Episode 8
Overnight: Passive stablecoin yield through USD+

Our guest today is Max, co-founder of Overnight protocol. Overnight's flagship product is USD+, a fully collateralized stablecoin that pays its holders daily yield by deploying its collateral into different strategies on-chain. 

In this conversation we explore, how Overnight works, what makes them unique, and how the idea of a yield-bearing stablecoin came about. We also dive into how Overnight thinks about risk management, their risk framework for assessing a new protocol and some of their plans for the future. 


My name is Oscar, I'm your host, I help products at Exponential, and this is Digitally Responsibly, a series by Exponential DeFi, where we're animation to bring rationality into the industry and also make it more accessible to all types of investors. In this series, we invite protocol builders to talk about their innovations, what makes their protocols unique, and also how they manage and mitigate risk. Today we have overnight the team behind USD Plus as our featured guests. Great to have you, and thank you, Max. Thank you for inviting me. Pleasure to be here. That's great. So before we jump into overnight, I always like starting by asking our guests, how did they start into DeFi slash crypto, and when did they decide it was time to go all in? Yeah, thanks for this question. So my background is essentially traditional finance, you know, JP Morgan, Morgan Stanley, and then I spent 17 years with the Boston Consulting Group. And around 2017, I was advising a bunch of my clients and helping them, you know, start building new ventures in the crypto space. My clients were very large banks, and I very quickly found out why large banks are probably not the very best investors into crypto projects. But yeah, that brought me into the DeFi. Actually, that brought me into crypto, got me interested. I got to start learning about new models, new protocols, and became very seriously familiar with the space. And then at some point in time, I wanted to, you know, to start building my own businesses instead of working for someone else. And I built my first business, which was called Mac49 Vostok, which was part of the global franchise called Mac49 out of Silicon Valley. We were building, you know, breakthrough businesses for e-games for corporate clients. We sold that business about two years ago, and I was thinking, you know, what can I do next? And, you know, I just imagine, you know, going back and, you know, working for someone, I wanted to start a new business. And I wanted to do something in fintech, because that's the only thing I really know about. And then I really kind of also wanted to build, you know, a fintech business, which will be global day one. Because when you try to build, you know, a fintech business, you have to choose a market where you get licensed, more or less. And, you know, you have to build a business to comply with specific kind of regulation of a market you are bound to. And if your market is not big enough or, you know, far away, you know, you have to choose something which is, you have to choose something. And in DeFi, at that point in time, I was kind of, you know, kind of hill farming myself to DeFi summer. In DeFi, at that point in time, you didn't have to choose a market. At this base, you must comply with American regulation, which we do. But overall, you don't have to choose your market as much as in traditional finance. And that was really kind of the deciding factor that I go all in, because no matter where I am, it was actually also right after COVID. So, you know, it got used to remotely and stuff like that. So I said, you know, it doesn't matter where I am, I can be anywhere and kind of work for the whole world and build for the whole world rather than for one small market. So that's how we got. Sorry for this long. No, this is great. It also gives us a glimpse into, you know, the team's background. You know, funny enough, I was reading, I think last, you know, last week that if there is a reason why DeFi will win over traditional finance, it's because DeFi, as it's permissionless and global, it is attracting people like you who are looking for the next frontier in technology and innovation. And all the composability in DeFi is just great for builders like yourself to take advantage of. And if there's a reason why DeFi will win over tradFi, it's because all the talent will ultimately be in DeFi and not tradFi. So I think it matches, you know, that theory matches a bit of your story. Let's get into overnight. If you were to explain to us, like we're five years old, how would you explain overnight and what it does? Yeah. So first of all, you know, overnight is always one USDC. So you can get one, well, sorry, USD plus is always one USDC. So I can get one USD plus with one USDC and you can go always redeem one USDC for one USDC. So it's kind of always $1. So then USD plus is always 100% collateralized. So there is always like behind $10 million of USD plus, there is always $10 million of real value. So it's 100% collateralized. If it's $20 million USD plus, it's $30 million value. If it's $5 million USD plus, it's $5 million value. This lending generates yield because, you know, all this money is invested on chain, in contracts. It's always kind of, it's verifiable. It's auditable by anyone. You can click on a link and check which contracts the money is stored in. And so this value, which is invested in DeFi, generates yield. And you just get this yield. You just do nothing. You get your yield every day. You fold your USD plus in your wallet, it will produce yield and the balance in your wallet will accrue. It will just go up every day. You put your USD plus into an IMM, like a deck. It will