Bankless - How Re is Rebuilding the $1T Reinsurance Market with Stablecoins | Karn Saroya & Avichal Garg

Episode Date: June 18, 2026

Re is bringing the $1T reinsurance market onchain. Founder Karn Saroya and Electric Capital’s Avichal Garg join David to unpack how stablecoins can become a new capital source for insurance, why real-world reinsurance may offer crypto’s missing “real yield,” and how Re is using Ethereum, smart contracts, and AI to compete with legacy giants like Lloyd’s of London, Munich Re, and Swiss Re. They also discuss the RE token, the future of onchain capital markets, and why stablecoins could become the backbone of a new financial system. --- 📣SPOTIFY PREMIUM RSS FEED | USE CODE: SPOTIFY24 https://bankless.cc/spotify-premium --- BANKLESS SPONSOR TOOLS: 🔮POLYMARKET | #1 PREDICTION MARKET https://bankless.cc/polymarket-podcast 🧭OKX | TRADE, EARN, PAY to OKX | 120M+ USERS WORLDWIDE https://app.okx.com/join/USBANKLESS 🦊 METAMASK | DOWNLOAD NOW https://go.metamask.io/BL-Pod-Download 🌐BRIX | EMERGING MARKET YIELD https://bankless.cc/brix 🎯THE DEFI REPORT | ONCHAIN INSIGHTS https://thedefireport.io/bankless --- TIMESTAMPS  0:00 Intro 2:13 Blockchain Reinsurance Edge 4:12 Stablecoin Capital Markets 9:17 Efficiency Beats Incumbents 13:02 Rewiring Insurance Plumbing 16:24 Durable Startup Advantage 23:26 Reinsurance Market Size 30:09 How Reinsurance Pays 32:42 Capital Stack Mechanics 35:52 Leverage and Yield 40:02 What $RE Tracks 41:34 Tranche Yields 42:36 Productive Capital Returns 44:47 Looping the Receipts 48:01 $RE Token Governance 51:26 Roadmap to a Billion 52:13 Onchain Adoption Ahead 56:02 The DeFi Mullet Future --- RESOURCES  Re https://re.xyz/home Karn Saroya https://x.com/karnsaroya Avichal Garg https://x.com/avichal --- Not financial or tax advice. See our investment disclosures here: https://www.bankless.com/disclosures

Bankless station, I'm here with Karn Sororia. He is the founder and CEO at Rhee. Karn, welcome to the show. Thanks for having me. Appreciate it. And back on the podcast today, we're getting some extra help here. Avichel from Electric Capital, who is an investor in Ria. Avichel.

Welcome back to the podcast. Good to see you, man. Thanks for having us. Karin, I'll just start you off with the easy layup. What is Rhee? Yeah, we're an on-chain re-insure. We take in stable coins. Those stable coins find their way to primarily U.S. insurance companies.

That capital, that's some of money. right insurance business, they collect premiums, percolates all the way back to this on-chain capital there. And that's what it is. We back 35 insurance carriers to do a half a billion in business and should grow to about a billion over the course of the next seven-ish months. What do we need to know about reinsurance to be productive in this conversation and why is a blockchain, why are smart contracts the right substrate to be? build the frontier of reinsurance? Yeah, yeah. It's, look, it's a massive boring business. There's about a trillion in reinsurance premium that's processed annually across, you know,

dozens of very large reinsurers, Munich, Greece, Swiss Re, Lloyds of London. All of it is basically just a pot of opaque capital. It's attested too kind of asynchronously. And the product that's that they sell is a promise. It's a promise to pay their insurance company customers if things happen. And then the second part of that is to prove that they can pay at a given moment's notice, right? And so being on-chain and utilizing on-chain capital is probably the most elegant use case of, in my mind, on-chain capital, and that it fulfills both of those things. We take in capital that anyone in the world can see at any given point in time, regulators, insurance, you know, insurance company customers, the insurers themselves, anyone with the computer can see that we are good for

their promise and that we're solving at any given moment in time. It's also a massive pool of capital that can take diversified risks and the cash rolls back into this pool of capital being transparent, you know, something that's never existed before in this space. So what part of the capital stack around reinsurance is blockchain tech doing this on smart contracts? You know, you're built on Ethereum using stable coins. What part of that are you improving? Now, is this like a, Are you guys simply improving the business model margins by using blockchains as your back end? Or what's really the secret sauce? What's the X factor here?

Yeah. So in two parts, if you think about reinsurance as a product, it's another capital source for insurance companies. The first part is the manufacturer of the product of reinsurance, the expense ratio, is lower. We're a much higher operating leverage business. We have less than a dozen employees will be on track to be a multi-eastern. billion dollar insurance market in comparison to legacy reinsurers that have tens of thousands employees, legacy business, legacy infrastructure. That's a meaningful difference in just the expense ratio load. And we're the first to find scale with on-chain capital and build transformers

into all DeFi protocols that now use us or we're composable with to pull in capital in a way that hasn't been done before in this space. And our viewpoint is at scale, as we kind of proliferate through those moral-end markets as folks are using our products on Pendle and the like, that we have a cost of capital as competitive, if not superior, to practically every reinsurer in the world. And so there's nothing special about money that is used to security collateral, to securities obligations. And we think we could just form that at a lower cost to a greater extent

than anywhere else within traditional insurance. Avichel, when you were talking to Karn looking at Ree at Electric, you're a VC, you audit things, you kick the tires. What got you excited about what Rhee is doing, what it can do? Yeah, so maybe zooming, because you know, VCs are very high level. So zooming out for a second, the thing that, there are like two things that kind of caught my eye about this particular thing. And it's a, you know, if you step back and think about what is Rhee,

what I think the way to think about it is there's this regulated fintech business. And it's a registered Cayman Island. You have to get licenses. There's regulators. There's rules you have to follow. And then there's the on-chain piece and the smart contract piece. And so kind of from an end consumer perspective or an end customer perspective, this just looks like a reinsurance business, right?

It just solves the same problem. But there are two things behind the scenes that make this work much, much better. So one is the fact that if everything runs on smart contracts, auditing and regulatory compliance become much cheaper and easier. You know where your money is, you know how to track it. There's a ledger. Everything's super clean. And a lot of fintechs are about how do you move the money around and where's the money sitting.

