The Wolf Of All Streets - How The DeFi Market Can Be 100x Larger | Sidney Powell, Maple Finance

Episode Date: April 30, 2023

Sidney Powell, CEO and Co-Founder of Maple Finance came to my show to to discuss how they tolenize T-bills and other assets and why he thinks DeFi can become 100 times larger than it is right now.  Sidney Powell: https://twitter.com/syrupsid ►►THE DAILY CLOSE BRAND NEW NEWSLETTER! INSTITUTIONAL GRADE INDICATORS AND DATA DELIVERED DIRECTLY TO YOUR INBOX, EVERY DAY AT THE DAILY CLOSE. TRADE LIKE THE BIG BOYS. 👉 https://www.thedailyclose.io/   ►►BITGET GET UP TO A $8,000 BONUS IN USDT AND GET MASSIVE DISCOUNTS ON TRADING FEES! 👉 https://thewolfofallstreets.info/bitget    ►►NORD VPN  GET EXCLUSIVE NORDVPN DEAL - 40% DISCOUNT! IT’S RISK-FREE WITH NORD’S 30-DAY MONEY-BACK GUARANTEE. PROTECT YOUR PRIVACY! 👉 https://nordvpn.com/WolfOfAllStreets   ►►COINROUTES TRADE SPOT & DERIVATIVES ACROSS CEFI AND DEFI USING YOUR OWN ACCOUNTS WITH THIS ADVANCED ALGORITHMIC PLATFORM. SAVE TONS OF MONEY ON TRADING FEES LIKE THE PROS! 👉 http://bit.ly/3ZXeYKd  ►► JOIN THE FREE WOLF DEN NEWSLETTER, DELIVERED EVERY WEEK DAY! 👉https://thewolfden.substack.com/   Follow Scott Melker: Twitter: https://twitter.com/scottmelker   Web: https://www.thewolfofallstreets.io   Spotify: https://spoti.fi/30N5FDe   Apple podcast: https://apple.co/3FASB2c   #Bitcoin #Crypto #trading  Time stamps: 0:00 Intro 1:10 Maple finance 7:50 What happened with the risk appetite? 9:30 Institutional clients 11:50 FTX affect 16:00 Does DeFi mitigates the risks 17:00 DeFi Can Be 100x Larger 20:20 AI role 23:15 Tokenizing assets 26:25 Staking in the US 32:10 Lending business 37:00 Mining lending 40:45 What Celsius clients do in 2023? 44:20 Peculiarities of crypto market making 51:51 Wrap up The views and opinions expressed here are solely my own and should in no way be interpreted as financial advice. This video was created for entertainment. Every investment and trading move involves risk. You should conduct your own research when making a decision. I am not a financial advisor. Nothing contained in this video constitutes or shall be construed as an offering of financial instruments or as investment advice or recommendations of an investment strategy or whether or not to "Buy," "Sell," or "Hold" an investment.

The crypto contagion of 2022 stung almost everyone. DeFi saw a massive reduction in TVL, and CeFi was effectively outright erased from the planet. But there are still people building incredible tools like Sid Powell at Maple Finance. And once this bear market is over, we're gonna see them rise to the top and see DeFi eat the lunch of JP Morgan

and the legacy system. This is one of my favorite conversations that I've had in a long time. It is incredibly intelligent and interesting, and I love what they're building. You guys do not want to miss this. We should start with you telling us about what you're building. Give us sort of the background on Maple and everything that you guys are doing.

Yeah, for sure. So the way that Maple works is it's like a capital market on chain. So what we're doing is we've built a platform where you can do pools of loans. And each of these pools has a kind of manager who approves the borrowers. And they kind of run like a credit strategy so you can think of it almost like doing credit funds or you know miniature banks on chain and what we uh when we launched in may of 2021 we're lending mostly to market makers and market neutral funds so business loans and we did about two billion loans two billion in loans

uh since then and then this year maple's's shifting and focusing more on real world assets. And yesterday, actually, we just announced the launch of a pool that will do T-bill backed loans. So this effectively gives people access to very low credit risk form of deposit and very liquid with daily withdrawals, but all happening on chain. And so those are loans that are one-to-one collateralized by T-bills. And how does that work? How does the person actually collateralize a T-bill? How do they digitize it? How do they tokenize it? What's the terminology?

Yeah, yeah, for sure. For sure. So the way it works is that the Maple pool will lend to an SPV. So the SPV is doing the loan on chain and then it will off-ramp the funds. This will likely go through Coinbase Prime, but there's a couple of other off-ramps they can consider. And then they're going to deposit the funds in a regulated broker and buy the T-bills. So we don't actually digitize the T-bills. Instead, what we do is the T-bills get pledged as collateral for the loan uh so this is one of one of kind of the evolving principles of reward assets do you do you need to digitize a house in order to have a loan against a house on chain and in this case we just digitize the loan

so the loan is a smart contract totally visible on chain all the repayments can be seen there except in this case if the borrower defaults, then we can go and repossess the T-bills, sell them and use them to repay the loan. In the same way, you'd go and sell a house and use the proceeds to repay a home loan if somebody defaulted. Right. But the T-bills can be liquidated immediately. You can't liquidate a house immediately. Exactly. You can't liquidate a house. That offers some unique challenges then if we're going to tokenize assets like real estate, which has been talked about for quite a while. And there are companies that are doing it in novel ways. I'm trying to remember what their name. Roofstock, I think is one of the companies

