Soft Jobs, AI CapEx Surge, and Institutions Move Onchain: Bits + Bips

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Today's topic is A Labs A will win proposal. Here to discuss is Stani Kulichov, founder of A Labs. Welcome Stonnie.

Hey Laura. Thanks for having me here.

Yeah, excited to dig into this proposal. Last week, A Labs published a post in the A DAO forum called A will win that seems to address some issues that were raised in December. Back then there was a controversy where prior there had been fees from the DEX aggregator Paris swap that were being directed to the A DAO and after switching it to cow swap those were moved over to a labs. This obviously sparked an from the community as you know happens in crypto. And so it sort of seems that this recent proposal was to directly tackle this question of which entity gets which part of the pie and how much and how the various entities can work together. So just give us the broad outlines of what you put in this a will win proposal.

Yeah. And I guess in some ways it's there's sort of like a bigger question about sustainability and growth. I think that the upgrade from the A interface that basically is run by A Labs and developed by our team. We used to have sort of a par swap integration that based on that integration created a positive slippage in some cases that was effectively donated to the DAO mainly to regulatory concerns because we couldn't capture any fees over the past years which kind of became a sort of a ongoing very small revenue stream and we upgraded that into a call swap to get a better aggregation and efficiency for the users.

And part of that this ability to give positive slippage basically wasn't anymore created for this integration. And instead what was this integration about is simply to create non-protocol features for the products that others builds and then create revenue streams so others can be self sustainable and continue building and expanding these application layer products to expand the protocol layer. So that is the kind of like a setup that's and and how it relates to to the swap integrations.

But the bigger question here is that and the way we've been thinking of is that what is the role of of a lab? So obviously a labs has started from eland being basically one of the first D5 protocols before D5 was coined within an ICO and raised some amount of funding in 2017 and basically we're building smart contract based lending and it turned into a down the line which turned into a relative well relatively largest D5 protocol over the past years and that's all that innovation that has been happen from a v one two and three and now also four and and go stable coins everything consists of a set of smart contracts.

So the very first time we established the economics for the a protocol was AIP1 where specifically we voiced out that anything that is happening on on the protocol level for the smart contracts there is going directly into the other protocol. So every sort of a borrowing that happens across the protocol whether it's a native go stable coins or other stable coins the protocol earns and that's the economical activity and then those funds can be used paying service providers and also using for growth initiatives and and such.

So we've always had this role of being a kind of like a permanent contributor into the a protocol and everything we simply built from a labs the idea there is to expand the economical activity of the protocol and we've been thinking of two kinds of models that could work when we think about like the growth so obviously like the defi phase between the most peak it it was in in 2021 and now last year we had another peak. So we've been peing up to 200 billion port of deposits roughly as a as a whole space.

And something that we've been trying to figure out how do we basically scale DeFi because a lot of the growth of a has been happening through consolidation within our space and being able to produce really good products and really good protocol economics to attract liquidity and and the sort of thinking behind of this will win proposal is to understand how do we actually grow the D5 pie ensure that AVA can be a leader in the space and at the same time how does the funding actually will happen and the way we were thinking about the funding in the past is that a lab should be a self- sustainable company grow with external funding and any growth on a labs and the product player basically then grows the economical activity of the protocol.

So this is kind of like a simple well a sort of a simple way to understand that the products grow the protocol should grow. On the flip side it creates a sort of a dilemma and uncertainty for some of the token holders. For example, like if there is protocol activity but at this which is governed by the token and then there is a sort of a for-profit business that has its own trajectory while growing the the protocol. It can get a little bit confusing.

So with a will win proposal, one of our biggest goals was to actually remove the uncertainty that comes from this sort of a dual model you know the a token and and labs and and sort of a direct all the value capture into one specific place while keeping this sort of a for-profit nature where we understand that expanding the economical activity of a protocol we have to build products and we have to go where the users are. But those for-profit applications that we built, we simply give 100% of that revenue to the AVA DAO for the benefit of the AVA token holders and AVA labs then becomes a sort of a tok fully token centric model and that removes the uncertainty and also expands the revenue capture surface for the AA token and then there's other nuances in the in the protocol as well. But that is the kind of like a key point there.

