Latest / The Income Show / Jakob Schillinger: Future of Money, Digital Credit, & Bitcoin | The Income Show | Ep. 4

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Jakob Schillinger: Future of Money, Digital Credit, & Bitcoin | The Income Show | Ep. 4 · The Income Show

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Bitcoin is the most important technology in our generation to generate freedom and prosperity for
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the world and that's why I'm dedicated to the technology in the broader space. You know, fix
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the money, fix the world. It is the most important technology in general, money in itself. And so if
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you can find a system that is incorruptible or as close to incorruptible as possible, it is the
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beginning of creating a financial system that's backed by Bitcoin. I think it's the intermediary
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step going from a high vol asset to a lower vol structure that is for the general population.
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to actually then going to NOVOL structures.
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I think it's one of the biggest financial innovations
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in the recent history.
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Jacob, thanks so much for taking the time
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to record with us.
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Yeah, pleasure to be here.
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So for the audience who may not know who you are,
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maybe can you explain who you are, what's your background,
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and why are you building something on digital credit?
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Yeah, Jacob, Jacob Schillinger, founder and CEO of Hermetica.
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Been in the Bitcoin space for like 10 years.
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Really fell in love back in the day, 2016, 2017.
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Believe that Bitcoin is the most important technology in our generation
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to generate freedom and prosperity for the world.
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And that's why I'm dedicated to the technology in the broader space.
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Had a career in software engineering.
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Went to work at Kraken for a while.
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Had a Bitcoin mining company.
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and now for the last three years have been building Hermetica.
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And really, Hermetica, you can think of it as the underwritable yield layer for Bitcoin.
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We have a number of many yield products that use Bitcoin and generate dollar yield,
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Bitcoin yield, and bring that to the market.
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Awesome.
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When you first learned about Bitcoin, do you remember the moment you first heard about it?
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Were you initially skeptical of it, or did it just click for you?
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I do remember it, yeah.
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I think we all kind of do, right?
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I read the white paper. I got it sent by a friend. He said, you should check this out.
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I read it and I remember being surprised that it was so short. It was like six, seven pages.
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And it immediately clicked. It was not like, oh, this is... It was more like there's something here
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and I have to explore it more. And then the next couple of weeks, I was just down the rabbit hole
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and kind of never came out of that rabbit hole. But yeah.
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What was it in particular that made it really click for you?
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I don't know. I think it's like the simplicity of the system, the power of the idea.
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Like if it works, what can it really do in the world?
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And I think that, you know, fix the money, fix the world.
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It is the most important technology in general, money in itself.
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And so if you can find a system that is incorruptible or as close to incorruptible as possible,
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the ramifications of that, like I started understanding them back then.
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I think I had an inkling of it and have since then obviously done a lot more work and understood more deeply.
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And that's why I'm dedicated to Bitcoin still today, because I really think that it's the technology that's going to change the world deepest if we have money based on Bitcoin.
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That literally changes everything.
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Yeah. How about like the same for digital credit?
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When you first heard about digital credit, like did it intuitively make sense to you?
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Did you think it was going to be a big idea or were you also like were you skeptical of that?
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Yeah, I mean, I think you have to be skeptical about any new financial product at the beginning,
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right?
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I heard Saylor talk about the idea of digital credit, and I was immediately thinking about
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how can I build on it?
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How can I integrate it into our platform?
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I think I was tracking STRC almost from the first day it started trading, and it was massively
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volatile.
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The chart, if you look at the first couple of days, I think 10 to 15 vol went down to
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like 85 or something like that.
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So I was skeptical on how is it going to actually become a stable market and a deep liquid market, which obviously right now it's changed a lot.
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Now it's like one of the most liquid secondary markets for preferred equity.
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Yeah, I think the idea behind digital credit, Bitcoin-backed credit is massive.
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At the end of the day, it is the beginning of creating a financial system that is backed by Bitcoin and money that is backed by Bitcoin.
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So I think it's the intermediary step from going from a high vol asset that is just Bitcoin, pure Bitcoin or MSTR or similar structures to a lower vol structure that is for the general population and very attractive to them to the actually then going to no vol structures that kind of like what we're building against.
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There's just stable coins and have yield that are still backed by Bitcoin.
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But yeah, I think it's one of the biggest financial innovations in the recent history.
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I completely agree.
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And I definitely want to go deeper on digital credit and what you guys are building at Hermetica.
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But first, real quick, what do you think the typical person gets wrong about money or markets?
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I think fundamentally people don't think about money as a technology.
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I think if you study history, you realize that money is one of the first technologies that humans have invented.
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Because transporting value over space and time is very difficult.
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And if you can't do that reliably, you have a lot of inefficiencies in the market.
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And that manifests as an economy that is not running as efficiently as it can be.
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And it ultimately leads to a less productive economy.
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and if a money is able to be siphoned up or corrupted like we have it today
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that leads to a lot of distortions in the market and ultimately to a lot of poverty
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and so I think that's what people don't understand that just think money is dollars in the bank
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account money is fundamentally a technology the question is how is it implemented and how is it
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run and and seeing it through that lens it means because that also means if you think about it as a
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not technology it means that you can actually change it or it can be changed right it's like
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money is like a given to most people it's like here's our money this is what we use um i think
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as bitcoiners we're like no actually there's a better way to do it there have been better ways
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in the past and there is a better way today that we can bring forward into the future
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and so i think people should think about it that way yeah you made a good point it's like
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money is something that's kind of just handed to people like they don't even
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And everyone just thinks that the dollar is money and that's always how it has been and that's always how it will be.
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But that may not necessarily be the case.
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Exactly.
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Which is interesting.
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Cool.
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Another thing that I think is interesting, thinking about income investing and this idea of the 60-40 portfolio that has been popular for so long.
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It seems like more and more people are beginning to understand that they don't want to have a huge allocation to bonds or fixed income.
