On-Chain Credit & The Future of Lending with Ryan Berkun of Teller
Access to credit is fundamental for everyone who wishes to secure a better future for themselves. Yet millions of would-be borrowers worldwide lack this access, in part because they have little opportunity to build the kind of identity and reputation that lenders seek.
Teller* Founder and CEO Ryan Berkun wants to disrupt this system. Ryan believes blockchain technology can dramatically expand access to credit, enabling people with limited capital to not only borrow with greater simplicity, but also build an on-chain identity and reputation that’s open, transparent, and portable.
Ryan sees the merger of on-chain technologies with off-chain assets as the next great extension of the American dream. Home loans, auto loans, and even student loans and other personal debt could all eventually be supported with the types of marketplaces he’s cultivating. This emerging infrastructure could enable a new wave of financial inclusion and economic activity that offer the prospect of rising prosperity for millions while protecting their identity and privacy.
*Teller is a Circle Customer with a Circle account
Jeremy Allaire: Hello, and welcome to The Money Movement. We're filming here at Converge Circle's first annual crypto ecosystem conference. I'm really excited to be joined by Ryan Berkun, founder of Teller, a company that's innovating in DeFi, real-world assets, USDC lending and credit. A lot of really cool stuff. There's a lot of themes I want to unpack there. Welcome to The Money Movement.
Ryan Berkun: Thank you so much for having me, Jeremy. Congrats on putting Converge together.
Jeremy: Thank you. It's a very, very exciting milestone for our industry. I'm excited to have so many founders, so many startups, so many people working in the space here. It's a great opportunity to have these conversations as well.
Ryan: I think it's a testament to the success of stablecoins, and specifically USDC. Every founder that's building in the ecosystem utilizes USDC in one way or another.
Jeremy: Yes. It's come a long way for sure. We were obviously catching up on some of that a few minutes ago, which is actually a good way to maybe segue into your own founder story, talk about how you arrived at Teller, and the mission that you have with Teller. We'll dive more into that, but that'd be a great start.
Ryan: The early days for me was the 2016 ICO bull run. I just got enamored with the use cases of blockchain as just a technology set. The price movements for speculation wasn't as interesting to me, but I thought you could develop such wild and empowering applications with the blockchain. In those days, we were just speaking of there were so many ideas. Finance was one pillar of many verticals that we thought blockchain would have immediate application.
Jeremy: Right. It was the blockchain for this, blockchain for that.,
Ryan: We were the Uber of blockchain base. As 2018 showed us, the one vertical that panned out was finance of all others. I started developing in the space. I started as a developer. I was programming different applications on Ethereum. The days of Aave, of Compound started to get me really excited about what you could do with assets. The idea that you have a global system of assets that can be leveraged for different use cases really piqued my interest.
Before diving into the world of credit, I thought there needed to be some way that a user could get access to capital without having these assets. When I think about the traditional world, that is how lending and borrowing works today. I have some identity and creditworthiness, and I can get access to capital.
Jeremy: Property or whatever.
Ryan: Property or assets. That's one of the most common forms of debt is to acquire an asset and that asset is then backing the loan. That started getting me excited, the idea that the end user could come into the crypto space without needing the capital before. This seemed like the narrative that could bring new users into crypto without Bitcoin. That's where I actually started working on a concept for under-collateralized lending.
It was a pretty simple idea that if you're a good actor in the crypto ecosystem, you can get lower collateral ratios on something like an Aave or a Maker. It went viral. I built an app as a solo developer and crypto Twitter just got really excited. I started meeting different investors in the space. There was a lot of interest in this concept that credit could be possible on-chain. That was the origin of what is Teller today. Our whole mission is to bring no collateral lending on-chain and accessible to everyone.
Jeremy: I think it's obviously a huge opportunity space. The example I like to use is people think about the total addressable market for things like stablecoins like USDC, and a lot of times people think about it as, "Oh, this is going to disrupt the payments industry and the payments industry is this big, and there's this much revenue from payments." I actually think that's a sideshow because I think if we're successful with dollar digital currency models like this, the cost of payments will just go to zero. Effectively, you'll just drive that down.
The real value and the real utility is going to come from the programmability of that money. Very specifically, it's going to come from the ability to take advantage of the time value of money, which is what credit intermediation really is. There's these different monetary measures, M2 is a big monetary measure and M2 money is commercial bank money. Most of that, I don't know the exact percentage, let's call it 90% of that is actually unsecured credit or various forms of credit.
