Alexander Szul Explains How the Hover Protocol Will Revolutionize DeFi

Hover is a global venture with a distributed team of contributors from diverse backgrounds, including institutional finance, data analytics, and enterprise marketing, all aiming to empower individuals worldwide and providing equal opportunities to participate in the DeFi revolution.

To learn more, I had a chat with Alexander Szul, a close advisor to Hover and the CEO at Rome Blockchain Labs (RBL), which is building the tech for Hover and providing  pre-and-post launch support.

“Hover is its own project,” Szul said. “I am working very closely with the team to prepare for the launch, but I am not a co-founder in the traditional sense.”

Peter Page: Hover is set to launch this summer, although the date hasn’t been specified, but you announced this week the partnership with Kava. What’s the significance of that partnership to Hover?

Alex Szul: The partnership with Kava is a pretty big step for launching the protocol. Kava has been around since 2019. They were one of the first in the Cosmos space. They’ve recently launched their Ethereum, or EVM co-chain on the Kava network. So you have the IBC enabled Cosmos SDK allowing for cross zone communication, and you have the EVM side where normal Solidity smart contracts that people are used to building and working with can be  deployed. Kava over the past few months, especially has seen a huge surge in TVL and user activity. They’re one of the largest zones in terms of TVL, in all of cosmos. I think they are in the top 10 or top 15 of blockchains, so Hover’s partnership with Kava is really a sign of support and encouragement. For the Kava team and the Kava community to work with Hover in making business connections, encouraging user adoption and community engagement with Hover, as well as letting the Hover team check the pulse, so to speak, on what’s going on with Kava. It’s a big deal.

Peter Page: There has been a lot of buzz about Hover, particularly considering that it hasn’t launched yet. What will Hover offer that isn’t already available in DeFi?

Alex Szul: Hover is really looking to bring two things to DeFi. The first one is actually advanced token economics. Hover is going to work with a tripartite token system. So you have the standard Hover token, HOV, that will be used for some emissions, it’ll be fungible, transferable and tradable on the open market. However, we’ve actually built in certain market discounts for people who stake the token. So for example, if a user comes to Hover, and they want to get discounts on the borrowing rates, say the standard market cost to borrow USDC, is, lets just say 10%, for example. They can buy HOV, stake it and they automatically get one or two percentage points taken off of that cost to borrow by reducing the Reserve Factor. The more Hover you stake, the greater your discount is worked in. So there is good utility built into the token.

Beyond this, there’s also going to be discounts on liquidations. So you get more money when you liquidate if you stake Hover. For technological reasons, Rome Blockchain Labs (RBL) will be initially running liquidations but that will be opened up down the road.

The third one is going to be the Hover Rewards Program. So for people who stake Hover, and get it converted to what’s called esHOV, they will recieve the above benefits. They can also go through an optional KYC process to convert esHOV to xHOV. Hover won’t know who you are, it’s just a check to ensure that you’re not in a sanctioned or blocked country. Once approved, they can then get a portion of the fees from the protocol operations. As Hover makes money off of lending and borrowing assets, stakers for xHOV, who go through that optional step, can actually receive a portion of protocol fees on a regular basis. This integration of the token economics for the utility into the actual operations of the market, in our eyes, is quite revolutionary.

Peter Page: Really, that’s not available otherwise?

Alex Szul: It’s not very common to have all of these features tied into a protocol, much less a liquidity market.

Peter Page: Congratulations on that. I’ve read you’re committed to transparency and integrity in blockchain. How does Hover contribute to this goal of transparency and integrity?

Alex Szul: One of the things that Hover is really looking to accomplish is actually to build technology that doesn’t allow what happened with FTX,  and what might potentially be happening with Binance, to occur.

One of the problems with the centralized exchanges [FTX and Biance] is that whenever you use those platforms, you give up control of your funds to a third party. So even though it is cryptocurrency, even though the blockchain is public, the actual movement of the funds on centralized exchanges is private. It’s all held behind closed doors by those companies. And that’s where you have things like the mismanagement of funds, you have the lending out of depository funds to third parties, like FTX did with Alameda, and like CZ (Changpeng Zhao, co-founder and CEO of Binance) is allegedly doing with Binance funds as well.

Hover is a noncustodial platform. That means even though people from anywhere around the world can connect their cryptocurrency wallet and deposit funds into the Hover lending market, even the Hover directors themselves, even Rome Blockchain labs who are building the technology for Hover, cannot touch that money. We can’t do anything with those funds beyond what’s hard coded into the smart contract. The only person who can pull that money out is the original depositor, or whoever has the keys for that wallet. We’re as noncustodial as we can make it in terms of the smart contract operations, with no intermediary. Everything is publicly available on the ledger, so when it launches you can go to a Block Explorer and track the movement of funds for the market from day one.

