On Ep. 69 of Tokenized, Simon Taylor, GTM @ Tempo and Cuy Sheffield, Head of Crypto @ Visa, are joined by Sunand Raghupathi, CEO & Co-Founder @ Veda to discuss Kraken and Coinbase DeFi earn products, the role of curators in DeFi vaults and more!
On Ep. 69 of Tokenized, Simon Taylor, GTM @ Tempo and Cuy Sheffield, Head of Crypto @ Visa, are joined by Sunand Raghupathi, CEO & Co-Founder @ Veda to discuss Kraken and Coinbase DeFi earn products, the role of curators in DeFi vaults and more!
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Music by Henry McLean
Sy Taylor 00:00
Simon, welcome to tokenized. The show focused on stable coins and the institutional adoption of tokenized real world assets. My name is Simon Taylor. I'm your host for today, author at FinTech, brain food and head of market dev over at tempo. And joining me making a welcome return, is my co host, my colleague, my friend, Kai Sheffield, how are you, sir?
Cuy Sheffield 00:29
It's good to be back. I missed you last week. I missed one week, and it feels like a month. It's one of my favorite times of the week.
Sy Taylor 00:35
Excited to get on with the show, indeed. And we're joined by an amazing guest this week. We've got sun rangapathy, who is the CEO and co founder of Vader, how are you doing?
Speaker 1 00:44
Son, I'm great. Thanks for having me. Big fan of the show. No Good to have you as well.
Sy Taylor 00:48
We'll get into Vader in just a while, but before we do, I need to remind viewers and listeners that views and opinions of contributors today are their own and might not reflect those of companies they represent. Please don't take anything we say is tax, legal, financial or investment advice, and always do your own research and stay safe, folks. All right, the first story this week came from just about everywhere. Kraken are rolling out defy earn working with Vader's yield bearing vaults. So we're a little bit late to this story, but some we thought we'd ask you to tell us a little bit about what's Kraken doing here. What's the value proposition for their customers, and how are you guys supporting them?
Speaker 1 01:30
Yeah, that's a great starting point. Kraken defi earn is pretty aptly named. What Kraken is doing is providing access to defi yields to their customers, right? They have about 15 million customers across the exchange, and it's a really tightly integrated product. They spent a lot of time refining the UX. The way it works is, you're on Kraken exchange. Maybe you've never touched defi in your life. You don't know what a wallet is. You haven't managed your own keys or anything like that, but you hit a button and through privy Kraken spins you up a non custodial wallet. It seeds that wallet with gas for you, moves your assets into that wallet, and then, in seamless process, those assets move on chain into a VEDA vault, where the Veda vault is now sourcing yield, not just across one chain, but across multiple chains and across multiple defi protocols. So this is groundbreaking. It's probably the most ambitious defi earned product that has ever been created. We've seen many of these, including Coinbase and others. But what Kraken has done that's very novel is created a product experience where a user who's never touched defi is now getting this chain abstracted, multi asset, multi protocol yield experience. And I think the numbers speak for themselves, right? What this actually enables is higher yields, better UX, cheaper fees, because it's on ink, but you're able to source yields on Ethereum. And so far, you know, it's been a little over a week, but the product's grown to almost 40 million in TVL, there's about 13,000 unique users using this, many of whom may have never touched defi. It's a huge win. It's been a really, really powerful rollout. I think there's a lot of eyes on this product, rightfully so.
Cuy Sheffield 03:01
So first off, congrats, big win for VEDA, and really exciting, innovative product from Kraken. Let me just see if I understand what's what's going on, like try and repeat it back to you. So several months ago, on the show, we covered the product that Coinbase launched that leveraged Morpho to basically create an earn vault where any Coinbase customer can now earn, I think it was up to eight or 10% APY in their USDC. And the way that it worked was it wasn't Coinbase doing the lending. It was Coinbase would spin up a wallet on the back end, enable a consumer to deposit into Morpho vaults, I think, curated by a company called Steakhouse, that would then lend it out on the other side, and the consumer would earn the yield. And so Coinbase has been making big investments and integrating Morpho finding ways to bring this on chain lending into their platform. Now Kraken, as Coinbase, is one of its largest competitors, is taking a slightly different approach, where Kraken is offering a similar product that you can as a consumer. You don't have to know anything about defi, but you can deposit into a vault and earn 8% but instead of just using Morpho as the single protocol, they're using VEDA as like an aggregator, where you deposit into a VEDA vault and then VEDA distributes the funds across Morpho. Ave many others. Is that the right way to think about it? So it's like, so it's like multi protocol rather than single. And then, if that's the right mental model, how should we think about the risk? Because each one of these individual underlying protocols, whether Morpho Ave or others, they have their own risk profiles, their own ways of like, what's the collateral? And so is that correct? And then what's the risk side of this?
