WEBVTT - Tom Schmidt Explains What You Need to Know about DeFi 0:00:10.640 --> 0:00:14.680 Hello, and welcome to another episode of the Odd Lots Podcast. 0:00:14.760 --> 0:00:19.360 I'm Joe Wisenthal and I'm Tracy all Away. So, Tracy, 0:00:19.600 --> 0:00:23.880 we've obviously done a few at least a couple Defy 0:00:24.079 --> 0:00:28.120 episodes this year to centralized finance sort of the hot 0:00:28.120 --> 0:00:31.600 thing in crypto. But if I'm being honest, like, there's 0:00:31.640 --> 0:00:33.520 just like still like a lot that I don't get. 0:00:35.000 --> 0:00:38.960 I don't think you're the only one, to be fair, like, 0:00:39.280 --> 0:00:42.000 I think there seems to be a lot of interesting 0:00:42.159 --> 0:00:46.680 things happening in the space, but it's hard to wrap 0:00:46.720 --> 0:00:49.199 your head around a lot of them because frankly, they 0:00:49.240 --> 0:00:52.680 are so brand new, and in addition to that, as 0:00:52.720 --> 0:00:55.400 we've spoken about before, a lot of them seem to 0:00:55.400 --> 0:00:58.360 be kind of wrapped around each other. It's like df 0:00:58.440 --> 0:01:02.000 I wrapped around DFI wrapped and DEFY sort of defy 0:01:02.040 --> 0:01:05.000 all the way down, and it's hard to figure out 0:01:05.040 --> 0:01:11.800 exactly what the application is to people outside of the space, right, 0:01:11.959 --> 0:01:14.360 And this is of course, like I think, like you know, 0:01:14.800 --> 0:01:18.080 there's a lot clearly a lot of like trading and speculation, 0:01:18.280 --> 0:01:21.280 and we'll talk about how those markets work because they 0:01:21.319 --> 0:01:23.800 work differently than say the stock market. But then there's 0:01:23.840 --> 0:01:26.000 also like the question of like what is it for, 0:01:26.080 --> 0:01:29.240 because like it's very easy for me to like conceptualize 0:01:29.240 --> 0:01:32.600 sort of traditional equity or traditional lending, because I have 0:01:32.640 --> 0:01:35.880 an idea of like what these financial instruments are for. 0:01:36.560 --> 0:01:39.320 Where my impression of the Defy space and large part 0:01:39.440 --> 0:01:43.480 is like it's incredibly sophisticated and derivatives and all this 0:01:43.600 --> 0:01:45.120 kind of stuff, but like I still don't know what 0:01:45.200 --> 0:01:48.240 it's like for per se. Yeah, I think that's right, 0:01:48.280 --> 0:01:50.440 And I mean to what I was saying earlier, who 0:01:50.440 --> 0:01:52.360 it's for. Right When I see a lot of before 0:01:52.400 --> 0:01:56.480 you Defy accomplishments, I think, like, Okay, that's great. You 0:01:56.520 --> 0:02:00.320 guys have built yourself a really interesting little defy eCos system. 0:02:00.360 --> 0:02:03.320 And I know that sounds patronizing, but like I don't 0:02:03.320 --> 0:02:07.200 know who's interested who's interested in an outside of that. 0:02:07.280 --> 0:02:10.000 I feel like that's the missing part of Defy. The 0:02:10.040 --> 0:02:14.360 space hasn't been very good at delivering the message about 0:02:14.440 --> 0:02:17.480 what this means for people who are actually outside of 0:02:17.680 --> 0:02:21.600 the DeFi space right where where it actually sort of 0:02:21.680 --> 0:02:25.359 competes with traditional finance and so far anyway, we always 0:02:25.360 --> 0:02:28.240 ask these questions, But I'm very excited to say, um, 0:02:28.280 --> 0:02:29.799 I think our guest today is gonna be really good. 0:02:29.880 --> 0:02:33.480 Multiple people have suggested that he's a great person to 0:02:33.520 --> 0:02:37.239 talk to, very active in investing in the DeFi space. 0:02:37.280 --> 0:02:40.160 So maybe we'll get maybe we'll get some answers today, 0:02:40.480 --> 0:02:43.000 I hope. So let's do it all right, I'm very 0:02:43.000 --> 0:02:45.520 excited we're going to be speaking with Tom Schmidt. He's 0:02:45.520 --> 0:02:49.360 a general partner at Dragonfly Capital. It's a venture firm 0:02:49.440 --> 0:02:54.600 that focuses on the crypto space. More broadly, Tom himself 0:02:54.680 --> 0:02:58.800 as a fairly long background long as these things go, 0:02:59.600 --> 0:03:02.240 in the DEFY space, a very active in it. So 0:03:02.240 --> 0:03:04.240 we're going to get all our questions answered. Tom, thank 0:03:04.280 --> 0:03:06.720 you so much for coming on odd Luck, thanks for 0:03:06.720 --> 0:03:09.400 having me, Thanks being Tracy. So I'm let's start with 0:03:09.440 --> 0:03:12.120 your background. I mean, like I think the average person 0:03:12.200 --> 0:03:14.240 may be listening to this has been like sending the 0:03:14.320 --> 0:03:17.440 last like two months trying to understand Defy and the 0:03:17.480 --> 0:03:21.120 idea that like one could have a long lineage in 0:03:21.160 --> 0:03:23.640 this space is kind of weird. But you actually legitimately 0:03:23.720 --> 0:03:25.400 do what do you give us things sort of like 0:03:25.560 --> 0:03:30.000 a little bit of like your background in crypto and Defy, etcetera. 0:03:30.000 --> 0:03:32.840 How you got here. Yeah, it's it's funny that defy 0:03:33.000 --> 0:03:35.000 is now sort of a thing that people talk about, 0:03:35.120 --> 0:03:37.600 but you know, it's it did sort of come from nowhere. 0:03:37.800 --> 0:03:41.040 I think in many respects, my sort of entrance into 0:03:41.080 --> 0:03:43.600 crypto sort of parallels defy in some ways. Not to 0:03:43.640 --> 0:03:46.520 get too poetic, I really got into you know, crypto 0:03:46.720 --> 0:03:50.200 during college. Um, I was writing this sort of computer 0:03:50.240 --> 0:03:53.720 science ethics paper on on your interesting topic that anyone 0:03:53.760 --> 0:03:55.560 can choose, and I ended up doing this sort of 0:03:55.600 --> 0:03:58.120 big coin regulation back and back in twelve and I thought, 0:03:58.400 --> 0:04:00.560 this is this brand new asset, no one really knew 0:04:00.600 --> 0:04:02.280 what to do with it, sort of thinking through, hey, 0:04:02.280 --> 0:04:04.040 how many this thing be be viewed in the eyes 0:04:04.080 --> 0:04:05.800 of the law, and then sort of actually put it 0:04:05.800 --> 0:04:08.000 into bitcoin mining from from my dorm room along with 0:04:08.040 --> 0:04:09.800 a couple of their friends. Um, and that was sort 0:04:09.800 --> 0:04:12.080 of when I got interested in in you know, the 0:04:12.080 --> 0:04:15.160 cryptocurrency space overall. If you look at you know, sort 0:04:15.160 --> 0:04:19.600 of those early days of bitcoin, you the things that 0:04:19.640 --> 0:04:22.719 people aren't doing are doing in defied. These days people 0:04:22.720 --> 0:04:25.080 were talking about back then, back on you know bitcoin talk, 0:04:25.080 --> 0:04:28.120 where they're trying to do where hey, there's this new asset, 0:04:28.520 --> 0:04:30.200 but it's sort of stuck. You know, it's not it's 0:04:30.200 --> 0:04:31.840 just it's this form of money, but you can only 0:04:31.839 --> 0:04:33.880 just sort of send this money back and forth. And 0:04:33.960 --> 0:04:35.760 people want to do other things with it, right. People 0:04:35.760 --> 0:04:39.000 want financial services, People want to be able to exchange, 0:04:39.240 --> 0:04:41.400 but in order to do that with bitcoin, you have 0:04:41.480 --> 0:04:44.120 to go through a centralized party, UM like a coin 0:04:44.160 --> 0:04:46.159 based or like a f t X, and they have 0:04:46.279 --> 0:04:48.720 to um, you know, because of your bitcoin. They might 0:04:48.720 --> 0:04:51.120 go down, they might lose funds that might exclude you, 0:04:51.520 --> 0:04:53.440 and so there's sort of those weird paradox where you 0:04:53.480 --> 0:04:57.719 have this great decentralized currency, but you don't have any 0:04:57.760 --> 0:05:00.719 financial services that are also that also those same properties. 0:05:01.080 --> 0:05:03.159 You know. One of those those main functions that I 0:05:03.160 --> 0:05:06.839 mentioned was exchange. Decentrized exchanges have been around for a 0:05:06.839 --> 0:05:09.719 long time. People have always been trying to build them. 0:05:09.760 --> 0:05:12.160 I ended up getting back into the cryptocurrency space in 0:05:12.600 --> 0:05:14.960 seen when I joined zero x, which is one of 0:05:15.000 --> 0:05:18.240 the very first decentrized exchange protocols to run product for them. 0:05:18.640 --> 0:05:21.000 And zero x is it's sort of this pure to 0:05:21.080 --> 0:05:24.320 pure exchange where um, you and I can agree to 0:05:24.320 --> 0:05:26.640 a trade off chain, you can sort of find each other, 0:05:26.960 --> 0:05:30.039 and then this smart contract basically acts as uh, you know, 0:05:30.160 --> 0:05:33.159 sort of the counterparties that executor at the trade, so 0:05:33.200 --> 0:05:34.920 we don't have to trust each other. Um, no one's 0:05:34.920 --> 0:05:37.280 actually taking custody. Um. This piece of code sort of 0:05:37.360 --> 0:05:39.839 runs it for us. So I ended up working at 0:05:39.920 --> 0:05:41.920 zo x for about two years, uh, and then joined 0:05:42.000 --> 0:05:44.440 Dragonfly about a year and a half ago to do 0:05:44.600 --> 0:05:48.640 investing for us and specifically focused on DeFi what was 0:05:48.680 --> 0:05:53.960 the transition like from bitcoin to more of the Defy experience, 0:05:54.000 --> 0:05:56.440 because we sort of take it for grounded now that 0:05:56.680 --> 0:06:00.440 there's a Bitcoin and now there's all this off being 0:06:00.440 --> 0:06:04.200 built on things like ethereum in the Defy space, but 0:06:04.640 --> 0:06:09.520 years ago that split wasn't as a parent. So I'm 0:06:09.560 --> 0:06:12.640 just curious what the move was like or the transition 0:06:12.680 --> 0:06:15.440 a few years ago. There are a number of very 0:06:15.440 --> 0:06:19.360 early attempts to basically build defy these same sort of 0:06:19.400 --> 0:06:22.880 financial services on bitcoin. One of them is still around 0:06:23.040 --> 0:06:25.480 quite you know, well known. It's called root Stock, basically 0:06:25.520 --> 0:06:28.520 a sort of side chain that sits alongside Bitcoin where 0:06:28.520 --> 0:06:31.279 people can write smart contracts that they can on Ethereum 0:06:31.600 --> 0:06:33.919 that do the same sort of things that you know, Defy. 0:06:34.000 --> 0:06:37.039 Early defined protocoles can do. Now another sort of blockchain 0:06:37.200 --> 0:06:39.400 U called bit shares sort of that came around the 0:06:39.400 --> 0:06:41.320 same time that again had a lot of the same 0:06:41.360 --> 0:06:44.320 ideas that we see and defy now where you could 0:06:44.600 --> 0:06:47.279 you know, meant that you could borrow, um, you could exchange. 0:06:47.760 --> 0:06:49.560 It's it's hard to say why a lot of these 0:06:49.560 --> 0:06:52.680 didn't take off. Certainly for some purposes. Uh, you know, 0:06:52.720 --> 0:06:55.520 the developer experience of building these things is pretty brutal 0:06:55.880 --> 0:06:59.080 um compared to the developer experience of building something on ethereum. 