How to Borrow Onchain Against Illiquid RWAs Without Oracles — Paolo DI Stefano | Frankencoin

Yeah. Um, thanks so much for having me. It's great to be here. Um, actually just two weeks ago, I didn't even know that I would be speaking here. Wasn't like fully aware of the conference.

So, thanks a lot to the organizing team for making it happen. And yeah, I'm very excited to be here to talk about how it is possible to borrow on chain against illquid uh rwas without oracles. And uh hope I can make this as high level and digestible as possible. I understand it was just a lunch break. Um, so first let me just quickly introduce myself.

So as you can probably guess by the name I'm Italian, but I grew up in Switzerland. Um, so my mother tongue is German. And of course, very typical for a Swiss person, I started my career in traditional banking at UBS, Switzerland's largest bank. Um, I did a master or bachelor's and masters in banking and finance. So you can see my background is very much like Trati.

Um but while writing my bachelor thesis on remittances in 2020, I realized how um undemocratic and inefficient the banking system outside of Switzerland actually is and um decided to join crypto in 2021. Um I then joined the largest Swiss broker, Bitcoin Swiss um stayed there for three years and after that uh spent two years living in Norway at K33. It's also a brokerage and research firm. And now since earlier this year, I joined the Frankencoin association as uh director of collateral management. So for those of you that don't speak um German, Frankencoin probably sounds a bit funny because it sounds like Frankenstein, but it has nothing to do with that.

Franken is just simply the name for Swiss Frank in German. And yeah, as as Philip just mentioned, it's um the biggest uh onchain Swiss Frank and it's based on a um CDP on Ethereum. So people can just mint it and it's not backed by any like off-chain um um Swiss Franks in custody. So very much like Maker Dow or liquidity. Um and TVL is about $80 million for now.

Um so like this is very much like my background. Um like I have this traditional financial background and now have been um working in the blockchain space for the last five or six years. And my feeling has always been that um traditional finance for the longest time had these very interesting assets that make it um also understandable and investable for people that are saving up for their pension, maybe saving up for a house um like stocks, fixed income instruments. They're uh they they're based on cash flows. They're they're they have intrinsic value.

They're regulated. They're issued by trusted institutions. Um but on the other side we have the blockchain which is this great innovation with very cool properties right it's uh instant settlement self-custody transparent um what I want to talk about later today is that they are composable and um these two worlds have for the longest part been quite separate and now this year or the last few years it's been very interesting or very exciting because I think these two worlds are finally converging with stable coins and RW WAS. So now you have traditional assets that work um in that way where where it's understandable and investable for the broad public, but you also leverage this new technology which is um much more superior as we can all agree. Um and maybe just to to focus on the composable part.

So for those who don't know, a composable asset in crypto just means that it's a token or component that can be uh pro programmatically combined or integrated with like uh smart contracts or D5 protocols. So the token is not just an idle investment but it can also be used to borrow against it. It's easier to trade it and so on. So that means now with this uh innovation we can take these tokenized bonds, stocks, ETFs that were before just sitting in a securities deposit account and start plugging them into D5 protocols. And yeah, here you can see that like the RWA market has grown very rapidly over the last two and a half years.

We're at about 30 billion assets under management um according to the DUN RWA dashboard. So the biggest um RWA category is still US treasuries but we now also see a lot of commodities uh private credit stocks reinsurance basically all the assets that already exist um now also coming on chain and for the issuers this is great because it creates new distribution um channels and faster settlements and um yeah so the key point here is basically just that RWAs are no longer just a niche experiment. They are becoming a serious onchain asset class. However, unfortunately, most RWAs are not uh part of DeFi yet. So, this composability that I mentioned before is not leveraged enough.

So, there is a major gap 30 billion assets that are tokenized but just about 10% that are being meaningfully used in DeFi. So that means those assets are just sitting idle on a wallet. Maybe they're being transacted or sent around once in a while, but they're not being borrowed against. They're not uh earning any extra yield for maybe liquidity pools. Um so they're basically just still this off-chain asset with a token wrapper.

