Cork: Pricing and Hedging Depeg Risk in DeFi

0:00 Welcome back to the permissionless podcast brought to you by of course the team at Guardian and as always on the permissionless podcast here we're going deep with DeFi protocols who are building something exciting on the edge of DeFi and we've got the promise of of something new and interesting today of course with Cork Protocol. So, in this conversation with Rob from Cork, we got to go deep on first of all, how he even found his way into DeFi, what his journey was, and how he saw the opportunity that they're going after today with Cork Protocol, which is addressing the risk of DEGs, of stable coins, of LRT tokens, and really creating the protocol to assess risk in a 24/7 market in crypto.

0:48 So we discussed everything from how risk is underwritten to the actual functionalities of cork protocol to really how we think that this sort of a feedback loop and measurement can be leveraged and actually help institutions be able to underwrite things and come into the space with the right tools at their disposal. But of course we will go much much deeper on all of those things in just a second.

1:12 My name is Owen and over three and a half years ago, I founded Guardian. And we started out on the premise that DeFi would house trillions of dollars of assets in TVL. And we knew that security just had to have a step-wise level of increase to be able to ship confidently in that environment. And today I'm happy to say that we have achieved the standard necessary with not just one but two distinct auditing teams on every engagement accompanied by a world-renowned lead researcher and a full-time dedicated engineer fuzzing the contracts and the scope to uncover even the most mind-numbing of edge cases.

1:51 And we've battle hardened this model so much so that we're actually able to put up our own funds as a bounty on the contracts. And so really at this point it is up to DeFi to catch up. We are ready to handle the masses. But of course now without further ado, let us get into this wonderful conversation with Rob from Cork.

2:17 Well, yeah. I mean, once again, Robert, thanks for thanks for taking the time to join us and really interested to hear more about what you guys are building at at Cork and and all of the the integrations that you guys are supporting for different types of depeg risk and then of course what kind of risk you guys can get into in the future if you're interested in that.

2:36 But yeah, I mean really before we get into all that stuff, I feel like there's so much to to cover on that side, but I'd love to hear how did you find your way into DeFi first? like personally like how did you find your way here? Me really excited for this conversation. My my initial journey into DeFi was initially colored by like traditional finance like I was personally very into like stocks and I got submitted to like u like derivatives like options and so forth.

3:04 This was in like probably from the 2016 to like 2019 like period. I had like during that period like heard like preferably of crypto especially during the like ICO boom but I really didn't like get into it myself like I was at the time busy building my first company and just was super focused on that but on my spare time I got really into like you know investing and then I I initially heard of like Bitcoin like that was like the the thing I first got into I got introduced like I was making some like payments using Bitcoin and then I heard about Ethereum on like Lex podcast and then I just like got like obsessed like I it was like a month or so where just like all my evenings I was just like

3:55 Looking into Ethereum and I was super excited about the ecosystems. This was in sort of the late like 2019 period and for me that was a very exciting time because there was all these things going on but it was super like unknown like like ETH was like not a known asset like the whole ecosystem was it was really just builders that were like there for the long term because it was like middle of the bare market and I really enjoyed the vibes for me like the the space resonated with me on a lot of levels.

4:24 I think in particular this sort of I have some like libertarian like like kind of core beliefs and I think this idea of just being able to build this like permissionless like financial system that is outside of like anyone's control that can't be stopped to me that was like super exciting and so I really wanted to get into it like I was really active in like DeFi summer and like I really wanted to find something to work in in DeFi and then that's initially how I got into working in crypto became one of the co-founders of Toucan Protocol which is working with tokenization on carbon assets.

5:00 Yeah, it's funny how that happens. It's very like addicting once you start to realize you start to pull a little thread and then you realize like how much is actually there in Ethereum and realize it's not actually all smoke and mirrors. it's not all about price. there's actually some like cool tech underlying with some really good compounding effects you know like you mentioned with like infinite composibility across everything on on the blockchain which is a really great thing to have on your side but yeah I mean I totally relate with so like seeing like a random podcast did you watch like was it like the Vitalic on Lex Freriedman yeah exactly it was Vital Lex I'm pretty sure I watched like the same one and then that that also kind of onboarded me to the

5:47 The the space as well. yeah, and then I mean it's like you start reading mastering Ethereum and then it's like you're you're hooked. You're like you'll never go back. But yeah, dude, it's great to hear, you know, I love to just hear about how everybody sort of found their way in and just kind of stumbled across it.

6:06 Everybody's got their own like cirudous path. and then so you get into DeFi and it's during DeFi summer. Are you using some of the applications? Are you participating some of those like crazy like protocol launches? What what what does that look like initially for you? Yeah. Yeah. I initially I started being a contributor to some like Dows.

6:28 So I was a bit involved in like Tracer D which is building sort of composible like options and then also index co-op which was doing like index products still doing that. Yeah. and so I I sort of started like you know trying to contribute in those communities and then I was starting to use some of the kind of new like yield farms and and so forth like I was I was using alchemics a fair bit and doing a lot of farming there.

6:58 There was also some of the like forks like there was one particular fork called pleman was built on top of which I found founding it. yeah, that was a whole rough project on that one. Yeah, it had a it was a crazy rise and fall of that whole ecosystem. but but yeah, so I was you know quite actively involved.

7:21 I mean I had limited time so it's not like I could spend like all my time kind of doing these things but you know you as much time as I could. I was kind of like it was basically all my like weekends and like the late nights was like just defi. Yeah. I feel like it it's all kind of well, first of all, I think we all have the moment where we just lose a ton of money on D5 protocols and that's like kind of the cost of entry.

7:47 But yeah, it's definitely like on the weekends, you know, you finish up maybe, you know, whatever for me, I was like a a remote like software engineer at the time, so it was like great to just go and like play with these DeFi applications and stuff like this. you know, and of course watch all the Forks and like get in the Discords.

8:06 I think the Discords were a massive contributor to this sense of like community and feeling like there's actually people there who are also like interested in this stuff and they're all like like especially with like index co-op like you like you were a contributor to as well. and then what what is it that got you to make the switch from you know full-time outside of web 3?

