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Bryce
All right, everybody, welcome back to another episode of the Crypto 101 podcast. I'm your co host, Bryce, as always, joined by my good buddy across the country, Brennan Veman. Brendan, how are you doing, dude? Good to see you.
Brendan Veman
Good to see it, dude. The dynamic duo is back here. I know a lot of the people out in the crypto 101 verse have been wondering and asking and so it's good to have you back. And what a podcast, you know, I know we're just getting back into it again together, but really electric podcast that we're going to have here today. Perfect time to have them on. A lot going on out here in the space, especially in defi. So I'm pretty stoked. I'm feeling good.
Bryce
I like, I like what you did there. It's electric because we've got the co founder of Spark, Mr. Sam McPherson, joining us today. Sam, thank you for joining the show. And how are you doing?
Sam McPherson
Yeah, thanks so much for having me. I'm doing great. Can't complain, Love it.
Bryce
Well, we really appreciate you joining the show and we want to just dive straight into it. This episode's going to cover, you know, all things defi lending. We'll probably talk a little bit about the broader sky ecosystem and how these, you know, the stars are developing. But first let's just touch base, you know, briefly on your background and how you kind of got into crypto. What Drew you to crypto. Why are you building in this space? I mean you could be building in tradfi, you could be building in AI, all these different industries. Why crypto?
Sam McPherson
Yeah, so I got into crypto. I came in I think like a lot of people as like a hobbyist investor at first. Like for me I came in at the 201717 ICO cycle. I got some, I was aware about Bitcoin before, but Ethereum smart contracts, this is me, my, my trade as a programmer. So this is kind of what really hooked me. And so just looking around for projects that would interest me and I stumbled across maker in early 2018 and from there, yeah, just kind of learning about the space over a couple years, but eventually culminated into me joining as part of the core engineering team on what was MakerDAO at the time. There's been since a rebrand to sky, but this is the original brand Maker. So I worked there for two years as an engineer and then as part of this process, like there was a governance vote in 2022 to restructure the governance, rebrand the sky, all these types of changes that were coming. So as part of this we decided at one point, me and various colleagues and other teams to launch Spark. You know, then Untitled, but initially it was to launch a lending market. And then this has kind of grown since 2023 when we launched into Spark of what it is today.
Bryce
I love it. And, and if you think about, you know, Spark at a high level, know how would, how would you classify it, what is it and who's it for?
Sam McPherson
Yeah, so Spark is a, is a defi native lending protocol. So users are able to deposit their stablecoins. So it could be USDT, USDC USDs, they can deposit into our product called Spark Savings. And then Spark operates one of the most sophisticated at scale yield generation algorithms in the space and it's able to generate yield from defi loans, you know, perpetual futures funding rates, RWAs. It basically rebalances between, between all these yield programs and such that it delivers the, what we consider the best risk adjusted rate in the space to stablecoin users.
Bryce
And so it's not just for institutions, but anybody could kind of utilize it. Is that right? And you know, on, on maybe the, the real world asset side and the, the lending side it's more institutions, but on the borrow side it's more retail. That's kind of how I understand. Is that accurate or.
Sam McPherson
Yeah. So for the deposit side. So for those users who are depositing stablecoins, this is open to everybody. So we have depositors all the way from retail to institutions. On the lending side there's also some variety, but primarily this skews more towards institutional. So we'll do loans within our internal crypto lending market called sparklend, which is a defi lending market where users can put up their Bitcoin or their ETH into the smart contract and basically take out a loan in stablecoins against their crypto collateral. We also do institutional lending through Anchorage Digital Bank. This is more like OTC loans where at fixed rate loans where we will issue a loan to a borrower and then Anchorage as a, as a qualified custodian will custody the collateral and facilitate the loan. But this, this will, these are quite large loans, usually on the order of like hundreds of millions of dollars. So it's more at the institutional scale. And then we also do lending through our more recent product that we launched called Spark prime, which is a CD5 prime brokerage. So this again is more on the institutional side. Delta neutral hedge funds will borrow from us there and then go do things like basis trade to generate yield, which then comes back into the Spark ecosystem, which then goes back to Spark savings depositors.
Brendan Veman
I've got a question for you. What is it like being a quote unquote star? Right. That's what we call the subdaos inside of the new sky ecosystem. What's it like being a star inside of the sky ecosystem? And why did you decide to do that as opposed to just doing all of this on your own outside of that, separate from that?
Bryce
Yeah.
Brendan Veman
I'm curious because you guys were like really one of the big first players to step forward and say, hey, we want to kind of lead this space. We want to be the first, one of the first, if not the first star or subdao. Can you walk us through that?
