Has the bridge between tokenization and finance finally started to form? On Ep. 3 of Tokenized, Simon Taylor, Head of Content & Strategy @ Sardine, and Cuy Sheffield, Head of Crypto @ Visa, are joined by Robert Leshner, CEO @ Superstate to discuss the Ethereum ETF, tokenized money market funds, MakerDAOs $1 billion tokenized treasury investment plan and much more!
On Ep. 3 of Tokenized, Simon Taylor, Head of Content & Strategy @ Sardine, and Cuy Sheffield, Head of Crypto @ Visa, are joined by Robert Leshner, CEO @ Superstate to discuss the Ethereum ETF, tokenized money market funds, MakerDAO's $1 billion tokenized treasury investment plan and much more!
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This episode is brought to you by Visa
A world leader in digital payments, Visa is bridging the gap between traditional financial institutions and innovative blockchain networks, helping players in the payments ecosystem navigate the ever-evolving world of tokenized fiat currencies with confidence and ease. Learn more at visa.com/crypto.
This podcast is also supported by Digital Asset.
Digital Asset is excited to launch the Canton Network, a proven, trusted, and scaleable service that provides interoperability between institutional-grade tokenization platforms. The Global Synchronizer is now live, managed by Linux and institutions are actively using Canton Coin to manage the governance. No, the banks haven’t launched a token in the classic sense, this is much more interesting. They’ve done it to make all token networks interoperable. Find out more at canton.network
Sy Taylor 00:10
Welcome to tokenized My name is Simon Taylor. I'm your host for the tokenized podcast, author of FinTech, growing food and head of strategy at a company called sardine and joining me is my friend and my co hosts the head of crypto at visa, the one and only co Sheffield. How're you doing, sir?
Cuy Sheffield 00:25
I'm fantastic. What an exciting week for the industry. We've got a lot to discuss. And we've got someone who's pioneer in defy on the forefront of tokenized securities, a podcast called tokenize has to have our guest today and so excited to have him on.
Sy Taylor 00:40
Yeah. Joining us for Episode Three is Robert leshner, CEO of superstate. And thanks for being with us, Robert, how are you sir?
Robert Leshner 00:47
I am excited to be on the show. Excited to chat tokenization and excited to dive right in.
Sy Taylor 00:54
There's some excitement here. Like let's just dive into why because for the uninitiated, why don't you tell the audience a little bit about your background from compound and life pre compound and a little bit about what Superstay is and what you guys are up to?
Robert Leshner 01:08
Yeah, happy to. So pre crypto. In the early days, I was in traditional financial markets, I was an interest rate guy. I then became a software entrepreneur. And the third business I ever founded was compound. And this was in 2017. There wasn't a phrase for defy yet defy is a phrase that has come to mean a lot of things. But at the time, it was just the idea of using a computer program deployed onto a blockchain to automate financial transactions. And I spent the next couple years building out one of the first examples of how do you use blockchains, to make finance more efficient, to create markets that are robust and anti fragile, and run 24/7 and are global and can route assets between different stakeholders efficiently and in ways they couldn't do on their own. And, you know, compound is now what we call defy, it's one of the first defy protocols. And it was a joy to build, because there was so much knowledge that was created during that process that has really transcended anyone protocol itself, and has led to, in some sense, a Cambrian explosion of other protocols and experiments in this space. About a year and a half ago, I left to to found superstate and superstate really builds on a lot of the early lessons that I learned a compound and tries to solve them in a different way. So compound, we built an application that could be used for whatever tokens existed to be borrowed and lent and used as collateral, and to be programmable intercepts. But most of the assets that were available to compound when I found that in 2017, are similar to the assets that were available. Starting at 2023, which is the most popular tokens on the Ethereum blockchain haven't changed that much. There's been a couple of new tokens that have been created in that time. But in terms of the largest and most liquid tokens on the Ethereum blockchain, it's still a small number of crypto Native Assets. And in the years and years, since I was always expecting there to be more I was always expecting that whatever defi protocols were built, would by this time, be used for stocks and bonds and commodities and real estate and all of these things that are just like a crypto native token that was created in 2021. Right. And so I'd anticipated that defy would have grown outside of crypto nativity by this point that defy whether it's running on Aetherium or on Solana or on Avalanche or any chain by this point would be doing more to power, call it real world asset transactions. And so this is something that I like continuously felt, you know, as a society, we haven't built up enough around yet. And so superstate is looking to bridge this gap wishes, being a company that brings assets from off chain on chain so that they can interact with defy protocols and benefit from utility. It's otherwise not possible with traditional record keeping. And
Sy Taylor 04:11
I think that global 24/7 If you speak to anybody in financial markets, that in itself is a pretty big sales pitch, but programmable and composable. It's like a whole nother level. So excited to dig into that. Before we get to the first story this week. I just need to remind our listeners views and opinions of contributors today are not necessarily those of the companies they're representing. Nothing we say should be taken as tax financial or legal advice. But before we get into the rest of the news, we have to talk about the ETF has been approved its trading day one saw Blackrock pull in $266 million bit wise $204 million fidelity with a not too shabby $71 million because greyscale saw some big outflows To point earlier that Robert about like the real world assets aren't coming, how significant is the ETF? ETF give this some context from a crypto Native perspective and also from an institutional perspective?
