Bankless - Resilient DeFi with Kirk Hutchison | Layer Zero

Episode Date: June 28, 2022

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

Welcome to Layer Zero. Layer Zero is a podcast of unscripted conversations with the people that make up the Ethereum community. Crypto is built by code but is composed by people. And each individual member of the crypto community has their own story to tell. Cypherpunks understood that the code they write impacts the people that use it. And Layer Zero focuses on the people behind the code because Ethereum is people all the way down and it always has been. Today on Layer Zero, I'm talking with Kirk Hutchison of Volt. And Volt is a inflation hedge stable coin. It's a stable coin that is hopefully designed to restore and retain its value as inflation goes up and up and up, which is a very timely conversation. However, we don't actually start the conversation there. Kirk has been recommended to me by many, many different people from across the defy ecosystem with universal consensus about this gigabrain nature of this guy Kirk. And so in order to meet this guy, Kirk,

and get to know why everyone respects him, I just decided to pull him straight onto a podcast. And so we dive down the rabbit hole of some very, very, very, very. primitive defy concepts that we haven't really revisited in bankless for a very long time, this concept of no magic numbers when we design our defy protocols. Anything arbitrary in a defy protocol is fragile. And if it's fragile, it's going to break. And so we talk about that concept. He also is very, very attuned to the world of monetary policy in economics and trying to apply the lessons of tradfi and economic history into the lessons of defy. So rather than this being like a more typical layer zero episode where I'm actually trying to go into like the soul and personality of our

guests. This is me just trying to figure out how Kirk thinks and what he's trying to do and what he prioritized. And I find a ton of alignment with what he is building, how he's building it and what he's modeling it after. And so I hope you guys follow me down this rabbit hole of understanding Kirk and also understanding Volt and seeing where all of this goes when the ecosystem that Kirk envisions for the DeFi ecosystem comes to fruition. So let's go ahead and get right into the show right after we get to some of these fantastic sponsors that make the show possible. AVE is the leading decentralized liquidity protocol.

And now AVEV3 is here. AVEV3 has powerful new features to enable you to get the most out of DFI, including isolation mode, which allows for many more markets to be launched with more exotic collateral types, and also efficiency mode, which allows for a higher loan to value ratios. And of course, portals, allowing users to port their AVE position across all the of the networks that AVEi operates on, like Polygon, Phantom, Avalanche, Arbitrum, optimism, and harmony. The beautiful thing about AVE is that it's completely open source, decentralized, and governed by its community, enabling a truly bankless future for us all.

To get your first crypto-collateralized loan, get started at AVE.com, that's A-A-A-B-E.com, and also check out the AVE protocol governance forums to see what more than 100,000 DOW members are all ravening about at governance.awe.com. Living a bankless life requires taking control over your own private keys. And that's why so many in the bankless nation already have their ledger hardware wallet. And brand new to the ledger lineup of hardware wallets is the Ledger NanoS Plus, a huge upgrade to the world's most popular hardware wallet. With more memory and a larger screen, the NanoSplus makes it easy to navigate and verify

your transactions. And the paired Ledger Live desktop app gets you increased transparency as to what is about to happen with your NFT. What you see is what you sign. The NanoS Plus gives you the smoothest possible user experience while you're doing all of your crypto things. So go to the Ledger website to check out the features of the new Ledger NanoS Plus and join the wait list to get yours. And don't forget about the Crypto Life card, also powered by Ledger. The CL card is a crypto debit card that hooks right into the Ledger Live app,

right next to all the Defy Apps and Services that you're already used to doing, like swapping tokens and staking. So if you don't have a Ledger hardware wallet, go to Ledger.com, grab a ledger and take control over your crypto. Rocket Pool is your friendly, decentralized Ethereum staking protocol. You can stake your eth with Rocket Pool and get our ETH in return, allowing you to stake your ETH and use it in Defy at the same time. You can get 4% on your ETH by staking it with Rocket Pool, but you can get even more by running a node. Rocket Pool is the only staking provider that allows anyone to permission

their network of validating notes. Running a Rocket Pool node is easier to set up than running a solo node, and you only need 16Eth to get started. Why would you do this? You get an extra 15% staking commission on the pooled ETH, so your API is boosted. So if you're bullish ETH staking, you can increase your API and get some extra tokens by adding your node to the decentralized rocket pool network, which currently has over a thousand independent validators. It's yield farming, but with Ethereum nodes. You can get started at

rocket pool.net and also join the rocket pool community in their Discord. You can find me hanging out there sometimes in the chat, so I'll see you there. Bankless Nation, I'm here with Kirk Hutchison, co-founder of Volt Protocol, and Kirk has been universally recommended me from by a number of people who I know and trust in the crypto space. The word diggerbrain has been used a number of times to describe Kirk. I don't know where this conversation is going to go, but I have a feeling it's going to be a good one. Kirk, welcome to the show. Thank you so much, David. I'm really excited to be here and, you know, flattered by the kind words that people have said of me. I definitely am like, you know, kind of a theory cell as far as crypto stuff. I come from a very

mechanism nerd, like look into the history, look into all the nitty gritty of it. And I feel very grateful for the opportunity to build and practice that now. Yeah, that's how I'd introduce myself. Fantastic. Yeah, crypto definitely offers a blank slate for thinkers to begin to tinker. Oh, I I like that line. Thinker is going to tinker. So as a thinker, Kirk, what do you think about? What are the subject matters that you often ideate in your imagination? Well, the thing that got me into crypto in the first place was like many people, in general, the idea of censorship resistance, not just money, you know, things like social networks as well. And I took a brief sojour and trying to be a solidity dev. I was never a particularly good one, although I gained useful insights by

trying to learn that. I became fixated after a while on the problem of scalability in governance and how, you know, if you look at like token governance models today, such as MakerDAO, how they decide to tune parameters in the system or add new collaterals, there's quite a bottleneck of attention. You know, the attention of the whole Dow at one time is not very scalable. And so I was thinking a lot about that problem, especially in the context of stable coins. And that's what drew me to fuse and, you know, Rari Capital and the Tribe Dow ultimately was looking at more permissionless lending markets and thinking how could you govern deployment of PCB or lending capacity in one of those markets in a more

scalable market-based approach. And that was what was my original idea that was behind Bolt. There's been quite a journey since then and a lot of other elements. And the scope of the problem for me has expanded into the question of really how can you correctly make a decentralized bank? You know, the fully symmetrical currency and credit markets and everything, you know, all the types of things that people need banks for in a totally transparent on-chain way that is governed ideally by markets and not by votes. Because the votes are where it gets sticky. And anything that is like asynchronous decision making, not very ideal for like a continuously running open system. That's why Ethereum or blockchains are so good is that they don't go down or they're not supposed to, right? There's always there and it can't be disrupted.

So having some of the principles about what makes L1 so good and thinking about can we take that into these applications and make further strides in the design is really what I'm obsessed with and how we could. Yeah, I'm inspired a lot by what exists. I also am inspired a lot by TradFi and learning about everything, how that works. And I think that there's a lot to learn as far as building those functions, but not necessarily in the same package on chain. Yeah, I have a feeling this is going to be a pretty brainy and technical show. so I definitely, as we go along, want to take some time to define some stuff to make sure that all the listeners are keeping up with us. You used a term which I have not heard in a very long time, a decentral bank. That term of a decentralal bank is something, I think I might have memeed this thing in 2018 when I was first getting into the world of content production and using it to describe Maker Dow.