produce the yield in the IMM. So wherever you go, there is always yield, which is accruing with more or less no effort from your side. Okay. So three key things to take away from this. One, USD plus is fully collateralized with USDC. The second one is that you put that USDC collateral to work across DeFi. So it produces yield. And the third thing, and it's probably the coolest thing in my opinion, is that there's no effort required from the user. You just hold USD plus and you get yield just by holding it because the collateral is producing yield. Exactly. That's pretty cool. I think this is the innovation. If we can take a step back and you can walk us through why this innovation exists. So what is the problem that you're tackling at Overnight with USD plus? Yeah, it was really kind of inspired by my own experience. I'm a very risk-averse investor. So whenever I was yield farming, I was actually really doing a lot of deductions myself and then kind of collecting rewards, investing rewards, general sorts of protocols. It was consuming a huge amount of my time. And when you will go for 100x type of tokens, that's probably justified. But I'm a very risk-averse person. I want to get 10% APY and spending all that time doing the research on my own to find things which are really, really low risk. You know, just did not justify, was not justified by the amounts of money that was producing. So really, I said, you know, in traditional finance, there is this thing called money market funds. So whenever it's the highest liquidity, you know, lowest possible risk. And people usually use it, you know, whenever they have spare liquidity, they don't know yet what to do with it or they just want to wait for the right market opportunity. They just put cash in, liquidity in and get something, but be sure that, you know, the liquidity is safe. So that's really the product I was looking for. And I couldn't find any because, you know, everybody has gone for 100x. You know, when we were fundraising, I spoke to a very high profile influencer and an investor, angel investor in this space. And she literally, during our call, laughed at me and said, you are going for, at that time, we were going for 15% APR. And she was like really laughing and saying, why would anybody in the world ever invest at 15% APR into stables when you can get 20% at Luna by calling UST? Yeah, exactly. I was trying to explain the concept of risk and, you know, going for low risk, low returns. And he was like, nah, he will just laugh. So there was literally no instrument like that. So kind of really for risk, you know, the problem we are solving is really delivering yield, but importantly, delivering low risk yield, low risk attractive yield and kind of minimizing your time effort on managing your liquidity. That's really the value proposition. That's pretty cool. So like in summary, if you're forming stables, the main thesis here is that it's probably not worth anybody's time to be, you know, collecting rewards, choosing the right protocol, doing all of that manual labor just to get, you know, 8-10% if you're forming stables. If you're forming some other token, maybe it's worth it because it also appreciates, you know, 10x, 20x, 100x. But for stables, you know, you might want to use your time better than for that 8%. And so that's when the value proposition of USDTlus kicks in because you just hold it and your crew yields just by holding it. Yeah, but it's not just time to, you know, collect rewards and invest them because, you know, you have guys like Ishii who we partner with and a bunch of other guys. Yeah. You know, streamline your yield farming. In our case, it's also kind of doing all the research, all the due diligence, you know, the kind of management of various protocols. And that is really what really takes a lot of time and expertise. And so, minding your time and investment on that and be sure that, you know, all due diligence is done. and the risk is minimized. It's never zero, but it's at least we've looked at it and you used it and kind of looked at the code and looked at the audit reports and everything. So that is really saving most of your time on due diligence and also kind of streamlining your yield farming process. Yield farming. Yep, that makes sense. Okay, so I think we have two great topics to continue. One is on the yield side of things, we can talk a little bit about how this yield is being generated, like the strategies that you have deployed and how you assess the protocols and how you do your due diligence. And then the next topic that I want to talk about is the risk aspects of that yield and how you assess the risk of the protocols and how you do your due diligence. So let's talk first about the yields. Where is this USDC that is held as collateral invested? Yeah, so we started with just allocating USDC into two types of strategies. One is lending, so it's very other, and that's like cash strategy, extremely low yield, but very safe. And we always keep a few percentage points in lending, similar to other. Second, we invested a lot into stable-to-stable pools. So like UDC-DAI and UDC-UDT, this type of things. We always choose stables which are borrowable on other, we never touch any algorithmics. And even the money stables which are borrowable on other, we are very picky. So for example, we just now maybe next week we'll add LUSD after a year of operation. LUSD is very well tested by Liquidity and is a very good stable. Things like, for example, FRAX or SUSD, despite being kind of also collateralized stables, we just wouldn't touch. Not because they're bad, but they're just out of our respect. So these were the two very early types of strategies. And there used to be a time where you could invest into a