On The Brink with Castle Island - Rafael Cosman (TrustToken) on Uncollateralized On-Chain Lending (EP.200)

Episode Date: March 31, 2021

Rafael Cosman, cofounder and CEO of TrustToken, joins the show to talk stablecoins and TrueFi, their non-fully collateralized lending protocol. In this episode:  TrustToken's various stablecoins that they administer The real-time stablecoin attestations TrustToken has done with Armanino How a real time attestation works Why the USD is so disproportionate in market share among stablecoins Why DeFi is potentially the killer app for stablecoins today Why Trust Token built a global fx currency basket Why overcollateralized lending doesn't necessarily constitute lending in the traditional sense How TrueFi introduces uncollateralized lending into DeFi How underwriting and credit creation works in a public blockchain context How legal contracts are introduced into DeFi Howo the TrueFi system incorporates revisions in creditworthiness How on-chain credit scores could proliferate and be used on a cross-platform basis How privacy is compatible with on-chain credit scoring Rafael's explanation for structurally high interest rates in DeFi The contrast between crypto yields and legacy yields

Hello and welcome to On the Brink with Castle Island. Today I'm talking to Rafael Cosman, the co-founder and CEO of Trust Token. Trust token does a number of things. They administer a few different stable coins, including TUSD, and they've also created TrueFi, which is a non-fully collateralized lending platform, which is pretty fascinating to me, because so far all of the quote-unquote lending we've seen in D-Fi has been over-collateralized, So it's basically been in programmatic risk management system, as opposed to lending in the traditional sense. And Jake Trevinsky, the compound GC, wrote this great article a while back about how Defi doesn't have true lending because you don't really have underwriting.

You don't really have credit creation and you don't really have legal obligations. So TrueFi actually changes that and introduces credit scores and, genuine legal arrangements into a DFI context. It's pretty interesting and I think we're going to see more of this. It grants these systems much greater capital efficiency. So we talk about the very suite of products. We talk about why interest rates are structurally high in D5 and how the systems of on-chain credit scoring can be made compatible with privacy. We also discuss Trust tokens really great work with Arminino, providing real-time out of stations for their stable coins. Something I'm really impressed by, something I think is really important.

Let's jump right into it. Brought down by bad mortgage investments, Lehman, which has 25,000 employees, will be liquidated. The federal government loans American International Group, AIG, $85 billion. This is a different kind of market, and the Fed is asleep. The federal government is stepping it to stabilize Fannie Mae and Freddie Mac, the two mortgage giants that have been threatened by the housing crisis. The Bank of England has pumped 75 billion pounds more into Britain's ailing economy

with a new round of quantitative easing. You print a couple trillion dollars and all of a sudden, people start to worry. So out of this worry, we have something called the Bitcoin. Bitcoin. So Raphael, thank you so much for joining us today. I'm really looking forward to the conversation. Thank you for having me on, Nick.

So I historically knew Trust token as a stable coin issuer, but as it turns out, there's a lot more to it than that. So there is a kind of IMFSDR product that you guys have built, True Effects, which is really fascinating. And now there's an uncollateralized lending product as well, which is super cool. But maybe we can just briefly start with the stable coins. So tell me about the different vintages of stable coins you have. And then one thing I really want to talk about is the attestations. I don't know if that's the precise accounting word, but the work you've done with Arminado to attest to the reserves on kind of a real-time basis.

Absolutely. So, yes, while our main focus today is on TrueFi, our uncollateralized lending platform, we do have five stable coins that we are a part of building. There's TrueUSD, which is our USD-backed stable coin. And then we also have True British Pound, Hong Kong dollar, Canadian dollar, and Australian dollar. So tell me about the work with Arminino. I mean, how did that come about?

I'm looking at an independent accountings report that was pulled this morning for me. I derived this report programmatically on the portal, basically attesting to the quality of reserves. I don't think I've ever encountered anything like this before. How did that actually come about? How does that work? Well, so Arminino is pretty amazing.

They are unusual for an accounting firm in their ability to design new products that really fit what the needs of crypto and other fast-moving industries are. I've been pretty surprised working with them that they're able to keep pace. And basically, what you're looking at is a dashboard where they do real-time 24-7. seven attestations of the funds backing true USD. And as you mentioned, you can download an independent accountant's report where they are a PDF, which has all the relevant signatures on it, that is in real time, you know, just generated minutes or hours ago at the most, that shows that true USD, true British pound, etc. are all fully 100% backed.

