The New Architecture of Credit by Stani Kulechov - Devconnect

GM GM GM. It's so good to be here. Um, I think I come to Buenos Cyrus every couple of years and I think this is the uh absolutely best uh community uh so far and ever before. Thank you for uh thanks for coming here and uh I think in um in Argentina and across Latin America, this is where truly Ethereum and uh DeFi shows its benefits and and and and really kind of like a you know it shows how DeFi and Ethereum can be used in in real life uh use cases and and empowering a lot of people. Um today we're going to talk about a lot about trust and and what it means to uh in in our um communities and societies and and overall how we build trust and program trust in in Ethereum and and thinking about also like what it what kind of purpose it has in in credit which I think is going to be a a big part of the kind of like a next wave of of use cases for decentralized uh finance.

And credit by itself isn't really a new thing. Obviously, like credit has been happening for as long as the whole civilization has been um around. Um and it's the biggest uh market on earth. So you know the the the the simple uh idea of u borrowing uh funds or creating promises between individuals, peers and businesses, governments um and institutions um effectively is a uh over 300 trillion uh market as of as of today. Um and that's uh that's a really interesting opportunity to really revolutionize how we issue credit uh as of today.

Um while credit is really empowering and you know it's it's it's something that really helps to to grow the economy. Um there's obviously the flip side of the credit how broken the existing credit system is. So as we know uh today governments take more debt. Um there is more debt today as uh ever before. Um and it's unclear how a lot of these uh governments um will actually uh manage their obligations uh in the future.

But also there's some sort of a stagnation between uh the increasing debt and how much the econom economy is empowered uh in in in the big picture. So I guess one thing about when we think about credit what we need to understand is that um there's few pillars of of what makes credit um and and those pillars are trust uh information riskification uh enforcement and uh capital movement. It's important to understand credit because if you want to change uh credit um how we create loans today in in uh in our uh society um these are the pillars that really put these things things together. In some ways, what I think is interesting is that credit is some sort of uh abstraction of of uh of trust and trust simply means and you can also define it by asking a few questions. So, and and these four questions are um quite significant.

So, who can you trust? um how do you measure the risk of of uh of of trust? How do I enforce obligations? Um and how do I move u capital uh efficiently? So all these four questions are always related to any sort of a uh credit system uh that we have as of today.

Obviously these questions were solved and asked um hundreds of years ago. uh it's nothing really new. Um in fact I think a lot of the primitives we have today uh whether it's like stable coins, DeFi, smart contracts um existed in the past in some some form um without the obviously the benefits that u that that Ethereum and and decentralized blockchain um and and that computation provides. But if you go back to Florence 1252, um there is um uh kind of a beginning of a modern uh credit facilities and uh modern uh base currencies. So Floren is a is a great example of um being one of the first um trusted base currencies uh and becoming a a credit system.

So it's a standard um gold coin consistent weight predictable trusted settlement. So um we started to standardize um actually these these base currencies that are really important for exchanging value and it became actually also a a a settlement currency across um Europe. We also when you go back in time uh in Venice uh we had the first oracle. So um they were called intelligence networks. So intelligence network is is uh simply uh people uh representatives um that were in in different places uh in the world and and passing information uh further.

So when uh banks at those uh old days wanted to extend credit or create uh insurance arrangements or some sort of a ventures for ships to go uh abroad u over the Atlantic or wherever they were going, you needed a lot of information and you need information because you want to price uh your risk uh uh efficiently and these u intelligence networks were there. Um it might be a person um in in some part of the world passing information when ships are leaving the Britain uh to Mediterranean or somewhere else. Uh someone who has better visibility on let's say uh the storms uh coming in some part of the uh the uh the the trade routes. Um and this helped to gather information and price the risk of of whether credit could be extended to um to these uh merchants or or um uh similar uh entities. And the merchant networks became in some ways the first uh uh uh liquidity layers.

And then the way I think about it is that we started to see actually branches um of of uh uh merchants that actually started to keep um double entry ledgers. So when you started to actually pro uh create promises, financial promises at that point uh we created a system where you have IUS. Um and what the revolutionary aspect here was is that you could actually move value uh without moving these gold coins for example. Um and that created a a really efficient way of of uh capitalizing any types of uh uh ventures and and be became a sort of a crossber um uh business. And something interesting that we actually found as well is is the concept of command.

Um and this is in some ways like a first programmable um credit system. So merchants really uh relied on this one type of a uh agreement on how profit loss enforcement uh was defined. And when you start standardizing um these types of terms uh you make uh trade uh efficient and you actually um reduce the the operational cost uh the friction on uh creating these uh these agreements uh at that point. So it really revolutionized the uh the trading between merchants um at that time. Um and now when we think about uh what we're doing at the moment on chain, we basically have a lot of similar concept that we are um uh using as primitives that live on chain at the moment and they provide uh layers a programmable uh layers for for credit.