and I met with them at Mainnet in October. I had them on the podcast and they do it through effectively buying the home in a Wyoming LLC. And then you own the Wyoming LLC and not really the house and that transfer is very novel, but I don't know how scalable. Yeah. No, that's, um, that, that idea of like, how do you increase the digitization of the underlying assets? Super difficult. Right. And I think the, um, the idea of putting it inside a company like an LLC is very novel. Um, but you need to do, you need to do a lot of them for it to scale. And then there's the idea of if we're lending against a house, we don't want to have to go and sell it. And probably the best way to sell it is probably not going to be to sell

an NFT. It would be to have a large real world market of buyers. So I'm interested to see how it plays out. We want to do more real world asset lending. One of the challenges is a lot of people, particularly in crypto space, don't want to lock up their funds for 12 months or longer. And even a 12-month loan would be an exceptionally short home loan. Yeah. 30 years. Yeah. Being so at the standard in the United States, it's a year. But I'm just kind of giggling because you're talking about crypto people. They like to be liquid basically 24-7. That investor mentality and lockup does not really exist to a great degree. Yeah. Yeah. One of the things we've been looking at though is whilst everyone's looking at real

world assets, there's also this huge market that totally got deserted, which was the lending to market makers and hedge funds. So the on-chain participants, those guys were all borrowing from Genesis, Celsius, BlockFi, many others last year. That was probably $55 billion in loans outstanding at the start of 2022. And all of that's gone away. So whilst we do really want to see the real world asset market develop, the other thing we're looking at is how do we fix

the problems of CeFi? We on Maple did most of that $2 billion in loans was uncollateralized. And that was fine when you could lend to market neutral firms and monitor their financials, but how do we serve that larger market that went away with the collapse of CeFi? And what we're looking at now as well is could we integrate with custodians so that they could pledge collateral with a custodian, but it's tied to on-chain loans? So I think that's a huge way to address that market that's just missing now. Structurally, that's similar to what you're talking about with T-bills, right? You don't... Exactly. Same principle. Yeah. That's insane, though, that you were able to do that uncollateralized. You have to be very sophisticated at monitoring these funds, right? Because we saw the three arrows capitals of the

world. Obviously, I don't think that the people that were lending them money necessarily had much visibility into what they were actually doing with it. No, no. It was interesting. Before that happened, they'd actually applied to borrow and had been turned down on the platform because the financials didn't make sense there. But yeah, you're right. You had to... I mean, to do those types of loans, we have delegates who do the underwriting on Maple. And so what they would have to do is monitor the financials monthly. So every month a borrower sends in the balance sheet, profit and loss statement and accounts for the positions they have. But it's still, even with all of that, it was still a very challenging market. And what we've seen though, is the appetite to lend in those kinds of loans has just pulled back. So that's why you're seeing at the

moment and all this appetite for lower risk, very low credit risk type of products. So T-bills on chain, over collateralized lending, even the idea of real world assets. When you look at the kind of duration, people are wondering like, what can I lend against that is super low risk? And they're also asking for much lower yields than they were. 2022, it was like, you needed 20% plus to get anyone interested. all insane. But it begs the question then, do you think that people's risk appetite is lower because they were stung by that contagion or just because the risk-free rate on those T-bills is so incredibly high? I mean, if you can go get at certain points, you'll be able to get five plus percent on what people would view as the risk-free benchmark, right? So that makes DeFi a lot less appealing because you're not going to take on extra risk to get one more percent. Yeah, I think it's the compounding effect of both of those things. So whenever risk-free rates rise, the pricing on growth assets comes off and the opportunity costs demand that people

need to hit also changes. And so here we've seen a lot of capital flood out of the system um and go you know go back into tradfi so in some way by bringing the traditional like the risk-free rate from traditional finance on chain we can hope hopefully enable a lot of the capital to remain on chain and it becomes kind of like an access product like if you talk scott to a number of startups in the space today, they'll say it's tremendously difficult to go into open bank accounts. And so in this way, we can kind of offer them a product where they don't have to go through an onboard with a bank and then onboard with a broker.

They just get it right there on-chain and they can transparently see all of the loans backing it in real time. Hopefully, the positive side effect of this shrinking access to banking facilities and banking services is that more people try and conduct their banking and their financial transactions all on-chain. We already pay a number of our contractors on-chain and try and pay vendors where possible using USDC or USDT. Yeah, that makes perfect sense. So then what type of institutions are we actually talking about here? Because I would imagine that what you just described only gets past the risk managers of crypto-native funds and people who really understand this, but you're not going to have

pensions and endowments doing it in that manner yet. Yes. I think you're right. So in terms of the entities and individuals who would use this type of product, it's mostly going to be crypto startups, particularly those who are offshore, where they have an additional layer of challenge um accessing banking facilities so high net worths startups that might have recently raised around and want to uh you know want to make sure that their treasury assets are protected and earning a yield that that offsets inflation but as i look out at what we need to get to to bring pension funds into the space. We just need more types of assets and a larger volume of assets that have higher yields on chain. Pension funds have extremely long time horizons, but they also have access to just about every kind of asset class that they could want at the moment.

