Unchained - After an Incredible 2024 for USDe, Ethena Plans to Supercharge Growth - Ep. 751

Starting point is 00:00:00 Kendall has roughly 50 to 60% of its TPL is built on SOSD. You know, Arbe added more than a billion in a couple of months. And so whether sort of like other DFI apps like Athena or not, you kind of have to engage with SOSD in some way because it's becoming that sort of important to the rest of the defy. Hi, everyone. Welcome to Unchained. You're a no hype resource for all things crypto. I'm your host, Laura Shin.

Starting point is 00:00:26 We are now featuring quotes from listeners on the show. and to date we have one from Luke Youngblood, a past guest, who's working on Moonwell. He commented on the show about how a court struck down the sanctions on the tornado cash smart contracts. And he said, judges really care about what things are called. For example, the fact that smart contracts are called contracts led to the bad lower court decision that ruled contracts were considered property and could be sanctioned, even though they more appropriately should have been called open source public goods

Starting point is 00:00:53 or open source algorithms. To have your comment featured, write a review of the podcast overall, or leave a comment on our video on YouTube or X. This is the December 17th, 24 episode of Unchained. Robin Hood's Defy Mobile app takes no fees on same chain and cross-chain swaps. Use Arbitrum's Layer 2 to swap with low network fees in just a few taps. Other fees may apply. Download on iOS or Android today.

Starting point is 00:01:22 Pocodot is the original and leading Layer Zero blockchain with over 2,000-plus developers. And the Pocodot 2.0 upgrade will be a massive accelerator for the ecosystem, making it faster, more secure, and adaptable. Perfect for GameFi and Defi to build, grow, and scale. Join the community at Pocodot.network slash ecosystem slash community. Today's guest is Guy Young, founder of Athena Labs. Welcome, Guy. Hey, thanks having me.

Starting point is 00:01:51 Athena Labs' synthetic dollar, USDE, has had an incredible year. It launched in February and is now. the third largest stable coin behind USDT and USCC. Since November 1st, just a month and a half ago, its market cap has more than doubled to nearly $6 billion. And it's even overtaken die, which is a longstanding defy native stable coin. So how do you feel about these achievements? And did you ever imagine it would grow this quickly?

Starting point is 00:02:17 Yeah, I think we're obviously generally pleased, especially with the fact that I guess we saw a bit of unwind in the supply in the middle of the year when the market cooled off. I remember in the first podcast that we did together, we sort of did describe the fact that the product was going to be quite reflexive to the cycle, i.e. when, you know, interest rates are high within crypto, when sentiment is quite bullish, the product does quite well. And then when it's not, it really was intended to sort of shrink. And we did sort of see that through the course of this year. So I was most pleased with just the mechanism of design working as we did describe. And I was actually more pleased that we unwound more than a billion dollars of supply with zero issues whatsoever. I think, that that to me was a pretty strong validation of the design to the rest of the market. And I think it actually gave people a bit more confidence to be able to come in where a lot of large pools of capital that we're speaking to, which is unwilling to actually engage with the product when it was so young and new in the beginning of the year without sort of seeing how it performs through different market conditions.

Starting point is 00:03:13 And so I was most pleased, I think, with actually the downtrend and being able to come back from that. And, yeah, obviously, sort of happy with where we've got to now. But I think the scope and opportunity of what lies ahead, I think is actually much larger than we sort of envisaged in the beginning. I did think we would get to the size eventually. I just didn't think it would happen this quickly. And I think sitting where we are now, the size of opportunities, like even 5x larger than I thought it would be at the beginning of the year. Yeah. I mean, the thing about the unwind is or reminds me of the time when I guess it was around like 3AC era, you know, we saw a lot of unwinds in defy that just happened very, you know, as planned.

Starting point is 00:03:52 and what's the word I'm looking for, just very smoothly. And obviously there was just a lot of turmoil in the centralized part of the market. And one other thing is just that I think like it shows that, you know, I asked you about these big accomplishments recently, but you were most proud of like how you weathered that storm, which given obviously everything that happened in 2022 makes sense is like that's, that moment when you, you know, kind of face your your biggest challenge. And yeah, you came through it. So another thing is that just a few days ago, Athena Labs X account tweeted, in less than two months,

Starting point is 00:04:31 USDA supply has grown by more than $3 billion. And this is more than the total ETH ETFs combined, which at the time was $1.9 billion. And then also the total Bitcoin ETFs, excluding Ibit, which is $1.3 billion. And you just wondered, you know, what that said to you about even outperforming, you know, some of the most successful ETF launches in history. Because obviously since this is, you know, that's just like a, the centralized CFI market. It's something that is, you know, a way of investing that a lot more people are familiar with. And then here you have this much more novel instrument.

Starting point is 00:05:09 So I just wondered if you had reflections on why that was the case. Yeah, I think again, I was even quite pleasantly surprised with the speed of growth. The fact that it's outpacing ETFs, I think is quite insane. even to me. I did not expect that in the last couple of months. I do think it's a pretty strong demonstration, though, that there is actually just so much capital in the world that is looking for a return on dollars. And I think we don't actually appreciate that being able to generate, you know, Athena's APY recently has been north of 20% pretty consistently to be able to do that on billions of dollars of capital. We really haven't even scratched the surface of what's possible

Starting point is 00:05:44 there and the different pools of capital that will find that interesting. I do think the sort of reference to the ETFs is most interesting to us just in terms of how we think about the next steps and the evolution of where Athena is going. So I think we, even in that original chat that we had, we sort of spoke about the three different components that we viewed as the stepping stones for us to sort of grow. And I think starting with Defi made sense. You have a higher risk appetite there for people to engage with the product that look pretty new and sort of different in its construction. CFI was a big next step for us. And we had some reasonable growth in the last few months on different exchanges as USDA became collateral there to trade derivatives.