Yeah. And the 100% of revenues has a specific definition where there's certain pieces that are you know it's like minus you know the revenue minus certain things that you would want to do for like incentives for users or you know other sort of considerations. And then the other kind of main three points are um you know moving to a model where a labs is being funded by grants and uh from the DAO and there's also an establishment of a foundation for um trademarks and and other kind of brand assets that are currently owned by labs. And then finally the ratification of V4 which kind of has uh certain technical features that are um sort of key to this proposal.

So before we get into that exactly um do you just want to flesh out like um you know where you're coming from like the DAO and the labs entity how have they kind of historically either been operating or splitting the pie and then and then we can move into some of the details.

Yeah. Historically speaking, obviously everything was incepted from from one sort of entity which is a labs and over the basic years we ended up into a model where we have multiple service providers in the AVA ecosystem. So the way to think about a is that in some ways it's a an active protocol. So the contrast can be deployed and and made immutable if if needed and if there's demand.

But what we noticed over the the the past and looking what you know how lending has evolved is that there's so sort of a active participation that is needed for different functions for the protocol that basically is risk management mostly and some other functions. So typically when you think about a a more simplified protocol like an AMM what happens is that once you deploy the protocol there's very little variables that you need to really optimize. So if you need to optimize the algorithm of of buying and selling typically you just deploy like it's more easier to deploy a completely new version of of of a protocol.

In obvious example, typically the relationships that users create, especially on the borrowing side and of course on the deposit side is is active ongoing relationships. And that means that because there's a factor of risk involved. That risk needs to be dynamically adjusted into because the market conditions are also dynamic. So the way to think about it is that if the if the parameters are fully static there might be cases and and times when the risk is the protocol is absorbing excess risk which then is on the cost of the borrowers or the depositors and to overcome that sort of a challenge the service provider model caters that really well.

So there's different sort of participants. They have different roles and they actively create proposals and they're publicly debated. So there's always sort of a criticism around Dows and and inefficiency. But something we kind of like forget is that a lot of the reasons why we know about what's basically you know happening in a what kind of parameters are being proposed or asset listings are happening is because there is this wide set of transparency that anyone can actually go and understand what is going on and at the same time also express opinions whether it's it's from a user perspective for token holders perspective and and that creates a sort of a resiliency that you really want from a u lending protocol and it doesn't necessarily apply to other forms of protocol either.

So this is this is the sort of way how the a ecosystem has evolved and obviously the protocol makes revenue and that revenue is then distributed across paying these different service providers. So it's a very sort of a decentralized way of trying to kind of like coordinate and coordination always create costs but it comes from the other aspect that we add some resiliency there and so as I alluded to earlier the a v4 version which you know isn't live yet but definitely you know kind of is a new evolution for the protocol. It has a pretty specific architecture that involves a hub and spoke model that creates kind of like a broader set of revenue models that are possible with the protocol and it it feels key to the proposal in various ways.

So explain you know a little bit more about the protocol and why you view it as um key to your a will win proposal.

Yeah, the reason it's very key for the overall proposal is because the proposal relies on a lot of the revenue streams that the AVA v4 creates and also the expanded use cases. And I think one really good observation is that av4 is is in our opinion the the sort of state-of-the-art of lending protocols because of its flexibility. So the AV tree allows to deploy for example markets with crosscolorization, markets without crosscolorization which which basically means that you can simply deposit an asset like Ethereum or Bitcoin and then borrow stable coins without lending out your underlying collateral. So all of the things that the the V3 is capable of.

For us what is very important about V4 is that we notice that actually the the use cases of of DeFi are expanding. So we've been able to grow quite significantly within the existing DeFi ecosystem by use cases like lending against Bitcoin, lending against Ethereum and also looping strategies or integrating yield bearing stable coins as well and using them as a collle and and trying to leverage your position. So, a in a current form really allows a various different sort of use cases and audiences.

And what we noticed is that for the future of lending and how we want to scale a we need something that is really modular and something that is easy to expand in the future in a way that multiple contributors can actually work on the protocol. So we came up with this architecture of hubs and spokes and and the way it works is that the V4's hubs is where the the assets are stored. But then all these spokes that are connected into the hubs are sort of lending strategies with their own colorization requirements and they can be also custom logic and then the hubs are giving credit lines directly to the spokes.

