Hello and welcome to The Ether. Today is Saturday, February 19th 2022. This episode of The Ether is brought to you by Talis. Talis Protocol is the NFT platform for independent artists on Terra. Talis helps to provide artists with the tools and resources needed to transition from traditional arts into the NFT world. With their V1 launch coming soon, Talis will be the place to see real world art reflected on Terra. Be sure to join their Telegram and follow Talis on Twitter for updates on their roadmap, validator, and other Talis news. Find your next favorite artist on talis.art. This episode of The Ether is also brought to you by Orbital Command, a community validator on Terra dedicated to educating, expanding, and promoting the LUNAtic community. Visit OC’s What We Do page using the link in the show notes to take advantage of some of their other educational resources including weekly meetups to discuss Terra protocols, strategies, and concepts, the Terra Luna Intel Report on Telegram, and YouTube explainer videos on Terra concepts. You can also support their community efforts by considering them next time you’re delegating or redelegating your LUNA. Find out more at orbitalcommand.io. TerraSpaces appreciates the support from all our sponsors. Today on The Ether we have a Cephii Space, Levana Leverage Mechanics. Let’s take a listen.
We’re gonna give folks a few minutes. I kind of started the Space early, it’s kind of loaded up. Jonathan is still finishing up on the Styllar Levana discussion, which really revolves around Levana’s NFT, lore, and all the fun stuff regarding their upcoming game. Oh, there they are. And just getting Jonathan on here for a moment. Let me add him as a co-host here. Hey, Jonathan, you good to go? Maybe… Yeah, go ahead, Jonathan.
Levana Protocol 2:43
Yeah, just give me 30 seconds. I’m just gonna grab a glass of water. I just got off an hour long AMA and I’m jumping into this. Thank you.
Yeah, we’ll give him a minute. Yeah, they were just finishing an AMA regarding NFTs, lore, and some other components of what’s happening with their service. I was hoping today to pick Jonathan’s brain a little bit about the DeFi elements, particularly regarding leverage in Levana. It’s short for “leverage any asset”. And we’ll get into the nuances of what kinds of financial products that we can expect to see. I’d like to ask some questions about how those things are gonna be used, and what kind of availability we’re gonna have and some of the really detailed mechanics regarding how Jonathan perceives us using these things. So give us just a minute, and we’ll have him hop back on. We’ll kind of keep questions towards the end and focus this discussion, like I said, more on the leveraged product components as opposed to some of the other aspects of Levana. So kind of make some notes as far as questions you might have on utility of the leverage protocols. Maybe throw up some… Well, there’s new emojis here, but throw up some little peace signs or something if you’re a fan of using leverage in general, on exchanges, or… 1, 2, 3, 4… It’s hard to keep count on this thing. I wish there was like a little point system on here where you can keep track of little polls and things like that, but there’s still some missing things on the system here. Some of you guys are probably used to using leverage in the form of perpetuals, for example, on KuCoin. Other people might be more used to taking traditional short and long positions with or without significant leverage multipliers. Many of us here are probably used to already borrowing off of Anchor for the purpose of buying, for example, more LUNA, which essentially is a form of leverage since you’re borrowing. And then presumably, you’re going to be repaying that at some point to get access to your collateral again. So I’m going to look at this.
Levana Protocol 5:22
Levana Protocol 5:24
Hi. Sorry. Thank you for your patience. I’m sorry we’re starting a couple minutes late.
It’s okay, I was just doing a little intro about possible leverage. And we could probably get right into really the nitty gritty of what you guys are doing. My understanding from listening to a lot of the work you guys have done, some of the things on YouTube and other factors, that to some extent or the other, the NFT/lore gamification project has a lot to do with funding the protocol. Is that correct?
Levana Protocol 6:08
Well, so we wanted… I’ll answer that question a little bit out of order. Because I think that it’ll be better in context. But creating a leverage basket through borrowing or through creating debt, it represents a risk that most farmers are not normally exposed to. And I’ll back that up because I think it’s a really important concept for listeners to understand. Now we thought what would be appropriate ways to be able to launch a product like this, test a product like this, because it can only be effectively tested, meaning like a test by fire, with real capital on mainnet. Obviously, you can run simulations, you can run back testing, but there’s so much human psychology with rebalancing, and with other aspects of it, keeper bot’s an example, that it’s going to take us some time, and some tweaking of variables to be competent about growing the leverage baskets, and allowing for other people to be able to be long term liquidity providers to those baskets. So we thought we need to test this with a few million dollars… Well actually, we anticipated a million dollars, but we will be testing it with slowly a larger amount. And we wanted it to be liquidity that wasn’t just asked for the community to put up liquidity, and then use that to farm tokens, because the risk factor of leverage is very different than something like staking to a validator, or even putting up on something like staking to… And the other opportunities that you have that you can do with your LUNA.
Levana Protocol 8:26
And so the ideal situation to be able to launch this is to have funds that if they were wiped out, God forbid, would not cause complete loss to the liquidity providers who thought that they were just farming. And so the way that we came up with this was the the meteor shower, which the meteor shower actually as a methodology, really predates the entire Levana product. But the meteor shower was used and adapted to the narrative of the lore of Levana, designed as a donation platform for community members to fund that first pool in a way where it’d be very transparent to them that you’re not going to get this money back. ‘Cause I think that there’s a real chance that in a DeFi winter situation, leverage baskets are going to get completely rekt, which is what happens. You see it on Binance, you see it on FTX, or Huobi, or KuCoin. And people who are playing with leverage that are not very experienced can have a bad time. And that was one of the things that was a major concern for us.
Jonathan, by rekt, do you mean the exchanges themselves getting into trouble or specifically, just the users playing on leverage getting into trouble?
Levana Protocol 10:12
No, the liquidity providers who thought that they were just depositing in order to farm high APYs. So, a person who buys a leveraged position knows, “Hey, I have to manage this. If this thing drops significantly, then I’ll just lose my shirt, because I’ll get wiped out.” But in an average liquidity providing situation, you don’t expect to just have complete loss. If you’re providing assets to Uniswap, or TerraSwap, in our situation, or you’re staking to a Terra validator, then there really isn’t a situation saved for some kind of a rug pull, that you’re just gonna lose all your tokens. Whereas if you’re providing the liquidity, that then is being used to generate a leveraged basket, so then you just might not be educated well enough to really understand the risks of the liquidity that you’re providing. And to launch and to ask people to… What would be another way to approach this? Let’s just say we did just a massive marketing campaign, and we got a bunch of KOLs, or influencers, and people posted about it, and we did a bunch of AMAs, and we said, “Okay, we’re launching. Now we’re gonna ask you guys to provide liquidity and deposit millions of dollars of LUNA tokens.” So if we failed, then the marketing would be poor, and people wouldn’t deposit. But if we were successful, then a bunch of retail investors would be FOMO-ing in, putting in all the LUNA that they have. And then if a strong market correction happens within a couple months after that, that could negatively impact the lives of lots of retail investors. And that was something that we weren’t comfortable with. And so we brainstormed about what’s another approach, what’s another way to raise funds for a protocol, and then that’s where the meteor shower came from.
Interesting. So when Levana begins to offer the leverage product, will that be done in some stepwise fashion where there is only so much available leverage per, say, wallet or something like that, because there’s going to be a certain number of funds that are allocated for this particular experiment?
Levana Protocol 13:01
Well, we don’t believe that limiting per wallet really has any impact. Because it’s a click of a button to make 1000 wallets, like it’s literally a click of a button to make 1000 wallets. Obviously, the average retail user doesn’t know how to do that. But at least they know on Terra Station, how to just click, make a new wallet and write down… Hopefully they write down their 24 seed phrase. So if we were to limit it, let’s say, to $5,000 per account, so then the people who wanted $50,000 would just make 10 accounts. And they probably even have multiple accounts anyways. I know I’ve got like, I don’t know, I probably have like 15 wallets just on my lonesome. And I have friends who are clocking in over 50 Tera wallets. So what we were really looking at was just the total market, the total market cap of LUNA 2X out of the gate. And being essentially the sole provider of that, until we felt that we had achieved some level of confidence both in-house, that the core Devs felt confident to kind of open it up for other people to be liquidity providers, and then also for the community to see that we kind of survived major market movements.
Now is each leverage long position going to be counterbalanced with an equivalent number of leveraged short positions? Or how do you see that structure being set up?