Sam McPherson
Yeah. So maybe it's helpful to understand the relationship between Spark and Sky. So in the beginning when maker was issuing dai, the stable coin that has since become USDs, the governance was really something that was, there was a lot of issues with, in that Maker was operating under like a monolithic dao. So there's token holders who hold the MKR token and then they can vote to pass proposals. But in us kind of like doing this at scale for between 2021 to 2022, it really started hitting a lot of growing pains and like it was basically grinding to a halt and became like the process which just wasn't working at all. So this was recognized. And as part of the restructuring to sky, there was a Governance restructuring. So that instead of having all the decision making within like one organization or one like structure, this is called the dao, it was decided to split it out into subdaos or AKA stars that you're referring to, such that decision making could be, could be scaled. So the idea is that sky kind of, it sits as like a very unopinionated rules maker. So it basically sets the rules of the road for everybody. And then the stars within the ecosystem, there's multiple of them, Spark is the first, but there are others. All of them compete to allocate the balance sheet of sky and deploy it into various opportunities, following the sky risk framework. And in this sense you now have decision making that can be done by smaller groups that maybe don't necessarily agree with each other, but the free market is kind of what keeps the system in check. And that you may have Spark making good decisions. And so therefore we will make money and grow. Spark will grow and be successful. Maybe another star is like making decisions that aren't particularly good. They lose money, they're wasting money, and then they will shrink. But the system as a whole, you know, remains competitive because the decision making can still be fairly agile. So this was the reason for the restructuring. And from my perspective, you know, I'm a, I'm not super into governance. I'm a very like products guy. So when I was existing in the previous structure and maker, I was just kind of wanting to build stuff like, you know, sparklend was the first product that we launched at Spark. I just wanted to do that originally and Maker, but the political process was just completely untenable. So there was just like this, you know, happy coincidence of the restructuring, the governance. I saw this opportunity where we could, you know, really go off on our own and start doing the products that we really want to build out under a governance structure that, you know, just facilitates this type of growth and creativity. So yeah, that, that's kind of how this all all came together.
Bryce
Absolutely. And I think, you know, a core component that, you know, Spark is, you know, comprised of is this borrow and lend, kind of like a bank, but it's not a bank. You work with some banks, but can you kind of help? In our mind, I don't know if it's a compare and contrast between Spark and like a traditional bank or if you could kind of let us know where that delineation is between, you know, a yield product, a defi capital allocator and something that's actually a bank.
Sam McPherson
Yeah, so I mean, there's definitely a lot of similarities. But I would not classify these things as banks. You know, these are permissionless on chain protocols. So just to be clear with about that up front, but a lot of the underlying mechanics are there's a lot of similarities. So like bankruptcy banks. Yes. Their job is to take in deposits and then issue loans while maintaining like liquidity constraints so that users can always withdraw. Lending protocols are very similar in that taking in user deposits and say Spark savings. So again, users depositing, they want to earn a Yield on their USDC, USDT, USDs so they can deposit with us and we'll go out and do the hard work of finding borrowers and connecting and like connecting with these borrowers and issuing the loans, managing the liquidity such that depositors can always get out. Well, they're still earning a decent yield. This is kind of the more or less the job. And then like there's a lot of details about how you facilitate these loans. You know, are they through something like Sparkland, which is on chain and variable rates, or is it more like institutional loans through Anchorage? You know, maybe they want to use custodians rather than going on chain. Really it's just catering to all these different use cases and, and dealing with the end borrower. But yeah, fundamentally the construction is very similar. I will say though, with the on chain lending that we do. You know, unlike banks, which kind of keep a quite a tight capital reserve on the order of usually 10% cash reserve within the sky ecosystem, the goal is to maintain at least 25% cash reserve. And so this is to make sure that these issues of liquidity like basically never come up. There's like, it's never going to be a concern. And because there's just so much excess liquidity that users can always get in and out whenever they want. This is extremely important because when liquidity dries up, you know, people, this is effectively a bank run and you know, people get like it just causes panic in the market. So part of the stuff that we've been doing within, you know, Spark is ensuring these, these highly liquid products so that you always can feel like you can get in and out whenever you want one.
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Bryce
yeah, totally. And so you know, folks will go, you know, mom and pop, random people, anybody kind of with an Internet connection that meets the jurisdictional requirements could go to spark savings and generate effective federal funds rate or you know what. What's kind of that rate is kind of like the first question and is it Variable. And then y' all take the, the money and then go look for partners or borrowers. And then I imagine there's some kind of underwriting process, because not just like free for all, like, hey, anybody could take this money. There's like, you know, a big process so that you guys don't get stuck with bad debt. So what's that whole process look like? That?
