S2E3: The Buttonwood Foundation

November 28, 2022


The Bean Pod




welcome to season two of the bean pod a podcast about decentralized finance and the Beanstalk protocol I'm your host Rex before we get started we'd like to again remind everyone that we here at the podcast are super bullish about Beanstalk protocol and other deep hype projects but as we've seen time and time again this is still a risky space so with that in mind always do your own research before investing in a project including anything covered here in the podcast and never ever invest funds that you can't afford to lose and with that on with the show [Music] here at the bean pod we love talking about the future our guests the projects we cover and the concepts we discuss are almost uniformly focused on what's Happening Now and how those things will improve Finance ownership or Society in general down the road we and those around us have seen how the status quo fall short and are bound together by a desire to figure out A Better Way Forward but that's not to say that history isn't important decentralized Finance is working to solve some of society's oldest problems and like it or not understanding history is not only advantageous but essential there are a few people who understand the history of finance and how it relates to Modern D5 better than Manny Rincon Cruz Manny is a financial historian by trade and a key part of the Buttonwood Foundation a collection of tools and Primitives that are helping developers build components of the decentralized finance stack Manny was kind enough to join us in the studio the other day to talk about how he got to where he is now and how Buttonwood will help Drive future D5 projects Manny thank you so much for joining us on the podcast thank you for having me how about you start us off by just telling us a little bit about yourself of course my name is Manny Rincon Cruz I'm the founder of Buttonwood and I am also I think in my second life the executive director for the history working group at the Hoover institution uh at Stanford University so my background is I'm a financial historian by training uh Financial historian of China specifically and uh most recently I've just been working on questions of financial Innovation you know kind of what drives the long site goals of these bursts of you know new instruments that come uh into financial markets and traditional markets how they survive how they evolve and I think kind of the big question for me is really what is the financial stack right I mean Financial Innovation for the most part the financial system that we have today spans about 600 years and it's really an accumulation of about eight key Innovations so you know most things don't survive and so I kind of want to understand what does and uh yeah so what led you to that particular area of Interest one of the things I noticed on the Buttonwood cite is it is it's very history driven I it's a it's a lesson in financial history what took you down that path and and how did that translate into what Buttonwood does now well that's a that's a very long story of how I ended up in financial history uh so when I was still an undergraduate at Harvard my focus was mathematical logic so it was modal logic diagrammatic logic diagrammatic logic is kind of like the language spoken by the aliens in um story of your life and others right so it's a picture-based system uh so then I I left I'd gone I'd done an internship at Goldman Sachs the summer of 2008 so when everything exploded and decided that I didn't want to be an investment banker I ended up in China for a year came back and it was when I came back that I enrolled in a number of International Financial history courses and there was one that was particularly influential I think for most of my life and that was a course uh co-taught by Charles Mayer and Neil Ferguson and so that it was in that course I think I I sat there for the first day and it just clicked for me it was like this these are the questions that I care about right what are the institutions that drive uh technological advancement or technological retardation you know what allows some countries to grow and what makes other countries stagnate there were these kind of big profound questions which I thought his uh history answered quite well or at least trying to in a way that economics and political science did not and so I left afterwards uh I had a job lined up so I went to Taiwan for another year because I had another scholarship lined up I also had a job lined up at the Boston Consulting Group so I did that in New York City primarily with clients that were in financial services so Insurance credit cards Banks uh there are a few others and so the digital transformation was still underweight particularly for insurance so that was kind of a big area of focus um but I was quite unhappy right I think within a month of being at BCG I kind of knew that I didn't want to be like one of the partners there I kind of looked around and said I don't see myself as any of these people so I should probably leave and the intellectual questions around Financial history right in history writ large were still very much top of mind so I replied to go back to grad school so I went back to Harvard and started grad school there uh and that's when I really started focusing on you know kind of what ended up being my area of expertise which is Chinese the history of Chinese Central Banking right so I had the language skills I had the quantitative skills I had the industry background so they seemed to be kind of the perfect fit um so this must have been I think 2013 to 2015 around that era so as you know Mount Cox happened Bitcoin was gaining Steam uh so the question of could Bitcoin be money was top of mind um so you know I was trying to explore this question most academics were