Ebisu: A CDP Stablecoin With User-Set Interest Rates

0:00 And welcome back to the permissionless podcast brought to you by the team at Guardian. And of course, as always, we are going deep with DeFi protocols that are building on the edge of DeFi. They're in the trenches, doing the protocol design, doing the implementation, overcoming the hard problems, and finding product market fit. And today we've got a conversation that touches on every single one of those with Ethan from Ebisu Protocol and they're coming out with a CDP style stablecoin that accepts yieldbearing collateral tokens.

0:34 So of course in this conversation we go much deeper on everything that goes into the risk and analysis when it comes to accepting these kinds of collaterals and everything really that goes into a CDP style stable coin. And then we look at the addressable market and what this can be in the future and zoom out and look at the potentiality of DeFi and where DeFi is going right now and what narratives are strongest at this time.

1:01 But of course, before we dive into this discussion with Ethan, as always, my name is Owen, and over three and a half years ago, I founded Guardian really based on the premise that DeFi would house trillions of dollars in assets, and that really we would need a step-wise increase in the level of security in order to gain confidence and ship in that environment.

1:24 And today I'm happy to say that at Guardian, we have achieved the standard necessary using not one but two dedicated auditing teams in parallel accompanied by a world-renowned lead security researcher and a fully dedicated fuzzing engineer fuzzing the scope. we are able to gain the confidence necessary so that we can actually put our own funds up as a bounty on the scope on behalf of the project to prove first of all our confidence and also the effectiveness of our model.

1:56 And so today it's just a matter of time for DeFi to catch up. Without further ado, let us get into this conversation with Ethan from Ebisu Protocol. First of all, dude, appreciate you so much for for taking the time to to join us, but I mean, I'd love to start even like before Ebisu and get to know more about like how did you find your way into DeFi and and we'll get to how you sort of came across the idea for Ebisu, but I'm interested like how did you even find your way into Ethereum and DeFi, etc.

2:31 For sure. Yeah, it's great to be here. Thanks Brendan and Owen for inviting me on. So before before working on Ebisu, I got my start in this tech space working as a scout for a web 2VC called Draper Associates. He's based out of SF and he's like famously like a Bitcoin bull. And my job was basically to manage this like scouting program.

2:50 There's like 25 scouts across the country and we would see deal flow preed seed stage deals and push up the ones that we thought were good to the to the big boss. This was in 2020. This was in 2020/2021 just before like NFTs were starting to pick up and yeah that 2021 cycle was starting to get to its peak.

3:07 So we were seeing a lot of crypto deals and to do better do my job I kind of dove deeper into what kind of technologies you can build on top of blockchains. I was like mining Bitcoin on like my school laptop in middle school and stuff but aside from that. So I knew what Bitcoin is like the concept of hard money is familiar to me but the concept of programmability on blockchains I kind of learned through this venture job.

3:28 So, one of the deals I led was called Sign. It's a non-financial application like company. They they have a multiple different products and I I yeah, Draper led basically their preede, the biggest check-in and their preede and then I I joined that team to do BD and later became a product manager there. So, that's kind of how I transitioned to working full-time in the space.

3:47 And I I highlighted that this company's like was building non-financial apps which at the time was an interesting place to be. It was kind of internally they had reached the conviction that enough infrastructure is built and it's time to build products that target that serve end users. From web 2, we learned that controlling the end user is is how you is like a very lucrative opportunity.

4:05 Figuring out what kind of applications that could be built for end users that provided tremendous value but that weren't financial in nature was like a very very tough thing cuz I think blockchain's killer use case is finance. First we worked on like the concept of enforcing legal agreements using blockchain and then we realized that maybe it's too broad.

4:22 We focused on enforcing specifically like token related agreements. So safe saft token warrant employee token grant and that kind of was the genesis for this product that I that I was like the one of the first PMs at that company to work on called token table. It's essentially like Carta for tokens token distribution. To date I think this company I'm like proud to say like I I I worked on it for like a year and a half.

4:44 We onboarded I I was like responsible for like working with Zeta Chain and Starknet for their airdrop and now they're like doing like 15 mil ARR like a lot of different companies using this product for token distributions. Anyways, that was kind of my how I kind of like cut my teeth in the industry. But and and throughout that process I was like using DeFi, enjoying DeFi, learning about it and still having this like fundamental conviction that finance is like the the number one killer use case for blockchain.

5:13 There's kind of like a problem with the current state of finance in the space where it's not being really accessible or usable by by the masses. it just this kind of feeling motivated me to explore opportunities to like build in DeFi. So it's a bit of a a long run, but that's kind of how I was motivated to like explore ideas relating to Ebisu.

5:30 Yeah, dude. I agree with a lot of a lot of what you said there. I mean, first of all, I think we're still at that stage where everybody's trying to figure out how do we actually bring all the infrastructure to the end user. I feel like we're still in that stage and we probably will be for at least like the next 5 years or plus really and there's even more infrastructure today like now we have you know all the L2s and we have like all the interop solutions and we've got you know unisoft v3 and we have unisoft v4 and we have a v3 and and all this stuff and now iigen layer which which you guys are are building on top of and we'll get into to all of that but yeah I mean

6:07 Even today there's even like the opportunity is even more ripe to be able to expose all this cool like restaking yields and stuff like that to users. And I mean, you're absolutely right like that's where the outsized returns lie today because I mean first of all I feel like we've hit the limit of like everybody who's in DeFi has kind of been in DeFi for the past like 3 four years at this point and it hasn't really we haven't had like a magnitude order of growth.

6:34 I mean really since like D5 summer if we're being honest. TVL has stayed the same across like all chains. So DeFi TVL hasn't really grown. It's definitely a problem. Yeah, it's pretty much flatlined. So I guess I mean we're kind of at like a sticker twist moment where it's like is DeFi going to have another order of magnitude growth and are we going to have like you know hundreds of billions maybe even trillions come on chain I guess that would be what it takes to get to the next magnitude.

7:02 So I mean do you think that's what's in store for DeFi and do you think that you know entrepreneurs just have to get in there and figure that step out or do you think there's some kind of a pivot that has to happen? Yeah, amongst DeFi circles like there's I guess like two schools of thought for builders.

