Recording

Transcript

What the auto is, how it allows for borrowing against zero coupon bonds, and then how we might be able to borrow against pods in the future. This is something that we're scoping right now with them, and it's looking really optimistic. And so Max will be able to speak to that. People just might be able to speak to that a little bit.

Yeah, We just want to give some exposure to see that they're launching in the next week or so. And then also talk about an exciting feature that we have for pods. So, yeah. Max, you want to jump in with an intro, share yourself at the being community? Yes, of course. And thanks for having me, guys. So I'm Max.

I'm one of the co-founders over at Fiat, and we're protocol that's essentially been in development since October officially. And as Max pointed out, we're looking to launch next week. So Max, would you mind if I just jumped into like Fiat kind of 101 and then hand it back over to you? Do it. Do it. Jump in. Okay. Sounds good.

So I give a little bit of background on why we're up to what we're up to and then a bit more about what that protocol is going to look like next week. But essentially about a year ago, I was an employee with Branch, who you may or may not be familiar with, but essentially it's a kind of platform for risk management protocols.

And last March, we released one called Smart Yield that allowed users to get either levered variable or fixed rate exposure to supported originators like compound or off markets. And as the month went on, we realized there was relatively little demand for the fixed income side of that protocol and started figuring out ways of how we could kind of create demand for bridge smart yields fixed side.

And so we spent most of the summer thinking about that problem and realized at the same time that other fixed income protocols across the space were kind of suffering from similar kind of lack of product market fit relative to the rest of the expansion across Defi. And so with that in mind, we kind of started thinking about, you know, how can we make fixed income in Defi be more attractive just across the board, not just for bridge.

And in kind of having that conversation, we look to know how tradfri interfaces with fixed income. And obviously that's a very massive thorny beast of a market that's just as big, if not bigger than traditional equities markets. But what are the key things that the traditional fixed income market has that defies fixed income, has not had to date is access to leverage.

Right. And so when we think about Defi today, you know, I think the kind of overarching theme is always this idea of super fluid collateral, which is what that answer from Nathan kind of codified back in 2019 with his blog post. And we've seen to date with the popularity of proof of liquidity tokens. But essentially if you put your collateral in a pool, more often than not, you expect to be able to do something a little bit more, right?

With like the IOU you get back. You never really want to be the end of the road for someone. And so the problem with fixed income assets today in Defi has been that, you know, you take this position in bar and bridge, you take this position in notional or elegant finance, and that's kind of it. You have locked in a cool gain for over some amount of time, but you're not really able to do much more with that position as opposed to, you know, like if you're holding spot if or holding stake even from light up, you can actually borrow against it and go do something else and kind of lever up your exposure or

at least give you more flexibility. And that just hasn't been the case to date. So this is where Fiat comes in. Essentially, we're trying to create a protocol that can, at its core, offer leverage to fixed income assets and later on to illiquid derivatives in general. Just because this has been a thorny issue across defi across derivatives protocols in general and in the real world.

This is answered by something called a repo market or repurchase agreement market where people can essentially lend cash to people who are putting up bonds as collateral. And that's just like a massive gaping hole that doesn't exist in Defi today. And so this is kind of the problem space we've been working on over the past few months. And what we're essentially releasing next week, hopefully is part one of our kind of grander vision for the Fiat protocol.

And for those of you who are familiar with Makerdao, I think that's the closest parallel to what we're shipping. We've taken a lot of their code and built on top of it to start kind of building out this concept of a defi native repo market. And so what I mean by that is you will be able to starting with element finance, collateral and then notional in yield and bond bridge collateral types come to the platform Mint, the singular VRC 20 asset called Fiat and be able to essentially have this line of credit in the form of a stable value asset for the duration of your bond, you know, and at which point for various incentive

purposes, you're then told, okay, now you got to pay back the Fiat that you minted once your bond has matured into its underlying assets. And the idea there is that it unlocks a number of use cases for the user. As a result, you know, if you take a fixed income position now, you know that you can mint some amount of fiat against it that you can use to, you know, maybe you're kind of strapped for cash when you need to get some liquidity before maturity.

If you're a more experienced trader, you might actually use that to lever up your fixed income position. You know, take that fiat, sell for more USD, see, get another usdc bond and kind of stack those fixed income positions and it just reintroduce the degree of flexibility that most defi users are familiar with but have not been able to access today.

And the reason we thought it would make sense for this to be it's a protocol versus incumbent to kind of offer the service or kind of twofold. Right. So as we were making the decision to set out on this protocol, I think we identified two kind of existing camps of incumbents that could theoretically, you know, support these types of assets in this type of functionality.

And that kind of boiled down to existing stablecoin issuers and existing lending markets. And so, you know, there were reasons on both accounts as to why we weren't super confident in incumbents being able to offer this specific repo market functionality. So on the Stablecoin side, I'll just use Makerdao as an example. The primary concern with this type of collateral is that there are no market making networks for fixed income assets today.