Peter Page: Will Hover do anything to close the gap between Defi and traditional finance? Is it possible that it will become easier to move between those two systems?

Alex Szul: At least for builders within the Defi community, this is a bit of a lightning rod. You have one camp that says they want to keep DeFi decentralized and keep regulation and institutions completely out of it. Almost a Wild West. And then you have the other camp that says, there’s a lot of capital and a lot of liquidity in the traditional markets. There’s a lot of regulation, sure, but there’s consumer protection and guidelines built into that. So it can’t be the worst thing if some of the stuff starts to move over.

The reality of the situation is that it’s not an either-or. Because of the nature of blockchain networks and decentralization, it’s impossible – I shouldn’t say impossible but it’s very, very improbable – for any government to fully shut down a blockchain network. It’s practically impossible, because anybody around the world can spin up a node, anybody around the world can deploy a smart contract to it. So even if a regulator tries to shut down a website, they can shut down the front end, the website that you and I interact with, but the smart contracts that are powering them are still running 24/7/365, on that network.

The reason I bring this up is because the point of regulation is to punish bad actors with fines, and potentially with criminal charges via the SEC, DOJ, etc., if they do something wrong. Which is good. But regulation is also to maintain market fairness via transparency, reporting requirements, all those things. So when you look at how specifically Hover is interfacing with that, the platform is in a difficult position. The SEC has historically told crypto companies around the world that want to build platforms in the US, just come into our offices, come talk with us. We’ll walk you through the registration process, we’ll get you in alignment with SEC guidelines, so that way you can do business in the US.

Well, people have done that. XRP did that for years with Ripple. Ripple Labs spent years in discussions with the SEC. Coinbase, before they launched, went directly into the offices of the SEC and said “Just give us the guidelines, tell us what you want to do, we’re happy to comply.” Guess what happened? SEC, allegedly, didn’t give them sufficient guidance. This is coming from Ripple Labs and Coinbase, and reporters who have spoken with executives there. What they (SEC) did was they took in all the information from those companies, didn’t give them any specific guidelines and then levied fines against them, after the fact through what is called “regulation by enforcement.” That’s colloquially the approach that the SEC is taking, which really upsets a lot of people.

When Hover and Rome Blockchain Labs, and quite a few of our partners, looked at this situation, we said, “Okay, we have three options here.”

The first option is we go into the SEC offices, or whichever regulator it is, and we apply to register. We have all the reporting standards and we cross our fingers that the SEC doesn’t pull a fast one on us. And, Peter, based on our conversations with people in the space, that has almost never happened. A smooth, easy, clear pathway has almost never happened. Almost everybody has had a hiccup, or they’ve had to adjust so much that there was no economic sense to launch a business that is shoehorned into their framework. So that’s one thing – people don’t trust the SEC. The people we’ve spoken with say that they’ve had problems with it, and the people who did go through with this say it’s just not worth doing it.

The second option is we just launch without any considerations for regulatory boundaries. That’s what most DeFi protocols do, actually, is they just launch. Anybody can use it. It’s quite common. That’s the standard practice right now. The problem is that it exposes your community, your investors and the ecosystem, to a lot of challenges. Because what if a regulator comes knocking on your door and wants to talk to you? What if you did a token sale and they say it falls under SEC purview? All of a sudden, then you have a pretty lengthy court case to fight or you have a big fine to pay, and that can be detrimental to your ecosystem.

There is a third option, which Hover has chosen. Hover has chosen to geoblock certain jurisdictions, including Americans, out of using the protocol. When the public sale is open, anybody can use it except for sanctioned countries. So North Korea, Iran, Russia, all those are kept out and so is the US. Americans can’t partake in a public sale, which isn’t that unheard of actually, that’s becoming common nowadays. The second one is actually geoblocking Americans. If you try to trade on the market from an American IP, you can’t get to it. And that’s also not unheard of either. Mars protocol is also geoblocking Americans. So as the protocol makes money, if you want to send that to people, we have to ensure that Americans aren’t getting access to those funds, which is where our optional KYC comes in. Just go through that quick KYC check to ensure that you’re not an American and then you can turn your tokens from esHOVr to xHOV, and you can get those rewards coming in on a pretty regular basis.

