Hi Fintech Architects,
In this episode, Lex speaks with Michael Egorov - Founder of Curve Finance and YieldBasis. Kicking things off about his journey from experimental physicist to founder of Curve Finance and YieldBasis, highlighting how theoretical physics concepts influenced his creation of financial invariants in DeFi protocols.
Curve pioneered fully automated concentrated liquidity for stablecoins and introduced veTokenomics, a governance model rewarding long-term commitment with voting power and protocol fees. Egorov defends veTokenomics against criticisms of unlock-driven volatility, citing that most CRV locks average over 3 years and behave like permanent commitments. YieldBasis expands Curve’s approach by offering impermanent gain strategies to counter impermanent loss in volatile markets like Bitcoin, aiming to scale toward a $50B market ceiling.
The discussion closes with reflections on DeFi token market structure challenges and Egorov’s call for protocols to connect token value to real economic flows by activating fee-sharing mechanisms.
Thanks for your time and attention,
Matt Low 🙌
Key discussion points:
veTokenomics Drives Long-Term Alignment and Token Sink Efficiency
Michael Egorov introduced veTokenomics in Curve to address short-termism in token governance by requiring users to lock CRV tokens for up to 4 years to gain voting power and protocol rewards. This mechanism has proven effective in practice, with the average CRV lock time exceeding 3 years, effectively removing tokens from circulation. Egorov notes that veTokenomics removed 3x more tokens from supply than buybacks would have, highlighting its material impact on protocol stability and investor alignment.YieldBasis Aims to Neutralize Impermanent Loss via Engineered Impermanent Gain
YieldBasis builds on Curve’s AMM infrastructure by combining two layers: a Curve pool experiencing impermanent loss, and a complementary structure engineered to capture “impermanent gain”. This dual-layer approach statistically delivers net profit in volatile assets like Bitcoin, assuming mean-reverting price movements. Egorov estimates the market ceiling for this strategy at $50 billion, positioning YieldBasis as a scalable solution for volatility-based yield generation.DeFi’s Market Structure Issues Stem from Uncertain Token-Economics Linkages
Egorov critiques much of DeFi for failing to connect protocol economics to token value. While Curve distributes fees directly to CRV lockers, most protocols (like Uniswap) have not activated fee-sharing mechanisms (”fee switches”), creating valuation uncertainty. Egorov argues that unless projects “turn the switch on” and reduce economic ambiguity, token pricing will remain volatile and fragile, hindering broader adoption and investment confidence.
Background
Before founding Curve and YieldBasis, Michael Egorov was an experimental physicist specializing in laser cooling and Bose-Einstein condensates, working hands-on with vacuum systems, lasers, and magnetic coils. He earned a PhD and completed postdoctoral work in this field before shifting gears in 2013 toward entrepreneurship.
After discovering Bitcoin, he worked briefly at LinkedIn and then co-founded NuCypher, a cryptographic privacy infrastructure, which later became part of Threshold Network. His deep technical background and physics training in invariants and systems dynamics directly influenced his later innovations in DeFi, particularly in designing algorithmic market mechanisms and governance systems.
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Topics:
Curve Finance, YieldBasis, Uniswap, MakerDAO, Convex, StakeDAO, Threshold Network, NuCypher, AladdinDAO, Athena, Yearn, DeFi, veTokenomics, AMM, Stablecoin, Tokenomics, Governance, CRV Token, Ethereum, ETH, Bitcoin, BTC
Timestamps
1’17: From Laser Cooling to Stablecoin Swaps: Michael Egorov on Physics-Inspired DeFi and Writing the “Laws” of Money
9’12: On-Chain Macro Labs: Designing Economies at Speed
14’58: Lockups vs. Liquidity Wrappers: When “Commitment” Becomes a Market for Illiquidity
18’57: Delegate Democracy on Chain: Vote Aggregators, Campaign Politics, and Why Ve-Style Governance Drives Higher Participation
23’52: Beyond TVL: Why Stablecoin AMMs “Need Less,” and How Yield Basis Targets Bitcoin’s Volatility to Neutralize Impermanent Loss
31’00: Who Earns the Volatility Yield: Wrapped Bitcoin Deposits, Market-Maker Liquidity, and the Long Runway Before Strategy Saturation
36’58: The Altcoin Valuation Trap: Why Buybacks Barely Move Prices—and Locking Can Shrink Supply
40’32: Fixing Token Market Structure: Connecting Cashflows, Killing Uncertainty, and Why “Turning the Fee Switch On” Matters
47’23: The channels used to connect with Michael & learn more about Curve and YieldBasis
Illustrated Transcript
Lex Sokolin:
Hi everyone and welcome to today's conversation. We are very fortunate to have with us today, Michael Egorov, who is the founder of Curve Finance as well as founder of YieldBasis. He is one of the original entrepreneurs in decentralized finance, is extremely technical and has a wealth of knowledge in the space. I'm super excited to have him with us today. Michael, welcome to the conversation. I want to zoom out to your background and how you got into financial markets in the first place. You started out as a physicist, right?
