On The Brink with Castle Island - Stephen Novenstern (Kintsu) on Building on Monad (EP.565)

Episode Date: October 3, 2024

Stephen Novenstern, the founder of Kintsu joins the show. In this episode we discuss: Stephen's path to the cryptocurrency industry and the vision for Kintsu, a liquid staking project in the Monad ecosystem. The history of DeFi and the LST category. Why Monad and views on the net new primitives that are enabled by this new layer one blockchain. The future of layer one blockchains. Central limit orderbooks in decentralized finance. To learn more about Kintsu visit their website and follow the project on X.  

Today on the podcast, I sat down with Stephen Novenstern, the founder of Kinsu, a portfolio company of ours that's building in the Monad ecosystem. This was a fun conversation that touched on the history of the defy ecosystem, some of the new primitives that have emerged over the past few years, and what is likely to be launching in the Monad ecosystem. I think you'll enjoy this one, so without further ado, here's my conversation with Stephen from Kinsu. Matt Walsh and Nick Carter are partners at Castle Island Ventures. All of these expressed by them where the guests on this podcast are solely their opinions

and do not reflect the opinions of Castle Island Ventures. Guest and host may maintain positions in the assets discussed in this podcast. You should not treat any opinion expressed by anyone on this podcast as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of their personal opinion. This podcast is for informational purposes only. 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 to 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 a Bitcoin. Bitcoin. Stephen, thanks so much for joining us today on the podcast. Love talking about Monad and excited about what you're building. Thanks.

Pleasure to be here, Matt. Very excited about Monad as well. So before we hit record here, we were talking in the weeds about Defi. And I'm always just curious how people got so deep in the space. So what was your story and how you got so deep in Defi to begin with? And then we'll start talking about Monat. It's definitely very active DeFi summer back in the early days of Uni Swap. I remember the sushi swap vampire type.

But I actually really got into crypto around 2016 or so. I think I started buying some Bitcoin, Heath, and building an egregious amount of Ethereum mining rigs in my then-Williamsburg, Brooklyn apartment. But I think Defy, I definitely was more of an ad tech person for the majority of my career. Some might say Web 2 monetization. DSP is SSP's programatic media. And I feel like I found my way into programmatic finance through the world of Defi. I think programmatic media might be the only thing more complicated than Defi. It seems like a very complicated field there. Maybe a whole conversation for another day, but I find there'd be some really fascinating parallels

there between publishers and media and deckses and decks aggregators and stuff like that. The way ads are sold and the demand side or supply side, do you as the buyer go to publishers directly or do you go to someone who's aggregating? I think you start to see traffic moving more towards aggregators longer. I think there's a lot of parallels there, funny enough. Well, it's a lot of parallels to the existing financial services ecosystem, too. I think a lot of people that are users of just a brokerage account would have no idea how other trades are actually executed and how venue selection works. So there's a lot of complicated things under the hood in all industries, and crypto is no

exception there. Yeah, certainly no exception there. Now, in terms of your migration across different ecosystems, talk a little bit about that. Curious how you landed on building in the Monite ecosystem. Yeah. Once we saw what was happening in Mona, there was really no looking back. But I spent around two years at Panglin, the decks that brought Avalanche from zero to one. It was a really cool experience.

In its lifetime, Panglin has generated north of $18 billion of trading volume, 3,200 plus different trading pairs went live across 4-plus networks. And I think we launched 75 different super farms, which are like multi-token liquidity mining campaigns there. I was very curious having really mastered and gotten such a deep understanding of EVMDFI. I was looking one year ago very heavily into like ZK stuff and it led us to, find some really cool ecosystems and to be on the very cutting edge of what's happening there. But at the same time, the EVM is just such a dominant force.

When you get deep into actually building something, there's a huge cost to essentially pre-planning and fully automating a financial ecosystem. You do it all up front and then you audit it. And having the tooling of the EVM ecosystem is this unbelievably nice to have. With Monad being 100% bytecode compatible, it just means that any developer, with any solidity experience. Solidity is basically like JavaScript for Web3. It just means that everything can be deployed there so easily.

