Speaker 1: Hello, and welcome to another episode of the Odd Lots Podcast.
Speaker 1: I'm Joe Wisenthal and I'm Tracy all Away. So, Tracy,
Speaker 1: we've obviously done a few at least a couple Defy
Speaker 1: episodes this year to centralized finance sort of the hot
Speaker 1: thing in crypto. But if I'm being honest, like, there's
Speaker 1: just like still like a lot that I don't get.
Speaker 1: I don't think you're the only one, to be fair, like,
Speaker 1: I think there seems to be a lot of interesting
Speaker 1: things happening in the space, but it's hard to wrap
Speaker 1: your head around a lot of them because frankly, they
Speaker 1: are so brand new, and in addition to that, as
Speaker 1: we've spoken about before, a lot of them seem to
Speaker 1: be kind of wrapped around each other. It's like df
Speaker 1: I wrapped around DFI wrapped and DEFY sort of defy
Speaker 1: all the way down, and it's hard to figure out
Speaker 1: exactly what the application is to people outside of the space, right,
Speaker 1: And this is of course, like I think, like you know,
Speaker 1: there's a lot clearly a lot of like trading and speculation,
Speaker 1: and we'll talk about how those markets work because they
Speaker 1: work differently than say the stock market. But then there's
Speaker 1: also like the question of like what is it for,
Speaker 1: because like it's very easy for me to like conceptualize
Speaker 1: sort of traditional equity or traditional lending, because I have
Speaker 1: an idea of like what these financial instruments are for.
Speaker 1: Where my impression of the Defy space and large part
Speaker 1: is like it's incredibly sophisticated and derivatives and all this
Speaker 1: kind of stuff, but like I still don't know what
Speaker 1: it's like for per se. Yeah, I think that's right,
Speaker 1: And I mean to what I was saying earlier, who
Speaker 1: it's for. Right When I see a lot of before
Speaker 1: you Defy accomplishments, I think, like, Okay, that's great. You
Speaker 1: guys have built yourself a really interesting little defy eCos system.
Speaker 1: And I know that sounds patronizing, but like I don't
Speaker 1: know who's interested who's interested in an outside of that.
Speaker 1: I feel like that's the missing part of Defy. The
Speaker 1: space hasn't been very good at delivering the message about
Speaker 1: what this means for people who are actually outside of
Speaker 1: the DeFi space right where where it actually sort of
Speaker 1: competes with traditional finance and so far anyway, we always
Speaker 1: ask these questions, But I'm very excited to say, um,
Speaker 1: I think our guest today is gonna be really good.
Speaker 1: Multiple people have suggested that he's a great person to
Speaker 1: talk to, very active in investing in the DeFi space.
Speaker 1: So maybe we'll get maybe we'll get some answers today,
Speaker 1: I hope. So let's do it all right, I'm very
Speaker 1: excited we're going to be speaking with Tom Schmidt. He's
Speaker 1: a general partner at Dragonfly Capital. It's a venture firm
Speaker 1: that focuses on the crypto space. More broadly, Tom himself
Speaker 1: as a fairly long background long as these things go,
Speaker 1: in the DEFY space, a very active in it. So
Speaker 1: we're going to get all our questions answered. Tom, thank
Speaker 1: you so much for coming on odd Luck, thanks for
Speaker 1: having me, Thanks being Tracy. So I'm let's start with
Speaker 1: your background. I mean, like I think the average person
Speaker 1: may be listening to this has been like sending the
Speaker 1: last like two months trying to understand Defy and the
Speaker 1: idea that like one could have a long lineage in
Speaker 1: this space is kind of weird. But you actually legitimately
Speaker 1: do what do you give us things sort of like
Speaker 1: a little bit of like your background in crypto and Defy, etcetera.
Speaker 1: How you got here. Yeah, it's it's funny that defy
Speaker 1: is now sort of a thing that people talk about,
Speaker 1: but you know, it's it did sort of come from nowhere.
Speaker 1: I think in many respects, my sort of entrance into
Speaker 1: crypto sort of parallels defy in some ways. Not to
Speaker 1: get too poetic, I really got into you know, crypto
Speaker 1: during college. Um, I was writing this sort of computer
Speaker 1: science ethics paper on on your interesting topic that anyone
Speaker 1: can choose, and I ended up doing this sort of
Speaker 1: big coin regulation back and back in twelve and I thought,
Speaker 1: this is this brand new asset, no one really knew
Speaker 1: what to do with it, sort of thinking through, hey,
Speaker 1: how many this thing be be viewed in the eyes
Speaker 1: of the law, and then sort of actually put it
Speaker 1: into bitcoin mining from from my dorm room along with
Speaker 1: a couple of their friends. Um, and that was sort
Speaker 1: of when I got interested in in you know, the
Speaker 1: cryptocurrency space overall. If you look at you know, sort
Speaker 1: of those early days of bitcoin, you the things that
Speaker 1: people aren't doing are doing in defied. These days people
Speaker 1: were talking about back then, back on you know bitcoin talk,
Speaker 1: where they're trying to do where hey, there's this new asset,
Speaker 1: but it's sort of stuck. You know, it's not it's
Speaker 1: just it's this form of money, but you can only
Speaker 1: just sort of send this money back and forth. And
Speaker 1: people want to do other things with it, right. People
Speaker 1: want financial services, People want to be able to exchange,
Speaker 1: but in order to do that with bitcoin, you have
Speaker 1: to go through a centralized party, UM like a coin
Speaker 1: based or like a f t X, and they have
Speaker 1: to um, you know, because of your bitcoin. They might
Speaker 1: go down, they might lose funds that might exclude you,
Speaker 1: and so there's sort of those weird paradox where you
Speaker 1: have this great decentralized currency, but you don't have any
Speaker 1: financial services that are also that also those same properties.
Speaker 1: You know. One of those those main functions that I
Speaker 1: mentioned was exchange. Decentrized exchanges have been around for a
Speaker 1: long time. People have always been trying to build them.
Speaker 1: I ended up getting back into the cryptocurrency space in
Speaker 1: seen when I joined zero x, which is one of
Speaker 1: the very first decentrized exchange protocols to run product for them.
Speaker 1: And zero x is it's sort of this pure to
Speaker 1: pure exchange where um, you and I can agree to
Speaker 1: a trade off chain, you can sort of find each other,
Speaker 1: and then this smart contract basically acts as uh, you know,
Speaker 1: sort of the counterparties that executor at the trade, so
Speaker 1: we don't have to trust each other. Um, no one's
Speaker 1: actually taking custody. Um. This piece of code sort of
Speaker 1: runs it for us. So I ended up working at
Speaker 1: zo x for about two years, uh, and then joined
Speaker 1: Dragonfly about a year and a half ago to do
Speaker 1: investing for us and specifically focused on DeFi what was
Speaker 1: the transition like from bitcoin to more of the Defy experience,
Speaker 1: because we sort of take it for grounded now that
Speaker 1: there's a Bitcoin and now there's all this off being
Speaker 1: built on things like ethereum in the Defy space, but
Speaker 1: years ago that split wasn't as a parent. So I'm
Speaker 1: just curious what the move was like or the transition
Speaker 1: a few years ago. There are a number of very
Speaker 1: early attempts to basically build defy these same sort of
Speaker 1: financial services on bitcoin. One of them is still around
Speaker 1: quite you know, well known. It's called root Stock, basically
Speaker 1: a sort of side chain that sits alongside Bitcoin where
Speaker 1: people can write smart contracts that they can on Ethereum
Speaker 1: that do the same sort of things that you know, Defy.
Speaker 1: Early defined protocoles can do. Now another sort of blockchain
Speaker 1: U called bit shares sort of that came around the
Speaker 1: same time that again had a lot of the same
Speaker 1: ideas that we see and defy now where you could
Speaker 1: you know, meant that you could borrow, um, you could exchange.
Speaker 1: It's it's hard to say why a lot of these
Speaker 1: didn't take off. Certainly for some purposes. Uh, you know,
Speaker 1: the developer experience of building these things is pretty brutal
Speaker 1: um compared to the developer experience of building something on ethereum.
