Philip De Smedt on Loans That Repay Themselves — Stacker Chats Recap and Transcript

In this Stacker Chats episode, I sat down with Philip De Smedt, Arkadiko Core Contributor, the first stablecoin where your collateral earns a yield.

Philip is a long time Bitcoiner who started out with the simple question: how to borrow against his own assets as cheaply as possible? Once Stacks 2.0 went live with Proof of Transfer, the novel consensus mechanism that connects the Stacks and Bitcoin blockchains and enables participants to earn Bitcoin rewards — the answer became more clear.

"We want to make it easy to get access to liquidity and to borrow against your own assets on the Stacks blockchain, leveraging the security of Bitcoin.”

The Arkadiko team uses Hiro solution Clarinet to manage the over thirty Clarity smart contracts in play building the fully decentralized DeFi protocol on Stacks. Arkadiko will go live as a Decentralized autonomous organization (DAO) with governance token ($DIKO) and liquidity rewards for users. The Hiro Web Wallet and Hiro-supported testnet infrastructure provided an easy path for community testing and auditing the protocol.

The Arkadiko suite of DeFi tools are anticipated to go live on mainnet in Q4, 2021.

The full episode is available on YouTube. See the transcript below, where we link and highlight resources covered in this chat with Philip De Smedt, Arkadiko CEO.  

— Gina Abrams:

Hi everyone, and welcome to the Builder Series of Stacker Chats, where we connect with the amazing founders building on Stacks. My name is Gina Abrams and I'm thrilled to be joined by Philip De Smedt, Core Contributor at Arkadiko. Arkadiko is a crypto protocol for loans that repay themselves through the first stablecoin, called USDA, where your collateral earns a yield. Philip is a successful entrepreneur, Bitcoin educator, and globetrotter. Thanks for being here, Philip, where are you calling in from, and how's everything going?

— Philip De Smedt:

Hey Gina, happy to be here. It's an honor to share this with likes of Muneeb, Trevor, and probably a lot of amazing other people in the future. Today I'm in Switzerland, but like you said I travel pretty much all throughout Europe. These days mostly by car. Today Switzerland, but often I'm in Spain or Belgium.

— GA:

Awesome! Well thank you for calling in, and I'd love to dive in and hear a bit about your background and the history behind Arkadiko.

— PDS:

Yeah. Great! So I got into Bitcoin around late 2013, and I got a pretty rough lesson that I think everyone should probably go through. I bought at the almost absolute top, so I became a “HODLer” immediately. So this is kind of my third cycle, so 2013, 2017 and now 2020/2021. I've always been in technology. Previously, we had set up a SAAS company, and we sold the company about two years ago. I always wanted to be in the crypto ecosystem, specifically in Bitcoin, but there were just not that many options in Bitcoin to build smart contracts at the time.

When Stacks 2.0 launched only seven months ago, I was super excited because it was really the first blockchain that allowed me to build smart contracts that anchor to Bitcoin.

At a high level, that's where I come from. I have a technical background, love playing with technology, and am excited to build Arkadiko.

— PDS:

Now, why do I mention Bitcoin? Obviously, because Stacks settles on it, right? For me, Bitcoin is two things. First of all, I think it's the hardest, most sound money that we have ever known as humankind. It's also the most global and dominant digital monetary network. You can think of it as a set of nodes.

It's those two things. Bitcoin, the “asset”, that's what most people refer to when they talk about Bitcoin. It's very liquid. It has amazing price discovery. It settles really quick. You have finality in something like an hour. It's really easy to send abroad, for instance.

— PDS:

I just love the properties of Bitcoin as a network and as an asset. And I think for me, that's where Stacks came in, because I could start using both the security of Bitcoin, as well as the assets to build smart contracts that settle on Bitcoin. And that's really the day, somewhere in January/February of this year, when our Arkadiko was born.

— PDS:

I started thinking, how can I borrow against my own assets? And how can I make it as inexpensive as possible for a person? That's where the self repaying loan angle really comes in. You have proof of transfer, which is the consensus mechanism of Stacks.

