Epicenter - Learn about Crypto, Blockchain, Ethereum, Bitcoin and Distributed Technologies - Something better than USDC for your Ethereum?

Episode Date: February 15, 2026

In this episode, host Friederike Ernst is joined by Michael Svoboda, CEO of Liquid AG, to discuss Liquity V2 and the launch of the BOLD stablecoin. Michael explains how Liquity maintains a governance-free, immutable architecture to provide "sovereign dollars" that are not dependent on human committees or centralized backstops. He introduces user-set interest rates, a novel DeFi primitive where borrowers determine their own rates to balance their cost of capital against the risk of being redeemed by stablecoin holders. They explore the technical mechanics of the BOLD stablecoin, its multi-collateral backing of ETH and LSTs, and why the protocol funnels 100% of fees directly to users rather than extracting rent. Michael also shares his analogy of crypto-native stablecoins as "electric engines" that offer a fundamentally different risk profile from traditional banking rails. Finally, the conversation dives into the impact of global regulations like MiCA and why the future of finance belongs to peer-to-peer credit markets.Topics00:00 Intro & Context04:15 Why Banking is Under Pressure09:30 From V1 to Liquity V215:00 User-Set Rates Explained21:45 Redemptions & Peg Stability27:10 Collateral Risk: ETH & LSTs35:20 Cefi vs. Defi Risk Spectrum42:15 Is Immutability Dogmatic?49:00 Revenue Distribution & Self-Sustainability55:30 Non-USD Stables & Global ShiftsLinksMichael on X: https://x.com/svobodamichaelLiquity: https://www.liquity.org/Bluechip: https://bluechip.org/Lido: https://lido.fi/stvaults?mtm_campaign=epicenterSponsors: Lido V3 introduces stVaults: modular staking infrastructure that lets builders and institutions deploy custom staking vaults, while staying anchored to stETH as a shared liquidity layer. Get started building with Lido V3 today: https://lido.fi/stvaults?mtm_campaign=epicenter

Welcome to Epicenter, the show which talks about the technologies, projects and people driving decentralization in the blockchain revolution. I'm Friedricha Ernst, and today I'm speaking with Michael Soboda, who is the CEO of Liquity AG. Banking is on the pressure. Cablecoin is a much better product than having your dollars in your bank, because there you have the counterparty risk. And this bank, you know, in Germany, might lend the money to bank. We had kind of this huge scandal and you're not aware of it. We see these forces now playing out with China. with Clarity Act, honestly, it's not about the users.

Regulation is actually used to protect the banks or create the mold. Liquity just follows 100% of the borrowers' fees to the stable coin holders to facilitate that peer-to-peer credit market. It's very hard, it's a very competitive market. But that's why we tried with Liquity V2 and Bold to have a very clear and distinct value proposition, rather serve a niche, but be very clear. Cleo.

Liquity protocol is a governance-free Ethereum protocol that lets users borrow a decentralized dollar against ETH at self-set interest rates. Before I talk with Michael, let me tell you about our sponsors this week. This episode is brought to you by Lido. As Ethereum Staking continues to evolve, more teams building staking products are running into a familiar challenge. On one hand, pooled liquid staking gives you liquidity and access to defense. but can limit customization.

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You deposit once, you choose a vault, and manage everything from a single interface. To learn more and start building with SDValtz, go to lydo.5 slash STVolts and get in touch with LIDER contributors today. Hi, Mike. It's good to have you on the show. Hi, Federic. Thank you for having me. Cool. Before we dive in, who are you? And what originally got you interested in all of this?

Yeah, so I'm Michael. I live in Switzerland. And I was working in a normal corporate telecommunications in the digital space. And we were talking about disruption. And I was talking to B2B clients about disruption. And then I heard about blockchain. And I realized this is really the only disrupting thing that is happening. now, like the internet, which took out intermediaries for comms and media. This will take out intermediaries in finance. And that fascinated me. And then I quit my job because it's not going to happen in this big corporate. And I jumped into the crypto world.

I think that was 2019 around the ICA craze. Liquity itself was founded, I believe, a year or two earlier, right? By Robert, who is still with liquidity, but in a more researchery background role. Can you talk about the original rationale for the founding of liquidity? So what did Robert feel was fundamentally broken or missing in how on-chain credit and stablecoins were being built at the time? First, I think he was really fascinated by blockchain, so he was working before for DFINITY on consensus algorithms.

And then I think the maker kind of sparked his interest, being able to issue your own stable coin, your own national bank kind of, I think was a very cool concept. He saw that and he just immediately came up with ideas and said, hey, we have blockchain technologies. Why do we need governance? Can't we automate that? Maybe we can also make it interest free.

Do we need to have interest? You know, you can break with all these paradigms. And he also thought he can create a higher loan to value ratio. So with these propositions, he set out to create a more efficient, more autonomous borrowing protocol that was very similar like single collateral die. And that's what he did, what he set out, and it was launched in 2021, was been running since then and had managed more than 5 billion in TVL, has its own stable coin LUSD. But what kind of talking about kind of like this early maker era, there were a couple of events

that must have shaped kind of how Robert and then also you. kind of thought about protocol design, right? Kind of like there was the infamous Black Thursday that kind of led to the rise of DPEC tools. So Maker still has the... PSM. PSM, yes, the PEC stability module. What lessons did you take away from watching Maker evolve in real time?