That plays a really big role in the economy and so I'm always just really interested in this idea of how do we start bringing credit primitives on-chain? In theory, just as you were talking about, it's like if you have transactions and transaction histories and various forms of identity and reputation and other things, and you're able to use on-chain technology for that, you actually could deliver credit intermediation far more efficiently, far more inclusively, far more globally. Actually, that's the big opportunity space.
Ryan: I think you just hit it. Everything in crypto that has shown success has been global by default and permissionless by default. Think of OpenSea, Uniswap, Aave, MakerDAO, anyone around the world now has access to these services. That's what will happen with credit where efficiency is not only the capital efficiency moving money around instantly, which as you mentioned with payments, the cost should go to zero, which would be the spend to write it on-chain. For credit, that time should go to zero where I have some type of identity that's globally recognized, which we've never had because credit is not transferable today. Between borders, if you are coming as an immigrant into a new country, that credit doesn't help today. If you are trying to send or access services in a new world, it doesn't translate today.
Jeremy: I think there's this concept of money velocity and money multiplication. I like to think about what I call the physics of money. There's a physics to money and there's a physics of money in the existing financial system, and it has all these time and movement and other constraints. When you get to a raw to the metal world of identity, reputation, and stable value tokens, then you could have extraordinary money velocity, and people who need capital at a moment can get capital at the moment. That should be what we strive to. Let's talk about Teller's products today. You've announced some really cool things. I think USDC.homes was I think one of the [crosstalk] first products that you guys made available, which really caught my attention for obvious reasons. Maybe talk about the products today, where are you guys in your product journey?
Ryan: I'll actually rewind to Teller's first product, which was a bank account associated on-chain loan where a user could connect in their bank account today, that bank account--
Jeremy: If you use Plaid and it tells you what you have.
Ryan: Exactly. It's through Plaid. The money could be used in a vault. That vault had very specific use cases. You could swap for different tokens or you could yield farm. That showed us that there was extreme demand, really high interest to borrow capital to do something but to offer the myriad of services or use cases that people wanted, there wouldn't be a world for us to scale a product that was a vault within a vault. That's where we started thinking about the latest version of Teller. Our protocol today is generalized for any underwriter to offer a no-collateral lending market to consumers.
One of those first markets that launched on us was USDC.homes. See, amazing that the domain is USDC.homes. You could have a mortgage in USDC. What really excited us was not only how large of a market and on-chain service could tap into, but also the demand. Today, as a crypto user, your crypto native credit is excluded completely from the Fannie and Freddie Mae guidelines. They explicitly state that Ethereum, Bitcoin, and other assets are not included, which is wild when some of these assets--
Jeremy: There's a trillion dollars of value floating around in that.
Jeremy: It's not something that you can borrow. Obviously, lots of lending markets in crypto itself so there are certainly options there.
Ryan: If you borrow against your collateral, but not-- [ceosstalk]
Jeremy: Yes, over collateral.
Ryan: What got us excited was the demand that crypto people wanted in that type of product. I think it is a really good narrative to show the rest of the world what's possible here. That your on-chain capital and credit developed in crypto is globally recognized to be applied to a mortgage, which is something that many around the world dream of, getting access to a home. That pool itself is actually run by an underwriter in Austin, Texas. They're processing right now-- I believe around 300 mortgage-
Ryan: -applications have come through. The total value of those would be I think around $100 million. You just think about that movement of capital on-chain and you're speaking of the time value, money, and the accessibility. Now we're starting to see a very, very, very small chunk of an enormous market moving.
Jeremy: There's still real-world property in that arena,-
Jeremy: -but they're taking advantage of knowledge about the person who's contracting their crypto credit readiness-
Jeremy: -and so they're-- [crosstalk]
Ryan: When you think about collateral, what is a good type of collateral? Real estate is one of the best forms of collateral.
Jeremy: That's one of the first. What else are you seeing develop on Teller?
Ryan: What I get most excited about is how we can use our native crypto credit to offer consumers access to capital. I think something that's interesting we're starting to see developed are these validator networks or minor networks, being able to offer capital to end users who have a small business, either an individual proprietorship and those users want to spin up a node or a validator because that's a very clear crypto native use case.
Jeremy: Like working capital financing.