So I could potentially see some appetite for doing loans collateralized with Bitcoin or with ETH, because those offer relatively high yield. They're quite short duration and can be relatively liquid. And they can't go and get that from Morgan Stanley or from Deutsche Bank. They would have to come to crypto native providers to get that type of asset. So that's kind of like the teaser that we would look for to start to bring them in. And eventually more pension funds will have to come in just because they need every source of yield that they can get yeah i mean in the off-chain world i think a spot etf would have solved some of that right uh maybe giving them a product that they can asset access but to your point a risk the risk management team at a pension or endowment can

take five years just to decide if they even want to touch an asset class. So I assume when you're talking about this is on an extremely extended timeline, especially for crypto where one year is like dog years, right? Yeah, yeah. It's totally like dog years. And I expect it probably got set back a little bit as well, given that a couple of them are kind of burned in Celsius and FTX last year. How much is that, would you say, set back? Or has it helped? I don't know.

How much has that affected your business in either direction? I was talking to Mike Novogratz the other day on Spaces, and he was like, Sam set us back two years. And then I asked Fred Thiel from Marathon the question yesterday, and he said, longer. In two years. So as an industry, but that could be a boon for you, I would imagine, to some degree. Yeah, well, it's a double-edged sword in that it, as an industry, kind of set it back definitely a couple of years, I would say, but it also pointed to or highlighted some of the benefits of doing this in a decentralized way. Or rather, when I say decentralized, I mean using smart contracts, because it is a fundamentally different kind of architecture.

Whether or not the smart contracts are controlled by someone, the fact the assets sit there and can't just be yanked out and kind of, it can't be yanked out and used in an opaque way. And that in the case of lending, you can see the performance of all of the loans on chain and you can see the terms of those loans. Makes a big difference when you're entrusting other people with your money or to lend that out and report on how those loans are performing. So I think it helped our business in terms of clearing away some of the competitors. But the flip side is that there's far less liquidity this year than there was

the previous year. Also, quantitative tightening kind of impacted that a little bit as well. Other things equal, if we just had more liquidity liquidity in the space it would be a lot easier to kind of uh or you know the debt cycle would be on an uptrend again i think the liquidity will come back but it's interesting i have to laugh because what you just described the transparency of the loan and being able to track it and where the funds are you don't even get that in a bank and we've seen bank failures where now I think for the first time in a while, I won't say the first time in history, but the first time in a while, people are thinking, well, what the hell is my bank doing with the money that I deposit?

Yeah. And how I think about the kind of banking system that we're creating today, Scott, if you look at it, the larger banks are getting larger. And so whilst we might smooth out some of the volatility, the system that we're creating is one in which the largest bank, if JP Morgan were to have some kind of risk event and need a bailout, it's getting to the size where the government wouldn't be able to afford to do that anymore. So we've created a system that's less volatile in the short to medium term, but over the longer term has a heightened risk of a systemic failure because you now have a participant who's so large that it could take down the whole banking system. is that you have this kind of concept of anti-fragility where it would be better if we had many smaller banks where the individual failure of any one of those is not cataclysmic to the system.

And that's what I think with smart contracts is it's kind of like we took the software to run a bank and then we externalized it so that anyone could use it. And then if you build, you know, smart contract lending platforms on top of it, but they're using this infrastructure. It's a level playing field where they're a little bit more equal in the capabilities that they have. And then what you could do is have a number of smaller banks operating on top of a blockchain system, conducting lending and borrowing transparently with far less risk of a large, you know, a much larger player failing and dragging down the whole system.

I love that you mentioned anti-fragility because as much as I hate to invoke Nassim Tlaib now that he hates us all, all big winners, but I was going to respond with the analogy of burning, you know, small fires to effectively save the forest and avoid the larger fire. And I think you eloquently explained why that's such a massive risk now. I guess the question then is, does crypto actually, does DeFi help mitigate that risk? Or is it so big that it's going to be a problem regardless? I think it takes time. When I look at DeFi,

we're a really small rounding error on the total financial system at the moment of just the US, let alone the world. And so as I look at how does DeFi chart a path to kind of take over most of the financial system, it needs to have a greater variety of products. So you can't just only rely on over collateralized lending because then it's constrained by the market cap of all of the crypto assets. So that's where things like real world assets come into it. Because then if you could lend in DeFi, but collateralize with something in the real world, you can then write a $10 million

loan without needing $10 million of Bitcoin or ETH pledged against it. So I think that's one thing that helps. The other would just be regulatory clarity and a framework in which to operate. Banks and other large financial players are continually reluctant to use smart contracts, touch crypto assets, because of what they perceive as this kind of regulatory sort of Damocles hanging over their head if they do. If they were to use it, then I think it's not hard to see a world in which DeFi is 100 times larger in the next 10 years in terms of who's participating in it. 100 times larger, but do you see it as a replacement for those legacy systems? Do you see it as a parallel rail? Or do you see it as legacy systems themselves

evolve and start operating on DeFi? Like, will it be JP Morgan and Morgan Stanley and Goldman Sachs? They'll just be using our tools? I don't think so. I think they will start to use the tools, but I think of it as kind of an innovator's dilemma. So you have this new paradigm shift and the people who became the biggest e-commerce retailers weren't the biggest big box retailers. And similarly, when the big box retailers came about, it wasn't A&P who came and capitalized on that shift in retailing. So the way I think about it is those systems or those incumbents are so tied to the way that things are done. They're so deeply invested that now there's this new kind of infrastructure. I can't see them transitioning and just wholesale

replacing their systems. So I think you'd have new players who grow. They might buy the legacy players as they start to take up more market share. But I do think that you need a business model that's oriented around using a new type of infrastructure or technology. And the ultimate thing I think is that this is going to take over the financial system. Because I used to work in in banking and I remember trying to get reports on loan performance. It would take days and you'd need multiple technicians to pull that stuff from a database versus with Maple, we have a dashboard that reads the loan performance in real time because it just grabs it from the blockchain. That updates second by second.

