The Pomp Podcast - #1520 Tarun Gupta | Will Stablecoins Be Bigger Than Bitcoin?

Starting point is 00:00:00 What's up everyone? This is Anthony Pompliano. Many of you know me as Pomp. You're listening to the Pomp Podcast, which is my effort to find the most interesting people in the world and sit with them for hours while I ask questions in an effort to learn. So it would mean the world to me if you would subscribe to the show on your favorite audio platform, watch episodes on YouTube, and tell your friends and family about the podcast. My goal is to help millions learn from the world's most interesting people. So let's get into today's episode. What's going on, guys? Today, we've got an excellent episode with Tarun Gupta. He is the founder and CEO of Coinshift. They have created a new type of yield-bearing stablecoin that I

Starting point is 00:00:39 think you're going to be interested in hearing about. In this conversation, we talk about what's going on with stablecoins. How big can they get? Why are so many people trying to launch these stablecoins? What the profound impact of people actually holding yield-bearing stablecoins could be all around the world to eight plus billion people. And of course, Tarun explains what they're doing, how they're doing it, what the risks are, and how they're trying to mitigate those risks. So I hope you enjoyed today's conversation with Tarun Gupta. Anthony Pompliano runs Pomp Investments. All views of him and the guests on his podcast are solely their opinions and do not reflect the opinions of Pomp Investments. You should

Starting point is 00:01:12 not treat any opinion expressed by Pomp or his guests as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of his personal opinion. This podcast is for informational purposes only. Today's episode is brought to you by Franzi. If you're a dreamer, a go-getter, or someone looking to own a business, you better listen up. Franzi is the ultimate platform to make franchise ownership accessible and achievable for everyone, from corporate escapees to side hustle seekers and investors. Franzi does more than just list franchises.

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Starting point is 00:03:29 cutting-edge security technology. Head to zapobank.com forward slash pomp to learn more. That's X-A-P-O-B-A-N-K dot com forward slash pomp. Go check out Zappobank today at zapobank.com slash pomp. Tarun, I thought a great place to start this conversation is, you know, And when I got into Bitcoin, I saw Bitcoin as a medium of exchange. It was a store of value, and eventually everything's going to be priced in Bitcoin, and you're going to get this hyper Bitcoinization. And one of the things that maybe I've changed my mind on is at least in the short to medium term, Bitcoin really has dominated what I would call the global store of value use case.

Starting point is 00:04:07 That is the thing that people are understanding. They buy it, they hold it, never sell your Bitcoin, it's going to be worth more in the future. And it's done a fantastic job of not only protecting your purchasing power, but actually increasing that purchasing power over time what has changed and what the new information was that really changed my mind is that there has been the rise of stable coins for that medium of uh exchange use case and so you all recently created this stable coin um and i think you got a lot of thoughts on it but maybe we could start with this idea that like you know bitcoin has got

Starting point is 00:04:35 the store value stable coins seem to be coming more of like that banking infrastructure how do you look at stable coins role and like what's happening here yeah for sure so so the way we see this is like for the last 10 years right as you said bitcoin has been like pretty successful uh as a store of value and that's why everyone thinks it as replacement or or an alternative to gold reserves right but at the same time what we have seen is like the world has changed into an internet economy and and the e-money which we call it like the the banking e-money is being like used by everyone very easily right and then the emergence of neobags for example like revolute breaks or mercury has really decreased the barrier and democratized the access to financial services

Starting point is 00:05:20 across the world right with just internet money and after this you know bitcoin blockchain or innovation what we have seen is like because of ethereum uh blockchain you can really program the other use cases right and and this make the emergence of these like two major stable coins like uh usdc and usdt became like the the 94 95 of the stable coin market today which is at 200 billion dollars right so think of like let's define like what is a stable coin even means right so so basically essentially it's like a dollar putting on a blockchain right so so what circle has been trying to do in the last 10 years is like can you just bring dollars on the blockchain very simple use case and it becomes like a simple money use case and then it merits the properties

Starting point is 00:06:12 of blockchain what what is the property of a blockchain is just this distributed ledger right so what the entire thread fire today is working on this problem statement of reconciliation and settlement right why your money moves slow if you think what the architecture of money is just dependent on this reconciliation and settlement layers and the more you have uh basically the amount of money the more risk you are taking while reconciling right and this specific property is if you dedicate to a decentralized ledger like ethereum then you solve this risk layer right and if you if you have this risk layer solved then you can move money irrespective of the amount at the speed of almost blockchain right so this is like a like a fundamental disruption and that's

