Ok I just read through vitalik’s paper and if the vision he outlined is executed the implications are absolutely insane especially for the app layer. The paper is basically Eth’s plan on how they will enable computation off chain with Eth verifying the result (ensuring computation occurred and what it did etc etc). Now what this means is the definition of “onchain” itself changes, because instead of every part of an app having to execute inside a smart contract you can push a huge amount of complexity elsewhere and still inherit ethereum’s guarantees, this really does open up a huge amount of design space especially for DeFi. For example with lending you could have really sophisticated systems analysing collateral, liquidity, borrower behaviour and market conditions offchain, with multiple solvers or execution systems competing to produce the best outcome, like the cheapest liquidation route, best refinancing rate, best collateral swap or best way to match borrowers and lenders all while the protocol only accepts outcomes that satisfy its rules. So basically a lot more of the smart stuff behind a financial product can happen outside the smart contract, while Eth still acts as the final layer that checks the rules were followed and makes sure the money moves exactly as it should. The MEV implications here are quite interesting too because more economic activity happening before settlement means more value moves upstream into who gets the information first, who computes the best outcome and what gets presented to Eth. But the thing I’m most bullish on is what this does to the TAM of Eth just because this vision means ethereum doesn’t have to be fast enough to do everything itself it just has to be able to verify everything that matters. And that’s an enormous difference. It’s literally a world computer.

Between Blast shutting down and aave taking steps towards directing more value back towards the aave token, it’s safe to say the days of useless tokens are over. End of the day if your token has no real value driver, people are eventually going to ask why it exists and the same goes for chains if they only work while you’re paying people to use it then your only renting an ecosystem. Now that the rent is due expect to see a bunch more of these useless chains shutting down. At the same time expect to see tokens with real cashflow/businesses underneath them and a mechanism for that value to accrue back to the token to massively outperform. Industry is growing up.

DeFi won this battle & the best part of it is the precedent. If you want to play with ETH issuance you need an insanely high burden of proof. “Staking is getting too popular” isn’t remotely enough to justify changing the economics of everything built on top of it.

The first credit franchise is coming to @aave v4. Crazy to see how quickly this is happening because a couple of weeks ago I posted a thesis on how v4 could let curators vertically integrate into Aave and move from simply managing vaults to operating entire credit franchises. Now @SentoraHQ is doing exactly that. I don’t think this will be an isolated case either, I expect a lot more curators to start looking at v4 and asking why they should stop at the vault layer when they can move further down the stack, operate their own credit markets and participate in more of the economics their distribution and risk expertise creates. Curators have already proven they can aggregate capital and build strategies, their next growth engine is owning more of the infrastructure those strategies sit on top of. Feels like we’re going to see a pretty big shift in what a “curator” actually is over the next couple of years. governance.aave.com/t/arfc-s…

The eth ecosystem has been absolutely cooking and this latest @ethlabs_org release is one of the best market structure upgrades I’ve seen in a while, I really love this kind of stuff because a change at the infra layer can completely change the economics one layer above it and FCR brings in some massive changes. A ton of DeFi infrastructure was basically built around the constraint that eth confirmations are slow and by significantly reducing that waiting time a lot of the assumptions around those previous constraints change too especially how liquidity has to be positioned. For example let’s say usdc borrowing on an L2 spikes to 12% while mainnet is sitting at 4%, you’d assume capital should move over and arb the difference pretty quickly, except capital can’t teleport. So you end up either waiting for it to move across or someone who already has money sitting there fronts the liquidity and settles everything afterwards which has been a moat for big market makers or firms that can afford to have millions across mainnet and L2s. Now the thing is with FCR, capital on mainnet can become usable somewhere else in seconds so the same dollar can be turned over much faster + smaller arbs become worthwhile and you don’t need as much capital sitting around doing nothing to support the same amount of flow. We also usually assume fragmented liquidity is purely a function of assets sitting on different chains or inside different pools, but some of that fragmentation is literally just time. The money exists, it just isn’t where you need it when you need it. This release helps change that, now I’m not saying that the entire ethereum ecosystem is going to magically become one giant pool, but from a financial standpoint all the different markets across the ecosystem should start pricing much more like connected venues instead of isolated pools. Like I mentioned earlier crosschain execution is basically someone saying “I already have money where you need it, I’ll pay you now and settle it later.” That someone is the solvers, now we will obviously still need them, but if capital can move much faster, warehousing inventory/capital everywhere becomes less of a moat and pricing and execution matter more which is great for users. Also because part of the fragmentation problem is literally just time, stablecoins and RWAs benefit massively because you can start separating where an asset is issued from where it actually gets used. You don’t necessarily need a bunch of liquidity sitting on every chain just because users want to transact there, issuance and redemption can stay on mainnet while the asset moves out to whichever venue needs it. The biggest thing for me though is when you look at FCR in the context of Vitalik’s world computer thesis, because then this isn’t just about liquidity moving around the ethereum ecosystem. As more external systems use ethereum as the place where state gets verified even when execution happens somewhere else, there’s naturally more reason for liquidity to sit close to that state too. FCR makes that liquidity much more useful because once something is verified on ethereum you can act on it almost immediately rather than waiting around for finality. Basically proof demand creates liquidity demand too and FCR amplifies the usefulness of that liquidity, but that’s probably a point for another day. It’s simple but kind of crazy at the same time, eth is going to be where the world proves what happened even when execution happens somewhere else and FCR means that state can be acted on very quickly giving liquidity even more of a reason to live on eth.