You know, certain fixed income asset issuers like Element and notional do have a degree of secondary liquidity for these assets through MF or for AMD, but they haven't necessarily scaled super, super deeply. And liquidity does get fragmented across different series of the assets they support. And so if you're a stablecoin issuer like Makerdao, you can accept these collateral types and maybe there some small percentage of the collateral backing DAI in that case.

But if you get to a point where your collateral backing is overwhelmingly these more illiquid assets, you can't be guaranteed that should one of them get liquidated, that the typical arbitrage terms that are, you know, the focal point of that kind of system will be there to take care of the liquidated position. Okay. If I can liquidate the Makerdao position and immediately flip the collateral, I just liquidated for a profit, that kind of goes in the face of the assumptions that protocol makes.

And so existing stablecoin issuers have today focused mostly on liquid spot assets and introducing these more illiquid derivatives, challenging some of their assumptions at scale. To be clear, like obviously Makerdao could throw a million or $2 million worth of capacity at these types of assets, but it's not like a sure fire solution to do that. Right. And then the other factor is that, you know, if there are dyed and dominated bonds, which is ultimately the goal of any stablecoin issuer, then it gets a bit awkward to mint dai against Dai, right?

It's a bit recursive to some extent and just isn't the neatest solution. And you still deal with like fragmentation as existing stablecoin issuers all try to solve the same problem and are competing against each other. So that's one side of kind of the incumbent analysis we did. And then the other side are like existing lending markets like compound and other or, you know, there's been an emergence of longer tail lending markets as well, such as silo or other finance.

And they're the main takeaway we had was, you know, sure, compound to orbit could write support for a bond tomorrow. You know, it's not likely, but they could. But the issue is, you know, will people want to lend to those assets necessarily? Right. Because like, if I'm locking in a four or 5% yield on a fixed income position, I'm not going to pay more than one or 2% to borrow against it.

Otherwise, it just kind of nets out right. And for that reason, Right. That's kind of where this like Stablecoin inspired model that we're starting out with comes from because it's kind of one of the only ways to actually be able to offer this type of lending facility in a in a sustainable way, just because you'd be very hard pressed to find people willing to lend out their liquid stable, that one or 2% annualized at the end of the day.

And so with all of that said, you know, Fiat is taking a very slow roll approach to a very large problem. But when we launch next week, you'll be able to bring stablecoin denominated bonds to the platform, get access to dynamic LTVs. That kind of change as a function of your time to maturity. So the amount of fiat you can bet against the collateral type.

Three months out to maturity versus one month to maturity is different, right? Because the closer you get to maturity, the less of a illiquidity premium or illiquidity discount you have to pay. And now we kind of open up this liquidity flywheel for a lot of these fixed income protocols because now they have users who are more comfortable to enter those markets because they know they have something like Fiat that can provide that interim liquidity as needed.

And so I've been speaking for a while, Max, I can talk more about how this relates to pods or if you want to dig into any kind of questions that are more general level. I'll be happy to do that too. Totally. Yeah, we definitely want to want to get into how this relates to pods, but maybe one of the thing that might be interesting to add is there's two tokens of Fiat.

There's the Fiat token and then there's FTT. Do you want to describe those two? Sure. So as you can probably guess by us basing our system off of Makerdao. Fiat is one RC 20 and it's what we call a stable value asset. So that means the system has an internal target of $1. As Fiat deviates from a dollar, we adjust our dynamic LTVs to make it such that, you know, if there, if, if you trading below a dollar, then you should be able to mint less fiat.

You start having to pay more interest on your fiat debt, outstanding and so on. But because it's essentially a liquid asset backed by illiquid collateral, we recognize that committing to a strong dollar peg on day one just does not make sense. Right. And for those of you with traffic backgrounds, it's very much akin to how money market funds might freeze up in periods of volatility and traditional markets.

Right. It's like we think back to oh eight, there was that one massive money market fund that lost its peg, quote unquote. And so that's like a similar kind of problem space where we're playing in here. And so, you know, I don't expect Fiat to be hyper volatile, but I can definitely account for some illiquidity premium to be a factor at different points here early in its life.

And so that's one half of the equation. The other is the Fiat Dao token, which is our governance token. And it's just a Bolivia that we are DAO first project. So there is no real world entity, there's no Fiat Labs, there's no equity cap table anywhere. We're really trying to do everything as much as on chain as possible.

And so while we've been developing in private as a core contributor team today, we're going public with the repos, I think tomorrow actually, and will be really keen on, you know, just distributing the work and kind of going to a true DAO structure based off of working groups and kind of community led roadmap as a result. And so today FTT is a quote unquote valueless governance token.

It'll allow us to do snapshot votes and we do have a DAO smart contract architecture in place, meaning we can actually execute real transactions on chain, which I think people often forget when they just look at those that are purely multisig. So that's something we're proud of but haven't really utilized to date. And while that is the current iteration of FTT are kind of future plans for FTT revolve around this idea of decentralized risk management.

And we're still kind of honing that idea and are looking to publish like an updated whitepaper with that in mind in the coming weeks here. But essentially, you know, you can think of FTT as taking the resources the protocol might accrue in the future. So maybe, maybe it's a Treasury insurance fund or maybe it's actual cash lent to the system to act as a backstop for kind of like these moments of illiquidity I alluded to earlier.

