get right into the show, right after we get to some of these fantastic sponsors that make the show possible.

• 2:35David Hoffman?

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• 3:20David Hoffman?

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• 4:02David Hoffman?

  So if you're bullish ETH staking, you can increase your APY and get some extra tokens by adding your node to the decentralized Rocketpool network, which currently has over 1,000 independent validators. It's yield farming, but with Ethereum nodes. You can get started at rocketpool.net and also join the Rocketpool community in their Discord. You can find me hanging out there sometimes in the chat, so I'll see you there. The Layer 2 era is upon us. Ethereum's Layer 2 ecosystem is growing every day, and we need bridges to be fast and efficient in order to live a Layer 2 life. ACROSS is the fastest, cheapest, and most secure cross-chain bridge. With ACROSS, you don't have to worry about the long wait times or high fees to get your assets to the chain of your choice. Assets are bridged and available for use almost instantaneously. ACROSS bridges are powered by UMA's Optimistic Oracle to securely transfer tokens from Layer 2 back to Ethereum. A token proposal is being deliberated

• 4:47David Hoffman?

  as we speak in the ACROSS forum, where community members will decide on the token distribution. You can have your part of ACROSS's story by joining the Discord and becoming a co-founder and helping to design the fair, fair launch of ACROSS. If you want to bridge your assets quickly and securely, go to across.to to bridge your assets between Ethereum, Optimism, Arbitrum, or Boba Networks. Bangsless Nation, I'm here with Kirk Hutchison, co-founder of Volt Protocol. And Kirk has been universally recommended me from by a number of people who I know and trust in the crypto space. The word "gigabrain" has been used a number of times to describe Kirk. I don't know where this conversation is going to go, but I have a feeling it's going to be a good one. Kirk, welcome to the show.

• 5:29Speaker 00

  Thank you so much, David. I'm really excited to be here and flattered by the kind words people have said of me. I definitely am like, you know, kind of a theory cell as far as crypto stuff. I come from a very mechanism nerd, like, look into the history, look into all the nitty-gritty of it. And I feel very grateful for the opportunity to build and practice that now. But yeah, that's how I'd introduce myself.

• 5:52David Hoffman?

  Fantastic. Yeah, crypto definitely offers a blank slate for thinkers to begin to tinker. So like, oh, I like that line. Thinker is gonna tinker. So as a thinker, Kirk, what do you think about? What are the subject matters that you often ideate in your imagination?

• 6:13Speaker 00

  Well, the thing that got me...

• 6:17Speaker 00

  Into crypto in the first place was, like many people, in general, the idea of censorship resistance, not just money, you know, things like social networks as well. And I took a brief sojourn trying to be a solidity dev. I was never a particularly good one, although I gained useful insights by trying to learn that. I became fixated after a while on the problem of scalability in governance and how, you know, if you look at like token governance models today, such as MakerDAO, how they decide to tune parameters in the system or add new collaterals, there's quite a bottleneck of attention. You know, the attention of the whole DAO at one time is not very scalable. And so I was thinking a lot about that problem, especially in the context of stable coins.

• 7:02Speaker 00

  And that's what drew me to Fuse and, you know, Rari Capital and the Tribe DAO ultimately was looking at more permissionless lending markets and thinking, how could you govern deployment of PCB or, you know, lending capacity in one of those markets in a more scalable market-based approach? And that was what was my original idea that was behind Bolt. There's been quite a journey since then and a lot of other elements. And the scope of the problem for me has expanded into the question of really, how can you correctly make a decentral bank? You know, the fully symmetrical currency and credit markets and everything, you know, all the types of things that people need banks for in a totally transparent on-chain

• 7:44Speaker 00

  way that is governed ideally by markets and not by votes. Because the votes are where it gets sticky. And anything that is like asynchronous decision-making, not very ideal for like a continuously running open system. That's why Ethereum or blockchains are so good is that they don't go down or they're not supposed to, right? There's always, always there and it can't be disrupted. So having...

• 8:08Speaker 00

  Some of the principles about what makes L1 so good and thinking about can we take that into these applications and make further strides in the design is really what I'm obsessed with and how we could, yeah, I'm inspired a lot by what exists. I also am inspired a lot by TradFi and learning about everything, how that works. And I think that there's a lot to learn as far as building those functions, but not necessarily in the same package on chain.

• 8:37David Hoffman?

  Yeah, I have a feeling this is going to be a pretty brainy and technical show. So I definitely, as we go along, want to take some time to define some stuff to make sure that all the listeners are keeping up with us. You used a term which I have not heard in a very long time, a decentral bank. Now, that term a decentral bank is something, I think, I think I might have memed this thing in 2018 when I was first getting into the world of content production and using it to describe Maker Dow. It was like, I understood Maker Dow at the time to be like a version of a central bank, as in it controlled interest rates, it had a monetary policy, it had like assets and liabilities, but it was decentralized. And so like, well, how do you talk about these things? Well, like,

• 9:19David Hoffman?

  let's call it a decentral bank. Me, I've never really caught on. But I think as we extrapolate from 2018 to where we are now, I think what you're leaning into is like, there is a more, rather than Maker Dow being the decentral bank, there is the concept of a decentral bank. And Maker Dow is now just like one flavor of that, or one implementation of that. And I'm getting the idea that Volt is an alternative flavor of a decentral bank. But before we go into Volt, can you talk about the concept of a decentral bank? You used some other words that I'd like you to define as well, as in a fully symmetric currency, that one left a question mark in my head, as well as asynchronous votes. So can we talk about like the model of a decentral bank for a model, and

• 10:01David Hoffman?

  then talk about those two dynamics of components of decentral bank, symmetric currencies and asynchronous votes? Can you talk about those things?

• 10:10Speaker 00

  That sounds great. So if we, I think maybe we should start by just asking about like, in a modern context, what is money?

• 10:18Speaker 00

  And since pretty much, you know, at least the Industrial Revolution, money means either a currency issued by, you know, a central bank, um, or maybe a deposit at a bank that issues its own independent notes. Um, and usually this represents some kind of like a hard money value, you know, which could be gold, it could be central bank notes. And there's an understanding that the bank is taking part of that capital and loaning it out. You know, and they have some portion of basically hard money reserves and then they have a loan book. So not everything is fully liquid and they have to manage, um, you know, the liquidity within the system to ensure the price is stable. This is what central banks do too with bond markets and all that.

• 11:01Speaker 00

  Um, but it existed with private banks too. Uh, and this is, you know, we could get into what is a bank in the gold standard, which is a little different. We won't worry about that for, for right now. Uh, but the idea that

• 11:13Speaker 00

  users need convenient media of exchange, exchange media. Uh, you know, so like you don't want to hold gold bars, right? You want dollar bills or now you don't want that. You want, just want a credit card or a debit card. Uh, and so users need to deposit their value with some kind of an institution that provides those convenient exchange media. And there's other functions that the bank does as well, which is that different people have different time preferences with their money. You know, you might have money that you need to spend tomorrow, but then you have money you don't need for five years or whatever. And you're willing to have different levels of liquidity on those funds in exchange for getting some return. And likewise, there's people who need to borrow money. And so those are all the things that a bank does. Uh, you know,

• 11:54Speaker 00

  there's lots of, and along with that, banks also do deals with other banks where they buy and sell these types of debts. And so essentially, and, and that la- latter function is what the Federal Reserve and central banks have kind of taken over. Like they control and regulate how the banks can relate with other banks and other various rules. But even before central banks existed, it's natural for banks to have things like, oh, if lots of people come to redeem from them and they run out of liquid reserves, that they would borrow from another bank to get what they need uh, and have those kind of deals in place. Uh, and These types of ideas are being brought up in DeFi by others as well.

• 12:31Speaker 00

  Like Seb Ventures from Maker Dow, someone I respect a lot. And he posted a blog post describing like a Clearings Dow where stablecoin issuers could draw credit from each other, like using their own stablecoin as collateral when they had liquidity needs, for example. And I think that these type of structures can be very informative for DeFi. So when I think about a decentralized bank, I say,

• 12:52Speaker 00

  to me, what is the problem with money on chain today? You know, if we look at L1 tokens like ETH and Bitcoin, the problem is that they're too volatile to be short-term money, you know? And I don't think that's ever going to change.

• 13:05Speaker 00

  They could be thought of as the equivalent of like, you know, the highest quality equities, right, in the future? Or like other, there's other entirely new ways of thinking about valuation, but they're not exactly the same thing as cash. Now, stablecoins, at the end of the day, all stablecoins basically either depend upon a not necessarily sustainable incentives model or on centralized stablecoins in order to maintain a stable backing. And there's nothing that's like a conclusive exception to that that's shown to be highly scalable so far. And we can see clearly the disadvantages of depending on like, I'm not someone who's like a PSM hater necessarily, you know? I, it's good that DAI has the PSM, but it's not good to stay that way forever. And they're working on it, right?