Michael Egorov:
Yes. That's right.
Lex Sokolin:
What did you study and what was your area of interest?
Michael Egorov:
Of course. First, when you study physics, you studied kind of generally. And then it was going a little bit into optics and stuff like that. And this optics brought me to apparently laser cooling, like making, making atoms very, very cool, using lasers to such a degree that they stop being just particles and they're merged into one giant matter wave called Bose-Einstein condensate. And that I actually was doing experimentally. So not in theory, but like in real experimental setup, which is, you know, I kind of made of vacuum lasers, magnetic coils, stuff like that. So, it was great experience, I must say. After doing PhD there, I did. I was doing postdoc in this similar area, but I at about that time, when was that 2013, I think I started thinking of both doing some company for which for and for that I was planning to go to the United States at that time. And actually, I did and I discovered Bitcoin. Well, anyway, to when I first went to the United States, I had to just get started somewhere.
I went to work in LinkedIn after that, founded a company called NuCypher, which is now known as, one of the main contributors to Threshold Network. So, they merged with Keep to essentially to essentially build a threshold network later on. But anyway, so I worked on that one till well, about from 2016 till 2000. Curve till 2020. Essentially with Curve it was actually, I would say driven by a few things. One was I looked at how staking works in well, I mean what how do Cypher works? At the time it did use staking. And I thought about liquid staking, and that brought me to the necessity to make some AMM for liquid staking. Right. So, what we know now that Curve is, is used for as AMM and for liquid staking. So that was one of the original ideas. But also, I am a user. I was a user of MakerDAO since end of 2018. And that was essentially borrowing Dai against ETH because I didn't really want to sell ease and well.
But I did notice that markets for Dai were not very efficient at all. Even if you go to centralized exchanges where it was listed. So, I thought that something needs to be done. And this all led me to making Curve, which started as an exchange to swap between the stablecoins, essentially. And that's probably the major use case for Curve today. Still.
Lex Sokolin:
I'm very interested in going deeper on DeFi, of course, but I want to just spend some time on maybe like the philosophical question upfront, which is there are many physicists and of course, more generally quantitative people that are extremely successful in finance. And I always wonder about kind of this transition between physics, which is, at least generally speaking, like observable and a hard science and financial markets, which are quantitative but are so squishy and human. What do you think about the transition from physics to economics or to finance? And then do you think about the sort of like it's in the nature of the markets versus, you know, the hardness of physics?
Michael Egorov:
I think the biggest attractive part in financial markets is that economists, they generally have no clue. And it's a lot of things are not invented in economics. And usually, physicists are able to bring a lot of insight into that area. So, like you have this way of thinking, which you have in theoretical mechanics and maybe quantum mechanics, which you can bring to, I don't know, to to build in automatic market makers. And that appears. That appears pretty good.
Lex Sokolin:
What is that way of thinking?
Michael Egorov:
In theoretical mechanics, you work out from invariants. You don't really think from, I don't know, from velocity and momentum perspective, you more think from like things like action and stuff like that. So, like invariants and you derive everything from there. And you can apply a similar way of thinking to, to automatic market making. You make some invariants. But you it's not like you discover some laws; you write laws. So, in physics you discover existing laws of physics and make some mathematical description for those in here in finance, you write your own laws for money and basically money within your little universe, within your AMM you follow these laws.
