Bo Zhang from Function on Institutional Crypto Trading & Yield

[00:00:00] Bo: Active management of a treasury in my mind is figure out how to generate yield and deploying that yield and reinvesting it to grow the treasury even more, right?

[00:00:09] Bo: You essentially want the yield that you're making to actually cover your outflows. That's when you've achieved the golden state of treasury management, is that you can continue to grow the assets in the treasury and pay for your expenses, using the yield that you're making. 

[00:00:26] Umar: Bo Zhang began his career at JP Morgan helping manage over $500 billion in client capital. He then joined Fyde Treasury providing on-chain investment solutions for crypto treasuries.

[00:00:38] Umar: At Odos, he served as Head of Treasury and Trading, optimizing DeFi order routing, and today he's the COO at Function building institutional grade infrastructure for Bitcoin DeFi.

[00:00:51] Umar: Bo what's the difference between loan based market maker and retainer based market maker, and which one do you recommend? 

[00:00:58] Bo: With the loan based market maker, you're basically giving the market maker a loan of your tokens.

[00:01:04] Bo: The market maker sets certain strike levels and say, okay, if your token price trades above that, we get to keep a portion of your token, right?

[00:01:12] Bo: Retainer based market maker is you give the market maker the cash to deploy on the exchanges themselves. And the market maker, just make sure that there's enough depth within certain spread levels, right?

[00:01:23] Bo: Really? Which one is better? It depends. If you have the cash, go with the retainer based market maker, right.

[00:01:31] Umar: Welcome to The Accountant Quits Podcast, where we help accounting and finance professionals learn how to manage a business using crypto.

[00:01:39] Umar: Bo Zhang is also one of the instructors in our upcoming course, the Crypto Treasury Management Academy, launching on October 29th designed to help web3 finance professionals learn how to optimize, allocate and protect their organization's treasury.

[00:01:56] Umar: In this episode with Bo, we discuss

[00:01:59] Umar: risk management frameworks for DeFi treasuries, active versus passive yield management, how to work with market makers, derivatives and hedging, the rise of Bitcoin DeFi, and more.

[00:02:14] Umar: Why are web3 organizations with massive treasuries not doing active treasury management?

[00:02:21] Bo: So people are afraid to take action because they're not the subject matter experts, right? It's like asking someone to go drill for oil when they're a painter.

[00:02:36] Umar: Bo welcome and thanks for making the time to be here. 

[00:02:39] Bo: Thanks for having me Umar I appreciate it. 

[00:02:44] Umar: I'd like to start with your background. Sure. So could you share with the listeners, a little bit more about your experience transitioning from JP Morgan into web3 a few years ago? And maybe what your role entailed working at Fyde and Odos?

[00:02:59] Umar: Then we'll speak about Function a little bit later on. 

[00:03:03] Bo: Sounds good. Yeah, so I was on Wall Street for quite a few years, right. I spent a lot of time at JP Morgan. Most recently there, as you mentioned. Yeah, I was a multi-asset Portfolio Manager in the Chief Investment Office.

[00:03:14] Bo: I think across the desk we ran half a trillion bucks and I traded equities, bonds, currencies, commodities. I was also focusing on crypto research for a bit when I was there as well and out our JP Morgan private bank, we ended up launching the it was one of the first private funds for Bitcoin actually, that was offered to ultra high net worth clients on the street at the time.

[00:03:37] Bo: So back in 2021, I realized, I started knowing more about crypto than the actual stocks in my book and realized, you know what, it's probably a time to pivot over. 'Cause also, I'd been following the crypto space since 2014, right? I've been like buying, researching, et cetera.

[00:03:55] Bo: And following the whole cycle of DeFi summer, right? 2017, 2018 bull run and, you know, the subsequent crash. And, yeah. At a certain point, 2021, my interest just laid light laid, a lot more in the crypto space, right. Than they did in traditional finance. So I made a jump over.

[00:04:14] Bo: When I made the jump over, first started off with Fyde, which is a company that me and some mates started. We started off focusing actually on crypto treasury management. Right? We wanted to create like a, almost like an on chain exchange fund for crypto assets. But we quickly realized actually that like there wasn't a one stop shop solution, right?

[00:04:39] Bo: And you can't take that approach for crypto treasury. So we ended up pivoting into more of very hands-on in the weeds working with individual crypto treasuries as well as building simulations, right? Like agent-based simulations, on chain simulations, stress tests, et cetera. So we did that for about three to four years.

[00:04:56] Bo: We worked with a lot of different treasuries. We worked with some of the largest protocols in the space, and then after a certain point, I wanted to dive more into a single project, right?

[00:05:06] Bo: Instead of what we were doing before, which is working with, call it one project for three months, four months, pivot, move on to the next and rinse and repeat.

[00:05:14] Bo: I wanted to just stick with one project and work with them, right? And that was Odos. Right. So I joined as their call it Head of Treasury and Trading, helped them set up the entire token management infrastructure, the DAO treasury infrastructure, right? How do we think about generating yield across the various assets that we have?