And I think it's just a fundamentally optimized system. It could be fundamentally changing the paradigm of Web3. So we at Kinsu have been building liquid staking protocols. And there's this really beautiful analogy I keep coming back to where proof of stake chains look like digital nation states. And right at the core of that, there's no issuance. We can talk about that more, but you can stake in, earn rewards. And this has some interesting parallels where we basically have staking is this

opportunity cost normally. You'd have to decide on the proof of stake chain that you'd rather participate in defy than stake. It's like the traditional concept of flight to quality. When you have high interest rate environments, it sucks all the liquidity out from risk assets and further out the curve to the safe bond structure. And there's some really cool stuff where liquid staking is almost like a composable bond. And the Kinsu S. Monad Protocol creates this bond that you can build on top of. So when we talk about liquid staking, I'm sure there will be people listening to this podcast that are not familiar with the concept. So maybe talk a little bit just around the history of the category, why it even exists and why it's exciting. That might have been a push into

the deep end there. Basically, I can use myself as a fun little example. I do run a Genesis Ethereum validator node. Historically, Bitcoin was a proof of of work chain, Ethereum also started as a proof of work chain, basically just buy more computers to earn more. This has different sustainability outcomes. People were concerned that Bitcoin was consuming more power than some small countries. Ethereum historically made this shift to proof of stake, and it's more like you put up ETH, you have to buy ETH, you have to be comfortable holding the underlying, and then you earn yield in kind for providing that ETH. But in Ethereum, you put up 32Eth and you make this commitment to run software. You're going to need a computer. The computer

you run, I'm sitting right there, staring at it might be like less than a thousand dollars. So it's a little bit approachable to be a validator from the processing side. But then you have to put up 32Eth, which is above 100K right now, or right teetering on that. And the idea here is that you are in-kind for continuing to provide this processing power. But you need to be compensating validators to provide that service because there's so many other things you can be doing with your time and money. And if you want to have decentralized world and this trustless ecosystem, the beauty of proof of state brings that together by letting thousands or even millions of different parties all uphold this ledger. And there's a cost associated with that, which is staking and the

issuance. So that's well said. In thinking about just the history of the category, I'm always interested to get people's perspectives on whether this is a centralizing force or a decentralizing force. Because as you point out, having to put up 32Eth is a lot. So if you were able to have a system where you could participate in this, but with smaller denominations, that seems like a good thing. In Ethereum land, Lido has a lot of market share, though. So how do you wrestle with the tradeoffs there? Or maybe it's the wrong framing. Are there even tradeoffs? It's kind of fascinating. First of all, it's incredible what Lido and Gito have done. I feel like we're really building on the shoulders of giants. I don't know if in their wildest dreams, I'd love to like ask one of our angels,

Martin is part of the Lido team, but I don't know if they actually expected to get $32 billion worth of TVL or assets under management for the protocol. So that's an awesome feat. Some people are concerned, because basically if you have 50% or 51% of the whole network stake, you could effectively attack the network. And the networks derive their security, crypto economic security, is what we like to call it. And they derive this security from the fact that it would be so extremely expensive to make that attack that no one has a reason to do it. It would just be such a massive loss to attack it.

But basically what really matters isn't just the total eath, it's the staked eath that matters or for any proof of stake chain like Monad. It's not just the FDV or market cap of Monad, but the staked percentage of it is really where the securities derived from. So when you look at something like LIDA, they have done all these cool things. to evolve it. But like in the original setup, there was a 30, 40 or so validators that were running the network. And that decision might have been made internally who the list is. And that's a small party that all of a sudden is controlling 30, 40, 50 percent of the network stake, all of a sudden

you might have a small cohort that is actually able to exert control over this network. So because the product market fit of LIDA was so incredible, it accidentally had this potentially centralizing effect on it. And I think that it's a little bit overblown. Sometimes when people talk about Lido as a centralizing force, we don't believe that to be the case. And then did this whole community staking module thing. There's a lot of really cool stuff happening there. But with that concern, born almost from its incredible product market fit, we really wanted to make sure soup to nuts right at the core of the consumer. protocol, that there was a solution to this where the community controls who the validators

