Are RWAs the answer to the DeFi boom-bust cycle? - Niklas Kunkel | Chronicle Labs/MakerDAO

hi everyone uh my name is Nicholas kungl um I'm the founder of Chronicle uh small blurb I guess about my history um was part of the the founding team of maker uh back in late 2016 and uh created the first uh production Oracle on ethereum um so what I want to talk to kind of about today is uh for those of you that have been in the space for a while right you've kind of seen these repeated cycles of like boom and bust boom and bust boom and bust and while in defi we are really really good at mechanism design and incentives um what we've really created is kind of this like hyper reflexive system right so when uh you know yields go up when leverage goes up right uh the tvl of a protocol right balloons um great right so it's it's all hyper reflexive with does number go up um because if number goes down everything goes in reverse right uh all of our kind of flywheel effects right go uh go the other way and so this is uh this is quite a big problem and so uh kind of from my experience at maker maker wasn't immune to this um and so I want to kind of tell you a little bit about the journey that we went on to trying to solve this problem and uh rather than this being like one of these like very like philosophical like rwa talks uh I I want this one to be like very tangible and real right with with examples and and what worked and and what didn't uh so quick uh shout out about Chronicle um we are uh a spin out of maker Dow um we are a generalized Oracle protocol that uh that anyone can use and are currently securing uh maker Dow spark protocol as well as uh a plethora of other kind of top D5 protocols um and cumulatively we secure around1 billion doar in in tvl so uh back to maker so um I I think a quick kind of uh way to illustrate is is through the numbers right so here um this is maybe a couple months dated but uh I I think the important thing here will kind of be like the the ratios so uh this is kind of a look at Maker's book right how does maker make money right and so you'll see that uh right there's some eth Vault some staked eth vaults some WRA BTC ones right uh there is a credit line extended to to spark protocol right and so all of these things are are earning like a good chunk of Revenue so it's around $155 million uh I think give or take maybe it's like 20 to 30 million more today so this is all kind of sourced from from crypto right that that's what I kind of want you to get away get away from kind of this table is this is just the money makers making on crypto and this is the money that makers making from M World assets um so the the names here are a little bit more uh conspicuous uh but for the most part um what these different vehicles are doing if you look at like the top uh two ones the top two ones are uh vehicles for getting exposure to us uh treasury bills right so us short dated Treasury bills yielding somewhere on the order of you know four to to 5% um then you have coinbase right the coinbase if you lock up usdc with them right will offer you a yield um so you can get yield that way uh there is a US Bank called Huntington Valley Bank uh that maker made a deal with um it's not a huge Bank just break not JP Morgan or a City Bank just a a very regular Bank um and what does a regular Bank do right well they uh they extend loans so people can buy houses right and so um what does a bank like this need well it needs uh cash to lend out to people who need mortgages so uh makers extending a credit line of 100 million in cash to Huntington Valley Bank uh who then in turn right uh give it out in the form of housing loans uh to people who need a house loan right and uh uh effectively the bank keeps 50% exposure to the loan and we keep the other other 50% exposure to kind of Ensure there's no moral hazard uh misalignment right and so I I I I don't want to dwell on this too long right so there's there's quite a few other ones on here as well um but you start to see that there's there's quite a diversity of of stuff kind of going here and so when you kind of put these two pictures together right this crypto Source revenue and this real world asset sourced Revenue I think this slide is really like illustrative of like this journey maker went on right so in the blue you see uh only the crypto sourced Revenue right so uh going all the way back right to uh to 2019 right you just see this like boom right that's the cycle and then now nothing right and then boom and then nothing and then boom and then right craters um you know it it may be good to take a second to reflect right on like why this boom bus thing is so bad right it's not just bad for you like as an investor if you're like holding a token and it just like goes up and then you feel like you made a lot of money right and then it goes down and then you're sad again right um there's much more fundamental problems here right uh so maybe not from the investor side but from like the organization side um you know when uh you're making a lot of money right there's a lot of growth opportunities right you hire a lot of people right salaries uh are are going up right salary expectations are higher from people that you want to recruit and then when the bare Market happens and all of a sudden you don't have all of this Revenue coming in right all of these amazing people that you hired all of these products that you started building but didn't finish right um all of these uh High salaries you're paying but now can't afford right you need to cut all of these people and cut all of these products right so it's a it's a very destabilizing uh type of situation for an organization right which is why you want to like Smooth this out right it's not necessarily about Revenue maximization rather than making sure that right you get revenue from a variety of sources and hopefully they're not correlated so when one is down right the other one's doing okay or you know even best case scenario right they're inversely cor uh correlated right so if one goes up the other goes down if one goes down the other goes up um so taking a look at the yellow right um that's uh I mean the the yellow and red are essentially a maker real world asset Revenue right and so you can see that you know we start off very small right doing some experiments we're not quite sure we're just feeling it out right and then we we start to figure it out right uh we we get our groove and you know very very quickly like in the span of two years right um rwa Revenue now accounts for about uh a little over a third of all of uh maker D's cumulative Revenue so right um that's it right that that's the whole talk right uh we we've solved this uh this problem right everyone just use rwa is great um not so fast right because it's much easier said than done to do this um because there's quite a big problem with rwas in that they're not crypto native so what does that mean by Crypt native well you know if you have a um I don't know a Unis swap token right uh on chain um this Unis swap token right has a bunch of properties right and you can even look at the Unis swap protocol contract and grab some numbers from there right the total volume the total transactions done how much tvl do they have right um there