8:29 What got you to go full-time on on onto Web 3? Yeah. So my first company was at the time we had just sort of closed some initial like funding that was kind of lead us towards doing an IPO. So we were kind of in this like in Sweden like I saw from Sweden and Sweden we have these like early stage IPOs you can do and we like raised money from investors that were kind of leading us in that direction.

8:53 And so I was going through that process and I I was not really that excited about like actually taking the step of being like a public company because there was a very large amount of like burdens of like regulation and things you have to like just comply with on so many levels. And so I was that was happening like on the one side.

9:15 And then on on the other side I like was writing like some blog posts tied to like like I I have a blog and I wrote some posts tied to in particular the sustainability profile of like Ethereum and the unique system. Yeah. And as a part of that I got in touch with like the early founding team at Toucan and then I ended up joining them basically.

9:36 And initially I was doing this in parallel with my like past job. It was kind of I was you know just contributing but then that became like like took took off like and that whole thing just started taking up more and more of my like attention and I ended up joining them as like a part of the founding team and so those things were happening in parallel and so I end up leaving one and jumping to the other.

10:01 And so my my previous company wasn't sustainable at the end. that was like for me the challenge I had with DeFi was like I didn't want to do something that was just a pure play like you know finance play that was just another like you know another toy in the casino. I wanted to do something that kind of to me felt meaningful and for me that's always been important to me as you know like I spend most of my time like with work and so I want the work I'm doing to be something that's impactful and yeah so toucan was for me that perfect synergy because it was working with carbon markets which I had worked with a bit in my past company and you know it's like tight sustainability and so that was really

10:39 Exciting and that made me kind of make the jump and since then like I I was really considering after I left I considering if you should like work in like web two or do something else. And honestly, it's like pretty like working in crypto is pretty addictive. It's pretty it's it's quite hard to go back to doing something else after because there's like a lot of aspects of working in crypto that are just, you know, for better or worse.

11:01 Like it it has its own really specific nature and it really appeals to me. So I I'm happy I'm still here and I'll probably be around for a good while longer. Awesome. Yeah. And so from Toucan obviously you know you founded Cork. I guess one thing that we're curious about is like what led to you know you picking that as the next thing?

11:25 How did you come up with the idea? Were there any events or things you saw in DeFi that kind of influenced that decision to to start what you're working on now? Yeah. So at Toucan I was doing I was leading amongst other things I was leading the tokconomics work. so doing all the like like market design and all these type of things and we had looked a lot at mortgage back securities because what we were doing was like functionally quite similar to a mortgage back security where you had all these sort of semifable assets that you want to like package up into one kind of package to make it more liquid and so from a market structure perspective it had like some similarities and so I looked quite deeply at that and so when I

12:08 Eventually left I I went on like a spatical and was exploring lots of different ideas and one of them I went pretty deep into was mortgage track securities. I then decided that the timing was not quite right to to build a project because the the project I was going to build was kind of trying to do like onchain mortgage back securities or like that type infrastructure finance but like tied to that type infrastructure finance you have like credit default swaps which is I would say in the same category and it's very intrinsically linked to mortgage back securities.

12:41 And so that that was like one source of inspiration and then the other side of it was I was writing again like a blog post. It's all start to blog post for me. I was writing a blog post specifically on the liquidity profile of like liquid staking tokens and how they're being like rehypoccated and what would happen in black swan event if you would have basically like some sort of like big systemic outflow or like some sort of like massive depeg and like what would be like the cascading effects across the ecosystem like how long could it like withdrawal queue get and what would that mean for other projects because this was in particular in response to blast was really taking off at at the time.

13:18 So this is like late 2023. And I was I was kind of getting a bit concerned that you know we hadn't really like internalized some of the lessons from the last cycle when like we had like the Terra Luna deep and like that whole crash resulted in like you know Three Arrows Capital kind of going under and then that led to like you know Genesis and like a lot of other like compounding effects from that that eventually led to like FTX I mean FTX probably would have collapsed at some point anyways.

13:52 But yes, it really contributed a lot to that. and so I was I was kind of like getting worried that okay, we're repeating the same mistakes. and I I was thinking about like how can we create something that helps like resolve that like basically create some sort of like way I mean initially it was like a some sort of buffer of liquidity that could help people to like get out if there's a depeg and you know if you have a depeg that's where it's primarily time risk like which it would be in a sort of like LST type depeg like how you could like designing mechanism around that.

14:31 So that that was initial design and then that evolved into basically becoming like a protocol like tokenize risk and now I'd say the core idea and where this evolved to is like all these types of instruments that are where you have like a pegged asset that's in particular earning yield is in a sense in our view very similar to a credit instrument.

14:51 It has very similar risks as you have in credit risk and you basically need a way to hedge and price credit risk in in the system. And so in our view this like roughly 300 like billion or so like pegged assets. It's like in a sense 300 billion of like credit that now we think it's important to like as this really wants to mature and reach like mainstream large scale institutions.

15:17 We need a way to like understand price this risk and be able to hedge it and create like risk management infrastructure around it and that's ultimately what the cork in my opinion is hoping to do. Yeah, absolutely. And as far as a user profile, do you see this as something where you know if you're a user of these of these assets, maybe you go on cork and kind of hedge any potential risk as a user or is it also like if you're speculating and maybe not involved in those assets and you think there might be potential risks, you can you know interact with the market in that way.

15:49 Yeah, I I think it's a bit of both. I think the there's multiple use cases and I think they're in a sense quite synergistic to each other because what you want is people to basically trade both sides of the risk like you want people to like have a private risk pricing and if the price goes above or beyond what they think the risk price should be they will take that that side and so for example if we take the Terra Luna example again like I personally had done like a fair bit of like due diligence on Terra Luna And I was really worried it was going to collapse.

16:23 Like I was telling all my friends like this this is very unsustainable and the liquidity profile like if there would be a mass flow of like redemptions they were like all crash but I didn't have a way to express that view and there was I was not the only one with that view like there was lots of people in the ecosystem in particular in the Ethereum ecosystem.

16:40 Was deeply skeptical of Terra Luna and its design and I think it would be very useful for the space if there was a a tool and a mechanism for them to basically say you know look like we can take this side of the bet that would probably push up the risk pricing and that would show the market that like look there's like all this capital that's basically saying like this is like super risky and I think that's you know it's a signal to the rest of the market.