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People are, maybe it's the money printer, maybe it's something else.
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Do you see that being the case?
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And like, how do you see that evolving with digital credit becoming more popular
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and Bitcoin becoming more popular as well?
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Yeah, I think, I mean, if I just look at my portfolio, I think our generation,
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why would you hold a bond that gives you 3 to 5% that is denominated in an asset
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that is inflating at a much higher rate,
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and you have to lock up your money for significant periods of time if you hold long duration.
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It's just not attractive.
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There's no way to look at that and be excited about it.
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I think that obviously Bitcoin is on the far end of the other side of the spectrum
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where you have a super high vol asset and you need to be able to stomach that.
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I think a lot more folks are becoming able to stomach it,
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but also the volatility of Bitcoin obviously is going down significantly over the last years.
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I think digital credit and a, call it, double-digit return that is not based on fiat, but based
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on Bitcoin, is the natural evolution of the bond market.
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And, you know, a multi-trillion dollar market at the end of the day.
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Bond market's the biggest market in the world.
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Yeah.
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Yeah, I know.
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I think I saw, like, the other day that STRC was, like, the largest preferred equity in
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the United States in terms of, like, notional value outstanding.
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yet it's this kind of new idea of digital credit,
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which perhaps is a multi-hundred trillion dollar market.
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Do you see it that way as well?
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How do you think about how big this could become?
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Yeah, I mean, if Bitcoin becomes the world reserve asset,
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which I think is its ultimate destination or destiny,
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the question is more when for me.
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then a money or a credit instrument issued against Bitcoin is just money.
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That's just the currency of the world.
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And so how big can that become?
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It's big as the financial system at the end of the day.
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How long will that take?
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What exactly will that look like?
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I don't know, it's anybody's guess, but I'm super bullish on it.
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Obviously, if you think to the extreme on that, like what does that mean for entities like Strive or MicroStrategy strategy, it's very interesting, right?
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Because those folks, those entities will then be kind of like the new banks, the new central banks of that kind of money system.
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Yeah.
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Thinking back to when Stretch was launched, you know, at some point last year, I guess it's been around probably maybe for a year or so at this point or almost a year maybe.
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Yeah.
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Are you surprised by the amount of success that it has had?
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Or do you think this was just kind of inevitable?
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I'm not surprised.
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I think it's definitely a very strong adoption.
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But if you think about it, and I think Saylor talks about this very eloquently,
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talks about this eloquently, is that a product that is a dollar yield
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that is generating more than inflation, call it 8% to 12%,
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that is reliable, low vol,
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and is issued by a very credit-worthy institution,
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the market for that is gigantic.
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Everybody wants that, literally everybody.
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And so, yeah, it's great to see it being adopted
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as quickly as possible, as we're seeing.
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It's like 8.5 billion at the time of recording.
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It's probably going to continue to grow.
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I think it's probably going to be a lot bigger.
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The question is, how will the market mature?
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or how will the secondary market mature?
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That's really what I'm most concerned about
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because obviously if there's a lot of outstanding shares
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and that needs to get liquidated or disposed at some point,
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that can be difficult to absorb.
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And it's so early that we kind of don't have the data
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to analyze and so can't really build models around it
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that are reliable yet.
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So there's a lot to do on that end, I think,
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for folks like us to really understand liquidity
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and the volatility as we move forward.
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But there's no questions that it's going to be massively popular.
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It's already massively popular.
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Yeah, I mean, I'm curious to hear also your thoughts
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on how much strategy can actually issue
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before the market gets a little jittery about LTV, right?
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Like, actually the size of stretch compared to their Bitcoin book.
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I don't know if you have thoughts around that.
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Yeah, I mean, it's a good question.
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I feel like it's a constant test with the market
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where they're like, how much can they issue or what does the yield need to be?
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They're kind of just getting market feedback, like looking at market price, volume,
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other market-based data metrics.
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And to me, from what I think I've seen, is over time,
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time is a key component of building trust in these products.
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You've got to trust that the issuer, they've issued this price guidance
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of between $99 and $101, but will the issuer actually follow through
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and adjust the interest rate to meet that?
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Will they establish a cash reserve to help the market understand
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that they're going to pay the dividends for a very, very long time,
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even if Bitcoin is volatile?
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So I guess maybe that's an interesting question.
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How important do you think a cash reserve is behind these digital credit products
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in addition to just Bitcoin?
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I think it's much less about my opinion and more about what does the market think.
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And if you look at volatility, as soon as the cash reserve was bumped up significantly,
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volatility compressed.
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And so I think it's very important.
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And since then, they have raised a good chunk more in stretch.
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And so obviously that compresses the month that are in reserve in dollar terms.
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And so I think we'll find a sweet spot in terms of how many month dollar reserves do
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we need for the market to be comfortable.
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I don't know exactly what that number is.
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Probably more than a year, I would suspect.
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I think it's extremely important.
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Yeah.
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Another thing that I think is interesting is like you look back last year, okay, Bitcoin
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peaked at $126,000, fell roughly 50% to a low of $60,000 this year.
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Yet, you know, from my perspective, digital credit held up pretty well, like despite the
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extreme, relatively, you know, extreme volatility of Bitcoin compared to other markets.
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Do you think that that was like a good stress test for digital credit and for people building
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on top of digital credit like yourself?
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Yes I generally think it held up fairly well but you did see significant volatility I think a product like Stretch really you don want to see volatility over like 10
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Probably not, ideally not even over 2 to 5.
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And, you know, as a markets guy, I want to see a lot more data.
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Because it coincided being very young
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and the stress that happening at the same time.
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And so there's not that much float.
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There's not much interest.
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and demand for it yet.
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So we'll have to probably go to another,
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probably another couple of years to really understand
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what the behavior of this instrument is.
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But yeah, so far so good.