• 13:50Speaker 00

  You know, like Maker Dow is all over trying to diversify out of USDC risk, but- Can you define a PSM? PSM is a peg stability module. And for a simple thought about decentralized stablecoins, you could either be doing over collateralized lending where they're minted against an, you know, over collateralized position of ETH or other assets, or you could mint it directly against another stablecoin in a PSM, which is a peg stability module. So, and not everyone would call it a PSM, but it's the same thing like how, you know, the portion of frac supply which is backed by USDC is analogous to a PSM type of operation. And then let's see, so when I think about a decentralized bank, I think that-

• 14:31Speaker 00

  All of these things that banks do, like accepting deposits and loan origination, you sort of, it's gonna be very, you can't leap all the way there in one step. You know, these decentralized systems to have the equivalent of TradFi instantly. But if we start to learn from these, I think it's possible to build a more resilient and decentralized stablecoin systems, especially if like you can, if you can cut out centralized middlemen in the right way, you know, like with USDC, Circle controls everything. We can see other things like how Lido manages the validators, or how MakerDAO is looking at them doing direct deals with different entities like bond offerings. Those things all can help mitigate counterparty risk.

• 15:12Speaker 00

  But having a really like, to me, it's, it's still done on like a case by case basis. You know what I mean? There's no like clear transparent framework for how MakerDAO will scalably decide what kind of real world lending it will do without just relying on like an inside group of experts. And so figuring out decentralized and market-based approaches for these things is one of my big goals. And when I said a fully symmetric stablecoin, I guess what I meant is one that has a,

• 15:41Speaker 00

  a match between both being able to,

• 15:45Speaker 00

  to matchmake between those who wish to deposit their capital in the stablecoin system and receive stable value and some yield, and those who would allocate that capital and the lending opportunities that exist in a way that is fully market-based and the rates are derived from the market. You know, utilizations, similar how Coven and Compound have utilization-based rates. But connecting that into a wider variety of activities, potentially even including real world assets. Cause I, you know, I am a decent, I say I'm decentralization mostly rather than decentralization maxi, because I do think that getting that last mile into the real world is very important. And we can't just, if, if, if the best decentralized systems, because they're too purist-minded,

• 16:29Speaker 00

  drop the ball on the last mile and then just let the scams and such go direct to the people, that is not a good out ending. And like, when I look at how big like Terra and UST got, and then look at like how little attention is given to even, you know, the more promising like radically decentralized experiments like RAI, I just think that for Volt, at least, it's one of my goals to really be proactive in that regard at least. And we can learn from.

• 17:00Speaker 00

  Yeah, I like what Seb at MakerDAO thinks about, you're like, there are ways to analog, to get close to the purity of a smart contract through the legal system. Not 100%, but like, we shouldn't be close-minded to the idea that there can be other consensus layers besides the one blockchain, right, and a settlement layers. And being in general, the perspective of looking as holistically at possible at the, how blockchain can fit into the world economy and in the, taking a long-term view over five, 10 years, right, and how lending markets and capital markets can evolve. That's all the type, and a historical perspective of how they've changed otherwise. Like, there's been many big changes in the world capital and financial markets in TradFi in the last 30 years, 40 years.

• 17:42Speaker 00

  And so, understanding how digitization has affected them and then, like, looking at the arc of how things will go. I think that there's a, I might be rambling a little bit now, but I think that there's a lot of significance to, you know, going to the kitchen and stealing the chef's secrets for TradFi, like, taking the best out of it and then, but keeping those robust decentralization and censorship resistance features. And, but that's what's like, you know, it threaded the camel through the eye of the needle, right? So you had to be, it's not an easy task, but that's the problem space.

• 18:16David Hoffman?

  Okay, so yeah, there's a number of different rabbit holes that I think just opened up. And the first one, I think, at the beginning, you talked about, like, all these different stablecoins that we have on Ethereum, Frax, Stai, USDC, Tribe. And I think you kind of alluded to how there's not really ever going to be any one single perfect winner of, like, the stablecoin systems, but the, the net results, once we have what kind of feels like a commercial banking layer of private monies, where we have, like, the MakerDAO making DAI, we have the Tribe Commercial Bank making Tribe, we have the USDC Commercial Bank and doing USDC. Once we have all of these, this commercial banking layer, and, and what I mean by that,

• 19:01David Hoffman?

  just to be super clear, is that in the TradFi world, we have the Federal Reserve, which is the bank zero of the whole entire thing. And then layered on top of that, you have the commercial banking layer, the Wells Fargos, the JP Morgans, the Goldman Sachs that have accounts at the Fed. And they trade and market make between each other, but then ultimately everything settles down to the Fed. And I think what you alluded to is that if we do want a fully decentralized bank, it's not going to be Maker Dow that wins, it's not going to be Tribe that wins, it's not going to be USCC that wins. But rather, it's going to be an emergent product out of the interrelationships between all of these things. And that's when we get the network of those things and these financialization networks between all of these stablecoins

• 19:44David Hoffman?

  that are mostly decentralized for the most part, with the exception of USCC, which is completely centralized. Then at that point in time, we actually do get this emergent decentralized bank that unlocks this bankless future that we're all looking for. Am I on track with this general thesis here?

• 20:02Speaker 00

  That's absolutely right. It's sort of like, you know the movie The Incredibles, right? It's like, if everyone's special, no one is, right? Like, if everyone's a bank, then no one is. That's the bankless future. The idea is democratizing access to the kind of powers that banks have. And you can, and I expect there'll be many more bank-like entities of varying degrees of centralization. You know, and from the spectrum of full decentralization, immutable smart contracts to, you know, just circle, but in a different legal jurisdiction and a different, you know, different backing exposure. And I see there being a wide diversity and them having, yeah, the more interlocked network they are, the more resilient the system can be. And I'm really inspired, I'll shill a little bit.

• 20:43Speaker 00

  My favorite living economist, George Selgin, who has written a lot about like the Scottish free banking era and some historical periods of robust banking networks that did not rely on a central bank. And there's interesting things to learn from there as far as how they manage liquidity, crisis or currency also for the, from a DeFi perspective. But I think there's, yeah, clear historical and theoretical evidence that a central bank actually.

• 21:10Speaker 00

  Generally contributes instability rather than stability to the system and that a decentral network will be far superior.

• 21:16David Hoffman?

  Cool, I definitely want to go into that, but also I want to just like double, double tap on the fully symmetric money system. I might be wrong on this, but like my, the way that I'm trying to understand this is like, if we talk about like Terra Luna, for example, I'm guessing that that is a fully non symmetric money system, as in it is extremely lopsided and it was so lopsided that it collapsed. And like, the idea that I see you nodding your head, so I think I'm on the right track here, is that like, when, when Terra, like Nick Harder had this tweet about Terra Luna that I really liked, where he said, "The day that Terra sold off UST to purchase Bitcoin to have Bitcoin on the balance sheet was the

• 22:00David Hoffman?

  start of the collapse." Because they took, they, it was a lopsided system, they took away liquidity out of UST to buy Bitcoin in, in hopes, like, okay, we're going to have this Bitcoin to like defend the peg one day, not realizing that like, if you sell UST to buy Bitcoin, you are causing the de-pegging of the UST, you are taking weight away from one side of the market and, and you're, you're adding a bunch of selling where you are not creating enough buying. And so with, if I'm, if I'm understanding like symmetric versus asymmetric monies, it's when there's like, there's the unequal buying and selling. It was like, kind of my general understanding for that. And so if we have like, money crises, it's because there is an imbalance in money. And so if you, if you are telling me that

• 22:43David Hoffman?

  like, the, the dollar, for example, or the way that currencies generally maintain their peg is being bi-symmetrical, where there's like, sufficient market participants on both sides, you have both depositors and creditors, right, you, and these things are balanced enough and the markets are efficient, that makes a symmetric money, which is a, which is, for a stablecoin purposes, going to hold its peg if it's symmetric, if it's sufficiently well-balanced. Am I on track here?

• 23:11Speaker 00

  Yes, and, and you know, symmetric was, was off the cuff, there might be other way to describe it, but the...

• 23:18Speaker 00

  So, and of course Terra had many other problems, but in general, there's a there's a general class of problems we could talk about and it applies to every stablecoin that exists today is that there's no such thing as a stablecoin whose backing is 100% instantly liquid for dollars, right? And so what that means is that for every stablecoin, there's a condition under which it might trade not at peg. And for some stablecoins, those conditions are extremely remote. For some of them, they are very likely and the worst failures of peg will always occur when people don't know what's going to happen. And so in the case of, I'll bring in one of the examples from this Scottish banking period.