Starting point is 00:06:22 But really, the much larger opportunity in the bit that I'm focusing, sort of 80% of my time on at the moment, is actually institutionalizing the product to be able to export it out of crypto into traditional pools of capital. So basically trying to set up a regulated wrapper around USDA where you can actually have those trillion dollar asset managers plug in directly into Athena and all of the assets that sort of sit behind them, being able to find a very clean and efficient sort of route

Starting point is 00:06:46 into the product. I think the scale of opportunity there is just so much bigger, primarily because the cost of capital for people who sit within tradfire is that much lower than people in crypto. So, you know, the return that Athena generates is obviously interesting on an outright basis, but actually relative to what people can achieve within crypto is not that interesting. When you compare that to what other people are doing within a hundred trillion dollar plus fixed income market in the real world, as rates start to fall in the real world, this becomes exponentially more interesting because the yield on this product actually goes in the opposite direction. And so for us, yeah, I think the size that we're at now, I think we can sort of get between

Starting point is 00:07:23 5 to 15 billion just serving the market within crypto, but the much bigger opportunity for us is actually packaging it up and exporting it out as a very easy instrument for Tradfite to get into dollar denominated returns from crypto. Oh, wow. This is so interesting. I definitely want to ask you a little bit more about that. But first, why don't we actually just talk about USTB, which is announced. saying the date before this podcast comes out. And why don't you first explain what that is and how it

Starting point is 00:07:50 works? Yeah, I mean, that's a very simple staple coin. So it looks almost the same as USDC and USDT. I think the only difference here is that we're backing that stable coin with BlackRock's Biddle Treasury Fund. So instead of sort of managing the Treasury assets ourselves or sort of delegating that out to different banks or different service providers in the world world, you're basically just having BlackRock look after that entire process with securitize. And so it's a It's a completely different product to USDE, and essentially the thesis here is that Athene has obviously got interesting relationships and connections with different centralized exchanges within crypto.

Starting point is 00:08:24 And we think being a neutral piece of infrastructure across all of these exchanges, which is broadly owned by the exchanges, is an interesting angle to basically provide a neutral stable coin for them on their venues. And so it looks very similar to a normal stable coin. It's not natively yield bearing. So retail users buying into it do not receive a yield like you would with. the Treasury fund. All we're doing is sort of backing it with BlackRock's product and then trying to be a conduit that we can sort of spread it as collateral into different centralized exchange

Starting point is 00:08:53 venues. And how did that partnership come together? And were you mainly working with securitize, the blockchain partner for that? Or were you also working with BlackRock or, yeah, just how did that all work? Yeah, I think we sort of had the product idea a few months ago and just had a bit of a process where we went out to speak to everyone who was providing these sort of treasury product, interacted with both the Securitized team and the BlackRock team directly on this. And I think, you know, in light of what I was describing there, our ambition is obviously to take, you can really think about the relationship here is we're taking a trad by asset from a trad by asset manager and securitize and then trying to be a distribution partner that sort of spreads

Starting point is 00:09:31 it through different pieces of the crypto system. And then equally, what I was just describing their thesis earlier, our ambition is to take USDA and then work with people who have distribution channels into the real world. And so it's almost like a similar type of relationship, just working in different directions. And that's sort of what we're trying to build on with both of those parties. Yeah, we just had Robbie Mnichnick on the show. And it's just very obvious from talking to him that he, in a way, I think he's like approaching a very similar to actually what you're describing where, you know, they have this sort

Starting point is 00:10:02 of three-pronged approach. But he definitely is looking at, you know, how these worlds can intersect. And just when you talk to him, you get the feeling that he, yeah, just is a lot more crypto-native than you would expect. So one of the other things I want to ask about is, well, actually, so for this particular product, I wondered, you know, I saw some people expressing concern about how it would work in a negative funding rate environment,

Starting point is 00:10:27 and I wondered if you could explain the risks there and how USTP would handle that. Yeah, so this was a piece of feedback that I think we took on from the market since we last spoke. I think it was a mistake of mine actually in the beginning, not actually designing the product as it looks now. I thought that people would care more about, you know, having a purely crypto-native asset rather than something that was just a bit more resilient and something that you could sort

Starting point is 00:10:51 of understand how it would have worked in a more clear way during the bear market. So, yeah, the short story there is that instead of, you know, having USDA fully backed by just the, you know, cash and carry per positions that is sort of the core piece of the product at the moment, you have the ability to basically just close down the positions and then sit in some other form of a stable coin or even USD TB ourselves. And so that's sort of part of the thinking here, which is if in a scenario you need to close down all of the positions within USDE in a bare market or if funding is negative, you can actually just move into your own product rather than sort of leaking that value out to a circle

Starting point is 00:11:28 or a tether. And so really the two products sort of work side by side, which is in 98% of the scenarios when crypto rates look more attractive than Tradfi rates, you have USDA function as it looks now. And then to the extent that that environment changes, you always retain the optionality to be able to just close down and move into USDTV and sort of retain that balance sheet within your own products. And so earlier when you talked about how now you're spending 80% of your time on, you know, these ideas run how to package your products for TradFi. I was curious how that has changed your workday. Like what kinds of things did you use to do

Starting point is 00:12:07 for it and what are you spending more of your time on now? And does it just involve like dealing with a lot more kind of regulatory things in different jurisdictions or yeah just describe how you're trying to accomplish that? Yeah, I think that's fair. I mean, the core product by the thing functions day to day without me having to sort of be involved with that much. It's sort of, you know, when there's demand, people come in and when there isn't, it comes out and that sort of runs very smoothly now without my involvement. It's really just like what are the entities that we're trying to face into and build business development type relationships with. In the beginning, that was really just getting the core building blocks of

Starting point is 00:12:40 DeFi lockdown. So we're kind of on every single major DFA application. Now, you might have seen the growth that we had with Arbe recently, which has been a pretty popular integration. And like at the moment, I'd say 80 to 90% of the DeFi apps that really matter was sort of integrated there. The other piece with CFI, I'd say around 60-ish percent of the market we've covered off. And that was where I'm spending most of my time in the months before now, just really trying to leverage integrations over there. And so, yeah, it's, as you said, just trying to think about structuring regulatory type pieces and then just facing off to different type of entities in terms of how you're pitching and presenting the product. And do you literally present directly to regulators at any point?

Starting point is 00:13:22 Or just? Yeah, we are at the moment. So there's obviously quite a bit going on with Mika at the moment, which we've made quite a bit of progress with outside. There's nothing to sort of formally announce there, but we have sort of got a strategy that we're pursuing on that front. But yeah, we're actively sort of speaking to regulators on the front at the moment as we sort of continue to go. And obviously, the story of crypto regulation has been a huge one generally for the last few years. And I was just curious, like even in, I guess, you know, I don't know how many months you've been doing this, but in whatever time that is, what is your perspective on just how the jurisdictions are, I guess how forward looking they are when it comes to crypto or, you know,

Starting point is 00:14:04 which jurisdictions are kind of easier to work with if you're trying to create this type of product? Yeah, I think that obviously materially changed, or at least the perception of that difficulty changed, I think, after we had sort of Trump come through. And I think there's a big sort of question mark around like actually how does that crystallize into change, you know, from January going onwards. And I think that that's one piece where we've seen a lot of speculation, but we don't actually know what's going to happen in practice. That's one piece that we're just watching closely. I'd say generally, this is not sort of an Athena comment, but I think generally the market's perception of Mika in Europe is that it's pretty difficult to actually work within those constraints.