And and the way to think about it is that a hub is kind of a acts as a central bank that is giving credit lines to these sort of commercial banks that then create this lending activity. And what it allows to do is that you can concentrate a lot of the liquidity into your hub while at the same time you can isolate risk and and cap the exposure into these different spokes and and especially when a lot of innovation comes in into DeFi. It allows any developer to create their own or deploy their own spoke that over time with the collateral composition can be connected across all the spokes sorry all the hubs depending on what is the the sort of like overall risk.

So it allows the A protocol to scale into different risk categories without compromising the the the the main liquidity concentration. And we're also betting that maybe in the future the collaterals might not for example be ERC20s. It can be lending directly into qualified custodians where the bitcoin or ethereum is sitting and borrowing directly from a or for example lending directly to a app consumer users where there's no tokenization. So that flexibility is is what really helps to scale the protocol itself.

And second really important design aspect is this so-called reinvestment feature. So investment feature is a way of taking the the float that is existing in the other pools which based on a vitri's data can be anything between few hundred million even up to 1.5 billion in some cases and reinvesting that in a risk down way where if there's for example if a pools have lower rates than the risk-free rates in with software in chatfi that can be invested into those sort of opportunities or a native asco saving savings opportunity. So it sort of creates this way of efficiency on how we actually manage the funds within these pools without adding additional risk.

And so aby v4 right now is in testn net. Um do you have kind of a you know a date when you would expect it to launch even if it's roughly?

Yeah I would I would like to see it as soon as possible. The reality is that we started to design a v4 almost two and a half years ago. And we've been working on it more or less two years and especially the the the past six or so months we've been focusing on on security hardening. We released our first public smart contract audit last week. We also finished a a public security contest end of last year. Everything we built for a v4 is is publicly available.

So the codebase is publicly available. anyone can actually look into the codebase you know give any sort of suggestions and and I think this is the kind of like a core point is that I think over the years what happened with DeFi is that a lot of these lowhanging fruits were built up. So you know once you have a really good lending infrastructure, swapping infrastructure and some yield aggregators and vaults, you kind of have a lot of the ecosystem being built and one of the concerns we had from engineering standpoint is that we want to see more native DeFi innovation. like we want to build bring the energy back from like the DeFi summer when you know everyone was cooking on some sort of DeFi innovation and and one way for us to do that is is basically have this sort of modular architecture with hubs and spokes where developers can come actually and create their own customized spoke as a way of requesting liquidity from the hubs that are governed by the Avid and if that innovation is is secure and and and scalable use case then it can create a credit line and if that use case proves out that credit line can be increased or also the spoke can be connected into multiple hubs.

So our goal is here to not only see sort of innovation coming out of the AVA community by the core developers but also thirdparty developers that have a really exciting ideas when it comes to DeFi but maybe they have lack of liquidity which is one of the biggest problems for a lot of new founders is that they have a really interesting projects but they have hard time getting those projects bootstrapped and out of the ground without decent liquidity and without actually launching a token.

So one other aspect of the proposal that I wanted to ask about was um the you know piece suggesting that a set up a foundation and to my mind this was to address again like some aspect of the controversy in December. You know out of that there was a proposal I think in the forum you know saying that there should be some process to determine um you know whether the DAO and token holders should have control over the A brand you know any associated assets you know traditionally all those and still are the property of a lab since the DAO is not a legal entity.

And I just found it interesting that, you know, you wanted to set up this LA foundation entity because I'm sure you're very well aware that that model is um maybe in a downtrend, I would say, in crypto. Last summer, A16Z wrote a blog post titled the end of the foundation era in crypto. So, um, you know, if A16Z is saying that they think the Foundation era is over in crypto, um, I'm so curious, you know, why you felt that this was the time for a to actually go that route.

Yeah, I mean, um, you know, A6Z has a lot of bets, um, you know, but they never bet on a and look what happened, right? So I I think I I think what they're doing is is very ambitious and I I think is really interesting step with the Dunas and I think UNISOP is um also exploring with this obviously with Dunas the the sort of obviously challenge is that the novey of the the structure. So whoever will be the sort of uh first of u adop that model will have to battle test how it works essentially and I think it works pretty well for um especially projects that are more US-driven I think from that perspective but I think pretty much everything still is running with foundations but I do think that if that Duna model gets more traction, it gets more proven, it could be sort of a viable solution for the whole industry.

