Private credit onchain: Fence, Grove and Avalanche on the loan lifecycle

Private credit is a $2 trillion market, and what surprises people is that this market still runs on spreadsheets, PDFs, and emails. What does that actually cost in time? By using technology, we're seeing eighty percent savings in operational costs, so in timings, as well as up to forty percent savings in cost of capital by improving that efficiency. What are you doing at Grove? What is Growth unlocking, and how does the blockchain play into that? Growth focuses to kind of build out and understand how we can take the off-chain assets and bring that yield on-chain. For people still watching and thinking blockchain is hype, what's the version of this that has nothing to do with hype?

This is the asset category best suited for the adoption of Web3 technology, and the reason is that it solves the three primary risk vectors and pain points of this asset class in particular, which are- I'm super excited to have a very, very special roster of guests here today, starting with Anant from Grove. We have Juan Montero from Fence, and we have Mike Manning from Avalanche. I'm Marc from Fifty-One Insights, where we help people running banks and financial institutions understand digital assets. All right, let's get into it. We'll start with a short introduction round, starting with you, Mike, and we'll get right into the questions.

My name is Mike Manning, and I'm Head of Institutional Finance for Avalanche, which is a top-ten blockchain that has been focused on real-world assets or what is now called real-world assets since its inception. I've got a particular focus on and love for private credit, in part stemming from work I did in my last role as the Amazon's first head of blockchain and digital currency, where I proposed a payables solution. Got a lot of traction internally, and I still think is a solution that will come to the market before too long. Prior to that, I worked for two layer one blockchain protocols, Provenance and Symbiant.

So I've been in this space for about eight or ten years, always on the institutional side. Thing that's exciting about this moment is we're finally moving out of pilot into production, and we're seeing that across the board. And I think asset-backed finance and private credit is one of the areas to really get a lot of traction in the very, very near term. Um, hey, all. I'm Anant. I'm over on Grove on the investments and the product side. So Grove is an on-chain lender kind of focused on building out the credit ecosystem, bringing more assets on-chain, kind of working with all stable coin issuers.

Previously, I was at Centrifuge, where I operated the various funds that we had, the tokenized assets of some private credit, some structured credit, some treasury bills. And before that, I was at Blocktower, where we operated the first on-chain CLO structure, deploying into AVS and borrowing from ecosystem members like Sky, and before that in structured credit. Hello, everyone. I am Juan Montero, CEO and one of the co-founders at Fence Finance. We build modern infrastructure for asset-backed finance, and we work with, uh, leading financial institutions like BlackRock, Mo-- Fortress or BBVA in operationalizing anything that it's, uh, focusing on, on financing a portfolio, like a securitization, a warehouse financing facility, um, or a forward flow agreement.

We moved away all the processes, manual processes from spreadsheets, PDF, and emails into smart contracts, a stable coin settlement and generally software. Before that, I was core contributor in one of the largest DeFi protocols in Ethereum, and before that, I was part of the founding team of a fintech lender that raised a hundred million from KKR. So experienced both the pain and the technology that is solving that pain. Let's jump in. Juan, starting with you, you mentioned you've been part of the traditional space just now, and now with Fence, you basically rebuilt the back office of private credit.

Can you just lay out for us what is so exciting about private credit and what do people need to understand about private credit in order to make sense of what we're gonna talk about today? One thing that is very exciting about private credit is the, the pace that it's growing, that has been growing for the past years, as well as the lack of infrastructure for operationalizing or, or controlling that private credit. It's been a, an industry not only like in private credit and private asset-backed finance, but also in some of the cases in the broader market that has been typically or historically dealt with spreadsheets and PDF and emails and very manual processes where settlement happens every week or every month in some of the cases, where reports, uh, come through every month or every quarter in some other cases.

But at the same time, that it's an industry or a segment of the, of the capital markets that it's financing a huge amount of the real economy. You have a credit card receivables, you have auto loans, you have invoice financing, merchant cash advances. There's a ton of activity that it's financed by, by private credit, by one of the structures like securitizations or warehouse financing facilities or forward flow agreements. It's, uh, very surprising it's still at that level from an operational perspective. Private credit is a two trillion dollar market, and what surprises people is that this market still runs on spreadsheets, PDFs, and emails.