Robert Leonard I love the idea of us buying the legacy systems or taking them over, but it brings too much of when SBF said he was going to buy Goldman Sachs that it gives me hives. Definitely, definitely valid point. But I think if I look at an example from recent history in financial innovation, you had the neobanks come about, but the neobanks come about but the neobanks didn't really own their infrastructure so they really struggled to kind of replace incumbent banks because they're always renting the infrastructure for them from them so you have this

pricing issue whereas what you can have now is you can create an opera um a banking operation that's vertically integrated because its tech stack is the blockchain, you know, plus a front end. And so I think if you own the tech stack, then the business is not constrained by having to pay a tithing to the legacy banks. Yeah, I mean, we see things being built in this space that probably rival or at least a fraction of what can be done in legacy systems, like in a matter of a month. Yeah. And at one one-hundredth of the cost. Yeah.

And how much do then, I have to ask this, it keeps coming up, but do you have a plan for, or how much do you think AI will affect that? I think AI, I see AI as like a cost reducer. So if I wanted to use it in our business, it'd be in two ways. One, to help developers be more productive so that we can build faster. So that reduces the fixed cost of running a financial company. And then also in things like credit decisioning. So if you could have an AI now just be able to read, you know, read a digitized balance sheet, also look at some ongoing monitoring

from a borrower, then you can have it in real time adjust the credit score or the loan terms to a borrower. And so it suddenly becomes much lower cost. So I think AI is going to be a huge boon to financial companies, particularly lending companies, just because it really sucks out a lot of the costs in the business. And obviously the time it would take a human to do it. But speaking of humans doing things, at the beginning, you sort of hinted at the fact that you have to still vet your borrowers, right? And so I imagine that's, you said that's not trustless, right? You have a person who effectively still has to do that. Is that correct? That's right. So you've got a person who will review the borrower's financials, meet management, get ongoing reports of financial performance from them,

and then determine if they're still going to be able to repay the loan. And also what price do you charge them? Because on a whole, you don't expect no borrowers to default. The idea is that the proportion of borrowers who default is less than the overall interest rate that you're charging. So as a whole, yeah, exactly. Exactly. Yeah. Some people are going to die and you're going to have to pay out life insurance, but it's

just a, it's a, it's a numbers game, unfortunately. So does there become a time then when AI or smart contracts largely even replace that? Or do you think that there's always going to have to be sort of the human touch? I think the way it'll go is it'd be like a really good human underwriter having a team of 10 people supporting them and making recommendations. So they'll be there to kind of tie-break decisions or overrule when they need to. But ultimately, most of the decisions can be made by the AI. It's like with pilots on planes.

Really, what they do is they kind of fly for a portion, like take off, landing. But for most of the flight, it's on autopilot. But you want them there just on the one in a thousand chance that something goes wrong. Hopefully less. Yeah, exactly. I was like, how many flights do we fly a day? Okay, that's too bad. Thousands. Right. Yeah. I get the message though, certainly. So we kind of talked about what you're doing already. The fact, obviously, that now T-bills, I think treasury is really exciting. What's next?

I mean, are there other assets that you see as sort of lower hanging fruit that you can either tokenize or access as collateral first? What are the next targets? What are you looking to do in the, I guess, nearer term? Yeah, so T-bills are the nearer term one that will launch that pool properly next week. We're then going to go into investment grade assets, so higher yielding stuff, which will be of interest for some of the larger on-chain balance sheets, whether it's some of the exceptionally large DAOs in the space

that want to hit SOFR plus 100 or 200 basis points. But the other opportunity I see is this one of assets on other chains. So, you know, we used to take wrapped Bitcoin as collateral or wrapped ETH as collateral. But I see a number of people want to have layer one Bitcoin. So by integrating with all of the custodians out there i think we can hugely increase the addressable market and the other one is liquid staked uh eath so i think a number of people are are doing that as a source of yield i think institutional adoption of that is going to be huge and so we're going to uh we're going to try and connect and take that as

collateral so that we can you know so that we can expand, serve those institutional borrowers. And also a ton of people are willing to lend against that now. Do you think they're largely going to go into the liquid staking market? Or do you think that now that we've had Chappelle Shanghai update that a lot of institutions actually would just rather stake directly into the contract as the withdrawal times come down. They're already sub 10 days after the upgrade. That's likely going to only get shorter with net inflows increasing. Obviously, the outflows have decreased very quickly. So do you think that this is a benefit to liquid staking? It makes the whole market bigger? Or do you think that more people are going to stake directly into the ETH contract? I do think you're on the money there that a lot

of people will now go direct to the ETH contract, or they might do it through a custodian. The interesting thing is that if they do it through a custodian, as long as it's sitting there in the custodian's control, if we're integrated with them, we could then accept it as collateral, lend to them on chain. And then you have this kind of twin benefit where they can keep their assets with a custodian, but borrow against them. So it opens up capital efficiency for them. And then somebody who's lending to them is now much happier because they can see that the loan's performing on chain. They can see the collateralization level. And they know that even if we go bankrupt, or if somebody who

