On The Brink with Castle Island - Guy Young (Ethena) on the Past and Future of Crypto Interest Rates (EP.507)

Episode Date: February 28, 2024

Guy Young, the founder of Ethena, rejoins the show to give us an update on Ethena and to discuss the nature of crypto interest rates. In this episode: Reflections on the Ethena launch ETH funding rates versus ETH ETF expectations Funding rates on crypto native exchanges versus CME Why Ethena versus doing the cash and carry trade At what point does Ethena start to drive down funding rates The history of the cash and carry trade in crypto Did yield farming represent a real form of yield? Why is yield farming less viable today? The ultimate convergence between tradfi and crypto yields Where risk premia come from for Ethena versus the risk free rate ETH taking yields and their development Guy's concerns about Eigenlayer and its effect on DeFi Interactions between real rates and crypto rates Stablecoin supply versus tradfi interest rates Crypto yields versus RWA supply The share of stablecoins that is speculative in nature Guy's expectations for the medium term future of crypto rates

Hello, Nick Carter here, sitting down with Guy Young, the founder of Athena. We've had him on before. We're doing a little retrospective on the first 10 days of the Athena launch, which has been a blockbuster. And we're talking about where crypto yields come from, how they interact with trad-fi interest rates, how this affects the supply of stablecoins, and what the future of crypto yields is in a world where Athena exists and in a post-Bitcoin ETF and maybe post-Eith ETF world as well. Guys, truly wealth of knowledge on this. It's always a pleasure to sit down with them. As a clear disclaimer, we are Athena investors. I just want to be very clear about that. Let's dive right into it. Here we are. I'm sitting down with Guy Young, Mr. Athena,

bordering on the main character in Crypto. I know he doesn't like it when I say that, But certainly one of the most impactful and explosive projects we've seen in the crypto space in some time back for your second episode here. We'll put some meat on the potatoes of our discussion about interest rates. We're going to dig into that today. It's a pretty incredible time in crypto. I'm here in Denver, 6 a.m. earliest podcasts ever recorded, actually.

And Bitcoin just hit 60K, I believe. So something's going on. I don't know what. But we're going to focus our discussion on. rates and I also were going to start with a brief recap of what's happening in Athena so Guy welcome back to the show I'm fine appreciate you having me so I think Athena just hit a big milestone 500 million in TVL let's call it can you recap sort of the first week or so of Athena sort of post-launch yeah sure thing so we came out to the public with our main net

Monday of last week, opened up the protocol for users to come in and start to test both USDA with some caps that were in place. So we've been pretty focused on trying to do this in a slow and controlled way to just manage the second order impacts of what Athena might cause throughout both C-Fi and D-Fi. And so we've just gradually been lifting those caps and allowing more users to come in. Just as a brief recap for any of your listeners who aren't aware of what Athena is up to, at a very basic level we're creating a synthetic dollar, which is basically long, a crypto asset on one side and then short to perpetual on the other,

with those two things netting off to create a synthetic dollar. And essentially, users have been coming in to acquire that USDA, and as part of that, and I'm sure we can jump into it. we've seen the funding markets within CFI explode higher in the last few weeks. And so the conditions at the moment have been reasonably favorable for what we're doing. And I think we're happy with how the launch went. But I think also acknowledge that we've been extremely fortunate with the backdrop in terms of the market conditions for really being primed for the product that we're putting out right now. Yeah, I mean, the timing could not have been better.

obviously rates funding rates were already pretty high and they've continued to climb since launch. Were you expecting this level of enthusiasm right out of the gate? I think I personally had an expectation that ETH funding rates in particular would start to get pretty hot. I think just observing what we saw in Q4 of last year when there was speculation around the PTC ETF starting to heat up. We did see funding rates on Bitcoin. get into territory that was actually even higher than where it is right now. And so I did have a broad expectation that people would start to move and rotate to speculate on when the EZTF would come.

I have no particular insight into when that does happen. I know you are slightly bearish in terms of the timing on that front, but it's actually slightly less relevant. It's sort of just when the market has the expectation, they're going to be front running that and expressing it through credentials. And so we did have a view that. that funding was going to be sort of favorable for our launch. But I think I was quite taken aback by the market interest in what we're doing.