are and this massive liquidity in the base layer doesn't ever compromise the security of the network itself. So do you think that it is a market structure that leads towards one entity being overwhelmingly powerful in terms of the total share? Or is this just a function of Lido having the best product in first mover advantage historically? That's a great question. I think the best we can do here is coming back to the history of it. And it does seem like liquid staking such an exciting space, it really does have strong first mover advantages and lock-in effects. I think there's moat in the

depth of the LST's market. So when you get these massive bulls for the gas token and the LST, drawing a parallel from ETH being Ethereum's gas token to Lido's Wrapped ETH or Rocket Bull Ar-Eth, and then on Monad, Kinsu making S-Modd, when you have a massive amount of decks, liquidity all of a sudden becomes viable to lending markets for the liquid staking tokens, the LSTs. And this is often something that like sticky lending yield does entrench the actual liquid staking protocol. But I think it's something where you tend to see power law distributions. Yeah, it's really fascinating. There are some of these categories in crypto that lend themselves to hyper-competitive markets. There are others where that first mover advantage is really just so

critical. I think people will probably be studying this 20 years from now and just looking at the biggest companies in certain categories, biggest projects, and it'll be interesting to see what that history looks like. Maybe going back just to Monad in that ecosystem, you've made a big bet here. You're building on a platform that is not alive yet. It's not in Mainnet. Obviously, we're very excited about the project as well. But what is it about this ecosystem that got you so excited other than just the fact that the tech is great? I'm always curious what it means to build in these ecosystems in terms of What type of support do you get? What does the community look like? So there's the tech, there's the business, there's the partnerships and community.

I think that for me being a builder and one of my favorite things when I was at Panglin and the experience that really informed founding Kinsu is just like working with all these other protocols. And when you see a lot of the other builders fiercely excited about something, that's indicative. You're starting to see a lot of funding coming into the Monad ecosystem and you're seeing all of these huge blue-chip projects months ago already, even before TestNet comes out, saying that they're going to support Monnet on day one. So all the major bridges, the wormhole layer zero axelars of the world, pancake swap balancer, all these really cool Ethereum stallwork core protocols are starting to come over.

And I think that's really beautiful. Just because it's really fast and efficient, I think you're going to see a lot of stable coin activity move there as well. I definitely think I would echo that tremendously. I think that stable coins on Monad will be an enormous category. If you just look at the remittance flows of stable coins on other networks right now and the gas fees that are being spent on these, it just seems like having a highly perform in Del One will just drive more liquidity from all sorts of different areas. If you're paying $4 for a transaction, that might be really efficient compared to like just the cost of a merchant accepting cash for pizza, it's very inefficient for that.

But if we're talking about moving a million dollars for the same cost, all of a sudden, it's great. But I think that networks like Solana are just so efficient to use, that it's just become really successful over time. And I think that Monag puts together the secret sauce of Solana with the tooling of the EVM, but like fundamentally optimizing some of the deep tech of the network that was taken for granted as the EVM moved into some other. domains? So Monad in my mind is a step function increase in just what you can do on a public blockchain. I think that you'll see a lot of net new primitives emerging here. But what do you think this does longer term to the L1 landscape? L1s don't really die over time. But you could argue that they do because very few people use some of the L1s from three, four years ago that never really

got to product market fit. But what do you see this looking like if we fast forward out 10 years in terms of how many L1s we have and what the design ecosystem looks like. Very fascinating. There's a couple parts to that, but zooming out, I think things get more and more efficient and that at some point it gets to that saddle point where you can continue getting more and more efficient, but are people actually willing to switch for that little bit of improvement? I think that Monad is getting people to switch for this improvement. And I think that they have a team that's ready to reconsider everything.

and it's a massive cost to do that. But I think they've done it, and we're about to see the Monad chain drop into the world. But I think there are a new category of use cases that were just not possible for. So if you wanted to put a lot of state and make a lot of updates, I think of proof of stake chains just make things simple for a second. At the end of the day, we know when we put gas in our car, that if you can get 40 miles per gallon, you can drive 40 miles on that one gallon of gas. It's like one-eath.