What does that actually cost? In time and risk as well. Not only like in time and risk, but also in inefficiencies. I would say it's a huge effort, and there are teams in the companies that are originating this credit that deal exclusively with the reporting and the operations of their facilities. And there are, in a lot of the cases, a lot of payments that happen just one week or fifteen days or one month after they were actually meant to, just because there's a ton of back office work putting together that report, a borrowing-based certificate, uh, details on the performance of that portfolio, sending them over, approving covenant compliance.

There's someone on the other side that needs to review them and spend time at reconciling and everything. So it's about time, about full-time employees that-- fully dedicated to the capital markets operations, reporting and monitoring. But it's also about lack of visibility. I think we're gonna talk about it later, and things that happen in the market because at some point, even if you have a spreadsheet, you cannot-- you don't have a spreadsheet like every second or every day, but every month, and you miss things. And then lastly, because there's so much manual work involved into these processes than a payment that is conditional on covenant compliance, for example, cannot happen every day because there's so much work behind, right?

So there's a lot of idle cost, there's negative carry, there's, there's cost drag, that it's a, a huge amount of a cost. In terms of sizing it, by using technology, we're seeing eighty percent savings in operational cost, so in timings, as well as up to forty percent savings in cost of capital by improving that efficiency. So there's a big margin for improvement. Thank you, Juan. And Mike, moving to you, you've been, uh, part of traditional finance for a long time, and you came over to crypto. For people still watching and thinking blockchain is hype and it's something that's difficult to understand, what's the version of this that has nothing to do with hype?

I would say that to some extent, I haven't really even come over to crypto yet. For me, the thing that's exciting is we're at a, a historical moment in time. And by that, I mean, we really are honest to God about to re-platform finance and capital markets from traditional rails onto blockchain Web3 rails. And that's not gonna be about blockchain or meme coins or the things that we think today of as crypto. It's gonna become, I think, very familiar and ideally, fairly boring. When I talk to financial institutions, I'm not talking about the blockchain so much.

And I'd like to echo everything that Juan said, by the way. And, and the way I talk about it with bankers is one level of abstraction back because we're coming to the topic new. And my message is, particularly with respect to asset-backed finance, is that this is the asset category best suited for the adoption of Web3 technology. And the reason is that it solves the three primary risk vectors and pain points of this asset class in particular, which are fraud, double pledging, and settlement risk. Juan alluded to some of those. How do you know that you've got a loan that's not been double pledged, for example?

That is something that happens on chain. If you, if you sort of step back and look at each of those, though, fraud you can eliminate through digital signatures by the obligor attesting to the integrity of the underlying loan. So if this is a payable and it's signed by the person who's gonna pay it, I can prove that to third parties. That means fraud goes away. Double pledging is satisfied by the observability of ownership. If you originate high enough upstream and the asset is digitally native, there's no way for me to pledge an auto loan into two different SPVs, for example, as First Brands and Tricolor did.

And then settlement risk is-- Juan alluded to just now, the speed with which money moves. This is a tremendous unlock that you can think of in terms of capital velocity and repositioning of assets. You get instant settlement. You also get settlement from the obligor, the, the person who owns the loan, to the current, you know, financial owner of the asset without having to route through an SME's bank account, which ex-introduces counterparty risk or a lockbox, which introduces cost. So in a lot of ways, this is really just about solving-- This is why I'm so excited about this category, is it's solving the problems that are known problems in this category.

You'd mentioned spreadsheets. Here's how I look at it. Asset-backed finance and securitization is composable finance without a composable stack. The thing that invented securitization was the spreadsheet and literally figuring out how we could pool lots of different mortgages together, but it's still a very manual process. We've got-- Think about this asset class. You've got one level of asset, which is the underlying loan, the payable, the auto loan. You've got another level, which is the warehousing facility. And then you've got a third level, which is the securitized notes that come off of the backside. And those are all linked together.

