Conversation | Liquefaction: Privately Liquefying Blockchain Assets | ETHDam III - 2025

Welcome to East to E to E to E to E. Hello. Hey everybody. Um so I'm Will. Uh I'm ecosystem growth manager here at Oasis.

Um a b high level overview. Oasis is a uh the first confidential EVM and I think currently still the only confidential EVM. That means that we um have the ability to support confidential smart contracts with encrypted smart contract state. And we have a really cool use case um out of the research coming out of Cornell um called liqufaction. And we'll get into that today.

But first, I'd like to have both of our panelists introduce themselves. Uh Danny. Yeah. Hello. Uh I'm Danny Vard.

I'm from Barcelona, first year PhD student at Cornell Tech. I have some background research on theoretical zero knowledge proofs but I now moved more towards blockchain interoperability and privacy and that's what I'm here to talk about. Um yeah my name is Rico. I'm founder of semiquid. Um we are unlocking liquidity for unvested uh token value and we are leveraging uh the research u of liquefaction of Cornell Tech u to do that.

Awesome. Great to have you guys here. Um I guess my first question is for you Danny. Um what I guess um sparked the interest in liquefaction um and the research at coming out of Cornell. Yeah, that's a great question.

It it was actually a blog post by Phil Diane. Uh some of you may know him. He's the founder of Flashbots. He worked in our team in 2018 and he published a blog post called Dark Dows. It was basically a construction a protocol that allowed people to sell DAO votes privately and uh we kind of saw this had further potential last year and digged further into it and we found that this had many other applications that just selling pH votes privately.

Um we kind of uh found that liquifaction broke one of the assumptions that underlay uh many blockchain protocols which we call the single entity address ownership assumption which basically says that uh each address is owned by a single entity. Some uh blockchain protocols that make this assumption are for instance the uh DAO tokens. They assume that the person that holds the token is the person that's actually voting. But also soulbound tokens make that assumption. Locked tokens like he'll later explain make that assumption that if someone has the locked token, he won't be able to trade it.

We show in our paper that we published last December that that's not the case. Uh we break many of the constructions, but we also propose some constructive use cases. Uh and yeah, I'll later go dig into it. Yeah. And just to a um I guess for the audience and for everyone listening at home um can you just explain like what at a high level liquifaction is doing um yeah to achieve these uh I guess groundbreaking uh new use cases.

Yeah. So uh the idea is quite simple. We basically h create and hide the private key that controls the account in an uh trusted execution environment. So the the private key is never leaked. It's always hidden.

No one knows the private key. And then we define logic on top of that private key via smart contracts. That's done inside Oasis. Uh because Oasis does not only offer the uh privacy coming from confidential compute but also the livveness coming from a blockchain which are two things very important for our protocol. And that uh allows basically to for instance define the logic you need to sell the votes.

How you would do it is imagine I have some votes uh some um Dow tokens in my personal account and I want to start renting them. I would create an encumbered account which is an account that has the private key inside the TE sell my tokens to that encumbered account and then define the DAO uh selling logic on top of that account via smart contracts. Awesome. Thank you for the explanation Danny. Uh yeah, we're really excited at Oasis for all the use cases that this opens up.

Which brings me to you, Rico. You guys are unlocking vested tokens uh and creating new OTC markets for them. Uh my question for you is, you know, their paper only came out in December of 2024. So, uh you guys have already and you guys started building in like March. So, how did you I guess find the research paper and start building and were you already thinking about vesting tokens and things of that nature?

Yeah, that's a great question as well. Um I think that it it all began like 3 four years ago when I uh already came across the uh the idea of of vesting in general right and what value is essentially locked away um at any fundraising uh effort. So I already saw that there was huge potential. Uh but back then the technology was not uh mature enough meaning you had liquidity fragmentation if you do um multiple venues right uh you have uh public visibility right when you have the uh trade happen on chain for example if you are an A6Z and you have bought 55 million in locked layer zero tokens but you turn around and sell those that's not something that the public markets would um be kind of be fond of Right. So there were all kind of different things that um were lacking back then.

