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Hey all, BlockWorks co-founder, Michael at Palito here, quick break to talk about something we've
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just launched, BlockWorks Investor Relations. As the market shifts toward institutional capital,
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investors want more transparency, more standardization, and a higher level of professionalism.
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But the traditional IR model is slow, manual, and not built for how crypto works. If you're building
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on chain, your data is already live, your business is already transparent, the challenge is turning
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that into a clear, credible story for investors. That's exactly what we're solving with BlockWorks IR.
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It's a single platform that brings together real-time analytics, branded investor portals,
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and hands-on advisory support so you can communicate what matters. If you're an on-chain business
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looking to level up your investor strategy, check out BlockWorks Investor Relations at blockworks.com
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slash investor-relations. All right, back to the episode.
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Nothing's said on 0x research is a recommendation to buy or sell securities or tokens.
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Ditz podcasts this for informational purposes only, and any views expressed by anyone on the show
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are soldier opinions, not financial advice. Bokatio, Ryan, and our guests may hold positions in
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the company's funds or projects discussed. Morning, everyone. Hope you're having a fantastic day
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too at the digital asset summit. My name is Luke Lazer. I'm the head of research here at BlockWorks.
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And today, I'll be talking to you about DeFi's yield curve, how it was built, and what it can signal.
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In traditional markets, yield curves and term structures are foundational, and we see them everywhere.
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Interest rates, commodity futures, the VIX term structure, plenty of action in all of these
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markets in recent weeks. These forward markets aren't just used to speculate on the path of
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the underlying. They're used to hedge both price and duration, to express views on positioning
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and time horizons, and to understand where markets may be headed. But for much of DeFi's history,
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we simply didn't have this. We had headline yields measuring what was realized historically,
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but we lacked an on-chain yield curve of depth and significance for the market to price where
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crypto's yields would be headed in the future. This has changed over the past year.
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Today, the building blocks for an on-chain yield curve are in place, the components of which
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are created, traded, and priced entirely on-chain. At the top of this system is Athena.
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It takes user deposits and deploys them into a blend of strategies.
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Treasury bills, stablecoin lending, and delta-neutral positions in perpetual futures
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earning the funding. It sees ladder 2, stablecoin lending, and the futures basis that,
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importantly, capture the carrying cost of levered long positioning with that carry yield passed
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back to SUSDE holders. Historically, this carry yield has been attractive, ranging from 5 to 10%,
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sometimes hitting as high as 25%, with low or zero variance in the principal value,
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but high variance in the yield. Athena's instruments have found some of their strongest product
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market fit on Pendle. Historically, we see 20 to 60% of the supply of these instruments
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traded on Pendle, representing several billion in notional value.
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Pendle takes a yield bearing asset, like Athena's SUSDE, and splits it into two components.
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The principal component, functioning as a zero coupon bond with a fixed yield to maturity,
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and the yield strip, offering a claim on the underlying instruments yield into a set expiration.
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We now have a market not to trade the underlying asset, but rather the expectation of its yield
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into the future. Rather than just viewing the headline yield, we now have a market that reveals
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the implied yield. When you line up multiple maturities, you produce an on-chain yield curve,
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revealing the market's implied path of yields across various points in time out into the future.
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Now, just like in traditional markets, the slope of this yield curve can be positive or negative,
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reflecting classic, contango, or backwardation.
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Shown here is an example of the yield curve in backwardation downward sloping,
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with a snapshot from December 2024, revealing that this market was pricing declining yields.
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Next, we show an example of an upward sloping yield curve and contango with this snapshot
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from April 2025. The back month implied yield is modestly above the front month,
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revealing that this market was pricing rising yields. But these are just snapshots of the yield curve
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at particular points in time. How can we track this slope throughout its history?
