Stephen Novenstern (Kintsu) on Building on Monad (EP.565)
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Today on the podcast, I sat down with Steven Novenstern, the founder of Kinsu, a portfolio company of ours that's building in the Monad ecosystem. This was a fun conversation that touched on the history of the DeFi ecosystem, some of the new primitives that have emerged over the past few years, and what is likely to be launching in the Monad ecosystem. I think you'll enjoy this one. So without further ado, here's my conversation with Steven from Kinsu.

Matt Walsh and Nick Carter are partners at Castle Island Ventures. All views expressed by them or the guests on this podcast are solely their opinions and do not reflect the opinions of Castle Island Ventures. Guests and hosts may maintain positions in the assets discussed in this podcast. You should not treat any opinion expressed by anyone on this podcast as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of their personal opinion. This podcast is for informational purposes only.

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Steven, thanks so much for joining us today on the podcast. Love talking about Monad and excited about what you're building. Thanks. Pleasure to be here, Matt. Very excited about Monad as well. So before we hit record here, we're talking in the weeds about DeFi. And I'm always just curious how people got so deep in the space. So what was your story and how you got so deep in DeFi to begin with? And then we'll start talking about Monad.

I was definitely very active DeFi summer back in the early days of Uniswap. I remember the SushiSwap vampire attack, but I actually really got into crypto around 2016 or so. I think I started buying some Bitcoin ETH and building an egregious amount of Ethereum mining rigs in my then Williamsburg, Brooklyn apartment. But I think DeFi, I definitely was more of an ad tech person for the majority of my career.

Some might say web to monetization, DSP is SSP is programmatic media. And I feel like I found my way into programmatic finance through the world of DeFi. I think programmatic media might be the only thing more complicated than DeFi. It seems like a very complicated field there. Maybe a whole conversation for another day, but I find there'd be some really fascinating parallels there between publishers and media and DEXs and DEX aggregators and stuff like that.

the way ads are sold and the demand side or supply side. Do you, as the buyer, go to publishers directly or do you go to someone who's aggregating? I think you start to see traffic moving more towards aggregators longer. I think there's a lot of parallels there, funny enough. Well, it's a lot of parallels to the existing financial services ecosystem too. I think a lot of people that are users of just a brokerage account would have no idea how their trades are actually executed and how venue selection works. So

There's a lot of complicated things under the hood in all industries, and crypto is no exception there. Yeah, certainly no exception there. Now, in terms of your migration across different ecosystems, talk a little bit about that. Curious how you landed on building in the Monad ecosystem. Yeah, once we saw what was happening in Monad, there was really no looking back, but I

I spent around two years at Pangolin, the DEX that brought Avalanche from zero to one. It was a really cool experience. In its lifetime, Pangolin has generated north of $18 billion of trading volume, 3,200 plus different trading pairs went live across four plus networks. And I think we launched 75 different super farms through multi-token liquidity mining campaigns there.

I was very curious, having really mastered and gotten such a deep understanding of EVM DeFi. I was looking one year ago very heavily into like ZK stuff, and it led us to find some really cool ecosystems and to be on the very cutting edge of what's happening there. But at the same time, the EVM is just such a dominant force. When you get deep into actually building something, there's a huge cost to essentially pre-planning

and fully automating a financial ecosystem. You do it all upfront and then you audit it. And having the tooling of the EVM ecosystem is just unbelievably nice to have. With Monad being 100% bytecode compatible, it just means that any developer with any Solidity experience, and Solidity is basically like JavaScript for Web3,

It just means that everything can be deployed there so easily. And I think it's just a fundamentally optimized system. It could be fundamentally changing the paradigm of Web3. So we at Kinsu have been building liquid staking protocols

And there's this really beautiful analogy I keep coming back to where proof of stake chains look like digital nation states. And right at the core of that, there's issuance. We can talk about that more, but you can stake and earn rewards. And this has some interesting parallels where we basically have staking is this opportunity cost. Normally, you'd have to decide on a proof of stake chain that you'd rather participate in DeFi than stake. It

It's like the traditional concept of flight to quality. When you have high interest rate environments, it sucks all the liquidity out from risk assets and further out the curve to the safe bond structure. And there's some really cool stuff where liquid staking is almost like a composable bond. And the Kintsu S-Mana protocol creates this bond that you can build on top of.

