Epicenter - Learn about Crypto, Blockchain, Ethereum, Bitcoin and Distributed Technologies - Kain Warwick: Synthetix – Bringing the World’s Assets Into DeFi

Episode Date: February 4, 2020

Like previous crypto winters, those actually building the ecosystem have been working diligently to create applications with industry-changing potential. The year 2020 may prove to be the year of Decentralized Finance (DeFi), with many exciting projects re-creating financial products common to the world of traditional finance, in the open and permissionless blockchain space. Synthetic assets enable exposure to the price action of an asset without actually holding the underlying asset. Kain Warick is the Founder of Synthetix, a company creating synthetic assets for DeFi, enabling exposure to fiat currencies, commodities (gold and silver), and cryptocurrencies. They have large aspirations to create synthetic assets for many more things, including traditional equities. Synthetic equities in DeFi is a massive opportunity that demands everyone's attention. Once traditional equities become accessible in DeFi, anyone in the world with internet access will be able to gain exposure to financial products currently only available to the privileged few with access to markets like the Nasdaq or NYSE.Topics covered in this episode:Kain’s eclectic background and his path to cryptoWhy the world needs synthetic assetsRetrospection on the Synthetix crowdsaleHow Synthetix worksThe SNX token and its governancePrice stability and the collateralization ratioThe price oracle, and a battle with front-running botsThe long-term vision of SynthetixHow Kain believes DEXs will compete with centralized exchanges in the futureEpisode links: Synthetix WebsiteSynthetix on TwitterThe Synthetix BlogSynthetix DashboardSynthetix on DiscordSynthetix on ViewBaseSynthetix 2020 RoadmapBending Metal on Amazon (Kain's sci-fi book)Sponsors: Nervos: If you’re a developer or project seeking funding for an innovative idea, check out the Nervos Grants Program today - https://www.nervos.org/grantsPepo: Meet the people shaping the crypto movement - https://pepo.com/epicenterStatus: A multi-purpose communication tool that combines a peer-to-peer messenger, secure crypto wallet, and web3 browser - https://status.im/This episode is hosted by Brian Fabian Crain & Friederike Ernst. Show notes and listening options: epicenter.tv/325

This is Epicenter, Episode 325 with guest, Kane Warwick. Hi, welcome to Epicenter. My name is Sebastian Quirio. Today our guest is Kane Warwick. Kane is the founder of synthetics, a project which went from relative obscurity just a few months ago to becoming the second largest defy project in Ethereum after Maker and the largest derivative platform. So what is synthetics and why has it grown so much? Well, before we dive into the project, I think it's helpful to briefly recap what synthetic assets are. So a synthetic asset is a financial instrument and it gives you exposure to the price of an asset

without holding the underlying asset. So essentially there are assets that simulate other assets. And there are several synthetics in defy. Of course, dye is the biggest one. When you lock collateral in a CDP, you mint this synthetic asset, dye, which is pegged USD. So dye holders are exposed to the price of USD through this synthetic without actually holding dollars. So that's essentially how they work. And you'll remember we've talked about this on the podcast before with Dan Robinson in May of last year when he came on to talk about the Rainbow Network,

which is an off-chain synthetics exchange. So the synthetics project is an issuance platform that allows people to mint a range of synthics. And they call these synths, which is kind of cool name. And just like Maker, when you lock up collateral, you create a synthetic asset, and then you need to repay that loan if you want to claim your collateral. It also has an exchange, which allows people to trade one asset for another, although here there isn't really any counterparty to the exchange. They just repriced the collateral. So essentially, you convert one synth into another, and the value of each synth is taken from an exchange rate at the time of the transaction, and so synthetics has a built-in price oracle to figure out what that exchange rate is.

Brian and Frederica did this interview, and there are a number of interesting things they pointed out that I'd like to talk about. One is just the number of assets available on the platform. There are several fiat synthetics, which basically act like stablecoin, so they have USD, euro, the pound, and many others. They have cryptocurrencies like Bitcoin, B&B, ether, but also the inverse of those currencies, so you can effectively take. a short position. They have commodities like gold, and they plan to add all kinds of assets like stocks and equities, so the possibilities are kind of endless. And they're also adding some interesting ones like this defy synthetic, which is a basket of defy projects. So it's kind of like an index

of the defy space. One interesting thing that Brian pointed out was that when users put up collateral, they get rewards from fees. So periodically users earn exchange fees based on the pro rata a proportion of tokens that they lock in the system. So when you think about it, they're putting up collateral to mint this asset, but in a way, they're also receiving like staking rewards for putting up that collateral. So it creates this interesting hybrid incentive model. Frederica pointed out that like Maker Synthetics is quite collateral heavy to run. Currently, the system requires 750% collateralization to receive fees. And Kane gave his thoughts on how DeFi could shift into an undercollateralized model as more assets come into the space.

So it was interesting to get his vision on where the DeFi space could be heading in the future. So what about the growth of synthetics? I mean, before Q4 of last year, the project was relatively unknown. Well, after listening to this interview, it seems like it was such a needed part of the defy infrastructure. If DeFi is going to continue to grow, in Finet, it needs to have exposure to most of the assets that people are used to in traditional. financial finance, and even though it's still in its early days, synthetics makes that possible. And the other thing that this opened my mind to is the idea that Maker could and probably will at some point allow for the creation of many different kinds of synthetics, and it'll be

interesting to see how much network effects play in the success of each of these platforms as they continue to grow and include all kinds of new and exotic assets. Before we go to the interview, I'd like to tell you about our sponsors for today's episode, starting with a new sponsor that I'm very excited to tell you about the Nervos ecosystem grants program. So you might have heard of Nervos. It went live recently. And if you're thinking, hmm, here's a new blockchain. I'd like to explore ideas on this platform or maybe contribute to building the infrastructure around it. You might want to check out the Nervos Grants program. They're funding innovative ideas and people that are looking to contribute to building the

Nervos infrastructure, and they have a total of $30 million in funding available. Nervos is really unique because it's a proof-of-work blockchain in a crowd of proof-of-stake networks, and they stand firmly behind Nakamoto Consensus, and they've made some adjustments to it that allow it to have much, much more throughput. So it combines the simplicity and security of Bitcoin at the base layer. So that's layer one, it's the common knowledge base, or KB, with the flexibility of Ethereum at layer two, so all the computation and scalability will take place on a second layer. And they have a low-level Risk 5 VM architecture, so you can write really robust smart

contracts in any programming language. So we recently did an interview with one of the founders of Nervos, Kevin Wang, and that interview will come out next week. So check it out if you want to learn more about how it works, because we went deep into the architecture and the vision for the project. So to connect with the team and learn more. more about the grants program, how you can apply, and what kind of grants are available, go to nervos.org slash grants. We'd like to thank the Nervos ecosystem grants program for their supportive

epicenter. We're also brought to you by status, and they're building tools and blockchain infrastructure at every layer of the tech stack to give people monetary independence, voice, and sovereignty. The status messenger is out and it's available in the Android and Apple app stores. Once you've installed it, you can enjoy private, secure communications. Status is a multi-purpose communication tool that has a peer-to-peer messenger, a secure crypto wallet, and a Web3 browser. Messages are truly private. Status leverages Ethereum's Whisper Protocol for peer-to-peer chats, and all messages are end-to-end encrypted by default. There's no servers, and the account creation is simple and privacy preserving.

