Samed Düzçay: Accessing Institutional Yield Strategies at Tori Finance

The podcast features Sam, founder of Tori, a yield protocol that brings institutional-grade delta-neutral strategies on-chain, starting with dollar-hedged carry trades in emerging markets. Delphi Ventures is a lead investor in Tori. Sam's journey to building Tori Finance began with early exposure to Bitcoin and later Ethereum and DeFi around 2017. He initially pursued a career in software as a service, building and selling his own company to BTC Turk, a major crypto exchange. After 2020, he became deeply involved in crypto and DeFi, observing a significant gap in the market. He noted that stablecoins, a multi-hundred-billion-dollar market, offer commodity-like yields, often below the risk-free rate of 4%. These yields primarily come from lending and LP positions that recycle crypto-native capital. In contrast, traditional finance, particularly fixed-income strategies, offers high single to mid-teen percentage yields through strategies like carry trades, which fund pension funds, private banks, and sovereign funds. This massive market is largely inaccessible to anyone outside private wealth management and institutions with substantial capital. The carry trade, a strategy in existence for over 50 years, scales to hundreds of billions of dollars but is inaccessible unless one has an 8 to 9-figure account at a top-tier global bank or possesses the specific infrastructure and timing to access these often difficult markets. Tori aims to package this institutional-grade execution, hedge it back to USD to remove local currency risk, and bring it on-chain in a transparent and verifiable manner. A common question regarding Tori is the source of its yield, especially when bridging traditional finance (TradFi) to decentralized finance (DeFi). Sam explains the global carry trade: it involves borrowing a currency with low interest rates (e.g., US dollar) and lending or investing in a currency with higher rates, typically emerging market currencies (e.g., Turkish Lira, Egyptian Pound). The difference in these rates constitutes the yield. For example, if a developed market currency yields 4% and an emerging market currency yields 20-40%, the differential is the profit. This is a well-established trade in global finance. The strategy involves hedging back to USD, which raises questions about why the spread exists if FX risk is removed. In a perfectly efficient market, according to covered interest parity (CIP), the hedge should eliminate the spread, as seen in developed markets where any remaining spread reflects credit risk. However, in emerging markets, the reality is different due to several factors: 1. **High Entry Barriers:** Accessing these local markets as foreign capital is difficult, requiring navigating complex regulations, banking requirements, tax IDs, and KYC/KYB documentation, often taking months or even years. 2. **Central Bank Intervention:** Central banks in these regions actively manage FX and local rates as policy tools, participating in the market with their reserves and setting rules that limit offshore and onshore participation. This shapes local liquidity pricing, meaning the FX forward curve isn't solely determined by pure arbitrage. 3. **Lack of Local Hedging:** Many natural participants, including locals and institutions, often do not hedge their currency exposure because it's not strategically beneficial. Not hedging can yield five to seven times more, and with central banks actively controlling the market, it's often a better strategy. This creates a structurally thin buyer side for FX forwards. As a result, even after fully hedging back to USD, a meaningful spread persists. Historically, this spread has ranged from 3-4% in stressed periods (e.g., after the Iran war) to 18-20%. This opportunity exists because the FX hedging market in these regions is structurally inefficient, a function of monetary policies that do not change overnight. Regarding the security of the hedge, Tori works with multi-hundred-billion-dollar banks, both local and global, such as JPM. These institutions are already active in these markets, running similar trades with tens of billions of dollars. Access to multiple hedging markets (spot, global, local) provides stability and better pricing, which is a key advantage. The core idea is to borrow in a stable, low-risk currency (like the dollar) and deposit in a higher-yielding, riskier local currency. The local government supports its currency by offering high interest rates. The risk of currency weakening is hedged. The hedge protects the principal, while the yield portion might fluctuate. If the trade becomes unattractive due to yield compression, it can be unwound. The credit risk lies with these large, often government-supported institutions, which historically have not defaulted. Sam emphasizes that bringing unhedged local currency on-chain for lending and borrowing introduces immense risk, as these currencies can depreciate 20-30% overnight. Therefore, tokenizing fully hedged positions is crucial, especially in these markets. The minimal credit risk comes from dealing with banks that have existed for decades, often bailed out by governments due to their systemic importance. Even in extreme scenarios, Tori deals with bonds and papers that can be reclaimed from custodians, mitigating risk further. Tori's strategy is designed to be delta-neutral and without FX risk. The implementation involves a hybrid approach. Tori, as the strategy manager, defines the mandate, risk parameters, and eligible trades. However, the execution is outsourced to institutional execution desks in each market. These desks are regulated, often state-backed or partnered with leading local institutions, and manage billions in volume with multi-decade track records and billions in AUM. They operate strictly under Tori's mandate, without discretion. This separation of strategy design and execution is critical because a perfectly designed strategy can still deliver directional risk if the hedge is imperfect or execution is flawed (e.g., funds sitting in local currency unhedged overnight). By utilizing specialized execution desks with deep expertise, Tori ensures the safest possible execution, even if it means paying a minimal fee. This is not akin to simply sending money to a fund manager; partners operate under tight constraints, full reporting, and defined risk limits. The "edge" for Tori is primarily access and volume, not proprietary trade secrets. While the trade mechanism is transparent, gaining access to these markets as foreign capital is challenging. It requires local bank accounts, custodian arrangements, tax IDs, regulatory