7:17 What I've observed it's like the grow the up high school of thought or like the tactically like tactically catering to existing D5 audience school of thought and like on one hand you can do like these TVL deals you can do all of these kind of like cryptonative style incentives and we've seen those work very well points and etc and I think most DeFi teams need to start by targeting the cryptonative users because that's who's going to be giving attention to these these products in their infancy but the second school of thought the grow the pie thought the grow the pie kind of thesis is like where's the net new liquidity going to come from that's going to like you said bring this next order magnitude of growth and it's pretty clear to us that it's

7:52 Like two buckets of institutional like yeah institutional like big boys and then consumers like non-cryptoiterate consumers from around the world and I think within two of these buckets there's like subgroup of like US and the rest of the world yeah so I I do think it's coming and slowly you're seeing signs of this like Ethena on the Ethena is doing a great job because they've identified like a yield source that's cryptonative but very interesting to Tradfy people and the the whole thing they're doing with Converge is creating a a blockchain environment that's like suitable for these like Trady guys to like on board to access these crypto strategies bringing their assets with them.

8:28 This is net new liquidity. On the other side, we see for example like Morpho integrate with Coinbase and offer like Bitcoin collateralized loans to their users and and and that's kind of like maybe giving reducing the opportunity cost for people to hold Bitcoin in Coinbase because now they can like borrow against it or whatever. I think so it it's coming and then I think like payments DeFi super app kind of like mobile integration whether it be Robin Hood comes in and takes everyone to lunch or there's going to be a cryptonative solution there's like this like B2C end user thing that I I think is also pretty bullish so yeah there's there needs to be net liquidity and I think it's going to tie into like our conversation but as a DeFi builder you have

9:06 To look at like what cards you have in your hand like your edge and from like the point you're currently in how can you play these cards such that you're positioned to capture some of this net new liquidity or be the force that drives it on chain in the future because yeah like Ethena, Coinbase, Morpho, they all start with cryptonative user base only and somehow they leverage their their cards and build products that allow them to bring on more more liquidity.

9:28 Yeah, 100%. And I think that that leads nicely into what you guys are building at Ebisu. So what is your strategy? You mentioned a lot of DeFi teams it's like best to just start off target the existing DeFi liquidity. Is that the approach that you guys are taking as well? For sure. So, a high level, Ebisu is like a protocol that is designed to offer users the best experience for borrowing dollars against their crypto wealth.

9:53 Like OG OG borrow lens were designed for like many to many kind of borrowings. I can post any kind of collateral. I can borrow any kind of asset. Maybe like ETH was used as the base currency when when it's like a compound and stuff. We're just getting started. But we have seen like the emergence of stable coins being some of the most soughtafter form of like credit from these kind of money markets.

10:15 So after observing this like we realized okay how can we make a system that's like the best for borrowing dollars and we're shaving away all the stuff that's not related to that. So with Ebisu it's not like typical borrow lens where you can like let's say you can borrow you can denominate your credit like your you can put let's say Bitcoin as collateral borrow ETH.

10:34 In our case, we can only support crypto collateral and you can borrow dollars against it. And yeah, it's targeting a crypton native audience to start because like money market borrow lend is already like kind of a a mature space and the innovation we're making is mainly on like the how we're setting the interest rates. So the goal is to be able to offer the most competitive rates for dollar credit against like blue chip crypto.

10:56 And we do this by using like a CDP model. and I can yeah I can get more into the model later, but essentially there's two value props. cheapest loans against your crypto so you can get dollar liquidity and then if you're a stable coin holder we're repackaging all of the interest that we generate as a protocol for yield for our stable coin holders such that there's a demand to hold a stable coin kind of what we're doing but I think with a few steps of imagination you can clearly see how this use case can be these use cases of dollar credit and yield can be like very useful to to end users as well or to institutions but yeah the crypton native audience is definitely how we're going to get our start yeah of course

11:30 Well I mean self-custody as long as you establish like I I think the hardest part for a lot of these CDP protocols is just establishing like a good reputation for for the bag and then once you have that it's kind of a lendy effect where I mean if you give an offer that's just better than holding like let's say an alternative like USDT like hey you can hold this and it has ideally I mean obviously it'd be very hard to recreate the liquidity that USDT has but if you can recreate the utility and I mean just the value prop of being able to hold your dollars on chain, then add yield to that and then it's kind of a a no-brainer.

12:09 But it does come with of course you've got to get to the the place where it's a very trusted collateral and it's a very trusted liquidation mechanism and all this stuff. But I mean so so you were a PM before even getting into what is your role now? Are you on the technical side or are you just on the product management side?

12:32 Like what what does that look like for you? For sure. So yeah, it's it's a lean mean team. I'm doing everything on the business growth side. We have a smart contract lead and then like a full stack engineer as our CTO. Yeah, like you said, DeFi is like DeFi is about like building trust within these trustless systems.

12:49 The especially amongst crypto natives and even as you scale especially as you scale to to to other types of user bases. So I'm I'm I'm focused on like talking to users, understanding what they want, understanding what concerns they have, and definitely one of the biggest things we're we're prioritized is like security and risk management. We have all the steps in place in terms of the audits on this contract side, but also with with lending economic and the risk management infrastructures like arguably equally or more as important.

13:16 We have like the monitoring setup. We have like the risk management plan for like scaling the parameters, ensuring that stable coins are issued in like a safe way. collaterals are always like sufficiently over collateralized monitoring each of the like different type of idiosyncratic risk associated with each collateral such that we're like the risk for like a SUSD as a collateral is very different than a WBTC versus a Lombard BTC.

13:41 Yeah, that's kind of my role and then the the tech guys are are focused on making sure the protocols indestructible. Yeah. Yeah, of course. And I mean, of course, that's that's a whole process in its own right, but I mean, what what did you what made you see the opportunity for this? Were you just looking at kind of like stable coin adoption in the space?

14:02 I mean, I I will admit like stable coins are probably I would say the most adopted use case of blockchain at this point and like the most immediately beneficial obviously for like remittances and stuff like this, but also for I think in a B2B sense in terms of payments like of course Visa, Mastercard, they have like ridiculous like is it like 3% now fees that I mean you don't even think about like we I mean obviously at Guardian we accept payment in in crypto.

14:33 We don't even think about those fees, but it's like you can imagine if we were getting a 3% haircut on every like transaction that we're accepting that eats into everything and is definitely a strong proposition. So I guess what was what was the main impetus that got you to see this as an opportunity and actually like go full throttle and pursue it?

