Next Generation Stablecoins w/ OneTrueKirk (Volt Protocol)

**Speaker A:** Right now, the conversation around stablecoins is chaotic. Most of the energy gets sucked into the regulation or the CBDC black hole that our entire industry currently orbits around. Maybe if you're in the right circles you can find gimmicky or domain specific threads to pick apart, but it definitely requires looking. Today's Guest One true Kirk is one of the best people to talk about the entire domain of stablecoins. Soup2nuts not only does he have deep experience in crypto and actually building stablecoins, he's been spending the bear market thinking about questions that will directly inform the next generation of stablecoins. How do you need to rethink collateral given the volatile nature of Defi? How do the latest innovations and governance come together with stablecoin design? What does a mature stablecoin industry mean for Ethereum and for this world? If you're someone who is interested in the most important, most stable primitive in Defi, you will love this conversation. One more thing before we begin. Please do not take financial advice from this or any other podcast. Ethereum will change the world one day, but you can easily lose all of your money between now and then. All right, let's get on to the show. Kirk, thank you so much for joining me. Welcome to the podcast. **Speaker B:** Well, thank you so much for having me. It's a pleasure. Always happy to talk shop and ramble on about the things that I'm researching at any moment or finding interesting. So yeah, thank you for having me. **Speaker A:** No, awesome. Well, we're definitely going to get to that portion, but before we do, I'm a big believer that as cool as the tech is, what's even more important are the people that choose to belly up to it and dedicate their lives and their careers to it. And so at least half this conversation I want to hear who are you, Kirk, and what's your story and what brought you to Ethereum? **Speaker B:** Well, as you might notice from my manner of speaking or writing, I'm kind of an academic bent and I come to this from a history and an economics perspective. In terms, that's what I studied in school, but I was also always close to stem sciences and especially space. And yeah, I was really into my friend and I started a robotics club in college and I got to know a lot of programmers that way and eventually thought well, maybe I could try that too. Basically realized that getting hands on and building stuff was a lot more fun than purely being stuck writing about it. It is interesting to read and write about stuff and I'm a big believer in Having a first principles and theoretical complete understanding of systems. But at a certain point you get stuck and think, well, I could never make these kind of changes in Tradfi. And I used to always get frustrated watching whatever might be happening in politics or economics or the Fed was doing and be like, well why are they doing this? And I feel like I, who am even a non expert might be able to have some insight into it. And just to think that you can't get a grip on anything or have traction anywhere. It's so hard. Everything is closed, right in Tradfi. You have to go through a certain path to get anywhere. And so through learning to code I got more hands on with things. And that is also how I learned about Bitcoin and Ethereum and the things that were getting started. And I wasn't like super early to these things. It was probably around like 2014 that I became bought my first Bitcoin, I think. **Speaker A:** I mean you're pretty early. **Speaker B:** No, but I mean not like only but even then I didn't fully grasp its significance, you know what I mean? It was only like purely like oh, you know, the like. I saw people use crypto when I was in high school to do like, you know, purchase things on the Internet. We'll leave it at that. Yeah, I didn't use it in that way myself and so it wasn't until I was in college that I bought any. And even still the significance of a Turing complete, you know, system like Ethereum eluded me until later. And once I really understood that, and it was once I saw Makerdao that it really became clear to me what was possible to, you know, and I understood how DAI worked. **Speaker A:** I'm very interested in when you like first heard the call of the world computer. It sounds like it was around Makerdao. But what like what was going on with you and in your life between like 2014 when you first like at least understood that there was something to mess around with and then what makerdao is like 2018, right? 17 maybe. Like what, what were you doing in the meantime? **Speaker B:** Well, so after I graduated I started working as a programmer doing all kinds of different things, wherever I could get my hands on some work. And one of the things that I was really interested in was censorship, resistance and decentralized computing. And I got into learning about some things like Althea Network and also Urbit, which you probably have heard of. And it was through Urbit that I really got fully into Ethereum. Actually that was kind of my starting point. Makerdao was what made me realize I had to work on this, right? But Urbit was what first got me thinking, oh, I could learn how to write a smart contract. And because I became friends with some people who are working on Urbit, including Philip Monk, who was one of the developers at Plon and I had gone to San Francisco just for a conference that actually my wife was going to for work and I happened to, you know, I hit them up and said, hey, could I stop by the Talon offices and just talk to you guys, learn about Urbit? And in that conversation he said you should really learn solidity because it'd be hard for you to get any work doing URBIT stuff, right? But you can definitely potentially get some work doing solidity things because they use these identity NFT registries, right? For anyone listening, they're pretty simple, they're a whole peer to peer networking protocol but they do ownership of the namespace on Ethereum. So that's a fairly simple smart contract, intractable, where I could get started with it and understand it. And I tried writing some extensions for urban related stuff to kind of dip my toes in the water. And in doing all that I learned fully about MakerDao and Dai and how to actually use Ethereum and was trying it out. And that's when I thought, okay, I have to actually just get a job working at some company in this space to fully learn. And so I started out, I got a job at a startup that at the time was trying to build a cross chain, non custodial decentralized exchange. You could say that their goals were in some sense analogous to thorchain but with the difference being that they were sort of a, had kind of a compliance first mindset of like it's non custodial so like we want to architect it so like all the market makers can easily trade on it and not worry about their compliance. And there were some, some things to do with that that I won't go into too much because in the end, well, I learned a lot about the difficulties of like different layers and trust assumptions and came to conclude that the task that I was working on was impossible and to do it minimized in the way that we wanted to. **Speaker A:** Yeah, yeah, I mean a huge like the story of this industry is like the vision is always like seven or eight steps above like what the technology can allow at the moment you have the vision and oh my God, just to like go back and watch like the 2014 videos of Vitalik talking about Ethereum and to like just now be getting to Some of those things it's, it like really blows your mind, right? But sorry, just to scoot back to your MakerDAO moment, what was it about that and I kind of hope I know the answer because I think people are drawn to Ethereum for a lot of different reasons, right? And some of it's about economic reasons and some of it's about the existential things around the economics like censorship resistant, that kind of stuff. Some people it's about like the computer science, like some people it's about the NFTs or you know like whatever we can come up with one's