• 24:01Speaker 00

  It was a common feature of many, you know, so these banks would issue notes, right? In exchange for gold, you know, gold deposits and the note would be in fact, in principle redeemable for a certain amount of gold. Although the bank was fractional reserve and some of these notes came to carry what they call an option clause and the note said that this bank is either redeemable in gold on demand or from the moment you brought it in payable in gold at a certain interest rate in this much time. And so by putting this clause on the note, the bank notes, it gave people the confidence that at least if they couldn't get their money right away, the bank was solvent and they would get a certain interest rate.

• 24:43Speaker 00

  And so, and that also meant that if the bank had a liquidity crisis, those notes converted into bonds and then had a higher value, right? And so it kind of, you can see a similar principle at work to, you know, an offer or compound when lots of people want to withdraw their money, you know, the interest rate goes up to incentivize people to close their loans or more deposits to be made. And so that's like a very responsive and symmetric system and it facilitates matchmaking of those who want more yield and those who want liquidity. And so you can't necessarily guarantee that a stablecoin would always hold peg with a system like this, but it should make any discount more rational and limited, right? So if you know Like in the case of DAI, because people know it is over collateralized,

• 25:25Speaker 00

  even in a case where more than half the DAI supply had to unwind and they depleted the PSM, it's not going to go that much below peg before people then refill the PSM by arbing, because they're confident since it's over collateralized. And so the knowledge in, um, the knowledge of the mechanism by which it would return to peg, or the mechanism, the amount of haircut you might take if you need instant liquidity demand, making that as clear as possible and predictable for the participants makes the system more stable. So one of our, you know, things we're thinking about a lot is, if you have a stablecoin that's, has a significant illiquid backing component, let me take a step back. Have you checked out Interest Protocol?

• 26:05David Hoffman?

  No, I have not.

• 26:06Speaker 00

  It's a new kind of compound or OVA-style market with a native stablecoin that was released recently. GFX Labs was behind it. And the idea of a stablecoin that is responsive on these kind of same yield curves makes a lot of sense, as OVA and Compound, but then the question is,

• 26:24Speaker 00

  if you're going to bring in, let's say, more PSM or real-world type of assets, or do these kind of, um, you know, loans or bond stuff that MakerDAO is considering, how do you do the right feedback between that and the interest rate that you're giving out on the stablecoin? And how can you do a, a market mechanism also to decide like how liquid the stablecoin's backing should even be? Like if you ask me, should the stablecoin's backing be 99% liquid? Should it be 50% liquid? That's not something I want to arbitrarily decide, right? That's something that a market should decide somehow. And you can look at like the frax collateralization market process. It's something kind of similar like that. And in this case, it would be like not choosing how under collateralized it is,

• 27:08Speaker 00

  but maybe just how illiquid it is, um, that kind of idea.

• 27:12David Hoffman?

  Interesting, interesting. Okay, um, so just to, just to go and define like what makes a good resilient stablecoin. All stablecoins that are going to be robust, resilient, anti-fragile, like, you know, sustainable, have to have what you call symmetric marketplaces, as in like, you know, a, a balance, right? Is that, that's part of the definition here?

• 27:35Speaker 00

  Yes, and this idea of symmetry is really, it's about liquidity. That's what I would emphasize is that there needs to be a two-sided liquidity marketplace and not just like fixed rates. Anywhere where there's fixed rates or things that are not responsive, there's problems. That's why when Maker Dow has to go in and manually tune the interest rates, right? That's less than ideal. The curves on oven compound are better. The anchor fixed rate was a problem. And we have in fact realized that the idea of pegging Volt to a fixed rate of the CPI is also a problem.

• 28:02David Hoffman?

  Right, yeah, we'll definitely get into that.

• 28:06David Hoffman?

  Actually, actually, no, let's go down that rabbit hole right now. Can you just illustrate like, why is fixed rate a problem? Like, we see this right now in the Japanese bond market, I believe, where I think there's something like a cap on like the yield of the bond market. They have yield curve controls of like 0.25%. So they're fixing their whole entire bond market. Can you, can you explain why a central bank would do that? And what problems arise as a result?

• 28:31Speaker 00

  So, central banks generally serve political ends. That's what I would emphasize and that I don't always know why they do what they do. Because it doesn't always necessarily look like the best idea. In this case of the Bank of Japan, if we just, at a basic level, ask what is the effect of very low interest rates on the economy? Is that it makes borrowing cheaper? And the reason that they might want to make borrowing cheaper is because there's lots of what you might call zombie companies in Japan's economy that are heavily indebted and don't have strong growth prospects, such that if rates rose, they would collapse. And this is the case of the United States economy as well, but it's significantly worse there. So if rates go up, it would lead to significant social disruption.

• 29:15Speaker 00

  And so that's what they don't want. And it's, but at the end of the day, it's like an incentivized system. It's being propped up by the central bank. They can't keep it that way forever. So oftentimes, keeping it that way longer doesn't make things better when you ultimately need to change. And, you know, that was the case for Terra, right? Like, I mean, the fact that it's unbacked in the first place means it won't work. But even if it wasn't unbacked and if it was instead just like, imagine like, we'll offer this 20% yield and then we'll go and like,

• 29:50Speaker 00

  Or even just look at something like Celsius, right? That's a more, you know, if you're like, we'll go offer 8% yield and then we'll go stake ETH and it's locked up for a year. It's like, well, what if they want to get out? And then if you don't have a clear marketplace to sell off your illiquid collateral in some way in order to, or give people like a defined haircut on exit and that they knew upfront what it would be, you get panic and bank runs and chaos.

• 30:15David Hoffman?

  Right. Okay. So we're going back to the symmetry thing. And is it this supply of the outstanding dollars for whatever this bank that we're going to talk about, whether it's MakerDAO, Tribe, whatever? The supply of the outstanding dollars needs to be balanced by the available liquidity. And when that, when those things are balanced, is that, is that like the symmetry that we're looking for here? As in like, if there's a, if there's like a billion dollars, there needs to be like 10 times more liquidity than a stablecoin that's only 100 million dollars. And it's that, that's liquidity that is like, if there's sufficient liquidity, then the peg will be sufficiently defended.

• 30:52Speaker 00

  Yeah, to an extent, although I would say I'm not sure what the right liquidity ratio is, but it certainly does scale with the size of the system. And then the other thing is that there needs to be a feedback mechanism. That's the most important thing is that there has to be, when it, like, and this, this happens with, I'll give an example of how Frax works, where there is a feedback mechanism. Like if I go and, you know, redeem some Frax, I get a certain amount of USDC and a certain amount of, you know, FXS. And as I do that, the Frax system adjusts slightly its preference in the direction of being more collateralized. So as redemptions occur, it will seek to become more collateralized in response.

• 31:37Speaker 00

  Now, overall, I'm a, you know, a pro over collateralization individual, that's for sure. But nonetheless, you know, we can learn good mechanisms from everywhere and the...

• 31:49Speaker 00

  The fact that there's any system variable that is fixed and can never change, that means that there's probably a market condition in which that's wrong. And so that's the kind of the insight that I've arrived at. And, you know, and needing to change it by a vote is also probably wrong. Because sometimes things happen fast and it'll be much more smooth if it can be according to a curve or a market process.

• 32:12David Hoffman?