Sam McPherson
Yeah, yeah, exactly. So the, like. First, about the Yield. So on USDC, the yield is I think 3.65% right now. And on USDT, we're generating 3%. So it varies a little bit on the stable coins. Right now, current market conditions are quite bearish, so it's going to be about. So for maybe a little bit less. But during bullish conditions, these rates can go up quite a bit. Quite a bit. So more like generating maybe even 4 or 5%. And this, this yield is coming from borrowers on the other side. Usually they're going like leverage long on crypto assets like Bitcoin or eth. But the other thing you touched on is like, it's very important. Which is, which is the risk framework. You can't just go into whatever you want. As you say, there is a particular set of collateral. And in fact, Spark Takes has taken a quite conservative outlook on the collateral that we accept. We prefer to just look at maybe a handful of four or five assets that we think are scalable surrounding Bitcoin and Eth usually, or a liquid staking token version of that. Just kind of a minimal set because we know there's lots of tail risks that can present themselves by having too wide an array of collateral selection. You basically have all these dependencies that you may or may not be aware about, basically like being aware of all the details of every single collateral that you onboard when you have 50 different collateral can be. It's. It's quite a challenging process. So going with a smaller scope has been one of the things that we think of, has really differentiated ourselves. And, you know, especially after the recent market conditions that happened, it goes to show that having this minimal collateral set can be quite important. And so we've seen a lot of growth in our internal lending market. Sparklending basically doubled in size since last week. A lot of people coming in precisely because of our quite conservative risk management process. But I mean, risk management, like, we could talk about this for the entire podcast. To be honest, there is a lot of things involved with risk management, and it is like a job you have to dedicate yourself to, to make sure that depositors are Protected. But I will say within Spark, we back all of our deposits with USDS, which is the third largest stablecoin, now just higher than 11 billion in total deposits. So that also contains with it insurance. So not only do you have that balance sheet providing a lot of safety for depositors, you also have like five layers of insurance that's backing this going all the way from the star level who takes first loss to a junior risk capital vault that will be opened up to the public. And this is a higher yield vault. For those who want a higher yield but are willing to take more risk, they'll be first on the hook before it goes back to USDS depositors and then Spark Savings sits on top of the USDs. So that is like, we really want this to be, you know, a quite safe, sort of the best safe yield opportunity in the space. You still get a, you get a yield that's pretty good, but you're not taking like you're basically as, as senior in the stack of risk as possible to make sure that there are no loss events.
Bryce
Yeah, no, that's incredible to think about just like, you know, having the, the balance sheet of sky and the USDs as something that could help insulate these borrow lend pools. And, and I, I want to put a cap on this, the borrower stuff in, in, in one second here, but I will allude to a conversation that we'll have here in just a few moments about how the kelp dao and the A debacle led to a lot of deposit flight from their model to you guys because you had the only pool that tether kind of stayed pegged at throughout this whole collapse. I'm curious about how you guys managed that, but real quick to put a point on the borrowers. So you're never taking this money and going out to like businesses, right? Like random businesses or, or you know, private equity or private credit and you know, or are you right? And then underwriting these businesses and saying, okay, over the course of the next, you know, five years or three years, you guys could generate, you know, a greater yield. And how is that work? Or is it just strictly borrowers who want to go long or short? Crypto.
Sam McPherson
Yeah. So for us at Spark, like we're very focused on like crypto backed loans primarily. So this could be like the internal lending market, the, the Anchorage loans or the CD5 prime brokerage which has more exposure to like centralized exchanges, stuff like that. But it's still like within the crypto realm. I think what you're talking about is More like the real world asset side.
Bryce
Yeah, like what sky is doing, they're, you know, they're you know, going out and lending money to like businesses and putting those shares on chain.
Sam McPherson
Yeah. So there are other stars that are more focused on this like Grove and Obex. Sure. You've maybe seen some announcements from them. Yeah. So like this is kind of the beauty of the star system is that you know, we can just dedicate ourselves more to the crypto side. This is our expertise where you know, like I'm an ex smart contract developer, like this is, this is where we feel at home and the other teams that are maybe more, you know, private credit, traditional finance expertise, they can focus on more that side of the, of the opportunities that are available. So it's really like a divide and conquer strategy. But yeah, sky as a whole is already deployed into real world assets, mainly treasury bills right now. Some exposure to like AAA Clos. But yeah, I think private credit is also something that's going to be increasingly a part of the space and really, I mean it's not going to be that differentiated from the way traditional finance works as like TRADFI continues to come on chain. Like the benefits of settlement time, transparency, everything that the blockchain can offer, it's just a huge efficiency improvement over the way TradFi normally works. So I'm not saying it's going to happen tomorrow, but I'm, you know, I'm a big believer everything's going to be tokenized and you know, all the banks will be, you know, 10, 15 years, we'll be largely transacting on blockchain rails.
Bryce
And once there are so many tokenized RWAs, do you imagine Spark lending against those or you know, touching them in some capacity Once you have, you know, tokenized ETFs, tokenized, you know, businesses and all that kind of stuff and tokenized T bills and all this stuff is happening. But where might that kind of touch your business?
Sam McPherson
Yeah, for sure. I think there's only these distinctions because it's kind of like early on, you know, what is crypto? What is an rwa? I think even you talk to people in the industry, what is in RWA is not always like unanimous about what even is that. So I think these things are going to be less about like, you know, what is the technology that is connecting, you know, is an etf, is it like an on chain asset? Like it's just going to be, it's going to all just converge to just like, you know, finance in general and you know, our Competencies will evolve along with this.