This is one of the things I love about status. When you create an account, they'll never ask you for an email. They'll never ask you for a phone number. Your account is protected by a private key. It's protected by math. So to learn more about status and all the infrastructure they're building for the ecosystem, go to status network.com and to download the app, go to status.com. And once you're in there, come and join us in the hashtag epicenter public channel. Come and say hi. And we'll give you some free S&T tokens to play around with and do things like create your own status E&S name. We'd like to thank the status network for those support. of Epicenter.

We're also brought to you by Peppo, where the crypto community comes together with short video updates and tokens of appreciation. So whether you're a crypto developer, a podcaster, an analyst, a blogger, or just an enthusiast. There's never been an easier way to showcase your work, earn appreciation, and connect with the community. So if you're still on the fence about going to East Denver, listen up because I can get you a free ticket. East Denver starts on February 14th. That's just under two weeks from now. And Peppo is. giving away a free VIP ticket worth over a thousand bucks. So to enter and maybe win this $1,000 ticket, it's super easy. All you got to do is download the PEPO app and create a 30 second

video explaining why you want to go to East Denver. And when you send the video, tag me in the description at Seb 2, P-O-I-N-T-Zero, same username as on Twitter. And yeah, you can maybe win. I think your odds are pretty high. So we'd like to thank PEPO for those support of epicenter. And with that, here's our interview with Kane Warwick. Hi, we're here today with Kane Warwick who's the founder of synthetics. Synthetics, probably most of you or many of you have heard of it. It kind of came from nowhere to the forefront of Defi and Defi the attention space. And it's now become the second largest protocol in terms of, you know, assets locked on. on that after Maker.

So we're really excited today to talk with Kane about, you know, how it works, how we got to it and sort of the inter-season vision of synthetic. So thanks so much for joining us. Yeah, absolutely. Thanks, guys. Thanks for having me. So, Kane, I often start by browsing the guest's LinkedIn page. And yours is absolutely fascinating.

So your background is really ecstatic. So from your LinkedIn page, I got that you studied genetics. at the University of New South Wales. You are United States Professional Tennis Association certified professional tennis instructor. You were the vocalist and guitarist and keyboarder of an emo punk rock band named the Lai Society, which performed in Victorian area outfits

and toured the East Coast for a couple of years. You wrote a sci-fi book named Bending Metal about an AI taking over, which can still be put on Amazon, and I think we can link to that in the show notes. And you found it a number of companies. to of which you're still the CEO of. So who are you?

And what makes you tick? So my first, like, real job out of, like, university was working at a startup. So I had a good friend of mine. We grew up together, playing tennis together. My dad was a professional tennis player. So that's, you know, where the tennis background comes from. So, you know, my brothers and I all played tennis. And one of my closest friend was a tennis player as well.

he went to the US and somehow got, you know, caught up in this startup thing. And he was like, hey, you should come to Seattle and work at the startup. So in like 2001, like late 2000, early 2001 turned up in Seattle to like work at this startup. And, you know, it was right before the dot-com crash. They were raising some money. And anyway, it didn't work out. So but I think that kind of got me into the idea of startup. So then, you know, I was involved in a couple of other startups.

that but I took a bit of a break again the same friend of mine who like we also used to play guitar together moved to Boston he's a psych professor so he moved to Boston to get his PhD and was like hey why don't you come to Boston and we'll like finally start this band and so moved to Boston started a band was there for like five years and then I think you know I'd been out of Australia for about 10 years at that time and started to kind of get the itch to come home and and decided to come back and did another couple of startups. So, you know, yeah, I've had a pretty kind of diverse background, I suppose. And one company that you still involved with, I'm curious about this thing called Blue Shift. What's like, how did you start Blue Shift? So I've been running an online retail

business and I shut that down and a friend of mine was working at a large consultancy. And I was just looking for a job to kind of get out of the startup scene for a little while, take a break and go and just get a paycheck. And so I started working this consultancy. And about like six or seven months in, mentor of mine said, hey, I've got this guy. He's trying to launch this startup. He needs a CEO for it.

They've got funding, but, you know, they don't have anyone to drive it. It's basically going to, you know, take this network of independent owner operators and turn it into like a national retail network. to provide services to a bunch of large national and multinational corporations. And I was like, okay, that sounds interesting, but like, no, get away from me. Like, I have no interest in doing a startup right now. And he kept pestering me and pestering me. And, like, I think it took about four or five months.

But eventually I came and met the guy who was starting it, whose name is Matt Hambry, who was actually Rupert Murdoch's nephew. And he was like, I really want to do this thing. You know, I've got the funding. Let's, you know, I want you to do it. And so eventually I started it. And one of the reasons why I started it was I saw the value in what we were trying to do, which was cash payments over the counter for cryptocurrency.

So in my online retail business in the past, I'd hooked up with a guy called Ashertan who runs Coinjar. And we started accepting Bitcoin for online retail purchases. There wasn't much demand because this is going back like 2012. But I really saw value in being able to accept cash payments. because of the chargeback issue for Bitcoin and other crypto. And so I reached out to Asher and I was like, hey, would you be interested in doing this? And eventually, you know, Asher came on and a couple of other Bitcoin businesses

that were, you know, looking for a payment mechanism to get money into crypto. And so that kind of, you know, took off. We've got some other services that we offer. But, you know, especially during like the 2017 bull run, at one point we're processing like $30 million a month in crypto deposits, in Australia. So yeah, it was it was pretty crazy, pretty crazy ride during that time. So that was basically people would go to some convenience store or something and they would give cash and then it would get credited to an exchange balance. Yeah, yeah, exactly.

That's super interesting. We just had Charlie Shrem on a few weeks ago and I don't know if you remember his bit instant business, which was doing exactly the same thing. Yeah, exactly. Yeah, It was like an Australian version of that. And obviously back then, and even now, but really, especially back then, the Australian banks were really adversarial and like aggressively shutting down any crypto business, shutting down their bank accounts. And so, you know, like we were, the cat and mouse games that were being played, like, all the crypto brokerages would like set up 10 different entities and be cycling through them and different banks and stuff. So for us, I think we provided kind of a stable on-ramp for them that was always there because the banks, we had 1,500 different locations, right? And the individual operator would deposit into their own bank account. So it was kind of this way of obfuscating the payment flow, I suppose, to a certain extent.