And I think some of the skepticism that was coming out, we had some pretty strong pushback, I think, from multiple angles, which I think I just want to make clear from our side. We're actually very open to that type of skepticism. I think after our cycle, it's important for us to actually diligence. Where did the yields come from? how sustainable are these products and where does fragility actually sit within the system. And so I think we did get a bit of pushback, but it was all stuff that we were open to responding to

and actually wanted to try and engage with. Yeah, and I think on our last episode, which was great, and I recommend you all go listen to that for Athena 101, we did endeavor to dig into where the yields actually derived from. light what are the intuitive reasons why these yields exist and I think that is the key to becoming comfortable if you desire to with a system like Athena versus what it was compared to a lot on Twitter in the last week which is of course the infamous Tara Luna I think that's really just the key thing is dig into where the yields derive from so that you can basically conduct the analysis in a fair way. With Terra, as we've discussed, the yields came from nowhere. The 20% was

arbitrary and basically it was a matter of, it was a sort of unbacked liability of the Terra Foundation that they were just trying to raise capital to pay out and they, it wasn't market driven in any way. It was just an arbitrary set figure that they were trying to maintain. Whereas with Athena, the yield is just a consequence of the ETH staking and then to a much more important degree, the funding rates in the market. So on the EF funding rate question and interactivity with the ETF expectations, the relationship there you feel is that as the market expects a decision on the ETH ETH ETF, let's say the market generally expects it to be approved. Again, I actually disagree with that, but the market is the market. You're saying that that enhances the decision.

desire for leverage on the long side, Neath, which pushes up the funding rate? Is that sort of an accurate way to say that? Yeah, that's exactly right. And it's not actually even just reflected within the crypto ecosystem itself. We've seen what I think is quite interesting is actually the development of like the CME and the importance of the CME as a venue in the last of 12 to 24 months, where BTC at least, flipped finance open interest in the lead-up to the BTC ETF. And we start to see, while ETH is actually much smaller than BTC on relative terms,

we've seen to start to see CNICM moves on ETH, CME, open interest as well. The reason I pointed out is that it's not just an irrationality of crypto-native participants who are overpaying for leverage within our own system. We're also seeing trad-by participants willing to pay and just looking at the ETHCME basis right now, it's close to 20% at the moment. And so I think it is exactly as you're saying, there's just front running of price expectations and people are willing to pay for that leverage to get long. And you could always argue that the rate that you're willing to pay to get long that leverage

should always be with reference to the underlying, realisable to do the asset that you're actually trading because if you do believe. that Heath can move 2x in the next few months up to a point where you expect an ETF. It's a perfectly rational thing to do to be able to actually pay 50% annualized to capture that on a post-leverage return. So yeah, I think sometimes it's portrayed as in the rationality of the crypto markets that those interest rates are so high. But I think that there is actually a very reasonable case to say, and I think it's backed up by the evidence of actually more sophisticated participants, within TradFi, where they are willing to pay that interest rate because they have such

a strong view that the underlying is going to move that much. But it is a fact that for the crypto-native exchanges, the funding rates are typically higher than the equivalence on the CME. Is that fair to say? That is correct. There is also an actual difference in the underlying contract. So when we're talking about funding rates within crypto, it's on perpetual contracts normally. So you can think of those as rolling future contracts.

But on the CME, those are actually not the same. They're not perpetuals. Those are actual features that everyone is used to. So there is slight differences in actually contract type. But yeah, we do typically see plunding within crypto-native entities does push above what we've seen within the basis on the CME. And that is with just a slightly larger sort of retail presence that are sitting on some of the crypto-native exchanges.

So I guess what I'm getting out is, We discussed this, obviously Castle Island's an investor in Athena that was disclosed. We discussed this as part of the round. My view, and maybe yours is different, is that there's kind of a structural difficulty in getting collateral onto crypto exchanges, mainly due to perceived risk and desire to not, you know, collateralize a position on a crypto exchange or have had such a sordid history of failures there. and so there's kind of a structural under supply of capital that might be arbitraising away, those sort of high yields, versus something like the CME where nobody's really worried about the

solvency or the counterparty risk of the CME. And so in theory, if a bunch of volume, futures volume, move to the Tradfi venues, that would, let's say in conjunction with the ETF and TradFi getting much more comfortable expressing V that way, that might actually suppress the yields in the long term. What do you make of that assertion? Yeah, I think that there's just a question of relative market share between, if we just put it between CME and then call it other for crypto-native venues. I don't really have a strong view on how that develops going forward.

