Why Crypto Needs Better Insurance Models | Drew Patel, Karak

our goal is to create like a universal restaking layer, not be focused and married to one chain. I know Janno said, hey, I don't know if going to every chain makes sense, but our perspective is, hey, look, this is like critical infrastructure. It doesn't have to only live on Ethereum. There's use cases all over the entire cryptosphere for restaking infrastructure. Why are we like saying only lives on Ethereum, only on mainnet, and only Ethereum token? Why are you shorthorning it?

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Hi everyone, uh, Janno decided to bail on me today, which is perfectly fine. Uh, today we have a very special guest which I've had the benefit of knowing, uh, through multiple cycles, I guess. Um, and I've had the privilege of seeing them build, uh, for quite a bit of time. There's a really fun and unique story behind it which we'll share in this pod, but we have Drew, co-founder of Karak, which Welcome Drew to the show.

Thanks for having me, Santi.

So Drew, uh, give us a very quick intro on who you are, um, and what is Karak.

Uh, it won't be brief. My background is, is a pretty fun one and very unique, I would say. Um, so I start— I first got into crypto when I was 13. Uh, so this is 2013. Um, I decided, hey, I was watching a YouTube video, so I, I had recently built like a small computer. I was like, I was really into like tech at the time, like just building DIY stuff like that. And so I watched YouTube video, um, and they're like, yeah, Bitcoin at $30. I'm like, what is this Bitcoin thing? So I, uh, I went to bitcoin.org, I think, at the time, and I didn't even— I didn't read the white paper. I'll tell you that. I don't even know if I've ever read the Bitcoin white paper. Um, but I just like saw GUI miner, downloaded GUI miner, and started running it. I'm like, wow, this thing just sends money to a— like, it sends this Bitcoin thing to your Bitcoin QT account and it keeps streaming in. And every day I would run it, run the Bitcoin miner every time when I would go to sleep and I would turn it off when I come back from school. And so I got really into it because I'm like, this is pretty cool. I took all that Bitcoin, I started selling it for keyboards and mouses and things like that. But like, the story was telling itself. It was like, okay, I can't get a credit card, I can't get a debit card because I'm too young. I would like to buy Steam games or just random gaming gear. I can do that by just running this program on my computer and then selling Bitcoins for Amazon gift cards to like BitInstant or whatever. And it like, it unraveled pretty, it was pretty obvious what the benefit of this was, right? It wasn't like, to me at the time, it wasn't like an investment or anything. It was like, oh, this is internet money. You know, this makes sense. This is like RuneScape GP or or WoW gold, but like you get it in a different way. Instead of putting hours grinding and cutting trees, you just run a program on your computer that runs the fans a little extra hard. And then so I started really getting— yeah, I was 13.

I don't know what I was doing when I was 13. Definitely not that.

I didn't grow up in like San Francisco or any like tech-heavy place, so It really was. It's a story that's very strange. When I think about it, I'm like, this was pure luck and life could have gone very differently if I didn't get into it just because I watched the video. And then I really started getting into Solidity around 2016. So one of the first big Ethereum hackathons happened close to where I lived and I was like, screw it. It was summer. I was like, I'll attend. And before that, I prepped a decent bit and then I learned how to write smart contracts. From there, then I interned at Coinbase on the wallet team where I built like a simulating thing, like simulate transactions to make sure you're not getting rugged. This is before a lot of like the MetaMask, like the warnings you have in MetaMask existed. So this was like one of the first things that told you, hey, this transaction may rug you or whatever. And this was during the heyday of DeFi summer. And then yeah, it was like, look, it makes sense to do something DeFi security related. I see people getting rugged left and right. I see hacks happening left and right. I think there's something here, like, if we can work on a security solution. And then we started looking at restaking here in the past, I would say since, like, November. Well, we were kind of staking during the bear market, so we thought about staking and staking risks and how do you prevent those risks or how do you underwrite those risks. The reason was that that was, like, the only yield in the bear market. Like, everyone was using staking as a 4%. This is the best you're going to get during the bear. And so we really put our brains to staking, spent a lot of time trying to model staking on Ethereum, staking, model the risks, bucket the risks, see if you can underwrite it, working with traditional insurance underwriters and reinsurers to be like, hey, is this something you're willing to put money towards and to underwrite? And then as restaking emerged, we're like, this makes sense. This is sort of what we initially built during DeFi Summer, like smart contract protection. But instead of protecting smart contracts only, you're protecting these new unique decentralized tasks that maybe go beyond smart contracts, but are still running in the same fashion, still have the same, um, same rules that you're trying to like protect against.

Yeah, let's, uh, pause there for a minute because this is at a time where I was obviously DeFi summer, I was very active on-chain and was constantly thinking about smart contract risk. And you go and talk to a lot of normal insurers, I certainly went and talked to Aons of the world and some kind of reinsurers, and no one really wanted to touch this space. And even today, it's really challenging to get any sort of insurance in size. And then you reached out. I was just leaving ParaFi. So, you know, I'd love the audience to hear that because I think it's very unique about your style and really conveys— because throughout this pod, I think we're going to be talking about generally insurance, security, Obviously the whole space has taken a whole form in terms of, you know, where you are now, but I'd like to just lay out a little bit more context before we get there.

Yeah. So the story about when we initially reached out, you were, I mean, on our radar, like, because you were the only one at the time talking about smart contract risk. I was watching podcasts and the only person to talk about it was you. I can literally tell you exactly what podcast it was. Your monitor is behind you. You're wearing a blue hoodie, if I remember correctly. I remember exactly the video. I'm like, wait, hold on, this is the only guy talking about this, we should reach out. But you were at Parafi already, and I think you guys had already done a few insurance deals or crypto insurance deals, so we held off.

Yeah, we're very active like in Risk Harbor. Uh, no, no, it was, it was Nexus Mutual, but it has its own challenge.

Yep, yep, yep. Yeah, so one day I woke up, I was browsing Twitter, it was like 9:00 AM, and I'm like, and I see your post about you leaving Parafi. And so internally I'd send a message saying, hey, Santiago left Verify, send a message. And then, you know, that's when the message came to you, uh, outlining what we're building and, and, and, and, and why we wanted you to be part of it. So it was like, it wasn't a, it wasn't a message.

It, it was a full couple page document outlining why you wanted me to invest. And look, I've invested in over 100 companies. And I don't think I've ever gotten a memo to that extent from anyone. So that immediately to me was very unique in the way that, you know, but anyway, you keep telling the story. Yeah.

Well, yeah. So that was the synopsis of it. We knew you did this. You were one of the few or only person people to talk about it as at least from an investor perspective. And we're like, we gotta get this guy. We can't get them. One day came, we can get them, bang, send it off. But yeah, like, I think even through all our conversations we've had, we've always talked about like the different— like, we've had conversations throughout the lifespan of DeFi and now into, you know, whatever you want to call this cycle through DeFi summer into now. And we've always talked about how we think the space should look at security and look at insurance. And it's, you know, it's changed quite a bit. I think initially we're like, initially our thesis was these smart contracts during these DeFi summers, smart contracts will, as they go through time, become more and more secure. So the idea is, hey, Compound, Aave, etc., deployed, they'll iterate. But as time goes on, as long as they don't get hacked, they will develop Lindy and become more secure and to a point where it is possible to underwrite or to protect against these risks in a way that makes sense for all parties involved. Right. And that was our initial idea. I think it started to have legs, but then I think the bear market showed us, you know, it was a frank reality check for where DeFi was. And subsequently where DeFi risk really was, right? One, the yields disappeared. So if the yields disappear, yeah, who's buying? Like, so it has to make sense for you to— like, the amount you're taking from the person that's buying protection has to make sense for them. And if the yields are so compressed, which they were during DeFi summer— or sorry, during the bear market— there wasn't much demand for it, right?

And you can't build something like Yeah, I live parified thinking, hey, maybe there's an opportunity to build a bank or an insurance company like a Berkshire Hathaway model, right? Where you can start insuring, you have a diversified book of insurance, and then you start writing coverage. The problem is, to your point, yeah, the yields went from, you know, teens to 5 to less than treasuries, and you're like, well, that's really challenging, right? Because then you can't really charge a premium. Um, but the general premise that has always excited me about just the ability to create more sophisticated insurance models is that you can measure risk far more effectively in an open, transparent system. Like, that to me is a core primitive that hasn't been fully explored. And when you guys came to me, I think you had probably the most thought-out vision, which, as we'll get to in the pod, has iterated quite a bit, right? Because, you know, DeFi changes a lot. You know, yields come down. Well, it's not viable to write to ensure against something where there's no demand for it or viable economic model. But conceptually, I think a core primitive here is if a system is transparent and you know the parameters, you can measure risk programmatically in real time, 24/7, 365. You know your counterparty, you know who you're interacting with. Hypothetically should allow you to measure risk more effectively and therefore price it more effectively. And so it could— it should in theory create a vast variety of not only financial products and primitives, but also just an insurance industry in and of itself. And maybe it's not going to be your actuary, it's going to be a Solidity engineer or just a smart contract engineer or a dev that understands these systems and can price that policy far more effectively, or, you know, options, risk management in general. Um, and so anyways, I, I think you guys, maybe we should get into kind of the evolution of your thinking in terms of the opportunity set of how you've thought about it over the years, where, what you've seen, and kind of where you are now leading into obviously Kurok.