That's c- that's what we talk about as composable finance in, you know, the Web3 world, but we haven't had a stack in traditional finance to execute that in a truly composable way. That's why I think this becomes very exciting. It's not because it's different, but because it's very familiar, and everybody knows what a pain in the asset is to reconcile a loan tape against a loan file. And what if they could just do that in an automated fashion, which Juan will allow them to do because of the infrastructure that he's building. I wanna ask you, Anand.

You're with Grove, and Grove already routes billions of stablecoin dollars into institutional credit products. Can you just expand on that for our listeners? What are you doing at Grove? What is Grove unlocking, and how does the blockchain play into that? I think you should take it and expand, Anand. Vic, he's frozen. Yeah, Grove, Grove's focus is to kind of build out and understand how we can retake the off-chain assets and bring that yield on-chain. So I think that initially started off with an allocation into Treasury bills, where we-- the initial focus was, let's look at what can we take that's an easy asset class that the crypto base is looking for in terms of yield, bring Treasury bills on.

We brought CLO AAA. AAA CLO is still working with Janus Henderson, who I think we put around two hundred and fifty million of that on Avalanche. The goal, I think, over there was to basically understand, okay, how is this ecosystem changing? And I think the two ways we discovered that we could, you know, make a big difference, and we're expanding on this in other ways that I'll mention, but the two ways we initially thought about was, one, how capital efficient can we be when borrowing? So innovating on the borrowing side, can you, you know, co-invest, use your equity capital contributed alongside the senior capital, you know, to be more capital efficient in your allocations?

So instead of, you know, deploying to something first and then borrowing, and so on the back leverage side, we have the ability to borrow alongside our investments. I think that has been a huge unlock in terms of capital efficiency. You know, block-based accounting of our senior facility is super helpful because of these various reasons that I think Juan alluded to as well. Can I just interrupt to kind of ask you to unpack that a little bit? What does it mean to borrow alongside? If you could just be really, uh, literal The way that our investments are set up is we have equity capital that we contribute, so collateral is deemed as eligible.

That collateral is then, you know, we are able to invest into that collateral along the senior. So once you agree on those covenants and the rules and kind of the equity capital that you need to put up in order to borrow from Sky to invest into assets, once we've done that, there's no need to, you know, buy the first hundred in assets and then borrow the next ninety-eight. You can immediately put your two dollars in, borrow that money because of all the codified smart contracts that allow them to lend against these asset bases. So I think that's been the huge unlock.

The second unlock is understanding that asset yields that live off-chain have a big demand on-chain. I think one of the goals there is to dampen the volatility of the crypto markets or crypto-backed lending markets. The second is to kind of, you know, invest in these structures that have been time-tested and working, and where there is actually an ability for us to, you know, bootstrap markets where you can now take these assets that are off-chain, borrow against them, lend against them, kind of, you know, introduce the other aspect of tokenization, where, like, if you have tokenization for servicing, which is what we're talking about with borrowing-based collateral with, you know, understanding asset values, understanding navs.

There's also tokenization for collateralization, where you can now much more easily borrow or lend against these assets because they're tokenized. Talking to some of your colleagues at Grove, my sense is that the deployment, let's say, of the J triple A is more of, like, tokenizing the wrapper. And I think what you're beginning to allude at is how do you get the underlying assets on-chain in a way that unlocks it. I'm gonna posit a distinction here between tokenization I view as tokenizing the wrapper, the ownership structure, it's like a casino chip, and digitally native issuance and lifecycle management, which I think a bit was, Juan was getting into.

And so that's when you've got the loan originated on-chain upstream, and you've got the lifecycle events like amortization and servicing and repayments occurring on-chain, and that's what we can, I think, a real unlock. Talking to some of your colleagues at Grove, I think that that's sort of the next phase vision, and I'd love to actually, Juan, to pitch it to you because I think that... What is your comment on that framing of the tokenization versus lifecycle management, and how do you see that? Because you guys are both active in the Avalanche ecosystem. How do you see that as unlocking the next phase?