I think we've obviously seen the CME growing relevance recently, but it's unknown if that's going to sort of continue in the same. that it has. I think that there is always just a general supply shortfall of dollars within the system within crypto when we do see a bull market. And I think the point that you're going to there is actually the right one, which is around credit risk, which is you can observe that there is a high funding rate on some of these venues, but that is absolutely correct, you know, correct sometimes when you're actually taking into account the credit risk of the venue that you're sitting on. And so I think when people describe it.

it as pure arbitrage, that's not actually correct because there should be venue-specific idiosyncratic differences between the funding on those venues. And so I think we'll always continue to see differences between them unless you truly isolate the custodial element of the collateral from exchanges where you can reduce that credit risk down to something that's comparable across all of these venues. But until you see that, I think that actually differences in funding rate are a more actually. representation of like risk-adjusted yield, then those numbers being closer together. And I think this gets to the meat of sort of why Athena versus why not just do this trade

yourself if you're relatively sophisticated, which was one of the critiques leveled at Athena when it came out. And I think the answer is Athena did the hard work of building those off-exchange custody relationships and managing the exposure to these exchanges. And managing the exposure to these exchanges in a dynamic way as a sort of specialist. Whereas as a sort of regular individual, you may be less equipped to do that. So I think that maybe answers the question, sort of why Athena? Yeah, I think that's one piece, but it's actually, I have a much stronger view on something that's a lot more compelling, which is actually just thinking about the composability within default and the rest of crypto. So yes, as you're pointing out, anyone can go into a cash and carry. That's not

what's interesting about Athena in the slightest. What is interesting is that when you tokenize a cash and carry and you have that embedded form of yield that we've described, your ability to then take that token and start to integrate into different defy applications is something which is fundamentally impossible if you're not putting it into a token and then plugging it into different areas. And so just to give you two simple examples here, which should make that clear.

One is just thinking about money markets within defy. So if you can take yield bear and collateral, and then just calling out the percentages, I'm seeing here on the screen now, these numbers can obviously change in their volatile three time. But since Athena's been live, we've seen interest rates at 27, 24, and now is pushing into the 30s. If you can put that down onto a money market within DFI, like Arve, for example, and the dollar borrower costs within DFI is at 5 to 7%. You now have an ability to actually lever up that position with relatively safe parameters because the asset and the liability are both in dollar denominated. and that can lead to really interesting post-leverage returns,

which is just not possible if the hedge fund is going and doing this themselves. I think the second one is actually thinking about percolateral using USDE itself. So one thing I think people forget is that actually an enormous sync for tether demand is actually just margining linear perpetual contracts on centralised exchanges. The last time I checked that number was close to $20 billion of tether was just sitting there to margin. linear perpetuals. And so if you can actually unlock now getting paid the basis on the collateral that you're using to trade, that is just an order of magnitude increase in capital efficiency for some of the trading funds. And we're talking like large eight figure, low nine figure,

lost interest income per year for some of the largest entities. That is a compelling enough use case where, yes, they can do it themselves. But actually using Athena through a liquid and composable token is actually where the magic is rather than the trade itself. So just looking at the numbers, I'm linking the dashboard right now, the eth-o-I is 8.5 billion. The average funding rate is 37%. Athena is actually already at 6% of ETHOI. At what point, as you continue to grow, do you think you actually start to affect that and maybe create this negative feedback loop whereby you start to drive down the OI, or rather the funding rates?

like very broad upper band where I think we start to like run into real constraints is roughly 30 to 40% of like post money open interest and so I think there's still a significant amount of room to grow there I think we will have a marginal impact well before then just in terms of bringing down funding but never getting to a size that's truly influencing the market across every single contract but Yeah, I think the upper bound for the way you can think about this constraint is something that's closer to a 30 to 40% range on the post money, open interest. And at the moment, as you pointed out, we're still sub 6%, and that's just on ETH. And you've got PTC as well, which is that around $20 billion of open interest at the moment. So as you layer Bitcoin into the system, that unlocks a huge amount, more capacity and room to grow, basically. Yeah, and I think one other interesting observation that we had from last cycle was

While market caps were enough, we actually saw the open interest or derivative market grow at a quicker pace than the market caps themselves. And so as just a very rough ratio on BTC and ETH, it was roughly between 1.3 to 1.5x, the growth in open interest versus the price or market cap growth. And so as we, you know, expect the cycle to continue and expand, we actually think that capacity grows at a quicker pace than the underlying assets themselves. Part of this conversation I wanted to cover is actually other yield types, sort of the past of yield and crypto as well and, you know, contextualize where we are. So maybe let's take a sort of little historical journey into the emergence of yield and crypto, the different types we've seen so far. You were telling me that even before Bitmex, there was this kind of same basis trade that was possible. Do you want to share a little bit more about the history there? Yeah, I wasn't around at the time.