The second is, I think the stable coin capital market piece is really, really, really interesting. I think we have this, like a lot of people have the concept of stable coins and they're going to move money around and people want dollars. And the way we think about this is, okay, you're going to have, today you have a couple hundred billion. You're going to end up with $5 trillion of USD stable coins on chain. And all of these people are going to say, yes, I'm so glad I have dollars now. Wouldn't it be great if I could make 4% using treasuries? And then immediately a large percentage of those people, I think 20, 30, 40, 50, maybe 80% of them will say, wait a second, I would like to make more than 4%.

How do I do that? And so they'll go hunting for yield. And so the really interesting thing about stable coins in my opinion is that you've created a new capital market. You're going to have $5 trillion hunting for yield. And they will want products. And so from a business perspective, yes, you have a fintech, but if you look at a lot of these fintech, you often have a very big capital markets function because so much of the job of a fintech

is going to the capital markets and raising all the time. This is why Blackstone exists, right? They take all this debt, they tranche it, they securitize it, they sell it to the capital markets. There's pension funds on the back end. It's a whole apparatus. And what you've done is you've collapsed that whole thing now into a smart contract. And the stable coin markets are just the capital markets now. And so I think the future architecture of fintechs look something like what REE is now, which is on the front end, it's a regulated fintech to the end

because customer, it just does the same thing, it just solves the same problem. It's built on smart contracts so that the operations of the business are much more efficient from a regulatory compliance perspective and there's AI agents and stuff built in

and Karp and talk about that. And then you have this capital markets piece, which is a huge part of what it is to run a fintech, and that is just the stable coin markets on chain. So that architecture, I think, is what the future of fintech looks like. And I think Rhee is the first that's actually sort of pieced it all together

and it's baking your work. So I think what you're saying, in VTroll, correct, if I'm wrong. And then Karn, I think I want you to also hop in here is that, you know, if there's $170 billion of stable coins on Ethereum, that number is growing, everyone's bullish on the total supply of stable coins. In the typical reinsurance world,

providing capital to reinsurance is kind of just gate kept. It's, you know, it's stratify. It's gate kept. It's not accessible to me. It's not accessible to most people on the internet. And it's kind of just like the siloed Wall Street thing where you already need to have a billion dollars and know who to talk to.

And Avutal, what you're pointed to is like, oh, there's this reinsurance business. There's actually two parts to re, we'll get into this later. There's the on-chain part and then there's recover, which I think is what you were alluded to, if you'll, it's just a normal reinsurance business. That part's nothing new. It's the on-chain part that's new.

And so instead of going to extremely well-endowed financial institutions who have a ton of capital who are interested in the yields that they get from reinsurance. What Karn is doing here with Rhee is simply pointing that opening, that funnel, that access point to on-chain stable coins. And now whoever has on-chain stable coins can get access to the yields that reinsurance provides. And so that's the democratization thing. That's the on-chain, that's the blockchain ethos thing. Is this correct? Yeah, that's right. So if you think about who's supplying capital this market right now, it's pension funds, it's sovereigns,

it's ultra high net worth individuals and certain family offices that want some exposure to a market that's completely uncorrelated with equities, with crypto, and the like. And what we've done is turned this into something

that cuts up slivers of insurance risk and makes some tradable across all of defy, right? So there's secondary market trading of this completely uncorrelated, you know, economic value stream that now exists. And so, yeah, that's a good characterization. The thing I would add, David, I think is, so there's the customer benefit piece of this,

which is, okay, now you can democratize access to all of these, so from the capital market side. The other customer, the other side of the market here are the people that are purchasing the reinsurance. And if you think about a lot of fintechs, again, sort of 10,000 foot, 50,000 foot view, you know, you can't really create or destroy risk, right? And so if you think about for lending or you think about reinsurance or insurance markets, like there are like three components to it. There's the base rate and you're not going to beat treasury yield, right?

You just can't borrow money lower than that. There is the risk that you're taking on from a customer perspective. So if you're underwriting workers' compensation or you're underwriting a 760 FICO score credit borrowerer on a consumer side or a $580 FICO borrowerer, that's just a certain percentage that gets, you know, computed into saying, like, I have to lend you money to certain rate to ultimately make this risk make sense. And then the third is the operational efficiency of the business. Right. So if the business is more efficient at running the business for whatever reason, AI, crypto, stable coins, whatever, that then gets packaged into the net yield that the, that the borrower of that money, the recipient of that fintech's benefits and as a product has to pay.

Right. So those are the three components. So you're not going to reduce the, you know, as a as a startup, you have no control over the Fed funds rate, right? You don't have any control over the rate. You don't really want to try to underwrite better. Like, I think that's a huge mistake that a lot of fintechs make is they try to say, oh, here's this pocket of people and FICO isn't good enough or like, hey, all the other people would have been doing reinsurance for 25 years or dumb. Like, we have the better way to do it. That's usually not the case. Like, usually these are pretty sophisticated market participants that have underwritten the risk correctly. So the, the place where you have leverage as a business to ultimately compete as a startup is to be more

operationally efficient. So like from a, from an ethos perspective, the I'm going to hit the capital markets on chain is like as very compelling in terms of democratizing access to phenomenal yields, like, you know, 12 to 25 percent yields for the average consumer. They can now just participate. But from a business perspective, the thing to understand is that because you can do smart contracts, which means you can do your regulatory function much more easily and efficiently, and because you can have a capital markets function that just says, here's a small contract, don't money into my smart contract and now I don't have to hire a dozen people to go pitch all the pension funds all the time and pay these people $500,000 a year and yet, yada, yada, you have operational efficiency

in your business. You've actually lowered the cost of running that function inside your business, which then means you can go offer a lower rate on your reinsurance to those same customers, which means you can actually eat market share. So ultimately, from an investor's perspective or a founder's perspective, what's compelling here is that the operational efficiency allows you to offer a product that's better, cheaper, faster. And as a result, you can need up market share. And as a result, you have, as a startup, you have a shot at competing. Because historically, if you wanted to go competing these capital markets, you need to hire 15 people to scale. It's just like a really brutal exercise. And now you have an operational efficiency advantage. Like, I think that's,

that's the other piece of this that makes this, I think, the right model for fintech startups going forward. And this sort of aligns with, I think, what we're seeing broadly, you know, AI and, you know, modern platforms allow the firm to be smaller and operate at a higher scale, simply because every individual has just more leverage to what they can do using, using crypto tools, using blockchains, using stable coins, and then also using AI, keep companies small, let them punch above their weight class. We're seeing this trend. We started this trend in crypto with things like Uniswap versus NASDAQ,

100 employees versus 10,000. And now with hyperliquid, even versus Coinbase, is like 14 people versus another 1,000. And so I think the firm is getting smaller because of AI and these tools. And so, you know, everything you're telling me of each other makes a ton of sense. You know, we can operate more efficiently.