Ryan: Working capital financing. You know where the revenue will come from, you know where the investment of money will go to.
Jeremy: It's CapEx financing in a sense too, right?
Jeremy: These hybrids. I have started a number of companies over the years and just the GE Capitals of the world, all these types of capital pools that would say, "Hey, you need capital to buy equipment, you need capital to cover hiring a few people, this, that," but they're able to assess that. That's real-world utility.
Ryan: Real-world utility because the money's being applied to an end-use case and you know where the--
Jeremy: Productive economic activity,-
Jeremy: -not just yield farming food tokens. [chuckles]
Ryan: It's an interesting conversation because that actual demand still does matter. Something we talked about, you mentioned you enabled the first Bitcoin purchases with a credit card.
Ryan: That's credit. Users are applying capital they may not have today to acquire assets.
Jeremy: Yes, we found a lot of people who couldn't actually pay back their credit. [laughs]
Ryan: It makes sense.
Jeremy: It's a challenging business.
Ryan: Credit underwriting matters.
Jeremy: Yes, risk management, all these things. How do you guys deal with risk? What are the permutations of risk that you're trying to deal with, and then how does that show up in the protocol and/or how people apply the protocol?
Ryan: Great question. Our core differentiator from others in the market is that we are truly permissionless, and we ourselves do not do underwriting, we are not risk assessors, and we do not promote that. We are infrastructure similar to an Aave or Uniswap that enables anyone to create their own pool. That pool has all the tools that are necessary to create a new no-collateral lending market. No-collateral lending markets are applicable across a multitude of industries outside of crypto, and they are applicable to end users in crypto as well.
Jeremy: Someone who wants to use this can come in and say, "I'm going to use this, I'm going to create a pool," they need to be able to do that, meaning-
Ryan: Correct. Underwriting.
Jeremy: -they need to either have the underwriting capabilities or the legal capacity or whatever the things that you need to wrap around that to do that, but they're operationalizing it with Teller.
Ryan: Correct. Exactly. Teller is the infrastructure for that. What's interesting about this new market is it's a little bit more complex than the over-collateralized DeFi. With Aave or Compound, it's pretty clear that the algorithm or the protocol is the underwriter that the user is depositing capital and borrowing against. Here you have three actors. You have that central underwriter that goes after a specific vertical in this case, you have the end borrowers, but you also have liquidity providers on the other end. Similar to how Maple operates with institutional capital, Teller is operating for these underwriters to service the end consumer.
It's an interesting chicken and egg problem solve. I think there is a lot of demand on-chain from crypto consumers to access capital for use cases they couldn't get capital for before. I think a validator network or no network is one of those. Other use cases of capital is just that purchase Bitcoin with credit. I think we saw everything in crypto moves on-chain every time there's demand. Some of the most sought-after use products in the crypto-centralized world that hasn't moved on-chain yet is a credit card either being issued by an exchange, a Gemini card, a BlockFi card, or using a credit card to purchase crypto assets.
Jeremy: Right. Yes, that's a big piece. Talk about what verticals you're most excited about being applied here. You don't need to disclose anything confidential obviously, but what are verticals that you're most excited about? You talked about essentially that CapEx working capital financing for operators in a sense in the proof of stake infrastructure world, right? That's clearly one. Obviously, USDC Homes is a fascinating one. That's more real-world asset tied into something very relatable for people, or auto loans or timeshare properties. What's next?
Ryan: I think I'm personally excited about all the above because credit markets are huge. As you mentioned with stablecoins, the TAM is not payments, it's what you can do with that. For us, that's our excitement with our infrastructure, what you can do with a credit market. There have been several fintechs that have actually approached us speaking about an auto-related market. There's also other fintechs that have come to us talking about student loans and different types of personal debt.
Here's what's interesting when you're building a crypto-native product or solution. Those that will stay and actively use the product are those that are already in crypto. While it is really exciting to power these off-chain and real-world use cases which will continue to move on-chain, transparency is huge. I think the innovation and the excitement of on-chain products is that transparency. When we think about the use of capital and the use of credit, I think we saw that using a non-transparent matter with Celsius' [unintelligible 00:15:55] capital.
Jeremy: Yes, totally. Right. The fundamental flaw was these are these opaque [crosstalk] debt books, you don't know what the hell is going on.