quite unreceptive to the idea that Bitcoin could be money right at Harvard Law School the idea was that money was a creation of the state or at least the money the the state provided a clearing house like service that anchored state issued currency as the only money around even in a commodity backed currency system uh so I transferred I ended up transferring to Stanford kusai I was dating my ex who got a job in Silicon Valley we broke up before I even finished moving here so you know it was totally in vain um but being in the Bay Area allowed me to then connect with a lot of crypto projects and default projects and ended up advising uh you know block tower ample for a couple other smaller projects and it was through that I think I truly grasped a little bit more what it meant to be uh you know what it meant for finance to become disintermediated and really the advancements that would happen there uh I was quite fortunate that when the bull market of 2017 hit and people everyone was asking what is money I could raise my hand and say I've been thinking about this for 10 years right uh and so you know that that kind of provided my entry into the industry and so you know that lasted for about three years 2020 is when you know D5 summer happens and you know ample forth is half of the volume on unisa and I'm looking at the unistop contracts and thinking that they don't make sense for rebasing assets so I start thinking to myself how would I design unisoft from scratch to be compatible with rebasing assets right you know being stock also has some you know Olympus Has revising assets revising is now everywhere nobody likes to admit it but it was actually quite a key innovation in token design but uh you know UNICEF V2 did not accommodate it so I started kind of experimenting designing my own contracts um I worked with a friend to kind of get them coated up and that was one of the most fulfilling things I'd done up to that point in a number of years so at the beginning of 2021 so a number of people I've been reading the essays that have been writing on on thinking Farm uh around kind of money design the properties of money how to think about you know amms and so on and so there were a number of investors kind of interested in supporting a project that I would create and so you know it took me a while to kind of come around to to doing that but uh yeah it was around the beginning of 2021 that I said all right you know I've had a lot of fun designing protocols I seem to be not terrible at it so uh I put together a team and that became Buttonwood yeah that's the long long story there you go that's great I love a good long story so one of the things that I saw on the Buttonwood site that I want you to talk us through is it's essentially the comparison of the historical Financial stack versus what exists in defy today and and I noticed that you know there were a lot of parallels or or um analogous items and then there were quite a few open items that you know that decentralized Finance or you know modern cryptocurrency doesn't have an equivalent for could you talk us through what that comparison looks like and where those where those gaps still exist yeah I feel like I have to pull up this timeline that I made uh really quick which is somewhere on here everybody thinks Rex is just asking random questions but I'm out here doing some research beforehand I like I like reading up the uh no okay I remember exactly now now I'm cheating I think it's totally allowed uh so the all right so let me let me begin with this so I because I wrote this up in 2020 and one of the things that I learned in 2020 is that the great monetizations right the ability to transact with items denominated in money is not a feature of all of human history it's really a feature of History post the plague right post the black death and you know that's kind of the first turning point I think in financial history so we've had pointed for a long time but for example in Europe your obligations your funeral obligations were denominated in kind right taxes were collected by the English crown right it was like you know you might owe three Honeycombs and one sheep and two bushels of corn right it's really after the disruptions of the of the plague because you have a labor shortage and you have kind of this loosening of the social ties that people start denominating both tax obligations and mutual obligations in in currency something analogous happens in China and that's driven a lot more by population growth and it's the big commercialization through in the Ming Dynasty uh which uh creates a lot of consternation in the in the elite Literati kind of Scholars uh right they think it creates kind of perversions and confusions um but uh that that's really the first great Innovation and for me in my mind right that really it's when you have Bitcoin and you can attach price to it that you can really start to begin that process of monetization at this point Defy is entirely monetized it's monetizing dollars right not in eth really uh but that's really the first thing that happens um the second thing that happens is what I would call the um kind of almost one-to-one relationship driven lending right and so this is uh Sovereign you know if we're looking at Sovereign Bonds in Europe the interest rates are really high they're like 25 35 which might sound familiar for people that are playing on defy but these loans are heavily collateralized right with land rules gold all this other stuff right it's it's not this under collateralized lending that people think is defines modern banking it's really just Merchant families uh you know lending against uh property that is held by this feudal class right so it's a class that has a lot of property and they just need liquidity so if that reminds you of Wales that got in on bitcoin or eth early have