Starting point is 00:07:01 why uh usdc is is has been growing it's almost like 60 billion right now and and usdt is like almost more than 100 billion dollars right that proves the use case but what these stable coins are doing under the hood is basically they are just keeping these reserves for example in case usdc they're keeping majority of the reserves in overnight treasuries or in other government bonds or there's like a reserve requirements you can say right and their entire promise is when you hold usdc they will give you one dollar when you want to redeem it and that is that has been their promise for a very very long time and and uh and because the regulations have not been like super sorted for a very long time obviously you need to trust their auditor reports and everything

Starting point is 00:07:51 uh but yeah i think this this has been like the true use case so far and now we are seeing uh basically because these stablecoin issuers are making uh money from their reserves right and they're not sort of easily can distribute the yield for example in us you cannot just distribute the yield generated from cash equivalents like overnight treasuries it is not legal right now it is not regulated and that's why we have seen the emergence of other stable coins which is like yield bearing stable coins uh where users want to just get the yield from the underlying asset and we can talk more on that but yeah just to summarize as like the the use case is very simple is money a lot of people have seen they are generating a lot of yield under the hood they

Starting point is 00:08:33 want to take a portion of that yield right and there is a lot of demand of of that yield bearing stable coin and that's why the last five years if we see like uh there is a huge competition uh to these two stable coins still they have been like the strongest but there are like 100 plus stable coins exist and out of that there are emergence of stable coins like athena which is at six six billion right now and and sky which is like maker dow almost at eight billion dollars right now so they are also growing and we can touch more on that but yeah i think these are like the distinctions. And that's why it is working. So you all are building like a yield based kind of value proposition for folks. And one of the things that I always think about is

Starting point is 00:09:16 in the United States of America, we're spoiled. We get yield, right? You go, you put your money in the bank, the bank holds onto it for you. They'll give it back to you when you want it. You don't worry about them taking it from you. They'll pay you some yield, although in certain accounts, it's very low and other accounts may be a little bit higher. But this concept of compounding and yield generation, all this kind of stuff exists. If you go in many places around the world, let alone putting your money in the bank and then giving it back to you, that actually may not happen, right? There's not kind of that strong of a clear rule of law, but this concept of yield can be life-changing. If you now can save money in a asset like dollars that are better

Starting point is 00:09:53 than your local currency, and you can then go ahead and get yield, that feels like it's pretty profound and so talk a little bit as to how these yield bearing stable coins are working are people getting more stable coins or is it just like increasing the value more like a stock buyback type situation like like walk me through exactly how this works and how you guys have built it oh there's a beautiful question so so think of right once you as an institution or a business uh you just start keeping these stable coins right on chain so you are on chain right now right and once you hold this like what you can do after that right and at the same time the underlying stable coin issuer is generating a lot of heat which is not being passed to you

Starting point is 00:10:33 so that the the next thing comes once you have these stable coins on chain the next thing comes is credit right everyone wants to generate some kind of yield on top of it and that's why the emergence of lending protocols in ethereum just became like so popular like ave morpho and there a couple of other lending protocols so users are sort of generating an additional yield through these stable coins by putting into a lending tool and from there the btc the bitcoin holders or ethereum holders can come they borrow these stable coins and the end user gets like an iou similar to bank it's like a usdc in case of morpho sorry in case of ave it's like an ave token and a usdc is representing your usdc that is lent out to ethereum bitcoin and other collateral

Starting point is 00:11:21 holders and that borrow yield is a real yield because there is a real demand for usdc in the borrow side you generate this additional yield very similar to your bank basically right so so there is a huge combination of these regulated sort of stable coins with the lending markets and that's how the end user is able to sort of generate a lot of it and then the this was like the the similar concept if you know make a dow make a dow is just does not dependent on uh in the initial days it was not dependent on uh any regulated entity or or stable coin issues so what they did is just come up with your bitcoin and you will be able to sorry come up with your ethereum and then now btc as well you will be able to mint the die directly and the btc holder has just uh

Starting point is 00:12:09 borrowing the die right so any die is in circulation is backed by over collateralized bitcoin or ethereum right so this is another way to actually create a stable coin but what is interesting about this the generation of yield is the borrowing fees right so what they did is they introduced this saving rate module around 2020 and what you can do is you deposit your die it's like a saving account you put it into a s die which is saving die and you get this borrowing fees as a yield. So think about the risk profile. Now I'm a Bitcoin holder. I'm meant to die, right? And I expect to a dollar, uh, just on the, on the ticker side. And then you put this diet into a stack and then you start generating yield on your Bitcoin in a, in a sense, right?