is all this contextual data that is readily available for any smart contract to consume on chain and this is what real world assets don't have because real world assets themselves are really just kind of dummy representations on chain of something that really is just in the space in offchain and so you start to realize that if as a protocol you want to integrate an rwa uh you're going to need a lot more of this context a lot more of this metadata in order to integrate it and emulate the behavior of a crypt native token and so while this is certainly not an exhaust postive list um I I think the ones that I've like put up here kind of can give you like an idea of what might be important uh the the problem with rwas is that uh there each one is quite bespoke right and so not each of these right will apply to each one right and uh depending on what we're talking about there may be others that are much more important right than any of these so that's to say not an exhaustive list but just to kind of give you an idea so um let's let let's kind of talk about how how some of these can be useful I I think the the most obvious one is probably custody I think that's that's the most intuitive for people right um here uh you know uh I I think the go-to example is probably stable coins right um hey I just launched this stable coin and uh you can trust it it's worth a dollar it's backed by T bills right um go and use it okay um how do I know it's backed by T bills how do I know the t- bills are there right well okay so uh you can report that hey right uh I connected to the custodian you know in some cases a bank right that's custody these Securities and I vouch right that there's X many uh of T bills there lovely okay so now we know that there's 100 million T bills and there's you know uh 99 million stable coins and the stable coin is fully backed right and you can you can trust the stable coin um right so so I think I think that that example is probably pretty clear right and and and that's already been done for for a number of years now right um I I think some of the other ones get a little more complex right so um let's talk about yield everybody is a everybody is a yield fer here you you want to get the most return for your your investment um protocols do too right so when maker is thinking okay which you know uh rwa do they you know commit Capital to do they commit additional exposure to um there there are a variety of problem s that come with well like what's the yield right and in many cases right the yield is changing so you need this information pipeline right you need this metadata so you need something like an oracle to report well for this rwa it's been over the past you know uh 30 days it's been yielding 3.5% and this one's been yielding 4.5 and this one's been yielding six and a half right so when the product so with all of this information information rather than someone like manually uh noticing this queuing up a transaction in a multii chasing down a bunch of signers to get them to to vote or you know putting up a governance proposal and getting the community to to vote on it right um You can just have Smart Automation in your protocol now right hey protocol like if the difference in yield between the lowest and highest is ever you know more than 1% you know move some Capital you know in X size chunks or Y percentage chunks you know from the lowest one to the highest one right these are not very like difficult things to do from a technology perspective but I think from a protocol perspective they're they're quite powerful right um you know uh liquidity right is is another okay um when you have an onchain asset right you tend to have liquidity on chain right so when uh let's say a loan needs to get liquidated because the price of the collateral token is dropping right it it's not a problem right you uh you do a liquidation auction or sale right and someone goes and buys that and sells it on a DEX because there's a bunch of liquidity uh on chain rwa don't have liquidity on chain they have liquidity offchain and although for some rwas like t- bills right is the most liquid Market in the world does that help you onchain right uh when uh you need to go through the very slow meatspace process of getting that that liquidation sale to happen offchain so um I I I think t-s maybe aren't the best example here because there there's other things that are that are much less liquid um but essentially you start to uh sometimes price things right not just based off of what they're trading at but based off of the liquidity that that is available right so knowing uh having this metadata of there is x amount of liquidity available versus like that liquidity shrunk by 50% or it doubled right will help you manage a credit position right uh so um you may be comfortable right having you know 10% of the total you know nav exposure of a particular asset right but you don't want to cross that 15% threshold because it just puts you uh at a lot of risk so um I I I kind of want to start like closing up here um but essentially right not an exhaustive list but I I I think I or I would hope that what you learned today is Right rwas aren't like the the the easy solution that fixes everything but they are a very good solution and so those of you in defi I really do think you should think about incorporating them I I think it will be like a net positive for your protocol I think it'll be a net positive for your Revenue um I think your token holders will be happy and your investors will also be happy uh but what I am saying is you know be careful and be considerate and uh don't just you know Chuck it in there and think that everything is going to be fine right these are much more complex Beast than anything that you're used to on the crypto native side and they need to be handled with a level of diligence that is curate with that and so the final kind of piece that I kind of want to leave you with today is that forget kind of everything you know about oracles because I think kind of the word Oracle kind of got poisoned over the year to just immediately make people think of like oh the thing that tells you a price um I think within a few years time like an oracle telling you the price will be the least useful thing that an oracle actually does in not just defi but in the greater crypto ecosystem um oracles are going to become this uh data interoperability layer uh between offchain and onchain and uh I I hope that people are quick to recognize right how powerful off a permit if that's going to be and uh you know in we were just talking about diligence right how much diligence you should do When selecting uh an oracle um I'm not going to uh be up here and just shill you hours that's fine I'm just saying like there's a lot of good oracles out there right uh but uh do your research and uh be thorough about your research and don't just listen to the the BD person and and Trust everything they say so uh that's it for me today um thank you thank you all for listening um if you're interested in finding out more uh you can go to our website and uh and follow our socials or uh or join our our Discord uh we also have like a really cool dashboard that uh that I think uh you'll really like if you if you want to check it out okay