You just define these laws in such a way that you are profitable, right? So that's a kind of interesting, interesting perspective. So, you write your own laws of physics, but for money. So money follow new laws of physics. That's kind of exciting, isn't it? I don't think economists generally do that. Right. But anyway, I think I would need to describe some of my findings in some coherent way, because I didn't really explain many of them publicly. I don't know. It's like research which hasn't been done in finance, whether decentralized or not. And that does. Well, that does correspond to what I've seen in the past. I've seen. I've seen people who like, for example, I know one person who had two gold medals on international physics Olympiads, and yet he after two in some PhDs and whatever, he went to work for a trading company or another person who studied with me. Good. Got very, very good physics education and should become a professor in economics. So, it's very common.
Or I've been on some physics conference back in the days, and I've seen some physicists who turned into economics explaining how he applied theory, which is like essentially for black holes to economics. Right. So, it's just a lot of similarities sometimes. Maybe it's not like it's not that it's similar. Well, in DeFi you can also like define your own laws essentially and make everything follow these laws very strictly inside the AMM. And then you have some hard, hard ground to stand on. Yes. So, it's not really all squishy as you might think.
Lex Sokolin:
Crypto is a bit of a black hole then, isn't it, for money? What resonates is this idea that economist’s kind of describe what's happened. Post hoc. And unless you're running the Federal Reserve historically, you didn't have the opportunity to design economies. And what cryptos unlocked at scale is, you know, there's still only a select group of people who are able to do this well. But for some group of people, you can design your own economy. And that's pretty amazing.
Michael Egorov:
What cryptosystems are. They are macroeconomics essentially. So and you can design different macroeconomic systems and do macroeconomic experiments, but they don't have to last tens or hundreds of years. They happen very very quickly on chain. And you see the results immediately. And I mean, you hope that your theory is right and that the experiment will be successful. Or maybe you see that something could have been done better and you can, oh, you can iterate on a like much faster than if you if you had to design economies for new countries, and then the whole country is participating in the experiment. That doesn't really happen in reality, because it's like one probably shouldn't do that. But in crypto, that happens all the time.
Lex Sokolin:
If I go to the next thought, which is around Curve itself, we talked about how you're able to engineer these laws or these incentives and kind of applied microeconomics. Curve was one of the original DeFi projects as a stablecoin. Having, you know, avoiding the slippage that Uniswap did for being a general. Can you talk about the innovations that Curve brought to market in particular? You know, maybe this idea around stablecoin to stablecoin, the idea around the clogged model and the bribing wars. Like, what are those mechanics?
Michael Egorov:
The stablecoin to stablecoin AMM was essentially the first concentrated liquidity on the market, I think. So, at the time, I did realize the way which resulted in which led to creation of Uniswap three, but I thought that maybe it's better if liquidity doesn't get crafted manually, but it's like fully automated. And I think Curve is still into fully automated liquidity provision, not in like manually crafted liquidity. But anyway, Curve was the first concentrated liquidity, I would say later when I felt the urge to fully decentralized, to fully decentralize the like all the Curve. Right. I saw that one token, one vote is kind of a silly system, so I thought that maybe we can do better. So, I figured out this veto economics. And the main idea is that you like, if you if you get governance rights in the protocol, you probably shouldn't be shouldn't be able to leave this position too quickly.
So, you should be invested in your decision. Right? So, you and for that you lock your CRV tokens, you get the CRV voting power. And this power decays towards the unlock. So, your voting power is essentially the product of your tokens and the time left before you can unlock and move the tokens around. So, if you can move the tokens around like a second later, then maybe your voting power should be near zero. And if you are invested in the protocol, then yes, then your voting power is big. So that was the idea. And I did it for Curve with vetokenomics. And that proved to be fairly good. Well, if governance was the only function of the token, that wouldn't be very good for users. So, we thought that maybe we need to do fee distribution to those who've locked tokens. So, if you are invested in the future of the protocol, maybe you should get something from it, which is fees from the protocol. And that appeared to be also very good. But I think you also mentioned the buy in the votes or how people call it bribes.
Lex Sokolin:
Maybe we'll pause here for a second. The way I interpret it. Right. Like there's a big problem with market structure. And I want to talk about that later. But there's a supply and demand of a token. Lots of people are very short term oriented. So, if they get a token as an airdrop or from some sort of activity, they want to convert it into, let's just say a more fungible currency. And so, unless they get paid for not converting out of it, and they can do that in what you described by trading duration or trading illiquidity for the power to control markets in Curve. And that means sending rewards to different pools and kind of changing returns in different pools, or by getting some sort of yield and return. But end of the day, you're still left with two problems. Number one is yes, there is some portion of the token that's going to get locked up. But now, you're kind of introducing sort of like a random walk of unlocks into your token price, which means that like there's going to be big chunks of selling or unlocking and selling like at random times, depending on people's desire to govern or not.