Speaker 1 04:40
Yeah, that's perfectly said. That's exactly right. It mirrors that Coinbase product in terms of UX, where the user takes no action, right? They just choose to deposit into this product. They don't have to worry about the complexities of defi, key management, any of that stuff. The difference is really in what sources of yield are these products able to access and deliver? To the user. So you said it perfectly. I'll just add two points to that, right? So one is on risk, and one is on why Kraken might do this. Last I checked with the Coinbase product, it was around three and a half percent APY all in, but something like 75 basis points of that was actually coming from Morpho tokens that are going directly to the user, right? So you think, you know, high 2% organic yield, 75 basis points in tokens. What are the challenges with this? Right? Number one, those numbers aren't very attractive from a yield perspective. And, you know, I would be keen to see the user adoption numbers there, because I think what we're seeing is users want higher yields. That's just a universal demand. And this is something that Kraken deeply considered when making their choices. The other consideration is getting yield in a token that is not the token you deposited. Namely, USDC is a really challenging UX, right? So contrast that with Kraken, Kraken launched with zero incentives. It was a really bold strategy. I don't think any other earned program has done this where they started with zero incentives on day one. Today, there's no incentives that Kraken or any of the providers are actually providing, but the organic yields on Kraken earn are north of 6% all organic, and this is a function of being able to access yield across different chains and different protocols. So it's a huge difference, right? Zero cost, higher yields, better user retention. That's the why they did this. Now, Kai, to your question, does this increase risk? I would actually argue that diversification decreases risk, because as soon as you enshrine a single protocol, you now are enshrining the risk associated with that protocol, whereas when you have the opportunity to diversify over multiple protocols, these products are not wrapping complex, highly risky new protocols. It's basic things like Ave Pendle Morpho, stuff that's been battle tested for years on billions of dollars, that diversification actually helps with risk.
Sy Taylor 06:53
Yeah, I think that diversification is an interesting one. The consumer redemption risk as well. Is something that I want to get your thoughts on. What are best practices like, if FinTech companies, or in a few years time, even a financial institution, was going to start to offer this type of earned product, what would they have to do to make sure that the customer could always pull their funds out of that vault? How do they make sure that there isn't an additional redemption risk there, like, what if there's a run on the vault? These are sort of the questions that I think in the back of the minds of a lot of risk managers at the moment, is what people worry about with a lot of stable coins, like, if they get big and hit scale, is there going to be a run on the stable coin? How do you how do you answer the run question?
Speaker 1 07:36
Yeah, this is right at the heart of what fintechs care about, their number one priority over everything else, over yield, over anything else, is, can my users get their funds out when they want to? So it's absolutely at the heart of the matter. And there's a couple of ways of thinking about this. When you look at what each protocol has to offer, these things are not totally commoditized, like what Ave does versus what Morpho does versus other protocols. They're not just drop in replacements for each other. Each has their own liquidity profiles, their own withdrawal risk, their own size limitations, and so one value prop for what we like to offer is how you tailor your product and what kind of liquidity profile you can target is really a function of what access you have, right? So I'll give you a concrete example. Morpho tends to have higher organic yields than Ave, but Ave has never had in the last several years a stable coin withdrawal issue. If you were a lender on Ave, I'm fairly confident that nobody has ever had issues getting their capital out. Because, you know, the market size is like $40 billion Morpho has seen withdrawal issues historically. Even a couple months ago, there was this issue with stream finance that really actually threw into question, like, what do we call a stable coin? What do we call a vault? There was no capital at risk in those Morpho markets, but there was withdrawal limitations just because of the dynamics of these protocols. So our view is that FinTech should be able to tailor the liquidity profile and the yield to their customers requirements. Some people want instant liquidity, 24/7, on up to 50% of the capital. Some people are willing to take lockup periods, and it really just depends on your customer. But what's important is giving fintechs enough tools to be able to compose and create the products that meet their customers needs.
Cuy Sheffield 09:18
So on that point, who makes the decisions around what the allocation is between these protocols, and ultimately, like manages the risk. And like in the Morpho ecosystem, there's a concept of a curator, and that's the role that steakhouse financial plays for Coinbase. And like, they're deciding which markets to deploy to. Is VEDA the curator. And are you deciding how much goes to Morpho versus Ave. Is the exchange the curator is Kraken deciding for their customers. Do consumers decide like, who? It's really important decision. Is it an algorithm? Is it AI, like, who decides, like, how you split up the funds between those different protocols? Absolutely.
Speaker 1 09:58
Our vaults have a concept of a curator as. All, and this is the entity or the address that is responsible for those allocation decisions. In the case of the Kraken launch, Kraken earn is not actually just a single product, it's actually three different vaults, each with its own liquidity risk return profiles. So for two of those vaults, the curator is chaos labs, who's effectively the Risk Manager. For Ave, they've been doing it for a long time. And for the other vault, the third vault, it's a company called centaura, which is really institutional focused. They're kind of an up and coming curator that has really deep defi expertise. So same concept, you need professionals who understand risk at a smart contract and economic and protocol level who are making these decisions. One thing that yeah, we can touch on which is really interesting is who are going to be the curators in defi long term, we have this group of crypto natives who really have built their businesses from the ground up, like the steak houses, like the Centaurus and chaos is but what we're seeing is massive interest from traditional institutions to bring their risk management management abilities on chain. And we're going to see a fusion of these roles, asset managers, risk managers and curators. We're all talking about the same thing, and these things will converge.
