Luca is a deep thinking analyst, economist and builder, with a background in institutional finance, alternative and credit investments and more recently DeFi lending and governance. Luca publishes analysis on Dirt Roads, a must read for anyone thinking about the construct and evolution of money and associated topics.
M^ZERO sprang into life recently with the announcement of a $22.5m seed round from investors including Pantera. AirTree, ParaFi, Mouro and Earlybird. The team is building decentralized infrastructure with the vision of ultimately replacing the commercial banking backend, starting with a better stablecoin.
In this conversation, Luca and I discuss the inspiration and vision for M^ZERO, Luca’s learnings from his time at MakerDAO, governance considerations for decentralized institutional infrastructure, the shortcomings of existing stablecoins and his team’s proposed approach, M^ZERO with respect to the current banking industry turmoil and more.
First, a primer on stablecoins as background for this material:
Stablecoins are reminiscent of bank deposits in their structure. Stablecoins are created when an individual or institution transfers an asset, usually fiat, to a stablecoin issuing entity and receives newly minted stablecoins in return. The assets contributed by the “depositor” are owned by the stablecoin issuer, managed to generate yield and made available 24/7 to fulfill redemption requests from stablecoin holders that wish to convert back to fiat.
Unlike fiat, stablecoins exist on-chain, meaning they can be quickly deployed in DeFi or used to transact for other on-chain assets.
While the dynamics of stablecoins are similar to bank deposits, the legal and regulatory structure is meaningfully different.
Stablecoins are liquid on secondary markets, providing an alternative route for market participants to acquire and dispose of stablecoins. As the name implies, stablecoins are designed to maintain a 1-1 peg with the US dollar or another major global currency, whereas other crypto assets are generally volatile, making stablecoins useful as a store of value and means of exchange.
Stablecoins can be redeemed to the issuer at face value, so a drop in the market value of the collateral portfolio could result in the undercollaterlization of the stablecoins in circulation and a rush to redeem, in other words, a run.
In many ways, the model is similar to the historical US banking model in which each bank issued its own dollars, which were exchangeable for other assets in the economy but only as good as the management, reputation and financial stability of the issuing bank.
Similar to the banking model, stablecoin issuers make money by investing the collateral portfolio to earn yield, which they generally keep for themselves. The riskier the investments made by the stablecoin issuer, the greater the likelihood of collateral portfolio losses and therefore stablecoin collapse. Unlike banking, there is limited regulatory oversight of stablecoin issuer operations.
The financial infrastructure opportunity
There’s a view among many, us included, that Ethereum along with other institutional-grade L1s could replace traditional centralized banking and payments infrastructure.
However, it is very inefficient for financial intermediaries to interact directly with these computing layers.
M^ZERO is building an overlay on Ethereum designed as a financial intermediation layer to allow institutional collateral, asset and liquidity providers to interact, abstracting out the complexity of the underlying network.
Once collateral, assets and liquidity are on-chain, they can be used to create a broad range of financial functionalities and products in an open source, open-architecture way, powered by the security, composability and scalability of Ethereum.
The stablecoin landscape
USDT and USDC are the most popular stablecoins currently by amount in circulation. Both are centralized in that they are issued by single parties (Tether and Circle, respectively) that manage the collateral portfolios backing them. The centralized issuers are responsible for investment decisions and risk management and capture the yield generated by the collateral portfolios.
DAI, a token issued by the MakerDAO protocol, is an example of a DeFi native stablecoin, structured as a loan. Anyone can create DAI by parking certain types of collateral in a smart contract and minting a proportion of this collateral value in DAI. Using this mechanism, asset providers are able to lever up their yield. To get collateral assets back, borrowers must repay their DAI loans. Holders of DAI have a stablecoin that is as decentralized as the underlying assets in the aggregate collateral portfolio, originally only ETH but now many other assets as well. Because DAI is overcollateralized, it’s safer than the collateral assets themselves. In essence, Maker abstracts one of the core functionalities of commercial banks, money creation through lending, and puts it on-chain.