Brendan Veman
You know, I was just talking, you know, briefly before this, I was talking to Chainlink's chief business officer, Johan Ide, and he was very bullish on tokenization as a whole, and he was talking to us about it. He's like, we help, like a lot of these people connect this and make it possible, and he thinks it has a really bright future. But one of the. I guess this will fit into our next point. But he was like, one of the big focuses right now is security. So security is the name of the game. And he says that's somewhat holding these people back from what it could be. He said it's partially security, but also partially just creating the demand where these tokenized assets are better than their traditional counterparts. But yeah, I mean, as we'll probably talk about here in just a second, it sounds like, you know, security really is a big point. But would you say you guys share kind of the same vision on that?
Sam McPherson
Yeah, for sure. I mean, security, especially now with all of these hacks happening lately, really has taken the center stage. I'll say, though, like, if you're following best practices in the space, there is actually like, relatively good practices that can like, keep you safe from these types of hacks. And like Skype in the beginning has been following a lot of these best practices. So things like time locks actually give you make you not a target by a huge amount. So if you have multi sig that have no time locks that are basically custodying assets, this is quite a dangerous setup and makes you a target of, you know, the dprk, which is primarily the. The state actor that's involved here. So there are techniques that we've known about for a while to mitigate these risks. And really it's just a matter of everybody in the industry needs to more seriously be following these best practices. Like, you know, if you take the case of the kelp down incident last week, you know, there was a number of issues there. Like they were using a one of one ddn. They were, you know, didn't have rate limits on the bridge. You know, AVE was also didn't have rate limits. So there's a number of things that could have been done. These are just kind of basic best practices. And so I think we all just kind of need to level up so that these incidents don't happen. Because even though, like Spark wasn't affected directly, the whole space gets affected when, you know, people see these things. And it's not really good for anyone. And so I'm you know, I'm an optimist by nature. I'm hopeful that we take this as a very serious learning experience and like, you know, we need to mature as a space for, to get tried by adoption.
Bryce
Yeah, I definitely want to, you know, start to chip away here at, you know, breaking down what happened with this and particularly how you guys were navigating it. But kind of for our listeners, the way I understand it is that, you know, somebody kind of hacked Kelp Dao and counterfeited a lot of their liquid staking token and then went to a and was like, hey, I got you know, $300 million of this liquid staking token. Let me take a borrow against it, a sat with it and then realized, oh my God, I have counterfeit stuff and I just gave away, you know, $300 million of non counterfeit stuff. Then the hackers ran away with it and AAVE gets stuck with the bad debt and then, you know, people are kind of on the hook for that. A, is that an accurate sort of representation simplification of kind of what happened and then B, you know, you know, how did you guys or how does your model make sure stuff like that doesn't happen?
Sam McPherson
Yeah, so I think that's a fairly accurate representation of what happened. So for us there's a couple of points that we make sure our internal lending market Sparkle End, which is a similar model to aave, but we have a number of differences that I think are quite important in this regard. So first and foremost, collateral onboarding, we keep a very restricted set of like high trust, high scale collateral and occasionally we will add a few more, but we keep them in like very restricted modes. So right away we never onboarded the CalCDAO version of ETH into like a high leverage mode into the market. So this is one of the mistakes. I would say all they did is allowing this kind of collateral to be at billions in size in their market in the first place. So for us we never had this kind of exposure. We also off boarded this collateral back in January. It was just, you know, not a, it wasn't generating that much business. And you know, as I mentioned, like having all these collateral present for a long period of time can present tail risk. You don't know what's going to go wrong but there's a lot of dependencies and so things can go wrong. So yeah, first and foremost I'd say keeping the collateral set small. The second thing is the rate limits. So Sparkland has rate limits. So, so even if there was this event and Sparklen still had this collateral onboarded, the damage would be very likely nothing and potentially like maybe a marginal amount of debt that could easily be covered by the protocol. So you kind of want to have this, like, don't allow yourself to be, you know, susceptible to these types of hacks. But even if you do, you need to limit the damage. And so Sparkland has rate limits. We do not allow 300 million to come in out of the blue and just, you know, take whatever you want. That's not how it works. You come in, you are a large user, you have, it's reasonable to expect it will take a few hours or even days to wind up your position. So at Sparkland we have a 12 hour cooldown. We allow a little bit to come in, 12 hour cooldown. And so this gives us more than enough time to react. We see something like this, we would shut it down. We have like emergency pause switches and so they basically were not a target at all because North Korea wouldn't be able to extract that much money out of Sparkland in the first place. So yeah, there's these things. We also have another bunch of security effects not related to the SAC in particular, but we have a triple redundant Oracle system. So we don't use one single Oracle provider. We have, we use a median between Redstone Chainlink and Chronicle. So if any of the Oracle providers experience a hack or something like that, we can still have accurate price feeds because the other two will pick up the slack, basically. So it's just outlining a few of the things that we do differently at Sparkland. And this has kind of been our mantra from the beginning. We're not trying to cater to everything all at once. We really want this highly curated small set of collateral for primarily, I would say, institutional users.