And these incentives. And then number two is the derivatives issue. Right. Like because you're telling people to put stuff in a box and then you're saying the box isn't going to get open for this much time. And then as we've seen with liquid staking, what happens is that somebody just takes your box and puts it into a different box, and then it's the other box.
Michael Egorov:
Yeah, that makes sense.
Lex Sokolin:
How do you think about that? How do you deal with it? Is there a way around it or does it just not matter?
Michael Egorov:
Unlocks I didn't see that being a big problem because the average lock time for CRV tokens in the CRV is larger than three years anyway. Right. So, there are not too many unlocks actually because like people, if they have lock pending at some point, if they don't extend their lock, then their returns and the voting power, it gets diminished towards the end lock. So, they extend the lock. And most of the people prefer lock tokens to stay locked.
So, they are. I don't know. That's it. They are practically locked forever in most, most cases. I mean, of course they can stop extending the locks and wait for like four years or whatever and get the tokens unlocked. But in reality, not too many people do it. So, this doesn't appear to be a problem for the market. I mean, much less of a problem than, I don't know, than cliffs, for example. But with the liquid, the derivatives, that's a problem. More interesting question, because if you imagine a liquid derivative, then you either give your voting power to someone else, like in a convex case or in stage door, you still have some voting power with your derivative. And then the question is, doesn't it circumvent the original purpose of locking? Like you, in principle, you don't have to be that much invested in the protocol. And that's that was my original thinking. But it appeared to be that it's not that simple.
If you have a wrapper, then liquidity of this wrapper isn't necessarily very huge, so you cannot expect the wrapper to be to be on tag forever, or to be able to absorb like a big selling power. If you are aware of who wants to exit and you still you still trade for a liquidity essentially, right? So, you get like revenues, you probably get some voting power, but in exchange you still get liquidity. It's just different liquidity instead of just a straight block. You may get market-based illiquidity with wrappers.
Lex Sokolin:
Shallow markets. Right?
Michael Egorov:
Yes. And that appears to be acceptable. That appears to still be I would say, keeping, well, keeping people somewhat invested in earlier decisions when they vote.
Lex Sokolin:
In the old world of finance, it reminds me of who votes equity decisions for large companies. Right. Like in, let's say, Apple or Microsoft or Oracle. Like who's actually going out and voting? And so much of the ownership of these companies is in a huge Blackrock index fund.
And the Blackrock, you know, index fund managers don't care to vote board issues because they are conflicted. They, you know, they own Microsoft and IBM and Oracle. And so, what they do is they hire a tiny company, I think like a 500 million market cap company that's been sold and bought by every exchange group around. I think it now sits with Deutsche Bourse and it's called the Institutional Share Group, I believe. Or something like that. And it's just, you know, one shop that goes out and votes on all of the board issues, all of the shareholder issues, and they have policies and they do it on behalf of large holders of financial instruments. And, you know, way you mentioned stakeDAO and so on. The pattern is really similar.
Michael Egorov:
Not quite because on stakeDAO and on convex. Yeah. Maybe why urn is exception for now. But you have voters inside the protocol whose votes are split into Curved votes. So in convex you need the CV holders to, to vote.
And then their votes are votes are casted to Curve. In stakeDAO it's a little bit trickier. You have to have SDCRV but you can have votes amplified by VeSDT right. So, you if you are invested in both stakeDAO and wrapper then you have voting power somehow bigger. But anyway, you still have votes of participants split into Curved votes. So, you don't actually have one large body voting. You have votes of participants of those ecosystems voting. So, you still have some sort of, or while you still have this have decentralization. It's just, well, how to say might be maybe a little bit similar to like representatives of different regions, but maybe not, but maybe not exactly. But anyway, you still have decentralization. You still have Democracy. It's not like everyone delegates to one entity and doesn't care. It's quite opposite. And I would say if you want to get down to vote on your proposal, you need to campaign around it. It's not easy. Like it's not like not an easy thing. Pretty stressful, I would say, but it's if it reminds something, it probably does remind elections.
Lex Sokolin:
Who are the market participants that routinely drive for voting? What's the shape of the entities that care about this?
