Darren Kleine

More real-world assets are coming to a blockchain near you, with the latest offering focusing on regulated financial products.



Superstate, a company created by Compound Labs&#8217; founder Robert Leshner, is delivering products like government bond funds, for example, to the <a href="https://blockworks.co/tag/ethereum">Ethereum</a> blockchain.



Leshner, who left Compound Labs in February, <a href="https://blockworks.co/news/regulated-financial-products-for-blockchain">previously explained</a> to Blockworks, “a firm can hold a record of your ownership of this mutual fund alongside stablecoins or other <a href="https://blockworks.co/tag/crypto">crypto</a> assets” in the same platform.



“We&#8217;ve talked about people in crypto, seeking yields that are offered in TradFi,” the host of the Bell Curve podcast (<a href="https://open.spotify.com/episode/6nKJlfORNnEEV1me9oXOe1?si=98f2ec2f64544b47">Spotify</a>/<a href="https://podcasts.apple.com/us/podcast/are-you-bullish-or-bearish-onchain-rwas-roundup/id1641356619?i=1000618892221">Apple</a>), Mike Ippolito, says. “It was only a matter of time before crypto tried to harvest some of those yields.”



“One of the key things to understand here,” Ippolito explains, “is that the fund is going to rely on a traditional Wall Street transfer agent to keep ownership records and Ethereum will act as an alternative or a secondary record-keeping service.”



<h2 class="wp-block-heading">Still figuring things out</h2>



The real world asset “push,” co-founder of Framework Ventures Vance Spencer says, “is two-fold.”



“Number one is bringing all the collateral on-chain,” he explains, “but we need to get the collateral moving around, being used on-chain.”



“The on-chain can&#8217;t just be the receipt of what&#8217;s going on off-chain,” he says.&nbsp;



“We still have to figure out how to do that,” says Framework co-founder Michael Anderson.



Anderson looks forward to the future possibility of an asset living “natively on-chain” with the same status as a regulated asset, adjudicated by a transfer agent. “We&#8217;re not there yet.”



“Rules will have to change for that to be the case.”



In the same way that digital signatures via applications like DocuSign now enjoy the same legal status as a physical signature, Anderson says legal designation will be necessary for <a href="https://blockworks.co/tag/blockchain">blockchain</a> transactions to represent financial transactions.



Spencer compares the process of transitioning from real world assets to blockchains with a retail purchase of <a href="https://blockworks.co/tag/usdc">USDC</a> on <a href="https://blockworks.co/tag/coinbase">Coinbase</a>. “You&#8217;re taking USD,” he says, and “converting it to USDC and then you&#8217;re putting it on-chain.”



“You have distribution from Coinbase. That&#8217;s what allowed USDC and <a href="https://blockworks.co/tag/usdt">USDT</a> to go to 120 billion plus <a href="https://blockworks.co/tag/stablecoin">stablecoin</a> market cap.”



But the “sales process” is entirely different with Superstate, Spencer says.



“You need Robert Leshner in a suit going to these <a href="https://blockworks.co/news/institutional-investors-cautious-eth">Wall Street institutions</a> saying, ‘Hey, put some of your cash management on-chain and we&#8217;ll give you additional yields.’”



“You&#8217;re still going to be able to run an asset manager at a far lower cost than the traditional asset managers in the space,” Spencer says. “All of your clearing, your settlement, your compliance, your tracking, that&#8217;s going to be on-chain.”



With fees incurred at each step, real world asset management is expensive, Spencer explains. Blockchain technology enables a broader range of products by streamlining the process. “We can actually design new financial products that would be too expensive to do off-chain.”



<iframe loading="lazy" frameborder="0" height="200" scrolling="no" src="https://playlist.megaphone.fm/?e=BWG5851338079" width="100%"></iframe>







Spencer says over the next couple years, he expects at least $10 billion in real-world assets to be “in the pipeline.”&nbsp;&nbsp;



“If you look at all the real-world assets on-chain today, it&#8217;s only a quarter billion.”



“There&#8217;s a lot of growth that you can get.”