Proof of transfer is not only great for you as a Stacker individually, but for me as a developer. I can reuse the protocol. That's where Arkadiko shines. We integrated proof of transfer as a building block into our own stablecoin, and that's where the collateral on your yield comes from.

So long story short: we want to make it easy to get access to liquidity and to borrow against your own assets on the Stack's blockchain, leveraging the security of Bitcoin.

— GA:

Fascinating. Thank you! Now you had a really successful Regtest launch with over seven million USDA, that's the Arkadiko stablecoin minted by the community. I'd love to hear some of the learnings and benefits of launching on Regtest, and what are the current priorities for the team as you look ahead toward a mainnet launch.

— PDS:

As you said, the reception from the community was amazing. I did not expect seven million to be minted, and it was really in like four or three days or something that it blew up. It was amazing. I think the reason we wanted to launch was not only to get confirmation that people wanted to use this (because we needed to figure out if we had product market fit). That was a great test. Additionally, we wanted to see how Clarity works in practice? I think Arkadiko today is one of, if not the largest, set of smart contracts that is being launched on Stacks. As a whole, I think we have about between 30 and 40 smart contracts that work together today. It's a very complex architecture, at least to me! Maybe people smarter than myself would disagree, but I believe it’s fairly complex.

— PDS:

Obviously there were some UI/UX issues, but the big takeaway was that this product is something people want.

People get really excited if they hear they can borrow against their own assets, earn a yield of about 7-8%.

It was great validation. That was two months ago, and now we are getting ready for a mainnet launch. We are currently in a code freeze, meaning we finished the product. We shipped that off as a package to our security auditor, and they're working on it as we speak. I'm super excited. Our launch date is in Q4, and a more specific date will be published on our Twitter soon. I can't really say any specifics about that yet, but it's going to come real soon within the next three months or so.

— GA:

Awesome. Now I think we dove pretty straight into some of the specifics there, and how these 30 to 40 Clarity smart contracts that are all interacting together. Maybe if we could bring it back to the different components to Arkadiko. How does it stand apart from existing DeFi protocols that are out there in the market today?

— PDS:

A lot of the tools that we use in Arkadiko, such as Clarinet, have been a huge help.

The Hiro web wallet was immediately implemented so the community could use the platform. A lot of the development tooling was super helpful in just putting those 40 contracts together. Clarinet was instrumental to what we have put together and engineered. Without it, it would’ve been pretty rough.

One of the main core maintainers, Ludo Galabru, has been holding my hand throughout. There's a lot I have to say, but super helpful tool. I can recommend it to any team that wants to get started with Clarity.

— PDS:

I would say we differentiate from other DeFi protocols in the way we generate a yield for you that's inherent to our stablecoin. Additionally, our smart contracts are obviously written in Clarity, and we're going to deploy to the Stacks blockchain.

So we're “native” to the Stacks blockchain. That gives you a lot of insight as an end user into how the system operates. Everything is transparent on the blockchain. You can read any contracts.

We have nothing to hide.

— PDS:

It's very easy to do an audit on Arkadiko if you know how to read some code. I think proof of transfer and the integration that we did with Arkadiko is something that is blowing people's minds. If you look at the ecosystem, and you look at the yields that are being generated, often they get advertised as high yields. This means you get 50-60% APR, but I always ask people: "Where does that yield come from?" Quite often, the yield comes from their governance token, which quite frankly is worth nothing a lot of the time. I think the real differentiator here is proof of transfer.

You get paid in Bitcoin, which is a scarce asset. As I mentioned, it's the most powerful asset, and you get paid in it while borrowing. I do think that's one of the biggest differentiators that any user of Arkadiko is looking for today.
— GA:

Absolutely. If you can just break it down for audience: What's that user journey look like? When it comes to collateralizing a stablecoin, how are they going to receive the yield? What can folks really expect upon launch?