reasons but like when, when you, let's say minted your first die, like what was it in that moment that where you're just like oh my God. **Speaker B:** Well I think for me a lot of it comes out of a lifelong. The reason that I wanted to study history and economics is this desire to know why the world ticks the way that it does, right? Why do people do the jobs they do and get paid what they do? And why are some people rich and others poor? And there's many answers for these kind of things. Any simple answer is wrong. But the key to me is that the fundamental way that systems work as far as how property rights are organized and how money systems and interest rates are determined are very important for these kind of outcomes. And so trying to understand all that is a long term obsession. And seeing that these kind of debates that scholars have throughout a century of like how could we automate the Federal Reserve? What should the Fed really do? How can, how should banks work? And the idea of MakerD I was like wait, someone had an idea about how money should work and they just put it right into practice, right there, there it is and I can go and use it. And to me that was magic, you know, and it's not that I, I didn't really even have a super strong use case to need personally to need to use a stablecoin, you know, in the sense that like since they're not readily certainly at that time and even now are not very usable for payments right in my day to day life but I could see how they could be used for those things. And so I could see right away, right this is if you could get people to use this, it can replace so much of the annoying infrastructure that exists in banks and it's much easier to deploy a smart contract than to write new laws or to create a trustworthy and as hard as it is to audit a code, it's a lot harder to build A trustworthy banking institution in the real world. So there's a lot of things you can do to try and experiment and push the envelope. And so that was, you know, very attractive for me. **Speaker A:** Yeah, and I think too like the, the reality of like I, I am a huge, just believer in the importance of history and like a huge believer that it's like important to recognize that everything single thing on this planet at this point in 2023 is this way because at some point somebody decided it was going to be like that and like that's super powerful because it means that like everything doesn't have to be and there's space to explore all this new stuff and we don't need to go that philosophical. **Speaker B:** And I'll add one more thing to this story which is besides the maker moment, the other critical moment for me was my Uniswap moment, which is that this time I was working on this decentralized exchange startup and the narrative at this time was like decentralized exchanges can't scale, right? It's like the bandwidth of L1 trades will never be sufficient. And so the whole thing we were trying to do is this independent chain or thing to do it right. So it's like you can never have decentralized exchange on Ethereum will never be enough. Right. The centralized exchange volume dwarfs it. It's always going to be that way. But as I was working I saw decentralized exchange volume grow and grow and grow and finally they released Uniswap V3. And when I saw that, I just said to myself, oh my gosh, not only is this design space on chain not fully explored yet, it's not even close to fully explored, right. And I said that I need to spend way more time understanding everything about this from first principles and I have to quit my job. And so I did like a month later and just I had enough of a little bull run nest egg, you know, to equal like 6 months of income or so. So I could felt confident in saying to my wife, let me quit my job and I need to work on this and maybe eventually either work at a new company or maybe start something, I don't know. And so that kind of launched me off and, and so scaling as an issue has been at the core of it for a long time. You know, the, to me credit and money is like a even further back foundational. But it is early. But so it's a topic near and dear to my heart about like how do you actually scale settlement and exchange? **Speaker A:** A quick little anecdote from, like, my pre crypto. And by the way, it's just very funny to hear you say that you had, like, six months of income and you felt like that was like, relatively like work. And it's just like, welcome to crypto. I can tell your brain was already, like, changed by crypto if you thought six months was a long time. But anyway, I sort of before I found crypto in 2021, because I heard Hayden Adams explain uniswap on a Bloomberg podcast. And, you know, that, like, we can talk about why, but just like, the ability for, like, anyone to create a market and, like, I don't know if anyone will trade on it, but it exists was like that. That was my. My moment where I was just like, I need to drop everything to figure this out. But before that, I was working for Anheuser Busch, you know, which is like Budweiser, Bud Light, and it's like, by far the largest beer company, and it's the second largest consumer products good company in the world. And one of my jobs was I was the cash manager for the US and Canada. And so that's like $20 billion a year, which is like, you know, just had to make sure was there to get pay the bills and, you know, whatever, everything that that entails. And like, my favorite story of, like, why crypto is, like, inevitable, like Ethereum is, like, inevitable is so one year we had, like, a $1.45 billion tax payment. And so, like, it was one wire transfer for, like, billions of dollars, right? And so the cfo, that day, he walks behind me, pulls up a chair, puts it behind my desk, and he goes, rex, I'm going to sit here until it clears. Like, this is so important that, like, I just, like, need to know that it happens. And so for eight hours that day, I sat there calling the bank every, like, 30 minutes and going like, hey, where's the wire? And every single time, they're like, rex, like, you know how this works? Like, it's a black box. Like, parts of it are different settlement banks. Like, we're, you know, we're waiting on liquidity. Like, it'll get there. Like, this is just how the system works. Like, we tell you this every 30 minutes. And then I would hang up the phone and say, like, they're working on it. Like, I make up stuff to give them updates. And then I'd go and, like, you know, look up, like, the price of aluminum on my Bloomberg terminal or just, like, make shit up while the CFO is behind me, you know, and, like, for all of you who've never done nine plus figure wire transfers, this is the system that runs the world today. We can talk about decentralized finance and the scaled world computer and all these things that are going to be enabled by light clients and dank sharding, blah, blah, blah, blah, but just on money transfer practical use, it's such a better solution than what we have today that. Yeah, I don't know, like, I think, I think like on first principles, like that's where I start with Ethereum. **Speaker B:** Well, I find that quite relevant given that I was on the receiving end of being debanked by Chase not long ago and faced quite a bit of trouble wiring the funds out. You know, they, they canceled any outgoing wires to Circle and they would have said, pretty much. When I talked to the customer representative, they said, I'm sorry, I don't know why. The, there's no way for me to find out why and you won't be able to get any resolution or answer before they close the account, so you'd better get to a branch and just get a check. And they said. **Speaker A:** So in last year, in summer, like while we're all like worried about our crypto lives, so I got locked out of all of my money from Wells Fargo and get this. Completely unrelated to crypto, completely unrelated to crypto. But for like five months I didn't have access to any of my liquidity. Five months, yeah, and it was just like so ridiculous. And they were just passing me around and I still don't have resolution, but I have my money, you know, resulted in me like dropping