And the way that works is they are actually inspecting via API. They're inspecting the funds backing our products in real time, 24-7. Yeah, it's so cool. I think it's one of those things you can sort of start to do with crypto finance as you know, you compare an on-chain balance to some off-chain, whether it's a bank account, reserve, something like that. or in the case of an exchange that has crypto reserves, you want to compare the liabilities on the platform

to the crypto reserves with stable coins. It's actually reversed. You want to compare tokens, the quantity of outstanding tokens that exist on chain to some currency in a bank account. So it's not fully trust this. I mean, you do need some intermediation. This is why you have the auditor effectively sitting in between.

But so they're inspecting the kind of the commercial bank accounts that are holding the currency in question. Is that right? Exactly. The API connect directly to those bank accounts. And so that information that you're seeing on the dashboard is not going through our servers whatsoever. It goes directly from our banking partners to Arminino, which is, as you know, a top 25 U.S. accounting firm. and they directly generate those reports for you. And not only that, they actually run their own Ethereum nodes. So that means that their verification that the U.S. dollars held in escrow exceed the balance of true U.S.C. on chain.

That is not dependent on ether scan. It's not dependent on infura. They are running their own nodes and inspecting the state of the blockchain directly. I think it's one of those things that's pretty eye-opening about crypto finance. And I try and drive this home when I talk to, you know, like gold bogs or just like people on Wall Street that are trying to understand crypto and they don't really get the value proposition. I mean, the auditability to me is one of the most underrated features of these systems. And it just never gets enough attention for some reason. And it's almost like crypto firms don't take it.

advantage of the auditability. I've been pretty disappointed by that, but I'm glad that there are providers like you guys that do. I mean, are you aware of any other stable coin issuers that do these real-time attestations? I don't think that there's a single other stable coin today that does it. And I do agree more stable coins should. And centralized exchanges could be doing these kinds of proof of reserves as well, where they're showing the crypto assets that they hold publicly and that those match all of their outstanding debts. But the place, Nick, where I think we've taken this to truly the next level is we partnered with ChainLink to have oracles that actually put all of this information on chain. So you can go and get a PDF. You can go to the dashboard

and you can see in real time what Arminino is attesting to. But the next level is that actually smart contracts can today, this is already live, they can consume from ChainLink's Oracle that information about TrueUSD's collateralization. And again, I believe that TrueUSD and our other true currency stable coins are the only stable coins in the world to support this. And what this means is that now,

defy products such as Ave, Maker, TrueFi, and so on, that use TrueUSD, they can actually inspect that collateralization directly and take actions such as stopping deposits or stopping withdrawals if the collateralization is ever beneath 100%. Oh, that's fascinating. So they can sort of get a real-time assessment of the risk in the system directly from the Oracle. Exactly. So what was the reasoning behind this discretionary work to provide more transparency? I mean, it's clearly not something that regulators are necessarily asking for right now.

It's not part of a formal requirement. You guys sort of went over and above to provide this transparency. Was that, you know, to find a competitive advantage relative to other issuers or is just because you felt that you had an obligation to owners of the token? Well, we originally launched true USD because the only stable coin in existence at the time that was USD backed was Tether. And Tether was a huge and growing product, but had lost the trust of many of its users because they didn't do any sort of attestations and they had almost no transparency. And so that's why we launched for USD. And since then, multiple other stable coins, U.S.D-backed stable coins, have come out. But we're always interested in being

the absolute most transparent that we can because we've got the assets, which these products are always going to be 100% backed. We have no intention of changing that. And why wouldn't we do everything in our power to make that crystal freaking clear to every single user of the product, so that they never have a doubt that those assets are there. That's a very refreshing attitude. It's one that I wish I heard more in the industry. In terms of the balance of sovereign currencies you have, you guys interestingly have made a few stable coins,

but then when you look at globally the preponderance of different stable coins, I think I tallied it up a while back, and USD was something like 97% of the value of all stable coins, We're referencing the USD. So how do you think about that? I mean, it seems that for some reason, crypto rails are super dollarized, and actually to an extent that's much greater