Robert Leshner 05:11
Well, it's interesting because I think of ETFs is almost the inverse of what I'm working on. So just to go into a, you know, at a high level, you know, the Bitcoin ETF laid the foundation for the ether ETFs Bitcoin ETFs make Bitcoin available to a traditional capital market audience that set up with the infrastructure, the brokerage accounts, the tools to trade, traditional market assets, and not crypto Native Assets. It's really designed as most people know, for investors that don't want to mess with private keys don't want to touch crypto itself, but they have brokerage accounts. And it brings a crypto Native Asset outside of crypto into traditional routes, ether ETF, it's the exact same thing in a lot of ways it opens up a new market for ether, just like the Bitcoin ETF opened up a new market for Bitcoin. And it's interesting, like I actually think it's going to be powerful for building products that start to bridge tread phi and on chain. When you have like a more cohesive capital market, it's a good thing. More liquidity is a good thing. more transparency is a good thing. And so these new products between ETFs and ether ETFs will make the underlying assets healthier, so to speak. It's a net positive across the board for the assets. And it works in the opposite direction of really what I'm focused on, which is taking traditional market assets and making them available on chain to crypto native users who do like wallets who do like keys, and who do like smart contracts.
Cuy Sheffield 06:38
It seems like the launch of the ether ETF is generally being considered a marginal success. And I think it was about 2020 to 25% of the volume that the Bitcoin ETF had. But to me the most interesting question is just how is Aetherium and ether being introduced and explained to a kind of larger set of institutional investors? And if you can compare it to the Bitcoin ETF, a Bitcoin seems to have more brand recognition, more well known. A lot of people think about it as digital gold and, and somewhat easier to explain where Aetherium now there are these new concepts. There's, you know, a smart contract, and it's a tech platform and okay, what are people building on the platform, and you got to use it for gas. So I'm curious for both of you like, how do you think Aetherium is going to be understood and explained to this new audience and like, you know, what rabbit hole does set send people down, kind of going back into the things that we're all excited about of the actual use cases of Aetherium that more people might be exposed to now because there's an ether ETF that they're trying to evaluate?
Sy Taylor 07:48
I wonder if Goldman's gonna go by and close all the way? No. But in all seriousness, you know, as I think I've got a past life as a head of crypto r&d at a bank, right? Like, I immediately My mind went to the amount of proof of concepts and pilots that financial institutions have done on the Ethereum network that always had an asterisk. It was always Yeah, it runs on the Ethereum network. But we're not doing this. And we're not doing that. And we're doing this kind of jujitsu. And they want to be able to take advantage of all of the stuff that Robert is talking about there with superstate, but they feel held back by this credibility gap. And an ETF is one thing as an asset, but it's like a whole other thing in terms of institutional credibility and the signaling that sends and we shouldn't underestimate that. I think that's a really, really key point. I mean, Robert, how would you talk about this? Yeah,
Robert Leshner 08:41
it's interesting, because as somebody who's built on Aetherium, for many years, I've been building on a theorem, I guess, for seven years now. I view Aetherium as a computing platform to program and move financial assets. And I don't think about it really, as a general purpose computing platform is actually really bad. For a lot of types of transactions you might think about, or a lot of use cases you might think about, it's not like a giant CPU in the sky. Right? It's like a giant, really bad CPU and this guy in a lot of ways, and the transactions that make the most sense to process when storage is extremely expensive. And computers extremely expensive, because of its extreme decentralization, the best transactions to process or financial transactions in nature, things where, you know, you're recording huge transfers of wealth and value that you need to be secure. You need to be immutable, you need to be transparent. The data that gets written to Aetherium is and can be and should be valuable data. It's not like a giant cloud computer, you know, or world computer. We're like other terms that people have come up with, which I think are confusing. It's like a giant database for Wall Street and all financial markets that is shared and robust and programmable, how
Sy Taylor 10:07
would you do it?
Cuy Sheffield 10:08
I was just say it's also like there's this interesting flywheel that seems like it's starting to emerge where you've got large institutions like BlackRock, that have a ether ETF that they're bringing to market. And so it's out there going out and trying to explain kind of why ether might be suitable to be in a portfolio and how to think about an investment case for ether now that they've got a product that enables access to it. At the same time in explaining that, well, what are the use cases they along with others are, are actually using Aetherium themselves, to then take their traditional assets and tokenizing them and bringing them on there. So it's, it's almost like the same companies that are creating the ETFs, that, as you mentioned, are taking these crypto assets and bringing them putting a Trad fi wrapper around them, are also some of the same companies that are taking traditional assets and putting a crypto wrapper around them. So they're almost kind of representing the use cases that are in argument of why Aetherium could be valuable, are being created and built by the same companies that are providing the ETFs. And so do you see that becoming this flywheel of the products built on a theorem, the more successful and we'll talk about Biddle in a moment, the more successful that traditional financial products tokenized onto a theory and become the more interests that that will drive back to why would you want to own ether? And where does ether fit into a portfolio? And how do those two interact with each other?