I think the reason the world computer paper resonated so much yesterday is because for the first time in a long time people could actually picture ethereum’s future, what the protocol’s end state may actually look like and why the world would need it in the age of AI, robotics and other frontier technologies. I mean we’re already watching AI change how we work, the jobs we do and how much of what used to need a human can now be handed off to software, which gives us a glimpse into a future where more and more human to human processes are replaced by machine to machine processes. The problem is machines can’t really operate on “trust me” in the same way humans do. Let’s say an agent’s about to process a financial transaction based on information from another machine. It needs to know the information it has is valid and the conditions are actually true, and then it needs to know the transaction really settled and everyone’s working from the same final state, which is basically the agreed record of who owns what after settlement. That’s just one transaction, now imagine that same trust problem repeated across billions of machine to machine interactions every single day. You can see where this is going. AI makes autonomous computation orders of magnitude more abundant, which means it also creates orders of magnitude more things that need to be proven and verified. At this point we all know there’s going to be billions of machines built by different labs, running different models, on different stacks and across completely different ecosystems. So the more fragmented that machine economy becomes and the more things those machines need to prove and settle with each other, the stronger the demand becomes for a credibly neutral place they can all treat as shared truth. So if you genuinely believe AI and agents are going to replace a huge amount of human coordination, I don’t know how you look at that future and not see ethereum having an absolutely gigantic role in it. It’s literally the world computer I think vitalik just saw this future before the rest of us did.

It’s getting funnier😂 they admit the post was real but their explanation is that an AI marketing tool somehow came up with 11 distributor integrations, 0%, 7%, 25% and the 80/15/5 split? Cool. Where did the AI get the numbers from?

Yoo uhm… @Morpho are you saying your business model doesn’t work?

The craziest thing about this whole Kelp/LZ lawfare situation is that it’s going to be the new normal. I don’t want to get into the legal fugazi of who’s right or wrong between Kelp and Layerzero here, but we need to understand that legal enforcement is completely normal in TradFi and as DeFi professionalises I think we’re going to see a lot more of it. DeFi tries to replace financial intermediaries with code, but code replacing execution and settlement doesn’t mean disputes around negligence, disclosure, responsibility or who eats the loss when something goes horribly wrong suddenly disappear. In TradFi if you rely on critical infrastructure and it fails there are contracts, warranties, indemnities, insurance and the legal system as an avenue of recourse. And I think as more institutions come onchain a lot of that will start making its way into DeFi too, which probably changes how we think about due diligence on critical infrastructure and “we have 5 audits bro” isn’t going to cut it anymore. We’re going to have to start asking questions like who is actually standing behind this, what have they represented, what happens if their infrastructure fails, what insurance do they carry and who is liable for the loss. Which is also going to significantly change the competitive landscape because being able to actually stand behind your infrastructure financially and legally starts becoming part of the security model itself. Smart contracts aren’t going anywhere, but neither are actual contracts.

