Speaker 01: 0:00

Hey, hey, hey, welcome to this week's episode of Blockhead's Blockcast. I'm your host, Takatoshi Shibayama. I'm also the head of APAC for Ledger. I aim to uncover the creative, intelligent, and radical minds who are shaping the crypto industry today. I'm as crypto curious as anybody that's tuning into this show. We're doing this together, guys. Let's go. Mr. Alex Ryvkin, founder of Rho Protocol, w elcome to the show.

Speaker 00: 0:30

Hey, Taka. Thanks for having me.

Speaker 01: 0:32

You and I have been colleagues at Copper, so we know each other quite well. We all both went off to do different things. You've created Rho Protocol, which is the industry's first rates market in DeFi, which is an amazing thing. And you just went live last month. Really great to talk about everything around rates and what you've built out. But for the listeners, it would be really great if you can introduce yourself and then how you got into crypto, your crypto journey so far.

Speaker 00: 1:00

Absolutely. I'm one of those recovering TradFi, victims of TradFi. I started in sales trading and structuring, ran a couple of startups. Together with you, we're working at Copper as a chief product officer back in the day in 21, 22. So ran product and technology for the firm. And at the end of 2022, actually one week before FTX, we started this business called Rho Labs, which is the company developing Raw Protocol, which in As you mentioned, as far as we are concerned, the first proper rates market in crypto were set up as a DEX on Arbitrum. So anybody as of end of last month, so you can say as of April, you can just come in and trade. We've been actually live with it for around about eight months. Before in private beta, traded around about $10 billion over that period and generally saw quite a bit of interest in some of the early products, which are basically rate products based on the family of rates which are available in crypto specifically, so crypto-native rates.

Speaker 01: 2:01

Yeah. So when you talk about crypto-native rates, I mean, generally, most people don't really associate rates to crypto. So what would you say is very uniquely about crypto and rates compared to the traditional markets?

Speaker 00: 2:14

Yeah, absolutely. Quite often when we start talking about rates and crypto, I'm assuming a lot of people in your audience would know, but for those who don't, rates happens to be the single largest asset class in TradFi by open interest. But funny numbers for open interest, hundreds of trillions of dollars, literally. And there are very simple reasons for that. As everybody knows, rates kind of affect everything. Rates are the basis for pricing all the digital assets, and especially risk-free rates, such as treasury rates. Everybody's following Fed announcements very closely, lately especially. Every time we come in and say we're building a rates market in crypto, people try to find that corporate that wants to hedge out that 20-year treasury risk in crypto, and they cannot find one, and they start asking questions. The thing is... Crypto actually has its own very developed and very important families of rates, which are affecting everybody's portfolios, the value of everybody's assets. People might not realize that, but everything in crypto is efficient enough to be interconnected as well. So for example, in crypto, you have staking, which happens to be the closest proxy to, probably the closest proxy to risk-free rate in crypto. That is something you can earn with relatively low risk, or at least not taking on any counterparty risk just by holding the asset and staking it to the right validator. Which is part of the rate you don't want to earn less than. So if, for example, on Ethereum, if you're making 3% staking, you probably don't want to lend it out for 1% to somebody to take on credit risk. And that affects other things like, for example, availability of balance sheet for traders and for other people. I guess the most interesting and the weirdest from the standpoint of the normal rates trader family of rates in crypto is perp funding. And perp funding in stock difference to, again, let's say, Fed rates, Treasury rates, which have some volatility every round about every decade every 10 years right and the rest of the time it's kind of flat right it was like zero for 10 years now it's at five percent for a couple of years now we'll see what's going to happen but that's where we are today in funding rates it's very different so funding rates for even on the large exchanges for largest assets like funding rates for bitcoin on binance goes from minus 20 to plus 60 in the span of a few days and that is a massive massive effect on people's portfolios the problem in crypto is some people do not quite but realize that and they realize the post-factum when they pay. So we have conversations with people who casually pay like $200,000 in funding payments on very large positions, large loans per position that they open. And they're not biggest fans of those heights. This is your hurdle rate. So these are the things we're trying to address. So you can either use our products to hedge that risk, which is increasingly, increasingly more important. So you can create fixed income products. You can create predictable income profiles. You can manage your hurdle rate, which you're funding on the long port position effectively is. Or it's actually a very diverse and not very efficient market. So you can actually trade rates independently from everything else and go for the product like ours in a very capital efficient manner. You can go long rate or short rate or you can trade the spreads and differences of rates between exchanges between different maturities between different assets and there are plenty of things you can do essentially making that market more efficient and reducing these fluctuations that everybody's so exposed to right now, specifically because there is no market like ours.