Yeah, I mean, Maker set out to follow a path, maybe more of growth, taking in more diverse collateral, getting exposure to Threatfy, which helped their growth. They also introduced the PSM with USDC, a centralized stablecoin to keep the pack, which helps the product. But I think Robert was very Ethereum aligned and just wanted to get out most of the technology, creating like the most Ethereum dollar-like money you can get, you know, by reducing all intermediaries and all kind of dependencies.

But one big learning that we learned and that also got introduced in V2 it was for example we had this interest-free loans so you had only a one-off fee which was very interesting if you talk to Treadfi people and you said you don't pay any interest it was like totally puzzling for them

that was very viable in a low interest rate environment and when these rates kind of raised then the protocol wasn't designed for that it still works but it had drawbacks on the collateralization ratio. So a learning was there, how can we design the interest rates in a more dynamic way to create an equilibrium or have a rate and a pack that can better self-regulate itself?

And that was definitely a learning. And I think, again, I think what I really like, why I joined liquidity is all this innovation, interest-freeness. And then with V2, we have user set interest rates, also something very cool. go to your bank and say, hey, I would like to have this interest rate. That's something you can do. And that was also a decision. Again, a lot of protocols set the rates by governance or by utilization and then it spikes.

And we took really a market approach. Who's the best to decide which rate we should have in defy? So we like the users decide. Okay. Maybe let's dive into how that works in just a second. But let's just contrast that to how Maker and Arbe do it, right? kind of like the two main players in this arena, right? So basically in Maker, the interest rate is set by governance

and kind of like it's fairly slow moving. It feels a little central bankish to me sometimes. There's a lot of governance. And in AVE, it's algorithmic, but that also means it can spike unpredictably. So kind of if you take out a loan and initially your rate was, I don't know, 5%. it's possible it kind of spikes to 10% or 15% and there's nothing you can do other than kind of repay the loan and kind of get out from under it. Let's kind of walk me through how the mechanics of liquidity work end to end.

So kind of I know that the range of collateral that I can deposit is very limited. So say I have eth or some sort of wrapped staked eith token. And I want to borrow USD. what actually happens step by step inside the protocol? So like with every collateralized depth position protocol or CDP position, you come with your collateral. So if or repstaked if or if, we only have these three collateral to, again, don't have dependencies on other collateral that we feel are less safe.

So as an human native as possible. And you self-issue alone. So you deposit a collateral into the protocol where it's held, where it's not lent out, it's always there, and then you can take out the loan, up to 90% loan to value. So let's say you put in 50k in if you take out a loan of 25K, you get that in the protocol stable coin bolt,

and then you can set a rate. So you can say, okay, I will have, for example, 3%. You do that, you get the bolt. Usually what you do, because you take out a loan, because you need liquidity, you will swap it to another stable coin, off-ramp into Fiat, for example. Or if you say, I get a cheap borrowing rate, I don't know, right now it's 3% on EF, which is low, you could form somewhere else for 10% and that could be also your use case. So that's the borrowing side.

I think that's quite straightforward and simple. And maybe the question people ask now, okay, how do I set the rate? Yes. Why is everybody setting it to zero? Exactly. This would have been my first question. So kind of like if someone tells me you can borrow money here, what kind of interest do you want to pay? I would go like, zero. Why don't people do that? Yeah. So for that, we need to look on the other side. We're really a market, a peer-to-peer finance market. So we have the borrower. On the other side, we have the stable coin holder. you know, because essentially if you want fiat, you sell the stable coin, and then somebody needs to hold it.

They can't disappear, you know. If everybody sells it and nobody holds it, then it depicts. So it's like the stable coin holder is like your creditor on the other side. And now you both need to agree on the right rate, because if the rate is not high enough, nobody will hold it. So borrowers have an interest to pay enough yield because there is like a stick. You have like the carrot and the stick. So stable coin holders have a stick.

If the stable coin depacks below one, everybody has the right to redeem the stable coin at face value. So that's also something that you don't have in many protocols. You can come with the dollar and you get really the underlying collateral. Try to do that with your Fiat or your USDT. And this is called redemption. So if I have 10,000 in bold that is below pack, I can go to the protocol and say, okay, I want now, this is only worth 9,500. I want 10,000 in EF, as from the collateral.

And I can exchange that. And this redemption hits the borrower with the lowest rate. So you see, kind of the stable coin holders are chasing the ones that think I have the lowest rate. They have also the highest risk. They get redeemed. They don't have kind of a economical, it's not an economical penalty. It's not a liquidation where you lose 5% of the value, but you just lose the exposure

of your underlying EVE. which can be also for some people, they want to avoid that. So if people see that, oh, I get redeemed. I'm really low. I'm going to hire my rate and this protects me from the redemption. So you have now this market where borrowers adjust and stable coin holders with the redemptions are driving the rate. So you have really market-driven rates and it's like a two-sided market of borrowers

and the stable coin holders, the creditors. And I think it's one of the first time I've seen that being implemented like that. And the beauty is it's actually very direct. You know, these parties talk together. If you think about it like how it's done in other protocols, as you said, okay, I don't know, stable coin defects or we have a problem, there is a governance proposal, we increase the rate. The yield funnels through a complex system. While in liquidity, liquidity just follows 100% of the borrower's fees to the stable coin holders to facilitate that peer-to-peer credit market at the end. I'll have a couple of questions. So maybe let's kind of ply this apart a little bit.

