On the Menu: Steakhouse Financial Is Serving an Entirely New System

Steakhouse’s co-founders – Sébastien Derivaux (below left), ADCV (the lizard), and Mark Phillips (not pictured) – met through their work with MakerDAO, the pioneering entity behind the dollar-pegged, decentralized stablecoin DAI. Their advisory combines expertise in TradFi and DeFi in an effort to bridge both worlds, with a distinct focus on a key ingredient: stablecoins. Mitigating rewards and stability, security and risk, these assets – if well designed – have what it takes to form the foundations of an entirely new-and-improved financial system. Steakhouse is poised to lead the build. They still count MakerDAO as a core client, among a peerless roster of partners including ENS, Arbitrum, LidoDAO, and many more. They’re also strategic advisors to the yield-optimizing platform Morpho, running Morpho vaults stocked with the real-world assets that will finally entice traditional institutions toward DeFi lending.

Speaking of RWAs, according to Steakhouse's Sébastien and ADVC – both interviewed here – it might be time to call them something else. 

CS: What gap in the market or pain points were you responding to when you founded Steakhouse?

SD: We all had experience in TradFi, and one thing we noticed was a lack of financial expertise deep in the ecosystem. There were amazing software developers, technicians, governance facilitators, and community managers, but we saw a knowledge gap when it came to financial institutions – which, ultimately, is what these organizations are. Sure, it looks like you’re building software, but you’re also a financial institution. You need a balance sheet. You need to understand profit and loss. You need to make a sustainable profit – otherwise, who is paying for the community support? When we came in, the reports were missing.

CS: You’ve advised across a variety of DeFi protocols, but you’ve really zeroed in on stablecoins – which is quite a unique focus.   

ADCV: We’re probably the only stablecoin specialists in the space at the moment. Part of what we do is help stablecoin issuers understand the demand side – what the elements of their go-to-market strategy could be, what levers they could pull, and what user segments they can identify to target. But we also advise on the asset side, to improve the backing of the stablecoin. This flexible framework is something that we've already proven out with MakerDAO. Now we're starting to apply it with centralized issuers, too. 

CS: Steakhouse published an operational manual for stablecoins in fall 2023. How has the conversation changed in the year since?

ADCV: The conversation and understanding around stablecoins has definitely matured. At the time we wrote the paper, decentralized stablecoins were all the rage, and people were focusing on how they could be designed on the asset side. But what we tried to do was explain that a stablecoin starts and ends with its users. The asset side of the equation is something to be solved in a second step – one that only exists if there is a demand for the stablecoin in the first place. After you put your primary focus on the user, then you can structure the stablecoin. For example, applying simple, even orthodox bank management practices can organize the balance sheet in logical and rational ways.

Today, we’re starting to see a lot more experimentation with stablecoins. USDL is a good example: a fiat-backed stablecoin that takes advantage of a beneficial regulatory landscape and jurisdiction to experiment with yield. 

CS: High yield, even, in the case of USDL. How do you draw the line between innovation and risk taking with this type of asset? How do you manage risk while offering higher-yield products? 

 SD: We only have a handful of yield-bearing stablecoins so far – USDL, USDM, USDY, a few others. What’s interesting is that despite perceptions, they're not taking on more risk than any other stablecoin. In a way, they are actually a bit safer, because they are issued within a better regulatory regime. Honestly, it’s about giving users the yield that they should have received from the start. It’s correcting a mistake. Sure, there is some security regulation that obscures the debate, especially in the US. But in principle, it should have never been the case that institutions kept the yield. That's something we want to solve in crypto: to not replicate the same bad behavior of banks in TradFi. On the risk side, some stablecoins and lending protocols are taking on more than others. Some are conservative. We try to err on the latter side. We only add regulated real-world assets and blue-chip cryptocurrencies. But in a permissionless world, everyone can choose the best fit for themselves. That’s not a bug; it's a feature. 

CS: Are stablecoins a means to an end for you or an end in themselves? As in, are they tools for moving all value onchain, encouraging adoption, or more radical goals? Or are they just a nice investment?  