Speaker 01: 5:25

And a lot of people do basis trade. So how would this fit into people who trade this type of strategies?

Speaker 00: 5:31

Absolutely. So pretty much every large trading firm in crypto is trading basis at some point in some way. And we also know that thanks to Athena and some of the other players in the market, tokenized basis became a thing kind of democratizing the trade. And that has been one of the primary source of stable yielding crypto. But again, the problem with it is if you trade basis, and again, for those who might not be familiar with it, basis is basically you're collecting funding while hedging out the underlying risk. You buy Bitcoin, you short Bitcoin perp. So you're basically hedged against fluctuations in Bitcoin price. And the difference that you're earning is funding on your perp position, which normally on large exchanges is around about 11% per hour. That's kind of what it averages out. The problem with it, again, if you look at Athena's returns in May last year, they were sitting at about $35. Today, it's at about 4%. And that's the function of the fluctuation of the basis rates and the funding rates on the perps. With a product like ours, you can actually hedge out that risk. So if you're a basis trader, at the very least, when the funding is high, you can hedge that position at least partially and guarantee some basis income for a period of time. You can say like, okay, for example, I'm happy with 15% for the next three months. But I know for sure, this is the rate I'm going to be getting. This is the basis I'm going to be earning. This is not possible without the liquid rates market. That's what we're solving for, for the registrator.

Speaker 01: 6:48

And there's also borrowing and lending rates. So how does this differentiate itself from like the perp funding rates? Obviously it is a market rate, but it doesn't really have like a public rate that everybody is accustomed to. And also it depends on supply and demand. How do you look at this and how can borrowing and lending rates go into this bucket of family of rates.

Speaker 00: 7:12

That is an interesting one, right? Because the lending, borrowing market in crypto is a little bit weird. A lot of balance sheet is supplied by people who are not really in the market that much. So for example, large exchanges have relationships with large private whales and they have some kind of fixed rate they're borrowing from independently on the current market rates. And that affects the supply demand and that kind of prevents the market from constructing an efficient benchmark rate that would be universally referenced. But there is still a substantial correlation, for example, between the funding rates. Let's take, I don't know, OKX, for example. So there is a significant correlation that we found between the funding rate for OKX perps and the margin in rate for on-exchange borrowing on OKX. So if you're levering up, if you're trading spot on leverage, right, you just want to trade Bitcoin on leverage. If there was no correlation, then people could kind of arbitrage that one. Like when borrowing becomes, specifically for the basis trade that you mentioned before, when borrowing becomes cheap, the spotlight happens to be the most expensive one in terms of the capital. So if borrowing is cheap, you can borrow more spots, then you get more basis, and that affects the basis trade that basically brings them back in balance. So while There is no direct correlation and there is no universal reference rate. There are still, for obvious structural reasons, significant dependencies. And one of the things we would actually be also trying to do is trying to construct the lending curve for borrow-lend rates. And I think some of the attempts before were predominantly focused on on-chain lending, specifically because, as you said, it's easy, it's public, you know what the rate is. It's not the private lending market. But that's not where a majority of lending happens in crypto. The majority of it happens on exchanges, maybe prime brokers, some private lenders that's what we're looking at that what we feel is more interesting for the trader

Speaker 01: 8:53

yeah on the on-chain market usually it's collateralized lending and it doesn't seem like it's very popular amongst institutional investors obviously they want their collateral to work at the same time you know i think we explored like using tokenized money market funds to generate some yield on that collateral boost up the returns but are you kind of seeing this kind of merge between traditional assets like your tokenized money market funds coming into this space in crypto? And how do you see that in the future?

Speaker 00: 9:23

Yeah, that's very interesting. Tokenized money market funds, people know them, I guess, in crypto as interest-bearing stable coins, but some of them actually are considered securities, right? Because they are essentially tokenized money market funds. Again, you and me, we're always talking to a lot of institutional investors. And as you said, all of them just want their collateral. They literally say point blank, if we have any collateral, we don't want to not work at any point in time. So even if I'm holding stables, I'm holding dollar, and it's a passively somewhere. I don't want to hold USDT, which earns yield for Tether, but not for me. So they're going for these tokenized money market funds. There are some structural complexities with that because it's a security, not everybody can touch the security, not everybody can trade the security, but there are some providers out there who can. And I think eventually the reason we have this proliferation of stable coins now is everybody's looking at Tether and understands that even if they share, find the way, whatever the way is to share part of that yield with their communities, that's got to differentiate them and the going to get them ahead in the competitive race. There are also other things which we are very excited about, like obviously everything to do with tokenization of any yield bearing assets or tokenization of credit is what we're eventually building this for. Like, you know, we don't want to build a product and wait for five years for Bank of New York to come in. So we're focusing on crypto native end of the market. But eventually, obviously, we think of like 10% of global rates markets traded on tokenized blockchain rails. Everybody wins for us. So we're looking forward for it and the framework we built would allow us trade treasury rates or anything else similar in the same way that you can trade like the native rates right now