So um stable coins are the base currencies. Um um oracles are basically providing the the the information. Um tokenized credit markets uh provides the liquidity. Um and then smart contracts are the the the kind of um binding force here of of ensuring uh and en enforcement um and also uh trans transparency. So so we have the same ingredients but in a digital um trustless uh stack.

So the big question here is that um why do we think about onchain uh credit and what is the potential uh here? So what I think is is is really interesting is that DeFi is really operating in a unique 247 type of a uh system where any financial opportunity can be accessed accessed by any point of uh time by any person any part of the world. It's the most democratizing financial technology uh up to this date. And the most interesting part is that this technology isn't really even penetrated the most masses um and and most of the people aren't able to benefit of the technology yet. And yeah, stable coins are essentially the the the the primitive of of of the base money, instant settlements, um unification of liquidity, execution layer is the smart contracts for automation, uh shared states and and automated outcomes.

Um and the truth layer effectively uh is where we we have these uh uh markets and and and oracles and and and can push the data that is available to everyone um auditable and and affect these outcomes based on what the data um is. And then obviously the the asset layer. So being able to create these uh asset markets um utilize them uh in decentralized finance and and also tokenize the value that exists outside of the native uh ecosystem. Um so I think with this new uh credit stack uh what we can actually do is is is that we can rely on how D5 works today um with it trustless uh setup um automated uh systems transparency um and and and liquidity. So one of the biggest uh exciting things that has been happening over the past years is that DeFi has become a sort of uh really efficient way of of allocating uh liquidity into the best financial opportunities, riskadjusted opportunities and and effectively price that liquidity accordingly on a global uh scale.

So one of the issues obviously is that uh DeFi uh DeFi is global uh accessible um you can earn uh earn on DeFi at the moment. You can borrow against uh native crypto assets tokenized asset today. But something kind of like is still uh a problem is that when we look at the the credit side of of of uh financial industry uh it's very local still at the moment. So the internet evolved to become a global um system accessible by anyone in terms of information and DeFi uh and Ethereum does the same for financial um primitives and financial uh opportunities. But credit is mainly the last bastion.

And the reason credit is important is that to scale DeFi, we have to go beyond the native opportunities that we have in decentralized finance and being able to actually look where uh the efficient capital allocation system that we created in DeFi could be applied to these more traditional consumer uh business cases, institutional cases um in the real real world um uh without compromising and adding too many trust assumptions. So if you look at today the the existing um uh credit markets and and how they work today there you can find the common uh denominator which is uh uh the the the local aspect of of credit. So if you think about mortgages um you have local underwriting local liquidity um or consumer loans they're very localized regional uh you don't see much uh funds flowing between uh different nations um and obviously you have local currencies as well um it's very much paper based uh it's slow subjective uh and we know all the credit existing credit scoring systems really uh suck uh and they're really really outdated. Uh and most so not most but some of the countries they don't even have a real um credit scoring system or a or a or or a credit system in overall. So what I think is the next kind of stage in in when it comes to uh onchain credit and and and DeFi is is basically take what we built really well uh the capital formation uh and the the the the movements of liquidity into the best financial opportunity and combining that with these more localized markets and making them more efficient.

So bringing some of the some of the concepts uh on chain um and also bringing a lot of that information on chain to making it easier to actually access to that global uh uh liquidity pools that exist in in decentralized finance today. And I think DeFi uh borrowing is going to be uh much more costefficient over time because of the competition and and because also the efficiency and the transparency that comes from DeFi. Um and if you look at the the the credit opportunities uh in today's world uh we see a lot of inefficiency. We still see credit card uh uh interest rates going up to almost 100% in Europe. Um and if you think about uh all the credit extension that is happening in Latin America um uh these interest rates are are really uh inefficient and when you have inefficient interest rates, inefficient financial opportunities and credit extension, what truly happens is that it handicaps the whole uh economy and who suffers the most is is everyone uh here.

So we the people um because we can't get access to credit when we need the most. Um and that's where basically the the opportunity comes. Horizon is a one example how we think about uh credit. One form is tokenizing credit um locally local underwriters uh making the data accessible globally having a verification system uh that isn't working uh within the closed doors. it should work work openly um accessible, auditable, proof of reserves and then being able to use that credit uh on on on the um a protocol and being able to borrow stable coins and and and push that stable coin liquidity into real life uh uh opportunities all the way to the consumers.

And I think uh real assets are something that's generally be um a really interesting uh programmable uh collateral. So once we actually start tokenizing a lot of these real assets um from debt from real estate mortgages uh we get into a place where uh we actually can start creating primitives uh that price the risk better or we can trunch the risk um and we can make a very efficient um system. So obviously there's uh certain things that we uh have to think about in terms of safety. So when you think about credit extension uh we have to think about how do we apply uh DeFi into these traditional assets and traditional financial opportunities and I believe that a lot of the ingredients are are there and invented uh centuries ago and decades ago. uh but really big defining uh part is is is actually the transparency and the fact that global markets can price the liquidity better based on what kind of information and data uh is being uh uh given.