Starting point is 00:14:38 So I think you've seen even entities like Tether, right, which hasn't engaged much to try and actually change their product to get a MECA licensing. You've only seen Circle actually achieved that at the moment. So I'd say those boundaries within Europe are actually quite difficult, but we are sort of doing that work because we think it's a worthwhile thing to do. And then I think sort of the full spectrum, Asia has generally been an easier place to sort of get this stuff done. Okay, okay, this is so fascinating because actually I feel like a number of regulatory people I've talked with have said that, well, although I guess normally they're comparing the U.S. to Mika.

Starting point is 00:15:12 So they're saying the fact that Mika exists at all is super helpful and it's really great, but you actually believe it's not that welcoming or easy to work with as a builder. So what are some aspects of it that you feel could be improved? Yeah, I don't think it's actually difficult to deal with as a builder because they have actually defined what a framework looks like. So you do have something to engage with at least. I think there's just some pieces around the edges. And again, this is not my day-to-day era of expertise, but it's sort of what I've gleaned from just a few conversations, is just very strict requirements around even where the assets are held.

Starting point is 00:15:46 So you do have a requirement to actually hold assets within European banks, which I think actually makes less sense than some of the structures that you see within the US where you can have a stable coin with assets that are sitting just in an isolated SPV. So if you look at something like PYUSD, for example, The actual treasuries are sitting within a bankruptcy remote SPV rather than having credit risk to a bank itself. And I think there's just some pieces around the edges where the industry is actually just questioning, does that make sense?

Starting point is 00:16:11 And I think that that was a piece that Tether pointed out in particular. So, yeah, I wouldn't sort of characterize it as it's difficult to work with. It's just that there's some pieces of questions or contention around how things have been defined so far. And then as you mentioned, the election in the US really changed the calculus over here, but it's kind of unclear where all that is going. And I wondered, you know, we're at this point in time where Athena's super popular is doing very well, but US users can still not access it.

Starting point is 00:16:39 And I wondered, like, what are the things that you would look for in terms of changes in the political and regulatory environment here in the US that would, you know, make you consider launching here? Yeah, I don't think we have a very well-defined. We need to see X to be able to change. I think these things are sometimes a little bit softer, which is maybe just seeing less of what we did see in the past, which was pretty heavy-handed

Starting point is 00:17:00 and what I think was pretty aggressive sort of enforcement on existing projects that were out there and trying to innovate. So, yeah, I don't think we've fully come up with a checklist of we need to see X, Y, Z. Some of it is a bit softer just to sort of gauge generally how the sentiment sort of feels towards crypto projects.

Starting point is 00:17:17 But yeah, I think most of the industry is actually just waiting to see exactly what it is that they're planning to push through because my one concern at the moment is that we as a space have sort of baked in a ton of optimism around what that actually means when we see a change of the administration. And as always, and we continuously do this, we saw the same with the ETFs at the beginning of the series, that we sort of bake in 110% of optimism, always with the most blue sky scenario. And then when

Starting point is 00:17:42 the reality sort of comes through, it's not always sort of consistent with that. So I think that is the one piece of caution on our side, which is you clearly seeing very positive pieces coming out, whether it's, you know, world liberty financial, all of sort of like the rhetoric that we've seen towards Defi in general. But I think we're just pausing and waiting to see what comes through in reality. And so I don't know how much you've been engaging with US regulators or anybody, like policymakers even, but since the election, do you have any kind of sense of how it is changing or how much it's changed?

Starting point is 00:18:17 The honest answer is no, I think, just because we don't really have any nexus within the US, don't sort of serve U.S. customers at the moment. We don't have much of a dialogue there just because, you know, we don't have any users there. So, yeah, the honest answer is that we have. haven't sort of got much color there. All right.

Starting point is 00:18:31 So in a moment, we'll talk a little bit more about the risks with Athena, but then also some of the other pretty amazing usage and other stats that we're seeing within Defi. But first, a quick word from the Spatsuits to make this show possible. Pocod is the original and largest layer zero blockchain with over 2000 plus developers. And the anticipated Pocodot 2.0 upgrade will be a massive accelerator for the ecosystem. upgrading the infrastructure with eight times higher transaction throughput and twice as fast block times, perfectly tailored core time for the needs of every protocol,

Starting point is 00:19:05 trustless bridges internally and into Ethereum, Cosmos, Near, Binance Smart Chain, and revised tokenomics and the implementation of a token burn to reduce inflation. Perfect for GameFi and Defi to build, grow, and scale with one of the most active crypto communities in this space. PogoDOT recently announced a partnership with mythical games, bringing top games like NFT rivals with over 650,000 players and 43 million transactions to pave the way for GameFi and the Pocodot ecosystem. Get your Web3 ideas to market fast with economics that work for you. Think big, bills bigger with Pocod.

Starting point is 00:19:41 Join the community at Pocodot.network slash ecosystem slash community. Big news for Dify traders, Robin Hood Wallet, Robin Hood's non-custodial wallet mobile app, has partnered with Arbitrum to make access to LXISTER. L2 swaps easier than ever. Enjoy gasless swaps and cross-chain swaps on Arbitrum and other networks. The best part, Robin Hood Wallet takes no fees on same chain or cross-chain swaps. Other fees may still apply. With gasless swaps, you can pay network fees with the same token you're swapping instead of ETH.

Starting point is 00:20:14 Cross-chain swaps make it incredibly simple to swap crypto without any manual bridging. Download the Robin Hood Wallet mobile app today on iOS or Android and join people in over a 140 countries exploring Web 3 with Arbitrum. The second comment from Luke Youngblood who said, there is a very old concept that dates back almost a decade in Ethereum called the owner role. I believe OpenCephalin first developed contract systems that had this concept of an owner. It's just a name, but it's really bad that we as an industry call this role that. If you're developing a new smart contract system, please name this something else like governor or minister.