If bold doesn't trade below a dollar, but at a dollar or above a dollar, there's, there are no redemptions, right? Kind of like I am not at risk of having my collateral kind of sold, right? Your loan gets repaid kind of from a third poverty. You have less debt, but you also have less collateral. Okay. But if a bold trades above a dollar or add a dollar, this doesn't. happen, right? This only happens kind of at negative deepag. Why, if I don't expect this to happen, if I don't think this will happen, why am I setting an interest rate at all? Am I at risk of not being

matched if I don't set an interest rate? No. So if the stable coin is above, then people or kind of advanced users will set really low rate. They can benefit, you know, because they can't get redeemed. But this means now the borrowing fees and the yield that is paid out that's smaller until it flips. But this kind of reduced the problem that we had in V1 that the stable coin could de-pack above. So this happens now very rarely and the peg is quite good for a decentralized one that is not packed to any, you know, kind of treasuries or centralized stablecoin. So this puts then the pressure down.

More people are probably selling the stable coin because they don't have enough field, then it goes below peg, and then you have the opposite mechanism, you know, the ones that set it low now racing again on the top, and then you're getting this balance. So if you compare the current rates with protocols like Maker and Arbe, where are we at with liquidity? Yeah, so, I mean, always much more volatile, so you don't get that much. I think it's quite low. on average, you know, Maker I had to look up. But usually, so the proposition of the borrower side is that liquidity had always quite low and predictable rates because it's also so efficient, you know, the system is not tax.

Nobody's taking away revenue. So the spreads are really low. So I think, I don't know, right now with the markets, I haven't looked up, but a month ago, maybe, you know, Maker was at 5% for even and liquidity was at 3%. Why do you think kind of forced the leveraging through redemptions is a better failure mode

than the traditional liquidation cascades that we see in the other CDP protocols when loans are underwater? Yes, so these are two different mechanisms and we also, Liquid TV has also liquidations

and liquidations are here if your collateralization ratio that is backing the stable coin gets too low. So then, like in every protocol, you get liquidated. There is a margin call, and then your collateral is taken away, and you're taking a haircut, and your position is wiped out. But that's something different. That's the over-collaritalization loan to value.

And that happens just to your trove, and it's dependent on your collateralization ratio. Redemptions, everybody can do redemption, and that has to do with the PEC, and only the ones that have low interest rates are targeted. So these are two different mechanisms. Why do we have them exactly to let the market define the market rate, to not need a governance, to be able to do that algorithmically or let the market decide?

And also to introduce, I think, a really nice feature, not many stable coins have, that every user has the right and can instantly redeem for the underlying collateral. that's the redemption mechanism and it helps the pack and not the over-colletalization of the protocol for that, that's liquidations like in any protocol. So you have deliberately only very small set

of collateral options, right? So kind of like as someone who now wants to redeem collateral because bold is trading below a dollar, do I have to take the lowest interest vault or can I choose which collateral I want to get back? Because it's possible that kind of, I mean, the probability is low, but it's possible that kind of like one of the liquid staking tokens kind of has a problem, right?

Sure. So V1 was only EVE. There you didn't have the problem, but like the market adopted these R-Eaf and wrapped steak EVE as the next safe place. And what we did, you have like three branches of these collaterals. They are managed quite independently. So the system detects if people kind of trust this collateral less, it will shrink faster. But if you redeem, you get from all three markets.

But it's split up. You can't choose because also the stable coin is backed by all these collaterals. And you could say, yes, it introduces a bit more risk. But if you compare that with what other stable coins are backed, you know, it's still amazing. You know, kind of if you see all these collateral that other stable coins have, you can't even redeem and if one of those fail, the risk is much greater. So yes, I agree. So you can't choose and you get it in a proportion, but it's still way better than I think

any other defy stable coin that is backed by crypto because then the crypto needs to be a collateral that is probably less pristine than Eif and the two biggest staking Eif derivatives. I hear that. But kind of in principle, kind of like if one of those liquid staking tokens were comprehensive, kind of like I'd get a haircut by kind of getting a proportion of the collateral back in a compromise token, right? Yeah. You know, you have that risk. You wouldn't have that in EVE.

And then it could happen that the protocol can handle something so that this branch just shut down. It tries to reduce as much bad debt as possible. And then, yeah, then it's kind of turned off. So it's built with that in mind. Of course, you don't want that. And if it's catastrophic, it's 50% is wrapped-staked Eve. And kind of wrapped-staked Eve loses 50% in the value. Yes, the system has a problem too.

Yeah. We already touched upon this lightly earlier. So kind of liquidity is notably governance-free and immutable, right? And you already said that kind of this was super important to Robert. Why was removing discretion and by that also emergency control? is so important. And I mean, basically because it costs you flexibility, right? Yeah, sure.