14:54 For sure. So So CDP has been like a one of the cornerstone of DeFi like pioneered by Maker. we saw like a resurgence of them in like the 2020 2021 cycle with like players like MIM liquidity and then later on with guys like Prisma. these systems grew from like ranging from like less than 100 million to like more than billions in the bull.

15:14 So we see like there's demand for these systems, but I think like the ideal, most elegant, most trustworthy CDP design has yet to be like shown to the market until liquid. We saw that they're what they're doing and we we really think that like it's a very robust way to issue a dollar credit against volatile crypto collateral with like the reason why some other CDPs fail is like risk management and principal agent risk.

15:37 Like you're trusting the team too much to manage certain parameters in in the land of DeFi like not every like you can't manage everything by hand. So the system needs to be robust enough to handle volatility and different yeah different changing dynamics. So I think yeah this was like the the reason behind going with like a liquidity inspired CDP style.

15:57 The the product itself was motivated by the fact that firstly like we saw Ian layer in 2023 after witnessing the boom of like lido and LSTs. So this kind of shows us that okay there's these cryptonative assets that are kind of been treat being treated as money. Bitcoin, ETH, soul and then stable coins. But now there's like different ways where you can repackage these assets into like kind of like a structured product where you take on some different kind of incremental risk and you get some incremental yield.

16:25 And some of these are like endogenous to crypto. Some of these are exogenous to crypto. Some of these are structured products that are created in a way that's permissionless. some structured products that's created in a way that's permissioned, different flavors of yield. And I I can view like the crypto person who wants blue chip crypto exposure to be t to be taking on different flavors of these derivatives.

16:45 I have ETH, maybe I'm going to restake some. Maybe I'm going to hold some native ETH. I have some Bitcoin. Maybe I'm going to put into Babylon. Maybe I'm going to trust Coinbase BTC rapc. Same with like the US dollar. Maybe I can lend it to A and like do something like LevelUSD or maybe I want to get some exposure to the type of yield Ethena is offering.

17:04 And whenever you have like a diverse portfolio of different kind of assets, the next layer above asset issuance in like financial system is is is leverage. Whether that be for desire to take leverage and engage in a different kind of complicated financial strategy. So you want to like take leverage to loop, take leverage to head, hedge, carry trade, basis trade or simply like to tap that liquidity without selling it.

17:26 Like a lot of these Bitcoin guys are using a just to like pay their mortgage by borrowing USDC against their Bitcoin. For both of these use cases, what really matters is like I think like the price the price of the loan. So it kind of is like a happy marriage between the idea that liquid EV2 is coming.

17:42 They have like a very unique way for the protocol to autonomously issue dollar credit at a very competitive rate. And then you have this emergence of like a a blue chip crypto like BTC, ETHUSD, but like derivatives of that. And I think demand demand for borrowing against those derivatives is there. Pricing that risk is really important. And we saw like a CDP as a way to to capture this opportunity.

18:07 And it's definitely not the beall end all. It's definitely a crypton native use case, but that's kind of how we we got the initial inspiration for the the initial scope of Ebisu. Yeah, it totally makes sense. And speaking of that DeFi user, would you say Ebisu is targeting, you know, like retail, crypto traders and holders, maybe DeFi, whales, institutional or all the above?

18:25 Like who who's the target user you're kind of building for at least for now? Yeah, it builds off the conversation about how how can you use this protocol? So for the average for the average DeFi user I think there can be like for the average user in general whether it be instit institution or user or anyone it's just anyone who holds crypto who who wants who has a need for dollar credit like to take a dollar loan against the crypto I think broadly these needs from talking to users fall into two buckets one person wants to do some sort of a financial strategy like whether that be supply bitcoin and borrow dollars and maybe like do a per short to hedge their spot exposure or do like a carry trade or do or maybe just

19:07 Like in the case of let's say Ethena SUSD you hold Ethed you borrow dollars you buy more Ethena and you you loop that and it's like an ink kind loop this is like one type of bucket and then the other type of bucket is like more practical bucket where you're just tapping you're you're tapping the liquidity of your assets without selling it and that would be like largely for payments or for it's like a line of credit I think to start you're taking a you can you can enjoy a lower interest rate but you're taking the risk of the CDB PEG like in Ebisu you're not borrowing real USDC you're borrowing ebUSD so you're taking the risk of our PEG and also when you enter in a loan in our protocol you take this thing

19:45 Called redemption risk which is different than liquidation and it is a risk that is experienced by users who are setting their rate a little bit too low so we didn't really go into it but in Ebisu and you're users can set their own rate and there's a kind of a game where you're not you're incentivized to not be the lowest person like the lowest interest rate borrower in the system, but you have a financial incentive to minimize it as much as possible.

20:07 So, it's kind of a game of chicken and yeah, redemption risk can lead to some of your collateral being taken from you. So, you're taking this kind of risk to enjoy the lower rate and I think this kind of system to start caters itself towards like DeFi native crypto literate people once the system reaches a certain kind of maturity and it doesn't have to be like it can be like pretty quickly.

20:26 We as the protocol can do things to abstract this kind of DeFi game away from people and just say hey here's the interest rate for borrowing Ebisu and if it is competitive relative to other venues that's how we start to get more institutional flows or more sophisticated players who say okay I really care about a few if it's like a 1% cheaper interest rate it matters if you're like dealing with size if we're yeah once we're able to prove and gain some trust that like the system is stable this rate game works at delivering competitive rate I I'm pretty confident that we can attract some like bigger players as Maybe even some Yeah.

20:57 Maybe even bigger players who are less sophisticated in DeFi but still looking for some sort of dollar credit. Yeah. And are these fixed rate lending rates? Yeah. So let me go into this this feature for a second. So in a borrow lend the way interest rate is set is a utilization curve. So there's borrowers who post collateral and demand to borrow a certain asset, let's say USDC, and there's lenders who lend it out.

21:20 And based on how much lender side liquidity there is relative to demand, there's a curve that sets a rate. And this this parameter for this curve is managed by like a centralized risk manager like chaos or a gauntlet. And and it works. Ebisu is kind of taking a like if this is the game of how to set rates in in traditional crypto, we're kind of taking a step out of like the the existing game where we let users set their own rate and we use the market as like a forward-looking source of truth on what the true rate should be because what is interest rate at the end of the day?