This was just reading old articles and blog posts, but my understanding is that actually a lot of the main characters from different cycles in the past, actually first initially got drawn to the space from seeing that cash and carry into the hundreds of percent. That was before any major derivative venues existed at any material size. But it was that initial opportunity,

which I actually think drew in a few, of the individuals who went on to build some of the more important businesses within crypto was actually that original cash and carry. I think it actually only sort of scaled to a size that was meaningful for participants outside of crypto really in the last cycle. So the derivative market around BTC and ETH before the 2021 cycle was still never at a size where I think that those institutions were here at scale in size in the market. and I think that there's really sort of like a pre and post 2021 market where it started to have a slightly different look in terms of the participants that were around.

I do think it's quite interesting though because it is one thing that people have described and discussed around Athena, which is I guess the size of opportunity that exists here and the dislocations that you do see within the basis and funding still seem to persist despite the fact. that we've been speaking about the institutions being here for the last two to three years. And yeah, I think the way that we sort of conceptualize Athena, aside from if you're just describing the vision that we had for building a crypto native dollar through the synthetic, the synthetic USCE, a different way I've tried to frame it to people is actually just, you can think of it as an arbitrage vehicle, which is actually just trying to tie together interest rates between DFI, CFI, and Tadfi.

Because at the moment, you don't really have a single vehicle which can actually tie together the borrower rates that are sitting within DFI, which often dislocate to hundreds of basis points from the cost of capital within CFI. And then equally, you don't have people within Tadfi who have a very easy way to plug the gap between borrow rates in Tadfi and the crypto capital markets. And so you can really just think of Athena as a vehicle which is forcing the convergence of interest rates between those three separate islands and USDA is really just the balancing item which forces those things to come together which we think is interesting and you can actually see it

popping up quite a bit now when I was describing some of those pieces out there with the money markets in defy there is just a very clear dislocation between your ability to borrow dollars sub 10% right now and then put it into Athena earning some of those those yields that we're describing And really, I think we're going to see large second order impacts across both funding rates within CFI, but then actually the impact of rates on chain as well. And Athena is really just that connective tissue, which is tying it altogether. Yeah, I mean, assuming that larger allocators become comfortable with the Athena system, isn't the rational thing to do just borrow at trad-fi rates, turn that to stable coins,

deploy into Athena. I mean, you know, like think of Athena as like a foreign nation where there's a very structurally very high interest rate. We're not dealing with FX risk because it's all dollars. And so the motive per larger allocators is just to come in in size and arbitrage way the difference. Does the existence of Athena actually hasten the convergence between sort of crypto-native yields and the risk-free rate, basically?

Yeah, I don't think we ever see true convergence between them, because I do think that there should be a reasonable spread to the product that Athena is producing versus those risk-free rates. But I think the thing that's even more of is less so between tradfi and C-Fi and D-5, but it's actually you can think of the spectrum of returns for stable-like assets, where you have a true anomaly with USTC and UST where they pay zero for unsecured credit to those entities. Then you have RWAs at 5%, and then really nothing else at scale, like beyond that, in terms of like a risk and reward spectrum.

And so it's actually, I think, partly, like this dislocation is actually partly driven by USDC and USDT, not paying out an interest rate on the products that they offer. and that actually just makes this discrepancy even more obvious where we think that the way that those two things converge and really what the thing is providing is you should not be getting paid north of 25% for an unleavened cash and carry. That interest rate must be much lower. And equally, I think that the borrow rates within defy to actually get your hands on dollars should be higher. And so for those two things to converge through time, you're going to see borrowing of those other dollar, like assets going into Athena and as I said, the balancing item there would be the growth of

USD going up and the interest rate that I described going way down, which is really the opportunity that we see. And we don't see that interest rate falling as something that's negative. That is actually just Athena doing the job and actually just making the market more efficient to have those interest rates converge. So am maturity and let's say capital becomes. less of a constraint and whoever it is that has enormous size that wants a diligence Athena does that and they're comfortable with it, you think the Athena rate will still be higher than the cost to borrow in traditional markets. And I guess you could explain that via risk premium, imagining that there's some degree of premium for a smart contract risk and then some degree