As useful as existing stablecoins are, they expose users to risk. As a USDT or USDC holder, you are exposed to the collateral portfolio management decisions of centralized issuers as well as credit risk on the underlying assets for which you are not compensated. As a DAI holder, you are similarly exposed to risks related to the underlying collateral portfolio as well as project governance decisions as the protocol attempts to scale in an uncharted space. Furthermore, Maker now accepts multiple types of collateral, including USDC and non-crypto assets, which bring complexity and potentially regulatable surface area to the project.
The M^ZERO approach
To address the perceived shortcomings of the existing stablecoin landscape and lay infrastructure to support other on-chain banking and finance activities, Luca and M^ZERO are focused on the following areas:
– Reducing or removing credit and counterparty risk in stablecoins and on-chain finance via a single-asset / over-collateralised model that does not rely on banks as custodians but is actually built on bankruptcy remote vehicles, most likely SPVs.
– Addressing stablecoin risk/return misalignment by compensating approved stablecoin holders for the limited but non-zero credit risk they are exposed to.
– Building programmatically enforceable governance to manage basic protocol activities, with governors selected based on expertise and decision making, rather than pursuing direct democratic protocol governance.
We expect more information to be available on the M^ZERO protocol design and roadmap in the near future as the team continues to build and look forward to following progress.
Luca Prosperi, welcome to Rebank.
Thank you, Will. Thanks for having me and thanks for pronouncing my surname right, one of the very few.
It's such a pleasure to connect with you. We've spoken on and off for the last number of months. I've been aware of the project that you've been working on, which you recently announced very publicly in association with the announcement of a massive effectively seed round. $22.5 million I think, is the number seed round from some of the best investors in the Crypto space in a extremely difficult market in terms of fundraising. Obviously a testament to you, the founding team and your vision. So maybe to kick off, you could give us the high level description of M^ZERO, and to the extent that it's worth weaving in your own personal path to how you got here.
I'll try to answer to question number one briefly. I think question number two is a bit longer. What is M^ZERO? We have been fascinated over the years by the distributed computing layer that is Ethereum, but we also understood that is very inefficient for financial intermediaries to interact directly with this computing layer, and try to sort out how they talk to each other. So what we're trying to do, is to create an overlay on Ethereum that is, we call it a middleware, but it's a financial intermediation layer that is designed in a way to allow institutions, so collateral providers, asset providers, and liquidity providers to interact, abstracting out a lot of the complexity from that. So imagine a way so that legitimate large institution can port assets on the chain or liquidity that is also an asset on the chain, and create any type of financial functionality or product in an open source, open architectural way.
Now this is very abstract, but we think that to make this a bit more pragmatic, a bit more real, the first example of a financial product or functionality that could spin out of this infrastructure, is a way superior stablecoin. You have currently centralized issuers of stablecoin, like Tether and Circle, or each centralized issuer that is doing the issuance in its own way. They're issuing their own type of stablecoin, compliant to their own requirements. We think that a financial middleware could actually allow several issuers to issue a stablecoin in their own way by actually having this stablecoin being fungible across the whole network, as an example. There are many, many other examples that we have in mind, but the idea here is to have a setup of this middleware, as we call it, that is done in a way that certain structure requirements of large institutions are respected when it comes to their own compliance and their own requirements vis-a-vis the regulator.
Because we are convinced that if we don't create an ecosystem that allows regulated large institutions to come and play, the DeFi ecosystem will never scale to the next stage. And that's what we want to do. Now, how we got there? It's a very, very long conversation, but I'll try to make it very short. We have been, all of us, the three founders from different sides, convinced about the superiority of decentralized infrastructure to exchange value or representations of value. We have tried to use the existing construct in terms of protocols to let institutions come and interact. I spent significant time in Maker, trying to let institutions connect to the protocol, and Greg did the same and Oliver did the same, up to the point that we realized that those protocols were phenomenal proof of concepts, but they were not ready in my opinion, from governance, execution and configuration to actually interact with those institutions.
So we decided to create this middleware ourselves. Obviously, each of us has a very, very long personal story that brought them there. Personally, I've been a mathematician, economist, financial professional at the very, very core of finance for almost 20 years. I've been very, very fascinated by the ability of blockchain tech to actually reimagine a lot of the financial concepts that we have in mind. And I spent a lot of time also writing, researching about this before going to building mode.
