Empire
Superstate: Unlocking On-Chain RWAs | Rob Leshner
Tue Jul 11 2023Description
The episode discusses Superstate, an investment management business that advises mutual funds and offers transparency through blockchain technology. It explores the migration of traditional assets to the blockchain, Superstate's approach and target market, different risk-free rates and borrowing preferences, interacting with blockchains and future opportunities, competition between stablecoins and investments, compliance challenges, Superstate's business model, Compound Treasury, and Superstate's new direction.
Insights
Tokenization of traditional assets
Superstate believes that tokenization of traditional assets like mutual funds, stocks, bonds, and currencies is the future, offering benefits such as composability, transparency, automation, and faster settlement.
Superstate's target market
Superstate aims to compete with Vanguard, BlackRock, and other investment management businesses by offering more functional, higher tech, and transparent financial products. It targets legacy family-run businesses in the investment management industry.
Short-term government bond funds
Superstate initially focuses on tokenizing short-term government bond funds due to their massive market potential. It plans to explore additional asset classes once the success of the bond fund is proven.
Different risk-free rates
Ether and dollars have different risk-free rates, with staking being the risk-free rate for Ether and T-bills for dollars. Borrowing stablecoins has been the preference in the crypto market, while fixed rate instruments haven't taken off yet.
Opportunities for companies in DeFi
Companies can buy treasury bills instead of investing in crypto. However, there are challenges with borrowing on-chain due to the unpredictability of interest rates. Treasuries present a trillion-dollar opportunity in the crypto market.
Competition between stablecoins and investments
Stablecoins and investments will eventually compete for users, capital, and use cases on-chain. Stablecoins have gained popularity due to their instant settlement and portability but become less attractive as interest rates rise. When easily accessible investment products are available, there will be a competition between stablecoins and investments.
Compliance challenges and Superstate's business model
Creating compliant products that handle taxes and KYC/AML correctly is important. Superstate aims to be competitive with larger investment firms like Vanguard, managing $200 billion in assets. Running a company in the third stage presents its own challenges.
Superstate's new direction
Superstate shifted its focus from Compound Treasury to a well-structured registered investment product for institutions. It aims to provide a straightforward and transparent path for acquiring assets in the crypto ecosystem.
Empowering user-focused individuals
User experience has room for improvement in crypto, and empowering more user-focused individuals is important. Jason, the new management at Compound Labs, will lead cool initiatives.
Chapters
- Introduction
- Migration of Traditional Assets to Blockchain
- Superstate's Approach and Target Market
- Different Risk-Free Rates and Borrowing Preferences
- Interacting with Blockchains and Future Opportunities
- Competitors, Compliance, and the Future of Stablecoins
- Competition Between Stablecoins and Investments
- Compliance Challenges and Superstate's Business Model
- Compound Treasury and Superstate's Direction
Introduction
00:00 - 07:07
- Robert Leschner announces Superstate on the Empire podcast.
- Superstate is an investment management business that advises mutual funds.
- The Superstate short-term government bond fund is similar to other mutual funds but offers an extra layer of transparency through blockchain technology.
- Shareholders can request a record of their ownership sent to a blockchain address they control.
- This allows for unified technical architecture and storage of investments alongside other crypto assets.
- Tokenization of traditional assets like mutual funds, stocks, bonds, and currencies is the future.
- Bringing assets on-chain offers benefits such as composability, transparency, automation, and faster settlement.
Migration of Traditional Assets to Blockchain
06:42 - 14:12
- The migration of traditional assets onto the blockchain has been slower than expected.
- There hasn't been enough demand from end users for securitization and tokenization.
- Crypto-native assets, issued on a blockchain, have been more popular and exciting.
- Short-term interest rates are currently the biggest driving force for bringing assets on chain.
- There is a market space to bridge the interest rate gap between traditional capital markets and DeFi.
- Superstate is focused on building an investment management business that competes with Vanguard and BlackRock.
Superstate's Approach and Target Market
13:45 - 21:16
- Superstate aims to compete with Vanguard, BlackRock, and other investment management businesses by offering more functional, higher tech, and transparent financial products.
- Superstate is targeting legacy family-run businesses in the investment management industry.
- The initial focus of tokenization will be on short-term government bond funds due to their massive market potential.
- Superstate plans to explore additional asset classes once they have proven the success of the bond fund.
- Tokenizing equities or commodities is not fundamentally different from tokenizing bonds and cash if the shares exist as digital records on-chain.
- Traditional yield opportunities in DeFi could crowd out DeFi up to that interest rate if there are low switching costs between off-chain and on-chain markets.