Levana Protocol 14:45
No. So okay, let me answer that question in about two minutes because I did want to address something that you had mentioned at the beginning. We just got off of a Styllar AMA, where we spoke for like an hour about the entertainment part and the NFT part. And I kind of want to give clarity to that through just an analogy. I don’t know if you know this, but Pepsi bought Taco Bell. They bought Taco Bell in almost… Actually it was just the anniversary of it, they bought it in 1978, they bought it for $125 million. And Taco Bell was regionally operated, they had about 1,000 restaurants. And the reason that Pepsi bought Taco Bell was that they did market research, and realize that the best way to help market their soda and their drink menu was to purchase an up and coming well-recognized food franchise. Because when you walk into a Taco Bell, you end up buying a big thing of Pepsi and you like it and you bring the Pepsi home, and it acts as a way to get Pepsi into homes, that according to their statistics, we’re not buying Pepsi. And so we see that approach as as well is that the best way to get DeFi in the hands of a massive audience is through entertainment. And so that’s why Levana can be such a complicated product, because so much of the marketing is focused around trying to attract people who have no interest in interacting with DeFi. So we see some of what we would consider as our core audience, which are the DeFi lovers, the people who are already red pilled, they look at it and they’re like, “WTF, I don’t want to dragon. What are you doing?” So it’s a complicated product. And we’re definitely open to suggestions as to how to better improve the narrative. But that’s kind of like the philosophy behind it.
Levana Protocol 17:19
And now my personal background is I got involved in crypto in 2016. First as a retail investor, I built up an e-commerce platform that eventually was acquired by Snapchat. And so I got into crypto and I got some of my investors into crypto and in the bull run of 2017, we took a $50,000 basket of funds, primarily Ethereum and Bitcoin, and we grew it to about US$750,000. And then we took that and then we created a formal fund. And then I was challenged to kind of articulate an investment thesis. And DeFi was not a term at the time, but essentially what I described would be the greatest investment thesis going back to 2018, was interoperable programmable banking tools on-chain that would be permissionless. And then that, obviously, I mean, we all know about the term “DeFi” and how it’s blown up. But unfortunately, DeFi has really kind of plateaued, just in terms of its growth. Most of the new wallets that are coming to crypto are not coming to DeFi, I think primarily because of the complexity. So when we set out to make a leverage trading platform, and I’ll back up and talk a little bit about why I think leverage is so important and just the significance of derivatives in general, but we want to be able to create that bridge that will attract the not financially savvy retail audience that’s rapidly pouring into crypto, and then find something that will successfully bring them over to the DeFi world.
Levana Protocol 19:22
Now, I’m going to pause and I see, Roy, you asked a question. But I do want to address your direct question that we have two different models, actually three different models of leverage that we are currently building. So one of them is leveraged baskets that are built on top of Mars. And this is based off of the FLI token model, which is created by Index Coop on Ethereum by a guy named Felix Feng, who is a friend and a long term friend of mine. I met him, I think in 2018 at a crypto conference. And I actually came in as one of the seed investors in this project. I was just super impressed by him and the methodology that he created in FLI. And that was a big inspiration for the LUNA2x token. And that doesn’t require a short position to counterbalance it. What’s happening there is it goes back to… You had mentioned borrowing UST against LUNA on Anchor. So when MakerDAO first came out, I was taking my ETH, I think ETH was probably about $80 at the time, and I was taking my ETH and I was borrowing against it. So I would borrow DAI, and then I would go to Uniswap, and then I would swap it for more ETH, and then I would put that ETH into MakerDAO, and then I would withdraw more DAI, and I would repeat that process over and over again. And if you repeated it about half a dozen times, then you could get roughly 2x exposure to your Ethereum. So you are a leveraged long position. Problem is it’s very hard to sleep at night when you have that type of position. Because you can get totally rekt if the price drops too fast. And it’s just stressful. And obviously today, there’s cheaper and faster way to do it. I still have some of those positions, but personally I’m using Aave, and I’m using it on Polygon with my ETH positions, and I’m just borrowing directly against ETH, USDC. And then swapping that on… I don’t even remember, I think QuickSwap. But the…
Jonathan, maybe you can describe just for a moment, so in this leverage long position, let’s say you have a LUNA2x going on, and let’s say I were to enter that position today at $50 LUNA or where we’re at now, right. So maybe describe the behavior I’d have to have, or the process I would go through to watch this thing in motion. So obviously, if the price of LUNA goes up, it’s all good. It’s not particularly complicated. But maybe describe, number one, what is the cost to the person doing the leverage over time as far as any kind of fees, but also describe maybe what would happen on the way down. So let’s say, LUNA goes to $45, what is happening to my position at that point and like you said, do I need to be awake and watching this, or what is my liquidation or loss look like in that process?
Levana Protocol 23:12
So if it goes down, you’re obviously going to lose more than the exact percentage. So you asked a couple questions there. So let’s first talk about what happens when the price goes up. So the goal with a flexible leverage index token is to roughly match 2x the movement over a short time frame. Because there is volatility decay, which has to be combated against. So that’s like, if you just take a number, any number, like 100, and then you do 100… You reduce it by 10%, and then increase it by 10%, reduce it by 10%, increase it by 10%, and you do that over and over again, you actually end up with something called volatility decay, where you slowly trend down to zero over time. So that’s one reason, that’s one thing why vide leverage tokens, first of all need to be rebalanced and are best for short term market movements. It could be days or even weeks, but you wouldn’t want to just buy a leverage token and then just sit on it for a year or two years.
The Royal Pirate 24:25
That’s the same as KuCoin, correct?
Levana Protocol 24:28
Yeah, absolutely. I mean, nobody really has a solution… I mean, it’s just the math. That’s not a problem that we’re faced with. that’s just how leverage works or how volatility decay works. Now, another thing is, is that because you’re taking on debt, so the debt has to pay to two different places. One it has to pay to the lenders, in this case it’ll be the liquidity providers of two different platforms. One is it’ll be the liquidity providers of Levana itself, meaning that they are putting their funds up at risk that you’re just swapping into and out of. So there is a fee, and that fee will be decided through governance vote, but there will be a fee that’s collected. I believe the current fee for FLI is 1.5% annually, but I will double check that. I know that Index Coop has had a few different versions of that over time. And then also, you have to take into account that you’re borrowing assets from Mars, so there’s fees to Mars as well. So you don’t get a free lunch, you can’t get double the gains without having to pay some type of… Yeah, I’m looking at it right now. The flexible leverage index is currently 1.95%, which is a streaming fee. And and the ETH2x FLI is currently at a market cap of $72 million. So there’s $72 million worth of Ethereum that’s currently being leveraged up using the same methodology. So while we aspire to even surpass that, because we think that this product makes more sense on a high throughput, low fee chain like Terra, and we think that LUNAtics have a different bullish nature than Ethereum, I think there is an argument to be made that the big gains on Ethereum have already been made. And I think that Terra and LUNA specifically, is just getting started. Obviously, that’s not financial advice, do your own research and all of those other disclaimers. But I think that this type of a product, of a leverage index token on Terra is really primed to be just such a badass token in addition to the ecosystem. I went on a tangent…
So Jonathan, describe maybe what this looks like in physical reality. So for example, I get $1,000 worth of this token today at $50 and the price goes down to, say, $45, am I going to see the value of the marker token, or perpetual, or whatever it is, for lack of a better term, is the value of that…
Levana Protocol 27:56
It’s an index token, that’s…
I guess the index token’s value itself is going to… The number is going to go down. So let’s say I have… $1,000 gives me 10 of these index tokens for whatever the ratio is going to be, do I end up seeing the value of that particular token drop proportionally to the amount of leverage? Or do I see that only when I go to redeem the token? What are the… How does this physically play out when I’m playing this video game? [chuckle]
Levana Protocol 28:32
Sure, absolutely. Okay. So well, let’s say you just want to buy the token. So you go either to the Levana website, or you go to Astroport, or to TerraSwap, or some other marketplace where you can either buy through an AMM or an order book CW20 tokens, because it will be a CW20 token. And so I will now just purchase either through UST or through LUNA, the LUNA2x token. Now, if the price of LUNA drops, in your case, you said 10%, so then the price of the LUNA 2x token will drop more than that. And the system will target that it should drop, roughly 20%. So about double, representing your double exposure. Now, there’s a lot of math that needs to go into that calculation there. How quickly did it drop? How much was… How quickly did the leverage index rebalancer need to rebalance? Because as the price is dropping, so then leverage is being taken off, and that leverage is being taken off at a loss. So you’re losing more and you’re going more into cash, into UST, as it’s going down. Now the same thing happens when it goes up. When it goes up, so then it’s rebalancing and the other direction. Now, the faster that it needs to rebalance, and there’s no need really for to rebalance quickly in the up direction, because there’s no fear of liquidation, but if it needs to rebalance quickly in the down direction, so then there could be a slippage issues, there could be front running issues, a lot of the things that you have when there’s these black swan events, where everybody is trying to get out of position at the same time, and then market makers end up benefiting the most from that. So from your position, whether or not you’re using some type of a gamified UI that we hope to bring to market this year, or you’re using just a traditional DeFi user interface, if the price of the underlying goes up, you’ll see that reflected in the token. And if it goes down, then conversely, you’ll see it in the opposite direction. And what we hope to minimize is the liquidation or partial liquidation, and that’s through continuous rebalancing.