And I I think we need solutions like that. Definitely. But getting something fast off the ground that is proven model. The foundation is still the strongest way way to do that because that's just a proven model. How things are in a year or two is different of course.

Yeah. And just to let listeners know, Duna is um decentralized or DAO or something unincorporated nonprofit association. Because I myself couldn't remember what what that was, but that's like a in Wyoming. It's a new um yeah, sorry, decentralized unincorporated nonprofit association. It was established in Wyoming or or not established, but you know, that's an architecture that Wyoming offers. And I think junas have some sort of uh legal liability protection and also if I recall correctly and it does help some of the tax questions as well but obviously um you know it has to be be be proven as well. I'm still I'm quite excited to be to be honest on on that model as well. I just want to see it you know grow a bit more.

So, one other thing that I was curious about was um I'm sure you're very well aware that there's a number of well-known Dows that uh kind of you know put a pause or were disbanded over the last year and here you are in a very different position. The labs is proposing that its own funding basically be at the mercy of a DAO every year. And you might recall that that was the original vision for the DAO in 2016, which was um to have the DAO vote on whether or not to fund Slocket, which created that DAO. We won't get into that, but um point is just, you know, that feels like such a big step to me. It's sort of like the labs, you know, has been in control of its own destiny at least um from a financial perspective more directly. Whereas you are now proposing that there's another entity with a whole set of token holders, you know, that are just very diverse that will, you know, basically determine what your budget is every year. if if not 100% then at least in large part.

So you know talk with me about why it is that you decided to go that route and you know whether you have any nerves about you know whether that could work out um maybe not so well for you.

Yeah and I think um I mean one of the challenges I see in our space is that um a lot of the things that come into governance dials and sort of a the there there is um there's sort of a area to explore right and experiment and I think there's always some sort of a narrative that that tells that you know this is the right thing to do at that current point so the DA was the way to do and and let's say uh two years ago or four years ago you had to do certain things certain way and now things are progressing into like you know foundations and from validations to Dunas and and so forth.

And obviously my biggest fear is always to you know not getting locked into a a particular model and having the flexibility to be able to innovate and not being constrained on on innovation. So for me the the the the big question here is that could a as a sort of like a you know as a project and this is the a token the a the protocol the dowo labs and and you know this sort of a wider spectrum of of of of the definition. Could it s could it succeed in in in what it actually needs to needs to achieve with this model or is some other model needed for for that?

So if you look at for example where defi is is sitting today we've we've really mastered well lending against crypto. There's no other place doing it better than a like that's even if I'm saying from like a very biased angle. During tent at 10th we liquidated over 200 million worth of collateral in few minutes. Couple of weeks ago we we liquidated over half a billion worth of collateral in in a course of seven days. without any without any human work like everything happened automatically, automated way. And and we some ways prove that actually these protocols and DeFi can be really significantly better for execution of course transparency but what it actually affects is the the cost structure.

So if this model works and it doesn't create excess that deb in in in lending protocols it means that DeFi is able to offer better cost structure compared to the traditional finance. when we look at something like cryptoback loans in the centralized way and we saw we saw the FTX happening we saw Triaro Capital Genesis lending we we saw the whole centralized lending basically collapse right and then we saw a surviving that market cycle and all the way here but fundamentally if you compare to the existing centralized lenders a is lending stable coins at 5% and a lot of decentralized competitors are lending between 7 to 12%.

And that just tells that onchain you can have way more better cost structure. Now that if we're able to achieve this really well with the cryptonative assets, how we can actually take DeFi and what we really achieve to do really well, which is in my opinion the capital aggregation. I think there's no better place in the world for capital to to move into best financial opportunities as long as they're in the same sort of risk adjusted categories than in onchain. So if if someone brings a new set of collateral that is attractive and within the range that is acceptable from risk perspective the liquidity will move automatically there.

So we've been able to prove that D5 works, a works, lending works, AMMs work, per work. This is like a really superior infrastructure. Now how do we actually go from here and and and scale the whole usage and and from a will win proposal perspective, we we have two ways of doing that. one is with the with a protocol of a v4 level where we expand the use cases of the infrastructure but the second is the product aspect. So being able to build something like a app that is direct to consumer application of of a where you download a mobile application, you sign with a wallet that you sign with email, sign with phone number and under the hood a wallet is created for you that you actually control without needing to know the concepts of wallet, gas fees, networks, everything is absected away and you can link your banking account and deposit into the other protocol as is as in any sort of existing fintech experience.