So, you know, we were lucky. We were able to kind of avoid being shut down or shut out by the banks. And this is still operational? Yes, yeah, it's still working. So, you know, we've got, we've still got a. about 1,500 sites and, you know, we process a big chunk of the volume for most of the domestic exchanges and some of the overseas ones. So Binance, for example, uses us. There's a couple of other international exchanges that use us as well. So when did you move on from the payments

use of blockchain? We always saw ourselves, I guess, as like a facilitator, right? Like just a, you know, a Fiaton ramp. We weren't, you know, handling crypto payments. We weren't dealing with, you know, any of the sort of challenging side of crypto, I guess. You know, we weren't doing with wallet security or, you know, custody or anything like that. It was literally just very standard kind of API integrations to allow, you know, cash payments to be accepted. I think when I saw the opportunity for Haven, you know, back in like 2016, 2017, was when we really started to see the spreads in some of the smaller crypto markets like Korea, Australia, et cetera, grow. Because what was happening is there was no real mining business in Australia.

So all crypto was it was net imported, right? And the more demand there was, there just wasn't enough supply to support that. And so spreads just kept creeping up. You couldn't get Fiat out of Australia fast enough to bring it back in. And it just created this arbitrage opportunity. And I think, you know, looking at at the time, there was really only tether was kind of the only viable option. And people had concerns about that, obviously.

And, you know, Dye hadn't launched. And so we looked at and said, what you really need is like a crypto payment network, like a closed loop payment network, like a PayPal or an Amex or something like that. And that would be able to kind of close the loop on this problem. And that was where the Haven idea came from. So the idea was basically to have these stable coins that, I mean, it can explain actually in the example of, you know, there being a big discrepancy in the crypto price in Australia versus maybe a US or Europe where like larger, markets, like how would that project have solved that issue? I think the idea was that you would have, you know, an alternative payment rail, right, that people could, could use to, you know, offset the potential Fiat limitations, right?

So even with Tether, Fiat still needs to move around, right? Like, you still need to get Fiat into, you know, Noble Bank or whichever bank they were using. So the idea of having like a fully crypto-native payment network that was collateralized by crypto could potentially offset that, right? Because you could, from anywhere you had crypto, get the crypto in, converted into these stable coins, and you didn't need to necessarily get the the Fiat out of it. It could become just a closed loop payment network to close those ob cycles. I mean, we never really got to the point of being able to test that out in market. So, you know, it's not even clear that it would have necessarily worked. And mainly because,

you know, one of the, I guess, assumptions that was built into that model was that regulated stable coins wouldn't be a thing, right? Which obviously has proven not to be the case. You know, you've got USC and true USD impacts are some, you know, a whole bunch of regulated stable coins that have launched in the last, you know, two years that sort of invalidated this use case of like a crypto-native solution to this problem. So you augmented the scope of your project to the extent that I would actually call it a pivot. So basically it's no longer just stable coins, but all kinds of synthetic assets, right? Yeah, yeah. I mean, Essentially, we were building a synthetic US dollar, right?

That was crypto collateralized and that was self-collateralized. So, you know, demand for access to this network would create more value and would capture more value and create more supply. And it was very sort of self-referential and self-contained, which is, you know, the, I guess, one of the positives and one of the negatives, right, because there's risk there. But, you know, the advantages that it is self-contained. And then I think once we realized that this synthetic US dollar was, very much marginalized in terms of the market potential by regulated stable coins and even maker.

When Dai launched and really got a lot of adoption, it kind of pushed us in this very narrow niche. And so we had to do something. And the solution was at the time, you know, let's add more fee-eac currencies, right? We had this idea that, well, okay, you know, if you've got this network that can move between different fee-eer currencies sort of natively within the payment network, that's that might be more viable. It turned out that wasn't the case at all.

That was another really kind of dumb assumption. You know, and it was not until we really launched gold and Bitcoin and other more volatile assets that there was any demand. People really didn't want to trade synthetic euros from what we could gather. But the fundamental system was it kind of the same back then already? I mean, was it a token already called S&X and would be used to sort of over collateralize the issuance of these different fiat stable coins? It was called Haven, the token, but yeah, fundamentally it was the same thing. It was just that the debt that you were issuing against the collateral was only a synthetic dollar. That was the only thing you could issue. So now you can issue, you know, 20 different types of synthetic debt. But they're all backed by this token that, you know, accrues value through activity within the networks through transaction phase, essentially.

Let's do a deep dive into the protocol in a little bit. But I would like to talk about your company set up first. So, you have a Swiss foundation, right? We've actually got an Australian foundation. So we did look into the Swiss Foundation, but we decided to normal asylum in Australia, which is a fairly stable regulatory environment, maybe not as stable as Switzerland, but not too bad. But yeah, it's an Australian foundation

and it's set up as an all-for-profit, essentially. And what are your takeaways from the organizational structure that you guys chose and sort of the learning, in terms of how you approach that and maybe how you'd approach it today. Yeah, I mean, you know, I think a lot of things in crypto are very path-dependent, right? And, you know, back in 2017, 2018, when we were doing our token sale, if you would come out and said, you know, this is a pure Dow, there's no legal entity, you know, there's no documentation or anything like that, you know, it's all done by smart contracts. I think that it would have been very difficult to get much traction. But if you get in a time machine and do it all over again,

I probably would push more aggressively on that and try and avoid some of these more traditional legal structures, I suppose. So at the time in 2017, you also did a token sale, correct? Yes, yeah, it was early 2018, so February of 2018. Cool. And you collected 30 million, is that correct? Yeah, about 30 million US dollars. It was like 30,000, 8th, 32,000, 8th, and a few hundred BTC. Tell us a little bit, like, what kind of people participated?

You know, what does the synthetics community look like? Yeah, so, I mean, back in those days, it was about, you know, 90% of the sale came from institutional fund-like entities. You know, there were some syndicates and some other things around, but, you know, funds like Block Tower, you know, lock asset, some of the Asian funds went in, and then about 10% of it was sort of more retail people, I suppose. So, you know, that structure, I guess, of, you know, a large pre-sale and then a small kind of open public sale was the thing at the time. Again, you know, in hindsight, I think we probably could have had a better distribution and, you know, the impact on that distribution and what happened throughout 2018 as the price kind of went from, you know, 65.

cents down to three cents was somewhat a reflection of that poor distribution, I suppose, the tokens. Interesting. How have those original investors, you know, how did they deal with the kind of pivots and strategy changes that, I mean, now of course, synthetic has found quite a lot of traction and success, but I guess there's a lot of things in between where it didn't look so good. Like, how was it to deal with your investors in that time? Yeah, yeah. Yeah, I mean, you know, we, one of the mistakes that I think we made, which was definitely a mistake, but somewhat helped us, was the fact that there was very little awareness of the project because we were, you know, often the hinterlands in Australia, right? So, you know, there weren't too many people in San Francisco and even in Europe or other places that were aware of the project until really like a few weeks before the sale. And so, you know, what happened, there was this mad rush for people who kind of then, And, you know, stable coins are becoming a huge thing. Basis had done a big sale.

