MakerDAO vs. Aave | Sam MacPherson & Marc Zeller

bankless Nation drama has ensued in the ethereum defi lending space maker Dow has opened up a vault with Athena their brand new synthetic dollar usce and given it a line of credit with die this allows Market participants to Loop their Athena position and leverage up on the yield that is being produced from the Athena product at the same time a governance has said yikes that's too new too risky and too overe propos for us to retain Dy as collateral a recent governance proposal in the a DA has

proposed to remove Dy as collateral in the a system driving a wedge between these two protocols today on the show we are going to Hash this out Sam mcferson from The Maker side of things and Mark Zeller from the a world are on the show today each of them are going to explain their perspectives as representatives from their respective ecosystem about the choices being made and the next steps here for each respective app if you are here for the drama in twice sadly this episode will disappoint this was an amicable cordial productive conversation between these two guests

and since we're all here to achieve the same goal to scale Defi and make better products for the onchain users of the world so let's go ahead and get right into the episode with Mark and Sam but first a moment to talk about some of these fantastic sponsors that make the show possible bankless Nation excited to introduce you to Sam mcferson he is the CEO and co-founder of Phoenix Labs a one of the main contributors to spark which is a part of the maker Dow ecosystem it's a maker Dow subow Sam welcome to bank list good to be here Mark Zeller of course very similar relationship over on the a side the founder of ACI which is

one of the core contributors to the a protocol Mark welcome to bankless heyo so we're seeing some developments in the ethereum app ler around the lending space some uh different decisions are being made by your guys' respective organizations that I want to unpack and parse into I want to kind of like attempt to see like a protocol here uh what is it like to have the perspective of a what is it like to have the perspective of maker da cuz as these are similar products they are making different decisions and I kind of want

to understand uh the decisions from the perspective of each of respective uh protocol uh the the big news here I think started off from maker Dow's choice to integrate uh uh usde from Athena this brand new synthetic dollar uh that everyone is is hyped up about uh and then give uh ethena a line of credit of of sorts uh to be collateral in the makerd system uh and um use that as a a source to back die uh and so this has uh

produced some sort of concerns and controversy around the risks of this brand new protocol uh since it is relatively new brand new on the scene and we've have never seen a product like this uh and so Sam maybe you can walk us through the thought process um if you could speak for like the maker da the protocol again like kind of seeing like a protocol uh uh can you walk us through the thought process of onboarding usde as collateral into the maker Dow system like what uh what are the risks how were the the parameters chosen just kind of

give us the perspective here yeah sure maybe let's first uh just say what uh USD even is Athena so uh usde is a tokenized cash and carry um so it's like a wellknown uh investment strategy where you go long and short on eth or Bitcoin and then on the short end you go short the perss and this allows you to have a delta neutral position and pocket the uh return that the borrowers on the other

side that are taking leverage on Ethan Bitcoin uh they pay for this position so this has been done for a long time it's it's nothing new what is new and interesting is this tokenization so you can think of it a lot similar to like uh e staking so you have um e staking that's all well good and people can go and do that themselves but what's what's new about this is the tokenization you have lsts and that enables you to use uh defi so this um composability is what

what what is the very new and interesting part and it's to the point where even uh some larger firms that have been doing this themselves prefer using Athena because of the capital efficiency of being able to use defi so uh this product in of itself is uh really great it's an innovation it's something new and I'm very excited about it and the market uh naturally is catching on now we see what the large uh growth right now so where so as everybody sees the uh interest rate or the yields on this uh the savings

version of this the S usde um are like you know 30 to 60% when the bull market is going so where is this yield coming from it's from a market inefficiency in that on these centralized exchanges where these users are using the perss to go leverage long they're willing to pay uh you know 80% uh Boral rates there uh because they think the prices of eth and Bitcoin are going to appreciate and that's a worthwhile trade so this whole thing is funded by actual users um paying for

this this is not some crazy construction it's well known it's fairly safe um there are some risks associated with it and I think we can get into that um but in and of itself it's a tokenized strategy so um where Maker's position in this uh maker has a lot of capital available five billion outstanding die which it can deploy on the supply side into various opportunities so previously um since the defi rates have been fairly low um you know below the t- bill yields

