Something better than USDC for your Ethereum?

Welcome to Epicentre, the show which talks about the technologies, projects and people driving decentralization and the blockchain revolution. I'm Frederica Anst and today I'm speaking with Michael Soboda, who is the CEO of Liquidity.

AT banking is under pressure, Sybil code is a much better product than having your dollars in your bank because there you have the counterparty risk and this bank and in Germany might lend them the money to Banco. We had the kind of this huge scandal and you're not aware of it. We see these forces now playing out with ACT with Clarity ACT. Honestly it's not about the users. Regulation is actually used to protect the banks or create the

mold. Liquidity just follows 100% of the borrowers fees to the stable coin holders to facilitate that peer-to-peer credit market. It's very hard. It's a very competitive market, but that's why we tried with Liquidity V2 and Bold to have a very clear and distinct value proposition. Rather serve a niche, but be very clear. Liquidity Protocol is a governance free Ethereum protocol that lets users borrow a decentralized dollar against ETH at self set interest rates.

Before I talk with Michael, let me tell you about our sponsors this week. This episode's brought to you by Lido. As Ethereum Mistaken continues to evolve, more teams building staking products are running into a familiar challenge. On one hand, pooled liquid staking gives you liquidity and access to Defy but can limit customization. And on the other, bespoke staking setups offer more control over things like pricing, performance, and operator selection.

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super simple. It offers curated Defy strategies built around SD ETH you deposit once you choose a vault and manage everything from a single interface. To learn more and start building with SD Vaults, go to Lido dot fi slash SD Vaults and get in touch with Lidar contributors today. Hi, Mike. It's good to have you on the show. Hi Fredrique, thank you for having me. Good, before we dive in, who who are you and what originally got you interested in all of this? Yeah.

So I'm Michael. I live in Switzerland and I was working in a normal corporate telecommunications in the digital space and we were talking about disruption and I was talking to B2B clients about disruption. And then I heard about blockchain and I realized this is really the only disruptive thing that is happening right now, like the Internet, which took out intermediaries for comms and media. This will take out intermediaries in finance. And that fascinated me.

And then I quit my job because it's not going to happening in this big corporate and I jumped into the crypto world. I think that was 2019 around the ICO craze. Liquidity itself was founded I believe a year or two earlier, right by Hobart, who is still with Liquidity but in a more research re background role. Can you talk about the original rationale for the founding of Liquidity?

So what did Robert feel was fundamentally broken or missing in how Unchained Credit and Sabre coins were being built at the time? First, I think he was really fascinated by blockchain, so he was working before for the Infinity on the consensus algorithms. And then I think this maker kind of sparked his interest. Being able to issue your own stablecoin, be your own National Bank kind of I think was a very cool concept.

He saw that and he just immediately came up with ideas and said, hey, we have blockchain technologies, why do we need governance? Can't we automate the debt? Maybe we can also make it interest free. Do we need to have interest? You know, you can break with all

these paradigms. And he also thought he can create a higher loan to value ratio. So with these propositions he set out to create a more efficient, more autonomous borrowing protocol that is was very similar like single collateral dye and that's what they did what they set out and that it was launched in 2021 was been running since then and had more managed more than 5 billion in TBL had its own has its own stable coin LUSD, but.

What kind of talking about kind of like this early Maker era that there were a couple of events that must have shaped kind of how Robert. And then also you kind of thought about about protocol design, right? Kind of like there was the infamous Black Thursday that kind of led to the rise of Deepak tools. And so Maker still has the PSMPSM, yes, the tax stability module. What lessons did you take away from watching Maker evolve in real time?

Yeah. I mean Maker set out to follow up half maybe more of growth, taking in more diverse collateral, getting exposure to tread Fi, which helped their growth. They also introduced the PSM with USDCA centralized Sablecoin to keep the pack I think which helps the product. But I think robot was very Etherium aligned and just wanted to get out most of the technology creating like the most Etherium dollar like money you can get, you know, by reducing all intermediaries and

all kind of dependencies. But one big learning that we learned and that also kind of got introduced in V2. It was for example, we had this interest free loans. So you had only a one off fee, which was very interesting. If you talk to threat high people and you said you don't pay any interest, it was like totally puzzling for them. That was very viable in a low interest rate environment and Wendy's rates kind of raised. Then the protocol wasn't

designed for that. It still works, but it had drawbacks on the collateralization ratio. So a learning was there. How can we design the interest rates in a more dynamic way to create an equilibrium or have a a rate and the pack that can better self regulate itself? And that was definitely a learning. And, and I think again, I think what I really like why my joint equity is all this innovation, interest freeness.

And then with V2, we have users set interest rates also something very cool, go to your bank and say, hey, I would like to have this interest rate. That's something you can do. And that was also a decision. Again, a lot of protocols set the rates by governance or by utilization and then it's spikes. And we took really a market approach who's the best to decide which rate we should have in Defy. So we let the users decide.