Amazing. So I think we can unpack a lot of different threads there over the course of the conversation. Couple clarifying questions maybe to start. So I think I've read of M^ZERO described as a protocol, you call it middleware. Are you envisioning an extension of say the broader EVM ecosystem? What's your sense of what you're building will interact with existing infrastructure?
We are not thinking about launching an alternative layer one at all. We are embracing the success of Ethereum as a project, and a lot of institutions are projects that are trying to launch alternative layer ones that are dedicated to very specific use cases. I think they are massively underestimating the importance of community and open source building on top of Ethereum, but we are developing our ecosystem for EVM compatible environments. It could be layer one, it could be on scaling solutions. Given the amount we have in mind for the people that use our protocol, for us, security is of paramount importance. So we think we will probably launch main net as a first step, but we always talk about a protocol, and I think you need to think about what we're doing as a hub and spoke model. We want to develop a protocol that sits at the center, which is fully permissionless, open source in nature, governed by decentralized governance.
We can talk about governance later on. This is an important topic for us that allows different bridges, different institutions that live in the real world to use the protocol. So you can think about a backend infrastructure for institutions that are allowed to use the protocol as a backend. I've always believed that DeFi is a B2B play, that's how we think about it. That doesn't mean that the products that can be created from this infrastructure, starting from a stablecoin for example, are permissioned in any way. But I think the actors that connect, they live in the real world or they live in their own world, and the protocol is agnostic, credibly neutral infrastructure that exists in the backend for them to interact. That's why I was mentioning, we talk about middleware. It's something that exists between the layer one and ultimate users, being those users as large as you want of the protocol.
Maybe we can talk a bit about your experience at Maker, because not only is it recent, but it's very relevant, I think to informing your views on what you're building now, both from a institutional financial products standpoint, as well as a governance standpoint. Do you want to talk high level to start about what you were working on at Maker, and then we can get into some of the learnings that you took away from that experience?
I was fascinated by Maker, because I think that the core offering of Maker is absolutely incredibly elegant, especially of the single collateral DAI, which is the first idea that Maker had. The core concept is very simple, yet phenomenally beautiful. You have a collateral that is very liquid and has quite recognizable value. For example, if you can park this collateral in a smart contract, and you can mint a subset value of this collateral as a stablecoin that you can sell in the open market. So what it means that as an asset provider, you are defacto levering up your yield, because you park $100 worth of ETH, you meant $50 worth of DAI. You can sell them in the open market, you can buy more ETH, for example. So ultimately, with the same type of exposure, you have more access to the yield, because then to access that asset, you need to pay back your loan.
And for a user of a stablecoin, you have a stablecoin that is as decentralized as the underlying asset as ETH, but way more stable. And that's why you need it, and it's safe. And I found it extremely beautiful, is a way to abstract one of the core functionalities of commercial banks and put them on the chain. Commercial banks do exactly the same. You come, you ask for a loan, they print money, the money that they give you in your account doesn't exist before, but that money is fact over collateralized on their assets, and you use the money around. It's a way to distribute the money supply around the system. And I literally loved it. And Maker started from this idea of having one collateral backing it, and then they say, okay, we can actually commingle different types of collateral that are back in the same stable.
So originally it was ETH, then it was ETH Bitcoin and many other things, and then they started to, someone in the protocols had the idea to expand it to the world outside of the chain, instead of the digital asset that exist and they are native of the chain. So you're saying, this DAI table coin is so liquid, people want to hold it. They ask no money for holding it, like keeping cash. Cash doesn't grow in your pocket. So we can actually open the window to other assets like mortgages, like bonds or whatever, that can be pledged as a collateral that would allow the DAI to expand in size and grow and transform Maker in some sort of central bank of DeFi. And I found this project fascinating, so I started getting involved. I cannot say I was leading this effort, but I was one of the people core to this attempt to connect from the protocol side, the protocol from two large institutions.
Now, it is difficult though, because to do the valuation, the underwriting, the liquidation of assets that don't exist on-chain, is not really straightforward. In my view, you needed to have very, very high standards for the institutions that you were talking to and for the quality of assets you were actually able to onboard. And I'm not sure that view was shared with everyone, and I was actually quite concerned, having spent 20 years in finance, not in engineering. I know that when you open up a window to that, you create a huge adverse selection.