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The issue is that for folks like us
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that are building on top of it
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and like wanna strip the vol even further,
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the actual vol of the underlying
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and understanding its profile exactly
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and then more importantly being able to hedge that
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using derivatives on the underlying MSTR or even on stretch,
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there are some options now on stretch, even if it's not very liquid,
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that becomes crucial.
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And so that's still, I think that's probably another,
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probably two years away for being mature enough
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to have size and confidence in it and run models on it.
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But by then, it's probably also going to be adopted a lot further,
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probably also in the Trat5 world much further.
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So that's kind of like our edge or our willingness to go into those markets earlier and understand them right now.
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That allows us to create products already that are basically taking on a little bit more of the uncertainty.
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Yeah, I want to start talking about the different products that you guys are building.
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But first, what would you say to someone that is a Bitcoin skeptic or they don't think Bitcoin is going to zero tomorrow,
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but they're interested in Bitcoin, but they don't maybe hold a huge position and they see this idea of digital credit
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Double-digit yields and they're like that's too good to be true. What would be your response to someone like that?
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Well, I
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think
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Obviously bit like everything in finance has a profile of risk award and especially around volatility and being able to
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to stomach that volatility.
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I think obviously Bitcoin is a unique asset
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in that there's really nothing like it.
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And the market is not clear on how to value that.
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And that's why we see massive amounts of volatility.
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Obviously, that's not for everybody.
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Digital credit, on the other hand,
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I would say is something that is, I think,
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more palatable for a lot of folks.
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But I think also it's still early for a lot of folks
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really understand like i wouldn't give it to my father-in-law or something because it's it's too
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too abstract um but then it's more like a product that we're building where it's like okay it's a
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it's a stable coin product and that kind of like is more easy to understand that's how i see it
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um but yeah i think for a skeptic is is you can just run the numbers on it right like you have
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you have cash reserves you have bitcoin reserves on it and um everybody likes yield right and
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comparable comparable double digit yields you would have to go in the junk
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bought territory and it's obviously you underwriting a specific balance sheet
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and income stream of a company it's much more challenging than just a Bitcoin
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reserve in a cash reserve yeah let's get into some of the products that you're
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building at her medica first like what is her medica I asked you this before we
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started recording but like why is it called that and then like what are some
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of the the cool things that you guys are working on yeah so her medica the name
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comes from Hermetica the book which is the book of Hermes Trismegistus or Thoth in the Egyptian
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tradition and it's the mythical creature or God that is associated with bringing higher knowledge
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to the human race and that higher knowledge is language and mathematics so he's a Hermes is the
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father of science the father of math and yeah we thought that it's an appropriate name for a company
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that is focused on Bitcoin and bringing Bitcoin to two more people and making it the world
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reserve asset.
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Love it.
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Yeah.
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And yeah, our products are essentially, we call it the underwritable yield layer for
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Bitcoin.
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And we have three products in the making, two of them are live.
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One is a dollar yield platform that is Bitcoin backed.
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So we essentially have a stable coin that is Bitcoin backed.
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And then we have two paths to stake that stablecoin and earn yield.
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One is Bitcoin basis.
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So we harvest funding rate on centralized exchanges.
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We trade through off-exchange settlement solutions on Bybit, OKEx, BitGet and Deribit.
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And essentially harvest the funding rate on coin margin Bitcoin futures.
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We hold Bitcoin spot, we go short on the futures market.
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And you can think of it as lending to derivatives traders in the futures market.
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So that's one side.
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Then we just integrated stretch into the platform so you can also stake and earn stretch yield and that essentially gives you exposure to STRC and the around 11% yield that you get there. Slightly different risk reward profile but still Bitcoin backed at the end of the day.
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And then we have a dollar yield product, HPTC, that we just brought to market around two months ago.
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And that is essentially a Bitcoin carry trade, we call it.
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Bitcoin flows into the smart contract, so self-custodial setup.
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You deposit Bitcoin, goes into a smart contract.
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We deployed it into a money market and borrow stablecoin value against that, call it 50% LTV,
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and then deploy the dollars into actually our own dollar yield platform, which is mainly stretch.
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so you're paying three to five percent on the borrower side you deployed it into stretch you
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earn call 11 and then the delta between the borrow rate and what you earn on stretch is
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you know call it seven to eight percent five fifty percent of that because you're borrowing
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only a 50 ltv we harvest that back into bitcoin on a daily basis so you get a three to five percent
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three to six percent bitcoin on bitcoin yield product that is fully transparent because you can
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see exactly what's going on on chain right you can see all the positions there are on the money market
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you can see what is deployed into you can see the harvesting happening every uh every so often and
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you can see the ltv being managed in real time um yeah that's been live for two months quite popular
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we have around four million dollars in tvl now um yeah those are the yeah it's it's cool to see
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like that idea of this carry trade gaining more traction because i think a lot of people like
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when they first hear about digital credit they think it's not necessarily for someone that's
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already like very interested in bitcoin as like this long duration asset but your idea and i've
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heard this from other people too is like you can use bitcoin as collateral obviously to run this
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carry trade and therefore digital credit is actually for for bitcoiners who want to accumulate
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more Bitcoin potentially. That's right, exactly. You're basically leveraging
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different money markets at different borrow rates, and you ARB those borrow rates. Because
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Bitcoin is such a good collateral asset, you can borrow against it around 3% to 5%. Obviously,
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depends on the market and what stage we're in. And then you can essentially lend it to strategy
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at 11.5%, and the delta between those, you can then just harvest back into Bitcoin.
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I think it's pretty straightforward trade.
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You know, everybody can understand it.
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Obviously, there's risk, right?
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There's never such thing as getting a Bitcoin yield or any kind of yield without taking risk.
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But it's a risk that you can underwrite and understand and can generate meaningful yield and can also scale, right?
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You can scale this to significant size.
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Yeah.