As you were pointing out, like, when you move away from just tokenizing or just putting, like, a wrapper on-chain and move the dynamics of a securitization and the underlying loan agreements on-chain, uh, you can automate not only the, as Anand was saying, right, like the dynamics on how to finance the senior node, for example, but also how you finance the underlying assets. What we're seeing with the originators and banks that work with us is that we enable exactly what you mentioned, Anand, but at the underlying asset level. A fintech lender is able to, let's say, earn weight access or buy now, pay later fintech lender.

They are able to originate a loan and instantly send it via API to our system. We will run all the covenant checks, all the calculations, all the verification, uh, to avoid fraud and double pledging, and our smart contract will be able to release the cash instantly. That means that they move from a world where they need to put their own equity, as you were saying, Anand, at a different level. You were talking more like the fund level or, or investor level, right? But in this case, it's originator level. From a world where they put in equity for one week, and then they sell assets to an SPV, to a securitization vehicle, to a world where they originate an asset, they send that information and all the documentation via API, and they, or directly the end of Ligard, receive the cash instantly.

That's huge, right? Uh, it turns a capital-intensive model into a capital-light model, and it makes possible so many other use cases, uh, not only by making the existing ones a lot more efficient but by unlocking things that require instantaneous settlement, like one to three-day underlying assets, right? They could be like acquired financing, for example. I just want to spell that out for people because this is such an important thing that people don't always understand, which is imagine what you're talking about really is collapsing the money rail and the asset rail on the same tech stack, and what that unlocks is very, very significantly accelerated capital velocity.

So what you were referring to is in a typical origination situation, let's say I'm originating mortgages. I might have to balance sheet a month's worth of production or a week's worth of production. Generally, you can only pledge once a week. A week's worth of production on my own dime before I can pledge that into a facility, get money back out, and make loans again, which is the Tradfi version of leveraged looping, right, of RWA looping. What you're talking about today is if the asset is originated on-chain, if the money moves on-chain, when the money moves out, it can-- and the asset is created, it can be immediately pledged loan by loan.

I don't have to wait a week to balance sheet production. Now, my balance sheet as an originator drops from a week's worth of production to one loan's worth of production. That is a phenomenal improvement in efficiency. So that's very exciting. Anand, did you have something you wanted to add to that? A couple of things. Like, the first is that I think what we're incredibly excited about at Grove is you can take this sort of asset that's natively on-chain, you can now pledge it, and then us at Grove, we can immediately borrow against it, so you can, you know, end-to-end codify the entire securitization workflow within, like, a single event even.

I think the other thing is that over the last few years, we've seen the infrastructure develop across the entire sector. So I think even the last two, three years, we've seen the stablecoin on and off-ramp, like, really mature as a sector, really grow. These have made it far easier for people to lend to the stablecoins, kind of take that money off-chain. I also think, you know, Juan, what you guys are building at Fence and kind of what we've seen come up over the last two years is, like, immense improvements in the infrastructure that's available to originators and the technology stack that's available to originators, where, like, even maybe, you know, twenty twenty-two, twenty twenty-three, when we were at Blocktower looking at on-chain credit, there wasn't actually-- We were able to borrow and codify the senior and junior side, but it was very hard to kind of tokenize the underlying follow the pledge collateral, kind of monitor custody.

So I think as these solutions are getting developed, we are very excited to kind of work with all of these partners in this space and allocate to assets that are coming on-chain and being originated on-chain. Can I sort of dive into that a little bit? So maybe take one real deal, like the BBVA facility, where Fence, uh, put the loan agreement into software, so cash to collateral, the checks all reported, they run regularly. Juan-If you could walk us through what changed for the bank in that case, and what were the numbers they would care about.

So they care about, I would say a couple things. One is real-time visibility over the portfolio. This is a portfolio that originates three hundred thousand loans per month. So as you can imagine, like it gets big, it gets out of a spreadsheet scope very quickly. And, uh, they want like to have visibility over that portfolio, how well it was performing, how well it was complying with covenants. But also for the-- in this specific case, for example, like they won the deal because they were able to offer a solution that was, we were calling at the time, like capital on demand, right?

