How Pareto Studio Works: The Underwriter Sets the Terms, the Credit Facility Deploys Onchain

There you go. Hey, guys. Hey. How's it going? Hey.

Great to have you on. It looks like you're gonna tell us some launching credit and maybe play us a song. We've got some guitars hanging out in the background. You know, you still?

Yeah. Well, you need to, you know

he's got a great song about about nine figure volume or something like that. Exactly.

About dancing and underwriting. You know?

You were saying Where are calling from? Are you? Yeah. I'm actually calling from Italy at the moment.

I'm based close to Venice, so Northeast Of Italy.

Brilliant. Not a bad place to be. I think you might be our first Italian call in. We've we've worked look. Even though the show is definitely focused on The US, we're getting quite the global reach. And, fortunately, Justin was just on, and normally he's in Taiwan, but we were able to catch him when he was in some eastern time zones. So thanks for, thanks for staying up late and and joining us today. On chain credit has been such an integral part of the conversation.

It was even part of the last conversation with, Justin. So maybe kind of give us the base layer. Like, Pareto, you run into somebody at StableCon. How do you explain what do you do, and what you're working on?

That's a very good question. I would say to explain Pareto in just a single question is we're building essentially a single platform to replace fragmented credit workflow workflows and, you know, continuously enforce the facility agreed rules, covenants, and Nordic terms the unknown chain kind of way. So everything is embedded. Everything is programmatic into the same infrastructure, and it's essentially replacing, all the infrastructure that takes months, even years sometimes to set up credit facilities.

So that's what 33 is.

And has this always been the goal? We we we love to dig into this. Like, you know, we we we've talked with this with Justin and multiple other founders where whether there was at the previous company that they were at or they were building in the ecosystem. And it feels like a lot of people underwent this, like, metamorphosis at the tailwinds of genius and at the rise of stablecoins where they say, actually, this is what we should be building.

We thought this, but then, like, this one client happened, we had this one conversation that was a very pivotal moment. What was that like for you, you know, building Pareto?

It was quite of an evolution, I would say, because, you know, we actually focused and kind of rebranding into Pareto a couple of years ago. But we started working in DeFi back here between 2018 and 2019. At that time, we were going by the name of Idle Finance. We released one of the first aggregators in the space, essentially. We were, you know, automating. It was still about automation, you know, but we were more automating reallocation of funds across different protocols.

At the time, there were only, you know, compound d y d x. AAVE wasn't still called AAVE. At that time, it was still eFland. But, you know, we started from that concept, and we built up all the, you know, kind of, like, technical skill set in order to build automation and smart contract infrastructure in general.

Then we go we went through, first evolution of the product suite because given the audience, that we got, which was becoming more and more institutional and professional as as capital allocators, We, you know, we moved more into building structures that let investors take different levels of risk against the same underlying assets, so de facto, you know, trenching. And, that was the first evolution from just yield aggregation to actual risk diversification.

And that's actually where we started getting our hands on early on chain credit protocols, early on chain credit facilities because, you know, tranching was, you know, a really good fit for that kind of underlying. And we realized that there were a lot of improvement or a lot of room of growth for this kind of infrastructure.

The the issue that we we realized the there was during I would say it was between 2022 and 2023, is that the early on stream credit protocols were too strict to to the borrowers in the sense that the borrowers needed to adapt to the protocols in order to run credit facilities on chain, and not the not not vice versa, not the opposite.

And so we wanted to essentially flip that kind of principle into building something highly customizable that could be tailored to any needs from a from a borrower originator perspective. And that's, you know, that that's kind of the journey that brought us to build Pareto to focus completely on on seeing credit.

Of course, from a growth and mark market growth perspective, I would say private credit has been growing quite a lot during the last years, especially in order to being able to, you know, serve the kind of audience that was unserved by, you know, traditional commercial banks that were were the legislation and all the all the infrastructure was really strict and not easy to set up.

And so, you know, that's kinda how we got from, like, really early DeFi builders to building these kind of more institutional and corporate on chain credit infrastructure.

And help us like, let's break down simply, like, when we talk about, like, credit infrastructure, these these credit products. Because it feels like credit is definitely having a moment. You know, you see Kai Sheffield and kinda go in this this announcement with breaking down these these stablecoin card credit facilities. How similar is Prado to those? How how different? Because, again, I think, like, credit starts to be this really big umbrella term, and I don't think it does what you're doing justice.