to minimum payments on all my credit cards. Like, I ended up taking five figure loans from my mom. And like, you know, a huge part about what crypto is to me is like control over my money. And like when you're dealing with Chase, when you're dealing with Wells Fargo, when you're dealing with any size bank, it's just, they don't care about your life, they don't care if you're going to miss your mortgage. Like, they don't care if like by closing this down, like the, like very real life that you have built up and are counting on is like going to get screwed up. And like what crypto is, is like the ability to say like, well, it doesn't really matter if no one cares. **Speaker B:** Yeah, I assert my right to due process, basically. You know, you can't, like, sure, Circle could freeze my account, but not, not arbitrarily and without explanation. Right. And it's proof that. And it's undeniable proof that they've done it. Right. Like it's, it's a public action that everyone can see and they can definitely get in trouble if they do it to a lot of people for no good reason. And so it's, it's not perfect, but even a centralized stablecoin like that is a lot better than a bank like this where it's just my word. Right. And what can I do? Right? Nothing. It's probably in terms and conditions. Right. I. It's hard to even start like a public outcry, but if you could say, look, check the chain, you know, they're freezing all these people, that's, that's something. **Speaker A:** Yeah. And like in on chain we have options that are not even like centralized. And like, you know, LUSD has its problems, but like literally unless you're like a Russian oligarch, like your, your size can probably be held in lusd, right? Or like you could take a long position in eth, or like whatever. But like point is, is that like we have options. **Speaker B:** There's a paradox where being able to defend against attack decreases the odds where you will have to. Perhaps a paradox is the wrong word, but I think that that's a positive thing in that, you know, sometimes people talk and even I will talk about the scaling constraints of certain systems. So that doesn't mean they're not valuable. Right. And giving these kind of perhaps not fully scalable but available refuges still increases the overall security in my, in my mind. **Speaker A:** Yeah. And yeah, I mean, I think there's a lot to unpack there, but let's just continue on with this story. So we talked about how you are at this, you know, like cross protocol, decentralized exchange and you just, you realize that like love them, but like it just wasn't going to happen. And so like, what are the next steps? And like, can you just basically walk us from there to, to where we are today? **Speaker B:** Well, I knew that the problem space I wanted to tackle was related to stablecoins, credit lending, that sort of thing. And so I thought about, I saw that Uniswap V2 to Uniswap V3. The key difference was that it was much more expressive for the LPs. It allows a lot more user preference in the defining the price relationships. And as many others have noted further, you could go with that. And there's other designs where people think about, well, what about different types of orders or different types of this and that? And there's lots of complexity you can do, but My mind started to go in a slightly different direction because that's kind of the opposite of a stablecoin, right? Like what a stablecoin is, is a thing where you evaluate it up front, front and then you opt into a stable something, right? And it's a. All stable coins are essentially synthetics, right? It's a synthetic debt asset of some kind or another. Right. Backed by different things and governed by different rules. But the key thing when we say a stable coin is that some set of rules and policies have to make it stable. And that's not each individual user independently managing that risk full and liquidity fully on their own and needing to set ranges of prices and all those kinds of things. So that brings in kind of a governance problem. And so besides the scalability question of like, how do we let more users express their preferences directly on chain, we also have to say, well, what about the users who don't want to express their preferences too explicitly and have to actively manage things and instead have some kind of a replacement for the kind of passive financial instruments that exist in Tradfi, but without the same kind of centralized intermediaries? And how can we have governance but without reintroducing these trust assumptions? And I saw that, you know, again from very early on in Ethereum, people have spoken out against token, you know, 51% token voting. Vitalik is always ragging on it, but I felt that there weren't that many credible alternatives in terms of how you could make a, a stablecoin system work. And so I spent a lot of time thinking about that problem. And at first I was more focused on kind of the reflexer style autonomous control systems. But I started to come to the conclusion that it's the computational difficulty of the problem of like, there's no set of inputs that can fully explain how you should lend. Right. And like in risk and everything and interest, there's no like smart contract where you could fully describe all the things you should consider at all times in the market and at all future times to evaluate it. And so instead of rule set. **Speaker A:** Yeah, to elaborate on that a little bit. So I'm sure if you've been on Twitter in the last week, you've like been aware of the Michael Curve CRV token AAVE situation. And like, one of the things that like really blew my mind through this conversation was really realizing that whether it's Michael or people like him, that it's not only this massive position in aave, but it's also in Abracadabra and in fraxland and so my thought is how can any individual lending protocol compensate not only for the price and liquidity of a token, but also the structure of where that token is in defi. And like, you know, you're basically taking on systemic risks that like, you're not acknowledging. And like, I guess I just totally hear you in that, like, forget worrying it about it from like a gas perspective, just from like a theoretical perspective, like how do you like handle the computation that like at the end of the day in tradfi, the way we do it is just like loan officers and gut jacks. **Speaker B:** In the end of the day, some human has to make the decision, right? And so it's my take that that human can't be entirely removed. And even in systems like LUSD and rai, there's a chainlink Oracle, there's someone who is running a computer program that observes the results of an API feed that comes from an exchange and computes a price and submits it at a particular time. And so that process is manipulable in certain ways. Like the AVI style attack could be done on any kind of asset or market that's reading in chainlink type feeds. The only question is like, how much leverage is there against that asset and how profitable, how deep is the spot market, how profitable is it to manipulate or even if not manipulate as in the current situation, right, where it's like the price doesn't account for what would happen if you had to liquidate the position. And so it's like the price isn't that meaningful in the Michael case. It's not to rag on him in any way, but it's more like people just don't understand the nature of the risk of such a large position. People will say things like, oh, but the health factor is fine. And I'll say, well, what would be the slippage? The current price doesn't mean much. You can't just use Oracle prices to guarantee that a loan is healthy at any size. Then the question is, how do you decide what's the max you lend against any particular asset and at what interest rate? That gets to be a very complicated governance question. I think that there's a lot of interesting work and it's not just us, there's a lot of other groups that have been doing interesting work on governance. Like I'll shout out Gyroscope as a stable coin that has been doing cool things as far as like governance circuit breakers. **Speaker