Sy Taylor 11:07
I think what was going through my head as you were talking the whole time is how asset managers think about constructing funds and the source of yields for funds and the different instruments in them, and structured products. It almost reminds me of a structured product type of setup where my yield generation is coming from a fund that buys multiple things. Obviously, vaults are very different in how they function, but the risk profile can be quite similar, even if legally they're different and distinct. So there's a lot of best practices there, and you mentioned institutions. We also saw on Bloomberg that bitwise Asset Management is buying a crypto staking firm, chorus one. So they provide institutional staking services for decentralized crypto networks, and they have $2.2 billion worth of assets staked. And the idea is that it's going to have another type of yield generating product to its crypto offerings over it bit wise. I mean, if only we had a crypto about yield Generation X, but might be worth unpicking the difference between sort of staking and vaults and just kind of, again, help us with the definitions here.
Speaker 1 12:09
Sure thing, this is perfect context for the trajectory of adoption that we're going to see these asset managers take. So staking has always been the gateway drug to defi. It's the thing that institutions really do understand, we're going to see this adoption at 100 billion dollar scale very soon. We're seeing this with, you know, people looking at stake ETFs, so staking is very simple for Trad, Fi and retail to understand, right? You have some asset, you can lock it up to secure a network, and that network pays you fees, right? The security mechanism of that, I think, is not that well understood, but people understand yield and liquidity and those dynamics. So staking has always been this entry point into defi. It's not surprising to me to see a large, credible asset manager like bitwise entering the staking space as one of their first kind of commitment of resources into defi and offering yields. But at the same time, we also saw news that bitwise is now going to start curating, right? They're going to do lending curation. So I think there's a very clear trajectory of what asset managers will start to do on chain. Step one is staking. It's just, it's easy, right? It's, it's well understood. There's a lot of infrastructure and tooling, and most importantly, the customers understand what that is. Step two is on chain lending. Lending is a very simple activity to do on chain I think this is also something that institutions and fintechs are starting to understand. How do these protocols work? What are the security risks of them, the withdrawal risk, all that stuff. They're really starting to get educated about this. And so we're going to see more and more asset managers start with on chain lending, but the logical conclusion of this is moving all the way to general purpose vaults, where you're not just restricted to staking as a product, lending as a product, any kind of fixed income stuff, RWAs, this entire universe of yield on chain will all be packaged up into single products, and that's the future we're building for right? So I think all of this is huge. We're seeing asset managers commit to on chain yield. They view this as a strategic necessity for the challengers who are up and coming asset managers. It's a way for them to differentiate their offering versus traditional institutions, and for the big dogs, they need to offer defi yield to their customers, or they will risk continuing to bleed market share. So this is just a wave that is washing over all traditional institutions and all asset managers. It's just a question of when and not if.
Cuy Sheffield 14:27
And so, Simon, I don't know about you, but I see this terminology getting confused all the time in tradfi, and so maybe, like, if anything, like, we could try just, let's repeat back what the glossary is like, there's staking and then there's lending, and those are two very different products. The thing that they have in common is they enable an end customer to earn yield, but the way that you're earning yield, the asset you're earning yield, on how you're earning yield and what you're doing is entirely different. And so correct me. If I'm wrong, I. But I don't understand, is it possible to stake a stable coin? And I have not, to date, seen a protocol where you actually stake a stable coin in the sense that you, like, put the stable coin up, and it's validating transactions on a blockchain, and you're, like, earning, like, it's just, I don't even think that that makes sense. And so I've literally seen, like in policy discussions, drafts of things that say you can stake a stable coin, just like you can't stake a stable coin, like it's not a thing. So you can stake a crypto asset, you can stake eth, you can stake soul. Most of these proof of stake blockchains, there's a native asset that performs work in validating the transaction. Staking gives you the right to participate in processing the transaction, and in exchange, you earn transaction fees and rewards. And so that is a form of yield. But I think the type of customer interest in staking is a customer who already has crypto assets, and they're either looking to earn more yield on the crypto assets that they have and prevent losing money from the inflation of the block rewards of that crypto asset. And so I'd say it's a much more crypto native customer base that has to already be in crypto to be staking, where lending on chain, lending or defi, you can lend a stable coin, and then lending a stable coin. That's what you announced with Kraken, and that's this concept of vaults where there could be mainstream consumers who come across a stable coin. They're not interested in crypto assets, but they like want dollars, and they want to earn 3% 4% 8% on their dollars. And so lending is a kind of real primitive that is emerging through this vault structure. And now what just broke my brain of what you said was you said there's gonna be a vault in the future that does both staking and lending together. And I'm like, Okay, how does that work? And so I see these as, like, two very separate things. I'm not sure if I fully grasp how they come together, other than there are similar entities that are involved in both of these businesses.
Speaker 1 17:04
Yeah, great point. And what I'll say is, I don't think it's going to be immediate that we have products that are mass appeal, that combine different assets and do staking and lending and all these different things. But when you really boil it down to what these things are, each of these are sources of yield on a specific asset with a specific risk return profile.