a lot of property they don't want to sell it but they need some liquidity this is where those markets come from and that's where you see Ave compound kind of come to the Forum they have exchanges I think um liquidity provision through unistop that's analogous to the rise of exchanges which happens a little bit later on the 1700s and 1800s um the pieces that are missing right in defy are pieces that came about earlier in the financial stack and the traditional Financial stack so bonds right the bond market is actually much larger than the equities Market uh and it was vastly more important in say allowing Britain to defeat Napoleon and the rise of Sterling as a world of currency anchoring that uh British dominance in general and in terms of being an asset class right it's it's it's very large and so you know that happens in and of itself right as a means of financing Wars but the follow-on effect is that state bonds are really good collateral for them creating private monies right so you set up a banking corporation you say that it's collateralized by railroad stocks or railroad bonds and then maybe some State bonds right and so you know as this kind of legislation gets passed the the state forces the banking system to use State bonds as collateral for these private monies and so you can sort of see how these things kind of Stack up right like you need the monetization first then you need this borrowing then you need people to discover bonds then you need exchanges then you need these money notes right the which are the banking corporations for private editions of money and then you know you you start at that point to start getting insurance and options which really only flours in the 1980s and then you get securitization in the early 2000s right we need to start tranching things into pieces what's different with difa is that tranching is actually really easy to do so you can put that all the way at the bottom and you can rebuild a lot of these instruments in a way that looks very different uh but still fulfill the same function so I hope that's a good walk through through I guess all of human Financial history uh that's a good summary no that's really good and so we've got we've got these pieces of the financial stack that or I should say these pieces of the stack that exist in uh historical finance that don't necessarily exist in let's say cryptocurrency or decentralized Finance the the next question that goes to my mind is what pieces that don't exist are necessary I mean are there are there certain parts that stack that decentralized let's just say decentralized Finance as as a whole can look at and say well we don't necessarily need that piece to function properly or to to grow and build yeah that's a hard one so I think options are overrated um I know a lot of the the nerdier geekier builders in D5 especially those with experience in high frequency trading or you know uh more advanced math would like to build options but options begin as a means of hedging real risk real economy risk right the word hedging I don't know if you guys know this but it comes from the the plants the hedges so when you're transitioning from a common land system right the commons to private land the way you delineate properties is by planting Hedges those Hedges kind of grow tall and they're kind of self-sustaining so the idea of hedging risk is really the idea that you can cleanly Define what the risk is and you hedge it and then you pay someone to take it right you sell it in that exchange basically um and so this is really valuable when uh you're engaging in Risky Ventures right whether trans Atlantic trade or long distance trade things that you get lost or if you're a producer if you have certain risk in your price inputs right from corn or you know whatever it might be and so up until the I believe it's the 1960s or the 1980s something like 90 of all options volume is actually with people that have real world exposure and they're actually hedging risk what happens unfortunately I think over the last 40 to 50 years is the options Market becomes a casino of sorts and so then the volume that relates to real economic activity is really small and so in my mind uh that's I mean it's an instrument that does not add much real value right you're not no one's really hedging or transferring risk in a useful way it's primarily a betting Casino in the same way that I think a lot of tokens became you know online on-chain casinos a lot of token systems became Mountain Casino so I would say I would hope people start paying less attention to options than doing something else more useful I think the one place where options are useful and they know companies like B scene have uh taking the lead on that is is uh for proof of work chain so Bitcoin right you do have exposure to fluctuating electricity prices a whole bunch of other things and so miners do in fact need to hedge their exposure to provide have enough cash flows right to meet expenses in the real world um and that was probably the one use of hedging that I thought was useful but that was provided by a centralized entity so it wasn't even on chain anyways so that's my take on that I cut off mod a minute ago so I want to turn it over to him but before I do that I will mention that in real life I work in oil and gas and let me tell you I spend a lot of time talking about hedging and options and I agree with you that I mean I've I have witnessed small mom and pop oil and gas companies lose it all because of options Reliance or poor hedging and not managing risk against price fluctuation and that is it can be super dangerous yeah I mean what happened in March of 2020 when people had oil options contracts and then suddenly it had to be physically settled and they were like wait I'm receiving all this oil but I have nowhere to store it because I