cryptofreedman

| we meme, we dream |

head of partnerships @hypepartners

[cryptofreedman @cryptofreedman]

https://t.co/ESjC4vbwq8

[cryptofreedman @cryptofreedman]

@ryanconnor i wonder what the customer market segments they think exist for this

politics/sports are the dominant modes for retail noise traders

more sophisticated actors already work hedges multifactorily and likely don't view event binaries as useful

[cryptofreedman @cryptofreedman]

@connorking lower IR score could also lend itself to valuation inflation because well capitalized actors won't participate in those token markets so hopeful noise trading becomes a larger share of mcap

[cryptofreedman @cryptofreedman]

@LiquityProtocol sometimes we cook, sometimes we slow cook gg

[cryptofreedman @cryptofreedman]

@bkiepuszewski i believe you

[cryptofreedman @cryptofreedman]

@ImperiumPaper defi fixed rate/traunching + IRS haven't worked so far

participant + yield homogeneity (no long duration liabilities to trade IRS; token printing "yield" = jr gets wrecked when the ponzi dies)

tradfi capital/credit onchain might create enough of a market for these to develop?

[cryptofreedman @cryptofreedman]

@AvgJoesCrypto ICM innit

[cryptofreedman @cryptofreedman]

@hosseeb in fairness to crypto people they were also bullish after billions in fresh VC/private market inflows

[cryptofreedman @cryptofreedman]

tl;dr for those who aren't connoisseurs of concepts like Ontology as I and Gabriel are

## intro

- the "security token industry" has built compliance infrastructure assuming tokens are securities and compliance can/should be smart-contract-rules based

- this is in direct conflict with the core value prop of blockchains: not "same intermediaries, on the blockchain w" but *disintermediation*

- starting from this incorrect assumption about what tokens actually are has lead to a compliance theater cul-de-sac that just adds tech complexity on top (doesn't reduce compliance cost)

## the ontological confusion

- Gabriel outlines 6 relationships tokens can have to securities:

1. chain-as-ledger
2. certificate tokens
3. instruction tokens
4. control agreement tokens
5. synthetic tokens
6. souvenir tokens

- #1 chain-as-ledger means the token is actually the security because the blockchain is the ledger the company uses to track ownership; #3/4 instruction or control tokens direct (with varying levels of legal force) the issuer to update their offchain ownership ledger based on token movement/holdership; #6 souvenirs have 0 legal enforcement structure, may vaguely match an offchain ledger but there's no legal binding that creates consequence for dislocation

- Gabriel argues only does #1 actually make tokens a security, none of the current chains/ERC implementations do so, and because of this they essentially only add complexity and compliance theater vs create meaningful economic value

## the PEB Report and the Token Instruction Model

- the Permanent Editorial Board for the Uniform Commercial Code - the body responsible for monitoring and interpreting the UCC - has been circulating a draft report on the tokenization of securities transfers that primarily analyzes models #3 and 4 above, but also notes #1 (chain as ledger) is an explorable design space

- the PEB report explicitly suggests tokens are not securities but Controllable Electronic Record under UCC Article 12 whose transfer of control constitutes an "instruction" to the issuer directing that the transfer of the uncertificated security be registered

- under this model token transfers are messages to the issuer to "register this person as the new owner" BUT the issuer is not obligated to comply if certain conditions are not met; Gabriel argues this means the smart contract compliance logic is essentially theater because the issuer is still legally required to evaluate the transfer and determine whether to update it's offchain register or not

## why hard coded transfer compliance makes no sense for instruction tokens

- when a token is simply an instruction and not a security, the entire compliance question remains where it has been with offchain securities: with the transfer agents/issuers who decide whether or not to honor the notification; these actors already have very sophisticated systems for tracking ownership and informing decision makers via richer context than onchain data provides, which renders smart contract logic redundant/thinly additive

- Gabriel argues onchain compliance pipelines are worse than current offline implementations for three reasons:

1. onchain pipelines misidentify who bears compliance obligations; securities can trade peer to peer relatively freely, it's issuers, broker-dealers, transfer agents, investment advisors, etc who are subject to regulation; these intermediaries *can not* delegate their legal obligation to infrastructure (smart contract automations) and incorporating controls to attempt to do as much destroy the "marketability" of tokens (composability in defi; if you can't trust you can liquidate a token because the issuer might freeze the txn you can't accept it as collateral)

2. onchain compliance pipelines presume transfer control is the primary modality of securities regulation when it is in fact offering/holding period/resale restrictions for private market securities and broker-dealer/transfer agent/investment advisor activity in the case of public securities; some of the related activity could be monitored/controlled in smart contract functions but current implementations do not do this