And everybody makes that compromise. But from a user perspective, what people like about liquidity, you have this predictability. You don't have to check every two weeks. Is it updated? It has the parameter change. And under the hood,

some of the big protocols are doing quite a lot of updates, which are not aware. You just think, oh, it's protocol X, Y, Z version two, but it changed in between. So I think for the user, that gives them also this trust and predictability. And kind of we need to change, but we need to change in the hard way. We need to redeploy the system and people need to get out. And but this gives the users also this guarantee that there is not a governance that can change things

and somebody else in control of it. So I think it was really with this ethos enabling sovereign users with sovereign dollars. without anybody being able to interfere with it. And also because it's more efficient, you know. I know a maker, I just saw these numbers recently. They have 100 people, budget of 30 million managing that. Of course, they have real-world assets and probably do a lot of stuff. But it's just beautiful to see that bold to manage a stable coin,

don't need any of that. And it can work, yeah, quite well. How many people do you have in the company? Yeah, so we were usually around eight to nine people, half of it developers and the other half more operational or business side marketing. That really is a pretty small team. Tell me, in some sense, I mean, I understand kind of the ethos of having this very pure only kind of stable coin protocol, right? So kind of, I mean, this is also why people loved single kitchens. die, right? And kind of when multi-collateral dye, kind of appeared, there was definitely

blowback from the ecosystem, especially when then kind of it became at some point 80% U.S.C. backed and so on. On the flip side, if you look at the outstanding amount of sables for Maker and Avey, there are also orders of magnitude bigger than liquidity, right? Kind of like I checked earlier today and kind of you guys have 30 million in outstanding bold and Maker and Avey are 300 times bigger or so. Maybe I'll look up the numbers of how big, but it's in the many billions, right? So kind of seeing that kind of liquidity is more efficient in some ways, what do you attribute this to? that it's still so small. Yeah, comparably small.

Yeah, I mean, it's really hard to scale a defy stable coin. So yes, Maker is big kind of first mover advantage and, you know, some, yeah, like USDC and USDT, a lot of first mover advantage. Or where you shouldn't compare the lending market size with the stable coin size. So the stable coin size is smaller, still much bigger than liquidity. But all these defy stable coins, say go, go, curve. FX, they are around 30 to maybe 300 million. So they are way, way smaller than the more centralized ones.

Yeah, I think mainly, I mean, the big ones are USDC and USCT. And there it's quite clear why they dominate because they're integrated. You have all these utility and it's just so easy. And for every new stable coin, it's very hard to get distribution and adoption. but that's why I also think some part is yes of course it's much easier to have USC but I think also some people

are maybe not aware of the differences between these C-Fi stable coins and I usually compare it you know like the core with a combustion engine these are if they are built well these are government market money funds that just are tokenized fiat products on chain

versus the car with the electric engine which looks like a core which drives like a car, but is built completely different and has other product properties and other risks that could be interesting. And I think a lot of people are not aware of it or still maybe, you know, kind of trust the traditional system more. But I still think to me why it's important

is that it adds a new option that you can opt out out of traditional rails if you feel like that. And I think there they can shine. But usually they only shine if things go south, you know. If things go wrong, you hope these things are there. We had the moment with USDC when it deepak where LSD was great and a lot of people switched to it. Yeah.

But to answer your question, yes, it's very hard. It's a very competitive market. But that's why we tried with Liquid TV 2 and bold to have a very clear and distinct value proposition, rather serve a niche, but be very clear. So, you know, I think you have the traditional Trat-Fi stable coins that can be fully regulated, safety through regulation. Or I think on the other hand, you have Liquity and Bold, that takes out as much as intermediary as possible and you trust the code.

And you have these two extreme. I think they have a value because they give you safety from different sides. And we rather are totally on the spectrum and rather a niche than somewhere in between, I call it the trust me brosone, where kind of people are just adding risk to it, you know, either by introducing a multisic or being a hedge fund not regulated. And there it gets, it's a very grayish area. I think that we'll have a hard time when regulation kicks in.

And there we also see the advantage that they say, hopefully we can stay outside of regulation because there is nothing to regulate. That's a bit a long answer. But it was more why I think it's important, why I'm passionate about it, why I think it's a generally Ethereum native product can be only built on Ethereum in that way

and why I'm passionate to build it and further drive it. But it doesn't make it easy that people understand it and value it for its proposition. Especially like you and me, you know, we live in I think you live in Germany and Switzerland. We have great financial systems. We have good

governments. So we don't have this immediate need. But I think maybe from different countries in different regions that looks a bit more different. I hear the spectrum. So kind of I fully understand if you hold USC, you kind of trust that a circle is sufficiently regulated and they kind of have the deposits they say they have.

I also understand, look, it's maths. You can check it out on chain argument that you guys are driving. I'm not fully caught up yet on the value proposition that you were referring to. I understand it kind of appeals to. a different set of people. But who's your customer? Who do you want your customer to be? Yeah, I think there are three customer segments.

I think for whom this can be interesting. So first of all, what are the properties? You talked about the USP. So I see three areas. One is no exposure to threat fire risk. So Bold, by the way, was rated by Bluechick. That's a rating agency that rates stable coin. and it was the only DFI stable coin with an A rating, A minus, to be precise.