— PDS:

It works by taking your STX tokens and locking them. You deposit them into what we call an Arkadiko vault. An Arkadiko vault is simply a smart contract implemented in Clarity. The name of it is vault. Once STX tokens are deposited in the vault, Arkadiko acts as a stacking pool towards proof of transfer. We group all those STX together, and we have an internal bookkeeping service. We might say: “Okay, Gina. You created a vault of 1000 STX, and you are eligible for your pro-rata share of what is in the pool.”

You can choose to let the loan repay itself, so you don't have to do anything. You don't have to think of monthly repayments or fear of liquidations because your collateralization is really high.

The point is your loan is paid off on its own in a trustless way, so you don't have to intervene. You just sit there and it's all automated. That's one option. The other option that we launch with is a self repaying loan, but without the option of having the automatic payments triggered. Meaning we would give you yield in the STX token, and just add that onto your vault. This means that your collateralization goes up, but those additional yields (those additional stacks tokens) would get “stacked” as well in a subsequent cycle. It would not be in the same cycle, because that's not possible! It creates this compounding yield.

There's really two options for people who do not want to worry. There’s automatic repayments, but for people who want to go a bit more advanced they can compound their own STX.

— GA:

Awesome. One other thing that I'm curious about is your vision for this product. Is it something that you're anticipating STX holders, bitcoiners, and folks across the crypto industry use 5-10 years down the line as this incredible protocol for the internet?! I'd love to hear, what are your thoughts for the future?

— PDS:

With a stablecoin, there's really endless amounts of use-cases. One of the first things, and I'll try to go chronologically, that we will focus on from launch is getting out into the Stacks community. We want to talk to them, because they're the most important! Let's call them a “cohort”, or a group of people that we want to target.

— PDS:

It’s probably safe to say that a lot of Stacks people, they are bullish on Stacks: the asset. They just want to get more of it! I already explained how the self compounding yield mechanism works. We act as a pool, and you get yields and that are added to your collateral. That's one way that you get more yields, but it's the same as it would be with stacking and proof of transfer.

— PDS:

Now let’s say you minted USDA against your own possessions. You deposit $1000 worth in STX tokens. Against that, let’s say you mint $250. With those 250 USDA you can buy additional STX. You're leveraging yourself with fairly low risk, but getting more STX exposure. We are helping users who want this type of opportunity, leveraging themselves in a low-risk scenario.

— PDS:

Another thing that I would love to do is collaborate with existing wallets in the ecosystem and make it really easy to interact with our smart contracts. DeFi is still a fairly advanced concept. There is still a steep learning curve in comparison to NFTs for example. An NFT, as a piece of digital art, is really easy to get. I just buy a token for the NFT. With DeFi you have a lot more complex concepts, such as governance tokens, that might or might not be worth anything.

The public often says: “Woah! This sounds complicated”.

There's a lot of education that needs to be done around DeFi, and we want to make it easy for those beginners. We want to create financial inclusion for casual users that want to access DeFi, but don't necessarily want to be a power user.

That's why we're speaking to wallet creators to integrate our smart contracts and abstract everything away. Let’s say you have two positions: your STX positions (say again, 1000 STX tokens) and also one half of a BTC in your wallet. Next to those assets could be buttons for "Lend USDA" or "Earn yield on your BTC". Those buttons would automatically be interacting with our smart contracts, without a user directly interfacing with our contracts.

— PDS:

Another strategy is to spread awareness on DeFi and get financial inclusion for those people who own BTC and STX, but aren't very comfortable installing a web wallet or something like that. We want to help those people as well. Ultimately, that’s five to ten years out, but I saw a question that was recently asked on Twitter, "Are you planning to do a credit card? Can I pay with USDA or my yield? What I staked and earned, can I pay with that?".

— PDS:

Now, I think that's a great idea. However, there's one caveat. One thing to consider is how we are aiming to be a decentralized protocol. We don't necessarily want to be the central entity that is a fiat on and off ramp, and helps you do payments in real life, physically.