don't actually use oil in any way and suddenly they were willing to pay other people to take the oil because they had nowhere to store it suddenly you say all right so most of the system is in fact not doing anything useful if in fact this is one of the outcomes it's absolutely right man um so all I was going to say to our listeners is that the you know the timeline that we're we're discussing we're talking about is on on button.foundation um sorry sorry about that that's what I wanted to say oh thank you yeah we'll make sure to direct everybody direct everybody to the site that no that's a that's a that's a good mention um man I Mania I feel like I feel like I want to just sit and have a beer with you because I have a lot of other thoughts on this exact conversation but I want to keep it pod related um so anyway to to to pull it back into um to Buttonwood so if buttonwood's goal is to provide a let's say a relatively accessible option for the multitude of the the financial stack and D5 how how do you do that do you do that through like specific tools that developers can access or how does that how does that work in a practical sense so I I had to answer this question at uh and then investor dinner recently uh what I would have told you a year and a half ago is that from a contract design perspective I think would provide a very good architecture for other products to then build upon right so the um what I would say the mainline events happening in the next month is uh there's a there's a team that formed and won the chain like hackathon called hourglass and they're building convertible bonds using Buttonwood contracts and Eric Vorhees says Dao shapeship will be issuing I think between half to a million dollar worth of convertible bonds on top of that so we were originally going to Tweet about it after Eric and SBF had that debate but then the collapse of the FTX kind of overtook all of that so uh but that's one you know one example the other example is the ample Force theme is uh releasing in December uh uh spot which is an inflation resistance or value token so it's basically a token that just its value increases based on inflation so it's an inflation hedge and so that market you know all these spots will always trade with a premium which reflects the inflation expectations of the market right so it's a little bit like tips and so you know they're using some of our contracts the challenging contracts to build these other products and you know we're happy with that um so that's one answer is we provide a very good architecture I think the other the other answer which is uh unfortunately that the true uh uh also real is that um I try to provide help I think to a lot of other teams in their contract design and so I think that also leads to some of the adoption of some of our contracts as well right um I think uh smart contract design requires attention to a type of uh elegance and simplicity which I think sometimes gets ignored and uh I think that the right mindset to design by the way so every time we hire one of our Engineers we give them these smart contract take-home assignments and I think every time the assignments come back I just never want to hire anyone uh but I think it's a learned process so you know none of the engineers that currently work for us would have worked for me uh you know would have not worked with us if it had just been up to me because I didn't like any of the solutions that provide but I think people kind of pick up on this instinct and I I think there's two pieces here I think one is really thinking about the robustness and simplicity of the instrument so you try to make it as small as possible and the second thing that really matters is thinking about decentralized Finance and traditional Finance as systems that evolve and converge but are never equivalent right so uh consider that Birds evolved Wings first and learn how to fly bats also evolved wings and learn how to fly but bat is not a bird I mean it doesn't need to replicate egg laying having a beak all these other features right they both involve similar functional you know appendages but they're not equivalent and I think D5 is very much like that and so I think one of the big leaps that happens that a lot of people don't make is really accepting the very unique environment that on-chain instruments have right everything's public there's no private information you have high transaction costs High information latency um so that's very hard and you know kind of to bring it all the way back this is why history is really important here right for most of human history Finance function in an environment with incredibly High transaction costs and Incredibly High information latency if you wanted to buy a bond in 1815 in London or 1780 whatever you would probably have to send mod on a ship to London to go by the paper security right to like make a bid in person at this Market the markets cleared once a day if you were lucky right even up to the 1950s the stock market only cleared once a day there was not enough volume so if you could build the entirety of the modern world in a high transaction cost High information latency environment you can surely build that on chain in the same way so look into history is a little bit like cheating you look at all the things that existed in that really tough environment and try to rebuild some of them some of them are actually useful I want to be clear that mods the brains so he would be sending me with very clear instructions he'd be saying okay Rex here's what I want you to do please don't mess this up again I'm just enjoying this I'm just enjoying this and listening but it reminds me of a of a story I think Manny and I I I actually don't remember it now quite well um or you know if this is uh as accurate as it is but I think sometime um in France um