So I just forgot about it back then. But then I was following uh IC3 um on LinkedIn and I was uh subscribed to the newsletter. So when it came in it immediately clicked, right? Um so we set up a call with James, one of your uh one of the authors of Liquaction as well and it started out uh from there. Awesome.

Yeah. Uh I think it's probably one of the more exciting use cases although all the all the use cases stated in the paper um are are quite exciting. Um I guess to to that degree um can you guys both explain what you guys have built? You guys have both uh started development on liquefaction. Um so we're moving fast here.

The research only came out and we're already building. So you have a demo that you built. Um can you just go into that a bit? Uh yeah it's actually came live yesterday. Uh we call the demo take my ape.

Thank you. Uh we we kind of build that demo to showcase the power of liquefaction. Uh so people can kind of grasp this more theoretical concept and and kind of play around with it. Uh do you all know what a board ape is? Uh do you want to own a board ape for less than a dollar?

So that's kind of what we are doing. We are we build a system where uh it allows you to create an an encumbered account that has some small restrictions. This restriction is that it does not allow you to transfer the ape, but you can do everything else. So once you create the encumbered account, you're allowed to kind of receive the ape from us and play around with it. You can log into uh websites that require you to have apes, for instance.

you can um sign sign messages saying you own the ape and on ether scan it will show that you actually own the ape with this account. So from a like a viewpoint of e of of ether scan or from ethereum side you like you will believe that the person owns the ape but the thing that you don't know is that that person cannot transfer the ape out of this account. So uh you can uh kind of check that demo out. I'm going to make a live demo tomorrow uh in the studio up there. Uh but uh it's called takemyabe.

com and and yeah, you can own the ape for 15 minutes, then it can probably be stolen by someone else uh and jump around like from person to person. Yeah, it's a really cool demo. Um I recommend everyone check it out. We'll share some details on our Twitter and I'm sure IC3 will as well. Um so great work, Danny, and I hope everyone enjoys it as much as I did.

Rico, uh what are you guys building? Uh I know you get touched on it a bit, but how are you using liquifaction? Yeah. So we use liquifaxing kind of like yeah a little differently. Um I would say we use it kind of like um TE based clearing house of some sorts.

Um so what we do is from your custodial setup where most of the unvested tokens reside currently you can pre-authorize to send those tokens at the unlock date. So when they become transferable to the liqufaction address and if the liqufaction address um uh has that confirmation then we can issue uh something that's called collateralized liquidity instruments right it's an ERC20 token onetoone basis to the unvested position uh think staked Eve but for lock tokens right um which can be freely traded on the uh exchange that we have built um and later on can also be used as collateral for uh lending Yeah, absolutely. I think it's it's uh an amazing idea. It's sort of and you you came up with this when we talked. It's sort of like a forward-looking contract.

Uh you know, OTC derivative where you it's not exactly, you know, priced the same as like the current token, but you know, it can be looked at as a future option or something along those lines. Yeah, if I can touch upon that. Um I think that's that's kind of like striking, right? So, if you have the traditional legal uh forward contracts where you're alluding to, um those are essentially a one-time sale, right? So, I am um signing a contract that I'm going to deliver the tokens at a future date to you.

You giving me cash now, right? But you're opening up yourself to a lot of counterparty risk and it's not tradable. It's only being sold, right? So now with a CLI as kind of like the anal analog to one unvested token you can start selling them one day and buying it back the other day or someone else can do it and you can create liquid markets of this um new institutional instrument right so that's I think one of the main things that is quite different but we you can call it exchange tradable self-settling forward or something yeah yeah it's extremely cool it's uh more efficient than traditional markets which is always nice when we create uh unique value propositions that are better than traditional markets. Uh my next question for is for you Danny.