We can disrupt, you know, slower moving gargantuan incumbents in the space using the modern tools. But is that like a thousand X opportunity? Or is that just like a 30% efficiency upgrade to a traditional business? Like, why is this, the big thing rather than like the marginal improvement thing. I think this is rewiring of

ancient plumbing, right? So, you know, just something about fintech insurance companies, a big part of this is, hey, sophisticated underwriters, every risk has a price. There's a convergence to ultimately what that is and maybe excess economics or rents kind of get stripped away over time. Part of the argument here is like, again, twofold. Production of the product cost comes down. So marginal cost of production comes down. And if you have a set of integrations or edge like we do into internet capital markets, you kind of subsume the market over time unless people can kind of competitively respond quickly. The second piece is, you know, while underwriting converges kind of to what price, you know, what price every risk should have,

responsiveness differs between each of the market competitors, right? And so if you've got these AI workflows that take in information at the topic where the risk is originated or sold, that passes through a bunch of different intermediaries all the way to the capital, all the way to the risk bear. That happens at differing rates. And in places like insurance, it happens incredibly slowly. So there's a future here where both like AI and on-chain capital make a really step function difference to the fundamental plumbing that moves trillions of dollars.

So it's not a 30% improvement. It is the potential to eat an entire industry. I think what I would add to that is specifically the market dynamics with financial products are a little bit different than, let's say, a SaaS business or a media business or some other businesses. And the reason is that like a 10 basis point improvement in something like insurance is dramatic. Right. Like that is enough where you can go out, compete everybody else. because the market participants themselves

are often dealing with such large numbers at scale that a little bit of efficiency, like 30% is like you are like $100 billion company, right? Like you are going to crush if you're 30% more efficient as a fintag business. And it's because the market participants are thinking about numbers in very small increments, right? It's like if you can improve things

by a couple of basis points, you went, like everybody will just switch over to you. And it's also because your counterpart is often are very, very rational. So, you know, if you're talking about a business, is saving a little bit of money on something that they have to do every year.

They're totally going to do that. Contrast that with, like, do you really care if you're going to save $10 a month or $20 a month relative to your $100 a month air table subscription or your Notion subscription or your Slack? It's just like too much work to rip it out. And so that's not why you make decisions that way,

but for these financial products, lending, I think about a mortgage. Like how do people decide where to get a mortgage? It's like, well, it's 6.3 over there and it's like 6.25 over there. I'm going to that first cent, right? It's like, these are tiny, tiny improvements that you have to make in sort of the net rate that somebody pays and the entire market will flow. So if you're right, Avitral, I think what is going to happen on the Rhee side of things, you know, assuming in a vacuum that the concept and theory of REE is correct, that, you know, re is only a 30% efficiency upgrade in one direction, but the size of it grows very, very, very large. that if you are correct about your theory, that would be the outcome, correct?

That's right. And not only that, but I think this is what's so compelling from a startup perspective is that if you manage to do this on the stable coin side with the on-chain capital markets the way that re is,

I think it's going to be very difficult for the incumbents to tap into that same efficiency. Right? So like everybody's going to do AI. All the intex are going to do it. The banks are going to try to do it. And I think that on the startup side, you execute faster

and you have a real shot at workflow efficiency. So every startup is going to do that. I think it's going to actually take the banks and the insurance companies and mortgage brokers and helocks and credit card companies. It's going to take them a long time to figure out how to tap into the on-chain capital markets. And so I actually think that's a durable advantage. So not only can you get big on the back of this, but I think you're going to be competing against incumbents that don't know how to do it at all

because they're starting from zero. And they're starting actually even farther behind than they are on the AI stuff. because they have no, they're like, I don't know how crypto works, I don't know how Ethereum works, I don't know how on-chain capital markets work, I'm kind of waiting for clarity to happen. There are all these sort of points of friction

and compliance and tech and whatever. AI is already greenlit, right? So everybody's starting to move faster on the AI stuff. So actually the companies that figure out the AI piece and the on-chain stable coin piece, the way that Rehas, actually have more of an advantage relative to the incumbents. And so you get big and you just start eating up

the market share from the big guys because they're not going to be able to tap into the same efficiency pools that you are. They can't, basically like with AI, I think there's an argument that the incumbents will be able to gain those efficiency improvements and that OpenAI and Anthropic have these forward deployed engineering teams that they're building because that's where all the money is. So they have to go to the big guys. They have to go to the incumbents to get the workflow optimizations.

And the AI companies are going to try to make that happen as quickly as possible. And so that's a tricky place to be as a startup. Now, I think you can still obviously build huge companies there. You can move a lot faster. But there's like there's no forward. deployed engineering organization that's going into insurance companies and teaching them how to do startups to do stable coins right now. So I think this ecosystem actually has a more durable advantage because the incumbents have no idea what they're doing right now with the stable

corn markets. That is the bigger idea, by the way, right? So like while I own a reinsurer and the protocol controls an on-chain, you know, vast capital ocean, what will, and is already happening, Bermuda reinsurers, Cayman reinsurers are approaching us to be able to tap that pool, right? And so it starts to behave much more like a Lloyds of London where you have this common capital pool that can feed any insurer and any reinsurer in the world. And that is a massive idea. I don't know if you want to go in this direction. I think this is like a fascinating thread to pull on, which is you see this in a lot of markets. Like I was an intern at Amazon right before they launched AWS on software engineering your side. It was really interesting because

the CTO Werner was already talking internally about how they were going to launch these compute products because Amazon was built on all that infrastructure. And they were just going to take those things that they were using as the first customer and open them up to everybody else. And so I think the other thing that a lot of people are not fully appreciating right now is I think there are a handful of fintechs. You're kind of seeing Ramp do this with AI. But I think there are a handful of fintechs that are figuring out that the AI workflows

and the crypto workflows, like Stripe is kind of trying to do this, are actually infrastructure. And if you solve it for yourself and you really get the file a little going, then you can go offer that as your AWS to everybody else. So I think a lot of these fintechs, if they're done well, actually I end up having a second act. So the first is like, can you be a $10 billion company on the back of reinsurance or helix or credit cards or whatever? And then your act, too, is I've solved my own problem.