It was like, I understood Maker Dow at the time to be like a version of a central bank as in a controlled interest rates. It had a monetary policy. It had like assets and liabilities. But it was to centralize. And so like, how do you talk about these things? Well, like, let's call it a decentralized bank. I mean, never really caught on. But I think as we extrapolate from 2018 to where we are now, I think what you're leaning

into is like there is a more, rather than Maker Dow being the decentral bank, there is the concept of a decentralized bank. And Maker Dow is now just like one flavor of that or one implementation of that. And I'm getting the idea that Volt is, like, an alternative flavor of a decentralized bank. But before we go into Volt, can you talk about the concept of a decentralized bank? You use some other words that I'd like you to define as well as in a fully symmetric currency. That one left a question mark in my head, as well as asynchronous votes. So can we talk about like the model of a decentralized bank for a model and then talk about

those two dynamics of components of decentralized bank, symmetric currencies and asynchronous votes? Can you talk about those things? That sounds great. I think maybe we should start by just asking about like in a modern context, what is money? And since pretty much, you know, at least the industrial revolution, money means either a currency issued by, you know, a central bank or maybe a deposit at a bank that issues its own independent notes. And usually this represents some kind of like a hard money value, you know, which could be gold. It could be central bank notes. And there's an understanding that the bank is taking part of that capital and loaning it out, you know, and they have some portion of basically hard money reserves and then they have a loan book.

So not everything is fully liquid. And they have to manage, you know, the liquidity within the system to ensure the price is stable. This is what central banks do too with bond markets and all that. But it existed with private banks too. And this is, you know, we could get into what is a bank in the gold standard, which is a little different. I won't worry about that for right now. But the idea that users need convenient media of exchange, exchange,

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

that, banks also do deals with other banks where they buy and sell these types of debts. And that latter function is what the Federal Reserve and Central Banks have kind of taken over. Like, they control and regulate how the banks can relate with other banks and other various rules. But even before Central Banks existed, it's natural for banks to have things like, oh, if lots of people come to redeem from them and they run out of liquid reserves and they would borrow from another bank to get what they need and have those kind of deals in place. These types of ideas are being brought up in defy by others as well. Like Seb Ventures from MakerDAO, someone I respect a lot.

And he posted a blog post describing like a clearings DAO where stable coin issuers could draw credit from each other, using their own stable coin as collateral when they had liquidity needs, for example. And I think that these type of structures can be very informative for defy. So when I think about a decentralized bank, I say, to me, what is the problem with money on chain today? If we look at L1 tokens like Ethan Bitcoin, the problem is that they're too volatile to be short-term money. And I don't think that's ever going to change. They could be thought of as the equivalent of like the highest quality equities in the future or entirely new ways of thinking about valuation. But they're not exactly the same thing as cash.

Now, stable coins, at the end of the day, all stable coins basically either depend upon a not necessarily sustainable incentives model or on centralized stable coins in order to maintain. a stable backing. And there's nothing that's like a conclusive exception to that that's shown to be highly scalable so far. And we can see clearly the disadvantages of depending on like, I'm not someone who's like a PSM hater necessarily. You know, it's good that die has the PSM, but it's not good to stay that way forever. And they're working on it, right? You know, like MakerDAO is all over trying to diversify out of USC risk. But can you define PSM? PSM is a peg stability module. For a simple thought about decentralized stable coins, You could either be doing over-collateralized lending where they're minted against an over-collateralized position of ether or other assets, or you could mint it directly against another stable coin in a PSM, which is a pay stability module.

And not everyone would call it a PSM, but it's the same thing, like how the portion of frack supply, which is backed by USDC is analogous to a PSM type of operation. And for Dai, you know, they have a certain amount backed by USDA. Faye has quite a bit backed by die. And same with right now, Volt is mostly backed by Faye. which are highly correlated stable assets. And I don't think stable coins only. You could also think of yield-bearing stable assets as being within this category as well. Anything that's the protocol controls directly and is not like a over-collateralized deposit.

Okay. Sorry, I just want to go down that quick rabbit hole. So when I think about a decentralized bank, I think that all of these things that banks do, like accepting deposits and loan origination, you can't leap all the way there in one step, you know, these decentralized systems to have the equivalent of TradFi instantly. But if we start to learn from these, I think it's possible to build more resilient and decentralized stablecoin systems, especially if you can cut out centralized middlemen in the right way. With USDC, Circle controls everything, we can see other things like how Lido manages the validators or how MakerDAO is looking at then doing direct deals with different

entities like bond offerings. Those things all can help mitigate counterparty risk. It's still done on like a case-by-case basis. You know what I mean? There's no like clear, transparent. framework for how MakerDAO will scalably decide what kind of real world lending it will do without just relying on an inside group of experts. And so figuring out decentralized and market-based approaches for these things is one of my big goals. And when I said a fully symmetric stable coin, I guess what I meant is one that has a match between both being able to match make between those who wish to deposit their capital in the stable coin system and receive stable value and some yield and those who would allocate that capital and the lending opportunities that

exist in a way that is fully market-based and the rates are derived from the market. You know, utilization's similar how often compound have utilization-based rates, but connecting that into a wider variety of activities, potentially even including real-world assets. Because, you know, I say decentralization mostly rather than decentralization maxi because I do think that getting that last mile into the real world is very important. We can't just, if the best decentralized systems, because they're too purest-minded, drop the ball on the last mile and then just let the scams and such go direct to the people,

that is not a good outending. And like when I look at how big, like, Terra and UST got and then look at like how little attention is given to even, you know, the more promising radically decentralized experiments like Rye, I just think that for Volt, at least, it's one of my goals to really be proactive in that regard, at least. and we can learn from, yeah, I like what Seb at MakerDAO thinks about, you're like, there are ways to get close to the purity of a smart contract through the legal system, not 100%, but like we shouldn't be close-minded to the idea that there can be other consensus layers besides one blockchain, right, and a settlement layers.

And being in general the perspective of looking as holistically at possible, how blockchain can fit into the world economy and taking a long-term view over five, 10 years, right, and how lending markets and capital markets can evolve. that's all the type and historical perspective of how they've changed otherwise like there's been many big changes in the world capital and financial markets in tradfi in the last 30 years 40 years and so understanding how digitization has affected them and then like looking at the arc of how things will go I might be rambling a little bit now but I think that there's a lot of significance to you know going to the kitchen and stealing the chef secrets for tradfai uh taking the best out of it and then

but keeping those robust decentralization and censorship resistance features. But that's what's like a, you know, it started the camel through the eye of the needle, right? So you have to be, it's not an easy task, but that's the problem space. Okay. So yeah, there's a number of different rabbit holes that I think just opened up. But the first one, I think at the beginning you talked about like all these different stable coins that we have on Ethereum, Frax, Thai, USDC, tribe. And I think you kind of alluded to how there's not really ever going to be any one single. perfect winner of like the Sablecoin systems, but the net results, once we have what kind of

feels like a commercial banking layer of private monies, where we have like the Maker Dow making die, we have the tribe commercial bank making tribe, we have the USC commercial bank and doing USC. Once we have all of this commercial banking layer, and what I mean by that, just to be super clear, is that in the Tradfai world, we have the Federal Reserve, which is the bank zero of the whole entire thing. And then layered on top of that, you have the commercial banking layer, the Wells Fargoes, the JP Morgan's, the Goldman Sachs that have accounts at the Fed. And they trade and market make between each other, but then ultimately everything settles down to the Fed. And I think what you alluded to is that if we do want a fully decentralized

bank, it's not going to be Maker-Dow that wins. It's not going to be tribe that wins. It's not going to be USC that wins. But rather, it's going to be an emergent product out of the interrelationships between all of these things. and that's when we get the network of those things and these financialization networks between all of these stable coins that are mostly decentralized for the most part with the exception of USC, which is completely centralized. And then at that point in time, we actually do get this like emergent decentralized bank that unlocks this like bankless future that we're all looking for. Am I on track with this general thesis here? That's absolutely right. It's sort of like, you know the movie The Incredibles, right?