probably during the 1800s or maybe late 1700s is that they use the military post to send messages and there was this Trader who would then bribe or who bribed one of the you know whoever was the government uh uh employee that would send these messages and then they would get early messages on you know stock prices or news and they would be able to you know to to bet and you know basically Arbitrage or make money on the market then so yes I agree with you on the development of you know of markets and and the cost of latency and these things getting better and it is something that we're experiencing maybe in the infancy of you know in web 3 but it is expected you know to improve I think you you might be referring the famous apparently false story uh about the Rothschilds having uh early access to the news of the outcome of the wars against Napoleon and then either buying or dumping bonds based on possible because the sword in my head has Napoleon as well so it could yeah so uh there's a wonderful book called The House of Rothschild there's two vollings it's by Neil Ferguson it's the definitive treatment on the topic turns out that that's not true at least for for that specific uh battle but yeah there was an advantage in having your own Courier system which they could afford right their own system of mail which was faster than government use so um you know really what goes through my mind mainly is with you know with with your historical knowledge and experience and and what what Buttonwood is trying to achieve I think you can pretty quickly turn your Viewpoint from the the past towards the future you know so when you think about what is coming what projects and protocols and needs decentralized Finance has what goes through your mind what are you looking at or thinking about when you think about the future oh so many answers I can give you the let me break that down into two parts the first part is kind of what we're working on and then the second part is what I hope somebody else will do uh that we can't do so I think the Buttonwood ecosystem has proven itself really good at building kind of three types of things so one of them is these non-callable instruments most commonly known as bonds right in the traditional Market and an adjacent problem to that is uh mechanisms for settling exchange right so we deployed a uh two-sided auction recently and so two-sided auctions are relatively understudied because they're just not that common anymore that's that used to be how you create liquidity on Equity exchanges up until the 1930s right that's why you have an opening price and a closing price you accumulate kind of bids and then you settle at the end of the day and so you have two prices that get recorded uh once you move to a continuous auction model in the post-war era nobody really cares about these things and most of the researchers really on one-sided auctions and that's um you know in your classic textbooks which I have on here the the textbooks you know that people studying grad school yeah auction Theory by Krishna right it's primarily one-sided auctions it's kind of what you use in ad sales and all these digital marketplaces um and so most of the auction designs out there are single-sided uh you know whether they're Dutch or sealed bed whatever it doesn't matter but the problem of settling trades for bond-like instruments is actually also a problem in traditional finance that goes relatively it's still kind of like a wobbly space so equities trade on you know Central limit order books and you have market makers that provide liquidity and You by participating you're also providing liquidity right because your bid gets settled immediately but bonds have kind of this request for quote system where somebody just broadcast this you know request for quotes I have some bonds right uh and usually these are institutional players so you have a large amount of bonds and you're asking for bids and then you kind of settled these large trades in this way so the liquidity is not super visible and uh it doesn't look at all kind of like what you would expect from a central limit order book and so that's I think a question that we're still trying to solve so the double-sided auction can really help in being the primary market for a new instrument but it's unclear to us where the secondary liquidity will live it's at this point clear that universalopy 3 is uh severely deficient in providing liquidity for instruments of this sort and so that's kind of one of the things that we're working on is like other mechanisms for settling peer-to-peer exchange right and so we're working on building that the other thing that I think Buttonwood has been really good at which I think is uh probably the future of Finance is what I would call uh vaults so vaults are basically contracts they have three sets of rules one is for depositing and minting kind of deposit slips so you deposit some asset you get a little token out of it um redemptions right rules for bringing the the the slip back and getting something out of it and then the third set of rules is what's happening on the back end right is it investing it somewhere is it not doing anything and so you know I think the the spot ecos you know the spot contracts are basically of this sort all they do is they accumulate all these ample tranches and the spot token itself is just something that you just hold and so I think uh the space of outcomes that you can get by manipulating I think the three sets of rules produce very nice set of properties a nice open space I think full of problems and so there's a couple other things that we're building there around uh potentially you know fully on-chain collateralized stable coin designs uh you know backed by assets of this this sort and so on so and again you can see the historical parallels right you you create