And so now everybody else in my industry should be running on my platform. And so like the eventual thing here, I think is there will be these choke points that are like, hey, in in Karin's case, you know, Munichry and Swissery, if you want to access the on-chain stable, coin markets, and this is a multiple trillions of dollars of capital markets sitting here, at a net lower cost than you can get in other places, you got to go through our infrastructure. And now you're monetizing the whole industry. I think there will be a handful of fintech that figure that out, you know, per sort of industry

slice, whether it's insurance, reinsurance, credit cards, helox, mortgages, like, whatever. I think people will start to figure that out as infrastructure as well. And I think that'll be the Act 2 for a lot of these fintechs. And you're saying that that could be, in theory, act two for re here. So like the, if we're extending the metaphor, Amazon once upon a time sold books. And now it's Amazon and re once upon a time sold reinsurance. And then it becomes what? Sorry.

Sorry. Yeah. Yeah. In an internet capital market for all of insurance, right? So Lloyd's, it's, uh, you know, the, the, it might be, it might be worth talking through the history of Lloyds. Yeah. Yeah.

Yeah. Yeah. Yeah. Yeah. Like, interesting Lloyd's London is as a business. Yeah. Roughly 330 year old insurance marketplace started in coffee houses. in London, you know, folks who were attempting to self-insure transatlantic trade morphed into

one of the largest insurance markets in the world. They have roughly 103 distinct underwriters from around the world that bring in business. The Lloyd's market, much like the Re-Protocol, dictates who the acceptable counterparties are, lines of business, capital requirements, has a governance council that kind of oversees all of this, and behind it, a very large pool of capital that secures the network for a lack of better determined. So a ton of our own inspiration comes from Lloyd's. And that itself is, you know, it has, is licenses at all practically every country in the world, has laws that have been drafted that enable local insurance companies and underwriters to be able to transact on the network. That's the North Star for us.

It's really interesting. Like, I'm such a huge fan of going back and reading the history of finance, because finance and capital markets are technologies to allow us to coordinate and share risk and then go pursue really big opportunities. And so, I mean, Karn, correct me if I'm wrong, but I think like, if I say anything incorrect here, you're the expert on this. But, you know, I think if you look at Lloyd's, it looks like a DFI protocol. Like when I first, like, understood it when Karn first explained it to me, it was like, holy shit, this looks like a D5 protocol.

There's like a bunch of money sitting here. There's like a governance council. People come in and sort of like pitch their idea to the capital market pool. You sort of like section off the wrist. You squint at it and you're like, this looks kind of like morpho and Ave and silo. And you know, you start squinting at it. You're like, holy moly, we just like reinvented Lloyd's London on chain, right? And they just look so similar.

And so for anybody who hasn't gone back and read the history of this stuff, I think reading about like the joint stock company and the Dutch East India company and Lloyd's of London and these things that have been around for hundreds of years, you look at them and you're like, oh, we're just doing the same thing now with far contrast. Like the structure of these things as protocols looks very, very, very similar. It very, it rhymes. Like you can look at it and say, oh, this, I get why this is going to happen in a very particular way. We don't say it too often anymore, but we used to say it quite frequently on bankless is we are just beadwriting the history of money and finance on chain. Yeah, including human coordination. Carn, I want to learn a little bit about the reinsurance market. Just how big is this market?

How many, how much dollars change hands? What kind of metrics can you put behind the market that you are going into? Yeah, so a trillion in premium globally. What does that mean, a trillion in premium? That means like a trillion dollars gets paid? Yes, correct. So premium, there's policies out in the world that are sold. In our specific case, we cover very plain, below volatility, stuff like auto, home, workers' cop, you know, a commercial property, the basics.

Because you're getting started, right? So you're starting with the basics. Correct, yeah. So nothing that's super high volatility, nothing with a binary outcome that says we destroyed capital. or we made a multiple of our money. Certainly, like, you titrate that type of stuff in at scale, but as of right now, low volatility. So a trillion in reinsurance.

What I'll say about that, what's really nice about that, I think, is that it's law of large numbers, right? So you're not talking about, like, oh, hurricane hit Florida or there's wildfires in California. That stuff is really hard to model, and you have tremendous loss risk. But, you know, like, what are the odds that, for some reason, I mean, maybe, like, if an asteroid hits the Earth or something,

there's a bunch of workers' comp policies in Massachusetts and Florida and California that have to get paid out all the same time, but a law of large numbers, that just doesn't happen. And so what that means is the business is really predictable. And so then as like a capital provider into those markets,

you're, you know, the bounds of what you can expect are very, very well understood. Like you can run a spreadsheet model and it all times. Right, because once again, we are not competing on Karn and Reisability to underwrite. We are competing on the ability

to attract a large amount of capital to take advantage of the law of laws numbers. So we're starting with the basics. We're starting with probably the least volatility thing ever, kind of just to like prove out the market. And like, I don't know, maybe Karnas, things get larger, you can ensure more exotic things. But like, we'll save that for later.

Yeah, that's right. You want to build the muscles. You want to attract the underwriters around the world that have the specialty in that particular domain, right? So if it's earthquake or if it's flood or it's fire, what you want to be is the capital source or the most sophisticated actors in the world to be able to tap this and deliver economics

rather than trying to build that muscle entirely yourself. Yeah, so massive reinsurance market. This sits below an even bigger insurance market. So we're talking about $7 to $8 trillion in just insurance premiums across health, life. Normal insurance. Property and casualty. Yeah, correct.

And so this is the stuff that you will buy from your broker or you'll buy on the internet. And, you know, what you'll see is that even that starts to over time kind of start to convert, right? because if you extract everything away, all of it is kind of just supported by a massive pool of capital. And there'll start to be fuzziness around those edges. So it's incredibly large.