Robert Leshner 11:42
Well considered point? Absolutely. Yes. I mean, I think for a huge swath of investors, right, they don't mentally process or think about the assets and the use cases that exist on the blockchain today, because it doesn't really enter their communication. It doesn't enter their like water cooler chat. It's like, whatever defy protocol is running, whatever token was launched. It's not really entering the mainstream, when they start to see Blackrock building on this platform, when they start to see other banks building on this platform. And they started to see companies like Superstay, etc. When like, you get the water cooler chat of like traditional investors and traditional capital markets all talking about products built on Ethereum. That's where I think there's like this flywheel effect between like people understanding the asset, and the computing platform, and like what you can do with it. But most people haven't even been exposed to what you can do with it yet. You know, the people using defy protocols. It's mostly retail today, the people using defi protocols, get it the people interact with NF TS get it? Right. But if you're not doing those two things, it's hard to like really grok you know, what the features are, what the use cases are, how it even works. And it's just like, it's this very abstract concept. But when you start to see Blackrock building on Aetherium, you say, oh, it's something that you can launch major financial products on by major financial institutions like this is actually really interesting.
Sy Taylor 13:11
Well, let's talk about that, because Blackrock did launch their battle fund. And there's a story recently that it's topped $500 million for its tokenized Treasury market fund. And, of course, this is backed by US Treasuries, the well known real world asset of choice that's quite commonly used. It's issued in partnership with securitize, it's been used by defi protocols such as on dough and mountain, an asset brokers, such as Falcon X and hidden road have used it as collateral. The overall tokenized Treasury market in this CoinDesk story I saw said, The including Biddle, the tokenize, Treasury market is more than doubled this year grown to 1.8 billion US as of the seventh of June from 780 million in January. So doubling in six months. Those are not nothing numbers. So, Robert, I kind of want to come to you like why is the tokenize money market fund such a big deal for somebody who is from that triad fie world and talk to me about the collateral use case? Because I know you you're involved in that as well? Yeah. So,
Robert Leshner 14:21
you know, the tokenized Treasury use case makes a lot of sense, when you think about what current US Treasuries are and how they work and what rails they're on today. So the process of moving US Treasuries today is generally like a daily process that's almost entirely manual. Like if a bank wants to send some treasuries to another bank. It's back office that's doing that and it's doing that once a day. Right. It's a lot of clickety, clack, right and spreadsheets. When an asset any asset involves US Treasuries as an example are tokenized And to be clear, the treasuries that are tokenized today are funds of treasuries, not individual US Treasury, bills, bonds, notes, etc. They're not like cuse IPs that are tokenized, it's funds that hold a whole bunch of treasuries that are tokenized shares of these funds are tokenized, abroad on chain. And what this enables is, instead of this like back office, clickety, clack, you know, handled once a day type thing to move treasuries, you can move them basically, instantly, basically, for free, anywhere in the world. And you can add automation to those different pieces. This makes them far superior for transfers and transactions and doing the things that you would want to do with treasuries. All right now, one of the most common use cases of why investors and banks and brokers and everyone loves treasuries is the best collateral in the world, there's no expectation that the US government is ever going to default or can default or will default, and that their money good. And they're also unbelievably liquid, right. And so an asset that is money, good and unbelievably liquid at Crazy sizes, you know, going into the trillions, right? Is the best possible collateral for every other type of transaction, whether it's just vanilla borrowing, whether it's derivatives, whether it's whatever, it becomes the sort of, like bedrock of most of other finance gets built around using treasuries, as collateral. Gold is also, you know, historically very popular collateral asset, you know, mostly for like central banks, because it's hard to move gold, you know, you have to put it on like a container ship and stuff, you know, but Treasuries are the best collateral in the world, and tokenizing them makes them better. Suddenly, instead of like a whole bunch of clickety clack. And it takes the daily settlement process that happens once a day, it takes 12 seconds to move treasuries to anyone else. And you can move those treasuries based on logic, it's like, Oh, if this price falls, move this asset from A to B. And you can start to build in these incredible efficiencies using this like digital building block of treasuries. That's exciting. Like to me, like this opens up a Pandora's box of new use cases and opportunities that like most people aren't even like configured in their head to think about yet, because they're used to the way things work today, you know, you can't really program your back office and how you like manage like collateral, let alone between many institutions. You know, the combination of a tokenized asset and smart contracts on a blockchain means that like, all sorts of use cases can be programmed. And the whole process of everything built on top of this incredible collateral building block can also get faster, and cheaper, and more efficient and 24/7 and global. And so tokenizing, this world class asset is going to have this like, eventual trickle down effect to making so many other processes more efficient. So
Cuy Sheffield 17:55