Bryce
Yeah, that makes a ton of sense and kind of a two pronged question. Have you ever, or has Spark ever had a similar scenario on a smaller scale? Any kind of bad debt where, you know, people had to, you know, cover their losses or, you know, the junior tranche got wiped out or has there ever been sort of defaulting borrowers or any kind of thing like that? And if so, you know, what was the patch and if not, then we could just move on.
Sam McPherson
Yeah, no, we haven't since launched. That's awesome. Yeah, it's, it's, it's been going pretty well. I think we have a good track record and I think this is why we've seen a lot of the growth that we have just from, you know, we're all we're paranoid though. We're always trying to see what's. What we can improve. But yeah, I think we have a pretty good track record in this regard
Bryce
as, as Elon would say, only the paranoid survive. So. So keep up the paranoia because that'll definitely, you know, pay its. Pay its dividends. And then one more question on the, the whole AVE debacle. What was the. I mean, I saw a lot of different numbers throughout the past week of how much in terms of inflows you received, whether it was flight from AAVE into Spark, what are some quantifications that you could give us into, you know, and obviously the SPK token went bonkers this week. On Monday it was like 2 cents. By the end of the week it was, I don't know, 6 cents or something. So it was a 300% roughly move. But what were some of the inflows that you saw? TVL or any other metrics that you like?
Sam McPherson
Yeah, so for TVL, we went from, we were 1.9 billion on April 17 and. And then we peaked at 3.7 billion about a week later, so doubled roughly a doubling. Yeah, we saw a number of like, a lot of borrowers coming in, like new borrowers who have never used Sparkle and before. That's a good metric. So yeah, I mean it's, it's been like fortunate for the lending market. But I'll say that, like, I don't think these types of events are like good for anybody in the space. I think, like, yeah, largely, like, I'm glad actually that AAVE was able to raise funds and make their users whole. I think that's great. Yeah, like these types of events are just put a chilling effect on the whole space and make. Make people reassess how safe defi can be. So yeah, don't get me wrong, I'm definitely not rooting for these types of events. But yeah, it has been a decent amount of growth for Sparkland.
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Bryce
Yeah, it definitely feels like to me, I mean again I've seen some varied numbers between 400 and $600 million worth of hacks just this year alone in defi between Drift and this one and a couple others. And so if we want to get to mainstream adoption and I want to kind of know like what I guess what the end goal is with Spark, like in order to go from crypto native users from, from folks who are comfortable on chain to you know, our parents or our, you know, aunts and uncles who just want a really great, effective, you know, high yield savings account or you know, a place to, you know, get a nice loan from or anything like that. What does Spark need to look like or accomplish or part. Who do they need to partner with in order to get to that mainstream end goal? If that is even the main, main end goal?
Sam McPherson
Yeah, I would say it's more about the, the perception of the space as a whole. Like as I mentioned, Spark has not had any bad debt event. So like our track record is quite good. But people group us in with defi lending in general and when they see these hacks, they mentally like, they associate it even though we don't have any direct exposure to it. So I think we need to sort out these events and they can't be happening this frequently. It's just a non starter. So as I said before, we know how to deal with this. There's been many, many protocols that are operating without issue for many, many years. It's just sometimes like, you know, there's a, there's a lot of protocols out there, right. All you need is one to screw up on some configuration issue or something and to basically just you know, have a bad incident like this. So I think we just need to level up in terms of the security of the space and everybody needs to be following best practices and like to be onboarded into a lending market. There should just be like much more like, like the lending market needs to hold the asset issuer more to account for best practices for security. But I think we'll get There I think, you know, if you look back 20, 21, the largest incidents were smart contract issues. But now that's not the case. We actually have best practices with smart contracts. And, you know, I'm not vouching for all smart contracts out there, but the major protocols I am, have high, high confidence that they will not be hacked. You know, knock on wood. But they've been out there for a long time. Lots of billions in tdl and this, we know how to do this now. We have like, the auditing process is quite good. We now have AI. You know, AI can be used on the defensive as well as the offensive. And so eventually everything will just, you know, be formal verification, largely by AI, I believe. And so we're already most of the way there. And with the contracts that are live right now, I think it's quite good. What we're seeing more now is like infrastructure operational security hacks. And again, like, we know how to do this, I think is accelerating the pace of attacks. But it's not like magic. It's. It just sort of allows like, you know, human beings to leverage themselves more, be more productive, you know, on the bad side of things as well as the good. But we really, and I think this is true even more broadly than crypto. Like you saw the Mythos announcement, where it's like they have thousands of security critical security vulnerabilities in all software. I totally believe this is the case. And like we really just, you know, this is going to be a hard and painful short period of time, but once we're out on the other side, I think all the systems are going to be much more hardened and things will just be much more safer in general. It's just kind of, we have to, you know, we're being put through the ringer right now, but I think we will emerge on the other side in a much better place.