And the only one in the A segment without counterparty risk, because there is no counterparty out there. So I think for people that look at that and say, hey, safety level, I can a centralized version where I have counterparty risk or I can have this DFI version without counterparty risk. So Treadfi exposure is counterparty, collateral, centralized exchanges, all the kinds of risks. are taking on to get the yield, kind of taking out all these intermediaries. And I can tell you now, for whom, afterwards for whom this is interesting. But that's the first really differentiator. No other stable coin provides that, this kind of risk profile. And it's good for diversification.

The second thing is people that want to have more control. So what bold also gives you is more control over, for example, the stronger property rights. There is no freeze. you can directly mint and redeem. With a lot of stable coins, you can't do that. You need to be a corporation. You need to be onboarded. You're probably the last one in the queue.

So that's another one. You get more control and also predictability. Nobody changes the terms. So in Liquity, for example, me as a CEO of Liquity AG, I don't have more information and control over this product than you have. So I think that's also something unique level playing field. So we have no threat for exposure, more control, the full transparency in predictability,

because everything is on chain. So I think these are three propositions. Not many stable coins have. And you as a user, you just get a stable coin, you know that it's built with the best interest in mind, the best user interest. So for whom is this proposition, if this is the differentiating factor?

I think three people. One is, of course, the self-sovereign individual. I just say, hey, I want to also hold dollars, maybe dollars of lost resort, where there is not a government, where there's not a jurisdiction that can interfere. And I have strong property lights, like I can hold Bitcoin, I can hold a digital dollar that doesn't have ties into the traditional system.

And that values this control, transparency, and being able to exit into EVE. You know, if you hold, you can anytime exit to EVE, which you probably feel more familiar. And you're again in your world without needing to hop through traditional institutions. The second one is I would call low-risk defy yield seeker. that says, hey, I would like to have some decent yield borrowing fees, native defy yield,

but I don't want to have the risk with all the other stable coins in the trust me bro zone, you know, where people just are exposed to six different protocols, where you have five different stable coins, where it's looped, where an and team is running it, this transparency of the yield and I think this good risk-adjusted yield, for people that are more looking for passive saving accounts or like defy treasury qualities like you want US treasury yield

I think we are close to defy treasury yield so this would be the second one and the third one treasury and asset managers that want to have a risk time diversification so imagine if 99% of your stable coins in USDC and USDT and we saw the USC kind of Silicon Valley Bank drama you could say hey

I don't shift everything, but having five or 10% in a totally different risk profile with a non-correlated yield, not treasury yield, could be an interesting play, like to diversify your portfolio. I think these are the USPs and target segments that would be most open. And obviously, these are crypto-native ones. You know, I think for every new crypto users, probably USDC and UST is totally fine, I think. But then the next level, if you start touching all these different stable coins, I think you should really think of how much risk you're holding for that yield. And there I think we're just

a very simple, a very clear and very honest play. And I think people that want to have a bit this peace of mind, yeah, I think for those, we're a good alternative. Over the last couple of years and months in particular, holding US dollars had its own risks, right? So kind of if you look at how much value the US dollar has lost deliberately by most accounts, it was not a good time to kind of be a USD holder. Have you thought about, but I mean, the fact remains that 99% of the global stable coin market is US dollars, right? Is that, on your side, is that a design choice or is it a historical accident? Are you thinking about supporting non-USD denominated loans in principle?

I think the decision was it's just a dominant currency. You know, it's the world currency, defy is denominated in that, so it makes a lot of sense. But that's the current time. That's why I think models like liquidity or others really crypto-native stablecoin are important that we have these crypto-native products that are on the crypto-rails that are not dependent on traditional rails, that in the next step, today we are USD-denominated. Maybe we can decouple from the dollar. That would be the next natural step.

And for that, we need kind of these kinds of designs and these kinds of stable coins that are backed by crypto and can decouple also from the dollar. I think that should be the future. We don't have plans, you know, Rai did it. And maybe now will be a better time. Maybe they were too early. Now with, as you said, like the dollar and all these global financial market shakeups, now will be the time. We don't have the plan, but I think it will happen and it makes sense. And that's again, you know, I think it's important that we have these stable coins like with electric engines rather than the combustion engines.

And because that's why we set out. You know, that's why we started to build on Ethereum to have our own financial rails and our own financial products and take finance also in our own hands. Not doing everything, but just kind of being able to opt out if you think just things are going too crazy and in a direction we don't like. what are the fiat options you would be considering if you went in that direction? Is it any one particular currency or is it a basket of currencies like special drawing rights? So where do you think the ecosystem is going to go post-dollar? Yeah, I think post-dollar, more from a global perspective. I think we're entering a time of dollar losing the dominance.

and maybe it's a multi-currency thing, something new. So I think it will be very interesting if we can have that or crypto has a bit its own thing. I think that has potential. Other than that, very difficult to say which currency. Of course, I'm Swiss. I like the Swiss franc, which is a great value. And there is a project called Frankencoin that does that. So I think it's interesting because a lot of people should be interested in it.

It's a bit harder model, especially if you want to do it centralized, because if you get no interest or have negative interest, the business model doesn't look so interesting. And Fronkencoin is doing a great job, so I really love them. But it's also really hard. It's a much smaller market and bootstrap that. So I'm happy with what we have. And I think I'd rather take what we have.