— PDS:

Now I do think it's an interesting idea, and we have brainstormed about this with the team, but this is a little bit further out. We would have to set up some kind of central entity either with the same or different name. It would interface with the Arkadiko smart contracts in a similar fashion that your wallets would do once we have those integrations going.

— PDS:

I think a lot of what I said boils down to is providing liquidity, in terms of providing leverage. You get access to the financial tools without having to worry, and without being a power user. We're really excited about building that out in the next few years.

— GA:

Absolutely. I think we're definitely seeing the need for that across the board when it comes to DeFi. You brought up an interesting point there when it came to the complexities. These underlying protocols managed by smart contract give a lot of power to end users. Obviously, within the crypto world over the past 10 years or so, there's been learnings from different challenges that have come up.

— GA:

I think it highlights the importance of network resiliency and community. Arkadiko is an open source project, and it's also constructed as a DAO, or a decentralized autonomous organization. Can you talk a little bit more about that, and how it sort of came to be? What are you envisioning for the future?

— PDS:

Yeah, I think it's one of the pillars of Arkadiko.

I mentioned we don't want to be a centralized entity in five years run by suits. We don't want to be compared to corporate America. It’s very important to have voting and buy-in from the community. If you look at our governance token, DIKO, we have a supply after five years of 100 million. That means there will be 100 million tokens in existence. 50 million of those will go to the community in terms of staking incentives, but we also have a treasury within the DAO, as a treasury. There is a dedicated amount of tokens that will be airdropped to people if they do challenges. There is more than one way to earn DIKO.

— PDS:

You could potentially earn DIKO by collaborating in hackathons, or building projects using our stablecoin. The point is we have those 100 million tokens and the majority of them should really belong to the community. For example, in the first six weeks after mainnet launch we could give away 1.5 million DIKO tokens to everyone who creates a vault. Imagine you create a vault, and you get your pro-rata amount against the collateral that you deposited. We want people to participate not only in terms of ownership of our token, but also in terms of governance. We want them to help us make protocol decisions. Hypothetically, if the community thinks we need to expand, get an investor on board, search for partnerships, etc., it's not really up to me or up to the team! It's up to that community as a whole.

— PDS:

If you own a DIKO token, you can start a governance vote. There are super majority votes and there are normal majority votes. A normal majority vote is 51% approximately, and super majority is 75%. If such a governance proposal succeeds, I cannot say we're not going to do it. In fact, I don’t even have the ability to. We have to execute the proposal. That's the bottom line, and the goal of what we're trying to achieve. We want the community as a whole to make those decisions together. Obviously, that's in the best interest of everyone. It's somewhere between making the right decision for you, but also for the community as a whole.

— PDS:

As an example, let’s say you pay interest on the USDA that you mint. Imagine that you, Gina, open a $1000 vault again. That's $250 of collateral you're borrowing against those $1000. On that $250, you pay a small interest (it will be about 1-3% a year). That number is dynamic and could change through governance. If users think it's too expensive or too cheap, because there are those vote decisions, they can launch a vote to change that number.

— PDS:

The interest us obviously revenue for us as the protocol, and in the best interest of the community we will spend that income. My point again is we don't make the decisions, but you as the community will.

— GA:

Awesome. Thank you! I guess I'm curious to dive a little bit deeper into how you're building this business after having been in the crypto industry for years. What are some of the things that you're looking out for? Anything that you've built into the underlying architecture of Arkadiko, with all this knowledge in mind?

— PDS:

Yeah! If I look at other projects, a basic mistake I see a lot is not having the right incentives for your community. That ties into greed. The founder usually starts a project and they take 60-80% of the token supply. What is the incentive for an end user then?! They don't have any voting power, nor do they share any economic or financial potential with the founders or with the protocol. That's something we looked at. I wouldn't call us a complete fair launch, because there is a small treasury for the DAO that we keep. Even if it's controlled through governance, it's not 100% of the tokens that we give away. We are however definitely on the fair side. We don't want to be greedy.

