In this episode of Mission: DeFi, Brad Nickel is joined by David Garai to discuss Raft’s stablecoin $R, how Raft works, and more! Read our notes to learn more.
Background
- Brad Nickel (Host) – Host at Mission: DeFi
- David Garai (Guest) – Founder of Raft
- Raft – an immutable and decentralized lending protocol where users can take out USD-denominated loans against their staked ETH.
David Garai’s Background
- David Garai shares his background, stating that he comes from a legal background, having worked in law firms in London and Tokyo. He mentions his experience in derivatives and structured finance, and his transition to a different DeFi project as a head of operations when Covid started.
- David talks about another project he co-founded, Tempus, a fixed-income project on Ethereum. He explains that Tempus allows users to earn a fixed yield on their compound interest-bearing tokens or speculate on the future yield.
- David discusses the challenges they faced when DeFi yields collapsed and interest rates in traditional finance went up. He mentions that there was no product-market fit for Tempus as people didn’t want to fix a 0.5% yield rate on Compound.
- David shares that they decided to rebrand Tempus into a multi-product studio that builds multiple products, not just focusing on the fixed-income side. They aimed to use their existing resources to branch out into different products with greater potential.
- Brad Nickel acknowledges the difficulty of pivoting in the market, to which David agrees, stating that most teams stay in one place. David shares that it was a difficult decision to pivot, especially with a large team, but ultimately everyone saw that it was for the best and was happy about it.
- Brad Nickel mentions that pivoting a brand or product is not an easy task, especially when it involves technical changes. However, he appreciates the model of having a top-notch development team that can create and produce products that meet market needs.
- David Garai talks about Raft, the primary product that David and his team are working on at the moment. He discusses the various narratives he has observed in the market, including the dependency of DeFi on stablecoins like $USDC and $USDT, which are centralized.
- David Garai expresses concern about the reliance on centralized stablecoins in what should be a decentralized space. He mentions that the recent scare event with $USDC highlighted the risks of depending on centralized systems.
- Brad Nickel agrees with David’s concerns about the dependency on centralized stablecoins, especially those that have the ability to blacklist. He sees this as a threat to the crypto ecosystem.
What is Raft?
- Brad Nickel asks David to explain the concept of Raft, how it came about, how it functions, and why they believe it’s a superior model.
- David Garai explains that Raft is a protocol that allows users to take out loans of their native stablecoin, $R, against staked ETH collateral (Lido’s liquid staking derivative token for $ETH collateral). This means users can deposit a certain amount of staked ETH into Raft’s smart contract, and borrow their native stablecoin $R against it for free while keeping the yield on their staked ETH.
- David Garai mentions that they have chosen to make the protocol free for users initially, similar to Uniswap‘s fee model, to ensure it scales to a great level of adoption. Once it gains adoption, the team at Raft can discuss implementing a borrowing fee.
- He further elaborates that Raft allows users to subdivide their staked ETH into dollar-sized chunks, which can then be used across DeFi for various purposes. The staked ETH continues to earn yield in the background.
- David Garai differentiates their stablecoin, $R, from others like $FRAX or $DAI, stating that $R is a single collateral stablecoin. It doesn’t rely on other types of collateral or a stability module for maintaining its peg. The price of $R is maintained solely by the staked ETH and their hard and soft peg models.
- David Garai mentions that one $R will always be redeemable for one dollar’s worth of staked ETH. If the price of $R falls below a dollar, users can redeem someone else’s collateral, take one dollar’s worth of staked ETH for that one $R, sell it, and bring the price of $R back to a dollar. This way, they always deliver on the promise that one $R will always be redeemable for one dollar’s worth of staked ETH.
How Raft Works
- Brad Nickel asks if the value of the staked ETH collateral increases as the user earns more from staking, and if this helps reduce the risk of liquidation.
- David Garai confirms that the value of staked ETH does increase due to the accrual of staking yield, which in turn reduces the risk of liquidation and improves the borrowing position over time.
- Brad Nickel talks about the risk of a collapse in the price of $ETH, to which David Garai responds that while there is always price risk, using staked ETH as collateral is generally a better position as its value should consistently increase compared to regular $ETH.
- Brad Nickel asks about the borrowing limits against Raft, and David Garai explains that the collateralization ratio is very low at 110%. He further explains that they achieve this by using instant liquidations, where once the ratio crosses 110%, the excess collateral (10%) is liquidated.
- David Garai elaborates that one of the primary use cases of Raft is to allow users to leverage their staked ETH. This allows users to multiply their staking yield and exposure to the delta. He mentions that users can leverage up to 11x on their platform, compared to 2.5 to 3.5x on platforms like Aave or MakerDAO.
- David Garai further explains that their system allows users to leverage their staked ETH in a single transaction, making the process simpler and more efficient.
- Brad Nickel summarizes the concept of leveraging for listeners who may not be familiar with it, explaining that typically, users would lend their staked ETH, get $R in return, swap it for more staked ETH, get $R, and repeat the process. He appreciates that Raft automates this process, allowing users to specify their desired leverage level and have the platform handle the rest in one transaction.