0:06:59.080 --> 0:07:01.320 And so you know, the argument that hey, you just 0:07:01.400 --> 0:07:04.000 don't have that sort of nexus of of developers you're 0:07:04.040 --> 0:07:06.440 going to make all these things that um, you know, interlink, 0:07:06.960 --> 0:07:08.360 it's just not probably not going to happen. You're not 0:07:08.400 --> 0:07:10.440 going to sort of hit that that critical mass. You 0:07:10.480 --> 0:07:12.440 can also say maybe it's just too early, right, A 0:07:12.440 --> 0:07:14.320 lot of things that are happening in DeFi right now, 0:07:14.360 --> 0:07:17.680 again we're being discussed you know, five years ago. But 0:07:17.800 --> 0:07:19.560 if you don't have the users, if you don't have 0:07:19.600 --> 0:07:21.680 the liquidity, if you don't sort of have you know, 0:07:21.720 --> 0:07:24.880 sort of this confluence of people in capital, you can't 0:07:24.880 --> 0:07:27.320 really get a true market farming and so some of 0:07:27.360 --> 0:07:30.120 the problems were obviously technological, where you know, Bitcoin is 0:07:30.160 --> 0:07:32.840 obviously very slow to upgrade, which is a plus in 0:07:32.880 --> 0:07:35.720 many respects, but a downside when you're trying to build 0:07:35.760 --> 0:07:38.160 something brand new and trying to um you know, tweak 0:07:38.240 --> 0:07:40.680 the underlying platform to make it easier for developers to 0:07:40.680 --> 0:07:44.320 actually start building these things. So one of the what 0:07:44.600 --> 0:07:48.240 you know, within the defy realme, you know, one of 0:07:48.280 --> 0:07:50.560 the pitches I guess, or one of the reasons people 0:07:50.600 --> 0:07:53.960 get excited about it is like is the yield opportunity? 0:07:54.040 --> 0:07:56.320 Like they was like, oh, you're like enter into this 0:07:56.400 --> 0:07:58.320 trade or lock up your asset and you get two 0:07:59.080 --> 0:08:01.880 a p y or thousand percent a p y in 0:08:01.920 --> 0:08:04.880 some cases. And we actually talked to someone several weeks 0:08:04.880 --> 0:08:07.840 ago it was like a yield farmer kind of more 0:08:07.880 --> 0:08:11.200 from the trader perspective, but like, you know, this kind 0:08:11.200 --> 0:08:13.040 of makes my head hurt because like, no one gives 0:08:13.040 --> 0:08:16.560 away free money, right, So how would you describe like 0:08:16.960 --> 0:08:21.080 where are these returns in DeFi come from? Like what 0:08:21.240 --> 0:08:24.240 is the what is the activity? Who is paying you 0:08:24.720 --> 0:08:27.840 for the service of say locking up your ether or 0:08:27.880 --> 0:08:29.960 locking up your stable coin or whatever, Like how do 0:08:30.000 --> 0:08:32.360 you sort of like describe some of the basic mechanics 0:08:32.360 --> 0:08:36.440 at play. Yeah, this is I feel like what has 0:08:36.520 --> 0:08:39.120 sort of brought in part defined in the mainstream maybe 0:08:39.120 --> 0:08:40.880 over the past years. People see these, you know, I 0:08:41.000 --> 0:08:44.040 popping returns, and you know when you're kind of what's 0:08:44.080 --> 0:08:46.360 going on because it sounds kind of insane. I think 0:08:46.360 --> 0:08:48.280 we sort of saw that with the whole mark cut 0:08:48.320 --> 0:08:50.840 in iron finance thing maybe a week or two ago. 0:08:51.640 --> 0:08:54.480 I think yield in sort of the DeFi space comes 0:08:54.520 --> 0:08:57.439 from a couple of places. The main source of yield 0:08:57.800 --> 0:09:00.400 that sort of drives again these huge meers that we 0:09:00.400 --> 0:09:04.040 talk about actually comes from these protocol tokens that are 0:09:04.080 --> 0:09:06.959 given away UM and very concrete example of this when 0:09:07.000 --> 0:09:10.760 the first project did do liquidity mining was compound finance UM. 0:09:10.800 --> 0:09:14.800 Compound Finance it's a decentralized money market on Ethereum where 0:09:14.880 --> 0:09:18.520 people can deposit lenders and borrowers can deposit assets into 0:09:18.520 --> 0:09:21.560 the smart contract um and then borrow against it and 0:09:21.760 --> 0:09:23.679 if they wish, and so I don't have to call 0:09:23.720 --> 0:09:25.839 up a lending desk get a quote. I hope that 0:09:25.880 --> 0:09:28.760 they're open, have them custom my assets. The smart contracts 0:09:28.760 --> 0:09:30.440 sort of take cares of all take cares of all 0:09:30.559 --> 0:09:33.640 that for us, and then they also set the rates problemmatically, 0:09:34.160 --> 0:09:36.640 so compound it's been around for about a year and 0:09:36.679 --> 0:09:38.840 a half or so, but m about a year ago, 0:09:38.920 --> 0:09:43.400 so it's March they announced this this program which has 0:09:43.640 --> 0:09:47.199 since been dubbed liquidity money, where in addition to the 0:09:47.440 --> 0:09:49.040 returns that you would get, the interest that you would 0:09:49.040 --> 0:09:50.880 get just for lending out assets to somebody who wanted 0:09:50.920 --> 0:09:53.760 to borrow, so let's say maybe six percent on your 0:09:53.760 --> 0:09:56.439 young your stable coin, your USDC or ethery or whatever, 0:09:56.840 --> 0:09:59.760 they'll also give you some comp tokens. So comp is 0:09:59.800 --> 0:10:03.800 the native governance token of compound, where people who old 0:10:03.840 --> 0:10:07.480 comp can vote on how to upgrade the compound smart 0:10:07.480 --> 0:10:09.079 contracts over time. So if you want to add a 0:10:09.120 --> 0:10:11.800 new feature, if you want to add new types of collateral, 0:10:11.880 --> 0:10:14.360 if you want to adjust rate, comp holders get to 0:10:14.559 --> 0:10:17.240 vote on shain as to how that actually gets upgraded. 0:10:17.280 --> 0:10:19.600 So there's no central party that actually controls this thing. 0:10:20.080 --> 0:10:23.440 So compounds started giving away about fifty of the total 0:10:23.520 --> 0:10:25.920 supply of comp two people who are using compounds, so 0:10:25.960 --> 0:10:28.880 people who are borrowing, people who are lending anyone sort 0:10:28.880 --> 0:10:31.640 of proportionately to how much you actually you're doing either 0:10:31.720 --> 0:10:34.400 those things, so how much capital you're actually borrowing or lending? 0:10:34.559 --> 0:10:37.040 In addition to this six percent, you start to get 0:10:37.040 --> 0:10:40.480 this supply of of COMP tokens, and basically that yield 0:10:40.679 --> 0:10:42.880 comes from sort of the market price of where people 0:10:42.920 --> 0:10:45.040 think comps should be trading at. So you know, if 0:10:45.040 --> 0:10:48.559 I'm earning again six percent on that USDC, them earning 0:10:48.559 --> 0:10:50.880 a few COMP tokens, and let's say compass trading at 0:10:50.920 --> 0:10:53.720 a few hundred dollars, suddenly you sort of project out 0:10:53.720 --> 0:10:56.360 these sort of two combined as with them getting both 0:10:56.400 --> 0:10:59.800 the USDC the stable point interest plus the COMP and 0:10:59.800 --> 0:11:02.160 so only my a R. It looks huge. And so 0:11:02.360 --> 0:11:04.640 people have basically been tweaking this over and over again, 0:11:04.679 --> 0:11:07.800 different ways of doing this liquidity binding where they're incentivizing 0:11:07.960 --> 0:11:10.480 growth of the of the protocol by giving away this 0:11:10.559 --> 0:11:13.040 native protocol token. And that's a large part of where 0:11:13.040 --> 0:11:14.840 you see. You know a lot of these numbers come 0:11:14.880 --> 0:11:19.840 from you call them governance tokens, but and you describe 0:11:19.840 --> 0:11:22.720 their value as being able to vote on upgrading the protocol. 0:11:23.080 --> 0:11:26.120 But obviously just voting rights typically aren't worth that much. 0:11:26.760 --> 0:11:29.720 Are we really talking about de facto equity in a 0:11:29.760 --> 0:11:32.320 different name, and as part of the part of the 0:11:32.440 --> 0:11:37.360 upgrade that one can vote for is is directing trading 0:11:37.440 --> 0:11:41.720 revenue to the token holders. Yes, this is uh, maybe 0:11:41.760 --> 0:11:44.200 a little bit of a touchy subject and defied because 0:11:44.240 --> 0:11:46.000 people do not want you want to sort of scirt 0:11:46.040 --> 0:11:48.080 around this topic. But I think a lot of a 0:11:48.080 --> 0:11:50.000 lot of people, a lot of investors definitely see it 0:11:50.040 --> 0:11:53.120 that way. Where you know, with compound, there's no company, right, 0:11:53.160 --> 0:11:55.360 there's no entity that I want to get take equity 0:11:55.360 --> 0:11:57.720 in um that is, you're going to take some some profit. 0:11:57.960 --> 0:12:00.840 But the protocol itself obviously generates ton of revenue. And 0:12:00.880 --> 0:12:02.679 so there's sort of an idea that hey, these are 0:12:02.679 --> 0:12:05.160 sort of going into the company treasury, they're on this 0:12:05.760 --> 0:12:08.440 protocol balance sheet, and if I have control over that, 0:12:08.640 --> 0:12:10.240 you know, much in the same way that you know, 0:12:10.320 --> 0:12:13.200 maybe I, you know, have governance rights in a company 0:12:13.240 --> 0:12:15.400 that has a hundred million dollars on the balance sheet, 0:12:15.679 --> 0:12:18.080 Certainly those those governance rights should be worth something, even 0:12:18.120 --> 0:12:20.520 if maybe I'm not entitled to to dividend rights at 0:12:20.559 --> 0:12:22.880 the moment, because I can vote in dividend writes down 0:12:22.920 --> 0:12:25.280 down down the road. I think one of the very 0:12:25.320 --> 0:12:29.160 earliest defect protocols. Make it out actually launched with this 0:12:29.240 --> 0:12:32.320 sort of baked in where make it out, it's a 0:12:32.320 --> 0:12:35.839 decentralized credit facility where anybody can come up. They can 0:12:35.880 --> 0:12:39.040 they can put down flateral and then they can borrow die, 0:12:39.160 --> 0:12:41.760 which is the natural stable coin, the native stable coin 0:12:41.960 --> 0:12:43.800 against that. So you can put down you know, two 0:12:44.400 --> 0:12:46.640 worth of ether, you can borrow a hundred die against it, 0:12:46.840 --> 0:12:48.480 and now you have liquidity which you can use to 0:12:48.840 --> 0:12:51.720 you know, for operating expenses, to pay taxes, to pretend 0:12:51.760 --> 0:12:53.599 to your friend whatever. You have this die which is 0:12:53.600 --> 0:12:54.760 pegged to a dollar, and you can use it for 0:12:54.840 --> 0:12:57.880 a new purpose now Maker Obviously it's the lending facilities. 