[00:05:33] Bo: Worked with them on market making, right? The whole nine yards. And then, yeah, and then now the team at Function has asked me to join them as initially it was Head of Institutional Strategy. Now it's gonna be COO. So, I'll be joining them as CO in the next week or two and that'll be super exciting.

[00:05:50] Umar: Okay, I'll change the role then when we market the podcast. 

[00:05:55] Bo: No worries. Titles are just in flux, man. This is crypto. Things are in flux. 

[00:06:00] Umar: Yeah. Yeah. So like I mentioned in the intro for the listeners, Bo is also one of the instructors for this new course that we are launching. The Crypto Treasury Management launching on October 29th for that will run for four weeks.

[00:06:14] Umar: So in this episode today, I actually want to touch on some of the topics Bo will be teaching, sort of a teaser to the actual course, and the first topic I wanna touch on is crypto risk management frameworks.

[00:06:28] Umar: As at the time of this recording, the TVL in DeFi is approximately $146 billion.

[00:06:34] Umar: Now investing in DeFi, of course, you'll have the usual credit and counterparty risk we see in TradFi, but arguably the biggest risk here is smart contract risk. In traditional finance, we do have rating agencies like Moody's or Standard & Poor's that assign risk scores, right? They provide this standardized framework.

[00:06:53] Umar: In DeFi, as far as I know, there's still not that real equivalent. So from your experience as Head of Investments at Fyde, where you had been stress testing different DeFi protocols, can you actually walk us through how that process looks like and how do you assess whether like a DeFi protocol is high risk or low risk?

[00:07:13] Umar: What metrics or indicators matter here? 

[00:07:16] Bo: Yeah, no, that's a really good question, man and I think, as the ecosystem matures, right, we're gonna see more and more of these type of risk stress testing methods pop up. I don't know if you saw this, but Sky Protocol formerly now has Maker DAO actually just got a credit rating right from S&P.

[00:07:36] Bo: They came out a B-, right? But it was their first crypto project to have actually gotten a credit score, which is I think a fantastic move forward for the industry. There are certain credit rating systems, right, that folks use internally. So to your point, the only industry wide one that I can think of is Credora.

[00:07:57] Bo: They, it's like a crowdsourced, right credit rating method. A lot of funds have their own like internal rating mechanism, right? So like Galaxy Digital has their whole rating scheme that they published. Re7 has like a rating scheme as well. I think it's called the DeFi Risk Index.

[00:08:14] Bo: But most of these things aren't super public. Right. And so for the general public, it's like how do you actually validate the risks that you're taking on when you're deploying to your protocol? There are several layers here to really consider, first things first, right? And like, this is kind of the stuff that we identified as well, is you go through the actual audits, right?

[00:08:34] Bo: Like, obviously most people can't read smart contract code. I can't read smart contract code, but I can tell whether or not a project has been audited by a good audit company. Right, and the extent of that audit. And so if you think of like the tier one auditors out there, right? Spearbit guys, like Zellic, killer B's, right?

[00:08:51] Bo: If you see one of those audit companies on the projects, audit sheet, then all right, like chances are right, they're a more serious project and they're happy to spend a lot of money on getting good outta it. So that's call one prime example. Another one is if the project founders are actually doxed, right?

[00:09:11] Bo: Like who are the people running the project? These are, I would say kind of like the base level things that you can and should do, but I think as projects evolve in complexity. It actually becomes more important to conduct more thorough stress tests, right? So what we do and this is obviously not everyone can do this, but what we do is we actually take a protocol and we will drop it, right?

[00:09:38] Bo: We'll just copy, paste the entire protocol and drop it at a historical point on the blockchain, right? Call it Ethereum network. And we'll create either A, a lot of different agents that have a common behavior to try to break that protocol, or B, we'll create a sandbox environment to see what the protocol, how the protocol would've behaved during those market conditions.

[00:10:09] Bo: Right. And to me, like that's the actual, that's the best way to actually stress test a project, right? Because then you can say, all right, I wanna take Hyperliquid now I want to assume that everyone is gonna go short this one token, or everyone is gonna go long this one token. And I wanna take into account how much money Hyperliquid is making, right?

[00:10:25] Bo: How many users are interacting with it? How many unique wallets, like the average size that the wallets are depositing into the protocol or are placing on a bet or a trade and then just see what happens, right? Like you're literally testing the worst case scenario using live figures that the project has actually experienced, right?

[00:10:48] Bo: So to me, this is the actual, like true is in the best way to stress test a project.

[00:10:54] Umar: And so for the listeners, the project that Bo mentioned earlier is called Credora, so C-R-E-D-O-R-A. You can check them out at Credora.Network and I think you mentioned Re7 Capital as well has come up with their own like DeFi Risk Index. That's right.

[00:11:14] Umar: I wanna move on to another topic and I should have mentioned this earlier, but nothing in this episode of course should be taken as investment advice.