Speaker 1: And so you know, the argument that hey, you just
Speaker 1: don't have that sort of nexus of of developers you're
Speaker 1: going to make all these things that um, you know, interlink,
Speaker 1: it's just not probably not going to happen. You're not
Speaker 1: going to sort of hit that that critical mass. You
Speaker 1: can also say maybe it's just too early, right, A
Speaker 1: lot of things that are happening in DeFi right now,
Speaker 1: again we're being discussed you know, five years ago. But
Speaker 1: if you don't have the users, if you don't have
Speaker 1: the liquidity, if you don't sort of have you know,
Speaker 1: sort of this confluence of people in capital, you can't
Speaker 1: really get a true market farming and so some of
Speaker 1: the problems were obviously technological, where you know, Bitcoin is
Speaker 1: obviously very slow to upgrade, which is a plus in
Speaker 1: many respects, but a downside when you're trying to build
Speaker 1: something brand new and trying to um you know, tweak
Speaker 1: the underlying platform to make it easier for developers to
Speaker 1: actually start building these things. So one of the what
Speaker 1: you know, within the defy realme, you know, one of
Speaker 1: the pitches I guess, or one of the reasons people
Speaker 1: get excited about it is like is the yield opportunity?
Speaker 1: Like they was like, oh, you're like enter into this
Speaker 1: trade or lock up your asset and you get two
Speaker 1: a p y or thousand percent a p y in
Speaker 1: some cases. And we actually talked to someone several weeks
Speaker 1: ago it was like a yield farmer kind of more
Speaker 1: from the trader perspective, but like, you know, this kind
Speaker 1: of makes my head hurt because like, no one gives
Speaker 1: away free money, right, So how would you describe like
Speaker 1: where are these returns in DeFi come from? Like what
Speaker 1: is the what is the activity? Who is paying you
Speaker 1: for the service of say locking up your ether or
Speaker 1: locking up your stable coin or whatever, Like how do
Speaker 1: you sort of like describe some of the basic mechanics
Speaker 1: at play. Yeah, this is I feel like what has
Speaker 1: sort of brought in part defined in the mainstream maybe
Speaker 1: over the past years. People see these, you know, I
Speaker 1: popping returns, and you know when you're kind of what's
Speaker 1: going on because it sounds kind of insane. I think
Speaker 1: we sort of saw that with the whole mark cut
Speaker 1: in iron finance thing maybe a week or two ago.
Speaker 1: I think yield in sort of the DeFi space comes
Speaker 1: from a couple of places. The main source of yield
Speaker 1: that sort of drives again these huge meers that we
Speaker 1: talk about actually comes from these protocol tokens that are
Speaker 1: given away UM and very concrete example of this when
Speaker 1: the first project did do liquidity mining was compound finance UM.
Speaker 1: Compound Finance it's a decentralized money market on Ethereum where
Speaker 1: people can deposit lenders and borrowers can deposit assets into
Speaker 1: the smart contract um and then borrow against it and
Speaker 1: if they wish, and so I don't have to call
Speaker 1: up a lending desk get a quote. I hope that
Speaker 1: they're open, have them custom my assets. The smart contracts
Speaker 1: sort of take cares of all take cares of all
Speaker 1: that for us, and then they also set the rates problemmatically,
Speaker 1: so compound it's been around for about a year and
Speaker 1: a half or so, but m about a year ago,
Speaker 1: so it's March they announced this this program which has
Speaker 1: since been dubbed liquidity money, where in addition to the
Speaker 1: returns that you would get, the interest that you would
Speaker 1: get just for lending out assets to somebody who wanted
Speaker 1: to borrow, so let's say maybe six percent on your
Speaker 1: young your stable coin, your USDC or ethery or whatever,
Speaker 1: they'll also give you some comp tokens. So comp is
Speaker 1: the native governance token of compound, where people who old
Speaker 1: comp can vote on how to upgrade the compound smart
Speaker 1: contracts over time. So if you want to add a
Speaker 1: new feature, if you want to add new types of collateral,
Speaker 1: if you want to adjust rate, comp holders get to
Speaker 1: vote on shain as to how that actually gets upgraded.
Speaker 1: So there's no central party that actually controls this thing.
Speaker 1: So compounds started giving away about fifty of the total
Speaker 1: supply of comp two people who are using compounds, so
Speaker 1: people who are borrowing, people who are lending anyone sort
Speaker 1: of proportionately to how much you actually you're doing either
Speaker 1: those things, so how much capital you're actually borrowing or lending?
Speaker 1: In addition to this six percent, you start to get
Speaker 1: this supply of of COMP tokens, and basically that yield
Speaker 1: comes from sort of the market price of where people
Speaker 1: think comps should be trading at. So you know, if
Speaker 1: I'm earning again six percent on that USDC, them earning
Speaker 1: a few COMP tokens, and let's say compass trading at
Speaker 1: a few hundred dollars, suddenly you sort of project out
Speaker 1: these sort of two combined as with them getting both
Speaker 1: the USDC the stable point interest plus the COMP and
Speaker 1: so only my a R. It looks huge. And so
Speaker 1: people have basically been tweaking this over and over again,
Speaker 1: different ways of doing this liquidity binding where they're incentivizing
Speaker 1: growth of the of the protocol by giving away this
Speaker 1: native protocol token. And that's a large part of where
Speaker 1: you see. You know a lot of these numbers come
Speaker 1: from you call them governance tokens, but and you describe
Speaker 1: their value as being able to vote on upgrading the protocol.
Speaker 1: But obviously just voting rights typically aren't worth that much.
Speaker 1: Are we really talking about de facto equity in a
Speaker 1: different name, and as part of the part of the
Speaker 1: upgrade that one can vote for is is directing trading
Speaker 1: revenue to the token holders. Yes, this is uh, maybe
Speaker 1: a little bit of a touchy subject and defied because
Speaker 1: people do not want you want to sort of scirt
Speaker 1: around this topic. But I think a lot of a
Speaker 1: lot of people, a lot of investors definitely see it
Speaker 1: that way. Where you know, with compound, there's no company, right,
Speaker 1: there's no entity that I want to get take equity
Speaker 1: in um that is, you're going to take some some profit.
Speaker 1: But the protocol itself obviously generates ton of revenue. And
Speaker 1: so there's sort of an idea that hey, these are
Speaker 1: sort of going into the company treasury, they're on this
Speaker 1: protocol balance sheet, and if I have control over that,
Speaker 1: you know, much in the same way that you know,
Speaker 1: maybe I, you know, have governance rights in a company
Speaker 1: that has a hundred million dollars on the balance sheet,
Speaker 1: Certainly those those governance rights should be worth something, even
Speaker 1: if maybe I'm not entitled to to dividend rights at
Speaker 1: the moment, because I can vote in dividend writes down
Speaker 1: down down the road. I think one of the very
Speaker 1: earliest defect protocols. Make it out actually launched with this
Speaker 1: sort of baked in where make it out, it's a
Speaker 1: decentralized credit facility where anybody can come up. They can
Speaker 1: they can put down flateral and then they can borrow die,
Speaker 1: which is the natural stable coin, the native stable coin
Speaker 1: against that. So you can put down you know, two
Speaker 1: worth of ether, you can borrow a hundred die against it,
Speaker 1: and now you have liquidity which you can use to
Speaker 1: you know, for operating expenses, to pay taxes, to pretend
Speaker 1: to your friend whatever. You have this die which is
Speaker 1: pegged to a dollar, and you can use it for
Speaker 1: a new purpose now Maker Obviously it's the lending facilities.
Speaker 1: So if they figure out how to set rates, ray
Speaker 1: to get set by and care holders, so it's not
Speaker 1: being done programmatically and care holders basically to determine how
Speaker 1: much how much interest to charge people who want to
Speaker 1: borrow against and how people who want to make die.
