Value Accrual and Market Reality in DeFi w/ Adrian (Steakhouse Financial)

Rex (00:02.902) Adrian, welcome to the Signaling Theory Podcast. Adrian Steakhouse (00:05.452) Hey, nice to see you again, Riggs. How's it going? Rex (00:07.79) Good, good, man, thank you. So before we get started, can you just tell us briefly about yourself and what steakhouse is for those that are unfamiliar? Adrian Steakhouse (00:16.398) Sure. So I'm a co-founder at Stakehouse. We're a crypto native company. We started as an advisory business, working with Maker, know, branched out to a few other DAOs since then. And today we're mainly what in crypto Twitter is colloquially known as a curator. We're the largest curator in the space, certainly the largest stablecoin curator. what we do is build on top of DeFi protocols to provide financial market infrastructure in a non-custodial way. And this includes, know, borrow facilities as well as, know, lending or earn side of the equation. And we do this in exclusivity for Coinbase, for example, as well as other partners like, you know, crypto.com, safe trust wallets. Ledger, many others. Yeah, so we've done a sort of transition from pure advisory to this sort of on-chain non-custodial, quote-unquote, asset management. And we also have a Sky ecosystem sub-dial called Grove. that has a mandate from Sky to allocate part of the reserves of the stablecoin and this mandate is more like asset liability management. So in total about three and a half, three point six billion across all of the mandates. know, one point nine almost two in Grove. and the remainder in DeFi volts, mainly Morpho, but increasingly in Camino and Solana. So yeah, very much, you know, finance nerds building, rebuilding finance on DeFi. Rex (01:51.119) Man. Rex (01:57.112) Yeah, correct me if I'm wrong or if you don't really like this characterization, but when I look at what you guys are doing, it's like you look at DeFi and you look at all these primitives that were built from everyone from Morpho to Uniswap to all these protocols that are on chain. And those are amazing, but they're almost impossible to understand and ingest unless you're... just like an absolute lifeless nerd like you and me, right? And like what you guys do at Steakhouse is package these all together into a financial product that people can understand as like, hey, you can get X percent yield and like these are the kind of risks you're taking as opposed to like, okay, like this is how you generate a transaction. This is like how you, like all of the kind of like nitty gritty that we need to worry about, right? So like from primitives to products. Adrian Steakhouse (02:49.174) Yeah. And I think the Coinbase experience is really like the perfect illustration of where that combination of our infrastructure work and a good product experience really comes to life. you live in, it's not available in all regions, know, some like New York are protected from the benefits of DeFi. So, you know, they won't be able to access it yet in countries that are unprotected or have the freedom to transact. You can experience the Coinbase app. user flow, you'll notice what's striking to me is how little you notice the DeFi interaction and I think this is actually the perfect end state. At the end of the day, DeFi and most public blockchains are functionally basically spreadsheets that update in, that have a different way of securing who is allowed to update them and how. And as spreadsheets, they really should do well is count the numbers that go in one direction or another. The user doesn't really have to know, right? When a user uses a mobile banking experience, they shouldn't have to care what programming language it's using to do the backend. And that Coinbase app experience really is sort of the best of DeFi in my view, because the interaction with the blockchain is also done on a non-custodial Coinbase smart account. So when the user touches the functionality to lend their USDC on the app, a Coinbase smart account is printed on their behalf and they retain the custody of that balance. So there is a segregation from Coinbase in that regard as well, which is, you know, nice from a DeFi perspective and, but also quite important. And I think also illustrates sort of the value proposition of these types of products. Like our end goal is to rebuild financial markets, but with better transparency and better counterparty guarantees. And I think the only way really to do this is public blockchains. Rex (04:47.546) Yeah, no man, for sure. I very much agree with you. I think to kind of like start to move us into like an interesting conversation and not just like a, do do? right, like I think that let's like put some markers around this era of DeFi, right? Which really I would say started, let's say 2020, 2021, generated all these like interesting primitives and you know. In my opinion, and I'd love to get your take on this, like we have somewhat stagnated in terms of innovation, but we came out of this with like really interesting core primitives that work in decentralized, like compute environments. And I really think that the next step is we need to start building consumer facing experiences that are not just about like, let's continue to speculate on. Adrian Steakhouse (05:29.101) Yeah. Rex (05:40.864) more crypto stuff, but let's build things that are relevant to people solving real problems in the real world. Part of that for sure is let's build financial products that just like how Lending Club or what was the like Kiva, think there was one that was doing like micro loans in places like Africa. What it did was allow people to have higher returns for a different risk profile and they didn't care at all about the technology or what was going on under the hood, just cared like, okay, like this is kind of a different type of lending, which provides a different risk profile and different set of returns than I can get from like the money market account or from CDs or like kind of whatever of their consumer facing financial products are available to them. And so, you know, I think that's one bucket of what we need to do. The other bucket is like, we need to just enable this technology to be used for things like commerce and payments, right? Like we can take Visa's lunch, we can take Western Union's lunch, and someone just needs to go build that on top of the primitives that we've already built. So I think that's a little less in your bucket. You're more the former. Adrian Steakhouse (06:46.508) Yeah. Adrian Steakhouse (06:50.476) Yeah, we're definitely closer to the infrastructure side in the sense that I don't think Steakhouse has aspirations of capturing retail user flow because that's a completely different product. the main like mobile banking apps are really a terrible experience generally, but people don't derive the value from the pleasure of using them. It's more the comfort and security around the idea that their money is safe, right? And that has, that's fine. That has value, but that's very expensive to build. And it's a very specific type of value proposition. In general also. You think DeFi, yeah, you mentioned there's been no like major, let's say like structural or secular, like changes or improvements in DeFi since 2021. It's probably true. Although I would say that like a lot of it is the washout of investments in infrastructure that has resulted in like, and that's actually kind of the point that is also. That is also part of the cycle of innovation to have to have like 50 companies doing the same thing. You know, so I think it's fine basically. But as far as DeFi primitives go, there's probably a a few areas left. think insurance is a very underexplored, you know, opportunity area that we're looking at very closely. I think this came into this, this came into light, especially with the insolvencies around stream protocol of October. Rex (08:02.424) Mm-hmm. Adrian Steakhouse (08:25.55) you know, people were using yield products and discovering that they were exposed to... like the risk profile