than regular international foreign exchange reserves, things like that. How do you reason about, you know, the preponderance of dollars versus other sovereign currencies in crypto land? You know, that's a good point. And it's not clear to what extent that is due to the demand being primarily for USDA-backed stable coins, or let's say USD-pegged stable coins,

if we include things like dye, versus the fact that on the supply side, there have been historically almost no instances of trustworthy non-USD fiat-backed stable coins. And so our products, true Hong Kong dollar, Australian dollar, British pound, Canadian dollar, those are fairly new on the scene and have grown quickly since we launched them. Australian dollar is now today at over 16 million Australian dollars in that product, over 13 million British pounds in that one. True Hong Kong dollar is at 35 million Hong Kong dollars. So these products are growing quickly and are seeing adoption. And they still haven't, because they're just young products, they haven't yet been integrated into many of the DFI platforms where true USD and other USD stable coins already are

integrated. So once they are, once we get over that hurdle, which will hopefully be within the next couple of months, we might see even more growth of these products. And so I'm guessing you feel the DFI and stable coins are sort of strongly synergistic. even if the stable coins themselves are, you know, backed by commercial bank dollars? Yes. We think that today, Defi is the killer use case for stable coins, and that is what the market seems to be showing. If you look at platforms like compound Ave, Ave, Maker, Trufi, they use stable coins

tremendously. Billions of dollars of stable coins are lent and borrowed on those platforms. and on decentralized exchanges like Uniswap or Sushi swap, there's a lot of trading against ETH, but that's partly because ETH has just been around longer than trustworthy Fiat backstable coins. You know, there's already a lot of volume that happens against USD backstable coins, and we think that that is probably going to grow over time. I would also mention part of the amazing power of crypto is that,

We have basically put a multi-currency account into every human's pocket. On your phone, your laptop, on your ledger, you can now hold all five of these major world currencies and you can move them and trade them 24-7 and we don't charge you a penny. Yes, there are some gas fees because of Ethereum and Vitalik is working on that. But that's already an amazing promise to people, especially when, when even just being able to hold US dollars was inaccessible to so many people on this planet and represents such a huge value ad for someone living in Argentina or in Turkey or in many other countries around the world.

But taking that to the next level and saying now you have a full multi-currency account where you can send and trade with anyone, anywhere in the world 24-7 and you can even earn an attractive rate on all the currencies in your multi-currency account using DFI products like Trufi, that is a whole next level. And those are the kinds of features that crypto is offering. And that is what's going to suck in the next billion, 10 billion, 100 billion dollars that are going to come into crypto and defy. I honestly couldn't agree more.

And we needed a whole series on this show called Crypto-Dolarization. I don't know if we invented that term, but we helped popularize it because in my view, you know, public blockchains at their core, what they're going to be known for is being foreign exchange clearing houses at the end of the day. Kind of global, real-time gross settled liquidity pools where foreign currencies or just FX will circulate. And we haven't really seen this yet, but I really feel that it's likely to be tremendously disruptive. by giving people worldwide that have only had access to weak currencies, this ability to now denominate their savings in harder currencies. And I don't think we've even begun to see the effects of that, which could be strongly disciplinary on some of these weaker central banks.

Is that something you sort of align with? That is, yes. And it is a tough message for some of some folks that are very into, let's say, taking out huge amounts of debt or printing massive amounts of fiat currency. Crypto is definitely a warning bell, if not a death knell for that kind of behavior, because we are putting the choice directly in people's hands on their phones and on their computers. And so if you want to start regulating what someone can do on their phone, what someone can do on their computer, whether they can use crypto assets go ahead but that's going to be a tough battle to fight and I do think that there's going

to be there's going to be just people voting with their feet more and more about what assets do you really want to hold whether that's fias currencies whether that's bitcoin ethereum whether that's putting your money in defy totally and I mean going direct to consumer where everybody has a smartphone now, that means everybody has access to digital assets, mobile wallets, etc. It kind of disintermediates the banking sector and it puts that choice to people directly. And, you know, the next wave of currency crises we see here, you see a huge amount of debt, sovereign debt worldwide. We're seeing a currency crisis in Turkey right now. You know, that's a very crypto-native country. Turks really love Bitcoin. There's a ton of exchanges.

there. You know, it's very interesting to see will there be a lot of Bitcoiners expect Bitcoinization, but I think what I expect is actually a crypto dollarization. So I'll be monitoring that very closely. One interesting product that you built was Truefx, which is a kind of equivalent of an IMFSDR built on your stable coins, which gives you a blended exposure. Talk me through the reasoning behind that product and why that flavor of risk might be attractive to people. Yeah, so True FX, it's live today, and it achieves a piece of what the vision for Libra has always been, which is a token that is backed by a global basket of different fiat currencies.