Speaker 1: They also take on risk where let's say that they
Speaker 1: onboard bad collateral, they want to add you know, iron
Speaker 1: token as clatteral into maker. People who meant a bunch
Speaker 1: of die suddenly dies, is suddenly you know the price
Speaker 1: of iron, you know drops by and now you have
Speaker 1: a bunch of unbacked die, so you really want die
Speaker 1: to trade out of dollar um. Suddenly there's not enough
Speaker 1: clatteral to back that up. So where you're going to
Speaker 1: get enough collateral to sort of reback this die And
Speaker 1: the answer is that the maker protocol will mint and
Speaker 1: sell more in car in order to recollateralize itself. So
Speaker 1: in one sense, you're you're governing the protocol, but you're
Speaker 1: also taking on this risk because there's a chance you
Speaker 1: might be deluded if this this system accrues debt and
Speaker 1: so in response or you know, in compensation for that risk,
Speaker 1: and care holders also get reward and that they are
Speaker 1: entitled to all that interest that is being a crewed
Speaker 1: by the system. That interest is then used to buy
Speaker 1: back MKR off the market and you know, effectively give
Speaker 1: that back to m care holders. So MKR you know
Speaker 1: right now, you can you can look online. There's a
Speaker 1: website maker burn dot com which will tell you, you know,
Speaker 1: how much cash flow is basically being given back to
Speaker 1: end care holders, uh, you know, every single year, and
Speaker 1: it's it's pretty insane. I think the last time I
Speaker 1: checked it was maybe a hundred million dollars or two
Speaker 1: and a million dollars that is bought off the market
Speaker 1: and basically given back to end care holders. So they're
Speaker 1: a good example of one of the few protocols that
Speaker 1: it actually has those sort of cash flows turned on.
Speaker 1: But certainly to your point, there's a lot of speculation
Speaker 1: right now around m hey, when our fees going to
Speaker 1: be turned on, if they're gonna be turned down at all.
Speaker 1: I think there's a counter argument to which is, hey,
Speaker 1: these are all very nascent protocols, right you don't really
Speaker 1: don't want to be charging fees right now. You want
Speaker 1: to be incentivizing growth. It's sort of like, uh, you know,
Speaker 1: if you're an early stage startup, you don't want to
Speaker 1: charge full fee. You don't want to you know, um
Speaker 1: sort of be maximizing revenue. You want to be maximizing
Speaker 1: growth and think about how to sort of turn on
Speaker 1: revenue down the road. So the equity question kind of
Speaker 1: reminds me of one of the bigger issues hovering over
Speaker 1: the entire space, which is I mean, defy in my
Speaker 1: mind is kind of like fintech on steroids. And I
Speaker 1: used to cover fintech. I used to cover peer to
Speaker 1: peer lending, and a lot of the use case for
Speaker 1: that new industry was this idea of we're going to
Speaker 1: cut out the middleman and we're going to directly connect
Speaker 1: lenders with borrowers, and we have all this new, cool
Speaker 1: technology that's going to allow us to do it. I'm
Speaker 1: not saying it's a one for one analogy, but a
Speaker 1: lot of the conversation around DeFi reminds me of that.
Speaker 1: So my question is how much of defy is about
Speaker 1: the technology versus how much of it is about doing
Speaker 1: something outside the existing financial system and existing regulation. I
Speaker 1: guess a shorter way of putting it is like, how
Speaker 1: much of this is regulatory arbitrage and giving people exposure
Speaker 1: to financial assets that would be more difficult or more
Speaker 1: expensive for them to get in a in the traditional
Speaker 1: financial system. Yeah, that's another great question, and I think
Speaker 1: it's frankly a large part of the appeal of defied.
Speaker 1: I would say, you know, regulatory arbitrage. I think at
Speaker 1: face value, maybe sounds like a bad word, but when
Speaker 1: you look at something like Uber, or you're looking at
Speaker 1: something like Airbnb, where you know regulations were um, you know,
Speaker 1: probably overly arduous and probably you know, hampering the growth
Speaker 1: of this market. I think it's interesting about DEFY. There's
Speaker 1: a couple of main components, right, one being the permissionless access.
Speaker 1: So anyone around the world can go and use these
Speaker 1: different protocols any time of day, um, any time at night,
Speaker 1: anytime anywhere, who you are, you can go and and trade,
Speaker 1: you can go and borrow. That's a pretty powerful, I
Speaker 1: think concept that you don't have to be living in
Speaker 1: a particular area. You don't have to be, you know,
Speaker 1: of a certain status or be able to post particular
Speaker 1: collateral order use any these things, and so you have
Speaker 1: this truly sort of global market from day one. The
Speaker 1: other as is maybe you were sort of leading to
Speaker 1: is sort of permission list to build on top of.
Speaker 1: And that's where I think this whole thing gets really exciting.
Speaker 1: Where I don't think he incorporated. I don't have to
Speaker 1: live in a particular locale, I don't have to beat
Speaker 1: certain requirements. As long as I can write software, I
Speaker 1: can go and experiment. And I think that sort of
Speaker 1: permission list innovation is sort of what made the Internet
Speaker 1: what it is. Where I don't have to go and
Speaker 1: you know, apply to the SEC for the license to
Speaker 1: you know, broadcast and you know, buy all this equipment
Speaker 1: to you know, sort of a television station. I can
Speaker 1: just go and take my camera and start posting it
Speaker 1: to YouTube. And that's where you sort of get this
Speaker 1: this consumer surplus where you know, these entrepreneurs all around
Speaker 1: the world are constantly devising new, better financial services and
Speaker 1: they have a very low bar in order actually deploy
Speaker 1: them and make them accessible to anyone around the world.
Speaker 1: So you have not only sort of permission less access,
Speaker 1: but you also have permission's access for builders who can
Speaker 1: again just use this thing as long as they can
Speaker 1: naturally write software. And the third thing that think makes
Speaker 1: it interesting is sort of transparency around it. You know,
Speaker 1: people sort of against site sort of dozen eight, where
Speaker 1: you know, you had all this sort of crazy debt,
Speaker 1: all these you know, crazy derivatives that we're piling up,
Speaker 1: and you know, sort of after the crash, we started
Speaker 1: saw that many different parts of the US financial system
Speaker 1: were levered like three point five to one and that
Speaker 1: wasn't really revealed to us until after the crash because
Speaker 1: there was not really a lot of transparency. It was
Speaker 1: just chechnically wasn't really possible to see all the different
Speaker 1: instruments in all different ways people were positioned with Defy,
Speaker 1: you know, as I was sort of alluding to early
Speaker 1: with Maker. You can go to any of these websites
Speaker 1: right now. You can look at the Ethereum blockchain itself
Speaker 1: and pull the data and can see exactly how much
Speaker 1: did his issue. You can see exactly, you know, the
Speaker 1: credit balance of every account Um. You can see the
Speaker 1: revenues of Maker. You can see who's going to you know,
Speaker 1: get paid, who's going to get liquidated, etcetera. And so
Speaker 1: this thing is a percent transparent and a hunder percent oudiable,
Speaker 1: and that just princess this huge sort of step function
Speaker 1: leap over what is possible today where you can have
Speaker 1: people that you know, maybe make an a t I
Speaker 1: that is up or available some of the time, and
Speaker 1: you sort of to trust that the data is available,
Speaker 1: but sort of that the core base layer is not
Speaker 1: auditable and it's not transparent the same way Um it
Speaker 1: is with a lot of the product products that are
Speaker 1: being built in Ethereum are in the Ethereum Defy ecosystem.
Speaker 1: So those are sort of how I think about you know,
Speaker 1: a lot of value props of Defy. The fourth obviously
Speaker 1: being and sort of the you know, direct analogy to
Speaker 1: fintech is programmability. The difference you know, being with with
Speaker 1: defy is I don't have to rely on our particular
Speaker 1: company to grant me API access to you know, be
Speaker 1: be available when I'm available, to have particular up time
Speaker 1: to do whatever is I needed to do. The API
Speaker 1: is sort of embedded into the into the contract, into
Speaker 1: the product itself. So as long as you know the
Speaker 1: Ethereum blockchain is running, which it almost always is, you
Speaker 1: can go and call into any of these contracts as
Speaker 1: as a as a as a programmer and actually go
Speaker 1: and build new applications. And so you know, those are
Speaker 1: sort of a few of the core value props when
Speaker 1: we think about defy, and certainly there's a lot of
Speaker 1: overlap with with fintech, but there's a lot of things
Speaker 1: that are new and sort of expand the market beyond
Speaker 1: what you know, something like a stripe could do, for example.