Yep. Yeah, so I think you touched on it. In a world where like Again, our initial thesis was all the information you need to price this thing should be available on chain and it's there, right? It's not like traditional insurance where Progressive tracks your driving but only keeps it internal to Progressive and doesn't share with Allstate or whoever, right? If you can see an—

by the way, policy is renewed annually, which is the most inefficient thing ever. Like health or driving. Now you have telemetry systems, right, that can real time measure like metro mile. But conceptually, it's like, for me, it's one of those industries that is going to totally transform, right? The idea that like we write a policy and you renew it every year. It's like, well, what happens within that year? You could become a crack addict. You can become a reckless driver. Your financial counterparty could be taking a whole amount of risk that you're not going to be able to see. I.e., Abacus, the global financial crisis. Yeah.

But anyway, I mean, so, so you touched on a point which is, hey, if the data— if all the data you need to actually refer to price, like actually actuarially price this thing, is there in public and transparent, you should have a very efficient market in that everyone's got the same information. So then it should be a competition to the fairest price point, right? This would all be true if there wasn't one category of risk that exists, and that's smart contract risk, right? So if it was purely just structural risk and governance risk, then I think for the most part that worldview would have played out and we'd actually have a pretty efficient risk marketplace for what is— I mean, for DeFi now. But I think because you have the additional element of smart contract risk, that it's not something you can just sit there and observe. Like a lot of these attacks, they take all the money, they're gone, right? If they run through flashbots or whatever, you don't see the transaction until it's over. And so it's not like a run on the bank that slowly occurs for the most part. It's, you know, here's $400 million, poof, it's gone. And how do you really actually model that, right? And how do you underwrite that? Because say you have like $10 or $5 billion or even $1 billion to underwrite all this, and then the Euler Finance attack comes and $400 million, your balance sheet's wiped out. Like, You have to leverage. You have to leverage is a very key component. You have to be able to underwrite two things or more with the same dollar, else you're better off literally just farming the thing that you're underwriting. You're going to get a better yield, right? So to make it worthwhile that someone taking all the smart contract risk and taking all the smart contract risk for all these protocols, you have to provide a yield that makes sense and you have to allow them to use leverage. But since everything's decently like, especially during DeFi summer, a lot of stuff was highly correlated. Yield on top of yield on top of yield on top of yield on top of yield. Yieldstack, any failure in this whole entire stack.

And now analogy of money Legos in a Jenga tower, right?

Yeah, exactly. And so that's why I think it's tough to do DeFi insurance. Do I think it's potentially possible? Yes. But it's a very difficult problem that I don't think you can just throw tech at. And I think we've talked about it a lot. It requires a fundamental change, I think, in how DeFi works. You need a lot more protocols and you need to have insurance limits. It's pretty complex. Hence why even Nexus, a lot of their underwriting is now mostly staking, right? Or staking type things. Because staking is way more easy to model, right? You know exactly where the loss will occur. There's 4 different clients, there's DBT, there's so much stuff to provide security and prevent slashing on staking. But that really doesn't exist on DeFi. And then, and then when a contract upgrades in DeFi, consider the Lindy effect basically reset. Okay. It upgraded. Now you gotta restart from square zero. You know, Tree has a new protocol.

Yeah.

Yeah.

There are opportunities like slashing risk, right? You can insure against that. You know, it's like, you know, the maximum loss, right? Which is either 5%, 10%, which is easy presumably to absorb and the probability is quite low. The other far more catastrophic risks that we all know of are an exploit of something like Euler. That's probably really hard to insure against absent an off-chain insurance company that has a huge book of PNC and other stuff that can absorb these losses. It's like catastrophe insurance exists, right? There's hurricane, there's all these weird risks, insolvency risks that fat tails as Taleb would call them, you can always get an insurance. There's always a price for it. The question of course is like market participants may not be willing to pay for it and it's not very economical. But so in this process of observing these kind of challenges, the bear market hits, it's kind of really challenging when rates come down. What then sparked the idea for Kurok? And what is Karak, I guess, now that we're here?

Yeah, yeah. So I mean, as I said, like, it became a point where everyone's just doing staking, looking at staking, a lot of products built on staking. So we started really looking at staking risk. We're like, hey, like, again, staking risk doesn't have the same challenges as DeFi insurance. It's a lot more consistent. It's way more easy to model. You know the rules, you know the slashing rules. You have DBT, you have all these different node execution clients, you have different, uh, consensus layer clients. So the risk is a lot less and it's way more modeled. Like, you can model it and then you can sell it potentially to the traditional insurers as, or reinsurers, and maybe get like a $100 or $10 million line to underwrite, right? And so that was our thinking. So we put a lot of time into this understanding what's going on on ETH2 staking and bucketing it and bucketing the risks and trying to model that out. So we grabbed all the attestations, We have, I think, a few terabytes of it now on the, at one point on the cloud, and that we were just processing and seeing if we can build models here. And as that was happening, I think the restaking movement started to come alive. And, you know, as we started looking at restaking, we're like, wait, this is very similar to what we were doing on the DeFi insurance side, right? Restaking in itself is basically a task and then a slashing condition. Slashing condition meaning, hey, if something goes wrong, there's a loss or like And this incentivizes the operators that are running these clients to basically behave correctly and to not provide false data or not run the task incorrectly or not try to be malicious. Yeah. And we're like, wait, this is the same thing.

Let's lay the groundwork here for people that might have no idea what they're talking about here. Proof of stake protocols like Ethereum, Cosmos, Tezos, it's called proof of stake because you have a token. You provide economic security by staking that token. You may be randomly selected if you're validating to validate that particular block in the same way that a Bitcoin miner may, well, has to prove the puzzle and submit the data. But in the proof-of-stake system, the security of the protocol comes from stakers, meaning you have Solana, you have Ethereum, you stake. The process of staking for the most part is done by professional organizations, right? These are the Lighters of the world, right, that you delegate to your tokens and they will do that for you. And they, in exchange for that reward, they will keep some of that and then share that to the user. That whole process has some risk attached to it because if the validator does not submit, if it gets selected, if it doesn't submit in time, if it gets all these different conditions where if it acts maliciously or is not, you know, is not online, then it gets slashed. And the slashing is you lose not the entire stake, some stake. Usually it's less than 10% in a slashing condition. And that tends to be a very low probability event. Like for the most part, a lot of the top validators don't get slashed because they have redundancy. They have, multiple systems in place. And that's why most people don't stake themselves. They offload and delegate to a professional staker, right? Whether it's through Coinbase or through Lido or some other organization, right? Is that fair? Just to kind of level set?

Yeah, I think it's fair. I think for the viewers, just think of it here. You're given a task and in the POS chains, this is validating the network. But think of it, you're given a task and you're given a reward and then there's a penalty for messing up. And those are the 3 things you look at. And then when you think of it in restaking form, you're doing the same thing. You're just doing a task, you're getting a reward for that task. And if you mess up, you get a penalty just like you do on the POS chains. But in, in restaking, the task is like, it's more arbitra— it's not as like, you know, ETH2 has been researched for a very long time. A lot of these chains, Cosmos, Solana, there's a lot of work into making sure, like the task is very well defined. Even ETH2, I think, has a formal spec. In restaking, there's additional risk because the task is, is not as, um, it's not as pretty.

Maybe a question, but why would people restake? Like, what's the, what's the opportunity there?

The opportunity is very simple: additional yield. I don't think anyone— there's no, like, I mean, unless you really care about alignment and all these other things, the only— the one-liners: there's additional yield in exchange for additional risk.

Right.

Nice.

Well said. Um, so, so, so Karak is, uh, you're seeing the restaking movement really take off after, you know, the Beacon Chain goes live. Lido gets all these deposits, grows in TVL, you know, largest DeFi protocol, you know, in terms of deposits value being secured by the protocol. And then there's this restaking opportunity. You guys say, okay, what, what did you see there? Um, what opportunity were you seeing? And, and kind of walk us through kind of how you're building Karak and what is kind of the, the angle there.