So when we talk about liquid staking, I'm sure there will be people listening to this podcast that are not familiar with the concept. So maybe talk a little bit just around the history of the category, why it even exists and why it's exciting. There might have been a push into the deep end there. Basically, I can use myself as a fun little example. I do run a Genesis Ethereum validator node.

Historically, Bitcoin was a proof-of-work chain. Ethereum also started as a proof-of-work chain. Basically, just buy more computers to earn more. This had different sustainability outcomes. People were concerned that Bitcoin was consuming more power than some small countries. Ethereum historically made this shift to proof-of-stake. And it's more like you put up ETH, you have to buy ETH, you have to be comfortable holding the underlying, and then you earn yield in kind.

for providing that ETH. But in Ethereum, you put up 32 ETH and you make this commitment to run software. You're going to need a computer. The computer you run, I have one sitting right there staring at

It might be less than $1,000. So it's a little bit approachable to be a validator from the processing side. But then you have to put up 32 ETH, which is above 100K right now. We're right teetering on that. And the idea here is that you are an in-kind for continuing to provide this processing power. But you need to be compensating validators to provide that service because there's so many other things you could be doing with your time and money. And you

If you want to have a decentralized world and this trustless ecosystem, the beauty of proof of stake brings that together by letting thousands or even millions of different parties all uphold this ledger. And there's a cost associated with that, which is staking and the issuance. So that's well said. Thinking about just the history of the category, I'm always interested to get people's perspectives on whether this is a centralizing force or a decentralizing force. Because as you point out, it

having to put up 32 ETH is a lot. So if you were able to have a system where you could participate in this, but with smaller denominations, that seems like a good thing. In Ethereum land, Lido has a lot of market share though. So how do you wrestle with the trade-offs there? Or maybe it's the wrong framing. Are there even trade-offs? It's kind of fascinating. First of all, it's incredible what Lido and Jito have done. I feel like we're really building on the shoulders of giants. I don't know if in their wildest dreams, I'd love to ask...

One of our angels, Martin, is part of the Lido team. But I don't know if they actually expected to get $32 billion worth of TVL or assets under management for the protocol. So that's an awesome feat. Some people are concerned because basically, if you have 50% or 51% of the whole network stake, you could effectively attack the network.

And the networks derive their security, crypto economic security is what we like to call it. And they derive the security from the fact that it would be so extremely expensive to make that attack that no one has a reason to do it. It would just be such a massive loss to attack it. But basically what really matters isn't just the total ETH, it's the staked ETH that matters or for any proof of stake chain like Monath.

It's not just the FDV or market cap of Monad, but the staked percentage of it is really where the security is derived from. So when you look at something like LIDA, they have done all these cool things to evolve it. But like in the original setup, there was a 30, 40 or so validators that were running the network.

And that decision might have been made internally of who the list is. And if that's a small party that all of a sudden is controlling 30, 40, 50% of the network stake, all of a sudden you might have a small cohort that is actually able to exert control over this network. So because the product market fit of LIDA was so incredible, it accidentally had this potentially centralizing effect on it. And I

And I think that it's a little bit overblown. Sometimes when people talk about Lido as a centralizing force, we don't believe that to be the case. And they did this whole community staking module thing. There's a lot of really cool stuff happening there. But with that concern, born almost from its incredible product market fit, we really wanted to make sure...

Soup to nuts, right at the core of the Kinsu protocol, that there was a solution to this where the community controls who the validators are. And this massive liquidity in the base layer doesn't ever compromise the security of the network itself. So do you think that it is a market structure that leads towards one entity being overwhelmingly powerful in terms of the total share? Or is this just a function of Lido having the best product and first mover advantage historically?