And, you know, there are a few other, you know, projects that were doing quite well. Maker was becoming, you know, a pretty hot project. And we ended up in a situation where everyone essentially got deallocated. So, you know, no one really got a large allocation of tokens, known of the institutional investors that went in. You know, I think the maximum that anyone got was like one and a half million dollars out of that sale, which is pretty unusual at the time, you know, back then, oftentimes, you know, a single institution might take 10% or 20% or 30% of the tokens. And what that meant is that we were never that relevant to anyone. And so even as the token price went down and as we failed to get traction and

kept launching things and doing things but not really having any meaningful impact, I don't think many people cared that much, to be honest. And I think we got to a point in sort of December of 2018 after we launched multi-currency and started to think about launching these alternative assets and also changing the monetary policy where we went out and kind of canvassed the investors and like they pretty much all just sort of said do whatever you want right like we don't really mind the token price is four cents like what how much worse could it get right and so you know I think that that's one thing where you know it was it was somewhat lucky that we were backs to the wall and we were in a position where you know we had to take a pretty big swing at something and

and throw a bit of a Hail Mary to have the room to kind of do what we did. I think if we'd been in a better position, it would have been much harder to get people to go along with such a huge pivot and change to a whole bunch of things about the project. Thank you for those super candid insights. I think throwing things at the wall and seeing what sticks is a lot what a startup life is about. So let's deep dive into the protocol. I think we alluded to this earlier. So synthetics is a protocol for creating total.

that track the value of another asset. How exactly does it work? So essentially we've got a single form of collateral. And this will change, but we can go into it later because we're adding ether in the next few weeks as a form of collateral. But at the moment, you've got this collateral token called S&X. And S&X is a governance token and it's a value accrual token. So whenever any activity happens within the network, the people who are staking S&X, are paid fees. So whenever an exchange happens on synthetic exchange, fee is collected and it's

paid to the token holders. And the token holders who are staking essentially lock S&X into something akin to like a CDP and maker and mint these synthetic assets, synthetic debt. And the synthetic debt can be priced in, you know, essentially any supported, you know, price feed. So, you know, we've got six or seven different fiat currencies. We've got commodities like gold and silver. We've got a bunch of different crypto assets. We've got some crypto indexes like centralized exchange token index and a defy index. And you're really only limited by having a stable price feed that you can use to price

this debt that people are issuing. So these synthetic assets that have created, are they just regular ERC20 tokens? They are at the moment. So at the moment, all of them are freely tradable, fungible ERC20 tokens. So if you get synthetic Bitcoin, for example, the ticker is SBTC. You know, you can go on EtherScan, you can see that contract. You can see the total issued amount of SBTC, the holders, all the normal things you get within ERC20 token.

Okay, cool. So just to make me fully understand how it actually works, so I have SNX and I stake them and I create these synthetic assets, who is actually the counterparty to that creation? of the sense? So what's, I guess, probably the most novel slash crazy, depending on your perspective, you know, aspect of this system is that it's a pooled counterparty model. So all of the SNX holders are essentially a pooled counterparty to all of these, this outstanding debt, right? So if you are holding debt, irrespective of whether you've minted this, if you've just bought it off market, synthetics gives you the right to reprice that debt using any one of the article.

into anything you want. So let's say you turn up and you go on to Uniswap and you buy some synthetic US dollars for dye, maybe. Now you've got synthetic US dollars and just by holding those synthetic US dollars, you have the right to turn up at synthetics exchange and convert at the current spot rate into, say, synthetic Bitcoin or synthetic ether or any one of the supported assets, synthetic gold. So the counterparties to these repricings or exchanges are, are the pool of S&X holders who have minted. They essentially take the other side of all these positions. And it's somewhat similar in a traditional finance paradigm, I guess, to a clearinghouse.

So a clearinghouse within a bank or a similar structure where anyone can come and trade against that clearinghouse. And the clearinghouse absorbs all of that flow and then externally hedges that flow as they're sort of taking on those trades. So, you know, it's something that I guess is, that's probably the closest analogy to what's happening. So who curates the list of these supported assets? Do the SNX holders, do they have some sort of governance? Yeah, so we still use a form of rough consensus. So we don't use on-chain voting or anything like that. Just because we believe in the early days, it's far safer to avoid things like plutocracy.

and what have you from token voting. So we have fairly vigorous debates within our Discord community about which assets should be listed. And even, you know, for example, there was an incident recently where we listed Maker. So we listed Maker maybe going back almost six months ago. And when we listed it, we did a review of the liquidity, the number of exchange venues it was trading on, the average liquidity across those venues, you know, total trading volume, a whole bunch of things, right? you know, asset distribution, how concentrated and centralized was it? And that was all well and good. And

you know, it passed our test in hindsight, it probably shouldn't have had, but but it did. You know, we might not have been as stringent as we could have been. But over the last six months, liquidity and maker has declined significantly. And some of those venues that were, you know, had significant volume have dried up. And what's actually happened is the vast majority of price discovery is happening on uniswap. And uniswap is, you know, interesting for a number of reasons. I'm a huge fan of Uniswap myself. So this is not necessarily criticism of Uniswap, but it is one of, I guess, the idiosyncratic things about having price discovery happen on Uniswap is that a trade on Uniswap is very deterministic, you know, as opposed

to a trade in, you know, normal counterparty matching, you know, venue, right? If you turn up at, you know, finance, for example, and try and dump a whole bunch of something into the market, market makers are going to move away from you. Some people might try and counter trade you. A whole bunch of things can happen. Uniswap, you have none of that. You literally turn up and you say, I'm going to dump this many tokens and you can predict exactly what the price is going to be. And someone did exactly that and started manipulating the spot market and taking the opposite position in synthetic exchange and profiting from essentially manipulating the spot market into this derivatives market, which is interesting in a permissionless setting because in the normal financial world, that

would be illegal and, you know, it's market manipulation, but in defy, you know, there's not much you can do. And so we got to a point where we sort of monitor, you know, the community was looking at it. Interestingly, people did start counter-trading this person on uniswap. And so it did become significantly less profitable, but it was still very high risk. And so the community, collectively, after some debate, decided that we would delist maker, or at least pause maker until we could sort of review it. And so, you know, it's, it's very much a moving target in terms of, uh, which assets should be listed and the risk profiles, et cetera. Okay. Interesting. I mean, this is a slight, maybe slight deter or a slight aside, but do you know why makers volume

is dried up so much? I think it's a, a number of factors. I think the, the transition to MCD, you know, caused, uh, some people to pull, um, maker off exchanges, uh, the float. was very low to begin with on exchanges. It was, you know, I think going back maybe six months or a year ago was like 3% or something like that. It's now less than 1%. If I remember correctly, there's a really cool site called Viewbase where you can view all of the RC20 token floats on all of the centralized exchanges and even decentralized exchanges. And so, you know, if you look at the graph of the maker float, it's just really kind of, you know,

declined. So to be totally honest, I'm not 100% sure. And this is something that I, I, think in the future we need to have much better handle of in our sort of continuous risk framework just monitoring these things and being aware of it. But yeah. And so what this person did was that they basically manipulated or, you know, they kind of traded on uniswap and then synthetics would use uniswap as a sort of price oracle. And then they could sort of do something there and benefit from it on synthetics and kind of game the system that way. Yeah, well, you know, it's kind of interesting. There was, I think, a little bit of misunderstanding in that people thought we were only relying on uniswap. The issue was that so much of the price discovery had accrued to Uniswap 4Maker that it was somewhat irrelevant what was happening in other trading venues. Like literally a trade would happen on Uniswap and it would get arbed, but the markets were so thin on all of the other venues that the arb was, you know, really inefficient and it would just move the price. So, effective, even though you're looking at 10 different trading venues, you're really just looking at one.