Like the ability for the originator. These originators is a airway success platform. So ten to twenty-five days receivable, very quickly fast turning that if they need to wait for one week until like the loan operations team in the bank, uh, disburses the money, the, the cost, the cost of capital will be increased by around like sixty percent. So it's, it's a crazy number. It's in the hundreds of thousands of dollars, uh, for these facilities, right? And they wanted to do this transaction that wasn't possible with their existing back office. They won the deal because they had that technological solution.

Uh, on what changed, uh, as I said in the introduction, they save eighty percent cost on the operational cost on both sides, on the banking back office or middle office side, as well as in the originator, the fintech lender side. They save thirty or forty percent of the total cost of capital. And lastly, they are able to see all the assets performing in real time. So the risk-adjusted returns are much better, uh, for the bank. So those three things are what changed here, and that was the beginning of basically like reaching one point five billion in assets under administration.

Mike, before we jump to the honest limits and also what still needs to be resolved is we had a case last year. I need to just look at this. The First Brands and TreeColor collapsed, uh, when it emerged that they basically pledged the same roles to several different lenders at once, hidden in the paperwork. Can you unpack for us what did go wrong there, and could that have been prevented by using blockchain? What went wrong is what you just suggested. They were pledging the same asset into two different pools of loans at the same time.

And a big part of the reason why that didn't get recognized is that it was thirty, sixty, ninety-day lags in applying particular cash payment to a particular loan. The syn-systems were not synchronized, so even though the loan was issued and the loan should have been repaying, the lack of an immediate linkage between cash and loan activity allowed this to persist for quite a while in kind of a Ponzi scheme. Now, in a more straightforward term, if you originate a loan and everybody can see where it's owned, you can't double-clock. A lot of people will talk to you about the principle, and a lot of people are increasingly coming to understand the principle.

The thing I'm really focused on is the practice. So I mentioned at the beginning that making Avalanche the go-to chain for private credit, part of that involves recruiting high quality platforms like Fence, another one we're working with called Tranched, another one that's being built called Tear, uh, and then high quality forward-leaning asset allocators like Growth, with, with whom we're working. However, it's more than that. It's also putting in place what I would say the infrastructure elements to make this work. And this is what I'm calling my four pillars of strategy. The four pillars that I'm pushing right now are legal enforceability, which is the one we're really talking about right now, fiat digital cash ramps, which is also implied by this.

You cannot pay in fiat. This, this has to turn into a, an ERC twenty token or digital cash very quickly so that it can be consumed by the asset and amortized to allow that gap or disclose that gap. Third one is ratings, which I'll get to in a moment if we've got time. And the fourth one is then capital, like bringing players like, like Anant in. So to answer your specific questions, how do you prevent it? You've got to get high enough up in the asset issuance life cycle so that you have legal enforceability, and we're taking that very, very seriously.

You can, you can prevent double pledging of an asset once that it is on chain. But the big question is, well, how do I know the asset that's on chain is the original one? How do I ensure that it is originated natively on chain and not digitally twinned, which is what you hear people talking about? Because you can absolutely double pledge an asset on one chain versus in a traditional facility. So you've got to get high enough up the origination path where, for example, the legal documents, the loan documents reference the blockchain, ideally Avalanche, as the control location for that asset, so that you've got this direct linkage now between the point of origination and the asset itself.

You're not doing a digital twin, you're doing a natively digital orish- issuance. The technology exists to do that today. What you need are serious players to commit to that technology, and that's what we're helping them do. That's what we're build-- we're working with law firms to build these reasonable legal frameworks so that you get the-- you turn the principle, which I think is moderately well understood now- right now, not as widely understood as tokenization, into the practice where it actually holds up in the real world. Mike, the technology is here. The will is here. What about the regulatory situation?

Is the US ready to support the system like that, or do we still need to wait for regulation to catch up? I think you had one of the lightning round questions, which is, you know, what's a bigger blocker, law or technology? And my-- what's needed, and my answer was, we need a few penguins. And what I mean by that is, I feel like the industry are these penguins Standing at the edge of an ice floe, looking into the water, worried about a sea lion, and somebody's got to go first. And what's gonna happen is somebody's gonna jump, and then everybody's gonna go in the water.