And most people think credit, they think a credit card, and it's like, no. What you're building is completely completely different from that. So maybe, like, help us unpack, like, the more of the practical case study side of, like, what what function does on chain credit serve, and why is it so important to finance?

So I would say we focus more on the plumbing, on the pipeline for on chain credit rather than on the final use case. Just to give you a concrete, a tangible example of that, imagine, you know, a specialist credit manager or a credit fund with a borrower that he knows well. Let's say, it's even like SME financing via accounts receivables or even like credit card financing, but the job of the credit manager of the credit fund is to underwrite these kind of businesses or and these kind of use cases.

So they have these kind of use case, the on a grid structure, lender interest interested in financing it. You know, launching an unchained facility that allows them to automate the process and the loan life cycle shouldn't require these these credit manager, these credit founder to, you know, assemble an engineering team.

So our focus is to provide, and to give the tools to credit managers, commercial banks, credit unions, for example, that are already issuing loans and are already underwriting business to be able to transfer that kind of knowledge on chain and, you know, bring a lot of different advantages from a lender side and a borrower side, like automated reconciliation, lower cost of financing, lower cost of of capital as well. And for lenders, for example, additional use cases given by DeFi.

But, know, what we focus on is more likely plumbing side of things for credit is a neutral kind of infrastructure that allows, you know, credit managers to be able to bring facilities that they're already running or they're looking to run that have an off chain component into a non chain kind of facility.

So yeah. And I think this is actually the reason I I I reached out and we kind of went back and forth on scheduling. So this was, I think, about a month ago now, you you announced the Pareto am I saying that right? I realized I might be saying it with my my American accent, Pareto.

So if you wanna use the Italian accent, it's Pareto, but it's Pareto is is completely fine. Okay.

Moving to the Pareto studio. So this is structure and deploy your own credit vault in fifteen minutes. Break this down for us because this seems like a really interesting product. You say you can you define the credit, all of it, term or revolving facility, fit fixed or benchmark linked rate, APR, cycle duration, fee split, chain and settlement token, open access, or KYC bid what's it KYC, KYC b gated. What's it been like getting this product off the ground? What's the reception been been like?

And just like the overall experience.

So well, as I mentioned before, one of the design principle that we took, at the very beginning of Pareto was to make it as much customizable as possible. We saw in our experience working with, you know, credit originators in general, is that all the facilities are kinda tailored to the use case. So whenever you need to use an infrastructure in order to run these facilities, you need to find enough customizability to be able to to meet the needs of your borrowers or to meet the needs of the actual facility.

So Studio Pareto Studio gives underwriters and institutional originators an environment to configure and deploy their own credit facilities. And, you know, you can as you mentioned, you can configure all these kind of terms around the facility, But the point is that you need you don't need to rebuild anything from a tech perspective, from a code perspective. You just need to have the terms clear with the borrower and within your underwriting framework, and that would be enough to set up the facility.

So what what I'm saying is that with Pareto, we are essentially servicing originators with an entire suite of loan life cycle management to onboarding those lenders. So if you have you mentioned KYC and KYC capabilities. We do provide those to that, essentially cutting down all the compliance work that that underwriter or originator should do in order to be able to make an on chain credit facility comply with their regulation, with their jurisdiction.

You also we're we the the main idea is also to provide a full suite of off chain to on chain kind of data communication, which means that you can you can bring off chain kind of credit facilities and provide the same transparency and the same real time kind of monitoring for these off chain facility to on chain lenders, which is paramount for on chain lenders as well.

So the idea with Pareto Studio is to, you know, aggregate everything together under the same platform where an underwriter or originator can use to just, you know, in a few clicks, define the terms of the facility and have it ready on chain with also DeFi integration attached to it. So you can deploy with a Morpho adapter attached to it. You can deploy with a Pendle fixed rate market attached to it.

So the idea is to have a comprehensive kind of platform where you can configure everything around the credit position that you're building.

I'm pulling this up,

Mateo. What am I looking at here? Can you walk me through some of the ecosystem players here and what we've got going on? Yeah. So, well, essentially, the public credit facilities that we currently have, the flagship one, I would say, and the the the model that worked the best is the FileConnect facility. The current FileConnect facility is underwritten by maybe 11 credit, you know, and and essentially provides funding to the loan book that FalconX is running as a prime broker.