Speaker 1: So pretty soon I want to get to the question of,
Speaker 1: like what are these tools being used for besides say speculation,
Speaker 1: because you know, you mentioned maker and I could post
Speaker 1: collateral and get die. But my impression is probably most
Speaker 1: people do that, just use that money to buy more
Speaker 1: coins as opposed to anything resembling business. But before we
Speaker 1: get to that, I like, here's another question I have.
Speaker 1: So we'll get there. But here's another question I have.
Speaker 1: Can you explain impermanent loss? Because I've like I had
Speaker 1: this after like people have done threads and explained like
Speaker 1: you know, the unit swap liquidity providers, and it's like, oh,
Speaker 1: just can you explain what that's all about? Yeah? Yeah,
Speaker 1: So I permanent loss refers to this future of this
Speaker 1: byproduct of UM what are called automated market makers, and
Speaker 1: so automated market makers are smart contracts that perform the
Speaker 1: function of a normal market maker on a normal order
Speaker 1: book based exchange. So you know, normally, let's say you
Speaker 1: want to go and I don't know, trade Apple stock
Speaker 1: right on on the exchange of your choice. Maybe you
Speaker 1: want to buy a certain price, you want to sell
Speaker 1: at a certain price. You have a market maker who's
Speaker 1: holding inventory that is quoting you on both sides right there,
Speaker 1: posting orders to buy, the posting orders to sell, to
Speaker 1: provide liquidity to this market so that if anyone wants
Speaker 1: to show up, they can buy or sell Apple stock
Speaker 1: at a reasonable price. UM. Now the same sort of
Speaker 1: market makers exist in crypto, where you go on coin
Speaker 1: base and you have market makers holding bitcoin inventory as
Speaker 1: dollar inventory, and they're sort of posting these orders to
Speaker 1: make sure that there's sufficient liquidity in the markets. An
Speaker 1: m M basically replaces that function with a formula. Sort of.
Speaker 1: The most popular style to MM is what we call
Speaker 1: a constant product and M, meaning instead of asking a
Speaker 1: market maker, hey, you know what kind of quote can
Speaker 1: you give me if I want to buy or sell
Speaker 1: hundred shares of apple, the answer is whatever, the formula
Speaker 1: sort of spits out, and so that's the quote that
Speaker 1: you're going to get. And the way this works again
Speaker 1: in a constant product sense is, let's go with another simple,
Speaker 1: really simple example. Let's say I want to a market
Speaker 1: aker for USDC market I can go, I can take
Speaker 1: some eth. I can take some USDC equal proportions and
Speaker 1: deposit it into a smart contract like unit swap, and
Speaker 1: now anybody can buy or sell against me. Right, this
Speaker 1: smart contract is taking my assets, and now they're basically
Speaker 1: acting as the marketingker're acting as as the quote provider,
Speaker 1: and anybody can buy or sell any amount of asset
Speaker 1: through the smart contract any time they want, and the
Speaker 1: smart contract will give them a quote. So in this
Speaker 1: really simple example, um that. Again, the constant product formula
Speaker 1: is um x times y equals k UM. So in
Speaker 1: this example, let's say I put in ten and ten
Speaker 1: USDC assuming E is one dollar, so ten times ten
Speaker 1: is a hundred. So no matter what sort of amount
Speaker 1: that you want to buy, at the end, there the
Speaker 1: amount of ether left in the smart contract times the
Speaker 1: amount of USDC left in the smart contract has to
Speaker 1: equal a hundred. So now the question is, you know, again,
Speaker 1: let's say I want to go and let's say I
Speaker 1: want to buy five Ether. I'm a new person. I
Speaker 1: want to buy five ether from the smart con tracked. Well,
Speaker 1: so at the end of this transaction, there's gonna be
Speaker 1: five e F left, but five times something has to
Speaker 1: equal a hundred, so there's gonna be USDC left. So
Speaker 1: there's twenty U s dc. So let's say there's ten
Speaker 1: U s dc five, So my quote is basically two
Speaker 1: U s DC per. So this thing is basically able
Speaker 1: to offer you a quote for any amount of asset
Speaker 1: that you want to buy yoursell through a smart contract.
Speaker 1: Now the problem is, again, let's say you're that LP.
Speaker 1: You're the person who put in ten and ten USDC. Well,
Speaker 1: now you've suddenly sold a bunch of eth, as eth
Speaker 1: has presumably gone up in market, and so you're worse
Speaker 1: off than if you had just held EATH and USDC.
Speaker 1: You have five, you have twenty U s DC. That's
Speaker 1: only thirty dollars. You would have had forty dollars if
Speaker 1: you had just stayed in. Permanent loss refers to this
Speaker 1: concept that in a concept product market maker, as the
Speaker 1: market moves, you will have you know, less busy, less assets,
Speaker 1: less money than if you just held on those assets,
Speaker 1: um and not put them into this smart contract. They
Speaker 1: self permanent. Yes, so here here's the caveat right, this
Speaker 1: would normally be an absolute a terrible value proposition, right
Speaker 1: you would you lose money as soon as you start
Speaker 1: to put assets into this smart contract. The way am
Speaker 1: ms make up for this is by charging fees. So
Speaker 1: Unit Swap for example, charges thirty bits on every trade.
Speaker 1: And the idea is that with enough volume that those
Speaker 1: fees will begin to make up for any of any
Speaker 1: of that permanent loss. And additionally, you know you sort
Speaker 1: of want uh what we call mean reverting assets, so
Speaker 1: you actually want a lot of volatility because that's gonna
Speaker 1: encourage people to trade, that's gonna allow you to your
Speaker 1: crew fees. But ultimately, at the at the end of
Speaker 1: the day, UM, you want those assets to sort of
Speaker 1: return to the ratio that they were when you put
Speaker 1: them in initially, UM, And that's how you sort of
Speaker 1: avoid impermented loss. But to your point, UM, if those
Speaker 1: assets never returned to that initial ratio, So let's say
Speaker 1: you become a liquidity provider for ether beneath is ten
Speaker 1: dollars and he goes up to a thousand dollars, it
Speaker 1: is probably not going to go back to a hundred dollars.
Speaker 1: You've you've you've probably would have been better off just
Speaker 1: just holding onto that ether instead of putting into a
Speaker 1: smart contract. But with enough volume, you can in theory
Speaker 1: make enough on fees or to common for that for
Speaker 1: that loss. So at a very high level, that's sort
Speaker 1: of how the whole m m impermitted lass sort of
Speaker 1: the thing works is you're sort of banking that's going
Speaker 1: to be enough volume, so you're gonna be able to
Speaker 1: crue enough fees in order to offset sort of the
Speaker 1: drift and asset prices. Okay, I have a question, um,
Speaker 1: and it sort of feeds into where we want to
Speaker 1: go next, which is the real world applications and what
Speaker 1: people are actually doing in this space. But it feels
Speaker 1: like there is a huge obstacle to Defy going mainstream,
Speaker 1: just in the fact that it seems very, very complicated.