Starting point is 00:12:54 So, so it's a very interesting way to, to really launch, uh, these stable coins, which can pass on the yield to the direct user. So the method we have seen last five years is just this additional staking layer so so you have this money layer and then you stake it somewhere to the lending protocol or saving rate module and then you pass on the yield right and then i think last three years what we have seen on the yield use cases having this uh delta new all hedge funds are generally delta neutral right so let's say you have uh ten thousand dollars worth of eat uh you are already longing this position as a collateral you can go to uh perps exchanges like finance and all you can put like a one is to one delta neutral position

Starting point is 00:13:37 on the short side so this delta neutral position athena like player has tokenized that and brought it into d5 and they are calling it like a stable coin we call it like a pseudo stable coins in in coin shift where but end of the day it's representing a delta neutral position right and the more uh the market is doing the long basically the more yield you can generate uh right from the underlying collateral and that has been passed to the end user so so these yield are just to summarize there are two sources of yield so far one is the lending side i'm talking like a real source not like these tokens and all real sources lending the second is delta neutral position both has very different risk profile right on the lending side you are trusting the

Starting point is 00:14:22 protocol you are using you are trusting their risk managers if they are allocating the right collateral or not right on the delta neutral size you are trusting that issuer who's dealing with the custodians to have your collateral and dealing with the centralized exchanges right so so i think these are the two ways uh and it is getting pretty hot these days like in terms of generating these huge uh yields and we have seen for up to 30 percent of yield on usdc because of these two reasons like lending protocols and and margin trading basically when you see very large yields right you know over 10 20 whatever um obviously there has to be some risk that's associated with it and how do you think about what those risks are and then what you or others are doing to mitigate

Starting point is 00:15:09 those risks yeah so honestly like as long as you were trusting let's say on usdc that is the first risk level right uh basically and then on top of this you're trusting the lending protocol uh right so always like at 30 billion plus in aum so you can say okay like there has been like a good trust and they have been not hacked so far so there's a smart contract risk you are taking and and and then the risk manager you are taking the risk of their risk manager because you cannot just say okay it's a smart contract end of the day you're reallocating the positions right so there is a risk manager and there is a dow and how centralized or decentralized is the dow it's always like a question right and it is not regulated uh and there is no bankruptcy protection right you have

Starting point is 00:15:53 in the banking so so overall these are the risks you are taking and then you are taking the risk of liquidation so let's say somebody is borrowing from bitcoin uh usdc right let's say there is a downturn in the market so you need to liquidate the position uh right if you don't do that you end up in a bad debt basically for your protocol and that's why your collateral needs to be very very liquid in the market right so you're taking typical all lending risk block changes brings the transparency right and over collateralization through a protocol but every other risk is pretty much similar to lending risks right and in case of delta neutral strategy you're taking the risk of exchanges and we have seen exchanges go you know down in the last cycle as well right

Starting point is 00:16:39 ftx and all and then you're taking the custodian risk as well right so because they are taking the custody and this delta neutral strategy is not regulated at the same time so all these are like additional risks and i would love to like talk about like how we are mitigating and how we work uh with with our stable coin but yeah these are the risks explain your stable coin yeah so so we lost uh cs usdl our own yield bearing stable coin which is backed by paxos issued usdl so paxos is the largest one of the largest stable coin issuer after like circle and then tether and they work with paypal mastercard stripe as you know so so they they work with the abu dhabi government and they regulated this uh t-bills like treasury bills yield out of abu dhabi so what what does it

Starting point is 00:17:29 mean is like they're literally representing the risk-free rate of treasury bills every single day on a blockchain right and this is like real innovation and in case of worst case right let's say paxos does go down still you have protection from fsra out of abu dhabi so it's a fully regulated uh stable coin and they pass the yield through a rebasing mechanism so every single day your usdl goes more in supply so one usdl today it will go like 1.0 something and that t-bill is accumulating basically right so what we are doing is we work with paxos as a distributor right and and uh after passing this yield they take the management fees and we take like a distributor fees right we make like 20 bps on every usdl minted through us so think of cs usdl

Starting point is 00:18:17 is fully collateralized by usdl under the hood and then we are combining the second source of the yield it's like a lending protocol so what we are doing is we are lending out this usdl to bitcoin holders and ethereum holders today and how we are managing the risk of that we work with Steakhouse Financials. So Steakhouse Financials work with MakerDAO with their entire RWA program of 2 billion plus. So they're one of the most conservative asset manager out there. So they manage the risk of reallocating all these positions. And at the same time, this entire system is working on Morpho. So Morpho is another lending protocol, which actually gives you an immutable system where they can't do anything with your market. It's an immutable market.