Sy Taylor 17:23
I would imagine it almost like how you can buy some 401 K plans. You know, they have some bonds in there. They have some cash. They have some emerging markets equities. They have sort of that 6040 portfolio, the classic. And inside that one product, you actually have lots of other products that have potentially lots of other products, and it's just like a Russian dolls of yield generation. But in order to get to that point, we may be offering these vaults that have this structured product with all of these sources of yield, we just have to remember that the products inside it, like a bond, is very different to an equity, to a stock. And so remembering that these things are different, carry different risk profiles, and therefore, from a regulatory standpoint, we just got to make sure, to Kelly's point, we understand what each of those one things are and why asset managers, to your point, son, I think are so interested in staking is it's so clean and so easy to understand as a new product that They can take out to customers.
Cuy Sheffield 18:22
Can we also just quickly address again? Crypto likes to invent new terms, and anytime I like use the term, I'm like, Wait, what is this? What does it mean? We've mentioned the term curator four times, and everyone's like, what is a curator? And in my mind, I just default to like, asset manager, like someone who is like, making decisions around where funds are going to go. Now, why isn't it just called asset manager, and you're saying asset managers are becoming curators. What in your mind is the like, important nuance and difference between an asset manager as, like, a traditional concept that everyone understands, and a curator and like, Why the need for this new term?
Speaker 1 19:01
Yeah, I'm with you in that crypto loves to define new terms where I think it's justified is when the analogies don't map perfectly to each other, and why these terms are being invented. What is different between a vault and a structured product, or a vault and a fund, and what it boils down to is the guarantees of transparency and decentralization that these products actually provide users. So you take a traditional asset manager or a fund manager, and the difference between a vault is that a vault provides guarantees to users about one they can see where their assets are at all times, right? It's all on the blockchain. It's all transparent, it's all publicly verifiable. Two, they have guarantees as to what can happen to those assets. So, you know, things like Lev control and leverage, what protocols can be taken out, what assets can this vault actually take exposure to all of this stuff is all public. It's all verifiable on chain. And so it's a fundamentally new kind of relationship between the service provider, whether you call them an asset manager. Manager or a curator and the customer, where the customer does not need to trust that entity as much because they have verifiability. So it's a small distinction. At the end of the day, the competencies involved, they're both doing risk management, and they're both doing this on behalf of customers. The difference is, how is that relationship mediated? Curators have these cryptographic constraints, and in some sense, they're more accountable to customers because everything is public. It's all on chain, it's all verifiable, and most importantly, it's non custodial, whereas Asset Management is a very different kind of relationship. One thing I like to point out is Celsius and blockfi, those kinds of customer relationships that product need was universal. Clearly, people wanted high yield savings accounts on their stable coins, on their crypto assets. It's why those products did so well until they blew up. But why did they blow up? It's because there was no accountability. Customers couldn't see where their capital was. They didn't have access to their capital at all times. So the product experience was right. People want that one click yield to earn higher yields on their assets. What vaults and what defi and crypto is enabling is a new kind of relationship where customers don't need to trust, right? They can verify, they can see where their assets are, and most importantly, they have access to their assets. So in some cases, I think it's worth creating new terms, because it forces people to really reason about the differences between these systems, even if they resemble each other in various ways.
Sy Taylor 21:23
Yeah, that's a really great point, son. I think we have to learn and explore the nuances of these things, otherwise we risk categorizing them incorrectly and trying to draw especially on the regulatory side. We can pull them into the wrong framework. We can make incorrect decisions. So we, we do need to be thoughtful about that. This is this has been a great explainer, like a defi yield 101. So thank you, son for doing that. We're going to get into some more stories in just a second, but I'm just going to take a quick pause here. What we hear from our sponsors this episode, if it's not obvious, is brought to you by our friends at visa, a global leader in payments, visas, tokenized assets platform, vtap uses smart contracts and cryptography to help banks bring fiat currencies on chain. Vtap allows financial institutions to issue Fiat backed tokens, improving financial efficiency and enabling programmable finance. You can check out the links in this episode's description to express your interest in vtap. This episode is sponsored by stripe. Here's the thing, selling digital goods globally is still far from easy. Many of the people around the world that want your product don't have an easy way to pay you. They simply don't have access to cards or a bank account stable coin payments change this. They're the first truly global payment method that you can use from anywhere. That's why, for any business with global growth ambitions, accepting stable coin payments is table stakes with stripe. Doing so is as easy as flipping a switch from big names like Shopify to fast growing names like shade form businesses everywhere trust stripe to accept stable coin payments from everyone everywhere. See what's possible@stripe.com forward slash crypto tokenized is also sponsored by fireblocks. Fireblocks is the stablecoin infrastructure of choice for global businesses, from visa to world pay to bridge to Revolut with over $100 billion in monthly stable coin volume, fire blocks powers stable coin strategies at scale with infrastructure that enables PSPs, fintechs, remitters and banks to issue, move, hold and manage stable coins. It's all done securely at scale with secure built in compliance with fire blocks. You get complete control to build your own stable coin orchestration layer, create payment accounts, manage liquidity and access on and off ramps in over 60 currencies. Makes it easier for you to build and scale and expand your business globally. Learn more@fireblocks.com
Sy Taylor 24:08
thank you to our sponsors. The next story was about the Wall Street giant CME, the Chicago Mercantile Exchange. They're eyeing their own CME coin says their CEO. So this is the CEO, Terry Duffy. They're investigating these initiatives that would operate on a decentralized network designed for institutional use and specifically to act as tokenized collateral for trading, rather than consumer facing, which makes sense, given what the CME does. And of course, this is a separate initiative to their tokenized cash product that they're looking at doing in partnership with Google Cloud. So interesting, push genius that what's possible seems to be being explored, and they say some of the benefits are trying to move to 24/7, crypto. Futures and options trading by early 2026 and of course, CME being the home for a lot of the crypto derivatives in Bitcoin and Ethereum and elsewhere. Son, you were talking about the institutional adoption earlier. What do you think the opportunities are for crypto natives to be moving towards CME, but also for the traditional institutions to be coming into the crypto space with moves like this, the 24/7 demand being what drives it. Perhaps, yeah, absolutely.