I think it's roughly 12% of global GDP. 12% of global, so a global GDP is the one trillion in premiums that are paid? No, the entirety of the insurance market. So the 7 and 8 trillion of insurance plus the trillion. One framework I heard at one point,

so I can't take credit for it. I think it might have been, I can't remember it was, so I don't want to misattribute it, but you can literally even think about the government as an insurance company, right? Like, what is the government ultimately doing?

It's like, you know, fire and police and the army and like, you know, provide services and Medicaid and the military, and specifically insurance services, right? It's like just in case something terrible happens,

that's the stuff the government should do. So I think there's an argument that I actually like, it's not like 12% of GDP, it's actually like 80%. Because it's like all the whole thing. Yeah. Because it's like all. All of the stuff the government actually backstops ultimately.

It's basically like the government is a giant insurance company. Yeah. But both guns. Yeah, there's an insurance company with guns. Both guns. Yeah, that's right. $100,000 is up for grabs. Metamask and Ando are giving it away in the Ondo trading competition.

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And now it's live inside the United States. And new users who deposit in trade can get up to $500 in Bitcoin through the bankless link. The link is in the show notes to learn more, not investment advice, not available in New York or Texas. Some exciting news. We are launching a new podcast to help people figure out the crypto cycle, how to know navigate it. The best crypto cycle investor I know, his name is Michael Nato. He runs the Defi report. This is the guy that sent me a sell alert before the 1010 price drop happened. His cycle analysis has been absolutely on point. I've been following him for years. And this year,

we started recording weekly podcast episodes. Each one we get into his portfolio, what he's holding, the market structure, entry targets, fair market value of Bitcoin and Ether. And where we are in the cycle, there's new episodes that are released every Wednesday. They're 30 minutes. They're short. They're punchy. I think this crypto. cycle is harder to navigate than most. So let's do it together. Go subscribe to this podcast. Search the DeFi report wherever you get your podcast, YouTube, Apple, Spotify, or find a link in the show notes. There's a new episode waiting for you now. Okay, just to kind of like keep on illuminating this for listeners, because like, you know, we think about finance and money a lot on bank list,

but not really insurance. So like I'm a consumer of a certain number of insurance products. I have renters insurance. I have homeowners insurance. I have auto insurance. And this is primary. insurance. And so there's a specific insurance company that, you know, will pay me out if I get robbed or my car crashes or my house burns down or something. But you insure those, those people. And so you are a step further away from the risk, but you also need to be larger as a result. And so you're, how do you get paid? How does reinsurance get paid? Complete this, like, flow. Yeah. Yeah. So insurance companies buy reinsurance for a variety of reasons. like maybe they feel they're too concentrated in a particular, you know, geography or a line of business.

Perhaps they have, you know, faster to expected growth ambitions. Perhaps they want to diversify into new line of business. All of that requires capital. And so they could go to market for it. There's a certain cost of capital for that. From a regulatory perspective, it tends to be advantageous to buy reinsurance because you have these other regulated counterparties that could now funnel you cash that enables those ambitions, whatever they may be. And so very likely, you know, your home insurance policy, your auto insurance policy, or what have you, what have you, some part of it is reinsured by one of the major reinsurers. I almost guarantee it. And it's part of this diversification, part of it is just ultimately what's the ambition of the team that's running the insurance company and what are they convinced their board to do? Is that just because there's somebody out there who's willing to take more risk for more wheeled and then somebody out there who's who doesn't want that much risk and will pay.

someone to take that risk. And so there's like you can kind of like slice up risk and yield in any different way. And that's kind of what in the insurance market does. To some extent, I mean, like what you would be looking at as an operator is, hey, I'm in a in a business that involves some risk, right, and some volatility. I want some part of my economics to look much more defined and like fee like. And so as somebody who's running, you know, the bankless insurance company, you'd say I'm much happier earning 20 or 25% for just originating the insurance policy, you know, servicing the insurance policy,

and I want to send the risk out the door or at least in some part so that I can dampen volatility in my earnings, right? There's a very specific purpose for reinsurance and it is as a capital source that helps to achieve that end. Okay, Karn, tell me, say I am a depositor of USDC or stable coins into RE.

What do you do with my money that I just deposited? How does that get into the system? And what does that do? Yeah, yeah. So as a stable coin depositor, you'd end up in kind of one of the capital tranches that is of varying degrees of risk remoteness and liquidity. At the bottom of the capital stack is our own money.

And so one of the ways we've been able to convince the defy market that we're a credible place to park capital is by putting our own capital at risk and eating what we cook. Right. And so there's roughly 77,000. million in our reinsurer assets that are on underwriting risk today and act as first loss. There's a re-usde product, which is kind of like a mezzanine layer that is relatively high yielding, less liquid that folks can park their money into, receive a deposit token, go do things in

defy. And then a fairly liquid senior layer called re-USD, which is minimum doubly over-collateralized, very remote from insurance risk. and is, you know, there's all sorts of markets have popped up around this already on Morphode, fluid, on Pendle that, you know, folks take advantage of today. And so that's a capital structure, but critical to all of this is we are the only folks in market that eat our own cooking, put our own, our money where our mouth is, and protect the depositor capital ahead of everything else.

So when I deposit stables into Reed, does it, do you guys just hold up? onto it, or do you guys take it into TradFi and, you know. Yeah, so, so there ends up being two components to it. Um, that kind of the beauty of the insurance businesses, it's not a lending business. It's like going out the door right away. Uh-huh. A big part of our reason to exist is to prove to the world that we have the capital in case certain things happen on mass, right? Um, and so there, there remains a significant amount, um, on chain and risk free and related assets. And then as capital was called by insurance companies, that finds its way through a transformer in the form of a regulatory-compliant note that ends up in segregated trust accounts.

So it's all kind of risk-free assets. It's all bankruptcy remote and segregated, utilized by the insurance company and the return by the insurance company. That's the basic flow. And that only happens when somebody needs to get paid out because something bad happened, right? I don't know if there's a technical word for this in the insurance business. No, it's actually kind of more mechanical than that.