Starting point is 00:19:02 So if you say, okay, the Bitcoin holders will borrow from us, right? So Morpho cannot do anything in that. It's a very protocol driven thing. And Steakhouse can allocate based on that. So yeah, I think the risk is lending side, which is also very transparent from the Morpho protocol. It has like 6 billion in AUM. And then the other risk is the Paxos and this Abu Dhabi sort of reserve management and all that. But at the same time, you are getting two yield components, right?

Starting point is 00:19:30 One is the T-bill rate on a daily basis and the lending yield block by block, right? And this unique composition does not exist today by default, right? And we don't ask you to stake or do anything extra. You can directly hold CSUSDL through an exchange, decentralized exchange, and you will be getting these two components of the yield by default. And there is one more thing just I want to mention is the depositor risk, right? So let's say you're an institution and you're putting like, let's say, 10 million into our stablecoin and you don't like how the collateral is managed, right, by Steakhouse. So there is a seven day time lock period, which we have.

Starting point is 00:20:11 It means whenever the new collateral is added, the depositor can veto the rights to remove that market and take their funds back. So this kind of system does not exist outside, you know, CSU's deal, like our stablecoin. And right now, what stats can you share about how it's going so far, what yield people are earning, where these people are, what they're doing with it? Yeah. So overall, Coinshift has been like a treasury management solution for the past three years. We manage over like one billion plus on Gnosis Safe, like a multi-sig account through only Coinshift by working with like all the largest institutions like Aave, Gitcoin, UMA. they are our clients right and what what we are doing in with csusdl we launched in january 7th and so far we are at almost like 37 million plus in in the aum of the stable coin and are offering us like largely for institutions because we want to reach to at least 100 million

Starting point is 00:21:08 dollars in total value long before we start pitching it to businesses on chain right so everyone wants to like trust the asset which is at least trusted by the larger institutions so so that's how this trust thing works right so so right now the largest market makers like amber group or gsr they are they already put csusdl on their balance sheet like large liquid funds and large hedge funds are already using it uh and we are pretty confident to cross it to 70 million like almost in next two weeks so yeah we are growing very very fast and uh their primary reason is basically the risk is very well known the risk is very uh conservative and everything thing is not controlled the coin shift cannot do anything from the assets anywhere it's pack

Starting point is 00:21:52 saws and and the the morpho protocol right so that is the highest appealing part and the yield right now uh the market is even down we are still yielding at like a 5.2 percent basically where that four percent is coming from the treasury bills almost and then the rest is coming from the lending side and when you see this uh kind of conversation with these businesses with these corporations and institutions what are they looking for are they looking for better rails are they looking for higher yield something else what what is the the value proposition to them yeah i think let's go one by one so for liquid fund for example right let's say you have usdc on your balance sheet so right now these institutions think usdc as their exit stable

Starting point is 00:22:38 point so they do something risky let's say or putting money somewhere and they want to come back to USDC right rather than dollars so can you build a risk profile which is closer to USDC that was like our value proposition because that's why we work with Paxos right so so I think what they're looking for is like from lowest risk to highest risk different instruments to put their money on and and we come at the lowest risk side so recently Morpho executed like a third party ordered on the credit rate like overall ratings of all these uh you know vaults and we are like one of the highest rated uh a plus rating uh in terms of the risk underlying risk disclosures right so the risk profile matters a lot for these institutions and we come under a lowest risk side

Starting point is 00:23:30 as compared to delta neutral strategies and all and the other reason is like cs usdl has 96.5 percent lltv right which is very very difficult for a lot of these stable coins to get that highest loan to value ratio and because of our risk profile is different like uh people are willing to give loan on this collateral so yeah and then how do you think about regulation of this stuff you mentioned that you know there's some stuff that may be specific to your local jurisdiction but how do you think globally and then also locally yeah i think in terms of us they are just getting started with the regulation I would say it's pretty warming up and I think