Starting point is 00:20:48 Your legal team will thank you later. Again, if you want to hear your comment featured on the show, please write a review or leave going to comment on an episode on YouTube or X. Back to my conversation with Guy. So as we mentioned earlier, you had been building or you have been building this reserve fund, which is a cushion for any future negative events that would require Athena to be protected in some way. Have you ever had to use it or have you had any particular lessons from this year that have caused you to think about how you might use it differently? Yeah. So we haven't tapped into that at all. And I think in that downtrend period that we were talking about earlier,

Starting point is 00:21:23 we did have a few periods where there was brief negative funding, but we didn't actually even average one week with consistently negative funding. So you'd have days where it went negative. I didn't never sort of average that for a full week. I think the lowest yield that SUSD you produced was around 4.5%. So just under Treasuries, and that was for like a one-month period where we're sort of at the lows. So, yeah, we haven't tapped into it at all. I also think with the change in the sort of design of the product where we have the option

Starting point is 00:21:49 to close the sort of current positions and just sit in some form of cash or like USDTB, the requirement for that type of reserve fund is just not as high, basically, because you don't need to sort of sit there and bleed out in the same way that we'd sort of propose before. So we don't plan to sort of, you know, take that cash and just say, like, it's not needed anymore or anything like that. I think we're just leaving it there in case something ever does happen just for benefit, I guess, of the protocol. But I think my honest view and things is that it's much less required now just in terms of the design of the product. And so we had talked earlier about just, you know, how you're switching to or not switching maybe,

Starting point is 00:22:28 but focusing a lot more on this intersection between crypto and TradFi. And I just wanted to also call out, though, Athena has really, you know, kind of skyrocketed past a bunch of crypto-native protocols in a number of different metrics. but one of them is that it's been amongst the top generator in fees. There have been times when it surpassed Tether, Uniswap, Ethereum, Jito, Solana, etc. And so I wondered if you had thoughts on why it's grown so quickly that it has surpassed these longstanding popular crypto products. Yeah, I think it's, as we're discussing, the product is very reflexive to the cycle.

Starting point is 00:23:06 So as those rates start to come back, I just think the demand for a dollar with the type of return that Athena's producing isn't even like $5 billion, it's north of 20 basically, and it's just a matter of time between like where we are now and sort of getting there. But yeah, I think the business model for Athena is pretty simple, right? It's just the supply of the synthetic dollar and then the interest rate that's being produced. But I think people don't fully recognize what it means to actually produce 25% on multi-billions rather than, you know, 4%, which is where normal fear staple coins are sitting right now. So you don't actually need to be at the size of supply of a circle, for example, 40 bill, had to be producing a lot more cash flow than them just because of the gross revenue

Starting point is 00:23:45 that's generated off of the product itself. So yeah, as you're pointing out, we're generating north of a billion and a half of revenue at the moment. That's just like 25 employees and having been around for like less than a year. And as I said, I think that that number can be 3-4X where it is if we continue on the path that we are at the moment. So this is kind of to me, I think what actually interested me about crypto in the beginning, which was less around the sort of like decentralization pieces of DFI was actually that when financial services can scale at the marginal cost of software, capital can move around like the world at the speed of the internet. You see things like this, which is like billions of dollars can flow into something which is a new idea. And you don't need

Starting point is 00:24:25 200 people to sort of run something like this. You can be producing those sort of, you know, billion dollar plus revenue figures in that space of time with basically no cost base. So yeah, I think we're pretty excited about the core business model. And I think it becomes more interesting actually when rates start to fall because the business model of like a tether and circle becomes a lot less interesting right when rates are closer to zero if you remember in 2019 in 2020 no one was looking at tether and thinking this was the best business model that was ever great they actually thought that after a rate 25 percent so I'm not going to sort of like call the top of the rate cycle or say that we're getting back to like zap very quickly but like

Starting point is 00:25:01 directionally that's obviously where things are going and yeah that's kind of the moment for Athena to shine which is actually when rates are sub 3 percent sub 2 percent I think we're comfortably going to be making more than those businesses, even without sort of massive growth on the supply side. And I also wanted to ask you a little bit more about the usage. I saw that Blockworks research had recently tweeted about the different ways that Athena was primarily being used. Pendle is the top destination for staked USDA with assets over a billion and AVE is second.

Starting point is 00:25:30 And I wondered if you had had like expectations around how you thought people would use it and then if you've been surprised to see how they're actually using it. Yeah, I don't think it's actually too far away from expectations. I think we did actually, even in the pitch decks before we had an actual product, we're describing what's going on with Arveh right now was sort of one of the core use cases that we did envisage. I think the one of the most exciting. And I think it's something that Arthur's actually spoken about on one of your podcast before, which is really just like the emergence of a new interest rate market that hasn't existed within crypto before. And you've never really actually seen fixed the floating interest rate type swap products emerge wearing tradfi. That's like a. multi-trillion dollar sort of notional industry. And really what we're putting in place here is just an ability where people can take one side of the market to either get exposure to a floating rate of interest or just lock in a fixed one. And it becomes very interesting when you can start to use that sort of fixed rate collateral in different defy applications. So you could even put that on Arbe or Morphe, for example, to be able to lever it up. So yeah, I think it's been really

Starting point is 00:26:33 exciting for us and probably the bit that I've enjoyed the most at Athenae which is like basically just giving DeFi a new building block to go and build new and interesting things, which didn't exist before. And I think this cycle, we sort of complained a lot that we haven't seen any real innovation within DeFi that was sort of zero to one like we saw in 2020. But from my perspective, it's sort of the stuff that's been built on SOS DE as the underlying asset. We've definitely seen some innovation. And yeah, as you said, you know, I think Pendle has roughly 50 to 60% of its TVL is built on SOSDE. You know, Arve added more than a billion in a couple of months. And so whether sort of like other defy apps like Athena or not, you kind of have to engage with SCSD in some way because it's becoming that sort of important to the rest of Defi.

Starting point is 00:27:17 So you have been sort of referencing a popular strategy that people have been dubbed AVE Athena. I don't even know if that's how it's pronounced, but that's look, you know, that's what it looks like. Can you, first of all, just explain what that strategy is? Yeah, sure. What's happening is you've got SCSD that's producing, call it like 20, 25, 30 percent on the collateral side. and then you can borrow dollars from defy at 8, 10, 12. And so you can essentially put down the collateral, earning you north of 20%, borrow dollars. So you've got like a spread of 10% there.