So, you know, each of the insurance companies is regulated. They need to show solvency. Part of their solvency is showing reinsurance credit. And so there are distinct points in the year where they need to check a box that says, hey, capital has moved into a trust account. It is available in that trust account for any sort of adverse development. And as time passes, premium earns, risk is removed. That capital comes out the other door.

That's the basic flow. And then retakes it and puts it back on chain to provide the yields to the depositors? Yeah, that's right. Okay. One way to think about it kind of mechanically for reinsurance business is like the government has certain collateralization ratios. So because the numbers are well understood here, what you can do is you can say, I will put a dollar in a trust account, a segregated account.

And that serves as collateral for up to $5 to $7 worth of. written premium. Let me know if I misspeak on anything here, Carl. What that means is that you're essentially, right, if those people, because they're looking at these as a law of large numbers, they're like, well, I could borrow money myself at like 4%, right? Or 5%, 5%. Well, you have is essentially that dollar is levered, right, five to seven times. And so in effect, that pool of capital can earn 5x the risk free rate. Right. So that pool of dollars, because it's underwriting $5 to that have been lent out, and you know you only have to pay certain amount out, you're actually making like 20% on that.

And so then you do have some loss ratios. You do have to pay certain amount out. The business needs to take its cut. And so you can very quickly, back in the envelope, you can say, okay, well, if you're operating like a 5x leverage ratio here, that pool can make 20%. You take out all your fees. And now you can see why the people who are putting the money into those more contracts

that's getting offboarded into these trust accounts could make 10, 12, 14%, right? Obviously, these things are variable. There's a lot of risk, not investment advice in any form. But you can very quickly do the back of the envelope math. And now you're starting to talk about return for stable coin holders in the teens, but in a way that you're like, wait, I understand the risk here. This is not like a terra-luna situation where it's all, you know, exogenous to crypto and it's all self-referential.

And when it unwinds it, unwinds it in a terrible way. This is like totally uncorrelated risks, geographically uncorrelated, sector-uncorrelated, uncorrelated, uncorrelated crypto. And I can see why if the company can make 20% on the money, why I as a capital provider into the company could make in the teens. So just so I'm getting the flow, there is stables that remain on-chain. And those get kind of like the on-chain rate,

the Athena rate, the yield rate that you get from USC on-chain just because why not, obviously. And then retakes some of that capital and deploys it where it needs to collateralize other insurance companies because that's just what's required in the industry world and to be compliant and solvent. That money is like the productive money that's like collecting the fees

and earns the actual yield. So a little bit of money goes out, a lot of money comes back in, in the happy case, so long as no systemic thing happened that wipes out all of insurance. And so a little bit of money comes out, a lot of money comes back in,

and then that gets added back into the pool and turns into the yield that the USC depositor like me put in there in the first place. Yeah, yeah. So just to be sure, there are exclusions for the systemic things. Those aren't a real thing in our business. But, yeah, fundamentally, that's it, right? So the insurance company pays us premiums.

Those premiums end up being investable float, right? We layer a safety cushion over on top of this to absorb any sort of volatility. Law of large numbers says if we do this across hundreds or hundreds of insurance companies, our results are very, very stable. You know, we've got 51 active insurance treaties today. We'll get to the hundreds in short order,

and so volatility continues to dampen kind of as that happens. And then, you know, if you zoom out a little bit, this is exactly, you know, insurance companies and asset managers go together like peanut butter and jelly, right? Like what we're seeing is a whole bunch of premium come in at zero cost of capital that could be invested at the risk-free rate, or if you're Berkshire Hathaway, it's invested amongst their asset management arm.

then generates a return that's kind of implicitly levered as a result of that, right? So, yeah, Berkshire has Geico and has Gen Re that generate all of this premium float, ends up being invested. Apollo has Athene. You see this kind of everywhere. But yes, investment income, kind of a levered position on risk-free rate, plus the insurance margin because you still expect to make money on the insurance as a totality of the economics.

So then in that case, what are the vectors of success that you really have control over? because we're not trying to improve on underwriting. You know, we're not trying to mess with any of that. You know, they figure that out. You're trying to just, like, access more and more capital. So, Karin, when you wake up in the morning, what do you think about? Like, what are the numbers that you want to make go up in order to make the whole startup successful?

Yeah. So, like, I think the business ends up being a function of how much capital we have that we're able to deploy. And the reason for that is, as we go to market and we talk to these insurance companies, A big part of it is like, hey, they like money. They want to know that they're working with a counterparty. It's more efficient. That marginal is going to cost them slightly less over time.

As we talked about, the production of the product of reinsurance, can happen as low as possible cost now because of these conversions of these technologies. So I think about TVL formation. I think about bringing in, so just capital. And I think about human capital in a sense that there are these existing relationships. There are these understanding of these markets that locked in like the heads of people who manage these multi-billion dollar books of reinsurance business and how do I track them, you know, to read.

And so that's how I spend most of my day. It's like thinking about TVL formation and who to bring onto the team to kind of continue to accelerate the top line. And so far we're doing a pretty good job with that. You know, half a billion in business is nothing to sneeze at. It'd be one of the very few DFI protocols at a billion run rate over the course of the year.

What are the yields that you get? There are two tranches. there's the senior tranche and the junior tranche. What are the yields that you can get? Do you know that? Yeah. So the senior tranche is fixed. It's a, it's 250 basis points above risk-free.

And then for the mezz trunch, I think it's between 800 and 850, depending on what's deployed. Okay. So eight fifth. Above risk-free or? Above risk-free, yeah. Okay. Once again, a bib is, 850 bips is 0.85% above risk-free? So, 8.5%.

Eight and a half percent. Okay, that's more like it. Yeah. Okay. So if there is free rate to something like three or four percent these days, is that about right? Yeah. Yeah, that's right.

And so then you're getting 12, okay. Correct. Yeah. So then why would I ever buy a stretch if it depegs and goes $8 off of its peg and it's only giving me 11 percent? And you're telling me that I can get like 12. Something percent. With all the collateral attested to.

With all of the collateral. In segregated trusts, yeah. Right. Which, which- Well, David, I think you're hitting on exactly the right thing here, right? Which is like, I think the thing that has been missing for so long, and what we talked about it for several years in crypto is the productive use of capital, right? This is a capital market.