17:05 It's in the same way that when credit default swap like rates spike like like offchain that that tells you something about the like likelihood of like default in the market and likelihood of like a recession and so forth as we're seeing like right now with credit false rates kind of spiking in offchain. I think you could see something similar on chain and so I think it it could have been useful there and so I think that's that's definitely one angle that's interesting.

17:29 I mean the other like you know probably more traditional angle is just you want to hedge. and I think that's probably likely where the biggest like pocket of demand for this sits. is like you know especially like institutions that have exposure to these assets they need to manage the risk. This is like you know it's it's pretty challenging to currently manage your risk in in DeFi and there's just not a lot of tooling available.

17:53 So I think this introduces like a net new like primitive that allows you to do that and then there's like whole composibility of it. You can integrate it into lots of different things. So like you know we think I think in particular things like looping traits and we actually talk more about this but for example like the way you're doing looping trades today like instead of hard coding oracles I think we should just hedge the collateral and then you like achieve the same thing like of volatility protection.

18:20 So yeah, there are lots of different use cases and you know ways you can use it, but definitely speculation is I think going to be an important driver. Yeah, definitely. And and going back to something you said a bit earlier, there's like almost this game theory element of like by creating this market, you all of a sudden like reveal a signal to everybody else, which is definitely super important.

18:42 But yeah, I guess going more to like how things work under the hood, how do you figure out pricing and like factoring risk and like what ultimately ends up to be what the user sees when they you know invest in the protocol. Yeah. So I would say to answer that you probably need to like understand a little bit the mechanisms of like how the the protocol works.

19:03 And so in particular how it works is that we have something called the Peg Stability Module and it's written on a specific asset pair. So if you take I mean if we take like one of our markets as an example which is like ETH to like stake ETH from Lido. So what happens that you send ETH into the Peg Stability Module and it means two tokens and these two tokens represent basically two sides of a trade.

19:27 So one is the Depeg Swap and the Depeg Swap allows you to swap st ETH one for one for ETH in the Peg Stability Module and then the other side is the cover token which basically gets whatever is left at the expiry in the Peg Stability Module. So it will either get back the original ETH if there was no EPG or if there was a lot of redemptions due to a depeg or some other reason it will get back state and so the covered token holder basically underwrites the risk and it's earning a yield by selling the Depeg Swaps and so the price of the Depeg Swap basically becomes the price of the risk and so that's you know to answer your question is it's basically the the price at which you can buy the Depeg Swaps

20:08 Determines the yield that the cover token holder is getting and determines basically the, you know, amount you need to pay for kind of continuous coverage on your position. Yeah. To me, it's almost like what you guys have done is like separate out all the different actors and incentives that need to exist for insurance to happen on chain.

20:25 That's like the way that I I see it. And obviously the insurance business is very much based on the float like they make money on investing the float of capital. Do you guys also do any kind of like rehypotheation where like they let's say I provide liquidity I get some cover tokens and then on top of the premiums that are paid to me is there any like strategies that I can put my capital in in the in the meantime or what does that look like?

20:52 Currently the way we have dealt with that and in particular like the sort of you know relative capital inefficiency of locking up this collateral is we accept also like yield bearing collateral. So for example, our market with etheri is wrapped state e from lido you know and it's written against the etheri. So then you know you're basically earning the risk premium of selling this coverage in addition to the like staking guild from lido.

21:18 So that's like one way you can achieve this. I would say like we're kind of in the middle of like finalizing our spec for our V2 and I think there's a lot of things we can do like without going into like all the specific details but there's a lot of things we can do in terms of creating much more capital efficient system by covering specific parts of the depeg range because currently we're basically you have a coverage for like the full range of DP you can even go to zero you're fully covered but in reality I think you know most of these markets end up you know the the the actual risk that's playing out is probably the first 10 to 20%.

22:00 And most of the use cases also in terms of like hedging this for like looping trades etc is probably you're talking about the first 10 20% that's relevant. So you know there you can have like a 5 10 x improvement in capital efficiency if you can like you know program it to be covering a specific range. So that's coming.

22:17 Yeah. That makes a lot of sense and that that's pretty exciting and I think you guys already have some kind of a Uniswap v4 hook or something like this. Is that right? Yes. Yeah, exactly. so actually you could we can support rehabification in the hook as well. so that's like for example there's there's some other hooks that support premification but but yeah we we're using before which is you know it's a because the way our market works is that we have it's it's from a market structure perspective quite similar to Pendle in that we have both like we have a market between the the cover token so like this underwriter token and then this like redemption asset that acts as collateral and because of how the Peg Stability Module works, we can create these basically

23:07 Synthetic swaps that where you basically mint the two tokens and you sell back the one you don't need. And so that makes it so you can have a market for both the cover token and the deep swap in one AM which basically concentrates like liquidity quite a bit and you can yeah anyway so we we built this using Uni4 and Uni4 enables us basically to you know customize quite a lot of things.

23:33 So we have because we have expiring tokens we need some customizability also in terms of for example the the fee schedules so that they reduce towards expiry and also kind of there's some things around this like flash loss mechanism around like like doing flash loans and doing that for free that we can do with unfortity curve that's is gradually concentrating liquidity as you get closer to expiry that's also something we built with uniform So, yeah, the the Uniswap team is awesome.

24:06 Like we we like I'm really excited for you before. I think it's still kind of in its infancy. It's it's like it has some function, but it's still kind of quite early. But I think this like model of creating like a toolkit and enabling people to kind of innovate with it. I think it's really exciting. So, yeah, we're happy to to be built on in that ecosystem.

24:26 Yeah, I think I think V4 it will be sort of a slow buildup but it will become like extremely compounding and and it will start to have just an unimaginable amount of like utility out of it because you've got to think okay so they they released V4 I mean V4 just went live like I mean really just I think like a couple of months ago and now all the teams like the the beauty of V4 is the integration level right and now all the teams and we've we've started working with a few of them who are bringing some V4 hook stuff to market.

24:59 You know, you can have like limit orders. You can have like like another team that we we actually just started working with this week is they're building like, you know, fixed fixed rates for for like floating rate, you know, markets. So, I'm like a and stuff like this, right? So, all the stuff that you can build, that stuff's going to take like you know, you know how long it takes to to take a DeFi product to market.