Um I guess can you maybe explain a bit of like why the confidential EVM is needed um and why this is not possible on you know other EVM networks or even you know non EVM networks. Yeah that's a great question. Uh well liquefaction basically the basis of liquefaction is having like key encumbrance what we call which is hiding private keys inside tees and uh that allows you to later define logic on top of that uh private key. Um so we we do need at least a te why we need oasis specifically because what ensures is that the te won't be shut off by the person that like owns it. So we want both the privacy that comes from T is for hiding the private key and then uh the livveness coming from the blockchain.

If we used a normal blockchain for that and kind of created the private keys plain in the open and we later sent a board ape to that address, anyone could just get the private key and send the board ape to their own account. So we would be losing the board ape. Very cool. And uh yeah, we at Oasis really love that this use case um obviously is unique to us. Um but I think it's it's really a you know potentially next pivotal technology uh in web 3 you know uh Ari is you know pretty famous uh you know originally the proofof work author also but also you know pushing oracles pushing me and hopefully you know uh liquefaction becomes as popular as all of those technologies have been.

Um, one more question for you Danny. You know, this is obviously like a novel or you know, emerging technology um or or I guess uh method uh within crypto crypto. Um what findings or like um difficulties have you had and that you you know hadn't expected originally but you you know sort of have learned along the way of building your demo? Yeah. Um well the the cool thing about liquefaction is how flexible it is.

um the the basic idea of hiding the key and then adding kind of access control policies on top of it that allow you maybe to uh do something but not do something else uh kind of made us rethink the whole system from scratch and try to make it as modular as possible. We we kind of uh achieved that and we have now a pretty strong code base. It's not audited, but um I I think if audited, it would be really useful for anyone that wants to build uh on top of liquefaction. Um but but yeah, I I really encourage everyone to to see what they can build on top. There's a paper we there's a big table on the paper that we propose uh different use cases for liqufaction.

Some of my favorite ones are uh like private auctions which would allow for instance I don't know if you know Constitution Dow they got outbid by a little just because their bid was public people could kind of see what they were bidding uh we we couldn't solve that with liquefaction um we also proposed methods for dust mitigation uh there's many like Vitalik for instance everyone knows Vitalik's account everyone can send tokens NF 's money to that account and Vitalik had needs a way to show that that he did not want that money because maybe he could get in legal trouble because of that. So we show that liquefaction can be used to kind of show to the to to to stay compliant. Um and uh I in the future I I really hope that liquefaction uh and I I do hope and I do think that liqufaction is going to be adopted in many many places. Um I think the biggest uh thing we are working on now we started this project a couple of months ago with Donsong and Arijules uh is uh basically um trying to build L layer 2 that uh does not uh need for any bridging via the use of liquefaction and also is uh chain agnostic in the sense that it's not an L2 for a specific chain is for every chain While no need to build bridges, this is a paper we are working on right now and it's one of the uh coolest use cases for liquifaction. But I I do think that there's going to be many things coming out from this.

That's very cool. So I guess Oasis will become an L2 for every chain soon. Uh that's very exciting. Um Rico, um so one of the things that you guys recently have done is a pilot. Um can you maybe talk about what that pilot was and who some of you the partners were that were participated?

Uh yeah, that was quite a milestone. Actually, it was Wednesday, so not so long ago. Um so the pilot, what we wanted to accomplish there is to let uh French capitalists, but also market makers and uh other buyers experience the power of um creating a CLI right from custody and then trade those CLIs, right? So essentially um get the impact of semi liquid, right? So we had a couple of partners like Animoka was participating.

Uh we had uh GSR uh Spartan um and some other big big name firms. Jump, right? Sorry, Jump. Yeah, Jump as well. Yeah, that's also a good one.