up until a couple months ago the best opportunity uh at the time was to have most of this uh idle Supply um in t- bills so that was yielding about uh 5% and that's why you saw saw the die savings rate at about 5% up until recently what changed in about January is the defi rates just started surging because the bull market kicked in and now U maker as a one of the as the largest LP in defi is reallocating uh this t- bill portion yielding 5% into

this uh higher yielding there is higher risk but it's it's uh it's being done in a safe way in into this higher yielding opportunity now I want to be very clear I think there's a misconception that maker is directly allocating into uh usde in the same way it would with t- bills it is not doing that instead maker has created uh vaults in the same way that you would um leverage up on eth or wbtc and the maker core vaults we have opened up a new Vault that is uh has over

collateralization of most primary positions are 85 86% LTV and 91.5% LTV so these positions are overcloud alized so maker has exposure indirectly to usde um which is different than the t- bill exposure which is held directly by the protocol so this provides a far greater level of uh safety for die holders and um maybe we can get into this later but we can go over all the layers of protection that are in there

that protect die holders from uh events that go wrong within Athena yeah maybe just to put it very simply uh when maker da owns t- bills it owns the T Bill asset uh but in contrast when maker gives uh Capital towards the Athena product there is a buffer of an over collateralized vault in between Athena and maker da uh and so there there's that like kind of like a circuit breaker there a buff and over collateralized buffer um when maker Dow gives Capital

to Athena uh maker Dow Maker's liability is D which is dollar denominated but Athena if I'm understanding the product correctly takes eth as Catal or maybe I'm mistaken how does that when maker Dow gives Capital to Athena how does that work yeah so maker Dow does not give Capital directly to Athena the market will do that so we just uh onboarded these vaults and they're just like any other vaults it requires uh leverage users on the other side to just uh wind this up so um when we uh put

these vaults up you have uh users who have usde and we also offer vaults with sde as well so let's just talk about USD to symbol so uh these users who have USD can put it up as collateral take a loan just like you would do with any other asset like eth on maker cor vaults and then because the interest rate on uh die borrow rate is lower than the yield coming from USD this user can lever it up you know about 10x is is what we're seeing and then they can uh uh this will

create demand side pressure on the uh USD token so and then the market makers who are are able to Mint this is behind a uh kyc process similar to like usdc so increased demand for uh USD will convert into uh pressure into increases in the price of USD which will get arbitraged out by the market makers who are kyc who will take this and then mint more and then sell it into the market to bring the price back in line okay so just to there there's a loop being established

here where there is a yield uh to produce uh usde from Athena and then there is a yield a cost an interest rate to borrow die and then Market participants are basically able to ARB these two things and so they're able to borrow die to Mint usde at some yield uh use that usde as collateral which is the thing that make the decision that maker doubt did to like allow usce to become collateral uh and then there's a spread here a yield spread uh and you're saying like we are enabling the market to close

that spread via looping via leverage uh but this is is okay because this uh product this vault is over collateralized exactly okay uh Mark let's let's turn to you here because there has been discussions in the a governance forums uh about offboarding die as collateral uh and I think it's because of this broad brand new product this brand new um offering from the makerd system uh saying uh it's just citing the risk uh so when you hear Sam explain this product uh I'm assuming you

hear risk uh can you kind of give us your analysis on like this whole side of things and some of the decisions the motivations to offboard diets collateral from a so the first thing is that we just have 10 minutes of straight up like uh uh how would I call that uh control uh facts and control truths and the thing is that this Cash and Carry trade if it was that seamless and that risk free everybody will be doing that like if it's a money printer I will do it myself and it is true that uh in a

bull market and when there's a reasonable expectation that market price will go up usually the funding rate when you take a leverage position to sh an asset and you hold the same asset into your wallet the funding rate will be positive to you so shorter are paid to hold position in a bull market and that's basically the spread and that's basically where the money come from because some people I think like the EA guy like Sim say today or yesterday on Twitter there's no leverage on Ina it's

very funny to me that the team doesn't know work but uh it's obviously you you don't have 100% LTV on those position so you need leverage to equilibrate uh both uh both those position and et9 is a good system I'm not saying it's a bad system I'm saying it's a good system but it's not a perfect system that just can PR money overnight there's no free NCH and it's quite important and our job as liquidity protocol is to do risk analysis because at the end of the day

we have actual people putting their life saving in the protocols so we have a Nial responsibility to do our best each time we go to bed to say okay today we did our best to protect the users so that's why we need deep analysis into the product and a good product and a good position can become a bad position depending on sizing so something that is true at the scale of $100 million might not be true at the scale SC of $600 million and even less true at the scale of5 or10 billion and that's the fact is

