The Rise of Rari Capital | Jai Bhavnani

hey bankless nation welcome to another episode of state of the nation this is the episode where we go deep on a topic that is in the news and uh today we're going deep on rari capital this is maybe the unit swap of lending they've just made their pools permissionless we're going to talk about what that means we're going to talk about what rari is um i you know i think the tl dr here david is that anybody can be their own compound anybody can open up their own pool and be their own ave but uh give us the the quick rundown of what this is

and why it's important why we're talking to jay from rari today yeah just like you said uh rory capital is a modular lending market i think it's an interesting way to explain it and there's also a chance that during this stream we watch rari capital cross 1 billion dollars in tvl right now it's clocking in at 986 million dollars creeping upwards uh and the growth in rari capital because of their innovations has just absolutely blossomed from just

a hundred million dollars about 90 days ago to where it is now perhaps crossing a billion dollars uh live on the stream so uh we're going to go into the details about how rari capital incentivized incentivized all this capital to become deposited into the rari smart contracts uh there's also another story of that vari capital is a protocol generated by three very young individuals at the time teenagers started yeah 19 and 20 not even able to drink i think some of them

might be 21 years old now we're about to check in on those details as well but really overall an astounding story in the world of defy look at this number tick up david we're reviewing this on the rory capital website is 987 million right now creeping up towards a billion dude like i feel old you want to feel old and defy i remember when all of d5 was less than a billion dollars and now here's a single protocol built by a bunch of like 18 19 20 year olds getting ready to pass a billion

dollars my my how things have changed the banks are coming to us but we are definitely going to be talking about this i think it's a fantastic story and that second piece kind of that next generation of protocols that zoomerfi is becoming a term that we want to investigate some more is going to be equally interesting but uh david before we get into some announcements and other things this is the part of the show where i get to show off your fidenza rocks oh my god and talk about sirion who is uh sponsoring bankless shows for the next

little bit because they want you to know that they have some nft features that they have added to xerion in particular their mobile app is quite nice if you want to showcase some hot nfts that you bought like these or your mistakes in my case showcase your mistakes but enzo rock number 54. they'd be showing that out flexing on the dates he's on uh showing the nfts that he's rocking uh anyway xerion is adding these fantastic features um i i love it it's kind of a

trophy case not only can you track your d5 portfolio but you can also track your nfts and you can check that out at um xerion.io bankless for more info on that and to get started plug and get started david let's talk about what's new in the world the bankless because we got some stuff cooking guys is a hot six weeks for content i mean it's always hot for content but like i feel like our lineup coming up is particularly hot i think it's the best ever lineup we've ever had

for sure okay after the show dave and i were just discussing uh our agenda for our episode with andrew gang andrew yang we've been trying to get him on the podcast for so long and we he is now finally on his tour trying to spin up his uh third party his forward party and there's a lot of problems about society that both andrew yang and crypto are trying to solve and so andrew yang is trying to solve those problems via reform and we want to

see if we can convince him that another way to solve these problems is just by building parallel solutions yeah the the title this episode guys is um crypto is the way forward is that the title isn't working forward with crypto forward with crypto even better thank you sir we're coming up with the title as we go by the way are you wearing that to the yang podcast i don't know do you think i think you'd like it we haven't talked about this what are we wearing like did we just wear this uh t-shirt do we have to have like i mean just a major politician do we need a suit and

tie uh definitely not he never wears a tie he never wears a tie that's his thing well i mean uh we will talk about it afterwards but i feel like you should just be you you just wear that oh that's what that's what andrew yang does andrew yang is just yang so i think he would vibe with that for sure all right let's do that uh we also had an episode with rune christensen defy og that came out on monday definitely listen that episode all about clean money also about uh ethereum maximalism in a weird way question mark in an interesting way uh david you also had peter pan on layer

zero um that is peter peter's real name right fun fact that is peter's real name that is not a pseudonym right and man peter pan was one of the early genesis members of meta cartel uh and really the story of uh peter pan and how meta cartel came to be is one of the most interesting uh anecdotes like interesting subject matters to dissect uh because i actually kind of think it's ground zero for a lot of culture that has been created after the fact so really a fascinating story there that's on layer zero of course where

david has these in-depth interviews asking people personal questions like it's about the people it's about the the cultural layer of ethereum rather than kind of the protocols and the tech that we speak about so often so make sure you catch that as well absolutely yes it definitely uh i love every single layer zero episode we do uh i do but uh this one i think is yeah that's kind of my favorite so far they're all your children they're all my favorite children that's exactly right all right well to kick things off david