Starting point is 00:27:49 You can lever that up, 5 or 10x. And so people have been doing this in the last few weeks where I want to say like relatively, obviously there's smart contract risk. There's all of these different risks that are embedded here, but a relatively safe way that people have been producing north of 100% return on dollars at, you know, billion dollar scale. the reason for that is that we see a disconnect between interest rates within tradfi, DFI, and CFi, where you have a different sort of cost of capital in each of these disparate islands. And another way that I've sort of encouraged people to think about Athena is actually,

Starting point is 00:28:21 we issue the synthetic dollar, but actually what Athena is doing is trying to bring interest rates in line between three different markets that don't really touch each other anymore. And basically, Avae plus Athena is the mechanism through which the interest rates in DFI have to basically converge with CFI interest rates because so long as SUSDE yields are higher than where you can borrow dollars from the rest of DFI, people are just going to continuously do what I just described there. And what's going to happen is the supply of USDE will go up massively, which pushes down funding rates within CFI, but then also the borrow rates for dollars within DFI will go massively up as well until that sort of arbitrage closes. That's like a very simple

Starting point is 00:28:59 example of how we're sort of tying together those interest rate differentials between DFI and TFI, but the real big opportunity is doing that in TradFi, basically, which is if you can take this collateral on a prime broken desk within TradFi and someone can borrow dollars at risk-free plus 100, 200 basis points instead of risk-free plus 1,000 basis points, which is where Arve's at. That's kind of when like real pools of gap to come in and fully close that interest rate differential. And when you have these conversations with Tradfai companies, do you feel that they're understanding and very open to what you're talking about? Yeah, 100%. Like they understand their cash and carry fully. I've been doing it for many decades within Tradfai and different instruments. It's more just getting

Starting point is 00:29:42 comfortable with sort of the credit risk of different entities within crypto, understanding like the custodial setup, credit risk to different exchanges than those different pieces. I think it's less around the financial risk of the actual product and what, you know, introducing leverage and that kind of stuff does to it. It's really more about counterparty credit risk that we sort of have to spend more time talking about. And so at this moment in time, do you feel that it's crypto natives that are kind of, you know, using that strategy? Or do you feel that these types of products are already attracting new users to the space? It's definitely a mix. I can't sort of say the names, but there's like real trad by entities that don't really touch the rest of crypto, which have a pretty large

Starting point is 00:30:20 exposure to what we're doing. So yeah, they're already here. It's not really like talking in hypotheticals. Yeah, the vast majority of the moment is still crypto-native, but there's pretty decent exposure from large trad by entities already. Oh, that's super interesting. I did see some people calling out, though, how quickly this strategy has grown. There's an ex-user name Andrew Lloyd who tweeted this graphic of Athena's growth on Ave and said the level of exposure USDA has in our ecosystem should be a cause for concern. And I wondered if you could just talk a little bit about those risks. And I wondered if you thought there, you know, could ever be a chance of a DPEG that caused. causes some set of chaotic liquidations?

Starting point is 00:31:03 Yeah, it's something that I've written about pretty publicly on Twitter, which is actually just trying to warn people about this in very specific pieces around USDA, which would be considered for this. So there's one actual mechanical to consider here, which is like when you're holding SUSD, it takes seven days to actually withdraw from the asset. So as a sort of duration risk that you're running there where the asset is a seven-day unlock. What that means is that you're actually necessarily going to see volatility within SUSDE, because some people don't want to wait seven days,

Starting point is 00:31:31 and so they're going to dump it in the open market, and for someone to buy it off them, they might need a 50 basis points or 100 basis points of discount to the underlying USD to sit there and wait for seven days. This is by design that is going to sort of oscillate around the underlying value of the SESD, and so that's just one piece to consider,

Starting point is 00:31:48 and it's obviously a piece of consideration that all of the risk analysts and ABE different lending markets have taken into consideration, and that's why you don't get like 98% leverage on the acid, it's something closer to 92 because they're trying to account for these different pieces. I think broadly, though, if we just take a step back,

Starting point is 00:32:05 we just sort of categorize leverage as a percentage of USD supply. It's much lower than some of the other projects that you see within the space. So the LRT projects, for example, the, you know, the eigenlayer staking ETH projects, some of them have like 70 to 80% of their entire supply sitting there

Starting point is 00:32:22 in leverage loops on Arbe or some other platform like that. For us, it's still, you know, even though the notion is quite large at just over a billion dollars, that's, you know, less than 25% of the existing supply within Athena. So I don't want to dismiss the risk. Important pieces that at the core product level, we're not using any leverage. So the actual underlying product does not have any leverage embedded into it. People are always going to take the acid and take more risk on the open market and do things.

Starting point is 00:32:48 And like I'll sit here and admit at some point in the next few years, someone is going to take that too far and there's going to be, you know, a hiccup where it trades a little bit off of the peg because people are getting liquidated and stuff like that. But that's what happens in crypto. It's a volatile market. People take too much risk. They take too much leverage. My job is to make sure that the core product is sort of sound

Starting point is 00:33:07 and we don't have any issues at the underlying level. And if people are going to get liquidated, that someone else is sort of edge to pick up in that moment. So yeah, that's what it might be on things. Yeah, this reminds me. I mean, this was so long ago. I think it was like 2017 or 2018. But basically there was like a flash crash of some really important asset on Coinbase.

Starting point is 00:33:26 I don't remember which one. ether or Bitcoin or something. And I asked them, oh, like, why don't you have circuit breakers? And they were like, you know, in crypto, it's so volatile that it like you could institute something, but then it might cause a different problem in the market. So I just remember being like, oh, wow, right. Like that makes a lot of sense. And I feel like you're talking about a similar thing here. So now actually circling back to my earlier Pendle question, you know, as we mentioned, And that's a really popular way that people are using S-U-S-D. And there's a temperature check for onboarding Pendle's PT tokens to Ave v3 core instance.

Starting point is 00:34:02 And I saw your BD person Sarah Pham Checker was commenting. We are entering the Athena Endgame. So to talk a little bit about what that would mean for the PT tokens in Ave, first of all, how that would work. And then how you would expect that, that might change how Athena's being used. or if it's just going to turbo charge with somebody happening. Yeah, so all that's happening there is when I was describing that sort of leverage trade on CSD where the yield varies, you know, it could be zero, but from zero to 30% plus.