Michael Egorov:
Well, I mean, you have big projects. Well, you have individual voters, of course, a little bit. You have large projects like Convex, StakeDAO and why earn some voting power in stakeDAO well and also supposing power in convex is going from projects from AladdinDAO. And I think there are a few others. And really, I mean it's an interesting landscape. It's like not even easy for me to grasp. But it's like it's not artificially made. It's just naturally appeared. And I'm just trying to learn it. But I just define the rules and then something grows on top of these rules and you're wondering, oh, what is this? And trying to work with that. But, you know, rules are the rules.
So yeah, it's just fascinating how establishing some rules leads to growing of something which you like. Couldn't even imagine.
Lex Sokolin:
Wolfram's a sort of game of life.
Michael Egorov:
It's very this landscape of voters is changing all the time, actually. Right. So yeah, I mean voters in convex or in stakeDAO can really change over time. And what you knew about voters maybe a year ago or two years ago might be not the case today in. But it's still very interesting. But again, it reminds me, countries and elections, not really companies. And what fascinates me is when you introduce a Vetokenomics rather than one token, one vote like voting shares in companies, your quorums in DAO are much larger somehow. So, for example, the vote to give to essentially make a credit line of code used for yield-based system like the recent vote got 93% quorum, which is insane, I think. And the in systems where you have one token, one vote, you often see like 5% quorums, and it's a huge difference.
Lex Sokolin:
Let's open up just some of the business terms around it before going into market structure. Can you talk about the size that the Curve arm got to and the size that the Curve token got to, and then maybe use that as a transition to YieldBasis and how that project came around.
Michael Egorov:
Right, right. Well, if you judge by TVL Curve TVL, actually it was very huge in around the end of 2021. It was like 25 billion, which was the biggest DeFi project at the time. Right now, I think it sits, just above, turbulence for some time. And I think the reason was that market probably realized that stablecoin AMMs are efficient, and you don't necessarily need a whole lot of liquidity to support the market. And of course, you have many stablecoins, but not overly too many. And, well, it appears that probably this TVL is enough to hold stablecoin market and, well, maybe a market of staked ethers and so on. But I think with yield bases, I started pushing into a volatile swaps territory and we will see where we will end up.
Lex Sokolin:
Yeah. So, tell us more about YieldBasis. And I guess kind of to unpack your point. The 2 billion in TVL is effectively the liquidity pool. That's sufficient to get all that transaction volume through for stablecoin conversions and for ETH and staked ETH conversions. If you have 10X the volume, then you might have 10X to the TVL. But the factory is efficient. Now comes Bitcoin, right? Like over the last two years Bitcoin has been the big success story in terms of capital appreciation not so much in terms of for smaller tokens. So, what does YieldBasis do and how do you think about it.
Michael Egorov:
In 2021 I introduced a crypto swap. And what it actually is, it's like, this automatically managed, concentrated liquidity. The main idea was that you have some background liquidity, which is a little bit like Uniswap too. And you have some parts which is concentrated and automatically managed. I worked out through these invariants and all the all the cool stuff, which reminds theoretical mechanics to how to manage concentrated liquidity to cause.
No losses. Right. Well, no losses compared to what? Compared to Uniswap v2 actually. But anyway. And of course, the idea was that concentrated liquidity probably should make a man performing a little bit better than not concentrated. And it was. Well, it is true to some degree. Right. So, you can get April maybe twice as big as, as Uniswap v2, but used to have impermanent loss and it is still the same. I mean, in Uniswap three, by the way, impermanent loss is typically larger because you manually manage your concentrated liquidity, and if you leave it at the same place, you actually have your impermanent loss higher than Uniswap v2. But if you have your concentrated liquidity automatically managed, then you can have impermanent loss, essentially exactly like in use of two while having concentrated liquidity. But it appears to be not good enough because let's say let's take bitcoin right. Bitcoin price appreciated what like four times right. So, like from 20 K to 80 K essentially.