OK, maybe let's dive into how that works in just a second, but let's just contrast that to how maker and are they do it right, kind of like the the the two main players in this arena, right? So basically in Maker, the interest rate is set by governance and kind of like it's fairly slow moving. It feels a little central bankersh to me sometimes. There's a lot of governance and in Ave. it's algorithmic, but that also means it can spike

unpredictably. So kind of if you take out a loan and initially your, your rate was, I don't know, 5%, it's possible it kind of spikes to 10% or 15% and there's nothing you can do other than kind of repay the loan and kind of get out from under it. Let's kind of walk me through how the mechanics of liquidity work end to end. So kind of, I know that the range of collateral that I can deposit is very limited. So say I have ETH or some sort

of wrapped staked ETH token. What and I want to borrow USD, what actually happens step by step inside the protocol? So like with every collateralized depth position protocol or CDP position, you come with your collateral. So if or Rep staked, if or, or if we only have these three collateral to again don't have dependencies on, on other collateral that we feel are less safe. So kind of as human native as possible.

And you self issue a loan. So you deposit the collateral into the protocol where it's held, where it's not lent out, it's always there. And then you can take out the loan up to 90% loan to value. So let's say you put in 50K in, if you take out the loan of 25 K, you'll get that in the protocol stable coin bolt. And then you can set the rate. So you can say, OK, I will have for example 3%.

You do that, you get the bolt. Usually what you do, because you take out the loan because you need liquidity, you will swap it to another stable coin off ramp into Fiat for example. Or if you say I want, I get a cheap borrowing rate, I don't

know. Right now it's 3% on Eve, which is low. You could form somewhere else for 10% and that could be also your use case. So that's the the borrowing side. I think that's quite straightforward and simple. And maybe the the question people ask now, OK, how do I set the rate? I guess. Everybody setting it to 0. Exactly, this would have been my first question. So kind of like if someone tells me you, you can borrow money here, what what kind of interest

do you want to pay? I would go like 0. Why don't people do that? Yeah. So for that, we need to look on the other side. We're really a market, a peer-to-peer finance market. So we have the borrower on the other side, we have the stable coin holder, you know, because essentially if you want Fiat, you sell the stable coin and then somebody needs to hold it. They can't disappear. You know, if everybody sells it and nobody hold it, then it D packs.

So it's like the stable coin holder is like your creditor on the other side. And now you both need to agree on the right rate because if the rate is not high enough, nobody will hold it. So borrowers have an interest to pay enough yield because there is like a stick you know look at you have like the carrot and the stick. So stable coin holders have a stick. If the stable coin D packs below 1, everybody has the right to redeem the stable coin at face value.

So that's also something that you don't have many protocols you can come with the dollar and you get really the underlying collateral. Try to do that with your feet or your USDT and this is called redemption. So if I have 10,000 in bold that is below pack, I can go to the protocol and say, OK, I want now this is only worth 9500. I want 10,000 in EVE as from the collateral and I can exchange that. And this redemption hits the the

borrower with the lowest rate. So you see kind of the stable coin holders are chasing the ones that think I have the lowest rate, they have also the highest risk they get redeemed. They don't have kind of a, a economical, that's not an economical penalty. It's not the liquidation where you lose 5% of the value, but you just lose the exposure of your underlying Eve, which can be also for some people, they

want to avoid that. So if people see that, oh, I get redeemed, I'm really low, I'm going to higher my rate and this protects me from the redemption. So you have now this market where borrowers adjust and stable coin holders with the redemptions are, are driving the rates. So you have really market driven rates and it's like a 2 sided market of borrowers and the stable coin holders, the the creditors. And I think it's one of the first time I've seen that been implemented like that.

And the beauty is it's actually very direct. You know these parties talk together if you think about it like how it's done in other protocols as you said, OK, I don't know stable coin DPEX. So we have a problem. There is a governance proposal we increase the rate the yield funnels through a complex system while while in liquidity. Liquidity just follows 100% of the borrowers fees to the stable coin holders to facilitate that peer-to-peer credit market.

At the end, I have a couple of questions. So maybe let's kind of apply this apart a little bit. If bulk doesn't trade below a dollar, but at a dollar above a dollar, there's there are no redemptions, right? Kind of like I am not at risk of having my collateral kind of sold. Right. Your loan gets repaid kind of from a third party. You have less debt, but you also have less collateral. OK, but if a bulk trades above a dollar or add a dollar, this

doesn't happen right? This only happens kind of at negative DPEG. Why if I don't expect this to happen? If I don't think this will happen, why am I setting an interest rate at all? Am I at risk of not being matched if I don't set an interest rate? No. So if a stable coin is above, then people or kind of advanced users will set really low rates. They can benefit because they

can't get redeemed. But this means now the borrowing fees and the yield that is paid out get smaller until it flips. But this kind of reduced the problem that we had in V1 that the stable coin could D pack above. So this happens now very rarely and the peg is quite good for a decentralized one that is not packed to any, you know, kind of treasuries or centralized stable coin.

So this puts down the pressure down more people are probably selling the stable coin because they don't have enough yield. Then it goes below pack and then you have the opposite mechanism, you know the ones that said it low, not now raising again on the top and then you have you're getting this balance. So if you compare the current rates with protocols like make and other where, where are we at with liquidity? Yeah. So I mean always much more volatile. So you don't get that much.