If you're doing some really complex financial transaction and there's high gas and the price of gas on Ethereum changes a lot more than like the gas at the gas station, you might end up spending 0.1 ether, $300 to mint some generative NFT. And that's a little bit absurd. If you wanted to do something like really crazy like private jet or something, you need more expensive gas. At the end of the day, these existing Ethereum applications have had to deal with this constraint by purposely not making a lot of state changes. It's almost like we make a rocket ship. Every ounce matters so much to put an ounce on a spaceship cost $10,000 or something. Every single decision needs to be so carefully done. But if you're able to do more bulk actions, you're able to just consider a new class of applications. I think you're starting to see some of the early funding going into Clobb that aligns with this.

And I think Staplecoins is perfectly up that category. Those are very far-reaching, just exchange and stable coins. They're very far-reaching wide audiences. I think you'll see a lot of specific applications, maybe like social media and Shopify alternatives that are on chain. Yeah, the central limit order book point is such a good one, because the only reason that we have AMMs, these automated market making platforms, is really just because you could not run a central limit order book on the existing tech. So in my mind, that's the first example of how Monad could be a really interesting platform. It's just you get to run exchange technology the way you want to run it as opposed to the way you have to build it. I think Clobbs are just way more

efficient. There are some really cool things about traditional dexes where the actual liquidity old is itself composable. And that's where we started to get crazy things like perps. And I don't know if those ideas are the way like on-chain perps work and stuff. I don't know if those ideas would have ever been born without ever once having that constraint. But that's a different thread. Well, that's a really good point because the perp is almost one of the all-time great exports from crypto into just traditional world. Now you're starting to see centralized companies look at the PIRP and actually start to adopt it. So it was really a genius invention. And I guess it was probably the Bitmex team that was the first to really bring that to market. But PURPS, AMM, I would argue

stablecoins is really one of the other crypto-native innovations that is now just migrating and crossing the chasm into traditional quote-unquote financial services. That's such a fascinating one. And then there's the circles and tethers. We can speculate about whether or not they'll launch onto Monad natively. I think they'll move fast to do it, honestly. It's all part of creating new defy ecosystem. I really believe defy is this net social good, giving control over assets to people, just the baseline, like, non-custodial technology that blockchain offers. But defy democratizes a lot of these complex financial structures. Most people in the normal world just don't ever mess with options in their lifetime. That's fine. That's never going to be everyone's playing

with options. But like something about defy where it's inherently open to learn more about these things, you can get involved in really small ways and experiment on change. And I think that's a net positive for the world. So I kind of just like want defy to win so badly. And I think that's what you see in the space and builders who are deploying to new chains, want Web3 to win so badly that we're constantly looking for the secret sauce. And I really think Monat's the next revolution. So when you talk about wanting to win, what does it take to win in this category in Monat?

What will make Kinsu the number one player in this liquid staking category? It's a great question. Specifically for liquid staking, less like the L1, L1 battle and stuff like that. But I don't think it's a single-chained world either. In liquid staking, I basically think of it almost from a channel partnership strategy almost. At the end of the day, liquid staking, and I promise this is adding up to an answer of how you win in liquid staking.

Liquid staking got its name on Ethereum from LIDA. I ran a Genesis Ethereum validator note. You couldn't even unstake for an unknown period of time that turned out to be over a thousand days. So the liquid USP mattered because you really wanted to be able to maybe sell your underlying position rather than unknown waiting time. That was like where the peg slipped for a while and people were really focusing on the time, part of like the time money equation. I think the superpower of liquid staking protocols is really that they're composable staking protocols. And this gets to like how you win. Because at the end of the day, an LST is really just a staking position that you have a receipt