So, so that's one big thing going directly to consumers abstracting this away and the second is obviously providing really good experience to existing sophisticated D5 users bringing new colla v4 and new spokes and the third which might be even more important near term is basically with the AVA kit offering ability to fintex to actually connect into the a protocol and and and with the most sort of secure way and offering the yield that is that is created in DeFi into these to these users.

So I think with all these components and moving pieces we put together on the protocol level on the product level that should get a into sort of a next chapter where we're able to break out of the crypto assets while we still think the crypto assets will grow and we're going to double down on them and be a leader there. But we also need to get this technology in front of tens of millions of people and and also kind of like upgrade the chatifi rails for for better DeFi rails.

Yeah. Yeah. It's the DeFi mullet strategy which definitely is very smart and already taking off in other parts of the industry. All right. So, in a moment we're going to talk about some of the criticisms and suggested tweaks to the AI will win proposal, but first we're going to take a quick word from the sponsors who make this show possible.

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Back to my conversation with Stonnie. So Mark Zeller of the Achan Initiative who um I think he once came on the show and calls himself Chainsaw Zeller he wrote a longish response to on X praising the general direction of the proposal such as 100% of the revenue going to the Dow but he also objected to some of the ways that that was defined. He said that you know labs that according to the proposal labs quote would retain discretion to redirect a portion of product inflow such as vault yields directly into user incentives and he said the Dow needs to define what revenue means and not have the entity that's being funded by this revenue define it. Multicoin Capital also requested the same tweak, saying, quote, "Clear frameworks around deductible categories, transparent product level reporting, and potentially independent P&L verification would ensure that revenue redirection is economically meaningful and free from conflicts of interest. What is your response to these criticisms and proposed changes?"

Yeah, I think first and foremost what's what's important is that there's part of the the the DAO proposals is that all of this discussion is is is public and anyone can contribute and I think it sort of reflects the the level of transparency that we're we're basically dealing with and I think that level of transparency probably doesn't exist anywhere else. So it's it's in some ways it's a quite a good feature in that sense and I think the part of the proposal is that we don't always know exactly what um you know everyone wants and and what are sort of a pref preferences we do have a vision in a way will win how to effectively grow the products which grow the protocol as well so part of that for example is that we do want to have the ability to actually create sort of a a bespoke agreements for example with integrators that are for example FinTech that want to integrate a and we need to be sort of a facilitator there for these revenue share models.

So when we're talking about that 100% of the product revenue goes to the ABA DAO that also means that 100% of the revenue goes to the DAO. And that means that for example if there is a some sort of a distribution channel that wants upside for or some sort of a revenue share that is something we facilitate. but end of the day whatever comes to to the direction of a that is passed directly to the to the a lab. So that's something that is important to acknowledge.

And the second piece is is that it is a temp check. So before the the the proposal can go as it is but before the the actual of a request for comments there's going to be certain types of changes and improvements into the proposal based on feedback. So the feedback has been overly positive and that's maybe because you know it's it's a very unique that a labs entity just for goes all the revenue. But also I think it just demo de demonstrates of the revenue capabilities of the the a ecosystem and and where the future could go. And also having any sort of criticism is actually really healthy and there's different parts of the Dow that represent different sort of interest. And it's always important to basically go all the feedback and and and figure out the implementations.

Another one of the criticisms by both Mark and Multicoin was about the size of the ask. Mark wrote in his post that quote the total ask of roughly $50.7 million is 31.5% of the entire treasury for a single service provider in a single vote. and um you know multicoin as I mentioned also commented on how large the request was in relation to the Dow's treasury size. So what's your response to their concern there?

Yeah, I think something to think about is that um the aid does earn 140 or so million in in revenue. So there's there's ongoing revenue streams into the DAO that was basically built over the years. And at the same time part of this proposal of revenue redirection what actually happens is that a labs is foregoing any sort of revenue capture that it might have on its own. So the previous model where a labs basically operated was that the anything that the protocol creates in terms of revenue based on the AIP1 goes into the a DAO treasury and any sort of application level product can put their own revenue streams.

