This episode of Bell Curve, featuring Robert Leshner and Hasu, unpacks the evolving architecture of DeFi, from modular designs and vertical integration to the profound impact of Real-World Assets (RWAs) and stablecoins, ultimately questioning how these shifts redefine DeFi's core value proposition for investors and researchers.
Introducing DeFi Season 3: Core Themes
- The conversation planned to explore the trend towards fragmentation and modular design in protocols. Examples cited include Uniswap V4's hooks, Lido V3's vault architecture, and Morpho's isolated borrow markets.
- Another focal point is vertical integration within DeFi, the burgeoning role of RWAs (Real-World Assets)—assets from traditional finance brought onto the blockchain—and the intersection of Traditional Finance (TradFi) and DeFi.
- The episode aimed to culminate in understanding how Robert and Hasu perceive the value proposition of DeFi today, contrasting it with earlier market phases like the 2021 "pool two" era.
- Robert humorously clarified his past DeFi activities: "I was more of like a pool one guy, you know, never pool three, you know, maybe maybe a dash of pool two."
- Pool 1, 2, and 3 were briefly defined by Robert as historical yield farming categorizations:
- Pool 1: Staking established crypto tokens (e.g., Ether, LINK) in a new protocol.
- Pool 2: Providing liquidity with an LP (Liquidity Provider) position, typically pairing the new protocol's token with Ether.
- Pool 3: Staking the new protocol's token itself. These represented a gradient of risk and speculation.
The Shift Towards Modular Design in DeFi Protocols
- The discussion delved into the increasing prevalence of modular architectures in DeFi, exemplified by Uniswap's evolution from V1's simplicity to V4's hook-based, developer-centric platform. Similar trends are seen in Morpho's fragmented financial products and Lido V3's "bring your own validators" vault system.
- Hasu, drawing on his research insights, suggested the primary driver is the pursuit of innovation and variety. He compared this to the Apple App Store or Steam, where a platform model allows tapping into broader market creativity. "When your product is variety, then you want to tap into a kind of more like modularized or platform model," Hasu explained. This allows for a multitude of staking configurations, AMM hooks, or repo agreements that an integrated provider couldn't offer.
- Robert, offering a founder's perspective from Compound, largely agreed, viewing it as a spectrum where protocols evolve from being highly opinionated by original developers (like Uniswap V2) to less opinionated, more flexible toolkits for external developers (Uniswap V4). He posited that this flexibility allows for institutional products but isn't solely driven by institutional demand yet, stating, "I don't think Uniswap V4 is that institutional. I don't think anything in Morpho is that institutional."
- Hasu added that the growing maturity of DeFi is a crucial factor. Early blockchains and protocols were monolithic because interfaces were immature. Now, with mature interfaces, protocols can reliably interoperate and outsource, enabling modularity. He also noted a potential for a "push back to vertical integration" if market conditions or customer preferences shift dramatically.
- Robert cautioned that new startups launching with a modular approach face immense challenges unless their offering is "10x better," due to the difficulty of gaining traction and trust as critical infrastructure.
Strategic Implication for Investors/Researchers: The move towards modularity signifies a maturing DeFi ecosystem, fostering greater innovation and customization. Investors should monitor which platforms successfully attract developer ecosystems, as this can be a strong indicator of future growth and network effects. Researchers can explore the resilience and security implications of increasingly interconnected, modular systems.
Vertical Integration: Expanding Protocol Capabilities
- The conversation shifted to the counter-trend of vertical integration, where successful protocols expand their offerings, such as Aave launching its GHO stablecoin or MakerDAO (now Sky) developing lending markets.
- Robert viewed this as a natural progression: "Any organization as it grows, it generally seeks to do more... Almost no organization is content with success." Successful projects will inevitably expand horizontally (new products) or vertically (controlling inputs/outputs).
- Hasu identified two main reasons for vertical integration:
- Fixing bottlenecks: He cited Aave's collaboration with Flashbots and Chainlink to control oracle update submissions, capturing liquidation value that previously went to validators. This allows Aave to offer a better service.
- New teams/market entry: New entrants often fix existing problems. He highlighted UniChain (Uniswap's own chain) as a move from an app to a chain, enabling more control over sequencing and block building, crucial for the trading experience. Hyperliquid's sequencer innovations were also mentioned as an example of improving user experience by prioritizing market makers.