3. onchain compliance pipelines are inflexible in a way that is incompatible with how compliance actually works; securities compliance is intentionally risk-based, judgement-intensive, and governed by principles not bright lines because bright-line hard-coded rules are inherently gameable; by hardcoding the compliance at the transfer layer protocols give the false impression that compliance is being handled when it is only being gestured at, which comes at the cost of gas expenses, composability constraints, a false sense of security, and the embedding of today's compliance assumptions into immutable/hard to upgrade code

## the permissioned-ledger variant

- instead of wrapping public-chain tokens in compliance logic, Canton replaces the public chain entirely with a permissioned ledger where unauthorized txns can't even be constructed; Gabriel argues Reg SCI / PFMI / CFTC compliance don't require that unauthorized txns can't be attempted, they just can't be processed (by compliance departments who aren't disintermediated by any blockchain), so Canton trades away public chain competitive advantage while overfitting compliance needs

- in doing this, he argues Canton is essentially isomorphic to existing post-trade infrastructure (DTCC/Euroclear/Clearstream), essentially adding a DAML layer on top of their COBOL, as it still requires all the same institutions, same gated membership, same bilateral opacity as the existing system

- Canton's sub-transaction privacy also kills a concrete legal benefit to transparent blockchains: DGCL §§ 219/220 grant stockholders the right to inspect the stock ledger, and a public-chain architecture makes that automatic; to solve for privacy near-term: issuer-controlled view keys encrypting PII while the ledger structure remains publicly verifiable; longer-term: per-issuer ZK rollups (ZKsync's Prividium, already live with Deutsche Bank) settling to a public chain, gives you transparent settlement + encrypted state

## the common thread

- the common failure across ERC-XXXX and Securitize/Canton tokenization standards is that all treated intermediation as a design constraint rather than the problem to be solved; every architectural choice assumes the existing intermediary chain persists and blockchains just add slight efficiency; this produced the false premises: if intermediaries are given, the token doesn't need to be constitutive, compliance can be encoded in the token, and the chain doesn't need to be public

- by reducing the chain to a notification layer for offchain intermediaries (instruction/souvenir/control agreement tokens), these protocols threw away the one structural advantage of public blockchains: settlement finality; when onchain state is a suggestion not a fact, or even where state is authoritative there are god-mode admin powers, tokens become unusable as a DeFi primitive which is why tokenized securities have generated near-zero meaningful ecosystem activity

- the "progressive decentralization" defense (ship instruction tokens now, make the chain constitutive later) has a poor track record: centralized dependencies become structurally embedded, the offchain DB becomes the system of record, admin keys become operationally necessary, compliance modules become contractual obligations to institutional partners, and migration cost exceeds maintenance cost

## what it means to really put securities onchain

- Gabriel argues onchain compliance only does real work when the token is the security, which is why MetaLeX CyberCorps build from DGCL outward; bylaws designate the onchain system as the stock ledger under § 224, each Stock Ledger Entry Token (ERC-721) carries the full legal metadata (holder, class/series, share count, § 202 restrictions, Rule 144 dates, officer auths), and the smart contract's rejection of a noncompliant transfer is the issuer's refusal to register; ownership mutates via metadata updates not wallet transfers so a stolen NFT doesn't change who owns shares

- entry/scrip separation solves defi composability: ERC-721 entry tokens hold the authoritative legal record + issuer governance powers, ERC-20 cyberSCRIPs mint against them for fungible liquidity with irreversible admin renunciation capability; lenders get real security interest with no override risk vs. ERC-3643 where agent freeze makes collateral unusable; the scrip layer accommodates multiple legal theories per issuer while chain-as-ledger stays intact underneath

## conclusion

- the corrective isn't a better compliance module but a different question: "what legal architecture makes onchain state authoritative?"; Gabriel argues the answer starts from corporate law: bylaws designating the onchain system as the record, tokens carrying their own legal metadata, compliance doing structural work on the actual stock ledger not theater on a notification channel; a token that doesn't know what it is can't be made compliant by infrastructure that doesn't know what it's protecting

- his argument revolves around what a token actually is as a matter of law: get it right and compliance follows naturally, the blockchain does real work, the intermediary chain shortens; get it wrong and no compliance engineering meaningfully closes the gap

- the stakes are whether tokenization delivers its promise: self-custodied legally authoritative ownership, peer-to-peer settlement, open stock ledgers, programmable full-lifecycle infrastructure; that requires chain-as-ledger (tokens = legal record, chain = ledger, governing instruments fusing both); instruction tokens can't get there regardless of wrapper sophistication

[_gabrielShapir0 @lex_node]

https://t.co/2wF7Y3vHaf

[cryptofreedman @cryptofreedman]

@0xsmac but how many tokens did they consume while selling so much so fast

[cryptofreedman @cryptofreedman]