So this this was essentially the first facility in DeFi and on chain to be able to provide access to prime brokerage yields, essentially. And it works really well because, you know, from from a transparency perspective, FalconX is doing great work with lenders that they have in order to be able to provide all the collaterals monitoring, and also improving, in order to reach a more quasi real time way to provide this kind of, covenants and collateral monitoring.

And I would say the FileConnect's facility is also the flagship one because the it has the most complete, device setup. So, it's, I think, currently the second highest WA collateral on Morpho. So the use case of being able to use the credit position as a collateral on Morpho also fostered a lot of other integrations because we have, for example, the three f team building an automated leverage and also deleverage sorry, deleverage strategy on top of FalconX. So you don't even need to manually leverage the position.

That's an automation that they provide. There's a number of projects that are building secondary markets in order to provide these liquidations for these kind of collateral assets. And so in general, we see that the model with the with FalconX facility has worked really well. We're replicating the same also with other facilities. Of course, not all the facilities requires hundreds of million of AUM of TBL. Like, it depends on the borrower capacity.

There are some facilities that are fine with 1 to 5,000,000, for example, funding just because their needs right now is for that size of funding. So, yeah, in general, that's the kind of, like, marketplace that we're building. It's quite still focused on on institutional kinda crypto related player. Next step is to expand into other kind of industries.

Yeah. I was gonna ask that, Matteo, because it's like this seems to be the evolution that, you know, we we felt and kinda seen with DeFi where it's like, you know, I think what's the the general idea of, like, hey. Lending market's on chain. They start with Bitcoin. They start with ETH. They start with Solana. That's kinda like pressure tested, stress test the system. Now we see the rise of RWAs. We see Robinhood chain. We see this happening for Solana, Arbitrum, all the all these other chains.

How how do you feel about this evolution? Where do you get excited when it comes to, like, this next wave of products, next wave of primitives that you primitives that you see that you want to say be able to say, hey, guys. Look. You can look at x, y, and z company that we've done work with here at UBS. It's a very defining example, but here's what you can learn from it and apply to, you know, what strategies, what do you wanna see coming? What do you wanna see so studio?

I would say, well, looking at the the current kind of trends that you mentioned, like, property chains, things are fintech companies approaching more and more different. Also, thanks to more legal clarity, the Clarity Act, for example, and even in general, like, the the the fact that the stable currency in the last years are has become like, they they made really clear how blockchain can turn dollars into something really programmable and adapt also to the current digital age.

I'm really excited because, you know, once that concept is, you know, consolidated into, let's say, traditional companies as well, like, let's take fintechs, but we can go into the SMEs or in general, like, even big corporations. The next step of that is to okay. Now how do we use these stablecoins? How do we make these stablecoins work? And, you know, credit is just, you know, the natural kind of organic evolution of that.

And, so what I would like I would love to see Pareto Studio being used for is, for example, being used by fintech originators. Actually, we do have some internal pilots that we're running at Pareto with, you know, fintech companies that, for example, are running payday loans, you know, where you essentially receive an an anticipation on your paycheck. And, they're really looking forward to use, like, stablecoins and facilities that uses stablecoins to run that.

They cut cost for the for the fintech originator, and they provide a better service also for the capital allocators that they're working with with these tech originators. So for sure, we are forcing the uses of Pareto Studio by fintech operators in general. Like, you know, payday loans, BMPL providers is another really good category that fits into into Pareto Studio, especially for revolving.

Have have you ever talked to Elo from, Credentials? We we had a good conversation with him a week or two ago, and they're doing some work with, Uber Bolt drivers. Again, there's some early case studies where I think a little bit buy now, pay later, but also definitely, like, on the on the cash advance side.

Help us understand, though, this this buy now, pay later positioning, like, why it would be advantageous to have an on chain credit facility managing these and embedding these, again, I imagine in, like, the neobanks of the world versus, you know, the way Klarna or whatever exist makes it makes makes us today.

Yeah. That's so mainly because, all these kind of businesses that are based on credit to run rely on t plus two or more kind of settlements. So adding stablecoins and the and the velocity of being able to found, you know, new request from a customer for a BNPL provider, for example, or even even the Uber kind of use case is really interesting. So whenever you need to bring velocity to the to the service that you're providing to the final user, stablecoins are helping you provide that.