  Okay, this, yeah, this opens up something I've always been fascinated about in the crypto space. Amin Soleimani, one of my, one of my personal heroes in this space, I say that every single time I bring him up, gave out this line in 2017, I think it was a tweet or it was on a podcast or something. And he actually doesn't remember saying this. And so he said, he said the line, no magic numbers. And while I was only very young in my like career down crypto, like I understood that line, like as soon as he said it, like no magic numbers. And what he meant by that is like, if you, if a human just chooses a number, a parameter,

• 32:52David Hoffman?

  and it's just arbitrarily chosen, that is the definition of something that is not anti-fragile. It is literal fragility because it's a fixed number. If it's something that's fixed, it's fragile. And so if we are trying to make censorship resistant, human resistant, like long-term sustainable financial systems, we can't just be picking arbitrarily arbitrary numbers. It has to be a dynamic system that can respond to the inputs and outputs that are around it, right? And so this is where, this is always where crypto starts to look a lot more like nature, more than it does finance. I mean, definitely it looks like finance, but like it borrows property from nature. And so there are a number of systems out there, like you've already talked about the dynamic interest rates

• 33:38David Hoffman?

  of Compound and AVE. As the utilization of these assets inside of Compound and AVE go up, the interest rates go up. And what that means by that is like, if there's, if AVE has 100 ETH deposited into its vaults, like people have supplied 100 ETH and no one is borrowing anything, well then the interest rates on that ETH are basically zero because we will need to incentivize people to borrow. As that number goes up, it goes up slowly at first, like 10 ETH gets borrowed, so interest rates go up a little bit. 20 ETH gets borrowed, so interest rates go up a little bit. If we get up to 80 ETH borrowed out of the 100 ETH that's deposited, the interest rates that are being charged by the borrowers goes up a lot. Because at some point, if you hit like 99 ETH that's borrowed out of the total 100 ETH that's deposited,

• 34:22David Hoffman?

  there's no more liquidity in the system. We got 1 ETH left, and so we have to dynamically increase this interest rate to naturally balance out this marketplace and incentivize more deposits or disincentivize people to repay their yield. A similar system, also part of RAI, RAI, the stablecoin, is like this governance, it's called a, what is it called? Basically like control theory, it's like a natural governor. Kirk, can you just talk about this dynamic of like a self referential feedback mechanism? And how it can take us from like a fragile version of finance to an anti fragile version of finance?

• 34:59Speaker 00

  Yeah, I think that, let me think about first thing about the best way to put it in words.

• 35:05Speaker 00

  Here's a, I like to give people very concrete examples. So let's think about this, you and I are, you know, we have two avocados between us. One of them is ripe today and one will be ripe tomorrow. And we each have $1. So the question is, yeah. Or, you know, there's an avocado seller present. How much is the one ripe avocado worth and how much is the unripe avocado worth?

• 35:37Speaker 00

  It's a good question, how do we decide, right? Because I don't want to overbid on my avocado, right? And so, you know, we get very quickly into the questions of like, how does market pricing work? And at the end of the day, most likely the avocado seller sets a price because he exchanges with many people or who knows what happens. But any system needs some way to regulate. Otherwise, what if, you know, I get word before you that the avocado is there and I run to the store and buy it, undercut you? And this is, you know, these kind of examples are what happens when there's like, you know, a liquidation failure in a lending market. You know, something doesn't happen at the right speed when it could have been sold for the right price, but it wasn't. And so you, even if you do have a, you know,

• 36:20Speaker 00

  there's always a chance that something could still be mispriced, right? Even if you do have feedback loops, but. The, sorry, I'm, I'm journaling my words. I think we need to step one step back and just ask like, what is a market? And if we understand that what a market is in general is like an information system where there's the whole economy and

• 36:46Speaker 00

  like, how does someone decide what something is worth to them? It's based on their own needs. And so based on their own needs, they'll pay the best price they can figure out for what they're gonna get. You know, I have, I have my income. I have to decide what I'm gonna spend it on. And those prices propagate into the economy and the market, and they inform the sellers and other things. And it all comes together to be expressed in the prices, which are an information signal. And

• 37:11Speaker 00

  when you have like a

• 37:14Speaker 00

  in order to have a market, you need the ability for the free exchange of this kind of information. And the easier it is for people to, you know, connect economically, the more efficient the market will be. So running on a blockchain that's 24/7 global, always online, you know, where anyone can be a market maker or a liquidator compared to these opaque TradFi systems, it's much smoother. And for lending and borrowing, that's why, it's the difference between like,

• 37:43Speaker 00

  you and I'll critique, this is a sample horn that I kind of like, but there's one thing I don't like about it, which is LUSD. The fact that it has a fixed fee on minting and no ongoing charge introduces instability into that system. And if the

• 38:00Speaker 00

  the, the fact that it is instead a liquidation only model, that's just based on like, you have to top up your collateral.

• 38:10Speaker 00

  It means that incentives are applied in a more staccato way, you know, like when the liquidation actually occurs instead of a smoothly adjusting rate.

• 38:19Speaker 00

  And so you can see that like, it means

• 38:23Speaker 00

  like traders and crypto will often like to look at where the liquidation walls are, right? A lot of people will have their position at that spot. And probably we can do a lot better with like automatically regulating these things. Like people are already working on like DeFi saver type of stuff that will automatically adjust your collateralization to be responsive to the market movements, right? So that's another type of feedback that's very beneficial for the users where you don't want to just be like.

• 38:48Speaker 00

  Or like even I'll draw an analogy to like uni V3, right? It's more of a market of opinions because instead of just being stuck to like, oh, it's this price in this curve only, you can say, oh, well, I'll put whatever curve I want, right? And it's my opinion. And then I can change it in the future too with flash liquidity provision on different curves. Anything that allows like more granular market choices and also brings people together into like a smooth place where they can all exchange in the market together will make things less risky and better. And this is observed in TradFi too. I was just reading a book. I got involved in a little DeFi, you know, DeFi slash meets TradFi reading group. And the first book of the week was an introduction to repo markets, which I found very well-written

• 39:32Speaker 00

  and talks about some historical perspective of how like, and just for the listeners, a repo market is one of the main types of like quote, low risk TradFi yields and banks do it and all kinds of things. And it's basically like, let's say I'm a stock trader and I have some Home Depot stock and I want to leverage up on it. I do an over collateralized loan, basically just like compound or Alva with the bank, where I give them, you know, a hundred dollars of Home Depot stock. They give me a $50 loan at a, you know, half percent or 1% interest rate. And then I go do whatever I want with that. I either short Home Depot to hedge or I lever up whatever my, my plans are. And this is a huge, you know, huge, huge market. The only really came into existence, I know the UK market was created in the nineties. That's not that long ago.

• 40:15Speaker 00

  And the motive of creating it and like legally allowing it, because before it was like only banks can do these types of deals. And then they made a market where like, oh no, any like firm can do it. Cause their goal was to reduce the volatility in the bond markets and allow people to like hedge their positions in that. And it worked and the bond markets grew after that. And so you can see that making a place where people can like trust how the rules work and more people can participate grows the pie for everyone. And so that's one of the things that's of course really exciting about DeFi when you take a look at the long term.

• 40:45David Hoffman?

  Certainly. Okay, so I think we've talked a lot about some just big ideas, right? Like resiliency through multiple decentral banks. We've talked about control theory and how that keeps things balanced if the parameters are tuned, right? Tuned in a dynamic fashion. I want to start to get into some more specific things about like the current state of DeFi and the problems you see in the current state of DeFi and how we get it to that future that you just alluded to where like the pie is very, very big. And so like, how do we, why, what parts of DeFi are preventing the pie from getting a lot larger that are like consuming your brain space? Like, what are the problems that you are working on right now?

• 41:27Speaker 00

  Well, one thing, you know, the central thing that we're working on right now at Vault, directly at the moment, is this liquidity management system where, you know, people may be familiar with the DAI savings rate. You know, so there's a version where people can take their DAI stablecoin and lock it to get yield. It used to be some yield on it. Now, it's been one basis point for a long time. Who knows, with the bear market, maybe it'll go back up. And the idea that a stablecoin could be natively yield-bearing. You know, we initially created Vault as the idea of the inflation-resistant stablecoin and a hard target on that US Consumer Price Index inflation peg. Well, we've realized, of course, is that in some market conditions, the risk that's needed to achieve a hard target may be unacceptable. It's a magic number and we need to get rid of it.

• 42:10Speaker 00

  That doesn't mean that, you know, the goal of the system is still to preserve user value and create a marketplace where that's possible. But it's just that sometimes it's not up to me to decide that eight and a half percent interest is the right amount at the right risk level. And so creating a way that risk and interest can be priced by the users is what's key. So we're working on a way to build a compound or Avastyle utilization curve into the stablecoin and have concepts of the difference between liquid and illiquid reserves.

• 42:40Speaker 00

  Difference between like holding Dai or Faye versus let's say, holding, you know, for a very simple example, like think about what's the equivalent of USDC for Dai for Volt? It would be like tokenized wrapped treasury inflation protected securities, you know, these, some kind of a trad fly inflation head instrument, right? Like, let's say there was some tokenized, you know, thing that we could get for that. So some maybe like, you know, that's earning nine percent, whatever. So it's like 10% of the PCV is in that 90% is liquid and a way for the market to choose how that breaks down. You know, having all those kind of design features. So that's what's our most proximal thing.

• 43:19Speaker 00

  The other big classes of problems I see in DeFi today are one, the lack of like longer term debt and liquidity management. You know, most DAOs are stablecoin issuers or on-chain. It's pretty difficult to get longer term borrows only against a very, very narrow range of collateral like ETH only. Right? And even then the markets aren't very liquid. So with the ability for a stablecoin issuer like MakerDAO to access or give out longer term debt is highly beneficial. Banks, you know, real world banks construct a yield curve and have like a management of the liquidity of the underlying things. And so that seems like a powerful area that will have all the ways to go still.