Tell us a little bit about the sort of assets you can trade. I mean, I think there are, right, you mentioned before, like different fiat stable coins, right? Then there are some crypto assets. There's also kind of the inverse of crypto assets, right, where you can basically go short on it. So why those assets, like, and what kind of other plans for other assets do you have? Yeah, so, you know, the idea was that we essentially, you know, being a clearinghouse, right? What you don't want is, you know, things like adverse selection and, you know, you don't want to have a highly skewed market because we want something that's as close to market neutral as possible. We do have significant adverse selection now because most of the people who are trading on sedetics exchange are SNX holders.

And SNX holders, like a lot of people in defy, tend to be fairly bullish on, you know, the overall prospects of DFI. and crypto and Ethereum and all those things. So we have a very, very high skew towards a long bias, I suppose. Even, you know, in, I guess, the decline from, you know, July, we were still extremely long, even while the rest of the market was failing that short. So, you know, this is something that we introduced, I guess, as a way to balance the market, these inverse sense, but the adoption hasn't been as good as we would like, mainly because we don't have a very good organic cohort of traders who, you know, are more representative of the overall market, which is a reflection on just where the project is. We haven't put as much focus on, you know,

building out, you know, marketing and awareness as we will this year. So for all of your assets, how do you maintain your pack? So basically, if you look at S-U-S-D, it often trades for significantly less than a dollar. Why is that? So, you know, again, it's somewhat about price discovery, I suppose, right? So the only, I guess, A, it depends on where you're looking at that price. So if you're looking at coin market cap, coin market cap only takes into account Ku-coin, which is the only centralized exchange that SUSD trades on.

And the volume daily on SUSD through Ku-coin is, you know, a few thousand dollars. So the vast majority of the volumes occurring on Uniswap, but CMC doesn't take into account Uniswold. well, which isn't to say that the peg is perfect. It tends to be somewhere between two and a half and one percent off, you know, and this is something that obviously we're working on. We've got similar issues to what Maker had last year where there was an oversupply and we need to kind of correct that. So we're working on that. But oftentimes you'll see on CMC, it might be trading it like 93 cents or something, but, you know, $50 of trades happened at that price, right?

So it is a little bit of a reflection of kind of poor information, I guess, that's contained on some of these sites, but I think the best place is probably to look at something like Uniswap.Info, for example, where you sort of see the effective rate, the real rate. So what kind of levers do you have that you can pull in order to stay closer to the real peg? Probably the strongest one is the collateralization ratio. So we made a decision, you know, last year, sort of mid-last year, because the price of S&X had risen. So quickly, there was an oversupply of. of synthetic assets and, you know, the market really wasn't absorbing them quickly.

And so we made a decision to raise the ratio from 500 to 750, which essentially had the impact of people needing to buy back debt in order to be able to be fully collateralized and be able to claim fees and do all of the stuff that we wanted them to do, which worked fairly effectively. It brought the peg back up. Obviously, the price has kind of continued to rise, even through that point. I think the price was 30 cents or something like that. you know, when we raise the C ratio. So that's a big lever that we could still pull. But I think you alluded to maybe when we're doing the introduction, you know,

the capital inefficiency of that. And, you know, there is kind of a psychological threshold where, you know, you raise the C ratio up to a thousand percent or something. And, you know, people start looking at it as a, you know, super inefficient system. So there's a bit of tension between those things. Okay. Let's look at the underlying mechanics first.

So basically, you already talked about the collage. Rationalization ratio being 750%, meaning you actually have to deposit 750% in collateral for any sins that are created. So what happens if the value of SNX falls or the value of SNX rises? Rising is not that big a problem, I guess, but basically saying it falls and you are undercollateralized, so you're way below 750%. So we don't currently have liquidation built into the system, and that's mainly because the collateralization ratio is so high. You know, so the likelihood that we go from 750 to,

you know, 100% or become under collateralized is pretty low. During 2018, we got down to, I think, at the absolute worst, it was about 150% collateralized from 500%, you know, which was a 70% drawdown and price, I think, across the entire network from where people admitted. And part of the reason for that is that the incentives to restore your C ratio were not strong enough because it was only based on the exchange fees, which were quite low, or the transfer fees, which were quite low. So people were basically just sitting there and not fixing their ratios and, you know, the price continued to decline. So I guess the incentives are much stronger now because we have the inflationary supply. So people tend to respond fairly quickly. There's still a bit of a lag. There's like

a two-week lag because we do have two weeks where you can claim your fees. And if you're under-collateralized for more than two weeks, you'll start to lose fees. Let's go back a little bit. So you can't be liquidated, but you do face some consequences in that you don't collect fees. So we haven't actually spoken about the fees yet. So tell us about how when you're not under-collateralized, what kind of fees are actually issued and what you need to do to actually get them. And then basically, yeah, what extent are they taking?

in a way as soon as you're under collateralized? Yeah, so when you are staking, you are eligible for fees. And those fees just accrue across each fee period, which is a one-week period. And who pays them? So where do the fees come from? Yeah, so the fees come from two places. One is from inflation, which is part of our monetary policy to pay inflation to people who remain collateralized and maintain the network.

And then the second sort of incentive is going to be. coming from exchange fees. So every time people convert one synthetic asset to another, they pay a 50 basis point fee, which is put into a pool. And depending on your proportion of the network that you represent, you get your pro rata share of those fees each week. Yeah. And I guess the thing worth pointing out here, right, is that, just to clarify, is that what you're doing, when you talk about staking, what that means is you're putting up SNX as collateral and you take out one of those assets. Correct.

Yep. Right. So in a way, it's almost, it's like hybrid form of you minting an asset and you're staking. And then you're getting rewarded for that. Right. But it also means that actually if you, if you're next the next holder and you want to kind of benefit from the future potential of SNX. from the trading fees and all that,

you actually have to go and you have to mint an asset, right? At least to do it fully, right? So that you get the inflationary rewards and the staking fees. I thought it's interesting design and, you know, really nice in terms of sort of, you know, forcing people to actually engage with the system. Yeah, yeah.