— PDS:

We want to bring the community along with us. If you look at Binance or Ethereum got launched really quick. They feel rushed and quite frankly like a cash grab just trying to make profit on top of the user. That's not something we want to do. We want to be transparent about how we launch our security audits, the results from those audits, our features, and our roadmap.

— PDS:

And that's why I'm also putting my name on the line.

Look, I could have done this pseudonymously or anonymously. I could have said, "I'm Philip, but I don't want people to know that I am launching Arkadiko." However, I don't have any issues putting my name on the line, because we want to do this transparently. We want to do this for the community and for the financial inclusion of Stacks users, or Ethereum users that want to come to Stacks.

I'm not a maxi, I'm not opinionated, but I do think we're building the best protocol on Stacks. We're here for everyone.

— GA:

To that end, I'd love to hear a little bit more about how are you looking for folks to get involved and follow along with Arkadiko, especially leading up to the mainnet launch. Is there's anything else in terms of incentives that folks can look out for?

— PDS:

In terms of roadmap, I mentioned we finished up the product. We're going through a security audit currently. The only thing we want to do is integrate microblocks into our product. Once that's done, I think within the next three weeks, we will launch a really quick beta on the testnet. It's going to be a lot smaller than the previous Regtest soft launch. It's more for people who really can't wait for eight weeks.

— PDS:

It's going to be smaller scale, just to show you the experience, if you want to run through a staking example, creating a vault, or doing anything to that extent. You will already have the real mainnet experience, but you can test on Testnet. We are fairly active and there for you on Twitter and Discord.

— PDS:

I don't know if people know, but I'm Pipje on Discord. It's one of my nicknames from when I was younger. Feel free to hit me up there on the Arkadiko channel, or on Twitter. We're there to help you and answer any questions you might have. We also have a whitepaper that can be downloaded on Arkadiko.finance, and extensive documentation on docs.arkadiko.finance. I think that should be sufficient, but speak to me for more information. Every person today who is interested in Arkadiko, I'd love to have a conversation with. I want to hear what they think about the vaults, self repaying loans, and any future roadmap.

— GA:

Yeah for sure, the website has super comprehensive information, great overviews, and graphs. I really love it as a resource. One thing I'm curious about is, for folks that are potentially looking to build on Stacks, is there anything that is a wishlist item for you that you'd love to see in the ecosystem? What would be some of your takeaways for those folks?

— PDS:

Yeah! There's one thing that I would love to see which is a stable swap. This means you trade a stablecoin against another stablecoin. That would be extremely helpful for us in terms of exchanging our stablecoin for another. I also think something like flash loans could be interesting. Flash loans are basically a loan that you take but has to be repaid in the same block. This enables all kinds of really interesting financial constructs. We are not working on that today, but I would love to see that type of mechanism through our stablecoin, for instance. I would generally say anything that uses proof of transfer in a novel way, because there are so many ways that we can still earn bitcoin as an underlying derivative. I'm thinking of maybe an NFT that generates a bitcoin yield when you hold it, or something like that.

— PDS:

I know boomboxes, for instance, are something like that. Although there can be other novel approaches to it. My point is the possibilities are really endless, and proof of transfer enables all of it. I don't think we have to reinvent the wheel.

There are great innovations and protocols on Ethereum, but we could bring those to Stacks. Some blockchain building blocks are helpful, but they will have more innovative potential if you leverage proof of transfer.
— PDS:

That's what I always tell founders: "Look at proof of transfer". They always say: "Oh, I haven't read the white paper, or I haven't really looked at that." I tell them to read that first, and come back to me in a week. Then, the subsequent conversation is often very different from the first one.

— GA:

Excellent. Thank you. We also had a few community questions. Are there plans for Arkadiko to distribute any profits from liquidations to DIKO holders? This would possibly come after the protocol launches, but curious about sort of what's going to be live at launch.