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I'm curious to hear your thoughts on this idea.
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But, like, you know, I've been in the Bitcoin space as well.
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Kind of got in 2017, or that's when I first got excited about it.
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and seeing the different Bitcoin yield products come and go,
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most of them were like a black box that blew up in due time,
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were taking risks that maybe weren't necessarily clear.
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To me, the Treasury company idea of amplified Bitcoin,
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increasing Bitcoin per share over time,
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that was the first time that, oh, this actually makes sense.
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There's risk involved, of course,
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but I can see how this might work.
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And then this new idea of this carry trade of using Bitcoin as collateral and buying digital credit to me is like the second iteration of Bitcoin yield that, again, there's risk to it.
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But it actually, like, it's not a black box per se.
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Do you see it the same way?
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Like, do you remember a lot of the Bitcoin yield products that have blown up in the past?
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Connoisseur of Bitcoin yield product history.
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Yeah.
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I see it as like, kind of try two different extremes.
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We went from like the BlockFi, I'll call it the opaque yield era, where we had essentially
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structured that were complete black boxes.
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As a user, you just put money into a platform, you send your Bitcoin to an address, and then
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you hope and prayed.
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Those structures scaled crazy.
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Like if you remember, they went to like, I think the number is 16 billion in 2021, 2022.
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There was a lot of leverage.
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and I think even BlockFi was not aware of exactly what was going on so it was
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really an underwriting issue that they didn't know what they were underwriting
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there was a lot of concentration because the market was very small back then too
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and so that led to blow ups at the end of the day and it was not worth the risk
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and impaired your Bitcoin and then what the market did and understandably
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understandably so we swung the pendulum to the other side and we said okay yeah
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we don't want to take any risk ideally and we entered what I call the custody
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only wrapper era where we essentially allowed folks to play token games where
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you lock up your Bitcoin into a time lock you still have custody and now you
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get some incentive paid out there's some there's some projects that are doing
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that and fundamentally if you don't take any risk the yield will not be very
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meaningful and that's what we're seeing I think Babylon yields are four basis
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points on an annualized basis and so I think that the block five show block five
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will show that there's real demand and there's actually a scalable market there, but it was
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not done right because it was not transparent and it was way too high risk. Basically the risk
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controls were not there. The other side was like, yeah, we want to have more security, but you still
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have to have a market-driven risk that you're taking. So we see Hermetica as the only scalable
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middle lane where it's market-driven and it's transparent, where you actually, you take risk
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And we're very clear about that risk and we make it so you can actually underwrite that risk
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You can understand what it is and you can say yeah, I'm comfortable with this risk maybe with whatever 5% 10% of my stack
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And then you can track it in real time and understand what's happening and on top of that
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We make sure that the main risks that are being
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Engaged with are actually controlled, right because in a carry trade you can understand the risk is obviously
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leverage. You're taking some leverage against your Bitcoin. So you need to be able to manage
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that very effectively. In the current iteration of a product, we essentially rebalance it as soon
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as it goes to 51% and on the LTV, it goes back to 50. But then also on the other side, if Bitcoin
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price goes up, you have more value that you can borrow. And if it goes to 49%, we bring it back
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to target. So you're constantly in a very narrow risk band. And you can understand that you can
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track that in real time and if it if it's showing that it's not actually in
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that band you can be like hey something's not right and I can withdraw my money
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right the other risks are there's Delta risk right because you accruing
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essentially profits in dollars but you really want Bitcoin yield right and so
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every basis point in dollar profit that we make we automatically swap into
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Bitcoin so you actually accrue dollar Bitcoin yield and then lastly if if for
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whatever reason the borrow rates spike or the rates on credit go down and the delta
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shrinks and becomes negative, the position gets unwound automatically.
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And so you actually not only understand the risk but you also have an institutional-grade
26:19
risk control around those risks that you can observe in real time and underwrite.
26:24
And I think that is a way to do it right.
26:27
And I think we're entering the new era of market-driven, transparent yield that can
26:32
actually scale.
26:33
And folks obviously can then get their own underwriting in place, put their thinking
26:40
hat on and understand how much of risk they want to put into their portfolio.
26:44
Thinking about risk when it comes to this idea, you mentioned volatility earlier, how
26:50
you wanted digital credit to ideally be less volatile.
26:54
Can you maybe connect those two, to me I understand it, but can you connect those two dots of
26:59
why is having digital credit be this low, almost zero vol asset so important for this
27:06
to work very well?
27:08
Yeah, I think fundamentally most people don't want any vol.
27:15
The best product is a zero vol product and they're willing to take some haircut on the
27:22
the APY that they're earning to make that less risky.
27:27
And so you know Saylo talked about this explicitly He says okay we have Bitcoin and basically distill it I call it financial distillation in the Hermetica nomenclature And you go from a very high vol asset that has
27:42
very high CAGRs, call it 30%, to a low vol asset with double digit returns to ideally, and that is,
27:51
I think, what we're in the process of designing and we're part of that, to a zero to almost zero
27:57
low vol asset because I think talking about zero is a little bit tricky because there's
28:02
still going to be some vol, but as little vol as possible and the yield going down somewhat.
28:08
And now obviously if you then package that into a carry trade where you're borrowing against it,
28:13
your liability is low vol, or it's actually going up from the interest. And so you want to make sure
28:19
that you are not taking on too much volatility because if you have to pay down the debt,
28:25
and it happens in a scenario where volatility is against you,
28:30
now you can have impairment of the underlying,
28:33
which obviously is the last thing you want to do.
28:35
So how do you generate a lower vol version of digital credit?
28:41
I think it's twofold, and it's also still emerging.
28:45
But one is we're building a reserve fund,
28:47
so there's over-collateralization, essentially.
28:50
Call it 2-3% over-collateralized,
28:52
So it's able to buffer those intermediate short-term movements that we see anyway around
28:56
the ex-dividend dates.