I mean, that was that was the intent, right? So, you know, I come from Bitcoin land back in the day. And, you know, I used to run mining software on my home theater PC at home and, you know, went through all the pain of trying to get that up and running. And I think, you know, Bitcoin did a very good job of incentivizing people to understand how the network worked by getting people to install mining software and try to mine and do all those things. And I think, you know, one of the flaws, I suppose in the token boom on Ethereum, you know, the ICO boom was that, you know, the the ERC20 standard has a default of a fixed supply of tokens, right? It's like, okay, we're going to mint a million tokens, 10 million, a billion, 100 billion, whatever crazy number you want, but you just mint that number of tokens and they just magically appear and scarcity is supposed to take care of all the rest of the problems, right?

The reality is that I think if a protocol in the early days can't incentivize people to understand how to use it, then it's very, very hard for it to get an option and get people to do the thing that you want. So that's the reason why we change the monetary policy to sort of, as you say, force people to learn how the system works and then they can make a decision if they like it or not. I think that's a super smart move. Can you put some numbers on this? So how many as an X tokens were initially created and what does the inflation look like currently?

There were 100 million created. And then in March of 2019, we went out to a lot of stakeholders and said, this isn't working. We're not incentivizing this properly. We want to change the policy. And over the next four years, we want to go from 100 million to 250 million. With initially 75 million in the first year, additional tokens minted. So by the end of the first year, we'd be at 175 million. And then halving each year after that, that was kind of the initial intent was to go from 100 million to 250 million, which is pretty high inflation. But our argument was we needed strong incentives to kind of turn things around. We can go into briefly now. So you mentioned other types of collateral like EF will also be

supported in the future. What's that going to look like? And how is it going to differ from the usage of SNX as collateral? Because I guess in the case of ETH being used as collateral, do you still consider that people staking or that's something different? It's kind of a hybrid lending staking. What it means is that some of the scents that are in circulation, so some of the synthetic assets are backed by ether, but the people who have minted those eth-backed scents still have the right, like any other synths, to trade those synths into any other asset. They can reprice them. The risk or, you know, the counterparties to those trades are only the S&X stakers. If you turn up and you lock Eith and you get synthetic EF and you start trading and you are in profit, the cost of those profits,

are born by all the S&X stakers. And the trade-off there is that the S&X stakers get all of the fees from all of the trades, and they get all of the inflation rewards from everything that the system is generating. The people who have minted synthetic ETH with ETH get nothing. All they get is the ability to trade. So it's a different way to get an system that's lower risk, but hopefully will generate more trading activity. So how do you hope to compete with this against Makeup? because currently, I mean, you can take ether and also other assets with maker. And you also, if you produce dye, you can also collect a savings, right, which I believe is around 6% or so currently. How do you think synthetics can compete with this?

It's sort of appealing to two different categories of people. The people who are locking ETH and getting synthetic ETH and eventually trading on synthetic exchange may be trading 10, 50, 100x leveraged Bitcoin contracts. That's a very different prospect to maker where it's, you know, the idea is to lock some eth and get a stable yield. Maybe you're getting some meat leverage, but they're very different risk profiles for the different groups of people, I think, that we're targeting. I guess that ties into a little bit with your previous thing around this, you know,

inverse kind of lack of interest in going short. If it's like almost obvious consequence, right? I mean, if you have to have a long SNX exposure in order to mint one of those assets, so like who is going to have, you know, long SNX exposure, but like, you know, short, if like the intersection might be small. So how do you think that's going to be addressed in the future? It's a very good point, right? So at the moment, it's this very sort of self-contained system, right, where the, you know,

95% of the trading activity is people that are already minting. The intent was never for that to be the case. The intent is that minters are providing a service. So the people are staking S&X and providing this debt are taking a risk and playing a role in providing this service. It should be totally separate people that have no idea necessarily how minting and staking and risk management and hedging and any of those things work. All they know is they can turn up to this place and they can get some SUSD or whatever and they can open up a leverage long position. trading Bitcoin on a totally non-custodial decks, you know, in a similar way to say Bitmex. But they don't need to be stakers in order to do that. They just need to have acquired some synthetic assets somewhere, you know, on Uniswap or wherever. But the stakers still have to worry about, right, the assets they're issuing, right? Because of course. Even if they're selling it afterwards, because if that asset, let's say, goes up,

then they have to put on more collateral. So they have this kind of interest there. 100%. Our expectation is that SNX stakers are likely to be net long. They're net long SNX. To your point, things are highly correlated. They're probably going to be net long, eth or BTC or whatever. But someone who's coming on to Synthetics Exchange who wants to say short tron doesn't have any interest in necessarily what the stakers position is, right? They can just go on and start trading and we should have a much more representative sample, I suppose. as the organic trading activity happens of what the regular market's doing. So even if you look at the last six months, the market has been net short.

There's been a lot more, you know, prices have been going down, and yet we've been net super net long that entire time, right? And which is just representative of that we don't have organic trading activity going on yet. And that's, to be totally honest, been a purposeful exercise. We haven't wanted to bring external sort of organic traders from other trading venues onto synthetics exchange because experience is terrible right now. It's a really bad experience. So it would be an extremely porous funnel for us to try and bring people into this exchange.

The only people are willing to kind of put up with how bad the experience is are the synthetics minters themselves right now. So it's kind of a consequence of just the structure and where we are as a project, I suppose. So the way that the project is currently set up, the total amount of synthetic assets that can be minted has to be smaller than the market cap of SNX. I mean, that's going to change as soon as you allow ETH as a collateral. How did you see this working? So basically, what kind of share of synthetic assets do you expect to be backed by ETH?

What was the thought process behind creating it this way? The core assumption behind that is that you're going to have a fairly high velocity of the synthetic assets. And we've seen this. Even just today, we crossed a billion dollars worth of trading activity. The maximum synthetic assets that we've ever had on issue over the last year was like 35 million or 40 million or something like that. So the velocity has been something like 25 or 30 times over the last year. And to be honest, I think that's very low. In a trading venue like this, if you look at something like Bitmex, the total deposits versus the trading activity daily, you know, it could be 100 or 200 times higher, particularly when you factor in leverage.

We sort of look at this as not a huge constraint, I suppose, because it's really the velocity of those assets within the exchange rather than the total supply that's available. Obviously, bigger supply means you can't have more trading activity. We don't see it as a short-term constraint, certainly. So with regards to trading and exchanging, right? So you're talking about like synthetics as an exchange. You know, when you try out the synthetic dot exchange, right, the product there, you're also sent to Uniswop like at various times.

So can you explain a little bit like sort of how does the synthetics exchange work? Where does Uniswop come in and how did the two play together? When Uniswap is launched because we have this need for a on-ramp. We need a way to onboard people into the Synth ecosystem. You know, they need to be able to get access to synthetic assets. Once they've got synthetic assets, then they can do all the cool stuff. They can reprice them, they can trade them, et cetera. You need a deep liquidity pool between the regular ETH ecosystem and the Synth ecosystem. Otherwise, people are going to have high slippage and high friction to get in and out. We, alongside the community, came up with this idea

of incentivizing a large and deep liquidity pool in Uniswap to ensure that there was a very liquid on ramp and off ramp between synthetics and the wider Ethereum ecosystem. If you turn up and you've got ETH, right, and you want to avail yourself of this ability to, you know, trade synthetic Bitcoin, you need to get that ETH into synthetic ETH or synthetic USD somehow. As we stand now, where the deepest pool in Uniswap, I think about 40% of the total liquidity in Uniswap is in the synthetic Eth pool. And so you can trade 10 or 15 or $20,000 worth of ETH with a pretty minimal slippage into synthetic eth and then start trading on synthetic exchange.