Raft Use Cases
- Brad Nickel asks David about the primary driver behind Raft. He asks whether it was initially aimed at creating a superior stablecoin or a better lending protocol.
- David Garai responds that Raft began with the idea of a stablecoin. However, they soon realized the protocol’s potential for various applications, leading to two distinct use cases.
- The first use case, as explained by Garai, is the stablecoin $R itself. It can be borrowed for free and used for multiple purposes, such as buying NFTs or even a house. The borrower can then repay the loan later without any borrowing fee, a significant advantage over traditional finance, which typically charges around 5-6%.
- Garai sees real-life applications where people stake their $ETH as collateral to make significant purchases, like a house or car, and then repay the loan from their salary. The collateral remains a productive asset, earning for the borrower. This vision represents a completely decentralized stablecoin, not backed by any fiat-backed stablecoin like $USDC.
- The second use case emerged from the realization that the protocol could offer a product that allows people to leverage their staked ETH due to the collateralization ratio requirements and innovations in flash minting. David Garai mentions that there is a significant demand for this, as evidenced by the numbers seen on platforms like MakerDAO and Aave.
Raft’s Liquidation Model
- David Garai explains that Raft’s liquidations will be managed by bots, initially run by Raft and their partners. However, the system is open-source, allowing anyone to participate in liquidations or redistributions by running their own bot. The model is designed to be a free market, with liquidation profits going to the first to liquidate, promoting competition and ensuring instantaneous liquidation.
- Brad Nickel asks about the profit model of the liquidations, asking if the idea is to gain $ETH at a discounted rate.
- David Garai confirms this, explaining that liquidation profits are calculated based on a formula that takes people back to 100%. If a liquidation occurs at a 109% collateralization ratio, the liquidator can keep between 9% to 4.5% of that, depending on the amount being liquidated.
- David Garai further elaborates that this model provides strong incentives for people to participate in liquidation. It’s a free market model, open to anyone, ensuring consistent liquidation activity.
Raft’s Loan Repayment Model
- Brad Nickel asks David about the possibility of Raft implementing a self-repaying model, similar to Alchemix, using earnings from staked ETH instead of just increasing the value of the overall collateral. He mentions this in the context of staking $ETH and earning more $ETH from staking while having a loan.
- David Garai confirms, stating that such a feature might be introduced a few months after Raft’s launch. He explains that they have already planned improvements on the UI side to facilitate this.
- David further elaborates on the proposed model, where instead of repaying your loan of $R manually, you can use the staking yield to repay your loan. The smart contracts would automatically take the profits from staking and reduce your outstanding loan size periodically over time.
- He describes a scenario where a user can simply click a button on Raft, which checks how much they’ve earned from staking, swaps it into $R, and then repays the $R loan from that. This process results in the outstanding loan continuously decreasing until it eventually reaches zero.
- David also mentions that this model is similar to a self-repaying loan because the staking yield is being used to repay the loan.
Liquidity Challenges for new protocols
- Brad Nickel asks David Garai about Raft’s significant workload associated with integrating new protocols, utilizing yield farms and swaps, and managing liquidity.
- David Garai responds that before they can move forward with those tasks, they need to ensure there is enough liquidity for their stablecoin, $R, around the $1 mark.
- He stresses the need to incentivize people to provide liquidity, especially in the early stages, acknowledging that new stablecoins pose more risks despite auditing measures from firms such as Trail of Bits.
- David Garai mentions that they are allocating significant resources, in the hundreds of thousands of dollars per month, to incentivize multiple liquidity pools. This is aimed at ensuring that people can leverage their staked ETH in a capital-efficient way without incurring high slippage costs.
- He describes the necessity of building liquidity around the $1 mark for $R, achieved by pairing $R with other stablecoins or via a 3pool strategy on Curve, and by incentivizing that liquidity.
- He explains the two different types of pools they are incentivizing, aiming to draw in more people to mint $R and thereby setting the foundation for Raft.
- David Garai envisions that easy swapping in and out will allow real-life applications like minting large amounts of $R, converting to $USDC, withdrawing to bank accounts, and repaying at a later time without interest.
- David Garai mentions that the next step is to ensure $R can be used without converting to a different stablecoin. This will involve significant business development and marketing efforts to establish partnerships with NFT marketplaces and other entities that would accept $R as a means of payment.
Launching Raft
- Brad Nickel acknowledges the ambitiousness of Raft but also sees it as a compelling offering in the market. He asks whether a separate round of funding was raised for Raft or if it’s being funded from an existing budget.
- David Garai confirms that Raft is being funded out of Tempus’ budget, but also mentions the potential for raising funds after launch. He states that currently, they have sufficient funds to run Raft.
- Brad Nickel asks about the general timeline for Raft’s launch.
- David Garai explains that an audit with Trail of Bits is ongoing, and should wrap up by the end of April 2023.