[00:11:25] Umar: Now, over the past four years, you've worked with a range of web3 companies. Yeah. Each holding different percentages of their treasury in fiat versus crypto. 

[00:11:35] Umar: A lot of DAOs, for example would hold a hundred percent of their treasury in crypto. Now many of our listeners, they're working on project that hold large amounts of stable coins, or native tokens like BTC, ETH, SOL, and from my conversations with those finance professionals, a lot of them are not really doing active treasury management.

[00:11:56] Umar: Now, a lot of these web3 startups, they've got like small finance teams. Sometimes it's literally one person handling everything from operations, payroll, monthly reporting and on on top of that, they're now expected to also dive into DeFi protocols to look for yield.

[00:12:13] Umar: Based on your experience, how common is it for web3 projects to have a dedicated treasury manager actually doing active treasury management? 

[00:12:22] Bo: Oh man, it's so rare. It's so rare and there's so much money just left on a table because of it, right? If you're a startup and you got $4 million bucks in the treasury, right?

[00:12:34] Bo: You're newly funded, you're burn rates a million bucks a year, right? For example, ByBit right now has a private wealth management program where you can earn 20 to 30% on stablecoins at a three month lockup, and the max draw down is like one 1%. Now obviously everyone is a bit PTSD from FTX and stuff.

[00:12:54] Bo: But what we saw with ByBit earlier this year was like a proper stress test. Yeah of all of their systems when they got hacked and they recovered like that, they just bounced back and if you dig under the hood of some of these strategies, like these aren't a UST type of strategies

[00:13:08] Bo: Where like it's created by some weird bonding system and then that when it depegs, it's over. This is actually just trading to capture market dislocations, right? So the things that a quant desk at a hedge fund or a quant desk at a asset management shop would do, these are the strategies that are being run by some of these exchanges, right?

[00:13:30] Bo: In order to deliver yield. And if you're a startup, for example, right? Going back to $4 million, right? And then your annual burn is $1 million, put $2 million to something like that. Yeah, making call it 20%, right? That's 400k per year. All of a sudden, your runway extends from four years to six or seven years, right?

[00:13:54] Bo: You're literally making six months worth of burn every year, right? So the fact that a lot of these resources go completely underutilized is mind boggling to me and same with assets on the balance sheet, right? Things like Solana, things like Ethereum, these assets should be staked, right? Same with Bitcoin as well, right?

[00:14:16] Bo: This should be put into some sort of yield generation mechanism because the difference between an asset that's growing in extra 5% a year versus an asset that's not right. After, again, going back to the four years example, you now have an extra 25% in value in that asset and that's, and people just aren't capturing this.

[00:14:38] Bo: They're just letting it slip. 

[00:14:41] Umar: Why do you think that's the case? That these assets are remaining idle? I mean, those projects I spoke of, they can be like very large foundations with like massive treasuries. Because what does the role of active treasury management actually look like? I mean, do these people have to, I mean, staking, they can just stake it and that's it.

[00:15:01] Umar: They don't have to do anything. 

[00:15:03] Bo: Yeah. Oh, for sure. I mean, look, so to answer the first part of the question, right? I think there's the bias of if you don't do anything and like you miss out on gains, it's a lot better than you doing something and then blowing up, right?

[00:15:20] Bo: So people are afraid to take action because they're not the subject matter experts, right? It's like asking someone to go drill for oil when they're a painter.

[00:15:31] Bo: They're kind of be like, wait a second. What am I doing here? I'm afraid I'm gonna hit like a land or like an electricity line or something like that, right? It's not one-to-one. But if you have somebody who actually has like a finance background or like trading background or something like that, right?

[00:15:47] Bo: Stepping in and observing the opportunities and then evaluating the risks and rewards. All these different opportunities, You can be a lot more effective with the capital that, that you have on hand. So I think that's why a lot of these projects aren't doing too much stuff with it, right? They're not subject matter experts or they don't have one in place.

[00:16:10] Bo: And they're afraid that if it blows up right, then obviously that's game over and they're at fault. But if you know what you're doing, like it's not gonna blow up. Like you put into very safe strategies. Or just like Ethereum staking, odds are most likely 99.9%, it's not gonna blow up.

[00:16:29] Bo: Now the second part of your question was like what does active management of a treasury actually look like, right? Active management of a treasury, in my mind, right? When it comes to the actual asset allocation component of it is figure out how to generate yield and deploying that yield and reinvesting it to grow the treasury even more.

[00:16:47] Bo: Because the ultimate end goal that you want to achieve if you're running a treasury is call it liability management, right? ALM, right? You essentially want the yield that you're making to match the duration of your outflows and to actually cover your outflows.

[00:17:03] Bo: That's when you've achieved the golden state of treasury management, is that you can continue to grow the assets in treasury and pay for your expenses using the yield that you're making. Some projects like Mantle for example, they make like 30, 40 million bucks a year from their treasury.