SD: The stablecoin will be a first step to unlocking all the features of blockchain. Eventually, of course, we’ll need payment systems to make it work – to make purchases online, to invest in assets, whatever. It’s so easy to put assets onchain – shares of companies, debt, bonds, equity, all of it. You can rebuild the entire financial system, and it’ll look a lot better than the one we have now.

CS: In the conversation about web3 / web2 parity, people get caught up with the usability of the interface. But that is cosmetic by comparison to what Steakhouse is , right? You’re talking about redoing the electricity grid, not installing new light fixtures.  

SD: Getting TradFi working on top of DeFi is a mission at Steakhouse. But you are right to point out that the UX in DeFi is far from perfect. If you are using non-custodial wallet, you can lose everything quite fast. And if I enter the wrong address and lose all my USDC, Circle won’t care. That’s why we need stablecoin options that are more retail-friendly, with customer support that can help you recover assets or insure payments. Bringing the same protections we have on credit card or bank transfers onchain means more trust assumption, more intermediaries. That is what we are trying to get rid of in blockchain. But the good news is that if we start from no intermediaries and no trust – which is layer one of the blockchain – we can add those components. The opposite is not possible. You can't build a trustless, decentralized system on top of existing institutions because you would need to trust the banks, and they are certainly not permissionless. 

CS: How bullish are you guys on self-custody and decentralization?

SD: There is no one-size-fits-all answer. It's a spectrum. We are decentralization maxis at Steakhouse. We don't even have a bank account. We are completely onchain, and that works well for us. But we also understand why some people might want intermediaries or custodians – people who don’t want to or can’t spend the time learning how to do things properly on the blockchain, for example. That makes total sense. We can bring a “light” version of the full permissionless and decentralized experience to people who want more guardrails and more intermediaries. The whole point is to provide people with every possible option, then let them choose what they want.

ADCV: It’s worth stressing that you need a decentralized settlement layer for that level of modularity to work at all. From a financial perspective, we see decentralization not just as an ideological objective, but as a key aspect of the value proposition. Using a permissionless blockchain that's credibly decentralized, like Ethereum, can benefit financial institutions and remove many elements of counterparty risk that they would otherwise be exposed to. As long as the base layer is decentralized, you can build an ecosystem of different degrees of centralization depending on the user's preference.

CS: People seem to find it difficult to decouple ideology from infrastructure in crypto. The value prop of the technology gets lost. Do you think that creates a barrier to adoption? Say, if people think you need to be “pilled” or adopt some type of philosophical position as opposed to just enjoying the better infrastructure.

ADCV: I think Ethereum's biggest innovation is that it doesn’t actually depend on ideology to advance adoption. Through the use of well-designed market incentives, they've proven that you can build a large, sovereign economy on a decentralized network. 

At the end of the day, profit-maximizing entities don't care about ideology. And as long as you can demonstrate that using permissionless blockchains presents a lower risk and better margins – because they’re decentralized –  even a traditional financial institution will see it as a value proposition rather than something they need to buy into ideologically, wholesale. 

CS: “RWAs are the new DeFi.” Do you agree or disagree with that statement? 

SD: RWAs are an extension of DeFi – a new frontier, for sure. If you just have permissionless stablecoins, fiat-backed ones that aren’t earning yield, and all the cryptocurrencies, that's not a super deep financial ecosystem. We need to onboard real-world assets, and particularly financial assets, because those are not only easier to tokenize, but there is also way more utility there. 

ADCV: We prefer thinking of them as “offchain assets” rather than real-world assets. When you say “RWAs” to a banking supervisor or a treasury manager in TradFi, they think of risk-weighted assets. It makes things very confusing. “Onchain” refers to things like a Morpho lending market against ETH, which is a sovereign, decentralized, purely digital native asset. If you borrow ETH against USDL, for example, we are talking about a representation of offchain asset components. The distinction matters to the extent to which a user depends on offchain assets to do settlement on decentralized rails. That’s not necessarily a concern if you’re just holding ETH.

CS: Isn’t the word “chain” a trigger to some of these hypothetical bank employees, who will associate it with highly volatile cryptocurrencies? There’s a move lately to abstract the language a bit to diffuse that skepticism. “Real world assets” seems more familiar than, say, “tokenized t-bills.”