People want to dump the shittiest possible quality of assets in your window and get the money and run away. So I think we had a few discussions about the risk appetite that you need to make this central banking of DeFi keep working. And that's where I think we had a few disagreements with the rest of the governance, and that's what also informed me in thinking about what type of functionality, a good protocol that is interacting with institutions should inherit from Maker, but also what type of governance, a protocol like this one should have to avoid moralizing and adverse action.
That's actually a topic that I would love to dig into with you, and maybe this is a good opportunity to do that. So governance in general, and it's clear from the materials that you guys are starting to put out around M^ZERO, that governance is a core component of what you're building. Sure governance has been an important concept in the DeFi space for the past number of years now, and different projects have taken different approaches, and actually I think Maker is broadly regarded as one of the projects that has the best governance.
Maybe not perfect, as you're saying, but regardless of what the best governance is for a large group of potentially disparate combination of retail and maybe small to medium-sized institutional players, it sounds like the protocol that you're building geared specifically toward ultimately large institutional players, will inevitably have different governance considerations. So what have you learned about governance for the financial infrastructure that you're building, and how are you thinking about it specifically for your target counterparty base?
We are spending a lot of time on governance. M^ZERO will have its own dedicated governance module that has been designed bottom up by Greg, who is one of the three co-founders. So we are trying on one hand to design good mechanisms of governance, then can incentivize what we think are virtuous behavior of governance. So we start from the mechanisms, and I'll get to the mechanism in a second, but mechanisms is just one part of good governance, we think. The other two elements, I believe, are first of all the nature of the decisions that you should take. We are designing infrastructure, so the governance that this infrastructure has should be as banal as possible. Our governance should resemble more a bureaucrat, rather than a politician. Should be like a boring official that checks a checklist and sees whether someone that is asking for something, has the requirements to be the actor they want to be.
Ultimately our role has a set of actors that can interact, and everyone comes forward and asks for governance to be approved to play that role. And governance should have a very simple checklist to say, okay, you have the requirements, you don't have the requirements. So the nature of the decision making is also very, very important. As soon as you have governance taking very, very complex decisions that they don't have a right or wrong answer, things get very, very political. Should we increase the tax rate by 5%? Who knows? Should we invest in this asset or not? Who knows? But is this institution compliant with certain requirements that we are hard coding on a constitutional document? We can say clearly if it is or it's not.
Pseudo algorithmic, the first point is governance mechanics. The second point is nature of the decision making process. And the third point is who the governors are? At the starting point of governance, is something that has been massively underestimated. I think you can have the best possible governance mechanism, but if you have bad governors, things will not go well. So we are cherry-picking our governors carefully. So we will not do an airdrop of governance tokens. We will not randomly distribute the governance to pretty much reduce our personal liability, which is something that other projects are doing in good or bad faith.
But we want to select the group of people that at the beginning will be the good governors of this protocol, because not everyone is the same. And I've never been a believer of the flat democratic approach. Not everyone is the same. People have different skills, different responsibilities, and the quality of the people that interact at the governance level will decide ultimately the success or the failure of a project, and that is very, very important to us.
In terms of the initial use case, you talked about a better stablecoin for the institutions that you're envisioning as counterparties. What does a better stablecoin look like, and then in your mind, what are the roots to ultimately distribution and adoption of a new stablecoin?
First of all, a stablecoin is useful for everyone, so it's not an institutional play. We need a better stablecoin as an ecosystem. The stablecoin and some of the pioneers of this product, they deserve kudos, but we have bad stablecoin around. I mean, I can't defend my statement. I've been writing about this even before bad things happened. So it's easy to go back to what you write, you put it your own words before the events. But I give you the three prominent stablecoin models, and then I'll tell you why I think we can have better. On the one hand you have Tether. Tether is the largest, most liquid stablecoin. There has been a lot of opacity for what concerns Tether's balance sheet. But even if we assume that Tether is representing fairly the assets they have, Tether is making money, and the holders of this Tether are taking the risk.