So it's kind of the deposit mechanism into the exchange, if you will. So let's talk about the price oracle for a bit. So you already alluded to this previously. So it's a mix of different exchanges that you're using for the price article. Can you go a bit into how exactly it works? When we launched this, we needed a price article. obviously. And, you know, there really wasn't anything on the Ethereum Mainnet that was a price article. There was pretty minimal solutions maker had their, you know, ETHUSD Oracle, which is pretty

slow, fairly robust and fairly decentralized, but very slow and not really going to be kind of suitable for what we were doing, which needed sort of five-minutely updates at the worst case. And so we had to build our own Oracle because there wasn't anything that was available. We, you know, obviously after building that, realized the amount of effort. and upkeep and issues that are entailed by running your own centralized Oracle. It's a massive attack vector. And I think we'll maybe talk about that attack vector in a second. But we made a decision sort of mid last year to really try and find a solution that would

allow us to offload this Oracle responsibility onto another project that was focused on that. And after a bunch of research, we landed with ChainLink. And so late last year, we moved all of our Fiat currencies onto ChainLink. You know, for your currency is obviously fairly a lot less volatile than crypto. So it was a safe first step. And then over the next probably month or two, we'll migrate the rest of our assets on the chain link. I mean, there was this history, right? There being an issue with the price oracle.

And to tell us what happened back then? We've had front running bots. And, you know, people hear front running and they think, okay, front running, I know what that is. In the context of a pooled liquidity model, it's a bit different. to a counterparty matching situation where, you know, bids and orders are getting sniped. So like zero X, for example, you know, front running is a bit different to our front running. In our case, what people were doing is front running the Oracle. So they would look in the MMP pool, see when a price Oracle update was happening,

they would trade into that asset, and then they would trade out of it. And provided the delta between, you know, the prices was above the fees that were being charged, they could profit from it. We've had this cat and mouse game and this arms race to kind of improve the system to mitigate that and reduce that. But before we had implemented a lot of those solutions, there was an Oracle outage. One evening, I think Australia time was like two in the morning. We had had an issue the previous day of one of the APIs for Forex had gone down. And then another API also started failing.

And we had this issue where we use a medianizer, but the medianizer didn't understand that this price was an outlier because it was essentially the price was kind of going up and down. So it was publishing a price and then it was changing the price. And the difference between the two prices was like a thousand times on the Korean one. We basically had this situation where one of the front runners said, oh, okay, I noticed a discrepancy, right? It didn't care or even know that the discrepancy was a thousand X, right? It was just looking for any discrepancy above, you know, 30 basis points, right? So it traded into Korean 1 from Synthetic Heath.

And then when the price changed back, 20 minutes later, it traded back in. And over the course of, I think, four or five trades generated something like $10 billion worth of synthetic heat through these trades. At the time, our CTO was overseas, who was in Madagascar on like Dialup Internet or something. And we were alerted to this through some monitoring in the community and a few other people started talking about it. Unfortunately, I was asleep. And so I got woken up at 630. in the morning or whatever, and we had this kind of catastrophe. Luckily, our CTO and a couple of the other team members were able to pause the system.

We have the ability to kind of halt the system. And then we started this essentially hostage negotiation with the person who had done this, who was, you know, looking for some cash to get essentially paid out to roll the trades back. And so we had a tense negotiation to kind of work out a way to roll the trades back. So we didn't have to fork the system and, you know, have some kind of catastrophe. catastrophic rollback. And thankfully, we're able to negotiate with the person and sort it out. It subsequently kind of degenerated, and there was a lot of acrimonious finger pointing back and forth about how it was handled and what have you. But luckily, for the system's sake, we're

able to resolve it. So that's the risk of articles that are not robust enough, I suppose. Yeah, I think that's a valuable lesson to learn. And in retrospect, it actually is quite an entertaining story, I'm sure it was absolutely nerve-wracking at the time. I mean, being in a hostage negotiation like that. While we're on the topic, I'd like to speak about a second attack vector or way to exploit the CISC, which is not quite, probably wouldn't bring it down, but you currently requires 750% collateralization. But seeing that the only thing that is actually done to you, if you don't comply with it, is that you don't get fees, as soon as you get below the 100% Mark, you in essence have a free option of actually defaulting on your debt, paying it in the future

of the price of asset goes up or the price of the asset goes down. Was this done as a deliberate design choice? It was done, I suppose, as like an expedient design choice in the sense that we had a view that the incentives as they stood combined with the high collateralization ratio were probably sufficient to avoid a scenario where we got close enough that liquidation was even going to kick in. We also had internally, especially in the early days when we were writing the white paper and discussing some of these mechanism designs, significant dispute between a couple of the team members about how liquidation should be handled and even how asset issuance should be handled. So we decided at the time to kind of kick the can down the road and say, okay, let's see in practice how it works with this high collateralization ratio. we'll observe it, and then we can make a decision as to how to implement liquidation

based on what we sort of observed empirically. In a way, that was good. It was high risk, like a lot of things that we do. We tend to take a fairly high risk approach to let's gather empirical data, even if that empirical data might kill us. We're sitting here x-raying ourselves, right, and not realizing sometimes the impact of it. But the end result is we do gather much more viable and important data, I think, at times than we would if we attempted to kind of constrain the system more.

So I think we now have a fairly robust liquidation mechanism that's been proposed that will be implemented in the next sort of month or two. And what that really unlocks for us is it removes the Black Swan optical risk, which we've absorbed now to 50 plus percent corrections over the course of a pretty small amount of time without the system blowing up. But what it also does is allows us in the future, you know, not in the short term, but in the future to reduce the collateralization ratio from, say, 750 down to maybe something more like 250 or 200% over time. And that's only possible if you have liquidation.

It just allows the system to kind of grow. But at the moment, we've been able to survive without it, thankfully. But yeah, it's definitely an issue that I think people see as a risk factor. Talk about this proposed liquidation. How will it work? So essentially what someone will be able to do is if you fall below a threshold, which is yet to be determined. let's, for the sake of argument, call it 200%. If your position falls below 200% collateralization ratio, anyone in the system will be able to send since,

so we'll be able to essentially pay your debt back for you, and they will be able to collect the equivalent amount of SNX plus a penalty that was backing that. In the case of 200%, let's say you'd be able to send $10,000 worth of SUSD, you'd get $10,000 worth of S&X plus, you know, a 10% penalty. So this is very close to the maker mechanism, right? It's very similar. Anyone can essentially just turn up and pay your debt for you. The difference to the maker system is that the entire CDP doesn't get unwound. So it's sort of proportionally unwound, right?