Um so this is actually where or let me just um switch to the next one. Yeah. So this is this is um the question or this leads us to the next question like why is this the case? So why are rwas not used more actively in DeFi just yet? Um and as you can see here um it's actually not that easy to get integrated into like a lending market like Morpho for example.

It's a lot of steps. So when you when you issue an RWA you first have to tokenize the asset. Um that's the first step. You have to find a compliance structure where you have a custodian that people can trust. Um then secondly you have to start distributing it.

So you need to be integrated on exchanges. Um you you maybe need to do some marketing efforts. You just want to make the economics work with enough holders with enough assets under management and this is where currently a lot of the RWA issuers are getting stuck right. Um then this is just the timeline to get a morph market up for example. So next you have to build secondary liquidity right if you want to um borrow against an asset um liquidations usually rely on this secondary liquidity so you have to build up a DEX pool you have to get listed on centralized exchanges um then the fourth step is you need an oracle which gives you a price feed and this is a bit tricky with RWAs because if secondary liquidity is not that great it there's a risk for manipulation right Um so you need to find a way how an oracle can reliably track the price um before you can l launch the lending market.

Now once you've launch the lending market with your risk parameters like LTV and interest rates and so on then you also need to attract lenders. So you're actually in uh competition with every other collateral asset on Morpho because you're competing for the same USDC liquidity from suppliers and you need to offer high interest rates. um and and good liquidation terms and so on that people are actually willing to give you money. Um and yeah and in practice this is just very expensive because it it it costs capital. It is slow.

Um so it it takes a while to get all these steps up and running. Um it is risky because you rely on a lot of counterparties and it's hands-on because it needs a lot of management and monitoring. Um, and this is much easier with a CDP like Frankencoin. Um, because on the first step, so you just mint your own stable coins by providing collateral. So if you lock the RWA and the CDP, you basically just mint the stable coins.

You don't compete with other um um liquidity where where you only can attract supply or liquidity by giving good enough terms. Um then secondly there is no requirement for an oracle. So this I'm going to go into more deeply after but this is basically thanks to the liquidation mechanism that Frankencoin uses. And then third you also don't need secondary market liquidity. Um and this is actually very normal in Trafi.

So in Trafi credit markets are basically mostly real estate. Like real estate is the most used collateral asset to get a loan and uh a house usually doesn't have a continuous price feed and it also isn't like immediately um sellable like if if you don't pay the loan um the bank doesn't know the exact price of that house in every day and it also can't sell it off like just by uh putting a part of it on a DEX pool. So this is a very known concept from Tratfi and in crypto we're just very used to looking at liquidity and oracles and price information as like the main requirements um to borrow against an asset and yeah so this slide shows how frankcoin actually works in practice. So it's just a CDP protocol really like make a doll and liquidity where you have um a selection of collateral assets that um get approved or whitelisted. Um this is just a selection.

It uh in total we're we have about 15 listed right now. Um but it there's a governance process to get multiple um listed like uh the X stock from circle is currently being proposed and we're also speaking to a lot of RWA issuers to extend this list. So how it works is that the mechanism is always the same. um you just use that collateral, pluck it into the CDP and depending on the collateral properties um maybe on the volatility, maybe on the liquidity, there are different LTVs and interest rates for each of these collaterals. There's also limits on how much you can borrow and you basically then just get your Frankencoin, which is the Swiss Frank stable coin, and you can either save it.

So there's a savings module which gives you a 3.5% yield. You can trade it into other USD stables, maybe start looping your exposure to the RWA or you can even redeem it. So um we have a venue which is called Montela. It's pretty known in Switzerland, not so much outside, but there you can get an account very easily and you can trade these Frankencoin one to one into Swiss Franks.

Um, so it's it's it's very straightforward to even get fiat out of that um RWA. And so the previous slide um essentially showed why you don't need to have liquid or um why why you don't need to attract external lenders for every new asset because the CDP just mints its own stable coins. And now this slide is showing why you don't need to have a highly liquid secondary market and also you don't need to have an oracle um continuously pricing the asset. So it's basically um a game theory approach that Frank Coin has chosen. This is out of a PhD thesis from the from the founder Dr.