Speaker 01: 10:58

yeah because i do definitely see like a convergence between the two worlds coming very soon obviously it won't be on regulated exchanges perhaps in crypto but on the regulated markets in traditional space there can be something like that i mean i can see let's say you know ethereum you know staked ethereum etfs so that you can use use that to say this is a stable or fixed rate coming from Ethereum or ETH, and then swapping that out from traditional rates, whether it be mortgage rates, what have you. I mean, that sounds quite exciting to me, and that could potentially boost the market much bigger than what it is today.

Speaker 00: 11:37

100%. And the forcing function there is probably regulation, right? So right now, for example, total return, Ethereum ETFs that you mentioned, it's a no brainer. The awareness of the clients is sufficient to start asking questions who is getting that staking yield. So the client, not thus the service providers, right? But the actual investors want that yield. And that will be the pressure on the regulators to unlock that eventually. And same with a lot of other things.

Speaker 01: 12:02

Yeah. And do you think you can kind of bring that into DeFi as well? Because since you are running a DEX, you know, it might be a really good testing ground before it really goes out into the regulated markets.

Speaker 00: 12:13

I think that's exactly the way to look at it, right? So DeFi, and to us as well, best case. And we really like what you can achieve with decentralization on blockchain, but it also comes at the cost technically and resource-wise. So we think decentralized platforms and access and everything that happens on-chain is a testing ground and the way to test new concepts, bootstrap liquidity for some new products and new primitives, which is what we've done first. And probably that's kind of the way to go with the tokenized products as well. I think there is a bit of complexity because we need to find the overlap between people who want threat-free stuff but want it on-chain. So your kind of target client universe is a little bit lower. It's typically that two separate worlds, but there are certainly some people which are shown by the likes of, I don't know, Maple, for example, and some of the other protocols out there who are interested in products like that. So certainly I'm with you on that

Speaker 01: 13:02

one. There are things that you probably noticed before you went live and then something that you noticed after you went live. What are some findings that you see? Obviously, markets change quite a lot as well, right?

Speaker 00: 13:13

Yeah, the last few weeks were quite eventful since we tried to do this previous time. So I think the fluctuation in funding rates were pretty fun. We had some major macro events, obviously, with Terry and the rest. And we had some idiosyncratic events recently with Mantra, for example, right, which is also could potentially, depending on how it turns out, could have some consequences for the ecosystem. But from the trader's standpoint, the funding rates on Mantra at the peak of that crash, like 90% crash in a day, on Binance were at minus 1000 and like above or below, how do you say it, in absolutes, 1,000 or 1,100% negative from normal 11%, like we discussed before, right? That's the function of a lot of people trying to short the asset through a PERP. And that's what drives that number. And I haven't fact-checked that, but some people told me there were a few thousand percent negative the funding rate for Mantra on Bybit at the time, which is insane, right? For a trader, that could be well. If you don't think that thing is going to absolute zero, which some people still do, you go long and you're just earning 5,000% per annum for as long as we call the asset, which is kind of fun. So a lot happened in funding rates, a lot of volatility, a lot of additional risk in the system that people do not necessarily know how to process. You see a lot of people pulling back to kind of on our crypto scale defense assets. So maybe the interest bear and stable coins, some money market funds, some simple Bitcoin yield products, and a lot of people go into some kind of weighted C mode, which we kind of deserve it after the bull run we had. It's not a bad thing. I think it's a good thing. And probably sometime as it normally happens, the selling may and go away normally works in crypto as well. And we'll probably go through some kind of a lull, maybe with some ups and downs and hopefully get back on the road in come September.

Speaker 01: 14:53

And what kind of feedbacks have you received since you went alive? Or maybe you can talk about your journey into kind of like launching this. I'm sure there's a lot of difficulties. Markets change quite often. Share us some of the experiences that you had so far.