So it is backed in equal part with True USD, Hong Kong dollar, Australian dollar, British pound, and Canadian dollar. And it actually uses a balancer pool, which means that you can get into Truefx using any five of those currencies, and you can get out of it into any five of those currencies. And it's directly providing liquidity on those five currencies and actually getting some fees every time someone trades between them and changes the balance of the pool. So that's the way Truefx works. It's a very cool technology. and what we are working on is getting Truefx itself integrated into more products.

So you should be able to borrow against your TrueFX balance, lend out your TrueFx balance, earn a high yield by putting your Truefx into TrueFi or another DFI product. And that is also the sort of adoption that is going to help that product grow. Right now it's still very new and quite small. So speaking of TrueFi, so this is very interesting to me when I learned about it. uncollateralized lending in Defi. I mean, you know, Jake Trevinsky at this really great point, the compound GC, he wrote this really excellent blog, which I recommend everyone reads. I don't remember exactly the title, but something about how there isn't quote-unquote real lending in

defy yet, because really what a lot of these lending protocols or interest rate swap protocols, whatever you want to call them, do is they let you effectively engage an algorithm. risk management by getting a specific flavor of risk backed against some over collateralized basket of assets. And then the protocol itself manages that exposure for you. But I don't really consider that to be lending. In my mind, lending is a legal process with underwriting and where there is credit creation whereby you assign an entity credit based on their credibility. and there might be some collateral involved, but to me, you know, lending is effectively a legal process and that just didn't exist before, which is why I found TruFi pretty interesting because

you propose to change all that. So tell me a little bit about the product and how it works. You got it. So TruFi is the Defi protocol for uncollateralized lending. So if you're familiar with compound or Ave, it is similar to those products, but without the collateral. And so that does mean that the Trufai platform needs to vet who's borrowing. Not anyone can be a borrower on the Trufai platform. And of course, it has to be careful with assigning a credit limit to each borrower that's appropriate given their level of creditworthiness. So the way TrueFi works is you can go to our application, app.trufi.io,

you could take $100 of stablecoin and stick it into the lending pool. And as soon as you do that, you can start earning a very attractive rate. Our unboasted rate just paid out in terms of stablecoin is right now about 13% APY, which is very good and better than what you can get on most collateralized lending platforms, such as compound, Ave, and Maker. But our boosted rate, when you take into account the additional rewards that we're giving out in the form of our governance token, TRU, our boosted rate right now is 51% APY. So you can take your stable coin, put on our platform, start making 51%. And there's no question you are taking some risk because you are doing uncollateralized lending.

But these are loans to very legit firms. And I think that the 51% that you're making is definitely worth taking a little bit of risk to make. So the TruFi platform kind of disintermediates the centralized lending systems. Is that a kind of a fair way to put it by basically putting, is it a Dow or just a token holder set of tokenholder governors in charge of the credit rather than like a centralized entity? I think it could accurately be described as a Dow, a decentralized autonomous organization, although we don't particularly brand it that way. But the decisions on the platform are governed by true holders. So true is the governance token for the platform. And so if a new borrower wants to join the platform,

they will submit an application that will be discussed by the community. And it will include information like how long they've been in the business, what they're going to do with the funds, the credit limit that they're looking for, their current assets under management, et cetera. And the community will discuss that. And then ultimately true holders will vote on if they want to add this borrower to the platform. And right now the platform includes something like maybe like six, seven, eight borrowers right now that are very legit trading firms

such as Amber Group, Wintermute, Sam Bankman, Freed's Alameda Research, and also has our first exchange recently joined, which is Polonex. And once a borrower gets on the platform, then they submit a loan request saying, for example, I want to borrow 3 million true USD at 16.5% for 30 days. And that loan request will go through the system where true holders will actually evaluate that and get to vote, thumbs up, thumbs down, so they want to approve that loan. We are moving towards a more automated process in the future that's going to require a bit less week-to-week day-to-day engagement from true holders, which right now can be a little bit tedious for them.