0:12:57.880 --> 0:12:59.920 So if they figure out how to set rates, ray 0:13:00.000 --> 0:13:02.400 to get set by and care holders, so it's not 0:13:02.440 --> 0:13:05.520 being done programmatically and care holders basically to determine how 0:13:05.600 --> 0:13:07.920 much how much interest to charge people who want to 0:13:07.960 --> 0:13:09.720 borrow against and how people who want to make die. 0:13:10.080 --> 0:13:13.439 They also take on risk where let's say that they 0:13:13.480 --> 0:13:16.080 onboard bad collateral, they want to add you know, iron 0:13:16.120 --> 0:13:18.720 token as clatteral into maker. People who meant a bunch 0:13:18.760 --> 0:13:21.680 of die suddenly dies, is suddenly you know the price 0:13:21.679 --> 0:13:25.520 of iron, you know drops by and now you have 0:13:25.679 --> 0:13:28.440 a bunch of unbacked die, so you really want die 0:13:28.440 --> 0:13:30.600 to trade out of dollar um. Suddenly there's not enough 0:13:30.600 --> 0:13:32.480 clatteral to back that up. So where you're going to 0:13:32.559 --> 0:13:35.160 get enough collateral to sort of reback this die And 0:13:35.200 --> 0:13:38.440 the answer is that the maker protocol will mint and 0:13:38.480 --> 0:13:42.360 sell more in car in order to recollateralize itself. So 0:13:43.040 --> 0:13:45.120 in one sense, you're you're governing the protocol, but you're 0:13:45.120 --> 0:13:47.439 also taking on this risk because there's a chance you 0:13:47.520 --> 0:13:50.960 might be deluded if this this system accrues debt and 0:13:51.040 --> 0:13:53.840 so in response or you know, in compensation for that risk, 0:13:54.160 --> 0:13:56.559 and care holders also get reward and that they are 0:13:56.679 --> 0:13:59.240 entitled to all that interest that is being a crewed 0:13:59.240 --> 0:14:01.880 by the system. That interest is then used to buy 0:14:01.880 --> 0:14:04.720 back MKR off the market and you know, effectively give 0:14:04.760 --> 0:14:07.640 that back to m care holders. So MKR you know 0:14:07.720 --> 0:14:09.440 right now, you can you can look online. There's a 0:14:09.480 --> 0:14:12.320 website maker burn dot com which will tell you, you know, 0:14:12.360 --> 0:14:14.319 how much cash flow is basically being given back to 0:14:14.440 --> 0:14:16.880 end care holders, uh, you know, every single year, and 0:14:16.960 --> 0:14:18.559 it's it's pretty insane. I think the last time I 0:14:18.679 --> 0:14:20.760 checked it was maybe a hundred million dollars or two 0:14:20.760 --> 0:14:23.320 and a million dollars that is bought off the market 0:14:23.440 --> 0:14:25.840 and basically given back to end care holders. So they're 0:14:25.880 --> 0:14:28.440 a good example of one of the few protocols that 0:14:28.520 --> 0:14:30.320 it actually has those sort of cash flows turned on. 0:14:30.400 --> 0:14:32.840 But certainly to your point, there's a lot of speculation 0:14:32.920 --> 0:14:35.240 right now around m hey, when our fees going to 0:14:35.240 --> 0:14:36.920 be turned on, if they're gonna be turned down at all. 0:14:37.440 --> 0:14:39.320 I think there's a counter argument to which is, hey, 0:14:39.360 --> 0:14:41.520 these are all very nascent protocols, right you don't really 0:14:41.560 --> 0:14:43.480 don't want to be charging fees right now. You want 0:14:43.480 --> 0:14:46.080 to be incentivizing growth. It's sort of like, uh, you know, 0:14:46.160 --> 0:14:48.520 if you're an early stage startup, you don't want to 0:14:48.600 --> 0:14:51.200 charge full fee. You don't want to you know, um 0:14:51.200 --> 0:14:53.440 sort of be maximizing revenue. You want to be maximizing 0:14:53.480 --> 0:14:55.160 growth and think about how to sort of turn on 0:14:55.200 --> 0:15:13.000 revenue down the road. So the equity question kind of 0:15:13.000 --> 0:15:16.520 reminds me of one of the bigger issues hovering over 0:15:16.560 --> 0:15:19.280 the entire space, which is I mean, defy in my 0:15:19.320 --> 0:15:22.840 mind is kind of like fintech on steroids. And I 0:15:22.920 --> 0:15:24.680 used to cover fintech. I used to cover peer to 0:15:24.760 --> 0:15:28.080 peer lending, and a lot of the use case for 0:15:28.560 --> 0:15:31.840 that new industry was this idea of we're going to 0:15:31.920 --> 0:15:34.040 cut out the middleman and we're going to directly connect 0:15:34.080 --> 0:15:36.800 lenders with borrowers, and we have all this new, cool 0:15:36.920 --> 0:15:39.480 technology that's going to allow us to do it. I'm 0:15:39.520 --> 0:15:42.120 not saying it's a one for one analogy, but a 0:15:42.160 --> 0:15:44.960 lot of the conversation around DeFi reminds me of that. 0:15:45.080 --> 0:15:49.120 So my question is how much of defy is about 0:15:49.160 --> 0:15:52.560 the technology versus how much of it is about doing 0:15:52.600 --> 0:15:58.040 something outside the existing financial system and existing regulation. I 0:15:58.080 --> 0:16:00.320 guess a shorter way of putting it is like, how 0:16:00.400 --> 0:16:03.520 much of this is regulatory arbitrage and giving people exposure 0:16:03.560 --> 0:16:07.200 to financial assets that would be more difficult or more 0:16:07.200 --> 0:16:10.760 expensive for them to get in a in the traditional 0:16:10.800 --> 0:16:15.560 financial system. Yeah, that's another great question, and I think 0:16:15.600 --> 0:16:19.200 it's frankly a large part of the appeal of defied. 0:16:19.920 --> 0:16:22.760 I would say, you know, regulatory arbitrage. I think at 0:16:23.120 --> 0:16:25.600 face value, maybe sounds like a bad word, but when 0:16:25.600 --> 0:16:27.560 you look at something like Uber, or you're looking at 0:16:27.560 --> 0:16:31.200 something like Airbnb, where you know regulations were um, you know, 0:16:31.200 --> 0:16:33.880 probably overly arduous and probably you know, hampering the growth 0:16:33.880 --> 0:16:36.600 of this market. I think it's interesting about DEFY. There's 0:16:36.600 --> 0:16:40.720 a couple of main components, right, one being the permissionless access. 0:16:40.760 --> 0:16:43.320 So anyone around the world can go and use these 0:16:43.320 --> 0:16:46.200 different protocols any time of day, um, any time at night, 0:16:46.240 --> 0:16:49.440 anytime anywhere, who you are, you can go and and trade, 0:16:49.520 --> 0:16:52.200 you can go and borrow. That's a pretty powerful, I 0:16:52.240 --> 0:16:54.400 think concept that you don't have to be living in 0:16:54.440 --> 0:16:56.320 a particular area. You don't have to be, you know, 0:16:56.360 --> 0:16:58.320 of a certain status or be able to post particular 0:16:58.520 --> 0:17:00.840 collateral order use any these things, and so you have 0:17:00.880 --> 0:17:03.520 this truly sort of global market from day one. The 0:17:03.560 --> 0:17:05.560 other as is maybe you were sort of leading to 0:17:05.720 --> 0:17:07.520 is sort of permission list to build on top of. 0:17:07.600 --> 0:17:09.680 And that's where I think this whole thing gets really exciting. 0:17:09.720 --> 0:17:11.840 Where I don't think he incorporated. I don't have to 0:17:11.880 --> 0:17:14.520 live in a particular locale, I don't have to beat 0:17:14.520 --> 0:17:17.359 certain requirements. As long as I can write software, I 0:17:17.400 --> 0:17:20.159 can go and experiment. And I think that sort of 0:17:20.160 --> 0:17:22.680 permission list innovation is sort of what made the Internet 0:17:22.920 --> 0:17:24.679 what it is. Where I don't have to go and 0:17:24.720 --> 0:17:27.119 you know, apply to the SEC for the license to 0:17:27.560 --> 0:17:30.040 you know, broadcast and you know, buy all this equipment 0:17:30.119 --> 0:17:32.199 to you know, sort of a television station. I can 0:17:32.240 --> 0:17:34.359 just go and take my camera and start posting it 0:17:34.400 --> 0:17:36.360 to YouTube. And that's where you sort of get this 0:17:36.359 --> 0:17:39.640 this consumer surplus where you know, these entrepreneurs all around 0:17:39.640 --> 0:17:43.480 the world are constantly devising new, better financial services and 0:17:43.720 --> 0:17:45.800 they have a very low bar in order actually deploy 0:17:45.880 --> 0:17:48.720 them and make them accessible to anyone around the world. 0:17:48.840 --> 0:17:51.439 So you have not only sort of permission less access, 0:17:51.480 --> 0:17:54.639 but you also have permission's access for builders who can 0:17:54.680 --> 0:17:56.399 again just use this thing as long as they can 0:17:56.480 --> 0:17:59.480 naturally write software. And the third thing that think makes 0:17:59.480 --> 0:18:02.679 it interesting is sort of transparency around it. You know, 0:18:02.680 --> 0:18:05.000 people sort of against site sort of dozen eight, where 0:18:05.480 --> 0:18:07.080 you know, you had all this sort of crazy debt, 0:18:07.119 --> 0:18:09.159 all these you know, crazy derivatives that we're piling up, 0:18:09.160 --> 0:18:11.400 and you know, sort of after the crash, we started 0:18:11.520 --> 0:18:14.080 saw that many different parts of the US financial system 0:18:14.080 --> 0:18:16.439 were levered like three point five to one and that 0:18:16.520 --> 0:18:18.680 wasn't really revealed to us until after the crash because 0:18:18.680 --> 0:18:20.280 there was not really a lot of transparency. It was 0:18:20.320 --> 0:18:22.920 just chechnically wasn't really possible to see all the different 0:18:22.960 --> 0:18:26.600 instruments in all different ways people were positioned with Defy, 0:18:26.640 --> 0:18:28.080 you know, as I was sort of alluding to early 0:18:28.160 --> 0:18:30.919 with Maker. You can go to any of these websites 0:18:31.000 --> 0:18:33.680 right now. You can look at the Ethereum blockchain itself 0:18:33.680 --> 0:18:35.959 and pull the data and can see exactly how much 0:18:35.960 --> 0:18:37.840 did his issue. You can see exactly, you know, the 0:18:37.840 --> 0:18:40.240 credit balance of every account Um. You can see the 0:18:40.280 --> 0:18:42.359 revenues of Maker. You can see who's going to you know, 0:18:42.400 --> 0:18:44.879 get paid, who's going to get liquidated, etcetera. And so 0:18:44.960 --> 0:18:48.280 this thing is a percent transparent and a hunder percent oudiable, 0:18:48.560 --> 0:18:51.399 and that just princess this huge sort of step function 0:18:51.520 --> 0:18:54.400 leap over what is possible today where you can have 0:18:54.480 --> 0:18:56.280 people that you know, maybe make an a t I 0:18:57.160 --> 0:18:59.560 that is up or available some of the time, and 0:18:59.600 --> 0:19:01.720 you sort of to trust that the data is available, 0:19:01.960 --> 0:19:03.959 but sort of that the core base layer is not 0:19:04.119 --> 0:19:06.560 auditable and it's not transparent the same way Um it 0:19:06.680 --> 0:19:08.399 is with a lot of the product products that are 0:19:08.400 --> 0:19:11.560 being built in Ethereum are in the Ethereum Defy ecosystem. 0:19:11.640 --> 0:19:13.680 So those are sort of how I think about you know, 0:19:13.680 --> 0:19:16.240 a lot of value props of Defy. The fourth obviously 0:19:16.280 --> 0:19:18.480 being and sort of the you know, direct analogy to 0:19:18.520 --> 0:19:22.320 fintech is programmability. The difference you know, being with with 0:19:22.400 --> 0:19:24.280 defy is I don't have to rely on our particular 0:19:24.280 --> 0:19:27.760 company to grant me API access to you know, be 0:19:27.920 --> 0:19:31.000 be available when I'm available, to have particular up time 0:19:31.520 --> 0:19:34.560 to do whatever is I needed to do. The API 0:19:34.680 --> 0:19:36.880 is sort of embedded into the into the contract, into 0:19:36.920 --> 0:19:39.439 the product itself. So as long as you know the 0:19:39.480 --> 0:19:42.800 Ethereum blockchain is running, which it almost always is, you 0:19:42.840 --> 0:19:44.600 can go and call into any of these contracts as 0:19:44.760 --> 0:19:47.199 as a as a as a programmer and actually go 0:19:47.359 --> 0:19:50.560 and build new applications. And so you know, those are 0:19:50.560 --> 0:19:52.240 sort of a few of the core value props when 0:19:52.240 --> 0:19:54.399 we think about defy, and certainly there's a lot of 0:19:54.400 --> 0:19:56.680 overlap with with fintech, but there's a lot of things 0:19:56.680 --> 0:19:59.320 that are new and sort of expand the market beyond 0:19:59.400 --> 0:20:02.200 what you know, something like a stripe could do, for example. 