And, a credit facility that use stablecoins provides you with, essentially the same setup that you're using right now. Most of these fintech companies are relying on credit to be able to run these kind of businesses. But if you bring, like, on chain credit facilities, you're bringing the velocity into the settlement for these facilities.

So you can let's say that you are managing or handling hundreds of transaction right now, you with a stable point credit facility, you can bring that to thousands, to million kind of transactions that can be settled on the same day, you know. So you essentially have a way that is cheaper than a traditional structure and brings more speed to your business. So, yeah, feels kind of like on a no brainer for these kind of fintech players, like the NPL providers or all these kind of fintech applications.

You mentioned at the beginning, Matteo, been building this for a while, have pivoted, rebranded all the things, you know, as many people would have in an evolving market here. When you think about what you believed at the beginning of this journey and what you believe now, what has changed and what has stayed the same?

That's a very good question. I would say well, when we started, I remember, you know, decentralization was kind of an obsession in the entire ecosystem. Now I see the it's still important in the sense that even from a lender perspective or customer perspective, in general, they they they reward if you're building on a neutral kind of infrastructure that doesn't rely on a central, let's say, authority in order to be run.

That's that's still there's still a premium on that, but I I I really felt the evolution of the ecosystem into focusing more on solving the tangible problems for the customers. So if I have to think about our days at, idle finance with the old aggregator, you know, we the the the persona that we were serving was quite broad, you know. It was like a DeFi user, like a a OG DeFi user, then an institutional player, then a VC fund.

So it was quite it's quite it was quite broad and, you know, and that's that's also what I've heard it from other, like, fellow funders, let's say. It was really chaotic as a process for building up the product. Now over over the last, six, seven years that I've seen DeFi evolving, I saw DeFi becoming more and more sectoralized. Like, at the beginning, everybody knew everything about, you know, NEV or AMMs, lending protocols, perks. Everybody was kind of a general generalist.

Now the the the industry became quite sectorialized, and I see people focusing on just credit on over and over collateralized lending, on perks, on options, on derivatives, on tokenized equity, for example, tokenized shares. So that's, I would say, a better environment to build at the moment.

Like, even if, the obsession for decentralization, came down a bit as a trade off, I would say, that allowed the funders and builders in the space to focus more on the personas and the customer that they're serving in order to build a better product. And we see now the results, would say. We see now more and more companies that if you think about, like, three, four, five years ago, would never approach the the ecosystem.

Now approaching the ecosystem not only because of the cost saving and the efficiency brought by block but also because the teams that are building on blockchain and DeFi became more focused and became more focused on improving the service that they provide. So that that's something that I would say I saw as an evolution of the ecosystem.

Love it.

Last question on my end. As a DeFi enthusiast, Mateo, what do you what trends are you excited about? Maybe on the more consumer side and maybe what's trend that you want to see kinda die off?

Yeah. Die off? So I would say from a retail perspective, from a power user perspective, I love the trend of tokenized shares at the moment because it allows me to to build my entire portfolio and to keep running my entire portfolio on Sheen. And and this gives, you know, a lot of flexibility on, even automating it. I'm probably biased because as a power user, of course, there's there's a there's still kind of like a technological barrier to be able to to have my grandma doing that, of course.

But still, I really love the trend because it allows to broaden up the the kind of, like, assets, the asset classes that we can work with as a user, I would say. So that's a really good trend. I'd love to see also names like coming into the space, and, you know, expanding and bringing more validation to the to the space itself. It's a trend that I would see like, I I I think it will die over time.

Well, maybe it's already done, but, you know, I mean, kind of rethinking, trend has been, I'm not saying that it's dying, but probably is not really something for retail users. It's something like more technical at the end of the day. And, yeah, restaking over, restaking position, all these kind of castles built on top of it, you know. Yeah. It feels a bit, distinguished as a as a kind of topic and term and and Yeah. And trend, I would say. So that's something I believe in the next years.

We we won't see a lot talking around that kind of aspect.

Got it. Awesome. Well, thanks, Matteo. We appreciate you coming on today. Please keep us in the loop as as you continue to develop. We'll have to continue this conversation. But we're gonna go to a quick break here. We have Anthony joining us from MoneyGram, Matteo. Thanks again for coming on, and we'll Thank you,

Appreciate you. Thank you. Enjoy the guys. In air.