underwrite the loan went bankrupt, they could still seize the collateral through the custodian if there was a default. So yeah, so I think we're trying to, we are trying to integrate and bring kind of DeFi and SteFi services closer together there. Yeah, that makes perfect sense. I guess the next question then is, will those custodians even be allowed to custody those assets without them being declared securities? Because we saw, certainly I speak obviously from coming in the USA, and I know that's not the case everywhere, but Kraken obviously just paid a huge fine. Interestingly, the bulk of the withdrawals from the Ethereum contract after the upgrade were crack and forced withdrawals. But there's certainly a huge question mark for a lot of companies in the United States as to whether they're going to be able to continue that staking as a service or whether the structure they

do it within is a security or not. Is that a huge concern or you think it just moves somewhere else? I believe it just kind of moves somewhere else. Yeah, I don't actually think it is that a huge concern or you think it just moves somewhere else? I believe it just kind of moves somewhere else. Yeah, I don't actually think it'll be a huge concern at the end of the day. I think, as we've seen, Coinbase has positioned itself and taken the stance that this is just the provision of a technology service and they're just passing through a base yield. They're not actually doing active allocation decisions there. And I think that'll probably end up being the decision that's adopted. And so to the extent that it remains here, we would try and support that. To the extent that it moves

offshore, that's the great thing about having a global business on chain. You can follow the money. Yeah. I think that's going to be litigated. So I just hope that they win. It's too big a business not to. Yeah, I don't think people are cognizant of just how big of a part of these businesses staking is. I think it's a huge business. It's probably even run as a loss leader,

potentially at some businesses like coinbase just to bring bring in the inflow you want them and get them doing doing the trading yeah yeah yeah so it's kind of like you know if you're a smaller staking provider it's kind of like competing with amazon there because you've got coinbase can run it almost like a loss leader and get it in for other parts of their business um which means it's hard for other providers to price it economically it's their gateway drug to get you onto the platform. I never really thought of it that way yet. Yeah. In the same way, we're kind of trying to do that with the T-bill product. Gateway drug, get people into doing this on chain and give them a really low-credit risk product to get them thinking about other forms

of lending on-chain. How much of your time do you spend thinking about regulation and compliance? Or do you think that what you're building basically can just be deployed wherever it makes sense at any given time? I mean, we're seeing Abu Dhabi, Dubai, Singapore, Hong Kong. I mean, they just effectively, for better or for worse, passed MICA in Europe. We are seeing Abu Dhabi, Dubai, Singapore, Hong Kong. I mean, they just effectively, for better or for worse, passed MICA in Europe. We are seeing some regulatory clarity around the world. Yeah, I think regulatory competition is good because it encourages the US to step up its game

or else it's going to lose innovation entrepreneurship to Hong Kong, Europe, Dubai, Abu Dhabi. up its game or else it's going to lose innovation entrepreneurship to you know hong kong europe uh dubai abu dhabi um so that's ultimately a good thing uh i don't think we can kind of operate uh operate you know with the posture that we can just kind of go kind of just do this wherever we want um because we do serve institutional clients and they can't easily shift their operations we kind of have to you know kind of have to be available where they are. And that means working within the confines of regulation. What you're seeing though, is it just, it becomes a bit of a maze in terms of selecting a path there. So whether it's going through the route of exemptions or, you know,

or some other kind of, some kind of pathway, the hard part has been, it's been very difficult to see what could you actually do to get a registration approved. And that's kind of been what innovators, what the innovators and the people in the space have been saying for years now. We just want kind of an indication of like, what would we have to do to register and be approved?

I don't think we're going to get that clarity in the United States anytime soon. I think they are purposely opaque to be able to just enforce without ever having to give clarity. I mean, you literally get Gensler on the floor of Congress. Unable to answer. I'm a security.

Yeah. Right. I mean, you can't get an answer to the most simple questions. I don't think we can get an answer to the complex ones, unfortunately. Yeah, I do tend to agree. So in that vein, it is good to have other jurisdictions kind of offer a path forward so that at least if you, you know, if you wanted to explore one of them, you know, you could. So I think that's for the positive. Coinbase is doing it,

right? What seemed like what seemed like a threat, you know, we'll go offshore if we, you know, lose if we have to continue dealing with regulators. Well, they've registered in Bermuda. They're apparently registering in other places and have talked about already launching derivatives products, which they don't even have in the United States offshore. So I don't know if that's theater or if it's a legitimate threat. I think that their business is largely dependent on the United States. So I don't think they can build that necessarily elsewhere with a competitive advantage, but we're actually seeing it in real time from the biggest players. There are a number of US trading firms who have now moved derivatives operations to Bahamas, Bermuda.

You're right, it's not an empty threat, Scott. Sad. you know so you're right it's it's not an empty threat scott sad yeah it's unfortunate because i mean like you know you have this uh huge market and you have you know people in the u.s who want to participate in this um there just needs to be kind of a framework whether it's a sandbox or some other you know some other kind of framework to allow people to offer these services. And I don't think that it needs to be an all or nothing thing where they either all need to be allowed or all banned. I'm sure you could set up regulatory sandboxes or other ways to do it in such a way that it's minimizing risks, if that's what people are concerned about. How much retail participation do you have on the platform and how do you address