money notes when there's a shortage of money by taking long-term debt and stuffing it into a vault otherwise known as a bank uh or you know at xinjiang or whatever in China um so you know these these institutions exist everywhere in history but that's kind of what we're working on so outside of what what's happening in the Buttonwood ecosystem there's the second group of things that I think will likely happen now and so one of them is I think the the decline of centralized exchanges I think at this point what happened with FTS I think it's a great example of a pattern you see repeated all throughout history which is the crisis always begins in the most heavily regulated sector of the financial system right if you think about what happened in 2008 everyone thought it was the hedge funds that were going to blow up but it was the banks and because they held assets from mortgages which are also heavily regulated uh if you look at the Fallout of the volcker shock right in the end of the 1970s when interest rates Spike up to 10 and and Beyond is the Savings and Loans associations right it's the greatest number of bank failures since the Great Depression again pretty straightforward regulated institutions there's this broader problem in traditional Finance which is the government backstop provided to uh deposits uh and kind of runnable contracts of which banks or one type and I think what happens is because the bank continuously commits to backstopping demand deposits that sector just continues to grow bigger so when I was young you know 12 13 years ago uh as everyone does they read uh Lombard Street by Walter badgett uh and he makes the argument yeah it just happens yeah right and so here's the thing right you read that book the first time and you say yeah of course the central bank is the lender of Last Resort you backstop the banking sector so that there's no stability and I feel like now that I'm older I look back and then I say no the answer is exactly wrong it's the government backstop of the demand deposit Market that allows it to grow even bigger and every time there's a crisis everyone says oh well if only the the guarantees were slightly more then we won't have a crisis and this gets legitimated intellectually through the diamond and divid kind of article in the 1970s about Deposit Insurance saying that that's a much more effective way of backstopping the financial sector so now you add insurance on top of this and so you have moral hazard that emerges and I think the lesson from history is that you have traditional Finance is very opaque you don't know who the counterparties are and even in a digital era people don't know where the instrument ultimately cashes out in right if you have a derivative of tranches of conscious of tranches like you don't know where what the ultimate mortgage is right where they are so it's very opaque and I think that's why the government regulates it which I think is a mistake I think they could just not regulate it and let it shrink on its own I think crypto in particular Defy is unregulated but it's also transparent and so what you see now right is no one the government is not going to save FDX they're not going to save any exchange there's no bailouts coming for crypto because most people think it's useless and I think that's actually good because what's happening is you'll see an unwind of all these opaque relationships all these opaque entities will wind down and users are demanding things like proof of reserves right on chain what I think this will create is a pressure on exchanges to put more and more of the infrastructure on chain and at some point the exchanges become kind of this on-ramp layer that gives users access to infrastructure that exists on chain and that only happens because the government in fact does not provide any backstop to people like coinbase or you know finance and and so on so uh somebody I think might build a good competitor that's built around kind of these D5 first principles so that's not going to be me but that's a that's a business idea for your listeners I'd be more than happy to provide some seed funding for that and some advice but uh definitely yeah yeah I I think that is very very insightful um so we've already kept you over time one one more note that I will give something I really appreciated as I was reading through Prometheus information was how helpful the guides were and you know when I'm reading this I am in the process of talking with friends and family about what Defy is and and like looking for really good resources and I would say that the Prometheus resources the guides were probably some of the best that I have seen in terms of how relatable they are and how useful they would be for somebody that's very new to the space that's that's great to hear I mean they need to be updated um but uh I spent 90 minutes helping someone reconnect our old ledger to their computer the other day very very smart person uh but you know this this stuff is uh still a little bit hard to use so but uh but yeah so for me his research Labs is one of the projects that uh works with the Buttonwood Foundation to build under contracts so I would say we're probably their primary contractor in terms of building the core contracts uh but as I've mentioned before hourglass receives grants from the Buttonwood Foundation and as well as a couple other teams um but yeah that's kind of our role there perfect and and samaj just mentioned Buttonwood zero yes zero you know a zero liquidation web 3 Bond and use and you start this uh Manny by saying margin Leverage is best suited for the sophisticated Traders yeah and the solution here is you know I'm not callable or you know a bond that doesn't get you know liquidated can you maybe take us through briefly maybe discuss you know maybe the the idea or the motivation behind