token for. So it grows with the stake you've earned over time, and you can re-hypothecate with it and compound your rewards. The liquid staking protocol success is really equal to staking plus all of its use cases. That is the value it creates. It's the opportunity for developers to integrate staking into everything, but you need to help the world, help developers find this and extend it. Building dexes let people pool liquid staking tokens like other DAOs can pair their liquidity with it or lending markets that allow you to lend liquid staking protocols like LSTs and borrow against them. Going long with an LSTs makes a lot more sense. Using it as better defy-optimized collateral is a great way of thinking of it. And there's a myriad different solutions that can be

built on top of that, some that we may not have even ever seen before. So I think it's about getting people excited, seeing what people will create on top of it. What do you think that's going to look like? Monagos Menet here? It's hard to tell who's even building what, because there's Nothing out there in the wild yet. It's just going to be a, hey, this thing goes live and all of a sudden a hundred different projects pop up. What do you think this is going to look like? I think you'll see hundreds or thousands of protocols pop up pretty fast. With staking specifically, there's some unique stuff that'll be not exactly like other chains, specifically like how the stake delegation system on Monad works will be a tiny bit different from other chains. So you can't

just direct copy another liquid staking protocol. But you can just direct copy of Uniswap Ave, go find your favorite yield aggregator, your favorite. it leveraged deal farming protocol or CDP stable coins that are using LSTs as collateral or something like that, you'll see all of these happen very fast. NFT marketplace deployment. Someone can be native to Monad. And I think that's an important thing for some protocols, like truly be Monad native. But you're also going to see big blue chip brands that are already very respected and trusted

come across. And I think it's not really a matter of if but when. Very curious to see how it plays out. Do you have any like spicy takes on the? on-ed, rollout? I don't know if it's a spicy take, but I do think that high-performance defy and stablecoins will be the two immediate product market fit categories in the ecosystem. So I think the fact that you can do just more computationally intensive things on the platform will lend itself to being very conducive to defy. And then I think there's

just a tremendous amount of data to support that stablecoins would be even more popular if you had a faster settlement mechanism. And the fact that if I were to send you $10 in a stable coin right now on ETH and have to pay, what, three, four bucks and gas fees, that just doesn't work. So I think a lot of design consideration will go into building support for stable coins and just peer-to-peer payments on top of Monad. I definitely agree with that. It's just returning to the EVM is such a nice thing.

You immediately get all of these tooling things that I think people, or I overlooked, even a year ago, excited to play with some of the new tech, the new toys, which I think is really important to always do. You forget how nice it is to have tools like dynamic or third web or something like that to just instantly have EVM connection and all these cool tools. So I think the tooling of the space allows people to create new primitives fast rather than having to recreate the basics. The basics are so there and so mature in the EVM environment that people can really get down and dirty quickly with building businesses on chain. I think that's right. I think it'll be interesting to see what it looks like when it goes the other way, too. So you could see the first phase of Monad being things that exist already in the Ethereum ecosystem, maybe coming over. But eventually, I would think that Monad would almost be an R&D studio for the Ethereum community to say, hey, look, this thing works over here.

Maybe we should make some changes to Ethereum. It'll be interesting to see the two communities and how they work together. Monad's like a more efficient app store. All of the apps on it are more efficient, actually, is the thing about it. Now, I'd say one of the biggest innovations in the Ethereum ecosystem over the past couple of years has been the launch of eigenlayer. How do you think that is going to interplay, if at all, in the Monad ecosystem? I think the eigenlayer is such a cool invention. I think that restaking as a category, it's funny. A lot of people just now call LSTs LRTs. And I think that's beautiful intellectual rebranding excellence from Shrateram and the whole Eigenlayer team.

They recreated the acronym. I actually think LSTs should be called composable staking tokens. I don't really think we should call them LSTs or LRTs. At the end of the day, there's all these on-chain things you can do, DFI-Stuff that are starting to talk about your Dex's lending markets, yield aggregators and stuff. And then what EigenLayer really did is they created this like semantics for doing things that aren't inherently on-chain.