Speaker 1 25:28
One thing I'll say is there was a time where news like this would have been like the biggest thing that happened in months. Crypto defi was very nascent. Now this is not very surprising, I think, to anyone who's been building the space. We're just seeing every FinTech and every institution has some sort of strategy for crypto. I think largely it's driven by basic user needs, right? We're seeing this with New York Stock Exchange and others who want to offer something as simple as trade 24/7, access more assets. So it's really a no brainer. I think these guys are starting at the basic consumer needs, and it makes no sense that consumers can't trade when and how they want.
Sy Taylor 26:07
Kai, any thoughts here on sort of this slew of announcements coming out of these large organizations?
Cuy Sheffield 26:12
Yeah, I think it's every major capital market infrastructure player has to have a strategy and wants to play a role and and I think we're seeing a ton of activity there. I think the interesting part of this one was Google's role. And I think CME has publicly been working with Google for a long time as a customer of Google Cloud, and kind of like an anchor financial market structure customer of them. And we've seen Google make a number of announcements around the Google Cloud, universal ledger, and the role that they could play around tokenized deposits or tokenized cash. And so this seems like a big win for them, of extending the Google Cloud, traditional kind of cloud relationship with CME, to like, starting to get into this kind of tokenized cash infrastructure for CME. And so I'm really curious to see, does Google continue to like end up powering a number of large institutions, and it seems like there's always this battle between Google has been so successful and so focused on agentic that agentic and stable coins is like tokenized deposits. They're yes, they're like coming together in some ways. But can you make Google Cloud the best infrastructure for agentic workloads and the best infrastructure for tokenized deposits, and like, how much of that is the same requirements versus different and different focus. And so really interesting to see how Google's role evolves here.
Sy Taylor 27:31
Yeah, and that's sort of what I hinted at when I was leading out right a post, genius. The idea of doing this your own coin on a decentralized network, becomes a lot more appealing than it was, maybe pretty genius, where you would look for tokenized cash on a closed ledger being your only solution, and if you have a large crypto native client base who's already operating in stable coins, but might prefer the lack of credit risk that comes with a CME issued stable coin And that lets them trade 24/7, that's a business case that kind of writes itself. So that's kind of going to be a fascinating one to watch as to what these use cases are and how they start to evolve. Talk to me a little bit about the psychology of the growth in the crypto native institutions, because you sort of talked about that tension earlier of there are asset managers coming into the space, but there are also crypto natives growing up. Are they now moving back into the traditional venues in some way, and looking for support from them? And how's that showing up?
Speaker 1 28:31
Absolutely, we're seeing a convergence. The Crypto natives are starting to sell to the non crypto natives, and the non crypto natives are starting to become more crypto native. And so it's really this race, and I'll tell you what each side has going for it, and you know, I'll leave it to you guys to decide who's going to win. I think what crypto, the crypto native institutions, have is that deep expertise, because blockchains are very complicated systems, they have all kinds of novel risk that traditional institutions don't know how to reason with. These systems are really difficult to build, right? Vaults are extremely complicated and extremely challenging to build if you do it wrong, right? If you build a financial product on chain in the wrong way, the downside is not, you know, it was a bad UX or something. There's real funds that can be lost. And so the crypto native institutions have done a great job of really leveraging that expertise to build products that it's really difficult for traditional firms offer. On the other hand, what the traditional institutions, whether these are, again, fintechs or more, kind of Trad fi players like banks, have, is distribution. They have customer relationships. They have assets on platform. So for them, that distribution is very sticky, and they are very quickly, actually becoming educated and learning how to build these products, I think, in terms of the kinds of institutions we'll see move on chain. Exchanges are happening today and yesterday. The coinbases and Krakens of the world. They're already crypto native. They're not deeply defi native, but they're getting there. And then you'll see fintechs more true. Traditional kinds of exchanges and fintech platforms like the Robin Hoods and revoluts of the world. They are very savvy because they're tech companies at their core. And so they're becoming educated really quickly. They're building these competencies in house. And then towards the end, you'll see the traditional asset managers, traditional banks. They're a little bit slower. It's harder for them to understand these things, but they're already doing the work to understand it and starting to come up with these strategies for how to move on chain so we'll see right it's deep expertise versus distribution. I think it's a win for consumers, no matter what.