So we fix the C ratio and then you still have the chance to come back and fix it. You can get hit again, et cetera. It doesn't unwind the entire thing. It just unwinds it by little slices. Cool. That sounds super promising. I'm looking forward to that. Synthetics is an over-collateralized system and you have maker and generally,

Defi has kind of relied on this, you know, maximum collateralization for its security. If you put in the traditional finance world, there's a lot of like under-collateralization. And it seems like it's something that's starting to get explored a little bit in the blockchain world as well. What are your thoughts on that? Do you think Defy in the long run and synthetics will rely on over-collateralization? or do you think, like, what's going to be the role of undercollateralized systems? I mean, I used to have a view that under collateralized permissionless systems were somewhat of a contradiction in terms, right? You need some trust there.

Over the last few months, I've spoken to several different teams, and I've come across, you know, several different other projects that are working on systems that rely on some kind of, you know, web of trust type model, where, you know, I know you, and therefore I'll lend to you, or I'll vouch for you. and I take some kind of risk on your behalf, which ultimately under collateralized loans, resolved to some kind of legal enforcement, right? You know, people with guns turn up in your house eventually. You know, let's say you need to pay this back or throw you into debt or jail or whatever. Traditional system has been reliant on that to the point of not needing to solve that problem. If you've got people with guns, they're a pretty good solution to, you know, people who aren't paying their debts, right? it seems like there are some potential design patterns and mechanism designs that could allow for this to happen.

And I think particularly once you get fully on-chain assets that could potentially be used but confiscatable, right? So like, let's say, for example, someone wants to get some kind of NFT or some kind of like game card, right? Like God's Unchained or something like that. And they want to buy it and it's $10,000 to buy this item in the game. it would be possible to create some kind of wrapper contract whereby if they don't pay back that loan over time, then eventually the assets confiscated, right? In the same way that your house would be confiscated if you didn't pay your mortgage, provided that asset is fully natively on the blockchain, right? It's when you get off-chain stuff that it becomes kind of more interesting, but I'm much more hopeful than I was six months ago. That makes sense, totally.

So I'm curious also with synthetics, what is your very long? term vision? What do you hope the system will look like in five or ten years and what impact on the world it will have and value will deliver for its users? I mean, synthetics is kind of interesting right now because people are very excited about the potential. The way I sort of see synthetics, the analogy that I use is it's really just giant hole in the ground. And if you want to build a skyscraper or a big building or whatever, you've got to dig a really deep hole first. And so, you know, there's certain people who turn up and go, wow, that's a really big hole I can see what's coming. And there's certain people who turn up and just go, that's

a giant hole. What are you talking about? We haven't yet even come close, I don't think, to demonstrating the effectiveness in the reality. We've got a very theoretical value that we've created and some people can see that. The next year for us is going to be all about kind of finding genuine product market fit, bringing in those organic traders and seeing will someone come and trade on this trading venue and given the alternatives they have like a Binance or a Bitmex or a Deribit or FtX or whatever, that's kind of the first step. If we can get that right and we can prove that Dex's work and that derivatives decks or a futures deck or whatever can gain significant traction, which I personally believe, then I think the next step from there is how do we extend that?

And that's where we start talking about some of the other asset classes that we could add equities indices, et cetera. And that's where I think it gets really exciting because now you're making available these asset classes that are maybe not as accessible to someone in a lot of places in the world, right? They don't need a bank account. All they need is some kind of fee it on ramp, some way to get fiat into the Ethereum ecosystem, and they can get access to ETFs and equities and bonds and, you know, all kinds of money markets, all kinds of assets that, you know, we take for granted. and vice versa. So the first stage is, let's prove that this is viable and that it's self-sustaining, that it can actually generate enough activity and enough users that it can work, and then we can start

building from there. So you've come out pretty strongly in favor of decentralization, also as a means of sidestepping compliance to a certain extent. And I mean, even when you were talking just now, you were kind of pitting dexes against centralized exchanges. So how do you think that's going to develop in the future? Bitcoin proved that you can build something that is unregulatable. And that's sort of phase shift in a lot of people's minds, right? And I think that's what got people very excited about Bitcoin. All of the touchpoints in the real world with Bitcoin that allow it to kind of be functional, the exchanges and Fiat on ramps and all that sort of stuff, all of that infrastructure is regulated. Centralized exchanges and, you know, OTC desks and all of that

stuff that we've kind of built up to make Bitcoin work. The thing that I think is most exciting about Ethereum is all of that infrastructure is being absorbed into the chain itself. And you don't need as much infrastructure on the outside to support the functionality of the system. And as more and more of that's absorbed into Ethereum, you have this fully unregulatable infrastructure that anyone can build on. And for me, the most, I guess, exciting thing about that is, is when you lower barriers to entry and you create a highly competitive environment, you get much, much faster innovation and iteration and get some really cool stuff. And I think we've just kind of crossed a tipping point with that in Ethereum over the last six to 12 months where you just

can't even keep up with the crazy stuff that people are building now, like on an hourly basis, right? Someone's like, hey, there's this thing and this thing and this thing. And a lot of that stuff is not going to work and no one's going to care and they're not going to want it. But if even one out of 50 of those things becomes hugely valuable to a large group of people, we're just in a different reality. So for me, that's the most exciting thing about this. Cool. Yeah. I mean, I think it's definitely a clear vision as well, like there have this exchange, I guess, down the line where you can trade, you know, all kinds of assets. So do you see this being, you know, tens of thousands, hundreds of thousands of assets at some point and just

a gigantic market? The challenge that we have in this iteration, of this model of synthetics exchange is that we're somewhat constrained in the assets that we can list because of the counterparty risk that all the stakers take on, as opposed to say something like UMA, where UMA is a purely counterparty driven system, they've got liquidity challenges, potentially, but they don't have the counterparty risk challenge that we have. So we've made a different set of trade-ups. If you look at how something like UMA and something like synthetics could fuse down. down the line and composability could enable that, then you could actually have an ecosystem where people could borrow some of the liquidity from synthetics exchange to create these highly exotic things like, you know, the shit coin index that they were talking about for San Francisco and some really cool assets that track different price feeds, for example. I think as these things kind of coalesce, you've got a whole bunch of products that Maker, D-YDX, Market Protocol, UMA, all these different synthetic asset issuance platforms, I think there

will be some kind of convergence that will enable us to have every asset that exists on Ethereum and then a whole bunch of assets that have never existed on Ethereum. Well, Kane, thanks so much for coming on. It's great to learn about synthetics. Super excited. Exciting what you guys are building and what's coming up. So I look forward to following and seeing how it develops. Awesome. Thanks so much, guys. Yeah, had a great time. Thank you for joining us on this week's episode. We release new episodes every week. You can find and subscribe to the show on iTunes, Spotify, YouTube, SoundCloud, or wherever you listen to podcasts. And if you have a Google Home or Alexa device, you can tell it to listen to the latest episode of the Epicenter podcast. Go to epicenter.tv slash subscribe for a full list of

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