Starting point is 00:34:34 What pendulum locks there is your ability to just lock in what is that interest rate on your collateral? At the moment, the PT tokens are trading last time I checked somewhere between 20 to 25%. And so that's actually pretty helpful if you're going to be doing this trade because you don't really like volatility when you're entering like a leverage position on dollars, right? you want to kind of know, if I'm entering this, I broadly know where the asset is going to be producing a return, and then broadly what my cost of financing on borrower side is going to be. So all that pendle is allowing you to do is it's creating a two-sided marketplace outside of sort of Athena to say, we'll lock in this fixed rate over the next three months.

Starting point is 00:35:08 And then for people who want to take that and use that as collateral, they're like, I'd rather have this sort of certain PY on the collateral, and they're willing to sort of give away some of the upside on the variability. And it just means when you're entering these loops, it just becomes a bit more consistent in terms of how you can underwrite. You'll go forward with expected returns. I think it's an exciting thing. Be clear, we've been doing this in Morpho already with Nakedao at nine-figure size for quite a while. So we've already had a bit of a test case to see how that's been going in the last few months.

Starting point is 00:35:39 I think it can be a huge market going forward. And it actually presents a little bit less risk from just like an unwinding perspective. Because one of the risks that you run with an Rave is that you lever this position up to, 10x and then Athena's rates fall to zero, for example, and you're sort of bleeding on the borrower cost, for example. So, you know, your collateral, let's say, is earning zero, but you're paying a loss sort of hold all of the debt. This obviously actually reduces the risk over there from that perspective because you kind of know what the collateral return is going to look like. But it introduces different risks, obviously, because you're using another smart contract

Starting point is 00:36:13 platform or all those different things. One of the other risks I wanted to ask about was that the yield that USDE generates comes from its positions on centralized exchanges. And I wondered how you account or mitigate for that centralization risk, like, you know, obviously, basically the risk I'm talking about here is just the fact that this money is going into centralized honeypots. Yeah, I don't think it's something for us to like account for necessarily. I think it's something that the market should basically price itself. So when someone's deciding should I sit in a Black Rock Biddle T-Bill or Athena's product, the cash. that they're taking is like, am I getting paid enough by Athena to sort of take the,

Starting point is 00:36:52 what I perceive to be a different type of risk. One is like holding, you know, pristine assets from the US government, also by BlackRock. And then the other one is obviously facing offshore crypto exchanges, like a very different risk profile. That just has to be reflected in like the equilibrium interest rate that people are willing to touch the product. So I think it's less about us sort of accounting for things in these ways. It's more us transparently telling people what the risks are and being open about what they are and letting them be adults to decide whether on a risk adjusted basis, that makes sense. So yeah, we don't sort of shy away from the fact it's core to the product. I think anyone's pretended that we haven't got exposure to these centralized exchanges.

Starting point is 00:37:31 It's really cool to what we're doing. Our job is here to sort of be transparent about what those risks are and then let the market decide whether they sort of accept those risks or not. Okay. Yeah, I don't remember the name of this project, but a long time ago, I had the founder of a project where basically it enabled you to transact on centralized exchanges, but routine, hold of your private keys. I remember the founder? I think it was, I think her name is like Sharon Goldberg. Does this ring a bell for you? No, no. It's just fascinating because I remember thinking, oh, this sounds like a really beneficial technology. And yeah, now that I think about it, I'm not sure where that is right now. But anyway, it feels like something that could be useful for you if they're still around.

Starting point is 00:38:15 So one other thing that was hilarious to me when I re-listened to our interview from earlier this year is that, I guess, right before we had recorded, there was some controversy where Dai had allocated some of its, you know, some money to USDA. And I don't know if you remember this, but Mark Ziller of the Avi Chan Initiative proposed that Avi Revoke Dye's collateral status because of that, which is super full. funny to me, given everything that happened. And I was just wondering, and I do recognize, I think, like, in the same part of the conversation, we talked about the, like, the criticism or fear that this was very similar to a Tara Luna. And I just wondered if you had any thoughts on how this, you know, perception of USDA has changed this year. Yeah, I think it, um, it circles back to what we said in the very beginning of this chat, which is like a lot of the market actually just wanted to see, you know, it was not good enough for me to stand up on

Starting point is 00:39:09 podcast and say, like, this is how we expected to perform when conditions aren't great. Like, people wanted to actually see it in action, and it's not good enough for me to just theorize about these things. I think that that was a pretty similar sentiment from the guys at Arben. That was a decision that they took, which was, you know, I think Maker got a lot of criticism when they did that in the beginning, but in retrospect, at the moment, that was the correct decision for Maker to make. They made, like, hundreds of millions of dollars, I think against that collateral. And I think at one point, Athena became close to 30% of the whole revenue of MakerDAO from that one decision that they made.

Starting point is 00:39:42 So on a risk-adjusted basis, Maker made the right decision then. But it doesn't sort of take away from the, you know, a perfectly legitimate position that Arbe took, which was we just want to see how this thing performs at different conditions. And so I think that's really just getting back to the same thing that I was making in the beginning, which is you have to go through those more difficult periods and demonstrate to people that it is resilient in order to sort of make that next leg of growth that we have at the moment. And I think we need to just continue doing that to recycles because it's almost like a necessary condition to get to a larger size.

Starting point is 00:40:14 Yeah, and it's fascinating because Maker had long been criticized for having so much of its collateral in USDA. So it just goes to show, yeah, sometimes you can't win no matter what you do. But people just like criticizing Maker. I think it's the like the best amount of this. It doesn't matter what they do. Yeah. And now they're called Sky, which is another thing that people criticize them for. But anyway, so I did also want to add. So Athena is on a whole bunch of chains, but it's actually not on base.