@ZeusRWA another example of the gap between token x equity that @MiyaHedge @lex_node and @metaproph3t are working to solve

[cryptofreedman @cryptofreedman]

@Crypto_McKenna capture the opportunity in defi-ing tradfi, earn the right to build anything you want

[cryptofreedman @cryptofreedman]

@fintechfrank i can't believe no one in crypto thought to do this before

[cryptofreedman @cryptofreedman]

@DennisMidas @RRE @creandum if you can pull of liquidity and transparency this is a real winner gg

[cryptofreedman @cryptofreedman]

@Yannimoto @Blockworks @MetaDAOProject @StreetFDN and @MetaLeX_Labs all doing interesting things re: token/equity hangover

[cryptofreedman @cryptofreedman]

@AvgJoesCrypto i am with you in the war on just another gambling app ™️

but in that war we should be honest about stated vs revealed preferences if we want to actually win; gen y/z has a large cohort of gamblers

[cryptofreedman @cryptofreedman]

https://t.co/w27Lfb5eEs

[cryptofreedman @cryptofreedman]

nice overview of where the yield is coming from via analysis of one of defi's largest

in exploring the future of onchain yield, I like the first principles approach - what is the essence of "yield" - so we don't get stuck just assuming what will be = more of what is

how do we do this?

I come from bitcoin, so Austrian theory is the base, from which we can parse 2 sources of "wealth creation"

1. Roundaboutness (Böhm-Bawerk) - provide capital to build out a known value-producing process (eg we know people want cars and how to build them; fund a factory expanding it's production capability and you're participating in wealth creation)

2. Entrepreneurial profit (Mises) - successfully addressing misallocations of capital by acting on subjective judgment where no calculable probability exists aka bearing uncertainty to make something new and valuable (eg no one knows the how and how much of ecommerce in 1994, Jeff and his backers took that problem on)

From these sources of new wealth, we can frame "yield" as compensation for services you provide to the structures of production and the exchange of valuable goods and capital.

1. Time value - even in a world of perfect certainty, people want things now more than later and are willing to pay for this

2. Roundaboutness Productivity - looks most like yield on a commercial loan, your portion of the surplus generated by enabling production expansion by providing up front capital

3. Entrepreneurial Productivity - looks like VC investment, your portion of the surplus generated by bearing a share of uncertainty by funding entrepreneurs in their exploration of closing allocation mismatches/creating new goods and services

4. Risk Bearing - absorbing *calculable* variance for others ie Insurance

5. Liquidity Provision - facilitating immediacy/optionality by standing ready to transact when others want to; Market Making

6. Rent - payment for access granting to scarce factors

We can then use these to see how they underpin a few different TradFi Products/yield sources:

Bond Yield = 1 + 4

Equity Returns = 2 + 3

Options Premiums = 4 + 5

So where do blockchains/defi add Real World Value that might indicate future sources of onchain yield?

Perhaps 2 + 3 - "Internet Capital Markets" of the VC investment and Private Credit kind; the trick of this is that the limit of wealth creation in Roundaboutness and Entrepreneurial Productivity is fundamentally one of information about what is actually productive and who has good entrepreneurial judgement.

There are some structural bottlenecks - part of why Brazilian grain producers pay 20% on working capital loans is terrible infrastructure for accessing funding

But that's a trust and politics question as much as it is a payment/repayment rails one

Most early stage ventures fail as a nature of the game; there is some differential between good founders + idea and inability to get VCs to take their call

whether that's a meaningful margin or not is *uncertain*

Risk Bearing - perhaps Smart Contract functionality and blockchain data availability can meaningfully reduce cost/improve quality of underwriting but that is the key, the payout mechanisms aren't the hard problem here though that's the most obvious solution blockchain provides atm

Liquidity Provision - AMMs, perps, flash loans are innovative. Maybe Pendle Yield splitting/Boros approach to IRS are as well; is there any more math to apply here to create genuine innovation?

Rent - ETH as the new Visa, Solana as the new Nasdaq, whether this value add can justify a network token price or not is still up for debate but building more open globally accessible settlement infrastructure remains a core, somewhat tangible value add from blockchains

the two things I'm watching as catalysts for a next wave of experimentation in onchain yield

1. Tradfi on chain - both capital and operational infrastructure; what happens when TF money + demand for permissionless, fixed rate, undersecured lending enables billions in net new global loan origination (likely a few million in honest entrepreneurs worldwide who are able to create wealth if they could secure a few thousand dollars in capital at sub 10% rates)

2. Some sort of US safe harbor rules or other legal infrastructure that enable token utility and equity property experimentation that's currently no-go'd by Foundation lawyers; maybe buyback and burn isn't so dumb if that's deemed an allowable mechanism for value accrual without being treated as a must-register equity