it's really interesting that now that these money market funds or Treasury funds are on a blockchain, you can also follow them very closely through the on chain data. And so when we look at the on chain data, not only can you see at least Biddle over $500 million in supply, you can see the number of addresses that hold it. So it looks like it today, there are about 18 individual addresses that hold it. And I guess that makes sense. There's a $5 million minimum investment for the product, we see Ondo holds about 43% of the supply. So I think one of the biggest questions is what's fueling this growth of who specifically is demanding and buying these Treasury products? Are there traditional investors who, you know, have access to money market funds, or treasuries that are saying we see these benefits let's go on chain to buy them, or is the market today very much. These are crypto native institutions, companies, traders, that were holding stable coins, they weren't earning any interest on the stable coins. Now, if they're able to qualify, they're then going directly in buying these these Treasury funds, like who's the customer for them right now? Yeah, so
Robert Leshner 19:04
the demand that we're seeing from superstate is very specific. Almost all of the customers are crypto native institutions that could potentially get set up with brokerage accounts and, you know, systems to be able to buy treasuries or other even fixed income assets directly. But don't, they don't because 99% of their focus is on crypto assets and crypto markets. They're set up with a digital asset custodian like Coinbase or Bico, not a traditional custodian like you know, a bank somewhere. They're set up to hold Bitcoin and ether and tokens, they're trading these things are accounting is set up for crypto assets, you know, they're not set up or they don't really care about trading Trad fi assets. And so, you know, in general, these firms have cash at any given time, anytime you sell Bitcoin or ether or whatever, you know, even if you're purely crypto native, you have cash or stable coins of some kind. And it's these investors that don't want to leave their stack of tooling and infrastructure that they put in place, but do want to have a better risk free rate, so to speak, they want t bills, but they want them in their digital asset custodian. They don't want them in a brokerage account or Treasury direct, or some non crypto off Chain system that would require them to almost like duplicate their efforts. And so, crypto native has cash and institutional, right. Like most individuals in the space don't have like a fiduciary, you know, mandate to LPs to like, optimize every ounce of yield. You know, a lot of the firms that we're seeing, get interested about this stuff or firms that like, otherwise, we're sitting on stable coins earning zero, and we're like, Well, we do have like a duty, even if it's not a huge position, even if it's like, you know, half a percent of our portfolio or percent of our portfolio, we should be putting this to better work. And this is where tokenized treasuries come in and at superstate, there's our first product ustv, it's a tokenized CBOE fund, you can purchase and redeem this fund with USD or USD C. And so once you're a crypto native investor, and you can go in between stable coins tokenize treasuries in one day, then suddenly, it all starts to make more sense. And this is the second reason why it's crypto native folks, they don't have to move the money into a brokerage account offline, where it takes like multiple days, and then they don't have to spend multiple days, bringing it back into crypto from Trad fi. When they want to exit their position. The whole process using stable coins works very quickly. And so there's just a significantly higher baseline for capital efficiency that they can have when there's less idle assets. It
Cuy Sheffield 21:54
seems like there's this really interesting interplay between stable coins and tokenize. Treasuries, where it's almost like you've got a checking account in a savings account kind of function that you could hold tokenized treasuries earn the yield, now go 24/7 into stable coins to be able to spend when you need to. And so seeing crypto institutions kind of building their own treasury management products with the combination is super cool. And then the other one, which Simon's I'm curious if if you've thought about this is the use case of tokenized treasuries or Treasury funds as collateral behind stable coins. And like one of the big questions we've talked about for years on stable coins is like, wait a minute, you know, the whole point is that you've got high quality liquid assets behind them. Well, how do you prove that? Well, you need these audits and attestations. And traditionally, those Treasuries are held off chain. Now, what does it mean for a stable coin issuer? If you could say, we can prove that we own this address that then has the equivalent amount of Biddle or the super state funds that are backing the stable coin product that we have? And so it seems like that's what I'm doing some of the others, like, it's more transparency into reserve backing of stable coins, if what it's backed by is also on chain that you can then point to, so Simon, how do you think about the stable coin, treasury and Interplay here?
Sy Taylor 23:15
I think bullseye. I mean, you said it really with the transparency thing that plays into a crypto native audience number one, but number two, the elephant in the room that just walked in is called tether, and have been questions about his backing for some time. And they've been weird audit situations. And that credibility question for some institutions is a real issue for others is like neither here nor there. It depends what their risk appetite is. But you know, few take the other side of robos compensation of like, this is primarily serving the crypto natives at the moment, I think the big institutions that would want to hold and would be creating the funds and have a high amount of liquidity. What's been holding them back from bringing that liquidity into this space has always been that credibility question. So if you can resolve some of that credibility question with a brand. And with transparency, you put yourself in a bit of a different category. Robert said something super interesting that stuck with me in his last answer, which was the crypto natives don't want to change their stack? That is even more true for the traditional institutions. Oh, my goodness, have you ever tried to implement change in a legacy financial institution, it is like open heart surgery on top of a nuclear power station on the middle of a earthquake. It is complex, to say the least it's unbelievable. So don't want to change that stack. But if somebody can come along with these really neat little on off ramp P bits. You know, we always used to talk about the on ramp to crypto and the off ramps and that sort of this but at the institutional level is I think we're just starting to see those breadcrumbs. play out. Robert, if you have any final thoughts before we move on?