It's like if everyone's special, no one is, right? It's like if everyone's a bank, then no one is. That's the bankless future. The I see is democratizing access to the kind of powers that banks have. I expect there will be many more bank-like entities of varying degrees of centralization, you know, and from the spectrum of full decentralization and mutable smart contracts to, you know, just circle,

but in a different legal jurisdiction and a different backing exposure. And I see there being a wide diversity and them having, yeah, the more interlocked networks they are, the more resilient the system can be. And I'm really inspired. I'll shill a little bit my favorite living economist George Selgan, who has written a lot about the Scottish free banking era and some historical periods of robust banking networks that did not rely on a central bank. And there's interesting things to learn from there as far as how they manage liquidity

crisis or currency also from a defy perspective. But I think there's clear historical and theoretical evidence that a central bank actually generally contributes instability rather than stability to the system and that a decentralized network will be far superior. Cool. I definitely want to go into that. But also, I want to just like double tap on the fully symmetric money system. I might be wrong on this, but like the way that I'm trying to understand this is like if we talk about like Terra Luna, for example, I'm guessing that that is a fully non-symmetric money

system, as in it is extremely lopsided and it was so lopsided that it collapsed. And like the idea that I see you nodded your head, so I think I'm on the right track here, is that when Nick Harder had this tweet about Tara Luna that I really liked, where he said the day that Tara sold off UST to purchase Bitcoin to have Bitcoin on the balance sheet was the start of the collapse because it was a lopsided system. They took away liquidity out of UST to buy Bitcoin in hopes. We're like, okay, we're going to have this Bitcoin to like defend the peg one day, not realizing that like if you sell UST to buy Bitcoin, you are causing the depegging of the

UST, you are taking weight away from one side of the market and you're adding a bunch of selling where you are not creating enough buying. And so if I'm understanding like symmetric versus asymmetric monies, it's when there's like there's the in equal buying and selling. It was like kind of my general understanding for that. And so if we have like money crises, it's because there is an imbalance in money. And so if you are telling me that like the dollar, for example, or the way that currencies generally maintain their peg is being by symmetrical. where there's like sufficient market participants on both sides. You have both depositors and creditors, and these things are balanced enough and the markets

are efficient. That makes a symmetric money, which is for a stable coin purposes going to hold its peg if it's symmetric, if it's sufficiently well balanced. Am I on track here? So, and of course, Tara had many other problems, but there's a general class of problems we could talk about, and it applies to every stable coin that exists today, is that there's no such thing as a stable coin whose backing is 100. 100% instantly liquid for dollars, right? And so what that means is that for every stable coin,

there's a condition under which it might trade not at peg. And for some stable coins, those conditions are extremely remote. For some of them, they are very likely. And the worst failures of Peg will always occur when people don't know what's going to happen. And so in the case of, I'll bring in one of the examples from this Scottish banking period. So these banks would issue notes, right, in exchange for gold, you know, gold deposits. And the note, the principal, redeemable for a certain amount of gold, although the bank was fractional reserve. And some of these notes came to carry what they call an option clause. And the note said that this bank is either redeemable in gold on demand or from the moment

you brought it in, payable in gold at a certain interest rate in this much time. And so by putting this clause on the bank notes, it gave people the confidence that at least if they couldn't get their money right away, the bank was solvent. they would get a certain interest rate. And that also meant that if the bank had a liquidity crisis, those notes converted into bonds and then had a higher value, right? And so it kind of, you can see a similar principle at work to, you know, an offer or a compound when lots of people want to withdraw their money, you know, the interest rate goes up to incentivize people to close their loans or more deposits to be made. And so that's like a very responsive and symmetric system. And it facilitates

matchmaking of those who want more yield and those who want liquidity. And so you can't necessarily guarantee that a city will always hold peg with a system like this, but it should make any discount more rational and limited, right? So like in the case of die, because people know it is over collateralized, even in a case where more than half the die supply had to unwind and they depleted the PSM, it's not going to go that much below peg before people then refill the PSM by Arbing, because they're confident since it's over collateralized. And so the knowledge of the mechanism by which it would return to peg, or the amount of haircut you might take if you need instant liquidity demand, making that as clear as possible and predictable for the participants makes the

system more stable. So one of our things we're thinking about a lot is if you have a stable coin that has a significant illiquid backing component, or sorry, let me rephrase that. Let me take a step back. Have you checked out interest protocol? No, I have not. It's a new kind of compounder-a-style market with a native stable coin that was released recently. GFX Labs was behind it. And the idea of a stable coin that is responsive on these kind of same yield curves makes a lot of of sense as a Zobben compound. But then the question is if you're going to bring in, let's say, more PSM or real world type of assets or do these kind of loans or bond stuff that MakerDAO is considering, how do you do the right feedback between that and the interest rate that you're giving

out on the stable coin? And how can you do a market mechanism also to decide like how liquid the stable coins backing should even be? Like if you ask me, should the stable coins backing be 99% liquid, should it be 50% liquid? That's not something I want to arbitrarily decide, right? That's something that a market should decide somehow. And you can look at like the fracts collateralization market process. It's something kind of similar like that. In this case, it would be like not how under collateralized it is, but maybe just how illiquid it is, that kind of idea. Interesting. Interesting. Okay. I think it goes without saying, but I'll just state it just to make sure that I'm still on the right track here is that like all stable coins that are like resilient and

robust and anti-fragile must be symmetric. Have to have what you call symmetric marketplaces, as in like a balance, right? And that's part of the definition here. Yes. And this idea of symmetry is really, it's about liquidity. That's what I would emphasize is that there needs to be a two-sided liquidity marketplace and not just like fixed rates. Anywhere where there's fixed rates are things that are not responsive, there's problems. That's why when MakerDA has to go in and manually tune the interest rates, right? That's less than ideal. The curves on oven compound are better. The anchor fixed rate was a problem. And we have in fact realized that the idea of pegging vault to a fixed rate of the CPI is also a problem. Actually, let's go down that rebel hole right now. Can you just

illustrate like, why is fixed rate a problem? Like we see this right now in the Japanese bond market, I believe, where I think there's something like a cap on like the yield of the bond market. They have yield curve controls of like 0.25%. So they're fixing their whole entire bond market. Can you explain why a central bank would do that and what problems arise as a result? So central banks generally serve political ends. That's what I would emphasize and that I don't always know why they do what they do because it doesn't always necessarily look like the best idea. In this case of the Bank of Japan, if we just at a basic level, ask what is the effect of very low interest rates on the economy is that it makes borrowing cheaper. And the reason that they might want to make borrowing cheaper is because there's lots of what you might call zombie companies in Japan's economy that are heavily indebted.

and don't have strong growth prospects, such that if rates rose, they would collapse. And this is the case of the United States economy as well, but it's significantly worse there. So if rates go up, it would lead to significant social disruption. And so that's what they don't want. But at the end of the day, it's like an incentivized system. It's being propped up by the central bank. They can't keep it that way forever. So oftentimes keeping it that way longer doesn't make things better when you ultimately need to change.

and, you know, that was the case for Terra, right? Like, I mean, the fact that it's unbacked in the first place means it won't work. But even if it wasn't unbacked and if it was instead just like, imagine like we'll offer this 20% yield and then we'll go and like, I mean, even just look at something like Celsius, right? That's a more, you know, if you're like, we'll go offer 8% yield and then we'll go steak east and it's locked up for a year. It's like, well, what if they want to get out? And then if you don't have a clear marketplace to sell off your illiquid collateral, in some way, in order to or give people like a defined haircut on exit and that they knew up front what it would be, you get panic and bank runs in chaos.