Yeah, so as I said before, it's very similar to what we built during the DeFi Summer. It's, you know, if you get to the technicals of what we were doing was basically you write on-chain invariants and say, hey, if these invariants are triggered payout occurs. Well, here we think if you think about restaking, you're basically again, here's a task, run the task. If there's some issue, slash and slash is almost akin to the payout here. It is. You're changing who the recipient is, right? Instead of giving it to someone else, you're burning it or sending it to a zero address. For the most part, it's the same thing with a small few little small tweaks. So we saw restaking, we're like, look, this is this is our wheelhouse, this is our bread and butter. We've done this, this— we understand how to make and how to architect systems that are sort of open-ended and allow people to create their own rules. We literally made a system that allows you to plug into any DeFi protocol and define rules that you want to make sure of. And if there's a hack or anything and these invariants are broken, you get a payout. It's the same thing here. It's like, here's a task, run the task, you get a reward. If you mess up, you get slashed. We just, we know how to make that, we know how to define those contracts, make that system very easily. So it made sense when we started seeing the restaking movement take off. Now when we looked at Karak, we're like, and, and the way we wanted to design it, we're like, there's a lot of politics that have been designed for restaking that we don't necessarily agree with. I think one of the big things is that the people have, you know, sort of defined restaking have said is, hey, it should live on Ethereum. ETH is the cleanest capital. Shouldn't live, it shouldn't be a multi-chain protocol, etc. And that was the first point of disagreement. Our idea is, hey, restaking is just putting— like, you're basically putting dollars up, dollars, economic security in exchange for rewards. Why do they have to be in Ethereum? Like, can anyone make a case for that aside from, hey, it's ETH-aligned, or some BS argument aside from ETH as pristine capital? Okay, ETH can be considered as pristine capital. One of the things we learned during the insurance phase was people are willing to underwrite in other tokens too, and the other side is willing to pay less of a premium in exchange for that. Right. It's called cost of capital. If I let you underwrite with something beyond ETH, for example, if I let you underwrite with USDC, sDai, which is staked Dai that earns 5%, basically follows the treasury rate or governance tokens, you're probably willing to take less of a yield because, you know, the, the capital is considered less pristine. On the other side, the DSS or the AVS can pay less of a yield to stakers in exchange for that less pristine capital. So our idea is one of the differing factors is, hey, let's make this thing run on any chain and take in any token. And our idea is basically create a universal restaking layer, right? So if one day we want to add Bitcoin restaking or I know, I know you're gonna laugh at this one. I'll say it because it's funny and it really exaggerates the point. Maybe you add Solana restaking. You can— but our goal is to create like a universal restaking layer, not be focused and married to one chain. I know Yano, uh, said, hey, I don't know if going to every chain makes sense, but our perspective is, hey, look, this is like critical infrastructure. It doesn't have to only live on Ethereum. There's use cases all over the entire crypto crypto, like, cryptosphere for restaking infrastructure. Why are we like saying only lives on Ethereum, only on mainnet, and only Ethereum token? Why are you shorting it?

I want to get to that because I think it's a very important question. I want to pause here and then maybe just ask a very basic question, like, what is the worst that can happen? Because I think when people talk about risk, they're very, um, they're very opinionated but not nuanced. And so in this re-stake, improve-a-stake systems, you stake, you re-stake, people are going to chase yield. We know that that's a common behavior of human beings. What's the worst that can happen? When you think about the total risk, right? There's been obviously a lot of concerns that people have been like, oh, this is going to create a huge problem. It might even affect the entire liveness security of the chain. If one protocol really goes down, like, what in your— walk us through, like, what are the biggest risks and what is the most catastrophic risk that you foresee in kind of this restaking economy? Um, like, just out of curiosity, is it catastrophic? What is the worst case? What is the most probable case?

Worst case is zero. Everything— I mean, everything can go poof, get sent to a burn address, right? That's like And if anyone says otherwise, practically speaking, like, how would that happen? Yeah. So basically what can happen is if an unintended slashing happens, say, let's keep it basic. The task is add up 1 1 2. Somehow the slashing condition on the contract was messed up and that it thinks 1 1 is actually 3. All operators report 2 and everyone gets slashed, right? Unintended slashing should have never occurred. And then everyone just gets slashed. And then the way the slashing was defined is a complete slashing of all the capital, saying if anyone messes up, 100%, not 5%.

Yeah.

And we're talking about the worst case, right?

The odds, right? The odds of someone catching that is pretty high though, right? If the contract is defining 100% slashing, like most people would kind of spot that fairly easily unless it's like an injected code there that is like a state actor that wants to take down an entire system.

Yeah, so there's safety mechanisms. One would be, hey, just get it audited and make sure it makes sense. Like, make sure that, yes, like, the slashing contract makes sense. Make sure your DSS or ABS makes sense and, and the slashing rules are fair. There's, um, there's like slashing veto committees that come in and say, hey, you know, we have 5, 6, 7 days to adjudicate if a slashing is correct or not. If it's not correct, then, you know, we can cancel it and current slashing. There's mechanisms in place, but we have to think not only about now, we have to think about when everything's completely decentralized, when there's no slashing committee anymore, when anyone's free to make an ABS or DSS and there's no human to sit there and judge. When it actually truly becomes a decentralized network, this is the world. This is the potential for the infrastructure. It could completely slash everything by the rules it's written in. When in a completely decentralized permissionless environment with the handcuffs, with the training wheels, with, you know, everything on, the risk can be much less. Or it could be honestly zero too. Like there's, you can build an ABS or DSS with no slashing. I think that's the case right now. Not many or any of the ABSs live right now have any slashing, right? So you could have 0% and you get 100% and or anywhere between.

What is your operating kind of base case here?

So the base case, I think for the most part slashing should pretty— be pretty minimal. If they actually— if slashing has become a, a, a common thing, this whole restaking just doesn't work. If slashing has become commonplace and you've gone from earning maybe 1% on top of your 4% that you're getting for ETH, so say you're getting 4% on ETH, now you've gotten 5%. If the slashing becomes commonplace and you start losing more than 1% or even half a percent, I think this whole thing flips and the public appetite for restaking actually goes south. Now, this is me being very frank about people. I'm not going to sell you on a story or fairy tale. This is the way I think it's going to work. It's going to be like when you start having some of these first initial slashings, actually I'd start thinking people are gonna start pulling money out 'cause they're gonna get scared, right? And so I think when the first initial slashings, you know, in whatever platform occur, people are gonna start pulling their money out of LRTs and pulling out of their native deposits because they're worried. They're like, oh, you know, now here's the risk. It's not just been a points farm anymore. Now, you know—

Well, the meta is evolving quickly, obviously with airdrops and now, you know, farming. To your point around people are really saying, hey, was it really worth it taking that incremental risk? I've actually lost some money. Can't even get my money out as quickly. Takes 7-14 days to bridge over and withdraw. And the points or whatever the airdrop wasn't as juicy and the yield's not there. I guess it brings me to the question, how big of a market is this? We certainly saw with DeFi yield farming, traditionally yields come down, the market sort of stabilizes and it's not sustainable to have these kind of super high yields. How do you think about now, how much TVL can you absorb and what are the restaking opportunities? I guess like there's a number of, but I'd like maybe for you to kind of bucket them in terms of where is this yield going to potentially come from?

Yeah, I'll give you a frank assessment here too. I think TVL is an awful metric for this entire thing, for the entirety of restaking. TVL right now is the worst metric you can look at. And I'll be— I'll explain. Okay, so Eigen's got $22 billion, $23, $21. I don't mean ETH price recently crashed, so but around there, right? How do you pay yield on $21 billion when the, the meme of the industry is there's no real revenue, right? Yeah, yeah. Your protocols that make real revenue. But how are you going to pay yield on $21 billion with infrastructure? It's, it's a question that many people are— no one's really willing to say it out loud and try to answer that question because I don't know if there's really an answer, right? And for the most part, it's people farming. Like, you just can't pay the yield on $22 billion. And I don't even know if there's a need for that much economic security in one specific AVS or DSS. I can't think of—

You mentioned AVS and DSS a couple of times. For the listener, like, what are those things? Yeah.