for these types of yield coins, let's say, is more like something that has an unknown probability of default and a 100 % loss given default. And it's very difficult to... explain to users that they're lending into things that have a wipeout risk when they think that they're lending into something that should accrue at a steady pace. Like all of the benefits of overcollateralization get wiped out the minute that you onboard collateral like this. And so I do think insurance plays a role. The other area is things like, on the other hand, you also have you know, patterns of defaults that are normal. Like there's no, there's no lending environment other than like super prime government bonds where you don't expect to face some defaults. And that's just part of the credit cycle. And there needs to be a level of maturation that the collateral that we can find in repo markets or to allocate to have like this normal profile, right? Also, here, insurance plays an important role. Like there's some level of like risk crunching that's possible that still hasn't been fully like developed in DeFi. That would be interesting to like see what solutions present themselves. I'm sure there's like 50, you know, I'm sure you'll get like 50 inbound telegrams from like, I'm building this and this is my token. And that's great. And then you kind of need that. And the other is just like plain principle insurance, know, like not just insuring against smart contract risks or like the halo of... Adrian Steakhouse (10:23.756) like random DeFi specific risks like hacks, but specifically against like principal loss in an investment context. Like there's some movement around this and like the liquid fund space where insurance providers will on the right up to a limit of AUM on the basis of still mostly like smart contracts and hack risk. I think some amount of first-loss capital is the next big thing and I think will substantially change the structure of economics of being a curator going forward as well. So I think there's, there's, there's still a bit of juice left. Sorry. Yeah. I'm rambling in general. So I agree. There is too much infrastructure. Like there has been an over investment in infrastructure tokens. The, the VC machine of the 21 cycle had this sort of perfect storm of venture like returns with immediate liquidity. And I think that creates like the wrong incentives for a long, what should be a longterm investment. There's a, there's a benefit to token issuance in terms of that extra that increased or extra earlier liquidity. But when taken to the extreme and in a context of very high valuations, it creates very, very poor incentives for investment in the space. And you wind up with too many L ones and too many like random, you know, infrastructure or protocols that wind up having like zero usage. So yeah. I think for sure the infrastructure doesn't matter as much as the ultimate product. I think this is something that like Ethereum, the Ethereum community has kind of taken to heart, which for the better over the past few years, especially as it's seen competition from other infrastructure products, you know, like Solana or other L1 chains and Adrian Steakhouse (12:25.198) I think it's good for Ethereum generally that there's been some degree of responsiveness from the community and from the Foundation in particular to pivoting more attention on the app layer than necessarily on the infrastructure layer. Rex (12:38.734) For sure, man. I definitely agree with you. And I mean, I think it would be, you have to be really naive to not acknowledge that the like specific combination of, you know, I'd say like in the soup, right. Is that there was like an insane amount of venture that was very aggressive with what they were investing with like the zero interest rate environment, like even like beyond the zero interest rate environment that we had in like. let's say 2020 to 22. then the just, you know, I don't really, I still kind of to this day don't really understand how this happened, but just this absurd premium that you got by like being able to call yourself an L1 or like core infrastructure. And, you know, it's still reflected in things like Cardano today, like while I was browsing before we got on, think I still like just happened to see something that like Cardano is still like an 80 or a hundred billion dollar valuation and like. I understand the incentives to chase that, especially in crypto when like at most you're locked up for a year and we're learning through people like Rushi and movement labs or Celestia that like those lockups were kind of like a joke in the first place. But I, you know, I do think there's something like kind of weird and sad that there really doesn't seem to be any like venture appetite to fund things. Like fund. DeFi, right? Which is like kind of the one thing that's real that we've been able to build on top of blockchains that isn't just like totally like it hurts me to my soul that like what got what got movement in the last two years is meme coins. Like that's just so nihilistic. And so like what are we even doing here? But, you know, all that to be said, like I do think something that we kind of need to grapple with is the fact that like even for our most legitimate products or projects or whatever, right, is the tokens that we generate from them, like, feel free to push back against this, but like they're not investable things, right? Like whether you're looking at, like, I think you can make an argument that Aave, like, or the Aave token is like an interesting investment, but everything else, like every chart looks exactly the same, which is like, Adrian Steakhouse (14:51.374) Yeah, yeah. Rex (15:05.146) pop off when they really hit their TVL growth and their narrative moment and then just slow or maybe quick bleed down to zero. And that's kind of the case whether you're talking about products that never really amounted to anything or it's also the case when you're looking at, just to pick an example, things like Lido or I'm not really sure how Maker slash Sky is doing but, How do you understand this dynamic and just like why at the end of the day, like if you section out, let's say Bitcoin, Ethereum, Solana, and like maybe one or two DeFi tokens, like the space doesn't really produce anything that seems to be able to retain long-term value. Adrian Steakhouse (15:53.846) I think it's, in my, we, so firstly, we don't, you know, we're not very good investors candidly. and we don't, you know, take active positions. We're very, averse to this. We tend to focus more on like the product space and what we can build with this technology in, in the token world. I think the token world is quite interesting though, from, just from like a corporate governance perspective. I do feel that of the... Of the examples that you cited, like Lido has an unfortunate chart, but Sky is doing relatively well, Aave is also doing very well. And these are examples of tokens that predate maybe to a degree the era of sort of VC quick pump and dump investing. And I think that kind of shows in the product design because these tokens have a feature which is genuine ownership rights over some part of the protocol and its value accrual. People are over indexing on things like buybacks and, you know, generally buybacks and dividends for an early stage startup are probably a bad idea or bad use of capital and resources. But from a corporate governance perspective, having that possibility in there, I think puts the token holder in a senior position relative to other stakeholders. And I think that makes them more investable than most. And I think those share characteristics of Like we had this phase of experimentation with DAOs since the beginning of Ethereum. It kind of went hand in hand with Vitalik's idea for how to nurture an ecosystem on this chain. Which I think a lot of people overindexed on the community and on the social organization aspect and forgot maybe some of the simpler value propositions which are around things like access rights. Adrian