Okay, so going back to the symmetry thing, is it the supply of the outstanding dollars for whatever this bank that we're going to talk about, whether it's MakerDAO, tribe, whatever. The supply of the outstanding dollars needs to be balanced by the available liquidity. And when those things are balanced, is that like the symmetry that we're looking for here? as in like if there's like a billion dollars there needs to be like 10 times more liquidity than a stable coin that's only 100 million dollars and it's that liquidity that is like if there's sufficient liquidity then the peg will be sufficiently defended yeah to an extent although I would say I'm not sure what the right liquidity ratio is right but it certainly does scale with the size of the system right and then the other thing is that there needs to be a feedback mechanism that's the most important thing I'll give an example of how frax works or there is a feedback mechanism like If I go and, you know, redeem some fracks, I get a certain amount of USC and a certain amount of FXS. And as I do that, the frack system adjusts slightly its preference in the direction of being more collateralized. So as redemptions occur, it will seek to become more collateralized in response.

Now, overall, I'm a, you know, a pro overcollateralization individual, that's for sure. But nonetheless, you know, we can learn good mechanisms from everywhere. And the fact that there's any system very, that is fixed and can never change, that means that there's probably a market condition in which that's wrong. And so that's the kind of the insight that I've arrived at. And needing to change it by a vote is also probably wrong because sometimes things happen fast and it'll be much more smooth if it can be according to a curve or a market process. Okay. Yeah, this opens up something I've always been fascinated about in the crypto space. Amin Soleimani, one of my personal heroes in this space. I say that

every single time I bring him up. Gave out this line in 2017. I think it was a tweet or was on a podcast or something. and he actually doesn't remember saying this. And so he set the line, no magic numbers. And while I was only very young in my like career down crypto, like I understood that line, like as soon as he said it, like no magic numbers. And what he meant by that is like if a human just chooses a number, a parameter and it's just like arbitrarily chosen, that is the definition of something that is not anti-fragile. It is literal fragility because it's a fixed number.

If it's something it's fixed, it's fragile. And so if we are trying to make censorship resistant, human resistant, like long-term sustainable financial systems, we can't just be picking arbitrary numbers. It has to be a dynamic system that can respond to the inputs and outputs that are around it, right? And so this is always where crypto starts to look a lot more like nature more than it does finance. I mean, definitely looks like finance, but like it borrows property from nature.

And so there are a number of systems out there. like you've already talked about the dynamic interest rates of compound and Ave as the utilization of these assets inside of compounded of Ave go up. The interest rates go up. And what that means by that is like if Ave has a hundred-eath deposited into his vaults, people have supplied 100-Eth and no one is borrowing anything, well then the interest rates on that eighth are basically zero because we won't need to incentivize people to borrow it. As that number goes up, it goes up slowly at first, like 10-Eth gets borrowed so interest rates go up a little bit, 20-Eth gets borrowed, so interest rates go up a little bit. it. If we get up to 80th borrowed out of the 100th that's deposited, the interest rates that are being charged by the borrowers goes up a lot because at some point, if you hit like 99th that's borrowed out of the total 100th that's deposited, there's no more liquidity in the system. We got one eighth left. And so we have to dynamically increase this interest rate to naturally balance out this marketplace and incentivize more deposits or to incentivize people to repay their yield.

A similar system, also part of Rye, Rye, the Sablecoin, is like this governance. It's called a basically control theory. It's like a natural governor. Kirk, can you just talk about this dynamic of like a self-referential feedback mechanism and how it can take us from like a fragile version of finance to an anti-fragile version of finance? Yeah, I think that, let me think about first thing about the best way to put it in words. I like to give people very concrete examples. So let's think about this.

I, we have two avocados between us. One of them is ripe today and one will be ripe tomorrow. And we each have one dollar. There's an avocado seller present. How much is the one ripe avocado worth and how much is the unripe avocado worth? It's a good question, how do we decide, right? Because I don't want to overbin on my avocado, right? And so, you know, we get very quickly into the questions of like, how does market pricing work? And at the end of the day, most likely the avocado seller sets a price because he exchanges with many people or who knows what happens. but any system needs some way to regulate. Otherwise, what if, you know, I get word before you that the avocado is there and I run to the store and buy it undercut you,

you know, these kind of examples are what happens when there's like, you know, a liquidation failure in a lending market. You know, something doesn't happen at the right speed when it could have been sold for the right price, but it wasn't. Even if you do have a, you know, there's always a chance that something could still be mispriced, right? Even if you do have feedback loops. but I think we need to step one step back and just ask like what is a market and if we understand that what a market is in general is like an information system where there's the whole economy and like how does someone decide what something is worth to them it's based on their own needs and so based on their own needs they'll pay the best price they can figure out for what they're going to get

you know I have my income I have to decide what I'm going to spend it on and those prices is propagate into the economy and the market, and they inform the sellers and other things, and it all comes together to be expressed in the prices, which are an information signal. And in order to have a market, you need the ability for the free exchange of this kind of information. And the easier it is for people to, you know, connect economically, the more efficient the market will be. So running on a blockchain that's 24-7 global, always online, you know, where anyone can be a market maker or a liquidator compared to these opaque trad-fi systems, it's much smoother. And for lending and borrowing,

that's why it's the difference between like, this is a stable corn that I kind of like, but there's one thing I don't like about it, which is LUSD. The fact that it has a fixed fee on minting and no ongoing charge introduces instability into that system. The fact that it is instead a liquidation-only model

that's just based on like you have to top up your collateral, it means that incentives are applied in a more staccato way, you know, like when the liquidation actually occurs instead of a smoothly adjusting rate. traders and crypto will often like to look at where the liquidation walls are. A lot of people will have their position at that spot. And probably we can do a lot better with like automatically regulating these things. Like people are already working on like defy saver type of stuff that will automatically

adjust your collateralization to be responsive to the market movements. Right. So that's another type of feedback that's very beneficial for the users where you don't want to just be like or like even I'll draw an analogy to like uni V3. Right. It's more of a market of opinions because instead of just being stuck to like, oh, it's this price and this curve only. You can say, oh, well, I'll put whatever curve I want, right? And it's my opinion. And then I can change it in the future, too, with flash liquidity provision on different

curves. Anything that allows, like, more granular market choices and also brings people together into, like, a smooth place where they can all exchange in the market together will make things less risky and better. And this is observed in Tradfai, too. I was just reading a book. I got involved in a little DFI slash Meets Tradfai reading group, and the first book of the week was an introduction to repo markets, which I found very well written and talks about some historical perspective of how, like, and just for the listeners, a repo market is one of the main types of, like, quote, low risk trad-fite yields. And banks do it and all kinds of things. And it's basically like, let's say I'm a stock trader and I have some Home Depot stock and I want to leverage up on it.