And using FTT, our kind of governance participants will actually be able to direct where these types of resources get targeted, you know, in the system of various collateral types and actually play a role in how interest rates are determined and debt ceilings are determined and so on, such that it's truly a governance token, but governance being used to kind of manage the risk that the protocol is taking on at any given moment in time.

Right. Because fundamentally it is building on top of other defi protocols and there is risk to be managed. Right. We're not trying to be the baseline money of DEFI or the reserve currency of Defi. It's very much a dynamic system that we'll have to kind of roll with the punches that if I may give it over time, because it is acting up as a derivative layer as opposed to the kind of underlying spot layer that most of Defi has built up has built to date.

Super cool. Super cool. That's helpful. So we've taken a few calls now about pods as collateral pods for everybody. For the background pods are effectively the debt instrument of beanstalk. When you lent money to bean stock, you get pods in return. And so now we're considering is you allowing for borrowing against them. And so if you want to talk a bit about that marks kind of like the process of, you know, adding a collateral type on on fiat, you know, what this might look like for pods.

You know, right now we have the pod marketplace, which will hopefully over time, give us some idea, you know, some curve as to what the price of a pod is, You know, X million in line. So I want to just hear your take and kind of how you've been thinking about it. Sure. So Fiat builds on top of Makerdao's architecture, specifically multi collateral maker's architecture.

So when we talk about Fiat coming to support new assets, essentially the way that looks on chain is that we work with a given protocol to construct what I would call like a factory template contract that is capable of interpreting that protocol's collateral types and being able to actually assess the value of that collateral type. And so date, you know, both in our whitepaper and what we're launching with, we focus specifically on zero coupon bonds that are fully collateralized, have a known maturity and have a known fixed yield.

But at its core, right, Fiat is actually kind of this generalized architecture for supporting a long tail of any illiquid derivative that has the ability to kind of implement a pricing methodology which for those of you who have actually ever tried to do something like this, you know that that's actually a very heavy question for every single collateral put, you know, we are in addition to kind of like the repos we're opening up tomorrow, we're also sharing more about our Oracle system called Delphi.

And that is a very tricky kind of nut to crack. But, you know, in the case of this conversation around bonds, IRRs are around pods. What's unique about them, right, is that they are a fixed yielding asset. But the question becomes, when do they actually actually yield? And so they're not a traditional fixed income asset in the sense that we've been working with.

You know, they're not a zero coupon bond with a fixed maturity, but there's still an opportunity here to think of a pricing methodology or more appropriately, a kind of like discount methodology such that, you know, if it comes to support pods as collateral, users would be able to deposit a given pod and there would be some kind of function in place built between us and the beanstalk, a kind of protocol that would be able to come up with a valuation figure that can then be used to determine an appropriate loan to value or kind of credit line in terms of fiat for that given pod.

And what we're excited about is, you know, the recent launch of the pod marketplace actually gives you quite rich data on how to think about any given pod. Right? So for those who aren't familiar, you know, if if you're coming from the community, a given pod has a place in line. And depending on that place in lines and depending on the market dynamics of the bean token, that's what drives when a user is actually able to have a matured pod at the end of the day.

And so this marketplace that Beanstalk has launched has allowed kind of price discovery to happen for pods across the spectrum because there's a there's a line of pods, so to speak, that's a first in, first out. And so with that in mind, you can actually look at the market and see, okay, well, the pod, that is one millionth in line versus 100,000,000th on line, there's some discount being applied to both versus a face value.

And since bean is a you know, is targeting a dollar, right. We can measure that as a discount from from one, essentially. And so with that in mind, it actually does become possible to think of almost a discount curve where, you know, we have data points from a couple of hundred pods that are listed on the marketplace and you're actually able to kind of extrapolate from there what a pod in a given position that is given to fiat should bear as a discount as a result of its respective place in line.

So I think this is a really good example of, you know, how does Fiat expand beyond just this very basic zero coupon kind of zero coupon bond that's fully collateralized? It has a known maturity and starts expanding to different collateral types that can differ in many different ways. To put it in a bit of a weird soup there because essentially.

Right, you know, pods present one kind of a vector for kind of challenging the pricing methodology we've used to today. But then there will also be normal zero coupon bonds that are denominated in volatile under wires. That's a whole different problem space. You know, I'm assuming in a couple of months we'll start seeing Dow's issue debt write down bonds almost.

And in that case, you bring in credit default risk. And so on. And Fiat is, you know, is going to have to be in a position where we can expand to that wide universe of collateral types. And ultimately it really comes down to this question of can you come up with a valuation methodology for that collateral that takes into account its unique kind of risk profile.

And doing that at a permissionless protocol level is very tough and you're going to have to side, you know, air on the side of caution. But I think this is an example of how Defi is really taking baby steps towards being able to kind of support more and more of financial activity on top of it beyond just crypto spot market speculation at the end of the day.