I think it's it's quite low on average and I'm maker I had to look up, but usually. So the proposition of the borrower side is that liquidity had always quite low and predictable rates because it's also so efficient. You know the system is not taxed, nobody's taking away revenue. So the spreads are are really low. So I think I don't know right now with the markets, I haven't looked up, but a month ago maybe you know Maker was at 5% for Eve and and liquidity was at 3%.

Why do you think kind of force deleveraging through redemptions is a better failure mode than the traditional liquidation cascades that we see in the other CDP protocols when loans are underwater? Yeah. So these are two different mechanisms and we also liquidity has also liquidations and liquidations are here if your collateralization ratio that is packing the stable coin gets too

low. So then like in every protocol you get liquidated, there is a margin call and then your collateral is taken away and you're taking a haircut and your position is wiped out. But that's something different that's the the over collateralization loan to value and that happens just to your trophant is dependent on your collateralization ratio redemptions. Everybody can do redemption and that has to do with the PEC and only the ones that have low interest rates are targeted.

So these are two different mechanism. Why? Why do we have them exactly to let the market define the market rate, do not need a governance to be able to to do that algorithmically or let the market decide. And also to introduce I think a really nice feature not many stable coins have that every user has the right and can instantly redeem for the

underlying collateral. That's the redemption mechanism and it helps the the pack and not the the over collateralization of the protocol for that. That's liquidations, like in any protocol. So you, you have deliberately only very small set of collateral options, right? So kind of like as someone who now wants to redeem collateral because bald is trading below a dollar, can I, do I have to take the lowest interest vault or can I choose which collateral I want to get back?

Because it's possible that kind of, I mean the, the probability is low, but it's possible that kind of like one of the liquid staking tokens kind of has a problem, right? Sure. So V1 was only EVE there, you didn't have the problem, but like the market adopted these RE even wrapped staked EVE as the next safe place and well, what we did, you have like 3 branches of these collaterals and they

are managed quite independently. So the system detects if people kind of trust this collateral less it, it will shrink faster. But if you redeem, you get from all three markets, but it's split up. You can't choose because also the stable coin is backed by all these collaterals and you could say yes into it introduces a bit more risk. But if you compare that with what other stable coins are backed, you know, it's still amazing.

You know, now kind of if you see all these collateral that all the stable coins have, you can't even redeem. And if one of those failed, the risk is much greater. So yes, I agree. So you can't choose and you get get it in a proportion, but it's still way better than I think any other Define stable coin that is backed by crypto, because then the crypto needs to be a collateral that is probably less pristine than EF and the two biggest staking EF

derivatives. I hear that, but kind of in, in principle, kind of like if one of those liquid staking tokens were compromised, kind of like I'd get a haircut by by kind of getting a proportion of the collateral back in a compromise token, right? Yeah, You know, you have that, you have that risk. You wouldn't have that in Eve. And then kind of it could happen that the protocol can handle some something so that this branch just shut downs and tries to reduce as much bad debt as possible.

And then, yeah, then it's kind of turned off. So it it's built with that in mind. Of course, you don't want that. And if it's catastrophical, it's 50%. It's repped stake EVE and kind of repped stake EVE loses 50% in the value. Yes, the the system has a problem too. Yeah. We already touched upon this lightly earlier. So kind of liquidity is notably governance free and immutable, right? And you, you already said that kind of this was super important to to Robert. Why, why was removing

discretion? And by that also emergency control is so, so important. And I mean basically because it costs you flexibility, right? Yeah, sure. And everybody makes that compromise. But from a user perspective, what people like about liquidity, you have this predictability. You don't have to check every two weeks is it updated, has the

parameter change. And under the hood, some of the big protocols are doing quite a lot of updates, which another way or just think, oh, it's protocol XYZ version 2, but it changed in between. So I think for the user that gives them also this trust and predictability and kind of we need to change, but we need to change in the hard way. We need to redeploy the system and people need to get out and.

But this gives the the users also this guarantee that there is not a governance that can change things and somebody else in in control of it. So I think it was really with this ethos enabling sovereign users with sovereign dollars without anybody being able to interfere with it and also because it's more efficient, you know, I'm a maker. I just saw these numbers recently. They have 100 people budget of 30 million managing that.

Of course they have real world assets and probably do a lot of stuff, but it's just beautiful to see that bold to manage the stable coin. Don't need any of that and and it can work. Yeah, quite well. How how many people do you have in the company? Yeah. So we were usually around 8 to 9 people, half of IT developers and the the other half more operational or business side marketing. That that really is a pretty smart team.

Tell me in some sense, I mean, I, I understand kind of the the ethos of kind of having this very pure only kind of stable coin protocol, right. So kind of, I mean, this is also why people loved single collateral dye, right?

And kind of one when multicolateral dye kind of appeared, there was definitely blowback from the ecosystem, especially when then kind of it became at some point 80% USCC backed and and so on. On the flip side, if you look at the outstanding amount of sables for maker and Ave., there are also orders of magnitude bigger than equity, right?