of premium for crypto, I guess, custodial risk and maybe some for the solvency of these exchanges themselves. Are those the risk premium you think will drive the continued discrepancy? Are there others that I haven't identified here? Yeah, and I think that there's also just a basic overlapeable operational functioning of Athena in terms of the software and stuff that we've developed on our side. But yeah, I think you hit the main points there, which is people are. were quite quick actually last week to assume that Athena was going to get so large

that it basically pushes the entire market into negative funding perpetually and that that that was almost like a design floor in the entire thing. I think if we just step through it, we can think of users' willingness to actually hold the product. Everyone's going to have a demand slope for what interest rate they require to be in the product. So some people might not want to touch it when it's at 25%. Some people might be happy to hold it at 12 or 10 or 8 or just a tiny pickup to RWA's. And everyone's going to have their own position on that demand curve. And the way that we see it is that as the supply of USDE goes up and we eventually push down to cash and carry spread to RWA to a level that makes a bit more sense, you're naturally going

have users who are saying, I'm not willing to hold this product at this spread versus the 5% risk free. And that's actually where we quite like this piece within the design, which is, it's an exogenous interest rate to the entire system. And it's totally market set where users will decide there is a clearing interest rate that I'm willing to hold this. And if they are not happy with that interest rate, if it gets pushed down too far, they step out of the product, which allows it to sort of mean revert. So it's funny that people, focus in on that negative funding risk, I think, from the commentary that I saw last week. It's probably the one that I'm the least concerned around because I think that people are

going to be reacting to the interest rate a long time before you ever get to 0% return on the cash and carry. Yeah, I think people are living on the second order effect here, which is the negative feedback loop between Athena growth and interest rates, but they forgot, they forgot about the third order. I know, of course, we're challenging people to get out to the third order, which is the reaction of allocators to Athena once Athena rates come down, which is naturally, as you're saying, some percentage of them will drop off once the required rate of return isn't what they require anymore. And we achieve a natural equilibrium. So one thing I want to ask you was before this kind of yield became basically productized the way you're doing it.

The other yield people talked about is the quote unquote crypto native yield was the yield from yield farming, which I always thought was actually a misnomer, frankly. But, you know, basically parking ether, stable coins within some protocol and being paid in kind of native token. we kind of still have this to a certain degree, but I think it's almost getting more speculative and less direct the relationship between sort of allocating capital to a protocol and getting paid because now it's becoming more diffuse with points and sort of unspecified future air drops with civil protection, which eliminates some of the certainty there. In 2020, I guess, in 21, was defy summer in 2020, yield farming was a thing. How do you compare that, the market,

dynamics there. How do you compare that sort of yield to the sort of funding yield that you're expressing? Yeah, I think what we saw in D5Sum is definitely subsided a little bit. I think it was really a quite unique moment in time where the only reason that that could exist at the returns that we saw and the scale and the size that we saw was really, I think, because it was the first time that people had seen liquidity mining like that and and fully sort of understood exactly the money game that was actually being played. Because I think ultimately we can obviously look back in it. In hindsight, then actually to see that there was a huge value transfer from retail users buying in on these inflationary tokens

to large industrial scale size farming operations like an hour meter or three hours or whatever it was back then. And there's only so many times that the user can actually be a loser within a game and still come back to play the same game. And so I think when we do see these things pop up now and more recently, they do tend to collapse in themselves a bit quicker. And I think that people have actually just stopped playing the games because they understand that they're at a table that they're going to lose. I think what you're getting to here is that we have seen a bit of an evolution with it, with points that have come out, and Athena is doing something similar in terms of its go-to-market. I think the difference here is that it's being slightly less explicit up front of this is exactly what the return is that you can expect to provide your capital and allows actually teams, the bit that I like about it actually is it allows teams to do a bit of testing with their users to understand how they're responding to things and then being able to actually adjust the product or the go-to-market with that feedback that's coming in. And so, you know, incentivizing users to do a few things, seeing how they're reacting and then, deciding how you'd actually adjust the incentive going forward is actually pretty useful user

feedback to be able to adjust your product to the ways that they're actually responding. What's interesting, though, is that whenever there is a possibility for an asset to be traded within crypto, we, I think, find a way to put liquidity around it. And we start to see the emergence of projects like Pendle or others, which are allowing you to now just speculate outright on these points without any knowledge on where the diluteous the valuation of the project will be, or even what percentage of the supply would even convert from these points into the supply itself. So again, I think there's interesting markets that are popping up there to put liquidity and speculation around that now. But the way that we saw