I do an over-collateralized loan, basically just like Compounder Ava with the bank where I give them, you know, $100 of Home Depot stock. They give me a $50 loan at a, you know, half percent or a 1% interest rate, and then I go do whatever I want with that. I either short home depot to hedge or I lever up whatever my plans are. And this is a huge, you know, huge, huge market that only really came into existence. I know the UK market was created in the 90s, that's not that long ago. And the motive of creating it and like legally allowing it, because before it was like, only banks can do these types of deals. And then they made a market where like, oh, no, any like firm can do it. Because their goal was to reduce the volatility in

the bond markets and allow people to like hedge their positions in that. And it worked. and the bond markets grew after that. And so you can see that making a place where people can trust how the rules work and more people can participate, it grows the pie for everyone. And so that's one of the things that's, of course, really exciting about Defi when you think look at the long term. Arbitrum is an Ethereum layer two scaling solution that's going to completely change how we use Defi and NFTs.

Over 300 projects have already deployed to Arbitrum, and the Defi and NFT ecosystems are growing rapidly. Some of the coolest and newest NFT collections have chosen Arbitrum as their home, all the while, DFI protocols continue to be. to see increased usage and liquidity. Using Arbitrum has never been easier, especially with the ability to deposit directly into Arbitrum through all the exchanges,

including Binance, FTX, Huobi, and Crypto.com. Once inside, you'll notice Arbitrum increases Ethereum speed by orders of magnitude for a fraction of the cost of the average gas fee. If you're a developer who wants low gas fees and instant transactions for your users, visit Arbitrum.com. To start building your DAAP on Arbitrum.

If you're a D-Gen, many of your favorite daps on Ethereum are already on Arbitrum, with many moving over every day. Go to bridge.arbitrum.io now to start bridging over your eth and other tokens in order to experience defy and empties in the way it was always meant to be. Fast, cheap, secure, and friction-free. The era of proof-of-stake is upon us, and Lido is bringing proof-of-stake to everyone. Lido is a decentralized staking protocol that allows users to stake their proof-of-stake assets using Lido's distributed network of nodes.

Don't choose between staking your assets or using them as collateral in D-Fi. With Lido, you can have both. Using Lido, you can stake any amount of your ETH to the Lido validating network and receive STETH in return. SCEath can be traded, used as collateral for lending and borrowing, or leverage on your favorite DFI protocols, all this without giving up your ETH to centralized staking services or exchanges. Lido now supports Solana, Kusama, and Polygon staking. Whatever your preferred proof-of-stake asset is, Lido is here to take away the complexities of staking while enabling you to get liquidity on your stake. If you want to stake your ETH, soul, or Matic, and get liquidity on your stake, go to Lido.fi to get you. started. That's L-I-D-O-F-I to get started.

The Layer 2 era is upon us. Ethereum's Layer 2 ecosystem is growing every day and we need bridges to be fast and efficient in order to live a Layer 2 life. Across is the fastest, cheapest, and most secure cross-chain bridge. With Across, you don't have to worry about the long wait times or high fees to get your assets to the chain of your choice. Assets are bridged and available for use almost instantaneously. Across bridges are powered by UMA's optimistic Oracle to securely transfer tokens from Layer 2 back to Ethereum. A token, a token proposal is being deliberated as we speak in the Across Forum where community members will decide on the token distribution. You can have your part of Across's story by joining the

Discord and becoming a co-founder and helping to design the fair, fair launch of Across. If you want to bridge your assets quickly and securely, go to across.tto to bridge your assets between Ethereum, Optimism, Arbitrum, or Boba networks. Okay, so I think we've talked a lot about some just big ideas, right? Like resiliency through multiple decentralized banks, We talk about control theory and how that keeps things balanced if the parameters are tuned in a dynamic fashion. I want to start to get into some more specific things about the current state of defy and the problems you see in the current state of defy and how we get to that future that you just alluded

to where like the pie is very, very big. And so like what parts of defy are preventing the pie from getting a lot larger that are consuming your brain space? Like what are the problems that you are working on right now? Well, the central thing that we're working on right now at vault, you know, directly at the moment is this liquidity management system where, you know, people may be familiar with the die savings rate. You know, so there's a version where people can take their die stable coin and lock it to get

yield. It used to be some yield on it now. It's been one basis point for a long time. But who knows, the bear market, maybe it will go back up. And the idea that a stable coin could be natively yield bearing, you know, we initially created vault as the idea of the inflation resistant stable coin and a, you know, a hard target on that, you know, U.S. consumer price index inflation peg. But what we've realized, of course, is that in some market conditions, the risk that's needed to achieve a hard target, maybe unacceptable, it's a magic number, and we need to get rid of it.

That doesn't mean that, you know, the goal of the system is still to preserve user value and it'll create a marketplace where that's possible. But it's just that sometimes it's not up to me to decide that eight and a half percent interest is the right amount at the right risk level. And so creating a way that risk and interest can be priced by the users is what's key. So we're working on a way to build a compound or Ava style utilization curve into the stable coin and have concepts of the difference between liquid and illiquid reserves. You know, the difference between like holding Dai or Fay versus, let's say, holding, you know, for a very simple example, like think about what's the equivalent of USDA for Die for Volt. It would be like tokenized wrapped treasury inflation protected securities, you know, these some kind of a tradfly inflation head instrument, right? Like, let's say there was some tokenized, you know, thing that we could get for that. So some maybe like, you know, that's earning 9% whatever.

So it's like 10% of the PCB is in that. 90% is liquid. And a way for the market to choose how that breaks down, you know, having all those kind of design features. So that's what's our most proximal thing. The other big classes of problems I see in defy today are one, the lack of like longer term debt and liquidity management. you know, most Dow's or stable coin issuers are on chain. It's pretty difficult to get longer term borrows only against a very, very narrow range of collateral like eth only, right? And even then the markets aren't very liquid. So the ability for a stable coin issuer like MakerDA to access or

give out longer term debt is highly beneficial. Real world banks construct a yield curve and have like a management of the liquidity of the underlying things. And so that seems like a powerful area that will have all the ways to go still. There's not a huge amount of traction. There are some cool projects, but nothing that has had like runaway product market fit yet. And then the other thing for me is, yeah, really cracking the governance nut. I think that token governance is a very thorny thing, especially when the more money is involved. And so really getting that right and checks and balances in the system is critical. So one of the things that we're working on for the next vault upgrade is governance rights to the stable coin holders. And I was very excited to see the,

recent Lido proposal along similar lines of putting various checks into the powers of the Lido token on Stakeith. And we like that idea. Like, you know, ultimately in the vault system, the goal is that in some way the governance tokens would be able to onboard new yield strategies or venues and then allocate, you know, PCV or choose in some kind of a market how that is directed. But we would like the Volt holders to be able to veto or say no to bad decisions. I don't think it's right to expect stable coin holders to proactively go and like decide should we do this or that, you know, or like weigh the merits of a highly nuanced governance decisions, but they should at least be able to say like, no, we don't want this. You know, like even in governance tokens like Maker,

getting participation from the holders is tough. So it's not like we expect all stable coin holders to be super engaged in governance, but giving them especially the large holders and in a relatively small forum, the right to veto negative changes is a great security check. So, you know, thinking about those patterns a lot. Yeah, another thing I learned from Amin Solmani is that if you remove the ability for one party to bully you around, he called this a rage quit mechanism out of Molok Dow, where if there was a proposal that was going through and it was accepted by Molok, the Molok Dow, they would go into it implemented in seven days. And if you didn't like that and didn't agree with it, you could rage quit before that proposal was implemented. And so you would remove the ability for anybody who