You're going to take these dollars and you're going to do something useful with them in the world. And again, I would really recommend people go read the history of why things like insurance or reinsurance exist in the first place. But they unlock people, right? They unlock productive formation of capital. They let you go build a factory. They let you go build cars. They let you go do stuff in the real world.

It lets a small business go run their business and be a dentist because you can have liability. All of these things are actually productive in the real world. And so rather than this being like some feedback loop inside a crypto based on the price of the asset, and if an asset unwinds, then your yield gets destroyed and you're in a death loop because you've got to sell the asset to pay the yield, this is actually uncorrelated and it's going into the real economy where it's funding things, where those businesses can make 18, 20, 30, if you have a business that's growing 40% a year because it's a real business,

then yeah, you're happy to buy insurance on that business because it's growing 40% a year, right? And so that's a real productive use of capital. And so that money flowing back is, I mean, this is the glue that we always talked about, right? It's like, actually, you're now having real net productivity impact in the world. And that's not fake return, that's real return,

which I think is awesome. I mean, that was always the promise of this stuff is we're going to glue together. It's actually final habit. I think it's so funny, too, that it's happening in the bear market, because this is always what happens, right? We had all this hype about this kind of stuff five years ago, and then, and then, you know, defy looks like it's dead. But now you can actually wire everything together end to end between regulatory being clear and the stable coin markets being clear. It's more contracts working and the fintech people having figured out how to offer.

It's like all of the infrastructure now exists to finally do the thing, but it's the depths of the bear market. So nobody's paying attention. And so by the time people figure this out, you know, we'll be like kind of raging bull again. people would be like, oh yeah, why wasn't I paying attention 18 months ago? But I think to me it's really amazing that all the pieces now fit and that actually works end to end. You know, these guys are, it's not theoretical. Like they're actually using the dollars from stable coins to go do stuff in the role world with them.

Yeah. Karn, you mentioned when people come in deposit USC, they get a receipt token representing the collateral inside of the system. You know, speaking of what Utrel just said about puzzle pieces fitting together, that's a puzzle piece that you are allowing to go into DFI and DFI people can do defy things with it. The first thought for me is looping. Can I go and take that receipt token,

collateralize it, you know, get a loan on that, put more USC into the pool and like loop up my yield position? Because like, don't you expect that to happen? Yeah. Yeah, so it's happening, right? So we've had a number of the top tier curators do the risk assessments on our products. Steakhouse, you know, Chaos Labs has looked at us.

And you can now, yeah, you can loop against reproducts on morpho, on fluid, and a bunch of other Boroughlin markets. What kind of yields are they paying out? So on a fully loop basis, I think it's got to be high teens, low 20s, is my last check. But, you know, that's entirely separate.

Or, I mean, what you've been saying is, like, yeah, you give low risk insurance to very stable, like, outcomes. So, like, I don't know, I've done pretty stupid stuff with that money. I don't think, like, kicking the tires just with you guys right now, that doesn't seem like the stupidest. Yeah, so from my perspective, right, I think what we care about is making sure that we take in the capital, we show the world that, hey, on a risk-adjusted basis, this is a great place to park stable coin capital.

We have left to say on what people decide to do in broader defy, right, a kind of of their own volition. that's to everyone's own kind of risk taste and tolerance. And honestly, yeah, not giving financial advice in any regard, but the infrastructure is all there. Yeah, but yeah, but you're stoked about it because any growth in the looping product ends up with just more stable coins inside of your product, which is what you want in the first place.

Which is what Avichel say. What's like, look at these capital markets that are available. This is what that looks like. That's right, yeah. it just makes the product in offering more compelling. And yeah, it helps capital formation for sure. By the way, this happens in TroutFi too, right? So this notion of looping, as we call it in a defy, it's like, this is like the financial

people have all figured this out, right? It's like, hey, I got some relationship with the pension fund. They're letting me borrow at 4%. And like these guys are giving me 12. And like if I just like stack that a few times, I'm just arming the spread. And I'm taking some risk that that thing like, you know, if the risk is, greater than I thought than like I eat in my own margins, but like, you know, leverage and what we call looping, which is like borrowing from one place at some rate to go invest it into

some other place that has a higher rate and capturing that spread. That's, that's what finances all about, right? And then the question is, can you find capital providers that will continue to lend you at that, at that rate? So yeah, I don't think there's like anything untoward about it as long as people understand the risk that they're taking and people understand, you know, when and when they can't get, you know, incur losses in that sort of scenario. Karn, the retoken is coming or is here today because that's why we are recording this podcast and releasing it today. What is the retoken?

What does it do? How does it function in the system? Yeah, so it's a governance token for the re-ecosystem. It's intended, you know, as we discussed, kind of emulate Lloyds of London governance. So it dictates who the acceptable counterparties are, lines of business, what capital is required. And it governs importantly,

the common pool of capital, the size of that capital when it gets released, the economics that accrued to the network kind of over time. And so that's the goal. The beauty of all of this is that we're not inventing anything new. This is like 330 years of evolution in the insurance market that's found its way on chain as a starting point. What, so Lawyers of London, it was the model of this token, as you said. What was the incentive to govern? Why would I govern? Why would I care? Yeah, yeah.

I mean, it has the potential to be a enormous sum of money that protects tens of millions of people around the world. And that has an investment policy. That access is valuable. Where it's pointed to is valuable. and, you know, every asset manager and every reinsurer and insurance company in the world should be interested in this, right? If we are in a position to be putting tens of billions

and whatever the secular trend of the stable point market is into a pot that is now accessible to this broad market, you know, it becomes a really high leverage tool for folks to be holders of the government's token. Right. So if you have a lot of the government's token, If you have a lot of the governance token, you can allocate the capital of the system towards certain endpoints.

You, as a large holder of the token, have some sort of internal alignment with it because if you choose poorly, if you are corrupt, then you're invalidating the value of the tokens that you hold, and clearly you hold a lot because that's why you have the power and influence in the first place.

Karin, this has been just like the broad concept of like governance tokens in defy, and the philosophy about why they are valuable in the first place, most of them have not worked that way, just if you look at the price on the market. And there's been, sometimes the product themselves didn't follow through. Sometimes the product did follow through, but the token was a governance token that didn't capture value.