• 44:02Speaker 00

  There's not a huge amount of traction. There are some cool projects, but nothing that has had like runaway product market fit yet.

• 44:10Speaker 00

  And then the other thing for me is, yeah, really cracking the governance nut. I think that token governance is a very thorny thing, especially when the more money is involved. And so really getting that right and checks and balances in the system is critical. So one of the things that we're working on for the next vault upgrade is governance rights to the stablecoin holders. And I was very excited to see the recent Lido proposal along similar lines of putting various checks into the powers of the Lido token on Stake ETH. And we like that idea, like. Ultimately, in the Vault system, the goal is that in some way, the governance tokens would be able to onboard new yield strategies or venues and then allocate PCV or choosing

• 44:55Speaker 00

  some kind of a market how that is directed. But we would like the Vault holders to be able to veto or say no to bad decisions. I don't think it's right to expect stablecoin holders to proactively go and like decide, should we do this or that, you know, or like weigh the merits of a highly nuanced governance decisions, but they should at least be able to say like, no, we don't want this. You know, like, it's even in governance tokens like Maker, getting participation from the holders is tough. So it's not like we expect all stablecoin holders to be super engaged in governance, but giving them, especially the large holders and in a relatively small quorum, the right to veto negative changes is a great security check. So, you know, thinking about those patterns a lot.

• 45:37David Hoffman?

  Aave is a leading decentralized liquidity protocol. And now, Aave V3 is here. Aave V3 has powerful new features to enable you to get the most out of DeFi, including isolation mode, which allows for many more markets to be launched with more exotic collateral types, and also efficiency mode, which allows for a higher loan to value ratios, and of course, portals, allowing users to port their Aave position across all of the networks that Aave operates on, like Polygon, Phantom, Avalanche, Arbitrum, Optimism, and Harmony. The beautiful thing about Aave is that it's completely open source, decentralized, and governed by its community, enabling a truly bankless future for us all. To get your first crypto collateralized loan, get started at Aave.com. That's A-A-V-E dot com. And also

• 46:19David Hoffman?

  check out the Aave Protocol Governance forums to see what more than 100,000 DAO members are all robbing about at governance.aave.com. There is a brand new staking feature in the Ledger Live app today. We all like staking the assets that we're bullish on, and now you can stake seven different coins inside the Ledger Live app. Cosmos, Polkadot, Tron, Algorian, Tezos, Solana, and of course, Ethereum. With Ledger Live, you can take money from your bank account, buy your most bullish crypto asset, and stake that asset to its network, all inside the Ledger Live app. Through a partnership with Figment, Ledger also lets you choose Choose which validator you want to stake your assets with. And Ledger is running its own validating nodes, offering a convenient way to participate in network validation. And it even comes with slashing insurance.

• 47:03David Hoffman?

  Ledger Live is truly becoming the battle station for the bankless world. So go download Ledger Live. If you have a Ledger already, you probably already have it. And get started securely staking your crypto assets. The era of proof of stake is upon us. And Lido is bringing proof of stake to everyone. Lido is a decentralized staking protocol that allows users to stake their proof of stake assets using Lido's distributed network of nodes. Don't choose between staking your assets or using them as collateral in DeFi. With Lido, you can have both. Using Lido, you can stake any amount of your ETH to the Lido validating network and receive STE in return. STE can be traded, used as collateral for lending and borrowing, or leveraged on your favorite DeFi protocols. All this without giving up your ETH to centralized staking services or exchanges. Lido now supports Solana, Kusama, and Polygon staking.

• 47:47David Hoffman?

  Whatever your preferred proof of stake asset is, Lido is here to take away the complexities of staking while enabling you to get liquidity on your stake. If you want to stake your ETH, Sol or Matic, and get liquidity on your stake, go to lido.fi to get started. That's L-I-D-O dot F-I to get started. Yeah, another thing I learned from Amin Solmani is that if you remove the ability for one party to bully you around, he called this a rage quit mechanism out of Molok Dow, where if there was a proposal that was going through and it was accepted by Molok, the Molok Dow, they would go into, get implemented in seven days. And if you didn't like that and didn't agree with it, you could rage quit without, before that proposal was implemented.

• 48:32David Hoffman?

  And so you would remove the ability for anybody who was a whale, to who was governing and controlling governance, if you just were able to quit, they couldn't bully you around. And this check on power, it always protects the minority and it gives the minority a voice. And so I think that it's an interesting checks and balances. It's definitely the right word. But also at the same time, isn't the goal of this whole bankless future is for having governance minimized things, right? And so like, I think anytime that there's a vote, I'll take a leaf out of Elon Musk's book and say, he says that anytime there's a user input into something, that's, that's an error. And I'll, and I'll say the same thing for governance is anytime there's a vote,

• 49:16David Hoffman?

  that's a bug that we need to remove. Uh, and like, and I don't know how far we can go down by doing that process over and over and over again. Like the bankless, the bankless utopia is literally all the way to the point where there are no votes. Uh, and, and I guess that kind of sounds scary is like no votes, like what, like we just are ruled by these algorithms and like, kind of like, uh, so I, I want to, I kind of want to go down that rabbit hole where like, if we do agree that like the idea is that anytime there's a vote, that's a failure. We wanted to, and we want to establish some like market-based equilibrium algorithm that, that removes the need to vote. And we have this future where it's everything on Zeeby is completely automated. Is that the actual utopia that we want?

• 50:00David Hoffman?

  Or does that actually like lead us down an accidental dystopia?

• 50:04Speaker 00

  Well, the one, so I very strongly agree with the, the dangers of, of mutable systems. However, I think it's a, a necessary risk. And so we have to tread, you know, thread the line where it's going to be very, the idea that we're going to today in 2022, create an immutable system that will work forever with no changes is ridiculous. Right? Um, every system that's ever been made has been changed a lot. Uh, Ethereum is a lot different than it was when it started. Bitcoin is a lot different than it was when it started. There's nothing that will work without change and be adopted and used long-term without change. However,

• 50:40Speaker 00

  you can get it so that the procedures for chains are less subject to abuse. Right? And so that's what you said with like the rage quit, right? Things like, like Uniswap will make new versions, but migration is voluntary. Right? Uh, so like opt-in is a great pattern. Um, there's some things for which that works better than others and you have to like, um, you know, think about ways that certain like dynamic or lending systems can be safely, um, moved over or, and then when, especially when there's a question of like, um, protocol-controlled value. Um, you know, these questions can get a little interesting of how it will work. But I am pretty much in favor of the idea that. The smart contracts themselves should be as minimal and as immutable as possible.

• 51:24Speaker 00

  And then it should be frequent changes and, you know, voluntary migrations, but also the tools to make that relatively easy. Um, and simple. Uh, so that's something that we're thinking about now, right? As we're looking at some of the next iteration of the vault system, you know, and vault is not immutable or fully decentralized today. Uh, that's certainly the goal, but in the first, you know, almost all DeFi projects today are controlled by multi sigs. And even the ones that are controlled by token governance, you know, a small number of whales in the core team have enormous influence. There's a few that have really gone the extra mile and attained, you know, distributed and effective decentralization. And you can see this when the founder tries to push things around and they don't work.

• 52:05Speaker 00

  Um, you know, there's a, there's only a couple of instances like that compared to like L1 projects like Ethereum. There's a long way to go for pretty much all of DeFi. Um, but I've definitely been reflecting a lot, looking at like the things that went to immutable too fast, in my opinion. And then, well, let me take one step back.

• 52:26Speaker 00

  Once, people just need to be a little more careful launching tokens for things. Um, and like launching a token for an immutable thing. And then having the team only have like a whatever few year vest is very questionable, in my opinion. Um, it's just like, at the end of the day, the incentives are not there for new versions to be made that use the same token. Um, so that's kind of a problem, but that's almost like

• 52:54Speaker 00

  separate from these like core mechanism questions that I'm trying to, you know, that harder problems to figure out. But I think that it's important to make sure that, um, incentive alignment is there. Um, and in the case of something like Maker Dow, right? It's obvious that the incentive alignment would be there, even if they were to build a successor to die. You know, they've already built Psy. It seems crazy to think that there might be a third one, right? After Psy and Die, but, but maybe there could be, who knows? Um, and if they did that and build a whole new entire system, um, that was voluntary migration, they could do that and they have the infrastructure needed to keep teams working and building on it, right? And that's like credibly neutral and trustworthy and you can, can count on that. When it's like, everything is built by some kind of a centralized labs entity,

• 53:37Speaker 00

  but they're still trying to pretend it's fully decentralized. You're, you have to wonder a little bit. Uh, you know, throwing a small amount of shade on uni, I think they're great builders, but it's sometimes it's like, you know. I just feel a little weird when I see like Uniswap Labs Ventures doing big investments when the uni token is like holders are kind of in the dark about what's going on. So transparency is big for me and that's you're like, I think transparency should almost precede decentralization and that.