This quarter, Tether posted $1.5 billion of profits for the quarter. The holders of USDT, that make nothing. So they are pretty much financing a non-risk free balance sheet that is actually clipping the returns in an offshore unregulated environment. There is too much risk for a stablecoin to justify the stability of the coin. Then you have on the other side Circle. Circle has a similar centralized model. They're doing things in a way more transparent way, but the problem is the same. Holders of the stablecoin have a lot of risk, and they don't get compensated for it. If SVB, Silicon Valley Bank, wouldn't have been bailed out by the regulators, the USDC would've gone under, and with it, Circle. It didn't happen, because of external conditions. But I believe that the holders of USDC don't want to get exposed to the bank counterparty risk that Circle is using, to hold the cash that backs the stable.
And then at the center you have DAI. DAI is a very elegant concept, but it was an elegant, yet non-scalable concept, and in order to scale they needed to embrace other type of assets like USDC. USDC is a big component of DAI. So the risk inherent in the DAI is very similar to the one in the USDC model. So I don't think there is any stablecoin out there that is satisfactory from a risk perspective. If you hold money in a stablecoin on-chain, you don't want to be exposed to counterpart credit risk that you cannot control that is fully centralized, you don't get any money for, and this is actually the type of system you want to escape. So in our vision for example, a stablecoin similar to the DAI concept, should be backed and over collateralized fully by an asset, the safest possible asset, and in a way that makes the holder of the stablecoin comfortable that there is way enough real hard money, hard value backing the stable.
And actually, the system, and I cannot share too much of it, because obviously we're finalizing the design, but the system we have in mind is a system that allows multiple issuers that can connect to the infrastructure, and use the infrastructure as a stablecoin, as a service infrastructure, where if they comply with the requirements that governance is enforcing, they can actually use the infrastructure to meet a stablecoin. So you can have five banks in the US, three banks in Europe issuing a stable through their regulated platform by leverage the M^ZERO infrastructure centrally, and have a stable that is fully fungible at the level of the chain, which makes it very, very powerful. So I think we have a view that we can have a better stablecoin from a risk adjusted basis, and a larger and more liquid stablecoin thanks to a scalable and open architecture infrastructure that M^ZERO wants to be.
If I oversimplify just for understanding, there are two, perhaps others, but two primary critiques with the existing model. One is basically centralized counterparty risk, and one is access to yield, the yield on the underlying collateral portfolio. So it sounds like in the M^ZERO model, access to yield is a core component. So rather than having a stablecoin that yields zero while the centralized counterparty clips the ticket, some portion, if not all of those returns, flow back to the stablecoin holders.
And then in terms of the centralized counterparty risk in the DAI model, the Maker model at least, with the purely on-chain collateral, excluding the RWA component, you had high quality tokens locked into smart contracts as collateral, therefore addressing the counterparty risk of underlying custodians and various other things. In the Circle model, SVB was a potential risky counterparty. Now it sounds like BNY Mellon is a custodian of the vast majority of Circle's underlying assets, so there is still a counterparty risk. It's predominantly, I guess with BNY Mellon, I imagine Circle is structured in a way that Circle itself is bankruptcy remote from the underlying collateral. I'm sure we could argue that. How do you think about getting real world assets custodied in such a way as to diversify a way as much possible counterparty risk?
A few verifications here, and I feel very important points. I mean this conversation will get potentially very nerdy, so please feel free to stop me.
Let's start with Maker. Maker is not backed by on-chain assets. I think 70% of DAI are not on-chain assets. If you go on, I don't know, Maker BIR, I'm not on top of the numbers, so please don't quote me on the numbers, but I will guess that 70% of the assets that are back in DAI are USDC itself, and other treasury assets that are both by affiliated parties to the DAO with most probably non-armslength relationship with the DAO. The 70% of the risk back in DAI, is not decentralized. I would love a fully decentralized DAI. The problem is that fully decentralized stablecoins, like LUSD or like Rye, are the most elegant systems possible.