21:49 It's a user's willingness to pay for for leverage and that intuitively doesn't really ha have to do with like utilization curves like lender side liquidity. That's like a abstract that's a that that that is like a great curistic for rate. It's like if the Fed changes their money supply, there's going to be it's going to affect the stable coin supply which will affect the lender side liquidity which will affect the rate.

22:13 It like trickles down from the Fed. But you can also kind of like skip this whole game and say, "Okay, the market is the is the source of truth. You tell me what you think the rate should be. What are you willing to pay to borrow? And if the system gets enough scale, like kind of like poly market, it's like able to get at the most competitive rate."

22:29 And let's say like oh a is and and the users of Ebisu also see the rates on a see the rates on morpho and they're feeding that into their calculations as well when they set the rates on au because if there's too big of a gap between a and au there can be some risk of like interest rate arbitrage.

22:44 Yeah this is the kind of game we're playing but as I mentioned if you can set your own rate it's obvious that okay why don't I set it to zero. So this is where redemption comes in. Redemption means that so ebUSD part of the how we get trust from our users is that it's always redeemable onetoone for $1 of collateral.

23:01 Though let's say I buy an ebUSD on a DEX at like 98 cents. There has just been a bit bit of a sell-off and now it's like trading under PEG. I can purchase it at 98 cents and redeem it for $1 of let's say etherf and I can sell that etherfi for for dollars and I now I just made two cents.

23:22 So this this is a key mechanism in and since all the loans are over collateralized the protocol will always be solvent as long as like yeah under most circumstances as long as there's no bad debt. this redemption mechanism is like a key hard peg method. Where does that collateral that we get when we do a redemption come from?

23:43 It comes from the user who pays the lowest rate. So this is how we have kind of like a a slap on the wrist to the person who thinks that they can who they think that they the rate should be like this low but the market is telling them no the rate is actually should be a little bit higher.

23:56 So that user is we take some of their collateral but we also cancel their debt proportionately. So they're not losing any money if you get redeemed but you're losing exposure to your collateral which is kind of the whole point you enter their system. So it's not not the best. Yeah this rate can be to answer your question it's not a fixed rate.

24:12 This rate is like dynamic based on what the what what the market thinks and you can change your rate at any time to reflect your updated view and like that's kind of how we have the conviction that Ebisu rates will always be the most competitive. Let's say that to to give a quick example of how this mechanism can can adjust.

24:31 Let's say that like the maker DAO savings rate let's say on on whatever competitive like borrowing venue the interest rate for borrowing dollars rises to 10%. And whereas on Ebisu it's at 5%. And let's say in that situation we can assume that lenders on that other venue maybe can lend at 8%. So there's an incentive for users to come mint ebUSD at $5 at 5% dump it for USDC and lend it for $8 for 8% on like a competitive venue.

25:03 This dumping of ebUSD creates like a downwards pressure in the peg which triggers redemptions which kicks off the lowest rate borrowers in the system which like automatically rises the average interest rate up closer to a level towards 8%. And it gets closer and closer until there's no incentive to do an arbitrage and then the peg remains stable.

25:24 No redemptions happen. The the rate is stabilized. Yeah, this is a little bit of a lengthy answer, but yeah, it's it's it's a dynamic rate that's supposed to represent the true demand for borrowing dollars against any given crypto asset. So for Bitcoin, it will be different than for ETH than it would be for Ethena SU. Yeah, that I I like that approach specifically because you're no longer charging an interest rate based upon whatever the borrowers are, you know, or the the lenders are setting at or whatever the supply is.

25:54 You're now charging based on the value that you actually provide by adding access to leverage or access to whatever it is that they want to do with this. If they're doing something that creates a lot of value, they can afford to pay a much higher rate to to lock in that that leverage. Yeah, I was actually Yeah, I was wondering like, okay, if the redemption just pays back $1 of your of your debt for access to $1 of your collateral, that would actually make your position even more healthy in terms of like a MCR perspective.

26:26 So, yeah, I was wondering like, okay, well, what is the downside of that? It does make sense like, okay, well, now you have less now you've got less exposure to your underlying collateral. yeah. So that that's an interesting mechanism I'm interested I'm thinking about. okay. If you're able to redeem and unlock Yeah. So you're basically redeeming $1 of your debt.

26:51 And if you were to personally redeem it, then you would unlock like let's say the LTV is one to $1.4 collateral, then you you would unlock $1.4 of collateral for yourself. But if they're if somebody else is redeeming it for you, then you're unlocking well, they're basically just unlocking and taking $1 of collateral. So yeah, that definitely makes sense.

27:14 You can think of it simply like, so the redemption system is very simple. Like you bring one ebUSD and you click redeem and it redeems it from whoever's paying the lowest rate. It's it's let's say there's like a Bitcoin trove, a Bitcoin collateral, ETH collateral, USD collateral. You're going to get a bit of each of these. It's like a systemwide kind of thing where it batches redemptions across all the different collateral types and you can't choose who you redeem.

27:36 The system automatically does it. But the simplest way to think about it is the person who hits redeem is repaying a little bit of debt for you. But they repay debt and they take one collateral from you too. So it's like it's to be honest, it's like this is a trade-off you take. It's it's actually not an ideal UX, but it's something that we need in the system to make the CDP work versus like a a money market.

27:56 It's just like a trade-off and and it's I guess our job to educate the users about these different kind of risks so that they're they can choose like where they want to borrow. Yeah. And so when you Okay, so let's say somebody redeems like $1, they only unlock $1 of collateral and obviously redeem that to them. But then that underlying position still has like let's say if I had a position that had $2 borrowed and it had $4 of collateral.

28:26 Now I've only got $1 borrowed and $3 of collateral. Exactly. Okay. So it actually improves the health of a lot of these positions and kind of forces you into like a more healthy state. That's that's an interesting way to look at it. And obviously I think liquidity was prioritizing the health. So if if a position was the least healthy, then it would go to pay back some of the debt and make that position more healthy.

28:49 Whereas you guys are just totally just looking at the interest rate and paying back the one that has the the lowest interest rate. It's a point to note here is like the Liquity V2 also focuses only on rate and not not LTV. The reason because like what you described is like a correct phenomenon where it's like it's a self-healing kind of system.