And then the available possible leverage tokens that are available then is dependent on how many people are providing liquidity on Mars, etcetera? And is that going to be hard capped? And then long term how do you see that? And the reason I ask that is because… So if you think about it, all right, so the lower the price as a crypto asset goes, the higher the probability of it going up from there just because, well it just sort of… What goes up must come down, and vice versa. And theoretically, my strategy generally is to get more on the way down than I did at current price. It seems like aleveraged product, it correct me if I’m wrong, would be most popular the lower the price of the asset goes. And so that would be the most obvious place where it would become “oversubscribed”, or whatever the term… I don’t know the terminology there. But could you describe…
Levana Protocol 32:27
In that case, the index price and the spot price diverge. So that’s where the demand for the leverage version of the asset outpaces the demand for the underlying, or the ability for arbitrage opportunists to then mint, or burn depending upon which direction. And so then you end up with inaccurate price discovery for the leverage asset. People are essentially paying a premium to take on a leveraged position. And that’s very common, not just in DeFi, but I mean, it’s very common in traditional markets that after a wipeout, when a floor is developed and now the sentiment goes from blood on the streets, everyone’s bearish, to this is the next best thing, we’re going all in. Then those… I mean, you’ve been around here for a while, so those sentiments go quickly. And so yes, during those time periods, it will be important to have, let’s call it cash in hand of the underlying, in order to be able to ramp up the market cap and essentially the liquidity of the leverage basket so that you can provide ample or fair price discovery for the leveraged asset when the market turns from bearish to bullish to bullish.
So, maybe on this front, describe what kind of advantages do you see for the leverage provider… I’m sorry, the liquidity provider, let’s say for example, on Mars, so if I’m going to be placing my LUNA at risk I suppose for a higher APY, how does that look like? How does that get incentivized from that end to be sure that there’s enough providers long term for this process?
Levana Protocol 34:41
So it uses a traditional farming methodology, where you have an ample amount of tokens which are being provided to liquidity providers. And in addition to that, we mentioned the fee. So that you’ll be receiving a fee by being a liquidity provider. And then in addition to that, you’ll be farming the LVN token, which is the native token of Levana. Now there will be a market equilibrium that will be formed, because let’s say that we’re giving out, I don’t know, I’m just making up a number, let’s say we’re giving out a million of the LVN tokens every month, I’d have to look up our emission schedule, I don’t have it in front of me to be able to answer that directly, but obviously that can be changed through governance vote as well what the emission schedule is, and how it will be distributed between the LUNA pool versus the other pools that will be formed. But let’s say that there was only one liquidity provider, so they would receive all of the rewards, which would be substantial. That’s where you get APYs that are five digits long. And then that obviously inspires other people to come in to provide liquidity. And then you see APYs settle at whatever the free market determines is the appropriate value for the amount of risk that they’re taking on.
Got it. Yes, I see what you’re saying. So in other words, it’s not that different from traditional liquidity provision. But how does the… So what is the possible loss here to the liquidity provider? Maybe play out a scenario since it’s a little bit different than just simple liquidity provision since there’s a possible loss involved, correct?
Levana Protocol 36:41
Well, yes, it’s… So just like how in an AMM you have impermanent loss, which can mean that you… Essentially, you can get totally rekt. If you put in two tokens… I put in a stablecoin and I put in some random alt coin, and I put in $10,000 worth of it or $100,000 worth of it, obviously, I’m exposed that… Look, if my alt coin goes to the moon and does a 10x, I’m not going to be exposed to that 10x because the AMM was constantly selling from the stronger coin into the weaker coin. And then the same thing is, is that I’m directionally exposed to the market that if my alt coin tanks, then obviously my LP position is gonna tank with it. So we kind of see this a little bit with Apollo DAO, for example, is that you might start with UST and then you open up some Terra farming position, which is autocompounding through Apollo, great guys by the way, and you might be in it for the APY, but if the underlying drastically changes in price to the downward direction, so then the rewards that you got don’t compensate for the loss that… I don’t know why they call it impermanent loss. I feel like that’s inaccurate marketing, because I’ve never met somebody that the loss was impermanent, it’s very much permanent.
Levana Protocol 38:09
So the similar thing happens with rebalancing of leverage assets. But if there’s a drastic move in the southern direction, so then it’s more of a loss than a 1:1 ratio of the drop of the value of the token. So whereas people might be familiar with AMM, and that I’m not going to get the upside if my token 10xs if I paired it with a stablecoin, but I’m also not going to get the 90% drawdown if this alt coin goes to zero, or drops 90%. Because again, you’re always selling from the… You’re always kind of balancing it out. So it’s just going to take some time for strategies to be developed. But I think that it makes sense that these strategies will be developed. If we just look at what is the value of the derivatives market in traditional CeFi, you’ll see that even within crypto, derivatives of crypto, where… One common form of derivative, a derivative is something that doesn’t represent spot ownership or custodial ownership of an underlying asset, but yet it’s owning an asset which derives its price from something else. That’s why the term, it’s derivative. So what we’ve been talking about with these leverage index tokens is not really a derivative, and perpetual swaps are not really a derivative. But for sake of analogy, I think that we can understand the overlap there and so we can use the term derivative.
Levana Protocol 39:55
But if you look at the performance, whether it’s on Binance, or FTX, or OKEx, or whoever, the derivative markets are much more robust and have larger trading volumes. And even in the traditional markets the TradFi spot market is about $90 trillion daily. And the TradFi derivative markets is one… I think it’s called quatrillion. It’s like if one of them… Just to put it in terms of size of balls, if the TradFi market was the size of a ping pong ball, so then the TradFi derivative market would be the size of a basketball. So it’s just significantly larger in terms of the daily volume. And I think that what we see in the crypto market is that the DeFi spot market is about $3 billion a day. And the derivative market is around $700. So there’s like an inverse to those ratios, it’s like grossly… Derivatives or grossly underrepresented within crypto. And I believe that that is because of the predominance of the retail market within DeFi. Now, obviously institutions are coming and you know, we’ve been saying institutions are coming for the last two and a half years. And there definitely are firms that are very professional that deal with market making, and trading and dYdX has just done phenomenally. But I think that we are at the cusp of when a transition happens from most trading being on an AMM to being on a perpetual swap platform. And that’s why perpetual swaps is the magnum opus of what Levana a protocol is. And that’s where we got our name of leverage any asset, because you can’t leverage any asset with a leverage index token what we’ve spent the last half an hour or so talking about. But you can really create a product that is community owned, that settles to an algorithmic stablecoin, which is censorship resistant, that is managed by a DAO, that collects fees to a DAO and has a responsible token economic model. And I think the perpetual swaps are the best way to do that. So I’ll pause here but I’d like to kind of shift subjects and explain what’s broken in AMMs and how perpetuals fix those broken aspects.
Yeah, sounds good. Let me make sure… I think Zealot and Pirate Roy here, any questions guys, as far as anything that’s been said so far?
The Royal Pirate 42:52
Yeah, I’m very intrigued with your background. I’m a fanboy a little bit. I own a couple eggs myself, very proud of it, love the gamification side, love what you guys are building. I wanna know a little bit more about your background. Are you a coder by trade? Are you a business development guy by trade? We all know now that you’re on the board of LFG. Very intriguing kind of how you grew your career, if you will.