I love them, but they have issues in scaling, and it's not a coincidence that DAI is scaled as soon as they included an arbitrage mechanism called the PSM, that would've allowed the DAI to digest USDC. DAI is becoming a wrapper of USDC, divesting part of SDC into treasuries. So DAI is becoming a wrapper of treasury risk. So DAI is not backed by decentralized collateral by a large margin. This is the first point. Then the second point of counterparty risk and how you do it. When you talk about risk and returns, the two things go in sync. So yes, it is true that now Circle are depositing most of their reserves in globally systemic banks that are highly regulated now, not in the past, but then Circle is leaving these banks clip the spread. So what BNY Mellon or any other bank does with the cash, they buy treasury bonds. Treasury bonds still 5%. They keep it for themselves. It's not a coincidence.
And I was extremely disappointed by the research of the BIS, the Bank of International Settlement that was actually comparing asset backable coins and digital deposit tokens, because it is a way to extend the business model of the bank. They issue an instrument, you have a claim on their balance sheet, and they make money by buying assets with this liquidity. They don't give any of this money back. So it's an unfair, even if small counterpart risk is small, credit risk is small, but that counterpart in credit risk is priced at 5% for the holders of the liquidity, and the holder of the stablecoin doesn't make any money. So from a risk adjusted perspective, even if the risk is very low, it's still extremely unfair.
Then the second point about bankruptcy remoteness, the balance sheets in Circle are not bankruptcy remote. I think they're extremely regulated as a money transmitter, which is good enough, but the underlying reserves that are in the banks are not bankruptcy remote. We have seen it with SVB. SVB goes down and there is a hard cut, and this impacts any order of the stablecoin. And again, there's always a risk adjusted return perspective. That is the other point. So our intention is first of all, to allow into the M^ZERO construct a system that is sorely backed by sovereign risk. So isolating out depository counterpart risk as much as possible.
It is doable today. The synchronization market was born for that. You can silo liabilities in bankruptcy, remote vehicles, special purpose vehicles or trust, staying away from the cash component as much as possible. You can do it. On chain, you can do it even better. Now when it comes to the yield, which is the other side of the answer, the risk adjusted yield, we talk about the risk, but what about the yield? And this goes to the idea that we had in mind about up bespoke model, B2B model. We are not in a position, and have no intention to facilitate issuers to come and meet the stablecoin that gives money to the holders of the stablecoin. This is regulatory impossible to do.
What we want to do is, again, provide a balance sheet as a service system to approve holders of the stablecoin to get the yield back. And I make you a very pragmatic example. Please don't quote me on this. I haven't discussed with any of those parties, this is just an example. This is my disclaimer. So today you are Coinbase, you are a good distribution channel for USDC that is issued by Circle. A USDC falls in the hands of your users. Circle is printing it. Circle is keeping the spread. Circle is making 5% or 4% whatever on the float. Circle, in order to incentivize, Coinbase might give them some sort of marketing rewards, but it's totally up to Circle to do it or not do it.
So we are envisaging a different model. Let's say you are an issuer of a stablecoin, you issue and distribute this stablecoin. If you're approved by certain parties, you can have access in automated way through protocol infrastructure to the underlying yield. Then if you want to distribute it to your customers or you want to keep it for yourself, it is a regulatory question that the distributor will need to ask. So if a platform wants to create some sort of staking as a service model for their clients, it's something that they need to figure out with their own regulator, but the system will allow them to do it. So will allow them to isolate out the centralized balance sheet that Circle and Tether are, and just transform any contractual relationships business to business, simply in a smart contract relationship with a protocol, which is very powerful.
We could literally extend this conversation to a couple hours easily. There's so many areas we could continue to explore, but I want to be conscious of everyone's time. Maybe to pull some pieces together around what we discussed, but also loop in some of the broader macro context, we are as we speak, it'd be nice to say, fresh off a mini banking crisis, though TBD, whether it's fully over or not. There are a lot of questions that people are starting to ask around the fractional reserve banking model. Money as effectively deposits, at least as liabilities of banks, and people are exploring or promoting different alternatives to that, direct deposit accounts with the Fed, various other things. How do you think about the timing of your impending launch of M^ZERO and the new approach to stablecoins and the implications for money, in the context of what we're experiencing with the broader banking sector?