Podcast co-host Jason Yanowitz suggests the technology could have “an interesting second order impact,” driving institutions to not just offer crypto products like <a href="https://blockworks.co/news/fidelity-bitcoin-etf-refiling">spot bitcoin ETFs</a>, but to “push them to start thinking about on-chain products.”



When markets recover and people see <a href="https://blockworks.co/tag/defi">DeFi</a> “as a real thing again,” he says, “you could start seeing some of these huge asset managers and investment management firms starting to toe the line between on-chain and off-chain products.”



Correction July 4, 2023 at 1:40 pm ET: Robert Leshner founded Superstate after leaving his role at Compound Labs, which is not affiliated with the new venture.



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Bell Curve

Superstate is moving real-world assets to the digital space

Bessie Liu

Superstate, a company built by the founders of Compound Labs, has just secured $4 million in equity funding to bring regulated financial products to blockchain networks.



Investors participating in the round include ParaFi Capital, 1kx, Cumberland Ventures, Coinfund and Distributed Global.



One of the first products that Superstate plans to bring is a short-term government bond fund that can be held in a cryptocurrency wallet or by a crypto custodian.



Superstate <a href="https://www.sec.gov/Archives/edgar/data/1982577/000110465923074744/tm2319534d2_n1a.htm">filed a draft prospectus </a>with the US Securities and Exchange Commission for the product on Monday.&nbsp;



The fund will enable shareholders to record that they own a government bond fund on the Ethereum blockchain.&nbsp;



“We are creating a new fund that has its own prospectus, which then shares of that fund can be held in blockchain wallets,” Robert Leshner, the founder of Compound Labs, told Blockworks.



Holding bond funds on a crypto wallet will primarily benefit crypto-native hedge funds and venture funds, he said.



“If you’re set up to trade crypto assets, you’re probably not set up with traditional brokerage accounts,” Leshner said.&nbsp;



With yields in DeFi now often lower than in traditional finance markets, holding government bonds in your crypto wallet enables you to use all existing systems that these investors already have in place.



“This is an opportunity to hold a TradFi fund in your crypto custody process,” he said. “So you as a firm can hold a record of your ownership of this mutual fund alongside stablecoins or other crypto assets in the same place in the same platform.”



Government bond funds in crypto wallets will only be available to US customers and not available to any offshore investors, Lensher notes.&nbsp;



Although Superstate will not be the first company to bring institutional-grade products onto the blockchain, Jake Brukhman, the founder and CEO of CoinFund, told Blockworks blockchain technology will have to converge with traditional technologies and regulators and governments to “sensibly come to market.”



“The founder, the strategy and the approach are just world-class, so we’re just very excited about it,” Brukhman said.



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bonds

Compound Labs founders developing regulated financial products for the blockchain

When DeFi was a novelty, the crypto world became obsessed with the rapidly growing industry and its many innovations. It was, for a time, DeFi summer.



But with current macroeconomic conditions and regulatory fervor, things have changed. DeFi summer is a distant memory.



On a recent episode of the <a href="https://blockworks.co/podcast/empire/a8a39810-d7df-11ed-a655-430614aea1d7">Empire podcast</a>, Rob Leshner, founder of Compound Labs answered a question about a potential return to glory: What would pull people back into DeFi?



Leshner began with a little background on current conditions: “One of the really big trends that’s happened over the last year is interest rates and trad-fi have eclipsed interest rates and DeFi. One of the symptoms of that is banks like SVB blowing up that just took too much interest risk.”&nbsp;



“The other, Leshner said, “is that you don’t have people trying to grab DeFi interest rates as much as they were before.”



As of now, it’s easier to just grab Treasury Bills as opposed to grabbing DeFi interest rates, he explained. On top of that, recent issues have caused extremely skittish behavior whereby investors are less trusting of any counterparty, even the most credible, he said.



<h2 class="wp-block-heading">Return of the DeFi</h2>



But Leshner said he expects that the benefits of DeFi will pull people back. DeFi stands in contrast to the opacity of the traditional system, he argues, with its virtues having risen to the surface during recent economic calamity. Past disasters in the space, like the FTX fiasco, caused a loss of trust that pointed users toward the ideals of self-custody and transparency, he explained.&nbsp;



“Take their word for it or validate it yourself. If you don’t have to be afraid that you’re being lied to, it’s an incredibly powerful thing.”