[cryptofreedman @cryptofreedman]

nice breakdown of the heterogeneity in "Private Credit Onchain"

re: my post the other day about the sources of wealth at the root of yield

lets trace back top line APY -> source of yield -> fundamental wealth generation

and see if crypto's real advantages = real SAM

Zeus presents 6 different examples of "Machines" behind onchain yield:

1. @maplefinance, direct lender - pools onchain capital, originates + lends, collects borrower repayment and delivers back to onchain LPs

2. @centrifuge, @HastraFi capital bridge - routes onchain capital to existing Real World credit needs; he particularly calls out working capital loans + HELOCs that earn/provide value via maturity transformation

3. @Securitize, @stokr_io wrapper - tokenizing existing funds/notes that offer yield; here the onchain actor (securitize) is essentially completely hands off of yield generation and adds very little to the risk layering

4. @paretocredit, programmable credit infrastructure/fund of funds - pareto blends two different concepts, one the more classical fintech play enabling third parties to build programmable onchain credit facilities, with a fund layer on top in USP

5. @onrefinance, reinsurance - as Zeus mentions, different in kind to "credit" though like credit it is a source of yield rooted in risk transfer

in my previous post linked in the thread we looked at the sources of wealth generation in the Austrian sense, then the broad categories of financial services that can be provided to support wealth creation to generate "yield"

this gives us a sense of the roots of value creation and how blockchains/defi might meaningfully create net-new or better-in-kind opportunities

we outlined categorical sources of yield:

1. Time value (capital now > later)

2. Roundaboutness Productivity (% share of wealth created by facilitating expansion of existing wealth production)

3. Entrepreneurial Productivity (% share of wealth created by facilitating the discovery of new sources of wealth production)

4. Risk Bearing (absorbing *calculable* variance for others)

5. Liquidity Provision (facilitating immediacy/optionality for others by standing ready to transact)

6. Rent (payment for access granting to scarce factors)

we then examined potential real competitive advantages across these factors blockchains/defi may have, and saw:

2+3 - insofar as technical access to opportunity blocks capital allocation, permissionless defi + globally accessible blockchains may genuinely facilitate cheaper/more effective flows to wealth generation

4 - well designed smart contract systems may reduce counterparty, duration, etc risks enough to better facilitate risk transfers across interested parties

5 - perps, AMMs, flash loans are real financial innovations, still testing in prod whether they're value add at scale/for sophisticated actors

6 - globally accessible, permissionless, automated financial infrastructure likely meaningfully reduces network Rent costs (even as we admit there's more to Visa/Mastercard/Swift than simple information sending)

now that we've refreshed the context - do we see anything interesting in a durable sense with our "private credit" yield examples?

direct lender - blends 2, 4; broader capital access + better quality/cost risk management through transparency/automation might create genuinely new yield that's delivered to LPs

capital bridge - in the described sense (working capital/HELOC), 2 4 6

wrapper - 5, if we just isolate us treasuries for now (simplicity + differentiation from the other examples); broader capital pool access makes existing financial product markets more liquid; perhaps blockchain infra also adds 6 (rent reduction) and for some actors 4 (broader access hedges than local markets provide), though the "yield" from this value add isn't delivered to the RWA holder

programmable credit infrastructure - 6, maybe 2; whether insourced our outsourced a well functioning defi infra should be lower cost than existing alternatives and that may be passed on via yield

fund of funds - in the described sense ("private credit"), 2

reinsurance - if the insurance contracts are moved onchain, with transparent and automated payout mechanisms, 4 (reduces the cost of bearing the risk via better modeling); for now likely just 2 until a lot of legal and BD work is done to bring a meaningful amount of the operational details onchain

thinking across these examples I can see space where the net new elements of crypto can add real world value

though at this level of analysis the question is how much of that value creation will remain endogenous to company equity holders vs be passed on to those allocating onchain capital to these products

[Zeus 🇬🇧 @ZeusRWA]

https://t.co/TlSKmq8vpk

[cryptofreedman @cryptofreedman]

@agra_gg very cool team up

interesting to think about who wants to be counterparty to people exiting onchain Aussie RE credit

5%+ below nav + 5%+ realized yield seems attractive

[cryptofreedman @cryptofreedman]

@TziokasV @Blockworks enterprises already spend B$ on working capital optimization

cut in and out times by hours/days

enable entirely new product access (can move in/out on weekends, new instruments accessible within cash conversion cycle)

2T+ in non-finance deposits according to FRED

nice TAM

[cryptofreedman @cryptofreedman]

@jamesrosst was reading about life sciences real estate ownership/development yesterday

which seems completely unrelated except that it's also a market where T1 operators as a rule internalize RE as a key operational need/advantage

while the vast majority of the Lab market is leased