Levana Protocol 43:20
Sure. Happy to. So I’m 38. I’m from Washington DC. I grew up as a script kiddie in the 90s. I upgraded our IBM clone to 86 computer from like DOS 5.5 to Windows 3.1. I first started hacking video games with Hugo’s House of Horrors. I think I was like 9 years old. By 10 I was building custom WADs for Doom and Doom 2. And then just got into running LAN parties to kind of grew up in custom game making experiences with… And I loved the keys and locked doors. I was making Doom games that were largely just custom bitmaps and like adventure games, almost, and quest within the Doom WAD maker. I don’t know if that means anything to anybody listening, but…
It does to me. [chuckle] I was around for all of that. [laughter]
Levana Protocol 44:22
Yeah. And then once we got CompuServe and we got a 56k baud modem up from our 9,600, then I was like, I remember asking my dad, “Why is everybody on the internet from California?” And I just got to see the birth of the Internet and it was… My first experience, I remember I was a tinkerer and somewhat, I don’t know malicious. We were script kiddies. We were… I don’t even want to say the names of the books and stuff that we’re trading online, but if you’ve ever used a tape recorder to get free phone calls on a payphone and stuff like that, you’ll know what I’m talking about. And then I got into… There wasn’t a term for full stack development at the time. This is fast forward, end of high school, beginning of college, and getting married, and things like that, but I was a full stack developer and I focused on getting small businesses, small to medium businesses, up online and entering into the world of e-commerce. And then I was an Apple developer, by just passion, because I loved my PowerBook. That was first laptop I bought with my own money that I earned from freelancing, I was probably about 21 years old at the time. And a couple years later, while I was in my senior year of a computer engineering degree, I was doing all my coursework on this Mac and my university was only Microsoft, only Windows, and Visual Studio. And I reached out to some of the developers at Apple, and I was like, “Please don’t make me get a new computer. I love this. This is my baby.” And so some of the guys there, it really resonated with them. And they really helped me with all of, let’s call it the DevOps aspect, because we were writing C++ code so we didn’t really need Visual Studio, but the teachers were not about to let us just slack off with Xcode.
The Royal Pirate 46:53
Are you saying that you’re part of the invention of Parallels?
Levana Protocol 46:57
No, no, no… I’m far less prestigious, I promise you, than what you may have seen online. But what I did is I made a lot of friends at Apple. And then I got early access to the iPhone SDK. So before they had an App Store, before there were third party people that were approved to write apps, so I was sitting there and I was just writing apps. And I waited tables, and did birthday parties as a magician in high school, which is a very lucrative thing for a 16 year old kid to do, because you could easily make $150 in an hour. And so I made some simple magic tricks. And then I realized, again, that everybody and their cousin was going to need a mobile app. All these startups that I was rubbing shoulders with were going to need… Just like they needed websites, they were also going to need mobile apps. So I borrowed about $30,000 from family and friends, and I dropped out of college, and I started a software house that only focused on transitioning your business model to mobile. And from 2008 until 2012, I grew out a team of about 12 people, about half devs and half artists, product, business development. And so we worked with about 40 different startups during that time period, to build 60 different mobile apps. And then during that time period, we kept having very similar requests, where people wanted to be able to stream video from mobile to mobile, but there wasn’t really a good way to do it because HTTP Live Streaming, which was the really available methodology protocol and codecs that was offered by Apple at the time had minimum requirements of… It was called these m3u files that were the playlist files and then you needed to really do handshaking, and the 3G antenna isn’t on all the time, and it has sometimes up to a 10 second warm up period where you could actually complete the NAT traversal.
Levana Protocol 49:23
So I invented like a methodology that was really dumb in terms of the level of innovation, but it was patentable. And I was able to drop the onboarding time from when a person started recording on one device to when it would be live streamed on the second device. So to move that from about 12 seconds on average to about two seconds on average. And that caught the eye of… First I mean, I got it patented, and I got it approved in the US and in London and in Japan. And then we were able to raise about $45 million on that patent, and created a company called Glide Video Messaging, and got about 26 million subscribers for our product mostly in North America, and we penetrated about nine different cities. I learned a lot about viral marketing and growth tactics, and built out a data science team, I had 84 employees doing that. I was young, I was probably like… I don’t even think I was 25 at the time. No, I must have been 20… I don’t know, I was something around there. And then we got really kind of… Our lunch was eaten by the whole movement of Periscope, and the faction wars between Instagram and Snapchat and everything. And we didn’t have hundreds of millions of dollars to budget to marketing. So we knew we had to pivot. So we went to focus on the Apple Watch. And so we got the same technology that my team, really, because again, I’m not really the genius behind any of this stuff, I’m more of the presenter most of the time, even though I do have a background in engineering.
The Royal Pirate 51:13
Well, that’s so… I’m sorry to interrupt, but that’s what’s so unique. I mean, you’re so well spoken.
Levana Protocol 51:19
Well, thank you. I say “um” a lot. I get that a lot of feedback, especially if my wife listens to anything that I speak about. But I digress. So then we ended up getting video streaming to work on the Apple Watch. And then I led the marketing campaign and the friends invite friends for building out a camera band for the Apple Watch called Wristcam. So we ended up… It was a Bluetooth low-energy video streaming module that had two cameras attached to it, two HD cameras, one for front facing, and one for outward facing. And we embedded it into an Apple Watch band, a custom band made out of silicone. And we did this Kickstarter where we got 10,000 backers to back it with about $2.5 million. And so that product actually we brought to market, it was a little bit thicker than what I had originally hoped. But it became popular with athletes that wanted to be able to record their exercise, and they didn’t have a phone on them because they just went out with their Apple Watch. And then we went into kind of like production. And so my passion is really inventing, and I like the fast pace of software. So the hardware cycle of, “Well, we built it, and then now it’s gonna take three years to manufacture it,” really was a big turn-off to me. And so then I got headhunted by the Kardashians, and their…
The Royal Pirate 52:56
What a curveball.
You didn’t work on their little video game app, did you? [chuckle]
Levana Protocol 53:03
No, I came after that. So I was brought in with the brief of Kim wants a high tech fashion app for e-commerce. Build something. And so I worked with her… It took about six months. Every month… So I put together a team, it was a team of guys from my previous engineering experience. And about once a month, we would come out with a prototype that we’d bring to her for feedback. It took about six prototypes before we found one that she really liked. What we did is we took on three different… We took a sentiment analysis which use… It would turn an image into keywords through various different machine learning methods. So we’d be able to identify what picture is in your gallery or on your screen were fashion related, then we used another technology in order to slice up and recognize the parts of the human body, and then another technology to be able to recognize the types of fabrics relevant to the portion of the body that they were on, and then another technology to be able to do a matching of products that then use another technology of a database normalizer from about 100 different retail brands that would then be able to offer in your country, in your price range. Yada yada yada, long story short, we could take your Instagram feed and we could turn it into a custom shopping cart. So that was called ScreenShop. So I was responsible for building out the engineering, the product, marketing, and the operations teams for it. And when they first approached me for the project, I thought that it was just a friend of mine that was just punking me and so I totally blew them off and then they flew out to where I was living to meet with me in person, and so I ended up taking on the product. And then we got acquired by…
So what you’re saying is, Jonathan, you’re the reason I’m wearing Kim Kardashian pants right now.
Levana Protocol 55:06
It very well could be. I don’t I don’t want to take credit for that. To tell you the truth, Kim was a pleasure to work with. Incredibly… She came across as business savvy, intelligent, focused, and displayed leadership skills. So, I’ve never seen her TV show before so I really can’t ascertain what is the discrepancy there between her public performance and… Her public persona, and what she’s like to sit with in a boardroom. But I do know many people like Steve Colbert and the like have really worked hard to create a public persona that then makes them the most money. And so, like her or hate her, I mean, she’s good at what she does. And she was a pleasure to work with. And then after that, I really fell down the crypto rabbit hole, and then I…
The Royal Pirate 56:12
About what year was that?
Levana Protocol 56:15
That was ’17. So that was…We launched the product in November…
The Royal Pirate 56:21
No, no. What time did you jump down the crypto rabbit hole?
Levana Protocol 56:24
Oh, so I bought my… So okay, I bought my first Bitcoin in… It must have been… I want to say December of 2016. Maybe it was January or February. I remember wiring to the exchange at $996 was the price of one Bitcoin. And I remember when I tried to dollar cost average. And because I was very nervous about it and I didn’t know if the exchange was gonna rip me off and stuff. But by the time that that first wire was completed over into Bitcoin, Bitcoin had jumped to like $2,200. And I hated myself and I went to bed being like, “I missed it,” like, “I knew it. I knew Bitcoin was gonna go on a run. And now it’s over doubled since my first entry price,” and I just hated myself.