i gotta ask you the question i always ask on these episodes and that is what is the state of the nation today sir state of the nation is boomered ryan we are getting boomered because we have jay who's gonna be our youngest guest ever on the bankless podcast coming to tell us all about how three uh ups like of you know starry-eyed zoomer dreamers created a 100 billion dollar protocol on aetherium uh and as we all say uh every single weekly rollup crypto moves so incredibly fast that like it feels like people who came

into the in class of 2017 like i was and ryan i think you were class of 2016. we feel like we're a whole generation of defy apps behind right like our d5 apps that we're familiar with are uniswap compound maker but the the new entrants into crypto into defy are just familiar with a different set of applications uh and so there's a new generation coming to town and we want to tap into that energy and that knowledge and that's what we are going to do here today on the state of the nation lest we fall out of touch with what the kids are doing in the d5

space right david i i do feel like there's this whole new generation of defy apps that is making waves now nfts have caught everyone's attention right now but these defy apps are silently occurring massive amounts of attraction and a value inside of their protocols and i think rory capital is one of them so we are super excited to get into this conversation with jay from rory capital but before we do we want to thank the sponsors that made this episode possible bankless is proud to be supported by

uniswap uniswap is a new paradigm in asset exchange infrastructure instead of a cumbersome order book system where trades are matched with other humans uniswap is an autonomous piece of software on ethereum which is what ryan and i call a money robot no human counterparties or centralized intermediaries just autonomous code on ethereum input the token you want to sell and receive the token you want to buy something brand new in the uni-swap ecosystem is the uniswap grants program is now accepting applications for grants

we have been saying this for a while and will say it again dals have money and they are in need of labor if you think that you have something to contribute to the una swap dow apply for a grant to uniswap just look at the size of the uniswap treasury it's almost 3 billion this mountain of capital is looking for labor do you have something of value to contribute to the uniswap dal no matter how big or small your idea is you can apply for a uni grant at unigrants.org and help steer uniswap in the direction that you think it should go that's

exactly what we did to get uniswop to be a sponsor for bankless and you can do the same for your project thank you uniswap for sponsoring bankless the era of proof-of-stake is upon us proof-of-stake systems like ethereum terra and solana allow the industry to move away from the hot loud and wasteful proof of work systems and return back to a cottage industry of individual stakers and individual validators and that is what we need to make this industry stay decentralized individuals must play their part in crypto network validation and that is

what lido is here to do lido makes sticking accessible to everyone at the click of a button by delegating your stake to lido's network of nodes you can access the yield offered by proof of sake systems and claim your share of the network transaction rewards do you have 32 eth and want to stake it to ethereum but running a node sounds intimidating or maybe you have less than 32 eth and you need to pool your eth with others so you can access baking yields lido offers a solution for both simply go to lydo.fi choose which assets you want to stake

and deposit them to the lido validating network lido is working to make sure proof of stake stays as decentralized as possible and is committed to decentralizing its own validating network to eventually become a completely permissionless protocol so if you want to stake your eth terra or soul and get liquidity on your stake go to lydo.fi to get started all right guys we are back with jay uh bob not nonnie sorry sorry jay uh

you guys have seen 10x in total locked value in the last 90 days so you've gone from like 100 million let me look at the ticker we are at 9 million uh 988 million 988 million at the time of speaking we might hit a billion during this episode um so that's like pretty good for any defy app right even an og defy app but what's crazy is you guys are like 20 21 years old

uh you know and you started this thing from the ground up so we want to hear the story first because i don't think david or myself or the bankless community has actually taken the time to hear the full story of rory capital we published some articles on rari uh like we've been following you guys for a while but take us through the story how did the three of you get together and decide to build a d5 protocol that's now worth a billion dollars tell us that story yeah definitely first of all thank

you guys for having me here um to dive into the story i guess it starts with like the start of my crypto journey right so got in late 2016 early 2017 right as the bull run was just beginning to start and the the crazy thing is that i was flipping all these coins on bittrex and everybody else wanted to do that so they couldn't do it because coinbase only had three assets at the time and then i wrote like an instruction book right on how to go from coinbase to my ether wallet at the time and then to

bittrex so that everybody else could trade these coins and of like 20 people i sent it to only three of them were able to do it right there that were actually able to go through all of these steps i was like this is a problem right like let's let's do something about this so started work on a mobile wallet that made it super easy to interact with a decentralized exchange at the time of 0x just pulling in orders from radar relay and then um basically pushed that out and had a bunch of d5 integrations right d5 was just becoming a thing at the time i think we were one of compound finance's