A really great example for example um is uh polyarket. So poly market really helps uh to price uh data and I think the same will apply to credit is that liquidity by its movements can price uh the risk the better data we can get um and that doesn't mean that the the data that we used in the old financial system but in the new financial system and then be able to protect that data uh with privacy zk proves and other new technology that is out there. So, in the old world, we had all these uh interesting primitives that make up the credit system of of of today and it really hasn't changed that much. So we went from gold coins to notes um paper we went to digital um but we really haven't been able to solved a a really system where liquidity can move to any part of the world to finance any particular financial opportunity uh and provide more access uh to credit and I think um if we put all these ingredients together and we have the best developers in the community trying to figure and solve credit. Um, we're going to get there.

We already solved DeFi. So, we proved that DeFi is mature. Um, a has existed over five years. Um, it it's been growing significantly. Whole DeFi space has been growing.

Um, most of the issues are happening on the edges. uh if if if if so and what we now need to solve is that how do we bridge the defire world into these financial needs that is is in the real life and every part of the world um and make economy more u sustainable and improve financial opportunities for for everyone. So credit is the new credit is trust and defy is the new architecture um for credit and that was my talk uh today and if you've been uh looking what we launched today so we launched a new application uh it's the A app um here's a uh sign up for the the weight list is the fastest way to move funds from bank accounts into uh a and and bring DeFi to the mainstream. We have also another surprise for you. I promise to drop some alpha during this talk.

So, we have few tickets uh left for RAV. Um if you scan this QR code really quickly um I don't I think there's not enough for everyone, but um there's few tickets there. And if you didn't get any tickets, you can always uh follow our Twitter or Instagram and um try to snipe some uh Rava tickets for yourself. We're going to be also in uh DeFi Day on on on Wednesday. Uh and RA is on on Thursday.

Thank you so much everyone. [applause] [cheering]

Awesome. Um so do we have some time for some Q&A um from the from the team from the audience? Sorry. So, okay. First question, how do I get a Ravi ticket?

So, you already answered it before you guys asked it. It's perfect. That's the most upvoted question. Um, second question was, how can RWAS participate in credit market? What is missing today in your opinion?

Yeah, I I think uh I think there's two paths of of uh bringing RWAs into um or let's say like a credit into RWAs and into D5 because D5 is the endgame, right? Um and and and the tokenization piece you can do the old way or bringing old let's say existing uh credits um let's say uh bonds or uh credit ETFs tokenize them bring them on chain and I think that's going to grow and that's going to be a a really big business for a lot of these asset issuers and it's going to be a growing collateral what I'm more interested in in is in finding where there's price inefficiencies uh when it comes to originating credit. So finding those places where there's a very big arbitrage um high cost of interest rates just because the old system is broken um or there's a not enough data available um of of the of the markets and and and then tokenizing that credit and extending that getting the liquidity from D5. I think that's the most uh appealing uh outcome for uh tokenizing credits. Awesome.

Um, DeFi's come a long way since you first got started in the space and pioneered it many parts of it. Um, what is something that someone getting into DeFi now should know um or should be aware of? Are is there any interesting skills that you think is good to know, good to practice um especially for newcomers into the space? Yeah, I think uh for newcomers this DeFi is becoming more easier to access and and that's was that's one of our mission as well is that we want to bring more access to DeFi and and creating let's say a an account or a wallet is a little bit different than than for example creating a bank account because you truly own your funds and that comes with resp responsibility of of basically ensuring that you have security over your uh funds as well and obviously from our perspective We're working hard to make it uh even easier for anyone to to access DeFi uh without needing to, you know, um use seedwords, having actual account recovery, um and making it feel like a more traditional financial app experience.

Awesome. You mentioned in a recent tweet that you would shave your head if Horizon hits a certain milestone. What do you find is accelerating it? What's behind that? And for maybe for people in the audience, what is Horizon?

Yeah, Horizon is a is a um a new a market. So, typically what we've done with a is we've we've used the A protocol so for these uh native uh crypto assets. So, you can use stable coins to borrow um uh lend out against uh Ethereum, Bitcoin and and these native assets. And now with the Horizon, you can lend out to uh traditional tokenized assets, money market funds, credit funds. Um and this market has been growing to over half a billion at the moment even more.

U and if if it reaches um into one billion I will shave my head. So that's a promise and and and and if it happens uh you know before Ravi I'm going to do it in RA. So, [laughter]

um, okay, let's see. Is it realistic to partner with existing credit agencies to come on chchain? Um, how do you think about like that integration stuff?

I I think so. I I think one thing that onchain credit systems uh will help is that they will create real competition for these kind of uh monopolized uh credit rating agencies. uh as an example I I think the way credit is assessed whether you can get a loan or uh you're eligible um is extremely extremely outdated and that's industry needs to be disrupted completely and I think by using onchain liquidity as a benchmark using the right data and pushing that with oracles um is going to really change uh the way we extend credit today and it's not going to be it's not going to look anything like it looks today.

Thank you so much Donnie. Thank you so much.