25:23 And of course, Uniswap V4. I will say one thing about it is it's it's the hardest yet to integrate with like there's, you know, all this transient storage management and, you know, you've got to unlock and implement the call backs and you got to make sure to pay down the exact deltas and all this stuff. which, you know, has its trade-offs, but it's it'll take some time, but I I definitely agree.

25:45 I think like give it time. the compounding effect of having all these integrations and all these teams building on top of Uni V4 will be like pretty impressive and I think it's kind of like that's kind of a microcosm of DeFi as a whole because DeFi as a whole is the same thing. anybody can come and permissionlessly build on top and integrate with all these primitives like a and and you know like what have you and and and maybe even like a cork something like this if they want to maybe spin up like their own insurance market or something like this in the future.

26:20 You know this is this is where DeFi has its edge over the traditional markets. but yeah, I mean also just going back to what you were saying with like Luna, I mean what better of a validation for this product than like people, if I remember correctly, people were literally making bespoke bets on Twitter and saying like I will I'll bet you like a million dollars that this will will not be a dollar in one year.

26:47 And yeah, so I mean what what a great like validation for like hey this people want to use a product like this. and then I remember also I think the USDC depeg was also around. Is that right? Did that also sort of like influence how you guys were thinking about this? Yeah, I was personally I mean just kind of like looking back on what you were saying with like uniform composibility like I think that's totally right and I think that's really the superpower of like the the whole space and also I think when we think about what we're building it's really trying to build a composable building block and if we can unlock this new primitive of kind of like risk management and insurance and have it be like composable and programmable I think that's

27:28 Opens up like whole new design spaces of things you can do and I think that you know the compounding effect of there being like thousands and thousands of teams doing this is like really I think why the space is going to win. but yeah, I mean to what you're saying with like UTC and and like Terra Luna, the bespoke bets like yeah, I was personally with UC I was really heavily affected by that because I had u like a pretty meaningful amount of my like personal savings were in USDC and at Toucan basically our almost our entire treasury was in USDC and I I have a very visceral memory of this weekend where it depected because it depicted over a weekend.

28:06 I believe it was like it started like on a like Friday night in like European time and then it the the peak was like on a Saturday morning I think and it was just like pure panic cuz like we didn't really know what to do if the right thing to do was to like try to get out of this or to just sit it out because it was just going straight down and before it reaches the bottom you know like our entire like like we have to spend this money to like pay people.

28:37 We didn't like sit on like a massive cushion and we had all these like liabilities that were like tight into his money and so that was super scary. So we were like frantically trying to figure out how to perform redemptions and like I set up like you know a circle account but like I needed to do it with another entity.

28:52 So I had to like you know it was like a whole thing to like try to set up a circle account to like try to perform redemptions. But then luckily like the you know SVB got bailed out and yeah it was all fine but you know I think it it still was a a big lesson right because it could have gone wrong it could have gone that this money was stuck there like if there was no bailouts it likely would and then you are stuck being you know you as a hold of USDC you're like a creditor to circle but they're a creditor like in the background to this other entity and like I think eventually you know there would be a payout but you know who knows how long these things would be you

29:32 Know stuck for and what the things being stuck like how how big of a write off you take on that and so I I think that's even if circle like I think it's the best designed like you know like safest probably stable coin like you know like if you want to take the most conservative stable coin route I think that's like UC but even even so like it just shows you I would say the the underlying risk that comes with all these like different designs.

30:00 Like it's not risk- free and to me that's like one of the the reasons why like we really need some way to like manage this risk because the risk is there and I think it's going to be very challenging to eliminate the risk completely. I think at some point once we get really clear regulation and maybe a very standardized way of doing this, I think you will get to a point where maybe you have extremely minimal risk.

30:24 Yeah. But I think it's still like ways away from us getting there. And like in the meantime, like you know, if we want the system to be truly resilient and to be able to really scale and especially scale with all this like composable leverage and everything that's going on like you know I think we need we need to think about the black zone events and make sure that when the black zone events happen like the system doesn't just like you know the dominance don't start falling.

30:49 Yeah. 100%. And well, I mean, for sure, Chapter 11 does not move at DeFi speed. So, like that that has to be there has to be another way to be able to like offset that that risk. and and even just being a able to like get out of tokens at like a reasonable price because like obviously when USDC was depeg a lot of that was commotion and and fear in the markets versus like I think even if they did get actually trapped it would have been like probably a haircut because they didn't have like a lot of money in SVB if I remember but still it was like the commotion and the fear and then if you if you have something like a cork protocol that gives you a way to, you know, just get

31:38 Out of it, step aside, like sidestep all the fear and the the panic selling. and yeah, I mean, in in the case of the V1, you're completely covered no matter what. and then in a V2, it sounds like, you know, you might be able to even as an LP decide like, hey, this is these are the ranges at which I want to basically insure against.

32:01 But I I mean you're totally right. There's all this risk in DeFi and in this like very immature financial market that's not even being tracked. It it's not even like it's intangible until we get some kind of markets like this which give us the ability to trade it and then you just let the market price it. There doesn't have to be any kind of algorithm to figure out.

32:24 You don't have to do like all these AI models and figure out like oh what's the you know let's look at Tether's balance sheet and figure out like what are they actually holding and what does that look like. You can just let the market do it and the market will you know be as sophisticated as the as the actors with the most information with the like the most up-to-date low latency access to information and it it gives us a a pinpoint.

32:49 And now if you had something like a Terra Luna, you could see and you have this indicator that like, hey, a lot of people are saying that something's wrong here. maybe maybe this is something that people should be looking more into. instead of kind of like this discreet bespoke like tweets that look like FUD but actually turn out to be like real signal.

33:12 So yeah I think like the the the market fit and the need is absolutely there and I think it goes even beyond just the folks who are you know either providing cover or taking cover. It provides value in a way that we can now measure and like reference what does the market think about the risk on this thing where like really that was not possible to measure before.

33:35 So I think that's that's a really cool externality of something like this even just having the market. but also it seems like it could be applied to other scenarios. So, obviously we've got it for the the depeg risk, but there are other risks in DeFi that could be priced. Are you guys thinking about any of these other risk cases like maybe like a smart contract security or something like this?