clearances, and substantial balance sheets (8-9 figures) to be taken seriously by top-tier desks. Even with access, smaller players get less favorable pricing. Tori's structural advantage comes from direct market access in each jurisdiction and multiple counterparty lines, allowing for daily rate shopping and capturing more of the spread. This volume and direct access yield better economics than typical participants trying to access these markets from global jurisdictions. Tori tokenizes these positions on-chain, offering significant benefits over a traditional fund structure. It has two tokens: TRUSD, a synthetic dollar representing $1 on-chain, and a staked version of TRUSD that earns yield. The basic flow is to deposit USDC/USDT, mint TRUSD, and then stake TRUSD to earn yield. Tokenization unlocks liquidity and composability. The staked token can be used as collateral in a lending market to borrow other stablecoins, which can then be redeposited and staked, creating a "looping" strategy. For example, if the DeFi borrow rate is 5% and the staked token yields 10%, each loop captures an additional 5% yield differential. Looping multiple times can boost effective yields to 20-40% after borrow costs. This is impossible in TradFi, where money market instruments are often illiquid and cannot be collateralized, and redemption windows restrict flexibility. A crucial design choice is that Tori's oracle is priced at Net Asset Value (NAV), not market price. This prevents cascading liquidation risk from market depegs, as collateral valuations in lending markets hold at NAV. This ensures that recursive borrowing and looping positions remain safe. If the underlying yield ever drops below the borrow rate, users would need to unloop, which takes about 7 days for unstaking. Looping is for sophisticated users who understand timing and secondary market dynamics. Internally, Tori itself does not take leverage; the protocol is unlevered, and looping is a user choice. The synergy between TradFi access and DeFi tokenization is powerful: 1. **Access to Tier-1 TradFi:** Tori provides access to trades usually restricted by relationships and capital. 2. **DeFi Utility:** Tokenization provides utility unavailable in TradFi, allowing yield enhancement through composability. This makes pivoting capital to crypto more attractive for existing TradFi participants. 3. **Enhanced Safety:** The ability to enhance yield via crypto allows Tori to opt for the safest, most rigid TradFi structures, potentially with slightly lower inherent yields, without compromising overall returns. 4. **NAV Pricing:** NAV-based pricing prevents large, sudden price drops and cascading liquidations seen in many DeFi protocols. The NAV price reflects the hedge, so it can only decline gradually based on negative yield. This allows for modest leverage without fear of liquidation cascades, giving users isolated exposure to risk. Regarding transparency and auditability, given the off-chain operations, Tori is implementing measures to build user comfort. They are partnering with Accountable, an independent third-party attestation provider. Accountable runs a server in a trusted execution environment with direct read access to all of Tori's custodian bank accounts and asset balances across all venues (on-chain and off-chain). In real-time, Accountable fetches balances and constructs an on-chain balance sheet using zero-knowledge proofs. This preserves privacy of underlying position data while making the aggregate fully verifiable on-chain. This means strategy overviews, collateral breakdowns, and liabilities are transparently reflected on-chain, allowing anyone to verify in real-time that reserves match liabilities and hedging ratios are correct, ensuring delta-neutrality and no off-balance sheet risk. Trust is still required for the strategy execution itself—that the mandate is followed, counterparties are sound, and risk parameters are respected. Tori mitigates this by working with regulated institutions with long track records and limiting single counterparty exposure. Sam emphasizes that continuous, real-time verification via Accountable is crucial for on-chain RWA yield products, distinguishing Tori from "trust me bro" tech. Historically, carry trades can unwind. If unhedged, a drawdown means a loss as local currency depreciates. However, with a hedged position, the nominal value is protected. If the local currency depreciates, the hedging instrument's price increases at the same rate, maintaining delta neutrality. The risk for hedged positions is on future capital and the yield it will generate, not the fixed yield already locked in for existing positions. Once instruments are bought, the yield is fixed for their tenor. If market conditions change (e.g., war, policy changes), new capital might earn a lower yield (e.g., 3-4%) or a higher one (e.g., 12-15%). If a negative yield scenario arises, Tori would simply not enter new positions and could fall back on other options like Eurobonds or US T-bills. The forward contracts are highly liquid, allowing flexibility to exit positions even before the hedge expires if the yield becomes unattractive. Addressing recent DeFi hacks (Drift, Midas Capital/Resolve, Hundred Finance/Capo), Sam notes that these protocols passed audits but failed at operational layers (key management, signers, infrastructure), not contract logic. Tori addresses this by: 1. **One-to-one Collateral Enforcement:** The minting contract enforces a 1:1 collateral ratio on-chain, preventing the minting of unbacked tokens even if keys are compromised. 2. **Time-locked Upgrades:** All contract upgrades go through a minimum 24-hour time lock, preventing malicious rapid updates. 3. **Least Privilege:** Roles are strictly scoped (minter can only mint, pauser can only pause), limiting the blast radius if a single role is compromised. 4. **Off-chain Security:** 2FA on everything, no single person with full access, no stale credentials, and multi-party production infrastructure. 5. **Audits and Bug Bounty:** Audited by Sherlock and Nethermind (top teams) with public reports, and a $1 million bug bounty. Sam acknowledges no system is unbreakable but aims to make it as hard as possible to exploit and minimize the blast radius if an incident occurs. The philosophy is "when something happens," not "if." Regarding stress tests, particularly a mass exit scenario (depeg without drawdown): 1. **Secondary Market Event:** If users sell tokens on DEXs below NAV, it's a secondary market event, not a reserve health issue. Reserves and strategy remain intact. 2. **NAV-based Oracles:** Lending market oracles for Tori's token use Accountable's real-time proof of reserves