So an AVS is Eigen's term, it's actively valid service. Our acronym is DSS, Distributed Secure Service. It just makes more sense. But there are two of the same for the most part. But yeah, these are the actual services that run on the restaking platform and they are the ones that will be paying for the economic security. Our view has been, hey, unless they're just going to create tokens that are going to sit there and airdrop and continually airdrop and go straight to zero, you need to create a sustainable economy for this whole thing to work. And this is why I said TVL is the worst metric to look at right now, because you first need to start a sustainable economy before you start bringing in large amounts of capital. Else the TVL chart ends up looking just like that, right? After the airdrop, it's going to look like that. And so when we— the way we've approached this, like, hey, let's start small. We implemented a $1 billion cap because there's not many No one can make a case that you need more than $1 billion in economic security, like an application need more than $1 billion in economic security. So we implemented a deposit cap and now we're really focusing on building actual proper use cases that can provide sustainable yields outside of native token dilution to the end users. Now, you asked about what we think as like applications that can actually do this, DSSs and ABSs that can actually do that. You have a few buckets to look at. So you have people creating things like, or just adding additional security to already existing things. So you have restake rollups, right? Where basically you provide economic, like you basically run clients that basically run the rollup. You can have decentralized sequencers, you can simply just have guardians that sit there and watch the state routes. And if anything goes off, they would just shut down. Or pause the chain. Another bucket is you have bridges basically providing insurance across transactions across the bridge, right? So you're bridging our, for example, Wormhole from A to B. You can then provide insurance for that transaction route, and if it doesn't get delivered, the user gets paid out. Another one is like ZK coprocessors and off-chain compute. And then after that, you really start getting into some new stuff. And this is actually where a lot of our focus is because I think this can power a new economy. So you have people building and you're an investor in things like Hyperbolic, right? They're building decentralized AI or compute using the POS system. Proof of sampling is one option for something that can leverage a decentralized network like this. Actually, a lot of teams are building AI projects that are leveraging DSS.

Yeah, the whole general concept that is makes sense is this idea of when people stake in a proof-of-stake network, there's a lot of, there's more security and it's a very simplistic mechanism. The idea of the active validating services or your mechanism is to create more possibilities into how that security gets shared, distributed for different use cases. I've said it multiple times, but like, not every use case requires the same level of security. Meaning, yeah, if you drive a Ferrari versus a Prius, different level of security that is needed, meaning insurance, right? Uh, the application itself, if you're moving around a million dollars versus $2 for a game, very different type of security that's required for that transaction, right? So that's a general idea, right? Between— it's actually the first very crude mechanism of you stake, It's a huge pool of security, and now this allows you to be more flexible in how you actually utilize that pool of security. This is kind of the whole mechanism that's got the industry so jazzed up over the last couple years, right?

The two metrics that you look at, and you just point out, is the actual utilization of the capital in a non-BS way. Okay, like, you can't be like, here's $6 billion, but is that— you really need $6 billion? So actual utilization of capital, and then Second from that is the yield being paid on that capital. And then non-dilutive token.

Yes. Yes. How sophisticated do you think this market is to determine how much security is required?

I think right now we're sort of taking and throwing a dart on a dartboard and saying, hey, this is, this is the amount we need, right? Hence why we started big and then now we're trying to figure it out when in reality And it's probably good to go over and then cut, cut, cut, and then find the equilibrium as opposed to being under. Well, I feel you can make the— you can make the argument for going under. And our approach is this: why don't you allow DSS to define limits? Say, hey, I only want $1 million economic security or $2 million. Because if you— if you don't define limits and you have a bunch of capital, then you're going to see a rush of the capital, the yield is going to suck, and then everyone's going to leave and then you'll become like You bounce up and down, up and down, up and down. Our approach is like, hey, why don't we allow these people that are writing DSSs to say, hey, I only want a million, I only want $2 million of capital, I want it for this duration of time so I don't have to sit there and wake up one day and be like, half my capital is gone, my thing's half as secure. So basically come in and say, hey, I want 90 days, I want $1 million for 90 days, lock in, and here's probably the yield you're going to get, plus or minus, you know, based on market conditions. Yeah. And then they can make it $2 million and then they can make it $5 million depending on their needs.

Like the whole general idea for a listener is that you're basically creating a marketplace for security. And if you're a particular chain or you're a particular application, you're going to go out to the market and say, I'm willing to pay this amount in my native token for this type of security. Going back to the example of Hyperbolic, you need all this kind of verification or whatever. They're, they're running their whole business and you require a certain amount of security to operate that in a decentralized context and utilizing the chain. And the investor here or the market might look at that and say, okay, yeah, the fair coupon here is X, 10%, 14%, 30% based on a couple of parameters like the duration of it, the perceived level of riskiness, the opportunity cost, a whole number of parameters. But naturally speaking, like the way people like, I think the way I think of it is there should be an equilibrium, right? In terms of there's in the same way that you have, you know, capital markets, you have a prevailing interest rate based on a ranking system of perceived level riskiness for a company. Like, you know, the rating scale, right? You're AAA, you're paying T-bill plus very small spread. If you're high yield, you're a risky company. It's so that's how the market, you know, these yields are presumably going to move quite a bit and capital's going to rotate really quickly. This shared security is going to move pretty quickly and then that's going to adjust. But your point's a really good one, which is we need these applications.

Yeah. Right. We need the applications first. We put the, what's the saying though? You put the cart before the horse. Yeah. And so our approach is start small, start small, start small. Create, create, create the use cases, create new applications that can actually use Economic Security beyond some meme. Okay, get away from this whole alignment crap about, oh, I want to be ETH-aligned or whatever. Focus on the actual damn application, build the application, figure out how the Economic Security actually slots in without shoehorning it in, and then grow the TVL and actually get the delegations. Um, that's the way you got to create sustainable model.

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The core differentiation here is you're saying we're going to allow other types of collateral, not just Ethereum. That's pretty novel. Walk me through that and how does that Because a skeptic might say, wait a minute here, if you allow shitty collateral, then that— why doesn't that make the system more fragile? Walk me through that. I have the answer to that.

We've—

you and I have talked about this a lot, but like, what is— for that skeptic, like, what would you say?

Yeah, so it's ultimately a free market. You know, if someone offers up WIF, if you want to take WIF, you can take WIF as a DSS. But you need to think about, okay, hey, what does this mean for my application? Right? In a free market, you can do like— our approach is to create a free market and let the market figure out what it wants to use. And so yes, someone can come in and bring a meme coin and restake with a meme coin, but who's really at fault? It's the, it's the DSS that accepting that shitty meme coin, right? It's not like— it's just how the free market plays out. So in Karak's system, we basically allow you to come and say, hey, and express, hey, I have capital in this token. Who's— who can I— what can I restake with? And as a DSS designer or operator or the creator, I can say, hey, you know, this is a bridge. It's connecting a bunch of different networks together. It's not just Ethereum 2.0 and L2, it's Ethereum to AVAX to Solana to Cosmos chains, right? So it's connected with a bunch of different networks. Hence, you know, it makes sense for me to maybe accept capital beyond just Ethereum. So I'm going to say, hey, I'll take an AVAX, it'll take in Solana, it'll take in, you know, wrapped Bitcoin, whatever. And then people that have those tokens can come and restake with you. So it allows you to use tokens that make sense for use case because Ethereum is not the best or it's not the best ROI collateral for all these systems. Like you can't just say, hey, if these— if the only thing you should be restaking with, everything else sucks. If it is a bridge that's connecting 5 different networks that have 5 different native tokens, Why can't you accept all those tokens? And why does everything have to be only deployed on Ethereum itself? Again, it's a bridge that's deployed to 5 different networks. You should have deployments everywhere, right? And that's the core differentiator. It's let the free market decide what it wants to do, what's the fair market rates willing to pay, and what tokens is it willing to take.

Yeah, I think I share that sentiment. The market is always the arbiter of truth and far more efficient predictor. People obviously are not hyped up about Polymarket. Well, yeah, when you have $300 million on the line, it's a far better estimation of what the market is telling you, signal versus, you know, someone having an opinion on what the pristine collateral should and shouldn't be. The learning that I had in DeFi is like a money market like AAVE and Compound. The difference between AAVE and Compound, AAVE was able to attract way more TVL because it was much more agile in onboarding collateral. And it's not so that you shouldn't be taking these tokens like Sushi, for instance, or Wi-Fi as collateral. It's the amount and the caps that you set on that. And that is, it's almost like a Markowitz efficient portfolio construction. Most people would intuitively say, hey, wait a minute, if you add private equity, hedge funds, venture to a portfolio, it's going to make it way more risky. And actually it's not because what you need to focus on is the correlation among said assets. And in different scenarios, how does one bucket of allocation perform? One might wildly outperform. Venture might be super high performer while everything else crashes. And if you didn't have venture in that portfolio, you would've been kind of screwed because everything's so tightly correlated.

Yeah.