Cuy Sheffield 30:30
It's going to be really interesting to see how the regulatory environment plays out here and how that impacts what large traditional institutions could do, particularly related to defi and on chain credit because it seems clear that at the current point, the crypto native exchanges like Coinbase and Kraken, they have gotten comfortable, although they are regulated entities, they're regulated in many markets. They have gotten comfortable offering defi yield to their customers, and now the way that they're doing it is pretty interesting in that, I guess both Coinbase and Kraken are following the same model that if I want to participate in one of these earned products, what they're actually doing is just being the interface. And then I spin up a self custodial wallet inside the custodial exchange, and then I send the money from the custodial exchange by self custodial wallet. And so I think that the argument, as I understand it, is that the consumer is taking their own action with their own funds that they can control, and depositing into the vault, and it's really just the exchange is offering them the interface. It's not that the exchange is managing the funds for them, and the exchange is sending into the vault and out, and so they've kind of like embedded these invisible ghosts, self conservative wallets behind the scenes. And I think there are terms and services that pop up and say, oh, like you're but is the disclosure clear enough? And do most of the mainstream consumers actually know that if something happens in this fall, or if something happens in this wallet. You know, if I lose my keys, like, I can't just call Coinbase and, like, reset my password. And so they've kind of found this interesting model that this has been happening in a self custodial world for a while. That's where like defi grew up. Now it's coming into regulated, centralized exchanges, but with embedded self custodial wallets to, like, create this gap between the regulated business. And then if you look at the large fintechs, and ultimately the banks, it's much harder to imagine fintech. We'll see it's harder imagine a bank saying, You know what, we're gonna offer defi yield, but we're gonna embed a self custodial wallet in so you're like, actually leaving the bank, but you're in the bank's interface. It's got the bank spread, like, it's, it'd be hard to explain to regulars. I think that's the thing. It's, it would take some time to explain that, and that's like, further out on the risk curve. And so I think the big question is, how does defi become regulated, or does it, and that's being debated in the clarity act, and depending upon that, it's kind of a weird environment, which is similar to what stable coins have been for a while. If Coinbase and Kraken can scale defi yield businesses, both on the lending and borrowing side, while traditional fintechs and banks can't touch it, then it's like a not a really level playing field. I don't think that's really good for anybody. And so that's going to be really interesting to see how this plays out.
Sy Taylor 33:18
Yeah, I suspect Kai having observed FinTech long enough that we will see some further out on the risk curve start to do vaults this year. And what's fascinating to me about all of this institutional momentum is, if you look at the crypto prices right now, there's a bloodbath. But son, I don't know about you, Kai, I don't know about you, but I'm no less busy than I've ever been on the institutional side. Like, if anything, it's getting more aggressive, especially on stable coins and tokenized real world assets. And so that decoupling from price action is really meaningful at this point, crypto is now absolutely not about the price. It is 100% about the utility. And there's this wonderful thing called revenue in a business case, that's starting to show up. And long may that continue. But I'm going to change gears for a second here, because our last story is kind of more on the infrastructure level. So this was Vitalik, Buterin, obviously the founder of Ethereum, and in some ways it's talisman saying that they're reevaluating their rollup centric roadmap. So the progress of the layer two blockchains was always intended to be a way of scaling Ethereum, making it go faster. But these layer twos have not really decentralized. If anything, they're operated by one individual company or one individual entity, and many of them are saying they don't intend to progress to stage two, which is to decentralize that smaller, faster network, which means, as far as he's concerned, he's less interested in that, and is a way forward. And so he says they're saying this for technical reasons about Zk, E, V, M, safety, but also because their customers regulatory needs require them to have ultimate control. This might. Be doing the right thing for your customers, but it should be obvious that if you're doing this, you're not scaling Ethereum in the sense that was meant by the roller centric roadmap. So the alternative is just make Ethereum a lot faster. Son, you've been watching the crypto and defi space for a while. What are your thoughts on this and the L twos and ethereums rule, because it's certainly been a challenging ride for Vitalik and many others in that space for the past 12 months. But I also think that institutions tend to default Ethereum. So yeah, there's an opportunity here.
Speaker 1 35:32
Yeah, I think that's exactly right. I don't think this is a surprise to a lot of people. There's been a long standing debate about what is the role of L twos in Ethereum. They are good for the world. There will be a multiverse of L twos. But are they good for Ethereum? Are they good for the asset? And I think the business realities, what business realities have created is this world where there will be many l twos, but they don't all conform to the same standard that Ethereum has for decentralization. That can be from a regulatory perspective. It can be because some institutions just want more control for safety purposes, right? They want the ability to censor malicious actors and transactions, and so I think this is great for everyone. Ethereum is very much the default place that institutions look when they're, at minimum, doing a proof of concept, but potentially even for all of their needs. But you're going to have more specialized chains, right? Maybe ones that spec into privacy, ones that are focused on specific use cases, like stable coins, like tempo and so you do want this universe of chains, but I think nature is healing, right? What we don't need are all these undifferentiated l twos that are basically like just worse versions of Ethereum, without differentiated use cases, without the same security guarantees. What we do want are specialized chains that bring something novel to the table that Ethereum cannot offer. And I think it's excellent that Vitalik is saying this now, because we do need the l1 to scale, right? It's time to put more resources into that. So yeah, I think it's really good news, actually.