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

need to remove. And I don't know how far we can go down by doing that process over and over and over again. Like the bankless utopia is literally all the way to the point where there are no votes. And I guess that kind of sounds scary. It's like no votes. Like what? Like we just are ruled by these algorithms and like kind of. Like so I kind of want to go down that rabbit hole where like if we do agree that like

the idea is that anytime there's a vote, that's a failure. And we want to establish some like market-based equilibrium algorithm that removes the need to vote. And we have this future where it's everything on a ZEVIS completely automated. Is that the actual utopia that we want? Or does that actually like lead us down in accidental dystopia? So I very strongly agree with the dangers of mutable systems. However, I think it's a necessary risk. And so we have to thread the line where it's going to be very, the idea that we're going to

today in 2022 create an immutable system that will work forever with no changes is ridiculous, right? Every system that's ever been made has been changed a lot. Ethereum's a lot different than it was when it started. Bitcoin's a lot different than it was when it started. There's nothing that will work without change and be adopted and used long term without change. However, you can get it so that the procedures for chains are less subject to abuse, right? And so that's what you said with like the rage quit, right? Things like uniswap will make new versions, but migration is voluntary, right? So, like opt-in is a great pattern. There's some things for which that works better than others,

and you have to, like, you know, think about ways that certain, like, dynamic or lending systems can be safely moved over, or especially when there's a question of, like, protocol-controlled value. You know, these questions can get a little interesting of how it will work, but I am pretty much in favor of the idea that the smart contracts themselves should be as minimal and as immutable as possible, and then it should be frequent changes in, you know, voluntary migrations, but also the tools to make that relatively easy and simple. So that's something that we're thinking about now, right, as we're looking at some of the next iteration of the Volt system, you know, and Volt is not immutable or fully decentralized today. That's certainly the goal, but almost all DFI

projects today are controlled by multi-sigs and even the ones that are controlled by token governance, you know, a small number of whales and the core team have enormous influence. There's a few that have really gone the extra mile and attained, you know, distributed and effective decentralization. and you can see this when the founder tries to push things around and they don't work. You know, there's only a couple instances like that. Compared to like L1 projects like Ethereum, there's a long way to go for pretty much all of Defi. But I've definitely been reflecting a lot, looking at like the things that went too immutable

too fast in my opinion. And then, well, let me take one step back. People just need to be a little more careful launching tokens for things. And like launching a token for an immutable thing and then having the team only have like a whatever few year vest is very questionable in my opinion. But just like at the end of the day, the incentives are not there for new versions to be made that use the same token. So that's kind of a problem. But that's almost like separate from these like core mechanism questions that I'm trying to, you know, that harder problems to figure out. But I think that it's important to make sure that

incentive alignment is there. And in the case of something like maker Dow right, it's obvious that the incentive alignment would be there, even if they were to build a successor to die. You know, they've already built science. It seems crazy to think that there might be a third one, right, after Sigh and died, but maybe there could be it, who knows? And if they did that and build a whole new entire system with voluntary migration, they could do that and they have the infrastructure needed to keep teams working and building on it, right? And that's like credibly neutral and trustworthy. And you can count on that. When it's like, everything is built by some kind of a centralized labs entity, but they're still trying to pretend it's fully decentralized.

You have to wonder a little bit. You know, throwing a small amount of shade on Uni, I think they're great builders, but sometimes it's like, I just feel a little weird when I see like, Uniswops, Labs ventures doing big investments when the Unitokin is like holders are kind of in the dark about what's going on. So transparency is big for me. And that's, you know, like, I think transparency should almost precede decentralization and that first of all, like, who are these people who are supposed to decide, right? When you give the tokens out, like, Ethereum is not decentralized in the sense that like all the East holders have to decide how it works, right? That would be kind of ridiculous. However, they are able to opt in or out very readily. And the kind of like peers, those

who can run the clients of the network can all opt in or choose, right? It's the majority consensus of the people who really like care and have skin in the game effectively decides the fate of the network. And that's pretty good robust decentralization. About as good as you can get. It's very hard in my view to get there with token voting system. And so these things need to be thought about very carefully and not rushed into is one of the things that I've been realizing lately is like I think that over the next couple of years we'll see really great governance systems design, but we can't expect, like, expecting products to either be fully decentralized at the first MVP or things to be immutable when they first are created will lead to

dead ends. But at the same time, things should not be allowed to scale to excess before they have achieved those goals. You know, and that's one reason that we've done a cap launch on Volt and will not be like, you know, significantly allowing the supply to grow until the core issues are ironed out and it's more hardened as far as changes. But I do think it's also, you know, there is a need for experimentation and that's where like these debates about like regulation or what should be allowed like there is a great need for experimentation and just freedom and sandbox to do whatever you want but i think there's also a room for industry standards of responsibility and things like i think a big lesson we can draw from this bull market is you probably shouldn't do like uncapped public launches of a lot of types

of experimental financial products it can lead to trouble now probably shouldn't doesn't mean should be illegal but it's still like it causes trouble and so it's why to think carefully about, you know, these are the types of lessons I've drawn. I think MakerDAO, again, is like, I keep pointing to them as like my golden favorite example of a stable coin issuer and like the place to look of MakerDAO's culture as if a change is going to happen, like it needs to be so thoroughly justified and there's all these stakeholders who are going to weigh in and that bias against change. Like when rocketry got started in California and like the people who would eventually go on to

found JPL were just sneaking outside of Caltech and firing off rockets and the cany when no one lived around. Like, that experimentation was good. It was also good that now, like, today in the aerospace field, there are such strict standards for software security, right? Like, far more than for any Defi project. You know, I have a friend who worked at JPL, and it's like they have entire separate teams

working on the tests and the code. And the people who write the code haven't even touched the test. And at the end, it all has to work perfectly, right? And it's like they have everything so specified and so many eyes on it, external firms where like even almost the best in the business, it's like, oh, we had two audits, you know, by these two big name firms. It's like, well, that sounds great. But like, when was the last time, like, Ava compound checked an audit on one of their collateral tokens and what

governance changes have been going on? Like, even at this moment, there's like a bunch of collateral tokens on Ava or Kampa where if a malicious change went through, they could just infinite mint or something and rug, you know, there's so many buried risks. And so that's why I respect MakerDA a lot being like, no, you're like very few collaterals per asset collateral caps, keeping them very small, getting rid of things. So those types of choices and also just a completely open and transparent decision-making process. That's what's so good about Defi. Like, you can see everything that happens on chain and it's even better if the decisions are all out in the open. And so that's something, you know, it's hard for small projects because at the end,

there's only so many people who care or understand, you know, and you have to just, you know, it's a small team who's figuring things out. But as things grow, making sure all of those rails are laid out and transparency is super huge. I'm very, I'm going on in another little tangent here, but I'm very much an enthusiast and proponent, although we haven't implemented these things at Volt yet of, like, decentralized front ends and informatics hosting, you know, like decentralized subgraphs or IPFS-based distribution of sites. You know, there's a lot that Defi products can do to just the simple fact of like making the site a front end an immutable link. Like front end security is such a can of worms to you. Like there's so many

things that need to be carefully minded. So after all of the like heady days of the last year, I've definitely taken a long look at just how deep a rabbit hole true security really is and what it means to have a security culture. And that I really admire the Ethereum core devs and their process. And so Defi needs to learn from like these robust decentralized existing orgs. I think MakerDAO and like all core devs. And the Ethereum culture is really strong. And that's what Defi needs to not get lost in.