29:07 The the loans that are like kind of the the least in line with like the needs of the protocol get punished first. But in Liquity V1 protocols with using that kind of model where you're punishing people who have like the least collateralized loan, it creates like kind of perverse incentive to over collateralize too much. Let's say in a period of like in a period where there's like a lot of volatility, maybe the stable coin is deping a lot, users will top up a lot of collateral but only borrow very small amount of debt in order to protect themselves from redemption.

29:35 But if you want to if you create this game for the user to play, it's like not a pleasant borrowing experience. The shortfall of CDP versus other stable coins and why like I view more as like kind of money market system versus like a payment stable coin system. It's not competing with USDT. It's kind of competing with a morpho is because CDP is like notoriously like capitalally inefficient.

29:56 So we still like with Ebisu you can play different games. There's like you can you can borrow at a very competitive LTV but set your rate very high. So you have very little redemption risk and you take on more liquidation risk on the MCR side. Or maybe you want to you want to pay less rate but you want to be exposed to more liquidation risk.

30:14 There's like a different game theory there. Yeah, just kind of like a side note of DeFi history where Liquity V1 was doing what you kind of what we kind of just talked about and they experienced 300 400% over collateralization which is just not like a good borrowing experience which is why they shifted part of the reason why they shifted their Yeah.

30:30 And also is so Ebisu a direct fork of like a Liquity V2 or is it built totally from scratch just with the same sort of like design principles? Yeah, so we did license we did get the Liquity license which gives us like exclusivity on mainet over like certain collaterals to use the liquidity like user set interest rate mechanism as like the core of our engine.

30:51 But Liquity is like very famously like very immutable. They only support like three collaterals and no no ability to upgrade the the collaterals, no ability to set debt caps, no ability to do certain things that that you need to do. Like if you're just supporting ETH as collateral, sure it can be immutable. But from like a if I put my business hat on, we need to best serve the needs of the market and they demand leverage against diverse set of assets.

31:15 And these assets are not static like ETH. They're like growing and and having different kinds of risk. So most of the changes that we've made like or most of the work that we've done is like strapping on all of these additional systems on top of the liquidity port engine that lets us do multiolateral lending in like a safe way.

31:33 Just like the the gold like liquidity is like the gold standard CDP in my view. but it's immutable. So you need to strap on all the learnings that we've gotten from a morpho about how best to manage risk. such as like yeah being able to change the parameters for a for collateral maybe like being able to freeze the protocol in the case of like something happening that's that's not supposed to happen.

31:56 A little bit of changes to the governance system but yeah it's yeah that's kind of how we relate to liquidity. Yeah. And obviously as you start to add more and more of these assets and you get into the more and more longtail of the different assets that you can support for CDP leverage, there's like an increasing amount of overhead and like management and risk underwriting that has to happen.

32:16 So I guess what kind of systems have you guys put into place to facilitate that at scale if you do want to get to scale for sure in the number of assets listed? So I think in this to answer this it's like really important to communicate clearly our thesis of why we're doing this and why we're doing this is because there's demonstrated demand for borrowing dollars against blue chip cryp against crypto.

32:40 A CDP system can offer you a cheaper cheaper rate but there's different risks and the one of the key risks is the risk of the peg. The risk of the peg is a function of all of the different collateral that back this stable coin. So the more collaterals we have, let's say you're just, let's say you're not even a borrower on Ebisu.

32:56 You just buy ebUSD to stake it for some yield, but now we add like a longtail collateral. You're indirectly being exposed to that that the risk of that new collateral without being really like conscious to take that risk. Our approach is like let's say fast forward in the future, the world's wealth is coming on chain. We think that like most of it will consolidate in a few buckets of yield bearing assets that are pegged to Bitcoin, ETH, and USD.

33:18 You're going to have your like your rapid cocoin. You're going to have your yield bearing Bitcoin. You're going to have your your like number one, number two, number three rest ETH or staked ETH. You're going to have your maybe like top five yield bearing stable coins. And that they these these like handful of blue chips will hold the majority of the wealth.

33:34 And yes, there will be a long tail maybe like 8020 or or whatever. But from talking to users and stuff to make this system as big as possible, we need to be very like we're aiming to be very conservative on what assets we list. And we only want to list assets that have demonstrated one that those assets have demand for people to hold and they're going to reach a big size.

33:54 So it's a market worth betting on and two like they're sophisticated and clear. They're basically doing the risk management like professionally. To start we're supporting Rap Bitcoin, Lombard BTC for the Bitcoin side, Ether W E and then on the stable coin side, Ethena SUSD and we're looking at a few more but this is these are like the ones I will disclose for now.

34:16 I think there's a few other blue chips that are that were not mentioned that we're definitely evaluating. The the strategy is basically to based on how big each of these assets is, implement a debt cap, how much debt can be issued against each of these assets. Like that's important because we don't want one asset to compose too much of the backing relative to another.

34:35 And how much an asset should compose the backing of the ebUSD should be based on like how easily we can liquidate that asset in a case of like a one the risk of like the risk of that asset and that the risk of that asset is comprised of like how did they create the yield what are the systems they use how and importantly how easy can we liquidate that in a case of liquidation when we're competing to liquidate against more fo a whatever we need to make sure that with with with confidence we're going to be able to to clear that clear that debt in the case of liquidations yeah we also O have so that's like debt cap.

35:07 There's also like MCR or LTV like the liquidation threshold for assets that are riskier like for example like a for example let's take like a longtail LRT for example like let's say they deal with a many many AVS that have their own risks and a slash risk is going to be like prominent then you should have a higher buffer for that asset because there can be a more there's more probability that there going to be like a fast like a slashing would cause like a fast decrease in the value of that asset which would cause liquidations and you want to make sure there's a good buffer Whereas like assets that are more stable that trade like let's say like a like a SDI for example something that's like less risky it's already having Lindy you

35:44 Can have a more aggressive LTV. So these are kind of the main debt cap LTV some of the some of the tools that we can use to manage risk to start the team is working with risk with like a risk shop to do this and we're doing it internally and eventually like there will be like a community input as to like what assets to list and there'll be like voting based on on governance and stuff but yeah.