curve and get 14% before. These days, it's like 0.5%, 0.6%. So you don't get that much anymore. So we actually, when we realized that essentially T5 winter, the yield was really going down and was becoming very unattractive. We were kind of at the crossroads. We had to make a choice. Typically, yield premium, so attractive yield, is the new protocols. Something which is about to be launched, we recently, for example, launched on SENA, on BNB. So, you know, one protocol launches for a few weeks or months, you can type check your premium. But then again, with new protocols, there is a bunch of risks. You really have to understand what they're thwarting. You really have to judge their governance. But most importantly, you have to judge their team. Does the team, which is thwarting that protocol, like these days, people thwart balance a lot or they thwart solidly a lot. Do they have the experience and capability actually to manage? We saw situations where people forked very reliable protocols, but then because they didn't have experience to manage it, that led to financial losses. Yeah, so it's lending, stable to stable. These are market making rules. And I also wanted to ask you, I think you have some allocation on purposely quantity, which seems to be like higher yields and also a bit more higher risk. I think in general, how do you define which strategy gets which allocation? Who's doing that? So you know, we have a specialty here. So what we do, we usually like, you know, a very sort of diligence, which basically is there to decide whether we put money in or not. So if there is any hygienic factors which are not there, like proper governance, for example, or they're not comfortable with the team, we'll just avoid things. But then if the hygienic factors are there, we will just put in a little bit of money. And then what we start doing, we start measuring true returns. But most importantly, we start measuring volatility of those returns. So every day, what is the probability of the return? Because sometimes it can be minus 1% one day and then plus 10% the other day. And so basically based on that, we try to construct a portfolio which never loses money on one day horizon. We try to make sure that kind of the volatility of the entire portfolio is such that we are comfortable that there will be no negative days. So that's really the portfolio construction. So the asset. And, you know, we always measure yield in USDC. So for example, if you're getting yield, for example, in BUSD these days, and BUSD was 0.9985 or something like this yesterday, that's actually 15 basis points per day lost. And 15 basis points per day lost in USDC is actually a lot of yield, just like IWTU. So we're very sensitive to those fluctuations and we try to kind of have a diversified portfolio where this volatility towards USDC is minimized. But so what I was saying is that actually what we decided to do, we decided to add actually this type of yield, it's actually very important. We didn't want to go for new protocols, or at least for a lot of new protocols, because of what I described there, protocol risks are huge. If a new protocol launches and something goes wrong in terms of like there's a rug pull or there is an exploit or something like this, that's a risk which is impossible to diversify, that's a risk which is impossible to ensure, you cannot hedge it. I mean, that's horrible. So we really try to avoid that type of risk. And so what we've done, we've built so-called delta-neutral strategies, which we now use more and more to generate yield behind USD+. So what is a delta-neutral strategy? A delta-neutral strategy relies only on highly reliable protocols, like Aave, Uniswap P3, for example, or Aave Quickswap. And basically it's a strategy which yield farms USDC ETH, for example, or BUSD BNB. So a stable and volatile pair, but we actually borrow the volatile asset against USDC or BUSD. So we put USDC, for example, into Aave, we would borrow ETH, and then we would yield farm USDC ETH on Uniswap P3. So this way, if ETH goes up, the value of our asset goes up, the value of our loan also goes up, one compensates the other. If ETH goes down, the value of our loan goes down, one compensates the other. There is some impermanent loss in this, and we've managed this with frequent rebalancing of the position. But basically, we decided at some point in time that the incremental financial risk which is there due to the strategy being delta-neutral, and which we can mitigate with rebalancing, is better value proposition and better risk return than going after new protocols and trying to get high yield while the protocol is young. And so that's actually very important in the way we decided things. I prefer a reliable protocol and a delta-neutral strategy based on that to a stable-to-stable pool with high APR on something which launched two weeks ago. That's a very interesting approach to risk when you think about how to maximize yield on stables, specifically. As you say, what is the potential return and the high risk of a new protocol versus what is the risk of trying to manage and rebalance a delta-neutral strategy against its reward? And what you're saying is the risk-reward of delta-neutral in a known protocol and battle-tested is way better than a new protocol with higher yield but a lot of unknowns as to their governance and team. Yeah, yeah, yeah. Because you know, in DeFi, and this is actually a valuable knowledge which we got through sometimes unpleasant experiences which we had in the past. But that's quite a valuable knowledge. Key risk is not financial risk. The key risk is protocol risk. Like really, you know, manage for the protocol risk, avoid large losses. Even if sometimes, you know, you might, you know, that