And sometimes move fast and break things is good. But sometimes the Ethereum instinct of no, slow down and contemplate. is a good one. So then contemplate and make sure it's really designed the right way for the long term and decide everything based on the best long term principles, not based on short term opportunism or incentives. So I mean, I'm 100% in alignment. With the other property about Maker Dow that I definitely admire is that, and this became super obvious right after the terror collapse, is that the growth of Maker Dow lags demand, or at least the growth of dye supply lags demand. Whereas like UST was minted in a growth strategy. It's like, well, mint all these tokens so that we

can go, like, do things, like, mint the tokens so people can have the tokens, like, mint the money, and then all of a sudden, like, it fell over. Dye supply is the opposite of where, like, it only grows if there's sustainable, long-term die demand, pushing up the die price on the secondary market, creating an incentive to mint new dye. And so this constraint on how fast this thing grows is what makes it and protects it and make sure that it's always going to be stable. And so, like, using these principles, same thing with, like, Ethereum block space, too,

right? Like, Ethereum block space is so constrained, yet it actually has gone literally 10x in supply since 2015 when Ethereum first got started. And so, like, the Ethereum block space supply has grown 10x, but everyone feels like that Ethereum scaling is going so slow because if we juiced up the block space supply, like, it would turn into Solana and then it would crash. And so these ethos of, like, constraining growth, while we are in a hyper-growing environment, like constraining growth is probably pretty okay, like, yo, we're going to be fine.

We're still going to grow. So, Kirk, we touch on it a little bit, but I want to just formally go down the Volt rabbit hole. Let's start from the very beginning. Like, what is Volt? And how have you applied all these principles that we've talked about so far in the podcast to building Volt? So let me quickly run through like three visions of Volt. And there was a time when Volt was actually going to be a fork of Rye. That's because I really admire the controller model.

And the idea was that Volt was going to be a Rye fork focused on long-tailed defy asset lending. This is a very bull market idea. Back when he were getting like 20 to 50 percent rates and fees. use on long-tail defy tokens and thinking that that would be a very, you know, effective way to do an inflation-resistant stable coin with a floating price but targeting the inflation rate return. So offering a lower borrow rate than maybe people were already paying for those long-tail assets, but more return to the users. We ended up moving away from that just because of kind of the complexity of the Rye implementation

and it's really made to be immutable and just be-eathe. You know, the kind of more scalable and modular thoughts that we were looking for wasn't there, although I admire the team and the design of it a lot. So we moved away from that to the die-like model, right, with the PSM and also, you know, thinking that lending would be this major component of it, directly issuing Volt through Fuse. And what I think is the bad part about this model is that, like you said,

the magic numbers, you know, and I had always intended to make it more market-based in various ways. But as the market conditions have changed, I think we've come to understand that it's, not necessarily destiny that on-chain yields will always be super high. You know, they won't necessarily always be more than trad-fite yields. And while there are those higher yields out there, they require you to move significantly farther on the risk curve. And so that's what's inspiring me to think about some significant changes versus the current Volt V1. So, you know, Volt V1 is live today. And it is

a very Fay-like stable coin because ultimately we did not issue any Volt as direct debt issuance as part of the V1 MVP, so it's just minted through a PSM. And realizing that having, like, in the early stage of the project, the team, it's not desirable for us to manually make yield decisions, especially risky yield decisions, right? That's the exact opposite of what a DFI project should be doing. And the goal is to create a, what we've realized we need is a feedback mechanism where when a vault holder says, I either want to hold more vault or I want to get out, the system needs to take that information and accept that feedback and say, okay, vault holders are leaving the system, so we need to adjust the rates accordingly, or we're minting more vault.

And there's various things you could adjust. Like, you can adjust the actual yield rate that the vault is earning. You can also adjust a mint fee. So, like, when there's very, very high demand to mint, you can do like equivalent of an auction, right? And essentially it was this yield-bearing type of stable coin. So there's thoughts to think about there. Like, when you are expanding the supply, how do you do it efficiently and as fairly as possible? Because it will be capped it first, and then at what point do you judge it safe to expand beyond the guarded launch? But I'll just kind of sketched through how I would envision the next step of Volt working, which is that the system will have a concept of, let's say, a stable coin can have both liquid and

illiquid backing. So for Dai, the liquid backing is USDC. The illiquid backing is the loans of die. You know, so if you've borrowed Dai against ETH, make your doubt cannot redeem that instantly unless they do emergency shutdown. They have to wait for you to repay. They can jack up their rates, but maybe you don't care. And so especially if you think that die is going to go further, like, below peg or like something's happening, like just being able to change the rates alone, just not guarantee that those things will be redeemed. And so you can categorize it roughly as liquid and illiquid backing. And for Volt, we're thinking the target liquid backing ratio should be determined by a market process. You know, this is similar to how FRAX has a collateralization ratio,

but Volt would still be over-collateralized, you know, by PCV. But how that was allocated would be based on this liquid or ill-liquid reserve. At first, it would be 100% liquid, probably. And then just with depositing into other decentralized on-chain yield venues, whether that's obvious. offer a compound, a certain menu of them, and optimizing the liquid yield rate. And so that liquid yield rate would be like the minimum that the Volt holders would earn. And then you can say a portion of the funds within the protocol could then be available to go into less liquid or riskier yield venues. So that could be as simple as like, you know, let's say the Volt protocol has, you know, $100 of circulating Volt. And then they have, you know, $99 and $7 of stable coins and like five cents

of ETH, you know, like just a tiny percent, you know, one percent volatile backing, right? Or it could be that tokenized, you know, yield-bearing instrument from off-chain, or it could be an on-chain loan, like a Dow to Dow loan, a bond to a Dow. Let's say a 7 percent fixed rate loan to a Dow that expires in six months. And the mechanisms by which that those could be added will also have to be designed. And I term that process market governance is like what I like to say for this whole theme. And maybe we could talk a little bit about governance. token design. I think it's very important that government's tokens have skin in the game

along with their decision making. So you can look at like, there's a few common classes of problems. I'd say one is tragedy of the comments. This is what we see with a curve and other VE style emissions tokens where, you know, I take the best bribe I can get and I vote for that pool. And who cares if that is actually good for the underlying Dow or its revenues? I'm just profit maxing for myself. And I capture a spread on how much I'm dumping on the other holders versus is how much I'm getting bribed. So that has significant issues. Then with just token voting, it's like majority rules.

And if you feel like you're part of the minority, it's like why even bother? Especially if it's an unpopular decision, and people will know what you're voting for. And you have some things that are really cool. Like, for example, I like a lot, like the Ava insurance module, where Ava tokens can put skin in the game voluntarily and opt into it to the staking module.

And so you can envision things like, what if they could stake, but like per collateral token? And then that set what the debt ceiling was for that collateral. And they put skin on the game for that collateral specifically. And so that pattern in general of like more gradiated or like smooth decision makings where you could stake to like a certain opinion and consequences and rewards associated with that stance, I believe will have more effective results.