0:20:02.560 --> 0:20:05.040 So pretty soon I want to get to the question of, 0:20:05.080 --> 0:20:08.920 like what are these tools being used for besides say speculation, 0:20:09.000 --> 0:20:11.480 because you know, you mentioned maker and I could post 0:20:11.480 --> 0:20:14.640 collateral and get die. But my impression is probably most 0:20:14.680 --> 0:20:17.240 people do that, just use that money to buy more 0:20:17.280 --> 0:20:20.920 coins as opposed to anything resembling business. But before we 0:20:20.960 --> 0:20:23.399 get to that, I like, here's another question I have. 0:20:23.480 --> 0:20:25.320 So we'll get there. But here's another question I have. 0:20:25.920 --> 0:20:30.200 Can you explain impermanent loss? Because I've like I had 0:20:30.240 --> 0:20:33.560 this after like people have done threads and explained like 0:20:33.920 --> 0:20:38.000 you know, the unit swap liquidity providers, and it's like, oh, 0:20:38.320 --> 0:20:41.440 just can you explain what that's all about? Yeah? Yeah, 0:20:41.560 --> 0:20:45.119 So I permanent loss refers to this future of this 0:20:45.200 --> 0:20:48.320 byproduct of UM what are called automated market makers, and 0:20:48.400 --> 0:20:52.359 so automated market makers are smart contracts that perform the 0:20:52.400 --> 0:20:55.960 function of a normal market maker on a normal order 0:20:56.000 --> 0:20:59.080 book based exchange. So you know, normally, let's say you 0:20:59.119 --> 0:21:02.320 want to go and I don't know, trade Apple stock 0:21:02.640 --> 0:21:05.760 right on on the exchange of your choice. Maybe you 0:21:05.760 --> 0:21:07.240 want to buy a certain price, you want to sell 0:21:07.280 --> 0:21:09.399 at a certain price. You have a market maker who's 0:21:09.440 --> 0:21:12.360 holding inventory that is quoting you on both sides right there, 0:21:12.480 --> 0:21:14.960 posting orders to buy, the posting orders to sell, to 0:21:15.119 --> 0:21:17.680 provide liquidity to this market so that if anyone wants 0:21:17.720 --> 0:21:20.080 to show up, they can buy or sell Apple stock 0:21:20.119 --> 0:21:22.439 at a reasonable price. UM. Now the same sort of 0:21:22.440 --> 0:21:25.200 market makers exist in crypto, where you go on coin 0:21:25.240 --> 0:21:27.879 base and you have market makers holding bitcoin inventory as 0:21:27.880 --> 0:21:30.720 dollar inventory, and they're sort of posting these orders to 0:21:30.760 --> 0:21:33.239 make sure that there's sufficient liquidity in the markets. An 0:21:33.440 --> 0:21:37.000 m M basically replaces that function with a formula. Sort of. 0:21:37.000 --> 0:21:38.720 The most popular style to MM is what we call 0:21:38.760 --> 0:21:41.760 a constant product and M, meaning instead of asking a 0:21:41.760 --> 0:21:43.800 market maker, hey, you know what kind of quote can 0:21:43.840 --> 0:21:45.680 you give me if I want to buy or sell 0:21:45.880 --> 0:21:49.320 hundred shares of apple, the answer is whatever, the formula 0:21:49.400 --> 0:21:51.560 sort of spits out, and so that's the quote that 0:21:51.560 --> 0:21:54.200 you're going to get. And the way this works again 0:21:54.280 --> 0:21:57.280 in a constant product sense is, let's go with another simple, 0:21:57.320 --> 0:22:00.399 really simple example. Let's say I want to a market 0:22:00.400 --> 0:22:06.120 aker for USDC market I can go, I can take 0:22:06.160 --> 0:22:09.119 some eth. I can take some USDC equal proportions and 0:22:09.200 --> 0:22:12.119 deposit it into a smart contract like unit swap, and 0:22:12.160 --> 0:22:14.359 now anybody can buy or sell against me. Right, this 0:22:14.640 --> 0:22:17.679 smart contract is taking my assets, and now they're basically 0:22:17.680 --> 0:22:20.360 acting as the marketingker're acting as as the quote provider, 0:22:20.600 --> 0:22:23.199 and anybody can buy or sell any amount of asset 0:22:23.280 --> 0:22:25.320 through the smart contract any time they want, and the 0:22:25.320 --> 0:22:27.600 smart contract will give them a quote. So in this 0:22:27.720 --> 0:22:30.960 really simple example, um that. Again, the constant product formula 0:22:31.160 --> 0:22:34.199 is um x times y equals k UM. So in 0:22:34.240 --> 0:22:37.360 this example, let's say I put in ten and ten 0:22:37.480 --> 0:22:40.960 USDC assuming E is one dollar, so ten times ten 0:22:41.119 --> 0:22:44.119 is a hundred. So no matter what sort of amount 0:22:44.119 --> 0:22:46.320 that you want to buy, at the end, there the 0:22:46.440 --> 0:22:49.040 amount of ether left in the smart contract times the 0:22:49.080 --> 0:22:51.119 amount of USDC left in the smart contract has to 0:22:51.200 --> 0:22:54.440 equal a hundred. So now the question is, you know, again, 0:22:54.520 --> 0:22:56.040 let's say I want to go and let's say I 0:22:56.080 --> 0:22:58.600 want to buy five Ether. I'm a new person. I 0:22:58.640 --> 0:23:00.840 want to buy five ether from the smart con tracked. Well, 0:23:01.080 --> 0:23:02.720 so at the end of this transaction, there's gonna be 0:23:02.720 --> 0:23:05.080 five e F left, but five times something has to 0:23:05.119 --> 0:23:08.200 equal a hundred, so there's gonna be USDC left. So 0:23:08.600 --> 0:23:10.719 there's twenty U s dc. So let's say there's ten 0:23:10.800 --> 0:23:13.880 U s dc five, So my quote is basically two 0:23:14.000 --> 0:23:16.760 U s DC per. So this thing is basically able 0:23:16.800 --> 0:23:18.639 to offer you a quote for any amount of asset 0:23:18.640 --> 0:23:20.280 that you want to buy yoursell through a smart contract. 0:23:20.600 --> 0:23:23.200 Now the problem is, again, let's say you're that LP. 0:23:23.359 --> 0:23:26.760 You're the person who put in ten and ten USDC. Well, 0:23:26.920 --> 0:23:29.280 now you've suddenly sold a bunch of eth, as eth 0:23:29.320 --> 0:23:32.280 has presumably gone up in market, and so you're worse 0:23:32.320 --> 0:23:34.399 off than if you had just held EATH and USDC. 0:23:34.880 --> 0:23:38.320 You have five, you have twenty U s DC. That's 0:23:38.359 --> 0:23:40.719 only thirty dollars. You would have had forty dollars if 0:23:40.720 --> 0:23:43.359 you had just stayed in. Permanent loss refers to this 0:23:43.440 --> 0:23:46.439 concept that in a concept product market maker, as the 0:23:46.480 --> 0:23:50.560 market moves, you will have you know, less busy, less assets, 0:23:50.640 --> 0:23:52.800 less money than if you just held on those assets, 0:23:53.000 --> 0:23:55.119 um and not put them into this smart contract. They 0:23:55.200 --> 0:23:58.679 self permanent. Yes, so here here's the caveat right, this 0:23:58.680 --> 0:24:01.600 would normally be an absolute a terrible value proposition, right 0:24:02.200 --> 0:24:03.840 you would you lose money as soon as you start 0:24:03.880 --> 0:24:06.360 to put assets into this smart contract. The way am 0:24:06.480 --> 0:24:08.720 ms make up for this is by charging fees. So 0:24:09.200 --> 0:24:12.200 Unit Swap for example, charges thirty bits on every trade. 0:24:12.760 --> 0:24:16.160 And the idea is that with enough volume that those 0:24:16.240 --> 0:24:18.640 fees will begin to make up for any of any 0:24:18.680 --> 0:24:21.240 of that permanent loss. And additionally, you know you sort 0:24:21.240 --> 0:24:24.000 of want uh what we call mean reverting assets, so 0:24:24.400 --> 0:24:26.800 you actually want a lot of volatility because that's gonna 0:24:26.840 --> 0:24:28.760 encourage people to trade, that's gonna allow you to your 0:24:28.840 --> 0:24:31.119 crew fees. But ultimately, at the at the end of 0:24:31.119 --> 0:24:33.240 the day, UM, you want those assets to sort of 0:24:33.280 --> 0:24:34.920 return to the ratio that they were when you put 0:24:34.920 --> 0:24:36.840 them in initially, UM, And that's how you sort of 0:24:37.160 --> 0:24:39.560 avoid impermented loss. But to your point, UM, if those 0:24:39.600 --> 0:24:42.400 assets never returned to that initial ratio, So let's say 0:24:42.440 --> 0:24:46.080 you become a liquidity provider for ether beneath is ten 0:24:46.119 --> 0:24:48.960 dollars and he goes up to a thousand dollars, it 0:24:49.000 --> 0:24:50.560 is probably not going to go back to a hundred dollars. 0:24:50.600 --> 0:24:52.520 You've you've you've probably would have been better off just 0:24:52.520 --> 0:24:55.119 just holding onto that ether instead of putting into a 0:24:55.160 --> 0:24:58.320 smart contract. But with enough volume, you can in theory 0:24:58.359 --> 0:25:00.679 make enough on fees or to common for that for 0:25:00.760 --> 0:25:03.720 that loss. So at a very high level, that's sort 0:25:03.720 --> 0:25:05.960 of how the whole m m impermitted lass sort of 0:25:05.960 --> 0:25:08.159 the thing works is you're sort of banking that's going 0:25:08.240 --> 0:25:10.159 to be enough volume, so you're gonna be able to 0:25:10.119 --> 0:25:12.080 crue enough fees in order to offset sort of the 0:25:12.160 --> 0:25:16.119 drift and asset prices. Okay, I have a question, um, 0:25:16.160 --> 0:25:18.440 and it sort of feeds into where we want to 0:25:18.480 --> 0:25:21.280 go next, which is the real world applications and what 0:25:21.280 --> 0:25:24.920 people are actually doing in this space. But it feels 0:25:25.040 --> 0:25:29.440 like there is a huge obstacle to Defy going mainstream, 0:25:29.520 --> 0:25:33.200 just in the fact that it seems very, very complicated. 