Kind of like I, I checked earlier today and kind of you guys have 30 million in outstanding, but and make and have a 300 times bigger or so. Maybe I'll, I'll look up the numbers of how big, but it's, it's, it's in, in the many billions, right. So kind of seeing that kind of liquidity, it is more efficient in some ways. What? What do you attribute this to? That it's still so, so small. Yeah, comparably small. Yeah, I mean it's really hard to scale a Defy stable coin.

So so yes, maker is big kind of first mover advantage and and and and you know some yeah like USDC and USDT a lot of first mover advantage over you shouldn't compare the the lending market size with the stable coin size. So the stable coin size is smaller still much bigger than liquidity. But all these defy stable coins say go curve ethics. They are around 30 to maybe 300 million. So they are way, way smaller

than the more centralized ones. Yeah, I think mainly I mean the big ones are USDC and USDT And there it's quite clear why they dominate because they're integrated, you have all these utility and it's just so easy. And for every new stable coin, it's very hard to to get distribution and and adoption. But that's why I also think some parties, yes, of course it's much easier to have USDC, but I think also some people are maybe not aware of the differences between these C5 stable coins.

And I usually compared, you know, like like the core with a composition engine. These are if they are built well, these are government market money funds that just are tokenized Fiat products on chain versus the the core with the electric engine, which looks like a car, which drives like a car, but is built completely different and has other product properties and and other risks. That could be interesting.

And I think a lot of people are not aware of it or still maybe, you know, kind of trust the traditional system more. But I still think to me why, why it's important is that it adds a new option that you can opt out out of traditional rails if you feel like that. And I think there they can shine, but usually they only shine if things go South. You know, if things go wrong, you you hope these things are

there. We had the moment with USDC when it D packed where LUSD was great and a lot of people switched to it. Yeah. But to answer your question, yes, it it's it's very hard. It's a very competitive market. But that's why we tried with liquidity V2 and Paul to have a very clear and distinct value proposition, rather serve a niche, but be very clear. So you, you know, I think you have the traditional threat 5 stable coins that can be fully regulated safety through

regulation. Or I think on the other hand, you have liquidy and bold that takes out as much as intermediary as possible and you trust the code. And you have these two extreme, I think they have a value because they give you safety from from different sides. And we rather are totally on the spectrum and rather a niche than

somewhere in in between. I call it the trust me, bro zone where kind of people are just adding risk to it, you know, either by introducing a multi sick or being a hatch from not regulated. And there it gets it's it's a very greyish area. I think that we'll have a hard time when regulation kicks in. And there we also see a the the advantage. So they say, hopefully we we can stay outside of regulation because there is nothing to

regulate. That's a bit the long answer, but it's what, what's more, why I think it's important, why I'm passionate about it, why I think it's a genuinely Ethereum native product, you know, can be only built on Ethereum in, in that way and why I'm passionate to build it and further drive it.

But it, it doesn't make it easy that people understand it and and value it for, for it's proposition, especially like you, you and me, you know, we live in, I think you live in Germany and Switzerland. We have great financial systems, we have good governments, so we don't have this immediate need. But I think maybe from different countries in different region that looks a bit more different. I hear the spectrum.

So kind of, I fully understand if you hold USCC you kind of trust that circle is sufficiently regulated and they kind of have the deposits they say they have. I also understand look it's maths. You can check it out on chain argument that you guys are driving. I'm not fully caught up yet on the value proposition that you were referring to. I understand it kind of appeals to a different set of people, but who's your customer? Who do you want your customer to

be? Yeah, I think there, there are three customer segments I think for whom this can be interesting. So first of all, what are the properties you you talked about the USP. So I see three, sorry, three areas. One is no exposure to threat, fire risk. So bold, by the way, was rated by Blue Chip. It's a rating agency that rates stablecoin and it was the only D5 stable coin with a rating, a minus to be precise, and the

only one in the A segment without counterparty risk because there is no counterparty out there. So I think for people that look at that and say, hey, safety level, I can a centralized version where I have counterparty risk or I can have this D5 version without

counterparty risk. So threat 5 exposure is counterparty collateral, centralized exchanges, all the kinds of risks you are taking on to get the yield kind of taking out all these intermediaries and that I can tell you now for whom afterwards for whom this is interesting, but that's, that's the first really differentiate and no other stable coin provides that this kind of risk profile and it's good for diversification. The second thing is people that

want to have more control. So what bold also gives you is more control over for example, the stronger property rights. There is no freeze. You can directly mint and redeem with a lot of stable coins. You can't do that. You need to be a corporation, you need to be onboarded. You're probably the last one in the queue. So that's another one you you get more control and also predictability. Nobody changes the terms.