This is a really strange argument because the argument basically defeats itself. You start by explaining that vaults exist because users can’t realistically track and manage thousands of markets themselves, so the vault abstracts that complexity and someone else allocates the capital for them. I don’t think anybody could have thought of a better definition for delegated portfolio management aka asset management lol. Also a timelock doesn’t magically turn the curator’s decision into the depositor’s decision, it just gives the depositor notice of any changes, your own docs literally say the Curator configures “liquidity allocation rules”, is “abstracting risk curation decisions away from depositors” and makes key decisions about “how capital is allocated.” So even if the code constrains the manager, it doesn’t remove the manager. You also failed to mention what SEC commissioner pierce actually says and thats vaults fall on a spectrum between “programmatic allocations determined solely by immutable smart contracts” and “allocations at the sole discretion of another person or group of persons.” She also explicitly points to selecting yield generating activities and reallocating assets as examples of managing a vault and says managing vaults can raise investment adviser issues. You’re basically trying to make the asset manager disappear by changing the test from “who is making the investment decisions?” to “can they steal the money and can I withdraw?” those are completely different things. Even your “implicit approval” argument is backwards, if I delegate allocation to you then you announce a change and I don’t withdraw during the timelock, my failure to leave hasn’t somehow transformed your investment decision into mine. In fact that requires me to continuously monitor the manager which is the exact complexity vaults supposedly exists to abstract away in the first place. Vaults can absolutely be noncustodial but noncustodial settlement is not non discretionary allocation, no matter how you try to spin this an asset manager is an asset manager even if you give them cute sounding names like “curator” or “allocator”.

Gearbox is a great example of why you shouldn’t confuse lack of attention with lack of progress, the market hasn’t exactly treated them kindly, but while everyone moved onto the next narrative they just kept grafting on the same core architecture. This RWA leverage solution they’ve just released is where that strategy is really going to pay off imo. I’ve spent a bunch of time looking into the different approaches being built here but what @GearboxProtocol has done is by far the most elegant design I’ve seen. It’s not just better looping ux, looping naturally assumes the underlying asset is liquid and everything settles atomically so you borrow, buy the asset, deposit it again and repeat, which is great for crypto native assets but doesn’t really work for RWAs where you have different redemption timelines, transfer restrictions, KYC requirements and in a lot of cases barely any secondary liquidity. So gearbox gets around all these issues by using the credit account to borrow the full amount upfront and subscribe directly with the issuer. Instead of needing 5 or 10 or however many separate loops and waiting through the settlement process each time, you can create the entire leveraged position in one go and redeem the entire thing in one go on the way out. What I really like about this is that leverage no longer needs to depend on secondary market liquidity to the same extent, because it was always pretty silly to expect an issuer to bootstrap $50m or $100m of dex liquidity before people can take levered positions on the asset. With this model the position can scale against available credit instead because the credit account is interacting directly with the issuer, which means the lending side can support assets that would have been impossible or just really inefficient to support through the normal loop model. Even the asset specific stuff like KYC, transfer restrictions, redemption and specialised liquidation logic can sit inside gearbox’s infra rather than the lending protocol having to figure all of that out. And because gearbox is separating the asset specific execution and risk machinery from the funding layer, I think the bottleneck for lending protocols changes quite a bit too. Because the problem is no longer whether an asset has enough secondary liquidity to be listed and what really starts to matter is whether somebody can actually originate good borrow demand against the liquidity sitting there. If an issuer can bring the asset, gearbox can handle the market specific plumbing and a lending protocol can provide the funding, which is just a more efficient way of creating leverage around assets that never really fit the normal money market model in the first place. These guys have done a great job of addressing the actual market specific pain points and creating a structure where everybody wins, RWA issuers get leveraged distribution without needing deep secondary markets first, stablecoins get a new structural source of borrow demand and lending protocols get access to a much wider set of credit opportunities. What I’m really excited to see now is how much leverage this can support in practice, because if you can get a decent amount of leverage on assets that were basically unleveragable before then you open up a pretty massive new market. Really excited to see how this plays out and wishing the chads at gearbox all the best with this launch.

I’ve been saying for a long time that v4 is a huge opportunity for curators because it can turn them from vault managers into actual lending franchises, so it’s great to see Stani validate the thesis and clear up some myths around v4. I really think the operating leverage v4 gives curators and integrators is pretty insane. Curator growth is tied to AUM but with v4 they can build from the demand side instead, find the borrowers, originate the credit, create the spoke and draw liquidity from the hub. If you’re good at that, the same funding base can support an expanding book of completely different credit markets. Which changes the economics of the curator business because your growth is no longer capped by how much capital you can attract into the next vault and is now driven by how much good credit demand you can originate. So at scale I really think we could have curators running multi billion dollar specialist lenders on top of Aave without ever needing to build the underlying liquidity network themselves. That’s a massive upgrade to the model and a much bigger business than charging 10-20bps to decide where someone’s USDC goes.