Speaker 1: So what you were just discussing about impermanent loss. Um,
Speaker 1: it feels like I am going to have to go
Speaker 1: back and really listen to that conversation a couple of
Speaker 1: times in order to wrap my head around it. How
Speaker 1: difficult is it going to be for these types of
Speaker 1: concepts and this type of space to actually go mainstream
Speaker 1: and attract a lot of people if you're asking them
Speaker 1: to participate with a level of understand ending that like
Speaker 1: I would say, borders sort of on obsessive, like just
Speaker 1: listening to people who come on to all Blots before,
Speaker 1: like the yield Farming episode. These are people who are
Speaker 1: intensely into the space. How are you going to attract
Speaker 1: people who are slightly outside of it? Yeah? I think
Speaker 1: right now, there's definitely a huge sort of pro sumer
Speaker 1: power user and element to defy where there are people
Speaker 1: who sort of live and breathe this stuff, and you know,
Speaker 1: they sort of biased towards being active with it, right,
Speaker 1: Like I like attending my yield farms, and I like
Speaker 1: sort of playing around with new stuff. And for the
Speaker 1: majority of people when they think about you know, financial services,
Speaker 1: that's not what they want, right They want to you know,
Speaker 1: by by S and P and put it in there
Speaker 1: for O, n K and and not really really think
Speaker 1: about it. And so I think the answers comes from from,
Speaker 1: you know, a couple different advantage points. One is just
Speaker 1: from a sort of offerings perspective. I think they are
Speaker 1: could be more and more abstractions built on many of
Speaker 1: these protocols such that the end user doesn't really end
Speaker 1: up thinking this kind of thing. And the impermanent loss example,
Speaker 1: you can sell off some of that yield to to
Speaker 1: pay for, you know, any impermanent loss that you might
Speaker 1: you might experience, or you might buy put some calls
Speaker 1: so that you know, you can sort of hedge out
Speaker 1: some of that volatility that you're exposed to. Ultimately that
Speaker 1: can be you know, bundled inside of a structured product
Speaker 1: and sort of give into an end user. And so
Speaker 1: I'm not thinking about you know, sort of what's in
Speaker 1: this basket of goods that then I'm buying. I just know, hey,
Speaker 1: I want to know, earn some yield on asset x
Speaker 1: y z, and then maybe this is a good way
Speaker 1: to do it. I think actually the stable coin market
Speaker 1: is a great example where you know, cryptocurrency users are
Speaker 1: willing to pay you a large amount of interest in
Speaker 1: order to get leverage on some of these assets. Right
Speaker 1: like you know, um to the futures markets often hit
Speaker 1: three annualized or even lending markets hit hr in order
Speaker 1: to borrow stable coins to to get leverage on some
Speaker 1: of these assets. But you know, if you're not a
Speaker 1: tryptop person, if you just want to you know, uh,
Speaker 1: sort of earn some interest on some cash that you're
Speaker 1: he laying around, you can go to you know, services
Speaker 1: like coin base or block by, and you know, they
Speaker 1: will take your USDC and they will lend it out
Speaker 1: for you and you don't have to think about, you know,
Speaker 1: anything that's sort of going on under the hood. I
Speaker 1: think actually a great example of this is in China
Speaker 1: there's a company called Matrix Suport which actually want to
Speaker 1: portfolio companies and they've sort of pioneered this swortter we
Speaker 1: called c D five. So it's half centralized, half decentralized,
Speaker 1: where it's a custodial service. You know, they own your bitcoin,
Speaker 1: they own your USDC, they sort of take care of
Speaker 1: it for you. You can't lose it. But under the
Speaker 1: hood they'll go out and they'll yield form for you.
Speaker 1: So they'll go put your USDC into compound, they'll take
Speaker 1: that comp they'll sell it for more u SCC, and
Speaker 1: then they'll go get to give it back to you
Speaker 1: at the end of the day. So from an end
Speaker 1: user perspective, you don't sort of see what's actually you know, happening.
Speaker 1: You sort of think about, you know, the yield that
Speaker 1: that's that you're getting. And so for a lot of users,
Speaker 1: I suspect that's going to be the way they're going
Speaker 1: to use defied much in the same way. You know,
Speaker 1: most people they don't think about trading bonds or you know,
Speaker 1: selling your complicated drivetives. They just think about putting money
Speaker 1: in the bank account, and you know, the bank sort
Speaker 1: of handles how to get actually interest on it. So
Speaker 1: I would say there's still a good amount of abstraction
Speaker 1: that for meaning to to make this stuff really palable.
Speaker 1: To to end users, not even talking about a lot
Speaker 1: of the transaction costs and all of the scalability issues.
Speaker 1: But I just like that's going to be a large
Speaker 1: part of the way people actually get exposure to this thing.
Speaker 1: Just on that note, we sort of touched on this before,
Speaker 1: um with the fintech angle. But if it's going to
Speaker 1: be similar to putting your money in a bank and
Speaker 1: just sort of trusting the process, isn't that where you
Speaker 1: kind of need regulation or at least you need to
Speaker 1: have some sort of faith in the middleman or the
Speaker 1: process that's doing this for you. So I guess I'm
Speaker 1: just curious, like how you swear like people not necessarily
Speaker 1: understanding all the details of the process, but also having
Speaker 1: faith in a decentralized process or method of doing this.
Speaker 1: I think it's about having exposure and having the ability
Speaker 1: to sort of go down to the middle and get
Speaker 1: access to it or audit it or do whatever you want.
Speaker 1: But there's always going to be people who are not
Speaker 1: gonna want to be their own bank. I always hated
Speaker 1: that that slogan that I think a lot of crypto
Speaker 1: people push because it's just not something that is appealing
Speaker 1: or feasible for a lot of people. I think of
Speaker 1: it a little bit sort of like email, where most
Speaker 1: people don't run their own email server. Most people don't
Speaker 1: have their own email client. They use a hosted service
Speaker 1: like Gmail, and Gmail sort of runs the email server
Speaker 1: for them. But email itself is still an open protocol.
Speaker 1: Anyone can go and run their own email server and
Speaker 1: I can go send you an email, You can go
Speaker 1: send me an email. That open protocol is always available
Speaker 1: to us if you want to use it. But of course,
Speaker 1: for convenience sake, a lot of people are gonna end
Speaker 1: up using, you know, a lot of these sort of
Speaker 1: hosted services at the end of the day. So the
Speaker 1: beauty is you have this sort of global permission list
Speaker 1: seven auditable um um settlement layer that anybody can tap into,
Speaker 1: and again that allows sort of permission permission list innovation.
Speaker 1: But you can still have these really nice financial services
Speaker 1: that sit on top of it that you know, give
Speaker 1: people a really simple yield that's when they get access
Speaker 1: to or you know, really let them let them really easily,
Speaker 1: you know, borrow money if that's what they want. Um.
Speaker 1: The two don't ness searily have to stay in conflict.
Speaker 1: So you brought up something, and actually it's come up
Speaker 1: a couple of times that have been maybe very curious about.
Speaker 1: So it's like, if I look on coin get go
Speaker 1: the top volume pair pairs traded on unit spop right now,
Speaker 1: it looks like fifty over is the U s DC pair,
Speaker 1: another five percent is the tether pair, another four percent
Speaker 1: is actually the U s DC tether pair. A lot
Speaker 1: of this so called defy is built on centralized um
Speaker 1: stable coins. So this is literally like a token that
Speaker 1: in theory we were told is represented by a dollar's
Speaker 1: worth of dollar denominated assets held at a bank somewhere.
Speaker 1: And then there is a decentralized able coin called die
Speaker 1: which is backed by crypto assets, except from my understanding
Speaker 1: even that is significantly as one of the backing assets
Speaker 1: us DC. So how much is this whole thing still
Speaker 1: like sort of like built on a highly centralized regulated
Speaker 1: asset that also could be significantly regulated further. Yeah, the
Speaker 1: stable coin risk is a real one, you know, maybe
Speaker 1: for for listeners who aren't to wear a stable coin
Speaker 1: such as USCC, which I realize I've been referencing quite frequently.
Speaker 1: It's a token that lives on ethereums as well as
Speaker 1: a few other blockchains that is backed one to one
Speaker 1: by dollars that are in a you know, audited US
Speaker 1: bank account. So one dollar comes in, one USDC is minted,
Speaker 1: and simultaneously you can then go and redeem that USDC
Speaker 1: so you can, um, you know, give centers, need the
Speaker 1: name of the company given the USDC and they'll redeem it.