such a product but can you take us through you know through it again why do we need such a product and then how does it work yeah so margin leverage uh is in fact I would say 99.9 of all leverage on D5 so basically the way that it works is you put up an asset and then you borrow against the value of it and the reason it's called margin is that the value of your loan and the value of the asset are supposed to stay within above a certain margin right so if the value of the asset Falls below that margin you get margin called which means the asset gets sold in to pay back the lender uh and uh you know that's Hobby and that's compound and in the traditional world that's what your brokerage would do right you put up some uh stocks for other types of security and you borrow against them and what's funny is that there's this obsession with capital efficiency people you know are trying to reduce that margin to ever smaller amounts and I think light uh liquidy for example that's kind of their pitch the problem is um margin Leverage uh has this this property which is really just a mathematical property which is that it has asymmetric exposure to the downside so if the value of our collateral Falls sharply because of high volatility you get liquidated which is equivalent of selling it at the lowest price that it hit uh and then if it bounces back up you don't you don't see any gains and of course the value of your collateral appreciates while you have borrowed you know you get no benefit from that either and so what happens is uh and there's many studies on this but you can model it uh very simply if you just have a wobbly line and then kind of a filter at the bottom is is that uh on average the average investor uh their returns are worse if they use margin leverage than if they had just not used leverage and it's entirely because of this asymmetry that leverage introduces into their portfolios and so you know this is kind of obvious when you explain it this way uh but and then it's a little bit more obvious if you think about how traditional financial markets are structured which is almost nobody uses margin leverage in the real world right only HED funds really use it and people on Robinhood governments don't borrow this way companies don't borrow this way there's you know 95 of the market is fixed duration non-callable debt the perfect example of not gullible that is your home mortgage if your house goes down in value the bank doesn't liquidate your house and kick you out I mean that would be ridiculous uh you might choose to not pay your mortgage anymore but that's a default that's a very different type of uh condition and so uh what xero seeks to do is to provide an alternative to margin leverage online uh on chain and so uh right now the way that it's Struck it will be permissionless soon but the way that is structured is you can take your commodity like digital assets like Bitcoin Heath ample and you trunch it so you create a senior claim and then your Equity claim and the senior claim is basically like a mortgage and so you sell these mortgages in the Zero Market and you get your loan and so it's like a home mortgage right you have you know half of the value of your home the the safest half is pledge to the bank or in this case your lender and they have given you stable coins and someday in the future you'll pay back the stable coins and get your claim back and if you don't pay back then that's when in fact the house gets repossessed or in this case the collateral gets liquidated um and so that's basically what we do there that's what the Zero Market is uh there was an earlier version of it called moon cake which launched I think Christmas Eve of last year because the deaf team was running late on it but uh that was the original iteration of it so it's it's basically the the nicer version of Mooncake um yeah so that's zero so it just allows you to borrow non-callable debt not on margin liquidation free against Bitcoin Ethan Apple okay many if we can like talk about an example and you have that example on the white paper and then we we talk about you know let's say someone wants to come and borrow um against let's say you know like a hundred dollars and then you you would split that into two trenches you know the Z zna uh and and as you call it you know the senior uh trench and maybe you know the one that's like that's safer you give an example of what happens if you know the price of eth in this example you know goes up or down um you know by fifty percent of the drops by 50 percent um and in the first example if it drops by 50 then you know um the the Z trenches are the ones that basically absorb all of the volatility and then you know they're worth nothing or they're worth zero right but the eight trenches are still worth you know what what they're worth um and then if the opposite happens and the price of if uh goes up um then the Z trans is the one that captures the increase you know again in volatility but because you know the price increase so now they're worth more they're not worth zero they're worth you know ten uh but then the Z uh the Z trench um um or sorry the eighth ranch or the sift wrench is the one you know it's still it's still worth five dollars uh that didn't change can can you so you know the air transfer is meant to be the safe the safe one right because the Z2 matches is what's absorbing uh the volatility um in this example the price of eth went down by 50 to well if it goes on by 80 or 90 so that means the eight range would eventually still go down in price is that correct so it is safe but it still has the risk of losing it you know under extreme volatility yeah so it is I mean when you mortgage your house right if it goes up in value the homeowner gets the appreciation if and depending on how much you mortgage the house for you know if the home