I think we have a good product and look that we can get more adoption, some critical mess, so the project can sustain itself. As I said, you know, and I think there we are. also need the support of users and the community, not only liquidity, but also other stable coins. These things are not used. We won't have the options when we need them. And then we only rely on the other options. There's also a liquidity token, right? Can you shed some light on what the token actually does? And just as importantly, what powers it doesn't have? Yes. So with With Liquity v1, it had actually no power unless you could stake it and earned the revenues

out of the protocol. So the fees that were generated. And with Liquity V2, because we said it's a continuation, we wanted to give also value back to the LQTY holders. As we recognized, you know, in the system, the borrowing fees, we shouldn't give it to token holders, like most stable coins do it. And then it goes into the Dow, and then they realize if they don't give it to the stable coin holders, the stable coin holders, the defects, and they have this complicated system, probably

have wondered people that figuring out where the interest should go. So we follow that through. So we thought a better mechanism there, how we can get value back to AlkitUI. Out of this 100%, 75 goes directly to the stable coin holders, which deposit their stable coil into the protocol and get this defy-native yield, which was 3-4%. And because we had e-fliquidations, that spiked, you know, since inception, it had 6 to 8. 8% yield on a defiantive stable coin. So I think that's pretty cool. But going back to LQDI, and 25% goes to the liquidity venue.

So also something very innovative. Liquity recognized that you need liquidity. So borrowers are paying for stable coin holders to give them credit, and they should also pay for liquidity. Because every protocol needs to pay for liquidity. You just don't see how it happens again. Liquidity made the transparent 25 goes to LP pools where LQDI holders can stake the token and they can direct where it goes.

And with that, of course, the idea is when it grows, you control 25% of the revenues and to which LP pools with which pairs. You create a bribing market on top. Right now it's probably too small, but we've seen first steps. And that can become then also a revenue source for LQDY holders. But you guys as Liquity AG, you don't partake in that revenue. So kind of how do you guys make a living? We have some treasury tokens.

So in V1, we also staked and like any other person could participate in that. We're also incentivized indirectly of the value of LQTIMI that others get of it. I think that's also the main thing. and liquidity was always set out to be rather self-sustaining. So not kind of to grow and make it bitter, but rather have really a small team and maybe even a shrinking team that the protocol should sustain itself. So, you know, out of the liquid LQDI revenues,

some of it we use to make the runway longer. But these were actually the funds to bootstep the protocol. And the idea is not to grow. it and make a bigger team, but rather make it all sustaining. So we are not set up to have this continuous big revenue stream going forward. Are you worried that liquidity might end up under-resourced compared to systems willing to extract rent? No, because it doesn't need, you know, what would it need the resources for? Now it's only growth.

So yes, I think that's why we invest into growth to get. it to the critical size. But again, even with the liquidity, we build it in a way that LQDY stakers and the protocol can take care of it and bring it to a size where it's sustainable. So this is really the goal. I think other teams, of course,

they can extract more value out of it, make it just because of the size. But I'm not sure if you then can achieve that much more. You know, kind of there is only some limitations. Or you can buy your success, you know, that's what most projects may be used. it for you buy TVL, you do all these deals and then it looks great. But the moment where it goes away, everything is away. So we try that's rather smaller steps, but organic. The protocol

needs to sustain itself. And yeah, that's the main goal right now. Is that a point where you think kind of this freeness of governance design becomes dogmatic rather than principled? Why do you think so? I think there's a reason why a lot of protocols choose to be upgradable, right? Kind of like you want an emergency off switch. You want some discretion. Kind of like you don't. I know that in terms of the smart contract set,

liquidity is a lot less complex than say, Ava V3 or something. I mean, there's kind of just pure lines of code. So it's less likely that something is wrong. But even if you take, for instance, the recent balance they exploit, right? Kind of like it was in code that was, that had been battle tested for four years. Kind of, there were hundreds of millions of dollars in it. In the end, it was kind of a maths buck, right?

And someone found it after years and years and kind of like it was exploited. So I think the idea that you can write code so perfect. that you don't need a fail-safe switch. I totally understand your qualms with governance. Governance is complete pain in the neck. Yeah, I mean, so basically, make a governance is dysfunctional. I mean, everyone knows this, right? And kind of like others, less governance and more politics.

I fully understand why you wouldn't want to subject yourself to that. But going the totally pure way in the other direction, it does have its risks, no? Yeah. And I think, you know, there are different ways how you can do it. I think the ethos should go into the right direction. I mean, why are we building on blockchain? Exactly that not three token holders can decide and kind of upgrade the whole system within 10 minutes. I mean, that's why we build on blockchain.

Otherwise, we can also build that in web two. And of course, we are a bit extreme, but I'm not saying that everything is bad, you know. Pause switch with good governance and can make a lot of sense and you can introduce that. Or these time locks that you have on voting can make also a lot of sense. And there are areas where you can't build it in a immutable way. I mean, that's why we also build the liquidity provisioning, where the liquidity goes, that we build it in a more dynamic way, where LQD device takers, can decide where it goes.