Lucius Micer um that came up with this. And so what happens is he actually uses the community or the public as the oracle because anyone can come in and just challenge open positions. So all all positions are of course open and transparent on the blockchain and anyone can just come in challenge say um like your position is underolateralized. There's an incentive for that. um if he is right then he gets a reward and if he is wrong then he has then he's going to lose the stake that he had to put up for that challenge.

Um and then then it's going to be um an open market auction. So um first for about or it it differs per collateral asset but say for the first 24 hours people have to have the chance to just buy that collateral at the liquidation price. If that doesn't happen, then it's a Dutch auction where the collateral price just goes slowly down to zero and biders can come in and buy the collateral at a discount. And now to the point with an RWA that has intrinsic value, um biders would be willing to buy that at a discount um even if there's no liquid secondary market, right? Like if you have a um an RWA which gives you exposure to say uh a tokenized bond and you can redeem it maybe in two weeks, you would still be open to purchasing that collateral if the discount is attractive enough.

You don't need a DEX pool where you can immediately sell it off. Um so now this is why there doesn't need to be an oracle. The the community is oracle and why do you don't need immediate secondary liquidity because it's just an open market auction on the blockchain. And yeah, this is not just a theoretical design. So Frankencoin is today already the most um used venue for spy on.

So spy on is on those tokenized version of the S&P 500 ETF. Um so it gives economic exposure to a very understandable and very like regular asset. But on chain this asset doesn't have that much liquidity yet. um like much less than most crypto tokens would have. Um so that means it's not the kind of an asset that other borrowing market find um interesting enough to to whitelist as a as a collateral token.

And um for Frank Francoin, it's actually the perfect case because everybody would agree that an S&P 500 ETF is a great collateral that you want to borrow against um despite being less liquid. um like the liquidity of of this token mostly depends on the redemption mechanism. So you need to go to Onondo and tell them hey I would like to redeem this token and they will just hand you out the money. Um so yeah according to D5 Llama it's about 98% of D5 active TVL that is um on Frankencoin for this token and almost no usage on the other ones. Um so this one I'm I'm just going to go through very quickly.

So um this is basically a summary of what I just said. So most other protocols you would require um secondary market liquidity. You would require an oracle. You need to attract lenders if you don't have enough secondary market liquidity. You might need agreements with liquidators um before you can spin up uh a lending market.

And the interest rates are then usually also dynamic dynamic right. So in Maro um if you want to borrow against um most assets now now they actually have a new feature where where you can also fix it but usually it's going to be dynamic. So it's quite unpredictable how much you're actually going to pay. Um whereas on Frankencoin it's the opposite right um you don't need secondary market liquidity you don't need an oracle you don't need to attract lenders because the the stable coins are just minted by the protocol and then interest rates are actually also just fixed and predictable making it very good for like long-term borrowing cases. So now um there are of course still requirements to become eligible as a collateral um but the checklist is just very short.

So if you are an issuer or a holder of an RWA, you can just ask yourself these questions. So um as long as it's a permissionless ERC20 or ERC 4626 token, which is the vault standard um that that works. Um so so transfers need to be permissionless, but minting and redemption can still be um KYC gated. Then secondly, you need sufficient free flow free float. So that means either you have a secondary market or just um uh a minting or redemption path which which works reliably like in the case of Onondo.

And third, there just needs to be already some demand to borrow against RWA. Um we don't want to list any tokens that are then not being used to mint new Franken coin. Um and yeah, that's basically it. I think right on time. Um yeah, ju just just let me just quickly summarize like um the main message is uh RWAs are growing uh but they're not used in DeFi just enough.

So if you're you if you're issuing if you're holding an RWA that you would like to borrow against but you can't get access to a more market just yet um just reach out to me and and I'd be very happy to speak speak to you. Thanks a lot. Okay, [applause] huge applause.