Sy Taylor 37:02
What do you think about this? Because the control points so interesting as it, as you think about institutions like it's that's a feature, not a bug.
Cuy Sheffield 37:10
Surely it's interesting to go back, let's say maybe like 18 months ago. And at the time, there was still this debate of permission chains versus public chains, and particularly when you talk to banks, and they were like, we forget about this, but like, there were very smart, reputable bank executives and kind of leaders, even on the digital asset side, who explicitly told me on many occasions that banks will never use public blockchains, that was, like a default perspective that a lot of people had. And, like, a lot of it came down to, okay, well, how do you know who the validator is and the gas fees? And it's just like, it's never gonna happen. Then a lot of the focus, you know, banks that wanted to experiment and do anything in the space, their only option was a permission chain, and you had quorum, you had hyper ledger and r3 like that was like the only thing you could do. And then as regulatory clarity and as kind of the administration in the approach in the US changed drastically. I think it became clear that banks could use public chains like that was like the first step. And I think it was a combination of, it was always weird to me that large fintechs and even asset managers Blackrock was using a public chain, like, when did Bittle launch? Like, that was a long time ago, and so it's like, it doesn't seem right that Blackrock can use a public chain, and Coinbase can use a public chain, but jpm can't use a public chain. Like, something has to break. It's either nobody can, like, Blackrock can't use a public chain, or it's like, jpm can use a public chain. It's like, you can't have the opposite sides of it. And so I think it became clear at some point, maybe let's say, 12 months ago, that, okay, institutions can use public chains. And it became clear first in practice, and then more regulatory guidance started to come out to say, okay, you can do that. And so then once you got to like, All right, we don't have to just use a permission chain. We use a public chain. The lowest risk, easiest place to start was Ethereum. It was the most established public chain that had been around the longest, that was the most understood, the best availability, that had the most security, arguably. And so I think it made sense that Biddle started on Ethereum. It made sense that a lot of stable coins, like launched on Ethereum first, EVM, I think was just better understood as a developer environment than anything else. And so then I think if we fast forward today, you have this interesting environment where, as sun mentioned, it's like, there's this battle of who's going to win the institutional chain use cases. And I don't necessarily think it's like one winner. It's you could actually divide it to there's capital markets, there's lending, there's payments and, like, yeah, there's synergies between them. But, like, you could have different chains optimized for different things, but Ethereum is no longer the only game in town. I think base has become a leading l2 that's pulled away, to some extent, from some other l twos, at least for institutions, has gotten a little bit of traction. You know, jpmd is on base, but like, it's still Coinbase. And they're talking about launching a base token, and it's a single sequencer. And so I think there's some institutions who say Coinbase is a competitor. Like, do I want to use the base chain? Then you've got Canton, who's kind of seemingly come out of nowhere in the last six months, and like, has become a major player in capital markets that's getting more and more institutions every day. Then you've got tempo and arc, which we're excited about. And like, we haven't launched yet. So like, You got to get live, where you get the game. But like, it's like, I think that the idea of building purpose built, optimized chains for payments and lending makes sense. And so I think it's a recognition from metallic that the dominant position that Ethereum had is this default that every institution would start there. And then Solana has continued to find, particularly payments and other use cases that it can get some institutions on. And so it's like you got to do something. And I respect that Ethereum is kind of revisiting, instead of saying, Oh, we're just going to sit behind base and hope base wins, they're going to try and say, How can Ethereum be the leading institutional chain? But to do that, you need better performance. You need better privacy. I think privacy is like going to be a major, major factor in terms of who wins this so I think it's a necessary thing for Ethereum to do. They're facing a lot more competition than they ever had. And I think the question is, 12 months from now, what is going to be the default lowest risk chain to launch on? Is it still going to be Ethereum, or, as there are more and more use cases, will it move to like one of these newer institutional chains, and we don't know yet.
Speaker 1 41:24
Just bring you back to a point you made Simon earlier, which is withdrawal risk. And here's a way of seeing why Ethereum has a moat and why Ethereum should be leaning into this and developing it. The Ave market on Ethereum is like $40 billion and that's an order of magnitude larger than any other chain. So when you're a FinTech, thinking about, what defi yield product do I want to offer, and how do I guarantee my users can withdraw at all times? That's the dominant factor. And the crazy thing is, until about six months ago, defi was not remotely the top priority of Ethereum, even though it has turned out to be one of the core drivers for institutional adoption on the chain. So yeah, this is just a case where, like, you know, this is the thing Ethereum needs to lean into, being the largest, most liquid, credibly neutral ledger can be really powerful, and it's time for Ethereum to start paying attention to that, right?