33:58 Yeah. So I mean just looking back to what you said like I think I completely agree with that and like I think the all those people who are like sometimes just like funding certain things like I think it also gives like a way to just say like put your money where your mouth is right like you know if you're like a tether trooper like go and buy the like apex swaps for tether and like you know express your opinion and like you know I think that's like a fair fair thing for like people to like be able to do instead of just like expressing it like expressing their frustrations on Twitter.

34:31 But but yeah, like going back to what you're saying with like different use cases, I think in particular with the V2, it should open up a fair bit of design space for like other things you can build with it. I would say smart contract hacks are like you know you know indirectly like they're like if if there's a smart contract hack on tight assets then like you know yes we can cover that but not I would say in the the sense that you mean it like where you can just cover any smart contract hack anywhere.

35:00 Yeah. in in the like new design it would be if you have a way to basically like attest to a certain event happening on chain you can like we'll be able to like program in a certain logic against that and so that should open up like quite a lot of doors for example like there's been like attempts like in the past for example at like parametric like insurance for farmers things like this I think this could like potentially with the right market structure really work where you say Okay, you have a a feed of weather and if there's certain extreme weather that happens, you have a certain payout.

35:35 And I think that could be a better like model to do it than, you know, necessarily going through like the insurance company to like write the risk. So I I do think there's some, you know, things like that that you can open up. and so if there is a data feed for it, I think you can do it.

35:51 But, you know, I'm not sure with smart contract hacks if that's like like maybe you have like a protocol. Yeah. Yeah. attesting to like was this protocol hacked? Yes or no? And maybe that could trigger a payout. But you know I think you would need to be creative with that. I think you know and I would say like just to speak to I think there's a there's a role for insurance that's just like a traditional insurance model.

36:15 I would say what we're doing is kind of more like like the primitive is more like swaps. And I think there's a role for both. I think there's a bigger role for like swaps in certain instruments and there's a bigger role for insurance in certain instruments. I think if we look offchain as like an indicator of this like there's a huge insurance market and so I think you know actors like Nexus etc that are building insurance products I I still think there's like a big need for that even if I think in certain markets like we take credit in particular for example I would say there you probably like you know you want like a credit default swap you don't want like some sort of proxy insurance on that I think in particular if you're

36:52 Talking about composability you want something that can like automatically get triggered and auto payouts something that has especially when you're moving DeFi speeds. Yes. Exactly. Yeah. And I guess with with that in mind, what is like the long-term goal for you guys? What do you see Cork being like? Let's say we played out, you know, five years.

37:14 What do you think Cork, who are the main users as the institutions who are like purchasing these swaps? Like what is the the end goal for Cork here? Yeah, I would say our kind of more long-term like goal is to accelerate the growth of like the onchain particular onchain like credit market. We think there's a lot of credit that's going to flow on chain.

37:37 We think the future of credit markets is onchain and for that to really occur to happen, you need sophisticated like infrastructure. I think those credit markets likely if you you know look at it from like where is most capital sitting I think it's likely going to be more on the institutional side like I think short term like we've seen like you know there's a fair bit of like retail activity like like onchain but but even so like there's a a stat we got from like some people working with it's I believe it's like 5% of the wallets hold about 98% of the capital so even like you know like there is a retail market today but it's largely dominated by whales and by like institutions and funds and like if you look offchain like it's

38:25 It's perhaps even more so or like to a similar extent and so I think largely credit markets are going to be instit like driven by institutions and I think where we see this going is that eventually all these things probably get like regulated in some way and this becomes part of like the you know regulated credit stack and like all the you know hopefully it serves as like basically replacing the back end of what we have today with like mortgage back securities and all these like like bond insuranceances.

38:54 Hopefully all those things happen on chain in a more like transparent programmatic way that's like more efficient like everything's just automated and like more fair and as a part of that stack you have basically like a a risk stack on top of that that you know is dealing with risk management of that for all the participants that are involved and that's kind of what we want to be.

39:15 Yeah, I think I mean adding the aspect of everything being verifi verifiable and onchain like actually adds a lot of value to a product like this because like I mean even thinking about like oh like in the big short when the when the price was actually trading in his favor they wouldn't the banks that he made the the agreement with wouldn't even like pay him out because of you know whatever excuse that cannot happen with a protocol that's verifiable on chain and you know you know how the the the what is it called the module you can see how that the module is functioning and and you know like it's immutable or you know maybe it's upgradeable I'm not sure what your architecture is but ideally it's immutable and and you know exactly you're going

40:00 To get paid out I think that adds a ton of value to a product like this in being able to trust your counterparty and well not even really having to trust your counterparty at all so yeah I think that's that's a big value ad there as well. And I think institutions, this is something very important for institutions coming in is being able to actually like underwrite the risk and understand the risks.

40:24 And I think right now they're just playing around and like trying things out and building in the space and just kind of, you know, feeling it out. Have you guys been in any discussion? has have you talked to any institutions about some of this like risk underwriting and you know examining what the risk is on like some of these like stake or something like this derivatives.

40:46 Yeah, see I would say most of the liquidity provisions in our our system currently are largely driven by institutions. I would say there's different categories of institutions to date. We have been dealing mostly with the institutions that are more onchain native because we're a new protocol like we we launched like you know maybe like five six weeks ago.

41:07 So there's a certain category of institution that's willing to like touch that type of product or most institutions like even the crypto ones like the even the crypto native ones many of them require you to be live for like 6 months with like 100 million TBL for them to even consider using you. Yeah. And so I would say that's probably the next buckets like you know beyond this like initial phase of like the early adopters and then I would say like beyond that and I think the the more exciting longer term like view is like you know talking with more of the like really like large scale institutions like we we've heard from some for example of the like you know ETF issuers and those types of actors that they're interested in these types like

41:50 They're shopping around for these types of products. but like we we haven't actively been like selling towards that audience yet because we just feel like it's maybe a little bit premature for us given where we are right now in sort of the life cycle of the protocol. but ultimately that's where we think this needs to go. Like we've secondhand from like actors that are involved with us in various capacities and that serve that type of clientele.