Speaker 1: And and why are you you know, US dollars to
Speaker 1: the bank account that you want. So really really simple,
Speaker 1: you know, one to one back. Now, the problem is
Speaker 1: this is sort of you know a little bit of
Speaker 1: a golden age of of this is sort of pure
Speaker 1: regulatory arbitrage right where um, if I want to go
Speaker 1: and you know, send a million dollars to you Joe,
Speaker 1: you know, throw a wire or to paypaler or whatever, yeah,
Speaker 1: we'll lose that up. You know, I have to go
Speaker 1: through m K, I C A, m L. We have
Speaker 1: to be using you know, um, everyone who's who's in
Speaker 1: the sort of the middle party is being MSB. There's
Speaker 1: a lot of regulation in between to make sure maybe
Speaker 1: bad actors can't use this with USDC. Once it's minted,
Speaker 1: I can go and send it to you, you know,
Speaker 1: on chain it's pseudonymous um, you're just one address. I'm
Speaker 1: one address, and really the only the k I c
Speaker 1: aml apart takes place off chain. Sou if you want
Speaker 1: to go take that million dollars and you want to
Speaker 1: then want to go but redeem it, then you have
Speaker 1: to do ky C. But in the interim, you know,
Speaker 1: it's all sort of being transferred on chain. There's always
Speaker 1: this risk that and we see this occasionally where you know,
Speaker 1: USDC and and TELL both have the ability to to
Speaker 1: blacklist and freeze as so if they determine that you know,
Speaker 1: these funds were sees as part of a hack, or
Speaker 1: maybe they're being used for money laundering or funding terrorism.
Speaker 1: Granted this is a very very very small percentage of
Speaker 1: all the sort of activity that's happening, they can say, hey,
Speaker 1: actually these tokens are frozen, they're not redeemable anymore. We're
Speaker 1: going to you know, it would be like you know,
Speaker 1: you your bank account is pros and sort of functioning
Speaker 1: the same thing. And so there's always this risk that hey,
Speaker 1: that might happen into Maker or compound or unit spop
Speaker 1: or any of these services where they're sort of reliant
Speaker 1: on a stable coin right now. Over time I think
Speaker 1: sensible regulation will come around. Hey, how are these thing
Speaker 1: is actually going to interact with the traditional and financial system.
Speaker 1: I certainly don't think it's going to be, you know,
Speaker 1: everyone needing constant, unchain financial surveillance all the time. But
Speaker 1: in the interim it is sort of this this weird
Speaker 1: place where there's always a little bit of risk that
Speaker 1: that something like that might happen. I think to your
Speaker 1: point that sort of speaks the need for something like Die,
Speaker 1: which right now is has a percentage of it's of
Speaker 1: its backing in USDC for the purpose of of stabilizing
Speaker 1: it um. So certainly they could get rid of USDC tomorrow,
Speaker 1: but basically die with trade above a peg because people
Speaker 1: like to take that USDC and quickly arbitrazed Die by
Speaker 1: minting it when it's above the peg and selling it
Speaker 1: and sort of capturing that spread. So it's sort of
Speaker 1: at this trade off for it. You can have that
Speaker 1: that stability, you can have that, or you can have
Speaker 1: that decentralized stable coin. But if you want to be
Speaker 1: perfectly stable, if you want to be really not volatile,
Speaker 1: there's a little bit of a crut right now. We're
Speaker 1: sort of depending on USDC. I think most of these
Speaker 1: teams have plans to gradually wean off of these these
Speaker 1: centralized stable coins. Is they see these same sort of risks,
Speaker 1: But you're right that right now it is a risk
Speaker 1: in the in the in the ecosystem. So this reminds
Speaker 1: me of something else I've been wondering. But to what
Speaker 1: extent is Bitcoin collateralizing a lot of these defy um
Speaker 1: operations or trades or industries through the stable coin channel,
Speaker 1: And like, if that's actually happening, does that mean that
Speaker 1: crypto because defy seems to be such a dynamic space,
Speaker 1: does that mean that defy like is eventually going to
Speaker 1: have to outgrow Bitcoin? Or I guess another way of
Speaker 1: saying it is like, by definition, you can't have a
Speaker 1: finite pool of collateral in the form of bitcoin um
Speaker 1: that's being used in a system that's growing exponentially. Does
Speaker 1: that make sense? That does make sense? I mean, I
Speaker 1: think the way I sort of think about purposes or
Speaker 1: sort of don't. I've been discussing what for sort of
Speaker 1: three main buckets, one of them just being financial services
Speaker 1: for crypto assets. So by and large, a lot of
Speaker 1: the services that you see and defy today are for
Speaker 1: ether so people hold they need liquidity against it, they
Speaker 1: want to trade it, they want to borrow it, whatever.
Speaker 1: All these sorts of different services allow you to do that.
Speaker 1: And there's even more sophisticated derivatives now where I can
Speaker 1: buy and sell decentrilized options against my ether um and
Speaker 1: and I can really do anything I would do on
Speaker 1: a normal exchange, but do it and defy. And increasingly
Speaker 1: this has happened with bitcoin as well as mean maybe
Speaker 1: you alluded to where there are tokens such as wrapped bitcoin,
Speaker 1: which is sort of like USDC for bitcoin, where custodian
Speaker 1: holds onto your bitcoin and midst w BTC on ethereum.
Speaker 1: And now you know, sort of going back to that
Speaker 1: initial Bitcoin defied dream, I can put my bitcoin as
Speaker 1: collateral and I can borrow against it, or I can
Speaker 1: trade my bitcoin for ether, or trade my bitcoin for
Speaker 1: USDC or vice versa. I would say that's actually a
Speaker 1: small percentage of what's happening in defied today. Most of
Speaker 1: it is sort of around ether and other sort of
Speaker 1: definative assets, but certainly for people who want Bitcoin exposure,
Speaker 1: it's a great way to sort of get access to
Speaker 1: these again sort of permission lists financial services that in
Speaker 1: many ways are superior just not accessible to you know,
Speaker 1: many of the people who are using them. I think,
Speaker 1: you know a great example of sort of this permission
Speaker 1: lists innovation. Um, there's this service that that we recently
Speaker 1: back called ribbon Ribbon. You know, one popular way people
Speaker 1: get yielled is they sell covered calls. Right, so I
Speaker 1: have some bitcoin, I ask some either I want to
Speaker 1: stack more bitcoin, I want to stack more ether. I
Speaker 1: sort of care about accumulating when you sell these like
Speaker 1: out of the money covered calls. In theory, they're not
Speaker 1: gonna expire in the money, and so you've got to
Speaker 1: collect the premium and and just sort of kept keep
Speaker 1: collecting more you collecting more bitcoin. Ribbon. You know, this
Speaker 1: is this is a service that isn't really accessible to
Speaker 1: many people in the US. It's if you do want
Speaker 1: to do it, you need to sort of post ten
Speaker 1: dollars in collateral. Um you go through all these different
Speaker 1: types of you know, hoops and actually get access to
Speaker 1: this thing Ribbon. You can go. It's it's all on chain,
Speaker 1: it's all trustless, it's all decentralized. Anyway, who go and
Speaker 1: and get access to this sort of sophisticated structured product
Speaker 1: without having to go through middleman and without having to uh,
Speaker 1: you know, sort of sort of subject themselves to financial surveillance,
Speaker 1: which I think is actually a huge plus. I think,
Speaker 1: going back to initial question, these are all sort of
Speaker 1: just different types of financial services for crypto assets. The
Speaker 1: big sort of question is how do you sort of
Speaker 1: break out of this realm, right like, how do you
Speaker 1: get out of just lending to Ether, just letting the bitcoin?
Speaker 1: And I would say that there's a couple of different
Speaker 1: different ways I personally want to think about it. One
Speaker 1: is is sort of through this realm of synthetic assets,
Speaker 1: where you know, there's I would say Die is a
Speaker 1: great example. Die is a synthetic version of US dollar.