• 54:05Speaker 00

  First of all, like, who are these people who are supposed to decide, right? When you give the tokens out like.

• 54:10Speaker 00

  Ethereum is not decentralized in the sense that like all the ETH holders have to decide how it works, right? That would be kind of ridiculous. However, they are able to opt in or out very readily. And the kind of like peers, those who can run the clients of the network can all opt in or choose, right? It's the majority consensus of the people who really like care and have skin in the game effectively decides the fate of the network. And that's pretty good, robust decentralization, about as good as you can get. It's very hard in my view to get there with token voting system. And so these things need to be thought about very carefully and not rushed into is one of the things that I've been realizing lately is like. I think that over the next couple of years, we'll see really great governance systems designed.

• 54:52Speaker 00

  But we can't expect like, expecting products to either be fully decentralized at the first MVP or things to be immutable when they first are created. Will lead to dead ends, but at the same time, things should not be allowed to scale to excess before they have achieved those goals. You know, that's one reason that we've done a cap launch on Volt and will not be like, you know, significantly allowing the supply to grow until. The core issues are ironed out and it's more hardened as far as changes.

• 55:18Speaker 00

  But I do think it's also, there is a need for experimentation and that's where like these debates about like regulation or what should be allowed like. There is a great need for experimentation and just freedom and sandbox to do whatever you want. But I think there's also a room for industry standards of responsibility and things like, I think a big lesson we can draw from this bull market is you probably shouldn't do like. Uncapped public launches of a lot of types of experimental financial products.

• 55:44Speaker 00

  It can lead to trouble. Now, probably shouldn't doesn't mean should be illegal. But it's still like, it causes trouble and so it's wise to think carefully about. You know, these are the types of lessons I've drawn. I think Maker Dow, again, is like, I keep pointing to them as like my golden favorite example of a. A stablecoin issuer and like the place to look of. Maker Dow's culture is if a change is going to happen, like it needs to be so thoroughly justified and there's all these stakeholders who are going to weigh in and. That bias against change, like.

• 56:17Speaker 00

  Yeah, let me, I'll tell a little. When, when rocketry got started in California and like the people who would eventually go on to found JPL were just sneaking outside of Caltech and firing off rockets in the canyon where no one lived around. Um, like that experimentation was good. It was also good that now, like today in the aerospace field, there are such strict standards for software security, right? Like far more than for any DeFi project, you know, I have a friend who worked at JPL and it's like they have entire separate teams working on the tests and the code. And the people who write the code haven't even touched the test. And at the end, it all has to work perfectly, right? And it's like, they have everything so specified and so many eyes on it, external firms where like

• 56:58Speaker 00

  even almost the best in the business is like, oh, we had two audits, you know, by these two big name firms. It's like, well, that sounds great, but like, when was the last time like Avor Compound checked? An audit on one of their collateral tokens and what governance changes have been going on like? Even at this moment, there's like a bunch of collateral tokens on Avor Compa where if a malicious change went through, they could just infinite mint or something and, and rug. You know, there's so many buried risks. And so that's why I respect MakerDAO a lot, being like, no, you're like very few collaterals per asset collateral caps, keeping them very small, getting rid of things. So those types of choices. And also just a completely open and transparent decision-making process.

• 57:40Speaker 00

  That's what's so good about DeFi. Like you can see everything that happens on chain and it's even better if the decisions are all out in the open. And so that's something, you know, it's hard for small projects because at the end, there's only so many people who care or understand. You know, and you have to just, you know, it's a small team who's figuring things out, but

• 57:57Speaker 00

  as things grow, making sure all of those

• 58:01Speaker 00

  those rails are laid out and transparency is super huge. I'm very I'm going on another little tangent here, but I'm very much an enthusiast and proponent, although we haven't implemented these things at Vault yet of like decentralized front ends and informatics hosting, you know, like decentralized subgraphs or IPFS based distribution of sites, you know, there's a lot that DeFi products can do to just the simple fact of like making the site a front end immutable link. Like front end security is such a can of worms too. Like there's so many things that need to be carefully minded. So you, after all of the like heady days of the, the last year, I've definitely taken a long look at like. Just how deep a rabbit hole true security really is and what it means to have a security

• 58:46Speaker 00

  culture and that, yeah, I really admire like the Ethereum core devs and their process. And so DeFi needs to learn from like these robust decentralized existing orgs. I think MakerDAO and like all core devs and they, they are, the Ethereum culture is really strong and that's what DeFi needs to not get lost in. And yeah, sometimes move fast and break things is good, but sometimes the Ethereum instinct of no, slow down and contemplate is a good one. Slow down and contemplate and make sure it's really designed the right way for the long term and decide everything based on the best long-term principles, not based on short-term opportunism or incentives.

• 59:23David Hoffman?

  So I mean, I'm a hundred percent in alignment. With the other property about MakerDAO that I definitely admire is that, and this became super obvious right after the Terra collapse, is that the growth of MakerDAO lags demand, or at least the growth of DAI supply lags demand. Whereas like UST was minted in a growth strategy. It's like, well, we'll mint all these tokens so that we can go like do things, like mint the tokens so people can have the tokens, like mint the money. And then all of a sudden like it fell over. DAI supply is the opposite of where like it only grows if there's sustainable, long-term DAI demand, pushing up the DAI price on the secondary market, creating an incentive to mint new DAI. And so this constraint on how fast this thing grows is what makes it and protects it and

• 1:00:08David Hoffman?

  makes sure that it's always going to be stable. And so like using these principles, same thing with like Ethereum block space too, right? Like Ethereum block space is so constrained, yet it actually has gone literally 10x in supply since 2015 when Ethereum first got started. And so like the Ethereum block space supply has grown 10x, but everyone feels like that is this Ethereum scaling is going so slow because if we juiced up the block space supply, like it would turn into Solana and then it would crash. And so these ethos of like constraining growth while we are in a hyper-growing environment, like constraining growth is probably pretty okay, like yo, we're gonna be fine, we're still gonna grow. So Kirk, I want to, we touched on it a little bit, but I want to just like formally go down the Volt rabbit hole.

• 1:00:53David Hoffman?

  Let's start from the very beginning, like what is Volt and how have you applied all these principles that we've talked about so far in the podcast to building Volt?

• 1:01:00Speaker 00

  Let me quickly run through like three visions of Volt. The, because there was a time when Volt was actually going to be a fork of Rye. That's because I really admire the controller model. And the idea was that Volt was going to be a Rye fork focused on long tail DeFi asset lending. This is a very bull market idea back when you were getting like 20 to 50% rates and fuse, you know, on long tail DeFi tokens. And thinking that that would be a very, you know, effective way to do an inflation resistant stablecoin with a floating price, but targeting the inflation rate return. So offering a lower borrow rate than maybe people were already paying for those long tail assets, but more return to the users.

• 1:01:41Speaker 00

  We ended up moving away from that just because of kind of the complexity of the Rye implementation. And it's really made to be immutable and just be ETH. It wasn't, you know, the kind of more scalable and modular thoughts that we were looking for wasn't there, although I admire the, the team and the design of it a lot. So we moved away from that to a, the DIE-like model, right? With the, the PSM and also, you know, thinking that lending would be this major component of it, directly issuing Volt through Fuse.