Which goes back to the initial observation you made over time. I guess like if you have two systems, one like Eigen that has only Ethereum, collateral versus another system that allows other types of collateral, well then you're presumably introducing some decoupling, less correlation between this, a bucket of different types of collateral. Now there might be other issues, which I want to get into with you is what are the complications of allowing other types of collateral? How do you think about the caps that you're setting? You mentioned this $1 billion cap. What are the other types of collateral? Like, how do you think about the caps? Who's setting these caps? Is it an internal risk committee? Is it just based on what?

Yeah, I think you brought up a good point. It's the lending markets have shown us all the ways you can, you know, think about accepting collateral. I think the closest one we're most akin to is actually Morpho. Morpho lets you accept anything, right? Everything's isolated in its own buckets, right? And so here everything's isolated in its own buckets. And the only, like, where the collateral comes and meets is when the DSS chooses to accept multiple types of collateral for its economic security. You touched on how do you, like, what are the complications of accepting multiple types of collateral? Well, and this is a small nuance, it's how do you equate the voting weight of these different types of collateral, right? So for example, if we have a governance token if we have Ethereum and then we have, for example, bridged asset, you're going to weight these things differently purely on— if we just look at it very simple, like simplistically, we're going to say, hey, based on dollars, one Ethereum is going to be worth more than one USDC, of course, right? 3000 versus one. So we're going to wait. Each of these is going to have a different voting weight when they're delegated to an operator. So basically, you know, think of it like shares for people at home. Think of it here. I have shares, I delegate it to an operator. And they go and vote and actually run the task on my behalf. And then I get rewards. It's how restaking works. Well, I'm giving different types of collateral and each collateral is going to be considered in different forms of value just from the dollar, like the face value of it, but also, you know, the type of collateral. If ETH is most pristine, it may have a higher voting, like you may get more votes for restaking ETH versus if you restaked with— I'm exaggerating, but yeah.

Is there one DSS? Um, are there multiple people here, like, or organizations? Like, um, like, how are— because in this, in this, in what you're describing, it really matters whoever is making that decision.

Yes. And so the person that we've given the rights to make decision, there is two parts. The DSS is the ultimate decider of what capital gets taken in. So if they're like, no, we don't want to take in wrapped BTC, you can't restake your wrapped BTC. That's the final answer. But again, every— like, you can have multiple DSSs that do different things. So you can have a Wormhole DSS that takes in maybe like W or USDC and ETH, and you can have another DSS that's a re— like a restake rollup DSS that takes in the governance tokens of various rollups. So They're the ones that ultimately decide. And then you have operators that are saying, hey, I will support this asset. So if I'm an operator and I only want to support pristine collateral like Ethereum, like USDC, then I can do that. If I'm an operator that wants to be more degen and I want to support more governance tokens, meme tokens, whatever, you can also support that.

The operator, meaning back to your example, would be like a Hyperbolic.

Sorry, the operators in this example would be someone like a Figment or Coinbase Cloud.

The validators themselves.

Yeah, yeah.

Got it. And so there's two components. Obviously validators in this industry have a long track record. Most of the top 10 are the top 10 across all different chains from Ethereum to Tezos to Cosmos. It's all pretty much the same guys, right? This could be even Coinbase, right? Or Binance running their own validators for the clients. So they, they, they, they're like on one side of the spectrum determining what DSS they work with, right? Yeah.

Yeah. And they, they choose what services. So if they want to validate the Wormhole one, they want to, they, they can. And if they're like, hey, this is a small one that we don't really put a— want to put our reputation on the line for because maybe it's not thoroughly audited or whatever, they don't have to operate on that one.

Right.

So they are free to choose which, just like they're free to choose which chains they're gonna run validators for, they're free to choose what DSSs they want to, to validate for.

What keeps a DSS in line and in check from taking too much risk?

I know it's a meme, social slashing. It's the social, like, consequences of it in the end, right? It's the reputational harm, uh, of it. It's the, you know, potentially just getting a black mark and saying, you know, no one's gonna really— no operator is gonna delegate to you or operate for your— with your DSS. It's completely social. Again, it's a permissionless protocol, so No one can block anyone from doing anything. There's no admin privilege.

So that's a good point. Anyone can come in and, and launch their own DSS.

Yep. I think it's important because again, you don't want to be— you don't want to sit here and be like, hey, we only want to work with this team or this team or this team, and we want to—

yeah, you're, you're not opinionated. I, I get it, and I think it makes sense. Uh, and the same with the market, you know, it's not opinionated. You know, you have multiple type of— I almost like it as an example. There's multiple types of hedge funds. They take all kinds of different risk. There's this problem that is a principal-agent problem. So anytime I invest in another fund, I do sometimes, I always ask the question, how much of your money is on the line? How much of the GP of the entire fund— say the fund's $100 million— how much of that is your money? And if it's less than a certain percentage, I will not invest because there's just not enough skin in the game. And so then how do you kind of think about the— just going back to this like principal-agent problem, like of a DSS, of an operator, like, yeah, they can, uh, are they anonymous, are they pseudonymous? They launch it, um, they offer a really compelling opportunity. And what I'm trying to get at is the market may not be as sophisticated and they're just chasing that yield, um, and it, and it blows up.

Yep.

Um, how do you— can you mitigate that? Um, can you, uh, like, what can you do to prevent that, if, if anything?

Yeah, so I think— so again, it's a permissionless protocol, so anything's possible. Um, but the way you confront this— so we made a pretty flexible design where you can sort of do whatever, like if you want to make your own custom vault that allows you to take custody assets on Coinbase custody or Binance custody and allows you to restake them and just have like an actual Ricardian contract where you write, hey, if I'm slashed and this event is emitted by a smart contract, I'm actually going to give up that money. You can technically, as long as the DSS says, hey, I'll take that capital in, right? If you can let governance tokens in, you can let stake governance tokens in. You can let bridge tokens in. Like, it's so flexible. Like, you can define however you want to restake. And as long as someone, some DSS on the other side is willing to take it in, take that cap, accept that as like restake capital and economic security, the protocol allows it to occur. Now, going back to your point, how do I create skin in the game? Well, you could extend that flexibility design. You can literally make it so the operator themselves has to put up 10% and pass up act like a GP, basically put 10-15% up and you can make it so if there's a slashing, they're the first to get slashed. Right. It's actually not too hard to build. You can create a 4626 vault that has those rules where the creator has to put 10% of the capital in and when that vault gets slashed, they're the ones that lose their deposit shares.

Sort of like some waterfall.

Exactly right. So you can easily define those rules in the card. Protocol. Um, and it's super easy to find those rules and create a vault and deploy that, right? So you can solve some of those issues, uh, within this open design.

We've thought a lot about, uh, or talked a lot about hypotheticals. I'd like for you to tell us a little bit about what's actually going on on the ground floor. Um, walk us through kind of— it's been a couple months since you launched, um, or just fairly recently. What, uh, kind of activity and interest have you seen? Where is what's the state of the protocol today and what does the rest of the kind of next 12 to 18, 24 months look like for you guys?

Yeah, so I think so. We launched in early April and it was been a pretty, a pretty successful launch, I would say. We got to a billion TVL, I think within like 6 weeks. And I know I did say TVL was a meme, but it showed that there, it showed that there's a demand here. For what's being built, an alternative to Eigen, right? People wanted something that, you know, is open, is going to exist on multiple different chains, accepts any asset. And I think that's actually become sort of the industry standard. Everyone's like, wait, why can't you restake with all these assets, right? Like, we were able to challenge that.

Presumably there's better— it's almost like you want to shop on Amazon. Do you want to just shop on Amazon in your local town or Amazon in the entire country? Or the world. We want to have access to all products, right?

Exactly. Um, and, and so I think we were successful in that mission saying, hey, this should be any asset and it should exist on multiple different chains. Um, so we saw success there. And from that, uh, after we launched, we were able to start adding a bunch of various different tokens. So we've added, um, the ETH, the LSTs, uh, some LRTs, even things like PT tokens, governance tokens, like, um, Blast was one I think we added last week. Things that help tell the story on what we're trying to do. And so that's been the past few weeks and now we're finishing up the V2 audit. So we're going to the third audit for V2. Security is pretty important to me. I try to keep it very simple. Like smart contract devs should write smart contracts in a way that's super simple for others to understand and audit. And get it audited multiple times because in the end you want to be able to sleep at night without— and you don't want to have to carry your computer and your ledger and, you know, everything around with you 24/7 because you need to potentially respond to things. Spend time and actually get this thing secured. Make sure it's well audited. Don't cut corners there. So V2 is almost ready to go and go for launch here in the end of July. We're onboarding tons of DSS partners again. We're trying to create actual use cases here that are just not non-dilutive, like not just dilutive governance tokens. People that actually want to use the services and take the economic security. So working with partners like Wormhole, which we announced about 2 weeks ago, and we're helping take Wormhole and make it more decentralized, right? Which meets the goals of the Wormhole community. So creating a decentralized validator set that can work alongside the existing Wormhole Guardian network. Potentially looking at creating a decentralized relay network. So the end UX for the user, that's bridging, becomes even better. Um, and, and working with our partners, right? So another one, working with HyperNative, which is basically building a, a security oracle. So how can we power security oracles that provide more security, new use cases that we haven't seen before, that can create products that can actually pay the rewards, uh, to people that are restaking? Um, and then beyond that, there's tons of partnerships I can't really talk about, but But the big takeaway would be, hey, these are new ideas that aren't just like the current infra memes that everyone's just like, man, it's over. Like the current high price FDP infra memes, right? Things that are completely new that only restaking can really power. We're really excited about that because you're actually creating new usable products for people versus playing the infra game. And so that's like the way we look at like integration, like that's the way we're looking at integrations, those type things. But yeah, like that's the current state. And then I can, you know, I can sell you in the future forever if need be.