Strategic Implication for Investors/Researchers: Vertical integration can enhance a protocol's value capture and user experience but also introduces new complexities and competitive dynamics. Investors should assess whether a protocol's expansion efforts genuinely address bottlenecks and improve its core offering or are merely attempts to chase new revenue streams that could dilute focus.
Lido's Restaking Strategy: A Retrospective
- Mike prompted Hasu to reflect on Lido's approach to restaking, particularly in light of the vertical integration trend.
- Hasu candidly admitted, "Yeah, I do regret the strategy that we took. I think we made a mistake." He specifically pointed to the decision not to create a secondary staking token for restaking.
- He felt they "overrated the network effect" of focusing on a single token (stETH) and underestimated the market's demand for variety and the value of restaking points, even without immediate fee generation. Lido V3 now allows for such modularity, but Hasu believes they could have acted sooner.
Strategic Implication for Investors/Researchers: Hasu's reflection underscores the challenge of balancing network effects with market demand for new features and risk profiles. For researchers, this is a case study in protocol strategy and tokenomics. Investors should note that even established protocols can misjudge market evolution, and adaptability remains key.
MEV, Margins, and Business Models: Aave vs. Maker/Sky
- The discussion touched on MEV (Maximal Extractable Value)—value extracted from block production beyond standard rewards—and its role, comparing Jito's validator-focused strategy with the approaches of Aave and Maker/Sky.
- Mike questioned if protocols are expanding from commoditized, low-margin businesses to higher-margin ones.
- Robert, drawing from his Compound experience, contrasted Aave's borrow/lend model (inherently low margin, with most interest paid to suppliers) with Maker/Sky's stablecoin issuance (theoretically high margin, as interest paid by borrowers could be retained). He argued, "Frankly, I think it's way more intuitive for an Aave to expand into a stable coin than it is for a stable coin to expand into lending."
- Hasu countered that stablecoin margins aren't always as high as perceived. Competition forces issuers to pay yield to holders, and operational costs (like Circle's distribution payments to Coinbase) reduce net interest margins. He noted Tether's margins are high but largely opaque.
- Monae added that early stablecoins like Tether and Dai benefited from launching in a Zero Interest Rate Policy (ZIRP) environment, where users didn't expect yield.
Strategic Implication for Investors/Researchers: Understanding the margin profiles of different DeFi business models is crucial. While stablecoin issuance appears lucrative, competition and operational realities can compress margins. Investors should scrutinize the sustainability of high-yield offerings and the true profitability of stablecoin issuers.
Vertical Integration and Neutrality: Competing with Your Users
- Monae raised the concern of protocols losing neutrality and alienating users by vertically integrating and competing with them (e.g., Circle acquiring a stablecoin issuer while also serving as infrastructure for others).
- Robert generally hasn't seen significant backlash from such moves, citing examples like Maker, Aave, MetaMask, and Coinbase. He believes users often react with a "good luck, let's see how it turns out" attitude.
- Specifically regarding Circle's acquisition of Hashnote (a tokenized Treasury bill issuer) and its potential impact on his own RWA company, Superstate, Robert expressed little concern. He believes Superstate can innovate faster and build better products, and that Circle has more to lose by acting anti-competitively. "I'm able to build a better product and I'm able to do it faster than a company like Circle can," he stated.
Strategic Implication for Investors/Researchers: While vertical integration can create competitive friction, strong product execution and innovation can often outweigh concerns about neutrality, especially in a rapidly evolving market.
The Inevitable Rise of RWAs and Stablecoins
- The conversation pivoted to the future of stablecoins and RWAs, referencing a Treasury report predicting $2 trillion in on-chain money market funds and stablecoins by 2028.
- Robert sees this as "inevitable," with DeFi protocols becoming major consumers of these on-chain off-chain assets. He envisions a future where KYC'd DeFi protocols can interact with off-chain assets while providing services to users who may not be KYC'd or even aware of the underlying mechanics. The core idea is "open composable DeFi platforms and slightly more permissions around how the underlying assets can enter and exit."
- Hasu agreed, framing stablecoin adoption within the "hierarchy of money," where credit money (like stablecoins) is essential for a functioning economy, while assets like Bitcoin and Ether serve as base money. He anticipates regulatory lines might be blurred due to composability, citing BlackRock's whitelisted Biddle token being accessible indirectly via Sky's sDAI.
Strategic Implication for Investors/Researchers: The massive influx of RWAs and stablecoins will provide new collateral types and yield sources for DeFi. Investors should explore protocols well-positioned to integrate these assets. Researchers should analyze the systemic risks and regulatory challenges of blending traditional and decentralized finance at scale.