Starting point is 00:40:44 And I wondered how you guys were deciding which chains to add. I think generally what we've learned is actually does how cross-chain expansion has been pretty poor, actually, I think, in terms of its success. What we found is that the majority of the interest still sits on Ethel 1. And the challenge that we have is that you go through these periods of you like there's a new chain that pops up there's like an unlaunched token which people are interested in until they drop the token and then sort of capital leaves and they go find something else to do and it's sort of this endless life cycle of just running around to different chains for like no real reason and not sort of creating any like lasting value on on some of these things and so I think we we just want to be a bit more opinionated going forward in terms of like we're taking a very strategic view

Starting point is 00:41:25 and this is we think we can do something that looks differentiated and I think the lens that we have is are we actually touching a net new user base who we would not be touching on Ethereum? Salana was an interesting one which we didn't actually deliver as well as we should have and we're going to come back and do that in a better way in the next few months. But I think like the user base there and the use cases just in terms of payment use cases that you're seeing on Solana I think is genuinely differentiated enough versus what you see underneath to sort of warrant us making a much more much sort of bigger push over there. And then one that I'm actually particularly excited by, which we haven't done at the moment,

Starting point is 00:41:58 is on Ton. So I think you can even recognize this from the way that centralized exchanges have been interacting with Ton in general. They've been listing a ton of the meme coins that are coming out of Ton ecosystem. And I think the reason for that

Starting point is 00:42:11 is that they actually recognize there's an entirely new, hundreds of millions of users that they haven't even got on a by bit or an OKX or whatever who are using Ton in some way. So that sort of just size of opportunity to me is very interesting

Starting point is 00:42:24 in terms of finding smaller retail balances are totally different to like ETH Wales who are putting in millions of dollars into USDE over there. And so I think the vision of what we want to put in place with Ton eventually is being able to have USDE as sort of like a mini savings app within your telegram app where you can sit alongside

Starting point is 00:42:41 Tether where you, you know, what is the most basic financial thing that everyone on earth wants is just being able to hold a dollar with a return and then send, spend and save with that dollar. And I think an ability to do that within your telegram app is actually like a product that a billion people can actually use. that's one piece that we're spending a lot of time on. And I think, again, it's not like us just going to another EVML too and playing some sort of farming game. This to me is like a very

Starting point is 00:43:06 legitimate, like real use case that and sort of touch millions of people, people's hands. Yeah, yeah, definitely can see the impact there. And I'm sure you've seen that. There are a lot of investors who are super bullish on town as well. I did also want to ask about Athena's Ina Governance token. That's been on a tear after governance approved a fee switch last month that will enable revenue sharing. And the token is up 70% in the last few days. And I wondered if you had any thoughts on what has made Ena is so successful. Generally, it didn't do that well, obviously, I think since the last time we spoke. It sort of came down pretty badly with the rest of the market. It's, again, similar to the product, it's going to be a token that's quite

Starting point is 00:43:46 reflexive to the cycle because when conditions are like they are right now, it's great, the revenue numbers, you know, beating tether on cash flow, that kind of stuff. It's, it's, it's when the market is sort of hot. And so generally, I think that the token is going to be pretty responsive to the cycle. And obviously, the cycle has come back some way. I don't really have any other sort of comments outside of that, which is like the core fundamentals of Athena respond very dramatically to the market environment. And I think that that's just sort of been reflected in what you've seen in the last few weeks.

Starting point is 00:44:15 Well, I do think that there are some novel strategies that were applied so that unit token could accrue more value. There's staking to get more points for subsequent airdrops. there's, I think, staking also gives you actually points for other airdrops. And I wondered if you just had any thoughts on how to do a successful air job, because I'm sure you've also seen, there's been a lot of backlash against airdrops generally. Yeah, I think that definitely isn't a formula for this. Obviously, like the hyperliquid air drop recently was extremely successful and had a lot of praise and rightly so.

Starting point is 00:44:51 I think people were incorrectly sort of categorizing that to say, like, you need to do X percent of your token here to do a successful drop. And that's actually kind of missing the point. The point is like build a good product and then your token might be able to do well on the other side. And that should always be your first sort of concern. And generally the, you know, I think the market has sort of been actually recognizing projects that are just delivering fundamentally useful products to people in an outsized way in the last few months. So I don't really have like a response to what do you have to do to do a good air drop. I think the thinking that we did have in the way that we're sort of designing sort of different ways

Starting point is 00:45:25 that energy to be used within the ecosystem is actually trying to take some inspiration from what we saw from B&B. So it's something that I've written about on my Twitter page, which is I think BNB is actually the best token model in the market. And the reason for that is that all of the launch pads that come on Binance,

Starting point is 00:45:43 whenever you see these listings, they give sometimes a pretty large percent of other tokens applied to B&B stakers. And so you can almost think about that as the B&B token is accruing all of this value from other projects, tokens, And so long as you believe that Binance continues to be, you know, the go-to venue for these launches and for liquidity and trading volumes, you can consistently sort of expect that that's going to continue into the future. And so really what we're trying to do with Athena and like the network and ecosystem that we're building around it now is moving Athena from something that's just a single acid issuer, i.e. you're just producing USDA and that's like the only thing that you're doing into something that's a bit more like a platform where people can actually come and build net new primitives on top of that core asset that we're actually providing.

Starting point is 00:46:25 providing to the market. And so I think along the same sort of kind of thinking that we had earlier when we're describing the ways of different money markets or Pendle and all these different new financial innovations that have been built on top of USDE, we want to actually sort of like grab new applications and help and sort of support and incubate them to grow and build on USDA. And so as part of that, we're seeing some of their token supply being dropped onto Athena holders. So we have two projects who are sort of part of this at the moment. And we sort of want expand that to eight to ten different apps that we're building within our system. And yeah, I think the market generally sort of saw the success of B&B in the way that they did things there

Starting point is 00:47:02 and sort of appreciates the idea of being able to sort of see the upside of that through steak to thin it. Yeah. And what about other tokens that are sort of similar or at least have a similar setup? I actually wouldn't know exactly like the full setup for things like Gito, like in terms of the tokenomics or Jupiter, but do you see any other projects that you feel have similar tokenomics that you think are that work well? Yeah, I think, um, again, I think all of these things have to be like downstream of a, of a good product to start with. So this whole idea of like dropping things onto tokens, I didn't come up. This is like a lot of people doing this pretty consistently. It's just a question of how well you can sort of attract actually, you know,

Starting point is 00:47:47 interesting applications to be building on what you're doing. So Celestea was quite famous for this at the beginning of this year, right, where there was a whole narrative around the airdrops that were coming to TIA. That obviously slowed down after the first few months. I think actually, Guy had a similar sort of narrative with, you know, Spark that's coming out now and Chronicle. There's a few different apps that are building on them.