your average crypto trader or investor who wants a loan for their house or their car or just wants to borrow money? Very little actually. So it tends to be mostly institutions who are depositing. And on the lending side, retail lending is just so regulated that there's a huge cost to setting up that kind of business. I mean, Goldman's took a huge loss on their consumer lending business. And that's because it's really hard to collect on it. It's huge, huge cost to set up and conduct. And so what we've tried to stick to is commercial and institutional lending on the borrower side. And then, you know, because of regulation, it's a lower risk proposition to try and stick to either accredited investors or institutions in terms of taking money into a

platform like this. They understand the risks a bit better. And there's, you know, just there's more regulatory exemptions that you can use to serve those customers. If we could serve retail, I think it'd be wonderful. But we kind of need a little bit more clarity there before we're able to. Yeah. And the bandwidth to vet all those retail customers coming in when you talk about the fact that you need to have sort of a human touchpoint probably doesn't make that much sense. And as you alluded to earlier, in sort of the previous cycle, the biggest appetite for borrowing was basically market makers or institutions. I mean, effectively, they wanted to get short for a hedging strategy or something. How much appetite is there for that?

I know you said it was decreased. And at what rate are they willing to pay? Because to be able to offer those massive yields that we have in the previous cycle meant that those people were hungry to pay even more to be able to borrow the coins. Yeah, it's a good question. So some of the larger borrowers that we had on the platform last year might borrow up to 100 or 150 million at a time. And those strategies, interestingly enough, it was to provide liquidity on the centralized exchanges. So as retail participants go to Coinbase or Binance or Kraken, these market makers are providing execution and the funds they use to do that,

they would borrow from platforms like ours and other CeFi providers. So we see that appetite really correlates upwards when retail trading volume on exchanges goes up. It's been a good start to the year. It's definitely gotten better than it was late last year. And we want to see that increase in trading volume continue. But the rates that they're willing to pay at this stage, you're probably looking at low teens rates on unsecured lending. And if you were to, if you do one-to-one collateralized or greater, you could probably go anywhere from between eight to 14% overall. So it's going to start the really sophisticated players will borrow at, you know,

a few percent above T-bills and, or SOFR. And then the less sophisticated players will be borrowing in the kind of the low teens level. So it's a relatively good yield. If you're a lender and you can get over collateralized loans from a fund that has a longer time horizon, then you could be lending out to them at 13% with liquid collateral and the ability to recall the loans in 48, 72 hours. Yeah. And I've seen that market makers are struggling a bit more in this market because of the lack of liquidity and lack of volume to actually make money. So I just have

to imagine that there's not that many who can confidently take a 13% loan and know that they're going to actually beat it. It's a squeeze out. what you see what you're seeing is the low cost providers of market making which is to say it's a scale game at the moment so those who already had the infrastructure they have the experience traders those are the ones who are doing okay in this market the smaller ones who were you know startups in 2020 2021 2022 they're getting squeezed out just because yeah just like they they they can't they don't have the systems to withstand the fragility and um their cost base is generally going to be too high so interesting it's like i mean you know that's like winter mute and jump

whatever all these guys but it's the same story with mining or anything really in this industry and you even talked about it with banks right it seems that seems to be just a sort of symptom of all the problems that we're having with the financial systems within and outside of crypto is this centralization into bigger players as people get squeezed out. I mean, we saw Bitcoin price basically go from 69,000 to 15,000,

but hash rate has continued to go up, right? So for mining, I know that's not what we're talking about here, but that annihilates anyone who's not one of these pools and actually increases centralization. Yeah. No, we actually looked at doing a mining lending strategy on the platform. We're kind of revisiting it now. So late last year, like September, October, we saw such a tremendous amount of pain in that sector. But we've looked at how would you adjust the underwriting and the loan structuring to miners to work with the constraints like hash rate and hash price at the moment. And so I'm actually interested and confident there would be a way that you could do Bitcoin denominated loans to miners where it hedges their revenues because the revenues are in Bitcoin. You do it at a lower

LTV and you do more conservative pricing against the ASICs. The problem was that that whole cycle- I was just going to ask if you could collateralize the ASICs. Yeah, I was going to say, could you collateralize the actual machines? And especially now they're so cheap, but yeah. Yeah, yeah, 100%. But one of the other interesting theses I have, since you were talking about like kind of the washout of people in the consolidation is, do the energy providers or the energy producers, do they just come in and start buying the miners?

Because if you're a Ramco, you're one of the lowest cost energy producers in the world. So you can theoretically have the highest margin Bitcoin mining revenue. I've heard that that's happening in Russia. I spoke to Fred Thiel recently, the CEO of Marathon Digital Holdings. They're one of the biggest miners. And he said that whether it's the government or a private company that's effectively the government, that in Russia, they're seeing a huge amount

of hash rate coming online. And obviously, since things are largely socialized there, it's probably just effectively a wing of the power company and the government that's doing it. And I think that makes a ton of sense. Yeah, yeah, yeah. a wing of the power company and the government that's doing it. And I think that makes a ton of sense. Yeah, yeah, yeah. It's well, you know, it just it also eliminates like a huge cost of running an energy business, which is distribution.

If you just hook up the energy production to miners, you don't actually. Yeah, at the site, then you don't actually have to connect the power assets to the grid and you don't have to actually worry about distribution or sale of them. Exactly what he said. He said the transmission lines are the biggest problem. That's obviously why Bitcoin miners go where they are, but that's also where you can get the wasted electricity. It seems like such an almost irrelevant cost to do it if you were the actual power company. Literally just hire a team that knows how to do it and just get it done. Yeah.