that ittina right now it's already A fifth or even a quarter depending on the market condition of the all open interest all the open position on the market right now in their vertical and the thing is that when you evaluate the risk you evaluate the liquidity uh crush the sigma event that say okay there's a high level of liquidity and a higher amount of day Leverage What happen if I have 20% of all the shorts in the market

and the eum price pump of 30% overnight of course I get liquidated but if 20% of all the position are liquidated that's a long squid or a short squeeze in this position what happened when there's a short squee the wall Market uh uh the whole Market uh just get uh that bought and the price went up uh with will go up even more and then the position is worse and worse ittina people are smart people so I'm not saying this is crazy I'm not

saying this is Terra Luna I'm not saying this kind of thing what is concerning to us from the a perspective is the speed of growth or disposition because what can be a good trade and a good money maker at a certain scale and growth over uh a few weeks can be extremely dangerous if you do overnight and that's basically what happened what we have been witness of this week is the fact that our

Baker is not an hour anymore so there's been 48 hours between the publication of block analytica Forum post hey let's grow this 100 million position to 600 million and okay we accept that and let's put that into a vote and the vote is just Rune and the perpet of Ru so we know the uh the vote will pass and we even have yesterday R goes on the Twitter going on the Twitter space and say I don't want Rond taking random people taking decision for my protocol

like oh like concerning it will be like if someone would say that on the a like it would be so disrespectful of our community that it would not pass like uh you you cannot do this kind of things so that's our main concern is because there's no gr raids anymore and because the speed of growth of this position even if this position at the current scale are probably safe it's better for the a user to be on the safe side and you can be on the safe side in two ways

the extreme way is to say okay D is not a collateral anymore and that's why and is completely fine because the use case of stable coins in defi is to be borrowed not to be use as collateral less than 5% of th in a are used as collateral so it's not a money maker for us and it's not a big market for us to have d as colat we make money when people borrow a D in order to build position in the market so if we remove that possibility the business we lose is

basically zero another way to do this is to reduce the LTV so reduce the borrowing power capacity of D and what you do when you do that is that if goes wrong your protol so the a protocol and the a user will get liquidated first so will get protected first and that's extremely important because when there's a dpeg event Le Creator will show up when they can show up first and when they can make

a profit first so if we have a LTV that is slightly lower for D on a than the other markets and things go wrong with d the a user will be protected first compared to the other protocols so the both solution are actually good for the Abid there's all upside and no downside that's why it's proposed to the form but because we are an actual da and we do care about our community uh they are not treated just like randoms there's a debate happening right now there's people that are PID by the da that will

provide the risk analysis and based on their answer and their valuable feedback there's going to be a consensus there's going to be a vote and that's going to be implemented in the a protocol Mark can you kind of rate just like um I want to just double click on the the risks that aac's in this whole system I think I think you're saying that at a $100 million like line of line of credit which is what um maker Dow started off uh giving this uh Vault this ath Vault you're saying that that's probably fine

um but the intentions of maker da is has stated to I think increase it to 600 million and then later later a billion um maybe Sam you can kind of check me on my numbers there is that right yeah can I can I clarify about these numbers some of them are like just more technical details and less risk parameters so the way uh Maker Works is that um all of the vaults um including like eth and the PSM and now uh this Moro Vault that goes to Athena are uh capped by this rate limit

so every the rate limit for these Athena vaults is set to 100 million every 24 hours and that is the important number not so the one billion number that keeps get throwing around that is a pretty arbitrary number that is the maximum debt cealing that this the source of that is the maker that will governance form and the source of that is the post of block analytica that is actually the guys that do this for you guys like it's not a random number that's created out ofer that's your words I'm saying it's

an arbitrary upper limit now what is important is this 100 million number that is the amount of uh debt cealing that can be allocated immediately then there's a 24-hour cool down and then you can all another 100 million this is the primary just really make sure I get this right so we can allocate 100 million and then it's like Frozen for 24 hours and then you can allocate another 100 million so every 24 hours you go up 100 million yes so $100 million every 24 hours does seem a little on the fast side yeah but the important part is that