So in liquidity, for example, me as a CEO of liquidity IGI don't have more information and control over this product than you have. So I think that's also something unique level playing field. So we have not heard for exposure, more control, the full transparency and predictability

because everything is on train. So I think these are three propositions not many stable coins have and you as a user, you just get a stable coin, you know that it's built it with the best interest in mind, you know the best user interest. So for whom is this proposition? If this is the differentiating

factor? I think three people, 11 is of of course, the self sovereign individual that just say, Hey, I want to also hold dollars, maybe dollars of loss resort where there is not a government, where there's not a jurisdiction that can interfere and and have strong property lines. Like I can hold Bitcoin, I can hold a digital dollar that doesn't have ties into the traditional system and that values this control transparency and being able to exit into Eve.

You know, which bold you can anytime exit to Eve, which you probably feel more familiar and you're again in your world without needing to hope through traditional institutions. The second one is I would call low risk defy yield seeker that says, Hey, I would like to have some, some decent yield borrowing fees, native defy yield, but I don't want to have the risk with all the other stable coins in the trust me,

bro zone. You know, where, where people just are exposed to six different protocols, where you have 5 different stable coins, where it's looped, where Ann and team is running it. This, this transparency of the yield and I think it's good risk adjusted yield for people that are we're looking for a passive saving accounts or like defy Treasury qualities like you, you want U.S. Treasury yield. I think we are close to defy Treasury yield. So this will be the second one.

And the third one, Treasury and asset managers that that want to have a risk diversification. So imagine if 999% of your stable coins in USDC and USDT and we saw the USDC kind of Silicon Valley Bank drama, you could say, hey, I don't shift everything. But having 5 or 10% in a totally different risk profile with an uncorrelated yield, not treasury yield could be an interesting play like a diversify your

portfolio. I think these are the the the USPS and target segments that would be most open. And obviously these are crypto native ones. You know, I think for for every new crypto users, probably USDC and USDT is totally fine, I think. But then the next level, if you start touching all these different stable coins, I think you should really think of how much risk you're holding for, for that yield. And there I think we're just a very simple, a very clear and

very honest play. And I think people that want to have a bit this Peace of Mind, yeah, I think for those we're a good alternative. Over the last couple of years and months in particular, holding U.S. dollars had its own risks, right. So kind of if you look at how much value the US dollar has lost deliberately by most accounts it was not a good time to kind of be Ausd holder.

Have you thought about, but I mean the, the, the fact remains that 99% of of the global stable coin market is U.S. dollars, right? Is that on your side? Is that a design choice or is it a historical accident? And would are you thinking about supporting non USD denominated loans in principle? Yeah, I think the decision was it's just a dominant currency. You know, it's the world currency. Defy is denominated in that. So it makes a lot of sense, but but that's the current time.

That's why I think models like liquidity or or others really Krypton native stable coin are important that we have these Krypton native products that are on the crypto rails that are not dependent on traditional rails that in the next step today we are USD denominated, maybe we can decouple from the dollar. That will be the next natural step. And for that, we need kind of these kinds of designs and these kinds of stable coins that are backed by crypto and can

decouple also from the all that. I think that should, should be the future. We don't have plants, you know, rye did it and maybe now would be a better time. Maybe they were too early. Now we've, as you said, like the dollar and, and, and all these global financial market shake UPS. Now will be the time. We don't have the plan, but I think it will happen and it

makes sense. And that that's again, you know, why I think it's important that we have these stable coins like with electric engines rather than the combustion engines. And because that's why we set out, you know, that's why we started to build on on Etherium to have our own financial rails and our own financial products and take finance also in our own hands, not doing everything, but just kind of being able to opt out if you think just things are going too crazy and in a

direction we don't like. What are the Fiat options you would be considering if he went in that direction? Is it anyone particular currency or is it a basket of currencies like yeah, like special drawing, right? So what, what, what? Where do you think the ecosystem is going to go post dollar? Yeah. I think post dollar and more from a global perspective, I think we're entering a time of multi. So dollar losing the dominance, maybe it's a multi currency

thing, something new. So I think it will be very interesting if we can have that. So crypto has a bit it's own thing I think that has potential. Other than that very difficult to say which currency of course. And and Swiss, I like the the Swiss franc, which is a great value and there is a project called Frankencoin that does that. So I think it's interesting because a lot of people should be interested in it.

It's a bit harder model, especially if you want to do it centralised, because if you get no interest or have negative interest, the business model doesn't look so interesting. And Fronk and Coin is, is doing a great job. So, so I really love them, but it's also really hard. It's a much smaller market and bootstrap that. So I'm I'm happy with what what we have and I think I rather

take what we have. I think we have a good product and look that that we can get more adoption, some critical mass so the project can sustain itself. As I said, you know, and I think there we also need the support of users in the community, not only liquidity, but also other stable coins. These things are not used. We won't have the options when when we need them and then we only rely on the other options. There's also a liquidity token, right? Kind of.

Can you shed some light on what the token actually does, and just as importantly, what powers it doesn't have? Yes. So with liquidity V1, it had actually no power unless you could stake it and earned the the revenues out of the protocol.