0:25:33.320 --> 0:25:37.560 So what you were just discussing about impermanent loss. Um, 0:25:37.640 --> 0:25:40.280 it feels like I am going to have to go 0:25:40.359 --> 0:25:43.439 back and really listen to that conversation a couple of 0:25:43.440 --> 0:25:46.480 times in order to wrap my head around it. How 0:25:46.560 --> 0:25:49.879 difficult is it going to be for these types of 0:25:49.960 --> 0:25:53.560 concepts and this type of space to actually go mainstream 0:25:53.600 --> 0:25:56.280 and attract a lot of people if you're asking them 0:25:56.480 --> 0:26:00.800 to participate with a level of understand ending that like 0:26:01.400 --> 0:26:04.560 I would say, borders sort of on obsessive, like just 0:26:04.600 --> 0:26:07.119 listening to people who come on to all Blots before, 0:26:07.200 --> 0:26:09.520 like the yield Farming episode. These are people who are 0:26:09.640 --> 0:26:14.440 intensely into the space. How are you going to attract 0:26:14.480 --> 0:26:19.720 people who are slightly outside of it? Yeah? I think 0:26:20.200 --> 0:26:23.440 right now, there's definitely a huge sort of pro sumer 0:26:23.720 --> 0:26:26.960 power user and element to defy where there are people 0:26:26.960 --> 0:26:29.560 who sort of live and breathe this stuff, and you know, 0:26:29.560 --> 0:26:31.879 they sort of biased towards being active with it, right, 0:26:31.920 --> 0:26:34.560 Like I like attending my yield farms, and I like 0:26:34.600 --> 0:26:36.520 sort of playing around with new stuff. And for the 0:26:36.520 --> 0:26:39.000 majority of people when they think about you know, financial services, 0:26:39.000 --> 0:26:41.159 that's not what they want, right They want to you know, 0:26:41.240 --> 0:26:43.320 by by S and P and put it in there 0:26:43.320 --> 0:26:45.280 for O, n K and and not really really think 0:26:45.280 --> 0:26:48.200 about it. And so I think the answers comes from from, 0:26:48.480 --> 0:26:51.399 you know, a couple different advantage points. One is just 0:26:51.440 --> 0:26:53.879 from a sort of offerings perspective. I think they are 0:26:53.880 --> 0:26:56.439 could be more and more abstractions built on many of 0:26:56.480 --> 0:26:59.359 these protocols such that the end user doesn't really end 0:26:59.400 --> 0:27:01.919 up thinking this kind of thing. And the impermanent loss example, 0:27:02.320 --> 0:27:05.800 you can sell off some of that yield to to 0:27:05.960 --> 0:27:07.880 pay for, you know, any impermanent loss that you might 0:27:07.960 --> 0:27:10.879 you might experience, or you might buy put some calls 0:27:10.920 --> 0:27:13.080 so that you know, you can sort of hedge out 0:27:13.119 --> 0:27:15.720 some of that volatility that you're exposed to. Ultimately that 0:27:15.720 --> 0:27:18.679 can be you know, bundled inside of a structured product 0:27:18.680 --> 0:27:20.640 and sort of give into an end user. And so 0:27:20.960 --> 0:27:22.520 I'm not thinking about you know, sort of what's in 0:27:22.560 --> 0:27:25.120 this basket of goods that then I'm buying. I just know, hey, 0:27:25.240 --> 0:27:27.639 I want to know, earn some yield on asset x 0:27:27.760 --> 0:27:29.199 y z, and then maybe this is a good way 0:27:29.240 --> 0:27:31.320 to do it. I think actually the stable coin market 0:27:31.320 --> 0:27:34.600 is a great example where you know, cryptocurrency users are 0:27:34.640 --> 0:27:37.240 willing to pay you a large amount of interest in 0:27:37.320 --> 0:27:39.000 order to get leverage on some of these assets. Right 0:27:39.040 --> 0:27:41.200 like you know, um to the futures markets often hit 0:27:41.480 --> 0:27:45.600 three annualized or even lending markets hit hr in order 0:27:45.600 --> 0:27:48.000 to borrow stable coins to to get leverage on some 0:27:48.040 --> 0:27:50.800 of these assets. But you know, if you're not a 0:27:50.800 --> 0:27:53.800 tryptop person, if you just want to you know, uh, 0:27:53.840 --> 0:27:55.520 sort of earn some interest on some cash that you're 0:27:55.520 --> 0:27:58.040 he laying around, you can go to you know, services 0:27:58.080 --> 0:28:01.040 like coin base or block by, and you know, they 0:28:01.080 --> 0:28:03.400 will take your USDC and they will lend it out 0:28:03.440 --> 0:28:05.159 for you and you don't have to think about, you know, 0:28:05.160 --> 0:28:07.240 anything that's sort of going on under the hood. I 0:28:07.240 --> 0:28:09.680 think actually a great example of this is in China 0:28:10.000 --> 0:28:12.200 there's a company called Matrix Suport which actually want to 0:28:12.200 --> 0:28:15.359 portfolio companies and they've sort of pioneered this swortter we 0:28:15.480 --> 0:28:18.439 called c D five. So it's half centralized, half decentralized, 0:28:18.480 --> 0:28:22.400 where it's a custodial service. You know, they own your bitcoin, 0:28:22.440 --> 0:28:24.240 they own your USDC, they sort of take care of 0:28:24.240 --> 0:28:26.439 it for you. You can't lose it. But under the 0:28:26.480 --> 0:28:28.760 hood they'll go out and they'll yield form for you. 0:28:28.800 --> 0:28:31.880 So they'll go put your USDC into compound, they'll take 0:28:31.880 --> 0:28:34.159 that comp they'll sell it for more u SCC, and 0:28:34.200 --> 0:28:35.480 then they'll go get to give it back to you 0:28:35.480 --> 0:28:36.800 at the end of the day. So from an end 0:28:36.880 --> 0:28:40.600 user perspective, you don't sort of see what's actually you know, happening. 0:28:40.840 --> 0:28:42.440 You sort of think about, you know, the yield that 0:28:42.520 --> 0:28:45.120 that's that you're getting. And so for a lot of users, 0:28:45.160 --> 0:28:46.760 I suspect that's going to be the way they're going 0:28:46.800 --> 0:28:49.000 to use defied much in the same way. You know, 0:28:49.040 --> 0:28:51.920 most people they don't think about trading bonds or you know, 0:28:51.960 --> 0:28:55.200 selling your complicated drivetives. They just think about putting money 0:28:55.200 --> 0:28:57.000 in the bank account, and you know, the bank sort 0:28:57.040 --> 0:28:59.400 of handles how to get actually interest on it. So 0:28:59.800 --> 0:29:02.160 I would say there's still a good amount of abstraction 0:29:02.280 --> 0:29:04.680 that for meaning to to make this stuff really palable. 0:29:04.680 --> 0:29:07.120 To to end users, not even talking about a lot 0:29:07.160 --> 0:29:09.400 of the transaction costs and all of the scalability issues. 0:29:09.480 --> 0:29:11.200 But I just like that's going to be a large 0:29:11.240 --> 0:29:13.320 part of the way people actually get exposure to this thing. 0:29:14.520 --> 0:29:16.560 Just on that note, we sort of touched on this before, 0:29:16.840 --> 0:29:19.920 um with the fintech angle. But if it's going to 0:29:20.000 --> 0:29:22.200 be similar to putting your money in a bank and 0:29:22.240 --> 0:29:25.520 just sort of trusting the process, isn't that where you 0:29:25.600 --> 0:29:28.840 kind of need regulation or at least you need to 0:29:29.080 --> 0:29:32.680 have some sort of faith in the middleman or the 0:29:32.720 --> 0:29:36.320 process that's doing this for you. So I guess I'm 0:29:36.360 --> 0:29:39.200 just curious, like how you swear like people not necessarily 0:29:39.280 --> 0:29:42.520 understanding all the details of the process, but also having 0:29:42.600 --> 0:29:47.320 faith in a decentralized process or method of doing this. 0:29:48.520 --> 0:29:52.240 I think it's about having exposure and having the ability 0:29:52.360 --> 0:29:54.960 to sort of go down to the middle and get 0:29:54.960 --> 0:29:57.080 access to it or audit it or do whatever you want. 0:29:57.480 --> 0:29:59.440 But there's always going to be people who are not 0:29:59.440 --> 0:30:01.080 gonna want to be their own bank. I always hated 0:30:01.120 --> 0:30:02.920 that that slogan that I think a lot of crypto 0:30:02.920 --> 0:30:05.800 people push because it's just not something that is appealing 0:30:05.920 --> 0:30:07.960 or feasible for a lot of people. I think of 0:30:08.000 --> 0:30:10.840 it a little bit sort of like email, where most 0:30:10.840 --> 0:30:14.760 people don't run their own email server. Most people don't 0:30:14.800 --> 0:30:17.560 have their own email client. They use a hosted service 0:30:17.640 --> 0:30:20.360 like Gmail, and Gmail sort of runs the email server 0:30:20.440 --> 0:30:22.880 for them. But email itself is still an open protocol. 0:30:22.920 --> 0:30:26.000 Anyone can go and run their own email server and 0:30:26.040 --> 0:30:27.480 I can go send you an email, You can go 0:30:27.560 --> 0:30:30.240 send me an email. That open protocol is always available 0:30:30.280 --> 0:30:32.360 to us if you want to use it. But of course, 0:30:32.400 --> 0:30:34.320 for convenience sake, a lot of people are gonna end 0:30:34.400 --> 0:30:35.720 up using, you know, a lot of these sort of 0:30:35.760 --> 0:30:37.760 hosted services at the end of the day. So the 0:30:37.800 --> 0:30:40.320 beauty is you have this sort of global permission list 0:30:41.400 --> 0:30:45.160 seven auditable um um settlement layer that anybody can tap into, 0:30:45.240 --> 0:30:47.880 and again that allows sort of permission permission list innovation. 0:30:48.240 --> 0:30:50.440 But you can still have these really nice financial services 0:30:50.440 --> 0:30:52.400 that sit on top of it that you know, give 0:30:52.600 --> 0:30:54.520 people a really simple yield that's when they get access 0:30:54.560 --> 0:30:57.000 to or you know, really let them let them really easily, 0:30:57.280 --> 0:30:59.200 you know, borrow money if that's what they want. Um. 0:30:59.240 --> 0:31:01.400 The two don't ness searily have to stay in conflict. 0:31:15.800 --> 0:31:18.960 So you brought up something, and actually it's come up 0:31:18.960 --> 0:31:21.600 a couple of times that have been maybe very curious about. 0:31:21.640 --> 0:31:24.040 So it's like, if I look on coin get go 0:31:24.360 --> 0:31:28.240 the top volume pair pairs traded on unit spop right now, 0:31:28.600 --> 0:31:34.200 it looks like fifty over is the U s DC pair, 0:31:34.920 --> 0:31:39.920 another five percent is the tether pair, another four percent 0:31:40.040 --> 0:31:43.320 is actually the U s DC tether pair. A lot 0:31:43.360 --> 0:31:47.920 of this so called defy is built on centralized um 0:31:48.040 --> 0:31:50.680 stable coins. So this is literally like a token that 0:31:50.760 --> 0:31:54.560 in theory we were told is represented by a dollar's 0:31:54.600 --> 0:31:57.640 worth of dollar denominated assets held at a bank somewhere. 0:31:58.240 --> 0:32:01.120 And then there is a decentralized able coin called die 0:32:01.160 --> 0:32:05.440 which is backed by crypto assets, except from my understanding 0:32:05.480 --> 0:32:08.960 even that is significantly as one of the backing assets 0:32:09.280 --> 0:32:13.160 us DC. So how much is this whole thing still 0:32:13.200 --> 0:32:17.800 like sort of like built on a highly centralized regulated 0:32:17.840 --> 0:32:23.280 asset that also could be significantly regulated further. Yeah, the 0:32:23.560 --> 0:32:26.760 stable coin risk is a real one, you know, maybe 0:32:26.760 --> 0:32:28.840 for for listeners who aren't to wear a stable coin 0:32:28.960 --> 0:32:32.120 such as USCC, which I realize I've been referencing quite frequently. 