Listen to our latest episode featuring Xerberus and learn why aligned, transparent risk ratings may be the missing piece for a safer, more trustworthy DeFi ecosystem.
In this episode, Nertila from Trading Strategy discusses with Simon Peters from Xerberus. Xerberus is a DeFi risk rating protocol built to make crypto investing safer through transparency and value alignment with investors. It describes itself as an independent, investor-governed risk rating protocol for DeFi vaults.
- View Xerberus Vaults Ratings
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Transcript:
Welcome to TradingStrategy.ai, the podcast where you can learn more about essentials of DeFi trading in new world. This is your go-to show for automated trading strategies and market insights. Welcome to the conversation, and this is your host, Nertila.
Nertila: Hello, everybody. Welcome to today's podcast on tradingstrategy.ai. Today we have a new guest. His name is Simon, and he works for a project named Xerberus. It's a great pleasure to talk with you, I would like to get started with a short introduction about yourself. How did you get started with crypto?
Simon: Yeah, as you said, my, my name is Simon Peters. I am a co-founder and also the CEO of Xerberus. We are a protocol that aims to make DeFi safer by creating transparency and value alignment with everybody who is invested in DeFi and has some of their assets at risk. And that's really the core of what we do.
Simon: If you are an investor in DeFi, our job is to make sure that you are safer, using us than you were not using us. And how did it all start? I am a true believer in crypto. I've been from the first moment on, because my journey in crypto really started in the most unlikely of all places. It started in Africa, where I was tasked for a German investor to build a supply chain in Nigeria.
Simon: And there I encountered a really pathological trust issue between parties. And as I moved on in my career and I learned what an Ethereum smart contract is, I realized that these very hard social problems could be fairly solved through this technology. And ever since I've had that realization, I knew that I wanna do things to make Ethereum and crypto successful to bring these solutions to the world
Nertila: How did you come up with the idea of Xerberus? You mentioned that it's mostly focused on, risk strategy
Simon: Yes. We came up with the idea of Xerberus. , So we've been working on it really for an entire cycle, so almost four years now, or over four years. It was really at the end when, Luna collapsed and FTX collapsed. We knew that crypto has a risk problem that people don't like to address. And back in the day, we had this idea that if crypto is changing finance, then you will probably see a disruption of existing institutions.
Simon: And we often think about banks when we talk about the disruption of crypto. But in a way, the foundation of these beliefs come from, comes from two thousand and eight, from the great financial crisis. But what we often overlook is that in two thousand and eight, it was not the banks alone that destroyed, the global financial system by being too risk-taking or risk-loving, but it truly was the risk-rating agency that were misaligned in their values.
Simon: The risk-rating agency today, as well as back in two thousand and eight, are being paid by an asset issuer to give him a rating so the asset issuer can sell it to the public markets. Now, if you're aligned with the person that you should judge, that is a fundamental misalignment of incentives, because I serve my customer, but my customer is the guy who gets the rating.
Simon: But the person who relies on the rating is an unknown third party that has no relationship to me or, the issuer. So when it comes down to this, what we see is, I've said it just now again, it's a misalignment of incentives that is really at the heart of what happened in two thousand and eight that persists till today.
Simon: And you see similar things happening over and over again. There was a bit of that in the recent private credit challenges, that some of the firms had. And our idea is fundamentally how do we do something to disrupt these institutions and offer something much better, much more aligned with the people and the actual person that is in need of a rating to be correct, not in need of a rating to sell an asset.
Simon: And that really is the core of it. So I would say value-wise, we come really from the cyberpunk, from the core idealism of crypto, but in a very practical way. We want to create a supreme product by using and following and living these values.
Nertila: I would like to know more about the risk strategy that you are deploying through your venture. Is it more, on the technical aspects of it, or is it more on conceptual or strategic perspective?
Simon: We have a very simple rule at Cerberus when we look at risk, and this is if it costs you money, if you could lose something, it matters to us. So what I'm trying to say is that if you are deployed in a protocol and you lose , a million dollars, you don't care why you lost it. You care that you have lost it.
Simon: And so what it means for us is that we have a very holistic approach at looking at risk. So we look at the intrinsic risk of, , the software architecture. We look at the, , systematic risk of how these financial products are connected to each other. But we also look at regulatory compliance when it comes to the way if a product is even legal to be sold.
Simon: For maybe some of the listeners might recall that quite recently there was a craze trading, pre-IPO Anthropic shares that then Anthropic basically killed with one, , with one letter from a lawyer saying, "This is, this is not fair." And they lost I think it was a hundred million dollars of, of user value that was lost.
Simon: And, so you cannot just focus on one aspect and say, "Okay, this is risk." No. To give a holistic product, what we do is we focus on anything that could you as the, as the investor make you lose money
Nertila: What do you do on a daily basis?
Simon: I do the CEO , how do I say this? You know, it's very strange to be CEO because sometimes, basically what you always do is you do the urgent thing. So when things go very well, I'm the least busy person in the company, right? But when things, when there's an issue, it always ends up with that I have to find a solution ultimately, right?
Simon: , The solutions can look very different. You know, it could be that maybe we need a new person, or we need a person less, or we need to have restocking, or we need to make sure that one person is under no circumstances that are interrupted to really finish this one important project, right? Or, we need to reallocate resources in a certain way.
Simon: So in a way, my job is truly to look at things, at the whole thing of the company and be like, "Okay, what is in our way? What is the barrier between us and achieving our goal?" And then make sure that that barrier is gone.
Before we get back to the episode, if you are interested in getting access to over twenty-five thousand five old datasets, including performance and risk metrics, visit our website tradingstrategy.ai for free data and professional subscriptions. Now, let's get back to the episode
Nertila: You are the leader of the company, and you have to be in control of everything that's happening. . What are some of the hard lesson you have learned so far?