Robert Leshner 24:54
Well, I just loved your analogy. That's all.
Sy Taylor 24:57
That's that's a good one. I'll take my phone was chi go? Can
Cuy Sheffield 25:01
I get kind of both of your take on a hypothesis that we've heard a number of times? And as I've talked to people in the space, there's this big question of, like, what are gonna be the key drivers of tokenization of traditional financial products? Like what's going to really accelerate and get people, we all believe it's got the of this promise, but what's gonna, like get people to get up and start moving in and start using them? And it seems like one view of that is that it really starts with crypto natives. And it's to say that, you know, first you've got, the biggest reason for someone to get crypto infrastructure is actually to trade crypto. That's the motivation of why go set up a digital asset custodian and learn to manage keys, it's because you want to be able to buy Bitcoin or be able to buy eath as the crypto markets grow, if the asset class continues to grow, and someday you have trillions of dollars of value in these assets, you have a set of investors who've already on boarded into the infrastructure, and now they want to diversify into other financial assets. And so It'll kind of be led by people come in for the crypto, they get the infrastructure, and then they stay in that infrastructure for the traditional assets, rather than people are looking at traditional assets? And are they willing to do the work to get the infrastructure to buy traditional assets on that new infrastructure? And so are there enough benefits with the efficiency the programmability, that Trad fie will move over to buy Trad fi assets? Or do translate institutions move over to buy crypto assets and that they stay there to buy their Trad fi assets once they're represented? And so curious how you think about that, that sequencing?
Robert Leshner 26:45
Well, I think of it as a slow feedback loop, right? Because as you start to have demand, you start to get new use cases, right? Once there's a large enough ownership base of tokenized. Treasuries, then suddenly, intermediaries and brokers and custodians and service providers and accountants and everyone starts to like, pay attention to it and make it a part of their processes and start to like add support for it. And the use cases slightly grow. And as those use cases slightly grow, the demand slightly increases. And this keeps on happening until eventually, you know, the tokenized version in crypto has kind of been upgraded, like 14 times. And the traditional offline analog hasn't really changed in 50 years, right? And so the crypto version of it just gets better and better and better slowly, not like you know, there's a tomorrow it's radically better, I mean, like over like, weeks, months, years, a decade, it's just gonna continuously get better, because there's gonna be more things to do with it more use cases, more applications, more support for it. And like as it gets continuously, better. Demand continuously builds, and eventually, you reach a tipping point and tried fi says, Wait, this is so much more effective over on the crypto rails. Did you know that once you own an asset, you can program it, you can do all the stuff with it, you can like meet a margin call instantly, you can have higher capital efficiency. You can have lower bookkeeping costs, you can have improved operations, like why don't we just switch to this crypto version of these assets?
Sy Taylor 28:26
It's really interesting the slowly then suddenly thesis you're outlining there when you were talking Robert, I drew a two by two of like, new customer new product on one side. And that's crypto native crypto needs to assets. And then existing customer existing product, traditional financial institution traditional financial institution products. Now think about that. With the advent of mobile in the early days of mobile banking, right? You had this weird period where there were new customers taking new products from like chime and Cash App and all of these other things. And it was typically the younger generation that did that. And then you had the existing customers taking existing products, maybe from Citi or chase, they launched a mobile app. But the business case for each was different, like the Chase Mobile app was reduced the cost of branches. The business case for joining was grow this new segment that's underserved. And you kind of see that parallel worlds thesis initially play out in crypto, but now we're seeing the well it's an existing customer getting a new product, the Bitcoin ETF traditional financial institutions or it's a new customer getting existing product, crypto native getting the real world assets. What happens over time is these things blend but they blend slowly, then suddenly, is the WellsFargo app as good as the cutting edge thing that chime just did probably not. But these things coexist and neither of them disappear. But over time The benchmark gets moved, which is kind of where we all move to. So it's not like Chase and Citibank haven't used the internet or mobile. But they haven't benefited in quite the same way as the new growth markets have. I do now need to move to an average unfortunately, to interrupt the flow just to mess with it. But this episode is sponsored by our good friends at visa. A world leader in digital payments visa bridges the gap between traditional financial institutions and innovative blockchain networks, how topical and it's helping players in the payments ecosystem navigate that world of tokenized and fiat currencies with confidence and ease, you can find out more visa.com forward slash crypto. And we're also supported by our friends at digital asset. Digital Asset has launched the Canton network in partnership with Linux, a proven trusted and scalable service that provides interoperability between institutional grid tokenization platforms, the global synchronizer is now live managed by line x as I mentioned, and institutions are using the Canton coin to manage their governance. Now, the banks haven't launched a token in the classic sense, this is much more interesting. They've done it to make all the token networks interoperable. You can find out more at Kent on dot network. Alright, on with some more news. This is about maker Dow and their $1 billion tokenized Treasury investment plan, which is apparently drawn interest from who other black rocks Bedell on dough and this little company called superstate we did just everywhere at the moment. Robert, do you want to kind of explain this one, because I took a read of it. And it's probably worth just kind of context setting this because I guessing you're reasonably close to it. Yes.