— PDS:

When your vault needs to be liquidated, what we call a keeper has to buy up the collateral in an auction. There has to be an incentive for the keeper to buy up those STX tokens in an auction. If we would give a significant chunk of that revenue (that is usually reserved for that keeper) to people who are holding DIKO, it honestly depends on the incentive mechanism. The incentive might disappear for that keeper.

— PDS:

Quite frankly, I'm not entirely convinced that would be the right model for us. Our stablecoin will only work if vault liquidations are efficient, and those keepers have the right incentives. Having said that, there's another way that we will share revenue with our community. I call them the “army of champions “. Everyone who stakes DIKO will be eligible for a part of the profit that Arkadiko makes. We will redistribute that profit to people staking in our staking module. I do think the revenue coming from there is indirectly tied to vault liquidations. If a vault gets liquidated, we make money as a protocol. We will distribute that profit through those stakers. Short answer is no, but the long answer is yes. Indirectly, you already receive part of those vault liquidations.

— GA:

Very cool. Dialing into that question a teeny bit, will DIKO governance operate similarly to Maker? How will it differ? Any thoughts there?

— PDS:

Yeah, it's quite similar. You can launch governance votes and change certain parameters on collateral types. You can come up with novel approaches to do things, we're very open. In fact, our governance will launch the same day that we go live on mainnet. It will be twofold: the voting on a governance proposal will always be on-chain, but the discussions around that will happen on Dicourse, which is a forum software we're setting up and will be available for users on day one. I do think we are, in terms of incentives, a lot better than Maker. For instance, Maker does not support staking. It doesn't give the most optimal revenue share. We looked at those things and thought, we can do those better, and we improved upon them.

— GA:

Great. You mentioned a little bit about the long-term vision for USDA, but can you talk a little bit about any near-term thoughts for fiat on and off ramps to of spend the minted stablecoin outside of the crypto ecosystem?

— PDS:

Yeah. One option is, again, those integrations with wallets. Imagine it has a credit card linked to it. It says "buy", and you could buy through USDA. In the background, we would turn your USDA into something else (USDC, or maybe a STX token that you would end up buying). It would be abstracted away. Indirectly, the user would think that they are paying with USDA, while we do the conversion in the background. I do think I mentioned another option being the stable swaps. You could go easily from USDA into USDC (or another stablecoin that might come available on Stacks) quite easily through that stable swap. While that requires some intervention from the user, it's still a way to go for fiat. Having a credit card is probably not in the first year or so.

— GA:

Alrighty. Last question before I let you go. I'd just love to hear at a high-level what's been a surprising or unexpected aspect of building an open source project in the Stacks ecosystem, and involving the whole community.

— PDS:

One of the things that surprised me is how tight-knit the community really is. I posted some code on GitHub. It was open source, and without asking I got three or four reviews. I didn't ask anyone. It was just kind of someone saying, "Hey, maybe you could do this, or, hey I see a little bug there."

— PDS:

That was really cool to see, because Stacks is going to be successful if the developer ecosystem delivers protocols, such as Arkadiko. That has really been a positive experience.I think if you're on Discord, or if you're not, join Discord, and speak to some people. You'll definitely get some help, we'll brainstorm, and get some feedback.

— PDS:

That has been really surprising for me, because if you go to a bigger community like Ethereum, where do you get validation? Where do you get help? You're just a small fish in a gigantic pond where a lot of things are happening.

I think that's the real, the Unique Selling Proposition (USP) today of Stacks: the developer ecosystem. We're here to help you, and to build together. It's all novel, including the POX. We’re really excited to see what comes in the next six months.
— GA:

Very cool! Thank you so much, Philip, for being here. That's a wrap for today. For anyone that's interested in checking out documentation, check out some of the external links to the Arkadiko website and docs. Arkadiko.finance has a ton of documentation, and definitely make sure to join our Discord where you can follow along with Arkadiko developments leading up to mainnet launch, which is happening sometime in Q4.

If you enjoyed this episode, please also subscribe to the Hiro YouTube channel. We're going to continue having these conversations, and learning about these awesome projects. Thank you so much!

— PDS:

Cheers! 🥂

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