Speaker 00: 15:07

It's actually very exciting for us because what we're trying to do is we're trying to create a new asset class, essentially. If you look at our product, if anybody goes to our website, website and looks at the product. If you've ever seen, let's say, Burps Exchange, you would know exactly what's going on. It's not very complicated. You do not have to be a professional threat by rates trader to use it. But still, we appreciate that it's a new thing. That's a new primitive that people are trying to figure out. So we're spending a lot of time on like building educational materials. We have a YouTube channel where we're showing how this thing works. And we're releasing some like non-financial advice, trading ideas, making examples of what you can do with this product. We have quite good feedback after the launch from people kind of appreciating the efforts and actually it's very exciting for us to see how people go through like this educational journey and start trading and start building volumes and start actually making money and that's very cool compared to launching you know yet another perps decks it's a bigger effort in terms of education and adapting it to the flow of normal on-chain user but both institutional and individual clients so far have been basically talking about it quite positively so we're quite excited we'll see what happens over the next couple of months it's gonna be an important time for us

Speaker 01: 16:14

I remember in the beginning, I tried to introduce you to some trading firms, etc. Initially, what were their reactions to it? And then how do you think it changed over time?

Speaker 00: 16:23

Indeed, I think when we started talking about it at the end of 22, beginning of 23, everybody was mostly concerned with saving their rear ends in the aftermath of FTX crash. The feedback we were getting back then was like, yeah, guys, this is interesting. This is definitely going to be there. Anybody who's coming from TradFi understands some things just do not work without the rates market. Some of the basic strategies, some of the basic structures, they cannot work efficiently. They're not scalable without an efficient rates market. But they were like, maybe you're a couple of cycles early. Well, lo and behold, one year down the line, we got Ethena, we've got Randall Brook, quite big. Ethena is out there. There are a couple of other players who are trying to create term structure for lending or some other things to the best of our knowledge. We are the only people so far who tried to do it at the proper scale for funding rates, which we feel is the most important rate in crypto. And the market seems to agree with us, judging by the breakdown of our volumes and stuff like that. But it's very different now. Everybody suddenly cares. I think the moment when people realized that was towards the end of 2023, before the last bull run. After the bull run started, people again started by printing billions of dollars on basis trades and got a little bit less interested in new primitives. But now some of the old trades are basically exhausting their potential. And again, democratization of certain things is happening. And now everybody is back on the search for what is the next big thing. And the rates are obviously potentially one of those next big things. Internally, we think that with a couple of more players coming in, which inevitably will happen, we can see in terms of notional volume rates overtaking perps in a couple of years' time. It's going to be a big market for sure.

Speaker 01: 17:58

Yeah.

Speaker 00: 17:59

Cause you know,

Speaker 01: 17:59

generally I always thought basis trade is only a bull market product. And you know, once rates come down, as you mentioned before, it just dropped down to like 4% or even close to zero and it doesn't work in like both market cycles, but with this kind of product, then you can actually hedge out that risk so that you can have some kind of. A normalized return over time so that you don't have to worry too much about volatile market swings in the market. And I definitely appreciate having products like yourselves out there to give the yield that people really want because ultimately it feels like most of the investors in these basis trades or actually not the investors but the products that are built around basis trades people who are buying them are generally retail investors and you know retail investors don't necessarily go out in the market and do it themselves and try to hedge it you know they're relying on these type of products and the people behind it in order to give them the stabilized return that they require otherwise you wouldn't really call them a stable coin right in a way i think there's a huge market you know i had for this product and then what else do you see like in terms of like your competitors or it doesn't have to be competitors but other players in this field looking at into this rates market because obviously you know, as you mentioned, track by market, interest rate swaps are the biggest market there is. I'm sure a lot of people want to come into this space as well. What kind of movements do you see within your peers?