Starting point is 00:48:06 I think the whole sort of actual Pocodot model originally was actually a very similar line of thinking. Yeah, there's a bunch of sort of tried it, but, you know, the reason that finance had been so successful in doing that, and the way that they've sort of managed to continuously attract all of that capital to B&B, again, the reason that they're doing that is because they're finance and it's the best exchange and it's that valuable that people are willing to sort of pay and be a part of it. And so, yeah, from our perspective, the core focus always has to be,

Starting point is 00:48:33 is your product powerful and is your product useful to people. And you can start thinking about these sort of like secondary pieces after that. Before we started recording, we were talking about how we feel like this bolt, that we've had this year isn't even where it's going to stop. You were talking about how part of it sort of seemed artificial because it started before the Bitcoin having. And I wondered, you know, you obviously used to work in Tradfai. Now you're working in this intersection of DFI, C-Fi, Tradfi.

Starting point is 00:49:03 And I just wondered if you could talk a little bit about where you think the crypto market and those trends generally are going to go over the next year, two years. Yeah, I think coin's probably in a very different cycle to the rest of the market, I think. My view is that we're going to be famous last words, but we don't really see what we saw with like a minus 75 minus 80 on Bitcoin anymore. Assuming we don't have like large scale fraud at like the largest entities within the space, like a tether or a finance or something, I think that's what it would require for Bitcoin to ever get down that low again. I sort of see Bitcoin in a separate cycle of its own. There's just too much capital that's willing to buy it at smaller discounts going forward. And so I think that that will live in a different cycle to the rest of the assets with the same.

Starting point is 00:49:46 the space, but we'll continue to see kind of what we saw, I guess, this year, which was Bitcoin was like in a range of maybe, you know, 20%. If you look at the Bitcoin chart, it doesn't look that ugly, but if you go and look at old charts in the last year, many of them did minus 80 to, minus 90 percent sort of dips while Bitcoin was essentially sort of flat, Athena included. And so I think that that actually continues going forward, which is Bitcoin is in a different cycle. It'll have moments where it's sort of ranging or bleeding down a little bit. The rest of the market can do a lot, a lot worse than Bitcoin during those periods. In terms of where does Bitcoin go, it's not really not qualified to sort of cycle the top

Starting point is 00:50:24 on anything, but I think the one piece I'm just thinking about, it feels quite binary in terms of where we go this cycle. I think you do need large scale, central bank buying to be able to really get beyond where we are now. I think on the margin, sort of small corporate boundary type stuff is not enough. I actually need that sort of like dream scenario that we've always been talking about of like central bank FOMO to come in. That's what you kind of need for it to take off to like three, four, 500K plus. And for me, this entire cycle is basically a pretty binary event of like when you start to see murmurs around that type of thing,

Starting point is 00:50:59 do you call the bluff and just say we're overextending the optimism of how much is going to happen over there? Or do you believe it? And I do actually truly like FOMO in the world reaches the market gap of gold. So yeah, for me, it's just trying to read how real, I think, that that narrative is. And if I don't think it's that real, and I don't think you'd get anywhere near those numbers that people are sort of talking about. And can you also talk a little bit about where you think that kind of the connections that are being built between defy and tradfi, like how far you think that might go in the next year or two?

Starting point is 00:51:31 Yeah, I think when you speak to those entities, actually, it's quite a narrow field of what they find interesting. It's like ETFs, stable coins, maybe trading infrastructure, little bit and then tokenization and like tokenization the vast majority of that is going to be two bills there'll be some stuff whether you're tokenizing like high yield credit funds or some investment funds and that kind of stuff but i don't think it's like that's like a multi hundred billion dollar market like sort of treasuries and staple coins are but yeah i from conversations i've had the interest isn't sort of that broad in terms of a bunch of different

Starting point is 00:52:01 things it's like a very narrow field of things that sort of make sense like stable coins and and trading infrastructure um and i think they'll continue to do stuff there but I'm not that convinced that they'll be, you know, diving that wide and far out the risk curve into defy. And I think the primary reason for that is actually one around sort of KYC, AML type stuff, which is, you know, trading in a curb pool or a uniswop pool doesn't really fit in any sort of like KYC, AML framework on earth. You just don't know who's on the other side of that transaction. And so that's sort of the skepticism I have around those type of entities being able to interact because that's the one thing that tri-fi institutions

Starting point is 00:52:39 can never fall short on, which is those stuff for issues. So as we mentioned, USDE has had remarkable success. And I wondered if you had thoughts on how much more could grow in the next, let's say, year. And what other ideas you have in mind for what you'd like to see in terms of the roadmap for it? Yeah, I think I'd be quite disappointed if it wasn't somewhere between 15 to 20 bill in 2025. And then I think we've got a pretty well-defined pathway in terms of how we get there.

Starting point is 00:53:09 I think that's what we laid out with our D5C5, triad-fye piece. For us, like, we've laid the groundwork, and it's just going to go execute on those pieces. But yeah, I don't think there's anything fundamentally new, game-changing. We've got the two core products, which we believe are, like, the most legitimate sort of challenges you have to what we view is the most important products within crypto, which is essentially tether.

Starting point is 00:53:30 So we've got sort of the building blocks that we think, like, a legitimate sort of pathway to actually do to go and challenge a product. And I think we just need to go execute on it now. All right. And since we are publishing this one day after launch, do you have any projections for how much in assets you expect to see on US TV, in US TV like, I don't know, within a month or some amount of time? You can need that timeframe. Yeah, somewhere between half a bill and the bill, basically. Yeah. I'm cheating because I do know some people who are coming in before, but I'll see where it ends up. Yeah. Okay. Well, I look forward to seeing what happens.

Starting point is 00:54:07 Thank you so much for coming on in Chained. Where can people learn more about you and your work? Yeah, I think the Athena Labs, I think the Athena underscore Labs. I've got all the links there and you can sort of find my Twitter on there as well. Perfect. Well, it's been a pleasure chatting with you. Likewise. Thank you. Thanks so much for joining us today. To learn more about Athena and Guy, check out the show notes for this episode. Unchained is produced by me, Laura Shin, with all from Matt Pilcher, Juan Imanovich, Megan Gavis, Pamma Jimdardt, and Marka Curia. Thanks for listening.

Starting point is 00:54:43 Thank you.

Unchained - After an Incredible 2024 for USDe, Ethena Plans to Supercharge Growth - Ep. 751

There aren't comments yet for this episode. Click on any sentence in the transcript to leave a comment.