So the fees that were generated and with liquidity V2, because they said it's a continuation, we wanted to give also value back to the LQDY holders as we recognized, you know in the system, the borrowing fees, we shouldn't give it to token holders like most stable coins do it and then it goes into the Dow and then they realize if they don't give it to the stable coin holders, the stable coin holders D packs and they have this complicated system probably wanted people that figuring out

where the interest should go. So we followed that through. So we thought a better mechanism there how we can get value back to LK device out of these 100 percent 75 goes directly to the stable coin holders which deposit their stable coin into the protocol and get this definitive yield, which was three 4%. And because we had EAF liquidations that spiked, you know since inception, it had 6 to 8% yield on a definitive stable coin. So I think I think that's pretty, pretty cool.

But going back to to LQDY and 25% goes to the liquidity venue. So also something very innovative, liquidity recognized that you need liquidity. So borrowers are paying for stable coin holders to give them credit and they should also pay for liquidity because every protocol needs to pay for liquidity. You just don't see how it happens again. And liquidity made that transparent. 25 goes to LP pools where LQDY holders can stake the token and they can direct where it goes.

And with that, of course, the idea is when it grows you, you control 25% of the revenues and to which LP pools with which pairs you create a a bribing market on top. Right now it's probably too small, but we've seen the first steps and that can become then also a revenue source for LKDI holders. But you guys as liquidity AG, you don't partake in that revenue. So kind of how, how, how do you guys make a living?

We have some treasury tokens. So in V1 we also staked and like any other person could participate in that, we're also incentivized indirectly of the value of LQDY that others get of it. I think that's also the main thing and liquidity was always set out to be rather self-sustaining. So not kind of to grow and make it bitter, but rather have a really a small team and maybe even a shrinking team. That and the protocol should

sustain itself. So you know out of the liquid LKTY revenues, some of it we use to make their own way longer, but these were actually the funds to bootstrap the the protocol and the idea is not to grow it and make a bigger team, but rather make it so sustaining. So we are not set up to have this continuous big revenue stream going forward. Are you worried that liquidity might end up under resourced compared to systems willing to extract rent? No, because it don't.

It doesn't need, you know what, what would it need the resources for it. Now it's only growth. So yes, I think that's why why we invest into growth to get it to the critical size. But again, you know, even with the liquidity, we build it in a way that LK device takers and the protocol can take care of it and bring it to a size where it's sustainable. So this is really the goal. I think all the teams, of course, they can extract more value out of it, make it just because of the size.

But I'm not sure if you then can achieve that much more. You know, kind of there is only some limitations or you can buy your success. You know, that's what most projects maybe use it for. You buy TBL, you do all these deals and then it looks great. But the moment where where it goes away, everything is away. So we tried it rather smaller steps, but organic that the protocol needs to sustain, sustain itself. And yeah, that's the main goal

right now. Is that a point where you think kind of this freeness of governance design becomes dogmatic rather than principled? Why do you think so? I think there's a reason why a lot of protocols choose to be upgradeable, right? Kind of like you want an emergency off switch, you want some discretion, kind of like you don't. I know that in terms of the smart contract set, liquidity is a lot less complex than say RV three or something. I mean, there's kind of just

pure lines of code. So it's less likely that something is wrong. But even if you take for instance, the recent balance they exploit, right, kind of like it was in code that was, that had been better tested for four years, kind of there were hundreds of millions of dollars. In it in the end it was kind of a maths buck, right? And someone found it after years and years and kind of like it

was exploited. So I think the idea that you can write code so perfectly that you don't need a fail safe switch. I totally understand your qualms with governance. Governance is a complete pain in the neck Yeah. I mean, so basically make a make a governance is dysfunctional. I mean, everyone knows this, right? And kind of like others, less governance and more politics. I fully understand why you wouldn't want to subject

yourself to that. But going the totally pure way in the other direction, it does have its risks, no? Yeah. And and I think, you know, there are different ways how you can do it. I think the ethos should go into the right direction. I mean, why are we building on blockchain exactly that now 3 token holders can decide and kind of upgrade the whole system in within 10 minutes. I mean, that's why we build on blockchain. Otherwise we, we can also build

that in that too. And of course, we are a bit extreme, but I'm not saying that everything is bad, you know, pause switch with good governance and can, can make a lot of sense and you can introduce that or these time locks that you have on voting can make also a lot of sense. And there are areas where, where you can't build it in immutable

way. I mean, that's why we also built the liquidity provisioning where where the liquidity goes that we built it in a more dynamic way where L2 device takers can decide where it goes. So we recognize we can't make that immutable. But I still think there are a lot of good ways how you can design it to protect users and not take advantage of it. I really like also the curve

model. Let's drive very nice balance of we can change some parameter, but we can't take away forms, we can't do much. We have a kill switch and otherwise we can upgrade. Also this ethos saying if we find something we can create a new version and people can decide if they want to move and we don't force them. And I think that's the the things I like about

decentralization. And there is a lot of widdle room and it doesn't need to be need to be pure, but I think we want to give the users the control and safety that blockchains provide in the best possible way. OK. I think, I think that's a very fair take. If you now kind of zoom out, the global sables market has absolutely exploded over the last couple of years. What are the thoughts that you will have when you see that? What are the challenges that you see? What are the topics you think

about? Wow. Very open question and it's very open. So I mean, but what I see is in the past, we had just this continuum of stable coins and everybody could do things if you had Terra Luna. Well, now we have a maker model with which was fully crypto, now has real world assets. We have people that tokenize, carry trades.