• 1:02:09Speaker 00

  And the, and what I think is the,

• 1:02:13Speaker 00

  the, the bad part about this model is that, like you said, the magic numbers, you know? And I had always intended to make it more market-based in various ways. But as the market conditions have changed, you know, I think we've come to understand that it's not necessarily destiny that Unchained yields will always be super high. You know, they won't necessarily always be more than TradFi yields. And while there are those higher yields out there, they require you to move significantly farther on the risk curve. And so that's what's inspiring me to think about some significant changes versus the current Volt V1. So your Volt V1 is live to date, you know, just, and it is a very Fae-like stablecoin,

• 1:02:55Speaker 00

  because ultimately we did not issue any Volt as direct debt issuance as part of the V1 MVP. So it's just minted through a PSM. And realizing that having like, in the early stage of the project, the team, it's not desirable for us to manually make yield decisions, especially risky yield decisions, right? That's the exact opposite of what the, a DeFi project should be doing. And the-

• 1:03:22Speaker 00

  Goal is to create a, what we have realized we need is a feedback mechanism where the Volt holders can say,

• 1:03:29Speaker 00

  this is the, when a Volt holder says, I either want to hold more Volt or I want to get out, the system needs to take that information and accept that feedback and say, okay, Volt holders are leaving the system, so we need to adjust the rates accordingly, or, oh, we're minting more Volt. And there's various things you could adjust, like you can adjust the actual yield rate that the Volt is earning, you can also adjust a mint fee, you know, so like when there's very, very high demand to mint, you can do like equivalent of an auction, right, and you're, you know, especially with this yield-bearing type of stablecoin, so there's thoughts to think about there, like, when you are expanding the supply, how do you do it efficiently and as fairly as possible? Because it will be capped at first, and then at what point do you judge it safe to expand beyond the guarded launch, but

• 1:04:11Speaker 00

  the, I'll just kind of sketch through how I envision the next step of Volt working, which is that there will be a, you know, the system will have a concept of, let's say, first of all, let's say there's a, a stablecoin can have both liquid and illiquid backing. So for DAI, the liquid backing is USDC, the illiquid backing is the loans of DAI. You know, so if you borrow DAI against ETH, MakerDow cannot redeem that instantly unless they do emergency shutdown. They have to wait for you to repay. They can jack up the rates, but maybe you don't care. And so, especially if you think that DAI is going to go further, like, below peg, or like something's happening, like there, there could be, just being able to change the rates alone does not guarantee that those things will be redeemed. And so, you can categorize it roughly as liquid and illiquid backing.

• 1:04:57Speaker 00

  And for Volt, we're thinking the target liquid backing ratio should be determined by a market process. You know, this is similar to how Frax has a collateralization ratio, but Volt would still be over-collateralized, you know, by PCV, but how that was allocated would be based on this liquid or illiquid reserve. At first, it would be 100% liquid, probably. And then, just with depositing into other decentralized on-chain yield venues, whether that's off or compound, a certain menu of them, and optimizing the liquid yield rate. And so that liquid yield rate would be like the minimum that the Volt holders would earn. And then, you can say a portion of the funds within the protocol could then be available to go into less liquid or riskier yield venues.

• 1:05:41Speaker 00

  So, that could be as simple as like, you know, in, let's say the protocol is 99% backed by

• 1:05:52Speaker 00

  You know, let's say the Volt protocol has, you know, $100 of circulating Volt, and then they have, you know, $99.07 of stablecoins and 3 cents, or like 5 cents of ETH, you know, like just a tiny percent, you know, 1% volatile backing, right? Or it could be that tokenized, you know, you know, yield-bearing instrument from off-chain, or it could be an on-chain loan, like a DAO-to-DAO loan, a bond to a DAO. Let's say a 7% fixed-rate loan to a DAO that expires in 6 months.

• 1:06:26Speaker 00

  And the mechanisms by which that those could be added will also have to be designed. And I term that process "market governance," is like what I like to say for this whole theme. And, you know, things where, I think it's very, maybe we could talk a little bit about governance token design. I think it's very important that governments' tokens have skin in the game along with their decision-making. So you can look at, like, a lot of governance tokens today, we have kind of tragedy. There's a few common classes of problems. I'd say one is tragedy of the commons. This is what we see with a Curve and other VE-style emissions tokens, where, you know, I take the best bribe I can get and I vote for that pool. And who cares if that is actually good for the underlying DAO or its revenues? I'm just profit-maxing for myself.

• 1:07:11Speaker 00

  And I capture a spread on how much I'm dumping on the other holders versus how much I'm getting bribed. You know, so that has significant issues. Then with just token voting, it's like majority rules. And if you, if you feel like you're part of the minority, it's like, why even bother? Especially if it's an unpopular decision and people will know what you're voting for.

• 1:07:32Speaker 00

  And you have some things that are really cool, like, for example, I like a lot,

• 1:07:40Speaker 00

  like the AVA insurance module, where AVA tokens can put skin in the game voluntarily and opt into it, to the staking module. And so you can envision things like, what if they could stake but like per collateral token? And then that set what the debt ceiling was for that collateral. And they put skin in the game for that collateral specifically.

• 1:08:00Speaker 00

  And so that pattern in general, like more graduated or like smooth decision-makings, where you could stake to like a certain opinion and consequences and rewards associated with that stance, I believe will have more effective results. So we have sort of the vision of like...

• 1:08:17Speaker 00

  Vault protocol is almost like an abstraction around a compound or Ava, where holders put in a stablecoin and they don't really care what underlying stablecoin it's backed by, it's kind of abstracted away. And the governance token holders borrow those funds and deploy them into yield strategies, and they can be liquidated, right? If they lose capital and there's some sort of a market-based system. And then there's interplay, and that's why I talked about symmetry, where the demand from the governance token holders to go and deploy in certain yield strategies is, you know, they'll want to go and pursue the best risk-adjusted return, whereas the vault holders will express their requirements as far as how much they need to be paid to keep their deposits in the system. You know, they'll have this floating curve, and hopefully it can all come together

• 1:09:02Speaker 00

  symmetrically to offer the, well, not hopefully, but rather through significant hard work and ongoing effort, will come together to get a fully symmetric stablecoin system that can support a wide variety of different types of like yield activities, more than just like what I would call on-chain repo, you know, over-collateralized secured lending, but also have other types of yield instruments and things.

• 1:09:25David Hoffman?

  Yeah, the concept of a work token comes to mind, and this was a term I remember being thrown around in 2017 about many, many, many, many 2017 ICO tokens? Yeah, ICO tokens. I think the Augers token was the first one I heard this classified as a work token, where if, a lot of people just like buy these tokens and like if they buy the right ones and it goes up in price, and then they're like, yay. But like the concept of a work token is that you do put it somewhere in the right box, and if you put it in the right box, then you get the right, you get a reward if you put it in the right box. And you have to determine what the right box is. And so Auger, as a prediction market, there would be like an Auger market spun up around like the Super Bowl, right?

• 1:10:10David Hoffman?

  And Team A would win the Super Bowl and Team B would lose the Super Bowl. And then all the Auger people, all the Auger token holders would come and they would put their rep, their R E P tokens, rep for reputation, and they would put it on the side of like Team A won the Super Bowl. And then they would they would collect a small fee from the gamblers who were gambling in that market. And the gambling would be denominated in like dye or ether or something. So there'd be a fee and then that fee would be shared by all the rep holders that that stakes their rep on the outcome of a particular event. Now, there's many, many, many different marketplaces. And so like rep was utilized, the rep token was utilized across all these different marketplaces. So it's not like every single person was voting on every single marketplace.

• 1:10:53David Hoffman?

  But you would go to the, the idea is that you would go to the Augur marketplace. And then you would just like, like stake your rep tokens that you have in the markets that you know what the outcome was. And then you would get a small fee. And like this was a way to get a decentralized oracle onto the system. Sadly, Augur never really took off, but it it made the token holders go do work. And it was kind of like governance over the system, like Augur, Augur governance says that it like team A won the Super Bowl. And then the token holders would go in and like actually move their assets and the value of their assets into this the right box. And they would be compensated as a proportion of the amount of capital that they put at stake there.

• 1:11:35David Hoffman?

  And so like if they put, if they put the thing in their tokens in the wrong box, they would get penalized, they would get slashed. And so if you're on, if you're, if everyone, 99% of people said team A won, but you put it in team B, you will lose your tokens. So there's risk there if you choose the wrong side. Now, maybe listeners are like, well, why would anyone choose team B? It's obvious that team A won. Well, then we start to get into the more gray area types of prediction markets where the market is actually confused. And so like there's perhaps something where

• 1:12:07David Hoffman?

  like the outcome of something is is not totally certain. And so we need to come to like, what, what does the wisdom of a crowd think? Like, I can't really think of an example off the top of my head, but you could totally example, think of a An outcome where like it's kind of up for interpretation. Like if we're doing the sports metaphor, it's like, all right, was it like everyone just looked at the film? Was that was that the football player's foot over the line or not? And like, everyone's looking at the film and like everyone's debating like, yeah, it is over the line. It's not over the line. It is over the line. And then token holders are gonna have to go and vote like, is it was his foot on the line or not? Uh, and then maybe like 75% of people say, yes, it's on the line. 25% of people say, no, it's not on the line. Uh, and then the 25% of people get slashed and the 75% of people get the rewards.

• 1:12:52David Hoffman?