A:** Well, actually, so before we get to Gyroscope, can you talk about what your group is doing and what you think good governance looks like. And then can you tell us what Gyroscope is doing? **Speaker B:** My approach, which is a little bit different from what most people are working on, is focusing around. On the question of like, well, so I was first inspired by a concept people call optimistic governance. And this came out of. Well, lots of people have worked on it, but I was introduced to it through Fay Protocol and Tom Waite among others who worked on it and I had a chance to work closely with. You have this basic concept of someone, we won't say who, some subset of token holders, a committee, we won't worry about that for now, can submit a proposal and then someone else can veto it. And the idea being that instead of having everyone have to come and make a quorum to do anything, as long as there's enough of a quorum to veto dishonest proposals, you can let things chug along and so you don't want to have one. This is still not good if it can do arbitrary modifications to protocol code that still demands a lot of diligence that the average token holder cannot be expected to provide. But optimistic control over parameters and certain narrowly define and scope processes is clear to me as an obvious step forward in governance of like, you have a certain quorum to modify a certain thing and you can say, all right, you need this percent of the token supply to vote to onboard a new collateral token. This percent to vote to strike off an existing collateral token. There's this long voting period and you can have various rules and I don't think there's like a magic perfect answer, right? That's like an. But, but there's. You can have customized rule sets that suit your risk and your preferences, right? And the level of trust, like similar to rollups where you can have different levels of decentralization or whatever that fits your own preferences. And there's many. I can see more than one decent spot in the configuration place. I'm not saying I have, I'm building the only right answer for that. But I think that that principle is very strong and could be applied generally. And then on top of that you can unify that to some existing things. Like I was also inspired by gauge style voting where instead of everyone voting on one thing, you can direct a certain amount of power or resources to a certain place. And so there's some concepts like that where you can. And one way that I would refer to it is we know that there's going to be some amount of intermediation, but if you can make it trust minimized. That's the key. So some people are the ones who are having more influence over the voting or they're directing resources to a certain place but they have skin in the game and there's veto over decisions. So the system should kind of safely wind down in the worst case and have like this kind of a rage quit or something. **Speaker A:** Yeah, well first of all, just quickly on the rage quit, like I'm a huge like fan of protocols designing that into, into the their VE systems. Let's just be frank about what we're talking about here. And I think that that is like well actually I guess for locked LPs too. But anyway I think that's like really smart both in terms of like giving optionality but also in a way that is like not only like safe for the protocol, but like actually healthy or like, or like profitable. So huge fan of like those kind of designs, but returning to what you just said, so in my head I'm hearing like kind of two different styles of governance. One is, you know, I'm a huge believer that like EVM and blockchain is cool, but that doesn't mean we throw away everything that's happened over the last 10,000 years of human coordination and whatever. And so I think it's really beneficial to look at models in the real world. And the obvious model I see is the corporate structure of board of directors where you have this type of ability for any, every single participant to like express their, their voice in proportion to their share. But like on the day to day and like on the like kind of like things that require like vision and executive like function is like deferred to people that the community has like explicitly like lended their trust. And so I think that that's one mode of governance. And I think that like kind of fits under the optimistic government bucket that you're talking about. But kind of in my head, on the other side of the spectrum is the gauge style, right? Which is like really saying like what we value is like very active governance by as many people as possible because we think that that's going to express something in a way that's like providing valuable data to the protocol. And so I think like of course like those two things aren't mutually exclusive. They're both like design mechanisms that you can put into one token. But how do you, how do you first of all, can you just reflect on what I said? But also like what do you think are the types of things that are appropriate for like the, the more optimistic like Trust approach. And what do you think is better for the like every person should engage with every, every vote approach? **Speaker B:** I think that they don't need to be separate, right. And that the, the question is if you want to govern a group of humans on chain, you need the board, right? Like that's what if you're developing software that is owned by the dao, by people who are paid by the dao, you need a board, right? Something like that. Because then it's really like an on chain corporation. And that's amazing, right? I love that because it's much better than an opaque off chain corporation and it's a much more even playing field for people in different jurisdictions. All these things we could get, you know, keeping that aside, for the gauge thing to really work well, you have to have a perfectly defined problem space and understand the resource that you're allocating really well. And so for certain things that's not so easy. It's not super easy for anything. But for some things it's impossible. And for other things you can do it with work. And so I think that for example, like allocating a debt ceiling in the lending market is something you can do with a gauge, but determining interest rates across all the loans in the lending market is a little bit more difficult. And, and so you need some things like these optimistic governance patterns. And so you have to think carefully for each type of a parameter. And I think that the kind of basic gauges, right, where you're just directing emissions like a resource spend is one thing, but even then I have quite a few criticisms of those models, right. In terms of there not being any skin in the game between what you vote for and the profits you're making. And so that's part of what I want to build into this model where think about how the AVA staking module works. You have people who can opt in to risk and have skin in the game. And I think of that almost like on a per asset, but not even per asset, per lending term basis. For every type of loan term that's available, whoever's voting in the gauge is in a staking module and has some kind of a skin in the game on involvement. But this core idea of a discrete resource allocation being a source of data, 100% I completely agree with it. And for lending markets, you can't have one board evaluate thousands or tens of thousands of different potential collaterals to say what should be the current debt ceiling. Right now, today you might be able to say what is like a toxic loan term that shouldn't be here, yes or no, but governing exactly how much liquidity should be in each one and exactly how much rate you need market processes for things like that. Um, and so I think that anywhere you need to have like a market based process, it's. That's super interesting. **Speaker A:** Yeah, well, and I definitely hear you and like very much agree that like what's so important is the problem space and like designing your. You're designing like your VE system in a way that is actually like achieving goals that you wanted to. And so, you know, I think like we