Automation is another important feature that gives DeFi massive advantages over CeFi, Leshner claimed. “DeFi works 24/7 autonomously with no real managers or upkeep.”



“Compare that to a CeFi anything. Long term, autonomous smart contracts, just on their own, are going to be seen as a much better tool for implementing financial markets and products than how they are implemented today.”



“The be-your-own-bank notion is great” Zaki Manian, Sommelier co-founder says. “It means people don’t need to put their faith in opaque, centralized institutions,” but he said it’s a non-starter for now, “as people have to take on the complex and demanding work of being their own banks.”



<h2 class="wp-block-heading">Automation solves this</h2>



“Automation is the solution to this problem,” Manian suggested. It allows users to enjoy “the non-custodial, transparent DeFi experience while offloading complexity of earning yield, managing portfolios, and the like to market-adaptive strategies.”



Automation also enables yield generation on stablecoins “that’s competitive with what you can get in Treasury bonds and yields on real financial activity with cryptonative assets.”



“These kinds of yield generation are essential for attracting capital to the space,” Manian insisted, “beyond the more speculative kind that represents most current liquidity.&#8221;



“Still, there are needed improvements,” Manian admitted. “Two key hurdles that we’re currently in the process of overcoming are the user experience gap – too much of DeFi is incomprehensible to non-crypto natives – and a gap in the kinds of products offered relative to traditional finance.”&nbsp;



“People want powerful, easy-to-use products.”



<iframe loading="lazy" frameborder="0" height="200" scrolling="no" src="https://playlist.megaphone.fm/?e=BWG6720676907" width="100%"></iframe>



“That autonomous nature of it is a huge magnet for developers and markets over time.” The amount of effort that goes into maintaining legacy markets from reconciliation to accounting and so forth is horrendous in comparison, says Leshner.



The final factor that will pull people back to DeFi is its composability, Leshner added. Advances in one area of DeFi benefit the entire ecosystem due to the system’s interoperability. “When you have your own balance in DeFi, you benefit from all improvements to different application platforms in parallel.” It’s a powerful feature that acts as a sort of hidden tailwind, developing a network effect that continuously improves.



People will come back to DeFi in full force, Leshner believes. “The virtues of it are so strong,” he says, that eventually DeFi is going to win. “All of the calamity of late is just reinforcing on that fact and makes me more confident than ever.”



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Compound labs

DeFi Summer Is Over. Will It Ever Return?

<div id="highlights-block_6308dd97b6629" class="highlights">
 <ul>
 <li>In Compound III, collateral will remain the property of the supplier</li>
 <li>Users can borrow USDC using ETH, WBTC, LINK, UNI, and COMP as collateral</li>
 </ul>
 
</div>



DeFi developer Compound Labs has officially launched Compound III, a streamlined version of the protocol emphasizing security, efficiency and user experience.



The governance <a href="https://compound.finance/governance/proposals/116" target="_blank" rel="noreferrer noopener">proposal</a> to initialize Compound III was first submitted on August 18, 2022, and received overwhelmingly positive support from governance, receiving 100% approval.



“The most profound change was to move away from a pooled-risk model, where users can borrow any asset,” Robert Leshner founder of Compound Finance <a href="https://medium.com/compound-finance/compound-iii-is-live-a7983dee7e60" target="_blank" rel="noreferrer noopener">wrote</a> in a blog post.



&#8220;Safer risk management in crypto has been a thesis that is emerging as a result of opaque financial practices in CeFi,&#8221; Paul Veradittakit, General Partner at Pantera Capital, told Blockworks. 



<blockquote class="wp-block-quote is-layout-flow wp-block-quote-is-layout-flow">&#8220;Continued enhancement of DeFi risk practices will continue to demonstrate DeFi&#8217;s resilience in this bear market and in the next bull market,&#8221; Veradittakit said.</blockquote>



<h3 class="wp-block-heading">Building on past Compound versions</h3>



Compound was first launched in September 2018 and is an interest rate protocol which pioneered the on-chain borrowing and lending concept. Users can earn interest on deposited funds without a third party intervening. Borrowers can take out loans against their cryptoassets deposited with the protocol. 