first integrations if not the first integration outside of the compound website itself we were really excited about d5 right so one of somebody who i brought onto the team was this guy jack lipstone who i knew from school we consulted with bain together bain and company and i was like okay you're a smart guy like let's do this right you handle bd i'll handle development and everything else and we we did it and it was a lot of fun right just discovering defy in its in its early stages interacting with all these protocols and then the bear market hit and we're

like okay there goes there goes a lot of our users right there there goes the people who are looking for 100x because they're they're all down and in the red so ended up being acquired by my crypto where we stuck around for about a year right so i was doing strategy d5 stuff jack was doing bd and during our time at my crypto we actually got introduced to this guy david lucid um jack got introduced him through a mutual friend at a party and we we instantly get connected and i'm like holy crap this is a smart guy i was like this is a guy

that i know i'm gonna work with at some point and stayed in contact with david ended up leaving my crypto at the start of the pandemic and i was like i want to i want to do something right like i want to play in d5 i was already obsessive about d5 and it was consuming all my mental capacity i was like i need to do something in this space and that's really how re capital started is we said let's build a yield aggregator right we just we sold a company we're sitting on some cash let's find a place to go and earn yield and let's build our own

product that can go earn us yield using the cash that we have on our like in our in our bank accounts so built out the product and as we were designing it we called david right who's whose number we had was like david i have this cool idea let's go and build a yield aggregator right and david had been in crypto for a long time as well he actually built one of the first decentralized exchanges um and and he was like hell yeah like i'm in so we build we built the first version together had like 350 deposit limit now it cost more than 350 to

deposit in and we we got up to like ten thousand dollars in tvl and we're like holy crap this is so cool like we got ten thousand dollars under under our own system and and we've just been iterating since then jay let me tell me what it's like to build a defy app i definitely we we're gonna totally unpack everything about rory but my first question is what it's like to build in d5 while you're in college what's that like yeah honestly i would say it's a lot of fun right what i think about a lot

honestly is the d5 founder life cycle right maybe it's because d5 founders want to be decentralized but the unfortunate reality is that d5 founders don't last more than 18 months right i don't know what it is maybe it's burnout maybe it's that they get so much money that they don't have any more motivation but a lot of them phase out after about 18 months and me jack and david and the rest of the team frequently talk about how do we not fall into this trap right how do we not burn out after 18 months how are we going to stay around for the

next decade and iterate on this product and a big piece of it is balance right so yeah maybe i'm in school don't really go to classes but what's more important is that school provides me a balance so that i can outlive every other person in in d5 today so with you it and all of your friends in college are you like the crypto person that does the weird crypto stuff or like when you explain what you're up to with your friends like do they get it so they don't really get it it's it's the weird person with the weird crypto stuff okay but honestly like when i'm

with them i want to just withdraw right like i don't want to talk crypto i'm on my computer like 18 hours a day just doing crypto i want like two hours a day in a day where i can just like withdraw and and be out of crypto because i think that's what will be key in in enabling this project to last longer than others okay so going back to rari you said uh it's a yield aggregator but it's also a money market like compound or ave how do you explain rari with in relation to all the other defy apps that uh listeners

might be familiar with yeah definitely that's a great question so we started rory as a yield aggregator right and we got up to ten thousand dollars tbl within like a month which was really cool um did like this guarded launch approach and then in october of last year we did a liquidity mining campaign right we're a fair launch project we gave out 87 and a half percent of our tokens to depositors across a 60-day period right so we like the founding team has very few tokens relative to most projects and it was

after this liquidity mining period that actually we realized okay now that we've stopped distributing our token our tvl has collapsed right we're just another yield aggregator in a complete red ocean we're in the middle of the stack in terms of people go from metamask to us and we go and deploy capital elsewhere and looking at legacy finance and traditional finance what we know is being in the middle of the stack is a race to zero with fees right and i just didn't want to compete in a landscape like that i did i figured it would i don't want to be in a race towards zero

with fees i want to do something actually cool here and not just be competing and iterating and competing for strategies so we said okay what can we do and we said we want to control the entire stack this entire capital funnel of the wallet to the yield aggregator to to wherever we deploy the yield aggregator we said okay where do we start first and it was on christmas day of last year that i came up with the idea for fuse and basically the idea was let's let's create this isolated this isolated lending and borrowing protocol and the the idea was not only because we

said okay we want to control the entire stack but alongside that we actually wanted to be able to lever up on the interest rate tokens that we had from the yield aggregator so you could have leveraged yield aggregation it wasn't possible to go into compound and go and go and ask them to add our tokens because we were still a new project at the time so we said this would be a really cool solution so i remember that night i called david christmas night and i'm like david i just came up with something that could be cool what do you think about it and we chat about it for two hours and then right