Speaker 1: But there's many protocols that use that same mechanism of
Speaker 1: posting collateral and then minting debt and and you sort
Speaker 1: of using what we call an oracle in order to
Speaker 1: keep it in pegg with some target price feed. But
Speaker 1: for other types of assets. So you can go on
Speaker 1: on defied today and you can go and buy synthetic Tesla,
Speaker 1: you know, synthetic apple Um, synthetic you know game stop stock,
Speaker 1: anything really um and it doesn't even have to be
Speaker 1: a real world asset. It can be the synthetic price
Speaker 1: of the median you know, housing sale in the San
Speaker 1: Francisco Bay area, or it can be you know, a
Speaker 1: synthetic a number of barrels of oils that are going
Speaker 1: to be you know, shipped across the specific this week
Speaker 1: or whatever it is. You can go and create these
Speaker 1: really novel financial products again without having to apply it,
Speaker 1: without having to jump through a lot of the arduous
Speaker 1: hoops that are normally required. That I think is a
Speaker 1: really burgeoning area of innovation within defied where I can
Speaker 1: go and you know, sort of get access to these
Speaker 1: products wherever I'm around the world. And and we already
Speaker 1: see companies that are you know, trying to do this,
Speaker 1: and and we see see a lot of limitations with
Speaker 1: you know, traditional brokerages for example, around you know, geographical
Speaker 1: restrictions or you know trading restrictions. As we sort of
Speaker 1: stat with the whole again, you know, Robin Hood, um
Speaker 1: gmy thing, these services you can't be stopped. As soon
Speaker 1: as this sort of synthetic gimme gets minted, anyone around
Speaker 1: the world can go buy and sell it seven wherever
Speaker 1: they are so there's there's actually room, I think, to
Speaker 1: sort of grow a lot of the financial services that
Speaker 1: are becoming very popular, you know in the U S
Speaker 1: and Europe, but have this sort of truly global seven
Speaker 1: version of them that is, you know, in many ways superior.
Speaker 1: I think synthetic assets. Obviously, you know you're still sort
Speaker 1: of looking at ways to sort of expand the existing
Speaker 1: financial system. Right these are just sort of extensions of
Speaker 1: the equities markets. I think the really cool thing is,
Speaker 1: you know, sort of what we call real world assets.
Speaker 1: So how do I go and get a mortgage from
Speaker 1: my house from Maker? How do I go and you know,
Speaker 1: trade early equity for my company on unit swap? How
Speaker 1: do how do I go? And it actually like bridge
Speaker 1: these things to the real world. And I would say
Speaker 1: that is probably the most nascent area within Defied. This
Speaker 1: last month, Maker I think sort of broke new ground
Speaker 1: where they are taking shipping invoices and using those as
Speaker 1: collateral and Maker and so Maker basically becomes this this
Speaker 1: invoice factoring facility where if I'm trying to get liquidity
Speaker 1: for you know, assetding debt from this invoice, I can go,
Speaker 1: I can work with a partner, I can create a
Speaker 1: token for this for this asset again in a very regulated,
Speaker 1: legally compliant way, I can put that token inside of Maker,
Speaker 1: and now I can die, and I can convert that
Speaker 1: die against Pegg one to one with dollars. I can
Speaker 1: go convert that die to USD, send it to my
Speaker 1: bank account, and suddenly a Maker is undercutting you know,
Speaker 1: all these other existing invoice factoring services by let's say
Speaker 1: three or four x. And so because there's no middlemen,
Speaker 1: because there's no employees, because there's not a lot of
Speaker 1: this operational overhead, it's just a smart contract. You don't
Speaker 1: need sort of these these huge bodies employees that you know,
Speaker 1: someone like a neo bank, my employee, I just need
Speaker 1: to go and tokenize this asset, putting the DeFi and
Speaker 1: start barring against it. So this is starting to happen,
Speaker 1: but I expect we accelerating the next year or two.
Speaker 1: Someone in that example whether and I'm aware of like
Speaker 1: a few different entities that are trying to but someone
Speaker 1: in this examples sort of like needs to be like
Speaker 1: I don't know, I guess I occupy the meat space
Speaker 1: like if the if the ship or the you know,
Speaker 1: the shipping invoys. There's like someone has to like okay,
Speaker 1: you're like have you have to deliver the goods or
Speaker 1: something like someone sort of has to be the real
Speaker 1: world proxy like take the ship or to court if
Speaker 1: they would show up with the goods or something like that. Right, Like,
Speaker 1: there's sort of like there's a lot of like the
Speaker 1: connective tissue between the chain or between just the protocol
Speaker 1: and the sort of real world assets. Like there's no
Speaker 1: real way to like avoid the fact that like some
Speaker 1: sort of like human at leasta now some sort of
Speaker 1: like human has to be there to like sue a delinquent,
Speaker 1: you know, someone who doesn't show up with the goods
Speaker 1: or whatever it is. Yeah, that that is true. Um,
Speaker 1: They're they're that whole sort of you know tokenization process
Speaker 1: that I mentioned, you know, is somewhat human intensive, but
Speaker 1: I think over time that will come down and become
Speaker 1: more automated. You know. Another interesting thing that we see
Speaker 1: happening in Defy is is sort of like capital formation
Speaker 1: Defy the Princess. You're it's really low barried entry where um,
Speaker 1: if I want to go and raise funds to um,
Speaker 1: you know, donate money to a cause or purchase an
Speaker 1: asset or start a company or whatever. I can go
Speaker 1: and you know, potentially pool funds with other people inside
Speaker 1: of Defied, give them sort of a pro rade of
Speaker 1: share in it, and then we can go and I'll
Speaker 1: take our money and go to you know, whatever it
Speaker 1: is that we actually want to do. And so you know,
Speaker 1: we sort of saw this this deliberate of an idea
Speaker 1: I think in the initial sort of i O wave
Speaker 1: in seventeen and obviously I think that was very you know,
Speaker 1: sort of poorly executed. But the idea that you don't
Speaker 1: have to go through trational fundraising means, especially if you
Speaker 1: don't have access to those, in order to get access
Speaker 1: to capital um and then be able to have sort
Speaker 1: of this you know, pseudocap table um. I think it
Speaker 1: is really powerful and it is starting to come back
Speaker 1: through the rise of a lot of these taws. So
Speaker 1: if you were going to describe Defy to someone who
Speaker 1: had absolutely no knowledge of the space, but your ambition
Speaker 1: was to get them very very excited about out it
Speaker 1: and about how, you know, how much this could improve
Speaker 1: or change the world, what would be the project or
Speaker 1: the function that you would point to. I mean, I
Speaker 1: think I tend to fall back on these sort of
Speaker 1: old reliables. I think Maker is really just incredible system,
Speaker 1: not only because it's it's sort of demonstrates the power
Speaker 1: of decentralized lending, where again, anybody can show up with collateral,
Speaker 1: borrow you know, any time of day, they can repay
Speaker 1: any time they want, etcetera. And the whole thing is
Speaker 1: sort of self sustaining, there's no company. But also to
Speaker 1: use it produces this very useful asset at the end
Speaker 1: of the day, which is die people. I think you
Speaker 1: inherently sort of get the value of a dollar, the
Speaker 1: ability to send these dollars back and forth on on
Speaker 1: a blockchain. We often use stable coins for for funding,
Speaker 1: where you know, a team maybe isn't incorporated yet, or
Speaker 1: maybe they don't have a bank account yet. We can
Speaker 1: just send them stable coins ditrectly to their theory and wallet,
Speaker 1: and then they can go and pay their employees who
Speaker 1: are sort of distributed across the world to do a
Speaker 1: little test transaction first. Like when you do that, you
Speaker 1: never you never grow out of that. Unfortunately, always get
Speaker 1: a little ish, but yes, you know, just superior to
Speaker 1: trying to send international wire uh, you know, waiting five
Speaker 1: business days you know, praying that you typed in the
Speaker 1: correspondent bank you number correctly. A stable coin such as
Speaker 1: die is able to do that just instantly, and I
Speaker 1: think that's really powerful. I think really the answer, you know,
Speaker 1: and sort of the most distinct, you know, maybe a
Speaker 1: little glib answer, is that it's going to do for
Speaker 1: finance with the Internet for information, where instead of being siloed,
Speaker 1: instead of being opaque, instead of being limited access, it's permissionless,
Speaker 1: transparent access to anyone around the world wants it. And
Speaker 1: I think what we've seen is entrepreneurs will take that
Speaker 1: and they will develop novel products that we couldn't even
Speaker 1: imagine right now and probably won't can't imagine right now,
Speaker 1: that will create this this massive sort of consumer surplus.
Speaker 1: So so my last question is, I mean I go
Speaker 1: to like Una Swab, it looks like an unregistered stock market.