But and when it appreciates four times then if you put it in whether it's Curve crypto swap or Uniswap v2 or whatever versus USD, then your liquidity appreciates only by a factor of two. Right. And you think, okay, well, maybe it's not too bad. But if you think about it, if you take this same Bitcoin and, I don't know, sell half of it for USD and then they do nothing and Bitcoin appreciates four times, then your liquidity. Well liquidity which is not working as liquidity would appreciate 2.5 x compared to two x which you have in Uniswap 2 AMM or in Curve AMM, and of course, on top of that, you earn fees. But overall, these fees be larger than the 0.5 difference between them. And it appears that no, it's actually this these fees. They will not necessarily be larger. And many people think it's a loss, but actually it's not a loss. It's just, you know, just what the property of the bonding curve. But you can essentially you can change the shape of the bonds and curve back to a straight line, and you actually can get rid of it, although it's not free.
But nevertheless, it appears that you can go back to pricing like Bitcoin and have some profit on top earned in. Even after you paid all these expenses of like transforming the bonds and curve back to the straight line and that's what your basis is doing. It's basically having an AMM which has impermanent loss. Right. It's putting that inside another. Which has what I would call impermanent gain and impermanent loss and impermanent gain together cancel out and you have just Bitcoin price plus some fees if you earned them. But well, the problem is that you have expenses on doing this impermanent gain thing essentially, and you're not guaranteed to have that profit after that. But it appears statistically that you do have net profit with if volatility of the asset is high enough and good enough. Right. And Bitcoin still has this volatility which is good enough to earn something. And I think for Ethereum it's also true. But you need volatility profile of the asset to be I would say good volatility right. So, you want asset price to be sort of returning to some trend line, more or less.
You probably saw like Bitcoin in the recent in like recent few weeks, jumping up and jumping down and jumping up and then again jumping down. So that's essentially what you want. Right. You know, it can its price can drift over time. But these up and down movements they should make some profit and they do. It's just you just need to manage liquidity so that this overall price movement doesn't screw them up. And that's what essentially YieldBasis does.
Lex Sokolin:
Who is the customer for YieldBasis. And what are the markets in which kind of this volatility is realized in simple terms like is it YieldBasis is going out and participating in markets, or is it the venue itself? And then who is the ideal customer user.
Michael Egorov:
Well, YieldBasis creates liquidity. I would say this right. So, if there are there are traders who exchange in that AMM. But your basis creates liquidity by a combination of Curve pools and YieldBasis. So that's in a sense. YieldBasis takes a market maker role. But people who deposit funds in the YieldBasis then I think want to earn some yield on their bitcoin essentially. Right. Or I mean ether and Ethereum will be added.
Lex Sokolin:
And so are there any technical challenges in terms of going cross-chain.
Michael Egorov:
I mean, you don't really have to introduce cross-chain as inside the protocol itself. I mean, it can be deployed on other chains for sure. Right? But you don't really need to introduce, hopping between chain chains inside the protocol itself because like, it's unnecessary complication, I think.
Lex Sokolin:
From a user perspective, what's the flow? Do I show up with bitcoin or do I show up with wrapped bitcoin or like.
Michael Egorov:
What's called a wrapped bitcoin? Yeah. You go with what bitcoin and deposit and that's it.
Lex Sokolin:
And so, I think today it's sitting at a couple of hundred million of TVL. What do you think is the market size. That's likely for the protocol.
Michael Egorov:
Yeah, that's a good question. It's like how is it best to grow it. But from the perspective of like from Bitcoin volatility perspective like wearing money from volatility essentially. Right. And the question is when that would saturate. Where will the yields saturate. And I think they tried to estimate I think it's somewhere maybe somewhere around 50billion or something. I think that's where we will start seeing Saturation. We're a little bit far from that, though.
Lex Sokolin:
Yeah, I think that's like 10X the size of the rapid coin market, right? Yeah.
Michael Egorov:
Yeah, yeah. So, it's still kind of a long way and it's still in its baby mode, I would say. But YieldBasis already created biggest Bitcoin wrapped Bitcoin pulls on chain. That's kind of insane actually. But yeah, it's but the size can be 100 times bigger. And it's eventually.
Lex Sokolin:
Yeah, I mean I remember talking to the Athena team very early on in their journey and asking like, what do you think is the maximum size of that strategy? And they said, around 6 billion. Everything starts to break, you know.