0:32:32.560 --> 0:32:36.400 It's a token that lives on ethereums as well as 0:32:36.440 --> 0:32:38.960 a few other blockchains that is backed one to one 0:32:39.120 --> 0:32:41.200 by dollars that are in a you know, audited US 0:32:41.240 --> 0:32:44.760 bank account. So one dollar comes in, one USDC is minted, 0:32:45.080 --> 0:32:48.040 and simultaneously you can then go and redeem that USDC 0:32:48.240 --> 0:32:51.160 so you can, um, you know, give centers, need the 0:32:51.200 --> 0:32:54.360 name of the company given the USDC and they'll redeem it. 0:32:54.400 --> 0:32:56.240 And and why are you you know, US dollars to 0:32:56.280 --> 0:32:58.760 the bank account that you want. So really really simple, 0:32:58.960 --> 0:33:01.640 you know, one to one back. Now, the problem is 0:33:02.680 --> 0:33:04.440 this is sort of you know a little bit of 0:33:04.560 --> 0:33:07.160 a golden age of of this is sort of pure 0:33:07.520 --> 0:33:10.200 regulatory arbitrage right where um, if I want to go 0:33:10.360 --> 0:33:13.280 and you know, send a million dollars to you Joe, 0:33:13.520 --> 0:33:18.000 you know, throw a wire or to paypaler or whatever, yeah, 0:33:18.280 --> 0:33:20.600 we'll lose that up. You know, I have to go 0:33:20.680 --> 0:33:22.680 through m K, I C A, m L. We have 0:33:22.760 --> 0:33:25.680 to be using you know, um, everyone who's who's in 0:33:25.680 --> 0:33:28.040 the sort of the middle party is being MSB. There's 0:33:28.040 --> 0:33:30.440 a lot of regulation in between to make sure maybe 0:33:30.440 --> 0:33:33.840 bad actors can't use this with USDC. Once it's minted, 0:33:34.280 --> 0:33:35.800 I can go and send it to you, you know, 0:33:35.800 --> 0:33:38.960 on chain it's pseudonymous um, you're just one address. I'm 0:33:39.000 --> 0:33:41.280 one address, and really the only the k I c 0:33:41.400 --> 0:33:44.240 aml apart takes place off chain. Sou if you want 0:33:44.240 --> 0:33:46.080 to go take that million dollars and you want to 0:33:46.080 --> 0:33:48.200 then want to go but redeem it, then you have 0:33:48.240 --> 0:33:50.240 to do ky C. But in the interim, you know, 0:33:50.280 --> 0:33:52.720 it's all sort of being transferred on chain. There's always 0:33:52.720 --> 0:33:55.800 this risk that and we see this occasionally where you know, 0:33:55.920 --> 0:33:58.880 USDC and and TELL both have the ability to to 0:33:58.960 --> 0:34:02.120 blacklist and freeze as so if they determine that you know, 0:34:02.160 --> 0:34:04.440 these funds were sees as part of a hack, or 0:34:04.520 --> 0:34:07.760 maybe they're being used for money laundering or funding terrorism. 0:34:07.760 --> 0:34:10.400 Granted this is a very very very small percentage of 0:34:10.440 --> 0:34:12.759 all the sort of activity that's happening, they can say, hey, 0:34:12.760 --> 0:34:16.640 actually these tokens are frozen, they're not redeemable anymore. We're 0:34:16.640 --> 0:34:18.759 going to you know, it would be like you know, 0:34:18.920 --> 0:34:21.480 you your bank account is pros and sort of functioning 0:34:21.520 --> 0:34:24.200 the same thing. And so there's always this risk that hey, 0:34:24.239 --> 0:34:27.800 that might happen into Maker or compound or unit spop 0:34:27.880 --> 0:34:30.440 or any of these services where they're sort of reliant 0:34:30.440 --> 0:34:32.440 on a stable coin right now. Over time I think 0:34:32.440 --> 0:34:35.160 sensible regulation will come around. Hey, how are these thing 0:34:35.200 --> 0:34:37.840 is actually going to interact with the traditional and financial system. 0:34:37.880 --> 0:34:39.600 I certainly don't think it's going to be, you know, 0:34:39.640 --> 0:34:44.080 everyone needing constant, unchain financial surveillance all the time. But 0:34:44.160 --> 0:34:46.000 in the interim it is sort of this this weird 0:34:46.040 --> 0:34:48.160 place where there's always a little bit of risk that 0:34:48.160 --> 0:34:50.359 that something like that might happen. I think to your 0:34:50.400 --> 0:34:53.120 point that sort of speaks the need for something like Die, 0:34:53.160 --> 0:34:57.160 which right now is has a percentage of it's of 0:34:57.200 --> 0:35:00.759 its backing in USDC for the purpose of of stabilizing 0:35:00.760 --> 0:35:03.680 it um. So certainly they could get rid of USDC tomorrow, 0:35:04.000 --> 0:35:07.120 but basically die with trade above a peg because people 0:35:07.120 --> 0:35:11.160 like to take that USDC and quickly arbitrazed Die by 0:35:11.280 --> 0:35:13.359 minting it when it's above the peg and selling it 0:35:13.400 --> 0:35:16.040 and sort of capturing that spread. So it's sort of 0:35:15.719 --> 0:35:17.799 at this trade off for it. You can have that 0:35:17.800 --> 0:35:20.160 that stability, you can have that, or you can have 0:35:20.280 --> 0:35:23.279 that decentralized stable coin. But if you want to be 0:35:23.440 --> 0:35:26.480 perfectly stable, if you want to be really not volatile, 0:35:26.719 --> 0:35:28.120 there's a little bit of a crut right now. We're 0:35:28.160 --> 0:35:30.719 sort of depending on USDC. I think most of these 0:35:30.760 --> 0:35:33.919 teams have plans to gradually wean off of these these 0:35:34.040 --> 0:35:36.680 centralized stable coins. Is they see these same sort of risks, 0:35:36.920 --> 0:35:38.759 But you're right that right now it is a risk 0:35:38.760 --> 0:35:42.080 in the in the in the ecosystem. So this reminds 0:35:42.080 --> 0:35:45.360 me of something else I've been wondering. But to what 0:35:45.520 --> 0:35:51.680 extent is Bitcoin collateralizing a lot of these defy um 0:35:51.719 --> 0:35:55.760 operations or trades or industries through the stable coin channel, 0:35:55.800 --> 0:35:59.120 And like, if that's actually happening, does that mean that 0:35:59.239 --> 0:36:03.080 crypto because defy seems to be such a dynamic space, 0:36:03.239 --> 0:36:06.680 does that mean that defy like is eventually going to 0:36:07.120 --> 0:36:10.440 have to outgrow Bitcoin? Or I guess another way of 0:36:10.440 --> 0:36:13.319 saying it is like, by definition, you can't have a 0:36:13.400 --> 0:36:17.920 finite pool of collateral in the form of bitcoin um 0:36:17.960 --> 0:36:22.600 that's being used in a system that's growing exponentially. Does 0:36:22.600 --> 0:36:25.480 that make sense? That does make sense? I mean, I 0:36:25.520 --> 0:36:28.320 think the way I sort of think about purposes or 0:36:28.360 --> 0:36:31.160 sort of don't. I've been discussing what for sort of 0:36:31.160 --> 0:36:34.400 three main buckets, one of them just being financial services 0:36:34.560 --> 0:36:37.440 for crypto assets. So by and large, a lot of 0:36:37.440 --> 0:36:39.520 the services that you see and defy today are for 0:36:39.760 --> 0:36:43.160 ether so people hold they need liquidity against it, they 0:36:43.200 --> 0:36:46.040 want to trade it, they want to borrow it, whatever. 0:36:46.680 --> 0:36:49.000 All these sorts of different services allow you to do that. 0:36:49.040 --> 0:36:51.439 And there's even more sophisticated derivatives now where I can 0:36:51.880 --> 0:36:55.040 buy and sell decentrilized options against my ether um and 0:36:55.040 --> 0:36:56.520 and I can really do anything I would do on 0:36:56.560 --> 0:36:59.480 a normal exchange, but do it and defy. And increasingly 0:36:59.520 --> 0:37:01.319 this has happened with bitcoin as well as mean maybe 0:37:01.320 --> 0:37:04.680 you alluded to where there are tokens such as wrapped bitcoin, 0:37:04.760 --> 0:37:07.400 which is sort of like USDC for bitcoin, where custodian 0:37:07.719 --> 0:37:10.840 holds onto your bitcoin and midst w BTC on ethereum. 0:37:10.880 --> 0:37:12.560 And now you know, sort of going back to that 0:37:12.600 --> 0:37:15.719 initial Bitcoin defied dream, I can put my bitcoin as 0:37:15.719 --> 0:37:17.680 collateral and I can borrow against it, or I can 0:37:18.280 --> 0:37:20.239 trade my bitcoin for ether, or trade my bitcoin for 0:37:20.400 --> 0:37:23.080 USDC or vice versa. I would say that's actually a 0:37:23.080 --> 0:37:25.920 small percentage of what's happening in defied today. Most of 0:37:25.920 --> 0:37:27.880 it is sort of around ether and other sort of 0:37:28.120 --> 0:37:31.640 definative assets, but certainly for people who want Bitcoin exposure, 0:37:31.680 --> 0:37:33.319 it's a great way to sort of get access to 0:37:33.360 --> 0:37:36.520 these again sort of permission lists financial services that in 0:37:36.560 --> 0:37:39.840 many ways are superior just not accessible to you know, 0:37:39.880 --> 0:37:41.439 many of the people who are using them. I think, 0:37:41.800 --> 0:37:43.880 you know a great example of sort of this permission 0:37:43.880 --> 0:37:46.600 lists innovation. Um, there's this service that that we recently 0:37:46.600 --> 0:37:49.319 back called ribbon Ribbon. You know, one popular way people 0:37:49.320 --> 0:37:53.239 get yielled is they sell covered calls. Right, so I 0:37:53.520 --> 0:37:55.719 have some bitcoin, I ask some either I want to 0:37:55.760 --> 0:37:57.440 stack more bitcoin, I want to stack more ether. I 0:37:57.480 --> 0:37:59.880 sort of care about accumulating when you sell these like 0:38:00.040 --> 0:38:02.360 out of the money covered calls. In theory, they're not 0:38:02.400 --> 0:38:04.200 gonna expire in the money, and so you've got to 0:38:04.200 --> 0:38:06.120 collect the premium and and just sort of kept keep 0:38:06.120 --> 0:38:09.200 collecting more you collecting more bitcoin. Ribbon. You know, this 0:38:09.239 --> 0:38:11.200 is this is a service that isn't really accessible to 0:38:11.200 --> 0:38:13.239 many people in the US. It's if you do want 0:38:13.280 --> 0:38:15.080 to do it, you need to sort of post ten 0:38:15.360 --> 0:38:17.919 dollars in collateral. Um you go through all these different 0:38:17.960 --> 0:38:19.960 types of you know, hoops and actually get access to 0:38:20.040 --> 0:38:23.080 this thing Ribbon. You can go. It's it's all on chain, 0:38:23.200 --> 0:38:26.239 it's all trustless, it's all decentralized. Anyway, who go and 0:38:26.239 --> 0:38:29.440 and get access to this sort of sophisticated structured product 0:38:29.640 --> 0:38:32.160 without having to go through middleman and without having to uh, 0:38:32.200 --> 0:38:34.600 you know, sort of sort of subject themselves to financial surveillance, 0:38:34.640 --> 0:38:37.200 which I think is actually a huge plus. I think, 0:38:37.520 --> 0:38:39.520 going back to initial question, these are all sort of 0:38:39.560 --> 0:38:42.840 just different types of financial services for crypto assets. The 0:38:42.880 --> 0:38:44.440 big sort of question is how do you sort of 0:38:44.440 --> 0:38:45.880 break out of this realm, right like, how do you 0:38:45.880 --> 0:38:48.480 get out of just lending to Ether, just letting the bitcoin? 0:38:48.520 --> 0:38:49.920 And I would say that there's a couple of different 0:38:49.960 --> 0:38:52.840 different ways I personally want to think about it. One 0:38:53.000 --> 0:38:55.080 is is sort of through this realm of synthetic assets, 0:38:55.440 --> 0:38:57.640 where you know, there's I would say Die is a 0:38:57.680 --> 0:39:00.479 great example. Die is a synthetic version of US dollar. 