[00:17:20] Bo: Granted, they have one of the largest treasuries in the space, but still it's, it goes to show what you can generate if you actually put the assets to work versus just letting it sit idle. But yeah, that's the what I think an actively managed treasury should look like.

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[00:19:15] Umar: Perfect. Now, one of the modules of the course is on native token management, where you'll be exploring working with market makers, OTC desk, custodians.

[00:19:26] Umar: For our conversation today, I'd like to focus on market makers only. For web3 projects with a native token, how should they approach working with a market maker or, and also, could you please explain the difference between what loan based versus retainer based agreements actually look like and which model maybe in your experience tends to work best?

[00:19:51] Bo: Yeah, for sure. I mean, So you know. If you have a native token treasury, you basically are just trying to, one, get yield on that token or two, like just actually manage that token provide liquidity, allow people to buy, sell, et cetera. I've seen a lot of projects where tokens just have zero liquidity, right?

[00:20:08] Bo: Or the flip side, they have too much liquidity, right? And they can't actually allow price discovery. Now both sides are quite painful. Obviously one is more painful than the other. But working with the market maker means that, you have just the right amount of liquidity and your market makers should be advising you on this, right?

[00:20:28] Bo: If they're not, then they're shit market makers, right? They should be telling you when you have too much liquidity, they should be telling you when you need to top up or exchanges you need to top up on, right? What you need to do to hit your milestones, your benchmarks, new exchange unlocks, et cetera.

[00:20:43] Bo: Market makers should be in addition to just market makers, right? Like advisors. And guiding you through the process, right? Oftentimes what I see is especially with the large market makers, they have a lot of clients, right? They have a lot of projects that they work with and even though they might have a team, like 10 people in the group chat, nobody responds, right?

[00:21:02] Bo: They're not who you go to for advice. All they'll do is just trade your token or provide liquidity on your token and then some do it poorly at that.

[00:21:10] Bo: So the difference between a loan based and a retainer based market maker this ties in is with the loan based market maker.

[00:21:17] Bo: You are basically giving the market maker a loan of your tokens. The market maker sets certain call levels or strike levels and say, okay, if you token price trades above that, we get to keep a portion of your token, right? Retainer based market maker is you are working with the market maker. You give the market maker the cash to deploy on the exchanges themselves and the market maker just make sure that there's enough depth within certain spread levels, right? Call it plus or minus, plus 2%, et cetera. Really? Which one is better? It depends.

[00:21:50] Bo: If you have the cash, go with the retainer based market maker, right? I would never, never encourage someone to go with a loan based market maker if they have the cash. Why? Because going with a loan based market maker isn't inherently bad for your token price, And because every loan based market maker, depending on how your price or who they are, will either pull liquidity or sell into a token downturn to recoup losses, right?

[00:22:19] Bo: So that's the whole market making setup there. With a retainer based market maker, you are the master and commander of the liquidity on your books. You can decide how much to add, how much to pull. You can decide, just exactly when is the right amount, right?

[00:22:37] Bo: And you don't have to worry about any negative price impacts your token. So if you can afford it, and by afford, I mean afford to post liquidity on the exchange, go with a retainer based market maker, I would never encourage anyone to go with a loan based market maker. 

[00:22:52] Umar: Perfect. Now, one of the other area that you specialize in is in crypto hedging, and it's actually the first time I'm covering this topic on the podcast.

[00:23:03] Umar: It actually took 99 episodes to get here. So to, to start, could you give a short overview of the differences between options, futures, perpetuals, and delta neutral positions? I just wanna maybe help the listener not having to pause what they're 

[00:23:19] Umar: listening and maybe go on chatGPT and ask this. Yeah, sure.

[00:23:23] Bo: So let's break it down into two different types, right? They're all derivatives at the end of the day, but you got options and then you got futures, right? Everything else is just you know what you can do with it. So options are basically you have the option to buy or sell at a pre-agreed of home price in the future, right?

[00:23:39] Bo: You don't have to, but you can. A future is basically, you are committed to that, right? You have to take that position.

[00:23:48] Bo: In terms of something like a perpetual future, right? Versus a standard CME, CME, Chicago Mercantile Exchange type of future is basically the settlement, right?

[00:24:02] Bo: Whereas with a CME type of future, you have rolling settlement, you have periodic settlement that are bound to specific durations. Perpetual futures are just always rolling, right? They're perpetual, right? They have eight hour funding rate periods where, you know, every eight hours one side pays the other depending on where markets are moving.

[00:24:21] Bo: And it was actually, I think it was created by Arthur Hayes, right? The perpetual future for cryptos. And it's been adopted by just about every single exchange it is. It's like a Perp DEX, right? That's what they are. This is one of the major financial innovations that the crypto space has actually brought.

[00:24:40] Bo: And I think that the traditional finance space could actually learn a lot from. That said the, ideal perpetual futures isn't new. I think the original, call it traditional finance white paper for it came out back in the eighties or nineties. But then, it just was never really explored until cryptos came about.