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

And hopefully it can all come together symmetrically to offer, well, not hopefully, but rather through significant hard work and ongoing effort, will come together to get a fully symmetric stable coin system that can support a wide variety of different types of like yield activities, more than just like what I would call on-chain repo, you know, over collateralized secured lending, but also have other types of yield instruments and things. Yeah, the concept of a work token comes to mind. And this was a term I remember being thrown around in 2017, about many, many 2017, I guess ICO tokens. Yeah, I CO tokens. I think the augurs token was the first one. I heard this classified as a work token where a lot of people just like buy these tokens and like,

if they buy the right ones and it goes up in price. And then they're like, yay. But like the concept of a work token is that you put it somewhere in the right box. And if you put it in the right box, then you get a reward if you put it in the right box. And you have to determine what the right box is. And so Auger as a prediction market, there would be like an auger market spun up around like the Super Bowl, right? And Team A would win the Super Bowl and Team B would lose the Super Bowl. And then all the Auger people, all the Auger token holders would come and they would put their REP tokens for reputation. And they would put it on the side of like Team A won the Super Bowl. And then they would collect a small fee from the gamblers who were gambling in that market. And the gambling would be

denominated in like die or eath or something. So there'd be a fee and then that fee would be shared by all the rep holders that staked their rep on the outcome of a particular event. Now there's many, many, many different marketplaces. And so like rep was utilized. The rep token was utilized across all these different marketplaces. So it's not like every single person was voting on every single marketplace, but you would go to the idea is that you would go to the auger marketplace. And then you would just like stake your rep tokens that you have in the markets that you know what the outcome was. And then you would get a small feet. And like, this was a way to get a decentralized Oracle onto the system. Sadly, Auger never really took off, but it made the token holders go do work. And it was kind of like

governance over the system. Like Auger governance says that like Team A won the Super Bowl. And then the token holders would go in and like actually move their assets and the value of their assets into the right box and they would be compensated as a proportion of the amount of capital that they put at stake there. If they put their token, in the wrong box, they would get penalized. They would get slashed. And so if everyone, 99% of people said team A won, but you put it in Team B, you lose your tokens. And so there's risk there if you choose the wrong side. Now, maybe listeners are like, well, why would anyone choose Team B? It's obvious that Team A won. Well, then we start to get into the more gray area types of prediction

markets where the market is actually confused. And so, like, there's perhaps something where, like, the outcome of something is not totally certain. And so we need to come to, like, what does the wisdom of a crowd think. I can't really think of an example off the top of my head, but you can totally think of an outcome where like it's kind of up for interpretation. Like if we're doing the sports metaphor, it's like, all right, everyone just looked at the film, was that the football player's foot over the line or not? And like everyone's looking at the film and like everyone's obeyed like, yeah, it is over the line. It's not over the line. And then token holders are going to have to go and vote. Like, was his foot on the line or not? And then maybe like 75% of

people say, yes, it's on the line. 25% of people say, no, it's not on the line. And then the 25% of people get slashed and the 75% of people get the rewards and then I also get the rewards of the rep tokens that was slashed. So you're rewarding all the people for being right. And the reason why I want to go down this rant is rewarding the people for getting it right is this control theory mechanism that we've been talking about where the market like has this input and it uses it to balance out the actual inputs of the system. And so if you're talking about like the Volt's governance token like staking it's like yes, I believe in this market. Like this is. not going to get rugged. The yields here are good. I'm going to stake my capital here. And then the vault system naturally increases the debt ceiling, the ability to mint and deposit capital into this one particular vault. That sounds like a self-regulating, marketplace regulating, low governance overhead, stable coin, yield-bearing stable coin marketplace. Am I on track here? You're absolutely on track. Okay, cool. But how on earth, maybe this is going down a different rabbit hole, but how on earth do you find like 8% yield right now to combat inflation on defy? The realization we've

ultimately come to is that it is not my place to decide whether there is appropriate risk-adjusted return at that yield. And as we do due diligence into defy yields today, in general, we conclude that they are mispriced as far as risk. You know, most defy yields are not enough to justify the, the yield is not enough to justify the risk that is actually present in the system. And even well-regarded safety defy projects have a lot of governance risks or things that could potentially go wrong with them. And so there's a lot of care and concern that thought that needs to go into, like, composability is huge, but you have to be careful you're not just composing risks. That is the central reasoning behind our need to, I think, move to a floating rate system with a feedback is realizing that for me to say Volt will always have 8.5% yield is a dangerous, dangerous thing that could lead to the system blowing up and being destroyed under certain conditions. And what we'd rather say is that, you know, in the early stage, the team will begin white listing, you know, certain yield venues on a basis of most secure first, you know, like existing well-regarded defy things. And in the meantime, be designing these mechanisms by which a decentralized process can onboard more yield venues. And we want to, you know, keep the scale of the system reasonably small like it is now while all these systems get ironed out. And then once they're well in place and have been working in production, we can scale it up more. And there'll be a

parallel effort, I think, to look into real world assets and also not just like purely real world, but maybe like what we could call like hybrid on-chain, off-chain things. Like, you know, you look at Maple Finance, right, as an interesting example where it's kind of like, quote, uncollateralized loans to these market making firms, which should be scary to people in light of the recent three AC kind of stuff. But, you know, they've said everything's fine and I, you know, not trying to throw shade at them, but it definitely is a little spooky to not necessarily know what all of these books of these people are. And so you can envision, like, maybe a middle ground that's one step more decentralized. Like, there's a special purpose legal vehicle that corresponds to a single borrowing

pool, right, and that it has very strict rules about what kind of things can be done with the funds. And so I'm interested in both learning about not saying that volleyball will internalize in-house all of these things too. Like, there's lots of projects going on and I've been learning about the efforts of other real world asset or also like on-chain native lending or credit market kind of projects. And so I would really encourage listeners to just look at the fact that there's conversion evolution happening among a lot of stable coin issuers today. And if you go look under the hood at what MakerDAO is planning and what Frax is planning and when I look into my own head at what I'm planning, there's a lot of the same things going on of stable coin issuers realizing that

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

You need to have read every line, not just on your own, but like pair program security reviewed with their team every single line of code. And you need to do that again every time they have a governance change of any kind. That's the truth, right? That's the type of diligence that ought to be done in systems that's handling, you know, tens or hundreds of millions of dollars of capital or more. And again, that's one reason that we're starting small. You know, there's any new project has limited capacity. And we have to be careful and quality over quantity for integration. So we've been doing a lot of deep dives into all of the existing projects.

And, you know, I've had a lot of fun. I took oiler protocol for a spin for the first time yesterday. I had my nose to the grindstone for so long on Vault. It's nice to look around and see what else has been built and exists today. So these new, you know, oiler protocol and interest protocol are the new on-chain, what I would call repo-style markets, you know, secured lending that interest me a lot. Of course, there's the classics of Ava and Compound. And then there's the sort of Ava and Compound style real world asset things like Tin Lake,

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

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

there to our Discord. And you can find me on Twitter or on Discord and also on Telegram anywhere you like as One True Kirk. You can also email me at Kirk at Volt Protocol.io. Yeah, always happy to chat about any Defi concepts and just answer questions. It's not limited to Volt, but also to learn from others because to me, the most limiting part of the whole like pandemic period was just being cooped up in a little box. I got out to my first ever crypto conference for East Denver.

Oh, cool. And I think that, you know, crypto Twitter is a bubble. And even within Defi, there's little bubbles, right? And so it's good to go outside that bubble. And so I'm working on that a little bit, trying to learn more about like L2 stuff to A Volt launched on Arbitrum recently. And I'm working on understanding a little bit more about the security and decentralization, like uptime concerns with L2s and how that relates to lending, lots of interesting stuff.

Well, Kirk, it sounds like you are becoming an expert in every single facet of crypto. So I'm glad that I got introduced to this way by doing the podcast. And I'm going to keep an eye on what you're up to and where your brain goes. And I think we will reconvene on the podcast at a later date and time as well. Thank you, David. I really appreciate getting the chance to speak with you. And apologies for the connectivity issues on my end. We're going to have to, unfortunately, grandma house internet has its limitations. Well, I think we can edit all that out in post. So no worries, Kirk. Thanks for coming on, my man. I appreciate it. Thank you. Take care, Cheryl. Talking a bit.