0:39:00.880 --> 0:39:03.480 But there's many protocols that use that same mechanism of 0:39:03.520 --> 0:39:06.480 posting collateral and then minting debt and and you sort 0:39:06.520 --> 0:39:08.080 of using what we call an oracle in order to 0:39:08.160 --> 0:39:11.040 keep it in pegg with some target price feed. But 0:39:11.120 --> 0:39:13.600 for other types of assets. So you can go on 0:39:13.600 --> 0:39:16.680 on defied today and you can go and buy synthetic Tesla, 0:39:17.040 --> 0:39:21.240 you know, synthetic apple Um, synthetic you know game stop stock, 0:39:21.640 --> 0:39:23.320 anything really um and it doesn't even have to be 0:39:23.360 --> 0:39:25.720 a real world asset. It can be the synthetic price 0:39:25.760 --> 0:39:28.359 of the median you know, housing sale in the San 0:39:28.400 --> 0:39:30.920 Francisco Bay area, or it can be you know, a 0:39:30.960 --> 0:39:34.239 synthetic a number of barrels of oils that are going 0:39:34.280 --> 0:39:36.399 to be you know, shipped across the specific this week 0:39:36.480 --> 0:39:38.560 or whatever it is. You can go and create these 0:39:38.719 --> 0:39:42.480 really novel financial products again without having to apply it, 0:39:42.520 --> 0:39:44.640 without having to jump through a lot of the arduous 0:39:44.640 --> 0:39:47.360 hoops that are normally required. That I think is a 0:39:47.400 --> 0:39:50.719 really burgeoning area of innovation within defied where I can 0:39:50.760 --> 0:39:52.839 go and you know, sort of get access to these 0:39:52.840 --> 0:39:55.240 products wherever I'm around the world. And and we already 0:39:55.239 --> 0:39:57.319 see companies that are you know, trying to do this, 0:39:57.360 --> 0:39:59.440 and and we see see a lot of limitations with 0:40:00.120 --> 0:40:03.239 you know, traditional brokerages for example, around you know, geographical 0:40:03.280 --> 0:40:05.719 restrictions or you know trading restrictions. As we sort of 0:40:05.719 --> 0:40:08.040 stat with the whole again, you know, Robin Hood, um 0:40:08.320 --> 0:40:11.719 gmy thing, these services you can't be stopped. As soon 0:40:11.760 --> 0:40:14.919 as this sort of synthetic gimme gets minted, anyone around 0:40:14.960 --> 0:40:17.120 the world can go buy and sell it seven wherever 0:40:17.160 --> 0:40:19.319 they are so there's there's actually room, I think, to 0:40:19.400 --> 0:40:22.000 sort of grow a lot of the financial services that 0:40:22.040 --> 0:40:24.279 are becoming very popular, you know in the U S 0:40:24.320 --> 0:40:27.439 and Europe, but have this sort of truly global seven 0:40:27.680 --> 0:40:30.600 version of them that is, you know, in many ways superior. 0:40:31.120 --> 0:40:34.319 I think synthetic assets. Obviously, you know you're still sort 0:40:34.320 --> 0:40:36.920 of looking at ways to sort of expand the existing 0:40:36.920 --> 0:40:39.279 financial system. Right these are just sort of extensions of 0:40:39.440 --> 0:40:42.319 the equities markets. I think the really cool thing is, 0:40:42.560 --> 0:40:44.680 you know, sort of what we call real world assets. 0:40:44.760 --> 0:40:47.400 So how do I go and get a mortgage from 0:40:47.400 --> 0:40:50.400 my house from Maker? How do I go and you know, 0:40:50.480 --> 0:40:53.480 trade early equity for my company on unit swap? How 0:40:53.480 --> 0:40:55.000 do how do I go? And it actually like bridge 0:40:55.040 --> 0:40:57.000 these things to the real world. And I would say 0:40:57.040 --> 0:41:00.080 that is probably the most nascent area within Defied. This 0:41:00.400 --> 0:41:02.880 last month, Maker I think sort of broke new ground 0:41:02.920 --> 0:41:07.319 where they are taking shipping invoices and using those as 0:41:07.360 --> 0:41:09.960 collateral and Maker and so Maker basically becomes this this 0:41:10.080 --> 0:41:13.760 invoice factoring facility where if I'm trying to get liquidity 0:41:13.800 --> 0:41:16.759 for you know, assetding debt from this invoice, I can go, 0:41:16.880 --> 0:41:19.480 I can work with a partner, I can create a 0:41:19.520 --> 0:41:23.040 token for this for this asset again in a very regulated, 0:41:23.080 --> 0:41:26.240 legally compliant way, I can put that token inside of Maker, 0:41:26.320 --> 0:41:28.400 and now I can die, and I can convert that 0:41:28.480 --> 0:41:30.799 die against Pegg one to one with dollars. I can 0:41:30.840 --> 0:41:33.360 go convert that die to USD, send it to my 0:41:33.400 --> 0:41:36.440 bank account, and suddenly a Maker is undercutting you know, 0:41:36.480 --> 0:41:40.399 all these other existing invoice factoring services by let's say 0:41:40.440 --> 0:41:43.400 three or four x. And so because there's no middlemen, 0:41:43.440 --> 0:41:45.640 because there's no employees, because there's not a lot of 0:41:45.640 --> 0:41:48.399 this operational overhead, it's just a smart contract. You don't 0:41:48.440 --> 0:41:51.400 need sort of these these huge bodies employees that you know, 0:41:51.440 --> 0:41:53.719 someone like a neo bank, my employee, I just need 0:41:53.719 --> 0:41:56.440 to go and tokenize this asset, putting the DeFi and 0:41:56.560 --> 0:41:59.279 start barring against it. So this is starting to happen, 0:41:59.320 --> 0:42:01.919 but I expect we accelerating the next year or two. 0:42:02.320 --> 0:42:05.840 Someone in that example whether and I'm aware of like 0:42:05.880 --> 0:42:08.760 a few different entities that are trying to but someone 0:42:08.800 --> 0:42:11.279 in this examples sort of like needs to be like 0:42:11.760 --> 0:42:13.760 I don't know, I guess I occupy the meat space 0:42:13.800 --> 0:42:16.440 like if the if the ship or the you know, 0:42:16.680 --> 0:42:20.440 the shipping invoys. There's like someone has to like okay, 0:42:20.480 --> 0:42:22.440 you're like have you have to deliver the goods or 0:42:22.480 --> 0:42:24.359 something like someone sort of has to be the real 0:42:24.360 --> 0:42:27.120 world proxy like take the ship or to court if 0:42:27.120 --> 0:42:29.440 they would show up with the goods or something like that. Right, Like, 0:42:30.239 --> 0:42:31.880 there's sort of like there's a lot of like the 0:42:31.880 --> 0:42:35.360 connective tissue between the chain or between just the protocol 0:42:35.880 --> 0:42:37.960 and the sort of real world assets. Like there's no 0:42:38.040 --> 0:42:40.040 real way to like avoid the fact that like some 0:42:40.120 --> 0:42:42.880 sort of like human at leasta now some sort of 0:42:42.880 --> 0:42:45.160 like human has to be there to like sue a delinquent, 0:42:45.440 --> 0:42:47.000 you know, someone who doesn't show up with the goods 0:42:47.080 --> 0:42:50.359 or whatever it is. Yeah, that that is true. Um, 0:42:50.400 --> 0:42:53.040 They're they're that whole sort of you know tokenization process 0:42:53.080 --> 0:42:55.799 that I mentioned, you know, is somewhat human intensive, but 0:42:55.880 --> 0:42:58.320 I think over time that will come down and become 0:42:58.320 --> 0:43:00.799 more automated. You know. Another interesting thing that we see 0:43:00.800 --> 0:43:03.680 happening in Defy is is sort of like capital formation 0:43:03.880 --> 0:43:06.920 Defy the Princess. You're it's really low barried entry where um, 0:43:06.960 --> 0:43:09.719 if I want to go and raise funds to um, 0:43:09.760 --> 0:43:11.920 you know, donate money to a cause or purchase an 0:43:11.920 --> 0:43:15.160 asset or start a company or whatever. I can go 0:43:15.280 --> 0:43:18.080 and you know, potentially pool funds with other people inside 0:43:18.080 --> 0:43:20.120 of Defied, give them sort of a pro rade of 0:43:20.160 --> 0:43:21.640 share in it, and then we can go and I'll 0:43:21.680 --> 0:43:23.560 take our money and go to you know, whatever it 0:43:23.600 --> 0:43:25.880 is that we actually want to do. And so you know, 0:43:25.880 --> 0:43:27.879 we sort of saw this this deliberate of an idea 0:43:27.920 --> 0:43:29.879 I think in the initial sort of i O wave 0:43:30.080 --> 0:43:32.880 in seventeen and obviously I think that was very you know, 0:43:32.920 --> 0:43:35.440 sort of poorly executed. But the idea that you don't 0:43:35.480 --> 0:43:38.160 have to go through trational fundraising means, especially if you 0:43:38.160 --> 0:43:40.280 don't have access to those, in order to get access 0:43:40.280 --> 0:43:43.600 to capital um and then be able to have sort 0:43:43.640 --> 0:43:45.719 of this you know, pseudocap table um. I think it 0:43:45.800 --> 0:43:47.399 is really powerful and it is starting to come back 0:43:47.440 --> 0:43:50.359 through the rise of a lot of these taws. So 0:43:51.080 --> 0:43:54.480 if you were going to describe Defy to someone who 0:43:54.560 --> 0:43:58.040 had absolutely no knowledge of the space, but your ambition 0:43:58.200 --> 0:44:00.319 was to get them very very excited about out it 0:44:00.400 --> 0:44:03.720 and about how, you know, how much this could improve 0:44:03.840 --> 0:44:06.880 or change the world, what would be the project or 0:44:06.920 --> 0:44:10.360 the function that you would point to. I mean, I 0:44:10.360 --> 0:44:12.440 think I tend to fall back on these sort of 0:44:12.440 --> 0:44:15.960 old reliables. I think Maker is really just incredible system, 0:44:16.000 --> 0:44:18.400 not only because it's it's sort of demonstrates the power 0:44:18.400 --> 0:44:21.920 of decentralized lending, where again, anybody can show up with collateral, 0:44:22.040 --> 0:44:24.400 borrow you know, any time of day, they can repay 0:44:24.440 --> 0:44:26.360 any time they want, etcetera. And the whole thing is 0:44:26.400 --> 0:44:29.480 sort of self sustaining, there's no company. But also to 0:44:29.560 --> 0:44:31.440 use it produces this very useful asset at the end 0:44:31.440 --> 0:44:33.440 of the day, which is die people. I think you 0:44:33.600 --> 0:44:35.640 inherently sort of get the value of a dollar, the 0:44:35.680 --> 0:44:38.600 ability to send these dollars back and forth on on 0:44:38.680 --> 0:44:42.080 a blockchain. We often use stable coins for for funding, 0:44:42.080 --> 0:44:44.879 where you know, a team maybe isn't incorporated yet, or 0:44:44.960 --> 0:44:47.640 maybe they don't have a bank account yet. We can 0:44:47.640 --> 0:44:50.040 just send them stable coins ditrectly to their theory and wallet, 0:44:50.120 --> 0:44:51.960 and then they can go and pay their employees who 0:44:51.960 --> 0:44:54.000 are sort of distributed across the world to do a 0:44:54.000 --> 0:44:57.480 little test transaction first. Like when you do that, you 0:44:57.520 --> 0:44:59.600 never you never grow out of that. Unfortunately, always get 0:44:59.600 --> 0:45:03.920 a little ish, but yes, you know, just superior to 0:45:04.040 --> 0:45:06.680 trying to send international wire uh, you know, waiting five 0:45:06.719 --> 0:45:09.160 business days you know, praying that you typed in the 0:45:09.200 --> 0:45:12.560 correspondent bank you number correctly. A stable coin such as 0:45:12.600 --> 0:45:14.360 die is able to do that just instantly, and I 0:45:14.400 --> 0:45:17.839 think that's really powerful. I think really the answer, you know, 0:45:18.040 --> 0:45:19.920 and sort of the most distinct, you know, maybe a 0:45:19.960 --> 0:45:22.719 little glib answer, is that it's going to do for 0:45:22.840 --> 0:45:27.520 finance with the Internet for information, where instead of being siloed, 0:45:27.560 --> 0:45:32.080 instead of being opaque, instead of being limited access, it's permissionless, 0:45:32.080 --> 0:45:35.200 transparent access to anyone around the world wants it. And 0:45:35.239 --> 0:45:37.440 I think what we've seen is entrepreneurs will take that 0:45:37.880 --> 0:45:40.239 and they will develop novel products that we couldn't even 0:45:40.320 --> 0:45:42.759 imagine right now and probably won't can't imagine right now, 0:45:43.000 --> 0:45:45.440 that will create this this massive sort of consumer surplus. 