So we recognize we can't make that immutable. But I still think there are a lot of good ways how you can design it to protect users and not take advantage of it. I really like also the curve model. Let's try a very nice balance of, we can change some parameter, but we can't take away funds,

we can't do much. We have a kill switch. And otherwise, we can upgrade. Also, this ethos saying, if we find something, we can create a new version, and people can decide if they want to move and we don't force them. And I think that's the things I like

about decentralization and there is a lot of wittle room and it doesn't need to be pure. But I think we want to give the users the control and safety that blockchains provide in the best possible way. Okay, I think that's a very fair take. If you now kind of zoom out, the global sables market has absolutely exploded

over the last couple of years, what are the thoughts that you have when you see that? What are the challenges that you see? What are the topics you think about? Wow. Very open question. It is very open. So I mean, what I see is in the past we had just this continuum of stable coins and everybody could do things. We had Terra Luna. We have a maker model which was fully crypto now as real world assets. We have people that tokenize carry trade. It's a bit the Wild West. And I think the biggest thing I see is that clearing up. And as I said, of these two models, you have these regulated ones in MECO or Genius Act, Clarity Act,

which makes a lot of sense. You want these treasuries in the most safest way. And we know how it's done in Tratvai-on-Che. So I think we'll see these models gravitate to that. That will become a commodity. You know, you can't differentiate that much. And then you will have the fully decentralized one, hopefully will survive because regulation will say, okay, that's something generally different

and there is no intermediary and that's fine. And the all in between, the trust me bro zone, where you just could operate, I think there you, the air will get very thin unless you get the right licenses because you can't tell me that you can do anything in between where you're not controlling users, funds, stuff like that, which is probably clear that like in traditional finance, there needs to be another setup. So I see this clearance, I think, of the picture. I think it will be really interesting on the centralized ones. You have USDT and USDC, but what happens next?

And there I really like the model. By the way, it was a great podcast with the heck from Bridge, which makes a lot of sense, you know. It's just a commodity. They provide the commodity. They take a fee. No thrills. Because, yeah, the product is simple.

The interesting part is what are people able to do with the yield that they get? Which players can monetize that and create the model? And for example, Bridge is issuing a native market's stable coin on hyperliquid. And there we already see, people need to use this yield for distribution and liquidity. Like liquidity, you know, that's what we use it for. And we will see their models that might work and that will create new stable coin incumbents that will be able to survive in the space. So that's about the things that I see moving, changing,

and that will be interesting. And on the decentralized one, our electric cores, I hope we see more adoption there, more recognition, and that this is another model, a model that should survive and hopefully. And I think also as an ecosystem, we need to fight for it, that people not just say, hey, this is dangerous, like self-driving cars, you know,

oh my God, we should avoid them because we have built a self-driving credit system and people might be afraid of that. But I think just that still these things are possible because I think it should be a right that you and I can facilitate peer-to-peer finance. We shouldn't be forced that this has to be done in an intermediate way because it wasn't the normal way

before 200 years, before they were bank. That was the way how you did finance. and it was totally okay to do that on a peer-to-peer level. I hear that. And I kind of, just to be, just to be clear, I kind of, I fully subscribe to that. So it does really appeal to me. So kind of I also really like single collateral, die and so on. I also like Rye.

So I know which camp I stand in. Zach also said something else interesting on the podcast, namely that he kind of sees banking and stable coins kind of converge rather than having kind of two. parallel financial systems in perpetuity. Kind of, do you think the user base of liquidity is going to evolve? Do you think at some point, J.P. Morgan will have liquidity positions on their balance sheet? Hey, could be. I mean, from a risk diversification point, and also it's interesting because there is no

counterparty, so there's maybe not the AML topic. So we had Bitcoin Swiss in Switzerland that facilitated direct loans with liquidity, so not on their balance sheet, but they just facilitated directly with liquidity. And that was possible in a regulatory way because there was no counterparty to it. It was the protocol that issued the stable coin. So these models can have some advantages. Also, institutional players really like the predictability, you know, that maybe they're not reliant on a maker governance and what happens there.

So I think they're not going to shift to it. But as I said, as a risk diversification, adding that to the portfolio, if they understand it, I think that could be interesting. And on the other side, I'm not sure what Zach said there, but what you see is now banking is under pressure. You know, the banking model with these tokenized treasuries, stable coins, they are eating really their market. So I'm really interested to see how this will evolve because banks will see people move their money to these stable coins because honestly, a PayPal stablecoin is a much better product than having your dollars in your bank

because there you have the counterparty risk and this bank, you know, in Germany might lend the money to bank coin. We had this huge scandal and you're not aware of it. And with Poxos, your money is, parked and you get the yield you know so with banks you they give you the risk without giving you the yield so and we see

these forces now playing out with Genius Act with Clarity Act honestly it's not about the users what they are arguing about who should get the yield so regulation is actually used to protect the banks or create the moat

which I think is a bit paradoxical and then just want to highlight it that I think half of it is regulation is used to protect the users, but half of it, sometimes it's also to protect incumbents. And the same for MECO. You know, MECA, I don't think they made stablecoins better or less risky for users because they forced, I think, EURC to hold more of their backing in bank deposits where you take on the counterparty risk of banks.

So that was really questionable to me. That's an interesting take on the regulatory side. can you give us more specifics of how you think the genius and charity and Mika Act, how they protect banks? Is it just that they disallow the passing on of yield? What is it specifically? Yeah, exactly. I mean, that's something I learned with crypto, how a bank works.