Speaker 1: I could see like mirrored Apple and mirror Tesla. Those
Speaker 1: look like synthetic derivatives. I mean, they're basically described this
Speaker 1: such anyone can buy them without any sort of like
Speaker 1: obvious like registration. There's no account or anything like that.
Speaker 1: Capital formation. The I c O s sort of like
Speaker 1: we're basically just I p O S. But without all
Speaker 1: of the regulation, why is this not just all you know,
Speaker 1: even if in theory it's more transparent stable like sort
Speaker 1: of a flagrant violation of existing securities laws. And do
Speaker 1: you think about like that risk frankly as a as
Speaker 1: you're investing, It's definitely something that we think about. I
Speaker 1: think one interesting thing about about Dragonfly is that our
Speaker 1: team is sort of split between Asian and the US,
Speaker 1: and so I think we talked about things you're very
Speaker 1: freely this very much US focused view. But you know,
Speaker 1: increasingly a large part of exchange volumes up until very recently,
Speaker 1: large part of mining volumes, and increasingly large number of
Speaker 1: defight users are coming from Asia, They're coming from Japan,
Speaker 1: or they're they're they're coming from China, they're coming from Japan,
Speaker 1: coming from Asian more broadly, and so what we see
Speaker 1: is sort of a lot of global talent around the
Speaker 1: world that might not live in the US, might not
Speaker 1: be American, and UM might not sort of be UM
Speaker 1: I think, relying on a lot of the same issues
Speaker 1: that that you see in in U S jurisdictions. I
Speaker 1: think to your earlier point, what we see with with
Speaker 1: defile lot and why we sort of emphasize this decentrized
Speaker 1: element is most of what we've seen today is is
Speaker 1: really covered under under free speech where users you know,
Speaker 1: for example, the developers of unit swap, they've written this software,
Speaker 1: they've deployed it, but they're not taking fees, they don't
Speaker 1: have you know, customer rights, they're not executing trades. Certainly
Speaker 1: they'reun this front end, but it's just a website, right,
Speaker 1: it's not actually doing anything. You can go on the
Speaker 1: ethery and blockchain and make the same sort of trades
Speaker 1: or you know, become a liquid in provider or whatever.
Speaker 1: Because the software is permissionless, because it sort of runs
Speaker 1: without you know, a middleman requiring to run it. It's
Speaker 1: it's sort of like like BitTorrent, where BitTorrent can be
Speaker 1: used for legitimate purposes, but obviously people can use it
Speaker 1: for relicious purposes as well, but that doesn't make the
Speaker 1: creators a bit torrent liable for those malicious purposes. So
Speaker 1: Defy I think has created a lot of again sort
Speaker 1: of consumer syrplus it's made a lot of that's in
Speaker 1: my life easier, just you know, going over the wiring
Speaker 1: stable point thing that I mentioned just a few minutes ago,
Speaker 1: but that doesn't mean that, and certainly everything not within
Speaker 1: it is not super palatable, but then doesn't mean, you know,
Speaker 1: you just have to sort of throw the baby out
Speaker 1: with the bath water. I think the other elements sort
Speaker 1: of that you mentioned around securities laws is certainly something
Speaker 1: that we consider, but I think that really relates more
Speaker 1: to sort of token issuements and not every protocol, not
Speaker 1: everything that comes out is going to issue a token.
Speaker 1: You can just create software and have people use it.
Speaker 1: UM and that you know it is is perfectly fine.
Speaker 1: That's sort of sort of covered under the existing understanding
Speaker 1: of the law. Tom, So great to have you on
Speaker 1: odd lots UM. I feel like that lived up to
Speaker 1: the hype that you are going to be able to
Speaker 1: explain these things in a very clear way, and I
Speaker 1: feel a lot smarter. Well, I really appreciate it. Thanks
Speaker 1: for having me, Thanks Tom, That was great. Thanks Tom, Tracy.
Speaker 1: I have an idea for a DeFi project that we
Speaker 1: should do. Okay, I kind of I like the idea
Speaker 1: of tending my own yield farm, but I have a
Speaker 1: feeling it's probably very different to uh, the you call
Speaker 1: it UM vision that I have of that, but go
Speaker 1: on so you definitely, like Tomas said, you could like
Speaker 1: create any sort of like synthetic sort of like asset
Speaker 1: that's tied to something in the real world or sort
Speaker 1: of like you know, tied to some price. We should
Speaker 1: um create token ized onion futures because that's like the
Speaker 1: one thing that you know, there's a law like there
Speaker 1: can't be onion futures, but in defy, I don't see
Speaker 1: anything stopping us from like creating a decentralized onion futures
Speaker 1: market that just like goes based on like you know,
Speaker 1: supermarket onion prices. I'm sorry why onions specifically, there's a
Speaker 1: law that says there's no onion futures in America. You
Speaker 1: didn't know that, No, I didn't. I'm over here in
Speaker 1: a Onions are a pretty big part of the economy.
Speaker 1: I think they've been fairly financialized. But maybe there was
Speaker 1: some law like a hundred years ago that said onions
Speaker 1: there could never be an onion futures market in the
Speaker 1: United States. Okay, let's let's do it, the Great onion Futures.
Speaker 1: I'm surprised you didn't know that then. See, I thought
Speaker 1: that would be like a little. I thought that would
Speaker 1: be like a tracy trivia that you would know about.
Speaker 1: I had no idea, but I have a feeling I'm
Speaker 1: about to go down like a massive research hole and
Speaker 1: learn about it. Let's do it, Yeah, let's do it.
Speaker 1: But it's seriously. I did think Tom was great, and
Speaker 1: I do think that he lived up to the hype
Speaker 1: in certain terms of like the clarity of explaining how
Speaker 1: all these things work. Um, I agree. I was also,
Speaker 1: you know, on the regulatory arbitrage issue, there is a
Speaker 1: tendency to think that regulatory arbitrage is a bad thing,
Speaker 1: particularly in finance, where rules tend to exist so that
Speaker 1: you know, there isn't money laundering or people aren't losing
Speaker 1: all their money. His vision or his summation of regulatory
Speaker 1: arbitrage as a way of generating more change in the
Speaker 1: financial system, similar to you know what happened with the
Speaker 1: internet and the idea that everyone can broadcast things like that.
Speaker 1: It's very alluring. I think there are still questions around it,
Speaker 1: but I can see like what he's getting at, and
Speaker 1: I can see why a lot of defied people are
Speaker 1: very excited about using this process regulatory arbitrage to affect
Speaker 1: change in the traditional financial system. Yeah, well, you know
Speaker 1: what I was thinking, like, and I get that. I
Speaker 1: think it's interesting. And he made a comparison to Uber
Speaker 1: and Airbnb, who is sort of like changed regulations. Like
Speaker 1: Uber was going up against taxi companies, and frankly, I
Speaker 1: don't think the taxi drivers have ever had, you know,
Speaker 1: in most places, all that much political power is sort
Speaker 1: of like going up against like highly regulated entities that
Speaker 1: in some sense like make regulation and lobbying like a
Speaker 1: huge part of their core business model. I don't think
Speaker 1: is going to be as easy as sort of like
Speaker 1: Uber basically rolled rolling the taxi industry and all these
Speaker 1: cities no ins so much more sensitive industry, given that
Speaker 1: you're dealing with money. But I think it's gonna be
Speaker 1: really hard. Well, yeah, I definitely wanted to watch them. Absolutely.
Speaker 1: Shall we leave it there. I'm keen to go start
Speaker 1: reading about onion futures, So yeah, go read about that. Okay.
Speaker 1: This has been another episode of the Odd Lots podcast.
Speaker 1: I'm Tracy Alloway. You can follow me on Twitter at
Speaker 1: Tracy Alloway and I'm Joe Why Isn't All. You can
Speaker 1: follow me on Twitter at the Stalwart Follow our guest
Speaker 1: on Twitter. Tom Schmidt is at Tom H Schmidt. Follow
Speaker 1: our producer Laura Carlson. She's at Laura M. Carlson. Follow
Speaker 1: the Bloomberg head of podcast, Francesco Levy at Francesco Today,
Speaker 1: and check out all of our podcast at Bloomberg under
Speaker 1: the handle at podcasts. Thanks for listening year to