can have a conversation about like, okay, like did it make sense for like, you know, velo Velodrome or like solidity solidly style Dexes to like flip flip what curve did in a lot of ways. And you know, that's one conversation, but another conversation is like innovations on like the gauge system. And you know, like, unfortunately I have to say, like, this project like may have been a like victim of the just the cycles in the bear market, but are you familiar with Fiat Dao at all? **Speaker B:** Oh yeah, closely familiar. I've, yeah, I've met and spoken with Max quite a few times. **Speaker A:** Yeah. And so like they used to do like a lot of good content back like early 2022. And so one of the things that I remember them talking a lot about was like using the VE system in a new way. And like what I loved that they were talking about is basically like instead of talking about using gauges to do like emissions, it was like using gauges to basically backstop like with the insurance buffer, like different pools. And so what that does is basically like give the market more confidence that it's a less risky loan and effectively like change interest rates, but in a way that like is like really leaves the decision in the parts of the protocol that like are controllable and make sense as opposed to like just kind of giving like the wild market, like the ability to just mess with parameters willy nilly. **Speaker B:** Yeah, you definitely have to watch out with manipulation risk in any of these kind of things. Of course. And I like that model a lot. And the other curveball I'll just throw out is that it doesn't necessarily have to be ve. Right. Like instead of calling it because VE really makes people think about a time lock. But the goal I don't think should be making people lock up their tokens for some duration, but rather coupling the lock of their tokens to the risk of whatever decision they're making. Right. So make sure that like if you're casting a vote you know, let's say, and you know, I'll get a little more concrete for our specific system because I think that's more interesting is that let's say that you're voting and for those listening, just think about a MakerDAO style system where you have different vaults, types that can borrow under different terms, right? So you have your own individual debt position and you can. So that'll be just the analogy we're working under, that's familiar for people. But then imagine instead of the existing maker governance, you instead have these kind of gauges that are allocating this debt ceiling. And the idea would just be that if the debt ceiling that you have voted with is utilized, right? Like you have voted a debt ceiling towards a certain asset and someone is currently borrowing, you could only unstake from that gauge if there's enough unutilized debt ceiling, right? So then you can't go and unvote once you voted and someone then borrowed until they repay their loan. And, and then you will receive interest from that. And also you could unstake as, and you can imagine someone else might be willing to come in and stake on year one and then you could unstake that kind of thing. But the idea should be that the lock should be coupled to the ramifications of your decision and you shouldn't be able to like walk away clean like stake, vote and then unstake and leave and then the risk hits the protocol. So if you can couple it towards the decision you're actually making and also give you rewards specific to that decision, I think that that is a design ideal and that's probably different for Mark. You know, for a Dex, it might be something like, oh, you escrow it for like a week or a month or something and then based on the trading rewards that have been received on that pair, you either get a reward or a slash, right? Because it's basically we're saying, hey, make an honest prediction of the yield on this pair. And if you're just getting like bribed and taking your own profits, that's great. But we're going to slash you a little bit to be like a base fee. You know, you could have however you want to do it. And I think that for different types of protocols there's anything that is like directly handling money in a very mathematical way. I think it makes sense to do this. For things like ENS it would be different, right? And it makes much more sense to have like a board or a foundation for other types of structures. But for it's A very mathematical lending market or exchange having tight coupling between the decisions and a financial outcome makes a lot of sense to me. **Speaker A:** Yeah, man, my like wheels are spinning just thinking about everything you're throwing out here and you know, like for anyone that's like feeling a little uncomfortable with the like the idea of matching the like your staked aave, right. With like duration of the loan. It's like that we do the same thing with the collateral, like because we have to. Right? Or no, sorry, not the collateral. Like the assets that you have loaned. **Speaker B:** The lenders in the market are potentially stuck. Right. So why shouldn't the governors be in the same boat? **Speaker A:** I don't know how you would encode this, but on a philosophical level, if anything they should be taking more risk. **Speaker B:** Yes. And we definitely interpret it the same as maker, right? Where that token is supposed to be the first loss and we don't have the exact same. There's lots of people, and this is kind of an aside, but there's lots of people have written interesting things about kind of the economics of the maker emergency auction and also Maker buy and burn and kind of critiquing them. HASU has some interesting things on that. And also in the light of this potential AVA v2 bad debt that might result from the curve position, people have been talking about how the AVA staking module works and kind of reviving interest in that. And it's clear that trying to sell your governance token in an emergency is not a great idea. Right. It's not going to make you a ton of money. But Maker also has this concept and AAVE have a concept of reserves or the surplus buffer where they have this accrued profit from lending. And so if you understand the governance token as like a share of those reserves, right. That's what they're directing around when they're staking. And part of the idea of the lending market should be like you don't want to have those reserves leave the protocol early on because you should be growing, right? You want to be always growing the reserves. And one of the criticisms of MakerDAO is that this buy and burn and even run now has pushed to stop the buy and burn and then and accumulate, you know, strategic reserves like eth now. But for a long time they bought and burned a bunch of MAKER at the top and then they had to sell it off at the bottom in an emergency and they ended up losing a bunch of money. And I think AVA would be in the same boat if they had a staking module loss now, but they've had more time to. They have accumulated a decent amount of reserves. Right. And they can use reserves from multiple markets if they need to. So that helps. And so I think that lending markets should think a lot about just like better infrastructure for how the reserves pay off bad debt and how bad debt is marked down. And I guess that's one other topic I would highlight as being of great interest to me is what happens when the worst happens, right? How do the lending markets perform when they fail? And I can tell you guys some stories. We can talk about interesting stories from what we've seen. Like, you know, vault protocol had integrated fuse on the, you know, when the fuse hack occurred. And so I had a front row seat to having to. Not just front row seat, but was, you know, responding in the. **Speaker A:** For the audience. The fuse hack is better known as the RARI hack. **Speaker B:** Yeah. And I, I distinguished that because rari had. There was actually more than one RARI hack. And so there was a RARI accelerator that was hacked prior. So I tried to be technical in that regard because the real history is part of the. When Fey and Rari merged, part of the deal was the loss from the