I think the issues of legal question marks and, uh, technology are what people worry about before they see deals happening. The legal frameworks are here 'cause... And here's the key, is we're not creating new structures. We're just replicating existing structures on chain. This is the rails, not the substance. And so don't issue an NFT. You cannot-- A Bored Ape is not legally enforceable in a court of law. That's always a red flag for me when I hear people saying they're issuing an NFT. You don't have to. You can issue a controllable electronic record or a securities entitlement or a depository token to a custodian.

Common legal frameworks that lawyers understand, that business people understand exist. And this is just ledgering technology. The difference between an Excel ledger or a SQL ledger and a blockchain ledger, if you properly understand it, really kind of recedes. So my sense is that actually it is the will that is missing. There's a lot more curiosity than investment in doing it, and I think that'll break very, very quickly when we see some large rated deals come to the table, which we should hopefully see on Avalanche before too long. I am going to ask, uh, you guys the lightning round.

We're gonna do it ourselves. So I just sort of answered this question to some extent. Most important thing that's needed for large scale adoption. This is a lightning round, so go quick. Juan, you first. I think this is, uh, in part like putting the tokens or the assets on chain natively. It's not a technological problem to solve. It's relatively trivial. Uh, it's a legal problem, and it's a more like experience kind of thing where you just need like people that are relevant. I always say something similar to your penguin, penguin things. It's everyone in this industry likes to be first in being third, and it's exactly that, right?

Basically, whenever there's one that jumps, there will be a lot of followers because the technology will be very clearly used. Now, that's one thing, legal time, so like, uh, experience. The other thing that I think is needed for the industry to be adopted is the institutional grade methodology. So all the covenant tracking, proper verification, execution of a structured finance, not simplistic like, uh, borrowing facilities, but properly like trance facilities. You can be financing the assets as they are done in a pro-- in a regular securitization, in a traditional finance securitization. Anant. Yeah, I mean, I think the lenders are here, so I think what we're really looking for is that end-to-end originators to originate assets that are on chain and borrow against them on chain.

Most tokenization today, real rebuilding or just repackaging? Juan. Most tokenization is just repackaging, putting a digital twin on chain. Anant. I would agree, but I think six months, nine months will change. Okay, we are three for three. The one comment I will make is I think the industry right now is building leveraging platforms. We need to start bringing-- building lending platforms. We need to refinance the real economy, not just lever it up. The banks adopt this because it is better or because they fear missing out. I would say we are seeing like because it is better, because we're hiding, almost hiding like everything that it's blockchain, so we just talk about the benefits.

Yeah, I think it started out of fear, but I think we're reaching a point at which collateral is becoming useful for a variety of reasons. We just need an open ecosystem in which we can use this collat- Totally agree. We're starting with fear, we're gonna end with opportunity. The one nuance I would say is that I think it's not collateralizing and lending. I think it's really the lifecycle events of fraud, double pledging, servicing efficiency, which is a slightly different use case than collateral. One thing this technology should never be trusted to do. Juan. Underwriting and structuring, like the actual legal and expertise part.

Anant. Yeah, I think that tracks. The underwriting is incredibly difficult. I think the other thing is, you know, bespoke deals need a flexibility, and I think that we should always understand how to, you know, include that flexibility when it comes to the code. So like code should do ninety-nine percent, we should flag that one percent. We did not collaborate at all ahead of time. That was my answer too, underwriting. This is a settlement and operational technology. It's not a judgment technology. All right, I'm gonna start with how complex is it to deal with waivers, PICS, et cetera, on chain?

From Lorna. That's probably more for fans. I would say it is complex from a system perspective because you need to build all the, the building blocks, let's say, the Lego pieces that allow you to replicate any covenant or any structure on the interest payments like cash or PIC or, or whatever you want like the, the amortization to be or the tranches to be. But once you have that system, it's fairly simple. It's just a configuration that we do at the beginning of the transaction. Anant, go ahead and answer. I would say for the on-chain side, I think what we've seen historically is the accrual mechanisms are pretty complex to put on chain, but I think the ways that, you know, we're getting around or understanding that better is kind of more simple accounting mechanisms like debit, credit, that are then validated or verified by reviewing the, the rules.