The Royal Pirate 57:20
That’s funny. That’s when we grabbed our first Bitcoin. It doubled between December and February 2017.
Levana Protocol 57:28
Yeah, exactly. And look, I’ve made so many mistakes in my own trading. And one of the motivators to build the Levana leverage baskets was because I just kept losing Bitcoin to Bitmex. I’m not even going to tell you, because we’d all feel terrible.
The Royal Pirate 57:58
The wins outweigh the losses.
Levana Protocol 58:01
Yeah, but you know what, but the losses hurt more than the wins.
The Royal Pirate 58:05
Of course, okay.
Levana Protocol 58:07
But I digress. So that’s a little bit of my background.
The Royal Pirate 58:11
So you bought your first Bitcoin, then what led you into finding… I mean, I think that’s one of LUNAtic biggest skills is taking a loan out, wrapping it, buying more. So you did that on ETH when I started doing that on LUNA. And that’s kind of what made me successful. So kind of final question and I’ll let you have the floor. So from building apps for the Kardashians to helping develop all these different apps, why now perpetual futures in DeFi?
Levana Protocol 58:42
Ah, that’s really from Professor Eli Ben-Sasson. So in late 2018… No, no, it must have been later than that, must have been mid 2019. I was at the Scaling Bitcoin Conference, which one of the speakers there was Vitalik Buterin, the founder of Ethereum. And so I knew he was going to come, and I knew it was going to be a very small conference, less than 200 people, so I knew I would be able to get some face time with him. So I was really… And I had my own fund by this point, we were doing pretty well. And we made a lot of money shorting the 2018 market on the way down. And so I spent about three weeks getting prepared for this time that I would have to sit with Vitalik, so I read everything he wrote about ETH 2.0, and a lot of his history, and his Twitter feed, and I really took it seriously. So when we’re on lunch break at the conference, so I’m sitting there with him, and we’re at a picnic bench at the university campus. And I’m just going through and I proposed to him an alternative scaling method, which I called the heterogeneous scaling, which meant that you would have multiple shards, shards could be instantiated by different parties, that it didn’t need to be centralized by the beacon chain in order to create them. And they can have different attributes, because scaling always has the trilemma of what compromises that you want to make. And different protocols lend themselves better to different incentivization methods, different types of security, different types of bridge implementations. And then I believe that the ultimate way to scale crypto to a massive level was not the methodology that Vitalik, and the rest of the guys at EF had outlined. And so I came to try and get my 45 minutes face to face with him to explain to him my opposing view.
Levana Protocol 1:01:10
So he was very gracious. And he recognized that I came very well prepared to this. So we’re sitting on a picnic bench, and we’re having this conversation. And it’s about a 45 minutes long conversation. And by the time that we’re done, we’ve easily got like, 50 people in a horseshoe shape just listening to us. Because everybody had finished their lunch now, and if you’re putting together events, you always know you kind of have the wash guy that’s right after lunch, because people are straggling in, so nobody was in a rush to get back to the event. And so I’m there, and we’re talking, and I feel like if it was a debate and somebody was keeping score, I would like to think that I won that debate. And I think that he was very gracious by giving me, who was really a stranger, the opportunity to speak like that. And he saw how many people that were both of our contemporaries around the table.
Levana Protocol 1:02:12
So afterwards when we kind of stopped and it was me, him, and Morgan from Facebook’s Libra project that were sitting kind of as the panelists on this conversation, if you will. And so a guy comes up to me afterwards and he says, “Oh, hi, I’m Professor Eli Ben-Sasson. It was so interesting to hear you talk, I want to know more about your background, how did you know all of that stuff?” And so he introduced himself, he said, “I’m the co-creator of Zcash, which is a top tier privacy coin. And I’m also the creator of a scaling technology that’s very similar to what you articulated you felt was the best type of scaling, which is called zero knowledge proofs. I produce a technology called Starkware, a company called Starkware and we’re producing a scaling technique based on my invention.” So I said, “Tell me more.” So he invited me to come to his lectures, and I came to his lectures, and he was the smartest person that I’ve ever met in my entire life. And then we just got to talking more and he graciously invited me to his office, and his office was full of the 30 of the smartest people that I’ve ever met in my entire life. But they weren’t crypto native. I asked them, “Oh, so what mobile wallet do you like the best for Ethereum?” And they were like, “Well, we don’t really use crypto.” And so my mind was blown.
Levana Protocol 1:03:48
So after my second time in the office, I sent him an email. And it was like a two pager, which was like, “Look, if I was going to market your product, if I wanted to think of a business plan, here’s how I would do it.” And so I wrote that to him. And it was completely no strings attached to anything. And three weeks later… I didn’t think anything of it. But three weeks later, he called me and he said, “You know, Jonathan, I keep coming back to that email that you wrote me, how would you like to lead business development for us?” And I said, “Okay.” And so at this point, I had worked out the thesis for my fund, it was kind of just making money, I was doing private deals, I had invested in Near Protocol, and in Solana, and in few other very successful early stage plays. And so then I took on the hat of business development, and over the next 20 months I spoke to 340 different dApp development teams. And the two that were most influential to me was a company called Immutable that produced an NFT minting platform and gaming SDK called Immutable X, which is now the third largest NFT minting platform, and then another was called dYdX.
Levana Protocol 1:05:26
So for Immutable, because I was the token in-house NFT guy, because I followed NFTs, and I believed in them, and I believed in their impact that they would have on gaming, and that NFTs would be an easier way for people to understand crypto and the value of self sovereign, scarce, interoperable, composable digital assets. Everybody knows why the Mona Lisa is valuable, everybody knows why even though I can just make a copy of it, I can right click and print out my own Mona Lisa, but nobody will pay for it. But yet, the one in the Louvre is invaluable, which means very valuable. And so I was farmed out to do technical sales for Immutable and so I got to speak for six months with like 40 or so different very big studios about what is the creator economy, and what does self-sovereignty have to do with gaming, and how can player economy and crypto go together, and how can new revenue streams be created. So that was one of the amazing experience that I got to have it Starkware. And then the second was when we close dYdX, the guy sitting next to me in the office, he was responsible for taking apart the Solidity contracts, and then outlining the architecture and methodology of them being ported over to Cairo, which is the language that’s used for the virtual machine for Starkware’s proof generation for their off-chain operators. And so, going through that, and just naturally just sitting next to him physically, we talked a lot about the protocol. And that was my first hand really getting to see how it worked and how elegant it was, and also how lucrative it was. And so that’s where I came away.
Levana Protocol 1:07:26
And now, this is where I think is the main point of this Spaces, and I thank everybody for being online for an hour for us to kind of get to the meat from the appetizers. But the most interesting thing about perpetual swaps is a few things. One is, let’s unpack how AMM works, and let’s answer the question as to what is a perpetual solving that was broken in an AMM. So we mentioned some of it on the call. An AMM has become so popular because it doesn’t have an order book, which means that it’s very simple. Now, the problem is is that if you want to be a market maker to an AMM, the AMM is almost like a scale, like the scale that Justice has with with her eyes closed that you put heavier side to one and it goes down, but it eventually needs to find an equilibrium. So the scale with the pools of AMMs is that if I want to be a market maker, the first thing I have to do is the markets that I want to make, they need to be tokenized on the blockchain that I want to be able to create price exposure to. Meaning before wrapped Bitcoin, or before RenBTC, or sBTC from Synthetix, you just couldn’t trade. You couldn’t use Uniswap to trade Bitcoin. So it creates this barrier that if you want to have a platform that can support any asset, now there’s the overhead that it needs to be tokenized either trustly tokenized like a custodianship from Bitco that produces wrapped BTC, or, I’m gonna use air quotes, but let’s say trustlessly collateralized like the overcollateralisation method of that Synthetix uses, or even the quasi decentralized method that Ren uses with their rotating validators for RenBTC. But really, people don’t really use RenBTC, you just use it as a way to get wBTC trustlessly. But I digress. So that’s the first problem with an AMM is that the assets that can be listed on an AMM have to be previously tokenized, and it’s usually tokenized through an independent project, which has its own security risks and its own incentivization methods and its own cost structure.