sorry christmas dinner wasn't entertaining enough for you so you're thinking about d5 stuff you could do exactly unfortunately i'm always thinking about d5 stuff we can do um and then i call david and um i explained it to him we talk about it for like an hour and then we don't really talk about it for a few days and then david text me like a week later and he's like hey i have a prototype you want to play with it and i'm like holy crap like let's do it and that that was really the start of fuse and since then obviously been iterating on the fuse protocol seeing how can we make this more capitally

efficient how can we make this support more assets and how can we make this truly something special and i mean now now when i think of rari i really think of us as this this open interest rate protocol right the yield aggregator is now just used to supplement the the fuse product where we're actively like iterating on all these products but it all really centers around fuse because fuse is something special right it enables people to borrow and lend any asset in a way that like quite honestly you could never do before in human history right you'd always need some

centralization whether it be token holders um your bank whoever it may be the the idea here is like let's enable individuals to do whatever the hell they want nobody should be telling anybody what they can and cannot do is this why jay people are calling this like or maybe you guys are coining this term uh the unit swap of lending because it's that permissionless because unlike exactly with an ave or a compound where it's sort of you know the pool is what it is maybe governance gets decide token vote gets to decide which assets you know go into it or out uh in this model

it's more like uniswap right so like anyone can who has a token you know can create a uniswap market anyone who has a token or a set of tokens can create a fuse lending and borrowing uh market for this right exactly how i like to think about it is like for those who were around in like 2018 2017 it was like you had dexes like radar relay right which had permission permissioned listings right it was the team that was adding to the order book and now with fuse it's it's similar to how you went from radar relay into

products like uniso right and now we're doing the same from compound then ave into something like fuse so uniswap famously is uh good at providing liquidity for quote unquote the long tail of assets and this is something that um actually antonio giuliano from dydx kind of changed my mental model about things where i thought you know unit swaps where all the liquidity is but his his argument was that well for the assets with the most trading volume it's still going to be order book

based exchanges but uniswap can have all of the longtail is that kind of the same model with like things like ave and compound where you know maybe ether and wbtc might be the best assets to put inside of of those money markets and then just borrowing usdc or die on the other end very basic stuff but the long tail of borrowing and lending might be better served by rari is that is that a fair take so i i think it'll be a little bit different for the lending and barring space than the exchange space right for

something like compound compound is a feature of the fuse protocol you can go and rebuild compound using our protocol so i don't think like what what what users of compound are using and why they're using it isn't for the protocol itself they're using compound for the risk assessment that the compound labs and the compound token holders are doing to make sure that the pool is safe maybe using some of the reserves to play a part in that decision making but for us there's there's no efficiency differences in terms of using fuse versus compound there's there's a total

world here where compound becomes a fused pool right maybe we can create a fuse pool that matches compounds exact same variables and we can have a bot do that and at that point there becomes no reason not to use fuse and this is infuse's current state right what we're working on now is a bunch of different upgrades that's going to make fuse capitally efficient right more efficient than the current lending and borrowing markets that we offer and that compound and ave offer and that's when it'll get really interesting why so if you can just like copy exactly compounds

parameters and deploy it into fuse why would you use fuse instead of compound what's the what's the incentive there it's more just like that that can happen right and what what what the consequences of that can be are really up to whoever the pool creator is maybe they want to get rid of reserve factors so that way they pay less to borrow in which case somebody can do that if they think it's the right decision but the the end goal there is there shouldn't be anybody telling you what you can or cannot do what you're saying is like basically fuse functionality is kind of a super

set of compound and ave right whereas compounded they are just a subset um but but one of the reasons that compound or ave in in particular a compound is maybe the more risk adverse more conservative of the two protocols right you have kind of you know uh compound which is like you know suit buttoned up thai right and then you have ave which is a little crazier a little bit of party and then you have fuse which is like out there you could do whatever you want on fuse and the compound folks will say that that's because of risk jay right

it's like some of these pools are downright dangerous like who knows the assets that might be backing some of these pools and you're really going to uh you know lend against them or you know borrow against them you're going to use this as a as a collateral source what happens when they go to zero what about the risk overall to the system how would you reply to uh to those i guess criticisms or those questions yeah i i agree with all of that right but it's it's up to the pool crater at the end of the day right if you believe

in compound risk model you can copy that into fuse right but the the the real thing here is fuse shouldn't just be the the party on this side fuse covers the entire spectrum and it's up to pool creators to decide where they want to fall on the risk spectrum i totally see fuse pool is collapsing with bad debt and i also see fuse pools thriving with with great markets and the the idea here is let's let free markets really decide and let the pool creators dictate where they want to be on the spectrum and i guess the key point jay is that like one