0:45:45.560 --> 0:45:49.920 So so my last question is, I mean I go 0:45:50.000 --> 0:45:53.920 to like Una Swab, it looks like an unregistered stock market. 0:45:54.000 --> 0:45:56.759 I could see like mirrored Apple and mirror Tesla. Those 0:45:56.800 --> 0:46:00.160 look like synthetic derivatives. I mean, they're basically described this 0:46:00.320 --> 0:46:03.000 such anyone can buy them without any sort of like 0:46:03.040 --> 0:46:06.279 obvious like registration. There's no account or anything like that. 0:46:06.800 --> 0:46:09.759 Capital formation. The I c O s sort of like 0:46:09.800 --> 0:46:12.120 we're basically just I p O S. But without all 0:46:12.160 --> 0:46:16.200 of the regulation, why is this not just all you know, 0:46:16.280 --> 0:46:19.399 even if in theory it's more transparent stable like sort 0:46:19.440 --> 0:46:23.319 of a flagrant violation of existing securities laws. And do 0:46:23.360 --> 0:46:26.680 you think about like that risk frankly as a as 0:46:26.680 --> 0:46:30.600 you're investing, It's definitely something that we think about. I 0:46:30.600 --> 0:46:34.080 think one interesting thing about about Dragonfly is that our 0:46:34.120 --> 0:46:36.000 team is sort of split between Asian and the US, 0:46:36.080 --> 0:46:38.920 and so I think we talked about things you're very 0:46:38.960 --> 0:46:41.840 freely this very much US focused view. But you know, 0:46:41.880 --> 0:46:45.520 increasingly a large part of exchange volumes up until very recently, 0:46:45.600 --> 0:46:48.000 large part of mining volumes, and increasingly large number of 0:46:48.080 --> 0:46:50.840 defight users are coming from Asia, They're coming from Japan, 0:46:50.960 --> 0:46:52.880 or they're they're they're coming from China, they're coming from Japan, 0:46:53.080 --> 0:46:55.480 coming from Asian more broadly, and so what we see 0:46:55.600 --> 0:46:58.040 is sort of a lot of global talent around the 0:46:58.040 --> 0:46:59.880 world that might not live in the US, might not 0:46:59.880 --> 0:47:02.400 be American, and UM might not sort of be UM 0:47:02.400 --> 0:47:04.400 I think, relying on a lot of the same issues 0:47:04.440 --> 0:47:07.040 that that you see in in U S jurisdictions. I 0:47:07.040 --> 0:47:09.040 think to your earlier point, what we see with with 0:47:09.120 --> 0:47:11.480 defile lot and why we sort of emphasize this decentrized 0:47:11.520 --> 0:47:14.239 element is most of what we've seen today is is 0:47:14.280 --> 0:47:17.799 really covered under under free speech where users you know, 0:47:17.840 --> 0:47:20.960 for example, the developers of unit swap, they've written this software, 0:47:21.160 --> 0:47:24.160 they've deployed it, but they're not taking fees, they don't 0:47:24.200 --> 0:47:27.160 have you know, customer rights, they're not executing trades. Certainly 0:47:27.160 --> 0:47:29.480 they'reun this front end, but it's just a website, right, 0:47:29.520 --> 0:47:31.840 it's not actually doing anything. You can go on the 0:47:31.880 --> 0:47:34.240 ethery and blockchain and make the same sort of trades 0:47:34.360 --> 0:47:36.200 or you know, become a liquid in provider or whatever. 0:47:36.600 --> 0:47:39.600 Because the software is permissionless, because it sort of runs 0:47:40.239 --> 0:47:42.839 without you know, a middleman requiring to run it. It's 0:47:42.880 --> 0:47:45.120 it's sort of like like BitTorrent, where BitTorrent can be 0:47:45.200 --> 0:47:47.719 used for legitimate purposes, but obviously people can use it 0:47:47.760 --> 0:47:50.120 for relicious purposes as well, but that doesn't make the 0:47:50.160 --> 0:47:53.200 creators a bit torrent liable for those malicious purposes. So 0:47:53.600 --> 0:47:56.160 Defy I think has created a lot of again sort 0:47:56.160 --> 0:47:58.279 of consumer syrplus it's made a lot of that's in 0:47:58.320 --> 0:48:00.960 my life easier, just you know, going over the wiring 0:48:01.000 --> 0:48:03.319 stable point thing that I mentioned just a few minutes ago, 0:48:03.600 --> 0:48:06.160 but that doesn't mean that, and certainly everything not within 0:48:06.160 --> 0:48:09.040 it is not super palatable, but then doesn't mean, you know, 0:48:09.040 --> 0:48:10.600 you just have to sort of throw the baby out 0:48:10.600 --> 0:48:12.719 with the bath water. I think the other elements sort 0:48:12.719 --> 0:48:14.879 of that you mentioned around securities laws is certainly something 0:48:14.880 --> 0:48:16.879 that we consider, but I think that really relates more 0:48:16.920 --> 0:48:19.719 to sort of token issuements and not every protocol, not 0:48:19.800 --> 0:48:22.040 everything that comes out is going to issue a token. 0:48:22.080 --> 0:48:24.359 You can just create software and have people use it. 0:48:24.640 --> 0:48:27.319 UM and that you know it is is perfectly fine. 0:48:27.320 --> 0:48:29.680 That's sort of sort of covered under the existing understanding 0:48:29.680 --> 0:48:34.239 of the law. Tom, So great to have you on 0:48:34.440 --> 0:48:37.200 odd lots UM. I feel like that lived up to 0:48:37.239 --> 0:48:39.160 the hype that you are going to be able to 0:48:39.640 --> 0:48:42.200 explain these things in a very clear way, and I 0:48:42.200 --> 0:48:45.479 feel a lot smarter. Well, I really appreciate it. Thanks 0:48:45.480 --> 0:49:03.880 for having me, Thanks Tom, That was great. Thanks Tom, Tracy. 0:49:03.920 --> 0:49:06.200 I have an idea for a DeFi project that we 0:49:06.200 --> 0:49:11.600 should do. Okay, I kind of I like the idea 0:49:11.640 --> 0:49:14.120 of tending my own yield farm, but I have a 0:49:14.120 --> 0:49:17.120 feeling it's probably very different to uh, the you call 0:49:17.239 --> 0:49:19.560 it UM vision that I have of that, but go 0:49:19.640 --> 0:49:21.840 on so you definitely, like Tomas said, you could like 0:49:22.000 --> 0:49:26.600 create any sort of like synthetic sort of like asset 0:49:26.680 --> 0:49:29.000 that's tied to something in the real world or sort 0:49:29.000 --> 0:49:32.000 of like you know, tied to some price. We should 0:49:32.200 --> 0:49:37.319 um create token ized onion futures because that's like the 0:49:37.360 --> 0:49:39.520 one thing that you know, there's a law like there 0:49:39.520 --> 0:49:42.600 can't be onion futures, but in defy, I don't see 0:49:42.640 --> 0:49:47.800 anything stopping us from like creating a decentralized onion futures 0:49:47.840 --> 0:49:49.960 market that just like goes based on like you know, 0:49:50.280 --> 0:49:55.080 supermarket onion prices. I'm sorry why onions specifically, there's a 0:49:55.160 --> 0:49:57.520 law that says there's no onion futures in America. You 0:49:57.560 --> 0:49:59.759 didn't know that, No, I didn't. I'm over here in 0:49:59.800 --> 0:50:02.520 a Onions are a pretty big part of the economy. 0:50:02.560 --> 0:50:05.480 I think they've been fairly financialized. But maybe there was 0:50:05.560 --> 0:50:08.240 some law like a hundred years ago that said onions 0:50:08.440 --> 0:50:10.600 there could never be an onion futures market in the 0:50:10.680 --> 0:50:14.160 United States. Okay, let's let's do it, the Great onion Futures. 0:50:14.840 --> 0:50:16.600 I'm surprised you didn't know that then. See, I thought 0:50:16.600 --> 0:50:18.200 that would be like a little. I thought that would 0:50:18.200 --> 0:50:20.040 be like a tracy trivia that you would know about. 0:50:20.080 --> 0:50:21.719 I had no idea, but I have a feeling I'm 0:50:21.760 --> 0:50:24.640 about to go down like a massive research hole and 0:50:24.719 --> 0:50:27.120 learn about it. Let's do it, Yeah, let's do it. 0:50:27.160 --> 0:50:29.279 But it's seriously. I did think Tom was great, and 0:50:29.320 --> 0:50:31.320 I do think that he lived up to the hype 0:50:31.360 --> 0:50:34.279 in certain terms of like the clarity of explaining how 0:50:34.320 --> 0:50:36.959 all these things work. Um, I agree. I was also, 0:50:37.719 --> 0:50:42.600 you know, on the regulatory arbitrage issue, there is a 0:50:42.640 --> 0:50:45.799 tendency to think that regulatory arbitrage is a bad thing, 0:50:45.840 --> 0:50:48.680 particularly in finance, where rules tend to exist so that 0:50:48.719 --> 0:50:52.000 you know, there isn't money laundering or people aren't losing 0:50:52.040 --> 0:50:56.279 all their money. His vision or his summation of regulatory 0:50:56.360 --> 0:50:59.440 arbitrage as a way of generating more change in the 0:50:59.480 --> 0:51:02.560 financial system, similar to you know what happened with the 0:51:02.640 --> 0:51:05.279 internet and the idea that everyone can broadcast things like that. 0:51:06.239 --> 0:51:10.160 It's very alluring. I think there are still questions around it, 0:51:10.880 --> 0:51:13.319 but I can see like what he's getting at, and 0:51:13.320 --> 0:51:15.160 I can see why a lot of defied people are 0:51:15.280 --> 0:51:20.520 very excited about using this process regulatory arbitrage to affect 0:51:20.680 --> 0:51:24.360 change in the traditional financial system. Yeah, well, you know 0:51:24.400 --> 0:51:26.239 what I was thinking, like, and I get that. I 0:51:26.280 --> 0:51:28.640 think it's interesting. And he made a comparison to Uber 0:51:28.680 --> 0:51:32.160 and Airbnb, who is sort of like changed regulations. Like 0:51:32.719 --> 0:51:35.800 Uber was going up against taxi companies, and frankly, I 0:51:35.840 --> 0:51:38.719 don't think the taxi drivers have ever had, you know, 0:51:38.719 --> 0:51:41.680 in most places, all that much political power is sort 0:51:41.719 --> 0:51:45.640 of like going up against like highly regulated entities that 0:51:45.800 --> 0:51:49.719 in some sense like make regulation and lobbying like a 0:51:49.800 --> 0:51:52.800 huge part of their core business model. I don't think 0:51:53.280 --> 0:51:55.239 is going to be as easy as sort of like 0:51:55.560 --> 0:51:59.080 Uber basically rolled rolling the taxi industry and all these 0:51:59.120 --> 0:52:02.400 cities no ins so much more sensitive industry, given that 0:52:02.440 --> 0:52:05.239 you're dealing with money. But I think it's gonna be 0:52:05.280 --> 0:52:09.719 really hard. Well, yeah, I definitely wanted to watch them. Absolutely. 0:52:10.000 --> 0:52:11.880 Shall we leave it there. I'm keen to go start 0:52:11.880 --> 0:52:16.200 reading about onion futures, So yeah, go read about that. Okay. 0:52:16.640 --> 0:52:19.280 This has been another episode of the Odd Lots podcast. 0:52:19.320 --> 0:52:21.759 I'm Tracy Alloway. You can follow me on Twitter at 0:52:21.800 --> 0:52:24.359 Tracy Alloway and I'm Joe Why Isn't All. You can 0:52:24.400 --> 0:52:27.600 follow me on Twitter at the Stalwart Follow our guest 0:52:27.680 --> 0:52:31.680 on Twitter. Tom Schmidt is at Tom H Schmidt. Follow 0:52:31.719 --> 0:52:35.720 our producer Laura Carlson. She's at Laura M. Carlson. Follow 0:52:35.760 --> 0:52:39.320 the Bloomberg head of podcast, Francesco Levy at Francesco Today, 0:52:39.760 --> 0:52:42.719 and check out all of our podcast at Bloomberg under 0:52:42.760 --> 0:53:10.800 the handle at podcasts. Thanks for listening year to