Robert Leshner 31:51
So here's how you can understand maker Dow at a high level. So maker Dow has long been a system to create a decentralized stable coin called die. And there's really two primary ways that this stable credit has been created over time. The first is that and this is the more historical approach, users could post collateral and mint die from it. Namely, they could post ether as collateral and they could mint die. The second approach to creating dye is something called their pet peg stability module, which is a similar process, but you basically provide to the maker Dow protocol, USD coin, and MIT die from that. And both of these are popular use cases to mint, the stable coin die. At this point, there's billions of dollars of dye that have been minted over time. And maker of the protocol is sitting on, you know, billions of dollars of assets, backing the stable coin. And a while back, they decided to be more capital efficient for the protocol, this process of manufacturing dye, and moving that USTC into a yielding approach. They've partnered with a number of firms, they've worked with Quinn base for a while, they have, you know, what are called these offline arrangers where they take the stable coins and they through a series of, you know, process to convert them into treasuries, and they pass the yield back to Maker Dow. It's basically a capital efficiency process for the assets backing this stable coin. And we talked a little bit more, you know, previously about, oh, well, one day we're going to have stable coins backed by treasuries, maker Dow is already sort of there. It's just that the process right now, by which it's backed by treasuries is opaque, it's off chain. And it's had some issues, there's been like, you know, there's public knowledge, like in the governance forums, it's been a little bit of a mess. The last team that was arranging for the, you know, investment of USDC into Treasury's was a bit of a mess. They weren't providing any statements or reporting or audits, you know, they weren't having any communication or any updates, and the community got frustrated. And that was one of the catalysts to switch to a different process. And so now they're running what's called a tokenization Grand Prix, where their goal is to find a series of different service providers or assets, so to speak, to deploy the reserves of detail that will be invested into low risk assets treasuries, with the yield being passed back to the protocol. And this looks very similar to any other customer for a tokenized stable product. It's someone who's who's sitting on a very large amount of stable coins and wants instead to be earning a tibial yield with the ability to withdraw back into stable coins when needed because if the amount of dye in circulation contracts, maker Dow needs to have stable coins on hand to pay back out to holders so they're looking for a yield bearing low risk highly liquid set of investments which tokens Treasuries are perfect for it. And so Blackrock on dough superstate and a couple other smaller firms are all in the process of explaining to the maker Dow community and protocol and governance, why their solution to a tokenized. Treasury is a good fit for this ecosystem investing assets in stable coins into treasuries. And it's going to be really interesting because it's going to draw out some of the nuances and differences between these products, it's going to educate a huge swath of the community, you know, whether you're a crypto native or Trad Fie on what the process looks like, from end to end, watching on chain activity lead to off chain like US Treasury purchases, and back again. And I think it's just going to be this wonderful process that's going to be incredibly informative, and hopefully kick off a lot more excitement and activity in the space. I mean, this is without a doubt, the largest tokenized Treasury investment of all time, right now, the whole market in aggregates about a billion dollars, you don't make it all alone is looking to deploy a billion dollars. And so this is a monumental event. It's not the last, you know, when you look at the size of investors out there that buy treasuries, right now, there's a lot of billion dollar investors, right? Like tether has had over $100 billion, right. But it's one of these like, major checkpoint processes that's along the way, have tokenized off chain assets coming on chain and providing yield to on chain investors. It's huge. So there's
Cuy Sheffield 36:37
so many fascinating concepts here. And I understand a very, very small fraction of it. So maybe let me try it kind of my own very simple mind, see how far I can get. So maker Dow originally started with people called it kind of like a crypto, collateralized, stable coin. You know, the idea was that you would deposit ether into a smart contract to mint dye. And that was kind of the first iteration of the product. Now, I think it's important to note that like, even though it's kind of called a stable coin, it's a fundamentally different model than USDC, or other stable coins that have an entity that's holding Fiat off chain. And so it was this kind of crypto native product. And it was just ether. And the challenge was, because ethers volatile, you'd have to deposit $100 of ether. And you could only borrow $50 of dye as the stable coin out of that. And so that was the first iteration of it over time, because that is not capital efficient. If you have to have twice the collateral of the stable coins are being created. They've looked to increasingly move to real world assets. And so they've said, Okay, let's have USDC, let's have other real world assets to back dye, rather than just ether. And so then now it's going from using just stablecoins to using tokenized treasuries. And the biggest question that I can't, like, explain it, I don't quite understand is, who is actually the entity, like this is a it's a Dow, and there's governance, and there's voting. And so when you have this tokenized, Grand Prix, and it's like, here's this new crypto native customer, we just reference of like, this is crypto native customer demand for a billion dollars of treasuries. Who is actually the customer? Is the dowel the customer? Is there an entity for that? Like, how do you even think about someone to buy the product? There needs to be some entity like how does that work? That's
Robert Leshner 38:40
a great question. So and this is all like, early in maker Dow figuring this out at unchained Dallas figuring this out, and protocols figuring this out. The methodology they've used is one in which historically they've had on chain governance where maker Dao token holders say, we approve this plan. And the plan says, form an entity in the real world, you know, an LLC, a corporation, here's the jurisdiction of it, form an entity, the operating agreement of the entity will say that any assets of receives our own can payable back to Maker Dow and then send that new entity some money from this on chain, Dow. And so this the process they've used to establish an entity, fund it have a paper trail of where it got its money from, and then have that entity do things in the real world, so to speak, our off chain world, with a team with an operating agreement with a process. I think it's so different to what you would see if you were a traditional asset manager and this was your like, you're gonna go sell to a pension fund and you're selling them some treasuries, right like dealing with this entity who represents this governance model, but like a pension fund has a gun model that just happens to be incorporated. They have a board of directors, fiduciary obligations, how that company is incorporated. And what its rules are for its incorporation just happened to be quite different to this, which has this community voting scenario that then the fiduciary officers of the entity go execute. So I can see how you make this compatible behind the scenes, but I'm kind of interested like, Robert, when you think about like, if a maker Dow if tether, or somebody else is gonna go do one of these, like, Formula One Grand Prix is to figure out, like, what does good look like for them? Versus what are what is it good look like for a pension fund? Yeah, absolutely.