The second version of Compound launched in May 2019, introducing liquid tokenized collateral in the form of cTokens to the protocol. It was also the turning point for the protocol to become community-governed via COMP, with a governance system that has been widely adopted by other protocols and DAOs.&nbsp;



In the first two versions of the protocol, with a pooled-risk model, one single bad asset could theoretically drain all assets from the protocol because collateral could be re-used. That’s why Compound has always limited the number of asset types it supports.



In the latest version, cTokens are no more, and collateral remains the property of the supplier, Leshner said.



“Compound III features a single borrowable asset. When you supply collateral, it remains your property. It can never be withdrawn by other users except during liquidation,” he said.



The latest version of Compound will allow its users to borrow USDC using ETH, WBTC, LINK, UNI, and COMP as collateral.



“While you won’t earn interest on collateral anymore, you’ll be able to borrow more; with less risk of liquidation and lower liquidation penalties; while spending less on gas,” Leshner said.



The new version launched with a Business Source License (BSL), which is meant to limit the ability of other teams to fork the protocol’s open-source code without governance approval. This scheme has been effective for Uniswap Labs which launched its V3 under the same license. Both Uniswap and Compound saw dozens of forks using their second iteration with more permissive licensing.



Jeremy Allaire, CEO of Circle, <a href="https://twitter.com/jerallaire/status/1563185488131149829" target="_blank" rel="noreferrer noopener">praised</a> Compound III on Twitter as “simpler, safer, more efficient, and provides one of the best possible platforms for USDC borrowing.”



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Borrowing

With Compound III Launch, DeFi Pioneer Emphasizes Security

Casey Wagner

<div id="highlights-block_6284fef873148" class="highlights">
 <ul>
 <li>Permissionless speakers today are focused on building, not market conditions</li>
 <li>Regulators are on high alert and bad actors should be put on notice, industry executives said</li>
 </ul>
 
</div>



As the aftermath from this month’s <a href="https://cms.blockworks.co/terra-halted-again-exchanges-delist-spot-trading/" target="_blank" rel="noreferrer noopener">TerraUSD meltdown</a> continues to unfold and cryptocurrency markets extend their sell-off, industry executives are urging their communities to stay strong.



“One of the benefits of a bear market is other sources of validation go away,” Mary-Catherine Lader, chief operating officer of Uniswap Labs, said during a panel discussion at the Permissionless conference in Palm Beach. “All you really have is whether what you&#8217;re building is going to work and whether people are going to use it.”



Other conference speakers agreed, choosing the opportunity to focus on what developers are building and excited about right now as opposed to negative narratives surrounding the industry.&nbsp;



Stani Kulechov, founder and CEO of Aave, said he was shocked at how quickly the industry has grown. Having billions of dollars of value locked into smart contracts is no small feat, and it’s happened in only a few years.&nbsp;



Decentralized finance (DeFi) industry leaders are looking beyond today’s market conditions, and rightfully so, the speakers said. Uniswap Labs’ key focus right now is simplifying the user experience, Lader added.&nbsp;



“To get out of a bear market, we need excited people, and we need capital,” Robert Leshner, CEO and founder of Compound Labs, said.&nbsp;



The source of capital he’s betting on? Institutional investors.&nbsp;



“Historically, DeFi has been individual-led…but our focus right now is how do we get an entire class of users in the system,” Leshner said.&nbsp;



<blockquote class="wp-block-quote is-layout-flow wp-block-quote-is-layout-flow">“We’re focused on enabling institutions with billions of dollars to safely deploy capital into DeFi”</blockquote>



Even amid the panelists’ optimism, the question of how the <a href="https://cms.blockworks.co/what-comes-next-for-terra-ecosystem/" target="_blank" rel="noreferrer noopener">collapse of Terra’s stablecoin</a> might impact the rest of the industry remains. Regulators are on high alert, they agreed.&nbsp;



“Terra and Luna and UST are their own ecosystem, but it has a big impact on everything,” Leshner said. “I worry the nuance is going to get lost, the positives are going to be overshadowed by the risks, and the next few years are going to be about trying to differentiate the good actors from the bad.”



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