28:59
And then the other element, and this is where we need derivatives markets to come in, be
29:06
able to hedge the downside, especially the tail risk, right?
29:09
Because it's like a 2-3 vol buffer.
29:12
I think that's not an issue.
29:14
But if you see very correlated events where Bitcoin and digital credit go down, because
29:21
Because if you run the carry trade, you're taking leverage so if Bitcoin price goes down,
29:26
that's when you have to pay it down.
29:28
And if at the same time, the stretch goes down, you can come into scenarios that are
29:34
not very favorable to that strategy.
29:36
And so you have to hedge those out.
29:39
And the way to do that is on the derivatives markets, either on the underlying company,
29:44
so MSTR, or directly on the credit instrument.
29:47
Makes a lot of sense.
29:49
So back to thinking about specifically the Bitcoin digital credit carry trade, do you think that like are those markets like is the TAM for digital credit correlated to like how large Bitcoin is?
30:03
Like is there some reflexivity here in the sense that as Bitcoin goes up, if more people pursue this carry trade idea and plow money into digital credit, is this kind of like a reflexive positive feedback loop?
30:17
Yes, I think so.
30:19
I think the trade can be big. I'm more worried obviously about the reflexivity on the downside
30:28
because it can obviously also unwind. It goes both ways. Yeah, it goes both ways. So I think we have
30:34
to be generally, generally as an industry, I don't think we're good at planning for tail risk and
30:40
being cautious about scaling financial instruments too quickly. I think we're not known for that.
30:47
I think we should though.
30:50
And as a principal for Hermetica,
30:54
I'm obviously very focused on that for our clients.
30:57
I think that there's a lot more room to grow.
31:00
Obviously, it depends on Bitcoin price.
31:02
If Bitcoin price goes 3, 4x,
31:05
credit markets will be probably even bigger than 3, 4x higher from here.
31:10
And the Bitcoin carry trade, I think, is still early days.
31:12
I think folks are running that on their private books,
31:15
but there's not like a product or several products out there that make that available, folks.
31:21
I think ours is one of the first ones, and we're seeing a lot of interest in it.
31:25
There's also other iterations where you can actually use stretch as collateral as well.
31:30
So if you can have a portfolio margin trade where you have Bitcoin and the securities margining the trade,
31:38
then the LTV can be increased or there's a lot less risk to actually get liquidated, if that makes sense.
31:44
I think those are we're working on that what trust is for what you guys are
31:50
building in particular like what trust is required like what's the
31:53
infrastructure with which you are building your products on yeah great
31:57
question so today the first iteration has been built on stacks which is a
32:01
Bitcoin layer to sidechain and what you're underwriting there is one their
32:06
bridge which is SPTC it's a decentralized signer set so it's 15
32:12
signers, 11 of them have to sign the transactions to peg in and peg out.
32:19
SPTC has been live for I think roughly two years now, has some of the industry names,
32:25
figment and other signers on there, so like institutional grade signer set.
32:31
But that has to be underwritten and then on the smart contract side that's Clarity smart
32:36
contracts that are that stacks smart contracting language as well as the
32:41
protocols that we're integrating with which is mainly the money market zest in
32:45
our first iteration and that has to be underwritten so one bridge smart contract
32:52
risk and then obviously there's economic risk meaning borrow rates and the yield
32:58
on the dollar side has to be profitable and then operational risk like our
33:03
systems have to operate and make sure that LTV is managed correctly and Delta is harvested.
33:09
Those are the main risks.
33:11
Nice.
33:12
Will it always be built on Stacks or are you guys looking at other alternatives at some
33:16
point or is Stacks like a good solution for what you guys are trying to build?
33:19
I think Stacks is a good solution for now because it allows us to create a very good
33:24
UX on the bridge side.
33:26
SPTC is probably the best UX on the bridging side for just bringing any Bitcoin amount into
33:32
an ecosystem that has smart contracts with three confirmations in, six confirmations out,
33:37
any amount, no fees.
33:39
So we really like that UX.
33:42
But generally speaking, this trade can be done on any smart contract platform.
33:47
Obviously Ethereum is the bigger one, has the biggest stablecoin liquidity, has the
33:50
biggest blue chip money markets.
33:52
So we're definitely thinking about bringing this to other smart contract platforms.
33:57
And the other interesting way to do this is actually off-chain and using prime brokers
34:03
and an infrastructure that is off-chain to do this trade directly in the venue where you
34:09
would trade STRC.
34:11
And that's becoming possible now as well, and we're working against that.
34:14
Nice.
34:15
You may not know the answer to this, but like a week or so ago, wasn't there like an issue
34:19
with like Aave and like RAP Ethereum?
34:23
If you remember or know, because I don't follow the DeFi space super closely by any means.
34:27
But like what happened?
34:28
Yeah.
34:29
So as far as I understand, it was an issue with KelpDAO, which is the issuer of a liquid
34:37
restaking token called RSETH, which is basically staked ETH, restaked.
34:44
And the issue was not with their infrastructure, but with Layer Zero's infrastructure.
34:48
So a cross-chain minting infrastructure, cross-chain bridging infrastructure, where their off-chain
34:54
keys were compromised and it was a one of one for KelpDAO.
34:59
So Korea or whoever the hacker is compromised that key and was able to print RSETH out of
35:07
thin air.
35:08
And what they then did is deposit that fake RSETH onto Aave, where it was considered good
35:15
collateral, and then borrow real ETH against that.
35:19
And once that happened, there was kind of like a contagion event where a lot of folks
35:25
drew capital from, because there's basically, I think it was a 300 million, close to $300
35:29
million hole now on Aave.
35:33
And so folks withdrew a lot of the outstanding collateral and all the pools went to like
35:38
max utilization.
35:40
And then it's basically you're frozen.