36:04 Yeah, I definitely agree with the like you want to pick the right collaterals and I think that's really the only true way to to hit a certain amount of scale is if first of all you find the right collaterals that have the right demand to to get leverage against and have the right like market that you can actually go to and actually like absorb liquidity from.

36:24 And then second of all, it has to be risk adjusted correctly. If you're going to take on $100 million of debt on a bad collateral and then you want to scale that to a billion, you're just scaling like a problem to be an even bigger problem, right? And so I think definitely like iterating and getting the right set of collaterals before you even scale and and then taking that approach is setting yourself up for success from day one versus like you don't want to accept like you said like I think that is like the nightmare scenario is like accepting some like LRT token that has like all these different AS's where you can have like like that to me is a very scary proposition for a collateral which is like there can just be a

37:09 Step-wise decrease increase in the value of the collateral based on it getting slashed. Like that's literally essentially a feature of having a a restake token is just that it could get slashed. There's some percentage chance that it will get slashed and of course like they're going to do everything they can if it's, you know, professionally managed. They're going to mitigate that as much as possible, but there is a a percentage chance.

37:31 Yeah. And so I totally agree with that. And then I think you named a couple of assets. Are you guys looking to only deploy on like an ETH mainet and have like native access to as many assets as you can or like let's say if there's an asset that you want to support but it's on like a different network like converge or something like this would you have a native deployment there?

37:52 Would you try and do some crosschain situation? What would you guys look to do for a setup like that? For sure. So yeah, it is going to be deployed on Ethereum when the the thesis is like when the world's assets are going to come on chain. historically they have come to Ethereum first and Ethereum is like a place with deep liquidity despite the sentiment right now.

38:11 We're not like opposed to the fact that plasma converge the other chains kind of competing with that value prop of being like the home for issuance but for now confident on Ethereum and yeah we've in in terms of crosschain like I think there's enough liquidity on Ethereum to start but we have been talking to different L2s or different asset issuers who have assets on L2 and I think like the next level DeFi experience is going to be heavily relied on like solvers and crosschain messaging to do these kind of like atomic DeFi crosschains.

38:39 It's it's I think it's still needs a bit of refinement on the tech side, but the user flow would be something like if you're holding an asset on an L2 that's compatible with Ebisu, you can on the via the front end click like deposit and it will be using like solvers to bring that collateral to the L1, deposit it into a trove mint ebUSD and then we can use like layer zero or something to bridge that ebUSD back to the L2.

39:03 So the user is only like signing transactions on the L2 but behind behind the scenes we're we're handling it and routing it all through our contracts on mainet. Yeah. With CDP if we deploy in another chain it's a new stable coin. And for Ebisu right now the the theme that we're like and the thesis is like blue chip blue chip BTC ETHUSD collateral on Ethereum.

39:23 So we kind of want to stick with that. We we don't want to deploy multiple stable coins at once. And we also want to focus on like the key for ebUSD success will be having deep liquidity with USDT USDC because as I said it's like a leverage it's a it's a money market product and when you want to spend when you want to spend your your ebUSD or do like another strategy usually you're going to be swapping it to USDC USDT to enjoy the liquidity that those those stable coins are not about yield not about leverage only about liquidity.

39:50 So we need deep liquidity with those guys and I think Ethereum is a good place to bootstrap them. So that's like answering the the crosschain chain expansion plan. We're not opposed to new deployments on different chains or on Ethereum that have a different thematic focus like for example like PTS inkind borrowing with PTS only like a deployment focus on that.

40:09 I don't think we're we were going to do this but it's an idea that's been explored and there's a few other ideas we're thinking that maybe yeah that that I I won't share yet but we can can keep an eye out. And I think I want to touch on real quick this point about longtail collateral because it's one of the shortcomings of like CDP system that the risk is socialized.

40:28 The risk of collateral is socialized amongst all stable coin holders. And like you mentioned like you don't want to be coming adding like a random longtail collateral that kind of breaks the whole system. Like maybe all these whales and institutions you've worked so hard to build trust with now leave the system because you add something den. We've seen it kind of in the past as well.

40:44 Like I think like if you look at MIM like they're supporting like year whatever why this and that as collateral and at the end of the day when the user comes and sees that they don't know what it is it's it's it's deterring but we still want to find a way to capture value from serving users who demand leverage against these longtail collaterals and this is where composability with morpho comes in like if you want to borrow dollars against let's say a coll that's not listed as collateral on the CDP we'll have like morpho markets where you can borrow ebUSD against those assets.

41:15 The the kind of interesting thing here is that if liquidity lets ebUSD be minted at a competitive rate relative to other borrow lends, just structurally how it works, that means lenders have a lower hurdle rate. So, I'm an ebUSD holder. I've just minted it. I'm down to lend it out for a lower yield than I would be on in other places because I'm paying a lower rate to borrow it in the first place.

41:38 And this could be like an interesting dynamic where the morpho markets for let's say like a longtail asset enable dollar loans against that asset at a cheaper rate than they would then you could borrow let's say USDC against that asset just because the hurdle rate for ebUSD holders is lower. It's one of the thesis we have. We're definitely going to support more more full markets.

41:56 So yeah, it's it's it's like that D5 Legos kind of kind of concept where we can serve users needs in other ways and I think CDP is just like the first step for Ebisu. there's going to be these there's a few other areas of growth that we're we're we're looking to focus on after we bootstrap the initial CDP.

42:12 Yeah, definitely. And thinking about some of these like key different key differentiators that you're talking about for Ebisu and even how you're kind of changing the game theory compared to other CDPs, what are your thoughts on like go to market and attracting and onboarding users to the platform? For sure. So, this is like the most important part.

42:29 I'll break it down. I'll break down the CDP first and I can maybe expand later about like different products and stuff we want to build that are complimentary. But the first first step of the growth flywheel relies on competitive interest rates for for loans. I think Ethereum is already mature ecosystem and you can't just say I want to like be the best lending venue without having like a very specific differentiated value prop.

42:49 So our value prop is competitive borrowing rate for dollars against crypto. And that's how we are bootstrapping the depositing of collateral and the issuance of ebUSD. But now that ebUSD is here, we need ebUSD to be used. It cannot just be like this like leverage asset that's like dump for USDC only. The system doesn't work. I think in a CDP you can think of the ebUSD holders, the ebUSD like liquidity providers as as lenders in a sense.