That's a great question. I think the best we can do here is coming back to the history of it. And it does seem like liquid staking is such an exciting space. It really does have strong first mover advantages and lock-in effects. I think there's moat in the depth of the LST's market. So when you get these massive bulls for the gas token and the LST, drawing a parallel from ETH being Ethereum's gas token to Lido's wrapped staked ETH or RocketBull RETH,

And then on Monad, Kinsu making S-Monad, when you have a massive amount of DEX liquidity, all of a sudden becomes viable to lending markets for the liquid staking tokens, the LSTs. And this is often something that like sticky lending yield does entrench the actual liquid staking protocol. But I think it's something where you tend to see power law distributions.

Yeah, it's really fascinating. There are some of these categories in crypto that lend themselves to hyper-competitive markets. There are others where that first mover advantage is really just so critical. And I think people will probably be studying this 20 years from now and just looking at the biggest companies in certain categories, biggest projects. And it'll be interesting to see what that history looks like. Maybe going back just to Monad and that ecosystem, you've made a big bet here. You're building on a platform that is not live yet.

It's not in mainnet. Obviously, we're very excited about the project as well. But what is it about this ecosystem that got you so excited other than just the fact that the tech is great? I'm always curious what it means to build in these ecosystems in terms of what type of support do you get? What does the community look like? So there's the tech, there's the business, there's the partnerships and community. I think that for me being a builder and

And one of my favorite things when I was at Pangolin and experienced that really informed founding Kintsu is just like working with all these other protocols. And when you see a lot of the other builders fiercely excited about something, that's indicative. You're starting to see a lot of funding coming into the Monad ecosystem.

And you're seeing all of these huge blue chip projects months ago already, even before testnet comes out saying that they're going to support Monad on day one. So all the major bridges, the wormhole layer zero axolotls of the world,

PancakeSwap, Balancer, all these really cool Ethereum stalwart core protocols are starting to come over. And I think that's really beautiful. Just because it's really fast and efficient, I think you're going to see a lot of stablecoin activity move there as well. I definitely think I would echo that tremendously. I think that stablecoins on Monad will be an enormous category. If you just look at the remittance flows of stablecoins on other networks right now and

the gas fees that are being spent on these. It just seems like having a highly performant Dell One will just drive more liquidity from all sorts of different areas.

If you're paying $4 for a transaction, that might be really efficient compared to just the cost of a merchant accepting cash for pizza. It's very inefficient for that. But if we're talking about moving a million dollars for the same cost, all of a sudden it's great. But I think that networks like Solana are just so efficient to use that it's just become really successful over time and

I think that Monag puts together the secret sauce of Solana with the tooling of the EVM, but fundamentally optimizing some of the deep tech of the network that was taken for granted as the EVM moved into some other domains.

So Monad, in my mind, is a step function increase in just what you can do on a public blockchain. I think that you'll see a lot of net new primitives emerging here. But what do you think this does longer term to the L1 landscape? L1s don't really die over time, but you could argue that they do because very few people use some of the L1s from three, four years ago that never really got to product market fit. But what do

What do you see this looking like if we fast forward out 10 years in terms of how many L1s we have and what the design ecosystem looks like? Very fascinating. There's a couple parts to that, but the

Zooming out, I think things get more and more efficient and that at some point it gets to that saddle point where you can continue getting more and more efficient. But are people actually willing to switch for that little bit of improvement? I think that Monad is getting people to switch for this improvement. And I think that they have a team that's ready to reconsider everything. And it's a massive cost to do that. But I think they've done it. And we're about to see the Monad chain drop into the world.