Defy Summer back in 2020, I don't think we ever see it at the same scale of returns for two different reasons. I think one is that retail users who are there can only really be tricked in the same way, with the same games. And it was all completely new back then, like everything about Defi. It was like really the first narrative where we felt like we found a real use case for applications sitting on Ethereum. And people were like rightly excited about that at the time and still working out what was this actually worth. And then I think the second one is that a lot of large-scale institutional funds hadn't actually set themselves up to be able to deal with Defi farming back in 2020. It was a process that they went through to sort of catch up.

into the beginning of 2021. And now you have, you know, very professional types of players who are sitting in here. And if you ever do see returns get up anywhere near to where they were there, I think capital would rush in a much more aggressive way than we did see in DFI summer. So I do think that that was a bit of a one-off at the scale and the turns that we did see in 2020 for those two reasons. So would you say that, quote-unquote, yield farming is a misnomer because, the yields were being paid through basically inflationary issuance, which, you know, it is sort of just represents dilution at the kind of FDV level and isn't really yield

driving from sort of a fundamental demand for economic activity on the other side. And so like ultimately not sort of a true yield. Like how would you characterize it? Yeah, I think that's right. It's just issuance of new tokens. and there's yields so long as people believe that there's forward value in the tokens that they're buying. There's nothing like inherently wrong with it. I think that we have seen some systems that have been bootstrapped in pretty incredible ways with the use of yield farming.

The question is, like, are you tricking yourself into believing that you found product not a fit with the use of tokens and inflation? And then obviously when that incentive subsides, you sort of see the reality of the fact that people were there using it because they're going paid to do it rather than. then finding the product is actually useful. I do think just surfing back to your questioning around Athena, that is one thing that looks quite different here, which is really the core economics of the return that any uses is finding through Athena is primarily and, you know, driven by exogenous interest rates to our own system.

So it's not us subsidizing anything with tokens. It's not VC's putting money into anchor at 20% and subsidizing yield. It's all really just market set interest rates, where if they're attractive, then great. Users want to come and use them. If they're not, then people will step out of the product. And all we're trying to do is provide the infrastructure to make that easier for them. And we hope that that creates something that's a bit more sustainable three time

where we're not sort of subsidizing our return for users. Now, moving on to the other leg of the trade for Athena, eat staking yields. There's obviously come down a fair amount as capital has become more willing to deploy to them. Who knows, maybe we'll get an ETH ETF that includes staking so that on boards tradfye and, in theory, sort of further suppresses the ETH stake yield. What do you make of the sort of state of affairs on ETH staking itself? Are the yields where you sort of thought they would be?

And, you know, what does it look like on a go-forward basis there? Yeah, I think when we're first putting the product idea to get that, with Athena, yields are actually closer to 5% to 6%. We didn't have an assumption that it would get down to call it like 3.5, which is where it's sitting right now, which has obviously been something that has made the product look slightly less attractive than it would have when we're first designing it. I do actually have pretty significant concerns around, I think, the broader implications of the way that Iganer is basically going to interact with each staking and its monetary policy.

And the implication that that has on StegDuth returns and then I guess all of the DFI infrastructure that's been built around the assumption that Steg Dith returns are sufficient to build financial infrastructure. So I think the main reason that this could have unintended and unexpected implications for the rest of the defy is what we've seen is a lot of capital start to flow into liquid restaking tokens. So in the last few months, a few of these have gone from quite literally zero to north of a billion dollars. And the part of this is driven by actually the incentivization that is sitting around Agamere itself. So people are expecting that you're going to be getting north of 20% all in return for providing capital within Nagamio. And you can see that expressed through the Pendle markets that have existed around there. And what that has the effect of doing is that every application that was just depending on stake deep returns rather than liquid restaking tokens has now struggled to keep capital within it because any user, is now looking at just as a very basic example, a CDP staple coin, do you want to put down

your ETH or your Steeth and borrow a stable coin with X percent return? Or now there's a new game in town where $5 billion of ETH can be sitting in EGEN layer and people have a return expectation above 20 percent. That has this enormous gravitational pull of ETH into eigenLayer, but then actually has impacts on these other projects. And I think the concern that I have, more broadly is that it's going to push down staking returns across the market as people are chasing add drops on different ABS infrastructure and then Iganair itself. And a lot of financial infrastructure, which is built on the assumption that stake debt returns was sufficient for their own application are going to be forced into taking more risk now with liquid restaking tokens.