[00:24:59] Bo: And then I think Arthur Hayes, yeah, like launched the first set of perpetual futures, right? So those are the two different types of futures contracts, CME standard futures, right? Like traditional finance futures versus perpetual futures.

[00:25:14] Bo: Now, what a Delta neutral position is, it's quite literally just being long on a spot position, short on a future position at the same time, you're essentially hedging out the price risk that you're taking on, and you're just clipping the basis in between the spot and the future position. If you do it with CME, the CME futures and the spot price will converge, right? So you know exactly what you're locking in.

[00:25:37] Bo: With perp markets, for example, right?

[00:25:39] Bo: You're clipping the funding rate right in between perp and spot. And so right now, or rather, over the last call a year or two, perp markets have a lot more lucrative than the traditional markets because all the large players, traditional players go to CME right? Whereas smaller players and the non-traditional players still do the funding rate part in crypto.

[00:26:04] Bo: Yields right now vary. Let's say on Bitcoin you can get plus or minus 10%, right? But it's fluctuated dramatically. Like someone's, it's zero, someone's, it's negative. It can turn negative really quickly. So you need a really good call it options management system, right?

[00:26:19] Bo: To be able to actually do this trade yourself. Most likely if you're running a treasury, you should just outsource it. 

[00:26:26] Umar: That's interesting. so using derivatives, it requires specialized knowledge, and you said it right, that you should outsource this.

[00:26:34] Bo: A hundred percent right? Like if you are. Let's say you are like managing this trade yourself, right? You're long the spot, you're short to futures, right? All of a sudden, prices move against you, right? You have to rebalance your short position in order to stay short otherwise you're actually taking a market risk, right? And then you have to manage your liquidation level so you don't get blown out of the books like what happened this past weekend. Right? And even if you do all that correctly, you still have to make sure that the exchange doesn't just cancel your position like Hyperliquid did, right?

[00:27:04] Bo: Like all of them. The positions that they had, which you know, anyway, but it takes layers of risk management and constant monitoring in order to not lose your shirt in this game, right? And so if you are just a one man team or a two man team, or even a three man team, like there's no point in running those yourself.

[00:27:24] Bo: Outsource it to a fund where this is all they do and is has like a 10 person team running this, building out their own risk management trading infrastructure. What your job is then, as called the, like the CFO is to conduct due diligence on the traders that you are giving the capital to, to run the strategy, right?

[00:27:44] Bo: Or the fund that you're giving this to, to make sure that the fund is legit. That's your job. Your job shouldn't be to run a strategy and house yourself. 

[00:27:54] Umar: Right. So in crypto right now, at least perpetual futures make up the majority of derivatives trading of course, hyper liquid is currently leading the market.

[00:28:04] Umar: I was looking at some of the figures while preparing this episode. Like the trading volumes have exploded. Now we're like 1 trillion every month according to DeFiLlama. So you've said it right? web3 organizations need to outsource this.

[00:28:19] Umar: Have you seen in practice that some of the web3 organizations are actually outsourcing this function and actually utilizing some sort of like hedging mechanism. 

[00:28:30] Bo: For sure. Yeah, absolutely. Protocol treasuries, for example, outsource this to onchain funds, right. A decent amount. I think it should do more, to be honest, like Edge Capital, for example, right runs the treasuries of some of the large foundations. And they deploy systematic delta neutral strategies in order to do so.

[00:28:49] Bo: Re7 as well, right? They run like these systematic delta neutral books. Like most of the on chain fund managers and just about all the crypto hedge funds have this as one sleeve of their strategy, right?

[00:29:02] Bo: It's the easiest thing to do in terms of a systematic strategy as far as systematic strategies go. That's why everyone runs it and it's a very efficient use of capital, but you do need like a team to manage it and stay on top of it. Like otherwise, you as a one-man person can't be monitoring a position. 

[00:29:24] Umar: Now, over the past two years, we've seen the shift in what people are referring to as Bitcoin DeFi. We are moving from a mindset of just BTC accumulation to now Bitcoin deployment, where the smart treasuries are actually starting to put their Bitcoin to work.

[00:29:41] Umar: New protocols like Babylon, Lombard Finance and Function, the project you're currently working as their COO are all working to unlock Bitcoin liquidity and bring it into DeFi.

[00:29:53] Umar: Everyone is taking like a slightly different approach. We'll dive into Function in the next question, but to start, can you walk us through the current state of Bitcoin DeFi and share what personally excites you about joining Function at this stage of the ecosystem? 

[00:30:10] Bo: For sure. I mean, I think BTC DeFi is there are pros and cons to it, right? Obviously we, we had the whole BTC DeFi kind of wave last year, which I would say for the most part just fizzled out, right? People realized that there was really any, like real yield that was being delivered by a lot of these projects and of course like Layer2 development on BTC has kind of stalled, right?

[00:30:34] Bo: I have my own, reasons for why I think that is, but overall, like if you think of BTC and what the future of it looks like. It's never gonna be used as like a payment asset, right? What it will be, it's a store of value, right? Part of that is because if you are super rich and a BTC will, you got here by not messing with your Bitcoin, right?