Sy Taylor 42:10
I think that's a valuable spot in the ecosystem, but it's not the only spot. As you say, I look at polygon and they've really sort of pivoted over the past 1218, months to being very, very payment centric in their own right, and kind of EVM compatible, but a very different organization. And so this specialization and having this credibly neutral space is super valuable. One of the things I think about L twos as well as we're reframing them from this idea of being a way to scale the l1 into being this thing that's almost like a sub ledger at a bank. And that idea that Coinbase runs its own l2 but it lets everybody see it, it feels almost like a point in time, or maybe it's a point for their network. But you could use that a different way. And so with ZK syncs, providiums, that's one route where that is a privacy focused l2 but you could imagine organizations running their own l twos on L ones, and that, I think, as a design space, is still far too complex. For most organizations. They're still getting their head around running an RPC node, never mind running a sequencer. But if you could make that much, much simpler, then I think what you'd have is something that the banks really immediately understand. And anybody in payments, which is, like Tai said it many times, as a merchant, do I want everybody in the world to see all of my supplier inventory payments and all of my customer payments? No, I absolutely don't. And in capital markets, do I want all my competitors to see all my trades? No, and the privacy meta that's really strong right now, that Canton has really cornered on the institutional side. They've been banging that drum for more than 10 years. I first met Yuval in, I think 2014 and he was talking about privacy. Then it was always going to be the case. And it feels like the crypto nases have kind of understood it, and the sentiment has really dropped. But I suspect over time, we'll come to realize that that's because it has utility. It makes sense. It's a very rational thing to do. And that doesn't mean that Ethereum is irrational, that we need this credibly neutral space, this decentralized space, it just means that there are different tools for different problems. You know, I remember when Ethereum launched, people were unhappy that it wasn't Bitcoin. And there are many tools for many different problems. So some of that sort of Ethereum native like, oh, things haven't accreted to Ethereum necessarily. I almost come at it the other way, which is, well, now at least it is, and play to your strengths and be what you're great at, and I think you'll do extremely well. And the defi is one piece of that. Kai, I think that narrative arc is so interesting,
Cuy Sheffield 44:44
son, I wanted to get your take on privacy within defi, because it seems like part of what makes defi work is the transparency, like you could see, you know, the assets are there and so, like, what is the mental model around like, does privacy work within? Defi, and then what is the experience for the lender or the borrower of having a privacy preserving vault? Does that exist? Is there something that you all are looking at in that space?
Speaker 1 45:10
It does not exist. And to me, this is one of the largest open questions in defi, because we're actually seeing it on the ground as we talk to fintechs and institutions who are looking at yield, this is something they're concerned with, right? They have millions of customers on platform, and you can imagine universe where they don't want those customer addresses to be associated with the platform, right? At a minimum, you know, it's not personal identification and identifying information, but still, there is an association between you have these addresses that live on chain, you know the addresses of the products these fintechs are using, and you can associate them. The problem is that there is no good way of doing that on Ethereum today, and it's one of the main challenges. And I think, you know, Vitalik, even in his kind of call to action for interesting l twos and new chains, is he's pointed out privacy is one of these things. So it's something we're looking at. There's things you can kind of get away with by only committing caches of information on chain, as opposed to putting the full data on chain. But at the end of the day, right, with these lending protocols and defi primitives that exist today, they were not built with privacy in mind, and now we're kind of just dealing with the fact that we don't have that infrastructure. So it's a huge opportunity, totally unsolved, but, yeah, there's a lot of work to be done in this space.
Sy Taylor 46:24
Yeah, so much work to do in privacy. I think we're not done with this. It's something that I'm spending a lot of time on with institutions. Just this morning, I was having a conversation with the G SIB about the tempo approach. And I think people are still trying to find their way, and it's going to be the unlock to really get to scale. I want to cover up some stories we also saw this week, but didn't have time to cover so we saw TRM Labs has reached unicorn status after a $70 million blockchain capital LED Series C, I missed that one shout out to TRM quiet infrastructure Y Combinator has opened stable coin funding options for startups in 2026 so they can receive their $500,000 in stable coins. Metamask is integrating tokenized US stocks via Ondo. Ing is opening retail access to Bitcoin, Ethereum and Solana in Germany. Isn't it interesting how common that is for European banks now? And K bank has filed a stable coin wallet trademark ahead of its IPO. So lots of interesting stories. As always, our show could be five times longer, unpacking all of those and all of the different reasons why. But I want to thank you some first and foremost, for joining us. If people are interested in Vader, what you guys do? What do they go to find out more about you and Vader?
Speaker 1 47:40
Twitter is the best place x our VEDA underscore labs, and for me, it's sun and our underscore. Feel free to give a follow and check us out.
Cuy Sheffield 47:49
Kai, how about you on x at Kai Sheffield and visa Comm, slash crypto.
Sy Taylor 47:53
You'll find me at sy Tai on the socials screaming instead of void. At FinTech, brain food.com, and at tempo, dot XYZ, writing some of the stuff going on there. Thank you so much. You'll find more of this show if you like it, if you subscribe to it, and if you tell all of your friends to listen to it too. Tell them to subscribe on Apple or Spotify or YouTube or wherever they get their shows. It really helps us. I have to do that host thing and ask you to do it. You know, before you finish, to just just hit the like button. Do that for us. Thank you so much, and we'll catch you next time.