means that sometimes you have to underwrite a little bit more of financial risk like in case of delta-neutral strategy. Avoid protocol risk at any time, at any cost. That's really, really the most important thing. Yep, yep. That makes a lot of sense and it also aligns very closely to how we think about risk at exponential where we qualify, you know, what is the quote-unquote fundamental risk as we call it, which is the risk of using your entire principle even, you know, due to various reasons. Protocol code quality, you know, the protocol maturity because it's relatively new or it could just be the asset that you're investing in an asset that is, let's say, algorithmic or it's not fully backed in the case of a stablecoin. So, we're trying to give investors this type of hints when they invest in DeFi and I think, you know, your due diligence and risk assessment framework is not too dissimilar. So, let's make the jump to risk. assess a protocol what things have are more important for you and what things are less important for you when you find a completely new protocol and you're thinking about integrating it into you as a plus yeah so you know it starts with the governance so what but we need to make sure always that there is a multi-sig and you know we try to see who are the people who are sitting on the multi-sig if this are well-known individuals so that's that's not but you know basically for us if there's no multi-sig that's not non-starter if there is a multi-sig but not very well-known individuals you know we can accept that second you know all code changes got to have time look and then these days there are certain libraries by open zip which allow actually to monitor those time logs so this these are two most important things on the governance side second we try to kind of understand what it is they're forking sorry for this because most of them yes most of the project I should fork something and there are some modifications the team will bring in typically around the reward structure and voting and kind of reward allocation and stuff like that but he usually what we try to understand what is the base code and to what extent it has been modified and we typically find that somebody is forking you know balancer or somebody is working you know the solidity well in case of some goods or sorry solidly in case of suddenly you need to understand which version of the sort of deaf working but usually not people would work village wrong these days because that's the most successful so you try to find out which version but usually you know once you understood what what it is they're forking and the level of those changes you know that's okay insert and that's again you know the objective criteria but but nevertheless we decided to must we must pay attention to it is what that the team have experience it's not always possible to box everybody obviously but you can kind of understand which team and what are their previous protocols which they which they brought together so for example astana again is a good example there isn't the launched on on being be chain and they forked solidly and they actually forked I think village on version they brought in a bunch of changes but they were comfortable with those changes after losing as the code but most importantly because we very understood for the teammates the team you know you know was did the liquid driver on phantom and was affiliated also with a bunch of other very successful projects in phantom they were looking away from phantom because that the the chain was a little bit it's its attractiveness but we were given their background or extremely comfortable with with the team which I was going to manage tenor so that allowed us to know combination of the code of the governance proven code and of transparent governance and the team that experience allowed us to kind of to become comfortable with investing into into Sena or like deploying some liquidity today into their pools on b&b which were to very very very much like with the month so that's really the type the type of approach with and then we usually deploy a little bit at the beginning we see how the young specific strategy on the platform is behaving and as I said yeah right to measure the volatility for us risk is not just a risk of losing but you know volatility itself and then we try kind of to reallocate a little bit less weight to strategies with high volatility and to more weights to strategies with with low volatility at the same time trying to kind of keep the risk sorry the yield an attractive level so and you know but then we see how things perform and we try kind of allocate more to two things you are not comfortable with and kind of rotate things out which are losing its attractiveness so basically that's the whole thing yeah I mean this is this is such a great and detailed explanation of on the inner workings of usd plus I think the one question that that I still have about team experience is there another way that you can assess experience besides that the people's background maybe the type of code that they write I don't know this seems highly subjective but also highly you know can be a very great you can get really creative in measuring experience yeah that's one thing which is quite subjective but we look at what kind of project that they did and whether those projects had exploits or any issues right for how long they lasted so that that's really kind of but that's still that's still quite quite subjective where we it's more like the other way around to look at it it's not how we are trying to assess experience and like who is better or who is worse that we are looking for signs that the team is extremely unexperienced and this is their first project if it's their