[00:30:56] Bo: You just kept it there as a store of value and it was indeed a store of value and you've done very well. And so that type of positive reinforcement loop is incredibly difficult to break, right? So I think moving forward, BTC will always be viewed as a store of value. But that said, the returns and the volatility for Bitcoin has compressed dramatically, right?

[00:31:18] Bo: Previously, you had annualized volatility for Bitcoin being 500%, then down to 300%, then down to 100%, then down to 50%, and so moving forward, the upside that you're gonna get from Bitcoin is gonna shrink a lot. But still, that said, it is the number one crypto asset, crypto token. And if Bitcoin goes, everything else goes right?

[00:31:41] Bo: So if you have this massive asset that's a store of value and you see returns compressing, then the smart thing to do is to generate yield on top of that store value asset. So now not only are you capturing the actual price return, but you're then capturing additional yield on top. And so if you look at, call it S&P500, right?

[00:32:06] Bo: S&P500 on average, analyze returns is around 7% volatility of around 16%, right? S&P500 has yield. Most people don't know this, right, or they don't realize it, but stocks pay out a dividend. S&P500 stocks, generally speaking, all pay out a dividend. And the average yield for S&P500 is around called plus or minus of 1.5%.

[00:32:29] Bo: Right. So now at 1.5%, you're now making 8.5% a year on S&P500 as the same volatility instead of 7%. Over the course of five years, that extra 1.5% compounds to call 9 10%. Right? So for every five years that you're deployed in, you get an extra year out of it, right? At least, right? So on Bitcoin, you can almost think of it as something similar, right?

[00:32:54] Bo: Like assume that the price of Bitcoin is only gonna increase at 50% a year moving forward on average, still quite good, very good, but it's a lot lower than what it was before. Now imagine if you can make an extra 5% on top of that right. Now after call it five years, compound that you've got an extra 35% plus or minus.

[00:33:18] Bo: Right of your returns relative to somebody who wasn't invested. And if you expand out over the course of 10 years, right? If you think about just holding BTC as a stable party of portfolio moving forward, that's a hundred percent delta right? Now, all of a sudden, right? instead of returning, call it whatever, 3, 400%, you're now returning 4 to 500%.

[00:33:45] Bo: That's the difference between 3 million bucks and 4 to 5 million bucks, right? It's a decent chunk of change. So I think as volatility for the asset class compresses, the hunt for yield is gonna become ever more important and with Function, we're here to essentially deliver that yield.

[00:34:07] Bo: Right? And a completely transparent non-black box way. And when people say the age of BTC DeFi has kind of died or never really materialized, I think it's because people just didn't see the yields they wanted to see. Right? People didn't see the development and build outs that they wanted to see.

[00:34:25] Bo: There wasn't a massive rush to deploy BTC into BTC DeFi. Part of that is quite literally just because, right? Like you know how BTC wheels kind of got to be BTC wheels, that they just didn't mess their stack. But the other part of it's because a lot of the tech was stuff that people just didn't understand a lot of trading strategies was very black box, right?

[00:34:46] Bo: If you look at some of our competitors or the funds out there, they're running these strategies and people have no idea what they're actually running. You can't see where your assets are. You have no idea where your assets are going. You don't know, like you are basically trusting the fund manager completely.

[00:35:02] Bo: Whereas with Function, we can generate 4, 5, 6, 7% yield on Bitcoin, right? And everything is on chain. Everything is transparent. You know exactly where your assets are going. There's no complex, crazy DeFi looping, right? There's no crazy triple lever or quadruple lever like plays all right.

[00:35:25] Bo: It's very straightforward, very simple DeFi strategies that we work with our curated partners to deliver to investors. And so I think that's what gets me really excited about the company right, is. The fact that this is solving one of the largest problems in the space, which is how do you actually get meaningful BTC yield in a transparent way, right?

[00:35:51] Bo: And I think that unlocks the next wave of BTC capital moving into the space. 

[00:35:56] Umar: Can you walk us through let's say there's a Bitcoin holder listening and they actually want to use Function. Could you provide us with like a walkthrough, like they'll have to probably go on Function's platform to the app, page.

[00:36:08] Umar: Sure. And probably wrap it into FBTC, right? 

[00:36:12] Bo: That's right. So right now, as a project is in its infancy, we're building out a lot of the on-ramps onto FBTC. Right now as a retail user, you can get FBTC by, either buy through Uniswap, or go into ByBit and minting FBTC, for your BTC, right? A ByBit earn also has yield on BTC that's completely run by FBTC, right?

[00:36:35] Bo: So we are the entirety of the, buy bid onchain BTC earn platform. If you are like a large whale, right? Things like that. We will actually work with you on a very hands-on like white glove experience to onboard you onto the FBTC platform and ecosystem. We help you mint FBTC, we share with you the curated strategies that you can deploy FBTC into right now.