previous RARI hack being paid off by the tribe now. So there's some interesting things like that. **Speaker A:** No. Very cool. And I think just to tie a bow on what you were just talking about in terms of like using your own token to defend, like using your own token in emergency situations, it's like, look, I understand why it was architected this way and the reality is it's because like you have nothing else to sell in that moment. But, you know, just to not recognize that the moments when you need to sell the token to raise funds are going to be the moment when the market has the most questions about your protocol and therefore you're going to get at the lowest prices is like, you know, it's a recipe for disaster. It is a literal recipe for like selling low and like taking on bad debt. And so, you know, again, like, this is the nature of innovation. Like we all have to take from. We stand on the shoulders of giants and like thank you giants for taking the licks for us. **Speaker B:** Yeah, a whole tower of giants at this point. **Speaker A:** So while we're like still in this maker world, I would love to like just hear your thoughts and reflections on what maker is going through in terms of like this transformation. And like, if you want we can talk about the like politics and like the end game of it all and whatever. But like, to me all of that's like noise and like, what's more interesting is just like watching the one of like the OG DeFi protocols, like really make a legitimate attempt to like reach off chain and like create a hybrid business that straddles both. And I'm wondering if you agree with that characterization and if you do, like what, how do you think that's going and do you think it's a good thing? **Speaker B:** Hmm. Well, that's a good, good set of questions. Well, let me, let me take that from the end. Do I think it's a good thing? Yes. Do I think it is going well? Mm, not as much. Right. So like conceptual I think it's a good thing, but I'm less convinced on the execution and so, and again, not to get too much into the internal maker politics but, but it is noteworthy that this push into real world assets was initially driven by a group of contributors in MakerDAO that have since been driven out, you know, and basically Rune is still continuing that same vision in a way. And that's what's interesting, right, is that MakerDAO is still pursuing this path towards being real world asset heavy in a sense, but now with kind of this defensive mindset, maybe even paranoid mindset, which is a little bit different. And so I'm going to give basically the good and the bad of both and to give a fully balanced answer. And so the, the bad of how things were before run came back in was that there was not enough, not enough fear of God in everyone, right, as far as risk and to, to. **Speaker A:** Provide my like little piece of the story in this. So as I was first getting into crypto at the end of 2021, I applied for a job for MakerDAO and it was as part of like, it was under Sebastian, it was like part of the like strategic analytics, something like that. And but like all of my interviews were with like the real world assets people and you know, like I was from the real world finance. So I think like that's just who they had me talking to. And you know, to me like the, the biggest like takeaway I had was just like, oh my God, does anybody know what anybody else is working on? And like this just seems like a, like, like a like, like huge blob. And so anyway, I'll let you continue. But that was just like my impression from getting rejected from a job there. **Speaker B:** No, that's absolutely right. So there was, there was too many disorganized groups and a lot of wasteful expenditure going on and also just things like inconsistent management of asset risk and interest rate. Pricing other shenanigans. But there was an organized direction towards fixing these problems. And so some people within Strategic Finance were cleanly aware of these things and frequently highlighted them. And there was a push by certain Maker holders to think about something like a Maker constitution and a board. And there was debate about this, right. Some people said, no, we shouldn't change it. Right. And so it wasn't clear where it would go. I'm not implying that there was a clear consensus that was disrupted, but from my point of view, there were credible proposals towards a beneficial direction and starting to grow the surplus buffer and have more sophisticated management of the PSMs and liquidity. And though the problems were acknowledged, I think that progress was slow because there was no central leader who had strong control over the organization. But what I've seen since is that kind of the opposite, right? Where I feel like now it's got to the point where Rune effectively has unilateral control over Maker in that they've enshrined a program where like you have to be a non to be a delegate. And so most of the experienced delegates are being for Slash have already departed, along with a lot of the experienced teams at the dao. And you have a situation where Run can more or less just push votes through by himself. I don't know exactly how many tokens he controls or through intermediaries, but even what he publicly controls is huge and it's very difficult for anyone to do anything different. So then the more interesting question becomes, well, what's run's vision? Right? What is Maker Rune's vision going to be like? Because it's not all bad, but there are things that concern me. And mostly it's just that I feel that there are certain examples of extreme and unrealistic thinking and like not what I would consider to be sober risk analysis or cost benefit analysis going on. But at the same time there are decisive changes being made for the good things. Just like simplifying the overall. The goal of paring down the overall organization and centralizing it around a unified objective is very. Is absolutely correct. But when I see what's happened, I see talent loss and I see a strategy that is not necessarily risk minimized in the way that I would like to see from Maker. **Speaker A:** Yeah, no, I mean, I think that I don't say this with any like humor or as a joke. Like, I mean it seriously. It's the dictator's dilemma, right? It is like this is like an energetic person who has a vision can like really like tighten things up and Bring like a massive like blob into this like tight organization that can really like affect change and do things. But like the flip side of that is like like dictators like whether it's because like they can't stand other people like sharing control or it's because like competent people like want to have real responsibility and real input. Like they end up like pushing away like their real sources of like feedback and like information and like just like what makes like an organization stronger than a leader. And so you know that we're maker seems like it's like living and dying on like Rune and just like be aware that that's what it is now. **Speaker B:** And the other just note of caution that I would give to people is that if there's one thing I've taken away from building in this space, it's that complex new systems are very scary from a smart contract security perspective. And like both AAVE and Compound have had bugs slipped through that accidentally froze markets in the last year. And that's scary. And it certainly when I hear about things like in the end game plan and all these subdaos and new structures, new synthetic assets, I think whoa, I would be nervous, right? I just hopeful that they won't make too many alterations in the existing core protocol and will remain conservative. But that's what, that's one of the hardest things for the average end user to evaluate risk about in a DEFI protocol, smart contract risk. And so just be wary when you see changes happening, right? A lot of new things going on like that. It's not the Lindy factor that you may think it has can erode. So that's what I am most concerned with. Because people are very worried about USDC risk or particular monetalis collateral. I'm less concerned. I think that MakerDAO, its current