43:14 It kind of they're the ones taking the other side to borrowers. So you need a reason for these guys to exist and that's where the yield comes the yield comes into play. So taking after like models like the HLP or this kind of idea of taking a protocol revenues and giving it back to the participants of the system who who help make it work.

43:33 100% of the interest revenue we generate from all of these loans is going to be going back to ebUSD holders in different forms. Majority through the stability pool which is like a vault we have within the protocol that you can put ebUSD in. you earn 75% of the interest from all of these loans. And the stable coins in that vault is used to help do liquidations.

43:52 So we're like open sourcing the profit from not only interest but also liquidation to stability pool depositors. So you can imagine like when borrowing demand is very high on on chain and Ebisu is like giving you a little bit of a cheaper rate we're going to get some loans and that in and then that those loans are going to generate interest and that interest will be given to back to our users who are holding our stable coin and that's how we're like focusing on building liquidity for the stable coin and I talked about 75% going towards stability pools 25% will be going towards DEX liquidity incentive so so that we have enough like dem incentive for LPS to provide liquidity on our our curve pools that we need to make this whole system flow the

44:30 The last step. So step one, originate loans and generate revenue. Step two, give that revenue back to ebUSD holders and also give them exposure to liquidation profit. Step three, it's the end goal for all of these assets, all of these stable coins, there's like some degree of monetary premium where ebUSD is ti is is is demand like the monetary premium means like demand to hold ebUSD like having like many supply syncs.

44:54 So integrations with Morpho, integrations with like Spectra, Pendle, places where you can use ebUSD in like payments use cases. These all create demand to hold ebUSD that strengthens the PEG outside of just like a demand for yield from from stability pool and whatnot. That's like the the gold golden standard. Like I think only like D really has like a quantifiable monetary premium and like a lot of these die holders who are just holding it for no yield.

45:19 So that's kind of the the growth plan for there. Sorry if you had any questions along the way. Yeah, I rambled a little bit. No, no. I think I mean I think the idea of giving particularly access to the liquidation rewards is pretty interesting to be able to spread that out across all the the remaining users who weren't liquidated with their with their ebUSD.

45:43 Yeah, that was also something I was going to ask about is like how do you incentivize liquidity because obviously like deep liquidity is something that's like very important for a stable coin especially like this to get that bootstrapped. And so does that look like with the all of the incentives and like rewards that you pay out to ebUSD holders, does that look like a self-repaying loan or do they just get like I don't know yield on top of what they already had with their collateral?

46:09 What does that actually come out as? Yeah. So, I like you mentioned the self-repaying loan part. This is not really when you borrow against the yield bearing collateral. If the yield you're getting is higher than the rate you're paying, then your loan is kind of self-repaying in a sense. Another way to look at self-repaying is like if you have a loan and you're paying interest, but you able to earn yield on that debt you just borrowed and the yield is higher than the interest, then kind of this position is it's not this this position as a whole is self-repaying.

46:36 So that's kind of just like if you want to frame it as a self-repaying thing, but how it actually works. Maybe I'll share screen real quick and just like show you what it looks like. so there's like two kinds of users here. There's borrowers who post who are posting collateral. And there's stable coin holders. If you're a borrower, yeah, you're going to have some stable coin.

46:52 You're also classified as a stable coin holder, but you can also be buying the stable coin spot and earning yield on it without having borrowing exposure. So first I want to show this is the kind of borrowing fee split we have where stability pool is like those pools that are used for liquidations and they're getting 75% of the ebUSD denominated interest as yield.

47:11 Then there's 25% going to this gauge system where we're shooting out incentives towards places that are going to help grow ebUSD. a curve unis swap. It can be incentivizing lenders on morpho. It can be incentivizing LPS in like the pendle pool. Eventually, it can be some sort of value acrruel to token holders. But what does this look like?

47:30 So on the borrowing page, you're able to like see the different collaterals and you're able to to create your loans. This is like test net. These these numbers are not real. And this is what it looks like to borrow. You're depositing collateral. You're going to see how much of a a debt you want to issue. And then you can set your own interest rate.

47:50 We have like a rate delegate so that they can help manage it for you. what you asked about is yield. When I have minted my stable coin, what can I do with it? Stability pool. These are like the different liquidation vaults for each of these different types of collaterals. I want exposure to etherfy liquidations. I will deposit my stable coins here and I'm going to be earning consistent yield on those stable coins.

48:13 And if there's liquidation, I'm going to be getting EtherFiW ETH back with like a 5% liquidation bonus on top of that. This is this is kind of how I think to answer your question like how it actually looks as a user. You could have chosen to put your stable coins in somewhere else. Then you wouldn't be exposed to this.

48:28 It's only those people who either borrow or buy the stable coin and choose to deposit in the stability pool that get access to this opportunity. And then the stability pool kind of just greases the wheels on liquidations and make sure that there's enough capital there to like repay debt and stuff. Exactly. We burn stable coins from the stability pool to cancel out the debt from a liquidated position.

48:49 It's instead of relying on like someone to take flash loan and and repay it or like have the capital to to to do the liquidation. Anyone who clicks the like liquidate trove function first is able to without posting any money is able to say okay this trove is supposed to be liquidated and then the stability pool automatically goes in and deals with it.

49:10 The liquidator who clicks liquidate first is rewarded as well as the stability pool depositor. Yeah. Yeah. And I think this is from Liquity V2. Is that right? Exactly. Liquidity V1 has also something similar. It's how you're able to do liquidation so fast because you already have the capital kind of like pulled on the side ready to go and it's important because stable coin if there's like a bad debt persisting over any period of time the market can express that as like a and the stable coin may dep important and like we you can read in our documentation but there's like fallback mechanisms as well like in the case where stability pool deposits are not enough to cover liquidations there's like secondary mechanisms to to ensure solvency.

49:52 Yeah. Yeah. And of course I think like even just partial liquidation would would be allowed, right? Yeah. yeah. And also I mean I think I love this mechanism because it gives a variable use case for the actual like ebUSD token to come and like actually generate some yield on it. But it's like for an actual utility. It's not just like come and like bridge your stuff over here and just put it here and we'll just like pay you out and just like incentivize like mercenary capital.

50:20 It's actually like it contributes to the protocol and actually like makes the protocol run smoother and it actually stabilizes the peg a lot better. Liquidations are much faster. There's much less like friction on that side of things. So yeah, and I know you guys also have like a a pre-eposit vault up. What's the status on on that?