35:42
Like nobody can do anything unless people pay back into the system, which nobody wants
35:45
to do because they're paying back into a bad debt system.
35:47
Right. And so, yeah, it was it was not a good it was not a good day for DeFi.
35:52
Yeah, I think DeFi TVL went down like 15 percent or something across the board.
35:59
Yeah. Do you think that that's like something that will just get better over time?
36:03
Because it seems like whether that's smart contract risk or just like there's a lot of moving parts, obviously, when it comes to DeFi.
36:10
I didn't even follow half the words you said there, not trying to just be like a more of a Bitcoin guy myself.
36:17
But like, will that get better over time?
36:20
Will it ever be perfect?
36:21
Can it ever be perfect?
36:22
Well, I mean, I think with any technology that is being built, there is a level of adoption
36:30
and sophistication that comes with time.
36:31
Right?
36:32
At the end of the day, DeFi is a new financial rails, a new financial infrastructure that
36:38
is permissionless, programmable, and therefore has multiple orders of magnitude of complexity
36:47
that can be exploited and as we're seeing is getting exploited from time to time.
36:52
But I'm bullish on it generally.
36:55
I think DeFi is a great new way to express financial primitives and infrastructure.
37:01
And so my hope is that the industry learns from it.
37:04
I think fundamentally in this case it was an underwriting issue and an OPSEC issue.
37:11
I think what you see in general in DeFi is that the small contract infrastructure is quite
37:15
hardened at this point.
37:16
Like this was not a smart contract bug.
37:18
Okay.
37:18
Yeah.
37:19
And so like Avid didn't do anything wrong, except they underwrote KelpDAO and said, yeah,
37:26
KelpDAO's collateral and their whole infrastructure set is good, which turned out not to be the case.
37:32
And so I think it's a maturing, the maturing on the smart contract side, I think is quite advanced at this point.
37:40
It's not perfect, but it's quite advanced.
37:41
I think that it needs to be in a maturing of operational infrastructure, OPSEC, key management, and especially bridges are kind of like the weak point in a lot of places.
37:52
But yeah, it's maturing and it will continue to mature and hopefully we'll get to a place where in like whatever, five to ten years we can say, yeah, this is super safe and nothing has happened for the last five years.
38:03
So I guess like what, you know, you guys are also building like DeFi related type tools.
38:10
What you guys are building was unaffected, I'm assuming, by what happened.
38:14
Yeah, completely unaffected.
38:16
Makes sense.
38:17
And then I guess like, would you say yours has less moving parts than kind of what happened
38:23
with, you know, the wrap-staked ETH?
38:26
Yeah.
38:27
Yeah, absolutely.
38:28
So the infrastructure on Stacks is very Bitcoin focused.
38:31
Yeah.
38:32
So collateral on the money market that we're trading on, which is Zest, is only SBTC, which
38:39
is only Bitcoin.
38:40
It's not re-hypothecated.
38:42
So there's no pooled infrastructure.
38:44
We just deposit our Bitcoin, we borrow stablecoins against that, and it's isolated to that specific
38:49
pair.
38:50
So if there was even an issue with any other asset on Zest, which there's not many, it
38:55
would be not an issue for our structure.
38:57
Then on the stablecoin side, we underwrite exactly what yields we're actually bringing
39:03
into HPTC, our Bitcoin product.
39:06
And those are our own stablecoin yield products.
39:09
So we understand them.
39:10
And most importantly, we control the liquidity and execution of them, which then allows us
39:15
to manage LTV a lot more effectively, if that makes sense.
39:18
Yeah.
39:19
And so, yes, we try to make it.
39:21
No, I'm a Bitcoiner as well.
39:22
I'm a technologist.
39:23
So I'm like in between both.
39:25
I'm a smart contract engineer.
39:26
so I understand I wrote our smart contracts.
39:28
I understand exactly how those work.
39:30
And simplicity is the most important element for high security, right?
39:36
And so definitely looking at that very closely.
39:38
Makes sense.
39:38
Is that what you did at Kraken, or what were you building at Kraken when you worked there?
39:42
At Kraken, I was on the security team, but in the second half, I was in corp dev.
39:48
So my background is engineering, but also finance.
39:52
So I worked on the corp dev team.
39:54
we did some M&A transactions across the industry and some investments, some venture investments.
40:00
Nice. Yeah. Very cool.
40:02
Thinking back to the Bitcoin digital credit carry trade and specifically what you're building, that product,
40:09
how scalable do you think that is like today?
40:11
You mentioned like right now it's like 50 Bitcoin or $4 million.
40:14
You know, maybe by the time people are watching this, it'll be like 500 Bitcoin and $40 million.
40:18
Or hopefully Bitcoin has gone up by this point.
40:21
But, you know, how scalable is it?
40:22
Yeah, I think it's scalable to multi-billion dollar scale.
40:30
I think it's very clear that Bitcoin is a great collateral asset for loans.
40:35
And so there is a lot of dollar liquidity that is looking to lend against Bitcoin.
40:39
And that's really the main constraint, right?
40:42
You need that liquidity to run this trade.
40:44
I think the credit instruments that we're seeing with SCRC, with Zeta, can also handle
40:48
billions of dollars and potentially tens of billions of dollars. And so yeah, I think this
40:54
is quite a scalable setup. What I would say though is we're only willing and able to do that if we
41:01
fully understand that this is also a structure that can be controlled in terms of risk. I wouldn't
41:08
want to scale this to those amounts if I wouldn't understand how we can also unwind them safely and
41:15
and make sure customers are not impairing their Bitcoin What do you think is the end game for this digital credit Bitcoin carry trade We talked about the reflexivity which can work both ways If this really starts to take off how does this play out over the long run
41:31
I think it becomes a line item in anybody's or Bitcoiners portfolio.
41:37
Obviously, you have a stack of Bitcoin you just hold and you don't want to impair it
41:43
or put any risk on it.