And I think the concern that I have there is that they're going to be more fragmented with weaker liquidity than Steeth. And I think the concerns around I can layer in terms of the systemic risk that can have are probably overblown when we think about like the actual slashing on ABS but are actually under explored when we think about potential ramifications for the rest of defy if we build the whole of defy on LLTs with weaker liquidity profiles. So what does that fragility coming to a head look like? I mean what do you envision like an actual eigen layer driven crisis? looking like if you had to speculate.

Yeah, and just to be 100% clear, this isn't like a base case expectation of mine. I think it's just something that we at Athena are thinking about as well, because it does impact the way that we construct that product. But I think it's basically just a migration of assets into fragmented liquid restaking tokens where you build a lot of money markets and leverage on top of those assets. And then you find out at the end that they were less liquid than actually just having state. So I think people have been, you know, critical of Lido and Steeth and their dominance, but actually one quite helpful benefit of having it all within one token, despite the concentration risk that that sort of causes for

decentralisation, is actually that it's a lot safer for the whole of DFI to build it on one token from a liquidity business sector, because we all just focus on one token to make sure that it's liquid and then all of the financial infrastructure around that is around a more liquid token. When you split that into 10 different tokens, and you need 10 different AMMs and 10 different sources of liquidity, it just makes it a lot harder to actually build robust financial infrastructure around it. So I think the concern, and this is just something that we're thinking about with Athenaeer as well, is that if Stake Dieth returns are pushed to a level where it no longer makes sense

to hold that asset from a return and duration profile perspective, are you then forced to think about liquid resaking tokens where it might not actually be sensible to do so on like a risk adjustment basis. How does this influence your design considerations at Athena itself? Yeah, honestly it's something that we're still grappling with. I think Staked Heath returns at the moment are definitely pushing like the lower bound of where we think it makes sense to even have this as part of the product because it does introduce duration and liquidity risks that don't exist with ETH in the same way. And so it might be that actually

in a bull market where a basis is as strong as it is right now, you don't actually hold much steep or other yield for bar and collateral at all because the contribution to the overall yield is so much lower now versus the basis that you find within perpetual markets. And it might actually just be something that at the bottom of a bear market, you actually just need more yield that comes from these sources at a smaller size of USDE, and you need that to retain like the core economics as the basis contracts through the cycle into a bad market. So it's something that we're actively monitoring and just making sure that we really think through like is the risk-adjusted return for adding some of these LSTs. Does it still make

sense in the context of like the border market cycle? And that's just the piece that's top of our mind. One thing I want to talk about is the interaction between real rates and crypto rates. And it's getting really complex actually because real rates are being pulled into crypto via tokenized treasuries and other forms of RWA. And, you know, I think we'll see that on an increasing basis, although I don't believe the tokenized treasury sector is over a billion yet. So it's still pretty small relative to stable coins that won 40 billion. Initially, we saw stable coins supply fall off as real rates rose

because basically the established stable coins, with the exception of tether, seemed to do fairly well in that rate. regime, but, you know, the other established stable coins didn't pay a yield. And so allocators rationally just went back in the fiat. I think it's probably fair to say that as sort of like the perceived crypto rate rose above the risk-free rate, stable coin supply started to grow again. I don't have a chart, but I think you could plot, you could probably plot it out like that. How do you think about those various interactions? And I guess the other thing to mention is as real rates fall, general liquidity increase.

and maybe sort of like crypto speculative activity increases. So how do you kind of untangle all those interactions? Yeah, it's been actually quite interesting to, I think, see the difference in the actual data and I guess the narrative that's like formed a little bit around like RWA's within crypto. So the data that I've seen and this is just from DeFi Lama's RWA section. It's actually really the one of the few sub segments within crypto that's actually declined. since October, exactly the chart that you're alluding to, which is when rates within crypto defined broadly as let's call it the basis within C-Fi started to expand beyond risk-free rates

in the real world, that's actually when stable coins as a whole saw an inflection point and actually start to grow off of the bottom. I think you actually maybe called it within a few days or a week of the actual bottom. I think it was roughly in like, let's say, October. of last year, October of November last year. Exactly right. Yeah. And what's even more interesting is if you overlay that with the month and month growth rate of RWA's, they actually start to shrink at the exact same time that stable coin supply

started to increase and it was at the exact same moment. And really what I think was being expressed there was that yes, new stable coins were entering the system, but stable coins were not entering the system to go into an RWA. It wasn't onboarding on a USTC and then going. into an RWA. It was onboarding in the USDC to capture crypto netive yields because they'd started to exceed the risk-free rate. And so actually there's like a percentage of market share, while stable coins have actually grown, I think it's close to $20 billion now since that low in October. RWAs have actually lost 25% of market share in the same time period. And again,

