Monday, 2024 February 26

Balancing transparency, security, and innovation: Q&A with Cake DeFi CEO and co-founder Dr. Julian Hosp

Cake DeFi is a Singapore-based decentralized finance (DeFi) platform that offers a range of financial services for cryptocurrency investors. The company aims to simplify DeFi for its customers by providing easy-to-use, transparent, and secure investment products. The company’s services include staking, liquidity mining, lending, and more, all with the goal of helping customers earn high yields on their crypto investments.

We spoke with Cake DeFi CEO and co-founder Dr. Julian Hosp about the company’s new offerings, general market sentiments, and his thoughts on crypto regulations. The medical doctor turned entrepreneur from Austria started his crypto journey since 2012 in Asia and founded Cake DeFi in 2019. The following interview has been consolidated and edited for brevity and clarity.

KR: How have you managed the negative market sentiment around crypto as a company and with your customers? 

Julian Hosp (JH): As a company, I’m super proud of how we have done it. First, we have always stayed true to ourselves. We didn’t step into any pitfalls. I think other companies that stepped into the space offering high yields and cash flow on crypto are now gone. Why? Because they all got greedy and built black boxes that no one understood,except for themselves, and they blew up.

I’m very proud of how we as a team and as a company have handled our decision-making. I think you always need luck. We were definitely lucky to say yes to certain partners and no to others.

We have seen how customers were really skeptical at times, especially when companies like Blockfi, Terra Luna, and Celsius started blowing up. But people soon realized how different we had always been and how differently we structured our products, especially with everything centered on transparency. We’ve seen record signups and growth in the third quarter of the year, at a time when the entire crypto market supposedly died.

With FTX, it was very similar. When it blew up, we saw outflows just like any centralized service. This was reversed within three days because people thought: okay, this works, and we publish proof of reserves. People can verify things for themselves and they trust us because they can do so.

When it comes to employee sentiments, it’s definitely harder to run the company when crypto prices are going down. Even for people who believe very much in crypto, it obviously shakes a little bit of their confidence.

In general, people don’t like these boom and bust cycles, but I think they’re healthy because they allow you to really grow during the boom and they weed out the weaker players during the bust.

KR: Showing proof of reserves and proof of liabilities is becoming an industry standard across all markets. What more can companies like Cake DeFi do to be much more transparent for customers?

JH: Currently, the biggest problem with regulators lies in their focus on money laundering when it comes to regulations. However, customers are more concerned about whether their money is actually safe with a company, rather than how many money laundering checks it performs. Therefore, regulators should prioritize ensuring that companies have adequate safeguards in place to protect customer funds.

In the crypto space, companies have a unique opportunity to demonstrate their financial health and liabilities through proof of reserves and blockchain transparency. However, auditing these reserves can be prohibitively expensive for most companies, which is a major challenge. While some companies like ours undergo audits, most do not due to the high cost. Additionally, demonstrating assets and liabilities can be difficult for exchanges compared to other types of companies in the crypto space.

For example, as a CeDeFi provider, we have almost no idle funds on our platform, so we can easily show customers where their funds are allocated. However, for exchanges, 99% of the funds are usually idle, making it difficult to show where the remaining 1% is in a hot wallet or somewhere easily visible on a blockchain.

Regulators need to find a way to support innovation in the industry while ensuring that customers’ funds are secure.

KR: In the past, you have welcomed cryptocurrency regulation. Do you think this goes against the philosophy of crypto being decoupled from central organizations?

JH: Anything with a centralized point needs to be regulated. Is Cake as a company decentralized? I think regulators should come and have a look. Once something becomes decentralized, like the protocol itself, it becomes impossible to regulate. Attempting to regulate it would stifle innovation. Instead, regulators should require companies and platforms to implement checks and balances. Therefore, DeFi should be left alone, as attempting to regulate it will only cause issues.

KR: There has been a lot of criticism of DeFi services, with companies overpromising returns and then closing up shop. How does Cake DeFi minimize the risk to customers with its services?

JH: The biggest criticism we received was not about staking or liquidity mining, services that we provide. It was actually about lending, where customers lend their Bitcoins and stablecoins to other institutions.

Many companies were competing to achieve higher yields, and as a result, they assumed more risk. They weren’t transparent with their customers about this during the times when the market went up in 2020-2021. We made a profit of USD 221 million in 2021. Just think about how much these companies who black-boxed everything leveraged. They probably didn’t make just USD 221 million — they probably made a billion in profit, so they became greedy. They thought they could print money, and that completely backfired in 2022.

The leverage they built up completely collapsed and went the other way, and then they started adding their own funds, which is completely not okay. They were hiding this from their customers, and that’s what made them collapse. For us, the entire structure is completely different in every single service we offer. It’s completely transparent where your money flows and what happens.

On the way up, our profits were lower than those of other companies who concealed their methods of generating revenue. By keeping their customers in the dark, they were able to provide greater yield. We frequently encountered individuals who stated, “Celsius is providing 9% while you’re only providing 5%. If you can’t give me a better return, I’m switching to Celsius.” I couldn’t comprehend how Celsius was able to offer such high returns. If it were possible, I would provide the same service with complete transparency.

As for how Celsius achieved their high yields, I can’t say for certain. It’s possible they used personal funds or leveraged assets, which ultimately led to negative consequences. Our customers do not bear that level of risk. Our product is designed with a different approach, and transparency is a fundamental aspect of our structure.

KR: Cake DeFi Enterprise was launched at the end of last year. How does it factor into your overall strategy?

JH: If we look at our defunct competitors, what they had was a black box model. They offered a tailored solution to clients without disclosing how it worked. Clients would give them USD 10 million, they would put it in the black box, and then generate yield for the client. This worked because the clients couldn’t do it themselves, as the process was proprietary.

Our experience with large funds was that they often inquired about potential collaboration. However, the challenge was that our services incurred a 15% fee, and they would not retain custody of their funds. These clients typically had USD 10 million or more invested, resulting in a yearly fee of approximately a hundred thousand dollars — an amount that could cover the salaries of two full-time staff. Understandably, many preferred to manage their investments in-house.

With that in mind, we decided to white-label our services and offer them to institutions. We charge a fixed amount, like a subscription fee, similar to a SaaS model. That way, they can simply use our plug-and-play solution. They have custody over their funds and the same access. It’s super easy for them. That’s how the institutional model of Cake DeFi Enterprise came about.

We launched the alpha version of our product last year during the Singapore FinTech Festival, and plan to launch the public beta version by the end of the quarter. The exciting part is that, if everything goes well, I think the B2B side will outperform the B2C side by the end of 2024.

KR: Cake DeFi Ventures was also launched last year as well. How are things progressing on that front?

JH: We’ve made two investments, Yield Monitor and Edge of NFT, but we have slowed down on the investment side for now. I want to be more cautious until I feel that we have hit a bottom and the market turns around. Then I would be more open to investing again. Currently, people are still too optimistic about their own valuations. When I talk to people, they propose a market cap of USD 10 million for an idea, which I find irrational. I think there needs to be more rationality in the market.

Currently, we are looking into partners, coin projects, and blockchains that we have integrated on Cake. We want to invest in projects that we can leverage, and would be willing to pay a small premium for this because we can really work closely together.

Our investment plans for this year entail projects that align well with our existing platform and provide synergistic benefits. However, if the market experiences a significant dip, we may reassess our approach.

Taro Ishida
Taro Ishida
Taro is passionate about technology, innovation and startups around Asia. He manages ecosystem and partnerships from 36Kr Global's Singapore office.
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