Robert Leshner 40:41
I mean, I think for a protocol and a pension fund, you know, you sort of want the same things, right, you want good investment management, that's cost effective, that's transparent, that has governance around that. That's low risk. And that has the least amount of conflicts with principal agent problems and insiders and all of these things. So you just want good process. And I think that's what maker Dow is trying to achieve here in soliciting a competition to provide the best process. And
Cuy Sheffield 41:15
I would assume that they might diversify and have multiple providers, rather than just choosing one. And is one of the realities, just like kind of practical realities of this is that normally with a pension fund or traditional institutional investor, you're pitching to a fund manager, who's already making the decision and sure they're accountable to their board here. Are you actually pitching on an open forum to make her token holders? And so there are random people across the world who are reviewing these pitches and then voting with their tokens around what they think the dowel should do? So that seems like a different type of a sales pitch than most funds are used to and like that's what you're doing. That's what Blackrock is doing. And you're all going to be in the maker forum, debating people with different screen names around the nuances of the product. Yes,
Robert Leshner 42:09
short answer. Yes.
Sy Taylor 42:10
So you win the business with emoji. This is the way forward you have to have good emojis. You do in a discord like this is this is the way you got to have a huge strong discord game to be winning. Last story that we got time for this week is about superstate themselves. So you've launched a crypto basis fund called us Si Si, is your second fund following the February 2020. For launch of us t be the tokenized Treasury fund. US si si takes advantage of price differences between the spot and future markets for Bitcoin and ether, and optimizes yield and risk relative to short term government debt by issuing it as an ERC 20 token on the Etherion blockchain, the fund will, in the future allow qualified investors to use it for peer to peer transactions, such as collateral settlement, enhancing its versatility. This is where I'd usually insert some sort of quote from the CEO, but like, I've actually got the guy like, talk me through this one. Why why this use case? Why now? Give me some context.
Robert Leshner 43:16
Yeah, so this is a product that I'm really excited about. It follows tokenizing a TITO Fund, which is probably the most vanilla easy to understand, and straightforward product that you can create where it has maximum liquidity, you know, minimal risk, and whatever yield is the risk free rate, essentially, that's keep those one of the things that we've heard repeatedly from institutions in the space is like, why don't you complement a low risk strategy with something that's also low ish risk, but significantly higher yield. And one of the longest running strategies in crypto, it's been around for close to a decade and was what's called the cash and carry trade or a basis trade, which is buying Bitcoin for one price and simultaneously selling it for a higher price in the future. When that price over time is better than the interest rates you would otherwise earn on treasuries or some other type of investment. This type of strategy exists in all commodity markets. It's not just unique to crypto, but it's much larger in its opportunity in crypto because of more inefficiencies in the crypto market. And so, this basis trade has existed for a long time because most people in crypto are deploying their capital into buying crypto not arbitraging, you know, spot prices and future prices. And so, there's generally been over the last number of years significant excess returns over short term treasury bills to invest in this basis trading strategy and implementing it is not easy, right? You have to have connectivity to exchanges and brokers, and you have to have a digital asset custodian and you have to have lined up accountants and you have to like Do all of these things which are completely doable. And there's a lot of firms that are doing this on their own. But there's a annoyance level that's significant and a time investment, and in some cases a capital investment that's significant. And so what we're doing by tokenizing, this is rather than tokenizing, a very specific type of asset or tokenizing a strategy. So alongside US TV, a T bill fund, we're going to have USCC, a crypto Cash and Carry strategy this tokenized adds, the hope is that investors will be able to seamlessly move between these two different strategies and vehicles, switching between the risk free rate and whatever the basis rate in crypto is, and provide just another tool to investors that are crypto native. We're also starting to see more interest from non crypto native investors after the announcement a few days ago, where there's a lot of traditional funds who don't want to get out just long Bitcoin or long crypto, but they want his foes or two more attractive economics derived from crypto markets that are interested in this. And so, you know, we're gonna see what the growth looks like. But there's been a tremendous reception, the first couple days is
Cuy Sheffield 46:14
super interesting. So how do you translate this more in like a Trad fi sense, where there are strategies like this, that you could execute in Trad Fie, either against Bitcoin or other commodities, and it takes work to actually execute that strategy? If someone wants exposure to that strategy without having to do the work? Do it? Is there like an ETF that you could buy that? Does that strategy? Like is there an equivalent of products that are you're buying a strategy? And then if so, are those products then also used as collateral? For other assets? or so is the new part here, your tokenizing strategy? And they're less traditional financial instruments, where you're just buying a strategy? Or is the new part that that instrument can then be used as collateral for other things?