It's a bit the Wild West. And I think the biggest thing I see is, is that clearing up. And as I said of these two models, you have these regulated ones in Miko Genius Clarity Act, which makes a lot of sense. You want these treasuries in the most safest way and we know how it's done in Treadfi on Che. So we will, I think we'll see these models gravitate to that. That will become a commodity. You know, we can't differentiate

that much. And then you will have the fully decentralized one, which hopefully will survive because regulation will say, OK, that's something genuinely different and there is no intermediary and that's fine. And the all in between the trust me, Bro zone where you just

could operate. I think there you the, the air will get very thin unless you get the right licenses because you can't tell me that you can do anything in between where you're not controlling users funds, stuff like that, which is probably clear that like in traditional finance, there needs to be another setup. So I see this clearance, I think of of the picture. I think it will be really interesting on the centralized ones, you have USDT and USDC,

but what happens next? And there I really like the model. By the way, was a great podcast with the heck from from bridge, which makes a lot of sense. You know, there it's just a commodity. They provide the commodity that take a fee. No thrills. They can't Yeah that the product is simple, but the interesting part is what are people able to do with the yield that they get, which players can can monetize

that and create the model. And for example, Bridge is issuing native markets stable coin on hyper liquid and there we already see people need to use this yield for distribution and liquidity like liquidity, you know, that's what we use it for. And, and we will see their models that might work and that will create new stable coin in combats that that will be able to, to survive in, in the space. So that that's about the things that I see moving, changing and

that will be interesting. And, and on the decentralized one, our electric course, I hope we see more adoption there, more recognition and that this is another model and model that should survive. And hopefully. And I think also as an ecosystem, we, we need to fight for it that people not just say, hey, this is dangerous, like self driving course, you know, Oh my God, we should avoid them because we have built a self self driving credit system and

people might be afraid of that. But I think just that still these things are possible because I think it should be a right that you and I can facilitate peer-to-peer finance. We shouldn't be forced that this has to be done in an intermediate way because it wasn't the normal way before 200 years, before they were back. That was the way how how you did finance and it was totally OK to do that on a peer-to-peer level.

I hear that and I, I kind of just just to be, just to be clear, I kind of I, I fully subscribe to that. So it does really appeal to me. So kind of I also really like single collateral dye and so on. I also like rye. So I know which camp I stand in. Zach also said something else interesting on the podcast, namely that he kind of sees banking and stable coins kind of converge rather than having kind of two parallel financial systems in perpetuity. Kind of. Do you think the user base of

liquidity is going to evolve? Do you think at some point JP Morgan will have liquidity positions on their balance sheet? Hey, could be, I mean from a risk diversification point and also it's interesting because there is no counterparty. So there's maybe not the AML topic. So we had Bitcoin Swiss in Switzerland that facilitated direct loans with liquidity. So not on their balance sheet, but they just facilitated

directly with liquidity. And that was possible in a regulatory way because there was no counterparty to it. It it was the the protocol that issued the stable coin. So these models can have some advantages. Also institutional players really like the predictability, you know, that maybe they're not reliant on a make of governance

and what happens there. So I, I think they're not going to shift to it, but as I said, as a risk diversification, adding that to the portfolio, if they understand it, I think that could be interesting. And on the other side, I'm not sure what Zach said there, but what you see is now banking is under pressure. You know that the banking model with these organized treasuries, stable coins, they're eating

really their market. So I'm really interested to see how this is, will evolve because banks will see people move their money to the stable coins. Because honestly, a PayPal Sabacod is a much better product than having your, your dollars in, in your bank because there you have the counterparty risk. And this bank and Germany might lend them the money to Banco.

We had the kind of this huge scandal and you're not aware of it. And with Poxos, you, your, your money's parked and you, you get a yield, you know, so with banks, you, they, they give you the risk without giving you the yield. So, and, and we see these forces

now playing out with genius, act with clarity, act honestly. It's not about the users what they are arguing about who should get the yield. So regulation isn't is is actually used to protect the banks or create the mold, which which I think is is a bit paradoxical and then just want to highlight it. I think half of it is regulation is used to protect the users, but half of it sometimes it's also to protect incumbents. And the same for for Miko.

You know, Miko, I don't think they made stable coins better or less risky for users because they forced I think Oil C to hold more of their backing in bank deposits where you take on the counterparty risk of banks. So that was really questionable to me. That's an interesting take on the regulatory side. Can you give us more specifics of how you think the Genius and Charity and Mica Act, how they protect banks? Is it just that they disallow the passing on off of yield? What?