Um yeah, and I think that what's so interesting to see is that because first of all and uh with liqufaction, right, it is a self-custodial uh model in the the basis. Um so the idea was that okay we are going to create a liqufaction wallet go to your foundation and say hey um we are giving you this EVM address because you can't see that it is a liquifaction address um and by doing so I receive the onvested tokens there and then I can create cli and can trade right but the idea that we have now with the custodians that are um very willing to participate and get a share of this untapped uh market is that we have altered it as what I discussed for um so yeah custodians are all over this market makers are all over this because it's a net new market from this dormant capital that uh we are opening up in a efficient way using liqufaction and uh collateralized liquidity instruments yeah and I I think I really you know one of the things that when we first talked that I didn't you know think of but you've done a great job with is targeting sort of the custodian solutions like that is I think um the people who have the vested tokens right now um And uh I guess one of the challenges that you would have had if you hadn't done that is that you would have to have everyone opt in and before um before they have the vested tokens, right? But by uh targeting custodian solutions now uh as long as they the custodians have them the tokens that means that you know you basically can create a liqufaction for any vested token that wants to participate. Right. Yeah.

Right. And I think that's something that was kind of like um learned on this journey. Right. because what I said we we started out with self custodial uh but yeah the unvested tokens are at custodians right so that was kind of like a problem because you can't move the unvested tokens um so that was kind of like where one of the the problems uh occurred um but yeah like what you're saying is that um by integrating into the custodian so where the unvested tokens are and by not moving them we're also mitigating any uh possibility of the foundation blocking it right because what you see now is that if I want to sell it, if I want to sell ownership now of this these tokens to someone, I need to get approval from the foundation. So what the CLI does, we are not changing ownership now, but we are transferring the economic rights uh to the tokens when they become unlocked, right?

So there's no involvement of the foundation whatsoever needed because you're not doing anything at this moment in time. You're basically getting a prepayment and the delivery is at the date when you can transfer it, right? Um so that's the great thing about working uh with these guys. Yeah, that's awesome. Uh, and like I said, you know, it's something that I had not thought of and I and I love the vision.

Um, I guess my my followup question for you would be what sort of impact do you think this can have in general for web 3? You know, what's maybe the market size? What maybe what about the culture will change? Do you think what we hope for will change is that we will stop with uh pushing project that are immature to um to TG. uh because what we see now is that people um investors they need liquidity right so it's it's their job to get uh return on their investment for their LPs so they are pushing these projects and these projects will go to market without any product market fit or without any significant amount of revenue um and then they're being pushed push pushed and then retail is getting dumped on right so what we would like to see using liqufaction and semiquid as kind of like the default uh private market so to say is that you have companies that will get liquidity or they they raise from the private markets and when they become profitable or they have significant product market fit only then go to a centralized exchange and basically more similar to how the IPO process works now right because if you do an IPO you are a mature company you have done a lot you have been vetted but now what we see on centralized exchanges it's mostly not vetted and mostly no product market fit um so yeah yeah absolutely I think um you know, anyone who's been in crypto long enough has gotten burnt on a TGE or something like that.

So that's I think welcome from the entire community if we can stop getting dumped on. Um so I guess uh my next question is for both of you guys. Um what challenges have you run into um in using working with such like a novel products? Um what yeah what do you have the bit what do you think the biggest challenge to liquefaction adoption or your own product adoption will be? Yeah, that's a great question.

Um I think the way you think of uh web web 3 security is different from classical security and now when you add this kind of privacy layer you you kind of add an extra step to that uh where you don't only have to think oh um how do I make it so they cannot steal the board ape from me you have to also think how do I make it so that no one knows knows who owns the board ape or um there's many things that come from like T security uh research that you have kind of have to adopt into your development that uh we had to learn and I think that was really really cool really interesting um I'm sure in five in three in seven years that's going to be easier from the developer standpoint and they are not going to have to worry about how they kind of use the the mappings in solidity to kind of not leak information. Um, but that that was pretty cool. Yeah, I think um, you know, it'll be similar to smart contracts in general when they first came out, right? Like there was so many uh, for example, Ari and his work with oracles, you know, people didn't understand why oracles were important. They could use the centralized ones and then every other DEX or lending protocol was exploited um, that didn't use them.