I too would write a love letter about partnering with competitors if I’d paid Robinhood $100m + for the privilege lol. The funniest part is coinbase then turning around and bringing aave in as a credit layer for tokenised stocks. The issue here is the conflating of distribution with a network effect that somehow accrues to morpho. Coinbase using morpho doesn’t make robinhood more dependent on morpho and vice versa, If anything, every big distributor you add has more incentive to make sure the credit layer stays competitive and replaceable. And I don’t think “we power your biggest competitor too” after paying them an insane amount of money is quite the flex to coinbase that you think it is. The base + Aave stuff on tokenised stocks is basically showing you the model in real time. Coinbase and RH own the users and distribution, they can shop the credit layer around product by product and make the protocols compete underneath them which is exactly what RH did and why you ended up massively overpaying. It’s basically the supermarket model they own the shelf space while you’re fighting to be stocked which means: You’re not the network. You’re a vendor to the network.

It’s pretty obvious that fixed rate is going to be the next DeFi battlefield. Morpho already has midnight, Kamino just announced their solution and I’d imagine every other major lending protocol is working on it too. I know by looking at the numbers today you could argue that nobody really cares. But here’s the thing with fixed rate, if a protocol manages to build deep markets across 30d, 90d, 1y and further out, they’ve built an onchain yeild curve that gives a proper view of what onchain capital costs across time. Defi hasn’t ever had that before and I think the ability to actually see where the onchain funding curve sits against Treasuries, SOFR and the rest of the dollar market is a big deal. So if 1y funding offchain is 4% and 1y funding onchain is 6%, that 200bps spread is telling us something. And whatever the reason for the spread the important thing is you can finally see it properly rather than having it buried inside a bunch of different utilisation curves. So if a business wants to borrow $50m for two years a bank can look at its own funding cost, add a spread for that borrower and quote a rate, private credit can do the same thing. But DeFi hasn’t really been able too as the underlying funding cost can move around underneath the loan for the entire term but If you have a real 2y onchain rate, you can actually start separating the price of capital from the risk of the borrower. Maybe 2y onchain money clears at 6% and you’re willing to lend to that business at 8.5%. Now you can put that next to whatever a bank or private credit fund is offering and see who is actually cheaper. That gives DeFi a way to start competing for credit that currently sits almost entirely offchain. Corporate borrowing, private credit, asset backed lending, RWAs, all of it gets much easier to price once you know what your own capital costs for the same period of time. And the more that market develops, the more interesting the spread between onchain and offchain funding becomes too. If onchain capital is expensive, money comes in to capture it, If it gets cheaper than alternatives borrowers have a reason to come the other way. A lot of people are sleeping on this and it’s why I wouldn’t read too much into fixed rate TVL today. So imo whoever ends up owning the deepest onchain funding curve, is going to have a serious advantage when DeFi starts competing for offchain borrowers and I reckon winning fixed term will mean becoming the undisputed category leader in DeFi lending. Protocols aren’t competing to offer fixed rates or even fixed terms they’re really competing to be the place the rest of finance compares itself against, some just don’t realise it yet.

So CME is launching compute futures next month with a forward curve going out 36 months which is a pretty cool opportunity for DeFi. For once we don’t have to turn up 20 years late and tokenise a market TradFi already built because the compute credit market is being built right now. @USDai_Official is already financing GPU operators onchain and CME is now creating the derivatives market around the underlying so DeFi actually has a chance to be part of building this market early instead of wrapping it afterwards. And the fact that we’ll soon have futures makes this a lot easier because they give lenders something they haven’t really had before. If I lend you $50m against GPUs, I don’t care that much what an H100 rents for today. I care what those machines are going to earn over the next 2-3 years because that’s what services the debt and ultimately determines how much I’m willing to lend against them, up till now most of this has just been underwriting but now there’s going to be a market price for it and eventually a way to hedge it. Which can make lenders more comfortable and pull in more capital which probably means the first effect of compute futures is actually more leverage lol. But the futures curve also tells us when the economics are getting worse. If the 24 month curve gets smoked, the borrower might still be making every payment and nothing has defaulted, but every lender looking at that asset now has a completely different view of what those GPUs are going to earn over the next few years. So the credit can start repricing before anything actually breaks and imo this is where DeFi can go way beyond just making loans against GPUs. You can split the credit into senior and junior tranches, trade it, build fixed rate markets around it and even use the senior claims themselves as collateral so we basically have an oppertunity to build a proper funding market around compute. The crazy thing is that the physical compute market, the derivatives market and the credit market are all being financialised at the same time which is pretty rare and basically a first for DeFi. We’re used to integrating with markets where all of this has already been built, but with compute we actually get a chance to be there while the market itself is still taking shape. Which means we don’t just get to compete for an existing market we actually have a shot at building it from the ground up. The age of abundance needs a credit market Defi is the answer.