41:45
You probably have a little bit of leverage in there which you can express either to MSTR
41:51
or similar structures or futures.
41:55
And then you have a portion that you might want to earn some yield on.
41:59
And that's a portion of that portfolio called 10-20%.
42:02
I think I can talk to myself, that's what my portfolio looks like.
42:06
And as Bitcoin becomes more valuable, you might want to earn some yield on that so you
42:11
You can actually use that yield to run your life or use it for other investments or just
42:16
grow your stack.
42:17
So we see our job or our mission to, on the high level, make Bitcoin the world reserve
42:24
asset, but on a practical level, create financial instruments that Bitcoiners want to put on
42:31
their balance sheet and hold in their portfolio that are both attractive from the yield side,
42:35
but also have the right risk profile.
42:39
You mentioned Bitcoin as the world reserve asset, which I agree, like we're definitely
42:43
trending towards something like that.
42:45
What does that mean to you?
42:47
What does the world look like at that point?
42:49
That's a great question.
42:50
I think it's kind of hard to imagine because it would look very differently.
42:57
I think it would mean that the major currencies in the world are settled in Bitcoin and backed
43:05
by Bitcoin.
43:06
And so that would, I think, fundamentally change the political landscape across the world.
43:14
I think a lot of things that are being done today, a lot of fraud and waste and abuse,
43:20
as well as excess government spending, would not be possible in that kind of world.
43:26
So I think fundamentally it's a much safer, much more prosperous world that incentivizes the right things,
43:33
and that is creative value, right?
43:36
Creating value, building things, thinking long-term
43:40
instead of short-term games.
43:44
Yeah.
43:45
Yeah, and it seems like a lot of either individuals,
43:49
corporations are constantly kind of playing short-term games
43:53
and maybe Bitcoin and digital credit will raise the hurdle rate
43:57
for capital allocation, encourage more saving,
44:00
and then they'll pursue ideas,
44:02
but they'll pursue like the best ideas.
44:04
Like, would you agree with that?
44:05
Yeah, 100%.
44:05
Yeah.
44:06
Well said.
44:07
Makes sense.
44:08
This is kind of a broad question,
44:09
so you can answer it however you want.
44:11
But what's something that, you know,
44:13
the audience watching that would sound very crazy to them,
44:18
but you believe this is going to happen within,
44:20
or five years from now,
44:21
like something that's going to be very commonplace,
44:23
could be Bitcoin related,
44:24
it could be digital credit related,
44:25
it could be AI, anything really.
44:28
Hmm.
44:31
Hmm.
44:32
In five years, that sounds crazy.
44:34
Yeah, something maybe like a controversial view that you might have or prediction per se.
44:39
I think that what comes to mind is that AI is actually creating jobs instead of destroying them.
44:50
And that AI is not actually replacing people, but making them a lot more, especially entrepreneurs, a lot more capable.
45:01
So I think we'll see smaller companies that are extremely effective and can compete with behemoth companies.
45:10
I think that the rise of small, lean, talented teams competing on the highest level that we haven't seen.
45:19
Like I'm talking competing against 10,000, 20,000 headcount companies.
45:28
And you have companies that are maybe 20 to 30 people.
45:31
enhanced by AI. I don't know if that's controversial, but I think that as an
45:35
entrepreneur, I'm very excited about that reality because it's very empowering. And yeah, there's a
45:41
lot of interesting things there to do. Yeah. It's like the rise of the dozen person company
45:48
compared to the juggernauts out there. It seems almost inevitable and highly disruptive potentially
45:54
too, I guess. Yes. Extremely disruptive, extremely profitable. Yeah. Yeah. Very interesting.
46:01
Looking forward also like five years or maybe more, would you say you're very optimistic
46:06
or pessimistic about the future?
46:08
I think you can only be optimistic.
46:12
I think being pessimistic is a miserable state of being.
46:16
And if you judge the future from anything that happened in the past, I think humans
46:23
tend to be very pessimistic and doomerish about new technology.
46:27
I think they 100% of the time are wrong.
46:31
And so I think you can only be optimistic.
46:34
I think there's going to be a lot of opportunities.
46:38
I think we're also entering an age of going beyond this planet into the star systems.
46:43
And there's going to be a whole industry or multiple industries being built around that.
46:50
There's so many things that we're not able to see coming that are positive for everybody involved.
46:56
and I think the U.S. being at the center of technology and innovation like it is today
47:02
with AI, with crypto being embraced on the highest level is extremely good for the world
47:08
because the U.S. is the most capable country to bring free technology to the world.
47:14
So I'm very optimistic about that.
47:16
I'm not American. I'm German, but I feel American in spirit
47:20
and I love to see the progress that is being made in the country.
47:24
Nice. Thinking back to, you brought up space, but then also, you know, we just talked about AI.
47:31
Do you see any, like, interesting connections between AI and Bitcoin or AI and digital credit that, you know, a normal person may not fully grasp?
47:45
Yeah, there's the whole notion of Jason Lowery's BitPower, which is, I think, very interesting to at least get an idea of.
47:52
and as far as I understand it, it's the idea of essentially in a world of abundance of AI
48:00
where AI is really spamming the internet or can create infinite code, infinite information
48:06
and infinite pings on APIs, if that makes sense.
48:10
There needs to be a digital physical barrier to entry, a proof of work entry point
48:18
or something that slows down the sheer number of information that is being distributed in many different ways.
48:27
And I think Bitcoin can play a central role on that.
48:31
I think last week there was a congressional hearing where a U.S. military official said that they're running a Bitcoin node
48:42
and they're experimenting with Bitcoin being part of power projection.
48:47
So that whole space is obviously fascinating.
48:50
I'm not an expert in it.
48:52
I'm a fan of Jason and his work.
48:54
I think that's something to track.
48:56
I think then the obvious one is like AI agent using Bitcoin.