Well, before we go to the future, this idea I've had for a while, I just want to validate with you and you tell me how you agree or disagree. But didn't Cosmos really pioneer this like ages ago, this idea of shared security model and allowing Like, you know, when you think about Cosmos, you have like ATOM as a hub and then you have like chains like dydx and you're borrowing security, um, and from the, from the hub. And, um, in some ways we're going more in that direction. Like, it feels a lot like a borrowed concept. Like, Cosmos is this kind of cursed protocol. It's built a lot of really good tech and then people then just borrow it. Uh, meanwhile, ATOM as a security substrate is sort of TBD and the price kind of reflects that. But it feels like that, no? Like, you know, you have, where I was going with this question, A, do you agree? B, do you foresee a scenario where you can now spin up chains like L2s or L3s or whatever? L2s are just other chains far more efficiently because you have multiple types of collateral And you can very easily spin up like a, you know, if you're not dYdX, if you're another protocol, you want to launch your own chain, they can borrow security from Karak in this marketplace and get it far more efficiently than it has ever been possible before in this industry.

Yeah. So on the Cosmos point, I think there's so much you can make cases for both sides. I think the idea of borrowed security, I think was pioneered by Cosmos, but again, As you said, the ideas and execution are two separate things. And there's a lot of politics on that side versus actually getting— I'm not shitting on that side of the crypto sphere. I'm just saying there's a lot of politics that sometimes get involved and muddy their goals. But I would say I would give it to them. There's no point of withholding credit. I think they have the credit. Is probably due to, is due to the Cosmos ecosystem saying, hey, you can do the shared security. So there's one world where you can say, hey, the idea of their, their way they looked at shared security was, hey, another chain can borrow the security. And they were really only thinking on like a chain level. I think the way I look at it is, and I have to figure out how to word it properly, but it's like there's a whole world of smaller applications that sort of everyone is talking about. Restaking is ignoring applications that only want $1 million, $2 million, $10 million in security. They're not a whole— they're not a whole chain. It's hard for them to justify having to run a whole Cosmos chain and talking with all these.

Not everyone is dYdX.

Yeah, exactly.

And so, yeah, effectively what this does in my mind is it lowers the cost, right? Because if you're— you If in order to bootstrap security, you have to give out all this inflation, crazy inflation like Bitcoin did in the early days, um, and new chains in Cosmos, you look at a bunch of— it has historically been quite expensive. This marketplace lowers that cost to bootstrap security because marketplace inherently makes things more efficiently because there's better price discovery and there's more competition, i.e., lowers the cost. You don't have to dilute yourself, you don't have to have these crazy inflation curves. You can now do it in a more efficient, cost-efficient manner.

Exactly.

Which Cosmos hadn't historically allowed you to do to that degree.

Exactly. Like, you want to make it super simple for people to borrow the economic security and create tools and applications. Like, you, you can make it so you can borrow economic security, but you need to create the stuff that people can actually use it with easily. You never— you know, you have the OP stack, alongside the borrowed security. You can borrow security, like, I mean, it's kind of whatever, but you need to build like infrastructure and applications on top of that so that people can actually borrow it easily. You need to build the restaked RASes to make— allow people to one-click launch restaked rollups, right? Um, I don't know if they really solved that part where, you know, here's things you can do aside from launching Cosmos SDK chain with that security. And going through governance processes to actually get it included in the AEC was probably another factor that provo— probably made it why, like, the reason why their shared security model hasn't really taken off. Like, it's a lot of politics versus just a clean marketplace. Here's applications, here's economic security, bam.

Mm-hmm. Yeah. Um, well, now that we're talking about politics, which I hate, um, there's still some degree of politics in the system.

No?

And maybe you want to just talk a little bit about what those are. And I know Eigen has like this veto council of sorts. And to your point around like the analogy of guardrails in place to make sure that the system kind of takes off smoothly, what are the like shades of politics in this system and in Karak?

I mean, in ours, I think, and it goes all the way back to the beginning of the podcast. I've been here since 2013. I've seen the entire crypto landscape change. And I'm not saying that because I'm not trying to say that and say I'm wise or I'm so wise that it's well beyond me. That's not the point. It's to say I really don't believe in this idea of alignment. I think alignment is kind of a meme. Like, what does it actually mean being ETH aligned? And also, who cares about alignment? Like, who are you really trying to impress here? Um, I, I think you do a good job. You, you especially, like, when you talk about Solana, you're like, Solana has presented a decent challenge. There's a whole alignment meme. And so I think it's pretty easy to talk to you about it, which is saying, hey, I think it's a whole line of thing.

It's just like, it doesn't matter.

Like, let's be adults in the room. Let's talk about what it is. Like, let's not— I think the other bit of restaking, it's been talked about as like A lot more than what it is. I've tried to—

well, I try also, when you talk about security, people that talk about alignment don't appreciate correlation and that that is at the heart of how you think about insurance and risk management. It boils down to— it's Markowitz. Go study Markowitz efficient portfolio construction frontier and then come talk to me about alignment as it relates to security. Exactly. And that's really it. And so you guys are— Yeah. So you guys, just to kind of round up for this chapter of the pod, restaking took off a lot, particularly as ETH, you know, the beacon chain launches. There's a lot of tokens that are delegated to the lighters of the world. They're staking their Ethereum. And then there's this kind of idea of, oh, you know, there's all this security that's pulled. Let's offer restaking or, you know, to, you know, distribute the security in more efficient ways conceptually. We haven't really found out a lot of the— what those use cases are really going to be. There's $20 billion plus of TVL chasing yield, but we haven't really solved the, um, the sustainable sources of yield per se. You guys have said in contrast to Eigen, which is kind of the competitor here, so to speak, they've garnered a lot of TVL. They've been Ethereum-aligned, only Ethereum as collateral, it's pristine. That's kind of their stance. You guys say, hey, wait a minute, no, we're going to introduce all kinds of other types of collateral. We'll have a more laissez-faire approach to it. And let's just set the right parameters, allow any people someone to come and, you know, it really depends on the application, the operator, and the DSS to figure that out. And that's the market. We're just here to provide a useful platform for the security to be shared in a more efficient way because, you know, crypto is not just Ethereum. So far, so good.

So far, so good. I mean, there's more I can add, I think, on the differentiation stuff. I think, I think, I think from a developer perspective, The way I get— I'm a developer. I'm sitting here defining the protocol as the Solidity engineer or the lead Solidity engineer, right? So I'm a developer. I understand where it sucks to work with. Like, since we're going through insurance, we were integrating other protocols. So I understand what sucks when integrating other protocols, what design sucks, what design's elegant and simple. And so from a developer standpoint, it's super easy to build on Karak. Why? You don't have to do any politics. You don't have to jump through politics. You don't have to make sure it's aligned. You can accept whatever collateral. I don't care what chain you want to deploy it on. We'll deploy on all the EVM chains and soon beyond that, deploy on non-EVM chains too. So you don't have to choose some chain alignment or sacrifice what chain you're already— if you're running a project on, for example, Arbitrum, right? Say you're GMX. Like in this case, you can run on the Karak infrastructure on Arbitrum instead of having to do some bridging between Ethereum mainnet and Arbitrum. And you can accept your GMX token, your GLP token, your ARB token, your ETH token, anything you want, right? It's super developer-friendly to build DSSs and get running on Karak. You don't have to deal with governance votes. You don't have to be aligned. You don't have to take the knee. Super— like, that's one thing I should have touched on earlier. It's very easy to build on Karak, right? I'm the engineer, right? 6 guys talk, like, uh, have 6 people between me and the protocol engineer themselves. I'm the, the lead engineer on the Solid Protocol, so I have empathy for the end developer.