goes down in value the bank should still be whole but let's say the home gets destroyed and you didn't insure it right so the home goes down to almost nothing right it is possible that you know when the bank forecloses on the home and sells it on the market it's not going to make back what it lent you right because the asset has no value or you know the value of the land but you know it's it's not nearly enough to cover what it lent you so that's entirely possible it's not it's not risk-free and so one of the what's important there is setting parameters that make sense right like you know most uh homes are relatively safe so the bank can lend you up to 70 or even 80 percent of value at home I don't think people should be lending on 80 of value of crypto I think it should probably be like 30. you know it depends the market should should sort that out on its own but it definitely should be less I think than 50 percent Anderson I guess my two questions now would be is the thesis and and this is what you've mentioned uh or maybe alluded to earlier on um is that having such a system or having such a product with you know that's not callable or doesn't liquidated creates an overall General let's say a stable Stable Market um that's you know um more uh has more appetite for you know people to be in just given that you know it's less or reacts better to volatility um let's say but if the price uh you know in our example again if it drops down by more than 50 is there anything stopping those who are holding the a trench from you know selling it and effectively you know liquidating it uh so I wouldn't call it liquidating it would be like your bank saying yeah you know Mod's a deadbeat he's not paying back this this mortgage we're gonna foreclose and only recover like I don't know maybe in the best case 80 cents on the dollar so then your bank says Hey Rex Manny you guys want to buy this mortgage on 60 cents on a dollar and we're like okay that sounds pretty good you know we'll make we'll put in a little bit of effort and maybe hope to get an extra you know we'll get the 80 cents but the bank can just sell it uh but that wouldn't affect actually what's happening to you in terms of your own home and what's going on with that process it's you know you can sell and trade back and forth all these assets on the back without triggering a liquidation or foreclosure or whatever that's going on with you and so Banks do this all the time right they sometimes sell the loans of their riskiest borrowers they sell it to another firm because they just don't want to deal with that or they think it's too risky clear okay those who hold the the easy trench uh and and as we said the Z transfer is the one that you know captures uh most or you know captures the volatility um would you describe them as kind of like they're leveraged just given that you know they capture all of the upside and the downside is that equal to it yeah so so this is again I I think you're getting to a very profound point which is that tranching can create all sorts of instruments right it creates mortgages it can create options it can create this inflation resistant safe asset it can also be interpreted in some ways as leverage right because you have now multiplied the exposure that you have to the price movements of the underlying asset in this case your home right so getting a mortgage is going levered on the Home Market basically um or on crypto so yes it can be interpreted as leverage it's not pure leverage on its own but it does have that property and I think that's a very good interpretation now I think it's great and it splits uh you know and then you know different users or different participants have different options on on what uh what they seek or what what you know fits their appetite thank you man for explaining this no no no problem at all this is great I I know we're short on time so many for just the last minute I want to just turn it over to you is there anything else you want to cover or you want to mention or talk about floor's yours uh what we're trying to work with uh one of the Beanstalk family teams uh irrigation protocol so hopefully who end up doing something with you guys using the pattern word contracts and irrigation protocol contracts um I heard that music crew Yep they're good that's what we wanted yeah I mean at this point I at this point it's very likely that most of the TV element comes from projects that I didn't actually directly build which would be really really good so Buttonwood was born decentralized first right the foundation is fully decentralized already I'm not part of it um and we have all these teams building on it but uh yeah hopefully Prometheus comes up with a killer app uh at some point but yeah we're working on on something with irrigation and I'm not entirely sure what the architecture of that will be but you know hopefully we'll have more details uh for you guys soon we'll keep an eye and we look forward to it whether it is you know something that has to do with Beanstalk or just you know Buttonwood uh and premises in general perfect thank you so much for having me guys thank you man yeah Manny this is a pleasure thank you so much for joining us you can find Buttonwood on the web button.foundation and on Twitter at buttondify you can find Manny in a whole bunch of different places probably the best are on Twitter at M Rincon Cruise that's m r i n c o n c r u z and on his personal research website thinking dot Farm we'll also have more links in the show notes the beam pod is a production of Beanstalk Farms a decentralized autonomous organization you can find us on Twitter Instagram medium Discord and our home on the web at bean.money you can also find me on Twitter at Rex the bean and as a final reminder this podcast is not Financial advice thanks again for listening [Music]