ADCV: We're not shy about using the word “crypto,” even when speaking to normies. For myriad reasons – some good, some bad – people still use mainframe systems that were last updated in the 1970s. This more advanced digital settlement layer that we are conducting business on just happens to have the feature of crypto assets as an economic incentive mechanism for users – which is something that could fade to the background eventually.

CS: That brings us back to cosmetic improvements. The Fintech product is prettier, faster, easier to use, but as you say what’s under the hood is still 50 years old.

ADCV: A European neobank from the 2000s may have brought in a couple people in marketing then had to hire 200 backend engineers to connect to the existing banking rails. From the perspective of a financial institution that's evaluating different technologies, hearing, “we're just going to completely ignore the existing settlement layer that you use today and make a new one” is what’s scary. That’s what freaks people out, way more than terms like “permissionless,” “crypto,” “chain,” etc.

CS: The tech is always faster than the regulation – and the marketing departments! With the speed of change in the space, though, how do you stay ahead of emerging risks? What tools and processes are you using to update your models constantly to manage that?

SD: Obviously, you need to stay ahead of the news. But that's why we want to target institutional lending: it’s not possible to analyze everything. There is just too much happening in crypto. We prefer to stay in our niche and to focus on the potential hacks and exploits there. The space will become safer as the community gains more expertise. If you look back to Ethereum’s Genesis, you got your private key sent to you in an email. That was the level of sophistication at the time. There is still risk, but our tools are getting better every day.  

ADCV: We've always been advocates of the original vision that Vitalik had for Ethereum. You can ensure better prudential outcomes when you let self-executing “smart contracts” regulate a transaction between two people. If we take the perspective that people in a regulatory setting are generally of good faith, and that they really care about protecting consumers, you really can see this technology being used to improve the likelihood of outcomes that are better for the consumer.

One thing that makes things worse from a regulatory perspective is gaslighting people into thinking that something is decentralized when it's not. We focus on what counts. For example, the way we set up our Morpho vaults empowers lenders to restrict or veto our decision making. Obviously, this makes it more difficult to add things like points and perks, but we think it's the correct approach in the long run – particularly if you want to involve institutions. This is why we've seen adoption of our Morpho vaults by institutions who have maybe been reluctant to adopt DeFi lending in the past. Morpho has really cracked it with this customization. Now we're creating tools on top of it with a decentralized mindset.

CS: How do you handle a situation where a platform-level exploit affects your vaults slash what are your biggest concerns or worries on the data?

ADCV: Obviously, a platform-level exploit is the type of block that you can't really plan for adequately, and they tend to be total-loss-level events. Look at any hack in recent memory – even ones that are socially engineered. The safest approach is to opt for technology and smart contracts that are simple. Fewer attack surfaces make it easier to evaluate the robustness of a smart contract setup. In this regard, Morpho is very simple. Kind like the original MakerDAO smart contract philosophy: design something once, in its simplest possible form, and remove as many levers to manipulate things as you can. Often, hacks take place across upgrade paths or the little back doors that allow design or developer teams to make small changes down the line. If you remove these, you remove the prospect of those hacks. Our approach is to lean on a simple architecture like Morpho’s and rely on immutability to guarantee perpetual security. Of course, that means you have to be extra careful during the initial setup. But the upfront investment in time and effort is worth it, and it pays dividends in the future in terms of peace of mind – for ourselves, and for our users.

CS: Would you say you’re optimistic over at Steakhouse?

SD: Absolutely. We take a very positive-sum view of the world at Steakhouse. And there are lots of things to be excited about. Morpho is one of them. Steakhouse's mission is to make finance open and transparent, and working with Morpho is helping us get there. They're putting in place the rails that will make it possible for the traditional financial markets to come onchain. The Morpho team is young, too, which gives a lot of confidence about the future: if this is the generation that's coming up behind us, the future is bright.

Generally, we’re excited to help further the adoption of stablecoins. We want there to be as many stablecoins as possible, and we're happy to work with all of them if they're willing. We already work with the best.