But we thought just to get the platform started, it is important to make sure, you know, the folks in governance are very involved and are, you know, the platform is only making decisions that they really approve of. And then if their loan request is approved by true holders, then the money will go directly out from the pool. And they get that loan. And then before the 30-day mark is up, they're expected to set. that back. And every one of these loans is accompanied by an actual loan agreement that our company signs with the borrower in question. And in order to make that more decentralized, we're actually moving that to a nonprofit foundation that we're setting up. That will be the centralized counterparty signing these agreements with all the borrowers. Because until we know that something on chain

can be itself legally binding and can be enforceable in court, we're going to want to absolutely have that extra protection of a legally binding contract, a paper contract signed with every borrower. And so that's what we have today and is very important for keeping the lenders safe. So in its current format, there is a legal wrapper on the system. I presume the borrowers are aware of this, right? That it's a legal process with a contract. How would that be adjudicated? I mean, what's the jurisdiction where disputes would be resolved in, for instance?

So the borrowers are no question aware of this because they have to put their signature on it. And the way that that contract works is actually the same as all of the other essentially centralized lending that happens in crypto. So if a desk like Genesis or someone like Celsius or Nexo, any of the trading desks or so-called crypto banks do a loan with someone, then they'll sign a document. It says, you know, this is governed under the laws of Delaware or California. You know, here are the terms. Here's the repayment terms, et cetera. That's all pretty industry standard and that's what we're using. And that is, you know, all of those.

all those legal terms are ultimately only going to use, really, if someone doesn't repay. That's when, you know, these will end up in court and, you know, assuming that the borrower actually has the capital, then, you know, should be able to get a judge to order them to hand it over. If someone truly goes bust, then it might not matter what legal protections you have in place if they don't have the cash. There's nothing we can really do. How do you think about ongoing monitoring of the counterparties? because of course, you know, someone's creditworthiness can change over time.

Does the system kind of incorporate this possibility, you know, that a lender may be a good standing or borrower might be a good standing and then, you know, become less creditworthy? How do you think about that? So right now we only have a very limited way that we take into account those changes where, you know, if any, anyone were to default on a loan, of course their creditworthiness would go down or be eliminated entirely and they wouldn't be allowed back on the platform. And whenever a borrower successfully repays their loan, then their credit limit actually increases and they're allowed to take a somewhat larger loan the next time because they already demonstrated a larger and larger record of repayment.

And so far that record has been getting quite good, we've got, I think today about $90 million dollars of uncollateralized loans that the platform has made successfully repaid. I think we're aiming to get above 100 before the end of March if we can. And these are all loans at very good interest rates, you know, oftentimes 15, 16 or even higher percent, and so far have zero defaults. But the thing that we're working on and do not have yet is having a full on-chain credit model that takes into account all kinds of data, including someone's borrowing history on this platform, including off-chain data about their AUM and the structure of their fund, and including potentially

other on-chain data, such as the holdings in their Ethereum address, their borrow history with compound or AVE or other protocols, all of that can be taken into account by an on-chain credit model. And that is something that is actually being developed right now in conjunction with some experts that we've hired who are like pros at building credit models. You know, that's what they specialize in. And what we're aiming to do is actually serve this credit model for all of defy so that other protocols could query our protocol saying, what is the credit score of this particular Ethereum address? And we could say, okay, that address is really high quality. They're a 700.

And then even a collateralized lending protocol like Compound or Ave might say, okay, because you're a 700, Nick, we're going to reduce your collateral requirement from 150% to 130%. And that's where we think Defi is going to have to go to be able to ultimately have the kind of efficiency that will give lenders the highest possible yield on their money while taking the least possible risk. Right. Yeah, I share your intuition completely that lower levels of collateralization are necessary, both for the business model of lending to really work and for defied to actually thrive to reduce everyone's cost of capital. How do you think, how do you square away privacy considerations, you know, where individuals may not want to reveal their transactional

footprint to the world with the need to harvest some of this data for underwriting purposes. Is this a system that's only works for firms that are okay with effectively having their activity be transparent? Ah, very good question. Okay, so some of the firms that we work for are very, very concerned about privacy. because someone like, let's say Alameda research, one of the best respected trading firms in crypto, they, of course, do not want other people to know, other funds to know what assets they're trading, what exchanges they're doing the most volume on, where their assets are at any given time.