Steakhouse (17:53.032) and around diffusing counterpart to e-risk. So the idea of Maker was that you could have a bank that effectively distributed the token holdings and make it easier in theory as an investment thesis because you have actual rights in the protocol by holding the token. Whereas if you look at some of the later stage tokens these are sort of quasi liquid equity that doesn't actually have any equity rights. And you see this in some of the &A that's taking place in the space where the tokens don't get bowed out at all. There is a big disconnect between the token holders and the Devco things like this. think those are generally signs that the token itself probably doesn't have enough ownership or access rights to the protocol. And I think that to your point, I think that that's actually what makes it uninvestable. I, as to why, I think it's easy to sort of blame the VCs and the game and all this, but like the reality is, that in the world's largest capital markets in the U S For years you had a regulator that was openly hostile to any form of innovation or development. It was openly permissive to outright scams like FTX and the like and overtly hostile to legitimate projects like Barnbridge. It just went after the library one. It just went after these utterly random Rex (19:26.468) Sure. Adrian Steakhouse (19:31.862) completely harmless projects. And I think that cost a very long shadow over how much risk founders could take with the token if they wanted to retain some footprint presence or visibility in the U.S. And I think that's sort of colored that generation of tokens, which hopefully we're putting, you know, that era behind us. And in the future, what I expect and hope to see more of is native issuance of like, because DeFi does capital creation very well. Rex (19:54.906) Sure. Adrian Steakhouse (20:01.776) It's like one of the like the token can actually like the early liquidity can actually be a feature if managed well. You don't have to like release all of it to the community immediately. You can manage it, you know, carefully as a founder. You can change the liquidity horizon depending on your goals for the company or the project. But as long as you retain some of these elements of the token that improve the corporate governance over the project. you know, forget notwithstanding how we test and all of this stuff. think that that makes them better forms of shares than like, it's just a new generation of shares or equity in companies. And they have many features that are actually a significant improvement over shares or equity. Rex (20:44.217) Yeah. Rex (20:51.758) Yeah, no, I mean, think whether you're talking about these tokens, which like are analogous to shares, although like, let's be careful. They're not securities, right? If that's still irrelevant. Yeah. Adrian Steakhouse (21:01.516) Yeah, but you see what I mean? Like, fuck, like, who cares? Like, at the end of the day, like, look, I don't know, like, if a, like the, You had a regulator that said, come in and register and we won't attack you, but then offered nothing to anybody who did come in and try and register. And then just took them around the block or made you a target or persecuted you. And so it's like, okay, then we have to do all of these random workarounds. But if we like obviate this, this notion of like something that is a security, something that's not a security, like just, just from very simple, you know, explain like a five year old. Rex (21:15.3) Yeah. Rex (21:21.038) No, even worse, I made you a target, right? Adrian Steakhouse (21:40.71) like the notion of ownership in a project is a form of capital creation, like you need to incentivize capital to come into a thing and to an initiative and to do that, that representation of the ownership needs to be worth something, eventually. Rex (21:59.355) Yeah, I definitely feel you. you know, my, I'd love to hear your thoughts on like the story of the uni token and like how that fits into this model, right? Because, um, you know, in a way that I don't think can ever be replicated the, uh, the, the airdrop and just like the intense value creation from nothing, um, really was something special. Um, but like, Adrian Steakhouse (22:25.326) Yeah. Rex (22:26.382) You know, I'm just looking at the chart in front of us. Like since then, you know, there's like kind of really been no motion. And that includes this, you know, I understand like we're a month out. It's still very early days from this whole like, okay, the fee switch is here. Like it might actually happen, but like we're essentially back at all time lows from like a relatively modest pop from that announcement. And. You know, I guess on the one hand, you can look at that and say, one. It's just, it's a weird time in the markets. There's not a lot of, juice anywhere. like this. Addition of the fee switch, will get this token to a point where like, Ave or like sky, like there is a real claim on the underlying value that's generated by the protocol and the token price will eventually reflect that. Or maybe you look at this and say, huh, maybe that's never really what. tokens were about in the first place and like there is something fundamentally different about tokens and shares and You know like quite frankly like why we love crypto is because our laws are code and what that means is We also like don't rely on the legal system and where all like the inherent values of shares come from is through the ultimate like understanding or threat or whatever that when push comes to shove the legal system will ensure your rights are respected. so anyway, now I'm rambling, but just when you think about union and the entire story, everything from the airdrop into this like governance token that is quite frankly, one of the first meme coins to now when we're starting to see value accrual without seeing that reflected in price. What do you think the lessons are from this and how do you think we should understand this story so far? Adrian Steakhouse (24:22.094) I think it fits very neatly into this idea that I have of the regulatory environment in combination with the VC cycle, the valuation bubbles and pops and so forth. There's definitely, crypto Twitter loves to be very negative. I think the uni story is more positive than it seems at first glance. You have a situation where a token is kind of after a period of intense scrutiny and overt hostility from there. a location where many of the founders are, you know, the founders are based, that many of the dev teams are based and so on. It's kind of unwinding that legal debt, or, you know, that legal slash organizational debt and coming back to the roots a bit more of being like an actual token with ownership rights and, you know, behaving as such. As to, you know, when people will recognize this value, I'm not sure that it's something specific to uni as it is an overall... general overvaluation in crypto. You know, there's this persistent, I like to trot out this meme. To date, I haven't like tested or done any research on it, but my favorite like head, like, you know, idea meme is that the cost of equity in crypto is lower than the cost of debt. And that's a result of a very, very persistent and structural overvaluation of tokens relative to. I don't know what they should be trading at, but you know, the behavior of the market today suggests that they probably should be trading lower, frankly. And so I don't know if the uni story is specific to uni or if it's just a general reflection of the market and slowly coming to the realization that the valuations have to converge a little bit more to something a bit more rational. like, you know, you see this, you see this in traditional finance all the time. I was looking earlier at Novo Nordisk and Eli Lilly charts. Adrian Steakhouse (26:23.198) share price. Nova Nordica is completely round tripped to Zempig, like completely. This is just what happens when you have, you know, expectations of valuation that foam and bubble and you think that there's a huge opportunity