Simon: A lot of them. Never ever trust anyone before they have proven their worth. I think, at least for me, I, I believe in humanity a lot, and I like to believe in humans. But I think the big lesson that I've learned is believe in everyone, but wait for no one. You know? So you can give the people a job and be like, "Okay, I think you're the right guy."
Simon: But you gotta, pull the, the plug quickly in case the person does not really live up to the promises they made. I think that's a big one. The other one is, and I think that's a very important one for every entrepreneur out there, it's better to have no investor than a bad investor. Cherish good investors and, , help them, support them because they are, they're truly your biggest asset that you can have.
Nertila: When you say good investor, are you referring to investor that get involved with, supporting projects on a day-to-day basis, or at least in managing aspect of it? Or is it about, , them providing, financial, or capital to your project? How do you differentiate those two?
Simon: Well, , there are different types of good investors, right? Some good investors can be very good because they provide large amounts of capital and are not getting involved in any way. But they're there in the moment when you need these sums of money. The other, I think, archetype of a good investor is an investor who is probably themselves an entrepreneur, either still active or exited, who has been in your shoes before, has been a CEO, a person that basically when you talk to him is, is always a no-bullshit conversation because he's been exactly the way you are.
Simon: So you, have to be very honest, and you also can be very honest. But what also can be very good strategic investors are people who are very familiar with your industry. So let's say - We work in on-chain finance. We talk to institutions, we talk to hedge funds. So hedge fund managers, traders can be very good investors.
Simon: But I think, you know, either an investor is very good already in the industry that you're doing or very good at a job that you have to perform, AKA being a CEO, or the person is a silent investor, right? So there has to be competence, that is being deployed, directly, , in the domain of your work, and then you have a really, really wonderful investor.
Simon: And of course, everything that's inverse, right, , is not a good investor, you know.
Nertila: I agree with you. Based on, some other podcast that I have run so far, majority of my guests have mentioned that, the capital in the future will be focused on the, primitives and, DeFi vaults. Where Do you think the capital and the risk will accumulate in the future?
Simon: I think that capital will accumulate massively in vaults. I mean, what is a vault effectively, right? A vault is a pool of money that -- follows a set of strict rules, and these rules are enforced through smart contracts, right? That's really what a vault is. A pool of capital and a set of rules that are transparent and hundred percent reliable, or as reliable as a smart contract can be.
Simon: Now, if you think about that, it's a perfect vehicle because it contains everything that you need to know, right? A vault could be a saving plan that an employee at a large company invests in every month, right? And it's a very risk-off approach. It has almost no overhead costs, because you have, because it is a smart contract who does the overhead himself, right?
Simon: You don't need people to manage it, which especially when you work on savings is extremely important, right? But in the same way, a vault could be the exact opposite. It could be a high-risk, , partially active managed, vehicle to produce altcoins. So what I'm trying to say, what makes the vault the future of finance is simply the fact that it is so versatile, while also offering transparency and a self-enforcing frame which ultimately brings reliability into it.
Simon: You know, and if you think about financial products, right, having no overhead and having high reliability is exactly what you want. So a vault is truly the archetype of a future financial product, and I think that is... It's just the standard that will come And I think every finance, every institutional player sees that if they look deeply enough into it how obvious the solution is to just use vault instead of, you know, other vehicles.
Nertila: Recently we have had a lot of hacks. What do you think is the impact of those hacks in the crypto ecosystem ?
Simon: You know, I think crypto has an advantage. That advantage is that it's so transparent. When people talk about the hacks in crypto, it's always very emotionally charged because people immediately know that there are massive hacks going on all over in, Web2 and banks are being hacked also a lot, and there's identity theft, and , there's all types of theft.
Simon: And if you actually look into it, the big difference between TradFi and crypto is not that TradFi or crypto is being hacked more. They're about hack- about the same. The difference is that you know with crypto, which you don't know with banks, right? Banks can come out like six months later, a year later to talk to all of the lawyers and all of the PR strategies about what actually happened.
Simon: And crypto, we don't have that privilege because it's so transparent. But I think not having that privilege is actually a reason why I would trust it more. So if you look at all of the hacks, we talk about the wonderful article by, , a friend of mine, who he did some calculations, and he basically put it down to three basis points of all TVL, under some constraints.
Simon: We can argue about that number. But I think the core message is it's not that much if you actually take the entire TVL into account, and I agree with that. You know, like if you're seeing three percent of-- three basis points of all TVL being hacked every year, that's, the rounding error
Nertila : That's very interesting perspective because most of the, sentiment that we see immediately after a hack is everybody's panicking or everybody's been pointing out the failure of this particular blockchain, the failure of this company. Which brings me to the question, what do you think about the current market efficiency?
Simon: I think DeFi is not a very efficient market. I think if you look at, , risk reward metrics of different, products. So normally when you would plot like risk reward, you would kind of get an efficient frontier, and in crypto you just don't really have that. So for example, a very common thing that we have noticed is that, normally would you almost assume there's a linear relationship between the risk that you take and the rewards that you get.
Simon: That's not true. So there's crypto yield that is very, very risky and you get very little yield for it. And then there's crypto yield where you get quite a lot of yield, which has almost actually some of the lower end of the risk spectrum, which basically means it's an inefficient market. So I would say DeFi yield as it is right now is not efficient
Nertila : Simon, thank you very much. I really appreciate your input and your insight and, , I wish you the best of luck with your venture, and hopefully I will get you another time in my podcast to discuss about other interesting topics
Simon: Thank you very much for taking, the time and , I hope that I can come, back soon