bad pool doesn't spoil the rest exactly a bunch it's just kind of an isolated thing is that correct yep exactly so your take is like let a thousand pools bloom and yeah some of these will you know be let the market decide uh you know some of these will actually be okay and the market will price that risk in and i presume for some of these pools uh reward in in terms of interest rates accordingly for for the risk that uh an individual is taking kind of

lending some assets to this is that correct exactly yeah like you you see some pools like tetranodes own pool right you're you're getting 76 ltv on your own which is absolutely insane but that's also reflected in interest rates being 40 plus percent on average for the past month on usdc and die so tetranode is paying 40 on his loans i don't know if tetranode himself is but other people are inside of the pool right and most of them are just leveraging up on home and becoming 99.

that's super fascinating and like you you also on the on the website though try to do some sort of maybe it's rudimentary maybe it's sophisticated i don't know some sort of risk assessment based on these pools and you have the qualification of verified and unverified pools and i'm assuming the verified pools mean it's been like previously it's kind of white listed like it's gone through your governance process now i believe you've removed the governance process like from that angle so anybody can create a pool so they're kind of i guess one of the same but but tell me about the the grade letter risk

assessment because tetranodes pool and it's not you know tetranode may have created it may be labeled but anyone can deposit anyone can borrow against it um just to clarify but like that gets a an f score on the report card so why does it get an f and what drives that risk assessment versus other pools that get closer to like a c or a b yeah there are a lot of different things that go into the risk assessment and it's something that we're also just evolving with time right as we learn more and more about how these markets

work and as we learn more and more about risk and what that looks like in d5 so really what's driving tetranode's pool score down is that there's so much om in there right and there's almost getting to be too much in there right and what it's happening is it's outweighing the the ohm that is available for liquidity on sushi swap right so that means that for if for some reason there is cascading liquidations and you see 300 400 million dollars of ohm there's a chance that not all of the

um can be liquidated in time at a good enough price to keep the lenders of the usdc solvent so the the if there is a liquidation on ohm you're saying that there's so much ohm in rory that it would just wipe out all the liquidity in sushi swap which is a risk and so you have to price that risk into the safety score that's what's going on exactly yeah but like who determines that safety score is it is it subjective no so it's completely public we have like an algorithm that does if you google ferrari risk score i believe it

should come up or something like that um ferrari safety score is what we call it and essentially like what it it's looking at so many different variables right now and i don't even know if the latest one is up to date um but but it's it's really cool and one one thing that i will add is like this is our front end right this is this is rory capital's front end but on the on the back end right risk scores don't affect anything it's just something that we add on the front end same with verified versus unverified pools so you go to an another front end ferrari

something like market.xyz and yeah they borrowed our risk scores but at the end of the day the white the white listed or verified versus unverified pools these are all just things that we're adding to the front end so all of these don't really mean anything on chain and they don't affect the lending and borrowing like interactions itself i am glad you added though like at least as kind of a placeholder and to your point somebody else could create a different front end with a different risk score assessment that's more accurate that's better a better model and all of these things but

i am glad that you you added at least this kind of a placeholder on your front end because i what i find is the tricky thing about um i i guess this is just human beings is we're really shitty at assessing risk like you just can't do it we see like juicy yields like 70 yield and we want to ape into that right like oh yeah 70 yield like what could go wrong but what we don't look at is the the true thing we should be looking at is risk adjusted yield right so what

does that yield after you factor in the risk of the pool and all of these things that can happen like factor figuring out risk and doing risk assessment that's the hard work it's very easy to generate a yield number the hard work is to actually do the assessment of risk and once you do that you might find out that that pool is like negative in terms of risk-adjusted reward or or maybe it's only five four percent or ten percent but um people don't do that particularly when when d5 is moving so fast we're just like going from farm to

farm to most attractive yield most attractive yield so i understand that your protocol is not a risk protocol but at some level if people in d5 are going to make good decisions we need to factor in the risk side of the equation as well i don't know if you have anything to add to that no i think you got most of it right it's like i i think that most farms just like in during d5 summer the risk to reward just doesn't make sense right and and it's really scary to see people aping in mortgaging their home to go and ape in

and unfortunately one or i guess fortunately and unfortunately is that our platform is now being used by real people who are using it for real-world use cases right people are borrowing against their their dollar amount to go pay for mortgages on their home right that's really really cool but it's also really scary right so as as the as the protocol as creators and as the protocols founder you're you're right on it we need to inform users of the risks so that they understand so that it doesn't affect their real their real