50:39 What what's kind of like the timeline looking like? When are you guys aiming to launch? What are the the details there? So, I think the pre-eposit campaign and stuff, this was we we've gone through a few iterations of what this product will look like. The pre-eposit vault, I think, is from like a year ago. It's deprecated at this point, but I appreciate you diving deep into our history.

50:57 The mainet of of Ebisu is looking to be in May. We're finishing the last stage of like our second audit. We've done like one audit already and we have like all the risk frameworks in place and we're just waiting for like the second audit to be complete before going live. it will be open to like a group of like private users first.

51:17 So you can feel free to like DM me or yeah or or reach out in our discord if you want if you want early access to the protocol. And once like we've kind of onboarded on boarded the first set of users got in the feedback of how the system is performing we're going to open it up to the public.

51:33 Yeah, there will be a points campaign, but we haven't done any like TVL deals or anything like that. Like we're really trying to test whether the value prop of the protocol is like strong enough to drive growth in the early days before slapping on too many incentives. Yeah. So yeah, in May, keep keep an eye out. Yeah, I agree with like not scaling a system that doesn't already capture value and like retain it because I think there's so many incentive systems that you just like plow a bunch of money into it and it doesn't actually retain any users.

52:02 It's like you're just pouring money into a leaky bucket. Yeah, I definitely agree with with that approach. Yeah, May. So, I mean this month. Yeah, this month it's it's the final stretch. Awesome. Yeah, you mentioned being a lean and mean team as well. So going into the launch, are you guys hiring for any roles right now or you think know you will be in the future?

52:21 I think we're we're solid for now. always always open to to conversations with like people who want to work with us whether that be on like the business go to market liquidity BD side of things or on the on the tech side of things like if if anything that we're building has like interest you definitely reach out.

52:38 I think we're able to handle the requirements of launch with the current team right now. can I I want to make sure like there's we have a few different products that are coming out that we may need more manpower for. So yeah. Yeah. Yeah. And I think I think this should actually be timed out pretty well. I mean when we're releasing this it might be you know right at launch or maybe like you know a few days before launch.

52:59 So I guess what what should folks check out on on launch day? Yeah. so if you're if you are a person who who has loans on on a or Morpho or you are or you're a holder of any of any like BTC ETHUSD derivatives, definitely check us out and focus on like the rate we're offering versus these other providers.

53:19 And also keep an eye out for our curve pool yield as well as our stability pool yield. Liquity V2 when they launched in the early days like Liquity V2 launched in February and then they have to migrate to a second deployment after like one security complication but they were offering 2.5% borrow rate against lido e so that's like whereas a was offering 8% at that time so keep an eye out for these huge risk discounts on rates in the early days and also they were like having like 20 plus% yield on their stable coin USD pool like bold is their stable coin the bold USDC pool was yielding 20 plus% % powered by some of these like in-built incentive systems from the protocol.

53:56 So yeah, keep an eye out for for for the the DEX yield as well cuz yeah, that's something that that's something that's definitely what I'll be farming. So yeah. Well, I mean it's always great when you launch a protocol and you're like, dude, I I can't wait to get my hands on this and and use it myself.

54:10 I I think that's a sign that you guys are you're building something that's actually value additive to the space. So yeah, dude, I'm excited to see how the how the launch plays out as well. And of course, we'll include the the links to the website, the the Twitter, and everything down below so folks can they can go and check out go check see what the rates are, see what you can like reasonably set your rate as as a borrower.

54:32 And I mean, I don't know. I think that it will be interesting to see how that sort of like chicken and and that game of chicken goes with like setting the borrowing rate. I'm interested to see like how that plays out on launch and see what the distribution of bar rates actually looks like. Yeah, this is it's like it's a new kind of game.

54:51 Whenever you see it in production, you can you can only simulate so much. You can when you see in production, it's going to be really interesting. If I take my like founder hat off and I put my user hat on, like one thing that I'm that I'm excited genuinely curious to to observe is like the the inkind borrowing that can occur between SUSD and ebUSD.

55:09 Like right now on a it's a very very hot loop where people are levering up to the tits on this kind of they're levering up their SUSD exposure. And right now I think Ethena has like swapped to T- bill yield. The yield isn't great. Just given the market conditions, but I'm I'm optimistic that throughout the rest of the year as the market picks up, demand for leverage only increases.

55:28 Your Bitcoin is only getting more expensive. You don't want to sell it. Demand for perpetual leverage is high on the sexes, which translates to Ethena yield. And if we can offer a borrow rate that's lower than the Ethena yield, this is like a great free money printer. Even if it's greater than like I think it can only remain the rate can only remain lower than the yield for like a short amount of time as it normalizes.

55:49 Even if it's still cheaper than competitive borrowing venues and I'm I'm very interested to see like the demand for this kind of cheaper form of cheaper protocol to express the strategy for inkind looping of SUSD. Yeah, like there's no liquidation risk, right? It's like a dollar denominated collateral and dollar denominated debt. So there's less liquidation risk. So this is like one thing that I'm excited for that I'll show like a strategy.

56:11 Yeah, I think that's that is one thing about this like particular area of of DeFi borrow lending is that the go-to market becomes extremely easy if you have an opportunity that's just like basically arbitrage versus like what a is offering or you know anything else like if you're enabling a borrow rate that's like like you said like 8% versus 2.5% on on a versus on liquidity that like you're going to get nine figures of TVL almost immediately and depending on what collateral that is, you know, you might even go to a billion.

56:48 So, I mean, I'm interested to see what kind of rates you guys are able to to bring about. And obviously, also to see like how stable it is and and how it, you know, weathers the storm over time. And of course, you know, we wish you guys the best of of luck with that. But yeah, I mean, excited for launch.

57:05 And I mean, again, dude, thanks for for setting it aside the time to walk through. I feel like we covered like pretty much everything in depth about Ebisu. Yeah, I mean really just thanks for taking the time to hop on, man. Yeah, thanks Ethan. Yeah, I appreciate you guys reaching out and setting this up too. It's it's been good to share and yeah, thank you if I can help in any way down the line like more podcast guest, D5 friends, I'm happy to to come back and and talk more as well.

57:30 So yeah, cheers.