Peter Page: US citizens get lumped in with North Koreans?

Alex Szul: Unfortunately, they do. When you look at token sale pages, and when you look at IP blocking, or guarantees for people who can’t access, it’s just the wildest thing. You’ll see Iran, North Korea, Russia, the territories that Russia has annexed, and then the US. You obviously can’t interact with sanctioned state actors, but with the US, a lot of companies don’t want to deal with regulators. They would rather cut out the entirety of this consumer base, because it’s a bigger risk to involve them than any type of money they could make.

Peter Page: How much different is regulation in the EU?

Alex Szul: So it’s better and worse in some ways. From our research, there’s a much more sophisticated and nuanced approach that regulators are taking in the EU. There are actual crypto standards going out. There are digital asset frameworks being proposed at an almost Eurozone level, to encourage development and provide actors with a good baseline for participating in things that are globally common. Dubai is looking into what’s called a “regulatory sandbox” where you’re free to build pretty much anything you want, for one to three years and regulators are not going to come after you. They’re not going to, like, attack you. They say you’re free to play around in the sand for a little bit, and then spend a couple years raising some funds, grow the community, developing your technology, and then come to us after a short amount of time and then we’ll work together to figure out which division you fall under.

Hester Pierce, who is a commissioner for the SEC, proposed this. She called it a regulatory beach, I think. She said the SEC is a lifeguard and the builders are the people on the beach. They can just hang on the sand and play within the existing framework as much as they want. Or they’re also free to go and swim out. And they can just kind of play in the water and go out as far as they want. If they go out too far, then the lifeguard brings them back. If they’re being fraudulent, then the regular will step in and beyond that you’re free to play and do what you want. After a certain amount of time you come in, and we’ll figure out how to make this work. That was ignored by the other Commissioners if I recall correctly. Gary Gensler and many others didn’t like Hester Pierce’s approach, which frankly was a common sense and reasonable approach at resolving this question of regulating comparatively novel and complex digital assets.

Peter Page: Is anything likely to change in the US? Is there anything on the horizon that you see?

Alex Szul: Things are changing, but not fast enough. One of the challenges with cryptocurrency regulation is that the technology is moving at an increasingly accelerated rate, but the capacity for regulators to keep up with it is not there. It’s grown faster than they can follow.

In Congress, the House Financial Services Committee has been working with the SEC and private industry to get some grasp on what’s going on. As a result, numerous bills have been proposed to regulate stable coins. You might have heard about bills on CBDCs, central bank digital currencies, efforts to regulate centralized exchanges, like by Binance and Coinbase, more and more attempts to do this effectively. All this legislation is coming out. That is pretty good, honestly, like Lummis-Gillibrand, for example. It was not perfect but it was a good attempt at regulating some of these things. The problem is there’s so much division in Congress, that it’s almost impossible to get something passed. You have a lot of competing demands.

On one side, you have a technology which is the epitome of market freedom, of laissez faire capitalism, where like, hey, build what you want, do what you want, just pay your taxes and you’ll be fine. Right?

Then you have the other side, which says, Okay,  I get that. However, we have to protect consumers, because people who aren’t sophisticated traders, who aren’t accredited investors, are trying to participate in these markets. How do you protect them? Well, we should have stronger regulation. Well, if we regulate the capacity for innovation goes away. And we want America to be competitive on a global scale, especially in this innovative space of decentralized finance and cryptocurrency overall. So, is something going to change? Yes, it will change. There will be regulation. Do I think it’d be good? Probably not, but it’ll be there. But, my opinion on this is that by the time it is adopted and adapted in a sophisticated manner, the technology will be so far advanced that it won’t even be worthwhile or useful anymore.

I can’t give too many details, but about a year ago I had a meeting last year with members of the US government, from the UN, and from a certain embassy, all talking about digital assets and cryptocurrency regulation, things like that. I asked, as a builder in this space, how soon can we expect some clear regulation around cryptocurrencies and DeFi? And they said probably about two to three years and you will have some base level framework for cryptocurrency. And that’s kind of tracking. We’re getting there. So I asked about decentralized finance, which is what Hover falls under. Hover isn’t within the same realm as Binance or FTX. Hover is a whole different animal. They said you’re probably five years out from any type of good regulation around DeFi. In five years time the Defi we’re building isn’t even gonna be to be seen as DeFi. it’s gonna be so much more advanced.

Peter Page: One last question. When do you think Hover will launch?

Alex Szul: We’re targeting a launch date of July 27, but that’s tentative and subject to change.