[00:37:00] Bo: Not everyone can access the same strategies because there is a size requirement you need to pass. Like a high net worth checklist, right? Same thing with Midas. Exact same principle. But we will work with you on a one-on-one basis, KYC, et cetera, and then onboard you onto the platform, and then help you deploy into the strategies, right?

[00:37:20] Bo: The same way that many of these, I would say, more legitimate and institutionally focused yield platforms are operating under. 

[00:37:30] Umar: So this reminds me of a previous protocol called Ren protocol, right? Where you could also wrap your Bitcoin into, I think it was called RenBTC. So it was, yeah, the wrapped version of Bitcoin where you could then deploy it into DeFi.

[00:37:45] Umar: But if I'm not mistaken Ren infrastructure, it was shut down after Alameda Research collapsed in late 2022 with FTX fallout. What can we learn from that whole experience of what happened with Ren? 

[00:38:00] Bo: I think that's a great question to ask. Right? And I think that actually is what makes FBTC and Function super unique.

[00:38:08] Bo: The history behind FBTC was that it was actually created by the largest miners in the space, right along with some of the largest publicly listed companies in the space. Because they didn't trust wBTC with Justin Sun they didn't want to just fully rely on Coinbase with cbBTC and the US regulatory system.

[00:38:29] Bo: They wanted a type of onchain BTC ERC-20 that met their incredibly stringent security requirements. And that wasn't bound to a single geography that wasn't tied to a single entity, right? And so FBTC was born. Now, from a technologically or from a technological perspective, right? The underlying FBTC isn't that innovative, right?

[00:39:01] Bo: It's pretty much the same code base or code stack as like a cbBTC or a wBTC. But the thing about technology, right? It's not how complex or convoluted or high tech something is. It's what you can actually do with a tech. So you can build the most powerful infrastructure in the world, but it doesn't matter if no one's ever gonna use it, right?

[00:39:23] Bo: Because they couldn't understand it. With FBTC, what's really interesting is that one yeah, one it's fully ERC 20, fully transparent, backed by proof of reserves. You can see everything onchain. You know exactly where all the assets are held in the background. We're split up across a variety of different regions, right.

[00:39:43] Bo: And different chains, but two, and I think this is the super important part, the underlying BTC that we hold does not move. It is always sat there in a custodian. We're not like I some wrapped BTC protocols will take that BTC, I'm not gonna name names, but they'll take that BTC out of the custodian.

[00:40:03] Bo: They'll give it to you in a trader or a fund, right? Who will then trade on it, and then all of a sudden you're exposing yourself to counterparty risk on a trader side, you're exposing yourself to exchange risk. All this, no, with FBTC, all of the underlying assets are literally just sat there in a custodian, the safest place possible.

[00:40:19] Bo: Right short of you building like a nuclear bunker and then putting your right like Ledger in there, but it's all just sat there, right? FBTC is just minted on top and that's the asset that moves around the ecosystem. So incredibly secure underlying stack and how we handle the underlying BTC relative to others.

[00:40:42] Bo: And third and also quite important is the security council of FBTC. Where instead of relying on a single entity or a single person right, to decide the fate of the entire network or in this case asset, our security council is comprised of four of the largest and many of which are publicly traded players in crypto.

[00:41:06] Bo: So the Security Council is Antalpha who's the essentially loan book or the asset management arm of BITMAIN, right? Or the lending arm of BITMAIN, I should say. Again, public trade, traded company, one of the largest BTC players in the world, right? Period.

[00:41:24] Bo: Galaxy Digital, right? Everyone knows who Galaxy Digital is, Mantle, who's top 20 project in the world, the largest treasury in the world, period. And Cobo, right? A custodian. So the way that we've split up our security council even is geographically diverse. It's not tied to a single person. It's not tied to a single entity and it's all institutionally driven.

[00:41:50] Bo: The idea behind FBTC is that this is an asset with a security stack, right, that is made by institutions for other institutions who have the same type of security requirements that the initial creators of FBTC did, right? Which is, in essence incredibly stringent.

[00:42:11] Umar: Great. That was a very good clarification. Now, during Token2049 Singapore, a few weeks ago you spoke about Function's broader vision building a network of functional assets and collaborating with some of the projects that you mentioned earlier, Mantle, ByBit, there's a new project called UR Bank, which I haven't heard before.

[00:42:33] Umar: Now for the listeners who might have missed that talk, could you share that vision? What exactly does a network of functional assets mean? And yeah, maybe also share some of the other partners or ecosystems Function is currently looking to work with. 

[00:42:49] Bo: Got it. Yeah, for sure man. I mean, look, I think we've seen the rise of RWAs in the last year, in the last two years.

[00:42:58] Bo: I think a lot of people understand the term RWAs. I think a lot of us don't understand what our RWAs are actually gonna entail. Right? Again, it goes back to don't sell the tech, sell what you can do with the tech. What can you do with RWAs right now? Most of 'em don't have liquidity. Most of 'em are just kind of sat onchain.