Michael Egorov:
Oh, oh, oh I think they are still correct in terms of order of magnitude. Right. So, like their size is limited to the market. You can get in like a farm in shorts, essentially. Right. So, you are limited by the amount of loans on the market. Right. And I think they estimated from that at the time, maybe it was six billion, but you know, it doesn't stay constant. It can totally grow by factor of, you know, two, three, five. But it can squeeze by the same factor. That's totally expected. So, they haven't been wrong. And here like plus minus half an order of magnitude are definitely can happen. It's not something unexpected at all. Right. So, I think that's kind of the case here. Well of course this the size of this market can grow with the asset appreciating in price. So, becoming bigger. That's possible. It can grow by introducing more assets. So, it's, that's also possible, but I think you get the idea that 50 billion size I thought of was pretty much for Bitcoin. But of course, we all know that you know, Bitcoin will become the world's reserve currency and the hyper bitcoin-ization will happen and so on. So, we all believe that.
Lex Sokolin:
We're all driving on the road and hopefully there's not a wall in front of us.
Michael Egorov:
Right. Right. And yeah. And we all believe into the future introduced by Satoshi.
Lex Sokolin:
I want to land us in a somewhat complicated topic. You have a lot of hands-on market experience in DeFi, and the question is going to be around tokens in general. Maybe I'll call them equity tokens in the sense that tokens that function like shareholder rights or economic rights over a protocol. And I think, you know, especially over the last 2 or 3 years, there's been sort of disappointment for crypto investors, myself included, in that. While we've had very strong interest in markets in Bitcoin, there's been a bunch of market structure issues around altcoins or project tokens or, you know, longer tail assets more broadly, whether it's, you know, Curve or Athena or other assets, you know, they are not priced in a predictable way, like equities, some of the sort of like revenue to market cap valuations are pretty dire.
And at the same time, they're sort of these unlocking or vesting schedules in a lot of tokens, which create selling pressure even when the projects are strong. You've been public around having your personal balance sheet of Curve locked into different borrowing protocols and then, you know, using that capital on supporting the price and things like that.
Michael Egorov:
Well, actually, I didn't do anything special for affecting the price. It's actually for me, it's a little bit of an unknown thing, how protocol builders can directly affect the price so that's like something I've never done.
Lex Sokolin:
Absolutely fair. Maybe I'll point into hyper liquid. Right. And the use of protocol revenues to buy back the token with the story. As if that affects the price.
Michael Egorov:
Yes. But the direct buybacks, they play a great very, very small by pressure. Really.
Lex Sokolin:
Yeah. I mean if you look at the numbers, it's just, you know, throwing 40 million in per year into…
Michael Egorov:
Yeah, it's absolutely nothing. And I think it's more of a combination of people believing that buybacks is something affecting the price and price manipulation. But if one just does buybacks, it doesn't do anything. I think it's all price manipulation really.
Lex Sokolin:
And this is like small floats of tokens. And then yeah.
Michael Egorov:
I don't know how it's done though.
Lex Sokolin:
Yeah. This isn't the direction I'm quite trying to go into.
Michael Egorov:
What I'm trying to say is that of course buybacks do connect economic value of the system to the token value. If it's buybacks which go back into projects Treasury, then there is a possibility that these tokens will be sold on the free market in the future. So that reduces token velocity but that doesn't reduce the supply. And the market reacts on that one way. Right. It could be bought back and burn when tokens are bought from flea market. They disappear from circulation. And when they are burned, they disappear from circulation forever. Right. So that's a different story. And in principle, it should be more efficient.
But I mean, at the moment of buying, it's the same buying. But psychologically people realize that these tokens will never come back to the market. And of course, there is a vetokenomics where the tokens. Well, people see the fees they can earn in the protocol or like they can sell their votes or whatever. And for that purpose, they buy tokens and lock them in. Like, is it directly or in wrapped Vetokens or whatever, and that removes those tokens from circulation in principle. Doesn't have to be forever. But practically most of these locks, they do happen forever. And we've seen that at least in the first several years. Locking of CRV tokens removed three times more tokens from circulation than buybacks would have done.
Lex Sokolin:
Yep, that makes sense. And I think in many ways, you know, it's like we talked about microeconomics and managing an economy in gaming. You would talk about, you know, sinks for the virtual currency and you're sort of end of the day, it's supply and demand.
Michael Egorov:
But there is also an issue of human psychology. And, well, some people think it's very bullish when tokens burn. Right. So, buybacks and they create very good sentiment. Maybe or well, maybe this sentiment is raised artificially, but here we are. People do believe that burning is something very bullish. Also, I think that free markets are very irrational. They can misprice tokens easily by a factor of ten either way or by a factor of infinity. If you think about midpoints, the fair price is zero and yet they are traded above zero right. So, they are infinitely mispriced.