Speaker 00: 19:20

Well, obviously, Pendle has been the biggest player and one of the biggest kind of popularizers of rates, of the idea of the fixed rates and rates as an asset class with ecosystem. Our products right now are very different. Arguably, you could say that we're both in the rate space, but it's an entirely different product. So Pendle works really well for somebody who is a long-term passive holder. It's a fully funded yield stripping product. And we are to that is basically what futures are to spot, right? So we are extremely capital efficient. You can, for example, get the same fixed staking rate that you can get from Pendle by putting 100% of your collateral into their smart contract, you can get by putting 0.5% of your notional as collateral on raw. And that's not crazy. So that type of leverage still will keep you well protected. You don't got to get wiped in some kind of sudden market move. So it's a very different product with very different groups of clients. Active traders obviously do not want to lose capital efficiency as we discussed before. And so anybody who is professional, anybody who is creating some structured products or doing something else using that yield cares about capital efficiency. greatly. Pendle mentioned that they're working on something which is surprisingly very similar to what we have already built. So that's their product called Boros that they announced some time ago. We're eagerly waiting for them to come in. We're very excited about it. Again, they're one of the pioneers of the asset class and we respect them and we would love to see more companies validation for us as well. I'm not aware of a lot of other people doing that at the moment, but I'm fairly certain if you're a centralized exchange and you already have spot and perps and and maybe options, right? Then this is a no-brainer next step. This is like a blue ocean for you, right? Instead of trying to launch another, if you're trying to create new markets for yourself and new sources of volume, then why would you try to launch another altcoin perp which will have barely any volume and a lot of competition when you can get into something like this? So I'm perfectly aware that this is going to come. We're actually talking to some of the centralized exchanges about partnering on that and some of the DEXs as well. It's a no-brainer. It's going to happen. I think it's going to happen over the next 12 months and we're really excited about it. It's not great in crypto to be the only player in the field. It's great to be the first. It kind of pays in crypto to be early and to be the first, but we want company. We would love some company.

Speaker 01: 21:31

Yeah, absolutely. And as you're very close to rates market right now, you know, there's a lot of things happening in a macro at the moment. Trump's tariffs, you know, liquidity being pulled out of the market, you know, over the past, you know, two or three years. I mean, how do you see the market going forward? Do you see a very choppy market in the next coming, you know, I'd say six to 12 months. What is your view?

Speaker 00: 21:54

Sadly, I'm not a macro analyst. I've spent a fair amount of time looking at it as a trader. But right now, the forces driving the market are so macro, and I don't know what's the best way to put it, the Trump stereotypes and some of the other things, some global conflicts and the rest of it, but it's very far from my area of expertise. But what it looks like to me, and it's a complete speculation, is that probably at some points, if things continue on the trajectory they are today, the Fed will have to do something and kind of bulge on the rates policy which is great for the markets and great for crypto as crypto however we want to position it it's still a risk asset and it's best correlated with other risk assets and so lower rates are good for us. Kind of good for everybody, but good for us. And another thing which I think is going to be very meaningful for us is that right now, for example, if you look at staking, there is very little incentive to use staking as your purely source of fixed income yield while the rates on treasuries are at about 5%. So if we go down again Probably it's not going to be that abrupt and not that sudden, but if the rates go down back to zero, we are in a very different realm of interest to crypto-based yield as we were, let's say, in 2020, 2021, which created the DeFi summer and some of the other things. So I think right now we have a much more diverse ecosystem, a lot of products, way more professionalized entry points than we had before. So I think once that is getting unlocked for reasons completely independent from crypto, we can have significant influx of capital that total return things that we discussed before. Sources of yields tokenized or, sorry, securitized or other way around tokenized is going to get more interesting. So it's going to be another sort of forcing function for additional capital coming into the space. Quite exciting.

Speaker 01: 23:36

Yeah, I mean, even if it falls the other way, it almost seems like it's still a win-win for crypto. As you mentioned, the more money printing there is, obviously that was what Bitcoin is made for. But on the flip side, if it doesn't and then it tightens and if it's an inflationary market, Bitcoin is going to start acting more like gold, right? For the first time, perhaps. Finally, we've been talking about it for so long. So I think either way, it's going to be a win-win. And for me, like in the long term, I still, you know, this is a disclaimer. It's not investment advice at all from both of our sides, but I think it's still a win-win for crypto in my view. We're almost at the end of our recording, but are there any parting messages you'd like to mention? Have we left out anything?

Speaker 00: 24:19

I think we covered quite a bit of it. Obviously, I would like to invite anybody to come in and try out the platform. We're now live in public, so anybody can go on Rho, that's R-H-O, like the Greek letter, RAW.trading, and check out the products. Try trading rates by simply connecting the Arbitrum wallet by Metamask. It's very simple Just check it out. There are some interesting opportunities there. There are a bunch of educational materials we are releasing and will be releasing. So feel free to subscribe to our socials and to our Discord. There's going to be a lot of cool stuff coming out.

Speaker 01: 24:48

Awesome.

Speaker 00: 24:48

Thank you so much for your time. Thank you. Appreciate your time. Thanks for having me.

Speaker 01: 24:53

And thanks for listening. If you like what you hear, give BlockCast a like and subscribe on your favorite podcast channels, Spotify, Apple, wherever they are. And for all your juicy Web3 news, keep updated on blockhead.co. Catch you all in the next episode.

Unknown: 25:06

Bye. Bye. Bye.