I think this is just getting to our point that I think RWAs are extremely useful products, for users at very specific moments in time. It's just during a bull market, it's quite difficult to justify capital basis sitting in there where you have so many different opportunities within crypto where there is like a dollar shortfall and supply shortage to find better returns, basically. And so I do think that RWAs will have their comeback

basically towards the tail end of this bull market. And that's sort of their moment to shine. And they really are like antipsical businesses. So I don't think that there is an expect. expectations that they grow massively through the build cycle. I think they're more there to park capital when the cycle does sort of start to slow down to the end. So if you decompose the supply of stable coins into its constituent parts is in the reason why people create stable coins. I think partly there's just crypto native balance sheet. There is people

that need them for collateral exchanges as you talk about. There is stable coins as a pure vehicle for obtaining a yield that you wouldn't otherwise be able to get with tradfai dollars. And then there's sort of the non-crypto demand for stablecoins, which is sort of like, let's just call it crypto dollarization in emerging markets where people just want dollars. They happen to want those dollars through crypto mechanisms or convenience or because they can't otherwise get it. I know this is an impossible question, but would you say that the supply of stable coins, the main driver of the changes is still driven primarily by the relative yields available in

crypto versus stratify? Yes. I think while stable coins are basically the only true large scale, like non-speculative use case that I think we can point towards, I think we also need to acknowledge that the use of a stable coin is actually very often for speculative activities as well. I think the easiest way to just try to get to the answer of what you're getting to there is actually just look at stable coin supply growth versus like a Bitcoin chart from 2021. They track pretty closely and it goes up as sort of the speculative cycle increases people are wanting stable coins more. I don't think people are waking up in South America or Africa and deciding that a stable coin is that much more useful when Bitcoin is pumping like 10% on the day.

I think that that's actually just evidence that people are using it to capture some of these yields or speculate within crypto during those periods. But that doesn't mean that after the speculative period, it brings on new users who actually just want to use it for what is fundamentally useful about stable coins, I think, going forward. So, yeah, I think the really sharp increases in supply growth that you see are still speculative-driven. But that's not to say that this isn't still, I think, the most important non-speculative use case that crypto has found. People say speculative in a pejorative sense, but you could also just describe it as rational if they feel that there's highly advanced yield that's far better than their opportunities and they feel that it's relatively safe for them to chase after. Obviously, that's kind of not the case with Terra, which created $18 billion, I think,

of demand for stable coins, although those were all kind of speculative in nature. But yeah, I mean, like you can explain why Rational Allocator would create stable coins to go after crypto yields as they come up. No. Well, I don't, yeah. I don't even think speculation is a bad thing, even though it's running that way a lot of time. So I know we're almost at time here. So I'll let you go. I'm pretty busy these days. In terms of, you know, rates in the next sort of 12, 24 months and it's very hard to predict. and, you know, obviously we don't even know what rates are going to do in the dollar world, so also hard to forecast in the crypto world. But, you know, what do you see as the, let's say Athena, you know, continues to do really well?

Like, what do you expect in terms of crypto rates? And, I mean, I guess it's also contingent on, like, just like crypto price activity and, like, the continued rally in things here. But what are some observations you would have for sort of the next 12, 24 months of crypto rates here yeah i think as long as we continue to see bullish price action and people still have something to look forward to like any of the tf um i think the expectations that like the basis within both futures and perhaps is about 15 quite often above 20 percent going forward um i think one view that i have full white might be slightly different to life cycle and you see actually

structurally higher interest rates about last cycle is actually just thinking about um post-leverage beta. So as as BTC and ETH get bigger and the market caps get larger and it becomes more and more difficult for them to pull huge multiples every cycle for someone to get the same post-leverage return as just holding spot our cycle that actually have to hold it on a small amount of leverage now because it just doesn't move as much and So I think that that's actually something that we've seen in the last few months which is users who are happy to hold ETH and actually just hold it spot and unleathered last cycle who are wanting the same sort of movement out of these now where it just doesn't move saying unleathered they actually need to do it on paps which i think you know drives um structurally

high interest rates going forward that makes sense and that's something you hadn't considered guy it's always such a pleasure talking with you like truly a wealth of knowledge on this topic and it's been really fascinating to watch you go from purely ideating on athena to this being a real deployed product and one of the hottest products in the market. So best of luck as you continue to grow here. And thanks for joining us once again. Thanks, John.