Next question that I'm gonna ask myself because it certainly comes to Avalanche. How important is the specific chain used when putting a facility on chain? Does Goldman Sachs care if assets are on one chain over another? Will banks make their own chains of ex-- et cetera? Right. So I'm gonna talk my own book here a little bit, but yes, it matters which chain you should be on. You should be on Avalanche. In a less self-interested way, though, I, I have a framing for this, which is there is this view in the industry that I would call opportunity through optionality.

We wanna be able to go wherever possible. Spoke to a GSIP the other day who said, "There's a hundred and fifty chains out there. There are gonna be more. Our job is to abstract that complexity away, so wherever our client wants to buy a, an asset, they can go do it." I actually think that's misguided. I think that I would instead propose distribution through depth. Because what opportunity through optionality does is it institutionalizes fragmentation. It is very, very hard to get to a critical mass. Increasingly, this is not a technology issue. This is a participation issue.

I think you are-- Yes, Goldman will say they don't care what assets are on the chain, but they do care who's in the room. And what I think we want to do is start having fewer rooms full of people who are serious. It's not gonna be one chain, it's not gonna be a hundred. It's gonna be something in the five to six range, and I think we would be better off focused on generating liquidity rather than generating optionality. Juan and Anant, any perspectives? I'm clearly coming from an L one perspective. Part that is relevant when choosing a blockchain is how resilient it is, how much uptime, and how low the possibilities are for you one day to come and try to do something and it not being available, or it being like against you because the person or group of persons controlling it decided like not to pay the services anymore, right?

We're seeing this with AI. I think-Like, this is very obvious in the case of value movement, assets or cash. So I'm not sure if they care about what specific chain, but they most probably care about not having, like, single point of failure or minor or very low points of failure. Anand. I think you both made great points. I think security and ecosystem are, like, core, core considerations, where, like, the blockchain is secure, that gives you the security of, like, wanting to put funds on there and, you know, that can kind of trace down a long graph.

And I think the ecosystem is what matters the most, where if the distributors, the, you know, infrastructure builders, the observability, the kind of on and off ramps are there, then it makes it far easier to bring more distribution and tooling on. Okay, last question is a meaty one, and I'm gonna let Juan, you take a crack at it first. It's from Bill. "Please clarify what portion of private credit infrastructure you're proposing actually operates on-chain versus off-chain. When originating loans on-chain or collapsing the money rail and asset rail doesn't address future receivables, covenant behavior, or borrowing base fundamentals." I don't think I agree with that.

"And because your settlement substrate appears to settle on a, only on a gross basis," which I don't think is true if, if done right, "most of the credit facility economics still need to be managed traditionally. So where precisely does real capital efficiency improvement come from beyond operational automation?" I'm gonna let Juan, you take a crack at that first. Uh, Anand, you can as well. I am suggesting to put on-chain all the parts that are required to reach an agreement between the parties, and that may differ transaction to transaction, right? That we may see in some cases, like what we are seeing in the DeFi world, where a hundred percent of it is on-chain.

And it's because the parties, like, may not have, like, a common jurisdiction or may not have, like, a common sign agreement, right? There are, in some of the cases where you want, like, the rules to be enforced, but as I think, uh, you and Anand said, cannot account for change of control or things like that to be dealt with by the blockchain or by a smart contract. So you want to have, like, a big, a part of it on the legal side. Why can't you trust the blockchain to deal with change of control? That's, like, the primary thing blockchain does, is it changes ownership.

Change, change of control as in, like, the, for example, like, there are a lot of covenants in, in these kind of warehouse facilities where they don't want, like, change of control of the originator or, or the servicer, and that's a covenant that would, would trigger, like, a covenant breach, right? And the blockchain doesn't know until, like, the equity of the originator or the top co is, uh, is put on-chain. But there are things like audited financial accounts, things that a smart contract cannot solve by themselves. Those are the things that are in the five percent or the one percent that are not in the day-to-day.