But I think there are new category of use cases that were just not possible before. So like if you wanted to put a lot of state and make a lot of updates, I think like proof of stake chains just make things simple for a second. At the end of the day, we know when we put gas in our car that

that if you can get 40 miles per gallon, you can drive 40 miles on that one gallon of gas. So like one ETH, if you're doing some really complex financial transaction and there's high gas and the price of gas on Ethereum changes a lot more than like the gas at the gas station, you might end up spending 0.1 ETH or $300 to mint some generative NFT. And that's a little bit absurd. If you wanted to do something like really crazy, like private jet or something, you need more expensive gas. At the end of the day,

These existing Ethereum applications have had to deal with this constraint by purposely not making a lot of state changes. It's almost like we make a rocket ship. Every ounce matters so much. To put an ounce on a spaceship costs $10,000 or something. Every single decision needs to be so carefully done. But if you're able to do more bulk actions, you're able to just consider a new class of applications.

I think you're starting to see some of the early funding going into clobs that aligns with this. And I think stablecoins is perfectly up that category. Those are very far-reaching, just exchange and stablecoins. They're very far-reaching, wide audiences. I think you'll see a lot of specific applications, maybe like social media and Shopify alternatives that are on-chain.

Yeah, the central limit order book point is such a good one because the only reason that we have AMMs, these automated market making platforms, is really just because you could not run a central limit order book on the existing tech. So in my mind, that's the first example of how Monad could be a really interesting platform. It's just you get to run exchange technology the way you want to run it as opposed to the way you have to build it. I think Clobs are just way more efficient.

efficient. There are some really cool things about traditional DEXs where the actual liquidity pooled is itself composable. And that's where we started to get crazy things like perps. And I don't know if those ideas or the way like on-chain perps work and stuff. I don't know if those ideas would have ever been born without ever once having that constraint, but that's a different thread.

Well, that's a really good point because the PERP is almost one of the all-time great exports from crypto into just traditional world. Now you're starting to see centralized companies look at the PERP and actually start to adopt it. So it was really a genius invention. And I guess it was probably the BitMEX team that was the first to really bring that to market. But PERP, AMM, I would argue stablecoins is really one of the other crypto-native innovations that is now just migrating and crossing the chasm into traditional quote-unquote financial services.

That's such a fascinating one. And then there's the circles and tethers. We can speculate about whether or not they'll launch onto Monad natively. I think they'll move fast to do it, honestly.

It's all part of creating a new DeFi ecosystem. I really believe DeFi is this net social good, giving control over assets to people, just the baseline non-custodial technology that blockchain offers. But DeFi democratizes a lot of these complex financial structures. Most people in the normal world just don't ever mess with options in their lifetime.

That's fine. That's never going to be everyone's playing with options. But something about DeFi where it's inherently open to learn more about these things, you can get involved in really small ways and experiment on chain. And I think that's a net positive for the world. So I kind of just want DeFi to win so badly.

And I think that's what you see in the space and builders who are deploying to new chains want Web3 to win so badly that we're constantly looking for the secret sauce. And I really think Monad's the next revolution. So when you talk about wanting to win, what does it take to win in this category in Monad? What will make Kinsu the number one player in this liquid staking category?

It's a great question. Specifically for liquid staking, less like the L1 to L1 battle and stuff like that. But again, I don't think it's a single chain world either. And liquid staking, I basically think of it almost from a channel partnership strategy almost. At the end of the day, liquid staking, and I promise this is adding up to an answer of how do you win in liquid staking. Liquid staking got its name on Ethereum from Lido.

I ran a Genesis Ethereum validator note. You couldn't even unstake for an unknown period of time that turned out to be over a thousand days. So the liquid USP mattered because you really wanted to be able to maybe sell your underlying position rather than unknown waiting time. That was like where the peg slipped for a while and people were really focusing on the time part of the time-money equation.

I think the superpower of liquid staking protocols is really that they're composable staking protocols. And this gets to how you win. Because at the end of the day, an LST is really just a staking position that you have a receipt token for. So it grows with the stake you've earned over time. And you can rehypothecate with it and compound your rewards.