Levana Protocol 1:10:10
Second problem on an AMM is that when you want to be a market maker, you need to be long exposed to both of the assets. So if I want to be a market maker for wBTC and ETH, I need to first go out and buy wBTC and buy ETH, and then now have an equal amount of those and then put them into Uniswap. So I’m exposed to these assets, when all I wanted to do was make money off of people trading them. And you’re exposed in the worst way. Because if ETH goes to the moon and does a 10x relative to Bitcoin, then I’m rekt because of impermanent loss that I totally sold from the winning position into the losing position. So not only are you directionally long to the asset, that you’re a market maker for, your directionally long in the worst way possible, where you just are guaranteed to not get the gains unless, miraculously, both sides of the market move in relatively the same manner, which there is reflexivity in our market because it’s still small, but that’s just going to diminish over time. And now that there’s a tendency to move away from crypto to crypto market making, but rather just crypto to stablecoin, so then you’re guaranteed to just be at a loss, which then puts more pressure on protocols that are providing the AMM services that they need to compensate for that through hiding the impermanent loss through some type of… Like what Bancor does, or, or overcompensating for it, like what many farming positions do where they incentivize you to lock up LP positions, so that the rewards and emissions compensate for the impermanent loss.
Levana Protocol 1:12:06
So the third thing with an AMM is that you can only have spot exposure, and you can only be 1x. There’s no shorting and there’s no leverage. And then the last thing that comes to mind in terms of a shortcoming of an AMM is that you only make money as the market maker or the platform when a trade happens on the platform. So meaning I come in, and I trade my DAI, or my USDC for ETH. So they get their 0.2%. And now, if I just hodl that ETH for the next five years, Uniswap doesn’t make any money off of it. It just sits there. And if I go and I trade it on Sushiswap, or I bridge it over and I trade it on Pancakeswap, or whatever, then also Uniswap doesn’t make any money. So those are all the shortcomings of an AMM and that’s what I was all familiar with. So now when we unpack perpetuals, and now there’s a few different ways that you can build perpetuals. So you can build it with an order book, which I think is a more advanced product and is not really relevant for a retail market, because I think the retail market it’s just struggles to appreciate the subtleties of order books. It’s very complicated, it’s intimidating to most people. So now with perpetuals, so there’s instead of the dYdX model, so there’s the the AMM, which is really a virtualized AMM, which was originally created by the Futureswap guys, then I think MCDEX came next if I’m not mistaken. And then…
The Royal Pirate 1:13:53
Quick question, is dYdX fully decentralized though? Or are they semi?
Levana Protocol 1:13:59
I don’t… Can we just agree that that’s outside of the scope of this conversation?
The Royal Pirate 1:14:04
Levana Protocol 1:14:05
Okay. And so then, let’s say that… Sorry to totally just avoid that, but I don’t want…
The Royal Pirate 1:14:19
Yeah, I’m the last person that’s ever gonna take offense. Keep going, please.
Levana Protocol 1:14:22
Yeah. So now if you look at… So then there’s the AMM or the virtual AMM, which really I think that Perpetual Finance was the first ones to really get it right. There was… Mai v3 from MCDEX had a lot of improvements. And where is… I’m trying to just bring it up here… Why is my VPN saying that I’m… Sorry, I digress. I was just trying to pull up Perpetual Protocol, but I got a “Service not available in your region” pop up. And so then there was even a better model, which is the Curie model that Perpetual Finance came out. And now to go into an analogy of how perpetuals work, because they’re really almost a predictions market. The prediction market is… If you look at just how Augur works, or let’s say a binary options market. So you and I, as long as it’s balanced on both sides of the trade, I could say, “You know what, I think that ETH is going to go up,” you say, “ETH is gonna go down,” we both put $100 on it, and one of us will be the winner. Now what perpetuals does is it creates pools, so you don’t necessarily need to find a counterparty. It’s not like with options where I make a contract and I wait for somebody else to buy the contract. Because that suffers a lot of liquidity challenges associated with it. One of the beautiful things about AMMs was that it made sure that there always was a counterparty. So the virtualized AMMs on Perpetual Finance really solved that problem without needing to provide a third party market maker.
Levana Protocol 1:16:24
So what you have now is a platform that using any type of an oracle feed now can create a market where I can take a long position. If there’s nobody on the short position, then a risk fund will be the counterparty. Now if it’s imbalanced, then I’m going to be paying a very high continuous funding rate. Now because it’s a debt position, and it’s a debt position even if it’s just 1x, I’m paying a fee to hold that position throughout the entire lifecycle of the position, which means that the market makers are making orders of magnitude more profit through the exposure of their capital, which is denominated in the stablecoin so the market makers have no impermanent loss. So obviously they take a risk that if the market runs away from them in the opposite direction, then they’re going to be the insurers… Not the insurers of last resort, because that’s where the DAO comes in and that’s where staking of the Levana token comes in. And if you’re familiar with the token economic model of Maker DAO, so then you can understand what that means. And especially if you remember that in March of… I think it was the original COVID March, when Maker DAO blew up and then they went $4 million in debt, and they had to get bailed out and they minted more MKR. So that’s similar to what the downside of being a market maker, or being the collateraliser of a perpetual swap looks like.
Levana Protocol 1:17:59
But assuming that there’s no major black swan events, what you have is a platform where anything that can be quantified in a price feed can have a market spun up. That market can be collateralized through a risk fund in stable coins. And in our case, UST, which is really the only truly decentralized censorship-resistant stablecoin. And then that market now can allow for anybody to take long and short positions. In our case, we’re limiting it to 10x. Because personally, I’m too much of a wimp to take on a position stronger than 10x. So I wouldn’t recommend… What I wouldn’t recommend to other people I wouldn’t want to build a platform for. But obviously governance vote can will control what the max leverage long and short is because it’s up to the community, not up to anybody on the team. And it’s a platform, again, can support any price or any asset, doesn’t need to be a crypto asset, doesn’t need to be a real world asset. It could be a Metaverse asset. It could be you know, the…
The Royal Pirate 1:19:21
And that’s where Mars comes in?
Levana Protocol 1:19:24
Well, no. So Mars is what’s used on the first protocol, which is the leverage basket which actually has underlying LUNA that’s being recursively wrapped. And that’s what creates the leverage. Perpetuals is just really a perpetual option contract of do I think the price is going to go up or down. Now, if you’re not familiar with how perpetuals work, imagine we’re in a high school gymnasium, okay. And we each have 100 $1 bills in our pocket. And I go to one side of the basketball court, and I lay out one after the other of $1 bills, making a nice stack towards the half court… Halfway court? I don’t know basketball, but the middle line, okay. And then you’re on the other side, and you lay out your $100 bills in the other direction. So now in the middle, we put a flag. And now I say, “This flag is going to represent the price of Tesla’s stock. And then we both agree to that. And now we say, “You know what, if the price of Tesla’s stock goes up,5%, then we’re going to move the flag 5% in your direction, because I was long and you were short. And if it drops 10%, so we’ll move it 10%…” It’s not literally 10%, but the math, I don’t want to digress with the math. But we move the flag farther away from you and towards me, so you own more of these $1 bills. Now, at any point, either of us can close the position. Now if it was just the two of us, that would just end the market. But what’s nice about perpetuals is that they use pools, so even if one person closes there’s enough of the counter pool, which then also has a risk fund, which will come in and fill in the other side of the pool as needed. But now, each of us can have exposure long and short, either direct, or with leverage, to the price of Tesla stock without any of us actually ever touching Tesla’s stock. And that’s the beauty of perpetuals. And that’s why perpetuals are the key to leveraging any asset, which is, again, what Levana stands for.
Interesting. So where does the where does the… Let’s say we’re talking about LUNA, for example. So the perpetual is taking place by just following the oracle price at that point?
Levana Protocol 1:22:11
Yes, and we’re working currently with Band which currently supports Cosmos and Terra, and then Chainlink has been very helpful to act an additional oracle source. And so we hope to be able to provide redundancy from that perspective, to also help prevent against an oracle attack.
An additional question I have regarding… So, obviously, you go back to Ethereum days and such, one thing I like to ask people is when it comes to a major project like this, in what ways is Cosmos/Terra/IBC and whatnot, how does that become the superior way to handle a Levana style protocol compared to doing this on any other chains? Are there certain pros and cons on Terra versus somewhere else?
Levana Protocol 1:23:20
Absolutely. Well, I also wanted to mention that… So I am a very big believer that the mission that was set out… Personally and this is obviously completely subjective and I don’t have a lot of evidence for that, but I believe the team that represents the moniker Satoshi Nakamoto, that they brought Bitcoin to the world in order to create a social change and that the ability to achieve that is best solved by Terra more than any other product that exists in the market. And Terra is is very dear to me on a personal level. While I was a researcher…
Wow, that’s intense.