first project then we will become significantly more cautious yeah as far as the code is concerned again how various way to look at it but what we found is that you know everybody gets the audit so in a sense the availability of the audit is a must but at the same time it's an insufficient factor we have a special person on the team he does all the reviews for us actually this person's you know number one job is to review our own code on a regular basis and make sure kind of to add another pair of the eyes to minimize kind of code risks on our own protocol but this same very person kind of acts for us as a diligence expert and will review the code changes and kind of be second like second type of auditor or like would conduct the audit for ourselves it's not profound audit as for example like a major firm could run for you but this person will come in and have a look and try to see what changes to the base protocol have been implemented in bait how those on how those changes are implemented you can actually understand where the team is you know highly professional or or not so but again that's this highly highly subjective and you know I'm not sure I'm not sure yet that we have so basically that's an area where maybe you know some more stringent criteria or more like articulated to your it could be implemented but still you know it's still it's still working product in the sense yeah no that makes sense you know in general risk is as much art as it is science so there are things that you can you know codify in parameters and formulas to define risk and there are some others like team experience and background that are more subjective so that's where the art part of risk assessment kicks in but you know totally valid I think you know how having a framework is better than not having anything so you know not crazy I think that it is subjective I was just curious about how we were thinking about measuring experience but the thing is hard to find red flags there is a red flag but stay cautious you know yeah yeah we we take the approach of if there's smoke in the house there's probably fire as well yeah so whenever we see something something burning and we only see the smoke I don't want to call any any protocols out but you know like the usual suspects you see smoke coming out either in thought or you know social media comments you start you know rethinking your assumptions a lot how risky that asset that protocol might be or a blockchain for that matter so it's better to distrust and not lose that's in that case yeah exactly there are besides find better mistakes and you know I from mistake when they invest into something which believe is a loss or when you kind of a better mistake is when you do not invest into something which turns out to be very profitable so it's okay to make better mistakes yeah one thing which actually I forgot but we rely on a lot when we said that you you know discord because you know very you know engaged community but we also pioneered this practice of having closed channels once we see people active on our discord and we see they have expertise it's been we found it's it is been extremely valuable to become close with these people so we give them special roles and they get access to certain channels in our in our discord and usually before investing or when we start considering kind of in investment strategy or we start considering a partnership with the protocol I will ask the team for the background or so I like these people you know whether they know any background about this protocol about these people and stuff like that and you would be amazed it's impossible actually to have a team of your own who will do who will gather all this information you will be amazed when you know these people our community know everything there is to know about everybody so they will kind of extract from two years ago and they will kind of put in discord and they will kind of conduct such a level of diligence with so much history running in the past that it's it's been kind of it's been extremely extremely instrumental for us. It's interesting I mean it's it makes sense since DeFi is still a bit of a niche community that you know everyone knows everyone at some point So if you have access to those to those people, you know, that's great for your risk framework and your risk assessment. Yep It's just good, you know to invite know things. You don't know like in particular as far as in background So yeah, yep Makes makes a ton of sense What I'm also adding as a pinned tweet to the space is you know The the historic USD plus yield and collateral that you have in your website You know, I will pin it to this to this thread If anyone is curious is and is more is interested in doing their own You know their own research on USD plus, you know for my side I don't have any further questions But I will also like to open up the microphone to anyone in the audience who would like to ask Either us as exponential or you any any questions? Yes, please I I think there's one in the in the replies. I'll read it out loud for you max, please So this is from from myth What is the centralization level of overnight protocol are some jobs already automated through smart contracts? Is it able to automate some strategies over time? Yeah, so What is so so basically? You know we At the moment we have same governance we we forked the governance of compound So what we have depth you So the way our governance is managed is that there is or the end token, which is not public yet But it allows kind of the community to vote on all the changes So sorry to avian holders to vote on all the changes to the code There are time locks And the voting is is under the multi-seq Which is held by by three addresses I must say