- The risk-free rate in DeFi could be determined by staking or equivalent low-risk investments like T-bills.
Different Risk-Free Rates and Borrowing Preferences
20:56 - 27:55
- Ether is different from dollars in terms of risk-free rate and exchange rate.
- For Ether, staking is the risk-free rate, while for dollars it's T-bills.
- The subjective nature of interest rates applies to all currencies.
- Borrowing stablecoins has been the overwhelming preference in the crypto market.
- Fixed rate instruments haven't taken off in DeFi yet.
- There hasn't been a large demand for fixed rates on borrowing or interest earning side.
- The opportunity lies with companies rather than individuals when it comes to borrowing on-chain.
- Companies avoid borrowing on-chain due to unpredictability of interest rates.
- Treasuries present a trillion-dollar opportunity in the crypto market.
- Most companies can buy treasuries directly instead of using crypto products.
Interacting with Blockchains and Future Opportunities
27:31 - 34:31
- Companies can buy treasury bills instead of investing in crypto.
- Over time, more businesses and institutions will want to interact with blockchains.
- People coming on chain will prefer web three stack over traditional web one or two stack.
- There are multiple ways to buy treasuries currently.
- Quicknode is a blockchain development platform that offers cost reduction and streamlined time to market for apps in crypto and Web3.
- Carbon is a DEX on Ethereum that makes concentrated liquidity easy with automated liquidity strategies.
- Empire raised funds from specific firms they knew and wanted as users and customers.
Competitors, Compliance, and the Future of Stablecoins
34:06 - 41:07
- Competitors can become collaborators and vice versa over time.
- Strategic investments with restrictive terms can harm a company.
- Taking strategic investments without complex terms is beneficial for both firms.
- Short-term government debt is a big opportunity in DeFi.
- Short-term government debt is a healthy product with low risk.
- DeFi could have a mix of permissionless and permissioned assets in the future.
- Regulatory requirements are necessary for market integrity and compliance.
- Building a registered product opens up opportunities in the US market.
Competition Between Stablecoins and Investments
40:53 - 47:55
- Stablecoins and investments will eventually compete for users, capital, and use cases on-chain.
- Stablecoins have gained popularity due to their instant settlement, portability, programmability, and self-custody features.
- However, stablecoins become less attractive as interest rates rise because sponsors earn significant profits while holders receive zero interest.
- The dominance of stablecoins is currently due to the lack of alternatives on-chain.
- When easily accessible investment products are available to crypto-native investors, there will be a competition between stablecoins and investments.
- Stablecoins have a broader ownership base compared to investment products that require KYC/AML compliance.
- In the future, there could be $400 billion of stablecoins and $200 billion of on-chain investment products.
- The development cycle will involve making investment products compliant with regulations before integrating them into DeFi platforms like Uniswap.
Compliance Challenges and Superstate's Business Model
47:27 - 54:08
- Creating a compliant product that handles taxes and KYC/AML correctly is important for asset usage in protocols.
- A proposal for a KYC/AML protocol where users receive a non-tradable token after going through the process, allowing them to trade certain assets on Uniswap.
- The challenge with a global whitelist system is the imbalance of information and the difficulty of maintaining privacy while still verifying users.
- In the short term, onboarding with a fund admin who knows the user and approves their ability to hold an asset is a more feasible approach.
- Developing a zero knowledge proof-based system that proves compliance without exposing personal information could be possible in the future.
- Superstate's business model relies on fees, starting at 33 bps but aiming to be competitive with larger investment firms like Vanguard.
- The goal is to manage $200 billion in assets, generating significant cash flow per year.
- The early stage of building something new and bringing it to life is exciting, while scaling from there requires different skills.
- Running a company in the third stage (beyond 10 employees) presents its own challenges.
Compound Treasury and Superstate's Direction
53:46 - 59:23
- Running a company in the third stage with a larger number of employees was challenging.
- The focus was on Compound Treasury, a product for institutions to interact with DeFi protocols.
- The product had 33 institutional users and customers but faced challenges when CFI blew up.
- The concept of 'give us your money' became questionable after the blow-up.
- This led to the idea of Superstate, a well-structured registered investment product for institutions.
- Superstate aims to provide a straightforward and transparent path for acquiring assets in the crypto ecosystem.
- Shutting down Compound Treasury was difficult but the new direction is exciting.
- Putting a product designer in charge of Compound Labs is commendable as product design is an undervalued skill set in crypto.
- User experience has room for improvement in crypto and empowering more user-focused individuals is important.
- Jason, the new management at Compound Labs, will lead cool initiatives.