The liquid staking protocol success is really equal to staking plus all of its use cases. That is the value it creates. It's the opportunity for developers to integrate staking into everything. But you need to help the world, help developers find this and extend it. Building DEXs, let people pull liquid staking tokens like other DAOs can pair their liquidity with it or lending markets that allow you to lend liquid staking protocols like LSTs.

and borrow against them. Going long with an LST makes a lot more sense. Using it as better DeFi optimized collateral is a great way of thinking of it. And there's myriad different solutions that can be built on top of that. Some that we may not have even ever seen before. So I think it's about getting people excited and seeing what people will create on top of it. What do you think that's going to look like? Monago's main net here. It's hard to tell who's even building what because there's nothing out there in the wild yet. It's just going to be a

hey, this thing goes live and all of a sudden a hundred different projects pop up. What do you think this is going to look like? I think you'll see hundreds or thousands of protocols pop up pretty fast. With staking specifically, there's some unique stuff that'll be not exactly like other chains, specifically like how the stake delegation system on Monad works will be a tiny bit different from other chains. So you can't just direct copy another liquid staking protocol, but you can just direct copy Uniswap, Aave, GoT,

Go find your favorite yield aggregator, your favorite leveraged yield farming protocol or CDP stable coins that are using LSTs as collateral or something like that. You'll see all of these happen very fast. NFT marketplace deployment. Someone can be native to Monad. And I think that's an important thing for some protocols, like truly be Monad native. But you're also going to see big blue chip brands that are already very...

respected and trusted come across. And I think it's not really a matter of if, but when. Very curious to see how it plays out. Do you have any like spicy takes on the Monad rollout? I don't know if it's a spicy take, but I do think that high performance DeFi and stable coins will be the two immediate product market fit categories in the ecosystem. So I think the fact that you can do just more complicated

computationally intensive things on the platform will lend itself to being very conducive to DeFi. And then I think there's just a tremendous amount of data to support that stablecoins would be even more popular if you had a faster settlement mechanism. And the fact that if I were to send you $10 in a stablecoin right now on ETH and have to pay, what, three, four bucks in gas fees, that just doesn't work.

So I think a lot of design consideration will go into building support for stablecoins and just peer-to-peer payments on top of Monad. I definitely agree with that. I think

It's just returning to the EVM is such a nice thing. You immediately get all of these tooling things that I think people or I overlooked even a year ago. Excited to play with some of the new tech, the new toys, which I think is really important to always do. You forget how nice it is to have tools like Dynamic or Third Web or something like that to just instantly have EVM connection and all these cool tools.

So I think the tooling of the space allows people to create new primitives fast rather than having to recreate the basics. The basics are so there and so mature in the EVM environment that people can really get down and dirty quickly with building businesses on-chain. I think that's right. I think it'll be interesting to see what it looks like when it goes the other way too. So you could see the first phase of Monad being things that exist already in the Ethereum ecosystem maybe coming over. But at

But eventually, I would think that Monad would almost be an R&D studio for the Ethereum community to say, hey, look, this thing works over here. Maybe we should make some changes to Ethereum. It'll be interesting to see the two communities and how they work together. Monad's like a more efficient app store. All of the apps on it are more efficient, actually, is the thing about it.

Now, I'd say one of the biggest innovations in the Ethereum ecosystem over the past couple of years has been the launch of EigenLayer. How do you think that is going to interplay, if at all, in the Monad ecosystem? I think that EigenLayer is such a cool invention. I think that restaking as a category, it's funny.

A lot of people just now call LSTs LRTs. And I think that's beautiful intellectual rebranding excellence from Sugarum and the whole EigenLayer team. They recreated the acronym. I actually think LSTs should be called composable staking tokens. I don't really think we should call them LSTs or LRTs. At the end of the day, there's all these on-chain things you can do. DeFi stuff that we're starting to talk about. Your DEX is lending markets, yield aggregators and stuff.

And then what EigenLayer really did is they created this like semantics for doing things that aren't inherently on-chain. So basically they take something like RAP stake ETH, which already is like very well optimized collateral inheriting all of the security of Ethereum. EigenLayer has this semantics for essentially taking on extra risk for extra reward. You can do that already in DeFi with LSTs by like using your LSTs in DeFi.