Robert Leshner 47:06
Yeah, that's a great question. So there's right now, not this sort of like traditional, analogous product, there are firms that are doing this for themselves, like I've spoken to a number of hedge funds on Wall Street that are doing this internally for themselves. There's not publicly traded products that look like this yet, that someone can just purchase. So in one sense, it's a new product, as well as it being tokenized means that the ability to interact with it for crypto native investors in particular, significantly more efficient, you're able to just like our treasury product, purchase, and redeem it using USD and USDC on a daily basis. And so it should hopefully, take all the work that we've done to build out a great framework for tokenization. And add another asset into the mix that people can deploy with the same ease as treasuries. It's fascinating
Sy Taylor 47:57
to me that the strategies that have been around for a long time, and now coming into this whole other automated level, where now I can just click and move and instantly between them, and tokens were always thought of as this very flat thing. Oh, I wrap a smart contract around the token. But actually, the token itself can be doing things this is one of the things that compound does is once the strategy is wrapped as a token, then you can trade that token to and we always have this in financial markets. But what that means is you can start to take different levels of risk appetite, as you see in the petri dish of Defy.
Robert Leshner 48:37
Yeah, absolutely. But it's not different than the way off chain financial markets work, the amount of financial engineering that exists by wrapping something in something else, and then slicing it and then wrapping some other component in something else and then financing it and like it's significantly more complicated.
Sy Taylor 48:56
Yeah, the paper trail is not transparent in that world, right? Like exactly the structured product that I build from a BNP Powerball whoever is doing a little bit of this a little bit of that little bit here a little bit there. Like who actually knows how all of that works long after the contract was signed, who knows where the PDF was filed? And what's supposed to happen when margin moves, and there's a collateral cause it's unbelievable. I know we're
Cuy Sheffield 49:20
running out of time. I feel like we've talked about this for hours. The biggest thing I want to hit before we lose you is what's the state of these products being used in defy in protocols you like compound that you founded? Is that there today? Are there tokenized treasuries that are being used at scale in Defy? Is that coming? What are the barriers? Like what should we expect in the future as your original vision, these assets representing traditional financial assets coming into default?
Robert Leshner 49:50
Yeah, that's one of the big elephant in the room questions. So thank you for asking it. Right now there's little integrations and composability namely, due the fact that the total market cap of these products is so small. They're not yet at the size of a lot of the other tokens available on chain. And so in terms of defy protocols, we're not seeing them being integrated in yet the number of holders is small, right? You are mentioning like the largest tokenized funding this face has 20 ish investors. We're at such an early point that right now we're not seeing huge amounts of traction yet, with integrating treasuries or tokenized, RW A's into defi protocols. But going back to like, it's gonna be a slow burn, it's a positive feedback loop all around. It's just gonna be one of the many threads that continues over the next couple of years.
Sy Taylor 50:42
We're gonna keep watching this, and we hope you'll come back, Rob, because this has been fascinating, like, genuinely fascinating to have one of the pioneers of defy who's bringing the real world assets into that crypto native world over at Superstay. If people have heard this show, and they are curious about learning more about superstate and you Where do they find you and Superstay?
Robert Leshner 51:02
Yeah, you can find me on Twitter, our leshner. And you can find superstate@superstate.co
Sy Taylor 51:09
and Kai, how about you
Cuy Sheffield 51:11
on Twitter and LinkedIn at Sheffield and visa.com/crypto.
Sy Taylor 51:16
You'll find me at sy Taylor on Twitter and Simon Taylor on LinkedIn. And do check out sardine.ai If you want to learn what we're up to over there, if you haven't already, please go ahead and hit the subscribe button on Apple Spotify or wherever we get your podcast. And if you've got a second lever review, it legitimately helps us out a little bit. Remember, not financial advice, informational purposes only. And yes, this show does focus on the tokenization of real world assets. But a lot of this space is volatile. You can lose money if you're buying assets. So be careful out there folks, the majority of this stuff is still unregulated, but my goodness, credibility has come into this space. It's exciting times is interesting. Thank you, everybody, and we'll see you soon.