Stablecoins vs. Traditional Banking: A New Financial Landscape
- The impact of stablecoins on the traditional fractional reserve banking system was explored. Fractional reserve banking is a system where banks hold only a fraction of deposits in reserve and lend out the rest. Full-reserve stablecoins, backed 1:1 by cash equivalents, offer payment services outside this system.
- Hasu explained that banks play a vital role in capital allocation. He referenced the "narrow bank" concept—a full-reserve bank—and the Fed's past reluctance, fearing credit contraction. He believes regulators might push stablecoins to become more bank-like (e.g., holding commercial paper) to ensure continued investment in the broader economy.
- Robert, offering a "devil's advocate" view, emphasized that banks are hyper-regulated and are unlikely to allow stablecoins to replicate their functions without similar oversight. "I don't think the end state is stable coins are pseudo banks just running on a blockchain. I think that they're going to be fundamentally different in perpetuity."
- Mike noted that stablecoins could be seen as a pseudo-form of narrow banking, offering lower overhead due to less risk-taking on the asset side, global reach, and high liquidity.
Strategic Implication for Investors/Researchers: The interaction between stablecoins and traditional banking will be a defining theme. Investors should watch for regulatory developments that could either restrict stablecoins or allow them to take on more bank-like functions. This also presents opportunities for protocols that can bridge these two worlds.
The Future Tokenization Wave: Beyond Dollars and Treasuries
- The discussion looked at which assets beyond US dollars and Treasuries are ripe for tokenization.
- Hasu argued against a simple "barbell" (liquid vs. illiquid) view, suggesting a "pyramid or waterfall" driven by buyer demand. He sees large stablecoin issuers like Sky as key demand drivers, capable of solving the "cold start problem" for tokenizing new asset classes by committing capital. He stressed that "liquidity, access to liquidity... is like an extremely underrated part of this whole RWA debate."
- Robert's core thesis: "Eventually, every asset is going to be on chain simply because a blockchain is better rails or a better file format for wealth to be recorded." While tokenization improves transferability and potentially secondary market liquidity, it doesn't inherently change an asset's underlying risk or liquidity. He predicts the next wave will be assets that integrate elegantly with DeFi: "corporate credit and things with duration and things that look a lot like T-bills to start with but are just like one degree of separation more interesting."
Strategic Implication for Investors/Researchers: The tokenization of diverse assets presents a vast opportunity. Investors should look for assets that offer genuine utility within DeFi (e.g., as collateral, for yield generation) rather than just tokenization for its own sake. Liquidity solutions for tokenized RWAs will be critical.
Redefining DeFi's Value Proposition: Trust, Efficiency, and L1 Tokens
- The episode concluded by revisiting DeFi's fundamental value proposition in light of these trends.
- Robert emphasized that most assets, even crypto-native ones (except L1 tokens like ETH or SOL), are not fully trustless. Blockchains are superior recording mechanisms for all types of wealth, trust-based or not. The L1s provide trust in the execution environment. He stated, "All of this stuff is totally ripe for migration because blockchains fundamentally are better place for assets to live than the legacy file formats that are not composable at all, that are not programmable at all, that are opaque and that are inefficient."
- Hasu believes bringing RWAs on-chain is "net extremely good" for L1 tokens. While ETH or SOL might not scale as "money" in isolation, they become the backbone of a tokenized internet economy, accruing value from fees and maintaining their status as prime collateral or base money.
- When asked if finance moving on-chain will make the economy more decentralized or just more efficient, Hasu, an "incrementalist," opined that the world "will not look that different from today," with similar levels of credit creation. The existing system isn't broken but can be improved.
Strategic Implication for Investors/Researchers: DeFi's value proposition is shifting from purely non-sovereign ideals to also encompass superior efficiency, programmability, and composability for all asset types. L1 tokens are positioned to capture value as the foundational settlement and security layers for this expanding on-chain economy, provided they can effectively translate activity into demand for the native asset.
Conclusion: DeFi's Maturation Towards Broader Financial Integration
This discussion reveals DeFi's evolution from niche experiments to a maturing ecosystem increasingly intertwined with traditional finance via RWAs and sophisticated stablecoins. For Crypto AI investors and researchers, the key is to track how modularity and vertical integration shape protocol dominance, and how the influx of tokenized real-world value redefines risk, opportunity, and the utility of L1s.