  And then I also get the rewards of the of the rep tokens that was slashed. So you're rewarding all the people for being right. And the reason why I want to go down this rant is rewarding the people for getting it right. Is this control theory mechanism that we've been talking about where the market like has this input? And it uses it to balance out the actual inputs of the system. Uh, and so if you're talking about like the Volt Governance Token, like, uh, staking it's it's like, yes, I believe in this market, like this is not going to get rugged. The yields here are good. I'm going to stake my capital here. And then the Volt system naturally increases the debt ceiling, the ability to mint uh, and deposit capital into this one particular vault. That sounds like a self-regulating marketplace, regulating low governance overhead,

• 1:13:37David Hoffman?

  stablecoin, yield-bearing stablecoin marketplace. Uh, am I, am I on track here?

• 1:13:42Speaker 00

  You're absolutely on track.

• 1:13:43David Hoffman?

  Okay, cool. Uh, so, but how on earth? Maybe this is a going down a different rabbit hole, but how on earth do you have? Uh, do you find like 8% yield right now to combat inflation on DeFi?

• 1:13:56Speaker 00

  And that is the realization we've ultimately come to is that it is not my place to decide whether there is appropriate, you know, risk-adjusted return at that yield. And as we do due diligence into DeFi yields today, in general, we conclude that they are mispriced as far as risk, you know, most DeFi yields are not enough to justify the the risk, the yield is not enough to justify the risk that is actually present in the system. Uh, and even well-regarded safety five projects have a lot of governance risks or things that could potentially go wrong with them. Uh, and so there's a lot of care and concern that thought that needs to go into, um, like composability is huge, but you have to be careful. You're not just composing risks. Uh, and so.

• 1:14:41Speaker 00

  The, that is the central reasoning behind our need to, I think, move to a floating rate system with a feedback is, you know, realizing that for me to say Volt will always have eight and a half percent yield is a dangerous, dangerous thing that could lead to the system blowing up and being destroyed under certain conditions. And what we'd rather say is that, you know,

• 1:15:04Speaker 00

  in the early stage, the team will begin whitelisting, you know, certain yield venues on a basis of most secure first, you know, like existing well-regarded DeFi things. And in the meantime, be designing these mechanisms by which a decentralized process can onboard more yield venues. And we want to, you know, keep the scale of the system reasonably small like it is now while all these systems get ironed out. And then, once they're well in place and have been working in production, we can scale it up more. And there'll be a parallel effort, I think, to look into real-world assets and also not just like purely real-world, but maybe like what we could call like hybrid on-chain, off-chain things like,

• 1:15:46Speaker 00

  you know, you look at Maple Finance, right, is an interesting example where it's kind of like, quote, "uncollateralized" loans to these market-making firms, which should be scary to people in light of the recent 3AC kind of stuff. But, you know, they've, they've said everything's fine. And I, you know, not trying to throw shade at them, but it definitely is a little spooky to not necessarily know what all of these books of these people are. And so you can envision like, maybe a middle ground that's one step more decentralized, like, there's a special-purpose legal vehicle that corresponds to a single borrowing pool, right? And that has very strict rules about what kind of things can be done with the funds. And so I'm interested in both learning about, not, you know, not saying that Volt will internalize in-house all of these things too. Like, there's lots of projects going

• 1:16:30Speaker 00

  on, and I've been learning about the, the efforts of other real-world asset or also like on-chain native lending or credit market kind of projects. And so I think it'll be very important over the next, like, month or two to, and I think there's, oh, here's what I should really put it. I would really encourage listeners to just look at the fact that there's convergent evolution happening among a lot of stablecoin issuers today. And if you go look under the hood at what MakerDAO is planning and what Frax is planning, and when I look into my own head at what I'm planning, there's a lot of the same things going on of stablecoin issuers realizing that

• 1:17:10Speaker 00

  You know, there's only so much demand for liquidity and on-chain repo markets just to leverage up against ETH. Right? And you need to be able to do more nuanced type of lending activities, whether that's like a long-term debt against ETH. Like, I'm sure there's a lot of people who would like to have a one-year-long bond on their stake ETH collateral. Right? Like, that might be a different kind of a deal than I could get liquidated at any time. Uh, so there's like room for more sophisticated lending markets. And so I'm excited to see what develops there that we can integrate with and also to what extent we need to build things ourselves. Uh, but we really did realize that Vault, like, if you're a DeFi protocol and you're integrating with another protocol, their code is your code. You know, like, you need to have read every line.

• 1:17:53Speaker 00

  Not just on your own, but like pair program, security review to their team, every single line of code. Uh, and you need to do that again every time they have a governance change of any kind. And so that's the kind of, that's the truth, right? Like, that's the type of diligence that ought to be done in systems that's handling, you know, tens or hundreds of millions of dollars of capital or more. Uh, and again, that's one reason that we're starting small. Uh, you know, there's, any new project has limited capacity. Uh, and we have to be careful and quality over quantity for integration. So we've been doing a lot of deep dives into all of the existing projects and, you know, I've had a lot of fun. I took Euler Protocol first spin for the first time yesterday. Um, trying to, I had my nose to the grindstone for so long on Vault. It's nice to look around and see what else has been built and exists today.

• 1:18:36Speaker 00

  So these new, you know, Euler Protocol and Interest Protocol are the new on-chain, what I would call repo-style markets. You know, secured lending that interests me a lot. Uh, of course, there's the classics of Ava and Compound. Uh, and then there's the sort of Ava and Compound-style real-world asset things like Tinlake, Goldfinch, Maple Finance.

• 1:18:56Speaker 00

  So learning more about that whole landscape and where we can fit in. But I think that Vault will both have its own internal mechanisms and integrate with other platforms. Uh, and I, you know, Maker Dow is the same way, right? Where they're looking to build their own internal real-world asset stuff. They also have D3Ms and Dava, other markets. And so these kind of connections, I think, will become very robust, but they have to be taken their time with and built very carefully.

• 1:19:19David Hoffman?

  Well Kirk, I definitely appreciate your perspective in emphasizing the conservative nature as we build out a brand-new financial system for the whole entire world. Some conservatism and slow-moving is perhaps the right vibe, especially as we are coming down off of a bull market where things only move very, very quickly. Kirk, if people want to just learn more about Volt and just follow you and your other thoughts that you have, where should they go?

• 1:19:45Speaker 00

  Yeah, so to learn more about Volt, you can visit us at VoltProtocol.io and you'll also find links there to our Discord. And you can find me on Twitter or on Discord and also on Telegram, anywhere you like, as OneTrueKirk. You can also email me at [email protected]. Yeah, always happy to chat about any DeFi concepts and just answer questions, not limited to Volt, but also to learn from others because, to me, the most limiting part of the whole pandemic period was just being cooped up in a little box. I got out to my first-ever crypto conference for ETH Dendel and I think that getting out of sight of our crypto Twitter is a bubble and even within DeFi, there's little bubbles, right? And so it's good to

• 1:20:27Speaker 00

  go outside that bubble. And so I'm working on that a little bit, trying to learn more about L2 stuff. So Volt launched on Arbitrum recently and I'm working on understanding a little bit more about the security and decentralization, like uptime concerns with L2s and how that relates to lending. Lots of interesting stuff.

• 1:20:44David Hoffman?

  Well Kirk, it sounds like you are becoming an expert in every single facet of crypto. So I'm glad that I got introduced to you this way by doing the podcast and I'm going to keep an eye on what you're up to and where your brain goes. And I think we'll reconvene on the podcast at a later date and time as well.

• 1:21:02Speaker 00

  Thank you, David. I really appreciate getting the chance to speak with you and apologies for the connectivity issues on my end. Unfortunately, Grandma House Internet has its limitations.

• 1:21:11David Hoffman?

  Well, I think we can edit all that out in post, so no worries Kirk. Thanks for coming on, my man. Appreciate it.

• 1:21:15Speaker 00

  Thank you.

• 1:21:16David Hoffman?

  Hey, we hope you enjoyed the video. If you did, head over to Bankless HQ right now to develop your crypto investing skills and learn how to free yourself from banks and gain your financial independence. We recommend joining our daily newsletter, podcasts, and community as a Bankless Premium subscriber to get the most out of your Bankless experience. You'll get access to our market analysis, our alpha leaks, and exclusive content, and even the Bankless token for airdrops, raffles, and unlocks. If you're interested in crypto, the Bankless community is where you want to be. Click the link in the description to become a Bankless Premium subscriber today. Also, don't forget to subscribe to the channel for in-depth interviews with industry leaders, Ask Me Anything's, and weekly rollups, where we summarize the week in crypto and other

• 1:22:01David Hoffman?

  fantastic content. Thanks everyone for watching and being on the journey as we build out the Bankless Nation.