collateral basket and current size are unlikely to result in problems. My issue is with their direction at scale. If they were to grow 10 times on the path that they're going, I think that they could get into a lot of trouble. But smart contract risk can strike at any time. And so definitely I'm going to be keeping a keen eye on that. And I'm honestly thinking that the culture and others have said this as well that the culture about security in DEFI just needs to change and be more collaborative. And so part of what I hope is that more people will do more building in public early and do more peer scrutiny and review of each other's code. So this is just a shout out to anyone who's listening and Interested in that, that we would love to, you know, of course have limited time, but would love to provide peer code reviews and also to get peer code reviews of what we're working on and would encourage like that to be more of a, more of a thing. Like it's not enough to get one or two external audit teams who don't have deep skin in the game and then just like one, it's hard to be assured. But if you think about the kind of practices that they do in aeronautics and other extreme security applications in other software fields, it's common to have a whole separate team that writes tests without even looking at the code. Right. You get the same spec to the code team and the test team and they make it and at the end the code has to pass the tests. And I have friends that went to school with me who went to JPL and have told me about all this. And I think if we're writing code that aspires to be immutable, that's going to secure millions or billions of dollars over time, then that's the least that we can do. And so we can try to do that internally. But it's a big burden on everyone who's a researcher or developer to have all that testing and security infrastructure in house. So I think that a culture of peer review and basically normalizing that it should be considered absurd and reckless to submit a governance update to a major dao without getting it signed off on by like the operators of its major competitors as well. Right. Like Compound and Avadev should run each proposal by each other publicly. Like why don't they? You know, and a lot of things like that seems like it would be just like a cultural norm that could be enshrined or like you can't publish a scientific journal without like a randomly selected set of reviewers. Right. How could you, how could a daoist sign off on a proposal without the similar scrutiny that. That was managed in a very public way. And of course they have, you know, they contract with security shops. But I just feel that it's not the same thing to have purely outside professionals who only come in occasionally and episodically. **Speaker A:** Well, look, I mean I think everything you're saying here like draw is like we have a couple of problems here. One is like we have an auditing industry, but like we have an auditory ind. We have an auditing industry that like, like we have like actors like Sir Tech who like is a well known meme that if you get audited by Sir Tech, you're like One week maximum away from getting hacked. Like that, like that is the fact that that is tolerated is a reflection of like the fact that we're not taking any of this seriously yet. I think like peer review and everything you're talking about is great. And I think you just covered kind of two things there. One is like on the code side and one is on the like just like responsibility in like decision making side with doubt proposals. And you know, I think like the, the kind of like dirty underbelly of this whole conversation is like this whole thing is predicated on the idea that you think that one thinks that daos are like really good faith organizations that are like trying to make decisions in concert over the Internet by using this new technology and not like a way to issue like unregistered securities that you can use as exit liquidity in a way that like people can't track that like where the money's going and like the how many people are involved in like that kind of thing. And so you know, I think like there's a lot of like hairy questions in our industry and a lot of like things that like really need to be like, like identified and like we as a community need to excise and like say we will not tolerate. I think there's a lot of things that we need to have like really good like good natured, like energetic debates because there's not a right answer. And I think there's like best practices that are already like appearing and that we like should be skating towards. And I think it's a big all hairy mess. But you know, while we just have like 10 or so minutes left of this conversation, I'd love to just kind of like pivot like away from like what is and like, like look more at what's coming. And so like within the context of like lending markets and like the things that you're working on and like governance, like as you look forward, whether it's new, like protocols or designs or like technologies that are going to be enabled. Like what is really like getting you excited and, and yeah, what is getting you excited about the future in an era that it's hard to even get out of bed knowing that we're in this industry? **Speaker B:** Well, at least for me, it's hard to stay in bed, both because of the exciting things I'm learning about and because I have a baby at home. So as far as what's coming up, what's really caught my fancy recently is the idea that so people have been focused on generalized scaling for a long Time in the Ethereum context. But I've begun to ask myself things like well how can I push the limits within specifically where I'm working? And that has led me to understand things in slightly different ways. One example would be normally for a roll up like Arbitram or Optimism, you have this kind of canonical bridge where you send if you need to send and that's also the sequencer selector, it's the contract where state updates are posted and where you send funds if you want to send them to the rollup. We can call it whatever we want, I don't care, Bridge, gateway, proposer, hub, anything. And this is where all of the non native assets of that roll up are and it also presumably is coupled with the state route of the rollup. So this native assets are there too, right? And especially for non native assets like all the ETH that might be on roll ups, it's just sitting there doing nothing, right? Like the it's whatever you position you might have on the roll up from the perspective of Mainnet the eth is sitting there idle in that contract doing nothing at all. **Speaker A:** So just to really drill home that point, like what you're saying is today let's say there's a million ETH on Arbitrum, but from the perspective of Ethereum that's just like 1 million eth sitting in one smart contract not moving just. **Speaker B:** Eth in a contract not able to be used to validate or anything of interest, right? But you might ask yourself well what if a hot topic is eigenlayer? What if in some kind of rocket bull like mechanism stakers could bid to get in on some of that eth, right? And stake that eth and use it to validate but without it ever leaving that contract, right? Because the rules for that staking so it's basically like a wrapped in the same in the same way that when you staked eth via rocket pool or other truly decentralized staking pools, it has to pass through some kind of a gateway, right? So if you're running a rocket pool node and you posted some ETH collateral, you can't get your own eth back without also returning the eth from the reith holders that they provided. And so you can do the same sort of thing here where you can do collateralized. But to me while eigen layer is cool, I have it's like the wait it's all over collateralization meme like the restaking, we use that term because it's eth, right? But if you we actually have A word for that in tradfi which is rehypothecation. Right. You know, we. Whether it's. It doesn't matter if it's either USDC or uni token or anything, right? Any token that you deposit in the roll up contract that's doing something on L2 