42:15 We've like secondhand heard like that there is clear interest and demand for this type of product. I think it's just really about proving it out and getting the coverage to the right price because there's certainly a price that these actors are willing to hedge these products up. I think you just need the market to get there and to get there you need like certain levels of volume, you need certain like levels of liquidity and you need certain levels of capital efficiency and so we're just kind of working to figure all those things out and then yeah, you know, basically like moved up to that direction.

42:47 Yeah. And I I love this product in the sense that now we're able to actually track it because another aspect of that is we actually need to get the industry to uphold a certain level of like security and and certainty. Like if if the risk of like a EtherFi you know restake token depeg was like oh they're depeg like once a month then it's like we have to fix that and then we can like you know improve like the yield that you can get as a as an LP on this stuff.

43:22 So it gives us like a feedback loop for this like it it actually lets us track stuff where otherwise this is like a very discreet phenomenon where like a USDC dpgs or you know have you know what have you what kind of restaking token depegs now you can actually track it without just having some like arbitrary event happen and then looking at that individual event you've like normalized it out and let the market trade on that.

43:51 So I think it's important to be able to track this stuff and I mean really it's there's a handful of things that are going to be really important to institutions and this is absolutely one of them is you know underwriting the risk of interacting with all these things because from what I've heard they're very interested in being able to get DeFi access or at least a subset of them are really interested in DeFi access and I think it's they've got a and they're going to bring a lot of the expertise and a lot of the work that has already been done in the traditional financial system and apply that onchain and it's going to look a little bit different but I think it's going to provide a lot of value and the exciting part is

44:30 Is that because it's DeFi the work that's done there will be able to apply to everybody in in DeFi because you know if you come up with some sort of risk assessment framework for smart contracts that's like an institutional-grade system that can be applied to assessing any arbitrary smart contract that you want to interact with even if you're not an institution.

44:51 So, I I think that's that's a really exciting thing for even just the everyday DeFi user and I think or plays a role there and and helps us sort of underwrite this stuff. But yeah, and I mean you guys you you're working on other stuff. You said you're working on a V2. What is what is like the biggest for you?

45:12 What is the biggest bottleneck on your road map that you're working on right now? Yeah, I think that's specifically solving this question of like capital efficiency and improving capital efficiency. I think that's like part of it and I think there's one angle to it which is the kind of core textility module and then the second piece of it is the AMM and I think kind of making I would think of it this is like you know we're in a completely new design space and we kind of like you know sort of invented this protocol based on like you know we had a lot of different inspiration different places but ultimately it's like a new primitive and I think with a lot of products like the the first version like you know I I think we've

45:54 Gotten really good feedback on it. We really excited about like what it's doing, how it's working and so forth. But we learned a huge amount throughout like building this and launching this. And I think the second version is probably going to be like, you know, significantly more like effective in a lot of different ways and just allow you to do so many more things.

46:13 Like the the current version is like a subset of what you can do with the second version. And so yeah, I'm very excited about that and I think that's going to be just unlocking a lot of new use cases. so you know, we're right now just focused on like with the V1, what we can we prove out like what can we show and demonstrate.

46:31 And then I think like V2 will I would say expand that quite significantly. But also just looping back to what you were saying before about like institutional side and like the need there for risk management like paradigm maybe one or two weeks ago they created this they had this big report on institutional adoption of of DeFi and it's really clear that like the vast majority of institutions are looking at DeFi and they had this u basically like survey they made of what were the like main blockers or barriers for them to adopt DeFi and the number one barrier was the regulatory But we're seeing like really a lot of changes there happening on the regulatory.

47:08 But the second biggest barrier was basically risk management. And so I think as the regulatory side gets kind of like flipped and like we can go from like regulatory uncertainty to regulatory clarity, I think the the next kind of order of business is figuring out the risk management side. And so I think like that report for me like you know it like we kind of implicitly knew it but I think it just kind of reinforces this idea that like this stuff really needs to be figured out for these types of institutions to really scale the market.

47:41 And I I really am quite excited about like the the size that these institutions are talking about is like it's a different like scale than what we're used to. And you know I think the timing is quite quite good like I think if we can figure out capital efficiency and at the same time like institutions are getting enabled to do this I think we're we're hopefully going to be ready like a year or so to to welcome you know larger amounts of capital with open arms and then I think we really see the whole ecosystem and like all the composability like will benefit from this because and where are these things going to trade like you know it's going to be on probably like AMMs like Uniswap etc.

48:21 Like all these things are probably going to get collateralized. They're going to get collateralized on like a and morpho etc. And like all these things going to use all the rest of the stack. They're going to use chain link. They're going to use like inferior etc. And so I think it's going to be extremely bullish for the entire space when like the flood gates they're open and yeah I'm you know really excited about kind of that that next space and I'm super bullish with like the next year I think like from a fundamental perspective like ignoring everything that's happening right now with price.

48:50 I just think it's you know there's so many layers of validation it's just like crazy that price is so off sync with that. Yeah 100%. I think and I mean really the biggest benefit will be you know for for everyday DeFi users will be the market depth like I think market depth has been a big limitation on like all the strategies that you can like profitably like scale up like all these like you you mentioned used to contribute to the index co-op.

49:22 A big problem there is like market depth and figuring out how to rebalance the strategies in a way that like fits within that constraint as you start to scale the the amount that you're managing. So yeah, I think institutions will completely turn that on its head. And it's it's funny because the DeFi like TVL, if you go to like DeFi Lama, it's been like it went up and then down and then now it's up again a bit, but it's like it's been mostly flat over the last you know like four years.

49:50 If you take the 2021 peak around then and you compare it to now, it's like we're pretty much at the same spot. This is how we go parabolic and we just go to like the next tier. I feel like we've hit the the the full surface area of people who are willing to like come and like open up their laptop and download MetaMask and like put in actual assets and play around with DeFi.

50:16 Now we've got to go we've got to go larger and I think the institutions are best at like I mean obviously they're just on a next level of like go to market how do we bring capital and allocate it to a certain sector so I think they'll really scale the market depth and I think that's when DeFi gets like it it almost becomes a compounding virtuous cycle because once we scale the market depth then it's like more institutions are going to come in and they want to take advantage of those that deep liquidity and those yields that you can get on larger sizes.