Um, I think similar with liquefaction, you know, there'll be some pain probably, but um, we will get there where it becomes uh, ubiquitous in the industry. Um for you Erico same question either on the business end or the technical end what have been the biggest challenges you've run into? Yeah. So on a business end um what we have seen in in terms of of pitching that okay we want to unlock liquidity for uninvested tokens one of the first signals or one of the first reactions is oh uh it's not possible right because the project before us they didn't have like perfection um so what they did they were more functioning like a bullet board so to say right so they were saying okay um give me your investor position or give me your private key and I'm going to sell you sell that for you right? Um, highly inefficient, expensive, no real price discovery.

So, it functions like a blue tan board. And so, I need to explain it in a way that uh, yeah, you're not selling, but you are making it tradable. EA blueboard versus the NASDAQ, uh, so to say, right? So, it's kind of like an analogy, and I'm really trying to find the right analogies that that click with different crowds. So, for devs, you need to use different uh, ideas, different analogies than for custodians or for VCs.

Um but yeah that's kind of like have been a challenge to really get them to understand that this time it is different right and it's uh yeah like that. Yeah, I I I imagine that. Yeah, explaining new technology um to VCs who are normally technical but not not necessarily especially with such an abstract idea. And that's why it's great what Danny's doing with Take My Ape is it really helps people, you know, understand what what's possible and it's like maybe not a physical product, but it's tangible, right? It's not so abstract.

So, I think um that's why also your pilot was a great idea, you know, that you showed them in real time. It's not only possible, it's extremely efficient. Um, so I guess my next question is what what other use cases for liquid faction would you like to be seen or like to be built over the next 3 to 5 years that you think are are valuable? Maybe ones that you will add to uh the semi- liquid in the future. Uh I think that for example where a lot of these VCs are interested in and traders, they look at uh options.

So for example, you could have onchain options and they're not cash settled but settled in the in kind essentially in in the native token. Uh EA you can bet on if the lay zero token is uh less than it is uh at unlock or of now at unlock or higher, right? So it's kind of like a bet that you make. That's an option. you can write options um and you can take on that that bet and when you are at an unlock date then basically you get the price discovery and when you have the price then the option is settled uh or not if the price is not correct right so kind of like such such ideas is really interesting to to to think about um or indexing right where you can you could have a token or an or yeah a token I think it's the best thing um where you have the top 10 top 15 CLI eyes, right?

And that token could be accessible on the public market, right? So you can get exposure to uh quote unquote cryptos private market without needing to access semi liquid yourself, right? Yeah. And I think that's actually really great for the retail investor, right? We already seen Coinbase do like their top 100 token uh index and stuff like that.

So that'd be really cool to see in the future. Uh, I know you sort of spoke already, Danny, on the ones that you liked, but are there any others that you wanted to mention that you think are will be useful for the industry or um just exciting in general? Yeah. Um, I think there there was a great talk about privacy pools before. uh liquefaction actually enables a really elegant and simple construction for uh legal compliant privacy pools that allow you to kind of prove that you're not part of a set of addresses that withdrew or introduced uh assets to the pool.

So that one would be pretty cool to see. Um but I I think the thing that needs the most uh kind of work uh from kind of a um public good standpoint is a really strong uh set of modularized components for liquefaction so people can implement what we call access policies on top of in a really easy way. Yeah, I I agree and I think that that also um you know speaks to the fact that you guys went modular. I think you know modular is a word we love in blockchain. It means that you know we can build quickly.

Um so I can't wait to see some of these things built out. Um so I guess one of my last questions is what is next for your projects? So Rico maybe like what what do you what's going on in the next year or what are the next steps now that your pilot is completed? Yeah. So in the uh near term we are doing a fund raise um where we have been speaking with the pilot participants and the appetite is is is is real.