49:00
I think there's some data that shows that AI agents prefer Bitcoin.
49:04
I don't know how actually reliable that data is
49:07
and how much of it is just generated by people that want that to be true.
49:12
What I would say, though, is that AI agents, obviously, they like speed.
49:15
and the ease of transaction, I think that's clear.
49:18
And Bitcoin is not that easy to transact in.
49:21
I think maybe as a savings instrument is interesting.
49:25
I think that Bitcoin L2s,
49:27
and especially also the L2s that are coming to market
49:30
in the next, call it, 6 to 12 months,
49:33
ZK roll-ups that actually have unilateral exit abilities into Bitcoin,
49:38
that actually have state that settles into Bitcoin,
49:41
are really interested in the combination with AI
49:43
and what the AI might be able to do there.
49:47
Makes sense.
49:47
Last question on digital credit in particular.
49:51
Interest rates are obviously a core component of digital credit
49:54
and markets globally.
49:56
There's been Kevin Warsh's projected new Fed chair
50:00
for the Federal Reserve in the United States.
50:04
And there's been talk from Trump and others
50:06
like the idea of getting interest rates lower.
50:09
How do you see that?
50:10
if that does play out over a certain period of time at some point in the future,
50:15
how do you see that interacting with both Bitcoin and digital credit?
50:19
Interest rate going lower.
50:20
Yeah.
50:22
I think interest rates going lower would obviously be a tailwind for Bitcoin price,
50:30
which then as a secondary effect would make it so the balance sheets of treasury companies is
50:37
more robust, which would mean that credit would need to probably not be as high.
50:44
So it would kind of be counter cyclical to actually credit rates.
50:50
So interest rates going down, Bitcoin price up, credit rates down.
50:55
It's kind of like, I think, the base case from a math perspective.
51:00
Obviously, it depends on a lot of other factors.
51:02
Yeah, and also what kind of instrument it is and what the marketplace and credit is
51:07
I think there's it's very early you guys are doing some interesting work, right? There's there's a lot of like
51:12
Bi-monthly dividend rates and whatever else we can come up with that makes it more compelling and less compelling
51:19
I
51:20
Don't know if worse is gonna be dovish though, so we'll have to see there
51:25
Yeah, we can always you know at some point volatility will return in every market and that's just kind of
51:31
inevitable. Thinking also I guess one more question on digital credit as
51:35
you're building on top of digital credit what's one thing that you want the
51:41
issuers to like prioritize more like is it like lowering volatility over time or
51:46
attempting to do that or is there anything else or any ideas that you might
51:50
have to do that? Yeah I think that the bump but like shortening the dividend
51:55
cycles is is critical and very interesting I think there's only so much
52:00
you can do in TradFi, if I understand it. I think bimonthly is probably the
52:04
fastest cycle that you can do without, I think there's like a 10-day rule that
52:09
was mentioned by Sailor. And the other element is obviously secondary
52:13
liquidity and making that robust and deep and not dependent on a single venue,
52:20
even though obviously it's mainly the NASDAQ. So those two, maybe there's some
52:25
other instruments that can be built around it. Obviously derivatives markets
52:29
are extremely important. I think they're very much underexplored today. There's some derivatives
52:35
on STRC, but seeing more of that is very important for folks like us.
52:38
How about also, sorry, another digital credit question came to mind. Strategy started with
52:45
STRF, STRK, a bunch of other digital credit products. Sailor at this point seems to be
52:53
like very focused on STRC in particular,
52:57
do you think that that's like the right move?
52:58
Like is it a good idea to focus entirely on one simple product
53:04
or should there continue to be experimentation
53:07
around the other ones or ones that may not even exist yet?
53:10
That's a great question.
53:12
I think generally it makes sense.
53:13
I mean, he did the experimentation part.
53:15
And I think he found STRC and like he saw the market reaction.
53:19
And there's no denying that there's something there
53:22
and the market really enjoys it.
53:23
So I think he's spot on to like double down on it.
53:26
And I think what he's thinking about now
53:28
is making that one product even more attractive.
53:32
I think that's the right way to do it.
53:33
Because in financial markets, liquidity begets liquidity.
53:36
So you want to create really deep liquidity
53:38
and understanding around one product.
53:41
I think though, you know,
53:42
maybe it's coming more from your guys' side.
53:45
There should be more experimentation.
53:46
I mean, I'm a technologist,
53:48
especially on the cutting edge of technology.
53:49
So I would always like to see more experimentation.
53:52
How exactly that looks, I don't know.
53:54
Obviously, there's a lot of levers that can be tweaked here and there,
53:57
and then see what the market thinks about it and double down on it.
54:00
I think that needs to continue.
54:01
I would love to see that continue.
54:03
Yeah, that makes sense.
54:05
Last question, you know, the audience watching this,
54:09
if there's one thing you want them to take away from this conversation
54:12
or from you in particular that they'll remember tomorrow morning,
54:15
what would that be?
54:16
it's that don't expect anybody to do the work for you when it comes to your financial
54:23
intelligence understanding and how you deploy your portfolio i think what you want to see from
54:30
providers of financial instruments is a clear understanding of the risk and giving you not
54:37
just a number but giving you all the information you need to make your own informed decision and
54:43
And that's what we try to do with our products and really what I like to encourage everybody,
54:47
even independently from our products, is that take the time and think through what the problem
54:52
is and what the risks are and how those risks are managed and how you can understand them
54:56
better because that will just make you smarter and that leads to more prosperity for you and
55:02
your family.
55:03
I love that.
55:05
Where can the audience go learn more about you and what you're building?
55:09
yeah thank you um on x jacob underscore btc jacob with a k jacob and then hermetica.fi h h e r m e t
55:20
c a dot fi and yeah hit us up sign up to our wait list come check out our products
55:26
love it yeah well enjoyed it this is awesome yeah likewise