Brendan Veman
You know, you read my mind because I was about to bring up Mythos. I was going back and forth with some guys over here and when that Mythos news came out. For people who don't know, Anthropic has this tool, this very, very advanced AI that they were using to discover cybersecurity threats. And it was like so good. It was basically deemed like a threat to national security. They're like, this thing is so good. It can point out all the flaws, stuff that we didn't know existed. We all over the place and they're like, we gotta like restrict access. And like a lot of government officials,
Bryce
AI BoT apparently broke out of its Own sandbox. Like, they had it, like, in this, its own, like, you know, sanctioned off sandbox and offline network. And like, it came online and started like emailing people, like, how crazy is that?
Brendan Veman
How crazy is that that we have, like. Anyway, long story short, it got me thinking, like, you know what I mean, we're just scratching the surface of this stuff.
Podcast Host (Ad Read)
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Brendan Veman
You know, we're only really a couple years, I would argue, even though AI has been around for a while, we're only a couple years into this AI revolution. But, like, how do you think something like that changes the world of crypto security? Because it feels like if we're getting to a point where we have stuff that that's powerful, that is that powerful, we can make a lot of these issues a thing of the past.
Bryce
We know how powerful it is because Trump went from blacklisting Anthropic one week to a couple weeks saying, okay, we can still use anthropic. Like, he very rarely like, backs down on, you know, on somebody like that. But he went full force and then said, oh, nobody in the government could use Anthropic. And like, now people are saying, okay, well, they kind of back down a little bit on that. People in the government are like, partnering with Anthropic again because it's just so freaking powerful. Yeah, I mean, it's just a crazy situation. But yeah, to Brendan's point, how does that all come to bear on crypto security, practically speaking? I mean, is the burden on the protocol developers like yourselves or is it on the users or. A little bit of both.
Sam McPherson
Yeah. So I'll say, and maybe for people who are non technical, like, like, it looks like we're kind of going through this, this phase change where it's like, you know, nothing will be secure, basically. Right. Like, we're just all screwed and everything's going to be hacked. And I think, although, like, crypto is kind of on the forefront because I think there's. There's so much money at stake, but there is like, it's not like AI again, it's not magic. It follows the laws of physics, the rules of mathematics. We know how to do cryptography, we know how to do security. And so it's more just like we have to do it for real. And so some of the projects that maybe are not taking the most security first approaches, they're getting taken out with hacks, but really, like, it's just a matter of we really need to take this seriously and like, really level up our security, but we know what to do the best practices are already out there and if protocols are following them, they will be fine.
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Sam McPherson
Yeah. And for whose responsibility is. I mean, it's the protocols in my view. I mean, that's. The users are depositing with the delegation of, you know, risk management, which includes security on your own part as well as the collateral that you may be onboarding into your lending market or whatever else protocol you're running. But yeah, I mean, even for me as a. As a technical person, yeah, it's AI is definitely leveling up. I see the way things are going. And so what this means is like a state actor, like North Korea, that's already, you know, involved in basically everything. We assume they're watching everything. They now they can leverage their. Their people who are working on this 10x or however much it is, because they have AI agents that are trying to break into everything. And so when there's like vulnerabilities that are things out there that just haven't been exploited yet. This is like the thousand vulnerabilities that Mythos found, those are already out there, right? They would have been found eventually. Maybe some of them are known to a lot of state actors and we just don't know about it yet. So I think it's actually, it's a good thing that we're discovering about it. You know, it's one of those things. It's like you're just not aware of it before, so you think everything's fine, but actually it's better to be aware of it and then patch them. So, like, what's going to happen is all these things are going to be patched. It's going to be a little bit of a cat and mouse between, you know, attackers and defenders. But ultimately I think where we'll end up is that software is just going to be extremely safe, you know, especially as the cost of coding drops quite drastically. We could just do formal verification on a lot of these things. And that's basically just mathematically proving that the code has no bugs. So because code is so cheap, it's much more economical to do this type of stuff. And so I. The defensive will just win out in the long run. But it's just. We're kind of in this intermediary phase and we just kind of. It's gonna. It's gonna be quite a ride.
Bryce
This is literally evolution. Like, what doesn't kill you makes you stronger. Only the strong survive. We're building open source out in the wild. Eat or be eaten. I mean, this is how in 25 years. We, we need this, right? For a world which will be overridden by these super intelligent AIs, we need to have this hardening phase and so short term pain, long term gain. And in order for, you know, our entire financial ecosystem to thrive for another hundred years, it has to be built out in the open with, with severe, you know, testing. And so this has been, you know, one of my theses ever since I got into crypto. I was like, oh man, Bitcoin. Like, anybody could audit the code at any time. Everybody knows what every account has and like the code is, you know, of course the developers are very smart, but they've reduced the code base, you know, to very, something very simple. Anybody in the world with a raspberry PI, you know, little smart computer can, can check and verify. We don't need to trust the, that what they say is, you know, that they're good for the money, that we, we actually have the verification. So I, I'm such a big proponent of this defi. Or, you know, it used to be called open fi. Right, because it's, it's open finance. And I think the whole Mythos thing clearly, clearly shows that, you know, we're, we're on the right path. I think we're on the right side of history here, building out in the wild. But while we still have you, Sam, I want to talk about the SPK token as much as we can because it's something that a lot of our listeners who are really excited about, in full disclosure, through our tower 18 hedge fund vehicles, we have exposure to the SPK Token. We've been part of the, part of the journey with you guys here from the sidelines, cheering you on. And so, you know, folks probably want to know, well, you know, this is a pretty cool idea. How do these tokens work? Why would I own a token? What drives the fundamental value? And so I guess, you know, from a high level, you know, if people are out there and, and they're really smart and they're making these fundamental models of, you know, price to earnings and DCFS and all that, like, what are the fundamental metrics that you guys really value that in theory should over time drive the price of the token. Just like a stock, right? You got earnings, you got revenue, you got all sorts of different stuff that in theory should lead the price of the token.