Why will this one be any different? There's a real business with massive cash flows behind it, right? And so if you think about a central fund analogous to Lloyd's, the economics that it accrues, the economic disbursement or accumulation to protect the network and to protect insurance companies, there is a sum of economics and cashels that can perform multitude of economic actions that show value here. So I think what you're asking about is like governance and the distinction between value or cruel. I think it is super valuable to potentially be controlling the largest insurance capital pool

on earth over time. Right. And the knobs and parameters that dictate kind of how it moves. Cool. Cool. Carten, when we log off of this podcast here in a second, what are you going to go do back at Reed? What do you need to go get your fingers dirty with?

What's on the near-term roadmap? What are you trying to get done like this quarter and this year? Yeah, it's, you know, I, TGE is a trying experience. I'm glad that we're kind of past it. we have a real business to run. We're running at, you know, adding a couple hundred million more new business over the course the next couple months.

And then we're gearing up for Jan 1st, 2027, which is when the insurance market kind of turns over to renews to crack a billion in premium. And so we're no longer, you know, a toy, we're no longer kind of conceptually interesting. It is a real market player with real market access and capital of a boot. A feature, this is a question for you, actually.

there's a lot of DGens on chain and in fact it's kind of one of the few players that are left is like basically DGens and Wall Street building on in crypto are all of the relevant parties that are interested in what Ria is offering the yields

the 12, 14% yields, the reinsurance yields are they on chain? Like do we even like you we talk about the Sablecoin capital market sure that it totally exists but I don't know if the parties that Rie is interested in in collecting their capital to

are on chain yet. Am I wrong in that? Or is there more people to bring on chain for the future of reiss growth? I think there are a lot of people still to come on chain. I mean,

I think the entire insurance industry ultimately needs to be here tapping into these capital markets. Again, if we go to this future world several years from now where there's five or $10 trillion dollars of stable points sloshing around and it's just because it's the most efficient way

to custody and move these assets and track where they are that the entire financial world should move here. Then a bunch of that will want to seek yield and a bunch of that will find its way to these pools. And so, you know, the on-chain capital markets, I think there will come a day, you know, like 20 years ago, let's say 25 years ago, let's say circa 20, the year 2000, right? There is this notion of going online. And so you'd say,

like, oh, I'm offline. And I think on-chain is kind of like that where people talk about on-chain capital today, or we talk about stable coins. And I think there will come a day somewhere in the next decade where we just stop using that term. Like, you can't be offline today. There's no notion of being online or offline. It's just like, well, it just kind of merged and just became the same thing, right? I think the same thing happens with on-chain versus off-chain. And so when we hit $5 trillion, it's not going to be on-chain capital markets.

It's just capital markets at that point, right? And they just kind of blend together. So there's a long way to go to get all of those market participants that need to be around for around the table for that to actually happen. And I do think that happens over the next five years. Now, what's interesting is we've always thought about that, right? We've been talking about, like, our thesis at Electric back in 18 when we started was this notion of programmable money.

We've always said that that's going to happen. I think the thing that, and by the way, we can't take credit for that term. I think that term has been in the ether for a while, no pun intended. But that was like our thesis paper that we wrote that said, why should we even do this? And I think the thing that the builders did was they created all of the supply. Like we created protocols, we created looping mechanisms. We created, you know, Morpho and Ave, and we got gauntlet and steakhouse. We got all these components that were like, hey, I'm ready to go.

And the thing that was missing was the demand. And it's like, well, why is somebody going to bring their stable coins in here? Why is somebody going to do asset management on chain? Like, why is that going to happen? And the thing that we needed was that final last mile was I need to be able to take these assets and get productive yield from them. I need to be able to do something useful with them. so that the person who is holding this token or is putting the capital at risk

knows that what they're getting is 6, 8, 10, 12, 14, 18, whatever percent. And I think that is what's starting to happen now. So I actually think like a lot of the plumbing exists, like you're talking about the looping. The plumbing is in place to make the flywheels work. The last thing that we needed was the demand side. It's like, why do the stable coin holders want to do this?

Why do they want to put it into the plumbing in the first place? And it's to get yield. And now we can actually get productive yield. And so that, I think, it's the fly wheel going. And then once the fly wheel is going, then the bigger capital providers just look down chain. And they're like, well, that's where I should be. That's where the money is. That's where the efficiency is.

And so then the whole thing starts to. At least that's our bet, right? I think that's probably what the next five to seven years look like because now that the demand is all plugged in. The flywheel starts to work. The loops start to work. The capital providers on chain start to work. And then the big guys start paying attention and have to move on chain. Karn, the name of the podcast is bankless.

We started it, you know, back in 2020 with the idea of like, oh, taking control of one's money because why would I put my money in a bank that's giving me 0.04% yearly yield. And they get to go do exactly what a vitro is saying, make it go productive. But they get all the productivity out of it. We get none of it. So what are we doing? Giving them the finger and we're going on chain. There has been a number of products integrated into Coinbase that have kind of been of the D5Mull.

thesis, you know, fintech in the front, defy in the back. We got morphos in there giving Bitcoin loans. Athena's in there now giving yield. Could you see Rhee being like the new savings account? Is that an appropriate way to illustrate the product? Is that not, is that not responsible in the same way some people are critiquing sailor calling stretch a savings account? Like, do you see the defy Mollet thesis kind of playing out for just being a funnel for capital for Yes, I mean, certainly like the current state, we are a defy mullet, right? We run a traditional reinsurance business on the front end. We've got the machinery on the back end that is distracted away, but elegant and people will want to access. If you think about what reinsurers and insurance companies become in the limit, they become the largest asset managers in the world. And so there is a pathway here to something that's a little bit more diversified. I won't profess to having designs on that right now because I think there's tons to do in reinsurance and insurance, generally speaking. But as soon as you get, you know, you have entities that are writing hundreds of billions in premium, there are natural

segues and their natural paths into other parts of finance. Avichal, Karn, thanks for coming on the show today and teaching me all about reinsurance and re and good luck with the TGE and I hope you guys cross a billion dollars sooner rather than later. Thanks, man. Appreciate the time. Good to see you. Here's guys. Banking station, you guys know the deal. Crypto is risky. You can lose. what you put in. Insurance is also risky as well. That's kind of the whole point. But nonetheless, this is the frontier. It's not for everyone, but we're glad you're with us on the panclous journey. Thanks a lot.