you can cut it off if something goes wrong um there is an interrupt there and so that's your maximum exposure this 1 billion number is is very is like an arbitrary maximum and it's getting thrown around and it's like it's not a particularly relevant number when you're considering risk so um yes there is a plan to ramp it up to 600 million Target but this will be done slowly there is could couldn't it in theory happen inside of six days uh yeah but I mean there is a feedback process so there's people watching the market conditions

we're going to ratchet this up slowly watch it it's not just going to go maximum Full Throttle the whole way so this is um this is like setting the bounds I guess and then humans will watch and make sure this is done in a safe way the whole way up but the thing is that's the available liquidity is zero so when the liquidity is used what you're going to do like take the money back from the users Force the liquidation of the users the only thing you can do is play is play with the interest rate so you can incentivize

the user to repay by uh putting them egregor interest fee to maintain their their position but you cannot just like close dep position of the user overnight that doesn't work that way so if you print 600 million and the market take it they take it yeah so this is all about duration risk so we can definitely get into this and I can explain what will happen in you know in the event of liquidity crunch or insolvency um do do we want to do that now David or yeah so I think what Mark is saying is like if

you let it get up to 600 million and then maker risk analysis is saying well that's that's too much per market conditions there's we have too much exposure here we're not able to sustain this level for whatever reasons Mark's I think Mark is saying well how do you how do you appropriately wind it down uh and so I think that that's the question to Sam yeah sure so if um there's a whole bunch of different scenarios that can happen here if there was sort of like yes we have too much exposure we need to pull it back um you know gracefully over the course of like a month or something that's pretty easy we just withdraw uh

all the idle die and the uh so these markets they use utilization based curves that will ratchet up the borrow rate um at when the market's at 100% utilization so this encourages people to repay their loans so we can do this gracefully over time I don't think there's a problem I think what Mark's more concerned about is like where there's more of an emergency situation um a liquidity crunch on uh D let's say the uh usdc let's use the real data right now the real data as we are recording right now is that the position

in moru that allows 20x leverage so the highest amount of Leverage currently has $1,000 of available liquidity out of $10 million of liquidity so 99.9% of that liquidity is use there's nothing you can do about it and people are ready to pay 90% to use that liquidity because they are farming like the in a drop or whatever they want to do with it so the cost of maintaining this position is 90% And that's a fact what can you do about that the liquidity is already done well let me run through it okay so and first

of all the average um LTV the collateralization is 90 is 88% so that's more like 10x not 20x but kind of beside the point anyway so let's run through the scenarios where um okay let's say Athena has uh there's there's two kind of uh different ways that there could be a dpeg of Athena where um it's no longer trading at a dollar there is a situation where there is a liquidity crunch where people just want to exit you know maybe the Market's crashing but the assets

themselves are it's still backed over collateralized on on Athena's side so this sort of scenario is um probably going to happen it's actually pretty likely I think even on ssde uh there was a 2% dpeg even like a couple days ago with the market crash so we expect this to happen and this is actually why uh we hard Peg uh the oracles because at maker size we do not want to be fire sailing these assets when we know if we wait a week they'll regain their value this

exacerbates the uh dpeg conditions and Maker's happy to wait this out so these uh temporary dpeg situations are not really a problem and this is actually the same a does the same on uh their market for lsts they hard that is not true that is not true that was true like six months ago but that's not true anymore it's still true so they hard Peg they hard Peg st e to eth me my own protocol some are you sure I mean just your Oracle the other day you

guys are still hard ping we do the same for the same reason I think it's the correct decision so anyways in the sense makes sense because let's move on because there's lack of liquidity sometimes in the uh defy markets it makes more sense to hold the asset and um wait for it to return to Peg um instead of exacerbating the problem by fire sailing it with liquidations and this is um the kind of trade-off you have with a lot of pegged assets so now what the situation where that's um more a little bit more

dangerous and precarious is this insolvency where there is actual losses and this can happen as well so I would bucket these into like two categories as well so there's categories where you have these uh catastrophic losses to the point you know it's like 30% plus where you're like really just something has gone horribly wrong and for Athena we've looked at these risks and there's really only two ways you can have losses of this magnitude if there is um let's say a fraud or um a custodian is hacked or

something like that so where these like basically we we're lucky it's never happening crypto okay but that's fine this is a risk for pretty any if you accept centralized assets at all this is a risk everywhere so you kind of just have to accept that this risk won't happen and if you do that you start looking at the more nuanced situations where you have losses on the margins so this would be something like an operational failure where you know um everybody's exiting all at once they have a slippage on the perss trying to