Sam McPherson
Yeah, so what we're primarily focused on at Spark is growing protocol revenue. Protocol revenue. So. Yeah, exactly. So, like, we have our internal lending market, we have our allocation system called the Spark liquidity Layer, we have a number of products that are doing lending as well as we earn distribution rewards for distributing USDs, the Sky stablecoin into the broader ecosystem. So we do have a financials tab in our. It's Data, Spark, Fi Financials.
Bryce
What is that? SparkData FI.
Sam McPherson
It's data Spark Fi and then there's like a tab for financials. So currently yearly net returns are 25 million. We have OPEX of 18 million. And so even in the bearish conditions of right now, there's a 7 million a year protocol surplus. And during bull market conditions, this number, these numbers are actually quite higher. We peaked at around 80 million per year at about September when there was the peak of the bull market. So these things are a little bit cyclical, but even in bearish conditions, the protocol is still generating a surplus. So that's pretty great. And so the other thing was, earlier this year there was a proposal passed by SBK holders to initiate a buy buyback program. So protocol returns will convert into value accrual for the token. Yeah, we view this as quite important to have a value accrual mechanism. We're not really interested in building meme coins. There needs to be some fundamental mechanism there. So, yeah, I think like overall the, the revenue metrics are what we're, you know, growth of the protocol as well as a sustainable revenue for the long run. This, this is what we're focused on, you know, just like any business. And so, yeah, this, this is the argument I would make. But in addition, like SPK holders, there's governance. You can vote on proposals. Everything that is done goes through spark governance for approval. There's also staking so you can stake your SPK and earn an extra return on it. As well as sbk. The plan is to eventually use it for securing the protocol. So this could be like oracles or bridging, basically like a staking of the asset to ensure that. Basically vouching for the security of bridges and oracles.
Bryce
Yeah, makes a ton of sense and that's really, really good information. I encourage everybody to hit the pause button, rewind for a couple of minutes and take some flipping notes, because that's what kind of assets that I'm really interested in owning exposure to. It's, it's more these tokens that in these projects that are really focused on driving value accrual back to the token holder, it's something that, you know, the crypto ecosystem has really been in quite a quandary. And it sounds like you guys are really forward thinking along with sky and some of the other stars forward thinking on how to accrue value. And so I also think I saw something recently about a public company, a couple of them, but one was called Better, and they were about home loans and they were part of, I don't know if they were a star in and of themselves or if you guys are associated with Better. Have you heard about this one?
Sam McPherson
Yeah, I did hear something about that. But I mean, the thing about the sky ecosystem is there, there's a lot of people involved. So I'm very familiar with what's going on. Spark and I have heard about the wider ecosystem with some of these initiatives. But that's the thing, it's divide and conquer. So, like, we're not necessarily specialists on everything that's going on in Sky. Sky is more aware of like the whole balance sheet as a whole. But then there's other teams that are like, more focused on this like real world asset type lending, which is great because then they can have the expertise in that type of underwriting.
Bryce
Totally. And it just goes to show like the legitimacy of the whole sky ecosystem. Again, another, you know, full disclosure, you know, a lot of exposure to sky. And we think that this is just one of these assets and ecosystems that is really driving a lot of value and it's real tangible, you know, earnings. I think we're recording this April 28th, I believe tomorrow or the 30th of April, sky is coming out with their Q1 financial report. We're going to be sleuthing through that and I'm sure it's going to be painting a very bright picture. Lots of growth, lots of earnings, lots of value. And then. Yeah, Sam, you know, we want to make sure that you've got the floor for any other stuff that you guys are working on in the future that you want to talk about that we might not have touched on. Anything that excites you, anything that we should have asked that we just totally flunked and failed to ask. How would you like to kind of put a point on our discussion today?
Sam McPherson
Yeah, I think we have a lot going on for the quarterly reports. Actually, Spark puts out a quarterly report as well. I think we just put out quarter 1, 20, 261 as well, like just last week. So you can look at that, look through the financials for, yeah, growth. We're very excited. We just cracked 1 billion in savings USDT. So this is a market we're really looking to grow. We launched this at the, in November of last year and it's, it's already gone past a billion. So this is providing a 3% yield at high liquidity. So the vault is currently about 600 million in immediately available liquidity on 1 billion total deposits. We want to grow this to 3, 4 or 5 billion over the course of this year. So that's pretty exciting. And then the other piece is at the beginning of the year, we launched Spark prime, which is a CDFI prime brokerage. This is going to be very important in the next bull market. We think this will grow to several billions in size, basically providing lenders with a much safer access to perpetual future funding rates through things like the basis trade.