Neutrl is an incredible case study in why “delta neutral” doesn’t mean risk free …49% of all value disappeared. These guys were buying locked altcoins/SAFTs otc at a discount, shorting the token on perps and pocketing the spread. This sounds like such a great trade until people want their money back. Just because the short hedges price risk that doesn’t mean it hedges counterparty risk or the fact that your long leg is locked and can’t be sold. And here’s where users got absolutely smoked NUSD was still a $1 liability sitting on top of a book that contained assets you can’t necessarily turn back into dollars when everyone heads for the exit now the redemption maths is showing roughly 51c on the dollar. 49% haircut. You can hedge the token price but you can’t hedge the fact you funded illiquid otc postions with money you promised people could redeem at $1. etherscan.io/address/0xB3f07…

I think the biggest BD/growth opportunities for DeFi are the temporary liquidity gaps that exist all over tradfi markets. Eg. Pension funds use interest rate derivatives to hedge what happens to their liabilities when rates move, If rates rip higher, the value of those future liabilities can actually fall, which is good for the fund. The problem is the hedge can move against them at the same time and start demanding cash collateral immediately, so you can have a pension fund sitting on billions in good assets potentially even in a better position overall and still scrambling around trying to find a huge amount of cash that day. You see the same kind of thing in commodities where producers shorts futures to hedge the stuff they own, prices rip and even though the actual inventory is now worth more the hedge is losing money and wants cash margin today. Point is timing is the problem and once you start looking for it, this stuff is all over tradfi. Banks make a huge business out of plugging these gaps through repo, credit lines and whatever else is needed to get cash where it needs to be quickly which is ironic considering that nothing beats onchain finance for that and so it feels like a really obvious place for DeFi to start hunting for growth. Especially now that we’re getting to the stage where traditional assets can stay with a custodian and still be used to secure onchain liquidity. The institutions don’t even need to care about DeFi, we just need to get plugged into the custodian, clearing broker or whoever already sits in the middle of the flow and provide the liquidity underneath it. This is a way more interesting origination opportunity with higher potential to convert imo simply because you’re starting with an existing liquidity problem and building the lending flow around demand that already exists.

So now both the SEC and CFTC have confirmed they’re moving ahead with crypto rulemaking regardless of clarity failings This is extremely bullish especially when you read Atkins statements on crypto and how the SEC plans to regulate, linked the two most important ones in the post. Even though congress fumbled i think we’re in a very good position as an industry. Future is bright sec.gov/newsroom/speeches-st… sec.gov/newsroom/speeches-st…

This is pretty big because it means that Aave doesn’t need to custody collateral to become the institutional liquidity layer. An institution can keep assets exactly where its mandate says they have to be which is with a qualified custodian and still borrow directly from DeFi liquidity. That massively expands the addressable collateral base, DeFi is starting to plug into traditional balance sheets rather than asking them to migrate first. Onwards

Not much has changed for DeFi in the latest version of the clarity act. The big thing is still how they define a decentralised protocol because that basically decides who gets treated like infrastructure and who will be considered a financial intermediary. Their definition says transactions need to happen according to an “automated rule or algorithm that is predetermined and non-discretionary”, without relying on someone else to custody or control the assets. They’re also pretty clear on what takes you outside that. They won’t consider a protocol decentralised if and I quote “a person or group of persons under common control … has the authority … to control or materially alter the functionality, operation” of it. And they’ve also clarified that governance on its own doesn’t count as common control which is great for protocols like Aave, Uniswap and Compound. Because it means that aave for example can still have governance changing risk parameters, adding assets and evolving the protocol without that automatically classifying it as a financial intermediary. So as long as governance of a protocol is purely setting the rules and isn’t sitting there deciding what happens to users assets you’re good and this bill is extremely bullish for you. If you’re the person being paid to decide where somebody else’s asset goes though, I think this gets a lot less bullish. That’s basically what curators on Morpho and Euler are doing and even though Morpho and Euler would almost certainly be considered decentralised based on the bills definition, the curator layer would sit outside of that as somebody is still choosing the markets and deciding where pooled capital gets allocated directly introducing discretionary judgement. Even thought a smart contract might execute that decision the decision itself is still discretionary. I’m not saying every single curator suddenly needs a licence but if the thing people are paying you for is your judgement on where their money should go, it gets pretty difficult to argue that you’re just neutral infrastructure. And even if the bill doesn’t pass, it doesn’t really change much as the SEC is heading in the same direction anyway, disintermediated software gets one treatment, businesses that exercise custody, control or discretion get another. For curators, that probably means some become proper onchain asset managers and just accept that regulation comes with the business others will probably try to automate more of the job away. Either way, clarity and the SEC notes from a couple weeks ago make it pretty clear that putting an intermediary behind a smart contract doesn’t make the intermediary disappear.