and then the company fumbles and something happens or something changes or some, you know, reset evaluation occurs and then the share price just goes back to where it was like five years ago. But others continue and Eli Lilly continues to be, you know, to go on an uptrend and Maybe it's overvalued, maybe not. It's just a reflection of what the market feels like it should be on the basis of its portfolio and performance and market share and so on. And I think in general, the crypto space would be. Well advised to like start looking more at these fundamentals than at like relative trading, momentum, narrative, all this shit. And there I think you would find that Uniswap has, you know, dominant share, huge brand value, massive distribution, really good consumer products, really popular front end. think I seem to remember reading it was like the most popular front end in all of crypto or something like this. Like this is a huge, huge brand value. you So maybe those factors will start to play in when it comes to thinking about, if more flows start coming on chain and what will the venues, what venues will capture that flow? How many fees will accrue? is, how much is this growth expected to continue? And you may see a re-rating of uni on that basis. It might be more interesting to see. Again, I've never done this because I don't invest in, I actually couldn't care less, but it may be more interesting to see it in relation to other tokens, for example, rather than on Adrian Steakhouse (28:04.91) its own or relative like eth or Bitcoin because like that's the weird feature of these tokens they have some degree of correlation with Bitcoin and ETH but if priced well if priced accurately like to a degree they shouldn't be that correlated like you'd have the lending verticals, whatever crypto credit card app verticals, the whatever verticals. And then ETH is like the commodity that they use to pay for gas, right? And that's it. eventually, hopefully these would kind of diverge. Like you don't see a correlation between Eli Lilly and the price of Oracle because they happen to use whatever NetSuite or something, you know? Rex (28:47.064) You do see a correlation between the valuation of Eli Lilly and the relative value of our underlying money system. I think that's how there's a logical consistency by saying that the value of these tokens should be correlated with ETH. When people feel richer and there's more money, people are making more trades, that kind of stuff. I think your point is valid that Adrian Steakhouse (28:54.592) of everything. Right, yeah. Rex (29:15.856) especially once you start to move away from like the big five or 10 protocols that are actually providing value and into the long tail. it, the, the direct correlation like starts to become harder and harder to justify. Yeah. Adrian Steakhouse (29:29.666) Yeah, and you kind of see this with Circle. Circle is not the largest player, but it's a significant player in stable coins. And it doesn't have a token, but it has a share price. you can see the effects of, I mean, the token would probably have traded in exactly the same way if they had done a token instead of an equity release. Going up now, have no idea where it is today. Rex (29:44.249) Mm-hmm. Adrian Steakhouse (29:52.042) I seem to remember there was a moment where in relation to the earnings that it was generating as a narrow bank, was very over or seemed very overpriced to a rational observer. Maybe they were also factoring in other growth verticals that were possible like services, the blockchain arc and all this. I have no idea. But this isn't specific to crypto. And generally, I think it's good to... Rex (30:11.45) Yeah. Adrian Steakhouse (30:19.308) Like, let's be honest, Uni is one of the good ones, right? Like it's a product, it's a, you know, I use it every day, right? Like it's a, it's a protocol that has clear value and it kind of encapsulates the best of crypto. the, the, know, you can have a pool of liquidity that exchanges between buyers and sellers in, with no counterparty risk at all, right? Other, for that specific settlement outside of like the tokens that are swapped and et cetera. It just works and it just keeps running. And that, and this is not complicated, you Rex (30:47.075) Yeah. Adrian Steakhouse (30:49.232) It's kind of like the best of crypto and it's like one of those basic financial primitives that I think have been replicated super well in crypto. Rex (30:57.85) For sure. mean, my entrance into crypto was specifically listening to Hayden Adams explain Uniswap and Ethereum to the Bloomberg Odleots guy, like the podcast. you know, I just remember thinking like, I read the Bitcoin white paper in 2010. I remember thinking like, okay, like, cool. But it wasn't until Hayden explained what Uniswap was and I realized what it means to have these permissionless networks and Adrian Steakhouse (31:08.395) Nice, yeah. Rex (31:28.218) I don't know. There's a good episode and yeah, I very much agree that Uniswap is one of the good guys and you know, think I think the the true underlying story for Uniswap kind of Just to like blow some smoke up your ass, right? Like kind of matches steakhouse a little bit which is sure that they did a token but like that's never really been Core to what they're doing and how they're building like at the end of the day they're just focusing on building better and better products and like doing things that people actually want to use. you know, they like, you have to wonder just based on how they operate, if they had been building now, if they ever would have done a token in the first place, or they just would have like continued to put great products out. But in a lot of ways. Adrian Steakhouse (32:14.712) Well, maybe because like the token has been extremely successful as a capital formation tool and they've used that capital very... Rex (32:21.306) Sure, but it's unrelated to the product at all, right? Like there in no way is their product even related to token price. Like the Unis tokens were $40 or $4. The trade is exactly the same. Adrian Steakhouse (32:31.95) Yeah, sure, sure. But yeah, like, I don't know how much like the, is the thing with trading startup equity from the moment that it launches. Very difficult to say, you know, how, how people are pricing things to what degree they're, they're pricing in new growth or what the base level of structural valuation there is in that specific industry. I'm not so Aggressive as many on crypto Twitter are about these types of things Outside because there are such easy comps to look at like movement or any any number of like random shit coins You know you look at something like uni and I think it's good to like okay if you bought at 40 and you're at four I'm sorry like Rex (33:11.951) Mm-hmm. Adrian Steakhouse (33:20.974) Okay, like, you know, we're not, can't, you know, solve everybody's problem here, but the, the token is there and you know, there's the spyback thing. There's beginning to be this unwinding of like the old debts that have been accrued as a result of like the market dynamics. I feel like it's trending in a positive direction and hope to a point, not, not to a point where I, hope that uni pumps, but like to a point where I hope that uni can get a rational valuation on the basis of, yeah. Rex (33:48.954) Fair evaluation, yeah. Adrian Steakhouse (33:50.989) on the basis of, and people stop worrying about like Twitter and all this. Rex (33:55.695) Well, I don't think that's ever going to happen. think that's core to our DNA, but fair enough. let's, let's move away from token talk, but let's stay in this, like kind of, conversation about value accrual. So you guys are super deep into stable coins and like that is, one of the most exciting things right now. And I think that's because it's the first thing that we can clearly articulate to people outside of our industry, the value that, the technology we're building is bringing. Adrian Steakhouse (33:58.414) Thank Rex (34:25.626) With this new energy and new entrance into