There's a lot of integrations where for example the integrators or applications they have their own revenue capture there and that was the initial model for for OLEAPS to actually operate where it takes its own sort of responsibility for being self- sustainable and at the same time creating revenue streams for for labs. But because of this sort of u sort of a balance question between value capture between the a token and and and labs we've noticed that actually creating this clarity where all the revenue goes into one certain address under one token is the best approach because that removes the uncertainty about value capture. it makes the model more clear and at the same time labs is forgoing also a lot of revenue.

So in just thinking about the cow swap fees that's between 10 to 30 million in revenue annualized revenue that is going to to the labs and then on the a itself that's where there's going to be fee capture and part of the a will win proposal at the same time there's going to be features that create more monetization and and one example is the AVA card. So for example, whenever someone swipes the AVA card anywhere in the world that creates fees those fees are going to go into the DAO as well. So it's a very unique model where the the protocol is collecting on the protocol activity fees but also from the fees outside of the protocol on application layer and and and sort of in real life as well.

And I was thinking about the the the the comparisons. We are in in a sort of a place where we're not simply competing with other D5 protocols that are very sort of small. They they focus on small level innovation. But if you think about unis swap and unification proposal, they were asking 120 million annual budget. That was passed a couple of months ago. Sky is operating between 75 90 million annualist budget rain raised 250 million. So the way to think about funding is about what is the funding amount to run all the operations for the protocol development innovation research application security product development across three different products and at the same time being able to invest into growth.

So effectively the proposal mainly is investment into product development, product research but also growing applications and and being a being able to compete at the same level as for example fintex today. So that's the sort of a level that we're looking for and from sustainability perspective that is possible as well. So that is the kind of like an overall picture there. So it is a big trade-off that we are giving up sort of a self- sustainable way to create revenue from the fees in the favor of putting all the fees to go into the benefit of the other token holders and growing that aspect.

So, one other concern that Mark raised was about how the foundation would be made truly independent. I wondered what you propose for that. You know, what do you think would be the best way to find the right board members and administrators and make sure that it's not just sort of like an arm of labs or or or really any other entity in the a ecosystem.

Yeah, it needs to be truly independent but also besides independence that's basically that has to be like the the baseline but it should be also in a position where it can actually enforce for example the the trademark. So one of the challenges that the Avida for example today has is that it doesn't have a legal entity which means kind of like a that creates a lot of uncertainty for everyone that is contributing to voting who's getting funding from the DAO and and and so forth. But the other sort of a challenge there is that when it comes to trademarks or or branding, it's important to be able to enforce the branding because if it's not enforced, then anyone can use a brand and it loses its its protection.

So it has to be a combination of neutrality and neutrality doesn't mean that basically that you know there's arms length to to to the overaps. has to be arms length to every single person in the AAO. Because one particular point about the A the way the ADA is structured is that there's service providers and these service providers are getting annual budgets from the DAO but at the same time they're also kind of like a active participants. So there is sort of a arms length that needs to be coming from all of the angles there and and and then the enforcability aspect. So that is important for us but we're really happy about the idea of giving sort of a control of of the brand in the benefit of the token holders because essentially that creates less certainty and we notice that the less certainty there is the easier it is to sort of understand where the value capture is going towards and the big thing about the a will win proposal is that we want to ensure that we send extremely strong signal that the value capture is going to the to the tokencentric model and that is where we and the whole team are are fully focused on.

So I also noticed a few comments around the request for 75,000 a tokens um you know so Mark Zeller said hey you're requesting this amount but we don't know how many DAO tokens um a DAO tokens the labs already has. He also talked about an onchain analysis he did showing that four wallets connected to a lab seem to be voting to defeat a proposal that would require disclosures of wallet ownership and conflicts of interest. that proposal failed a few days ago. Were those four wallets that he identified, were those tied to a Labs?

There was some wallets that were tied to me personally, not not all of them. And so there's a lot of misinformation in overall going and I think the the the problem wasn't really u the voting itself is it was the the conflict of interest topic is something that we have addressed in in certain ways and we have disclosure requirements on on proposals but also the way the proposal was written is that sort of every single wallet that you have you have to dox your wallet if you get any sort of benefit from the DAO. So it it it doesn't really when you read the proposal it doesn't really relate only to participants. It can