You know, your deposit, your money. You don't get any yield and they can lend it out with some. nice interest with leverage. You know, these are the... Many times over, right? I mean, kind of like they can lend out like... Eight times leverage. You know, we think these are these are digital crypto trade.

No wonder they need regulation. So that's a very risky business model these days, especially if people can just with a click move all their money out. You know, it's not designed for that. Kind of duration of risk is not managed like that. And so there I see really disadvantage. Now I have a product where I can deposit my dollars, which are held bankruptcy remote, and I still get the yield.

So, I mean, I would be really dumb if I wouldn't use it. And now, I mean, these products are governed market money funds. They are aware. I think with fidelity, you can open such accounts. It's nothing new. I think crypto just adds new rails. Makes it, for example, for me, easier to get access without my bank and be able to use it in Defi and repackage and rebuild it.

So I think that's great. But I think that's what I message you. I learned with crypto that not every dollar is created equally and how different all these dollars are, especially from a risk perspective. Going back to this blue chip rating, what I also learned is, for example, USDC is only B plus rated because with USDC you still have some counterparty risk of circle.

I wasn't aware of that. And PayPal or even ripple USD installer is better because it's bankruptcy remote and it's a better set-off. So these things really matter. And going back to your question is, yeah, I think breaking up this banking model, they just got this deposit and could lend out and taking the spread. I think that's a bit breaking up. And everybody says they're afraid saying, okay, credit for small. businesses will be very difficult.

But honestly, most of this money went into hedge funds or a lot of other stuff. And now I think just these two markets, getting yield on your deposits and getting paid to lend out your money will be priced differently. So

I think that's the pressure on the model that I see that these stable coins now will offer to more users. And banks are afraid of bank deposit flights. Exactly. as you said it, because now they're getting more yield on their dollars somewhere else. If I turn this argument around, kind of, if I'm a small business owner and kind of I want to get a loan from the bank,

what they do is kind of they look at, they look at me and my CV. They look at my business plan. And then kind of they do some sort of risk underwriting to kind of see whether they think I can make this work. that they can kind of make their money back with interest. Kind of in liquidity, I actually need some sort of, well, actually very specific capital, IEEs, in order to actually get a loan, right? So kind of this entire under-collateralized loan space.

I mean, we don't actually have to talk about the in-between stages where, say, for instance, in Maker, kind of you deposit RWA. and so on. But kind of the really under-collateralized end of the spectrum is where most loans actually take place, right? Everything, more or less, everything that's not a mortgage is severely under-collateralized, right? So how do you see that kind of migrating into the trustor's realm? Or do you see that migrating into the trustor's ram?

because I actually see that as the main skill set of banks, that they have become very good at risk underwriting. Exactly. And it makes totally sense that they make it. So I'm afraid, you know, that's what I said. If I hold a stable coin and now some crypto team is giving undercollateralized loans to market makers, I think then I take a lot of risk. And that's why I said, okay, maybe I'm just fine with 6% on bold by not taking on all these risks.

Because that's an old business, underwriting business and traditional banking is very good in that and should be done by these people. And the role that crypto can play is that you say now depositing stable coins or funding such companies that can underwrite the loans is now much easier, much more direct. So already some years ago, I talked to invoice financing companies that instead of getting a credit line from a bank would take credit from crypto investors. And I think that makes a lot of sense as long as you kind of have this regulated business and you're doing it in a diligent way. But then again, blockchain and crypto just become the distribution channels

or just the digital channels or rails for traditional financial products. Cool. So Michael, tell me, what's next for liquidity? What should we watch out for? Yeah, so we are really focused on building out. the ecosystem and the utility for bold. So being it, you know, kind of integrated in lending markets and then really beating the drum that people see this proposition,

understand that they get a stable coin that can have the same similar risk profile, like, you know, even better than USDC and die in this blue chip report, that were B plus and bold is a minus, and getting a good yield and starting. and start using it. So that's really our main focus. You know, the product is out there and now it needs to be used.

So we are really focusing in educating people, understanding the product proposition, the good yields we achieved. So that's, you know, as I told you, you have the borrowing fees. But if you deposit the stable coin, you also partake in liquidations and you can make 5% gain.

So in these markets now, where there were liquidations, people earned great returns. just making them aware of that, that kind of in this very risk-adjusted way, these are great earning opportunities. That's really our main focus, driving growth, driving integrations and utility. And I think that's the blueprint of every stablecoin holders. And that's really also the challenging part. You know, deploying the stable coin is always the easy part. And we see that, we have a lot of forks, actually. Our model gets forked quite a lot. And deploying it is the easy

part, building a user base, building utility is really the tough part. So that's our full focus. So where do we send people to find out more? Yeah, go to liquidity.org. There you have the website. There you can inform yourself. There you find front ends because even frontends are decentralized with us. So you have different frontends. There you have very great and deep detailed docs. And we have also a Twitter channel, that's the main communication channel that's at Liquity Protocol, where you can follow us, learn about us, yeah, and help to push sovereign money and Ethereum dollars. Fantastic. That's a fantastic way to go out today. Thank you so much for joining us, Michael.

Thank you, Federative, for having me.