Colin (CP): Thanks for joining us, big fan of what you guys are building. Can you tell our readers a bit about who you are?
Kyle (KK): I’m a co-founder and operations lead at bZx. I have a MSc in Computational and Molecular Biology, and got into blockchain in 2011. I started doing a PhD but then left to start working on bZx.
Tom (TB): I’m the founder and CEO at bZx Network. Prior to bZx, I worked for Nokia where I lead software teams, and was a developer before that.
CP: Thanks, can you talk to us a bit about what bZx is, and tell us about your journey?
TB: We originally founded bZx in 2017 after reading the 0x, Kyber and Bancor whitepapers, the first idea was to decentralise margin trading. After watching Bitfinex’s hacking issues we saw a real need in the market. We wanted to help people earn interest on their assets like on Bitfinex, but without putting them at risk on a centralised platform, by using a smart contract. We looked at doing it on Bancor, but decided that Kyber was a better fit as it offered secured price feeds. One early idea was looking to offer the 0x of margin and had considered that bZx could be a protocol play as well.
KK: Since we went to mainnet in 2018, we started to work with 0x relays, and then spoke with the team at ETHFinex, who were working on decentralising the orderbook. Spoke with them a lot about their ideas in late 2018. By that time the trend was moving away from protocols and platforms, and towards productizing. 0x relays were all trying to get liquidity on the spot market and really didn’t have bandwidth to work on margin.
CP: And how did you ultimately take those learning to build your current products?
TB: We looked beyond the decentralisation of orderbooks, and thought about how the lending positions themselves could be tokenised, which brought us to the iTokens that we now offer.
KK: One of our products, Fulcrum, allows you to earn interest by buying iTokens. We also have a platform, Torque, which allows you to borrow on an overcollateralised basis. It was purposely designed to be super easy. In addition to using our frontend, you can borrow directly from My Ether Wallet with 3 clicks. We’re now working on creating protocol that handle a number of more complicated market order types.
CP: You talked about “product”, which is a trend that I find really promising. Can you talk to me about how you made the pivot towards this?
TB: Really we could have been even faster on this, projects like Dharma, dYdX, and Maker all went for product early not, not just marketing a protocol. Almost every successful company at this point leaned in to products, with the notable exception of 0x.
CP: So we’ve talked about “DeFi”, what does it mean for you?
TB: I think that the name is self-explanatory. Finance is the transmission of money, so DeFi is that but somewhat decentralised. Well, at least one component is decentralised. First thing generally decentralised is custody. If you don’t have that, usually it doesn’t pass the bar of the core DeFi proposition. There is also an almost parallel movement towards “open finance” as well, but we regard that with some suspicion. People finding this idea more attractive are generally not using decentralised components.
CP: Outside of what you are doing, what excites you?
KK: Derivatives and stablecoins are exciting. 2019 was the year of the stablecoin, Maker being a big part of that success. Synthetix, Augur and UMA are still very interesting. Synthetix got a lead on the market because of smart business decisions. Starting with a credible product and slowly decentralising the control. Others are going the longer route, sticking with decentralisation. We expect more competition here.
CP: Talk to me about some of the risks in DeFi
TB: One of the more obvious ones is smart contract risks, doing good audits is important, some are moving so fast that they haven’t conducted these yet. With smart contract risks though, people aren’t talking about it with enough granularity yet, they view any code change as a single risk. Small changes versus completely fusing code is seen as the same level of risk, even if they are quite different in reality. There are different magnitudes of risk between Chai (which was developed by the same people that created MakerDAO’s Dai Savings Rate, “DSR”), and changes to the underlying code. People just look at lines of code, rather than the number of platforms involved.
There are also risks around network congestion. This could be the largest risk for lending based businesses. Making sure that there are redundancies in the liquidation mechanisms and that you can have throughput to handle the volumes is key here. As an example, Nuo suffered a loss because they were the only ones able to trigger liquidation. Each transaction needed to liquidate in succession, but other designs allow anyone to call liquidations can allow for more redundancy and reduce risk.
KK: One big trend that is not talked about alot is that all the current lending protocols are not competitive with Maker in their current state. Maker offers 6% DSR and supply rate. All other protocols rely on automated market makers. That means that the spreads are pretty big, and can be up to 25-50% of rate. If you want the lowest rates, there is really no reason to use a platform other than Maker at the moment.
CP: So are the Compound model and the DAI market obsolete?
TB: Not entirely, there is borrowing and lending, but as long as there is zero spread on Maker it’s hard to compete with it. Addressing traders who are less sensitive to interest rates is one route, whereas normal borrowers are more sensitive to interest rate levels. We really need some level of greater attractivity on lower liquidation penalties and lower maintenance margins to stay competitive.
CP: Guys, thank you very much, that was super interesting and taught me a lot about the DeFi lending space. Please keep up the great work you’re doing.
TB: Thanks for having us, this was fun.
KK: Yes, thank you, good speaking with you.
As always, nothing here should be construed as financial advice, recommendation or endorsement of any project or cryptocurrency.