50:49 Yeah, and I think like you said, it's going to go through all these protocols. There's going to be fees that are charged based on the value that's provided for, you know, swaps through Uniswap, or like borrowing on a or something like this. And that's all just going to get propagated through the entire DeFi ecosystem. So, I mean, yeah, we're really sitting on the precipice of potentially a really really big acceleration for DeFi and it's it's very exciting and and you guys are at a super exciting spot in that solving one of the core issues to bring more more institutions, more capital like this on chain.

51:23 So, well, I mean, first of all, we're rooting for you. I hope you guys are are able to to solve this. and second of all, how do you guys track like what kind of KPIs are you guys measuring and and focusing on to to be able to say like, hey, we want to get to this this place in, you know, x amount of time.

51:42 Are there any KPIs metrics you guys are tracking there? Yeah. Yeah. We're in particular, we're looking at like notional coverage is one of our like northstar metrics. So what we what we what we mean by that is basically the same like you have like notional I think it's notional like open interests on like perexis it's like a similar metric for us where it's basically the amount that's being hedged and covered by the protocol and so for us that's a reflection of people actually using it like for type of demand like for us of course things like you know liquidity and like TVL like that's, you know, matters as well.

52:23 But it's it's sort of like a function of like that needs to be there and exist for us to actually have like enough market depth to achieve a certain level of like notional coverage. and then there's of course like volume like I think for us it's of course positive if there's volume across the markets. you know, doing all the different like types of activities and so yeah, those are the things we're tracking.

52:47 We have like a doing dashboard for for that and we we generally like are are looking or we're trying to optimize for like how we can expand the national coverage and like figure out like deals that will kind of get us there. Yeah. And this is it's an interesting product where you have, you know, kind of both sides that you've got to attract.

53:05 You've got to attract the folks who want to sell coverage and the folks who want to buy it. What's the bottleneck there? Like how how do you scale both at the same time? How do you guys approach that? Yeah, exactly. It's it's really it's kind of like a marketplace that has those two sides and you need to more or less bootstrap both.

53:23 So we our thinking has been that initially we need to bootstrap the supply side because you can't really have like you know demand like the demand can't do anything else as we push up the supply. So we've done that like we have now like 16 million of liquidity. so that's like for us sufficient to kind of satisfy like some of the initial demand.

53:45 And now we're like looking at like how we can like scale up the demand and like bootstrapping more on that side. And so we're testing out like some different things on that. and like basically we're launching different markets like testing out different types of integrations. We're really excited about in particular some like there's some integrations on on both the demand and supply side that are pretty interesting.

54:06 So one is like we can do a looping trade using the cover token. So the one that's on the right item. So then you basically have like you know like if you take one market that we have is it's SUSD so from Ethena it's underwriting tether risk and so you're basically getting SUSD yield but while it's underwriting tether so it's like just a higher yielding Ethena and if you think tether is like you know it's fine then you know that's yeah that's fine and so you can use that to do the same type of looping trade you would do with Ethena but you now like a higher yield.

54:42 So it's it should be like a higher kind of yield in loop trading. so that's one one you know more on the like DGEN side of it. And then another one which is like the DJ gen like safer DJ side is we have this thing called like the protected unit that we're about to roll out which is like a bundle that's taking a like collateral for example Ethena and hedges Ethena.

55:05 So we have a market for Ethena we can hedge Ethena. So you take those two combiners you have basically hedged Ethena and it's like perpetually hedged. So it uses the yield to buy new coverage whenever runs out and to use that as the collateral for looping trades. And so I think that's like a pretty interesting new use case where you can basically have hedged looping trades and then instead of like forcing like a lot of these markets are hardcoding oracles to support looping trades which for lenders it's you know create certain risks like for example in the USD0++ depeg like you had these like kind of a nasty situation where like people were like stuck with their collateral because the codes were hardcoded and so we think the better way to do this

55:48 Is that you have basically h collateral and we I think that could be a better market structure to like scale out looping trades and so that basically creates almost like a risk-free rate and like I think it's going to be like these markets are all going to be like reactive to each other. but yeah, that's another like market that we're really excited about rolling out soon.

56:05 And so do we think some of these like you know ways of integrating this will you know potentially bootstrap also the demand and supply because if you get like more people looping the the cover tokens and people kind of looping the other side of the the protection you're kind of like leveraging lending markets to drive adoption on both those sides that's leading to increasing the supply and both the demand.

56:26 Yeah. And obviously another driver is just like what assets you can you can sell coverage for. Like I think I mean it's too bad that Luna collapsed when it did because if you had a Luna like this I think that'd be a great like asset to list and and you'd have really good like product market fit for people who are you know want to speculate on the the sustainability of the peg.

56:47 Are there any assets like that for you guys that you are experiencing a lot of demand on or something you want to look to list? What what's the the next Luna is what we're trying to find out. Yeah. I'm I I I feel like I can't like specifically comment on what I think is the the next Luna, but I mean I would say for example last week alone we had like two events where like I was like damn I wish we had like a market for those.

57:13 So one was the synthetics depeg that was Yeah. Yeah. You know it's still like SUSD from synthetics is it's still deped quite meaningfully like around 7%. Yeah. so I think like you know I I don't want to compare that to Terra Luna, but like if there's any stable coin that has a using in indoor indominous like collateral like we're using just it's just SNX that's backing the the stable coin.

57:40 Like I think that that might be like directionally maybe something like but but yeah like where there's demand I would say demand where that's something we're kind of trying to figure out and we have like certain answers for it. we have one market we're launching like very soon that we think is quite exciting. I don't want to like you know say it here but we we think in particular like yield bearing stable coins like stable coins with like a relatively high yield that are taking on like you know novel forms of risk.

58:13 I think stable coins in particular is like something that there seems to be really a lot of traction for and like you know we're talking about like the D5 TVLs and everything like the one thing that's not flat is stable coin TVL because that's just like going up to the right. and so I think there's a lot of excitement there around like stable coins.

58:32 And then there's like some, for example, like Bitcoin markets like there's there's a fair bit of actors who are like doing yield farming within the Bitcoin ecosystem. And a lot of that is also like quite new and novel. and it's like similar to I think if we were live when the like I points farming was was going on.