Levana Protocol 1:24:16
Now while I was a researcher for my own crypto fund, or the crypto fund that I started building back from 2018 and 17, I was a big believer in stablecoins and I hated, and I still do, the centralized stablecoins, the banker coins, as I call them, because I believe that they are antithetical to everything that we’re building in the space today. And the fact that they are the primary backings for Ethereum is a systemic risk. It’s the biggest risk today to DeFi and to Ethereum as a whole. So I started just investing and trying to get exposure to just everything that was algorithmic. So Synthetix’s sUSD, to Ampleforth, to Empty Set, to OHM, to all the forks of Empty Set, and none of those were successful. And so I came away realizing something, which is that you needed… If we were going to build something that was going to be the most valuable asset in the entire crypto space as a stablecoin… So I was actually introduced in I think it was 2018 to a project called Haven, I think it’s XHV, maybe, is the token. I mean the project is basically defunct. It was like a merge mining Monero stablecoin, which was a dual token, where there was a volatility token, which would be… And a stablecoin token. And so the way that the stablecoin token would keep to its peg would be the minting or burning redemption, or or minting of the volatility token. So I was super obsessed with this model of using a two token system to be able to create an algorithmic stablecoin. But obviously, from an interoperability perspective, merge mining on Mineiro was out of the question.
Levana Protocol 1:26:34
So when I started seeing stuff really picking up on Cosmos, and it coming to market, and the Cosmos SDK really being something that you could build on top of, so I started just working on a thesis, which I never published, and never cleaned up enough to publish, but I did circulate it enough to get real feedback on it, and the thesis was that the ultimate stablecoin would be this two token model that I learned from Haven, but it would have a few different aspects to it. One of which is that the validators need to be paid in stablecoin, because one of the problems with Ethereum is that the miners, they don’t give a crap about any type of ERC-20 stablecoin, because whatever, they just get paid in ETH. So they’re not incentivized to ensure that the system works or has any long term longevity, they’re not holding a whole bunch of stablecoins that they’re going to get wrecked if something happens. So there’s a misalignment in terms of the security of the network. So you had to build something and I envisioned that we would build it on Terra… I mean, sorry, on Cosmos. And that it would be interoperable. And that it would be a stablecoin, not just used for its own network but that would be a stablecoin that would be generated on this network with this set of validators that would receive payment in the stablecoin asset, not the investment asset, that if you wanted to run a validator you’d have to lock up the investment asset, but then you would collect fees in the stable asset creating this symbiotic relationship between the two. And then there would need to be some type of a variable tax rate, because we didn’t know obviously, at the beginning the fees would be low, because there wouldn’t be a lot of activity or interactions with other protocols. So you need to have the tax rate high. But then as users came in and started using the stablecoin, then you’d be able to lower the taxes over time. And then that would kind of like be block production.
Levana Protocol 1:28:45
So I put all of this together. And I go out and I start circulating it to see if maybe I could raise some funds to build this or who would be interested in working with me on this. And one guy is like, “This is… You just ripped off Terra.” And I was like, “You mean the Chai payment thing?” And they were like, “Yeah.” I was like, “This has nothing to do with that.” And they were like, “Yes, you should go read the white paper of Terra.” And then I went and I read it. And it was like a Twilight Zone episode. Because it was like the thing that I had invented in a whiteboard, in a room, somebody else had thought almost exactly the same thing, and they actually built it, and they actually did an amazing job building it. And so at that point, it was obvious. It was like, “Okay, I’m going to build something that is built on Terra that uses gamification to adapt an onboarding experience for a massive audience that is going to be easy to use, and is going to provide the most lucrative, comprehensive trading experience possible.” And then that was where really Levana came from. I wish I could take more credit or claim it was like inventive, but it kind of just all fell into place.
Yeah, I’m probably equally as insane as you from the perspective of my interest in Terra, similar to how… So back in the late 90s, when we were building on video game gold systems and dealing with things like mudflation, and some of those issues, I don’t know, if you were around playing those games back then, the RuneScapes, and the EverQuests of the world. And a lot of the…
Levana Protocol 1:30:52
No. My dad bought me a Super Nintendo and then an N64, and I was playing Zelda and Mist. So yeah, my dad was like… I had friends that were doing it, and I would watch them do it. But the idea of spending a monthly fee on a video game was just… Didn’t comprehend.
Hilarious was I was actually playing simultaneously during my last years of medical school and such, so I didn’t sleep very much as you might imagine. [laughter] But anyway, what I was gonna say is, philosophically, as interesting as the setup and the structure of Bitcoin is to most people, I find that among the various sort of tokenomics models, and system models, as it were, philosophically I think Terra is really the Bitcoin’s sister, or whatever you want to call it. It has the complimentary features, in my opinion, that most things in crypto don’t have. And I certainly have not been nearly as interested. In fact, I didn’t even play on Twitter until more recently, really only because of Terra. So I do find myself to be fairly enamored with the system, obviously. [laughter]
Levana Protocol 1:32:25
Well, when I was offered to join as a board member of the Luna Foundation Guard, I mean, it was a very emotional experience. I really felt like, so much of what I am passionate about in life, and what I want my… The change that I want to see in the world and to help cause, that I was given a direct opportunity to do it. And I see Lavana as an extension of that, I see it as an opportunity to onboard 100 million people into crypto. I know that the dragons look kind of like kitschy, and childish or a distraction. And it could be that that narrative is correct. But I see that there’s a real problem of getting people excited about 20% APY on Anchor. And at the same time, I just see what my kids are into. And I want to make something that every high school kid is gonna know. I want to make a Netflix series of cartoons that people thought that they were just learning about some post-apocalyptic setting, and how magic and other stuff solved it, but really what they were learning about is the value drivers that will be bringing them into crypto.
Yeah, I mean, we are the story we tell ourselves, as the phrase goes. Yeah, having been in all sorts of RPG universes and guilds structures with video games, and watching digital assets and how they get inflated in a gamified world, yeah, all of the things you were talking about earlier with Styllar, and with some of the other discussions about NFTs and lore, and the whole mythos behind what you guys are doing, I can see through your eyes that background and all the different components you’re bringing to the table as far as the creation of what Lavanya is, it’s pretty cool. I think you and I would have very similar conversations about screwing around on Doom, for example. [chuckle] But I think I’m a little bit older than you, I’m in the late 40s, but I was a child of that time and felt like I was shaped by similar experiences that you were in many, many ways. And a lot of what you’re doing in Levana really resonates with me.
Levana Protocol 1:35:15
Yeah, and even just trying to figure out how do you distribute tokens to people that are just not dumpers. We looked at… The guys at Flipside are our good friends, and I was very impressed with that report that they came out with, but the boilerplate, let’s just airdrop to LUNA stakers, first of all 60% are never even going to redeem, and then of the people that redeem, the majority are just going to dump. So that’s why we created this whole Faction War thing is that what we’re trying to do here is we’re trying to weed out, to draw out, the people that have, I would say, a little bit larger attention span, and are interested in trying something new, and taking a longer term time preference. Because that’s one of the things that Bitcoin taught me most strongly that just impacted every part of my life is that the more that you can have a long term time preference, the more opportunities that are going to be open in your life. And so whether or not it works, whether or not it doesn’t, we’re not afraid to fail. That’s the other thing is, is that we don’t want to just do what worked. A lot of the people on the team are at a point financially in their life where they never have to do anything again. And so then when you get to that point in your life, then you start thinking about, well what’s my legacy going to be? How am I going to… How do I want to change the world? And what risks do I want to take to get there? And then if you’re not afraid to fail, then you can try something new. And it might not be the most lucrative, it might not work all the time, or it might have hiccups along the way. But at least you tried. And I think that what we’re doing at Levana really reflects that mindset.
Let me get a couple of questions and I think we can break since we’ve gone on a pretty good time. TerraSpaces has recorded a lot his conversation, and hopefully they store it somewhere. Because there’s a lot of useful, maybe a history of Terra, information here. And it was really super informative, besides just discussing Levana itself. Taoi, did you have a question or comment?
I do indeed. Firstly, amazing, very colorful background, my dude. I was completely captivated by it. So I’ll go into my question real quick here, since you’ve demonstrated to be an amazing storyteller. What happens to my UST when I deposit it and I’m trying to mint, say, a LUNA flexible leverage token, right? So what’s the adventure that my UST goes on once I make that mint transaction? And if you can go into real details that that’s good too.