[00:43:18] Bo: They're just a tokenized version of fund people are using it for basically tax avoidance, right? Because they don't wanna move their assets off chain. That's the main source of inflow for RWAs at the moment. For us, we think there should be additional use cases to these RWAs, whether that's borrow lending markets, whether that's call it predictions on yield, right? Whether that's deployment across the broader DeFi ecosystem for incentives. Yeah. There needs to be another functional layer to these RWAs rather than just you putting money into it and it just sat there, right? Because I can do the same thing with my brokerage account today, and I would actually prefer to do that because those are rails I trust and I understand.

[00:44:02] Bo: So unless there's some sort of reason, a use case that people can get out of RWAs, they can't get out of traditionally traditional assets off chain, they're never gonna move into RWAs. Right and tax avoidance as a use case can only last for so long. Right. So for us, our goal is working with Mantle, the broader ecosystem, working with other chains as well.

[00:44:26] Bo: We're just actually integrated on Plume as of today. We want to build these functional use cases for RWAs, build a functional marketplace where people can take the RWA and work with us to get even more yield out of it, right? I'm not talking about again, triple, quadruple lever crazy DeFi looping nonsense.

[00:44:48] Bo: I'm talking about very simple strategies and very simple markets where you can deploy. The BUIDL fund into right for additional incentives or for additional yield, and that is what we're hoping to accomplish. Working with the partners that we have today, FBTC and as an asset is just a blueprint.

[00:45:12] Bo: It was a proof of concept in our minds that we were able to tokenize an entire asset stack and build a market around it, a marketplace around it for yield. Where there wasn't one before. Moving forward, we plan on doing the same thing with the rest of the RWA token stack. 

[00:45:31] Umar: Perfect. As we wrap up our conversation today, Bo, I wanna take a step back and look at the bigger picture.

[00:45:38] Umar: If you think about treasury management in web3, with everything from onchain risk that we covered earlier, cross chain liquidity, DeFi positions to stablecoin allocation, it's still a relatively young discipline, right? So, yeah. Maybe as closing thoughts, for today from your perspective, what should be the North Star for web3 projects when it comes to treasury management?

[00:46:01] Umar: Maybe if you could share a few guiding principles like founders and CFOs can keep in mind as they are building their treasury department to be more resilient, more transparent. 

[00:46:12] Bo: For sure. I think the main question that folks need to ask themselves, right, founders is what do they hope to get out of the tr Do they want to grow it? Do they want to sustain it over time? Are they just worried about draw down and they're just happy using the assets as assets. What do they want out of their token? Right? Is it just a community thing? Do they want to generate some yield or make returns on their token as well?

[00:46:40] Bo: These are the fundamental questions that, and the starting point that they need to have before they can dive into any of the rest of this. Once they have asked themselves that question and understand what they want to get out of it, then they can structure the team and the actual functionality around it.

[00:46:59] Bo: In my opinion, the use case of a treasury is to continue to grow and sustain the protocol and the development into perpetuity being the operative part of the sentence here, and the best way to do that is to follow some sort of like an asset liability management scheme, right? Is to allow yourself or enable yield generation, enable ways to use your treasury to make money.

[00:47:29] Bo: That then covers the outflows that you actually have to pay. Yeah. That to me is the holy grail treasury management and what every company should be aiming for with their treasury. The question is based on your starting point, how do you get there? And that's what we're gonna cover in the class. 

[00:47:48] Umar: Perfect way to end the episode. Yeah, I think we gave the listeners a small taste of what's coming today and it was great to, to talk today, Bo. So I usually like to end the podcast with asking the guests if they have a favorite quote or maybe a maxim that they live by or they often repeat to themselves?

[00:48:10] Bo: I have a few, but one of my favorite ones was from the Iron General. Right. I don't know if it's, cliche to say. Or to reference him, but it's the wise man learns from the mistakes of others, right? Where others have failed under treasury, don't let that be you and learn from the mistakes that haven't made in the many years of crypto blowups that have happened so far. Right. Yeah, I think that would, that's pretty apropos. 

[00:48:34] Umar: Yeah, it is. If people want to learn more about Function, where should they go? And if people want to reach out to you, Bo, how should they do so?

[00:48:44] Bo: Sure. So for Function, definitely hit up the website, www.fxn.xyz. We have an email at the bottom where you can send an email and it goes out to the entire team. So if you wanna get in touch with anyone on the team, that would be the best way to do so. And then if you wanna reach out to me personally, my telegrams always open.

[00:49:03] Bo: I am @Bozhangles . 

[00:49:04] Umar: Great. I'll be sharing that in the show notes of the podcast as well. Awesome. Cool. So see you very soon when we start the Treasury Management course on the 29th, October. If, and if anyone listening is actually interested to learn more about this course, you can go to the theaccountantquits.com/crypto-treasury-management-academy , or you can just reach out to me on LinkedIn or Twitter.

[00:49:31] Umar: Until then, see you very soon.