stable coins, where do you think the value is ultimately going to accrue? The main players here are, we have the issuers, we have the issuers being Tether and Circle and just the people that are actually putting the coin out. You have the distribution, which you could say is Coinbase or PayPal, PayPal covers both. And then you have the places where they're used, right? Whether that's on-chain or off-chain, but the lending markets, the DEXs, the places, how even the people actually holding them in the case of Athena, a lot of that value is pushed down to the holders. I know the answer is gonna be, well, Adrian Steakhouse (35:15.075) Yeah. Rex (35:19.502) kind of depends on which product you're talking about and we'll see which one wins out in the long run. based on what you're seeing and where you believe this is going, where do think the real winners are gonna be from the acceptance of stable coins as a legitimate way to hold and use money? Adrian Steakhouse (35:35.746) I don't know that there's necessarily gonna be a... a single massive profit pool that dominates. Like if you look at a stable coin life cycle or value chain or something like this, and as you say, like the issuers, the distributors, the asset management layer, the cut, there's also the custody, the service, etc. I think the value chain is a lot longer than people appreciate. And in the limit, like in a more stable coinized financial economy, at the limit, the value chain is a lot longer than it is today. So there's more places where that profit can accrue. not super clear to me that there's going be one place that's going to generate a massive outside pool of profits because that will just have the speed just the transaction velocity of stable coins makes it very easy to come in and compete and you know the main differentiators ultimately wind up being something like brand value and trust and you know it'll I feel like it'll be more like a few dominant players in each vertical, not super clear to me how large each vertical will be. And even in the issuer space, like if you consider, like we measure things, like we have this framework for the hierarchy of money starting at the federal reserve with regular bank deposits, with stable coins on top of that, with a sort of Y axis, increasing in credit-like qualities as you go down and increasing in money-like qualities as you go up. And... You have like different types of stablecoin issuers and what we call like the crypto dollars or the ones that allow redemption for something higher up in the hierarchy. If you think of them in terms of like, if all they were were narrow banks and full reserve stablecoins that had a full allocation to liquid asset buffers to allow like a Adrian Steakhouse (37:27.948) redemption of 100 % of the balance sheet if necessary, which is what a lot of regulation is forcing them to be. Yeah, sure. Like the profit would be very constrained logically. But I think you're finding that also, like there's two major ways around this. One is you simply ignore the regulation like Tether is doing and they sidestep it by simply not getting regulated in the US or Europe or finding other mechanisms or sub entities to do that on their behalf. or you expand horizontally into adjacent services and products like Circle is doing. And so I think the, you know, the penny hasn't dropped yet on that business model. Like it's... It's clear to anybody with like two brain cells to rub together that a plain narrow bank, especially if interest rates decline is not going to be massively profitable, though they can take very high degrees of leverage on their surplus. So the return on equity can be very attractive if the operating costs are low. But you can... make a more robust business model by building into services. So all of Circle's investments into adjacent businesses are completely rational and the profit potential of those I think is not fully understood yet. So the size of that profit pool is not super clear. And then when you do ignore the regulation or when you sidestep it, let's say, you can do fractional reserve banking, which is hugely profitable for a stablecoin issuer. So yeah, not super clear to me that the issuers are gonna be the ones that are squeezed the most. There's definitely gonna be more competition, but I also definitely see that there is, it's less clear to me that there's always going to be one dominant stable coin for everything. And it's going to hopefully look more like an ecosystem of privately issued stable coins that recognize each other, trade with each other, redeem each other, and just operate in a more dynamic environment. Adrian Steakhouse (39:23.084) And I'm basing this just based on the history. Like you saw this in the period of Scottish banking. We like to cite this a lot. We love this, you know, period of history because it's very illustrative. It was basically stable coins at slow speed in Scotland in 17th century, where unlike in England, where there was a government run Bank of England that emerged and kind of acted as the anchor depositor in the hierarchy of money, the Scottish banking system emerged somewhat organically with multiple companies, some of them not even being full banks, but just like trading companies doing cotton. or tobacco or things like this, issuing their own private script. And you have similar periods of market dynamics like competition between issuers to the degree, you know, they were measuring DPEG or Agio or premium or discount of each other's liabilities, sometimes on the basis of the geographic distance of one branch to another. So from the same issuer, a stablecoin in Glasgow versus Edinburgh would have a discount just because it was further away. and in other instances you would have like active competitive behavior like you know, one of the banks accumulating as many of the liabilities of the other as they could to then do a run and like force them to go bankrupt. Eventually they realized that this was stupid and they should just recognize each other's notes and they did and they didn't need a central bank to coordinate any of this. They just did it because it was logical and it was better for everybody if they did and that's when you really had, of course, he had some failures, had Airbank that collapsed, you know, it was in the midst of like other scams that were unrelated to banking. Rex (40:31.29) You Rex (40:46.074) Mm-hmm. Adrian Steakhouse (40:54.646) like the failed Scottish colony that ended up in Panama that almost bankrupted the country actually. So it has a lot of very interesting and relevant lessons learned and for me the big takeaways are that the ecosystem of stablecoins is going to be way more diverse than we think and it'll mature into something that's more cooperative and dynamic and where you have like PayPal dollars, PayPal collecting... Metamask dollars and just netting it with each other once a month or something to close out the balances. Rex (41:28.716) Yeah, I feel you. But like, let me just show my American bias, right? Like the analog that I look to is the era of like wildcat banking and like early kind of pre-federalized banking in the United States. And, you know, the lesson I take away from that is like everything was a mess to the point where, because the financial plumbing was so broken, society was kind of unable to function. And debt like, That's just like basic level society to the point where like people were just driven into poverty because like the things they thought were safe or not. And that's problematic. But on top of that, that doesn't give us a strong enough foundation to support growth and innovation. And the solution to that was to wipe away all of these different competing, you know, stable coins or dollars and replace it with one that that kind of one solved the trust issues. But to Adrian Steakhouse (42:06.851) Yeah. Rex (42:29.274) I think we've seen that everything with money is like kind of a power law and that the more concentrated and similar something is, the faster money can flow and the more