- He mentions that after the completion of the audit, there are several tasks: setting up timelines, setting up pools, deploying contracts, testing the liquidation box, and setting up their pools. They would then ask partners to seed with their own funds and announce Raft as live when it has several million dollars of liquidity. He anticipates this would likely happen by the end of May 2023.
Raft’s Tailwind
- Brad Nickel asks about potential partners’ attitudes towards Raft’s decentralized stablecoin $R.
- David Garai responds, saying that the current climate is in their favor, due to recent events such as the $USDC depeg event, which has made people skeptical of more centralized alternatives.
- David mentions that concerns about security risks are often diminished when they mention audits by a tier-1 auditor who has never had any audited protocols hacked. Having insurance is also a significant reassurance.
- David talks about the contrast between collateralized and non-collateralized models, stating that their model with Raft, which uses staked ETH to back an over-collateralized stablecoin, carries different risks compared to something like Terra’s $UST.
- David mentions that when potential partners understand these facts, the conversation changes as they become comfortable with the model and the research behind it, viewing it as a legitimate project.
- David also mentions that Raft aims to eliminate barriers for people by not charging a borrowing fee at the start – users only pay the gas fee, try out the system, possibly make money, and then repay the loan.
- David says that the team’s ultimate goal is to ensure that Raft takes off and is utilized by their potential partners.
Raft’s Collateral
- Brad Nickel inquires about the potential of incorporating other staked ETH protocols into their platform.
- David Garai responds by highlighting their current focus on staked ETH as their primary collateral, given its considerable market capitalization (Lido Staked Ether $stETH has a market cap of ~$12 billion as of 24/05/2023). He acknowledges the potential to add other forms of collateral in the future, possibly including different types of staked ETH, but emphasizes that this decision will be made carefully and will depend on various factors such as decentralization risk, volume, price feeds, and user preference.
- Brad Nickel clarifies his question, asking whether they would accept tokens from new protocols as staked ETH collateral, referencing specific platforms like EtherFi and Swell.
- David Garai acknowledges the possibility of this but clarifies that such decisions would require conversations with those specific teams. He suggests the need for some form of incentive from these protocols, given the competitive advantage they’d gain from being integrated with Raft.
- David continues, underlining that any such integration would hinge on mutual comfort between the involved parties.
- David mentions that the potential for these future integrations is under consideration and will depend on various factors, indicating openness to this direction without committing to it definitively.
Native $ETH as Collateral on Raft
- David Garai believes Raft will likely include native $ETH as collateral in the future, catering to users who do not wish to stake their $ETH. He says that this doesn’t present any risk and potentially broadens the platform’s user base.
- Brad Nickel asks if David envisions deploying Raft’s approach onto other chains, beyond just Ethereum.
- David Garai responds that while it could be discussed, he doesn’t currently see a strong case for adoption on other chains. He believes Ethereum will dominate in terms of volumes, headlines, and liquidity compared to other staking protocols. He notes that while there is some liquidity in staked tokens on chains like Polygon, it is relatively negligible.
- David mentions that there may be potential for expanding to other chains if they have a robust staking derivative, and if Raft’s model is validated post-launch. He suggests they could potentially deploy versions of their system backed by different staked tokens on other networks.
- Brad Nickel mentions that other chains could be interested in a system like Raft’s, as it would bolster their chain security, and network growth, and offer a powerful incentive.
- David agrees, adding that even if a network doesn’t have a staking derivative, its native token could potentially be integrated. He imagines a scenario where Layer-2 tokens are used for gas payments instead of $ETH. Raft could consider deploying an L2’s native coin within its ecosystem, negating any bridge risk.
- He emphasizes the importance of choosing collateral that is both capital efficient and decentralized, steering clear of centralized options like USDC-backed crypto-collateralized stablecoins like $DAI.
Investors Support
- Brad Nickel asks about Raft’s engagement, hiring, and community joining, pointing out that no governance token is necessary for this project.
- David Garai acknowledges that there isn’t a governance token for Raft, adding that they’re expanding their team cautiously. Despite the bear market, he emphasizes that the team size has remained consistent, and no one has left the team.
- Brad Nickel asks about the conversations with original investors regarding the pivot in strategy during the bear market.
- David Garai expresses that the investors were very supportive. He believes the team, not the investors, should ultimately decide the direction of the project. Despite this, they were open to investor opinions and were fortunate to have supportive investors.
- David adds that some teams may face challenges with investors due to potential conflicts with existing portfolio companies when pivoting. However, he encourages founders to pursue what they believe is the right course, emphasizing that those building the project are the best to decide.
- David Garai mentions that early-stage investors primarily invest in the founders and the team, not a specific product. They trust the team to use their judgment to build something impressive.
Important Links
- Watch the original podcast
- Follow Mission: DeFi on Twitter
- Follow David on Twitter
- Follow Raft Finance on Twitter
- Check out the Raft Finance site
Show Information
- Medium: Podcast (Youtube)
- Show: Mission: DeFi
- Show Title: Can $R be the decentralized stablecoin we need? David Garai of Raft
- Show Date: May 5, 2023