given that ovian token has not been Sold publicly yet And a hundred percent of the tovian token is currently in the hands of the team So I think you can classify. This is not yet decentralized our Our kind of approach to this is you know we see decentralization as as a In the sense of the journey was a goal And we are playing actually to show governance token within a reasonable number of weeks and so basically You know that will be the first step in achieving the true decentralization of the ovian token which will be the governance token Among other utilities it will provide which will be the governance token for for for USD plus now the way I see Decentralization we can you know kind of not sure how to address and I'm not going to hide it and That's quite obvious. Yes is that you know whenever we manage that the neutral strategies so As I said that the neutral strategy of a borrower is against USDC, and then we would yield from USDC is We actually do have special goods, which we designed which will look at the market and when the market starts moving and Impermanent loss risk starts accumulating in our position. It has to rebalance the position To avoid impermanent loss and minimize the impermanent loss so Those bots are managed off-chain And so we have not yet been able to find a way to make that component centralized I know guys like Robo vault and to mommy and some others who tried who ventured action is that a neutral space? From time secret was sometimes unsuccessfully. I've been looking for similar way to to work with this So they're studying the experience but at the moment I believe there is this certain centralization component to this board which is hard to Decentralize we are seriously considering that because of this component at some point in time we might have to get licensed so Yeah, we at the moment. We are kind of You know doing what everybody else is we're trying We're asking our users to represent their acting in compliance with the regulation of their country including North America And at the same time I think a better route because of this centralization component at some point in time will be Getting a sub management license Yeah, I mean, this is great transparency. Thank you max. I'll let you speak. Yeah. Thank you Matt This is really really good and I know like defy is a journey decentralization itself is it's pretty hard to to to execute on and so one of the question I have is also like In terms of like access to the treasuries Yeah, so All the strategies, you know dedicated smart contracts this smart contracts are managed by our governance This governance is the fork of compound governance and actually there is an open Zeppelin library Which we essentially used without any changes And so the governance contract which is managing usd plus Has a time lock on it. So whenever we initiate any changes That address which can issue initiate changes is our our multi seek by our team But, you know, basically it's multi-seek but this has three people who are on the same team so I would say that's that's That's technically multi-seek but most importantly it has time lock component in it and You know that the time lock is is the governance contract for for any contract which is holding, you know, the collateral We implemented this time lock specifically on the request of bfee And you don't bfee, you know helps a lot of people manage their yield farming so that time lock I'm fully aware that most people would not be kind of monitoring our contracts, but guys like bfee and some other kind of high-profile protocols, which are you know keeping substantial amount of liquidity in usd plus Are actually monitoring that that time lock on a continuous basis and you know Whenever there are new changes up from time to time I do get you know direct telegram messages from the bfee team asking me What is what is this you're doing? What is that you're doing? And I explain what what the changes are so We believe that at this point in time is kind of transparent Of course there is still kind of this multi-sig which is managed by the team But it's it's as transparent as it gets in this situation This makes a lot of sense To make it very very very clear. I cannot Direct the money You know from treasurer from collateral to a specific protocol without designing the strategy So making a smart contract which will do it and then putting that contract under the governance which is under the time lock So it's not physically possible for me to send money to an address We can only implement a smart contract then it goes into the governance Then there is time delay When this contract gets analyzed or not analyzed by by third parties It can only be verified fully verified contract people look at it what we are doing and only then it gets gets implemented Only then the cash moves Yeah, yeah, I think that also gives me a Product idea that you know, we should be monitoring all the existing time logs and let people know whenever there's a new change That's a very useful practice we do it for some of the protocols which we invested it's very very close to practice Nice I Think we're over time. I don't think or I don't see anyone else are raising their hand to get to ask a question to us But again, I want to thank you max and overnight team for setting this up with with us I'm taking the time to walk us through the protocol and great success going forward. Thank you Thank you for this opportunity to welcome me here and thanks to the audience for an opportunity to present to use the bus You can get early access to our invest products if you sign up to our waitlist I pinned the tweet in this in this space. So check that out as well again. Thanks max Thanks everyone for joining. Have a great rest of your day