network effects and those kinds of things you get out of it. so when I look around and I think that we are entering an era where there will be a bunch more stable coins, like hopefully, honestly, to compete with USDC and Tether, and that could be the PayPal dollar, that could be the whatever. Stripe ends up issuing like all of these things would be great, but I just can't really imagine a world where any person is interested in holding like 12 different kinds of dollars. And I understand that a lot of these products aren't, we're not building them for people, we're building them for institutions and like B2B concepts, but you know, I do like, I do wonder. what the world looks like when we have like 15 stable coins and is that all like just abstracted away into like you have digital dollars or Adrian Steakhouse (43:37.314) Yeah, probably, actually. The feature of the technology is such that you would probably be able to find out which issuer has minted the dollar that you're holding at a specific point in time, if you wanted to. You don't have that benefit today, although you still face very much the same degree of credit risk from a bank. It's easy to say, too big to fail. that kind of illustrates the degree to which the banking industry has actually kind of been distorted and bent out of shape, like the Queen of Spades in Pushkin's story. It's just not something that looks anything like what it should have been, which is a facilitator of deposit collection and matching savers and borrowers. Now it's more sort of like a public-private partnership to facilitate the transmission of monetary policy in a completely fiat and deracinated system. And I also wouldn't necessarily categorize like the wildcat period. The benefits of the other parallel with free banking and stable coins is that they emerge in governance voids. in situations in Scotland and Canada, even in the US, they emerge in situations where there's no alternative and nobody's telling anybody what to do. And these things just kind of emerge organically. And in Canada and in Scotland, the experiments were largely successful. So it's not the presence or absence of a central bank that dictates whether it's successful. and at the end of the day in Scotland at one point in time you could hold a Royal Bank of Scotland or a Bank of Scotland note and there would still just be a pound. And you know it may have traded a premium or discount in certain conditions if you went to a farm. Adrian Steakhouse (45:24.994) you know, out in the islands, it would have likely traded for a discount in the same way as if you take a euro to an airport, you're going to get the skin off your face, ripped off. Nobody calls the euro DPEG because it trades at a discount in an airport. And also there are many like... exculpatory conditions to the free banking discussion in the US, which are often omitted as a way of making this propagandistic point that what the US was missing was the government stepping in. If you look at the details, there are many good resources for this. Maybe we can link these in the show notes. Rex (45:50.714) You Adrian Steakhouse (46:00.094) know, true, like the number of failures was much smaller and much more localized geographically than is generally reported and in many other conditions, the free banks basically just worked. And the areas where they didn't is like those localized elements of failure, fraud, know, disconnection from other states. And also by virtue of being so many states, it's very difficult to like, unlike in Scotland, it's very difficult to talk about US wildcat banking. It's more accurate. to refer to specific states and the conditions in those states to correctly identify which ones were examples of a failure of the system or a broad-based transmission of fraud and credit risk. And so yeah, to come back to stablecoins, I think it's basically fine. Like there's a lot of regulatory anxiety. That's I wonder to what degree it's the banking sector pushing this anxiety to the regulator or vice versa or likely both. One of the main, you know, the tone is changing somewhat in different jurisdictions and different jurisdictions are more or less flexible on this. You know, an example of a more flexible central bank is the Swiss National Bank. Like I tend to be very critical of central banks in general and I like to waste my time on Twitter complaining about them, especially the European Central Bank. But the Swiss Central, the Swiss National Bank has a special place in my heart because they're genuinely stuffed by extremely intelligent and thoughtful people and they are very focused on their mandate for administering the franc and you know moderating the level of inflation in the swiss economy and doing the right thing for their country which is really the role of a nationalized central bank oddly enough it's also a central bank that has tradable shares so you can actually buy equity in the swiss national bank if you want Adrian Steakhouse (47:59.414) And one of the largest holders is just this random guy in Germany. Sorry, this is just random facts. But as a flip side. And so the perspective there might not be generally shared, but at least some elements of the governing board are open to the idea of private currency issuance. They're just concerned about how it interacts with the existing financial market, which is obviously much larger. And they want to make sure that they avoid disruptions to it because they want to make sure that the economy functions well. But in general, the read that I take from these elements Rex (47:59.727) No, man. Adrian Steakhouse (48:29.368) the governing board and in some parts of the Swiss National Bank is that as long as people choose to use stable coins to transact, that's fine. people will choose, the attitude is like people will use what they choose to use and our role is to just do the best thing for the Frank because that's what we're responsible for. But if they want to hold Bitcoin, they'll hold Bitcoin and it's volatile and it's not for everyone and it has its drawbacks but you know what if people want to hold it they'll hold it. And if they had polled the They had done polls and studies on whether people would value CBDC in Switzerland and found that wholesale users would and were therefore putting a lot of effort and investment into building up wholesale CBDC infrastructure in that regard. But retail users had no appetite, interest or desire for CBDC and their conclusion was like... shockingly like, okay, then we're just not gonna do that. And the contrast to me is something like the European Central Bank, much more centralized, much less accountable than the Swiss National Bank shoving this digital euro into everybody's face. Nobody asked for it. And some of the key things that they're concerned about is less like euro price inflation and the mechanism and orderly flow of the eurozone economy than it is making sure that the bank deposits don't fly. Rex (49:23.546) Mm-hmm. Adrian Steakhouse (49:51.08) if there is stable colonization of the Eurozone, which is like, how is that? How can that possibly be your concern? Then there's a degree of like, yes, it may well be disruptive if there's huge deposit flight from the banking sector to the non-banking sector. But like this is already happening in the U.S. and a lot of... Rex (49:51.098) Mm-hmm. Adrian Steakhouse (50:13.83) lending origination is already happening for non-bank lenders. And, you know, there's risks in everything, but those risks existed before and now they're just being served better by new players. And I see stable coins in the same kind of category of non-bank. financial institutions. And I generally take the view of like, it's probably fine. If people want to use stable coins, we will figure out how to build a credit economy on stable coins and banks will go bankrupt. sorry, that's just the way it is. And the banks that see the music that... the music playing will adjust and will become custodians of stable coins or will issue their own stable coins or you know