I can answer to bullet points. The first one is, what is the long-term vision of M^ZERO, and the second one about the timing of this vision. I think the long-term vision of M^ZERO is the following. Today you have financial intermediaries are front-ends and back ends. So you go to a bank, maybe you want something, you just want to deposit your money there, you want to use the digital money that you have in your account, that you don't care about the rest. And then each bank is managing their backend, and the front-end with the customer, and with the backend they're doing something to keep themselves profitable. But sometimes you don't really want to buy the whole bundle, you just need one for a function. So what M^ZERO wants to do, is abstract out the backend from the front-end.
So M^ZERO want to be fungible, composable backend to any institution that connects with the ultimate user, so that the front-end, which is the business that is connected to the user, needs to comply to several regulatory requirements, that I think most cases are in good faith, but they don't need to reinvent the old stack on the back. They can use distributed technology to cherry-pick and compose whatever they want to do. So imagine, a bank can compose their balance sheet by interacting with other asset providers completely on the chain, or a stablecoin provider can create a stablecoin using the middleware that we are developing, or anything else. So the ambition for M^ZERO is to be an open source, open architecture backend for any regulated front-end that is a financial intermediary across the globe. It seems very abstract, but it's not. Stablecoin is the first really pragmatic example we have in mind, but there are so many that you can envisage.
Now in terms of timing, the tagline here is, we think that blockchain can do to financial intermediation what the internet has done to publishing. Totally. So if you are publisher, let's say you manage the front-end, which is your website, but then the connectivity in terms of communication information happens on a distributed protocol that is the internet, very similar. We think this can happen with money as well. Now, I think this needs to happen. I work in banks all my career, and the way banks are managing their infrastructure or their internal processes, is definitely not at the same level that web to companies are actually managing their business. So this revolution technology-wise, needs to happen.
Now what interest rates are doing now is, they are providing significant ammo for the systems to incentivize the various actors, because the spread between what ultimate users are keeping for themselves, like the depositors, and what the intermediaries are keeping on their balance sheet is huge, it's 5%, 4%, a year ago was zero. So this is actually a huge reserve of value that any builder in this space can use to incentivize actors to participate, because there is a lot of meat to attack. Our vision is not dependent on the interest rates at all, but I think the current situation of interest rates give it a great boost, and we want to use that boost, because I think it's not going to last forever. And there are few institutions that are getting the majority of this boost for themselves, and it shouldn't be.
And in your view, does the backend for banking that you envision, is it characterized by less structural instability than the current model?
That's a great question. I don't know. I don't know. Most probably there will be a different equilibrium in the long term. I think the current model is quite stable, because there is an ultimate stabilizer, which is the central bank that is stabilizing it. It has a cost, but I think has a lot of frictions that are unnecessary, because there are a lot of intermediate parties that are involved and extract value for themselves, and this value is not justifiable. The new system we have in mind is definitely more efficient, is definitely less cumbersome, is definitely more compostable, more open internationally. Whether it's going to be more stable or not, I think it will depend. But the ideal of starting from a stablecoin that is back to the dollar, if well-designed to stay under stablecoin example, is a stablecoin that wants to inherit the stability that is provided by the central banking system.
Just wants to get rid of the unnecessary fact that exists in a commercial banking system, which is ultimately what a retail-oriented CBDC would do, and that's the reason why they would never do it. Because issuing a CBDC that goes in the hand of ultimate users, it means killing the banking system, and I suspect that it will not do it. My view is that CBDC will be some sort of interbank wholesale settlement tool, but it will never go to the ends of the retail for this reason.
If you have a triangle that goes central bank, ultimate user and commercial bank, the weak spot, the weak corner of this triangle is not the central banking system. The weak corner is the commercial banking sector that is not providing value, because it's not very efficient in underwriting, and it's taking too much risk in depositing, and I think can be bypassed a lot by new tech. And these are the guys that should worry. And these are the guys, in my view, that lobby to demonstrate that the system we are building doesn't make any sense, because obviously they have vested interest in it.
Luca, I'm so grateful that you've taken the time, given everything that's going on for you right now, to connect and have this conversation. I'm very excited about what you're building and look forward to tracking your progress very closely.
Thanks, Will. It is a pleasure for me, and I think we really need to elevate the level of professionalism and communication in this space. It's something that I want to do with my co-founders. There is a lot to do, and I'm super, super excited for what is yet to come. Thanks for having me.
Luca Prosperi, thank you very much for joining us today.