Levana Protocol 1:38:15
Okay, so it depends on where… Let’s talk about the minting process. So there’s no minting from UST to the LUNA2x. There’s only from LUNA to LUNA2x, meaning that that’s the pool that we will incentivize and then that’s how it’s actually generated. So if you were to buy from UST, so you’d actually be first… Either you’d be buying from another pool, which would just be a pool based on arbitrage, or it would be swapping from UST to LUNA and then to LUNA2x. Now to answer your question of what happens when there’s LUNA. So if it’s minting that you’re doing, you’re actually increasing the market cap of you’re increasing the market cap of the pool of LUNA2x. And what’s happening is that it’s actually going to Mars, it’s being deposited into a basket, which then if that sets off a trigger to rebalance, meaning that the loan to collateral ratio is below a certain key metric, and that metric isn’t a fixed one because it has to change over time depending upon where the asset is in a rebalancing state, and so then it there’s UST that’s borrowed against the asset that you deposited, and then that UST is then used to swapped on Astroport, which is another incubated Delphi product, and then it’s used to purchase LUNA, and then that LUNA goes back into the basket. So that process happens a few times. And then obviously, when you sell, the beauty of selling or of just buying spot from Astroport is different than minting, because you don’t have to deal with any of this in the background. You’re essentially just swapping one token for the next token. So at that point, let’s say that there was $10 million worth of LUNA that then had gone through those multiple hoops of recursive borrowing and swapping. So then now there’s a basket, which has $20 million of LUNA and $10 million of debt associated with this basket. That basket is now sliced up into, let’s say, it is 20 million chunks, so each chunk would be worth $1. So the LUNA2x token at this point would be worth $1. So you would just go to an AMM, and you would just buy LUNA2x tokens, and then they would go up, they would go down. And then when you wanted to exit the position, you just sell back to LUNA2x… I mean, sorry, from LUNA2x back to LUNA.
Right. Yeah, I totally got that. I just wanted to get a little more understanding of what’s going on in the background. If you’re cool, can I ask a second question?
Levana Protocol 1:41:39
Okay, so you touched up on streaming fees when you were referring back to Index Coop, right. And then you also touched up on the Levana token being one of the mechanisms in which you’re going to ensure shortfalls in the protocol. So can you tie it all up together? And what is the risk reward there for the token holders, and the stakers of the token?
Levana Protocol 1:42:04
So you’re talking about the LVN token?
Yeah, that’s right.
Levana Protocol 1:42:09
Okay. So LVN token, when you stake it you will have… Okay. Now we get tricky as to what is a governance token, and some bureaucracy and things like that. So initially, the LVN token out of the box will have control over the protocol. Now the protocol will collect fees into a protocol treasury. Now the protocol owners will have to vote on what relationship the LVN token will have with that protocol treasury. Now I can’t make any promises or commitments or anything like that, because I don’t know what the community will vote on. But I can say that other projects like Sushi decided to share some of the… Curve and Sushi, both payout some of the fees that are collected in the treasury to stakers. Other protocols like Maker DAO use the fees to buy and burn to make the governance token more scarce. So really, those decisions as how to connect the token to the collected fees that the protocol make, that will be up to the community to decide. Now, I’ve outlined… Actually I gave a lecture that I originally wrote as a research paper back in 2019, I was invited to speak at Ethereal Summit, which is a paper called Token Economics for Sustainable and Profitable Crypto-based Businesses. So it’s available, published by the Ethereal Summit YouTube account. So if you’re curious to hear some of more detailed my thoughts about how governance tokens can more effectively be aligned with the positive profit margins of DeFi protocols, you can see a crash course of it there by watching that on YouTube. But to talk about the downside, is that in the perpetual risk pool that we’ve outlined, they’ve created the backstop, meaning the last resort, meaning if there is a massive liquidation event so then initially the risk pool, which was denominated in UST, will be depleted. And then still if the platform is underwater, then tokens will be minted and then sold on the market, which will obviously increase the supply, which in rational markets, decreases the value per unit. And then also the stakers themselves will be the… Initially some of their tokens will be sold before the minting goes into effect. So depending upon whether you are a staker in the DAO, or whether you’re just a holder in your wallet, you’ll have different risk profiles, but that will kind of trickle down over time.
So, that insurance fund, what are the mechanisms you have set up for it to gain or build that cushion over time? How are you adding funds to it? And the slashing for your stakers? What do you have certain caps? Like for example, I think it was yesterday or the day before yesterday, when Cephii was hosting Mars Protocol, that they said it was something along those lines of a 30% slash to their stakers. So on that regard, do have some numbers that you’re working with for your stakers?
Levana Protocol 1:46:18
I mean, we are… There’s a lot of overlap, in terms of the big math heads between the Mars team and the Levana team. So until I get a green light to talk about our specific numbers, I’d rather be vague and not create a false expectations or just piss off anybody in the team. But yes, there will be limits to how much each kind of rung of the platform is depleted over time. And so we don’t have… I wouldn’t be surprised if we end up going with very similar numbers as to what Mars expressed. But I don’t want to comment further on that.
Okay, that’s totally fair. Thank you.
Perfect. Yeah, pretty insightful questions there. Thank you. And then let’s to, lastly, Crypto S. Thompson, and we’ll close after that, because I bet it’s getting late night for Jonathan where he is. [chuckle]
Levana Protocol 1:47:23
Yeah, I’m actually I’m flying out to Dubai tomorrow morning, to present on the impact of gaming in the crypto space. So I’ll be presenting at a… Speaking at a conference this week on the subject.
Crypto S. Thompson 1:47:39
Cool. I don’t want to take anybody’s time. I’m on the Levana team and it’s an absolute joy and the best job I’ve ever had. [chuckle] And so that’s it. I’m just happy to be here. And I don’t want to take anyone’s question time. So I’ll go on mute.
Cool. I actually… I think we covered most things. I think we have a few more people waiting. But I think we’ll kind of break ’cause we’ve been going on for a while. But yeah, Jonathan, that was a super detailed, as far as your background and all of the nuances of Levana. I think I’ve learned a lot today, a lot of the folks that follow here are sort of pretty hardcore DeFi folks. And so I tried to keep the conversations that I have a little bit higher technical level and not total newbie level. So I think we achieved that today for the most part. [chuckle] So thank you for that.
Levana Protocol 1:48:39
Well, thank you, it was a lot of fun. Thank you for… It’s challenging, because we have a very clear marketing direction, which for better or for worse forces kind of hand waving or hiding what I think are some of the most impressive parts of what we’re building and the thought behind it. So it’s a lot of fun to get an opportunity to kind of speak more about the man behind the curtain or the the engine under the hood.
Yeah, I mean, well, as folks like Steve Jobs have said, making things simple is actually hard. A lot of the things that happen in the background to make it look so simple is actually… That’s where the… I guess the devil’s in the details, as they say. So yeah, good luck with getting everything running and hopefully a successful launch to the leverage components of the platform.
Levana Protocol 1:49:44
Well, thank you. Thank you. It definitely is a pleasure. All right. So I’m gonna clock out now. And we’ll be in touch.
Excellent. Alright guys, we’ll catch up later.
Levana Protocol 1:49:56
Levana Protocol 1:49:58
See you, everybody, and we’ll break. Catch you later, guys.
Thanks for checking out another episode of The Ether. That was a Cephii Space, Levana Leverage Mechanics. Recorded on Saturday, February 19th 2022. This episode of The Ether was brought to you by Luart. Luart is the first gamified NFT platform built on the Terra network. Luart provides a seamless minting and trading experience all while earning you rewards just for being a user. Be sure to follow them on Twitter and join the community in the Discord server for the most up-to-date news and announcements regarding all the hot new NFT launches, platform upgrades, and new projects hitting the secondary marketplace. Are you ready to #PutYourHelmetOn and join the movement? Find out more at luart.io. This episode of The Ether was also brought to you by WeFund. WeFund is a community crowdfunding cross-chain incubator on Terra and it’s the first launchpad that implements a milestone funding release system to protect investors. All money raised for projects is deposited in Anchor Protocol and it’s refundable, and all decisions are based on community voting power. WeFund is community focused and designed to be a user friendly experience for both project creators and investors. Be sure to follow them on Twitter and join the Telegram for more information. Links are in the show notes and check them out online at wefund.app. TerraSpaces appreciates the support from all our sponsors. For terraspaces.org, I’m Finn. Thanks for listening.