will adjust accordingly. Some of them are Societe Generale is you know large slow organization but is actually quite forward thinking in terms of you know at least Euro stable coin issuance for example. Others are just completely dormant and they may well still have a deficit base in the future and I wish them well, but in our view the economy will eventually stabilize and everything is going to be fine. Rex (51:21.314) Yeah, no, I'm with you on most things. First of all, I think that your comment about how just because you take a euro into an airport and it trades at like, you know, whatever 75 cents, like doesn't mean no one would call that off peg. I love that. think. Adrian Steakhouse (51:35.404) No, because the BIS, like these guys, had a period of, like, the paper mill was churning out, look, stablecoins are de-pegging, they don't trade at one. Rex (51:44.986) Mm-hmm. Adrian Steakhouse (51:45.582) We have always had the distinction of look, there's a secondary price and there's a primary price. And if you take that stable coin to the issuer and you get a dollar, how could you possibly call it de-pegged? Whether somebody buys it from you at 90 cents or 99 cents is irrelevant to the solvency of the dollar and is actually irrelevant to its utility. Because if you have a contractual agreement with someone and you say, I want to pay you a hundred dollars for a service, you send them a hundred USDC. You don't calculate the fucking price on the decks and send them 99.9 or, you know, 100.9. Rex (51:49.892) Mm-hmm. Rex (52:10.03) Mm-hmm. Mm-hmm. Adrian Steakhouse (52:15.566) You send them 100 USTC, full stop. Rex (52:16.6) Yeah. And I don't, I don't know if this is an American thing or anywhere, like Coinbase makes this super clear, right? Where if I hold a hundred USDC on chain and I try to trade it, like I'm not going to get a hundred dollars worth of ETH, right? Like there's going to be some spread and like whatever, right? But if I go, well, fine. But if I, if I trade between USDC and USDT, right. But if I go on to, if I take my USDC and send it to Coinbase, Adrian Steakhouse (52:34.968) But that's between dollars and ETH. That's the price of ETH. Rex (52:46.02) There's no price. It just calls it a dollar and there's a button that says convert and it's one-to-one either way. Adrian Steakhouse (52:52.876) And if you take those $100 and you send them to Tether, you will mint $100 USDT. And there's no defect. Do see what I mean? Rex (52:58.936) Yeah. No, yeah. Sure. For sure. For sure. And yeah, no, I think your point is like super valid that like just because you can find some sucker that's willing to take it for like 90 cents doesn't mean like the whole system's broken. like that whole like the best example is like the the famous USDC DPEG was like over a weekend because people were worried about something that just didn't happen. Adrian Steakhouse (53:19.735) Right. Yeah. Rex (53:26.818) And at the end of the day, not one single person had any problems redeeming except for... Adrian Steakhouse (53:31.564) And you know what the interesting thing about the price action over the weekend on USTC is that it contained what turned out after the fact to be relevant and directly correlated information as relates to the degree of solvency risk exposure that Circle faced due to its position in SVB. Rex (53:49.196) Mm-hmm. Rex (53:54.191) Yep. Adrian Steakhouse (53:57.132) So that secondary price contains useful information and it's actually a feature. And in reality, nobody's actually depending on that secondary price to actually transact in dollar terms. That secondary price may influence the price for other assets and other secondary trading and so on. But as relates to like dollar to dollar, there's no, like if the stable coin issue is solvent and will redeem your stable coin at par, it's like what's the issue. You know, and that's kind of our view. And like, as another proxy, any any you pick any bank failure in recent history, you like the none of those deficits were being priced on the secondary market. Right. But Rex (54:28.213) Mm-hmm. Mm-hmm. Adrian Steakhouse (54:47.214) You know, the only holders of SVB that had a live mark to market of their position was Circle. And every other depositor of SVB had nothing to go on. know, Credit Suisse went very loudly under, what's it called? A shotgun wedding with UBS. Rex (55:01.018) Yeah Adrian Steakhouse (55:12.302) arranged by the government to prevent it from failing and affecting depositors. There's no information anywhere at any point in time other than the annual report that they released about the state of the balance sheet in the 31st of December, which showed that they were overcapitalized. Rex (55:29.786) Yeah, well, to make it like a little more like sinister, right? Like there was information, but it was only between like the most well-connected, the already wealthiest, like the people who kind of least were at risk of being like totally wiped out, right? It wasn't like the depositor, like the, you know, mom and pop farmer who had like 100 % of their liquid savings in UBS that like had access to any of this information. They were just completely shut out. And it was like, really, trust me bro, we'll figure this out. And the multi-billionaires who kind of got us into this situation in the first place, they were the ones who had the information and were able to make intelligent decisions on both what they should do with their own money as well as make the decision on how this was gonna get resolved. Adrian Steakhouse (56:18.766) other than if you looked at the price of USDC, which contained part of that information, right? Rex (56:22.2) Right, yeah, yeah. Yeah, and maybe, yeah, maybe one of the things this industry needs to do in order to grow up is like be able to tell stories like these in a positive light as opposed to accept the framing that like, look, your dollar wasn't worth a dollar. Like, therefore, this is not money. This is no good. Adrian Steakhouse (56:39.98) Yeah, we don't accept it at all. We love stable coins and we love all of them. We love all the issuers. We love all their features. It's clear. Stakehouse is a pure stable coin company. We have a nominal position in some bank accounts for the occasional supplier that needs to receive fiat payments. That's it. And in every other regard, we transact exclusively in stable coins. We're obsessed with them. We read up on history about their precursors. We definitely think that it's one of and stable coins could only exist on public blockchains. Like there's no other technology, technological condition under which they could exist really. Rex (57:15.226) Mm-hmm. Rex (57:22.042) So like to walk us out, would love to hear like, how do you, so right now we first, and maybe we didn't even have this first, right? But we had stable coins that were completely on chain native. And then now we have these stable coins like Tether and USDC. Well, I guess USDC that is completely backed by, you know, cash equivalent like instruments. And then you have Tether, which are probably mostly cash equivalent then with some. you gold and some like weird stuff under there. As you look towards the future, like how, what are the types of stable coins that you're bullish on that are backed by more and more exotic things? Like when you look at, there's a project called USD.AI that are issuing stable coins based on graphics cards, which like welcome to the true state of like technology investing in 2025, right? But Do you see those things as like, yes, like this is good, this is what we want. We want stable coins to be able to like have these more exotic and more interesting backings. Do you think that those are just like interesting experiments but are not really the future of stable coins? Like when you look towards the future, what are you excited about seeing stable coins evolve into? Not on the like on chain side, but more on the like what we're able to do with them side. Adrian Steakhouse (58:48.428) I think coins like USDAI or Daylight or Athena