But that kind of information, of course, can be useful for informing a credit model. And so the approach that we're taking, which I am very excited, about is to use what is essentially a zero knowledge proof where we can have a secure enclave that's sitting, let's say, on an EC2 server somewhere and could even be run by Alameda themselves. The secure enclave could connect to the borrower's exchange accounts or any other private information that they have, that they don't want to reveal to the world. That data is pulled into the secure enclave and then a bunch of computation is run inside of the enclave computing the credit score and so then let's say that that information is run and it pops out a 700 okay so they've

got a ton of assets they're not overexposed to any particular asset or any particular exchange and very very solid okay outputs a 700 then the secure enclave can upload to the blockchain both that final of a 700 as well as a proof of computation that proves that the credit model was computed in the way that the protocol expects. The protocol can then check that proof of computation on chain even though it doesn't have the inputs. It can still verify that the secure enclave ran exactly the code that it's supposed to run. And so unless someone has actually hacked the secure enclave, you know, which is companies like Intel develop these things. So unless there's a novel bug, which we don't know about, in Intel's secure enclave itself, then there is no way

to forge, you can't forge this proof of computation without running it exactly in the way that it's supposed to, that the credit model is supposed to be run. So that allows everyone to know, okay, this is the credit score for this particular borrower or this particular Ethereum address. And here's exactly how it was calculated. But you don't need to know the inputs that were put in. The exact trades, the exact exchanges, the exact balances are not visible to everyone on chain. But you know that it was computed correctly. You know, as I was asking that question, I kind of figured that the answer would have something to do with zero knowledge proofs.

It usually does in crypto. Yeah. Yeah. It's a perfect use case for it. in terms of so you mentioned the interest rates they seem very high obviously out in traditional finance land interest rates are horrendously low if not negative and this is something I struggle with all the time you know I obviously we're invested in some of the centralized lenders and you know we're sort of aware of where credit demand comes from and crypto and how that drives interest

rates but it's still kind of a mystery to me why crypto interest rates are so so structurally high. And the unsubsidized rate is, as you were describing, is very high. So what is it that drives that sort of positive carry, basically? Yeah. So they are high right now, and I suspect they're going to be high for a while. And the reason is that, well, okay, so let's start with DFI. In DFI, there's a lot of, farming happening where protocols are willing to pay very high rates in their governance token in order to bring in more capital and it's worth it for the protocol because if you're actually if your protocol is actually going to be the

next you know a next key piece of infrastructure key Lego block in the stack that's being built and you can pull in a billion dollars over the course of a couple of then you know, you secure yourself in that position and your governance token is going to be end up being worth potentially billions of dollars. And if you have to give out a lot of the governance token to get there, it's 100% worth it because you're securing this extremely valuable position in the DFI stack. Now, of course, some protocols don't end up in that position because they aren't designed right or they get hacked and so on, but still the overall

strategy makes sense. Now, that is, of course, going to create very high rates. And so part of what these funds are doing is they're just farming various protocols that are offering high rates. And that's basically helping the right protocols to grow really quickly, which is part of how, part of why the defy financial stack is assembling itself so quickly is because if you build the right next Lego block, that needs to get put on the stack, which is getting assembled. If you build that, you are able to suck in tens or hundreds of millions of dollars very quickly and secure yourself in that position and then allow the next building blocks be built on top. And we have to go fast because we only have a couple of years or a couple of decades,

and we'll be dead or will be gone. We've got a ton to build. We've got all of traditional finance to recreate. So we can't just hang around and drag our feet on this. There is a lot of stuff that needs to get built. And so we need to be building these protocols fairly quickly, getting them out, they're getting them established, and then building the more complex protocols on top of them,

because that's how the whole financial stack is going to get assembled. You sort of needed these collateralized lending protocols like compound and Ave. to be there and to become established before the market was really ready for the uncolateralized lending protocols like TruFi to come out. That is the next step. It's a little bit higher risk, higher reward when you don't have collateral. And there's another step after that that's going to be enabled as TruFi becomes more established and so on. So this industry is sort of paying the world in order to bring in capital and bootstrap itself. And as long as it continues to to offer an interesting new value and continues to grow, which I suspect it will, because I think