but doesn't mean it has to be idle on L1. So we can start thinking about interesting things we can do. Not only restaking but also like lending markets where you can simultaneously be using the same liquidity on L1 and L2 and I'll shout out someone else who's doing related work. There's something called the distributed AMM or the DAM that I believe comes out of the stark net context where it's like you can have one pool but it allows multiple contracts to have trade at separate. I don't want to mangle the explanation of how that works too much, but I would encourage anyone who's interested to look at the way that they allow the same liquidity to be traded against from multiple consensus layers. But this is sort of the opposite, right? Because I'm saying, well, what if we're not worried about what's happening on L2, right? But, but we're saying what if that funds that is on L2 without worrying at all about what it's being used for? Who currently owns it on L2 could be earning yield and then that could go to all of the people who are on the L2. **Speaker A:** For anyone who's like hearing this and just being like, oh my God, like we are such degens, like things are so crazy, like how can you be layering risk like this? I mean like at the very most basic, it's like Arbitrum could just swap all the ETH in that smart contract into staked Eth, right? And then that ETH is backed. Everything that's on the L2 is backed. It can always be redeemed one for one for staked ETH. Or Arbitrum can do the swap for you or the redemption for you, but in the meantime Arbitrum can be gathering new ETH and they can distribute that to people on their roll up. They can use that as a buffer. They can, you know, anything. But like man, like this is like an incredible just like idea and insight. And just like if you know me, you know that I like, I'm a big believer in Eigen layer and like not even necessarily in like the company, although I'm a big believer in Sri Rom. But like I'm a big believer in the Paradigm and the idea and like the transformation and what it means for like Ethereum and smart assets. But man, this, you just opened it up way more. I mean this is even more basic. So man, mind blown. **Speaker B:** I'm glad that interests you because I've definitely been spinning with all the possibilities and it all started off just asking the question like how could a lending market have a fungible debt unit on multiple scaling layers and how do you handle things like bad debt getting safely reported? And I started to realize what's very difficult unless you can tightly couple the state on L1 to the state on L2 in the bridge contract. But I realize if you can do that, there's all kinds of things that you might be able to do that are interesting. And so I think that you know, one, one example of the significance of the funds that are on the bridge contract being borrowable are that normally on a roll up it's very common that the prices of assets won't be exactly the same as on mainnet. Right. Because of the, you know, the withdrawal delay mostly and there's bridges but that you can't get around the fact that final settlement does have to occur with Mainnet. And so there'll always be some kind of a. Anytime there's a meaningful imbalance in demand to hold certain assets on the roll up versus Mainnet, there'll be price deviations. And well, I thought, well, if you can borrow funds from the roll up, that means that you could do something like this, right? Let's say that ETH on the roll up is trading at a premium to Ethan mainnet. Oh, sorry, let me do that the other way around, Ethan. The roll up is trading at a discount to Ethan Mainnet because people are trying to exit the roll up. But. But what? They're really, they're not really trying to get off the roll up. They're actually just trying to sell, to sell eth. Right? There's net sales of eth. They would be fine to stay on the roll up as long as they could hold stable coins. And so they're dumping, you know, they're dumping ETH for stables on the rollup. And so normally we would have to wait and say, okay, someone is going to have to move stable coins from mainnet to the roll up and buy roll up eth so that they get to close that arbitrage and then they're going to have to wait for the withdrawal delay to withdraw that roll up eth back to Mainnet to close the loop. So they have to wait that and the degree of capital that's willing to do that delay defines the price deviation people will actually see. But the question is, what if instead of waiting like that, I could go ahead and provide USDC to the rollup on L1 right on the L1 contract, not bridged yet, but provide it to the L1 contract and then borrow ETH from the rollup on L1 and use that to lever up my position enough to fully satisfy the demand of on that roll up to swap from ETH to usdc. And then after all that's done, I can bridge my whole debt position onto the rollup. And so I can then go ahead and sell all that USDC for roll up eth and close my debt position out. And so I can do a leveraged arbitrage, but settle it quick. And so I'll still have to wait to get my full profits off, but I don't have to wait to close the arbitrage, right? And so I can close my debt position and just wait to get my money. And so there's lots of things kind of like that that we might be able to imagine for types of applications. And like, I haven't thought about this fully in the DEX or exchange space, but I imagine that there are things that are very interesting within order settlement and swaps within the same kind of thinking. **Speaker A:** For sure, for sure. And I think like on the one hand, like the introduction of ZK and ZK rollups ruins that specific arbitrage you just talked about, but on the other side, completely changes what's possible because of the instantaneous communication. The instantaneous, trustless communication between the different layers is really going to transform what we're even talking about here. I wish we could go on forever, but unfortunately we got to keep it to an hour. What this does mean is, Kirk, we got to get you back on and we didn't. For those of you listening at home, we didn't even start talking about the original purpose of this, this conversation, which is like Ethereum scaling and the Ethereum roadmap. So, Kirk, I hope I'll see you again soon. And before I head out, like, can you just share with the audience where they can find you? If you can share the name of the project you're working on and just like, where people can learn more about the things that you're interested in. **Speaker B:** Well, you can find me anywhere you care to. As one true Kirk, Twitter is the best place. Feel free to tweet at me. And I'm always very happy to talk shop. And thank you so much for having me. It's a. It's a real pleasure. I work remote and I'm, you know, my colleagues are also all remote, so it's always nice to just connect with people who are sincere, you know, enthusiasts who know about what matters in the space and are trying to learn more about and drive it forward. So. Anyone, please, don't be shy. And I got. I was, you know, the project I originally built what we called vault protocol. We deprecated the V1, and we're now calling the successor the Ethereum Credit Guild. You know, a little bit aligned with the immutable Ethereum values, too. And, you know, I was originally started just cold tweeting at people, and it's thanks to the grace of people who have talked to me and helped me meet people that I'm able to work on this full time now. So, yeah, please, if you're listening, and. And that's you. And you're, you know, I'm very happy to have a call and, you know, help anyone, any way I can. **Speaker A:** Excuse me. Wow, Kirk. Well, thank you so much. And again, I hope to see you soon back on this pod. **Speaker B:** Yep, same to you. And hope to get the chance to buy you a coffee or a beer in person one of these days. **Speaker A:** No, I will definitely make sure that happens, but I will be buying the beer. **Speaker B:** Okay, well, we could take turns. Yeah. **Speaker A:** All right, man, have a good rest of your day, and I'll talk to you soon. **Speaker B:** Sam.