And it's so cheap right yeah basics yeah yeah no super super low cost and for some of them like the power just gets wasted otherwise so it's it's effectively a zero marginal cost revenue stream yeah yeah if not negative because the waste is it costs you something right and so to be able to use that it's pretty incredible also i think this would solve a huge huge problem for miners having to sell their coins, right? If they can get effectively get loans for you, that keeps them afloat, they don't have to sell equity if they're traded and they don't have to sell off their supply. I think that that then helps the market in general.

Yeah. Yeah. No, it's actually a very healthy hedge for their business. As long as they have some ability to forecast how many units of Bitcoin they'll be able to mine in the future, then they effectively lock in that forward revenue by taking the loan in BTC now so that in future they don't have to sell it. They can just use the proceeds of the Bitcoin mining to repay the loan. You should do that.

Working on it, working on it. I want to go back a bit to retail. Obviously, you said you're not really servicing them. It doesn't make much sense. The people that were servicing these retail loans were the Celsiuses and BlockFis of the world. So is that were servicing these retail loans were the Celsius's and BlockFi's of the world. So is that just kind of dead for now? Yeah. I mean, it's hard to see another provider coming in and servicing that clientele because

you need consumer lending licenses in almost every state in order to do so. And just as well, the collection costs and the administration costs of serving that market is huge. So I can't see anybody coming out and doing loans to retail in stable coins or against Bitcoin anytime soon. There's the consolidation, man. Yeah, it's just like a widowmaker business at this stage. Sucks to just be like the average guy who wants to really participate in all of this, especially if you're in the United States in 2023.

It just sucks. Yeah. Well, I would say that's the clientele that will probably go to Aave or a compound or a maker in this kind of market. A decentralized permissionless platform is probably the only player who can serve that need for somebody who wants to just take out a $5,000 loan against some Bitcoin or some ETH. Yeah. I mean, I think it's clear that there was a washout of the entire industry, but I think that really the story that doesn't get told is how well DeFi actually performed through all of that. I mean, people, I think, obviously look at the decreases in TVL over the time and just say it kind of died. But like the loans were, you know, the loans were liquidated in an orderly manner and they were collateralized and smart contracts kept humming on.

And to be fair, TVL, I think, is up 30 percent across DeFi in 2023. So at least there has been a significant recovery alongside the price of Bitcoin and everything else. Yeah. Yeah. I mean, the total volume in DeFi DeFi I expect is going to track, you know, overall crypto market cap pretty closely. It relies a lot on, you know, on the coins that are driving the market cap increase as collateral. So that makes total sense. But yeah, I mean, the thing about DeFi was that it was kind of, you know, algorithmic

and it, you know know it just functioned properly in terms of closing out risk like where a lot of over collateralized lenders lost money was you know the period between when they first issued the margin call and when the person actually responds to them on telegram um was wide enough that their their loan went from over collateralized to uncollateralized under collateralized um we We even in the under collateralized lending space, because that's where Maples played, the transparency of the lending on chain that also forced the people approving the loans

to be much more careful because they couldn't rely on collateral to backstop losses. So even on Maple as a platform as a whole, there were only two borrowers to actually default over the entire course of last year oh yeah it's two more two more than we would have liked but you know compare that against you know nearly two billion in loans that have been done but you said that's part of the business I mean that part of the business is calculating the acceptance for how many is appropriate and and knowing where you'll make

it up on the other side I I have to go back to the fact that you said, like you guys denied Three Arrows Capital, right? And I've told this story. I was in Dubai, maybe in February, and I crashed a meeting with the Three Arrows Capital guys because they were raising for OpenX or whatever. And I just wanted to show up and get some answers. They were not expecting me. And I said, listen, I'm a Voyager creditor. So I've touched on all this. And I said, what the hell did you tell Steve Ehrlich at Voyager? What lie?

I said, what lie did you tell him to get $700 million? Like, what did you you obviously, you know, had to lie about your leverage positions. They would have never given you money if they knew what you're doing with it. And he says he literally was so hungry to give someone $700 million to be able to pass his yield on. He didn't ask us for anything. Yeah. It's not hard to believe. There was so much capital floating around the space that you had all these businesses that had liabilities because they would borrow the money from people promise a yield and then they've got to go put it to work and so like that over that over supply of capital caused a huge decrease in the quality of underwriting that was done on counterparties and also there was there was actually a viewpoint that

you weren't necessarily lending it to people as much as you were outsourcing yield generation to them. So a lot of people viewed it as like, I partner with a market maker and I outsource my yield generation to them. And it's like, no, no, no. When you give someone money, that's an uncollateralized loan. Yeah. That's a definitional stretch, if ever I've heard one, but that is consistently what people were saying. But we gave them the money to earn the yield, but no, you just gave them the money. Stop it right there. Yeah. Yeah. Well, consider any token project, right? And you talk about, there are a number of token projects who give a loan to a market maker and they can be super against uncollateralized lending, but what are the tokens

to the market maker if not an uncollateralized loan and i can guarantee you if you talk to nine out of ten of them none of them have ever seen the financials of the market maker that they just gave their tokens to um and so that's you know effectively them giving out like a few million dollar loan to somebody without actually having any idea how much equity is on that balance sheet. So they can do that while simultaneously holding this idea in their mind that uncollateralized lending is stupid or silly or careless. And they're just not viewing it as such. And that's kind of a trap and you have to feel for smaller projects because A, they're probably actually not even sophisticated enough to vet the financials of that market maker anyways. Because if you're a developer and come up with

a project idea that doesn't automatically make you an amazing CFO. And I think that's been a huge problem is that people didn't have CFOs and didn't know how to manage their treasuries. But also, if you want your coin to be tradable, you have to have a market maker because it's low liquid and you can't get on an exchange. So your token literally will not exist in the minds of, you know, retailer traders, if you don't have a market maker creating that market. That's true. Often you can't even get listed on an exchange if you don't have an arrangement with a market maker. I don't think people understand how much is happening in the background here just for you to be able to buy and sell a token on an exchange.