Starting point is 00:24:10 the payment use case like payment focused stable coins it is going to be like fully regulated as the bill has been passed right after that I think almost all fintechs either can use directly USDC right because it can comply the entire requirements but they are not letting like this yield distribution directly to the end users in us yet it is not regulated at all so i will say it's a step-by-step process because previously it was like little uh you know so think about from the regulation perspective is already a a threat to the banking infrastructure right so the first

Starting point is 00:24:48 use case is just have the payment use case and then then i think i'm pretty confident over the years everyone will realize okay passing the yield will make your dollars more dominant uh to the end users but outside us yes you can do that so for example abu dhabi in bermuda and you can build these kind of instruments where you can buy the t-bills and pass the yield to the end user so these governments are utilizing their underlying reserves to pass that yield right so regulation is pretty becoming competitive i would say us is just getting started and and uh because it's competitive end of the day if if people are holding more us reserves in abu dhabi government right the other issuers will also feel right we want to provide the service to our users

Starting point is 00:25:29 so it's very competitive and regarding europe i think they are the most stringent i feel like in terms of strictness they have like a lot of capital controls and and uh even on the payment use case and the reserve requirements are pretty tight so in a sense i feel it's good for the industry because it will bring more sophisticated players to actually have consumer protection for the end user so i think we are in this time of the industry where you cannot just you know build any random uh instruments and and you know pass the entire yield through your token and and you know so you just need to get into the the real regulation and and yeah i think brex and stripe and all these players are making major investments in stable coins i think that makes uh that makes

Starting point is 00:26:16 a ton of sense what is the biggest challenge for you moving forward i think first is regulation for sure uh if if i think uh countries like us and others like regulate this yield bearing instruments it becomes so easy uh to really you know uh like launch cs usdl there but right now it is not available for us citizens uh it is only for offshore and that's why we only work with institutions because they have these offshore setups right very easily they can acquire uh the asset right so the real challenge is liquidity uh how do you bootstrap the liquidity in the beginning and how do you create on-chain liquidity, right? And how do you create mints and redemptions at scale?

Starting point is 00:26:58 So Paxos has like a great experience in working with PayPal to build that entire infrastructure to scale, right? Because there is a regulatory requirement. You can't just mint and redeem that easily. So yeah, I think that they have been huge help in facilitating all this. So liquidity and then overall,

Starting point is 00:27:16 this regulation is the biggest challenge, I would say, to scale this back. How big do you think stable coins are going to be? You know, we see Bitcoins at $1.5, $1.6 trillion in market cap. Total crypto is, you know, call it $3 trillion or so. Stable coins are $200 billion. Should we expect stable coins to be even bigger than Bitcoin collectively? Or how do you think about it?

Starting point is 00:27:36 So the strange thing is everyone I know right now wants to launch a stable coin. So even TreadFi or DeFi, right, does not matter. i think very clearly the e-money should be like moved to uh usdc or or like these kind of payment use cases right so we will definitely see like trillions of dollars coming in the next five years a hundred percent like for sure this is like inevitable after this stablecoin bills passes right and and then i think it depends like if if that is successful then all other yield instruments regulated yield instruments will come because your once your money money is on chain right what we'll do with that you need to build credit instruments for that right and that's how the financial system

Starting point is 00:28:22 works so so it's like you know saying when the internet happens in the early days okay a lot of people just believed you know cash because it's tangible and all that right but eventually everything moved into internet uh right so so yeah i think the finance should work on on stable coins and then that is the use case that's why these countries are regulating it so we should expect like trillions of dollars that um that makes a ton of sense to me where can we find uh more information about coin shift yeah so uh you can reach out on twitter it's like zero expansion you can reach out on to me like 14751 on twitter amazing i i'm very fascinated with this idea of the yield bearing stable coins you guys have been out at the forefront of uh

Starting point is 00:29:05 of working on this and i think you got some pretty unique ideas around kind of your thesis of stable coins how big you'll think they'll get and then also the infrastructure that's needed to be able to build this so i appreciate you taking the time to come talk to us today tarun and we'll definitely do it again in the future thanks sir it's a pleasure to be here

The Pomp Podcast - #1520 Tarun Gupta | Will Stablecoins Be Bigger Than Bitcoin?

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