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To do so, we produce the rolling term spread, measured as the difference between the back month
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implied yield and the front month. Positive values on the term spread reflect contango,
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while negative values reflect backwardation. From here, we ask the simple question,
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does this actually matter? Can the slope of this yield curve tell us anything about where markets
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are headed? Liquid markets are rich with coin toss opportunities. Can we identify points in time
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in which the odds might skew in our favor? So, we examined how the term spread relates to
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forward returns on Bitcoin, and the results are extremely clear. Steep backwardation, or large
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negative values on the term spread, precede the most negative returns on Bitcoin over the coming
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90 days. And, virtually, as we move to the right on the x-axis towards contango and a positive
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term spread, we see the most positive forward returns on Bitcoin over the coming 90 days.
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Similarly, this next chart shows what percentage of observations within that term spread bucket
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recorded positive returns. In nearly 100% of the observations of contango and a positive
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term spread, forward returns on Bitcoin were positive over the coming 90 days.
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And, as we move left on the x-axis into backwardation, we see the probability of positive returns
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collapse. In nearly 0% of the observations of steep backwardation with a term spread value beneath
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negative 7%. We saw almost zero positive forward returns. So, if the slope of this yield curve
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actually matters, what drives its shape, and when can we expect signal? What we find is that the
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underlying yield regime has a strong inverse relationship with the term spread. Contango is
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meaningfully over-represented in low yield regimes, while backwardation is meaningfully over-represented
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in high yield regimes. The front end of this yield curve will consistently move in line with
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current market conditions, but the back end, holding more duration, consistently points to where
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yields are expected to normalize on longer time horizons. To this extent, the term structure is
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simply just a pointer towards mean reversion. So, if the term spread relates to the underlying
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yield regime, and it can give us a leading indicator to changes in the price of Bitcoin,
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can it give us a forward-looking signal to changes in the underlying yield and in turn the cost of
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carry? Yes, what we show here is the term spread plotted against the forward 90-day change in the
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underlying yield, and we find a strong positive relationship. Backwardation, shown in the lower
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left quadrant here, consistently precedes large declines in the underlying yield.
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Contango, on the other hand, shown in the upper right quadrant, consistently precedes increases
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in the underlying yield. To go one step deeper, one might make the assumption that if the
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pendulum market were perfectly efficient in pricing yields, implied yields would track that of
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the underlying, or that premiums and discounts would net out. But what we find is that's actually not
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the case. In the same way, equity option implied volatility, almost always prices a premium to
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realize volatility, or how dated futures tend to trade at a premium to settle price. We see the
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same to be true for implied yields on Pendle, almost always commanding a premium to the underlying
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yield. On Pendle, bond buyers are short, the entire right tail of the underlying yield distribution,
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beyond the implied rate. They require a premium for forgoing this exposure.
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On the other hand, the yield strip is perhaps the most precise and liquid public market hedge
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to the carrying cost of levered-long inventory, financed in either the perpetual futures complex,
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or an on-chain money market like Awe. Yield strip buyers will pay a premium to acquire this hedge.
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With this, this yield curve reveals the risk premiums created from hedging levered-long positioning.
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Again, bond buyers receive this premium, frequently realizing fixed returns in excess of the
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underlying variable yield. When Awe listed the bonds as collateral last summer during a high yield
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regime, they saw blockbuster demand, growing from zero to over five billion in collateral,
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posted in the span of months. Additionally, the bonds exhibited collateral utilization rates
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multiples higher than the underlying SUSDE itself. I think this lies a little broken.
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Out of any instrument within crypto listed on a major on-chain money market,
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it was the SUSDE principal tokens that exhibited the highest percentage of their supply
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to be posted as collateral on an on-chain money market. All of this taken together suggests that
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high yield Athena bonds, maybe some of the most attractive financial instruments crypto has to offer.
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To acquire the bonds or the hedge, one must trade on the yield curve, impacting its slope.
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To conclude, what we now have in DeFi is something we didn't have before. In on-chain yield curve,
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hyper-specific to the on-chain financial system, giving us signal into how the cost of carry,
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price level of Bitcoin, and all metrics downstream of these might change into the future.
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All of this research and data you can find at blockwrestresearch.com and I'll be at the
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blockwrestre booth later today if you'd like to discuss or see what the yield curve looks like today.
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I want to thank you for your time and enjoy the rest of the conference.