But do you think that that's going to become more sophisticated and that people are going to become better at this I mean I think we've seen you know everyone says that we haven't it's funny I have these conversations with maybe people who don't get the market as well they're like well as long as the doge and shib and all these things exist it means there's still too much excess in the crypto market that has to be washed out but I say to them, you clearly haven't looked at the tail end 95% of coins that are literally at zero. I mean, things that were doing 100Xs on pre-seed launches or whatever in 2021 are worth fractions of a penny a coin. And even the pre-seed investors went from having like a hundred grand to $5 worth of these positions. So I do think we have seen that, but are the new projects that come out in the next cycle just going to be forced to use predatory

market makers and collateralized loans? Have we learned anything? I don't know. It's a tough one. I am seeing more people. I'm seeing more people come out who kind of offer the service of vetting market makers. I think Glass Markets is an interesting one where I've spoken to the founder there. But I put it this way. I don't think we have a great answer yet for if you're a project, what do you do other than give a loan to a market maker? You kind of rely on you you kind of rely on their reputation some you know some of them will start giving out financials i think but also it'd be kind of interesting if somebody solved that problem with a protocol level

where like a market maker stakes some kind of collateral to borrow uh the tokens from a project it's free money for the big market makers i mean that's free money for the big market makers because it's the yet again the central problem. You're going to go to the Wintermute or whoever it is because you know that they're a name. I'm not saying there's anything wrong with these companies, but that's literally how 3AC continued to get loans and loans and loans from everyone because they were 3AC, not because they had shown anything. Yeah. Same with Alameda like the number of projects who had taken an investment from them and then used them as as their market maker um

because of that um it is interesting though like one of the things i had one of the things i haven't seen i haven't seen um new token projects stop coming out um like it's the pace of the pace of new projects starting has slowed a bit um but I think a lot of them are still bought into the idea of issuing a token when they launch because of the ability to generate interest in the product, bootstrap participation and reward early supporters as well. Yeah, I think that there's been quite a few that sort of raised and then were waiting for the bear market to end because they just didn't like the environment of launching a token that was going to go straight down. But I think that that's thawing.

I agree with you now. I don't think people, even though they maybe should be, I don't think they are living in fear necessarily of the market. I do think that they're coming out. But that just makes me scared that we're going to see, I mean, humans are going to human, right? But the same repeated mistakes into the next cycle. Yeah. What is it they say? History doesn't repeat, but it rhymes.

Yeah, it certainly does in this industry. And history is like three years old instead of 300 years old. So it's like... Yeah, yeah. Dog years. As the cycle's tight, you're like, we just did this, man. It was like last week. Yeah, yeah. Dog years. As the cycle's tight, you're like, we just did this, man. It was like last week.

I mean, people don't know, we're recording this on like April 20th. And like, we just saw this Pepe coin and go up, you know, thousands of percent or whatever. And CryptoGPT raising $10 million at $250 million valuation just because they put GPT in the name. I saw a bear, is it Bearachain just raised it like a $400 million valuation. Yeah. I mean, literally like, I mean, and I,

and I think the bunch of anonymous people behind it are four anonymous guys with like bear eye in their Twitter name or something. Yeah. Yeah. But I think I literally joked about it that I would prefer if you're going to make a meme, at least call it bullet chain, you know,

like some, some hope. It's like the government just now we just call it the bad thing that's going to rug pull you instead of even pretending. So listen, I know we're kind of getting up against time here. Anything I might have missed here? Anything that you guys are looking

to build maybe further down the road that we haven't talked about or anything you're excited about? No, no. I think we covered most of it. I mean, look, next week we're aiming to properly launch and do the first loans out of the cash management pool, which would do T-bill collateralized loans. And then keep an eye out for early June. We want to have this Maple Prime product live, which would be the integration with qualified custodians. So, hopefully opening up a wider universe of lending options for people that includes tokens on other chains, whether it's AVAX, Bitcoin, maybe even Baruchain. Who knows?

It's coming, man. It's the protocol of the future. Well, I for one hope that you eat JP Morgan and Goldman Sachs lunch and that you outright replace them and that we start hearing your opinions instead of Jamie Dimon's on the mainstream media. So I'm definitely cheering for you.

Where can people follow you and check out Maple after this conversation? If you go to Twitter, you'll find us at Maple Finance. And then the website is maple.finance. So you can reach out to us through either of those channels. And if you like syrup, you'll love the website. It's just everywhere. Syrupy sweet.

I'm a big syrup fan. It is very syrupy sweet. It's a great name. Sid, man, this was really an awesome conversation. I want to just invite you back now. So I hope that you're willing to willing to do this again in the future. Also, it would be really fun to potentially get you on like some spaces or some of our panels. So I really, really loved your perspective and what you're building. So thank you. Love to. Thanks, Scott. Appreciate it.

Thanks, Scott. Appreciate it. Thanks, Ted.