Ryan: How can we leverage this paradigm shift where your financial activity from one wallet is public, it's truly public?
Jeremy: Let's talk about identity. This is an area that we're very focused on, which is cryptographic proof of you're a real person and someone whose job it is to validate you has validated you, but then verifiable claims about that person that are irrelevant that could have to do with some offline activity or asset or other. We have a protocol, the Verida protocol which is open source, open standard. We'll be talking about more of that here in the coming days.
There's this world of what people talk about as on-chain reputation, which is your wiring up wallets and then that's totally decentralized. It identifies that. What about hybrid where you've got provable identity combined with on-chain data, and where do you see that come together?
Ryan: That will be what works, or at least what seems like will work because identity is a gray area. Identity goes from a fully identified publicly addressable individual that is associated with a wallet to a completely unknown wallet with no transaction history. It will be something in between.
Jeremy: We need privacy obviously as well, right? No one wants to be like these doxxed wallets.
Jeremy: That's just a real problem.
Ryan: What I think was interesting from the 2021 year was that users were willing to showcase their wallet if it had an NFT in it. That was interesting. I think it's Twitter and now you have a social profile link with an on-chain activity. That I think is the start to the pseudo-anonymous identity.
Jeremy: Yes, we're seeing people bootstrapping ideas with that and so on. When it comes to the pool underwriter that is trying to figure out whether to give you money for buying a house, maybe that's not enough.
Ryan: Identity matters in that situation. I think it's the use case and how much identity needs to be revealed based on the use case. For a mortgage, you are revealing a significant amount, but that's to the underwriter. The underwriters can maintain privacy around that data while they outsource the capital provisioning to liquidity providers. Liquidity providers may not know, but you are trusting some entity to have some amount of data. That privacy component is massive. There's examples from proving your credit scores above something to proving your age.
Jeremy: For sure.
Ryan: There will be a blend. I think where it ties together is where credit can be dinged, where it can be hit if there's a case of a default. That's both your on-chain credit from different providers spectral or cred, and it's also your off-chain credit if it's being applied for a loan.
Jeremy: Right. Those two worlds coming together, we talk a lot about bridges and not just bridges of chains but bridging the on-chain, the blockchain world--
Ryan: USDC is a bridge.
Jeremy: It is a bridge, yes.
Ryan: It's arguably the bridge of our ecosystem.
Jeremy: Yes. This is a theme that you'll see more from us, how do you have one sector meet the other through bridge and make that happen?
Ryan: You asked what I'm most excited about. This is really what I think is the next unlock where you're able to build up credit on-chain while using a paired-off chain identity because there's trust from the underwriter that you will care if you default because of identities tag to it. Just like the concept of the American dream where an immigrant can enter America and become successful, it's the same with credit, and I think you're going to see that on-chain.
Jeremy: I think that's right. There's obviously a lot of experimentation there. Talk just for the few more minutes we have, we're very much in the thick of it with regulatory stuff and this whole industry is, and there's all this innovation happening and people trying to figure out what's what, where do things fit? Are you guys seeing the structures and things that you have cleanly fitting with, whatever, broker-dealer's securities law or other lending law? Where do you see that happening and where do you feel like the most clarity's needed?
Ryan: Our entire approach has been focused on infrastructure. Regulations are there so consumers don't get burned. We've always felt that to empower the many use cases of underwriting, there will be risk taken. That should be put onto those that are managing these pools. The trust is put onto those who are operating a business that is leveraging the tools of the industry. Just because I'm using Ethereum doesn't mean that I'm doing something neither good nor bad, and fits or doesn't fit into a regulatory framework today.
We view it the same in the lending world that there are opportunities across the globe for lending markets. If we believe that capital efficiency will come into play, you need the most competitive market for every vertical. If we were to tie the infrastructure itself to one framework, that would limit its success, its growth. However, it is important for every single underwriter and pool manager and owner on Teller to comply with the laws that are associated with their jurisdiction and with their specific lending market, which is different in the US than in Latin America.
Jeremy: The internet challenged a lot of existing frameworks for regulating communications and media and other things, and became more open and more global. We're certainly hoping for that normalization and openness in the financial realm.
Ryan: I think that's the goal of money. The goal of money, the goal of lending credit.
Jeremy: That's why we're all here. Awesome, Ryan. Really enjoyed the conversation. Thanks for coming on the podcast.Ryan: Thank you for having me.