So what if, I guess on that point, what kind of interest, uh, from projects have you seen since you've announced in April? And back to your point, which is probably more interesting where I wanted to go, is these projects that you say need the $1 to $2 million of security Like, what, what are those projects? What do they look like? And what kind of interest from developers have you gotten since you've kind of been more public about it since April?

Yeah, we got a ton of interest from developers. The developers that we're getting interest from are the ones like, hey, how do I get— how do we, how do we get building?

Like, and have these been EVM-based projects or non-EVM? Or both?

I would say predominantly EVM because those are really the only ones I've thought about restaking because it hasn't really been an option for non-EVM projects. But we've seen a small sprinkle of non-EVM projects come in and say, hey, maybe there's a— for example, Wormhole. I don't know if you consider it purely EVM or partially Solana EVM.

Yeah.

And so we're working on people like Wormhole, right? And there's a few others who probably announced this week that also have connections to non-EVM chains. But for the most part, it's been mostly EVM developers. But the type of developer that's come to us is like, hey, how do I get started? Where are the docs? Let's get the SDK going. And I match that energy. I'm like, look, let's ship this thing. Let's ship a POC. Let's do a POC testnet. Let's see how it works. Let's see if it makes sense. You have this governance token. Why don't we let that get restaked, huh? Let's give some utility to your governance token, right? And this attitude, I think, has done us pretty well. Have incredible BD, work on a bunch of products, projects, and we're just focused on shipping, shipping POCs and getting them to mainnet. And in terms of types of projects, again, it's been a variety of projects. Again, you have the AI ones, you have existing infrastructure that's trying to add a decentralized component like Wormhole. You have restaked rollups, which is something new and nascent. Yeah, it's a little bit across the board. You have a lot of indexing and data stuff that's actually pretty new, and that will probably make you know, front end's more decentralized. Yeah, a little bit of everything, I think, in the space has reached out and said, hey, we're interested in how do we get started?

Yeah. In this final chapter, I want to get more of your general thoughts. One, how do you measure success and what does success look like for you guys? And if you could touch on on that, like, what are the kind of the major themes that you're focused on in terms of maybe the type of applications? Um, the overarching kind of, uh, theme of this chapter in this pod is like, why does this make crypto a better industry? What you're building, like, how does Karak make it better? And what does success mean to you? And how does that percolate in, uh, into the broader industry?

Yeah, I think the over— and you summarize it, why does restaking really matter? And how does it— what does it mean for the end user? And who is the end user? And so, you know, for us, again, and the whole theme, hopefully, that I presented through the podcast is really cut through a lot of the random verbiage, a lot of the academic memery, I would say, like a lot of that stuff to really get down to the nitty-gritty of what restaking is, who does it benefit, and what it overall means for crypto, or in that case, making systems more secure. The way we measure success is, look, from a user— for users, it's like, how do we bring utility and yield to the end user? And I already touched on that. Saying, okay, you have all these tokens, can you give them yield? And if we are able to do that, I think we're successful in the user's eyes because now we've taken users that have tokens that are potentially otherwise not generating any yield, like governance tokens, and giving them yield and giving them a reason to hold the token beyond up and down price action. The other way we measure success is like through ecosystem. Have we built an ecosystem of partners, of DSSs, of operators that have created new types of applications and those applications are actually getting positive benefit from economic security. So instead of just points farming all day, is DeFi or is crypto better because of these applications being secured by economic security and versus them just existing in their current form without any economic security ever? Can we enable again new verticals of applications that weren't, that didn't exist before? And can we enable them to be more decentralized and more fair and more open? And I think the third measure is security and slashing. Like I talked about it, once slashing starts happening, people are going to run away. So when we look at security, you know, what's the security of the protocol look like? What are the slashings? How many slashings have occurred? Is there censorship? Is the operator set diverse enough? Is it geographically decentralized? Is it the same 10, 20 operators that operate on everything, or is it a good mix of professional operators and home operators? That's the way we're going to measure success here. Again, I don't think it's TVL. TVL really shouldn't be looked at because you can have $20 billion TVL, but if your security is not good, poof. It's gone, right? If users aren't satisfied with it, poof, the money's gone. If there's no ecosystem there and there's nothing to put money in, poof, it's gone.

So that's why I think we in this industry, we go one step forward and two backwards. And I think, you know, of course yields are not sustainable, but that's fine. I mean, I think the market naturally has an equilibrium to yields. But what is not really acceptable is the level of It's just smart contracts, right? And every time there's a hack, or it really sets us back as an industry. And I mean, you and I have had these conversations over the years, like, until we have robust risk management in place, this industry will not realize its full potential. Just won't. Yeah. There, throughout history, there hasn't been an industry that has really taken off without proper insurance.

Yep.

Explorers, whaling expeditions, home building and home owner. Like, it's just you need proper insurance otherwise, you know. And we know that, you know, this space is a lot of risk. There should be a lot of yield, um, and you should understand where that yield comes from. Otherwise you are the yield.

Exactly. And I'll give the frank assessment on the, on the yield and the risk, right? I'm not going to say this is going to create— this is the— I'm not going to tell you this is the next coming of Jesus for ETH, or this is the next coming of Christ for Ethereum, right? I'm going to be, hey, this is what's happening. And these are the type of yields you're going to get because you do that task, and here's the risk you're going to present yourself to.

Yeah, but I think it's a novel endeavor to create a marketplace for security and real-time assessment of risk. Because if you have a really, you know, one of the things that was super interesting was Wynter. You remember Andre launching Wynter? So Nexus, for users that might not be familiar, so the short story is Nexus was required you to do KYC. So only people, if you were farming in a particular DeFi protocol or putting money in AAVE, you could buy insurance, say for 6 months, insuring up to $1 million in AAVE, and you could buy it for $2,000 or whatever. It was like super cheap, actually it was like grossly underpriced. But you had the KYC, so not everyone had access to it. Andre then put a wrapper to that policy and allowed people to sell it. And that created a far more efficient market because it had better price. Now, Hugh and the team at Nexus were pricing the policy and I had a lot of conversations with him. I was like, how are you pricing it? It just feels really inefficient. My mind is like super underpriced and it's not dynamic, it's not real time. The market is always going to be a far, far better mechanism to price risk. Like look at options, right? I mean, there's a way to do it. Like if you want to understand the riskiness of a company, go look at option pricing, like literally Black-Scholes, right? And so I think what you guys are doing is, in my mind, it's not so much about can you get the extra yield from your token? Can you get, it's really the hyperbolics of the world that require security and they can come to this marketplace in a very efficient way and tap into it and plug into it and say, Hey, yeah, I need X amount of security, boom, and you get it. And yeah, the token holders benefit and the DSS benefit and the entire Karak ecosystem benefits, but it really is enabling lowering the cost of security by creating more flexibility and opportunities for these applications to come into this free marketplace and say, price me security now and I need it. And boom, you get it. And that I think will, 'cause security is paramount. If you don't care about security, go build a, centralized database in Web2 and just forget about crypto, full stop. Uh, and so I think that, that to me is why this is so exciting. Not so much, uh, the meme of like you restake and then, you know, you, you add yield on top of yield on top of yield. Like, that's irrelevant in my mind. It's not sustainable, it's not interesting.

I, I have a line that I think you would appreciate. Um, it may be a stretch, but I, I think I've listened to a few of these, so I get— I can, uh, I think I've heard this before from you. Basically, I'll say Karak is like restaking for Solana. Not actually literally restaking on Solana. It's like the philosophy of it, right? One, how Solana presents itself, it doesn't care for these alignment memes, right? The way Solana has presented itself, it really cares for building for 20 years in the future, right? Same here. We don't care about the politics. We don't care about alignment. It's just build a great product for the end user. The users will come and hopefully it'll be success if the idea actually works out.

Um, and presumably also cheaper or more efficient, right? Because if you allow more types of collateral, then that should expand the opportunity set. Now, you know, of course, like Bitcoin's now all the rage, right? And you're going to see much more flexibility there. You get a bunch of activity happening there after Taproot upgrade. You're going to have, you know, Solana in and of itself. You have, uh, you know, the high throughput chains, Aptos, Sei, Sui. Um, you know, Avalanche, like those are all viable collateral types. Not only that, but like we haven't even touched on this, but like from a customer acquisition standpoint and attracting just a lot of alignment, like is a thing in terms of like by allowing other types of collateral on the margin, it's beneficial because you tap into those communities and all of a sudden that if you're an application that, that That is interesting that on the margin, like, you care about that, right? You care about tapping into the users of Solana and other chains, right, wherever they may be.