I think, like, what should be put into smart contracts is money flows and value flows, so money and asset flows that can be automated and that can happen, like, in ninety percent of the cases, ninety-five percent of the cases. That's where the big value is. We'll probably differ a little bit at this, on this theory, and I'll come back to it in a moment. But Anand, do you wanna just answer that, your thought quickly about what needs to be on-chain versus off, and then I'll come in and- In my mind, what the debate is a little about is, like, we have these components of, you know, like, three capsules.

So let's say if you're the originator, you can put all of the borrowing base and the asset information on-chain. If you are in a facility where you are warehousing or lending, you can kind of, you know, put that infrastructure, those covenants, those waterfalls, kind of that structure on-chain. And then finally, you know, if you're a senior lender, if you're, like, back-levering or, like, lending or borrowing against this, you can also put that infrastructure on-chain. Today, we have all three different components being built out. I think the goal is trying to figure out how we wire these together.

And I think at the end of it, maybe, you know, like, the answer is we put it-- we can put it all on-chain. Just today, you might put them on-chain separately and then figure out how to wire them together. Let me respond quickly to Bill, and Juan, this is where I may differ a little bit. I'm-- I think that there's a way we can get to every single life cycle event being represented or executed on-chain such that you can even transfer the servicer from a smart contract A to smart contract B with, if it's properly defined in the legal documents.

But more than change of control, I think what you really can do is speak specifically to some of the things that Bill raised. So not addressing future receivables or covenant behavior. I don't agree. I think there's two steps here. One is, what is the buy box? Like, what is the definition of something that hits the credit box for a receivable that's not yet originated? You can encode that in smart contract, and when a receivable comes in the door, it tries to get applied to the warehouse facility, a smart contract either accepts it or rejects it.

So that's how you ensure that future receivables that are placed into this pool continue to honor the same covenant behavior, the same covenant borrow box. And then about covenant behavior. Well, a lot of this is, comes down to how well do you define this on-chain? Let's say a covenant is you miss a payment by fifteen days, and that loan therefore falls out of the borrowing base for that facility. You can absolutely implement that on-chain. So I think that there's a lot of... And then fin-- sorry, the final question about settlement substrate appears to settle only on a gross basis.

Not at all. I think this is one of the things where it gets very, very powerful. Let's come back to the credit redeployment example we were talking about earlier. I'm running a warehouse facility. I've got a bunch of BNPL loans in there that have a very short duration. The consumers pay the hundred dollars for their trainers. It shows up. It rattles around that facility for a little while in a traditional world before it gets applied to the specific loan, at which point it can be amortized, and that money can then be redeployed again. If you're doing this right on-chain, that money payment is coming in as an ERC-20 token or a stablecoin of some kind.

It's getting applied directly against that one loan, not against the pool as a whole, but mapped to that particular loan, which is amortizing and then pushing that stablecoin back out for redeployment to another loan. So I think a lot of these things, and Bill, hopefully, I've, I've spoken to some of this. I still haven't addressed all of the issue as to what's on-chain versus what's off because there's personally identifiable information. There's other-- This is a very rich topic that I can't fully unpack in this just call. But I do think you're getting capital efficiency by doing some of the things like that, which are, you know, handling future behavior, handling, you know, net settl-- not net settlement, but real, you know, in, you know, asset-by-asset settlement and, and making the facility just sing much more fast on, on capital allocation deployment.

Thank you, Mike, and appreciate you taking over here. Thank you everyone for joining. I think it was a, a great panel despite the technical difficulties. Thank you everyone, Mike, Juan, and Anand. If you are interested in learning more about this topic, you should have an eye on your inbox. We'll send out a report on that, that we published together with Avalanche. Everyone who joined today will receive that in their inbox, so please keep an eye out. And we'll also link all the companies, Fence and Rail and Avalanche, in the show note. Please check them out.

So that's it. Thank you for joining and, and all the best. You obviously like this video enough that you got to the end. Listen, do me a favor, hit that like and subscribe button because I think you'll like it. And if you want even more, with more I mean incredible alpha, research, and digital asset market updates, subscribe to our newsletter on 51, that's the number 51, insights.xyz and get the most actionable insights on digital assets. See you next time.