Lex Sokolin:
Yep. But I think you kind of add up all these different sinks where you've got, you know, for a while I remember there are many chains where just staking the thing led to 80% of the coins being staked. You know, ETH, I think is only 25 to 35% staked. And then you have the sort of like governance and fee driven staking with the Ve mechanics, and that can add a bit more.
Then you might have some sort of alchemy around, you know, buyback and burn from the protocol revenues, although nobody's making really enough money to deal with sufficient volume, you know. And so, we've tried all of these different incentives, and it still feels like a whole bunch of the market structure is just broken. Like, it feels very fragile, like token valuations. Do you have any thoughts around this question of between the large centralized exchanges and the decentralized exchanges and sort of like all these experiments of incentivizing people to hold and these like selling overhangs of investor tokens and team tokens and so on, like it doesn't seem to be enough. Like, what is it as an industry that we can do to try to address the market structure question such that, you know, regular people who are buying the tokens of projects they like have a better investment experience.
Michael Egorov:
It's anyway going to be in such a way that only long term, like very long-term participants will like, truly realize the value of the token.
But here we have a problem. Like in the Curve. We do have all the economics connected together. And of course there are risks like a bell curve, be like would Curve have its place in the future. Will it be bigger? Will it be smaller? What will happen in the future with the project itself? That is of course, some sort of uncertainty which can be interpreted either way for the token, like either up or down. But at least economic value is connected. So, you have fees go into like to the CRV token lockers. And with projects like Uniswap you have another uncertainty. You have fees, but like you don't have admin fees. Which fees switch on. And then there is an uncertainty whether Uniswap will at all. Turn the fee switch on. And another uncertainty, wouldn't it. Like. What is the profit and loss margins people are operating at when they're LP on Uniswap and wouldn't admin fee? Que all the incentives to provide liquidity on Uniswap and that's another uncertainty.
It hasn't been done. So it's an uncertainty. And most project didn't truly turn the fee switch on and turn it by turning fee switch on, I mean that value goes back to not token holders or token lockers or whatever. Not getting collected somewhere, but actually goes back to the people. That is not happening in these projects. And like if you don't even talk about general public, if you talk about someone who analyzes deeply these projects, they just cannot analyze. They cannot predict, like whether these projects will do it and or how turning these, which would affect the performance of the projects themselves. And in traditional finance you. Well, I think everything started with dividends. Right. And then of course, there are companies who don't yet distribute dividends. They invest back in growth. They introduce a little bit more, more of uncertainty. But I think it's still less uncertainty than in decentralized projects, especially when a project makes a token. and didn't quite figure how they make money.
For those who have the token and then if they have some earnings, they use it just to build a project. And then they sell out the company and the token is thrown away out of the window. Right. So, and that is probably the worst scenario which is, which is still successful for I don't know for the team, but definitely not a good one for those who purchase the token. Yeah. So, this is things like this. They introduce uncertainty. And I think another problem is that the general public, they don't really think so deeply that they don't really analyze that deeply. And they think all the projects are the same. So, if that project doesn't perform well, maybe the whole category doesn't have to perform well, and then they well, then hype waves appear like with meme coins. So, people invest in meme coins because they grow and the whole category grows, and then it crashes and everyone is disappointed. But I think you need some good foundation, which you can analyze. And I think you can have it with DeFi, but you do need economic systems to be to be fully connected.
Lex Sokolin:
Difficult question. I think the only thing we can do is just continue to work through it.
Michael Egorov:
Now I can build. Yeah. And I think we just need more projects to turn the switch on. And of course, it can be good, it can be bad, but we will remove the uncertainty.
Lex Sokolin:
Yeah. That's the experimental part of it. Michael, thank you so much for joining me today. If our listeners want to learn more about YieldBasis you or Curve, where should they go?
Michael Egorov:
If you want to learn about Curve you go to Curve.Finance and you have a bunch of links on the bottom of the swap page, essentially, so you can go through those on YieldBasis. You can go to yieldbasis.com and well there are plenty of lines of links like documentation. You can go chat in community as well and ask questions. So yeah. And I think in both projects most active discussions with community are happening on telegram.
Lex Sokolin:
Fantastic. Thank you so much for joining me today.
Michael Egorov:
Thank you. Very thoughtful discussion.
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