Yeah. Uh, a quick side point, I, I— there's also a perspective where there's a— and there's a world where most of these tokens that actually end up being restake are governance tokens, uh, versus, you know, pristine collateral. Like, it gives use to governance tokens that otherwise previously didn't have a use, right? Allows them to be used for, you know, of course with some limits, right? You want a mix of good collateral and governance tokens. But you can give use to tokens that didn't have a use. And I think that's actually super powerful for a lot of end users. Like, people may not care about restaking at all, but if you're saying, hey, I can enable you to do something with that token that otherwise you couldn't do anything at all with, that's actually pretty compelling for a lot of users. And then on the other side, institutions too, right? Institutions hold bags of all these various tokens. They'd be willing to restake if they could, you know, if they could with governance tokens. But yeah, back to the Solana thing I was saying, and I think you touched on it, is like, hey, you got all these perceived collateral types of Sui and Aptos and Solana and all these other different chains. There's a notion that EVM should be the only place and Ethereum itself should be the only place restake lives and it's the only game in town. And again, we're here to challenge that. Create the free market and make it exist everywhere. Make it exist in all the chains. Anyone can show up and create two sides of the marketplace. And in the end, the person that benefits is the users, right? They're able to restake on their preferred chain or the chain they're working on. Developers can deploy on the chains that already exist on. We're here to work for and develop for developers in the future, not just where everyone is today. But yeah, that's sort of the long way of saying it's sort of like the Solana philosophy.

Right. Yeah. You just care about the end user and making it just a far better experience.

Exactly.

So just to round it up, I mean, I think this has been a very balanced discussion. Obviously I'm biased. I've known you for years. I am an investor and no surprise there. I hope that this discussion has been balanced and I want to end it with that tone in terms of, I think there are time and time again in crypto, it's important to just appreciate that there are unknowns. And I think this wouldn't be a proper discussion about risk if we didn't probably end this episode with just that type of closing in terms of, I think we've touched on a couple of the things that while this creates a marketplace and it creates the ability to share security, the ability to distribute it more efficiently for different types of applications and ultimately create a more efficient market to price security, which I think is beneficial. The unknowns and the things that might, you know, we ought to just pay attention to is, you know, this dynamic of anyone, the permissionless has both a blessing and a curse sometimes. It's important. The user might not fully appreciate, you know, might just see higher yield, but it's like when you go and buying like a bond, right? And if the coupon's 40%, well, Well, yeah, it's 40%, but what does that tell you about the viability of the company, of the issuer? So I think it's, we touched on this, but I just want to reemphasize and I want you to comment on it. So it's sort of the making sure that, you know, the DSS, you know, understanding like that type of operator, maybe creating a dashboard, right? Like the L2 dashboard is really good. You see which one have fraud proofs, which don't. A ranking system, maybe a rating system of these operators to make sure, you know, which are good, what's their track record. Would you agree with that? Is that something you guys are developing?

Yeah, so I think, I mean, it makes complete sense. Like these, the end product that you're restaking to is a highly technical thing that, and if you're not an engineer, you're really not gonna know what's the, how it actually works. Hence also why we have credit rating agencies in real life. Because you can assign— it's very easy to assign a letter to something, and for the most people be like, yeah, yeah, it's very easy to understand the letter, right?

Yeah, yeah.

Um, but something like this, very technical, there's going to be a very specific amount of people that can actually understand what's going on. Um, and so I think one thing that's done decently well right now for restaking is the LRTs, because you've sort of offloaded the— and delegated at least as like a small user.

You talk about like the world, um, like EtherFi, like a Swell, those—

yeah, you offloaded it to them and they're there to make the informed decision on where to allocate the capital. Yeah, yes, you, you may have a principal-agent problem, but for them, their goal is to make sure the capital stays in a protocol, and the way they're going to do that is providing competitive yield at a low amount of risk, right? So you've sort of, you know, with— by using an LRT, you've sort of offloaded your your risk analysis to someone else that's actually nitty-gritty deep in staking and the restaking, that actually has a direct line to the DSSs and, uh, that they allocate to and the operators that are operating for them. Um, and so I think that's one good thing we've done in the, in the restaking cycle is, you know, create some like layers of abstraction for the end user so they're not actively having to do this themselves unless they're sophisticated enough. But I think, yeah, you have to create dashboards. You have to create— you have to take audits for the DSSs. You have to sit there. And I think every user should at least look and figure out what their money is being allocated to, even though it's inconvenient and maybe technical and maybe time-consuming. As good practice, you should figure out what it's allocating to, what the source of the yield actually is. Is it just diluted governance token, or is it actually something sustainable? And you should become familiar with the risks and you shouldn't just, you know, chase the next farm because it could end poorly. So yeah, I mean, this is like anything else in the industry. You should always put time and due diligence in yourself to make sure it makes sense to you. If it's, you know, if it's a lot of word salad and fugazi fugazi, maybe stray away from it, right? Like, be very— I hope I presented— restaking is not very complex. It's pretty straightforward. You don't need research papers or even a white paper to explain it. You have a task, you have a reward, and you have a slashing condition if the task is messed up. This is why I'm a big fan of starting small in TVL, right? It's like instead of you having a large amount and chopping it down, it's like you start small and you allocate more and more and more as the DSS matures. Just from a time perspective, as it develops, as it has better docs. And as people come to an understanding of actually what's going on, nothing like you can write all you want in a paper, but nothing tells you how things are going to go better than actually running it. No one's going to tell you how the wisdom of the crowd is going to shape up. No one's going to tell you how to analyze crypto Twitter sentiment about your DSS. You can't predict any of that. Start small, build up from there. And that's been our philosophy. It's like, this is the way it's going to work. If something sucks, at least, or something is risky, hopefully doesn't get too much capital and it can be de-risked or, you know, compelled to shut down before it becomes too much of a nuisance.

Yeah, wise words from someone that started when they were 13 and still fairly young. Um, very, uh, very interesting discussion. Hopefully this has been— I mean, I want to bring you guys on the pod just to talk about risk because I enjoy our private conversations a lot of it, just generally about the direction of risk and where this industry is going. And we both share that passion. I don't know, we talk about it, you know, insurances and risk, talk about risk is sexy, at least for a few of us.

It's the most boring topic in the world, right?

It's the most important, I think, for crypto security and then creating more robust risk management solutions in place. And I think you guys are moving in that direction. So really excited for what you guys are doing. Thanks for coming on and sharing your thoughts, Drew. I think parting thoughts and also where, best place for people to follow you or learn more about Karak?

Yeah, parting thoughts. I mean, if you're a developer and you're thinking about restaking or potentially adding restaking to your application or building something new and you don't want to go and like build your own operator set and/or build your own chain and you want to, you know, if you want to focus on building the thing that makes you different versus the same, like the same peer-to-peer consensus stuff, you want to make something super fast and super secure, reach out. You know, we're a fast-moving team. You reach out, you'll be talking with me within a few hours if you need to be, and we can start moving and coding pretty fast. If you're a user and you want to potentially restake some of your assets, we offer a wide variety of assets on currently our V1. So you can deposit things like ETH, ETH LSTs, LRTs, PTs, governance tokens, things like Blast even. We offer a wide variety because again, I'm trying to tell the story of all the assets that we can accept in the future. And then if you are an operator, professional operators can always reach out. And yeah, you can find us on Twitter, @karak_network, karak.network. We don't have a whitepaper, actually. We never wrote a whitepaper because we just never felt the need to build the product and prove the point. You don't need to write a paper that 10 people will read.

But there is documentation on the site people can go read.

No, there's really good developer documentation. Very good developer documentation.

Yeah, yeah.

Written plain English, no math. Like, I know there's literally no LaTeX math equation in our documentation.

Plain English. Plain English. A 13-year-old, the next 13-year-old Drew that's listening to this and can go and look at it and maybe get started.

Yeah.

Really good story, Drew. Thanks for coming on again. And I really enjoyed this discussion. And hopefully users, let me start, listeners enjoyed it as well. And if you have any comments or want to learn more about it, just always comment on YouTube. You know, we're reading them and commenting on them. So I look forward to seeing some of those. But otherwise, thanks everyone for listening. And yeah, we'll be back next week with the roundup.

Thanks, Andy.

Thanks, Drew.

All right, you heard about Sei a couple times. Just want to give them one last shout out. Big thanks to Sei for sponsoring this episode of Empire. There are a ton of reasons to build on Sei. If you want to get in touch with them, you can reach out to me. I'll put you in touch directly with the team. You can also get in touch with them on Twitter @SeiNetwork. You can follow the journey @SeiNetwork. They are currently live. They've got Sei V2 on public devnet today. Mainnet goes live later in Q2. Really excited to have Sei sponsoring and partnering with us on this episode of Empire.