or Sky are still in our framing. Maybe we need to get a bit more. Maybe we need to revisit our hierarchy of money because we would call them stable coins. And to a degree we would call them crypto dollars because they allow one to one redemption for something that's higher up in the hierarchy of money. Although they are obviously not the same as USDC and USDC, but they are, I think, interesting experiments and they show like maybe yield coins. is a better term. Like they're further down in the credit stock and they're instruments of... capital formation to enable allocation of capital into this into this monoline strategy or segment of the economy that I think is worthwhile. Like if we're USDAI, it's lending against GPUs for daylight. It's like securitizing the receivables from solar panels. Like these are interesting. Like we're going to see more of these, but it's a it's a very different world from Maker in 2022 that was receiving the full adverse selection of like the shittiest borrowers that could only get lending from DeFi or try to get lending from DeFi and were hopefully and thankfully prevented on Maker for doing that. And now you're getting to a point where people have more freedom to experiment. And they just, think, circumstantially have the feature of a stable coin in that they have the unstaked and the staked version, which exploits kind of this dynamic of the token being more valuable than the debt. Adrian Steakhouse (01:00:27.246) because you can basically raise a balance sheet by issuing more of the token to the unstaked people and the balance of people in the unstaked can transfer the cash or debt component over to the staked ones, whose capital actually gets lent out. And USDAI and Daylight have that thoughtfulness around the balance sheet and that at least those are segregated, right? And only the staked version is allocated to these monoline credit strategies. And so you'll be able to to price those accurately. And somebody who wants to play the game and get exposure to the token will have very little solvency risk and somebody who wants to do the GPU landing will have the debt risk, but will have less of the token and so forth. And I think this is just an interesting example of capital formation. We might get 50 of these and 49 of them might fail. And that's fine. know, and like some of these acid lines or credit strategies are going to be sub are going to be shown to be subprime for a reason. some of them are going to be shown to be subprime because they were underserved. And that's like the thesis behind these. Like the main theory is for USDAI, my read of it anyway is like GPU borrowers have an asset that's valuable. It's in demand. They have a stream of revenues and nobody is lending to them because nobody understands it. No bank is lending to them because no bank understands this. But they're specialists supposedly, and they understand the profile of the GPU and they can underwrite it accurately. and they can issue these loans. And this is the same way of credit gets transferred from the bank system to the non-bank lending system, know, borrowing system. And I think that's basically fine. And there's a benefit in doing it with these yield coins because at least the loan origination or the capital formation or the exposure is transparent. And like if a... Adrian Steakhouse (01:02:24.878) Blackstone goes bankrupt. Like, how would you know, you know, other than, you know, the cost of your credit cards randomly spiking or something. But if USDAI has a failure or a solvency issue, then you'll know immediately. And I think that that level of transparency and risk pricing is extremely valuable to the economy. It'll allow for much more velocity, much more credit creation. Not every experiment is going to work out. I hope a lot of them do, but I think it'll be valuable that more of them can. Rex (01:02:44.388) Yeah. Rex (01:02:55.768) Yeah, you know, and we talked earlier in this conversation about the areas in DeFi that are still not unexplored, but underserved. Right. And we talked a lot about insurance. think the other one that's like pretty obvious is under collateralized lending and the, know, what I'm starting to believe with this new era of stable coins is like, maybe that's not solved on chain. Like inherently on chain is not good at under collateralized lending. Cause like the whole concept. Adrian Steakhouse (01:03:11.395) Yeah. Rex (01:03:25.602) of under collateralized lending is built on top of having a legal system to like make things good if things go wrong. But like maybe these primitives are created and solved through stable coins or and again, this word stable coin probably isn't. Adrian Steakhouse (01:03:41.976) But you can combine the two. There is a world where there's more code is law to it than like Sky is an amazing example. You had situations like the Celsius bankruptcy where in order to unwind the estate, Celsius had to repay the loans it took out on Maker Vaults. Rex (01:04:00.901) Mm-hmm. Adrian Steakhouse (01:04:04.482) that just made maker holders senior to the bankruptcy estate because that's just what the code was like. And it's not that it obviates the legal system or circumvents it. It's that there's no need for legal enforcement because the rules of enforcement are agreed to upfront between the participants. so Celsius knew what the terms were and they engaged in it and the code can't be stopped. And this is just what the terms are. And I think that this is a very valuable feature in certain contexts because you can circumvent all of this legal deliberation Rex (01:04:19.663) Yeah. Adrian Steakhouse (01:04:34.416) agree to the rules upfront and depend on the smart contract to enforce those rules. But for something like GPU lending, you're obviously still going to need a legal construct and part of the success of these stablecoins or these yieldcoins is going to be the recourse because some of these loans will default and you know, we'll see, it'll separate the goats from the sheep or the wheat from the chaff and how effective each of these teams is in actually servicing these loans and going out and getting the collateral and liquidating it. you know, for as many cents on the dollar as they can. And so there's definitely, I definitely think there's a world for uncollateralized lending. The word uncollateralized is very broad. You have uncollateralized lending to, you know, Uber motorcycle drivers in Uganda, and you have uncollateralized lending to like Amix Black, you know, credit card owners. You know, as we get more... segmentation of exposure to these different assets on chain. I think different types of yield coins will become possible. But yeah, that's definitely an area that we're excited about more credit creation on chain. Rex (01:05:42.702) Yeah, no, and I think like the ultimate takeaway is that stable coin or this concept of stable coins, which again is a too broad of a term, is allow, it serves as like kind of that conduit from the on-chain to the off-chain world that makes these concepts more possible. And yeah, again, like might be that core primitive that's needed to unlock these like next level primitives like uncladarized lending or maybe even insurance or. or whatever else we can build here that was just, we weren't ready for when Ethereum was just like crypto kitties and like a few, you know, like meme points before there were meme points. All right, man, Adrian, thank you so much for the sake of both our schedules and everyone's attention. I will wrap us up here. But if people are excited about what they're hearing, they wanna learn more from you or learn more about what Stakehouse is doing, can you just let people know where to find you? Adrian Steakhouse (01:06:16.515) Yeah. Yeah, exactly. Adrian Steakhouse (01:06:23.618) Yeah, exactly. Adrian Steakhouse (01:06:40.212) on Twitter at StakehouseFi and on stakehouse.financial. Rex (01:06:45.082) Alright, awesome man. Well thank you very much and have a good rest of your day. Adrian Steakhouse (01:06:49.486) Ciao.