Reby them to close out their positions to honor the redemptions and this can totally incur losses if the especially if the funding rates go negative and Athena is very aware of this this is why they're building up a huge Insurance buffer right now currently stands at 32 million they've raised this in only a month and part of this uh points program that they're running is actually fairly genius they are building up this massive cash Insurance to protect against these sort of uh slippage events as as they happen and protect USD holders so these

can kind of affect it to a couple percentage points but okay let's let's run through the scenario where um Athena is taking uh losses in the degree of you know maybe uh 20% or so and this is kind of this is on the upper end of what is uh reasonable so they've blown through their insurance buffer now what happens is the uh users who have taken uh leverage on these uh Moro vaults what they what the market will do is they'll just max borrow all the idle die because the collateral is now worth uh 80 cents

on the dollar and they can borrow uh more die that's more valuable so they'll Max up the vaults to 100% utilization so this will just um naturally occur so what happens next is that the uh interest rates uh will continue to climb on these vaults um these vaults are now in solvent and once the interest rates they'll just keep growing and growing and growing until these vaults reach liquidation threshold now because the assets are worth 80 cents on the dollar

they're worth less than the die to repay the market is not going to liquidate this position but there is one person who is or one actor who is uh wanting to liquidate this position that's maker maker can mint the die can repay the loan get the assets back on its books and then you know do the settlement at 80 cents on the dollar now uh even if this occurred so we have let's say this 20% loss scenario you have a 10% protection that comes from roughly 10% that comes from these over collateralized vaults so immediately

Maker only taking losses of 10% of the position so let's say this is uh 600 million position that's 60 million in losses that goes to maker these Surplus buffer is larger than that so maker can cover that in cash and in so even if we start going Beyond these numbers like maker additionally has another layer of uh security here where it protects die holders that it owns $150 million of maker die Unis swap V2 position this is protocol on liquidity so as it's minting

maker to cover the shortfall it can use this uh you know 75 million die that's sitting there with buy orders that can uh sustain the price of maker but this is this is like sort of a very catastrophic scenario that is is is unlikely what's more like if there are if there is some level of uh insolvency it's going to be on the margins you know a couple percentage points but this is why we don't hold uh USD directly on our books Mark when we when you see the risks of the Athena protocol what where do you see the

losses potentially coming from like what what what's the scenario in which you see losses need needing to be like covered the the important fact is to to be clear that I'm not against satina like I think it's an interesting uh Cash and Carry trade what I'm less convinced is their ability to produce significant yield over time because every Arbitrage opportunity on the market that's like Basic Finance is meant to be temporary otherwise we just print money and we all

be unit I would love that but that's just not a fact of the market and as we are speaking right now because we've been through a tough week on the market the actual yield of s USD is not 60% anymore I'm checking it right now as we are speaking and it's actually 7% so it's below the DSR yield so right now the only reason people use the the meod volt is to actually bet on the airdrop of etina because the spread between what

uh the yield of the position so when you hold s USD and the cost of your position is negative so you're not making money opening this very high leverage position uh you are actually losing money and you are losing money on average but the BET of the user is that the airdrop will compensate that which is fine why not uh it's a legitimate bet and everybody can try whatever they want in the market so that's the first thing I'm not against Ina uh I think that in the long term

that's uh that's something that will normalize and find some equilibrium and if they are smart enough to to and I think they are smart enough uh to not be completely dig uh it will be an interesting uh another New Vertical in the defi landscape the thing that is important is that there's a lot of optimism in this conversation so we just going to uh print some money that money going to be great in all our Treasury and if things

go wrong uh that money will be used to compensate the loss and at the end of the day it's risk and reward and we take a fair amount of risk but because the reward is so high we are making 60% 70% 90% return on those position if we lose a couple million or even 20 million that's completely fine because we have the cash and the bottom line is still profitable for the protocol that's a combo and it's a fact and I'm not sure that the people that sign up to the most

decentralized the decentralized uh stable coin of the ecosystem sign up for supporting uh an N age Edge found that's basically the the system right now because when I start using die six years ago now and even more more than that and I was a huge supporter of mead my idea was to support a decentralized table coin otherwise I just use usdc usdc is very simple and it's I know there's some dollars in a bank account somewhere the idea was to have a stable C and and the