58:50 Yeah. And was at its peak. I think this would have been a great fit for that. I think we have something similar going on now with like Bitcoin with like Babylon and the system and so I think that's another angle which we think is pretty exciting. yeah I you know I think we're I think it's we have to be responsive to where the market goes and like what's happening in market.

59:12 I think there's probably going to be interesting markets that are coming up and like as we hear people wanting coverage for different things like you know we'll start listing those. but but yeah that those are some some of the angles that we think are pretty interesting. Yeah. Yeah. Yeah. I mean there's a lot of interesting and it's hard it's also hard to predict what the next event will be and then you know get the market up ahead of time.

59:40 It's always going to be like looking back like oh of course I wish we had a market for this. but eventually you'll just have everything. And and it's good to have the the underlying infrastructure that is, you know, flexible enough to be able to list tons of different types of assets. You know, as long as it's like compatible with like a an ERC20 standard, then, you know, presumably, you know, of course, if there's no like rebasing or weird stuff like this, presumably it would be easy to support under the same peg stability module.

1:00:11 So, yeah, I mean, I think it's just a matter of time of getting the largest support and then, you know, once you have a certain amount of tokens listed, there's going to be events happening across, you know, whether it be 1% chance, 50 basis points, percent chance, like it's there's going to be a lot of actual value brought by by Cork.

1:00:36 And in terms of Okay, so we've we've gotten all of these these different tokens listed and is this essentially are you guys shooting to have a lot of tokens or are you seeing yourself more long-term as like focusing in on a select few and then just scaling the the amount of liquidity that can be sold or cover that can be sold for those?

1:01:03 What do you think is like the winning play here? just going wide or going very deep on a couple. Yeah, I I think that's something which we're ourselves trying to figure out and I think as the market evolves like we'll we'll see where that goes because I think on one hand you have some kind of like economies of scale where certain types of markets and certain types of like behavior and types of hedging you need fairly deep liquidity and like you know we've heard like through many of our partners like you know people who want coverage for like $50 million or hundred million dollars And we just can't satisfy that right now.

1:01:40 And for us to satisfy that, we need fairly large markets. And I think I would guess that the majority of our TVL is going to sit with those large markets. At the same time, I think what crypto uniquely enables you to do is that we can, you know, create these smart contract factories and you can just spin up markets and it cost almost nothing.

1:02:00 Offchain it costs like you know around 100k or so to create a contract for like a credit bot swap because you have these like massive stacks of paper that needs to go through a legal team and everything and so you you just want to have access to that and you're paying a huge amount of money and so that's only viable for a very narrow audience for a narrow set of instruments where you're dealing with like large sizes but with crypto we can spin these things up like if it's on layer two it will cost like literally like cents on layer one like nowadays it's just even so it's just like a few dollars to spin up these markets and so I think it's a pretty good fit for the long tail as well and I

1:02:41 Think you can create like coverage for like the long tail like you know quite well and some of these like trades might not even be like you know on an AMM it might just be OTC where you say you know you have this as infrastructure and if two counterparties can meet to come up at a price where they want like one wants to provide coverage one it's like you know buyer coverage you could do this through like something like a RFQ like a request for quote system you know I think you can pretty easily support like a long tail and do really like customized like products there as well and so I think in particular when you're looking at you know for example like credit like you have a lot of like you have a

1:03:19 Long tale of like credit that's you know currently like uncovered and I think we can probably open up and en enable products for that So I think it's probably going to be a bit of both. I would guess majority is on the like fat tail and then but I think this can be quite attractive for long tail as well.

1:03:40 Yeah, definitely. And I mean when there's like very little overhead to support that, you might as well, you know, be able to open it up and ideally let anybody spin up their own market and and the beauty of that is anybody can come and provide cover for it if they if they like the the underlying risk. yeah.

1:03:58 I mean, is there anything in the next couple of weeks that you guys are going to be pushing out that maybe folks should be aware of, maybe they should go check out? obviously guys just recently launched. Is there anything related to that? yeah, we have some exciting new markets that are coming live. so be on the lookout for that.

1:04:17 So, that's something which we're working on getting out now. and then we have this like protected unit that's going to come live. We've already like built it. It's like live on test net and everything. It's just we're waiting to launch it and we're going to announce some really interesting integrations with that. I think that's going to be a I think for DeFi it's going to be like when we're talking about this like experimentation and like learning and shared learning.

1:04:42 I think this is like fundamentally a new type of way of doing looping trade and like a new take on it. And I think that's we'll see how it goes. But I I think that has the potential to really be like an important building block and I hope I hope it becomes like like a more resilient way to scale up sweeping trades.

1:05:05 That that's kind of our aspiration and so I would really be looking to look after that because I think that's going to be really a a very novel novel like experiment. Yeah. much easier to de lever and and sort of get out of these positions and yeah and addresses those like those those risky edge cases that you can get into where you have like a an exitable position and stuff like this and just makes it a lot simpler.

1:05:32 I think making the UX of this stuff a lot simpler is going to accelerate it's only going to accelerate the rate at which we can implement new strategies, compose new integrations and stuff like this. so yeah, that that's incredibly cool. I can't wait to see what the results are of of that going live. and I I'll be checking it out myself for sure to see because I'm interested to see like how it's implemented, what it looks like, and all this stuff.

1:05:57 So we'll be definitely digging in. So, we'll have the the link to your guys' website below, Twitter as well. So, if folks want to go and check out some of these new cover products and then also what you guys are are going to be launching in the in the next couple of weeks here, head on over to the website and and check it out.

1:06:16 Is there is there anything else we can we can push folks towards. I think that's that's the main thing. Yeah, follow us on Twitter and if you want to check out the app you know we also have that you can you know provide liquidity to the system or take out coverage with a free market live like for Lido EFI Tether and Dina.

1:06:37 So if you're holding any of those tokens or you want to bet against them or underwrite the risk there's like you know opportunities on both sides. So you're happy to anyone check that out. Awesome. Well, appreciate you hopping on and and discussing Cork Protocol and all the cool things you guys are working on. I learned a lot about what you guys are are building even just in this in this last hour.

1:06:58 So, much appreciated to to walk through some of this cool stuff with us and yeah, it was a pleasure.