Bryce
Very cool. Love it. Hey Sam, we greatly appreciate all the time that you were able to hear spend here with us today. If people want to follow along on your journey, we'll put some links in the show notes and we'll do our own research. But are there any that you just wanted to highlight and shout out, maybe your personal exit account or the company's website, anything like that?
Sam McPherson
Yeah, we're quite active on X Twitter. So the company is Spark Fi and I'm under Hexan Hexanot.
Bryce
You gotta follow Hexanot. It's a good follow. A lot of good stuff coming out of your guys's corner of the world. So everybody who is listening today, we hope you enjoyed come back same time, same place next week. And Sam, we, we hope that we have you back on the show sometime. Maybe Q2 for the, for the checkup as well or Q3, I should say. But until then, we'll talk to everybody soon. We'll see you guys next week. And thank you, Sam.
Sam McPherson
Cool. Thanks for having me.
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Title: DeFi Lending Is Changing Fast — Spark’s CEO Explains the Future of On-Chain Lending
Date: May 19, 2026
Hosts: Bryce Paul & Brendan Viehman
Guest: Sam McPherson (Co-founder & CEO, Spark)
This episode dives deep into the rapidly evolving world of DeFi (Decentralized Finance) lending, featuring Sam McPherson, co-founder of Spark—one of the leading on-chain lending protocols within the Sky ecosystem (formerly MakerDAO). The discussion ranges from Sam’s personal crypto journey, foundational mechanics of DeFi lending, and Spark’s risk and security frameworks, to the ecosystem’s response to recent high-profile DeFi hacks and the challenges and prospects for mainstream DeFi adoption.
[05:03 – 06:26]
"I was just kind of wanting to build stuff ... but the political process was just completely untenable. So there was this happy coincidence of the restructuring, the governance. I saw this opportunity where we could go off on our own and start doing the products that we really want to build out under a governance structure that just facilitates this type of growth and creativity." — Sam McPherson [11:34]
[06:26 – 09:06]
"We back all of our deposits with USDs, which is the third largest stablecoin...and this also contains with it insurance—five layers of insurance that's backing this." — Sam McPherson [19:33]
[09:06 – 12:27]
"The idea is that Sky sits as a very unopinionated rules maker...and then the stars compete to allocate the balance sheet...what keeps the system in check." — Sam McPherson [10:21]
[12:27 – 15:07]
"Within the Sky ecosystem, the goal is to maintain at least 25% cash reserve...so that these issues of liquidity basically never come up." — Sam McPherson [13:58]
[17:40 – 22:42]
[22:42 – 25:33]
[25:33 – 32:48]
"We have rate limits. So even if there was this event and Sparklen still had this collateral onboarded, the damage would be very likely nothing." — Sam McPherson [29:36]
[33:10 – 34:52]
[35:53 – 36:45]
"People group us in with defi lending in general, and when they see these hacks, they mentally associate it—even though we don't have any direct exposure to it. We just need to level up … it's a non-starter otherwise." — Sam McPherson [36:45]
"Eventually everything will just be formal verification, largely by AI, I believe." — Sam McPherson [38:30]
[39:39 – 44:35]
[47:01 – 50:23]
[51:50 – 52:59]
"I'm a very products guy...in the previous structure [of MakerDAO], I was just kind of wanting to build stuff...but the political process was just completely untenable."
— Sam McPherson [11:33]
"We back all of our deposits with USDs...which also contains with it insurance—five layers of insurance that's backing this."
— Sam McPherson [19:33]
"For us at Spark, we're very focused on crypto-backed loans primarily... divide and conquer strategy."
— Sam McPherson [23:04]
"We have rate limits... even if there was this event and Sparkland still had this collateral onboarded, the damage would be very likely nothing."
— Sam McPherson [29:36]
"No, we haven't [had bad debt or defaults] since launch. That's awesome. It's been going pretty well."
— Sam McPherson [32:48]
"Spark has not had any bad debt event...but people group us in with defi lending in general and when they see these hacks, they mentally associate it—even though we don't have any direct exposure."
— Sam McPherson [36:45]
"Eventually everything will just be formal verification, largely by AI, I believe."
— Sam McPherson [38:30]
"Even in the bearish conditions...there's a 7 million a year protocol surplus... during bull market conditions, this peaked at around 80 million per year..."
— Sam McPherson [47:37]
This episode offers a comprehensive, candid look at the current and future state of DeFi lending. With Sam McPherson sharing both technical and strategic insights, listeners leave with a clear view of Spark’s risk-first approach, robust growth, and vision for a secure, open, and scalable on-chain financial ecosystem—undoubtedly relevant to anyone following DeFi, investing in crypto, or interested in the broader digital asset landscape.