Um so we're hoping to close the seed round uh by July so before the summer. And then the next steps are um integrating more tightly into the custodians. So you could also issue CLI to a custodial wallet instead of uh issuing the CLI to a Metamas wallet. um increasing the capacity on the order book uh improving the order book access for API to the market makers um and the other side is the buy side right so we're working with Elwood to make CLI also tradable from threadfi terminals and if we can get all of these stakeholders um aligned become the default private market for crypto so to say awesome I can't wait I can't wait till um you you know, this starts going into production more. Uh, seeing your pilot just had me excited for the future and I can't wait until it goes live.

Um, Danny, I know you again, you've already talked a little bit about, you know, what your next research project is, but maybe you want to elaborate a little bit more on that. You know, you talk about it as a bridge, but but it also like enables smart contracts on chains that don't have smart contracts. Maybe you can elaborate on that aspect. Yeah, that's a good point. It it actually uh in the paper we mention it as a use case.

We just has like a small paragraph. Uh we call it overlay smart contracts. It basically allows you to kind of use addresses on any blockchain even blockchains that don't have smart contracts like Bitcoin or XRP as uh and like then use those addresses and add logic on top of it in the Oasis uh layer and use them as as smart contracts. So you can basically add smart contract behavior on top of non-s smart contract ledgers. What we found out after publishing the paper is that it's a even more powerful than that if you add some kind of extra uh logic on top of it which allows you not only to kind of have smart contract behavior which would be similar to a classic L2 but also use the uh utility that that token uh provides in set chain.

For instance, if you have an NFT that allows you to log into a website, uh you can use that NFT to log into a website. Even when kind of trading it in Oasis or if you're using some tokens to vote on a DAO in XRP, uh you can still vote on the DAO or sell your votes uh in Oasis and it it does not lose its its properties. And we kind of duck more into that and we are now kind of uh generalizing this idea and showing that you can use any token on any blockchain as if it was on Oasis which is kind of the end goal we want to to showcase that it's basically a blockchain of blockchains. Yeah, we love that and we love all the value propositions and ideas you're coming up with. Um I'm really excited.

And I think liqufaction is um uh potentially like one of the most interesting use cases for for Oasis, you know, that we've come across. Um we do we are running low on time. I did want to ask the audience if there's anyone who wants to ask maybe a question. There's questions here. Oh, okay.

Um which one does owning the ape show that you have that amount of money in your account? have that token I guess. Yeah, it it does. Uh you you create the encumbered account and then on etherscan it shows that that encumbered account owns the ape and you can sign messages with it. The only thing you cannot sign is a transaction transferring the ape.

But if you wanted to kind of post tweet with a signature showing I own this account and this is my Twitter handle, you would be able to do that. Awesome. Uh maybe just last where can people follow you guys if they want to know more about you know the rays and that we're going live or they want to know what the latest research coming out of Cornell is. Yeah. Um Ari Jules posts everything on LinkedIn and uh Twitter Blue Sky.

Uh I know Oasis is going to also post something about that. Uh there's going to be some news article coming out on the Take My Ape demo uh pretty soon. Uh and uh I work for a lab called IC3 uh which is led also by Ari Jules and there we post all our research. Enrio we only have the website live uh now because we are in stealth semi stealth. Um so yeah I think uh after July after we have done the seed run we will come out of stealth and then we will just be visible on all socials.

The website is semilequid.com. Yeah, and we will be always posting everything going on with both the projects um on our Oasis Twitter, in our Oasis Discord and Telegram. So, you can follow Oasis as well. Um I want to thank you guys.

Uh it's been a great panel. And for anyone who asked a question that we didn't get to, I'm sorry. Um you come find us at the booth or come find us after this talk and we we can answer your questions. Thanks everybody. Thank you.

Yes.