What is it specifically? Yeah, exactly. I mean, that's something I learned with crypto, how a bank works, you know, your deposit, your your, your money, you don't get any yield and they can lend it out with some nice interest, with leverage. You know these are the. Many times over, right? I mean kind of like they can, they can lend out like. 8 times leverage, you know, we think these are these are decent crypto, the one that they need

regulation. So that's a very risky business model these days, especially if people can just with a click move all their money out. You know, it's not designed for that kind of duration of risk is not managed like that. And so there I see really disadvantage. Now I have a product where I can deposit my dollars, which are held bankruptcy remote and I still get the yield. So I mean, I would be really dumb if I wouldn't use it. And now I mean these products or government market money funds,

they are aware. I think with Fidelity, you can open such accounts. It's nothing new. I think crypto just adds new rails, makes it, for example, for me easier to get access without my bank and be able to use it in defy and repackage and rebuild it. So I think that's great, you know, but I think that's what I messaged you. I learned with crypto that not every dollar is created equally and how different all these dollars are, especially from a risk perspective.

Going back to this blue trip rating. What I also learned is, for example, USDC is only B plus rated because with USDC you still have some counterparty risk of Circle. I wasn't aware of that and PayPal or even Ripple USD dollar is better because it's bankruptcy remote and it's a better setup. So these things really matter. And going back to to your question is, yeah, I think the breaking up this banking model, they just got this deposit and could lend out and, and taking

the spread. I think that's a bit breaking up. And everybody says it's they're afraid saying OK, credit for for small businesses will be very difficult. But honestly most of these money went into hedge funds or, or, or a lot of other stuff. And now I think just these two markets getting yield on your deposits and getting paid to lend out your money will be

priced differently. So I think that's the pressure on the model that I see that these stable coins now offer will offer to to more users and and banks are afraid of bank deposit flights exactly as you said it because now they're getting more yield on their dollars somewhere else.

If I turn this argument around, kind of if I'm a small business owner and kind of I want to get a loan from the bank, what they do is kind of they, they look at, yeah, they look at me and my CV, they look at my business plan. And then kind of they do some sort of risk underwriting to kind of see whether they think I can make this work and whether they can kind of make their money back with interest kind of

in, in liquidity. I actually need some sort of actually very specific capital, IE ES in order to actually get a loan, right? So kind of this entire under collateralized loan space, kind of I mean, we don't actually have to talk about the in between stages where kind of say, for instance, in Maker kind of you deposit RW as and so on. But kind of the really under collateralized end of the spectrum is where most loans actually take place, right?

Everything more or less everything that's not a mortgage is severely under collateralized, right. So how do you see that kind of migrating into the trust as RAM or do you see that migrating into the trust as RAM? Because kind of I actually see that as the main skill set of banks that they have become very good at risk underwriting. Exactly. And it makes totally sense that they make it so I'm afraid, you know, that's what I said.

If I hold a stable coin and now some crypto team is giving under collateralized loans to market makers, I think. And I take a lot of risk. And that's why I said, OK, maybe I'm, I'm just fine with 6% on, on bold by not taking on all these risks because that's an old business underwriting business and traditional banking is very good in, in, in that and

should be done by these people. And the, the role that crypto can play is that you say now depositing stable coins or funding such companies that can underwrite the loans is now much easier, much more direct. So we already some years ago I talked to invoice financing companies that instead of getting a credit line from a bank, would take credit from

crypto investors. And I think that makes a lot of sense as long as you you kind of have this regulated business and you're doing it in a diligent way. But then again, blockchain and crypto just become the the distribution channel or just the the digital channels or rails

for traditional financial products. Cool. So Michael, tell me, what's what's next for liquidity? What should we watch out for? Yeah. So we are really focused on building out the the ecosystem and the utility for for bold. So being it, you know, kind of integrated in lending markets and then really beating the, the drum that people see this proposition, understand that they get a a stable coin that can have the same similar risk profile.

Like, you know, even better than USDC and Dai in this blue chip report that that were B plus and, and, and ball is a minus and getting a good yield and start using it. So that's really our main focus. You know, the product is out there and now it it needs to be used. So we are really focusing in educating people, understanding the product proposition, the good yields we we achieved.

So that's you know, as I told you, you have the borrowing fees, but if you deposit the stable coil, you also partake in liquidations and you can make 5% gains. So in these markets now where there were liquidations, people earned great returns and just making them aware of that, that kind of in this very risk adjusted way, these are great earning opportunities. That's really our main focus, driving driving growth, driving integrations and utility.

And I think that's the blue pen blueprint of every stable coin holders. And and that's really also the challenging part. You know, deploying the stable coin is always the easy part. And we see that we have a lot of forks actually our model gets forked quite a lot and deploying it is the easy part. Building a user base, building utility is, is really the the tough part. So that's our full focus. So where do we send people to find out more? Yeah, go to liquidity.org.

There you have the website. There you can inform yourself. There you find front ends, because even front ends are decentralized with us. So you have different front ends. There you have very great and deep detailed docs. And we have also a Twitter channel. That's the domain communication channel that's at Liquidity Protocol, where you can follow us, learn, learn about us. Yeah. And then help to push sovereign sovereign money and Ethereum dollars. Fantastic.

That's a fantastic way to go out today. Thank you so much for joining us, Michael. Thank you for everything for for having me.