we are going to take over a very significant chunk of all of traditional finance, then there will always be new protocols offering high yields to people that are willing to deploy their capital into them and take a little bit of risk. Yeah, that's a very, very lucid answer. You know, I find it interesting to contrast the crypto world of crypto liquidity. where interest rates are high and have been high, and I share your intuition that they're likely to remain high, to me that's demonstrative of a real vibrancy

and a real growth, which, as you say, sucks in capital. And to me, a high interest rate indicates that, you know, there is a real cost of capital. You know, it's not free, but people are willing to bear that cost because the opportunities and the returns on capital are significant. which indicates just the optimism people have around this industry and the growth that we expect. Whereas in traditional finance, there's so much capital flooding the system, interest rates are negative.

That's a sign of pessimism, as far as I can tell. There's nowhere to put productive capital. That's right. And that interest rate differential, that is a gradient which is sucking capital into defy. And so there's no question that the rates, the rates of interest in crypto are going to be volatile over the next couple of years. But I do think that they will consistently be far higher than traditional capital and traditional finance until we get to the point where crypto has gobbled up a certain fraction of the entire financial market. and its growth slows and say, okay, you know, this is the 30% or this is the 60% of all of finance that crypto is owning and, you know, the rest traditional finance can keep.

And that is the point when this this chemical gradient is going to slow down and crypto is not going to need to suck capital in anymore. But I think, Nick, this is the reason why so many people in crypto end up if they're in crypto long enough with most or all of their capital in crypto in one way or another, or at least a very significant fraction. And part of the reason is because they live with one foot in either world. And there's just this gradient that they feel that's sucking capital into crypto. The returns are just so much better.

And then you just have it just spreads from person to person. Someone tells their friend, hey, you know, why are you earning 0.01% in your Chase account when I'm earning 50% in my TruFi account. You know, maybe just consider putting a little bit of capital in the other place and getting, you know, 500x the yields when yields are so low in traditional finance today. Yeah. Or when the alternative is a negative real rate. We're even seeing negative nominal rates getting passed on to consumer depositors in certain countries in Europe, for instance. So you're getting an undefined, a, you're getting an undefined

a, you know, multiple rate because you can't even compute how much greater, you know, plus 15 is than a negative 0.3. I think we all feel this carry trade effect where crypto promotes vibrancy and growth. And like as you finance, the business models are literally dying. Like the business models predicated on net interest income don't work. They have morbidity. And, it just continually reinforces, you know, my decision to work in this industry, which was, you know, I was at a crossroads a few years ago. I'm glad I took this path. Good choice. And so I've had you on for a while now.

Last question, I guess. In terms of the underwriting, you know, that's one of the most interesting questions about the model because you are putting a lot of faith in the token holders to make sound decisions about the protocol, you know, how scalable is that, I guess, right now and sort of how do you expect that to develop over time? Do you expect more specialization there? Well, yes and no. Right now, the token holders are vetting every individual borrower, and that's okay when we only have, you know, about 10 borrowers or so on the platform. But what we are going to be moving to and are developing right now is having a full on-chain credit model, and then the token holders will only need to vote on protocol changes,

including any changes to the model itself. But the model can operate and can evaluate many different borrowers without the token holders having to be directly involved in that. So I agree that the current model actually requires far too much intervention from token holders to be scalable long term and is really to help get the protocol off the ground with an initial set of really high-quality borrowers that the whole community trusts. But we know that it is not going to be the model we're going to have even six months or even potentially three months from now as we scale to more borrowers and more capital. Well, Raphael, this has been really, really fascinating. It's been quite eye-opening for me to discover the growth of genuine lending.

in an on-chain context, where would you direct people to go to sort of learn more about the protocol? I'd say go to trufi.io, and you can actually, it's got a link to our, you know, blog post and documentation there. It's got the actual app itself where you can play around with. So truefi.io, and you can also check out our Twitter account, which is just at Trust token. And we've got lots of great information about TrueFi and how to use it and exciting stuff coming up like rolling out the on-chain credit score that we think is going to be crucial for Defi. Well, this has been a blast. Thanks for coming on. Thank you, Nick. I appreciate it having.