So basically they take something like RAPStake-Eath, which already is like very well optimized collateral, inheriting all of the security of Ethereum. I can layer has the semantics for essentially taking on extra risk for extra reward. You can do that already in Defi with LSTs by like using your LSTs in DFI. You might lend out an LST, borrow some stable coins against it, and then buy more of the LST because you want to go along. And you can kind of build your own leverage. It's the beauty of the composable defy world. But there are some things that don't just imagine.

immediately compose when they're off-chain. If you were going to build a whole new network on top of something, all of a sudden, you have to get new validators on, you have to get people to hold the underlying, see the staking opportunity as good, bootstrap your validator set. So I feel like I'm one of the coolest things that's happened, one of the net new, really impactful things that have happened in like the Ethereum ecosystem to basically unlock a new set of use cases. And at the end of the day, it's really like a semantics that has this abstract interface of

slashing and rewards. As long as some other activity has the way that you can lose money and make money, you can use something like restaking to access it. I think it'll be very interesting to see it out of it. For me, it's into the monode ecosystem where something evolves natively. That's super fascinating. Now, maybe just a higher level question. So if you're out in your everyday non-crypto life, I assume you start talking about some of these concepts to people and they have absolutely no idea what you're talking about. So if we fast forward a little bit, Do you think this defy category and just how these things interact with each other ever become something that everyday people learn about? Or is this TCPIP where no one knows how it works,

but you just go on a website and you enjoy the internet? How do you see the future of just how much people need to know about some of these fundamental protocols? A lot of the protocols are just coming back to non-financial things almost for a second. TCPIP, it's like the internet. People don't need to know that works, but they can still go and check their email and send a text message to their friend or whatever it might be. Things like I'm kind of obsessing over Shopify right now, I think that you don't need to know how to build an e-commerce store to buy a pair of sneakers. And I think that I can see a world where some people are going to make their own seed phrases. Other people might just trust Google with holding a thousand bucks of USDC on Monad for them. And they might have a wallet

where they don't need to put in these complex seed phrases. And then I think it's just at the end of the day, it could be the new social media platform or something like that. All of a sudden, I think it's very easy to imagine a world where people just have a crypto app in their pocket without even knowing or caring what chain it's on. I think the people that are focused on it now that are building care, but I think one day we're just going to see that it was slowly but surely,

and then all of a sudden, all at once kind of thing. I guess you're part of seeing that a little bit. you could argue with Polymarket. People go on election betting odds.com and then they click through to Polymarket. And most people have no idea that that's a blockchain enabled platform. Yeah, that's a perfect example. Is there a polymarket for when Monad test in it? If there isn't, there probably will be after this episode. Yeah, I can make a bet on that one for sure right now. Right, so let's jump back to Kinzu a little bit. So where did the name come from? Tell us a little bit more about the origin story here. It seemed very clear that there was this

opportunity cost between staking and defy and none of these networks want to like inhibit the actual protocols building on them and all these use cases emerging all these businesses on the block. There's this beautiful art, this Japanese art called Kinsugi. If you picture someone clumsy, like me, smacks a matcha bowl off the counter and it falls onto the ground splits into a hundred pieces. The art of Kinsugi is putting back together the pieces using gold to mend the cracks and It makes it stronger and more beautiful than it was before. And I really feel like what Kinsu does is we are the gold lining. We put together staking in DFI.

And we're really this DFI middleware. And at the end of the day, it's a platform for developers to extend staking. And I think that's a lot of where the name comes from. That's incredible. Well, we're really excited to be backers of Kinsu and psyched about the launch of Monad here. So appreciate you coming on the podcast. Where do you want to send people to learn more about the project? To get involved, I would definitely follow Kinsu.

underscore XYZ or go to kinsu.xyz join our Discord. Time is great to get involved in the community. And if you're a builder looking to extend Kinsu or a validator looking to get involved, you know where to go. Awesome. Stephen, thanks so much for joining today on the podcast. Thank you, Matt. Appreciate you having us on. Have a great day. Thanks for listening to another episode of On the Brink with Castle Island. To find out more about Castle Island, visit castle island.Vc. To listen to all of our podcast episodes, please go to On the Brink-Podcast.com or just click on the tab in our website.

Thanks for listening.