🟢 Consensus Unfiltered: Day 2 Live

The discussion begins by explaining the mechanics of decentralized exchanges (DEXs), specifically highlighting the "MetaDEX" system, also referred to as the "Aero system." Unlike traditional DEXs where liquidity providers earn trading fees, MetaDEX allows providers to earn token rewards by staking their liquidity. In return, token holders, through "VE Aero" (soon to be "SAero"), receive 100% of the protocol's generated revenue. This creates a self-reinforcing "MetaDEX flywheel" where increased liquidity attracts more volume, leading to higher fees and revenue, which in turn makes the token more attractive to liquidity providers. This model has proven successful, dominating trading volumes on chains where it's implemented, such as Aerodrome and Velodrome. The system is slated for launch on Ethereum's mainnet in the summer. The conversation then shifts to the Consensus conference in Miami, where the mainstreamification of crypto and the integration of traditional finance with DeFi are key themes. Discussions revolve around critical aspects like Anti-Money Laundering (AML), Know Your Customer (KYC), custody, and legal title to assets, which are often overlooked in crypto but central to traditional finance. Despite these challenges, the substantial growth of crypto stablecoins and DeFi vaults has made engagement unavoidable for traditional financial institutions. Alex Pool from 2 Prime, an asset manager for institutions with accounts typically over $10 million, discusses their historically "boring" approach focusing on Bitcoin. 2 Prime has primarily facilitated low-risk Bitcoin trading and dollar loans backed by Bitcoin. They differentiate themselves from entities like Celsius and BlockFi, which imploded after FTX, by emphasizing robust risk management. Unlike those firms that lent to each other, provided false balance sheets, and rehypothecated Bitcoin, 2 Prime prioritizes a simple, secure model of lending dollars against Bitcoin with proper management of their book and clear terms with capital partners. This approach ensures stability even during market volatility and liquidations. Demand for Bitcoin-backed dollar loans is correlated with Bitcoin's price, increasing as the price rises. However, 2 Prime sees persistent demand from entities with fixed capital expenditure needs, such as Bitcoin miners looking to build new facilities or invest in AI. While the overall lending market is currently slow and more competitive, specific client categories continue to borrow regardless of market conditions. Regarding Bitcoin price drivers, Michael Saylor and MicroStrategy's Bitcoin purchases are identified as a significant factor, though uncertainty surrounds the mechanics and timing of dividends for their Bitcoin-backed product. The potential absence of this demand could leave a void, as other massive buyers are scarce, and some institutions and miners are selling. A rebound in Bitcoin's price could trigger reflexive buying, but current rallies are seen as largely driven by derivatives and leverage rather than spot buying. Geopolitical stability and a clearer outlook for the global economy are also crucial for institutional risk-taking. The current stock market rally, driven by a few AI-related stocks, is also viewed with caution due to extremely high valuations, signaling potential market tops. On the topic of Bitcoin DeFi, 2 Prime does not directly offer products but works with companies in the space. They observe that on-chain DeFi yields and staking rewards have largely diminished, leading many DeFi entities to seek returns through more traditional finance methods. The recent hacks in DeFi have eroded institutional confidence, making it difficult for DeFi to offer yields superior to traditional safe assets like Treasuries, thus presenting a "big mess" with more risk and less reward. Muli from Zertora, a security firm specializing in DeFi, discusses the heightened focus on security following major hacks. He notes that vulnerabilities are found not only in smart contract code but also in infrastructure configuration, centralized points of failure, and compromised keys. Security firms like Zertora now offer end-to-end security, including incident response and broader security practice audits, beyond just code review. The attack surface has expanded across various layers, including layer 1s, layer 2s, and cross-chain interactions. Vulnerable spots in DeFi include the deployment phase, smart contracts, wallets, and the supply chain of software development. While bridges have historically been a significant target, Muli suggests that network-level vulnerabilities and smart contract issues are also critical. He believes that while bridges remain tricky, secure bridges are being developed, and attackers are increasingly looking for other avenues, including social engineering. The cost of maintaining robust security and decentralization raises concerns for smaller projects with limited budgets. Muli hopes that smaller, bootstrapped projects can still thrive by building innovative solutions, but acknowledges that cost-effective configurations like single signers are often chosen over decentralized networks for bridges. Regarding the response to hacks, Muli is involved in the security council for Arbitrum and notes the contrast between the corporate world's approach to risk and DeFi's community-driven bailouts. While the collaborative spirit of token holders pooling funds to cover losses is inspiring, he questions its long-term viability as a security solution. He emphasizes the need to limit losses and suggests that an insurance layer could be beneficial if it can effectively manage risk without causing premiums to become prohibitively high for institutions. Despite the recent security incidents, Muli is surprised by the continued institutional interest at Consensus, attributing it to a perception of the DeFi space maturing. He believes that while immediate concerns exist, the sector will improve in the coming months. Muli's goals at Consensus include learning about the advancements in payment and security, particularly how LLMs can be leveraged for both offensive and defensive security measures in DeFi.