You might lend out an LST, borrow some stable coins against it, and then buy more of the LST because you want to go long and you can kind of build your own leverage. It's the beauty of the composable DeFi world. But there are some things that don't just immediately compose when they're off-chain. If you were going to build a whole new network on top of something, all of a sudden you have to get new validators on, you have to get people to hold the underlying, see the staking opportunity as good.

bootstrap your validator set. So I feel like eigenlayer is one of the coolest things that's happened, one of the net new really impactful things that have happened in the Ethereum ecosystem to basically unlock a new set of use cases. And at the end of the day, it's really like a semantics that has this abstract interface of slashing and rewards.

As long as some other activity has a way that you can lose money and make money, you can use something like restaking to access it. I think it'll be very interesting to see how that permeates into the Monad ecosystem where something evolves natively.

That's super fascinating. Now, maybe just a higher level question. So if you're out in your everyday non-crypto life, I assume you start talking about some of these concepts to people and they have absolutely no idea what you're talking about. So if we fast forward a little bit, do you think this DeFi category and just how these things interact with each other ever become something that everyday people learn about? Or is this TCP IP where no one knows how it works, but you just go on a website and you enjoy the internet?

How do you see the future of just how much people need to know about some of these fundamental protocols? A lot of the protocols are just come back to non-financial things almost for a second. TCP/IP, it's like the internet.

People don't need to know that works, but they can still go check their email and send a text message to their friend or whatever it might be. Things like I'm kind of obsessing over Shopify right now. I think that you don't need to know how to build an e-commerce store to buy a pair of sneakers. And I think that I can see a world where

Some people are going to make their own seed phrases. Other people might just trust Google with holding a thousand bucks of USDC on Monad for them. And they might have a wallet where they don't need to put in these complex seed phrases. And then I think it's just at the end of the day, it could be the new social media platform or something like that. All of a sudden, I think it's very easy to imagine a world

where people just have a crypto app in their pocket without even knowing or caring what chain it's on. I think the people that are focused on it now that are building care. But I think one day we're just going to see that it was slowly but surely, and then all of a sudden, all at once kind of thing. I guess you're already seeing that a little bit, you could argue with Polymarket. People go on electionbettingodds.com and then they click through to Polymarket. And most people have no idea that that's a blockchain enabled platform.

Yeah, that's a perfect example. Is there a polymarket for when Monad tests it? If there isn't, there probably will be after this episode. Yeah, I can make a bet on that one for sure right now. All right, so let's jump back to Kintu a little bit. So where did the name come from? Tell us a little bit more about the origin story here. It seemed very clear that there was this opportunity cost between staking and DeFi, and none of these networks want to inhibit the actual protocols building on them and all these use cases emerging, all these businesses on the block.

There's this beautiful art, this Japanese art called kintsugi. If you picture someone clumsy like me, smacks a matcha bowl off the counter and it falls onto the ground, splits into a hundred pieces. The art of kintsugi is putting back together the pieces using gold to mend the cracks and it makes it stronger and more beautiful than it was before.

And I really feel like what Kintsu does is we are the gold lining. We put together staking DeFi and we're really this DeFi middleware. And at the end of the day, it's a platform for developers to extend staking. And I think that's a lot of where the name comes from. That's incredible. Well, we're really excited to be backers of Kintsu and psyched about the launch of Monad here. So appreciate you coming on the podcast. Where do you want to send people to learn more about the project?

To get involved, I would definitely follow Kinsu underscore XYZ or go to Kinsu dot XYZ. Join our Discord. Timing's great to get involved in the community. And if you're a builder looking to extend Kinsu or a validator looking to get involved, you know where to go. Awesome. Stephen, thanks so much for joining us on the podcast. Thank you, Matt. Appreciate you having us on. Have a great day.

Thanks for listening to another episode of On the Brink with Castle Island. To find out more about Castle Island, visit castleisland.vc. To listen to all of our podcast episodes, please go to onthebrink-podcast.com or just click on the tab in our website. Thanks for listening.